<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1997
REGISTRATION NO. 333-34339
================================================================================
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 SEPTEMBER 23, 1997
PROSPECTUS
$100,000,000
[AMERICAN RETIREMENT CORPORATION LOGO]
% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002
------------------
The Debentures will be convertible into shares of common stock of the
Company, par value $0.01 per share (the "Common Stock"), at any time on or after
December 31, 1997 and prior to maturity, unless previously redeemed, at a
conversion price of $ per share (the "Conversion Price"), subject to
adjustment in certain events. The Common Stock is traded on the New York Stock
Exchange (the "NYSE") under the symbol "ACR." On September 22, 1997, the last
reported sale price of the Common Stock on the NYSE was $19.81 per share. See
"Price Range of Common Stock." The Debentures have been approved for listing on
the NYSE. At the request of the Company, up to $10,000,000 principal amount of
the Debentures 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."
Interest on the Debentures will be payable semi-annually on
and of each year, commencing , 1998. The Debentures
will be redeemable at any time on or after , 2000 at the option of the
Company, from time to time, in whole or in part, at a redemption price equal to
100% of the principal amount thereof, together with accrued interest thereon to
the redemption date. Upon a Change in Control (as defined), each holder of the
Debentures will have the right, subject to certain conditions and restrictions,
to require the Company to repurchase any or all outstanding Debentures owned by
such holder at 101% of the principal amount thereof, plus accrued and unpaid
interest.
The Debentures will be unsecured and subordinated in right of payment to
all present and future Senior Indebtedness (as defined) of the Company. In
addition, the Debentures will be effectively subordinated to liabilities
(including trade payables, but excluding intercompany liabilities) of the
Company's subsidiaries. As of June 30, 1997, Senior Indebtedness of the Company
and other liabilities to which the Debentures are effectively subordinated
totaled $176.8 million. See "Description of Debentures."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE DEBENTURES 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(1) COMMISSIONS(2) COMPANY(1)(3)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Debenture..................... % % %
- -------------------------------------------------------------------------------------------------------------
Total(4).......................... $ $ $
=============================================================================================================
</TABLE>
(1) Plus accrued interest, if any, from , 1997.
(2) See "Underwriting" for indemnification arrangements.
(3) Before deducting expenses payable by the Company estimated to be $400,000.
(4) The Company has granted the Underwriter a 30-day option to purchase up to an
additional $15,000,000 principal amount of Debentures solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, and Proceeds to
Company will be $ , $ , and $ ,
respectively. See "Underwriting."
The Debentures are offered by the Underwriter when, as, and if delivered to
and accepted by the Underwriter, 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 Debentures will be
made in New York, New York on or about , 1997.
SCHRODER & CO. INC.
September , 1997
<PAGE> 3
Omitted Graphic and Image Material
The following graphic and image material is omitted from the form of
the prospectus filed electronically:
A map of the United States depicting the location of the Company's
operating home health care agencies and a home health care agency under
development, and the location and resident capacity of the Company's operating
communities, communities under development, and a community to be acquired by
the Company in the future. The following caption accompanies the map: "The
above map shows the locations of the Company's existing owned, leased, and
managed senior living communities and home health care agencies, including
those under development, and a pending acquisition."
------------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
DEBENTURES OFFERED HEREBY OR THE COMMON STOCK, INCLUDING OVER-ALLOTMENT,
STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS, AND PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<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." Unless
otherwise indicated, all information in this Prospectus assumes no exercise of
the Underwriter's over-allotment option. Unless the context otherwise requires,
references to the Company include the Company, its subsidiary partnerships and
corporations, and the Company's predecessor, American Retirement Communities,
L.P. ("ARCLP" or the "Predecessor"). Immediately prior to the Company's initial
public offering in May 1997 (the "IPO"), the Predecessor was reorganized (the
"Reorganization") and all of its assets and liabilities were contributed to the
Company. See "The Company -- Reorganization."
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. Established in 1978, the Company believes it ranks among the leading
operators in the senior living and health care services industry. Currently, the
Company operates 22 senior living communities in 12 states, consisting of 12
owned communities, three leased communities, and seven managed communities, with
an aggregate capacity for approximately 5,800 residents. In the fourth quarter
of 1997, the Company expects to acquire a long-term leasehold in an additional
community located in Richmond, Virginia with capacity for 917 residents. The
Company operates 15 home health care agencies, ten of which are owned and five
of which are managed. At June 30, 1997, the Company's owned communities had a
stabilized occupancy rate of 95%, its leased communities had a stabilized
occupancy rate of 94%, and its managed communities had a stabilized occupancy
rate of 94% (stabilized communities are generally defined as communities or
expansions thereof that have (i) achieved 95% occupancy; or (ii) been open at
least 12 months). For the year ended December 31, 1996, and the six months ended
June 30, 1997, revenues attributable to the Company's senior living communities
accounted for 91.5% and 89.8%, respectively, of the Company's total revenues,
and revenues attributable to the Company's home health care agencies accounted
for 6.2% and 8.0%, respectively, of the Company's total revenues. Approximately
92.4% of the Company's total revenues for the year ended December 31, 1996 and
approximately 89.2% of the Company's total revenues for the six months ended
June 30, 1997 were derived from private pay sources.
Since 1992, the Company has experienced significant growth, primarily
through the acquisition of 14 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 by developing
senior living networks 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 27 free-standing assisted living residences, with an
estimated aggregate capacity for approximately 2,400 residents, and is expanding
nine of its existing communities to add capacity to accommodate approximately
800 additional residents.
The Company was founded by Dr. Thomas F. Frist, Sr. and Jack C. Massey, the
principal founders of Hospital Corporation of America. 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
3
<PAGE> 5
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 ten 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.
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
Debentures Offered............ $100,000,000 aggregate principal amount of the
Company's % Convertible Subordinated
Debentures Due 2002 ($115,000,000 if the
Underwriter's over-allotment option is
exercised in full).
Interest Payment Dates........ and , commencing
, 1998.
Maturity...................... Due on , 2002.
Conversion of Debentures...... The Debentures will be convertible at any time
on or after December 31, 1997 and prior to
maturity, unless previously redeemed, into
shares of Common Stock at a price of
$ per share, subject to adjustment in
certain events.
Optional Redemption........... The Debentures will be redeemable at any time
and from time to time on or after
, 2000 at the option of the
Company, in whole or in part, at a redemption
price equal to 100% of the principal amount
thereof, together with accrued interest thereon
to the redemption date.
Ranking....................... The Debentures will be subordinated to all
present and future Senior Indebtedness of the
Company. In addition, the Debentures will be
effectively subordinated to all liabilities of
the Company's subsidiaries. The Indenture will
not limit the amount of Senior Indebtedness or
other liabilities the Company or its
subsidiaries may incur from time to time. At
June 30, 1997, the Company's outstanding Senior
Indebtedness totaled approximately $90.9
million and liabilities of the Company's
subsidiaries totaled approximately $85.9
million.
Change in Control............. Upon a Change in Control, each holder of the
Debentures will have the right, subject to
certain conditions and restric-
4
<PAGE> 6
tions, to require the Company to repurchase any
or all outstanding Debentures owned by such
holder at 101% of the principal amount thereof,
plus accrued and unpaid interest.
Use of Proceeds............... For general corporate purposes, including the
development and construction of free-standing
assisted living residences, possible
acquisitions of businesses engaged in
activities similar or complementary to the
Company's business, and the possible prepayment
of indebtedness.
NYSE symbol................... "ACR02"
5
<PAGE> 7
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, the six months ended June 30, 1996, and the year ended
December 31, 1996 is derived from the consolidated financial statements of the
Predecessor. The summary financial data for the six months ended June 30, 1997
is derived from the unaudited consolidated financial statements of the Company
and includes the operations of the Predecessor for the period January 1, 1997
through May 28, 1997 and the Company for the period May 29, 1997 through June
30, 1997. See "The Company -- Reorganization" and Note 1 to the Combined and
Consolidated Financial Statements.
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES
(COMBINED) PREDECESSOR
--------------------------- ---------------------------------------------------------------
THREE MONTHS NINE MONTHS YEAR ENDED SIX MONTHS
YEAR ENDED ENDED ENDED DECEMBER 31, 1996 ENDED JUNE 30, 1996
DECEMBER 31, MARCH 31, DECEMBER 31, ----------------------- ----------------------
1994 1995 1995 ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1)
------------ ------------ ------------ -------- ------------ ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................ $33,341 $12,356 $48,763 $ 75,617 $ 79,543 $34,806 $38,732
Operating expenses............ 28,126 10,270 38,730 60,066 63,861 27,313 30,685
------- ------- ------- -------- -------- ------- -------
Income from operations....... 5,215 2,086 10,033 15,551 15,682 7,493 8,047
Other income (expense), net... (5,053) (3,334) (6,682) (10,938) (11,353) (4,609) (5,718)
------- ------- ------- -------- -------- ------- -------
Income (loss) before income
taxes and extraordinary
item......................... 162 (1,248) 3,351 4,613 4,329 2,884 2,329
Income tax expense
(benefit) -- current(2)...... -- 20 55 (920) (920) -- --
Income tax expense --
deferred(3).................. -- -- -- -- -- -- --
------- ------- ------- -------- -------- ------- -------
Income (loss) before
extraordinary item........... 162 (1,268) 3,296 5,533 5,249 2,884 2,329
Extraordinary item(4)......... -- -- -- (2,335) (2,335) (2,335) (2,335)
------- ------- ------- -------- -------- ------- -------
Net income (loss)............. $ 162 $(1,268) $ 3,296 $ 3,198 $ 2,914 $ 549 $ (6)
======= ======= ======= ======== ======== ======= =======
Net income (loss) available
for distribution to partners
and shareholders............. $ 162 $(1,268) $ 2,171 $ 2,094 $ 2,590 $ (165) $ (330)
======= ======= ======= ======== ======== ======= =======
UNAUDITED PRO FORMA TAX
DATA(5):
Income before income taxes and
extraordinary item........... $ 4,613 $ 4,329 $ 2,884 $ 2,329
Pro forma income tax expense.. 820 712 1,096 886
-------- -------- ------- -------
Pro forma income before
extraordinary item........... $ 3,793 $ 3,617 $ 1,788 $ 1,443
======== ======== ======= =======
Pro forma income before
extraordinary item available
for distribution to partners
and shareholders............. $ 2,689 $ 3,293 $ 1,074 $ 1,119
======== ======== ======= =======
Pro forma per share data:
Income before extraordinary
item available for
distribution to partners
and shareholders........... $ 0.29 $ 0.35 $ 0.11 $ 0.12
======== ======== ======= =======
Shares used in computing pro
forma per share data(7).... 9,375 9,375 9,375 9,375
======== ======== ======= =======
Pro forma as adjusted per share data(8):
Income before extraordinary
item available for
distribution to partners
and shareholders........... $ 0.29 $ 0.10
======== =======
Shares used in computing pro
forma as adjusted per share
data(9).................... 11,406 11,406
======== =======
<CAPTION>
SIX
MONTHS
ENDED
JUNE 30,
1997
--------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................ $44,389
Operating expenses............ 35,867
-------
Income from operations....... 8,522
Other income (expense), net... (6,308)
-------
Income (loss) before income
taxes and extraordinary
item......................... 2,214
Income tax expense
(benefit) -- current(2)...... 92
Income tax expense --
deferred(3).................. 10,728
-------
Income (loss) before
extraordinary item........... (8,606)
Extraordinary item(4)......... --
-------
Net income (loss)............. $(8,606)
=======
Net income (loss) available
for distribution to partners
and shareholders............. $(8,606)
=======
UNAUDITED PRO FORMA TAX
DATA(5):
Income before income taxes and
extraordinary item........... $ 2,214
Pro forma income tax expense.. 841(6)
-------
Pro forma income before
extraordinary item........... $ 1,373
=======
Pro forma income before
extraordinary item available
for distribution to partners
and shareholders............. $ 1,373
=======
Pro forma per share data:
Income before extraordinary
item available for
distribution to partners
and shareholders........... $ 0.14
=======
Shares used in computing pro
forma per share data(7).... 9,752
=======
Pro forma as adjusted per shar
Income before extraordinary
item available for
distribution to partners
and shareholders........... $ 0.12
=======
Shares used in computing pro
forma as adjusted per share
data(9).................... 11,406
=======
</TABLE>
6
<PAGE> 8
<TABLE>
<CAPTION>
AT JUNE 30, 1997
--------------------------
AS
ACTUAL ADJUSTED(10)
-------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 21,863 $118,963
Working capital............................................. 15,472 112,572
Total assets................................................ 246,072 346,072
Long-term debt, including current portion................... 167,259 267,259
Shareholders' equity........................................ 50,122 50,122
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES
(COMBINED) PREDECESSOR
--------------------------- ----------------------------------------------------
THREE MONTHS NINE MONTHS YEAR ENDED SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED DECEMBER 31, 1996 ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, ---------------------- JUNE 30, JUNE 30,
1994 1995 1995 ACTUAL PRO FORMA(1) 1996 1997
------------ ------------ ------------ ------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Adjusted EBITDA(11)............. $8,407 $3,262 $15,815 $23,679 $23,198 $10,782 $12,031
Ratio of Adjusted EBITDA to
interest expense(12)........... 1.6x 1.4x 2.1x 2.0x 1.9x 2.3x 1.9x
Ratio of earnings to fixed
charges(13).................... 1.0x 0.5x 1.4x 1.4x 1.3x 1.6x 1.3x
Distribution to partners,
including preferred
distributions.................. $2,580 $1,400 $ 5,189 $ 7,139 $ 6,359(14) $ 3,546 $ 2,500(15)
OPERATING DATA:
Revenue mix:
Private pay.................... 93.0% 92.2% 91.2% 92.4% 92.5% 91.3% 89.2%
Medicare and other(16)......... 7.0 7.8 8.8 7.6 7.5 8.7 10.8
------ ------ ------- ------- ------- ------- -------
Total.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Resident capacity (at period end):
Owned.......................... 2,141 2,386 2,594 3,369 2,886 3,369 3,002
Leased......................... -- -- -- -- 483 -- 573
Managed........................ 3,315 3,079 3,008 2,159 2,159 2,159 2,159
------ ------ ------- ------- ------- ------- -------
Total.................... 5,456 5,465 5,602 5,528 5,528 5,528 5,734
Average occupancy rate:
Owned.......................... 89% 91% 93% 94% 94% 93% 94%
Leased......................... -- -- -- -- 89 -- 93
Managed........................ 93 95 91 91 90 90 93
------ ------ ------- ------- ------- ------- -------
Total.................... 90% 93% 92% 92% 92% 92% 93%
</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 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) Periods prior to 1997 reflect 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. Income tax expense for the six months ended
June 30, 1997 reflects income taxes incurred by the Company during the
period May 29, 1997 (the day following the Reorganization) through June 30,
1997. During the period January 1, 1997 through the date of the
Reorganization (May 28, 1997), the Predecessor did not incur income tax
expense because it was a partnership. See Note 12 to the Combined and
Consolidated Financial Statements.
(3) At the time of the Reorganization and as a result of the conversion from a
non-taxable to a taxable entity, the Company recorded as a one-time charge
to income a net deferred income tax expense of approximately $10.7 million
resulting from 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.
(4) Amount represents loss on early extinguishment of debt. See Note 9 to the
Combined and Consolidated Financial Statements.
(5) 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 unaudited pro forma tax 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.
(6) The unaudited pro forma tax data for the six months ended June 30, 1997,
does not give effect to a non-recurring $10.7 million ($1.10 per share)
charge to income 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 footnote (3) above and Note 16 to the Combined and
Consolidated Financial Statements.
7
<PAGE> 9
(7) Reflects 7,812,500 shares issued in the Reorganization, plus 1,562,500
shares, representing the value of the $21.9 million principal amount of a
promissory note issued to the Predecessor in connection with the
Reorganization ("the Reorganization Note") (based upon the IPO price of
$14.00 per share). For the six months ended June 30, 1997, also includes
the weighted average effect of (a) the 3,593,750 shares sold by the Company
in the IPO; and (b) Common Stock equivalents.
(8) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the Reorganization; (b) the sale of the 3,593,750
shares sold by the Company in the IPO, and the application of a portion of
the net proceeds to retire the Reorganization Note; and (c) for the year
ended December 31, 1996 data, the transactions described in footnote (1)
above.
(9) Reflects 7,812,500 shares issued in the Reorganization, plus the 3,593,750
shares sold by the Company in the IPO.
(10) Adjusted to reflect the sale of the Debentures offered hereby.
(11) Adjusted EBITDA represents earnings before deductions for interest expense,
income taxes, depreciation and amortization and excludes the non-recurring
charge related to the 1995 Roll-Up and extraordinary loss from early
extinguishment of debt. The Company believes that Adjusted EBITDA provides
additional information for determining its ability to meet its future debt
service, capital expenditure and working capital requirements. Adjusted
EBITDA is not a measure of financial performance under generally accepted
accounting principles and should not be considered as an alternative to net
income (loss) or income from operations as an indicator of the Company's
operating performance, or to cash flows as a measure of the Company's
liquidity.
(12) For purposes of this computation, interest expense includes interest
capitalized and net interest expense.
(13) For purposes of this computation, earnings are defined as income (loss)
before income taxes and extraordinary item and fixed charges (excluding
capitalized interest). Fixed charges are defined as interest expensed and
capitalized, amortization of capitalized financing costs, and the portion
of operating lease rental expense that is representative of the interest
factor. Earnings were inadequate to cover fixed charges for the three
months ended March 31, 1995 by $1.2 million.
(14) Reflects the elimination, on a pro forma basis, of the preferred
distributions paid with respect to $5.2 million of the Predecessor'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 and
distributions of $324,000 paid from January 1996 through June 1996 with
respect to such Preferred Partnership Interests were not eliminated.
(15) Reflects the payment by ARCLP of an aggregate of $2.5 million to its
partners (the "Tax Distribution"), which amount represented the approximate
amount of income taxes associated with the Predecessor's earnings in 1997
through the date of the Reorganization.
(16) Includes Medicare (including Medicare-related private co-insurance) and
Medicaid.
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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
At June 30, 1997, the Company had long-term debt (including current
portion) of $167.3 million, of which $144.3 million was payable to one lender,
and was obligated to pay annual rental obligations of approximately $3.0 million
under long-term operating leases. In addition, the Company has signed a
definitive agreement to acquire a long-term leasehold interest in a community
located in Richmond, Virginia that will require annual rental payments of
approximately $4.3 million. 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 satisfaction of 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"). Currently, the Company has been allocated
$41.6 million and $4.7 million, respectively, in commitments under 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, the
remaining proceeds from the IPO, the proceeds from the sale of the Debentures
offered hereby, 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. As of June 30, 1997, the Company's existing debt and lease agreements
required aggregate annual payments for the years ending December 31, 1997, 1998,
1999, 2000, and 2001, assuming no change in the Company's average interest cost
(8.4% at June 30, 1997), ranging from approximately $20.7 million to $22.9
million. In addition, the Company intends to incur significant additional
indebtedness and lease obligations and therefore expects its annual debt service
and lease obligations over the next five fiscal years will be significantly
greater than the amounts set forth in the preceding sentence. For the fiscal
year ended December 31, 1996, the Company's net cash provided by operating
activities, before giving effect to the payment of interest expense on the
Company's outstanding indebtedness, was approximately $23.6 million. 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. The Company
maintains a $2.5 million line of credit that restricts the Company's ability to
incur additional indebtedness. There can be no assurance that future debt
instruments will not also include covenants restricting the Company's ability to
incur additional debt. Moreover, raising additional funds through the issuance
of equity securities could cause existing shareholders to experience 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.
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At June 30, 1997, $48.3 million in principal amount, or approximately
28.9%, of the Company's indebtedness, bore interest at floating rates, with a
weighted average annual rate of 7.9%. 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.
SUBORDINATION
The Debentures will be expressly subordinated in right of payment to all
existing and future Senior Indebtedness of the Company. At June 30, 1997, the
Company's Senior Indebtedness aggregated approximately $90.9 million. In
addition, the Debentures will be effectively subordinated to the liabilities
(including trade payables but excluding intercompany liabilities) of the
Company's subsidiaries, which were approximately $85.9 million at June 30, 1997.
Neither the Indenture nor the Debentures will limit the ability of the Company
or any of its subsidiaries to incur additional Senior Indebtedness or other
liabilities. The Indenture and the Debentures will not contain any financial
covenants or similar restrictions with respect to the Company and, therefore,
the holders of the Debentures will have no protection (other than rights upon
Events of Default as described under "Description of Debentures") from adverse
changes in the Company's financial condition. By reason of the subordination of
the Debentures, in the event of insolvency, bankruptcy, liquidation,
reorganization, dissolution, or winding up of the business of the Company or
upon a default in payment with respect to any indebtedness of the Company or an
event of default with respect to such indebtedness resulting in the acceleration
thereof, the assets of the Company will be available to pay the amounts due on
the Debentures only after all Senior Indebtedness and all liabilities of the
Company's subsidiaries have been paid in full.
DISCRETIONARY USE OF PROCEEDS
The Company intends to use the net proceeds of the offering for general
corporate purposes, including the development and construction of free-standing
assisted living residences, possible acquisitions of businesses engaged in
activities similar or complementary to the Company's business, and the possible
prepayment of indebtedness. Accordingly, the Company will have broad discretion
as to the application of such proceeds. See "Use of Proceeds."
DEPENDENCE ON PRIVATE PAY RESIDENTS
Approximately 92.4% of the Company's total revenues for the year ended
December 31, 1996 and approximately 89.2% of the Company's total revenues for
the six months ended June 30, 1997 were attributable to private pay sources. For
the same periods, 7.6% and 10.8%, respectively, 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 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.
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
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.
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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 27 free-standing assisted living
residences, with an estimated aggregate capacity for approximately 2,400
residents, and is expanding nine of its existing senior living communities to
add capacity to accommodate approximately 800 additional 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 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."
RISKS IN ACQUISITIONS OF COMMUNITIES AND COMPLEMENTARY BUSINESSES; DIFFICULTIES
OF INTEGRATION
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.
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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.
RISKS OF DEVELOPMENT IN CONCENTRATED GEOGRAPHIC AREAS
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."
INCREASING 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 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
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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
The Company's officers and directors and entities controlled by them,
collectively, beneficially own approximately 40.0% of the outstanding shares of
Common Stock. Accordingly, such persons 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 Debentures
and the Common Stock. See "Principal Shareholders."
GOVERNMENT REGULATION AND THE BURDENS OF COMPLIANCE
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
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,
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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 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.
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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. In the event of
any Change in Control of the Company, each holder of the Debentures will have
the right, at such holder's option and subject to certain conditions and
restrictions, to require the Company to repurchase all or any part of such
holder's Debentures. The right to require the Company to repurchase Debentures
may delay, deter, or prevent a change in control of the Company. See
"Description of Debentures" and "Description of Capital Stock -- Certain
Provisions of the Charter, Bylaws, and Tennessee Law."
ABSENCE OF PUBLIC MARKET FOR THE DEBENTURES
The Debentures are a new class of securities for which there is currently
no public market. Although the Debentures have been approved for listing on the
NYSE, there can be no assurance as to the liquidity of the market for the
Debentures that may develop, the ability of the holders to sell their
Debentures, or the prices at which holders of the Debentures would be able to
sell their Debentures. If a market for the Debentures does develop, the
Debentures may trade at a discount from their initial public offering price,
depending on prevailing interest rates, the market for similar securities,
performance of the Company, performance of the senior living industry, and other
factors. See "Underwriting."
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FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which are intended to be covered by the safe
harbors created thereby. Those statements include, but may not be limited to,
the discussions of the Company's operating and growth strategy, including its
development plans and 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, therefore, 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.
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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. Established in 1978, the Company believes it ranks among the leading
operators in the senior living and health care industry. Currently, the Company
operates 22 senior living communities in 12 states, consisting of 12 owned
communities, three leased communities, and seven managed communities, with an
aggregate capacity for approximately 5,800 residents. In the fourth quarter of
1997, the Company expects to acquire a long-term leasehold in an additional
community located in Richmond, Virginia with capacity for 917 residents. The
Company also operates 15 home health care agencies, ten of which are owned and
five of which are managed. At June 30, 1997, the Company's owned communities had
a stabilized occupancy rate of 95%, its leased communities had a stabilized
occupancy rate of 94%, and its managed communities had a stabilized occupancy
rate of 94%. For the year ended December 31, 1996 and the six months ended June
30, 1997, revenues attributable to the Company's senior living communities
accounted for 91.5% and 89.8%, respectively, of the Company's total revenues,
and revenues attributable to the Company's home health care agencies accounted
for 6.2% and 8.0%, respectively, of the Company's total revenues. Approximately
92.4% of the Company's total revenues for the year ended December 31, 1996 and
approximately 89.2% of the Company's total revenues for the six months ended
June 30, 1997 were derived from private pay sources.
Since 1992, the Company has experienced significant growth, primarily
through the acquisition of 14 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 by developing
senior living networks 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 27 free-standing assisted living residences, with an
estimated aggregate capacity for approximately 2,400 residents, and is expanding
nine of its existing communities to add capacity to accommodate approximately
800 additional residents.
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 IPO. 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
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 was
American Retirement Communities, LLC, a Tennessee limited liability company (the
"LLC"), whose members included W.E. Sheriff, the Company's Chairman and Chief
Executive Officer, and other Company executive officers. See "Certain
Transactions -- The 1995 Roll-Up."
17
<PAGE> 19
REORGANIZATION
Prior to the IPO, ARCLP completed a series of transactions resulting in the
Reorganization. Pursuant to the Reorganization, ARCLP contributed 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 Reorganization Note in the principal
amount of $21.9 million. The number of shares issued to ARCLP and the principal
amount of the Reorganization Note were established by ARCLP and the Company in
connection with the Reorganization based on a number of factors, including the
value of the assets contributed to the Company. In connection with the
Reorganization, ARCLP made certain representations and warranties to the
Company. Such representations and warranties are limited in scope, however, and
do not cover undisclosed liabilities of ARCLP or other matters related to
ARCLP's business. Following the Reorganization, ARCLP distributed 1,350,000
shares of Common Stock to the LLC, as general partner of ARCLP, and an aggregate
of 6,462,500 shares of Common Stock to the limited partners of ARCLP, generally
in accordance with the limited partners' ARCLP contribution accounts. See
"Principal Shareholders" and "Certain Transactions -- Reorganization."
Immediately after completion of the IPO, the Reorganization Note was repaid by
the Company out of the net proceeds from the IPO and such amount was distributed
to the limited partners of ARCLP in liquidation in accordance with the limited
partners' ARCLP contribution accounts. See "Certain Transactions --
Reorganization."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Debentures offered
hereby are estimated to be approximately $97.1 million (approximately $111.7
million if the Underwriters' over-allotment option is exercised in full), after
deduction of the underwriting discounts and commissions and estimated offering
expenses payable by the Company. The Company intends to use the net proceeds for
general corporate purposes, including the development and construction of
additional free-standing assisted living residences, possible acquisitions of
businesses engaged in activities similar or complementary to the Company's
business, and the possible prepayment of indebtedness at such time as management
deems to be in the best interest of the Company. Any such debt prepayment may be
subject to substantial prepayment penalties and no assurance can be given that
the Company will prepay any indebtedness.
The Company currently has eight owned communities undergoing expansions and
27 free-standing assisted living residences under development. The estimated
cost to complete and lease-up the Company's existing expansion and development
projects ranges from $250.0 million to $300.0 million. In addition, the Company
has reached an agreement in principle to acquire a long-term leasehold interest
in a community located in Richmond, Virginia. See "Business -- Recent and
Pending Acquisitions." The Company believes the remaining net proceeds from the
IPO, the net proceeds from this offering, funding available under the REIT
Facilities, future bank indebtedness, construction and mortgage financings, and
funds from other sources will be sufficient to fund the Company's current
development and acquisition plans. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business -- Development Activities."
Pending the use of the net proceeds as described above, the net proceeds
will be invested in short-term, investment-grade securities.
18
<PAGE> 20
PRICE RANGE OF COMMON STOCK
The Company sold shares of Common Stock in the IPO at a price per share of
$14.00. Since the date of the IPO (May 30, 1997), the Common Stock has traded on
the NYSE under the symbol "ACR." The following table sets forth the range of
high and low sales prices for the Common Stock for the periods indicated on the
NYSE.
<TABLE>
<CAPTION>
1997 HIGH LOW
- ---- ------ ------
<S> <C> <C>
Second Quarter (beginning May 30, 1997)..................... $17.88 $14.25
Third Quarter (through September 22, 1997).................. 21.88 17.88
</TABLE>
On September 22, 1997, the last reported sale price for the Common Stock on
the NYSE was $19.81 per share. The Company estimates that as of August 22, 1997,
there were approximately 135 holders of record of the Common Stock.
DIVIDEND POLICY AND PRIOR DISTRIBUTIONS
It is 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 Reorganization, the Predecessor and the Predecessor Entities
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." In the second
quarter of 1997, ARCLP paid the Tax Distribution, which approximated the income
taxes associated with the Predecessor's earnings in 1997 through the date of the
Reorganization. In addition, immediately following the consummation of the IPO,
and in connection with ARCLP's liquidation, the proceeds from the repayment of
the Reorganization Note were distributed by ARCLP to its limited partners,
generally in accordance with their respective contribution accounts. See "The
Company -- Reorganization" and "Certain Transactions -- Reorganization."
19
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) at
June 30, 1997, (ii) as adjusted to reflect the issuance and sale of the
Debentures offered hereby, and (iii) as further adjusted to give effect to the
assumed conversion of all of the Debentures at the initial Conversion Price.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Condensed
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
--------------------------------------
ASSUMING
100%
ACTUAL AS ADJUSTED CONVERSION
----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt, including current portion of long-term
debt...................................................... $ 5,935 $ 5,935 $ 5,935
======== ======== ========
Long-term debt:
Long-term unsubordinated debt, less current portion....... $161,324 $161,324 $161,324
% Convertible Subordinated Debentures due 2002........ -- 100,000 --
-------- -------- --------
Total long-term debt, less current portion.......... $161,324 $261,324 $161,324
Shareholders' equity:
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; 11,406,250 shares issued and outstanding,
actual and as adjusted; shares issued and
outstanding assuming 100% conversion of the
Debentures(1)........................................... 114 114
Additional paid-in capital................................ 60,213 60,213
Accumulated deficit....................................... (10,205) (10,205) (10,205)
-------- -------- --------
Total shareholders' equity.............................. 50,122 50,122 147,222
-------- -------- --------
Total capitalization.................................... $211,446 $311,446 $308,546
======== ======== ========
</TABLE>
- ---------------
(1) Does not include 627,500 shares of Common Stock reserved for issuance
pursuant to outstanding stock options under the Company's Stock Incentive
Plan. See "Management -- Compensation Pursuant to Plans -- 1997 Stock
Incentive Plan" and "Description of Capital Stock."
20
<PAGE> 22
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The accompanying Unaudited Pro Forma Consolidated Statements of Operations
for the six months ended June 30, 1996 and for the year ended December 31, 1996
reflect 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 Unaudited Pro Forma Consolidated Statements of Operations for the six
months ended June 30, 1996 and for the year ended December 31, 1996 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. No unaudited pro
forma condensed combined financial information is presented as of June 30, 1997
or for the six months then ended because there were no transactions for which
pro forma financial information is required for that period.
21
<PAGE> 23
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
CARRIAGE CLUB SALE-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
Preferred return on special redeemable preferred
limited partnership interests(F)............... (1,104) -- -- 780
-------- ------ -------- -------
Pro forma income (loss) before extraordinary item
available for distribution to partners and
shareholders................................... $ 2,689 $ 193 $ (679) $ 1,090
======== ====== ======== =======
Pro forma per share data:
Income before extraordinary item available for
distribution to partners and
shareholders(G).............................. $ 0.29
========
Shares used in computing pro forma per share
data(H)...................................... 9,375
========
Pro forma as adjusted per share data(I):
Income before extraordinary item available for
distribution to partners and
shareholders(J)..............................
Shares used in computing pro forma as adjusted
per share data(K)............................
<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
Preferred return on special redeemable preferred
limited partnership interests(F)............... (324)
--------
Pro forma income (loss) before extraordinary item
available for distribution to partners and
shareholders................................... $ 3,293
========
Pro forma per share data:
Income before extraordinary item available for
distribution to partners and
shareholders(G).............................. $ 0.35
========
Shares used in computing pro forma per share
data(H)...................................... 9,375
========
Pro forma as adjusted per share data(I):
Income before extraordinary item available for
distribution to partners and
shareholders(J).............................. $ 0.29
========
Shares used in computing pro forma as adjusted
per share data(K)............................ 11,406
========
</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 ($4.4 million over ten years); and
22
<PAGE> 24
(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) A total of $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
Unaudited Pro Forma Consolidated Statement of Operations data.
(G) Income per share before extraordinary item available for distribution to
partners and shareholders is calculated after subtracting the return on the
Preferred Partnership Interests.
(H) Reflects 7,812,500 shares issued in the Reorganization, plus 1,562,500
shares, representing the value of the $21.9 million principal amount of the
Reorganization Note (based upon the IPO price of $14.00 per share).
(I) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the Reorganization; (b) the sale of the 3,593,750
shares sold by the Company in the IPO, and the application of a portion of
the net proceeds to retire the Reorganization Note; (c) the Carriage Club
Acquisitions; and (d) the Sale-Leaseback Transactions and the application
of a portion of the net proceeds therefrom to retire debt.
(J) Does not reflect a $10.7 million ($1.10 per share) one-time charge to
income 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.
(K) Reflects 7,812,500 shares issued in the Reorganization, plus the 3,593,750
shares sold by the Company in the IPO.
23
<PAGE> 25
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
CARRIAGE CLUB SALE-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............ $33,888 $4,086 $ -- $ --
Management services revenue................. 918 -- (160) --
------- ------ -------- -----
Total revenues............................ 34,806 4,086 (160) --
Operating expenses:
Community operating expense................. 21,727 2,498 (160) --
General and administrative.................. 2,421 -- -- --
Lease expense............................... -- -- -- 1,046
Depreciation and amortization............... 3,165 464 104 (580)
------- ------ -------- -----
Total operating expenses.................. 27,313 2,962 (56) 466
------- ------ -------- -----
Income (loss) from operations............. 7,493 1,124 (104) (466)
------- ------ -------- -----
Other income (expense):
Interest expense............................ (4,733) (833) (991) 694
Interest income............................. 132 21 -- --
Other....................................... (8) -- -- --
------- ------ -------- -----
Other income (expense), net............... (4,609) (812) (991) 694
------- ------ -------- -----
Income (loss) before income taxes and
extraordinary item...................... 2,884 312 (1,095) 228
Income tax expense (benefit).............. -- -- -- --
------- ------ -------- -----
Income (loss) before extraordinary item... $ 2,884 $ 312 $ (1,095) $ 228
======= ====== ======== =====
PRO FORMA TAX DATA:
Income (loss) before income taxes and
extraordinary item.......................... $ 2,884 $ 312 $ (1,095) $ 228
Pro forma income tax expense (benefit)(E)..... 1,096 119 (416) 87
------- ------ -------- -----
Pro forma income (loss) before extraordinary
item........................................ 1,788 193 (679) 141
Preferred return on special redeemable
preferred limited partnership
interests(F)................................ (714) -- -- 390
------- ------ -------- -----
Pro forma income before extraordinary item
available for distribution to partners and
shareholders................................ $ 1,074 $ 193 $ (679) $ 531
======= ====== ======== =====
Pro forma per share data:
Income before extraordinary item available
for distribution to partners and
shareholders(G)........................... $ 0.11
=======
Shares used in computing pro forma per share
data(H)................................... 9,375
=======
Pro forma as adjusted per share data(I):
Income before extraordinary item available
for distribution to partners and
shareholders(J)...........................
Shares used in computing pro forma as
adjusted per share data(K)................
<CAPTION>
PRO FORMA
---------
<S> <C>
Revenues:
Resident and health care revenue............ $37,974
Management services revenue................. 758
-------
Total revenues............................ 38,732
Operating expenses:
Community operating expense................. 24,065
General and administrative.................. 2,421
Lease expense............................... 1,046
Depreciation and amortization............... 3,153
-------
Total operating expenses.................. 30,685
-------
Income (loss) from operations............. 8,047
-------
Other income (expense):
Interest expense............................ (5,863)
Interest income............................. 153
Other....................................... (8)
-------
Other income (expense), net............... (5,718)
-------
Income (loss) before income taxes and
extraordinary item...................... 2,329
Income tax expense (benefit).............. --
-------
Income (loss) before extraordinary item... $ 2,329
=======
PRO FORMA TAX DATA:
Income (loss) before income taxes and
extraordinary item.......................... $ 2,329
Pro forma income tax expense (benefit)(E)..... 886
-------
Pro forma income (loss) before extraordinary
item........................................ 1,443
Preferred return on special redeemable
preferred limited partnership
interests(F)................................ (324)
-------
Pro forma income before extraordinary item
available for distribution to partners and
shareholders................................ $ 1,119
=======
Pro forma per share data:
Income before extraordinary item available
for distribution to partners and
shareholders(G)........................... $ 0.12
=======
Shares used in computing pro forma per share
data(H)................................... 9,375
=======
Pro forma as adjusted per share data(I):
Income before extraordinary item available
for distribution to partners and
shareholders(J)........................... $ 0.10
=======
Shares used in computing pro forma as
adjusted per share data(K)................ 11,406
=======
</TABLE>
- ---------------
(A) Reflects the historical consolidated statement of operations of the
Predecessor for the six months ended June 30, 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
24
<PAGE> 26
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 $580,000 of depreciation and amortization
expense on assets sold in the Sale-Leaseback Transactions; (ii) lease
expense of approximately $1.3 million, less $228,000 representing
amortization of the deferred gain on the Sale-Leaseback Transactions ($4.4
million over ten years); and (iii) elimination of $694,000 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) A total of $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
Unaudited Pro Forma Consolidated Statement of Operations data.
(G) Income per share before extraordinary item available for distribution to
partners and shareholders is calculated after subtracting the return on the
Preferred Partnership Interests.
(H) Reflects 7,812,500 shares issued in the Reorganization, plus 1,562,500
shares, representing the value of the $21.9 million principal amount of the
Reorganization Note (based upon the IPO price of $14.00 per share).
(I) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the Reorganization; (b) the sale of the 3,593,750
shares sold by the Company in the IPO, and the application of a portion of
the net proceeds to retire the Reorganization Note; (c) the Carriage Club
Acquisitions; and (d) the Sale-Leaseback Transactions and the application
of a portion of the net proceeds therefrom to retire debt.
(J) Does not reflect a $10.7 million ($1.10 per share) one-time charge to
income 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.
(K) Reflects 7,812,500 shares issued in the Reorganization, plus the 3,593,750
shares sold by the Company in the IPO.
25
<PAGE> 27
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 selected statement of operations
and balance sheet data as of and for the six months ended June 30, 1996 are
derived from the unaudited consolidated financial statements of the Predecessor.
The selected statements of operations and balance sheet data as of and for the
six months ended June 30, 1997 are derived from the unaudited consolidated
financial statements of the Company and includes the operations of the
Predecessor for the period January 1, 1997 through May 28, 1997 and the Company
for the period May 29, 1997 through June 30, 1997. In the opinion of the
Company's management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 1997 are not necessarily indicative of
the results that may be expected for fiscal 1997. 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
------------------------------------------- -------------------------------------
NINE MONTHS
YEARS ENDED THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, ENDED DECEMBER DECEMBER 31, 1996
--------------------------- MARCH 31, 31, ----------------------
1992 1993 1994 1995 1995 ACTUAL PRO FORMA(1)
------- ------- ------- ------------- ------------ ------- ------------
(IN THOUSANDS)
<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
Lease expense......................... -- -- -- -- -- -- 2,090
General and administrative............ 2,656 3,290 3,455 1,108 3,446 6,200 6,200
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) --
current(3)............................ -- -- -- 20 55 (920) (920)
Income tax expense -- deferred(4)...... -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary
item.................................. (453) 714 162 (1,268) 3,296 5,533 5,249
Extraordinary item(5).................. -- -- -- -- -- (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(6).......................... -- -- -- -- (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
======= ======= ======= ======= ======= ======= =======
<CAPTION>
PREDECESSOR
----------------------
SIX
SIX MONTHS MONTHS
ENDED JUNE 30, 1996 ENDED
---------------------- JUNE 30,
ACTUAL PRO FORMA(1) 1997
------- ------------ --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Resident and health care revenue...... $33,888 $37,974 $43,424
Management services revenue........... 918 758 965
------- ------- -------
Total revenues.................. 34,806 38,732 44,389
Operating expenses:
Community operating expense........... 21,727 24,065 27,519
Lease expense......................... -- 1,046 1,072
General and administrative............ 2,421 2,421 4,070
Depreciation and amortization......... 3,165 3,153 3,206
------- ------- -------
Total operating expenses............ 27,313 30,685 35,867
------- ------- -------
Income from operations.............. 7,493 8,047 8,522
------- ------- -------
Other income (expense):
Interest expense...................... (4,733) (5,863) (6,611)
Interest income....................... 132 153 364
Other................................. (8) (8) (61)
------- ------- -------
Other income (expense), net......... (4,609) (5,718) (6,308)
------- ------- -------
Income (loss) before income taxes
and extraordinary item............ 2,884 2,329 2,214
Income tax expense (benefit) --
current(3)............................ -- -- 92
Income tax expense -- deferred(4)...... -- -- 10,728
------- ------- -------
Income (loss) before extraordinary
item.................................. 2,884 2,329 (8,606)
Extraordinary item(5).................. (2,335) (2,335) --
------- ------- -------
Net income (loss)...................... 549 (6) (8,606)
Preferred return on special redeemable
preferred limited partnership
interests(6).......................... (714) (324) --
------- ------- -------
Net income (loss) available for
distribution to partners and
shareholders.......................... $ (165) $ (330) $(8,606)
======= ======= =======
Distribution to partners, excluding
preferred distributions............... $ 2,832 $ 2,832 $ 2,500(7)
======= ======= =======
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
PREDECESSOR
---------------------------------------------
YEAR ENDED SIX MONTHS SIX MONTHS
DECEMBER 31, 1996 ENDED JUNE 30, 1996 ENDED
--------------------- --------------------- JUNE 30,
ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1) 1997
------ ------------ ------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA TAX DATA(8):
Income before income taxes and extraordinary item........... $4,613 $4,329 $2,884 $2,329 $2,214
Pro forma income tax expense................................ 820 712 1,096 886 841(9)
------ ------ ------ ------ ------
Pro forma income before extraordinary item.................. 3,793 3,617 1,788 1,443 1,373
Preferred return on special redeemable preferred limited
partnership interests(6)................................... (1,104) (324) (714) (324) --
------ ------ ------ ------ ------
Pro forma income before extraordinary item available for
distribution to partners and shareholders.................. $2,689 $3,293 $1,074 $1,119 $1,373
====== ====== ====== ====== ======
Pro forma per share data:
Income before extraordinary item........................... $ 0.40 $ 0.39 $ 0.19 $ 0.15 $ 0.14
Preferred return on special redeemable preferred limited
partnership interests.................................... (0.12) (0.03) (0.08) (0.03) --
------ ------ ------ ------ ------
Income before extraordinary item available for distribution
to partners and shareholders............................. $ 0.29 $ 0.35 $ 0.11 $ 0.12 $ 0.14
====== ====== ====== ====== ======
Shares used in computing pro forma per share data(10)...... 9,375 9,375 9,375 9,375 9,752
====== ====== ====== ====== ======
Pro forma as adjusted per share data(11):
Income before extraordinary item........................... $ 0.32 $ 0.13 $ 0.12
Preferred return on special redeemable preferred limited
partnership interests.................................... (0.03) (0.03) --
------ ------ ------
Income before extraordinary item available for distribution
to partners and shareholders............................. $ 0.29 $ 0.10 $ 0.12
====== ====== ======
Shares used in computing pro forma as adjusted per share
data(12)................................................. 11,406 11,406 11,406
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30, 1997
-------------------------------------------------- -------------------------
PREDECESSOR ENTITIES
(COMBINED) PREDECESSOR
---------------------------- ------------------- AS
1992 1993 1994 1995 1996 ACTUAL ADJUSTED(13)
------- ------- -------- -------- -------- ---------- ------------
(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 $ 21,863 $118,963
Working capital (deficit)........................ 1,545 2,529 3,168 (1,048) (14,289) 15,472 112,572
Total assets..................................... 54,419 63,393 111,425 165,579 228,162 246,072 346,072
Long-term debt, including current portion........ 38,469 43,335 89,414 102,245 170,689 167,259 267,259
Partners' and shareholders' equity............... 11,937 15,042 12,823 51,823 37,882 50,122 50,122
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES (COMBINED) PREDECESSOR
---------------------------------------- -------------------------------------
NINE MONTHS
YEARS ENDED THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, ENDED DECEMBER DECEMBER 31, 1996
------------------------ MARCH 31, 31, ----------------------
1992 1993 1994 1995 1995 ACTUAL PRO FORMA(1)
------ ------ ------ ------------- ------------ ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Adjusted EBITDA(14).......... $4,018 $6,534 $8,407 $3,262 $15,815 $23,679 $23,198
Ratio of adjusted EBITDA to
interest expense(15)........ 1.5x 1.9x 1.6x 1.4x 2.1x 2.0x 1.9x
Ratio of earnings to fixed
charges(16)................. 0.9x 1.2x 1.0x 0.5x 1.4x 1.4x 1.3x
<CAPTION>
PREDECESSOR
----------------------
SIX
SIX MONTHS MONTHS
ENDED JUNE 30, 1996 ENDED
---------------------- JUNE 30,
ACTUAL PRO FORMA(1) 1997
------- ------------ --------
<S> <C> <C> <C>
OTHER FINANCIAL DATA:
Adjusted EBITDA(14).......... $10,782 $11,345 $12,031
Ratio of adjusted EBITDA to
interest expense(15)........ 2.3x 2.0x 1.9x
Ratio of earnings to fixed
charges(16)................. 1.6x 1.3x 1.3x
</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) Periods prior to 1997 reflect 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. Income tax expense
for the six months ended June 30,1997 reflects income taxes incurred by the
Company during the period May 29, 1997 (the day following the
Reorganization) through June 30, 1997. During the period January 1, 1997
through the date of the Reorganization (May 28, 1997), the Predecessor did
not incur income tax expense because it was a partnership. See Note 12 to
the Combined and Consolidated Financial Statements.
(4) At the time of the Reorganization and as a result of the conversion from a
non-taxable to a taxable entity, the Company recorded as a one-time charge
to income a net deferred income tax expense of approximately $10.7 million
resulting from 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.
27
<PAGE> 29
(5) Amount represents loss on early extinguishment of debt. See Note 9 to the
Combined and Consolidated Financial Statements.
(6) 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 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.
(7) Reflects the Tax Distribution.
(8) 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 unaudited pro forma tax 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.
(9) The unaudited pro forma tax data for the six months ended June 30, 1997
does not give effect to a non-recurring $10.7 million ($1.10 per share)
charge to income 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 footnote (4) above and Note 16 to the Combined and
Consolidated Financial Statements.
(10) Reflects 7,812,500 shares issued in the Reorganization, plus 1,562,500
shares, representing the value of the $21.9 million principal amount of the
Reorganization Note (based upon the IPO price of $14.00 per share). For the
six months ended June 30, 1997, also includes the weighted average effect
of (a) the 3,593,750 shares sold by the Company in the IPO; and (b) Common
Stock equivalents.
(11) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the Reorganization; (b) the sale of the 3,593,750
shares sold by the Company in the IPO; and (c) for the year ended December
31, 1996 data, the transactions described in footnote (1) above. See Note
16 to the Combined and Consolidated Financial Statements.
(12) Reflects 7,812,500 shares issued in the Reorganization, plus the 3,593,750
shares sold by the Company in the IPO.
(13) Adjusted to reflect the sale of the Debentures offered hereby.
(14) Adjusted EBITDA represents earnings before deductions for interest expense,
income taxes, depreciation and amortization and excludes the non-recurring
charge related to the 1995 Roll-Up and extraordinary loss from early
extinguishment of debt. The Company believes that adjusted EBITDA provides
additional information for determining its ability to meet its future debt
service, capital expenditure and working capital requirements. Adjusted
EBITDA is not a measure of financial performance under generally accepted
accounting principals and should not be considered as an alternative to net
income (loss) or income from operations as an indicator of the Company's
operating performance, or to cash flows as a measure of the Company's
liquidity.
(15) For purposes of this computation, interest expense includes capitalized and
net interest expense.
(16) For purposes of this computation, earnings are defined as income (loss)
before income taxes and extraordinary item and fixed charges (excluding
capitalized interest). Fixed charges are defined as interest expensed and
capitalized, amortization of capitalized financing costs, and the portion
of operating lease rental expense that is representative of the interest
factor. Earnings were inadequate to cover fixed charges for the year ended
December 31, 1992 and the three months ended March 31, 1995 by $453,000 and
$1.2 million, respectively.
28
<PAGE> 30
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 22 senior living communities in 12
states with an aggregate capacity for approximately 5,800 residents. The Company
currently owns 12 communities, leases three 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 completed the IPO and the Reorganization in the second quarter
of 1997. 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 IPO. See "The Company -- 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 and amounts for the six months ended June 30, 1997 represent
the sum of the results of operations of the Predecessor for the period January
1, 1997 through May 28, 1997 and the results of operations of the Company for
the period May 29, 1997 through June 30, 1997. 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 12 of the
communities it now owns or leases. From 1994 through 1996, the Company acquired
eight of these senior living communities, with an aggregate capacity for 2,212
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 six of its owned communities, which are
expected to cost approximately $60.0 million to $70.0 million to complete and
lease-up. These eight expansion projects will add capacity to accommodate
approximately 700 additional 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.
29
<PAGE> 31
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
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 73.5% and 73.7% of total revenues for the six months
ended June 30, 1997 and 1996, respectively, and 75.5%, 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% and 15.1% of
total revenues for the six months ended June 30, 1997 and 1996, respectively,
and 13.7%, 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 10.3% and 8.6%
of total revenues for the six months ended June 30, 1997 and 1996, respectively,
and 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
2.2% and 2.6% of total revenues for the six months ended June 30, 1997 and 1996,
respectively, and 2.3%, 3.5%, and 7.1% of total revenues for the years ended
December 31, 1996, 1995, and 1994, respectively. Approximately 89.2% and 91.3%
of the Company's total revenues for the six months ended June 30, 1997 and 1996,
respectively, and 92.4%, 91.2%, 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
(10.7% for the six months ended June 30, 1997 and 7.5% for the year ended
December 31, 1996), including Medicare-related private co-insurance, and
Medicaid (0.1% for the six months ended June 30, 1997 and the year ended
December 31, 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) lease expense; (iii) general and administrative expense,
which includes all corporate office overhead; and (iv) depreciation and
amortization expense.
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. Currently, the Company owns 12 senior living communities
and ten home health care agencies; leases three communities; and operates seven
communities and five home health care agencies 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.
30
<PAGE> 32
The Company's community 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
services, risk management, 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 April 1998 and July 2000.
The Company's home health care agency management agreements are generally
for terms of three years; however, certain of the agreements may be canceled by
the owner of the agency on short notice. Pursuant to the management agreements,
the Company is generally responsible for providing operational oversight,
utilization review, billing, accounting, data processing services, and other
services. The Company receives a monthly fee for its services based on a
contractual fee per visit. The Company's current home health care agency
management agreements expire between February 2000 and July 2000.
The following tables set forth, for the periods indicated, selected
Statement 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
Lease expense............................................... -- -- -- -- -- --
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 income (expense)...................................... 98 0.3 (94) (0.1) 788 1.0
------- ----- ------- ----- ------- -----
Other 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>
31
<PAGE> 33
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------
1996 1997
---------------- ---------------
$ % $ %
-------- ----- ------- -----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Resident and health care revenue............................ $ 33,888 97.4% $43,424 97.8%
Management services revenue................................. 918 2.6 965 2.2
-------- ----- ------- -----
Total revenues............................................ 34,806 100.0 44,389 100.0
Community operating expense................................. 21,727 62.4 27,519 62.0
Lease expense............................................... -- -- 1,072 2.4
General and administrative.................................. 2,421 7.0 4,070 9.2
Depreciation and amortization............................... 3,165 9.1 3,206 7.2
-------- ----- ------- -----
Total operating expenses.................................. 27,313 78.5 35,867 80.8
-------- ----- ------- -----
Income from operations.................................... 7,493 21.5 8,522 19.2
Interest expense............................................ (4,733) (13.6) (6,611) (14.9)
Interest income............................................. 132 0.4 364 0.8
Other income (expense)...................................... (8) -- (61) (0.1)
-------- ----- ------- -----
Other expense, net........................................ (4,609) (13.2) (6,308) (14.2)
-------- ----- ------- -----
Income before income taxes and extraordinary item......... 2,884 8.3 2,214 5.0
Income tax expense -- current............................... -- -- 92 (0.2)
Income tax expense -- deferred.............................. -- -- 10,728 (24.2)
-------- ----- ------- -----
Income before extraordinary item............................ 2,884 8.3 (8,606) (19.4)
Extraordinary item.......................................... (2,335) (6.7) -- --
-------- ----- ------- -----
Net income (loss)........................................... $ 549 1.6% $(8,606) (19.4)%
======== ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
----------------------- --------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
End of period capacity:
Owned..................................................... 2,141 2,594 3,369 3,369 3,002
Leased.................................................... -- -- -- -- 573
Managed................................................... 3,315 3,008 2,159 2,159 2,159
----- ----- ----- ----- -----
Total............................................... 5,456 5,602 5,528 5,528 5,734
===== ===== ===== ===== =====
Average occupancy rate:
Owned..................................................... 89% 93% 94% 93% 94%
Leased.................................................... -- -- -- -- 93
Managed................................................... 93 91 91 90 93
----- ----- ----- ----- -----
Total............................................... 90% 92% 92% 92% 93%
===== ===== ===== ===== =====
End of period occupancy rate:
Owned..................................................... 91% 94% 96% 93% 93%
Leased.................................................... -- -- -- -- 84
Managed................................................... 96 91 92 88 93
----- ----- ----- ----- -----
Total............................................... 94% 92% 94% 91% 92%
===== ===== ===== ===== =====
Stabilized average occupancy rate(1):
Owned..................................................... 89% 93% 94% 94% 95%
Leased.................................................... -- -- -- -- 94
Managed................................................... 93 95 95 95 94
----- ----- ----- ----- -----
Total............................................... 91% 94% 95% 94% 95%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Includes communities or expansions thereof that have (i) achieved 95%
occupancy or (ii) been open at least 12 months. The 12-month stabilization
period may be extended for certain large retirement communities. In the
table above, the stabilized results for the year ended December 31, 1996 do
not include a large managed community with a capacity for over 240 residents
which opened in August 1995.
32
<PAGE> 34
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 and leased 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>
SIX MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
----------------- ----------------- -----------------
1994 1995 % CHANGE 1995 1996 % CHANGE 1996 1997 % CHANGE
------- ------- -------- ------- ------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <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% $28,803 $30,962 7.5%
Home health and
companion services
revenue............... 627 2,699 330.5% 2,699 3,789 40.4% 3,010 4,424 47.0%
------- ------- ------- ------- ------- -------
Resident and health
care revenue........ 27,011 31,739 17.5% 49,097 52,677 7.3% 31,813 35,386 11.2%
Community operating
expense............... 19,212 21,795 13.4% 32,854 34,314 4.4% 20,570 22,866 11.2%
------- ------- ------- ------- ------- -------
Resident income from
operations(1)....... $ 7,799 $ 9,944 27.5% $16,243 $18,363 13.1% $11,243 $12,520 11.4%
======= ======= ======= ======= ======= =======
Resident income from
operations
margin(1)(2)........ 28.9% 31.3% 33.1% 34.9% 35.3% 35.4%
OTHER DATA:
Average occupancy
rate(3)............... 88% 91% 92% 94% 94% 96%
Average monthly revenue
per occupied
unit(4)............... $ 2,322 $ 2,467 6.2% $ 2,217 $ 2,295 3.5% $ 2,200 $ 2,337 5.3%
Average monthly expense
per occupied
unit(5)............... $ 1,639 $ 1,665 1.6% $ 1,465 $ 1,475 0.7% $ 1,398 $ 1,471 5.2%
</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 trends
in operating cash flow and community performance 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 and lease expense. These excluded items are significant
components in understanding and assessing the operating performance of the
Company as a whole. The following table reconciles resident income from
operations and income from operations as determined in accordance with
generally accepted accounting principles on a Same Facility basis:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
---------------- ------------------ ------------------
1994 1995 1995 1996 1996 1997
------ ------ ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Resident income from operations........ $7,799 $9,944 $16,243 $18,363 $11,243 $12,520
Lease expense........................ -- -- -- -- -- 1,027
Depreciation and amortization........ 2,533 3,090 4,648 4,332 2,642 2,260
------ ------ ------- ------- ------- -------
Income from operations................. $5,266 $6,854 $11,595 $14,031 $ 8,601 $ 9,233
====== ====== ======= ======= ======= =======
Income from operations margin.......... 19.5% 21.6% 23.6% 26.6% 27.0% 26.1%
</TABLE>
This information should be considered in conjunction with the historical and
pro forma financial statements of the Company included elsewhere in this
Prospectus.
(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.
33
<PAGE> 35
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1996
Revenues. Total revenues were $44.4 million for the six months ended June
30, 1997 compared to $34.8 million for the comparable period in 1996,
representing an increase of $9.6 million, or 27.5%. Resident and health care
revenues increased by $9.5 million, and management services revenues increased
by $47,000. Of the increase in resident and health care revenues, $6.0 million,
or 62.7%, was attributable to revenues derived from two senior living
communities acquired in May 1996, one assisted living residence acquired in May
1997, and one assisted living residence leasehold acquired in May 1997. The
remaining $3.6 million, or 37.3%, of such increase was attributable to Same
Facility growth.
Revenues attributable to Same Facilities were $35.4 million for the six
months ended June 30, 1997, representing an increase of $3.6 million, or 11.2%,
over 1996. Home health care agency and companion services fees on a Same
Facility basis increased by $1.4 million, or 47%, over the comparable 1996
period. Monthly/per diem service fee revenue on a Same Facility basis increased
$2.2 million, or 7.5%, over the comparable 1996 period. Of this increase, 5.5%
was due primarily to increases in average rates (including Medicare rate
adjustments) and 2.0% was due to higher occupancy. Same Facility average
occupancy rates increased to 95.6% for the six months ended June 30, 1997 from
93.6% for the comparable period in 1996.
Community Operating Expense. Community operating expense increased to
$27.5 million for the six months ended June 30, 1997, as compared to $21.7
million for the comparable period in 1996, representing an increase of $5.8
million, or 26.7%. Of the increase in community operating expenses, $3.5
million, or 60.3%, was attributable to expenses from acquired living communities
and acquired and newly leased assisted living residences, and 39.6% of the
increase was attributable to Same Facility operating expenses, which increased
by $2.3 million, or 11.2%, over the comparable 1996 period. Of such increase,
$948,000 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 7.4% for the six months
ended June 30, 1997 as compared to the comparable period in 1996. Community
operating expense as a percentage of resident and health care revenues declined
to 63.4% for the six months ended June 30, 1997 from 64.1% for the comparable
period in 1996. Same Facility community operating expense as a percentage of
Same Facility resident and health care revenues declined to 64.6% for the six
months ended June 30, 1997 from 64.7% for the comparable period in 1996. Same
Facility operating expenses exclusive of home health agency and companion
services expenses as a percentage of Same Facility revenues, exclusively of home
health and companion services revenue decreased to 62.9% for the six months
ended June 30, 1997 from 63.0% for the comparable period in 1996.
General and Administrative. General and administrative expense increased
to $4.1 million for the six months ended June 30, 1997, as compared to $2.4
million for the comparable period in 1996, representing an increase of $1.6
million, or 68.1%. Of this increase, $580,000 was directly related to the growth
of the Company's home health care agencies and $427,000 of the increase related
to salary and wage expenses of new employees. The remaining increase of
approximately $642,000 resulted from continued investments in infrastructure
necessary to support the Company's growth. General and administrative costs as a
percentage of total revenues increased to 9.2% for the six months ended June 30,
1997 from 7.0% for the comparable period in 1996.
Lease Expense. The Company incurred lease expense of $1.1 million for the
six months ended June 30, 1997, primarily as a result of the Sale-Leaseback
Transaction, as well as the acquisition of a leasehold interest in an assisted
living residence in May 1997. The Company did not incur lease expense prior to
the Sale-Leaseback Transaction.
Depreciation and Amortization. Depreciation and amortization expense
increased to $3.2 million for the six months ended June 30, 1997, representing
an increase of $41,000, or 1.3% over the comparable period of the previous year.
This outcome was primarily the result of decreases related to the Sale-Leaseback
Transaction partially offset by increases related to the acquisitions of two
retirement communities in May 1996 and one assisted living residence in May
1997. Same
34
<PAGE> 36
Facility depreciation and amortization expense decreased to $2.3 million for the
six months ended June 30, 1997 from $2.6 million for the six months ended June
30, 1996, as result of the Sale-Leaseback Transaction.
Other Income (Expense). Interest expense increased to $6.6 million for the
six months ended June 30, 1997 from $4.7 million for the comparable period in
1996, representing an increase of $1.9 million, or 39.7%. The increase in
interest expense was related to indebtedness incurred in connection with the
acquisition of two senior living communities in May 1996. Interest expense, as a
percentage of total revenues, increased to 14.9% for the six months ended June
30, 1997 from 13.6% in 1996. Interest income increased to $364,000 for the six
months ended June 30, 1997 from $132,000 for the comparable period in 1996,
primarily as a result of interest income earned from the investment of the
remaining net proceeds from the IPO.
Income Tax Expense. The conversion from a non-taxable limited partnership
to a taxable corporation in May 1997 resulted in a one-time $10.7 million charge
of income related to the recognition of a net deferred income tax liability for
the amount of the difference between the accounting and tax bases of the
Company's assets and liabilities.
Extraordinary Loss. In the six months ended June 30, 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 (Loss). As a result of the foregoing factors, the Company
reported a net loss of $8.6 million for the six months ended June 30, 1997.
Adjusting for the effect of the income tax charge referenced above, the Company
reported pro forma net income of $1.4 million for the six months ended June 30,
1997. For the six months ended June 30, 1996, the Company reported pro forma net
income before extraordinary item of $1.8 million, pro forma net income before
extraordinary item available for distribution to partners and shareholders of
$1.1 million, and net income of $549,000.
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,
3.3% was due primarily to rate increases and 2.1% 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, $695,000 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
2.5% in 1996 as compared to 1995. Community operating expense as
35
<PAGE> 37
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) $981,000 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.
During 1994 and 1995, the
36
<PAGE> 38
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,
7.1% was due primarily to rate increases and 3.0% was due to higher occupancy.
Same Facility average occupancy rates increased from 88% 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 $313,000 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 RESOURCES
The Company sold 3,593,750 shares of Common Stock in the IPO in the second
quarter of 1997 and received net proceeds (after deducting the underwriting
discount and expenses) of approximately $45.2 million. The Company used
approximately $21.9 million of the net proceeds from the IPO to repay the
Reorganization Note to the limited partners of the Predecessor. The Company has
been using and will continue to use the remaining $23.3 million of the net
proceeds from the IPO to fund the Company's growth strategy. See
"Business -- Growth Strategy."
37
<PAGE> 39
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 June 30, 1997, the Company had $167.3 million of
indebtedness outstanding, including $144.3 million payable to GECC, with fixed
maturities ranging from December 31, 2001 to April 30, 2003. The Company has the
capacity to borrow up to an additional $17.0 million from GECC to finance future
acquisitions or expansions. The Company also maintains a $2.5 million secured
line of credit with a bank that is available for working capital and to secure
various debt instruments. At June 30, 1997, approximately $2.3 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 June 30, 1997, $2.9 million was outstanding under this line of
credit.
Except for the Company's $2.5 million line of credit, each of the Company's
debt agreements contain restrictive covenants that generally relate to the use,
operation, and disposition of the community or communities that serve as
collateral for the indebtedness thereunder, and prohibit the further encumbrance
of such community or communities without the consent of the applicable lender.
Additionally, substantially all of such indebtedness is cross-defaulted. The
Company does not believe such restrictions are material to its business because
the Company does not intend to further encumber its owned properties and does
not believe the covenants relating to the use, operation, and disposition of its
communities materially limit its operations.
The Company's $2.5 million line of credit, under which $2.3 million was
outstanding as of June 30, 1997, contains covenants prohibiting, among other
things, the incurrence of additional debt or liens on the Company's assets, the
acquisition or disposition of properties or businesses owned by the Company, and
a change in the management of the Company. Such credit agreement also contains
financial covenants that require the Company to maintain certain prescribed debt
service coverage, liquidity, and capital expenditure reserve levels. The Company
does not believe that such covenants materially limit its operations because the
Company believes that, if necessary, it will have sufficient resources to repay
such indebtedness to obtain relief from such covenants.
All of the Company's owned communities are subject to mortgages. Except for
the Company's Homewood Residence at Corpus Christi, Richmond Place, and Homewood
Residence at Tarpon Springs communities, each of the Company's owned communities
serves as blanket collateral for the indebtedness payable to GECC described
above. The Homewood Residence at Corpus Christi community is subject to a $4.7
million mortgage in favor of NHI. See "Business -- Recent and Pending
Acquisitions." The Richmond Place community is the subject of an approximately
$8.0 million revenue bond financing, which is supported by an approximately $8.0
million letter of credit that is secured by a mortgage on the community. The
Homewood Residence at Tarpon Springs community is subject to a $3.5 million
mortgage in favor of a bank.
As of June 30, 1997, approximately 71.1% 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 7.9% as of June
30, 1997. Less than 15% of the Company's currently outstanding indebtedness
matures before December 31, 2002. Currently, the Company's minimum annual lease
obligations are approximately $3.0 million. The Company expects to service
current outstanding indebtedness and lease obligations with internally generated
funds.
At June 30, 1997, the Company was obligated to pay annual rental
obligations under long-term leases of approximately $3.0 million. As of June 30,
1997, the Company's existing debt and lease agreements required aggregate annual
payments for the years ended December 31, 1997, 1998, 1999, 2000, and 2001,
assuming no change in the Company's average interest cost (8.4% at June 30,
1997), ranging from $20.7 million to $22.9 million. In addition, the Company
intends to incur significant additional indebtedness and lease obligations and
therefore expects its annual debt service and lease payment obligations for such
periods to be significantly greater than the amounts set forth in the preceding
sentence.
38
<PAGE> 40
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 and
upon satisfaction of 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.
Net cash provided by operating activities was $11.7 million, $9.0 million,
and $3.5 million for the fiscal years ended December 31, 1996, 1995, and 1994,
respectively, and $4.7 million and $8.2 million for the six months ended June
30, 1997 and 1996, 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 June 30, 1997, unrestricted cash balances were $21.8
million.
Net cash used by investing activities totaled $67.6 million, $11.0 million,
and $46.3 million for the fiscal years ended December 31, 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 in an
aggregate amount of $10.9 million. During the same period, the Company sold an
aggregate of $2.8 million of assets. Net cash provided by investing activities
was $3.4 million for the six months ended June 30, 1997, as compared to net cash
used of $64.5 million for the six months ended June 30, 1996. During the six
months ended June 30, 1997, the Company acquired an aggregate of $11.5 million
of assisted living residence assets, sold $28.8 million of assets, and made
$10.9 million of capital expenditures at certain of its owned communities.
Net cash provided by financing activities was $55.3 million, $2.9 million,
and $42.6 million for the fiscal years ended December 31, 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 or accrued cash
distributions to its partners of $7.1 million, $6.6 million, and $2.6 million in
1996, 1995, and 1994, respectively; and redeemed $4.8 million of the $10.0
million of Preferred Partnership Interests in 1996. Net cash provided by
financing activities was $10.6 million and $59.4 million for the six months
ended June 30, 1997 and 1996, respectively. During the six months ended June 30,
1997, the Company repaid $14.6 million of indebtedness with a portion of the
proceeds from the Sale-Leaseback Transactions, repaid a $2.3 million term loan,
made $3.6 million of principal payments on its long-term debt, and redeemed the
remaining $5.2 million of the Preferred Partnership Interests, which was accrued
as of December 31, 1996. The Company paid the $2.5 million Tax Distribution to
its partners in the second quarter of 1997. 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 $4.4 million, which will be
recognized over the ten-year initial term of the lease.
In May 1997, the Company acquired an assisted living residence in Tarpon
Springs, Florida. The purchase price for the residence was $4.6 million and was
financed primarily through a $3.5 million mortgage loan provided by a bank. The
residence was licensed and opened in August 1997.
In May 1997, the Company acquired the Homewood Residence at Corpus Christi
community and acquired a long-term leasehold in the Homewood Residence at
Victoria community. The purchase price for the Corpus Christi community was
approximately $5.8 million, and the Company financed the acquisition primarily
through a $4.7 million mortgage loan provided by NHI. The
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<PAGE> 41
purchase price for the Victoria community leasehold was approximately $1.1
million. The lease provides for annual lease obligations of approximately
$468,000. The Company has also entered into five joint venture arrangements with
third parties pursuant to which it will develop six assisted living residences
with an aggregate capacity for approximately 500 residents.
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 reached an agreement in principle to lease and operate
Imperial Plaza, a senior living community located in Richmond, Virginia with
capacity for 917 residents, and to acquire title to certain related assets. The
Company will have the option to acquire the community at its fair market value
at the expiration of the lease. Expenditures by the Company for the acquisition
of the leasehold, the related property, and the purchase option will aggregate
approximately $13.1 million, which will be payable in varying amounts over the
next three years. The Company will be obligated to make annual rental payments
of approximately $4.3 million under the lease. In addition, the Company will be
required to maintain a capital reserve account with payments of approximately
$300,000 annually, and to make a refundable deposit of $5.4 million to secure
the performance of its obligations under the lease.
Capital expenditures planned for 1997 total approximately $60.0 million. Of
this amount, the Company anticipates that approximately $30.0 million will be
used toward the development of approximately 27 free-standing assisted living
residences; approximately $27.0 million will be used for the expansion of
existing communities; and approximately $3.0 million will be used for renovation
and replacement of equipment at existing communities. The Company estimates that
capital expenditures 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 expects that its current cash and the net proceeds from this
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 incurred a one-time $10.7 million ($1.10 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> 42
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. Established in 1978, the Company believes it ranks among the leading
operators in the senior living and health care services industry. Currently, the
Company operates 22 senior living communities in 12 states, consisting of 12
owned communities, three leased communities, and seven managed communities, with
an aggregate capacity for approximately 5,800 residents. In the fourth quarter
of 1997, the Company expects to acquire a long-term leasehold in an additional
community located in Richmond, Virginia with capacity for 917 residents. The
Company also operates 15 home health care agencies, ten of which are owned and
five of which are managed. At June 30, 1997, the Company's owned communities had
a stabilized occupancy rate of 95%, its leased communities had a stabilized
occupancy rate of 94%, and its managed communities had a stabilized occupancy
rate of 94%. For the year ended December 31, 1996 and the six months ended June
30, 1997, revenues attributable to the Company's senior living communities
accounted for 91.5% and 89.8%, respectively, of the Company's total revenues,
and revenues attributable to the Company's home health care agencies accounted
for 6.2% and 8.0%, respectively, of the Company's total revenues. Approximately
92.4% of the Company's total revenues for the year ended December 31, 1996 and
approximately 89.2% of the Company's total revenues for the six months ended
June 30, 1997 were derived from private pay sources.
Since 1992, the Company has experienced significant growth, primarily
through the acquisition of 14 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 by developing
senior living networks 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 27 free-standing assisted living residences, with an
estimated aggregate capacity for approximately 2,400 residents, and is expanding
nine of its existing communities to add capacity to accommodate approximately
800 additional residents.
The Company was founded by Dr. Thomas F. Frist, Sr. and Jack C. Massey, the
principal founders of Hospital Corporation of America. 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 ten 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
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<PAGE> 43
living networks in targeted geographic markets. The development of a senior
living network involves the clustering of assisted living residences and other
senior living communities within a particular geographic service area,
complemented by one or more of the Company's home health care agencies, thereby
providing residents with a broad range of high quality care in a cost-efficient
manner. The following are the principal elements of the Company's growth
strategy:
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 intends to develop and market a significant
number of its newly developed assisted living residences under the tradename
"Homewood Residence." See "-- Trademarks." 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 27
free-standing assisted living residences, with an estimated aggregate capacity
for approximately 2,400 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
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<PAGE> 44
other forms of dementia), and skilled nursing beds. The Company currently has
three expansion projects under construction (including one managed community)
and six expansion projects under development, representing an aggregate increase
in capacity to accommodate approximately 800 additional 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 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 or near 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 15 home health care agencies, 12
of which are in their initial year of operation. The Company owns ten home
health care agencies and manages five agencies for third parties.
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.
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<PAGE> 45
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 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.
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<PAGE> 46
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 eleven
communities, leases three communities, and manages an additional five
communities which provide independent living services, with an aggregate
capacity for 2,358 residents, 434 residents, and 1,491 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 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.
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<PAGE> 47
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.
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 three
communities owned by the Company, one community leased by the Company, and five
communities managed by the Company, with an aggregate capacity for 253 residents
at the Company's owned communities, 60 residents at the Company's leased
community, and 393 residents at the Company's managed communities. In
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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 or near certain of its existing senior living communities and
manages home health care agencies owned by third parties. 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 15 home health
care agencies, 12 of which are in their initial year of operation. The Company
owns ten home health care agencies and manages five agencies for third parties.
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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 operated by the
Company or to be acquired by the Company.
<TABLE>
<CAPTION>
AVERAGE OCCUPANCY
RESIDENT CAPACITY(1) COMMENCEMENT 1996 RATE AT
------------------------- OF OCCUPANCY JUNE 30,
COMMUNITY LOCATION IL AL SN TOTAL OPERATIONS(2) RATE 1997
- --------- -------- ----- --- --- ----- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OWNED(3):
Broadway Plaza...................... Ft. Worth, TX 252 40 122 414 Apr-92 94% 91%(4)
Carriage Club of Charlotte(5)....... Charlotte, NC 363 54 42 459 May-96 91(6) 92(6)
Carriage Club of Jacksonville(5).... Jacksonville, FL 292 60 -- 352 May-96 89(6) 89(6)
The Hampton at Post Oak............. Houston, TX 162 21 -- 183 Oct-94 94 94
Heritage Club....................... Denver, CO 220 35 -- 255 Feb-95 100 99
Parkplace........................... Denver, CO 195 48 -- 243 Oct-94 99 98
Homewood Residence at Corpus
Christi(7)........................ Corpus Christi, TX 60 30 -- 90 May-97 N/A 29
Richmond Place...................... Lexington, KY 204 4 -- 208 Apr-95 98 98
Santa Catalina Villas............... Tucson, AZ 197 15 -- 212 Jun-94 90 98
The Summit at Westlake Hills........ Austin, TX 167 30 89 286 Apr-92 98 100
Homewood Residence at Tarpon
Springs(8)........................ Tarpon Springs, FL -- 64 -- 64 Aug-97 N/A N/A
Westlake Village.................... Cleveland, OH 246 54 -- 300 Oct-94 94 96
----- --- --- ----- --- ---
Subtotal/Average................ 2,358 455 253 3,066 94% 93%
LEASED:
Holley Court Terrace(9)............. Oak Park, IL 179 17 -- 196 Jul-93 81% 91%
Homewood Residence at Victoria(10).. Victoria, TX 60 30 -- 90 May-97 N/A 43
Imperial Plaza(11).................. Richmond, VA 778 139 -- 917 -- N/A N/A
Trinity Towers(9)................... Corpus Christi, TX 195 32 60 287 Jan-90 94 94
----- --- --- ----- --- ---
Subtotal/Average................ 1,212 218 60 1,490 89% 84%
MANAGED(12):
Burcham Hills....................... East Lansing, MI 138 71 133 342 Nov- 78 92% 89%
Meadowood........................... Worcester, PA 355 51 59 465 Oct- 89 94 96
Parklane West....................... San Antonio, TX -- 17 124 141 Oct- 94 86 90
Reeds Landing....................... Springfield, MA 148 54 40 242 Aug- 95 65(13) 91(13)
USAA Towers......................... San Antonio, TX 505 -- -- 505 Oct- 94 100 100
Weinberg Village.................... Tampa, FL -- 75 -- 75 May- 96 25 67
Williamsburg Landing................ Williamsburg, VA 345 7 37 389 Sept-85 98 98
----- --- --- ----- --- ---
Subtotal/Average................ 1,491 275 393 2,159 89% 93%
----- --- --- ----- --- ---
Grand Total/Average............. 5,061 948 706 6,715 92% 92%
===== === === ===== === ===
</TABLE>
<TABLE>
<CAPTION>
COMMENCEMENT
OF
HOME HEALTH CARE AGENCIES: LOCATION OPERATIONS
- -------------------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OWNED(14):
Broadway Plaza....................... Fort Worth, TX June 1994
Carriage Club of Charlotte........... Charlotte, NC October 1996
The Hampton at Post Oak.............. Houston, TX February 1997
Heritage Club........................ Denver, CO October 1996
Holley Court Terrace................. Oak Park, IL May 1994
Parkplace............................ Denver, CO February 1997
Richmond Place....................... Lexington, KY June 1990
Santa Catalina Villas................ Tucson, AZ August 1997
The Summit at Westlake Hills......... Austin, TX June 1997
Westlake Village..................... Westlake, OH January 1997
MANAGED(15):
Air Force Village.................... San Antonio, TX August 1997
Bibb County.......................... Centreville, AL March 1997
Burcham Hills........................ East Lansing, MI August 1997
Hale County.......................... Greensboro, AL May 1997
Meadowood............................ Worcestor, PA July 1997
</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).
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(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 communities 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(4) 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 June 30, 1997, was
98%.
(5) GECC has certain rights with respect to the Carriage Club communities,
including the right to receive 30% of the net cash flows generated by the
Carriage Club communities and 30% of any proceeds from the sale or
refinancing of the Carriage Club communities in excess of certain defined
amounts. In addition, GECC has a right of first offer with respect to any
proposed sale of the Carriage Club communities by the Company.
(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 June 30, 1997 would
have been 97% and 96%, respectively, at Carriage Club of Charlotte and 91%
and 93%, respectively, at Carriage Club of Jacksonville.
(7) The Company acquired the Homewood Residence at Corpus Christi community in
May 1997. See " -- Recent and Pending Acquisitions."
(8) The Company acquired the Homewood Residence at Tarpon Springs community in
May 1997 and commenced operations at the community in August 1997. See
"-- Recent and Pending Acquisitions."
(9) Leased pursuant to an operating lease with an initial term of ten years
expiring December 31, 2006, with 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.
(10) The Company acquired a long-term leasehold in the Homewood Residence at
Victoria facility in May 1997. See " -- Recent and Pending Acquisitions."
The Company leases the community pursuant to an operating lease expiring in
July 2011, with renewal options for up to two additional ten year terms.
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 the county in which the community is located during the
term of the lease and for two years thereafter.
(11) In the fourth quarter of 1997, the Company expects to acquire the Imperial
Plaza community. See " -- Recent and Pending Acquisitions."
(12) 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.
(13) 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.
(14) Each of the home health care agencies owned by the Company is based at or
near one of the Company's senior living communities.
(15) Managed pursuant to management agreements with an initial term of three
years. The Company receives a contractual fee per visit. None of the home
health care agencies managed by the Company are owned by affiliates of the
Company.
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RECENT AND PENDING ACQUISITIONS
In May 1997, the Company completed the acquisition of an assisted living
facility located in Tarpon Springs, Florida with capacity for 64 residents. The
purchase price for the facility was $4.6 million and was financed primarily
through a $3.5 million mortgage loan provided by a bank. The Homewood Residence
at Tarpon Springs community commenced operations in August 1997.
In May 1997, the Company completed the acquisition of the Homewood
Residence at Corpus Christi community, which is located in Corpus Christi, Texas
and has capacity for 90 residents, and acquired a long-term leasehold in the
Homewood Residence at Victoria community, which is located in Victoria, Texas
and has capacity for 90 residents. The purchase price for the Corpus Christi
community was approximately $5.8 million, and the Company financed the
acquisition primarily through a $4.7 million mortgage loan provided by NHI. The
purchase price for the Victoria, Texas leasehold was approximately $1.1 million.
The landlord under the Homewood Residence at Victoria lease is Healthcare
Properties Investors, Inc., a health care real estate investment trust, and the
lease provides for annual rental obligations of approximately $468,000.
The Company has reached an agreement in principle to lease and operate
Imperial Plaza, a senior living community located in Richmond, Virginia with
capacity for 917 residents, and to acquire title to certain related assets.
Imperial Plaza has capacity for 778 independent living residents and 139
assisted living residents (including 32 assisted living units that are nearing
completion). The community is currently 99.2% occupied.
The Company will acquire a long-term operating lease, which has an initial
term of 20 years with a seven year renewal option. The Company will have the
option to acquire the community at its fair market value at the expiration of
the lease. In addition, the lessor is required to fund a $3.5 million capital
expenditure program for the community. In connection with the lease, the Company
will also purchase 12 acres of undeveloped land located on the Imperial Plaza
campus, which is zoned to allow for additional senior living capacity.
Expenditures by the Company for the acquisition of the leasehold, the
related property and the purchase option will aggregate approximately $13.1
million, which will be payable in varying amounts over the next three years. The
Company will be obligated to make annual rental payments of approximately $4.3
million under the lease. In addition, the Company will be required to maintain a
capital reserve account with payments of approximately $300,000 annually, and to
make a refundable deposit of $5.4 million to secure the performance of its
obligations under the lease.
Although the transaction is subject to a number of conditions and
approvals, the Company anticipates completing the acquisition in the fourth
quarter of 1997. In the event that the transaction is consummated, the Company
anticipates that Imperial Plaza will be profitable immediately.
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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
Carriage Club of Charlotte, Charlotte, NC.................. 7/98 -- 30 -- 30 Development
Richmond Place, Lexington, KY.............................. 10/98 -- 73 -- 73 Development
The Hampton at Post Oak, Houston, TX....................... 11/98 -- 15 76 91 Development
The Summit at Westlake Hills, Austin, TX................... 5/99 -- 95 -- 95 Development
Westlake Village, Cleveland, OH............................ 6/99 -- 15 88 103 Development
Carriage Club of Jacksonville, Jacksonville, FL............ 10/99 -- 15 60 75 Development
-- ----- --- -----
Subtotal........................................... 57 439 303 799
-- ----- --- -----
DEVELOPMENT PROJECTS:
Lady Lake, FL(3)........................................... 12/97 -- 55 -- 55 Construction
Halls, TN(4)............................................... 3/98 -- 55 -- 55 Construction
Pearland, TX(5)............................................ 3/98 -- 82 -- 82 Construction
Marietta, GA............................................... 4/98 -- 60 -- 60 Construction
Houston, TX (Northwest)(5)................................. 5/98 -- 95 -- 95 Construction
Knoxville, TN (Deane Hill)(4).............................. 5/98 -- 108 -- 108 Construction
Houston, TX (Willowchase)(5)............................... 6/98 -- 67 -- 67 Construction
Spring Shadow, TX(5)....................................... 6/98 -- 67 -- 67 Construction
Houston, TX (West)(5)...................................... 7/98 -- 95 -- 95 Development
Lakeway, TX................................................ 7/98 -- 81 -- 81 Construction
Nashville, TN (West)(3).................................... 8/98 -- 90 -- 90 Development
Tampa, FL(3)............................................... 8/98 -- 90 -- 90 Development
Aurora, CO................................................. 10/98 -- 95 -- 95 Development
Lakewood, CO............................................... 10/98 -- 93 -- 93 Development
St. Petersburg, FL(6)...................................... 10/98 -- 100 -- 100 Development
Greenwood Village, CO...................................... 11/98 -- 90 90 180 Development
San Antonio, TX............................................ 11/98 -- 75 -- 75 Development
Boynton Beach, FL.......................................... 12/98 -- 95 -- 95 Development
Del Ray Beach, FL.......................................... 12/98 -- 81 -- 81 Development
Austin, TX................................................. 1/99 -- 95 -- 95 Development
Cleveland (Brooklyn Heights), OH........................... 4/99 -- 80 -- 80 Development
Flint, MI(3)............................................... 4/99 -- 95 -- 95 Development
Nashville, TN (Central).................................... 4/99 -- 115 -- 115 Development
Boca Raton, FL............................................. 5/99 -- 75 -- 75 Development
Clearwater, FL............................................. 5/99 -- 95 -- 95 Development
Cleveland (Heights), OH.................................... 6/99 -- 120 -- 120 Development
Houston, TX (West University).............................. 7/99 -- 85 -- 85 Development
-- ----- --- -----
Subtotal........................................... -- 2,334 90 2,424
-- ----- --- -----
Grand Total........................................ 57 2,773 393 3,223
== ===== === =====
</TABLE>
<TABLE>
<CAPTION>
ANTICIPATED COMMENCEMENT
HOME HEALTH CARE AGENCIES LOCATION OF OPERATIONS
- ------------------------- -------- ------------------------
<S> <C> <C>
Trinity Towers.......................................... Corpus Christi, TX April 1998
</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) Being developed by a joint venture in which the Company owns a 50% interest.
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(4) Being developed by a joint venture in which the Company owns a 40% interest.
(5) Indicates a community at which the Company is providing full development
services for the owner, who is an affiliate of the Company. The Company will
manage the community after completion of construction. In each case, the
Company has an option to purchase the community. See "Certain
Transactions -- Management Agreements."
(6) Being developed by a joint venture in which the Company owns a 60% interest.
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
and market a significant number of its newly developed assisted living
residences under the trade name "Homewood Residence." See " -- Trademarks."
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 intends to enter into development and management agreements
with one or more developers which provide that the Company will manage nine
assisted living residences to be developed using the Company's residence designs
and grant the Company an option to purchase the residences. In addition, the
Company has entered into joint venture arrangements with development partners to
develop assisted living residences and may enter into additional joint ventures
in the future. See "Certain Transactions -- Management Agreements."
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
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other things, resident care and operations; (ii) performing accounting
functions; (iii) developing employee training programs and materials; (iv)
coordinating human resources, food service and marketing functions; and (v)
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.
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.
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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.
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
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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.
Estimates of annual expenditures in the assisted living sector of the
senior living and health care services industry for 1996 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 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, there are approximately 6.5 million people age 65 and older in the
United States who needed assistance with ADLs, and the number of people needing
such assistance is expected to double by the year 2020. According to the
Alzheimer's Association the number of persons afflicted with Alzheimer's disease
is expected to grow from the current 4.0 million to 14.0 million by the year
2050.
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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
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, the annual cost per patient
for skilled nursing care averages approximately $40,000, in contrast to the
annual per patient cost for assisted living care of approximately $26,000.
Senior Affluence
The average net worth of senior citizens is higher than non-senior
citizens, primarily as a result of accumulated equity 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
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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 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
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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 care businesses with
respect to attracting and retaining nurses, technicians, aides, and other high
quality professional and non-professional employees and managers.
TRADEMARKS
The Company has registered its corporate logo with the United States Patent
and Trademark Office. The Company intends to develop and market a significant
number of new free-standing assisted living residences under the tradename
"Homewood Residence." The Company has filed an application with the United
States Patent and Trademark Office to register the "Homewood Residence"
tradename and logo, but there can be no assurance that such registration will be
granted or that the Company will be able to use such tradename.
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
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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 2,275 persons, of which approximately
1,390 are full-time employees (approximately 60 of whom are located at the
Company's corporate offices) and 885 are part-time employees. In addition, there
are approximately 500 full-time employees and 400 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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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........................... 40 Executive Vice President -- Finance, Chief Financial
Officer, Treasurer, and Secretary
H. Todd Kaestner.......................... 42 Executive Vice President -- Corporate Development
James T. Money............................ 50 Executive Vice President -- Development Services
Tom G. Downs.............................. 52 Senior Vice President -- Operations
Lee A. McKnight........................... 52 Senior Vice President -- Marketing
H. Lee Barfield II........................ 51 Director
Jack O. Bovender, Jr...................... 52 Director
Frank M. Bumstead......................... 55 Director
Robin G. Costa............................ 30 Director
Clarence Edmonds.......................... 64 Director
John A. Morris, Jr., M.D.................. 50 Director
Daniel K. O'Connell....................... 68 Director
Nadine C. Smith........................... 40 Director
Lawrence J. Stuesser...................... 55 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.
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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 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. Mr. Bovender has been President and Chief Operating Officer of
Columbia/HCA Healthcare Corporation ("Columbia/HCA") since August 1997. From
March 1994 to August 1997, Mr. Bovender was retired. Prior to March 1994, Mr.
Bovender worked for Hospital Corporation of America, a predecessor to
Columbia/HCA, for over 18 years in various capacities, including Executive Vice
President and Chief Operating Officer. Mr. Bovender is a director of America
Service Group, Inc., a provider of managed health care services to correctional
facilities.
Frank M. Bumstead has served as a director of the Company since its
inception. 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.
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 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. 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 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. Ms. Smith is President and Chief Executive Officer of Enidan Capital
Partners, L.P., an investment company that makes equity investments in public
and privately held companies ("Enidan"). Prior to co-founding Enidan, Ms. Smith
was managing general partner of NC Smith & Co., a financial and management
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consulting firm, from 1990 to 1997. Ms. Smith also is President and Chief
Executive Officer of Sirrom Resource Funding L.P., which provides financing to
environmental companies.
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.
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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"), which was approved by the Board of Directors and shareholder of the
Company in February 1997 and became effective on the date of the IPO. 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, 1,140,625 shares of Common Stock have been
reserved and will be available for issuance, which
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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 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,
options to purchase 627,500 shares of Common Stock have been awarded to 115 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 were automatically granted to each
person serving as an Outside Director as of the date of the IPO. Any person who
was not previously a member of the Board of Directors and who is elected or
appointed an Outside Director following the consummation of the IPO 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
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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 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") pursuant to which an aggregate of 250,000 shares of Common Stock
have been reserved for issuance. 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
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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 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 1995 and 1996,
the Company contributed approximately $99,000 and $274,000, respectively, 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
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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 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 IPO, 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> 69
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of the date hereof 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. 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>
NUMBER OF SHARES PERCENT OF
NAME BENEFICIALLY OWNED COMMON STOCK
---- --------------------- ------------
<S> <C> <C>
NAMED EXECUTIVE OFFICERS:
W.E. Sheriff................................................ 1,670,353(1)(2) 14.6%
Christopher J. Coates....................................... 242,603(3) 2.1
George T. Hicks............................................. 170,259(4) 1.5
H. Todd Kaestner............................................ 180,244(5) 1.6
James T. Money.............................................. 175,252(6) 1.5
DIRECTORS:
H. Lee Barfield II.......................................... 617,661(7)(8) 5.4
Jack O. Bovender, Jr........................................ -- --
Frank M. Bumstead........................................... 5,000 --
Robin G. Costa.............................................. 1,390,037(9)(10) 12.0
Clarence Edmonds............................................ 360,907(11) 3.2
John A. Morris, Jr., M.D.................................... 358,490(12) 3.1
Daniel K. O'Connell......................................... 13,285 *
Nadine C. Smith............................................. 29,956 *
Lawrence J. Stuesser........................................ 67,547(13) *
OTHER 5% SHAREHOLDERS:
American Retirement Communities, LLC........................ 1,350,000(14) 11.8
Dan Maddox.................................................. 1,438,259(9)(15) 12.5
DMAR Limited Partnership.................................... 1,372,037(16) 12.0
Mary Louise Frist Barfield.................................. 617,661(17)(18) 5.4
Robert A. Frist, M.D........................................ 573,872(19)(20) 5.0
All directors and executive officers as a group (16
persons).................................................. 4,565,497 40.0
</TABLE>
- ---------------
* Less than 1%.
(1) Address: 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027.
(2) 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 14. 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.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) Address: 2700 First American Center, Nashville, Tennessee 37238.
(8) Includes 472,857 shares beneficially owned by Mr. Barfield's wife, Mary
Louise Frist Barfield. See Note 18. Mr. Barfield is the brother-in-law of
Robert A. Frist.
(9) Address: 3833 Cleghorn Avenue, Suite 400, Nashville, Tennessee 37215.
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<PAGE> 70
(10) Includes 1,372,037 shares beneficially owned by DMAR Limited Partnership
("DMAR"). Ms. Costa is a Vice President of Margaret Energy, Inc., the
general partner of DMAR. Also includes an aggregate of 18,000 shares
beneficially owned by trusts for the benefit of certain members of Dan
Maddox's family, as to which Mr. Maddox and Ms. Costa exercise voting and
dispositive power. See Note 15.
(11) 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.
(12) All shares are beneficially owned by partnerships owned and controlled by
Dr. Morris, his brother Alfred Morris, and members of Dr. Morris' family.
(13) All shares are beneficially owned by B&W Development Centers ("B&W"), of
which Mr. Stuesser is a director and 50% shareholder.
(14) 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 2, 3, 4, 5, and 6.
(15) Includes 1,372,037 shares beneficially owned by DMAR and an aggregate of
18,000 shares beneficially owned by trusts for the benefit of certain
members of Mr. Maddox's family, as to which Mr. Maddox and Ms. Costa
exercise voting and dispositive power. See Notes 10 and 16.
(16) The partners in DMAR include corporations and trusts owned by, or for the
benefit of, Mr. Maddox and his wife.
(17) Address: c/o H. Lee Barfield II, 2700 First American Center, Nashville,
Tennessee 37238.
(18) Includes 144,804 shares beneficially owned by Mrs. Barfield's husband, H.
Lee Barfield II, and an aggregate of 184,084 shares beneficially owned by
trusts for the benefit of Mrs. Barfield's children, of which Mrs. Barfield
serves as trustee. See Note 8. Mrs. Barfield is the sister of Robert A.
Frist.
(19) Address: 1326 Page Road, Nashville, Tennessee 37205.
(20) 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
TRANSACTIONS IN 1994 AND 1995 PRIOR TO THE 1995 ROLL-UP
Partnership Distributions
Prior to the 1995 Roll-Up, certain of the Predecessor Entities made
distributions in the ordinary course of business to their respective equity
owners, generally in accordance with such persons' relative equity interests,
including certain of the Company's directors and Named Executive Officers (all
of whom may be deemed to be the "founders" of the Company). During 1994, the
following directors and Named Executive Officers of the Company received
aggregate distributions, directly or indirectly, from various of the Predecessor
Entities in the following amounts: W.E. Sheriff -- $33,000; H. Lee Barfield and
Mary Louise Frist Barfield -- $310,000; and Lawrence J. Stuesser -- $15,000. In
1995 through the effective date of the 1995 Roll-Up, the following directors and
Named Executive Officers of the Company received aggregate distributions,
directly or indirectly, from various of the Predecessor Entities in the
following amounts: W.E. Sheriff -- $32,000; H. Lee Barfield and Mary Louise
Frist Barfield -- $100,000; Clarence Edmonds -- $7,000; John A. Morris,
Jr. -- $66,000; and Lawrence J. Stuesser -- $4,000.
Management Fees
Prior to the 1995 Roll-Up, ARC Management Corporation ("ARCM"), a
wholly-owned subsidiary of American Retirement Corporation II ("ARCII") (one of
the Predecessor Entities), provided community management services to certain of
the other Predecessor Entities (Fort Austin Limited Partnership, Trinity Towers
Limited Partnership, and Holley Court Terrace, L.P.) and was paid a management
fee pursuant to the terms of management agreements between ARCM and such
Predecessor Entities. During 1994 and the first three months of 1995, Fort
Austin Limited Partnership paid ARCM aggregate management fees of approximately
$1.1 million and $423,000, respectively; Trinity Towers Limited Partnership paid
ARCM aggregate management fees of approximately $266,000 and $71,000,
respectively; and Holley Court Terrace, L.P. paid ARCM aggregate management fees
of approximately $95,000 and $31,000, respectively. Certain of the Company's
directors
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<PAGE> 71
and Named Executive Officers were equity owners in ARCII and the other
Predecessor Entities and, consequently, had an indirect interest in such
payments. Such directors' and Named Executive Officers' respective ownership
interests in the Predecessor Entities were as follows:
<TABLE>
<CAPTION>
OWNERSHIP PERCENTAGE
---------------------------------------------------------
FORT AUSTIN
TRINITY TOWERS HOLLEY COURT LIMITED
NAME ARCII LIMITED PARTNERSHIP TERRACE, L.P. PARTNERSHIP
- ---- ----- ------------------- ------------- -----------
<S> <C> <C> <C> <C>
W.E. Sheriff....................................... 7.7 6.7 2.8 --
Christopher J. Coates.............................. -- -- 0.3 --
George T. Hicks.................................... -- -- 0.3 --
H. Todd Kaestner................................... -- -- 0.3 --
James T. Money..................................... -- -- 0.3 --
H. Lee Barfield and Mary Louise Frist Barfield..... 5.3 5.4 9.4 8.4
Clarence Edmonds................................... -- 1.7 -- --
John A. Morris, Jr., M.D........................... -- 16.7 0.6 --
Lawrence J. Stuesser............................... -- -- -- 0.1
</TABLE>
Additionally, ARCII owned 50.0% of Trinity Towers Limited Partnership, 20.1% of
Holley Court Terrace, L.P., and 32.0% of Fort Austin Limited Partnership.
Fees Paid to Directors
In February 1995, ARCII paid a fee of $15,000 to Messrs. Edmonds and
O'Connell and a fee of $30,000 to Ms. Smith, in each case as compensation for
services rendered as members of a special committee of ARCII's Board of
Directors. In February 1995, ARCII paid Ms. Smith a fee of $165,000 for
consulting and other services rendered to ARCII during the period from April
1993 through February 1995 in connection with certain transactions involving
ARCII, which fee had previously been deferred by agreement between Ms. Smith and
ARCII.
FORMATION OF ARCLP; THE 1995 ROLL-UP
ARCLP was formed in February 1995 in anticipation of the 1995 Roll-Up of
the Predecessor Entities. In connection with the formation of ARCLP, certain
directors and Named Executive Officers of the Company contributed cash to ARCLP
in the following amounts in return for corresponding limited partnership
interests in ARCLP: W. E. Sheriff -- $800,000; Christopher J. Coates --
$100,000; H. Lee Barfield and Mary Louise Frist Barfield -- $1.0 million; John
A. Morris, Jr. -- $2.0 million; and Lawrence J. Stuesser -- $250,000. In
addition, 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, who
received their respective LLC interests in exchange for services rendered to
ARCII. 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.
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
equity interests in the Predecessor Entities and thereby became the owner,
directly or indirectly, of all of the assets of the Predecessor Entities. As a
result of the 1995 Roll-Up and the equity exchanges related thereto, certain of
the Company's directors and Named Executive Officers received the following
limited partnership percentages in ARCLP: W. E. Sheriff -- 3.7%; Christopher J.
Coates -- 0.3%; George T. Hicks -- 0.03%; H. Todd Kaestner -- 0.4%; James T.
Money -- 0.1%; H. Lee Barfield and Mary Louise Frist Barfield -- 7.3%; Clarence
Edmonds -- 0.4%; John A. Morris, Jr., M.D. -- 2.4%; Daniel J. O'Connell -- 0.2%;
and Lawrence J. Stuesser -- 0.5%.
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<PAGE> 72
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 -- $2.34 million (includes $2.16
million distributed to DMAR and $180,000 distributed to a partnership in which
Mr. Maddox was a principal; does not include $240,000 distributed to a
partnership controlled by Mr. Maddox's son).
REORGANIZATION
In connection with the Reorganization, the Company issued an aggregate of
7,812,500 shares of Common Stock and the Reorganization Note to ARCLP. Following
the Reorganization, ARCLP distributed 1,350,000 shares of Common Stock to the
LLC, as general partner of ARCLP, and an aggregate of 6,462,500 shares of Common
Stock to the limited partners of ARCLP, generally in accordance with the limited
partners' ARCLP contribution accounts. In addition, ARCLP distributed, in
liquidation, proceeds from the repayment of the Reorganization Note to the
limited partners of ARCLP, generally in accordance with the limited partners'
contribution accounts.
In connection with the Reorganization, certain executive officers,
directors, and other limited partners of ARCLP who beneficially own more than 5%
of the Common Stock (and, in each case, their immediate family members and
affiliates), received shares of Common Stock and received proceeds from the
Reorganization Note as set forth in the table below.
<TABLE>
<CAPTION>
NUMBER OF SHARES PROCEEDS FROM THE
NAME OF COMMON STOCK(1) REORGANIZATION NOTE($)
---- ------------------ ----------------------
<S> <C> <C>
W.E. Sheriff................................................ 1,670,353 1,084,371.49(2)
Christopher J. Coates....................................... 242,603(3) 108,666.34(4)
George T. Hicks............................................. 170,259(3) 6,293.82(4)
H. Todd Kaestner............................................ 180,244(3) 40,093.44(4)
James T. Money.............................................. 175,252(3) 23,193.63(4)
H. Lee Barfield II.......................................... 602,661(5) 2,039,949.38(6)
Robin G. Costa.............................................. 1,372,037 4,644,227.96(7)
Clarence Edmonds............................................ 360,907 1,221,640.38(8)
John A. Morris, Jr., M.D.................................... 358,490 1,213,458.23(9)
Daniel K. O'Connell......................................... 10,285 34,813.61
Nadine C. Smith............................................. 29,956 101,398.86
Lawrence J. Stuesser........................................ 67,547 228,639.84(10)
American Retirement Communities, LLC........................ 1,350,000 --
Dan Maddox.................................................. 1,420,259(11) 4,807,455.82(12)
DMAR Limited Partnership.................................... 1,372,037 4,644,227.96
The Jack C. Massey Foundation............................... 335,888 1,136,953.90
Mary Louise Frist Barfield.................................. 602,661(13) 2,039,949.38(14)
Robert A. Frist, M.D........................................ 573,872(15) 1,942,507.25(16)
</TABLE>
- ---------------
(1) See Notes to "Principal Shareholders" for certain beneficial ownership
information.
(2) Amounts distributed to a family limited partnership in which Mr. Sheriff is
a general partner.
(3) Does not include shares distributed to other members of the LLC or other
partners in Sylvester I.
(4) Includes $6,293.82 which represents such person's pro rata portion of
amounts distributed to Sylvester I.
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<PAGE> 73
(5) Does not include shares distributed to Robert A. Frist or an aggregate of
841,555 shares 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 $977,470.45 distributed to Mr. Barfield's wife, Mary Louise Frist
Barfield, and an aggregate of $572,330.52 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 distributed to Robert A.
Frist and his wife, and children; Mr. Barfield's brother-in-law; or an
aggregate of $2,848,592.12 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) All amounts distributed to DMAR. Ms. Costa is a Vice President of Margaret
Energy, Inc., the general partner of DMAR.
(8) Includes $1,136,953.90 distributed to The Massey Foundation and $84,686.48
distributed to Mr. Edmonds' wife.
(9) All amounts distributed to partnerships owned and controlled by Dr. Morris,
his brother Alfred Morris, and members of Dr. Morris' family.
(10) Amounts received by B&W, of which Mr. Stuesser is a director and 50%
shareholder.
(11) Does not include an aggregate of 15,39 shares distributed to Mr. Maddox's
son.
(12) Includes $4,644,227.96 distributed to DMAR. Does not include an aggregate
of $443,495.52 distributed to Mr. Maddox's son.
(13) Does not include shares distributed to Robert A. Frist or an aggregate of
841,555 shares distributed to Ms. Barfield's father, sister, and trusts for
the benefit of Ms. Barfield's brother and nephews.
(14) Includes $490,148.41 distributed to Mrs. Barfield's husband, H. Lee
Barfield II, and an aggregate of $572,330.52 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 distributed to Robert A.
Frist and his wife, and children; Mrs. Barfield's brother; or an aggregate
of $2,848,592.12 distributed to Ms. Barfield's father, sister, and trusts
for the benefit of Ms. Barfield's brother and nephews.
(15) Does not include shares distributed to H. Lee Barfield II or Mary Louise
Frist Barfield, or an aggregate of 841,555 shares distributed to Dr.
Frist's father, sister, or trusts for the benefit of Dr. Frist's brother
and nephews.
(16) Includes $76,393.06 distributed to Dr. Frist's wife. Does not include an
aggregate of $648,394.62 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 distributed to H. Lee Barfield II or Mary Louise Frist Barfield and
trusts for the benefit of their children, or an aggregate of $2,848,592.12
distributed to Dr. Frist's father, sister, and trusts for the benefit of
Dr. Frist's brother and nephews.
MANAGEMENT AGREEMENTS
The Company is providing full development services related to and has
entered into management agreements to manage five assisted living residences
with an aggregate capacity for 399 residents, four of which are located in
Houston, Texas and one of which is located in Spring Shadow, Texas, owned by
affiliates of Jim Maddox, the son of Dan Maddox, a significant shareholder of
the Company. Three of the residences are currently under construction and two of
the residences are under development. Such management agreements provide for the
payment of management fees to the Company based on a percentage of each
facility's gross revenues and require the Company to pay operating deficits
above a specified amount. The management agreements also provide the Company
with the option to purchase the subject facilities. The Company expects to enter
into additional management agreements with Jim Maddox or his affiliates.
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
prior and proposed transactions have complied with this policy.
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<PAGE> 74
DESCRIPTION OF DEBENTURES
The Debentures will be issued under an Indenture, to be dated as of
, 1997 (the "Indenture"), to be executed by the Company and IBJ
Schroder Bank and Trust Company, as the trustee under the Indenture (the
"Trustee"). The terms of the Debentures include those stated in the Indenture
and those made a part of the Indenture by reference to the Trust Indenture Act
of 1939, as amended. A copy of the Indenture has been filed as an exhibit to the
Registration Statement and is incorporated herein by reference.
The following is a summary of certain provisions of the Indenture, and does
not purport to be complete and is qualified in its entirety by reference to the
detailed provisions of the Indenture, including the definitions of certain terms
therein to which reference is hereby made. Wherever particular provisions or
sections of the Indenture or terms defined therein are referred to herein, such
provisions or definitions are incorporated herein by reference.
GENERAL
The Debentures are unsecured general obligations of the Company, subject to
the rights of holders of Senior Indebtedness of the Company, and will mature on
, 2002. The Debentures will be limited to $100.0 million aggregate
principal amount, and will bear interest payable semiannually on and
of each year, commencing , 1998, at the per annum rate of
%. The first payment will be for the period from the date of delivery to
, 1998. The Company will pay interest on the Debentures to the
persons who are registered holders of Debentures at the close of business on the
or preceding the interest payment date. Principal and
interest will be payable, the Debentures will be convertible and exchangeable,
and transfers thereof will be registerable, at the office or agency of the
Company maintained for such purposes, initially at the offices of the Trustee.
The Company may pay principal and interest by check and may mail an interest
check to a holder's registered address. Holders must surrender Debentures to a
Paying Agent to collect principal payments.
Initially, the Trustee will act as Paying Agent, Registrar, and Conversion
Agent. The Company may change any Paying Agent, Registrar, Conversion Agent, or
co-registrar upon prior written notice to the Trustee and may act in any such
capacity itself.
The Debentures will be in fully registered form without coupons in
denominations of $1,000 or integral multiples thereof. A holder may transfer or
exchange Debentures in accordance with the Indenture. No service charge will be
made for any registration or transfer, exchange, or conversion of Debentures,
except for any tax or other governmental charges that may be imposed in
connection therewith. The Registrar need not transfer or exchange any Debentures
selected for redemption. Also, in the event of a partial redemption, it need not
transfer or exchange any Debentures for a period of 15 days before selecting
Debentures to be redeemed. The Indenture does not contain any provision
requiring the Company to repurchase the Debentures at the option of the holders
thereof in the event of a leveraged buyout, recapitalization, or similar
restructuring of the Company, even though the Company's credit-worthiness and
the market value of the Debentures may decline significantly as a result of such
transaction. The Indenture does not protect holders of the Debentures against
any decline in credit quality, whether resulting from any such transaction or
from any other cause. The registered holder of a Debenture may be treated as its
owner for all purposes.
CONVERSION RIGHTS
The holders of the Debentures will be entitled at any time on or after
December 31, 1997 and prior to maturity, subject to prior redemption, to convert
the Debentures (or portions thereof that are $1,000 principal amount or integral
multiples thereof) into shares of Common Stock at the conversion price set forth
on the cover page of this Prospectus (subject to adjustments as described
below). No payment or adjustment will be made for accrued interest on a
converted Debenture. If any Debenture not called for redemption is converted
between a record date for the payment of interest and the next succeeding
interest payment date, such Debenture must be
73
<PAGE> 75
accompanied by funds equal to the interest payable to the registered holder on
such interest payment date on the principal amount so converted. The Company
will not issue fractional interests in shares of Common Stock upon conversion of
the Debentures and instead will deliver a check for the fractional share based
upon the current market price per share of the Common Stock (as determined in
accordance with the provisions described in the Indenture) on the conversion
date. If the Debentures are called for redemption, conversion rights will expire
at the close of business on the redemption date, unless the Company defaults in
payment due upon such redemption.
The conversion price is subject to adjustments in certain events, as set
forth in the Indenture, including the payment of dividends or distributions on
the Common Stock in shares of capital stock; subdivisions or combinations of the
Common Stock into a greater or smaller number of shares of Common Stock;
reclassification of the shares of Common Stock resulting in an issuance of any
shares of the Company's capital stock; distribution of rights or warrants to all
holders of Common Stock entitling them to purchase Common Stock at less than the
then-current market price at that time; and the distribution to all holders of
Common Stock of assets, excluding certain cash dividends and distributions, or
debt securities, or any rights or warrants to purchase securities of the
Company; provided, however, that no adjustment will be required if holders of
the Debentures receive notice of and are allowed to participate in such
transactions. No adjustment will be required for rights to purchase Common Stock
pursuant to a Company plan for reinvestment of dividends or interest or the
Company's Employee Stock Purchase Plan, or for a change in the par value of the
Common Stock. To the extent that Debentures become convertible into cash, no
adjustment will be required thereafter as to cash. No adjustment in the
conversion price need be made unless such adjustment would require a change of
at least 1.0% in the conversion price; any adjustment that would otherwise be
required to be made, however, shall be carried forward and taken into account in
any subsequent adjustment. The Company may voluntarily reduce the conversion
price for a period of time.
If the Company pays dividends on the Common Stock in shares of capital
stock or subdivides or combines the Common Stock or issues by reclassification
of its Common Stock any shares of its capital stock or merges with, or transfers
or leases substantially all of its assets to, another corporation or trust, the
holders of the Debentures then outstanding will be entitled thereafter to
convert such Debentures into the kind and amount of shares of capital stock,
other securities, cash, or other assets that they would have owned immediately
after such event had such Debentures been converted before the effective date of
the transaction.
Any Debentures called for redemption, unless surrendered for conversion on
or before the close of business on the redemption date, are subject to being
purchased from the holder of such Debentures at the redemption price by one or
more investment banks or other purchasers who may agree with the Company to
purchase such Debentures and convert them into Common Stock of the Company.
SUBORDINATION OF DEBENTURES
The indebtedness evidenced by the Debentures will be subordinated and
junior in right of payment to the extent set forth in the Indenture to the prior
payment in full of amounts then due on all Senior Indebtedness. No payment shall
be made by the Company on account of principal of or interest on the Debentures
or on account of the purchase or other acquisition of Debentures, if there shall
have occurred and be continuing a default with respect to any Senior
Indebtedness permitting the holders to accelerate the maturity thereof, or with
respect to any Senior Indebtedness and such default shall be the subject of a
judicial proceeding, or the Company shall have received notice of such default
from certain persons, unless and until such default or event of default shall
have been cured or waived or shall have ceased to exist. In the event of default
on any Senior Indebtedness, whether now outstanding or hereafter issued,
payments of principal of and interest on the Debentures may not be permitted to
be made until such Senior Indebtedness is paid in full, or the event of default
on such Senior Indebtedness is cured or waived.
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Upon any acceleration of the principal of the Debentures or any
distribution of assets of the Company upon any receivership, dissolution,
winding-up, liquidation, reorganization, or similar proceedings of the Company,
whether voluntary or involuntary, or in bankruptcy or insolvency, all amounts
due or to become due upon all Senior Indebtedness must be paid in full before
the holders of the Debentures or the Trustee are entitled to receive or retain
any assets so distributed in respect of the Debentures. By reason of this
provision, in the event of insolvency, holders of the Debentures may recover
less, ratably, than holders of Senior Indebtedness.
"Senior Indebtedness" is defined to mean the principal, premium, if any,
and interest on, and all other amounts payable under or in respect of,
Indebtedness of the Company (other than Indebtedness owed to a subsidiary of the
Company, Indebtedness of the Company that is expressly pari passu with the
Debentures, or Indebtedness that is expressly subordinated to the Debentures).
There is no limit on the amount of Senior Indebtedness that the Company may
incur. As of June 30, 1997, the Company's Senior Indebtedness totalled
approximately $90.9 million.
"Indebtedness" as applied to any person means, without duplication: (i) all
indebtedness for borrowed money whether or not evidenced by a promissory note,
draft, or similar instrument; (ii) that portion of obligations with respect to
any lease that is properly classified as a liability on a balance sheet in
accordance with generally accepted accounting principles; (iii) notes payable
and drafts accepted representing extensions of credit; (iv) any balance owed for
all or any part of the deferred purchase price of property or services, which
purchase price is due more than six months from the date of incurrence of the
obligation in respect thereof (except any such balance that constitutes (a) a
trade payable or an accrued liability arising in the ordinary course of business
or (b) a trade draft or note payable issued in the ordinary course of business
in connection with the purchase of goods or services), if and to the extent such
debt would appear as a liability upon a balance sheet of such person prepared in
accordance with generally accepted accounting principles; (v) tenant deposits;
(vi) any debt of others described in the preceding clauses (i) through (v) that
such person has guaranteed or for which it is otherwise liable; and (vii) any
deferral, amendment, renewal, extension, supplement, or refunding of any of the
foregoing indebtedness; provided, however, that, in computing the "Indebtedness"
of any person, there shall be excluded any particular indebtedness if, upon or
prior to the maturity thereof and at the time of determination of such
indebtedness, there shall have been deposited with a depository in trust money
(or evidences of indebtedness if permitted by the instrument creating such
indebtedness) in the necessary amount to pay, redeem, or satisfy such
indebtedness as it becomes due, and the amount so deposited shall not be
included in any computation of the assets of such person.
OPTIONAL REDEMPTION
The Debentures will be subject to redemption at the option of the Company,
in whole or in part, at any time or from time to time commencing on or after
, 2000 on at least 30 days' and not more than 60 days' prior notice
by mail, at a redemption price equal to 100% of the principal amount thereof,
plus interest accrued to the date of redemption.
MODIFICATION OF THE INDENTURE
Under the Indenture, the rights and obligations of the Company with respect
to the Debentures and the rights of holders of the Debentures may, with certain
exceptions, be modified by the Company and the Trustee with the written consent
of the holders of not less than 66 2/3% in principal amount of the outstanding
Debentures. Without the consent of each Holder of any Debenture affected,
however, an amendment, waiver, or supplement may not (a) reduce the principal
amount of outstanding Debentures whose holders may consent to an amendment; (b)
reduce the rate or extend the time of payment of interest on any Debenture; (c)
reduce the principal of or extend the fixed maturity of any Debenture; (d) make
any Debenture payable in money other than that stated in the Debenture; (e)
change the provisions of the Indenture regarding the right of the holders of a
majority in principal amount of the Debentures to waive defaults under the
Indenture or impair the
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right of any holder of Debentures to institute suit for the enforcement of any
payment of principal and interest on the Debentures on and after their
respective due dates; (f) make any Debenture payable in currency other than that
stated in the Debenture; (g) make any change that adversely affects the right to
convert any Debenture; or (h) make any change in the subordination provisions of
the Indenture that adversely affects the rights of any holder. No consent of the
holders of the Debentures is required for any amendment of the Indenture or the
Debentures by the Company or the Trustee to cure any ambiguity, defect, or
inconsistency, or to provide for uncertificated Debentures in addition to or in
place of certificated Debentures, or to make any change that does not adversely
affect the interests of the holders of the Debentures in any material respect.
EVENTS OF DEFAULT, NOTICE, AND WAIVER
The following are Events of Default under the Indenture: (i) default in the
payment of interest on the Debentures when due and payable that continues for 30
days; (ii) default in the payment of principal of (and premium, if any) on the
Debentures when due and payable, at maturity, upon redemption, or otherwise,
that continues for five business days; (iii) failure to perform any other
covenant of the Company contained in the Indenture or the Debentures that
continues for 60 days after written notice to the Company as provided in the
Indenture; (iv) default under any bond, debenture, note, or other Indebtedness
of the Company or under any mortgage, indenture, or other instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company, whether any such Indebtedness exists as of the date
of the Indenture or is thereafter created, if (a) either (x) such event of
default results from the failure to pay any such Indebtedness at its maturity or
(y) as a result of such event of default, the maturity of such Indebtedness has
been accelerated prior to its expressed maturity and such acceleration shall not
be rescinded or annulled or the accelerated amount paid within ten days after
notice to the Company of such acceleration or such Indebtedness having been
discharged, and (b) the principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure to pay
principal or interest thereon, or the maturity of which has been so accelerated,
aggregates $10,000,000 or more; and (v) certain events of bankruptcy,
insolvency, or reorganization relating to the Company.
If an Event of Default occurs and is continuing with respect to the
Debentures, either the holders of at least a majority in principal amount of the
outstanding Debentures or the Trustee at such holders' direction may declare all
of the Debentures to be due and payable immediately.
The Indenture provides that the Company will not (i) declare or pay any
dividends or make any distribution to holders of its capital stock (other than
dividends or distributions payable in shares of Common Stock) or (ii) purchase,
redeem, or otherwise acquire or retire for value any of its Common Stock, or any
warrants, rights, or options to purchase or acquire any shares of its Common
Stock (other than the Debentures or any other convertible indebtedness of the
Company that is neither secured nor subordinated to the Debentures), if at the
time any Event of Default has occurred and is continuing or would exist
immediately after giving effect to such action.
The Trustee may require indemnity reasonably satisfactory to it before it
enforces the Indenture or the Debentures. Subject to certain limitations,
holders of a majority in principal amount of the outstanding Debentures may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from holders of the Debentures notice of any default (except a default
in payment of principal or interest) if it determines that withholding notice is
in their interests. The Company is required to file with the Trustee annually a
statement of certain officers as to the absence of defaults in fulfilling any of
the Company's obligations under the Indenture.
CERTAIN RIGHTS TO REQUIRE REPURCHASE OF DEBENTURES BY THE COMPANY
In the event of any Change in Control of the Company occurring after the
date of issuance of the Debentures and on or prior to maturity, each holder of
Debentures will have the right, at such
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holder's option, to require the Company to repurchase all or any part of such
holder's Debentures on the date (the "Repurchase Date") that is 75 days after
the date the Company gives notice of the Change in Control (as described below)
at a price (the "Repurchase Price") equal to 101% of the principal amount
thereof, together with accrued and unpaid interest to the Repurchase Date. On or
prior to the Repurchase Date, the Company is required to deposit with the
Trustee or a Paying Agent an amount of money sufficient to pay the Repurchase
Price of the Debentures that are to be repaid on the Repurchase Date. Neither
the Board of Directors of the Company nor the Trustee, acting alone or together,
can modify or waive this required repurchase of the Debentures.
Failure by the Company to repurchase the Debentures when required under the
preceding paragraph will result in an event of default under the Indenture,
whether or not such repurchase is permitted by the subordination provisions of
the Indenture.
On or before the 15th day after the occurrence of a Change in Control, the
Company is obligated to mail to all holders a notice of the event constituting
and the date of such Change in Control, the Repurchase Date, the date by which
the repurchase right must be exercised, the Repurchase Price for Debentures, and
the procedures that a holder must follow to exercise a repurchase right. To
exercise the repurchase right, a holder of a Debenture must deliver, on or
before the 10th day prior to the Repurchase Date, written notice to the Company
(or an agent designated by the Company for such purpose) and to the Trustee of
the holder's exercise of such right, together with the certificates evidencing
the Debentures with respect to which the right is being duly exercised, duly
endorsed for transfer.
A "Change in Control" will occur when: (i) all or substantially all of the
Company's assets are sold as an entirety to any person or related group of
persons; (ii) there shall be consummated any consolidation or merger of the
Company (A) in which the Company is not the continuing or surviving corporation
(other than a consolidation or merger with a wholly-owned subsidiary of the
Company in which all Common Shares outstanding immediately prior to the
effectiveness thereof are changed into or exchanged for the same consideration)
or (B) pursuant to which the Common Stock is converted into cash, securities, or
other property, in each case other than a consolidation or merger of the Company
in which the holders of the Common Stock immediately prior to the consolidation
or merger have, directly or indirectly, at least a majority of the common stock
of the continuing or surviving corporation immediately after such consolidation
or merger; or (iii) any person, or any persons acting together that would
constitute a "group" for purposes of Section 13(d) of the Exchange Act, together
with any affiliates thereof, acquires beneficial ownership (as defined in Rule
13d-3 under the Exchange Act) of at least 50% of the total voting power of all
classes of capital shares of the Company entitled to vote generally in the
election of directors of the Company. Notwithstanding clause (iii) of the
foregoing definition, a Change in Control will not be deemed to have occurred
solely by virtue of the Company; any Subsidiary; any employee share purchase
plan, share option plan, or other share incentive plan or program; retirement
plan or automatic dividend reinvestment plan; or any substantially similar plan
of the Company or any Subsidiary or any person holding securities of the Company
for or pursuant to the terms of any such employee benefit plan, filing or
becoming obligated to file a report under or in response to Schedule 13D or
Schedule 14D-1 (or any successor schedule, form, or report) under the Exchange
Act disclosing beneficial ownership by it of shares or securities of the
Company, whether at least 50% of the total voting power referred to in clause
(iii) of the foregoing definition or otherwise. (Section 14.5) A
recapitalization or a leveraged buyout or similar transaction involving members
of management or their affiliates will constitute a Change in Control if it
meets the foregoing definition.
Notwithstanding the foregoing, a Change in Control as described above will
not be deemed to have occurred if (i) the Current Market Price (as defined in
the Indenture) of the Common Stock on the date of a Change in Control is at
least equal to 105% of the conversion price of the Debentures in effect
immediately preceding the time of such Change in Control or (ii) all of the
consideration (excluding cash payments for fractional shares) in the transaction
giving rise to such Change in Control to the holders of Common Stock consists of
shares of common stock that are, or
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immediately upon issuance will be, listed on a national securities exchange or
quoted on the Nasdaq National Market, and as a result of such transaction the
Debentures will become convertible solely into such shares of common stock; or
(iii) the consideration in the transaction giving rise to such Change in Control
to the holders of Common Stock consists of cash or securities that are, or
immediately upon issuance will be, listed on a national securities exchange or
quoted on the Nasdaq National Market, or a combination of cash and such
securities, and the aggregate fair market value of such consideration (which, in
the case of such securities, will be equal to the average of the daily closing
prices of such securities during the 10 consecutive trading days commencing with
the sixth trading day following consummation of such transaction) is at least
105% of the conversion price of the Debentures in effect on the date immediately
preceding the closing date of such transaction.
There is no definition of the phrase "all or substantially all" as applied
to the Company's assets and used in the definition of Change in Control in the
Indenture, and there is no clear definition of the phrase under applicable law.
As a result of the uncertainty of the meaning of this phrase, in the event the
Company were to sell a significant amount of its assets, the holders and the
Company may disagree over whether the sale gives rise to the right of holders to
require the Company to repurchase the Debentures. In such event, the holders
would likely not be able to require the Company to repurchase unless and until
the disagreement were resolved in favor of the holders.
The right to require the Company to repurchase Debentures as a result of a
Change in Control could create an event of default under Senior Indebtedness, as
a result of which any repurchase could, absent a waiver, be blocked by the
subordination provisions of the Debentures. See "Subordination of Debentures."
The Company's ability to pay cash to the holders upon a repurchase may also be
limited by certain financial covenants contained in the Company's Senior
Indebtedness.
In the event a Change in Control occurs and the holders exercise their
rights to require the Company to repurchase Debentures, the Company intends to
comply with applicable tender offer rules under the Exchange Act, including
Rules 13e-4 and 14e-1, as then in effect, with respect to any such purchase. The
Change of Control purchase feature of the Debentures may in certain
circumstances make more difficult or discourage a takeover of the Company and,
thus, the removal of incumbent management. The Change in Control purchase
feature, however, is not the result of management's knowledge of any specific
effort to accumulate Common Stock or to obtain control of the Company by means
of a merger, tender offer, solicitation, or otherwise, or part of a plan by
management to adopt a series of anti-takeover provisions. Instead, the Change in
Control purchase feature is a standard term contained in other similar debt
offerings and the specific terms of this feature resulted from negotiations
between the Company and the Underwriter. Management has no present intention to
engage in a transaction involving a Change in Control.
The foregoing provisions would not necessarily afford holders protection in
the event of highly leveraged or other transactions involving the Company that
may adversely affect holders.
CONSOLIDATION, MERGER, SALE, OR CONVEYANCE
The Company may merge or consolidate with, or sell or convey all or
substantially all of its assets to, any other corporation or entity, provided
that (i) either the Company shall be the continuing entity, or the successor
entity (if other than the Company) shall be an entity organized and existing
under the laws of the United States or a state thereof or the District of
Columbia and such entity shall expressly assume by supplemental indenture all of
the obligations of the Company under the Debentures and the Indenture; (ii)
immediately after giving effect to such transactions no default or Event of
Default shall have occurred and be continuing; and (iii) the Company shall have
delivered to the Trustee an Officer's Certificate and opinion of counsel,
stating that the transaction and supplemental indenture comply with the
Indenture.
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MARKETABILITY
The Debentures are a new class of securities for which there is no
established trading market. Although the Debentures have been approved for
listing on the New York Stock Exchange, there can be no assurance that an active
trading market will develop after the Offering.
GOVERNING LAW
The Indenture and the Debentures will be governed by and construed in
accordance with the laws of the State of New York.
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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"). Currently, 11,406,250 shares of Common Stock are
issued and outstanding, no shares of Preferred Stock are outstanding, and
627,500 shares of Common Stock are 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 outstanding shares of Common Stock are, and 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 is listed 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
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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.
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
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represented at a 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 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
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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.
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
Beneficial holders of an aggregate of 7,812,500 shares of Common Stock have
contractual rights with respect to the registration of the sale of such shares
("Registrable Shares"). Beginning May 30, 1998, 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 May 30, 1999, 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 to
issue Common Stock 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. Holders of Registrable Shares are not entitled to
request registration thereof in connection with this offering. 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 is the
transfer agent and registrar for the Common Stock.
83
<PAGE> 85
UNDERWRITING
Schroder & Co. Inc. (the "Underwriter") has agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase, and the Company has
agreed to sell to the Underwriter, $100,000,000 aggregate principal amount of
the Debentures.
The Underwriting Agreement provides that the Underwriter is obligated to
purchase all the Debentures offered hereby, if any such Debentures are
purchased.
The Underwriter has advised the Company that it proposes to offer the
Debentures directly to the public, initially at the public offering price set
forth on the cover page of this Prospectus; that the Underwriter proposes
initially to allow a concession not in excess of % of the principal amount
of the Debentures to certain dealers; and that the Underwriter and such dealers
may initially allow a concession not in excess of % of the principal amount
of the Debentures to other dealers. After the initial offering of the
Debentures, the public offering price and such concessions may be changed by the
Underwriter.
The Company has granted an option to the Underwriter, exercisable for 30
days from the date of this Prospectus, to purchase up to $15,000,000 additional
principal amount of the Debentures at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriter may exercise such option only to cover over-allotments in the sale
of the Debentures offered hereby.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act.
The Company and its executive officers and directors will agree with the
Underwriter that, for a period of 90 days following the offering, they will not
offer, 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 the Underwriter
(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 Debentures are a new issue of securities with no existing market. The
Debentures have been approved for listing on the NYSE, but there can be no
assurance an active trading market in the Debentures will develop or be
sustained following the offering or that the purchasers of the Debentures in the
offering will be able to liquidate their investments or to resell such
Debentures at or above the initial offering price.
The Underwriter 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 Underwriter 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 $10,000,000 principal amount of
Debentures have been reserved for sale in the Offering to certain individuals,
including directors and employees of the
84
<PAGE> 86
Company, members of their families, and other persons having business
relationships with the Company. The price of such Debentures to such persons
will be the initial public offering price set forth on the cover of this
Prospectus. The principal amount of Debentures available for sale to the general
public will be reduced to the extent these persons purchase such reserved
Debentures. Any reserved Debentures not purchased will be offered by the
Underwriters to the general public on the same basis as the other Debentures
offered hereby.
LEGAL MATTERS
The validity of the Debentures 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 617,661 shares of Common Stock. See
"Principal Shareholders." Certain legal matters will be passed upon for the
Underwriter by Stroock & Stroock & Lavan LLP, New York, New York.
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.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Debentures offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. Certain items are omitted in accordance with
the rules and regulations of the Commissions. Statements contained in this
Prospectus concerning the provisions or contents of any contract or other
document referred to herein are not necessarily complete. With respect to each
such contract, agreement, or document, reference is made to such document for a
more complete description, and each statement is deemed to be qualified in all
respects by such reference.
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files proxy statements, reports, and other
information with the Commission. The Registration Statement (with exhibits), as
well as such proxy statements, reports, and other information, may be inspected
and copied at prescribed rates at the public reference facilities maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Seven World Trade Center, 13th Floor, New York, New York 10048, and Northwestern
Atrium Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661. The
Commission maintains a web site that contains reports, proxy and information
statements and other information regarding registrants, including the Company,
at http://www.sec.gov. The Company's Common Stock is listed on the NYSE and
proxy statements, reports, and other information concerning the Company may be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
85
<PAGE> 87
AMERICAN RETIREMENT CORPORATION
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
AMERICAN RETIREMENT CORPORATION
Condensed Consolidated Balance Sheet -- June 30, 1997
(unaudited)............................................... F-22
Condensed Consolidated Statements of Operations -- Six
Months Ended June 30, 1996 and June 30, 1997
(unaudited)............................................... F-23
Condensed Consolidated Statements of Cash Flows -- Six
Months Ended June 30, 1996 and June 30, 1997
(unaudited)............................................... F-24
Notes to Condensed Consolidated Financial Statements........ F-25
CARRIAGE CLUB OF CHARLOTTE, LIMITED PARTNERSHIP AND CARRIAGE
CLUB OF JACKSONVILLE, LIMITED PARTNERSHIP
Independent Auditors' Report................................ F-28
Combined Statement of Operations -- Four Months Ended April
30, 1996.................................................. F-29
Combined Statement of Partners' Equity -- Four Months Ended
April 30, 1996............................................ F-29
Combined Statement of Cash Flows -- Four Months Ended April
30, 1996.................................................. F-30
Notes to Combined Financial Statements...................... F-31
</TABLE>
F-1
<PAGE> 88
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, except for
Note 16, which is as of
June 4, 1997.
F-2
<PAGE> 89
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> 90
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> 91
AMERICAN RETIREMENT COMMUNITIES, L.P.
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
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> 92
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> 93
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 -- 521
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 11,696
-------- ------- ------- --------
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
Proceeds from (purchases of) marketable securities... (52) -- (50) --
-------- ------- ------- --------
Net cash provided (used) by investing
activities................................... (46,357) (3,214) (7,783) (67,621)
-------- ------- ------- --------
</TABLE>
(Continued)
F-7
<PAGE> 94
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) (1,364)
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) 55,322
-------- ------- ------- --------
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> 95
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) 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
occurred in 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.
F-9
<PAGE> 96
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 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
F-10
<PAGE> 97
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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.
F-11
<PAGE> 98
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 lender has certain
rights, including the right to receive 30% of the net cash flows generated by
the two communities, 30% of any proceeds from the sale or refinancing of the two
communities in excess of certain defined amounts and the right of first offer
with respect to any proposed sale of the two communities. 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
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>
DECEMBER 31, DECEMBER 31,
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.
F-12
<PAGE> 99
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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>
DECEMBER 31, DECEMBER 31,
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>
(6) LAND, BUILDINGS, AND EQUIPMENT
A summary of land, buildings and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
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>
F-13
<PAGE> 100
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) OTHER ASSETS
Other assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred financing costs, net of accumulated
amortization.................................... $2,649 $1,129
Long term investments............................. 435 --
Other............................................. 525 979
------ ------
$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>
DECEMBER 31, DECEMBER 31,
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>
(9) LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
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
</TABLE>
F-14
<PAGE> 101
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
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 beginning May 1, 1997 and 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
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
</TABLE>
F-15
<PAGE> 102
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
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-16
<PAGE> 103
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 -- (964) (17) --
1)......................................
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-17
<PAGE> 104
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-18
<PAGE> 105
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.
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.
F-19
<PAGE> 106
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 $27.6 million. The lease
is an operating lease with the gain from the transaction of approximately $4.4
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)
In connection with the initial public offering by American Retirement
Corporation (New ARC), the Partnership implemented a reorganization with New
ARC, such that all of the Partnership's assets and liabilities were contributed
to New ARC, a newly formed corporation, in exchange for common stock totaling
7,812,500 shares and a promissory note to the Partnership in the original
principal amount approximating $21.9 million. Immediately prior to the initial
public offering, which was completed on June 4, 1997, the Partnership
distributed its common stock of New ARC to its partners. New ARC sold an
additional 3,593,750 shares of its common stock in the initial public offering.
Total proceeds to New ARC from the initial public offering were $45.2 million,
after underwriting costs. A portion of the proceeds were utilized on June 4,
1997 to repay the approximately $21.9 million promissory note to the Partnership
and the Partnership distributed such amount to its limited partners. The
Partnership's historical carrying value for assets and liabilities were carried
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 received when the reorganization became
effective plus 1,562,500 shares for the approximately $21.9 million promissory
note at an offering price of $14.00 per share.
F-20
<PAGE> 107
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 recorded, as a one-time charge to
income, a deferred income tax liability of approximately $10.7 million resulting
from the difference between the accounting and tax bases of New ARC's assets and
liabilities.
F-21
<PAGE> 108
AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 21,863
Assets limited as to use.................................. 3,462
Resident and health care receivables...................... 3,912
Management services receivables........................... 719
Inventory................................................. 419
Prepaid expenses.......................................... 1,011
--------
Total current assets.............................. 31,386
Assets limited as to use, excluding amounts classified as
current................................................ 3,183
Land, buildings and equipment, net........................ 207,020
Marketable securities..................................... 52
Other assets.............................................. 4,431
--------
Total assets...................................... $246,072
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 5,935
Accounts payable.......................................... 3,042
Accrued expenses.......................................... 6,937
--------
Total current liabilities......................... 15,914
Tenant deposits............................................. 4,365
Long-term debt, excluding current portion................... 161,324
Deferred gain on sale-leaseback transactions................ 4,311
Deferred income taxes....................................... 9,807
Other long-term liabilities................................. 229
--------
Total liabilities................................. 195,950
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized,
no shares issued and outstanding....................... --
Common stock, $.01 par value; 50,000,000 shares
authorized, 11,406,250 shares issued and outstanding... 114
Additional paid-in capital................................ 60,213
Accumulated deficit....................................... (10,205)
--------
Total shareholders' equity........................ 50,122
--------
Total liabilities and shareholders' equity........ $246,072
========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-22
<PAGE> 109
AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
JUNE 30, 1996 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Revenues:
Resident and health care revenue.......................... $33,888 $43,424
Management services revenue............................... 918 965
------- -------
Total revenues..................................... 34,806 44,389
Expenses:
Community operating expenses.............................. 21,727 27,519
Lease expense (net)....................................... -- 1,072
General and administrative................................ 2,421 4,070
Depreciation and amortization............................. 3,165 3,206
------- -------
Total operating expenses........................... 27,313 35,867
------- -------
Income from operations...................................... 7,493 8,522
Other income (expense):
Interest expense.......................................... (4,733) (6,611)
Interest income........................................... 132 364
Other..................................................... (8) (61)
------- -------
Other income (expense), net............................. (4,609) (6,308)
------- -------
Income before income taxes and extraordinary item....... 2,884 2,214
Income tax expense -- current............................... 92
Income tax expense -- deferred.............................. -- 10,728
------- -------
Income (loss) before extraordinary item................. 2,884 (8,606)
Extraordinary loss on extinguishment of debt................ 2,335 --
------- -------
Net income (loss)....................................... $ 549 $(8,606)
======= =======
Preferred return on special redeemable preferred limited
partnership interests..................................... 714 --
------- -------
Net income (loss) available for distribution to partners
and shareholders..................................... $ (165) $(8,606)
======= =======
Pro forma earnings data:
Income before income taxes and extraordinary item, as
reported................................................ $ 2,884 $ 2,214
Pro forma income tax expense.............................. 1,096 841
------- -------
Pro forma income before extraordinary item................ 1,788 1,373
Preferred return on special redeemable preferred
partnership interests................................... 714 --
------- -------
Pro forma income before extraordinary item available for
distribution to partners and shareholders............... $ 1,074 $ 1,373
======= =======
Pro forma earnings per common share:
Pro forma income before extraordinary item................ $ 0.19 $ 0.14
Preferred return on special redeemable preferred limited
partnership interests................................... 0.08 --
------- -------
Pro forma income before extraordinary item available for
distribution to partners and shareholders............... $ 0.11 $ 0.14
======= =======
Shares used in computing pro forma earnings per share
data.................................................... 9,375 9,752
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-23
<PAGE> 110
AMERICAN RETIREMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
JUNE 30, 1996 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 549 $ (8,606)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 3,165 3,206
Deferred income taxes.................................. -- 10,728
Extinguishment of debt................................. 2,335 --
Amortization of deferred gain.......................... -- (102)
Increase (decrease), net of acquisitions, in cash due to
changes in:
Receivables............................................ 190 (1,284)
Inventory.............................................. (17) 1
Prepaid expenses....................................... 39 (643)
Other assets........................................... (59) (333)
Accounts payable....................................... 248 601
Accrued expenses....................................... 1,812 620
Tenant deposits........................................ (17) 502
Other long-term liabilities............................ (74) (28)
-------- --------
Net cash provided by operating activities................... 8,171 4,662
Cash flows from investing activities:
Additions to land, building and equipment................. (2,125) (10,851)
Acquisition of retirement communities..................... (63,184) --
Acquisition of assisted living residences................. -- (11,524)
Investments in joint ventures............................. -- (1,030)
Proceeds from (purchases of) assets whose use is limit.... 289 (1,987)
Proceeds from the maturity of marketable securities....... 50 --
Proceeds from the sale of assets.......................... 437 28,789
-------- --------
Net cash provided (used) by investing activities............ (64,533) 3,397
Cash flows from financing activities:
Proceeds from initial public offering, net of expenses.... -- 45,221
Repayment of reorganization note.......................... -- (21,875)
Payment of redeemable preferred interests................. (4,805) (5,195)
Distributions to partners................................. (3,576) (4,132)
Expenditures for financing costs.......................... (341) (32)
Proceeds from the issuance of long-term debt.............. 68,948 17,132
Principal payments on long-term debt...................... (826) (20,537)
-------- --------
Net cash provided by financing activities................... 59,400 10,582
Net increase in cash and cash equivalents................. 3,038 18,641
-------- --------
Cash and cash equivalents at beginning of period............ 3,825 3,222
-------- --------
Cash and cash equivalents at end of period.................. $ 6,863 $ 21,863
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 3,356 $ 6,268
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-24
<PAGE> 111
AMERICAN RETIREMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
American Retirement Corporation (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Certain 1996 amounts have been reclassified to conform with the 1997
presentation. Operating results for the six month period ended June 30, 1997 are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 1997.
Prior to the IPO, the Company's facilities were owned, managed and/or
operated by one or more limited partnerships of the Company's predecessor,
American Retirement Communities, LP (the "Partnership" or "Predecessor"). As the
Company is newly formed, all references to the Company in connection with
historical financial data or otherwise include the Predecessor.
2. INITIAL PUBLIC OFFERING
On June 4, 1997, the Company completed an IPO of 3,593,750 shares of common
stock, the proceeds of which (after underwriting discounts and expenses)
amounted to approximately $45.2 million. The Company used approximately $21.9
million of the net proceeds from the IPO to repay the promissory note resulting
from the reorganization discussed below. The balance of the net proceeds are
being used for working capital purposes, including the development and
construction of free-standing assisted living residences and possible
acquisitions.
3. FORMATION OF AMERICAN RETIREMENT CORPORATION AND PRO FORMA ADJUSTMENTS
The Partnership was reorganized concurrent with the IPO such that all of
its assets and liabilities were contributed to the Company in exchange for
7,812,500 shares of common stock and a promissory note for approximately $21.9
million (the "Reorganization").
(a) Pro Forma Earnings Data: The pro forma adjustment reflected on the
statements of operations provides for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes, assuming
the Partnership was subject to taxes.
(b) Pro Forma Earnings per Share: Pro forma 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 shares received as a result
of the Reorganization plus 1,562,500 shares for the approximate $21.9 million
promissory note.
(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, the
Company recorded as a one-time charge to income a net deferred income tax
expense of approximately $10.7 million resulting from the difference between the
accounting and tax bases of the new corporation's assets and liabilities.
F-25
<PAGE> 112
AMERICAN RETIREMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. EQUITY
The following table summarizes the Company's equity transactions for the
six months ended June 30, 1997:
<TABLE>
<CAPTION>
ADDITIONAL
PARTNERS' COMMON PAID-IN RETAINED
EQUITY STOCK CAPITAL EARNINGS TOTAL
--------- ------ ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996....... $ 37,882 $37,882
Net income (loss).................. 1,599 (10,205) (8,606)
Partner distributions.............. (2,500) (2,500)
Reorganization Note................ (21,875) (21,875)
Transfer of partnership equity for
7,812,500 shares of common
stock............................ (15,106) 78 15,028 0
Net proceeds from issuance of
3,593,750 shares of common
stock............................ 36 45,185 45,221
-------- ---- ------- -------- -------
Balance at June 30, 1997........... $ -- $114 $60,213 $(10,205) $50,122
======== ==== ======= ======== =======
</TABLE>
5. INCOME TAXES
The total provision for income taxes for the quarter ended June 30, 1997
was $10.8 million consisting of current income tax expense of $.1 million and
deferred tax expense of $10.7 million. The deferred tax expense includes an
increase in deferred income tax liabilities of $12.2 million primarily related
to the Reorganization. The increase in deferred income tax liabilities is
partially offset by an increase in deferred income tax assets of $2.3 million,
also related primarily to the Reorganization. The Company believes that it is
more likely than not that the benefits of the deferred income tax assets will be
realized. Accordingly, the Company has not established a valuation allowance
against the deferred tax assets. The net deferred income tax liability as of
June 30, 1997 was $9.8 million.
6. ACQUISITIONS
In May 1997, the Company acquired assisted living residences in Tarpon
Springs, Florida and Corpus Christi, Texas and a leasehold interest in an
assisted living residence in Victoria, Texas. The total consideration was
approximately $11.5 million, of which approximately $8.2 million was financed
through mortgage loans and the remaining $3.3 million was paid in cash.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 , "Earnings Per
Share". This statement establishes and simplifies standards for computing and
presenting earnings per share. SFAS No. 128 will be effective beginning with the
Company's quarter ended December 31, 1997 and requires the restatement of all
previously reported earnings per share data that are presented. Early adoption
of SFAS No. 128 is not permitted. SFAS No. 128 replaces primary and fully
diluted earnings per share. There will be no impact on the calculation of basic
earnings per share for the quarters ended June 30, 1997 and 1996. Diluted
earnings per share is not expected to differ materially from basic earnings per
share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". The statement establishes standards for the reporting and display of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise
F-26
<PAGE> 113
AMERICAN RETIREMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
during a period from transactions and other events and circumstances from
non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distribution to owners. SFAS No.
130 will be effective for the Company's fiscal year ending December 31, 1998.
Adoption of SFAS No. 130 is not expected to significantly impact the Company's
financial position or results of operations, including the required comparative
presentation for prior periods.
In June 1997, the FASB also issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information" which supersedes SFAS No. 14. This
statement changes the way that public business enterprises report segment
information, including financial and descriptive information about their
operating segments, in annual financial statements and would require that those
enterprises report selected segment information in interim financial reports to
shareholders. Operating segments are defined as revenue-producing components of
the enterprise which are generally used internally for evaluating segment
performance. SFAS No. 131 will be effective for the Company beginning with the
Company's first quarter of 1998. Adoption of SFAS No. 131 will not impact the
Company's financial position or results of operations.
F-27
<PAGE> 114
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-28
<PAGE> 115
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-29
<PAGE> 116
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-30
<PAGE> 117
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-31
<PAGE> 118
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-32
<PAGE> 119
======================================================
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 THE 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......................... 9
The Company.......................... 17
Use of Proceeds...................... 18
Price Range of Common Stock.......... 19
Dividend Policy and Prior
Distributions...................... 19
Capitalization....................... 20
Unaudited Pro Forma Condensed
Combined Financial Information..... 21
Selected Combined and Consolidated
Financial Data..................... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 29
Business............................. 41
Management........................... 60
Principal Shareholders............... 68
Certain Transactions................. 69
Description of Debentures............ 73
Description of Capital Stock......... 80
Underwriting......................... 84
Legal Matters........................ 85
Experts.............................. 85
Available Information................ 85
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
======================================================
======================================================
$100,000,000
[AMERICAN RETIREMENT CORPORATION LOGO]
% CONVERTIBLE SUBORDINATED
DEBENTURES DUE 2002
------------------------
PROSPECTUS
------------------------
SCHRODER & CO. INC.
, 1997
======================================================
<PAGE> 120
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........................................ $ 34,849
NASD fee.................................................... 12,000
Accounting fees and expenses................................ 30,000
Legal fees and expenses..................................... 85,000
Printing and engraving expenses............................. 85,000
Blue sky fees and expenses.................................. 2,500
Trustee fees and expenses................................... 9,500
Miscellaneous fees and expenses............................. 141,151
--------
Total............................................. $400,000
========
</TABLE>
- ---------------
* To be completed by amendment.
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.
II-1
<PAGE> 121
The Company has purchased a directors and officers insurance policy
providing for $10.0 million in coverage for certain liabilities of the Company's
directors and officers. The policy expires in May 2000.
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.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
All of the shares of Common Stock outstanding on the date hereof other than
the 3,593,750 shares sold by the Company in its initial public offering in May
1997 (the "IPO") were distributed to the Registrant's shareholders immediately
prior to the effectiveness of the IPO 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 were 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 the Company's
registration statement in connection with the IPO to organize the Registrant and
liquidate the limited partnership, subject only to the effectiveness of the IPO.
The Registrant believes that the distribution of shares of Common Stock by the
affiliated limited partnership was 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)
4.3 -- Form of Indenture between the Company and IBJ Schroder Bank
and Trust Company, as Trustee
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*
</TABLE>
II-2
<PAGE> 122
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
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*
10.22 -- Construction Loan Agreement, dated March 14, 1997, between
Fort Austin Limited Partnership and First Union National
Bank of Tennessee*
10.23 -- Construction Loan Addendum, dated March 28, 1997, between
First Union National Bank of Tennessee and Fort Austin
Limited Partnership*
10.24 -- Promissory Note, dated March 28, 1997, by Fort Austin
Limited Partnership to First Union National Bank of
Tennessee*
10.25 -- Letter of Intent, dated April 3, 1997, by National Health
Investors, Inc. to American Retirement Corporation*
10.26 -- Master Loan Agreement, dated December 23, 1996, between
First American National Bank and American Retirement
Communities, L.P.*
10.27 -- Letter of Intent, dated February 24, 1997, by Nationwide
Health Properties, Inc. to American Retirement Corporation*
12 -- Statements re Computation of Ratios**
21 -- Subsidiaries of the Registrant*
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Bass, Berry & Sims PLC (included in Exhibit 5)
24 -- Power of Attorney**
25 -- Statement of Eligibility of Trustee**
</TABLE>
- ---------------
* Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-23197).
** Previously filed.
II-3
<PAGE> 123
(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.
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-4
<PAGE> 124
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 September 22,
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 September 22, 1997
- ----------------------------------------------------- Executive Officer
W.E. Sheriff (Principal Executive
Officer)
/s/ GEORGE T. HICKS Executive Vice September 22, 1997
- ----------------------------------------------------- President -- Finance,
George T. Hicks Chief Financial Officer
(Principal Financial
and Accounting Officer)
* Director September 22, 1997
- -----------------------------------------------------
H. Lee Barfield II
* Director September 22, 1997
- -----------------------------------------------------
Jack O. Bovender, Jr.
* Director September 22, 1997
- -----------------------------------------------------
Frank M. Bumstead
* Director September 22, 1997
- -----------------------------------------------------
Robin G. Costa
* Director September 22, 1997
- -----------------------------------------------------
Clarence Edmonds
* Director September 22, 1997
- -----------------------------------------------------
John A. Morris, Jr., M.D.
* Director September 22, 1997
- -----------------------------------------------------
Daniel K. O'Connell
* Director September 22, 1997
- -----------------------------------------------------
Nadine C. Smith
* Director September 22, 1997
- -----------------------------------------------------
Lawrence J. Stuesser
* /s/ GEORGE T. HICKS
- -----------------------------------------------------
George T. Hicks, Attorney-in-Fact
</TABLE>
II-5
<PAGE> 125
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> 126
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)
4.3 -- Form of Indenture between the Company and IBJ Schroder Bank
and Trust Company, as Trustee
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*
</TABLE>
<PAGE> 127
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
-- Senior Promissory Note, dated May 7, 1996, by
10.21 ARCLP-Charlotte, LLC and American Retirement Communities,
L.P. to General Electric Capital Corporation*
10.22 -- Construction Loan Agreement, dated March 14, 1997, between
Fort Austin Limited Partnership and First Union National
Bank of Tennessee*
10.23 -- Construction Loan Addendum, dated March 28, 1997, between
First Union National Bank of Tennessee and Fort Austin
Limited Partnership*
10.24 -- Promissory Note, dated March 28, 1997, by Fort Austin
Limited Partnership to First Union National Bank of
Tennessee*
10.25 -- Letter of Intent, dated April 3, 1997, by National Health
Investors, Inc. to American Retirement Corporation*
10.26 -- Master Loan Agreement, dated December 23, 1996, between
First American National Bank and American Retirement
Communities, L.P.*
10.27 -- Letter of Intent, dated February 24, 1997, by Nationwide
Health Properties, Inc. to American Retirement Corporation*
12 -- Statements re Computation of Ratios**
21 -- Subsidiaries of the Registrant*
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Bass, Berry & Sims PLC (included in Exhibit 5)
24 -- Power of Attorney**
25 -- Statement of Eligibility of Trustee**
</TABLE>
- ---------------
* Previously filed.
** Previously filed.
<PAGE> 1
___% Convertible Subordinated Debentures Due 2002
UNDERWRITING AGREEMENT
New York, New York
September __, 1997
SCHRODER & CO. INC.
As Underwriter
Equitable Center
787 Seventh Avenue
New York, New York 10019-6016
Ladies and Gentlemen:
AMERICAN RETIREMENT CORPORATION, a Tennessee corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to you, as underwriter (the "Underwriter"), $100,000,000
aggregate principal amount of its ___% Convertible Subordinated Debentures Due
2002 (the "Firm Securities"). In addition, the Company proposes to grant to you
an option to purchase up to an additional $15,000,000 principal amount of such
debentures (the "Option Securities"), on the terms and for the purposes set
forth in Section 2 hereof. The Firm Securities and the Option Securities are
herein collectively referred to as the "Securities."
1. The Company represents and warrants to, and agrees with,
you that:
(a) A registration statement on Form S-1
(Registration No. 333-34339) relating to the Securities, including a
preliminary prospectus relating to the Securities and such amendments
to such registration statement as may have been required to the date of
this Agreement, has been prepared by the Company under the provisions
of the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations (collectively referred to as the "Rules and
Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder, and has been filed with the Commission. The
Commission has not issued any order preventing or suspending the use of
the Prospectus (as defined below) or any Preliminary Prospectus (as
defined below). The term "Preliminary Prospectus" as used herein means
a preliminary prospectus relating to the Securities, as contemplated by
Rule 430 or Rule 430A ("Rule 430A") of the Rules and Regulations,
included at any time as part of the foregoing registration statement or
any amendment thereto before it became effective under the Act and any
prospectus filed with the Commission by the Company pursuant to Rule
424(a) of the Rules and Regulations. Copies of such registration
statement and amendments and of each related Preliminary Prospectus
have been delivered to the Underwriter. If such registration statement
has not become effective, a further amendment to such registration
statement, including a form of
<PAGE> 2
final prospectus, necessary to permit such registration statement to
become effective will be filed promptly by the Company with the
Commission. If such registration statement has become effective, a
final prospectus relating to the Securities containing information
permitted to be omitted at the time of effectiveness by Rule 430A will
be filed by the Company with the Commission in accordance with Rule
424(b) of the Rules and Regulations promptly after execution and
delivery of this Agreement. The term "Registration Statement" means
the registration statement as amended at the time it becomes or became
effective (the "Effective Date"), including all financial statements
and schedules and all exhibits, and all information contained in any
final prospectus filed with the Commission pursuant to Rule 424(b) of
the Rules and Regulations or in a term sheet described in Rule 434 of
the Rules and Regulations in accordance with Section 5 hereof and
deemed to be included therein as of the Effective Date by Rule 430A of
the Rules and Regulations. The term "Prospectus" means the prospectus
relating to the Securities as first filed with the Commission pursuant
to Rule 424(b) of the Rules and Regulations or, if no such filing is
required, the form of final prospectus relating to the Securities
included in the Registration Statement at the Effective Date.
(b) On the date that any Preliminary Prospectus was
filed with the Commission, the date the Prospectus is first filed with
the Commission pursuant to Rule 424(b) (if required), on the Closing
Date and any Option Closing Date and when any post-effective amendment
to the Registration Statement becomes effective or any amendment or
supplement to the Prospectus is filed with the Commission, the
Registration Statement, each Preliminary Prospectus and the Prospectus
(as amended or as supplemented if the Company shall have filed with the
Commission any amendment or supplement thereto), including the
financial statements included in the Prospectus, did or will comply in
all material respects with all applicable provisions of the Act, the
Rules and Regulations, and the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"), and the rules and regulations of the
Commission thereunder, including containing all statements required to
be stated therein in accordance with the Act and the Rules and
Regulations. On the Effective Date and when any post-effective
amendment to the Registration Statement becomes effective, no part of
the Registration Statement or any such amendment did or will contain
any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein not misleading. At the Effective Date, the date the
Prospectus or any amendment or supplement to the Prospectus is filed
with the Commission and at the Closing Date and, if later, the Option
Closing Date, the Prospectus did not or will not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading. The foregoing representations and
warranties in this Section 3(b) do not apply to any statements or
omissions made in reliance on and in conformity with information
relating to the Underwriter furnished in writing to the Company by the
Underwriter specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto, it being understood
that such information includes the
2
<PAGE> 3
last paragraph on the cover page, the paragraph at the bottom of the
inside cover page, and the information in the third and eighth
paragraphs under the caption "Underwriting" in the Prospectus. The
Company has not distributed, and, prior to the later to occur of (i)
the Closing Date or, if later, the Option Closing Date and (ii)
completion of the distribution of the Securities, will not distribute,
any offering material in connection with the offering or sale of the
Securities other than the Registration Statement, the Preliminary
Prospectus, the Prospectus or any other materials, if any, permitted
by the Act.
(c) The indenture, including any amendments and
supplements thereto, pursuant to which the Securities will be issued
(the "Indenture"), will conform in all material respects with the
requirements of the Trust Indenture Act and the rules and regulations
of the Commission thereunder.
(d) Set forth on Exhibit A attached hereto is a list
of each entity that is directly or indirectly wholly-owned by the
Company (collectively, the "Subsidiaries"). Each of the Company and the
Subsidiaries is, and at the Closing Date and any Option Closing Date
will be, duly organized, validly existing and in good standing under
the laws of its state of organization. Each of the Company and the
Subsidiaries has, and at the Closing Date and the Option Closing Date
will have, full corporate, partnership or other power and authority to
conduct all the activities conducted by it, to own or lease all the
assets owned or leased by it and to conduct its business as described
in the Registration Statement and the Prospectus (or, if the Prospectus
is not in existence, in the most recent Preliminary Prospectus). Each
of the Company and the Subsidiaries is, and at the Closing Date and the
Option Closing Date will be, duly licensed or qualified to do business
and in good standing as a foreign organization in all jurisdictions in
which the nature of the activities conducted by it or the character of
the assets owned or leased by it makes such licensing or qualification
necessary except for jurisdictions in which the failure to be so
licensed or qualified would not have a material adverse effect on the
business, properties, condition (financial or otherwise), net worth, or
results of operations of the Company and the Subsidiaries, taken as a
whole. The Company, directly or indirectly, beneficially owns all of
the outstanding equity interests in each of the Subsidiaries, free and
clear of all liens, security interests, restriction, pledges,
encumbrances, charges, equities, claims, easements, assessments and
tenancies (collectively, "Encumbrances"), except as set forth in the
Prospectus (or, if the Prospectus is not in existence, in the most
recent Preliminary Prospectus). Except with respect to the Subsidiaries
and except as described in the Registration Statement and Prospectus
(or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus), the Company does not own, and at the Closing
Date and any Option Closing Date will not own, directly or indirectly,
any shares of stock or any other equity or long-term debt securities of
any corporation or have any equity interest in any firm, partnership,
limited liability company, joint venture, association or other entity.
Complete and correct copies of the charter and the bylaws or
partnership agreement or operating agreement of the
3
<PAGE> 4
Company and each Subsidiary and all amendments thereto have been
delivered to the Underwriter, and no changes therein will be made
subsequent to the date hereof and prior to the Closing Date or, if
later, the Option Closing Date.
(e) The outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid
and nonassessable and are not subject to any preemptive or similar
rights. The Company has, and, upon completion of the sale of the
Securities, will have, an authorized, issued and outstanding
capitalization as set forth in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, in the most
recent Preliminary Prospectus). The description of the securities of
the Company in the Registration Statement and the Prospectus (or, if
the Prospectus is not in existence, in the most recent Preliminary
Prospectus) is, and at the Closing Date and, if later, the Option
Closing Date will be, complete and accurate in all material respects.
Except as set forth in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus), the Company does not have outstanding, and at
the Closing Date and, if later, the Option Closing Date will not have
outstanding, any options to purchase, or any rights or warrants to
subscribe for, or any securities or obligations convertible into, or
any contracts or commitments to issue or sell, any shares of its
capital stock or any such warrants, convertible securities or
obligations.
(f) The combined and consolidated financial
statements and the related notes and schedules of the Company, the
Predecessor (as defined in the Registration Statement) and the
Predecessor Entities (as defined in the Registration Statement) set
forth in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, in the most recent Preliminary
Prospectus) present fairly, in all material respects, the financial
condition of the Company, the Predecessor and the Predecessor Entities
as of the dates indicated and the combined and consolidated results of
operations, changes in partners' and shareholders' equity and cash
flows of the Company, the Predecessor and the Predecessor Entities for
the periods covered thereby, all in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout
the entire period involved, except as otherwise disclosed therein. The
combined financial statements and the related notes and schedules of
Carriage Club of Charlotte Limited Partnership and Carriage Club of
Jacksonville Limited Partnership (the "Carriage Clubs") set forth in
the Registration Statement and Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) present fairly,
in all material respects, the financial condition of the Carriage Clubs
as of the dates indicated and the combined results of operations,
partners' equity and cash flows of the Carriage Clubs for the periods
covered thereby, all in conformity with GAAP applied on a consistent
basis throughout the entire period involved, except as otherwise
disclosed therein. The selected financial data of the Company, the
Predecessor and the Predecessor Entities set forth under the captions
"Prospectus Summary--Summary Combined and Consolidated Financial and
Other Data" and "Selected
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<PAGE> 5
Combined and Consolidated Financial Data" in the Registration
Statement and Prospectus (or, if the Prospectus is not in existence,
in the most recent Preliminary Prospectus) have been prepared on a
basis consistent with the financial statements of the Company, the
Predecessor and the Predecessor Entities. The pro forma financial
statements included in the Registration Statement and the Prospectus
comply in all material respects with the applicable requirements of
Rule 11-02 of Regulation S-X of the Commission and the pro forma
adjustments have been properly applied to the historical amounts in
the compilation of such statements. No other financial statements or
schedules of the Company, the Predecessor, the Predecessor Entities,
any Subsidiary, the Carriage Clubs or any other entity are required by
the Act or the Rules and Regulations to be included in the
Registration Statement or the Prospectus. KMPG Peat Marwick, LLP (the
"Accountants"), who have reported on those of such financial
statements and schedules which are audited, are independent
accountants with respect to the Company, the Predecessor, the
Predecessor Entities, the Subsidiaries and the Carriage Clubs as
required by the Act and the Rules and Regulations.
(g) Each of the Company and the Subsidiaries
maintains a system of internal accounting control sufficient to provide
reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorization, (ii) transactions
are recorded as necessary to permit preparation of financial statements
in conformity with GAAP and to maintain accountability for assets,
(iii) access to assets is permitted only in accordance with
management's general or specific authorization, and (iv) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(h) Except as set forth in the Registration Statement
and the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), subsequent to the respective dates as
of which information is given in the Registration Statement and the
Prospectus and prior to the Closing Date and, if later, the Option
Closing Date, (i) there has not been, and will not have been any change
in the capitalization of the Company or any material adverse change in
the business, properties, condition (financial or otherwise), net worth
or results of operations of the Company and the Subsidiaries, taken as
a whole, arising for any reason whatsoever, (ii) none of the Company or
any Subsidiary has incurred, nor will any of them have incurred any
material liabilities or obligations, direct or contingent, (iii) none
of the Company or any Subsidiary has entered into, nor will any of them
have entered into any material transactions, other than pursuant to
this Agreement, and (iv) none of the Company or any of the Subsidiaries
has paid or declared any dividends or other distributions of any kind
on any class of its capital stock, partnership interests or other
equity securities.
(i) Each of the Company and the Subsidiaries has
good, marketable and indefeasible title to the respective properties
described in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
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<PAGE> 6
Prospectus) as owned by them or by the Company (collectively, the
"Owned Properties"), in each case free and clear of all Encumbrances,
except as set forth in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), and except such
Encumbrances that do not materially interfere with the use made of
such properties. Each of the Company and the Subsidiaries has valid,
subsisting and enforceable leases for the respective properties
described in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus) as leased by them or by the Company (collectively, the
"Leased Properties"), in each case free and clear of all Encumbrances,
except as set forth in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). All Encumbrances
on or affecting the Owned Properties which are required to be
disclosed in the Registration Statement and Prospectus are disclosed
therein. The use and occupancy of each of the Owned Properties and
Leased Properties complies with all applicable codes and zoning laws
and regulations and there is no pending or, to the knowledge of the
Company, threatened condemnation, zoning change, environmental or
other proceeding or action that will in any material respect adversely
affect the business, properties, condition (financial or otherwise),
net worth or results of operations of the Company and the
Subsidiaries, taken as a whole.
(j) Except as set forth in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus)
the mortgages and deeds of trust encumbering the Owned Properties are
not convertible into equity interests in the Owned Properties. Such
mortgages and deeds of trust are not cross-defaulted or
cross-collateralized to any property not to be owned directly or
indirectly by the Company or a Subsidiary.
(k) The Company is not an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for,
an "investment company," as such terms are defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act").
(l) Except as set forth in the Registration Statement
and the Prospectus (or, if the Prospectus is not in existence, in the
most recent Preliminary Prospectus), there are no actions, suits or
proceedings pending or threatened against or affecting the Company, any
Subsidiary, or any directors, officers, partners or shareholders of any
of the foregoing in their capacity as such, or any of the Owned
Properties or Leased Properties, before or by any Federal or state
court, commission, regulatory body, administrative agency or other
governmental body, domestic or foreign (collectively, a "Governmental
Body"), wherein an unfavorable ruling, decision or finding could be
reasonably expected to adversely affect the business, properties,
condition (financial or otherwise), net worth or results of operations
of the Company and the Subsidiaries, taken as a whole.
(m) Except as set forth in the Registration Statement
and the Prospectus (or, if the Prospectus is not in existence, in the
most recent Preliminary Prospectus), each of the Company and the
Subsidiaries has, and at the Closing Date and the Option Closing Date
(if any) will have, all governmental licenses, permits, consents,
orders, approvals, franchises, certificates and other authorizations
(collectively, "Licenses") necessary to carry on its business and to
own or lease and operate its properties as contemplated in the
Prospectus (or, if the Prospectus is not in existence, in the most
recent Preliminary Prospectus), except where the failure to have any
such License would not have a material adverse effect on the business,
properties, condition (financial or otherwise), net worth or
6
<PAGE> 7
results of operations of the Company and the Subsidiaries, taken as a
whole. Each of the Company and the Subsidiaries has complied, and at
the Closing Date and the Option Closing Date (if any) will have
complied, in all material respects with all laws, regulations,
Licenses and orders applicable to it or its business and properties.
None of the Company or any Subsidiary is, and, at the Closing Date and
the Option Closing Date (if any), none of them will be, in default
(nor has any event occurred which, with notice or lapse of time or
both, would constitute a default) in the due performance and
observation of any term, covenant or condition of any indenture,
mortgage, deed of trust, voting trust agreement, loan agreement, bond,
debenture, note agreement or other evidence of indebtedness, lease,
contract or other agreement or instrument (collectively, a "contract
or other agreement") to which any of them is a party or by which any
of their respective properties is bound or affected, which default
would individually or in the aggregate have a material adverse effect
on the business, properties, condition (financial or otherwise), net
worth or results of operations of the Company and the Subsidiaries,
taken as a whole. To the best knowledge of the Company, no other party
under any such contract or other agreement is, or, at the Closing Date
or the Option Closing Date (if any), will be, in default in any
material respect thereunder. There are no governmental proceedings or
actions pending or threatened for the purpose of suspending, modifying
or revoking any License held by the Company or any Subsidiary
(including, without limitation, any proceeding or action to decertify
any of the Owned Properties or Leased Properties from participation in
any Medicaid or Medicare program). None of the Company or any
Subsidiary is in violation of any provision of its charter or bylaws
or partnership agreement or other governing instrument.
(n) No consent, approval, authorization or order of,
or any filing or declaration with, any Governmental Body is required
for the consummation of the transactions contemplated by this Agreement
or in connection with the issuance and sale of the Securities by the
Company in the Offering, except such as have been obtained under the
Act or the Rules and Regulations and such as may be required under
state securities or Blue Sky laws or the bylaws and rules of the
National Association of Securities Dealers, Inc. (the "NASD") in
connection with the purchase and distribution by the Underwriter of the
Securities to be sold by the Company.
(o) The Company has full corporate power and
authority to enter into this Agreement and to carry out all the terms
and provisions hereof to be carried out by it. This Agreement has been
duly authorized, executed and delivered by the Company and constitutes
a valid and binding agreement of the Company and is enforceable against
the Company in accordance with the terms hereof. Except as disclosed in
the Registration Statement and the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), the
execution, delivery and the performance of this Agreement and the
consummation of the transactions contemplated hereby will not result in
the creation or imposition of any Encumbrance upon any of the Owned
Properties or Leased Properties or any of the other assets of the
Company or any Subsidiary pursuant to the
7
<PAGE> 8
terms or provisions of, or result in a breach or violation of or
conflict with any of the terms or provisions of, or constitute a
default under, or give any other party a right to terminate any of its
obligations under, or result in the acceleration of any obligation
under, (i) the charter or bylaws or the partnership agreement or other
organizational document of the Company or any Subsidiary, or (ii) any
material contract or other material agreement to which any of them is
a party or by which they, any of the Owned Properties or Leased
Properties, or any of their assets or properties are bound or
affected, or (iii) any judgment, ruling, decree, order, law, statute,
rule or regulation of any Governmental Body applicable to the Owned
Properties or Leased Properties or the business or other assets of the
Company or any Subsidiary. The Company has full corporate power and
authority to authorize, issue, offer and sell the Securities, as
contemplated by this Agreement, free of any preemptive rights. The
offer, issuance and sale by the Company of all shares of its common
stock, par value $0.01 per share (the "Common Stock"), prior to the
date hereof complied with or was exempt from the registration
requirements of the Act and applicable state securities laws.
(p) There is no document or contract of a character
required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement
which is not described or filed as required. All contracts to which the
Company is a party that are material to the operation of the business
of the Company, have been duly authorized, executed and delivered by
the Company, constitute valid and binding agreements of the Company and
are enforceable against the Company in accordance with the terms
thereof.
(q) Neither the Company nor any of its directors,
officers or affiliates (within the meaning of the Rules and
Regulations) has taken, nor will he, she or it take, directly or
indirectly, any action designed, or which might reasonably be expected
in the future, to cause or result in, under the Act or otherwise, or
which has constituted, stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the
Securities or otherwise.
(r) No holder of securities of the Company has rights
to the registration of any securities of the Company as a result of the
filing of the Registration Statement.
(s) The Securities have been approved for listing on
the New York Stock Exchange (the "NYSE"), subject only to notice of
issuance.
(t) No material labor dispute with the employees of
the Company or with the employees of any Subsidiary exists or is
threatened or imminent.
(u) Except as set forth in the Registration Statement
and the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), the Company or a Subsidiary owns, or is
licensed or otherwise has the full exclusive right to
8
<PAGE> 9
use, all material trademarks and trade names which are used in or
necessary for the conduct of its business as described in the
Registration Statement and Prospectus (or, if the Prospectus is not in
existence, in the most recent Preliminary Prospectus). To the
Company's best knowledge, no claims have been asserted by any person
to the use of any such trademarks or trade names or challenging or
questioning the validity or effectiveness of any such trademark or
trade name. The use, in connection with the business and operations of
the Company, of such trademarks and trade names does not, to the
Company's knowledge, infringe on the rights of any person.
(v) None of the Company or any Subsidiary, nor, to
the Company's best knowledge, any employee or agent of the Company or
any Subsidiary, has made any payment of funds of the Company or any
Subsidiary or received or retained any funds of the Company or any
Subsidiary in violation of any law, rule or regulation or of a
character required to be disclosed in the Registration Statement and
Prospectus (or, if the Prospectus is not in existence, in the most
recent Preliminary Prospectus).
(w) The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the business in which the
Company is engaged; none of the Company or any Subsidiary has been
refused any insurance coverage sought or applied for; and the Company
has no reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires.
(x) The business, operations and facilities of the
Company and each Subsidiary have been and are being conducted in
compliance in all material respects with all applicable laws,
ordinances, rules, regulations, Licenses, permits, approvals, plans,
authorizations or requirements relating to occupational safety and
health, or pollution, or protection of health or the environment
(including, without limitation, those relating to emissions,
discharges, releases or threatened releases of pollutants, contaminants
or hazardous or toxic substances, materials or wastes into ambient air,
surface water, groundwater or land, or relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling of chemical substances, pollutants, contaminants or
hazardous or toxic substances, materials or wastes, whether solid,
gaseous or liquid in nature) of any governmental department,
commission, board, bureau, agency or instrumentality of the United
States, any state or political subdivision thereof, or any foreign
jurisdiction, and all applicable judicial or administrative agency or
regulatory decrees, awards, judgments and orders relating thereto; and
none of the Company or any Subsidiary has received any notice from
governmental instrumentality or any third party alleging any violation
thereof or liability thereunder (including, without limitation,
liability for costs of investigating or remediating sites containing
hazardous substances and/or damages to natural resources), except for
such noncompliances, violations or liabilities that would not have a
material adverse effect upon the business,
9
<PAGE> 10
properties, condition (financial or otherwise), net worth or results
of operations of the Company and the Subsidiaries, taken as a whole.
(y) Each of the Company and the Subsidiaries has
filed all foreign, federal, state and local tax returns that are
required to be filed or has requested extensions thereof and has paid
all taxes required to be paid by it and any other assessment, fine or
penalty levied against it, to the extent that any of the foregoing is
due and payable.
(z) The Company and each of its executive officers
and directors has delivered to the Underwriter an agreement in the form
set forth as Exhibit B hereto to the effect that it, he or she will
not, for a period of 90 days after the date hereof, without the prior
written consent of the Underwriter, offer to sell, sell, contract to
sell, grant any option to purchase or otherwise dispose (or announce
any offer, sale, grant of any option to purchase or other disposition)
of any shares of Common Stock or securities convertible into, or
exchangeable or exercisable for, shares of Common Stock. (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 any acquisitions).
(aa) Each certificate signed by any officer of the
Company and delivered to the Underwriter or counsel for the Underwriter
shall be deemed to be a representation and warranty by the Company to
the Underwriter as to the matters covered thereby.
(bb) The Securities have been duly and validly
authorized and the Securities, when the Indenture has been duly
executed and delivered by the Company and the Trustee (assuming the due
authorization, execution and delivery of the Indenture by the Trustee)
and when the Securities have been authenticated by the Trustee and
issued, executed, delivered and sold by the Company in accordance with
this Agreement and the Indenture, will have been duly and validly
executed, authenticated, issued and delivered and will (i) constitute
valid and legally binding obligations of the Company enforceable
against the Company in accordance with their terms and entitled to the
benefits provided in the Indenture, subject, as to enforcement, to
bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to general
principles of equity, and (ii) be convertible into shares of Common
Stock (the "Conversion Shares") in accordance with the terms of the
Indenture. The Conversion Shares have been duly and validly authorized
and reserved for issuance upon conversion of the Securities and, when
issued and delivered upon such conversion, will be duly and validly
issued and outstanding, fully paid and nonassessable and will not have
been issued in violation of or subject to any preemptive or other
similar rights. The Securities and the Conversion Shares, when issued,
will conform to the respective descriptions thereof set forth in the
Prospectus.
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<PAGE> 11
(cc) The Indenture has been duly and validly
authorized by the Company and, when duly executed and delivered by the
Company and the Trustee (assuming the due authorization, execution and
delivery of the Indenture by the Trustee), will constitute a valid and
legally binding instrument of the Company, enforceable against the
Company in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to general
principles of equity. The Indenture will conform to the description
thereof set forth in the Prospectus.
2. Subject to the terms and conditions herein set forth, the
Company agrees to sell to you, and you agree to purchase, $100,000,000 aggregate
principal amount of Firm Securities at a purchase price equal to 97.5% of the
principal amount thereof, plus accrued interest, if any, from September __, 1997
to the Firm Securities Delivery Date (as defined herein).
In addition, subject to the terms and conditions herein set
forth, the Company agrees to sell to you, as required (for the sole purpose of
covering over-allotments in the sale of the Firm Securities), up to $15,000,000
principal amount of Option Securities at a purchase price equal to 97.5% of the
principal amount thereof, plus accrued interest, if any, from September __, 1997
to the Option Securities Delivery Date (as defined herein). The right to
purchase the Option Securities may be exercised by your giving 48 hours' prior
written or telephonic notice (subsequently confirmed in writing) to the Company
of your determination to purchase all or a portion of the Option Securities.
Such notice may be given at any time within a period of 30 days following the
date of this Agreement. No Option Securities shall be delivered to or for the
accounts of the Underwriter unless the Firm Securities shall be simultaneously
delivered or shall theretofore have been delivered as herein provided.
3. The Underwriter proposes to offer the Securities for sale
to the public at the "Price to Public" set forth on the cover page of the
Prospectus and upon the other terms and conditions set forth in the Prospectus.
4. The Firm Securities, in definitive form, to be purchased by
the Underwriter hereunder shall be delivered by or on behalf of the Company to
you for your account, against payment by you of the purchase price therefor by
wire transfer of immediately available funds to an account designated by the
Company, at the office of Stroock & Stroock & Lavan LLP, New York, New York, at
9:30 A.M., New York City time, on September __, 1997, or at such other time,
date and place as you and the Company may agree upon in writing, such time and
date being herein called the "Firm Securities Delivery Date."
The Option Securities, in definitive form, to be purchased by
the Underwriter hereunder shall be delivered by or on behalf of the Company to
you for your account against payment by you of the purchase price thereof by
wire transfer of immediately available funds to an account designated by the
Company, in New York, New York, at such time and on such date (not earlier than
the Firm Securities Delivery Date nor later than ten business days after giving
of
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<PAGE> 12
the notice delivered by you to the Company with reference thereto) and in
such denominations and registered in such names as shall be specified in the
notice delivered by you to the Company with respect to the purchase of such
Option Securities. The date and time of such delivery and payment are herein
sometimes referred to as the "Option Securities Delivery Date" (and either of
the Option Securities Delivery Date or the Firm Securities Delivery Date may be
referred to herein as a "Delivery Date").
The Firm Securities and the Option Securities so to be
delivered will be in good delivery form, and in such denominations and
registered in such names as you may request not less than 48 hours prior to the
applicable Delivery Date, respectively. Such Securities will be made available
for checking and packaging in New York, New York, at least 24 hours prior to the
applicable Delivery Date.
5. The Company covenants and agrees with the Underwriter:
(a) The Company will not, either prior to the
Effective Date or thereafter during such period as the Prospectus is
required by law to be delivered in connection with sales of the
Debentures by an Underwriter or dealer, file any amendment or
supplement to the Registration Statement or the Prospectus, unless a
copy thereof shall first have been submitted to the Underwriter within
a reasonable period of time prior to the filing thereof and the
Underwriter shall not have objected thereto in good faith.
(b) If the Registration Statement is not yet
effective, the Company will use its best efforts to cause the
Registration Statement to become effective not later than the time
indicated in Section 7(a) hereof. The Company will notify the
Underwriter promptly, and will confirm such advice in writing, (i) when
the Registration Statement has become effective and when any
post-effective amendment thereto becomes effective, (ii) of any request
by the Commission for amendments or supplements to the Registration
Statement or the Prospectus or for additional information, (iii) of the
issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose or the threat thereof, (iv) of the
happening of any event during the period mentioned in the second
sentence of Section 5(b) that in the judgment of the Company makes any
statement made in the Registration Statement or the Prospectus untrue
or that requires the making of any changes in the Registration
Statement or the Prospectus in order to make the statements therein, in
light of the circumstances in which they are made, not misleading and
(v) of receipt by the Company or any representative or attorney of the
Company of any other communication from the Commission relating to the
Company, the Registration Statement, any Preliminary Prospectus or the
Prospectus. If at any time the Commission shall issue any order
suspending the effectiveness of the Registration Statement, the Company
will use its best efforts to obtain the withdrawal of such order at the
earliest possible moment. The Company will prepare the Prospectus in a
form approved by the Underwriter and will file such Prospectus pursuant
to Rule 424(b) under the Act not later than the
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<PAGE> 13
Commission's close of business on the second business day following
the execution and delivery of this Agreement or, if applicable, such
earlier time as may be required by Rule 430A(a)(3) under the
Securities Act. If the Company has omitted any information from the
Registration Statement pursuant to Rule 430A, the Company will use its
best efforts to comply with the provisions of, and to make all
requisite filings with the Commission pursuant to, said Rule 430A and
to notify the Underwriter promptly of all such filings.
(c) If, at any time when a Prospectus relating to the
Debentures is required to be delivered under the Act, any event occurs
as a result of which the Prospectus, as then amended or supplemented,
would include any untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading, or the Registration Statement, as then amended or
supplemented, would include any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein
not misleading, or if for any other reason it is necessary at any time
to amend or supplement the Prospectus or the Registration Statement to
comply with the Act or the Rules and Regulations, the Company will
promptly notify the Underwriter thereof and, subject to Section 5(b)
hereof, will prepare and file with the Commission, at the Company's
expense, an amendment to the Registration Statement or an amendment or
supplement to the Prospectus that corrects such statement or omission
or effects such compliance.
(d) To make generally available to its shareholders
as soon as practicable, but in any event not later than 90 days after
the close of the period covered thereby, an earnings statement in form
complying with the provisions of Section 11(a) of the Act covering a
period of 12 consecutive months beginning not later than the first day
of the Company's fiscal quarter next following the Effective Date.
(e) To file on a timely basis all documents required
to be filed with the Commission pursuant to Section 13, 14 or 15(d) of
the Exchange Act subsequent to the Effective Date and during any period
when the Prospectus is required to be delivered.
(f) The Company will comply with all the provisions
of all undertakings contained in the Registration Statement.
(g) During the period of three years commencing on
the Effective Date, the Company will furnish to the Underwriter, upon
request, a copy of such financial statements and other periodic and
special reports as the Company may from time to time distribute
generally to the holders of any class of its capital stock, and will
furnish to the Underwriter, upon request, a copy of each annual or
other report it shall be required to file with the Commission or the
NYSE; and (ii) such additional information concerning, the business and
financial condition of the Company as you may from time to time
reasonably request in connection with your obligations hereunder.
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<PAGE> 14
(h) To apply the net proceeds from the sale of the
Securities in the manner set forth in the Prospectus under the caption
"Use of Proceeds."
(i) That it will not take, directly or indirectly,
any action designed to cause or result in, or that might reasonably be
expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Securities.
(j) The Company will not for a period of 90 days
after the date hereof, without your prior written consent, offer to
sell, sell, contract to sell, grant any option to purchase or otherwise
dispose (or announce any offer to sell, sale, contract to sell, grant
of any option to purchase or other disposition) of any shares of Common
Stock or any securities convertible into or exchangeable for shares of
Common Stock (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 may issue privately placed shares in connection
with any acquisitions).
(k) That it has caused the Securities and the
Conversion Shares to be authorized for quotation on the NYSE upon
notice of issuance.
6. The Company covenants and agrees with you that the Company
will pay or cause to be paid: (i) the fees, disbursements and expenses
of counsel and accountants for the Company, and all other expenses, in
connection with the preparation, printing and filing of the
Registration Statement and the Prospectus and any amendments and
supplements thereto and the furnishing of copies thereof, including
charges for mailing, air freight and delivery and counting and
packaging thereof and of any Preliminary Prospectus and related
offering documents to the Underwriter and dealers; (ii) the cost of
printing this Agreement, communications with the Underwriter and
selling group and the Preliminary and Supplemental Blue Sky Memoranda
and any other documents in connection with the offering, purchase, sale
and delivery of the Securities; (iii) all expenses in connection with
the exemption of the Securities for offering and sale under securities
laws as provided in Section 5(b) hereof, including the fees,
disbursements and expenses for counsel for the Underwriter in
connection with such exemption and in connection with Blue Sky surveys
or similar advice with respect to sales; (iv) the filing fees (but
not the fees and disbursements of counsel for the Underwriter) in
connection with securing any required review by the National
Association of Securities
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<PAGE> 15
Dealers, Inc. of the terms of the sale of the Securities; (v) all fees
and expenses in connection with the quotation of the Securities and
the Conversion Shares on the NYSE; and (vi) all other costs and
expenses incident to the performance of the Company's obligations
hereunder that are not otherwise specifically provided for in this
Section 6, including the fees of the Company's Transfer Agent and
Registrar, the Trustee under the Indenture, the cost of the Company's
personnel and other internal costs, the cost of printing and
engraving the certificates representing the Securities and all
expenses and taxes incident to the sale and delivery of the Securities
to be sold by the Company to the Underwriter hereunder. It is
understood, however, that, except as provided in this Section, Section
8 and Section 11 hereof, the Underwriter will pay all of it own costs
and expenses, including the fees of its counsel, stock transfer
taxes on the resale of any of the Securities by it, and any
advertising expenses connected with any offers that it may make.
7. The obligations of the Underwriter hereunder shall be
subject, in its discretion, to (i) the condition that all
representations and warranties and other statements of the Company
herein are true and correct in all material respects, when made and on
each Delivery Date, (ii) the condition that the Company shall have
performed all its obligations hereunder theretofore to be performed and
(iii) the following additional conditions:
(a) The Registration Statement shall have become
effective, and you shall have received notice thereof not later than
10:00 P.M., New York City time, on the date of execution of this
Agreement, or at such other time as you and the Company may agree and
the Prospectus shall have been filed with the Commission in the manner
and within the time period required by Rule 424(b).
(b) (i) No stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings
for that purpose shall be pending or threatened by the Commission, (ii)
no order suspending the effectiveness of the Registration Statement or
the exemption of the Securities under the securities or Blue Sky laws
of any jurisdiction shall be in effect and no proceeding for such
purpose shall be pending before or threatened or contemplated by the
Commission or the authorities of any such jurisdiction, (iii) any
request for additional information on the part of the staff of the
Commission or any such authorities shall have been complied with to the
satisfaction of the staff of the Commission or such authorities and
(iv) after the date hereof no amendment or supplement to the
Registration Statement or the Prospectus shall have been filed unless a
copy thereof was first submitted to the Underwriter and the Underwriter
did not object thereto in good faith, and the Underwriter shall have
received certificates, dated the Closing Date and the Option Closing
Date and signed by the Chief Executive Officer of the Company and the
Chief Financial Officer of the Company (who
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<PAGE> 16
may, as to proceedings threatened, rely upon the best of their
information and belief), to the effect of the foregoing clauses (i),
(ii) and (iii).
(c) You shall not have advised the Company that the
Registration Statement or Prospectus, or any amendment or supplement
thereto, contains an untrue statement of fact or omits to state a fact
which in your judgment is in either case material and in the case of an
omission is required to be stated therein or is necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading.
(d) Bass, Berry & Sims PLC, counsel to the Company,
shall have furnished to you their written opinion, dated such Delivery
Date, in form and substance satisfactory to you, to the effect that:
(i) Each of the Company and the Subsidiaries
(A) has been duly incorporated or organized and is a validly
existing corporation, partnership or limited liability
company, to the extent applicable, in good standing under the
laws of its jurisdiction of incorporation or organization with
full power and authority (corporate, partnership or other) to
own or lease and to operate its properties and to conduct its
business as described in the Registration Statement and
Prospectus and (B) is duly qualified to do business as a
foreign corporation or partnership and is in good standing in
each jurisdiction (x) in which the conduct of its business
requires such qualification and (y) in which it owns or leases
property;
(ii) To the knowledge of such counsel, the
Company owns no capital stock or other beneficial interest in
any corporation, partnership, joint venture or other business
entity except for equity interests in the Subsidiaries and
except as set forth in the Registration Statement;
(iii) The Indenture has been duly
authorized, executed and delivered by the Company and duly
qualified under the Trust Indenture Act and, assuming due
authorization, execution and delivery by the Trustee, is a
valid and legally binding instrument of the Company,
enforceable against the Company in accordance with its terms,
subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in
equity or at law) and except as rights to indemnity and
contribution may be limited by federal and state securities
laws or the public policy underlying such laws;
(iv) The Securities have been validly
authorized, duly executed by authorized officers of the
Company, and assuming the due authentication and delivery of
the Securities by the Trustee,
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<PAGE> 17
are the validly issued, outstanding and legally binding
obligations of the Company, entitled to the benefits of the
Indenture and enforceable against the Company in accordance
with their terms, subject to the effects of bankruptcy,
insolvency, fraudulent conveyance, reorganization moratorium
and other similar laws relating to or affecting creditors'
rights generally, and general equitable principles (whether
considered in a proceeding in equity or at law);
(v) The Company has authorized capital stock
as set forth in the Prospectus and all of the authorized
Common Stock, including the Conversion Shares, have been duly
authorized, all of the Conversion Shares have been duly
reserved for issuance upon such conversion, and all of the
issued and outstanding shares of Common Stock are, and all the
Conversion Shares, when issued pursuant to the Indenture, will
be, validly issued, fully paid and nonassessable, with no
personal liability attaching to the ownership thereof; all of
the outstanding shares of Common Stock were issued and sold in
compliance with all applicable Federal and state securities
laws; except as described in the Prospectus and except with
respect to existing stock incentive or stock purchase plans
and the Company's proposed dividend reinvestment plan, to the
knowledge of such counsel, there are no outstanding options,
warrants or other rights calling for the issuance of, and
there are no commitments, plans or arrangements to issue any
shares of capital stock of the Company;
(vi) To the best of such counsel's
knowledge, except as set forth in the Prospectus, there are no
legal or governmental proceedings pending or threatened to
which the Company or any Subsidiary is a party or of which any
property of the Company or any Subsidiary is the subject
which, if resolved against the Company or any Subsidiary,
individually, or to the extent involving related claims or
issues, in the aggregate, is of a character required to be
disclosed in the Prospectus;
(vii) This Agreement has been duly
authorized, executed and delivered by the Company and is a
legal, valid and binding agreement of the Company subject to
the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization moratorium and other similar laws relating to
or affecting creditors' rights generally, and general
equitable principles (whether considered in a proceeding in
equity or at law);
(viii) The Company has full corporate power
and authority to execute, deliver and perform this Agreement
and the Indenture, and the execution, delivery and performance
of this Agreement and the Indenture, the consummation of the
transactions herein and therein contemplated and the
compliance by the Company with all the provisions of this
Agreement, the Indenture and the Securities will not conflict
with, or result in a breach of any of the terms or provisions
of, or constitute a default under, or result in the creation
or imposition of any lien, charge, claim or encumbrance upon
any of the property or assets of
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<PAGE> 18
the Company or any Subsidiary pursuant to, the terms of any
material contract or other agreement known to such counsel to
which the Company or any Subsidiary is a party or by which the
Company or any Subsidiary is bound or to which any of the
respective property or assets of the Company or any Subsidiary
is subject, nor will such action result in any violation of
the provisions of the charter or bylaws or partnership
agreement or operating agreement, in each case as amended, of
the Company or any Subsidiary, any statute or any rule or
regulation known to such counsel of any Governmental Body
having jurisdiction over the Company or any Subsidiary or any
of their respective properties or the terms of any judgment,
decree or order, known to such counsel, of any arbitrator or
Governmental Body having such jurisdiction;
(ix) No consent, approval, authorization,
order, registration or qualification of or with any court or
any regulatory authority or other governmental body is
required for the consummation of the transactions contemplated
by this Agreement and the Indenture, except such as have been
obtained under the Act or may be required by the NASD, and
such consents, approvals, authorizations, registrations or
qualifications as may be required under state or foreign
securities or Blue Sky laws in connection with the purchase
and distribution of the Securities by the Underwriter;
(x) To the best of such counsel's knowledge,
neither the Company nor any Subsidiary is currently in
violation of its charter or bylaws, partnership agreement or
operating agreement, in each case as amended to the date
hereof, or in material default under any indenture, mortgage,
deed of trust, lease, bank loan or credit agreement or any
other agreement or instrument of which such counsel has
knowledge to which the Company or any Subsidiary is a party or
by which any of them or any of their respective property may
be bound or affected;
(xi) There are no preemptive or other rights
to subscribe for or to purchase, nor any restriction upon the
voting or transfer of, any Securities or Common Stock issuable
upon conversion thereof, pursuant to the Company's Charter or
Bylaws, in each case as amended to the date hereof, or any
agreement or other instrument known to such counsel; and no
holders of securities of the Company have rights to the
registration thereof under the Registration Statement;
(xii) To the extent summarized therein, all
contracts and agreements summarized in the Registration
Statement and the Prospectus are fairly summarized therein,
conform in all material respects to the descriptions thereof
contained therein, and, to the extent such contracts or
agreements or any other material agreements are required under
the Act or the rules and regulations thereunder to be filed or
incorporated by reference therein as exhibits to the
Registration Statement, they are so filed or incorporated by
reference; and such
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<PAGE> 19
counsel does not know of any contracts or other documents
required to be summarized or disclosed in the Prospectus or to
be so filed or incorporated by reference as an exhibit to the
Registration Statement, which have not been so summarized or
disclosed, or so filed or incorporated by reference;
(xiii) All descriptions in the Prospectus of
legal or governmental proceedings are fair summaries thereof
and fairly present the information required to be shown with
respect to such matters;
(xiv) The Registration Statement has become
effective under the Act, the Prospectus has been filed in
accordance with Rule 424(b) of the rules and regulations of
the Commission under the Act, including the applicable time
periods set forth therein, or such filing is not required and,
to the best knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act, and the
Registration Statement, the Prospectus and each amendment or
supplement thereto, as of their respective effective or issue
dates, complied as to form in all material respects with the
requirements of the Act, the Trust Indenture Act and the rules
and regulations thereunder, it being understood that such
counsel need express no opinion as to the financial statements
and schedules or other financial data contained in the
Registration Statement or the Prospectus;
(xv) The Securities, the Indenture and the
Common Stock conform as to legal matters, in all material
respects, to the statements concerning them in the
Registration Statement and the Prospectus;
(xvi) The Company is not an "investment
company" or an "affiliated person" of, or "promoter" or
"principal underwriter" for, an "investment company," as such
terms are defined in the Investment Company Act; and
(xvii) The Securities have been duly
authorized for listing on the NYSE, subject only to official
notice of issuance.
In addition, such counsel shall state that in the
course of the preparation of the Registration Statement and the
Prospectus, such counsel has participated in conferences with officers
and representatives of the Company and with the Accountants, at which
conferences such counsel made inquiries of such officers,
representatives and Accountants and discussed the contents of the
Registration Statement and the Prospectus and (without taking any
further action to verify independently the statements made in the
Registration Statement and the Prospectus (other than the sections
identified in paragraph (xiv) above) and, except as stated in the
foregoing opinion, without assuming
19
<PAGE> 20
responsibility for the accuracy, completeness or fairness of such
statements) nothing has come to such counsel's attention that causes
such counsel to believe that the Registration Statement as of the date
it was declared effective or as of the Closing Date or the Prospectus
as of the date thereof or as of the Closing Date contained or contains
any untrue statement of a material fact or omitted or omits to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading (it being understood that such counsel need
not express any opinion with respect to the financial statements,
schedules and other financial and statistical data included in the
Registration Statement or the Prospectus).
In rendering any such opinion, such counsel may rely,
as to matters of fact, to the extent such counsel deems proper, on
certificates of responsible officers of the Company and public
officials and, as to matters involving the application of the laws of
any State other than Tennessee (to the extent satisfactory in form and
scope to counsel for the Underwriter) such counsel may rely upon the
opinion of local counsel to the Company. The foregoing opinion shall
also state that the Underwriter is justified in relying upon such
opinion of local counsel, and copies of such opinion shall be delivered
to the Underwriter and counsel for the Underwriter.
(f) Stroock & Stroock & Lavan LLP, counsel to the
Underwriter, shall have furnished to you their written opinion or
opinions, dated such Delivery Date, in form and substance satisfactory
to you, with respect to the incorporation of the Company, the validity
of the Securities, the Registration Statement, the Prospectus and other
related matters as you may reasonably request, and such counsel shall
have received such papers and information as they may reasonably
request to enable them to pass upon such matters. In rendering such
opinion, such counsel may rely as to all matters of Tennessee law upon
the opinion of Bass, Berry & Sims PLC, Nashville, Tennessee.
(g) With respect to the letter of KPMG Peat Marwick
LLP delivered to you concurrently with the execution of this Agreement
(the "initial letter"), the Company shall have furnished to the
Underwriter a letter (as used in this paragraph, the "bring-down
letter") of such accountants, addressed to the Underwriter and dated
such Delivery Date (i) confirming that they are independent public
accountants within the meaning of the Act and are in compliance with
the applicable requirements relating to the qualification of
accountants under Rule 2-01 of Regulation S-X of the Commission, (ii)
stating, as of the date of the bring-down letter (or, with respect to
matters involving changes or developments since the respective dates as
of which specified financial information is given in the Prospectus, as
of a date not more than five days prior to the date of the bring-down
letter), the conclusions and findings of such firm with respect to the
financial information and other matters covered by the initial letter
and (iii) confirming in all material respects the conclusions and
findings set forth in the initial letter.
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<PAGE> 21
(h) Neither the Company nor any Subsidiary shall have
sustained since the date as of which information is given in the
Prospectus, any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree; and since the respective dates as of which information
is given in the Prospectus, there shall not have been any change in the
capital stock (other than shares issued pursuant to the exercise of
stock options or pursuant to the terms of the Securities) or short-term
debt or long-term debt of the Company or any Subsidiary nor any change
or any development involving a prospective change, in or affecting the
general affairs, management, financial position, shareholders' equity
or results of operations of the Company and its subsidiaries, otherwise
than as set forth or contemplated in the Prospectus, the effect of
which, in any such case, is in your judgment so material and adverse as
to make it impracticable or inadvisable to proceed with the public
offering or the delivery of the Securities on the terms and in the
manner contemplated in the Prospectus.
(i) Between the date hereof and such Delivery Date
there shall have been no declaration of war by the Government of the
United States; on such Delivery Date there shall not have occurred any
material adverse change in the financial or securities markets in the
United States or in political, financial or economic conditions in the
United States or any outbreak or material escalation of hostilities or
other calamity or crisis, the effect of which is such as to make it, in
the judgment of the Underwriter, impracticable to market the Securities
or to enforce contracts for the resale of Securities and no event shall
have occurred resulting in (i) trading in securities generally on the
NYSE or in the Common Stock on the NYSE being suspended or limited or
minimum or maximum prices being generally established on the NYSE, or
(ii) additional material governmental restrictions, not in force on the
date of this Agreement, being imposed upon trading in securities
generally by the NYSE or in the Common Stock on the NYSE or by order of
the Commission or any court or other governmental authority, or (iii) a
general banking moratorium being declared by either Federal or New York
authorities.
(j) At the Closing Date and, as to the Option
Securities, the Option Closing Date, there shall be furnished to the
Underwriter an accurate certificate, dated the date of its delivery,
signed by each of the Chief Executive Officer and the President of the
Company, in form and substance reasonably satisfactory to the
Underwriter, to the effect that:
(i) Each signer of such certificate has
carefully examined the Registration Statement and the
Prospectus and (A) as of the date of such certificate, (x) the
Registration Statement does not contain any untrue statement
of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the
statements therein not misleading and (y) the Prospectus does
not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or
necessary in order to make the
21
<PAGE> 22
statements therein, in light of the circumstances under which
they were made, not misleading and (B) since the Effective Date
no event has occurred as a result of which it is necessary to
amend or supplement the Prospectus in order to make the
statements therein not untrue or misleading in any material
respect;
(ii) Each of the representations and
warranties of the Company contained in this Agreement were,
when originally made, and are, at the time such certificate is
delivered, true and correct in all material respects; and
(iii) Each of the covenants required herein
to be performed by the Company on or prior to the date of such
certificate has been duly, timely and fully performed and each
condition herein required to be complied with by the Company
on or prior to the delivery of such certificate has been duly,
timely and fully complied with.
(k) The Company shall have delivered to you evidence
that the Securities and the Conversion Shares have been authorized for
quotation on the NYSE upon notice of issuance.
8. (a) The Company will indemnify and hold you harmless for
any losses, claims, damages or liabilities to which you may become
subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or
are based upon (i) any untrue statement or alleged untrue statement of
a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or
supplement thereto, or filed with the Commission or any securities
association or securities exchange (each, an "Application"), or the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements made therein
not misleading, (ii) any untrue statement or alleged untrue statement
made by the Company in Section 1 of this Agreement, or (iii) the
employment by the Company of any device, scheme or artifice to defraud,
or the engaging by the Company in any act, practice or course of
business which operates or would operate as a fraud or deceit, or any
conspiracy with respect thereto, in which the Company shall
participate, in connection with the issuance and sale of any of the
Securities, and will reimburse you for any legal or other expenses
reasonably incurred by you in connection with investigating, preparing
to defend, defending or appearing as a third-party witness in
connection with any such action or claim; provided, however, that the
Company shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged
omission relating to you made in any Preliminary Prospectus, the
Registration Statement, or the Prospectus or such amendment or
supplement or any Application in reliance upon and in conformity with
written information furnished to the Company by you expressly for use
therein; and provided, further, that, the indemnity agreement contained
in this Section 8(a) with respect to any
22
<PAGE> 23
Preliminary Prospectus shall not inure to your benefit (or any persons
controlling you) on account of any losses, claims, damages,
liabilities or litigation arising from the sale of Securities to any
person, if you fail to send or give a copy of the Prospectus, as the
same may be then supplemented or amended, to such person, within the
time required by the Act and the untrue statement or alleged untrue
statement or omission or alleged omission to state a material fact
contained in such Preliminary Prospectus was corrected in the
Prospectus, unless such failure is the result of noncompliance by the
Company with Section 5(b) hereof.
(b) The Underwriter will indemnify and hold harmless
the Company against any losses, claims, damages or liabilities to which
the Company may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or any Application, or arise out of or
are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was made in any Preliminary Prospectus,
the Registration Statement, the Prospectus or such amendment or
supplement or any Application in reliance upon and in conformity with
written information furnished to the Company by you relating to you
expressly for use therein, and will reimburse the Company for any legal
or other expenses reasonably incurred by the Company in connection with
investigating or defending any such action or claim.
The indemnity agreement in this Section 8(b) shall be
in addition to any liability which you may otherwise have and shall
extend, upon the same terms and conditions, to each officer and
director of the Company and to each person, if any, who controls the
Company within the meaning of the Act or the Exchange Act.
(c) Promptly after receipt by an indemnified party
under Section 8(a) or 8(b) of notice of the commencement of any action
(including any governmental investigation), such indemnified party
shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party
in writing of the commencement thereof; but the omission so to notify
the indemnifying party shall not relieve it from any liability which it
may have to any indemnified party under Section 8(a) or 8(b) except to
the extent it was unaware of such action and has been prejudiced in any
material respect by such failure or from any liability which it may
have to any indemnified party otherwise than under such Section 8(a) or
8(b). In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party
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<PAGE> 24
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party shall not be liable
to such indemnified party under such subsection for any legal or other
expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation.
If, however, (i) the indemnifying party has
authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party or (ii) an indemnified party shall
have reasonably concluded that representation of such indemnified party
and the indemnifying party by the same counsel would be inappropriate
under applicable standards of professional conduct due to actual or
potential differing interests between them and the indemnified party so
notifies the indemnifying party, then the indemnified party shall be
entitled to employ counsel different from counsel for the indemnifying
party at the expense of the indemnifying party and the indemnifying
party shall not have the right to assume the defense of such
indemnified party. In no event shall the indemnifying parties be liable
for fees and expenses of more than one counsel (in addition to local
counsel) for all indemnified parties in connection with any one action
or separate but similar or related actions in the same jurisdiction
arising out of the same set of allegations or circumstances. The
counsel with respect to which fees and expenses shall be so reimbursed
shall be designated in writing by Schroder & Co. Inc. in the case of
parties indemnified pursuant to Section 8(a) and by the Company in the
case of parties indemnified pursuant to Section 8(b). If at any time an
indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel to
which such indemnified party is entitled under Section 8(a) or 8(b),
the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if
(i) such settlement is entered into more than 30 days after receipt by
such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified
party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending
or threatened proceeding in respect of which any indemnified party is
or could have been a party and indemnity could have been sought
hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability
on claims that are the subject matter of such proceeding.
(d) In order to provide for you just and equitable
contribution under the Act in any case in which (i) the Underwriter (or
any person who controls any Underwriter within the meaning of the Act
or the Exchange Act) makes a claim for indemnification pursuant to
Section 8(a) hereof, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be
24
<PAGE> 25
enforced in such case notwithstanding the fact that Section 8(a)
provides for indemnification in such case or (ii) contribution under
the Act may be required on the part of the Underwriter or any such
controlling person in circumstances for which indemnification is
provided under Section 8(b), then, and in each such case, each
indemnifying party shall contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject as an indemnifying
party hereunder (after contribution from others) in such proportion as
is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriter on the other from the
offering of the Securities. If, however, the allocation provided by
the immediately preceding sentence is not permitted by applicable law
or if the indemnified party failed to give the notice required under
Section 8(c) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Company on the one hand
and the Underwriter on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by
the Company on the one hand and the Underwriter on the other shall be
deemed to be in the same proportion as the total net proceeds from the
offering of the Securities purchased under this Agreement (before
deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriter
with respect to the Securities purchased under this Agreement, in each
case as set forth in the table on the cover page of the Prospectus.
The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Underwriter on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriter agree that it
would not be just and equitable if contributions pursuant to this
Section 8(d) were determined by pro rata allocation or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this Section 8(d). The amount paid
or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to
above in this Section 8(d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8(d), the Underwriter
shall not be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it
and distributed to the public were offered to the public exceeds the
amount of any damages which the Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement
or omission or alleged omission. No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation.
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<PAGE> 26
(e) Promptly after receipt by any party to this
Agreement of notice of the commencement of any action, suit or
proceeding, such party will, if a claim for contribution in respect
thereof is to be made against another party (the "contributing party"),
notify the contributing party of the commencement thereof, but the
omission so to notify the contributing party will not relieve it from
any liability which it may have to any other party for contribution
under the Act except to the extent it was unaware of such action and
has been prejudiced in any material respect by such failure or from any
liability which it may have to any other party other than for
contribution under the Act. In case any such action, suit or proceeding
is brought against any party, and such party notifies a contributing
party of the commencement thereof, the contributing party will be
entitled to participate therein with the notifying party and any other
contributing party similarly notified.
9. The respective indemnities, agreements, representations,
warranties and other statements of the Company and the Underwriter, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of the Underwriter or any controlling person of the Underwriter, or the Company,
or an officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Securities.
10. This Agreement shall become effective (a) if the
Registration Statement has not heretofore become effective, at the earlier of
12:00 Noon, New York City time, on the first full business day after the
Registration Statement becomes effective, or at such time after the Registration
Statement becomes effective as you may authorize the sale of the Securities to
the public by the Underwriter or other securities dealers, or (b) if the
Registration Statement has heretofore become effective, at the earlier of 24
hours after the filing of the Prospectus with the Commission or at such time as
you may authorize the sale of the Securities to the public by yourself or
securities dealers, unless, prior to any such time you shall have received
notice from the Company that it elects that this Agreement shall not become
effective, or you shall have given notice to the Company that you elect that
this Agreement shall not become effective; provided, however, that the
provisions of this Section and Section 6 and Section 8 hereof shall at all times
be effective.
If this Agreement shall be terminated pursuant to Section 9
hereof, or if this Agreement, by election of you, shall not become effective
pursuant to the provisions of this Section, the Company shall not then be under
any liability to you except as provided in Section 6 and Section 8 hereof, but
if this Agreement becomes effective and is not so terminated but the Securities
are not delivered by or on behalf of the Company as provided herein because the
Company has been unable for any reason beyond its control and not due to any
default by it to comply with the terms and conditions hereof, the Company will
reimburse you for all out-of-pocket expenses, including fees and disbursements
of counsel, actually and reasonably incurred by you in making preparations for
the purchase, sale and delivery of the Securities, but the
26
<PAGE> 27
Company shall then be under no further liability to you except as provided in
Section 6 and Section 8 hereof and in no event will the Company be liable to the
Underwriter for any loss of anticipated profits from transactions contemplated
by this Agreement.
11. The statements set forth in the last paragraph on the
front cover page of the Prospectus, the paragraph on the inside front cover of
the Prospectus containing stabilization language and the third and eighth
paragraphs under the caption "Underwriting" in the Prospectus constitute the
only information furnished by the Underwriter to the Company for purposes of
Sections 1(b), 1(c) and 8 hereof.
12. All statements, requests, notices and agreements
hereunder, unless otherwise specified in this Agreement, shall be in writing
and, if to the Underwriter, shall be delivered or sent by mail, telex or
facsimile transmission (subsequently confirmed by delivery or by letter sent by
mail) to Schroder & Co. Inc. at Equitable Center, 787 Seventh Avenue, New York,
New York 10019, Attention: Syndicate Department; and if to the Company, shall be
delivered or sent by mail, telex or facsimile transmission (subsequently
confirmed by delivery or by letter sent by mail) to the address of the Company
set forth in the Registration Statement, Attention: Chief Financial Officer. Any
such statements, requests, notices or agreements shall take effect at the time
of receipt thereof.
13. This Agreement shall be binding upon, and inure solely to
the benefit of, the Underwriter, the Company and, to the extent provided in
Section 8 and Section 10 hereof, the officers and directors of the Company and
each person who controls the Company or the Underwriter, and their respective
heirs, executors, administrators, successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement. No
purchaser of any of the Securities from the Underwriter shall be deemed a
successor or assign by reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used
herein, the term "business day" shall mean any day when the Commission's office
in Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS
PRINCIPLES THEREOF.
27
<PAGE> 28
16. This Agreement may be executed by any one or more of the
parties hereto in any number of counterparts, each of which shall be deemed to
be an original, but all such counterparts shall together constitute one and the
same instrument. If the foregoing is in accordance with your understanding,
please sign and return to us two counterparts hereof. Upon the acceptance hereof
by you, this letter and such acceptance hereof shall constitute a binding
agreement among you and the Company.
Very truly yours,
AMERICAN RETIREMENT CORPORATION
By:____________________________________
Name:
Title:
Accepted as of the date hereof:
SCHRODER & CO. INC.,
as Underwriter
By:________________________________
Name:
Title:
28
<PAGE> 29
EXHIBIT A
SUBSIDIARIES
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.
ARC Tarpon Springs, Inc.
ARC Sun City Center, Inc.
A-1
<PAGE> 30
EXHIBIT B
September __, 1997
SCHRODER & CO. INC.
As Underwriter
Equitable Center
787 Seventh Avenue
New York, New York 10019
Ladies and Gentlemen:
In order to induce Shroder & Co. Inc. ("Schroders") to underwrite a
proposed public offering (the "Offering") of ___% Convertible Subordinated
Debentures due 2002 (the "Debentures") of American Retirement Corporation, a
Tennessee corporation (the "Company"), as contemplated by a registration
statement filed with the Securities and Exchange Commission on Form S-1
(Registration No. 333-34339), the undersigned hereby agrees that the undersigned
will not, directly or indirectly, for a period of 90 days after the commencement
of the Offering, without Schroders' prior written consent, offer to sell, sell,
contract to sell, grant any option to purchase or otherwise dispose (or announce
any offer, sale, grant of any option to purchase or other disposition) of any
shares of the Company's common stock, par value $0.01 per share (the "Common
Stock") or any securities convertible into or exchangeable for shares of Common
Stock (except that the Company may grant options to purchase or award shares of
Common Stock under the Stock Incentive Plan and the Stock Option Plan and issue
privately placed shares in connection with any acquisitions).
This letter shall have no further force or effect if the Company and
the Underwriter shall not have executed and delivered an underwriting agreement
related to the Offering by [_______ __, 1997] or if any underwriting agreement
entered into by such parties shall be terminated prior to the initial closing
date provided for therein.
This letter agreement shall not prohibit the undersigned from
transferring any Debentures or shares of Common Stock to members of his or her
immediate family or to a trust for their benefit, provided that such persons or
trust agree to be bound by the terms hereof.
Very truly yours,
By: _________________________________
Name:
B-1
<PAGE> 1
EXHIBIT-4.3
- -------------------------------------------------------------------------------
AMERICAN RETIREMENT CORPORATION
$100,000,000
___% Convertible Subordinated Debentures Due 2002
INDENTURE
Dated as of _________, 1997
IBJ SCHRODER BANK & TRUST COMPANY,
AS TRUSTEE
- -------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I. DEFINITIONS AND INCORPORATION BY REFERENCE....................................................1
SECTION 1.1. Definitions.........................................................................1
SECTION 1.2. Other Definitions...................................................................4
SECTION 1.3. Incorporation by Reference to Trust Indenture Act...................................5
SECTION 1.4. Rules of Construction...............................................................5
ARTICLE II. THE SECURITIES................................................................................6
SECTION 2.1. Form; Dating; Incorporation of Form in Indenture....................................6
SECTION 2.2. Execution and Authentication........................................................6
SECTION 2.3. Registrar and Agents................................................................7
SECTION 2.4. Paying Agent to Hold Money in Trust.................................................8
SECTION 2.5. Transfer and Exchange...............................................................8
SECTION 2.6. Replacement Securities..............................................................9
SECTION 2.7. Outstanding Securities.............................................................10
SECTION 2.8. Temporary Securities...............................................................10
SECTION 2.9. Cancellation.......................................................................11
SECTION 2.10. Defaulted Interest.................................................................11
SECTION 2.11. Securityholder Lists...............................................................11
SECTION 2.12. Persons Deemed Owners..............................................................11
SECTION 2.13. CUSIP Number.......................................................................12
SECTION 2.14. Book-Entry Provisions for Global Securities........................................12
SECTION 2.15. Certificated Securities............................................................12
ARTICLE III. REDEMPTION...................................................................................12
SECTION 3.1. Notices to Trustee.................................................................12
SECTION 3.2. Selection of Securities to be Redeemed.............................................12
SECTION 3.3. Notice of Redemption by the Company................................................13
SECTION 3.4. Effect of Notice of Redemption.....................................................13
SECTION 3.5. Deposit of Redemption Price........................................................14
SECTION 3.6. Securities Redeemed in Part........................................................14
ARTICLE IV. COVENANTS
SECTION 4.1. Payment of the Securities..........................................................14
SECTION 4.2. Commission Reports.................................................................14
SECTION 4.3. Waiver of Stay, Extension or Usury Laws............................................15
SECTION 4.4. Notice of Default..................................................................15
SECTION 4.5. Compliance Certificates............................................................15
SECTION 4.6. Limitation on Dividends and Other Distributions....................................16
ARTICLE V. SUCCESSOR CORPORATION........................................................................16
SECTION 5.1. When Company May Merge, etc........................................................16
SECTION 5.2. Successor Corporation or Trust Substituted.........................................16
ARTICLE VI. DEFAULTS AND REMEDIES........................................................................17
SECTION 6.1. Events of Default..................................................................17
</TABLE>
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<TABLE>
<S> <C> <C>
SECTION 6.2. Acceleration.......................................................................19
SECTION 6.3. Other Remedies.....................................................................19
SECTION 6.4. Waiver of Defaults and Events of Default...........................................19
SECTION 6.5. Control by Majority................................................................20
SECTION 6.6. Rights of Holders to Receive Payment...............................................20
SECTION 6.7. Collection Suit by Trustee.........................................................20
SECTION 6.8. Trustee May File Proofs of Claim...................................................20
SECTION 6.9. Priorities.........................................................................21
SECTION 6.10. Undertaking for Costs..............................................................21
SECTION 6.11. Limitation on Suits................................................................22
ARTICLE VII. TRUSTEE ...................................................................................22
SECTION 7.1. Duties of Trustee..................................................................22
SECTION 7.2. Rights of Trustee..................................................................23
SECTION 7.3. Individual Rights of Trustee.......................................................24
SECTION 7.4. Trustee's Disclaimer...............................................................24
SECTION 7.5. Notice of Defaults.................................................................25
SECTION 7.6. Reports by Trustee to Holders......................................................25
SECTION 7.7. Compensation and Indemnity.........................................................25
SECTION 7.8. Replacement of Trustee.............................................................26
SECTION 7.9. Successor Trustee by Merger, etc...................................................27
SECTION 7.10. Eligibility; Disqualification......................................................27
SECTION 7.11. Preferential Collection of Claims Against Company..................................27
ARTICLE VIII. SATISFACTION AND DISCHARGE OF INDENTURE......................................................28
SECTION 8.1. Satisfaction, Discharge and Defeasance of the Securities...........................28
SECTION 8.2. Satisfaction and Discharge of Indenture............................................28
SECTION 8.3. Survival of Certain Obligations....................................................29
SECTION 8.4. Application of Trust Money.........................................................29
SECTION 8.5. Paying Agent to Repay Monies Held..................................................30
SECTION 8.6. Return of Unclaimed Monies.........................................................30
SECTION 8.7. Reinstatement......................................................................30
SECTION 8.8. Indemnity for Government Obligations...............................................30
ARTICLE IX. AMENDMENTS AND WAIVERS.......................................................................31
SECTION 9.1. Amendments and Waivers Without Consent of Holders..................................31
SECTION 9.2. Amendments and Waivers with Consent of Holders.....................................31
SECTION 9.3. Compliance with Trust Indenture Act................................................32
SECTION 9.4. Revocation and Effect of Consents..................................................32
SECTION 9.5. Notation on or Exchange of Securities..............................................33
SECTION 9.6. Trustee to Sign Amendments, etc....................................................33
ARTICLE X. CONVERSION OF SECURITIES.....................................................................33
SECTION 10.1. Right of Conversion; Conversion Price..............................................33
SECTION 10.2. Issuance of Shares on Conversion...................................................34
SECTION 10.3. No Adjustment for Interest or Dividends............................................35
SECTION 10.4. Adjustment of Conversion Price.....................................................35
SECTION 10.5. Notice of Adjustment of Conversion Price...........................................37
SECTION 10.6. Notice of Certain Corporate Action.................................................38
</TABLE>
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<TABLE>
<S> <C> <C>
SECTION 10.7. Taxes on Conversions...............................................................39
SECTION 10.8. Fractional Shares..................................................................39
SECTION 10.9. Cancellation of Converted Securities...............................................39
SECTION 10.10. Provisions in Case of Consolidation, Merger or Sale of Assets......................39
SECTION 10.11. Disclaimer by Trustee of Responsibility for Certain Matters........................40
SECTION 10.12. Covenant to Reserve Shares.........................................................40
ARTICLE XI. SUBORDINATION; SENIORITY.....................................................................41
SECTION 11.1. Securities Subordinated to Senior Indebtedness.....................................41
SECTION 11.2. Company Not to Make Payments with Respect to Securities in
Certain Circumstances..............................................................41
SECTION 11.3. Subrogation of Securities..........................................................43
SECTION 11.4. Authorization by Holders of Securities.............................................44
SECTION 11.5. Notices to Trustee.................................................................45
SECTION 11.6. Trustee's Relation to Senior Indebtedness..........................................45
SECTION 11.7. No Impairment of Subordination.....................................................46
SECTION 11.8. Article XI Not To Prevent Events of Default........................................46
SECTION 11.9. Paying Agents other than the Trustee...............................................46
SECTION 11.10. Securities Senior to Subordinated Indebtedness.....................................46
ARTICLE XII. CHANGE IN CONTROL............................................................................46
SECTION 12.1. Right to Require Repurchase........................................................46
SECTION 12.2. Notice; Method of Exercising Repurchase Right......................................47
SECTION 12.3. Deposit Of Repurchase Price........................................................48
SECTION 12.4. Notes Not Repurchased On Repurchase Date...........................................48
SECTION 12.5. Change In Control Defined..........................................................48
ARTICLE XIII. MISCELLANEOUS................................................................................50
SECTION 13.1. Trust Indenture Act Controls.......................................................50
SECTION 13.2. Notices............................................................................50
SECTION 13.3. Communications by Holders with Other Holders.......................................51
SECTION 13.4. Certificate and Opinion as to Conditions Precedent.................................51
SECTION 13.5. Statements Required in Certificate and Opinion.....................................52
SECTION 13.6. Rules by Trustee and Agents........................................................52
SECTION 13.7. Record Date........................................................................52
SECTION 13.8. Legal Holidays.....................................................................53
SECTION 13.9. Governing Law......................................................................53
SECTION 13.10. No Adverse Interpretation of Other Agreements......................................53
SECTION 13.11. No Recourse Against Others.........................................................53
SECTION 13.12. Successors.........................................................................53
SECTION 13.13. Multiple Counterparts..............................................................53
SECTION 13.14. Table of Contents, Headings, etc...................................................53
SECTION 13.15. Severability.......................................................................54
</TABLE>
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EXHIBIT A - FORM OF SECURITY
<PAGE> 5
CROSS-REFERENCE TABLE
AMERICAN RETIREMENT CORPORATION
Trust Indenture
Act Section Indenture
- ---------------- ---------
310(a)(1) 7.10; 13.1
(a)(2) 13.1
(a)(3) 13.1
(a)(4) 13.1
(a)(5) 13.1
(b) 7.10; 13.1
(c) 13.1
311(a) 7.11; 13.1
(b) 7.11; 13.1
(c) 13.1
312(a) 13.1
(b) 13.1; 13.3
(c) 13.1; 13.3
313(a) 7.6; 13.1
(b) 7.6; 13.1
(c) 7.6; 13.1
(d) 7.6; 13.1
314(a) 4.2; 13.1
(b) 13.1
(c) 13.1
(d) 13.1
(e) 13.1
(f) 13.1
315(a) 7.1; 13.1
(b) 7.1; 13.1
(c) 7.1; 13.1
(d) 7.1; 13.1
(e) 7.1; 13.1
316(a) 7.1; 13.1
(b) 7.1; 13.1
(c) 7.1; 13.1
317(a) 13.1
(b) 13.1
318(a) Not Applicable
- -------------------
Note: This Cross-Reference Table shall not, for any purpose, be deemed to be
a part of the Indenture.
<PAGE> 6
INDENTURE dated as of __________, 1997 by and between AMERICAN
RETIREMENT CORPORATION, a Tennessee corporation (the "Company"), and IBJ
SCHRODER BANK & TRUST COMPANY, a New York banking corporation, as trustee
("Trustee").
RECITALS
The Company has duly authorized the execution and delivery of
this Indenture to provide for the issuance of the Company's __% Convertible
Subordinated Debentures due 2002 (the "Securities").
Each party agrees as follows for the benefit of the other
party and for the equal and ratable benefit of the Holders (as defined herein)
of the Company's Securities:
ARTICLE I.
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1. Definitions.
"Affiliate" means any Person directly or indirectly
controlling or controlled by or under direct or indirect common control with the
Company. For the purposes of this definition, "control" (including, with
correlative meanings, the terms "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
or policies of such Person, whether through the ownership of voting securities
or by agreement or otherwise.
"Agent" means any Registrar, Paying Agent, Conversion Agent,
co-registrar or agent for service of notices and demands.
"Bankruptcy Law" means Title 11 of the U.S. Code or any
similar Federal or State law for the relief of debtors.
"Board of Directors of the Company" means the Board of
Directors of the Company or any committee of the Board of Directors of the
Company.
"Board Resolution" means a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors of the Company and to be in full force and effect on the
date of such certification, and delivered to the Trustee.
"Business Day" means a day that is not a Legal Holiday.
"Capital Stock" means any and all shares or other equivalents
(however designated) of capital stock, including all common stock and all
preferred stock, in the case of a corporation, or partnership interests or other
equivalents (however designated) in the case of a partnership or common shares
of beneficial interest or other equivalents (however designated) in the case of
a trust.
<PAGE> 7
"Closing Price" means with respect to the shares of Capital
Stock of the Company on any day, (i) the reported last sale price regular way
or, in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case, on the New
York Stock Exchange (the "NYSE"), or (ii) if the shares of Capital Stock are not
listed or admitted to trading on the NYSE, the reported last sale price regular
way or, in case no such reported sale takes place on such day, the average of
the reported closing bid and asked prices regular way, in either case, on the
principal national securities exchange on which the shares of Capital Stock are
listed or admitted to trading, or (iii) if the shares of Capital Stock are not
listed or admitted to trading on any national securities exchange, the average
of the closing bid and asked prices as furnished by any New York Stock Exchange
member firm selected from time to time by the Company for that purpose.
"Company" means the party named as such in this Indenture
until a successor replaces it pursuant to this Indenture and thereafter means
the successor.
"Corporate Trust Office" means the office of the Trustee at
which at any particular time its corporate trust business shall be principally
administered, which office at the date of execution of this Indenture is located
at One State Street, New York, New York 10004.
"Custodian" means any receiver, trustee, liquidator or similar
official under any Bankruptcy Law.
"Default" means any event which is, or after notice or passage
of time or both would be, an Event of Default.
"Dollar" or "$" means the lawful money of the United States of
America.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Global Security" or "Global Securities" means any Security
or Securities issued in global form.
"Holder" or "Securityholder" means the Person in whose name a
Security is registered on the Security Register.
"Indebtedness" as applied to any Person, means, without
duplication: (i) all indebtedness for borrowed money whether or not evidenced by
a promissory note, draft or similar instrument; (ii) that portion of obligations
with respect to any lease that is properly classified as a liability on a
balance sheet in accordance with generally accepted accounting principles; (iii)
notes payable and drafts accepted representing extensions of credit; (iv) any
balance owed for all or any part of the deferred purchase price of property or
services, which purchase price is due more than six months from the date of
incurrence of the obligation in respect thereof (except any such balance that
constitutes (a) a trade payable or an accrued liability arising in the ordinary
course of business or (b) a trade draft or note payable issued in the ordinary
course of business in connection with the purchase of goods or services), if and
to the extent such debt would appear as a liability upon a balance sheet of such
Person prepared in accordance with generally accepted accounting principles; (v)
tenant deposits; (vi) any debt of
-2-
<PAGE> 8
others described in the preceding clauses (i) through (v) that such Person has
guaranteed or for which it is otherwise liable; and (vii) any deferral,
amendment, renewal, extension, supplement or refunding of any of the foregoing
indebtedness; provided, however, that, in computing the "Indebtedness" of any
Person, there shall be excluded any particular indebtedness if, upon or prior to
the maturity thereof and at the time of determination of such indebtedness,
there shall have been deposited with a depository in trust money (or evidences
of indebtedness if permitted by the instrument creating such indebtedness) in
the necessary amount to pay, redeem or satisfy such indebtedness as it becomes
due, and the amount so deposited shall not be included in any computation of the
assets of such Person.
"Indenture" means this Indenture as amended or supplemented
from time to time.
"Officer" means the Chairman of the Board, Chief Executive
Officer, the President, any Vice President, the Treasurer, the Secretary or the
Controller of the Company.
"Officers' Certificate" means a certificate signed by two
Officers or by an Officer and an Assistant Treasurer, Assistant Secretary or
Assistant Controller of the Company. See Sections 13.4 and 13.5.
"Opinion of Counsel" means a written opinion from Bass, Berry
& Sims PLC or any other legal counsel who is reasonably acceptable to the
Trustee. The counsel may be an employee of or counsel to the Company or the
Trustee. See Sections 13.4 and 13.5.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government (or any agency, instrumentality or political subdivision thereof).
"Redemption Date" when used with respect to any Security to be
redeemed, means the date fixed for such redemption pursuant to this Indenture.
"Redemption Price" when used with respect to any Security to
be redeemed, means the price fixed for such redemption pursuant to this
Indenture.
"Regular Record Date" means, with respect to any Interest
Payment Date, the ________ or ___________ (whether or not a Business Day), as
the case may be, next preceding such Interest Payment Date.
"Security" or "Securities" means the security or securities in
the form of Exhibit A hereto that are issued under this Indenture as amended or
supplemented from time to time.
"Securities Act" means the Securities Act of 1933, as amended
from time to time.
"Securities Custodian" means the Trustee, as custodian with
respect to any Global Security, or any successor entity thereto.
-3-
<PAGE> 9
"Senior Indebtedness" means the principal, premium, if any,
and interest on, and all other amounts payable under or in respect of,
Indebtedness of the Company (other than (i) Indebtedness owed to a Subsidiary,
(ii) Indebtedness of the Company which is expressly pari passu to the Securities
or (iii) Subordinated Indebtedness).
"Subordinated Indebtedness" means the principal, premium, if
any, and interest on any Indebtedness of the Company which by its terms is
expressly subordinated in right of payment to the Securities.
"Subsidiary" means a Person the majority of whose voting stock
is owned by the Company or a subsidiary of the Company. Voting stock is Capital
Stock having voting power under ordinary circumstances to elect directors or
similar positions.
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code
ss.ss. 77aaa - 77bbbb) as amended by the Trust Indenture Reform Act of 1990 and
as in effect on the date of this Indenture.
"Trustee" means the party named as such in this Indenture
until a successor replaces it pursuant to this Indenture and thereafter means
the successor.
"Trust Officer", when used with respect to the Trustee, means
an officer of the Trustee assigned by the Trustee to administer its corporate
trust matters or any other officer of the Trustee to whom such matter is
referred because of his knowledge of and familiarity with the particular
subject.
"United States" means the United States of America.
SECTION 1.2. Other Definitions.
Term Defined in Section
---- ------------------
"Change in Control" 12.5
"Common Stock" 10.1
"Company Order" 2.2
"Conversion Agent" 2.3
"conversion price" 10.1
"current market price" 10.4
"Depositary" 2.3
"Event of Default" 6.1
"Group" 12.5
"Interest Payment Date" 2.1
"Legal Holiday" 13.8
"Paying Agent" 2.3
"Payment or Distribution" 11.1
-4-
<PAGE> 10
"Registrar" 2.3
"Repurchase Date" 12.1
"Rule 13e-3 Transaction" 10.6
"Security Register" 2.3
"Trading Day" 12.5
"U.S. Government Obligations" 8.1
SECTION 1.3. Incorporation by Reference to Trust Indenture
Act.
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture. The
following TIA terms used in this Indenture have the following meanings:
"Commission" means the Securities and Exchange Commission.
"indenture securities" means the Securities.
"indenture security holder" means a Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the
Trustee.
"obligor" on the indenture securities means the Company or any
other obligor on the indenture securities.
All other terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by Commission rules
have the meanings assigned to them therein.
SECTION 1.4. Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the
meaning assigned to it in accordance with United States
generally accepted accounting principles in effect as of the
time as to which such accounting principles are to be applied;
(3) "or" is not exclusive; and
(4) words in the singular include the plural, and in the
plural include the singular.
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<PAGE> 11
ARTICLE II.
THE SECURITIES
SECTION 2.1. Form; Dating; Incorporation of Form in Indenture.
The aggregate principal amount of Securities which may be
authenticated and delivered under this Indenture is limited to $100,000,000,
except for Securities authenticated and delivered upon registration of transfer
of, or in exchange for, or in lieu of, other Securities pursuant to Sections
2.3, 2.5, 2.6, 2.8, 3.6, 9.5 or 10.1.
The Securities shall be known and designated as the ___%
Convertible Subordinated Debentures Due 2002 of the Company. Their fixed
maturity shall be ________, 2002, and they shall bear interest at the rate per
annum of ___%, from and including the date of issuance thereof until maturity or
earlier redemption, payable semiannually on _______ and __________ commencing
__________, 1998 (each an "Interest Payment Date"), until the principal thereof
is paid or made available for payment. Subject to Section 2.10, such interest
shall be paid to the Holder in whose name each Security was registered at the
close of business on the Regular Record Date next preceding each Interest
Payment Date.
The Securities shall be redeemable as provided in Article III.
The Securities shall be convertible as provided in Article X.
The Securities shall be subordinated in right of payment to
Senior Indebtedness, to the extent provided in Article XI.
The Securities shall become subject to a Holder's right of
repurchase in the event of a Change in Control as provided in Article XII.
The Securities and the Trustee's certificate of authentication
shall be substantially in the form of Exhibit A which is incorporated in and
made part of this Indenture. The Securities may have notations, legends or
endorsements required by law, stock exchange rules, agreements to which the
Company is subject, or usage. The Company shall approve the form of the
Securities and any notation, legend or endorsement on them.
Each Security shall be dated the date of its authentication.
The terms and provisions contained in the Securities shall
constitute, and are hereby expressly made, a part of this Indenture and to the
extent applicable, the Company and the Trustee, by their execution and delivery
of this Indenture, expressly agree to such terms and provisions and to be bound
thereby.
SECTION 2.2. Execution and Authentication.
Two Officers shall sign the Securities for the Company by
manual or facsimile signature.
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<PAGE> 12
If an Officer whose signature is on a Security no longer holds
that office at the time the Trustee authenticates the Security, the Security
shall nevertheless be valid.
A Security shall not be valid until the Trustee manually signs
the certificate of authentication on the Security. Such signature shall be
conclusive evidence that the Security has been authenticated under this
Indenture. Notwithstanding the foregoing, if any Security shall have been
authenticated and delivered hereunder but never issued and sold by the Company,
and the Company shall deliver such Security to the Trustee for cancellation as
provided in Section 2.9, for all purposes of this Indenture such Security shall
be deemed never to have been authenticated and delivered hereunder and shall
never be entitled to the benefits of this Indenture.
The Trustee shall authenticate Securities for original issue
in the aggregate principal amount of up to $100,000,000 upon the execution of
this Indenture and a written order or orders of the Company signed by two
Officers or by an Officer and an Assistant Treasurer of the Company (a "Company
Order"). The aggregate principal amount of the Securities outstanding at any
time may not exceed that amount.
The Trustee may appoint an authenticating agent to
authenticate Securities. An authenticating agent may authenticate Securities
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with the Company or
an Affiliate.
The Securities shall be issuable only in registered form
without coupons. The Securities shall be issuable only in denominations of
$1,000 principal amount and any whole multiples thereof.
SECTION 2.3. Registrar and Agents.
The Company shall maintain an office or agency where
Securities may be presented for registration of transfer or for exchange
("Registrar"), an office or agency where Securities may be presented for payment
("Paying Agent"), an office or agency where Securities may be presented for
conversion ("Conversion Agent") and an office or agency where notices and
demands to or upon the Company in respect of the Securities and this Indenture
may be served. The Registrar shall keep a register of the Securities (the
"Security Register") and of their transfer and exchange. The Company may have
one or more co-registrars, one or more additional Paying Agents and one or more
additional Conversion Agents. The Company or any Subsidiary may act as Paying
Agent and/or Conversion Agent. The term "Paying Agent" includes any additional
paying agent and the term "Conversion Agent" includes any additional conversion
agent.
The Company may change any Paying Agent, Registrar, Conversion
Agent or add as a co-Paying Agent, co-Registrar, or co-Conversion Agent an
entity on sixty (60) days' prior written notice to the Trustee specifying the
name and address of any such entity. If the Company
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fails to maintain a Registrar, Paying Agent, Conversion Agent or agent for
service of notices and demands, or fails to give the foregoing notice, the
Trustee shall act as such.
The Company initially appoints the Trustee as Registrar,
Paying Agent, Conversion Agent, Securities Custodian, and agent for service of
notices and demands.
The Company initially appoints The Depository Trust Company
to act as depositary (the "Depositary") with respect to any Global Security.
SECTION 2.4. Paying Agent to Hold Money in Trust.
At least one Business Day prior to each due date of the
principal of, premium if any, and interest on any Securities, the Company shall
deposit with each Paying Agent a sum sufficient to pay such principal, premium,
if any, and interest so becoming due. The Company shall require each Paying
Agent other than the Trustee to agree in writing that it will hold in trust for
the benefit of Holders of Securities or the Trustee all money held by the Paying
Agent for the payment of principal of, premium if any, or interest on the
Securities and to notify the Trustee of any default by the Company (or any other
obligor on the Securities) in making any such payment. If the Company or a
Subsidiary acts as Paying Agent, it shall on or before each due date of the
principal of, premium, if any, or interest on any Securities segregate the money
and hold it as a separate trust fund. The Company at any time may require a
Paying Agent to pay all money held by it to the Trustee and the Trustee may at
any time during the continuance of any payment default, upon written request to
a Paying Agent, require such Paying Agent to forthwith pay to the Trustee all
sums so held in trust by such Paying Agent. Upon doing so, the Paying Agent (if
other than the Company or a Subsidiary thereof) shall have no further liability
for the money.
The final installment of principal of and premium, if any, on
each Security shall be payable only upon surrender of such Security at the
office or agency of the Company maintained for such purpose. Payments of
principal and premium, if any, and interest on the Securities shall be made at
the office or agency of the Company maintained for such purpose, or, in the case
of any such payments other than the final payment of principal and premium, if
any, at the Company's option, by check mailed to the Person entitled thereto at
such Person's address last appearing on the Security Register maintained by the
Registrar.
SECTION 2.5. Transfer and Exchange.
(1) When a Security is presented to the Registrar or a
co-registrar with a request to register the transfer thereof, the Registrar or
co-registrar shall register the transfer as requested, and when Securities are
presented to the Registrar or a co-registrar with a request to exchange them for
an equal principal amount of Securities of other authorized denominations, the
Registrar shall make the exchange as requested provided that every Security
represented or surrendered for registration of transfer or exchange shall be
duly endorsed and accompanied by a written instrument of transfer satisfactory
to the Company and the Registrar duly executed by the Holder or such Holder's
attorney-in-fact duly authorized in writing.
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(2) To permit registrations of transfers and exchanges, the
Company shall issue and the Trustee or any authenticating agent shall
authenticate Securities upon a Company Order. No service charge shall be made
for any registration of transfer or exchange of Securities but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto, but this provision shall not
apply to any exchange pursuant to Section 2.8, 3.6, 9.5 or 10.2 not involving
any transfer.
(3) The Registrar shall not be required (i) to issue, register
the transfer of or exchange Securities during a period beginning at the opening
of business 15 days before the day of any selection of Securities for redemption
under Section 3.2 and ending at the close of business on the day of selection,
or (ii) to register the transfer or exchange of any Security so selected for
redemption in whole or in part, except the unredeemed portion of any Security
being redeemed in part.
(4) Any Holder of a Global Security shall, by acceptance of
such Global Security, agree that transfers of beneficial interests in such
Global Security may be effected only through a book-entry system maintained by
the Depositary (or its agent), and that ownership of a beneficial interest in
the Global Security shall be required to be reflected in a book entry.
The Trustee shall have no obligation or duty to monitor,
determine or inquire as to compliance with any restrictions on transfer imposed
under this Indenture or under applicable law with respect to any transfer of any
interest in any Security other than to require delivery of such certificates and
other documentation or evidence as are expressly required by, and to do so if
and when expressly required by, the terms of this Indenture, and to examine the
same to determine substantial compliance as to form with the express
requirements hereof.
SECTION 2.6. Replacement Securities.
If a mutilated Security is surrendered to the Trustee or if
the Holder of a Security presents evidence to the satisfaction of the Company
and the Trustee that the Security has been lost, destroyed or wrongfully taken,
the Company shall issue and the Trustee shall authenticate a new Security in
replacement of and substitution for such Security if the requirements of the
Trustee and the Company are met. An indemnity bond may be required by the
Company or the Trustee that is sufficient in the judgment of the Company to
protect the Company and is sufficient in the judgment of the Trustee to protect
the Trustee or any Agent from any loss which it may suffer if a Security is
replaced pursuant to this Section 2.6. The Company and the Trustee may charge
for its expense in replacing a Security.
In case any such mutilated, destroyed, lost or stolen Security
has become or is about to become due and payable, the Company in its sole
discretion may, instead of issuing a new Security, pay or authorize the payment
or convert or authorize the conversion of such Security.
Every new Security issued pursuant to this Section in lieu of
any destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Securities duly issued hereunder.
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SECTION 2.7. Outstanding Securities.
Securities outstanding at any time are all Securities
theretofore authenticated and delivered under this Indenture except: (a)
Securities theretofore canceled by the Trustee or delivered to the Trustee for
cancellation; and (b) Securities in exchange for or in lieu of which other
Securities have been authenticated and delivered pursuant to this Indenture,
other than any Securities in respect of which there shall have been presented to
the Trustee proof satisfactory to it that such Securities are held by a bona
fide purchaser in whose hands such Securities are valid obligations of the
Issuer; provided, that in determining whether the Securityholders of the
requisite principal amount of outstanding Securities are present at a meeting of
Securityholders for quorum purposes or have voted or taken or concurred in any
action under this Indenture, including the making of any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor upon the Securities or any Affiliate of the
Company or such other obligor shall be disregarded and deemed not outstanding,
except that, in determining whether the Trustee shall be protected in relying
upon any such determination as to the presence of a quorum or upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Securities which a Trust Officer of the Trustee actually knows to be so owned
shall be disregarded.
If a Security is replaced pursuant to Section 2.6, it ceases
to be outstanding until the Trustee receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
If the Paying Agent (other than the Company or a Subsidiary)
holds on a Redemption Date or maturity date money deposited with it by or on
behalf of the Company sufficient to pay the principal of, premium, if any, and
accrued interest on Securities payable on that date, then on and after that date
such Securities cease to be outstanding and interest on them ceases to accrue.
A Security does not cease to be outstanding because the
Company or an Affiliate holds the Security.
SECTION 2.8. Temporary Securities.
Until definitive Securities are ready for delivery, the
Company may prepare and the Trustee shall authenticate temporary Securities.
Temporary Securities shall be substantially in the form of definitive Securities
but may have non-material variations that the Company considers appropriate for
temporary Securities. Without unreasonable delay, the Company shall prepare and
the Trustee shall authenticate definitive Securities in exchange for temporary
Securities upon a Company Order. Until so exchanged, temporary Securities
represent the same rights as definitive Securities. Upon request of the Trustee,
the Company shall provide a certificate to the effect that the temporary
Securities meet the requirements of the second sentence of this Section 2.8.
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SECTION 2.9. Cancellation.
The Company at any time may deliver Securities to the Trustee
for cancellation. The Registrar, the Paying Agent and the Conversion Agent shall
forward to the Trustee any Securities surrendered to them for transfer,
exchange, payment or conversion. The Trustee shall cancel all Securities
surrendered for transfer, exchange, payment or conversion and destroy canceled
Securities and deliver a certificate of such destruction to the Company unless
the Company directs the Trustee in writing prior to such destruction to deliver
canceled Securities to the Company. Subject to Sections 2.6, 3.6 and the second
paragraph of Section 10.2, the Company may not issue Securities to replace
Securities that it has previously paid or delivered to the Trustee for
cancellation or that a Securityholder has converted pursuant to Article X
hereof.
SECTION 2.10. Defaulted Interest.
If the Company defaults in a payment of interest on Securities
when the same becomes due and payable and such default continues for a period of
30 days, it shall pay the defaulted interest to the Persons who are Holders of
the Securities on a subsequent special record date. After the deposit by the
Company with the Trustee of money sufficient to pay such defaulted interest, the
Trustee shall fix the special record date and payment date. Each such special
record date shall be not less than 10 days prior to such payment date. Each such
payment date shall be not more than 60 days after the deposit by the Company of
money to pay the defaulted interest. At least 15 days before the special record
date, the Company shall mail to each Holder of a Security, with a copy to the
Trustee, a notice that states the special record date, the payment date, and the
amount of defaulted interest to be paid.
SECTION 2.11. Securityholder Lists.
The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the names and
addresses of Securityholders, a copy of which list shall be provided to the
Company upon its written request. If the Trustee is not the Registrar, the
Registrar shall furnish to the Trustee at least seven Business Days prior to
each semiannual interest payment date and at such other times as the Trustee may
reasonably request in writing a list in such form and as of such date as the
Trustee may require of the names and addresses of Securityholders upon which the
Trustee may conclusively rely. The Trustee may destroy any such list upon
receipt of a replacement list. The Paying Agent will solicit from each
Securityholder a certification of social security number or taxpayer
identification number in accordance with its customary practice and as required
by law, unless the Paying Agent is in possession of such certification. Each
Paying Agent is authorized to impose back-up withholding with respect to
payments to be made to Securityholders to the extent required by law.
SECTION 2.12. Persons Deemed Owners.
Prior to registration of transfer, the Company, the Trustee
and any agent of the Company or the Trustee may treat the Person in whose name
such Security is registered as the
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owner of such Security and neither the Company, the Trustee nor any agent of
the Company or the Trustee shall be affected by notice to the contrary.
SECTION 2.13. CUSIP Number.
The Company shall use a "CUSIP" number when issuing the
Securities. The Trustee may use the CUSIP number in notices of redemption or
exchange as a convenience to Securityholders; provided that any such notice may
state that no representation is made as to the correctness or accuracy of the
CUSIP number printed in the notice or on the Securities and that reliance may be
placed only on the other identification numbers printed on the Securities, and
any such redemption or exchange shall not be affected by any defect in or
omission of such numbers.
SECTION 2.14. Book-Entry Provisions for Global Securities.
(a) The Global Securities initially shall (i) be registered
in the name of the Depositary or the nominee of the Depositary and (ii) be
delivered to the Trustee as Securities Custodian for the Depositary.
Members of, or participants in, the Depositary ("Agent
Members") shall have no rights under this Indenture with respect to any Global
Security held on their behalf by the Depositary, or the Trustee as Securities
Custodian, or under any Global Security, and the Depositary may be treated by
the Company, the Trustee and any agent of the Company or the Trustee as the
absolute legal owner of such Global Security for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent the Company, the
Trustee or any agent of the Company or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the Depositary
or impair, as between the Depositary and its Agent Members, the operation of
customary practices governing the exercise of the rights of a beneficial owner
of any Security.
(b) Transfers of a Global Security shall be limited to
transfers of such Global Security in whole, but not in part, to the Depositary,
its successors or their respective nominees. Interests of beneficial owners in
a Global Security may be transferred in accordance with the applicable rules
and procedures of the Depositary and the provisions of Section 2.5.
(c) The registered holder of a Global Security may grant
proxies and otherwise authorize any person, including Agent Members and persons
that may hold interests through Agent Members, to take any action which a
Holder is entitled to take under this Indenture or the Securities.
SECTION 2.15. Certificated Securities.
If the Depositary is at any time unwilling or unable to
continue as a depositary for the Global Securities and a successor depositary
is not appointed by the Company within 90 days, the Company will issue
certificated Securities in exchange for the Global Securities. In connection
with the execution and delivery of such certificated Securities, the Trustee
shall reflect on its books and records a decrease in the principal amount of
the relevant Global Security equal to the aggregate principal amount of such
certificated Securities and the Company shall execute and the Trustee shall,
upon receipt of a written order of the Company signed by two officers,
authenticate and deliver one or more certificated Securities in an equal
aggregate principal amount.
ARTICLE III.
REDEMPTION
SECTION 3.1. Notices to Trustee.
If the Company wants to redeem the Securities pursuant to the
optional redemption provisions of Paragraph 5 of the Securities, it shall notify
the Trustee of the Redemption Date and the principal amount of Securities to be
redeemed. The notice shall be given to the Trustee in writing at least 60 days
prior to the Redemption Date (unless a shorter notice period shall be
satisfactory to the Trustee in its discretion) and accompanied by an Officers'
Certificate stating that the redemption complies with the provisions of this
Indenture. Redemptions provided for in Paragraph 5 of the Securities shall be
effected as provided in said Paragraph 5 or as otherwise agreed upon by the
Company and the Trustee.
SECTION 3.2. Selection of Securities to be Redeemed.
If less than all the Securities are to be redeemed, the
Trustee shall select the Securities to be redeemed pro rata or by lot or by any
other method that the Trustee considers fair and appropriate under the
circumstances. The Trustee shall promptly notify the Company of the Securities
to be so called for redemption. The Trustee shall make the selection from
Securities outstanding and not previously called for redemption. The Trustee may
select for redemption portions of the principal of Securities that have
denominations larger than $1,000 principal amount. Securities and portions of
them it selects shall be in principal amounts of $1,000 or multiples thereof.
Provisions of this Indenture that apply to Securities called for redemption also
apply to portions of Securities called for redemption. The Trustee's selection
of Securities for redemption by any method authorized by this Section 3.2 shall
be conclusively deemed reasonable.
Upon any redemption of less than all the Securities, the
Company and the Trustee, for the purpose of selecting Securities to be redeemed,
may treat as outstanding any Securities surrendered for conversion during the
period of 15 days next preceding the selection of the Securities and need not
treat as outstanding any Security authenticated and delivered during such
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period in exchange for the unconverted portion of any Security converted in part
during such period.
SECTION 3.3. Notice of Redemption by the Company.
At least 30 days but not more than 60 days before a Redemption
Date, the Company shall mail a notice of redemption by first-class mail to each
Holder of Securities to be redeemed, with a copy to the Trustee.
The notice shall identify the Securities to be redeemed and
shall state:
(1) the Redemption Date;
(2) the Redemption Price;
(3) the conversion price (as defined in Article X of
this Indenture);
(4) the name and address and telephone number of the
Paying Agent and the Conversion Agent;
(5) that Securities called for redemption may be
converted at any time before the close of business on the
Redemption Date and, if not converted prior to the close of
business on the Redemption Date, the right of conversion will
be lost;
(6) that Holders who want to convert Securities must
satisfy the requirements of Paragraph 7 thereof;
(7) that Securities called for redemption must be
surrendered to the Paying Agent to collect the Redemption
Price;
(8) that interest on Securities called for redemption
ceases to accrue on and after the Redemption Date; and
(9) if any Security is being redeemed in part, the
portion of the principal amount of such Security to be
redeemed and that, after the Redemption Date, upon surrender
of such Security, a new Security or Securities in principal
amount equal to the unredeemed portion thereof will be issued.
At the Company's written request, the Trustee shall give the
notice of redemption in the Company's name and at the Company's expense. If a
CUSIP number is listed in such notice or printed on the Security, the notice
shall state that no representation is made as to the correctness or accuracy of
such CUSIP number.
SECTION 3.4. Effect of Notice of Redemption.
Once notice of redemption is mailed, Securities called for
redemption become due and payable on the applicable Redemption Date and at the
applicable Redemption Price. Upon
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surrender to the Paying Agent, such Securities shall be paid at the Redemption
Price, plus accrued interest to the Redemption Date.
SECTION 3.5. Deposit of Redemption Price.
At least one Business Day before the Redemption Date, the
Company shall deposit with the Paying Agent (or if the Company or a Subsidiary
is the Paying Agent, shall segregate and hold in trust or cause such Subsidiary
to segregate and hold in trust) in immediately available funds money sufficient
to pay the Redemption Price of and accrued interest on all Securities to be
redeemed on that date. The Trustee or the Paying Agent shall return to the
Company any money so deposited not required for that purpose.
SECTION 3.6. Securities Redeemed in Part.
Upon surrender of a Security that is redeemed in part, the
Trustee shall authenticate for the Holder, at the expense of the Company, a new
Security equal in principal amount to the unredeemed portion of the Security
surrendered. There shall be no service charge to the Holder.
ARTICLE IV.
COVENANTS
SECTION 4.1. Payment of the Securities.
The Company shall pay the principal of, premium, if any, and
interest on the Securities on the dates and in the manner provided in the
Securities and this Indenture. An installment of principal, premium, if any, or
interest shall be considered paid on the date it is due if the Trustee or Paying
Agent (if other than the Company or a Subsidiary) holds on that date money
designated for and sufficient to pay the installment. The Company shall pay
interest on overdue principal and premium, if any, at the rate borne by the
Security; it shall pay interest, including post-petition interest in the event
of a proceeding under any Bankruptcy Law, on overdue installments of interest at
the same rate to the extent lawful.
SECTION 4.2. Commission Reports.
The Company shall file with the Trustee, promptly after filing
with the Commission, copies of the annual reports and of the information,
documents and other reports (or copies of such portions of any of the foregoing
as the Commission may by rules and regulations prescribe) which the Company is
required to file with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act. The Company shall also comply with the other provisions of TIA ss.
314(a).
So long as the Securities remain outstanding, the Company
shall cause its annual reports to shareholders (containing audited financial
statements) and any other financial reports
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furnished by it to shareholders to be mailed to the Holders at their addresses
appearing in the Security Register maintained by the Registrar.
SECTION 4.3. Waiver of Stay, Extension or Usury Laws.
The Company expressly waives (to the extent that it may
lawfully do so) any stay or extension law or any usury law or other law that
would prohibit or forgive the Company from paying all or any portion of the
principal of, premium, if any, or interest on Securities as contemplated herein,
wherever enacted, now or at any time hereafter in force, or that may affect the
covenants or the performance of this Indenture, and the Company (to the extent
that it may lawfully do so) hereby expressly waives all benefit or advantage of
any such law and covenants that it will not hinder, delay or impede the
execution of any power herein granted to the Trustee, but will suffer and permit
the execution of every such power as though no such law had been enacted.
SECTION 4.4. Notice of Default.
The Company will, so long as any Securities are outstanding,
deliver to the Trustee, within three business days of becoming aware of any
Default or Event of Default in the performance of any covenant, agreement or
condition in this Indenture, an Officers' Certificate specifying such Default
or Event of Default, the period of existence thereof and what action the
Company is taking or proposes to take with respect thereto.
SECTION 4.5. Compliance Certificates.
The Company will deliver to the Trustee, within 120 days after
the end of each fiscal year of the Company (which as of the date hereof is
December 31), a written statement, which complies with Section 314(a)(4) of the
TIA, signed by the principal executive officer, principal financial officer or
principal accounting officer of the Company, stating, as to each signer thereof:
(1) that a review of the activities of the Company
during such year and of performance under this Indenture has
been made under his or her supervision;
(2) that to the best of his or her knowledge, based on
such review, the Company has kept, observed, performed and
fulfilled in all material respects each and every condition
and covenant contained in this Indenture throughout such year,
or, if there has been a default in the fulfillment of any such
condition or covenant, specifying each such default known to
him or her and the nature and status thereof; and
(3) the conversion price (as defined in Article X of
this Indenture) then in effect.
The Company will give the Trustee written notice of a change
in the fiscal year of the Company, within a reasonable time after such change is
effected.
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SECTION 4.6. Limitation on Dividends and Other Distributions.
The Company will not declare or pay any dividends or make any
distribution to holders of its Capital Stock (other than dividends or
distributions payable in Capital Stock of the Company), or purchase, redeem or
otherwise acquire or retire for value any of its Capital Stock or any warrants,
rights or options to purchase or acquire Capital Stock (other than the
Securities or any other convertible indebtedness of the Company that is neither
secured nor subordinated to the Securities) or permit any Subsidiary to
purchase, redeem or otherwise acquire or retire for value any of the Company's
Capital Stock or any such warrants, rights or options if at the time of any of
the aforementioned actions an Event of Default has occurred and is continuing
or would exist immediately after giving effect to such action.
Notwithstanding the foregoing, the provisions of this Section
4.6 will not prevent (i) the payment of any dividend within 60 days after the
date of declaration when the payment would have complied with the foregoing
provisions on the date of declaration; or (ii) the retirement of any shares of
the Company's Capital Stock by exchange for, or out of the proceeds of the
substantially concurrent sale (other than to a Subsidiary) of, other shares of
its Capital Stock.
ARTICLE V.
SUCCESSOR CORPORATION
SECTION 5.1. When Company May Merge, etc.
The Company shall not consolidate with or merge into, or
transfer all or substantially all of its assets to, another Person in any
transaction in which the Company is not the continuing or surviving entity
unless (i) the resulting, surviving or transferee Person (or the parent
corporation of such Person in the case of a triangular merger) is a corporation
which assumes by supplemental indenture, in form satisfactory to the Trustee,
all the obligations of the Company under the Securities and this Indenture; (ii)
such corporation is organized and existing under the laws of the United States,
a State thereof or the District of Columbia although it in turn may be owned by
a foreign entity; (iii) immediately after giving effect to such transaction no
Default or Event of Default shall have happened and be continuing and the
Officers' Certificate referred to in the following clause reflects that such
Officers after due inquiry are not aware of any such Default or Event of Default
that shall have happened and be continuing, and (iv) the Company shall have
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that such consolidation, merger or transfer and such supplemental
indenture comply with this Indenture, and thereafter all obligations of the
Company shall terminate.
SECTION 5.2. Successor Corporation or Trust Substituted.
Upon any consolidation or merger, or any transfer of all or
substantially all of the assets of the Company in accordance with Section 5.1,
the successor corporation formed by such consolidation or into which the Company
is merged (or the parent company of such successor or surviving corporation in
the case of a triangular merger in which the Company is a constituent
corporation) or to which such transfer is made shall succeed to, and be
substituted for, and may
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exercise every right and power of, the Company under this Indenture with the
same effect as if such successor corporation has been named as the Company
herein; the Company shall thereupon be relieved of any further obligation or
liability hereunder or upon the Securities; and the Company as the predecessor
corporation may thereupon or at any time thereafter be dissolved, wound up or
liquidated. Such successor corporation thereupon may cause to be signed, and may
issue either in its own name or in the name of American Retirement Corporation,
any or all of the Securities issuable hereunder which theretofore shall not have
been signed by the Company and delivered to the Trustee; and, upon the order of
such successor corporation, instead of the Company, and subject to all the
terms, conditions and limitations in this Indenture prescribed, the Trustee
shall authenticate and shall deliver any Securities which previously shall have
been signed and delivered by the Officers to the Trustee for authentication, and
any Securities which such successor corporation thereafter shall cause to be
signed and delivered to the Trustee for that purpose. All the Securities so
issued shall in all respects have the same legal rank and benefit under this
Indenture as the Securities theretofore or thereafter issued in accordance with
the terms of this Indenture as though all such Securities had been issued at the
date of the execution hereof.
ARTICLE VI.
DEFAULTS AND REMEDIES
SECTION 6.1. Events of Default.
An "Event of Default", wherever used herein, means any one of
the following events (whatever the reason for such Event of Default and whether
it shall be occasioned by the provisions of Article XI or be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order or any court or any order, rule or regulation of any
administrative or governmental body):
(1) the Company defaults in the payment of interest on
any Security when the same becomes due and payable and such
default continues for a period of 30 days;
(2) the Company defaults in the payment of the principal
of or premium, if any, on any Security when the same becomes
due and payable at maturity, upon redemption or otherwise, and
such default continues for five Business Days;
(3) default in the payment of the Repurchase Price in
respect of any Security on the Repurchase Date;
(4) the Company fails to comply with any of its other
covenants, agreements or conditions in the Securities or this
Indenture and such default continues for the period and after
the notice specified in the last paragraph of this Section
6.1;
(5) there shall be a default under any bond, debenture,
note or other evidence of Indebtedness or under any mortgage,
indenture or other instrument under which there may be issued
or by which there may be secured or evidenced
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any Indebtedness of the Company or any Subsidiary, whether any
such Indebtedness now exists or shall hereafter be created, if
(a) either (i) such event of default results from the failure
to pay any such Indebtedness at maturity or (ii) as a result
of such event of default, the maturity of such Indebtedness
has been accelerated prior to its stated maturity and such
acceleration shall not be rescinded or annulled or the
accelerated amount paid within ten days after notice to the
Company of such acceleration, or such Indebtedness having been
discharged and (b) the principal amount of such Indebtedness,
together with the principal amount of any other such
Indebtedness in default for failure to pay principal or
interest thereon, or the maturity of which has been so
accelerated, aggregates $10,000,000 or more;
(6) the Company pursuant to or within the meaning of any
Bankruptcy Law:
(a) commences a voluntary case or proceeding,
(b) consents to the entry of an order for relief
against it in an involuntary case or proceeding,
(c) consents to the appointment of a Custodian of
it or for all or substantially all of its property, or
(d) makes a general assignment for the benefit of
its creditors; or
(7) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law:
(a) for relief against the Company in an
involuntary case or proceeding,
(b) appointing a Custodian of the Company or for
all or substantially all of its property, or
(c) ordering the liquidation of the Company,
and the order or decree remains unstayed and in effect for 90
days.
A default under clause (3) is not an Event of Default until
the Trustee notifies the Company, or the Holders of a majority in principal
amount of the Securities then outstanding notify the Company and the Trustee in
writing, of the default and the Company does not cure the default within 60 days
after receipt of such notice. The notice must specify the default, demand that
it be remedied and state that the notice is a "Notice of Default." The Trustee
shall give such notice to the Company only if directed to do so in writing by
the Holders of a majority in
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principal amount of the Securities then outstanding. Such notice by the Trustee
shall not be deemed to be a certification by the Trustee as to whether an Event
of Default has occurred.
SECTION 6.2. Acceleration.
If an Event of Default (other than an Event of Default
specified in Section 6.1(5) or 6.1(6)) occurs and is continuing, the Trustee by
notice to the Company, or the Holders of a majority in principal amount of the
Securities then outstanding by notice to the Company and the Trustee, may
declare to be due and payable immediately the principal amount of the Securities
plus accrued interest to the date of acceleration. Upon any such declaration,
such amount shall be due and payable immediately, and upon payment of such
amount all of the Company's obligations with respect to the Securities, other
than obligations under Section 7.7, shall terminate. If an Event of Default
specified in Section 6.1(5) or 6.1(6) occurs, all unpaid principal and accrued
interest on the Securities then outstanding shall become and be immediately due
and payable without any declaration or the act on the part of the Trustee or any
Holder. The Holders of a majority in principal amount of the outstanding
Securities by written notice to the Trustee may rescind an acceleration and its
consequences if (x) all existing Events of Default, other than the non-payment
of the principal of the Securities, which have become due solely by such
declaration of acceleration, have been cured or waived, (y) to the extent the
payment of such interest is lawful, interest on overdue installments of interest
and overdue principal and premium, if any, which has become due otherwise than
by such declaration of acceleration, has been paid, and (z) the rescission would
not conflict with any judgment or decree of a court of competent jurisdiction.
The Trustee may rely upon such notice of rescission without any independent
investigation as to the satisfaction of conditions (x), (y) and (z).
SECTION 6.3. Other Remedies.
If an Event of Default occurs and is continuing, the Trustee
may pursue any available remedy by proceeding at law or in equity to collect the
payment of principal of and premium, if any, or interest on the Securities or to
enforce the performance of any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Securities or does not produce any of them in the proceeding.
A delay or omission by the Trustee or any Securityholder in exercising any right
or remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
SECTION 6.4. Waiver of Defaults and Events of Default.
Subject to Section 9.2, the Holders of a majority in principal
amount of the Securities then outstanding, on behalf of all the Securityholders,
by written notice to the Trustee may waive a Default or Event of Default with
respect to the Securities and its consequences. When a Default or Event of
Default is waived, it is considered to be cured and ceases to exist;
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but no such waiver shall extend to any subsequent or other Default or impair any
right consequent thereon.
SECTION 6.5. Control by Majority.
The Holders of a majority in principal amount of the
Securities then outstanding may direct in writing the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on it. The Trustee, however, may refuse to follow
any direction that conflicts with law or this Indenture, that the Trustee
determines may be unduly prejudicial to the rights of other Securityholders, it
being understood that (subject to Section 7.1) the Trustee shall have no duty to
ascertain whether or not such actions or forbearances are unduly prejudicial to
such Securityholders, or that may involve the Trustee in personal liability or
for which the Trustee does not have indemnification reasonably satisfactory to
the Trustee pursuant to Sections 7.1(5) and 7.2(6); provided that, the Trustee
may take any other action deemed proper by the Trustee which is not inconsistent
with such direction.
SECTION 6.6. Rights of Holders to Receive Payment.
Subject to Article XI, notwithstanding any other provision of
this Indenture, the right of any Securityholder to receive payment of principal
of, premium, if any, and interest on the Security, on or after the respective
due dates expressed in the Security, or to bring suit for the enforcement of any
such payment on or after such respective dates, is absolute and unconditional
and shall not be impaired or affected without the consent of the Holder.
Notwithstanding any other provision of this Indenture, the
right of any Holder of any Security to convert such Security or to bring suit
for the enforcement of such right shall not be impaired or affected without the
written consent of the Holder.
SECTION 6.7. Collection Suit by Trustee.
If an Event of Default in payment of interest or principal,
and premium, if any, specified in Section 6.1(1) or (2) occurs and is
continuing, the Trustee may recover judgment in its own name and as trustee of
an express trust against the Company or any other obligor on the Securities for
the whole amount of unpaid principal, and premium, if any, and accrued interest
remaining unpaid on the Securities, together with interest on overdue principal,
and premium, if any, and to the extent that payment of such interest is lawful,
interest on overdue installments of interest, in each case at the rate borne by
the Securities and such further amount as shall be sufficient to cover the costs
and expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
SECTION 6.8. Trustee May File Proofs of Claim.
The Trustee may file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Holders of Securities allowed in any judicial proceedings relative to the
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Company (or any other obligor upon the Securities), its creditors or its
property and shall be entitled and empowered to collect and receive any monies
or other property payable or deliverable on any such claims and to distribute
the same. Any Custodian in any such judicial proceeding is hereby authorized by
each Securityholder to make such payments to the Trustee, and in the event that
the Trustee shall consent to the making of such payments directly to the Holders
of Securities, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section 7.7.
Nothing herein contained shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any
Securityholder any plan of reorganization, arrangement, adjustment or
composition affecting the Securities or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Securityholder in
any such proceedings.
SECTION 6.9. Priorities.
If the Trustee collects any money pursuant to this Article VI,
it shall pay out the money in the following order:
FIRST: to the Trustee amounts due under Section 7.7;
SECOND: to holders of any Senior Indebtedness as required by
Article XI;
THIRD: to the Holders of the Securities for amounts due and
unpaid on the Securities for principal, premium, if any, and
interest, ratably, without preference or priority of any kind,
according to the amounts due and payable on the Securities for
principal, premium, if any, and interest, respectively; and
FOURTH: to the Company.
The Trustee may fix a record date and payment date for any
payment to Holders of Securities pursuant to this Section 6.9.
SECTION 6.10. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under
this Indenture or in any suit against the Trustee for any action taken or
omitted by it as Trustee, a court in its discretion may require the filing by
any party litigant in the suit of an undertaking to pay the costs of the suit,
and the court in its discretion may assess reasonable costs, including
reasonable attorney's fees, against any party litigant in the suit, having due
regard to the merits and good faith of the claims or defenses made by the party
litigant. This Section 6.10 does not apply to a suit by the Trustee, a suit by a
Holder pursuant to Section 6.6 or a suit by Holders of more than 10% in
principal amount of the Securities then outstanding or a suit by any holder of
Senior Indebtedness.
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SECTION 6.11. Limitation on Suits.
A Securityholder may not pursue any remedy with respect to
this Indenture or the Securities unless:
(1) the Holder gives to the Trustee written notice
stating that an Event of Default is continuing;
(2) the Holders of at least 25% in aggregate principal
amount of the Securities at the time outstanding make a
written request to the Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee
reasonable security or indemnity against any loss, liability
or expense satisfactory to the Trustee;
(4) the Trustee does not comply with the request within
60 days after receipt of notice, the request and the offer of
security or indemnity; and
(5) the Holders of a majority in aggregate principal
amount of the Securities at the time outstanding do not give
the Trustee a direction inconsistent with the request during
such 60-day period.
A Securityholder may not use this Indenture to prejudice the
rights of any other Securityholder or to obtain a preference or priority over
any other Securityholder.
ARTICLE VII.
TRUSTEE
SECTION 7.1. Duties of Trustee.
(1) The duties and responsibilities of the Trustee shall be as
provided by the TIA. If an Event of Default has occurred and is continuing, the
Trustee shall exercise its rights and powers vested in it by this Indenture and
use the same degree of care and skill in their exercise as a prudent Person
would exercise or use under the circumstances in the conduct of his own affairs.
(2) Except during the continuance of an Event of Default:
(a) The Trustee need perform only those duties that are
specifically set forth in this Indenture, and the Trustee
shall not be liable except for the performance of such duties
as are specifically set forth in this Indenture, and no
others, and no implied covenants or obligation shall be read
into this Indenture against the Trustee.
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(b) In the absence of bad faith on its part, the
Trustee may conclusively rely, as to the truth of the
statements and the correctness of the opinions expressed
therein, upon any statements, certificates or opinions
furnished to the Trustee and conforming to the requirements of
this Indenture. The Trustee, however, shall examine the
certificates and opinions to determine whether or not they
conform to the requirements of this Indenture.
(3) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(a) This paragraph does not limit the effect of
paragraph (2) of this Section 7.1.
(b) The Trustee shall not be liable for any error in
judgment made in good faith by a Trust Officer, unless it is
proved that the Trustee was negligent in ascertaining the
pertinent facts.
(c) The Trustee shall not be liable with respect to
any action it takes or omits to take in good faith in
accordance with a direction received by it pursuant to Section
6.5.
(d) No provision of this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties
hereunder or in the exercise of any of its rights or powers,
if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such
risk or liability is not reasonably assured to it.
(4) Every provision of this Indenture that in any way relates
to the Trustee is subject to paragraphs (1), (2) and (3) of this Section 7.1 and
subject to Sections 315 and 316 of the TIA.
(5) Subject to subsection (3), the Trustee may refuse to
perform any duty or exercise any right or power unless, subject to the
provisions of the TIA, it receives indemnity satisfactory to it against any
loss, liability, expense or fee.
(6) The Trustee shall not be liable for interest on any money
received by it. Money held in trust by the Trustee need not be segregated from
other funds except to the extent required by law.
SECTION 7.2. Rights of Trustee.
(1) The Trustee may rely on and shall be protected in acting
or refraining from acting upon any document believed by it to be genuine and to
have been signed or presented by the proper Person. The Trustee need not
investigate any fact or matter stated in the document.
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(2) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel, or both, which shall
conform to Section 13.5. The Trustee shall not be liable for any action it takes
or omits to take in good faith in reliance on such Officers' Certificate or
Opinion of Counsel.
(3) The Trustee may act through agents or attorneys and shall
not be responsible for the misconduct or negligence of such agents or attorneys
appointed with due care and shall not be responsible for their supervision.
(4) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers.
(5) The Trustee may consult with counsel of its choice and the
written advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken, suffered
or omitted by the Trustee hereunder in good faith and reliance thereon.
(6) The Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders of Securities pursuant to this Indenture, unless
such Holders shall have offered to the Trustee security or indemnity reasonably
satisfactory to the Trustee against the costs, expenses and liabilities which
might be incurred by it in compliance with such request or direction.
(7) Unless otherwise specifically provided in this Indenture,
any demand, request, direction or notice from the Company shall be sufficient if
signed by an officer of the Company.
SECTION 7.3. Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become
the owner or pledgee of Securities and may otherwise deal with the Company or
its Affiliates with the same rights it would have if it were not Trustee. Any
Agent may do the same with like rights. The Trustee, however, is subject to
Sections 7.10 and 7.11.
SECTION 7.4. Trustee's Disclaimer.
The Trustee makes no representation as to the validity or
adequacy of this Indenture or the Securities, it shall not be accountable for
the Company's use of the proceeds from the Securities, it shall not be
responsible for the use or application of any money received by any Paying Agent
other than the Trustee and it shall not be responsible for any statement of the
Company in the Indenture or any statement in the Securities other than its
certificate of authentication or in any document used in the sale of the
Securities other than any statement in writing provided by the Trustee expressly
for use in such document.
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SECTION 7.5. Notice of Defaults.
If a Default or Event of Default occurs and is continuing and
if it is actually known to the Trustee, the Trustee shall mail to each Holder of
Securities notice of the Default or Event of Default within 90 days after it
becomes known to the Trustee. Except in the case of a default in payment of
principal of, premium, if any, or interest on any Security, the Trustee may
withhold the notice if and so long as a committee of its Trust Officers in good
faith determines that withholding the notice is in the interests of Holders of
Securities. Notwithstanding anything to the contrary expressed in this
Indenture, the Trustee shall not be deemed to have knowledge of any Event of
Default hereunder unless and until a Trust Officer shall have actual knowledge
thereof, or shall have received written notice thereof from the Company at its
principal Corporate Trust Office as specified in Section 13.2. The Trustee shall
not be deemed to have actual knowledge of an Event of Default hereunder, except
in the case of an Event of Default under Sections 6.1(1) or 6.1(2) (provided
that the Trustee is the Paying Agent), until a Trust Officer receives written
notice thereof from the Company or any Securityholder that such a Default or an
Event of Default has occurred.
SECTION 7.6. Reports by Trustee to Holders.
Within 60 days after each May 15 beginning with May 15 of the
first year in which Securities are outstanding hereunder, the Trustee, if
required by the provisions of TIA ss. 313(a), shall mail to each Securityholder
a brief report dated as of May 15 of such year that complies with TIA ss.
313(a). The Trustee also shall comply with TIA ss. 313(b), ss. 313(c) and ss.
313(d).
A copy of each report at the time of its mailing to
Securityholders shall be filed with the Securities and Exchange Commission and
each securities exchange, if any, on which the Securities are listed. The
Company agrees to notify the Trustee in writing whenever the Securities become
listed or delisted on or from any securities exchange.
SECTION 7.7. Compensation and Indemnity
The Company shall pay to the Trustee from time to time, and
the Trustee shall be entitled to, reasonable compensation for its services
(which compensation shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust). The Company shall reimburse
the Trustee upon request for all reasonable disbursements, expenses and advances
incurred or made by it. Such expenses may include, but shall not be limited to,
the reasonable compensation, disbursements and expenses of the Trustee's agents,
consultants and counsel.
The Company shall indemnify the Trustee and its officers,
directors, shareholders, agents and employees for, and hold them harmless
against, any loss or liability incurred by any of them in connection with the
acceptance or administration of the Trustee's duties and the exercise of its
rights and powers under this Indenture or any Security, including (whether
asserted by any Securityholder, the Company or any other Person) the costs and
expenses of defending themselves against any claim or liability in connection
with the Securities or the exercise or performance of any of
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the Trustee's rights, powers or duties hereunder. The Trustee and its officers,
directors, shareholders, agents and employees in their capacity as Paying
Agent, Registrar, Conversion Agent, Securities Custodian and agent for service
of notices and demands shall have the full benefit of the foregoing indemnity
as well as all other benefits, rights, and privileges accorded to the Trustee
in this Indenture when acting in such other capacity. The Trustee shall notify
the Company promptly of any claim asserted against the Trustee for which it
may seek indemnity; provided, however, that any failure to so notify the
Company shall not relieve the Company of its indemnity obligations hereunder
except to the extent the Company's ability to defend such claim shall be
prejudiced thereby. The Company may elect by written notice to the Trustee to
assume the defense of any such claim at the Company's expense with counsel
reasonably satisfactory to the Trustee; provided, however, that if the Trustee
is advised by counsel that the interests of the Company and the Trustee
conflict, the Trustee shall have the right to retain separate counsel at the
expense of the Company.
The Company need not reimburse the Trustee for any expense or
indemnify it against any loss or liability incurred by it through the Trustee's
negligence or willful misconduct. The Company shall not be liable for any
settlement of any claim or action effected without the Company's consent, which
consent shall not be unreasonably withheld.
To secure the Company's payment obligations to the Trustee
pursuant to this Article VII and all other obligations of the Company to the
Trustee pursuant to this Indenture, including all fees, expenses, and rights to
indemnification, the Trustee shall have a first priority lien on all money or
property held or collected by the Trustee. Such lien shall survive the
satisfaction and discharge of the Indenture and the resignation or removal of
the Trustee. The Trustee's right to receive payment of any amounts due under
this Indenture shall not be subordinate to any other indebtedness of the
Company and the Securities shall be subordinate to the Trustee's rights to
receive such payments.
When the Trustee incurs expenses or renders services after an
Event of Default specified in Section 6.1 occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any applicable bankruptcy or comparable law. The provisions
of this Section shall survive termination of this Indenture.
SECTION 7.8. Replacement of Trustee.
A resignation or removal of the Trustee and appointment of a
successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section 7.8.
The Trustee may resign by so notifying the Company. The
Holders of a majority in principal amount of the Securities then outstanding may
remove the Trustee by so notifying the Trustee and may appoint a successor
Trustee with the Company's written consent. The Company may remove the Trustee
if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged a bankrupt or an insolvent;
(3) a receiver or other public officer takes charge of
the Trustee or its property; or
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(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee.
If a successor Trustee does not take office within 45 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company or the Holders of a majority in principal amount of the Securities then
outstanding may petition any court of competent jurisdiction for the appointment
of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any
Securityholder may petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after that,
the retiring Trustee shall, upon payment of its fees and expenses, transfer all
property held by it as Trustee to the successor Trustee, subject to the lien
provided for in Section 7.7, the resignation or removal of the retiring Trustee
shall become effective, and the successor Trustee shall have all the rights,
powers and duties of the Trustee under this Indenture. Notwithstanding the
replacement of the Trustee pursuant to this Section 7.8, the Company's
obligations under Section 7.7 shall continue for the benefit of the retiring
Trustee with respect to expenses and liabilities incurred by it and compensation
earned by it prior to such replacement or otherwise or the Indenture. A
successor Trustee shall mail notice of its succession to each Holder of
Securities.
SECTION 7.9. Successor Trustee by Merger, etc.
If the Trustee consolidates with, merges or converts into, or
transfers all or substantially all of its corporate trust assets to, another
corporation, the successor corporation without any further act shall be the
successor Trustee.
SECTION 7.10. Eligibility; Disqualification.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA ss. 310(a)(1). The Trustee shall have a combined capital and
surplus of at least $50,000,000 as set forth in its most recent published annual
report of condition. The Trustee shall comply with TIA ss. 310(b), including the
optional provision permitted by the second sentence of TIA ss. 310(b)(9).
SECTION 7.11. Preferential Collection of Claims Against
Company.
The Trustee is subject to TIA ss. 311(a), excluding any
creditor relationship listed in TIA ss. 311(b). A Trustee who has resigned or
been removed shall be subject to TIA ss. 311(a) to the extent indicated therein.
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ARTICLE VIII.
SATISFACTION AND DISCHARGE OF INDENTURE
SECTION 8.1. Satisfaction, Discharge and Defeasance of the
Securities.
The Company shall be deemed to have paid and discharged the
entire indebtedness on the Securities after the date of the deposit referred to
in paragraph (1) below, the provisions of this Indenture shall no longer be in
effect in respect of the Securities, and the Trustee, at the expense of the
Company, shall execute proper instruments acknowledging satisfaction and
discharge of such indebtedness; provided that the following conditions shall
have been satisfied:
(1) the Company has deposited or caused to be deposited
with the Trustee irrevocably as trust funds in trust,
specifically pledged as security for, and dedicated solely to,
the benefit of the Holders of the Securities, with reference
to this Section 8.1, (a) money or (b) U.S. Government
Obligations or (c) a combination thereof, sufficient, in the
opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof
delivered to the Trustee, to pay and discharge the entire
indebtedness on all the Securities for principal, premium, if
any, and interest, if any, to the maturity date of the
Securities as such principal, premium, if any, or interest
becomes due and payable in accordance with the terms of this
Indenture and the Securities;
(2) the Company has paid or caused to be paid all other
sums payable hereunder by the Company in connection with all
of the Securities, including all fees and expenses of the
Trustee; and
(3) the Company has delivered to the Trustee an Opinion
of Counsel and an Officers' Certificate, each stating that all
conditions precedent herein provided for relating to the
satisfaction and discharge of the entire Indebtedness on the
Securities and the discharge of this Indenture and the
termination of the Company's obligations hereunder have been
complied with.
"U.S. Government Obligations" means direct, non-callable
obligations of, or non-callable obligations guaranteed by, the United
States of America for the timely payment of which obligation or guarantee the
full faith and credit of the United States of America is pledged.
SECTION 8.2. Satisfaction and Discharge of Indenture.
In addition to its rights under Section 8.1, the Company may
terminate all of its obligations under this Indenture when:
(1) all of the Securities theretofore authenticated
and delivered (other than (a) Securities which have been
destroyed, lost or stolen and which have been replaced or paid
as provided in Section 2.6 hereof and (b) Securities for whose
payment money has theretofore been deposited with the Trustee
or the Paying
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Agent in trust or segregated and held in trust by the Company
and thereafter repaid to the Company or discharged from such
trust, as provided in Section 2.4 and Section 8.6 hereof) have
been delivered to the Trustee for cancellation (including any
cancellation resulting from the conversion of such Securities
pursuant to Paragraph 7 of the Securities); and
(2) the Company has paid or caused to be paid all
other sums payable hereunder by the Company in connection with
the outstanding Securities, including all fees and expenses of
the Trustee.
SECTION 8.3. Survival of Certain Obligations.
Notwithstanding the satisfaction and discharge of this
Indenture pursuant to Section 8.1, the respective obligations of the Company
specified in Sections 2.3, 2.4, 2.5, 2.6, 2.11, 4.1, 7.7, 8.5, 8.6, 8.7 and in
Article X shall survive until the Securities are no longer outstanding, and
after the Securities are no longer outstanding, or upon compliance with Section
8.2, only the obligations of the Company in such Sections 7.7 and 8.6 shall
survive. Nothing contained in this Article VIII shall abrogate any of the
obligations or duties of the Trustee under this Indenture.
SECTION 8.4. Application of Trust Money.
(1) Subject to the provisions of Section 8.6, all money and
U.S. Government Obligations deposited with the Trustee for the Securities
pursuant to Section 8.1 or Section 8.2, and all money received by the Trustee in
respect of U.S. Government Obligations deposited with the Trustee for the
Securities pursuant to Section 8.1 or Section 8.2 shall be held in trust and
reinvested by the Trustee in (a) U.S. Government Obligations or (b) beneficial
interests in one or more mutual funds which invest solely in U.S. Government
Obligations and which are rated in the highest applicable rating category by a
nationally-recognized statistical rating organization in accordance with the
Company's written instructions and applied by the Trustee in accordance with the
provisions of the Securities and this Indenture, to the payment, either directly
or through any Paying Agent (including the Company or any Subsidiary acting as
Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of
the principal, premium, if any, and interest, if any, on the Securities; but
such money need not be segregated from other funds except to the extent required
by law. Money and U.S. Government Obligations so held in trust are not subject
to the subordination provisions of Article XI.
(2) The Trustee shall deliver or pay to the Company from time
to time upon the Company's written request any U.S. Government Obligations or
money held by it as provided in Section 8.1 or Section 8.2 which, in the written
opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, are then
in excess of the amount thereof which then would have been required to be
deposited for the purpose for which such U.S. Government Obligations, or money,
were deposited or received.
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SECTION 8.5. Paying Agent to Repay Monies Held.
Upon the satisfaction and discharge of this Indenture, all
monies then held by any Paying Agent under the provisions of this Indenture
shall, upon written demand of the Company, be repaid to it or paid to the
Trustee, and thereupon such Paying Agent shall be released from all further
liability with respect to such monies.
SECTION 8.6. Return of Unclaimed Monies.
Any monies deposited with or paid to the Trustee or any Paying
Agent for the Securities, or then held by the Company in trust, for the payment
of any principal, premium, if any, and interest, if any, on the Securities and
not applied but remaining unclaimed by the Holders of the Securities for two
years after the date upon which the principal of, premium, if any, and interest,
if any, on the Securities, as the case may be, shall have become due and
payable, shall, unless otherwise required by mandatory provisions of applicable
escheat or abandoned or unclaimed property law, be repaid to the Company by such
Trustee or any Paying Agent on written demand by the Company or (if then held by
the Company or any Affiliate) shall be discharged from such trust; and the
Holders of the Securities entitled to receive such payment shall thereafter look
only to the Company for the payment thereof; provided, however, that, before
being required to make any such repayment, the Trustee may, or shall at the
written request of the Company, at the expense of the Company, cause to be
published once in an authorized newspaper in the same city in which the place of
payment with respect to the Securities shall be located and in an authorized
newspaper in the City of New York, or mail to each such Holder, a notice (in
such form as may be deemed appropriate by the Trustee) that said monies remain
unclaimed and that, after a date named therein, any unclaimed balance of said
monies then remaining will be returned to the Company.
SECTION 8.7. Reinstatement.
If the Trustee or Paying Agent is unable to apply any money or
U.S. Government Obligations in accordance with Section 8.1 by reason of any
legal proceeding or by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, the Company's obligations under this Indenture and the Securities
shall be revived and reinstated as though no deposit had occurred pursuant to
Section 8.1 until such time as the Trustee or Paying Agent is permitted to apply
all such money or U.S. Government Obligations in accordance with Section 8.4;
provided, however, that if the Company has made any payment of principal of,
premium, if any, or interest on the Securities because of the reinstatement of
its obligations, the Company shall be subrogated to the rights of the Holders of
such Securities to receive such payment from the money or U.S. Government
Obligations held by the Trustee or Paying Agent.
SECTION 8.8. Indemnity for Government Obligations.
The Company shall pay and indemnify the Trustee against any
tax, fee or other charge imposed on or assessed against U.S. Government
Obligations deposited with the Trustee pursuant hereto or the principal and
interest received on such U.S. Government Obligations.
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ARTICLE IX.
AMENDMENTS AND WAIVERS
SECTION 9.1. Amendments and Waivers Without Consent of
Holders.
The Company, when authorized by Board Resolution, and the
Trustee at any time and from time to time, may amend or supplement this
Indenture or the Securities (any such amendment or supplement to be in a form
satisfactory to the Trustee) without notice to or consent of any Securityholder
for any of the following purposes:
(1) to comply with Section 5.1; or
(2) to provide for uncertificated Securities in
addition to or in place of certificated Securities; or
(3) to cure any ambiguity, defect or inconsistency,
or to make any other change that does not adversely affect the
interests of the Holders of Securities in any material
respect; or
(4) to add to the covenants of the Company, for the
benefit of the Holders or to surrender any right or power
herein conferred upon the Company; or
(5) to add any Event of Default.
The Trustee shall be entitled to receive upon request an
Opinion of Counsel to its satisfaction with respect to any supplement to this
Indenture without consent of the Holders that all conditions precedent have been
satisfied.
SECTION 9.2. Amendments and Waivers with Consent of Holders.
With the written consent of the Holders of not less than
66-2/3% in aggregate principal amount of the Securities at the time outstanding,
the Company, when authorized by Board Resolution, and the Trustee may amend or
supplement this Indenture (any such amendment or supplement to be in a form
satisfactory to the Trustee) or the Securities for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Indenture or of any supplemental indenture or of modifying in any manner
the rights of the Holders of the Securities. The Holders of a majority in
principal amount of the Securities then outstanding may waive compliance in a
particular instance by the Company with any provision of this Indenture or the
Securities without notice to any Securityholder. Subject to Section 9.4, without
the consent of each Holder of Securities affected, however, an amendment,
supplement or waiver, including a waiver pursuant to Section 6.4, may not:
(1) reduce the amount of Securities whose Holders
must consent to an amendment or waiver;
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(2) reduce the rate of or extend the time for payment
of interest on any Security;
(3) reduce the principal of or extend the fixed
maturity of any Security;
(4) waive (except unless theretofore cured) a default
in the payment of the principal of (and premium, if any on),
interest on or redemption amounts with respect to any
Security;
(5) make any Security payable in currency other than
that stated in the Security;
(6) make any change in Sections 6.4, 6.6 or 9.2;
(7) make any change that adversely affects the right
to convert any Security; or
(8) make any change in Article XI that adversely
affects the rights of any Securityholder.
To secure a consent of the Holders under this Section, it
shall not be necessary for the Holders to approve the particular form of any
proposed amendment or waiver; rather, it shall be sufficient if such consent
approves the substance thereof.
After an amendment under this Section becomes effective, the
Company shall mail to Securityholders a notice briefly describing such
amendment.
SECTION 9.3. Compliance with Trust Indenture Act.
Every amendment or supplement to this Indenture or the
Securities shall comply with the TIA as then in effect.
SECTION 9.4. Revocation and Effect of Consents.
Subject to this Indenture, each amendment, supplement or
waiver evidencing other action shall become effective in accordance with its
terms. Until an amendment, supplement or waiver becomes effective, a consent to
it by a Holder of a Security is a continuing consent by the Holder even if
notation of the consent is not made on any Security. Any such Holder or
subsequent Holder, however, may revoke the consent as to his Security or portion
of a Security, if the Trustee receives the notice of revocation before the date
the amendment, waiver or other action becomes effective.
The Company may, but shall not be obligated to, fix a record
date for the purpose of determining the Holders entitled to consent to any
amendment, supplement or waiver. If a record date is fixed, then notwithstanding
the provisions of the immediately preceding paragraph, those Persons who were
Holders at such record date (or their duly designated proxies) and only
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those Persons, shall be entitled to consent to such amendment, supplement or
waiver or to revoke any consent previously given, whether or not such Persons
continue to be Holders after such record date. No consent shall be valid or
effective for more than 90 days after such record date unless consent from
Holders of the principal amount of Securities then outstanding required
hereunder for such amendment, supplement or waiver to be effective shall have
also been given and not revoked within such 90-day period.
After an amendment, waiver or other action becomes effective,
pursuant to Section 9.1 or Section 9.2, as the case may be, it shall bind every
Holder of a Security.
SECTION 9.5. Notation on or Exchange of Securities.
If an amendment, supplement or waiver changes the terms of a
Security, the Trustee may request the Holder of the Security to deliver it to
the Trustee. The Trustee may place an appropriate notation on the Security about
the changed terms and return it to the Holder. Alternatively, if the Company or
the Trustee so determine, the Company in exchange for the Security shall issue
and upon Company Order the Trustee shall authenticate a new Security that
reflects the changed terms, the cost and expense of which will be borne by the
Company. Any failure to make the appropriate notation or to issue a new Security
shall not affect the validity of such amendment, supplement or waiver.
SECTION 9.6. Trustee to Sign Amendments, etc.
The Trustee need not sign any amendment that adversely affects
its rights or interests, as determined by the Trustee in its sole discretion. In
signing or refusing to sign any amendment the Trustee shall be entitled to
receive and shall be fully protected in relying upon, an Opinion of Counsel
stating that such amendment is authorized or permitted by this Indenture. The
Company may not sign an amendment until its Board of Directors approves it.
ARTICLE X.
CONVERSION OF SECURITIES
SECTION 10.1. Right of Conversion; Conversion Price.
Subject to the provisions of Section 7 of the Securities, the
Holder of any Security or Securities shall have the right, at such Holder's
option, at any time on or after December 31, 1997 until the close of business on
________, 2002 (except that, with respect to any Security or portion of a
Security which shall be called for redemption, such right shall terminate at the
close of business on the Redemption Date fixed for redemption of such Security
or portion of a Security unless the Company shall default in payment due upon
redemption thereof), to convert, subject to the terms and provisions of this
Article X, the principal of any such Security or Securities or any portion
thereof which is $1,000 principal amount or an integral multiple thereof into
shares of common stock of the Company, $0.01 par value per share ("Common
Stock"), initially at the conversion price per share of $____or, in case an
adjustment of such price has taken place pursuant to the provisions of Section
10.4, then at the price as last adjusted (such
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price or adjusted price being referred to herein as the "conversion price"),
upon surrender of the Security or Securities, the principal of which is so to be
converted, accompanied by written notice of conversion duly executed, to the
Conversion Agent, at any time during usual business hours at the office or
agency maintained by it for such purpose, and, if so required by the Conversion
Agent or Registrar, accompanied by a written instrument or instruments of
transfer in form satisfactory to the Conversion Agent or Registrar duly executed
by the Holder or his duly authorized representative in writing. For convenience,
the conversion of any portion of the principal of any Security or Securities
into shares of Common Stock is hereinafter sometimes referred to as the
conversion of such Security or Securities.
SECTION 10.2. Issuance of Shares on Conversion.
As promptly as practicable after the surrender, as herein
provided, of any Security or Securities for conversion, the Conversion Agent
shall notify the Company in writing of the surrender and the Company shall
deliver or cause to be delivered at the office or agency of the Conversion
Agent, certificates representing the number of fully paid and nonassessable
shares of Common Stock into which such Security or Securities may be converted
in accordance with the provisions of this Article X to, or upon the written
order of, the Holder of the Security or Securities so surrendered. Such
conversion shall be deemed to have been made as of the close of business on the
date that such Security or Securities shall have been surrendered for conversion
by delivery thereof with a written notice of conversion duly executed, so that
the rights of the Holder of such Security or Securities as a Securityholder
shall cease at such time and, subject to the following provisions of this
paragraph, the Person or Persons entitled to receive the shares of Common Stock
upon conversion of such Security or Securities shall be treated for all purposes
as having become the record holder or holders of such shares of Common Stock at
such time and such conversion shall be at the conversion price in effect at such
time; provided, however, that no such surrender on any date when the stock
transfer books of the Company shall be closed shall be effective to constitute
the Person or Persons entitled to receive the shares of Common Stock upon such
conversion as the record holder or holders of such shares of Common Stock on
such date, but such surrender shall be effective to constitute the Person or
Persons entitled to receive such shares of Common Stock as the record holder or
holders thereof for all purposes at the close of business on the next succeeding
day on which such stock transfer books are open; and provided, further, that in
such event such conversion shall be at the conversion price in effect on the
date that such Security or Securities shall have been surrendered for conversion
by delivery thereof, as if the stock transfer books of the Company had not been
closed. The Company shall give or cause to be given to the Trustee written
notice whenever the stock transfer books of the Company shall be closed.
Upon Conversion of any Security which is converted in part
only, the Company shall execute and the Trustee after receipt of written notice
from the Conversion Agent shall authenticate and deliver to or on the order of
the Holder thereof, at the expense of the Company, a new Security or Securities
of authorized denominations in principal amount equal to the unconverted portion
of such Security.
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SECTION 10.3. No Adjustment for Interest or Dividends.
No payment or adjustment in respect of interest on the
Securities or dividends on the shares of Common Stock shall be made upon the
conversion of any Security or Securities; provided, however, that if a Security
or any portion thereof shall be converted subsequent to any Regular Record Date
and on or prior to the next succeeding Interest Payment Date, the interest
falling due on such Interest Payment Date shall be payable on such Interest
Payment Date notwithstanding such conversion, and such interest (whether or not
punctually paid or duly provided for) shall be paid to the Person in whose name
such Security is registered at the close of business on such Regular Record Date
and such Securities surrendered during this period (i.e., subsequent to any
Regular Record Date and on or prior to the next succeeding Interest Payment
Date) must be accompanied by payment of an amount equal to the interest payable
on such Interest Payment Date.
SECTION 10.4. Adjustment of Conversion Price.
(1) In case the Company shall pay or make a dividend or other
distribution on any class of Capital Stock of the Company in shares of Common
Stock, the conversion price in effect at the opening of business on the day
following the date fixed for the determination of shareholders entitled to
receive such dividend or other distribution shall be reduced by multiplying such
conversion price by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding at the close of business on the date fixed
for such determination and the denominator shall be the sum of such number of
shares and the total number of shares constituting such dividend or other
distribution, such reduction to become effective immediately after the opening
of business on the day following the date fixed for such determination.
(2) In case the Company shall issue rights or warrants to all
or substantially all holders of its shares of Common Stock entitling them to
subscribe for or purchase shares of Common Stock (or securities convertible into
or exchangeable for Common Stock) at a price per share (or having a conversion
or exchange price per share) less than the current market price per share
(determined as provided in paragraph (6) of this Section 10.4) of the shares of
Common Stock on the date fixed for the determination of shareholders entitled to
receive such rights or warrants, the conversion price in effect at the opening
of business on the day following the date fixed for such determination shall be
reduced by multiplying such conversion price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the close
of business on the date fixed for such determination plus the number of shares
of Common Stock which the aggregate of the subscription price of the total
number of shares of Common Stock so offered for subscription or purchase (or the
aggregate conversion or exchange price of the convertible or exchangeable
securities so offered) would purchase at such current market price and the
denominator shall be the number of shares of Common Stock outstanding at the
close of business on the date fixed for such determination plus the number of
shares of Common Stock so offered for subscription or purchase, such reduction
to become effective immediately after the opening of business on the day
following the date fixed for such determination. In the event that all of the
shares of Common Stock subject to such rights or warrants have not been issued
when such rights or warrants expire, then the conversion price shall promptly be
readjusted to the conversion price which would then be in effect had the
adjustment upon the issuance of such rights or warrants been made on the basis
of the actual number of shares of Common Stock issued upon the exercise of such
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rights or warrants. For the purposes of this paragraph (2), the number of shares
of Common Stock at any time outstanding shall not include shares held in the
treasury of the Company but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of shares of Common Stock. The Company
will not issue any rights or warrants in respect of shares of Common Stock held
in the treasury of the Company.
(3) In case the outstanding shares of Common Stock shall be
subdivided into a greater number of shares, the conversion price in effect at
the opening of business on the day following the day upon which such subdivision
becomes effective shall be proportionately reduced, and, conversely, in case
outstanding shares of Common Stock shall each be combined into a smaller number
of shares, the conversion price in effect at the opening of business on the day
following the day upon which such combination becomes effective shall be
proportionately increased, such reduction or increase, as the case may be, to
become effective immediately after the opening of business on the day following
the day upon which such subdivision or combination becomes effective.
(4) In case the Company shall, by dividend or otherwise,
distribute to all or substantially all holders of shares of Common Stock
evidences of indebtedness or assets (including securities, but excluding any (a)
rights or warrants referred to in paragraph (2) of this Section 10.4, (b) any
dividend or distribution not prohibited by Section 4.6 hereof and (c) any
dividend or distribution referred to in paragraph (1) of this Section 10.4), the
conversion price shall be adjusted so that the same shall equal the price
determined by multiplying the conversion price in effect immediately prior to
the close of business on the day fixed for the determination of shareholders
entitled to receive such distribution by a fraction of which the numerator shall
be the current market price per share (determined as provided in paragraph (6)
of this Section) of the shares of Common Stock on the date fixed for such
determination less the then fair market value as determined by the Board of
Directors of the Company (whose determination shall be conclusive and described
in a resolution of the Board of Directors of the Company filed with the Trustee)
of the portion of the assets or evidences of indebtedness so distributed
allocable to one share of Common Stock and the denominator shall be such current
market price per share of the shares of Common Stock, such adjustment to become
effective immediately prior to the opening of business on the day following the
date fixed for the determination of shareholders entitled to receive such
distribution.
(5) In case the shares of Common Stock shall be changed into
the same or a different number of shares of any class or classes of stock,
whether by capital reorganization, reclassification, or otherwise (other than a
subdivision or combination of shares or a stock dividend described in paragraph
(1) or (3) of this Section 10.4, or a consolidation, merger or sale of assets
described in Section 10.10), then and in each such event the Holders of
Securities shall have the right thereafter to convert such Securities into the
kind and amount of shares of stock and other securities and property receivable
upon such reorganization, reclassification or other change, by holders of the
number of shares of Common Stock into which such Securities might have been
converted immediately prior to such reorganization, reclassification or change.
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(6) For the purpose of any computation under paragraphs (2)
and (4) of this Section, the current market price per share of Common Stock on
any date shall be deemed to be the average of the Closing Prices for the 15
consecutive Business Days selected by the Company commencing not more than 30
and not less than 20 Business Days before the date in question.
(7) No adjustment in the conversion price shall be required
(a) pursuant to paragraphs (1) through (5) if Holders of the Securities receive
notice of and are allowed to participate in such transaction, (b) pursuant to
paragraph (2) if the rights or warrants to purchase common stock of the Company
were issued pursuant to a company plan for reinvestment of dividends or interest
or the Company's employee stock purchase plan, or (c) as a result of a change in
the par value of the common stock of the Company.
(8) No adjustment in the conversion price shall be required
unless such adjustment (plus any adjustments not previously made by reason of
this paragraph (8)) would require an increase or decrease of at least 1% in
such price; provided, however, that any adjustments which by reason of this
paragraph (8) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this
paragraph (8) shall be made to the nearest cent.
(9) The Company may, but shall not be required to, make such
reductions in the conversion price, in addition to those required by paragraph
(1), (2), (3), (4) and (5) of this Section 10.4 as the Company's Board of
Directors considers to be advisable in order to avoid or diminish any income tax
to any holders of shares of Common Stock resulting from any dividend or
distribution of stock or issuance of rights or warrants to purchase or subscribe
for stock or from any event treated as such for income tax purposes or for any
other reason. The Company's Board of Directors shall have the power to resolve
any ambiguity or correct any error in the adjustments made pursuant to this
Section 10.4 and its actions in so doing shall be final and conclusive.
(10) The adjustments provided for in this Section 10.4 shall
be made successively whenever any event listed above shall occur.
SECTION 10.5. Notice of Adjustment of Conversion Price.
Whenever the conversion price for the Securities is adjusted
as herein provided:
(1) the Company shall compute the adjusted conversion
price in accordance with Section 10.4 and shall prepare an
Officers' Certificate setting forth the adjusted conversion
price and showing in reasonable detail the facts upon which
such adjustment is based and the computation thereof, and such
certificate shall forthwith be filed at each office or agency
maintained for the purpose of conversion of the Securities
pursuant to Section 2.3 and with the Trustee; and
(2) a notice stating that the conversion price has
been adjusted and setting forth the adjusted conversion price
shall as soon as practicable be mailed by the Company to all
Holders of the Securities at their last addresses as they
shall appear in the Security Register.
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(3) If the conversion price is adjusted and the
Company fails to file an Officers' Certificate with the
Trustee as provided by Section 10.5(1) and the Trustee is
acting as the Conversion Agent, the Trustee shall be entitled
to rely conclusively on the conversion price set forth in the
Officer's Certificate most recently received by the Trustee
(or as set forth in the Securities and this Indenture if the
conversion price shall not have been adjusted).
SECTION 10.6. Notice of Certain Corporate Action.
(1) In case:
(a) the Company shall authorize the granting to
holders of its shares of Common Stock of rights or warrants
entitling them to subscribe for or purchase any shares of
Capital Stock of any class or of any other rights; or
(b) of any reclassification of the shares of Common
Stock of the Company, or of any consolidation or merger to
which the Company is a party and for which approval of any
shareholders of the Company is required, or of the sale or
transfer of all or substantially all of the assets of the
Company; or
(c) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of the Securities pursuant to Section 2.3 and shall
cause to be mailed to the Trustee and all Holders of the Securities at their
last addresses as they shall appear in the Security Register, at least 20 days
(or 10 days in any case specified in clause (a) or (b) above) prior to the
applicable record date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
rights or warrants, or, if a record is not to be taken, the date as of which the
Holders of shares of Common Stock of record to be entitled to such dividend,
distribution, rights or warrants are to be determined, or (y) the date on which
such reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected that holders of shares of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities, cash or other
property deliverable upon such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up. Such notice shall also state
whether such transaction will result in any adjustment in the conversion price
applicable to the Securities and, if so, shall state what the adjusted
conversion price will be and when it will become effective. Neither the failure
to give the notice required by this Section, nor any defect therein, to any
particular Holder shall affect the sufficiency of the notice or the legality or
validity of any such dividend, distribution, right, warrant, reclassification,
consolidation, merger, sale, transfer, liquidation, dissolution or winding-up,
or the vote on any action authorizing such with respect to the other holders.
(2) In case the Company or any Affiliate of the Company shall
propose to engage in a "Rule 13e-3 Transaction" as defined in the Commission's
Rule 13e-3 under the
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Exchange Act, the Company shall, no later than the date on which any information
with respect to such Rule 13e-3 Transaction is first required to be given to the
Commission or any other Person pursuant to such Rule 13e-3, cause to be mailed
to all Holders at their last addresses as they shall appear in the Security
Register, a copy of all information required to be given to the holders of the
Company's Capital Stock pursuant to such Rule 13e-3. The information required to
be given under this paragraph shall be in addition to and not in lieu of any
other information required to be given by the Company pursuant to this Section
10.6 or any other provision of the Securities or this Indenture.
SECTION 10.7. Taxes on Conversions.
The Company will pay any and all stamp or similar taxes that
may be payable in respect of the issuance or delivery of shares of Common Stock
on conversion of the Securities pursuant hereto. The Company shall not, however,
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of shares of Common Stock in a name other
than that of the Holder of the Security or Securities to be converted, and no
such issuance or delivery shall be made unless and until the Person requesting
such issuance has paid to the Company the amount of any such tax, or has
established to the satisfaction of the Company that such tax has been paid.
SECTION 10.8. Fractional Shares.
No fractional shares or scrip representing fractional shares
shall be issued upon any conversion of the Securities. If any such conversion
would otherwise require the issuance of a fractional share an amount equal to
such fraction multiplied by the current market price per share of Common Stock
(determined as provided in paragraph (6) of Section 10.4) on the day of
conversion shall be paid to the Holder in cash by the Company.
SECTION 10.9. Cancellation of Converted Securities.
All Securities delivered for conversion shall be delivered to
the Trustee and upon Company Order certifying that certificates representing
the number of fully paid and nonassessable shares of Common Stock required to
be delivered by the Company pursuant to Section 10.2 have been delivered, the
Trustee shall cancel and dispose of the same as provided in Section 2.9.
SECTION 10.10. Provisions in Case of Consolidation, Merger
or Sale of Assets.
(1) In case of any consolidation of the Company with, or
merger of the Company into, any Person, or in case of any merger of another
Person into the Company (other than a consolidation or merger which does not
result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock), or in case of any sale or transfer of all
or substantially all of the assets of the Company, the Person formed by such
consolidation or resulting from such merger or which acquires such assets, as
the case may be, shall execute and deliver to the Trustee a supplemental
indenture providing that the Holder of each Security then outstanding shall have
the right thereafter, during the period such Security
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shall be convertible as specified in Section 10.1 to convert such Security only
into the kind and amount of securities, cash and other property receivable upon
such consolidation, merger, sale or transfer by a holder of the number of shares
of Common Stock into which such Security might have been converted immediately
prior to such consolidation, merger, sale or transfer. Such supplemental
indenture shall provide for adjustments which, for events subsequent to the
effective date of such supplemental indenture, shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Article X. The above
provisions of this Section 10.10 shall similarly apply to successive
consolidations, mergers, sales or transfers.
(2) The Trustee shall not be under any responsibility to
determine the correctness of any provisions contained in any such supplemental
indenture relating either to the kind or amount of shares of stock or securities
or property receivable by Holders upon the conversion of their Securities after
any such reclassification, change, consolidation, merger, sale or conveyance or
to any adjustment to be made with respect thereto.
SECTION 10.11. Disclaimer by Trustee of Responsibility for
Certain Matters.
The Trustee and each Conversion Agent (other than the Company
or any Subsidiary) shall not at any time be under any duty or responsibility to
any Holder of the Securities to determine whether any facts exist which may
require any adjustment of the conversion price, how it should be calculated or
what it should be, or with respect to the nature or extent or accuracy of
computation of any such adjustment when made, or with respect to the method
employed, or herein or in any supplemental indenture provided to be employed, in
making the same. The Trustee and each Conversion Agent (other than the Company
or any Subsidiary) shall not be accountable with respect to the validity, value,
kind or amount of any shares of Common Stock, or of any securities or property,
which may at any time be issued or delivered upon the conversion of any
Security; and it makes no representation with respect thereto. The Trustee and
each Conversion Agent (other than the Company or any Subsidiary) shall not be
responsible for any failure of the Company to issue, transfer or deliver any
shares of Common Stock or stock certificates or other securities or property
upon the surrender of any Security for the purpose of conversion or, subject to
Section 7.1, to comply with any of the covenants of the Company contained in
this Article X.
SECTION 10.12. Covenant to Reserve Shares.
The Company covenants that it will at all times reserve and
keep available, free from preemptive rights, out of its authorized shares of
Common Stock, solely for the purpose of issuance upon conversion of the
Securities as herein provided, such number of shares of Common Stock as shall
then be issuable upon the conversion of all outstanding Securities. The Company
covenants that all shares of Common Stock which shall be so issuable shall be,
when issued, duly and validly issued and fully paid and non-assessable. For
purposes of this Section 10.12, the number of shares of Common Stock which shall
be deliverable upon the conversion of all outstanding Securities shall be
computed as if at the time of computation all outstanding Securities were held
by a single holder.
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ARTICLE XI.
SUBORDINATION; SENIORITY
SECTION 11.1. Securities Subordinated to Senior
Indebtedness.
(1) The Company agrees, and each Holder of the Securities by
his acceptance thereof likewise agrees, that the payment of the principal of,
premium, if any, and interest on the Securities (all of the foregoing, a
"Payment or Distribution") is subordinated and junior in right of payment,
except as provided in Section 8.1, to the extent and in the manner provided in
this Article XI, to the prior payment in full in cash of all Senior
Indebtedness whether outstanding on the date hereof or hereafter created,
incurred, assumed or guaranteed.
A Payment or Distribution shall include any asset of any kind
or character, and may consist of cash, securities or other property, by set-off
or otherwise, and shall include, without limitation, any purchase, redemption or
other acquisition of Securities or the making of any deposit of funds or
securities pursuant to this Indenture (including, without limitation, any
deposit pursuant to Article VIII hereof).
(2) The Senior Indebtedness of the Company shall continue to
be Senior Indebtedness and entitled to the benefit of these subordination
provisions irrespective of any amendment, modification or waiver of any term of
any instrument relating to refinancing of the Senior Indebtedness. There shall
be no limit on the amount of Senior Indebtedness that the Company may incur.
(3) All the provisions of this Indenture and the Securities
shall be subject to the provisions of this Article XI so far as they may be
applicable thereto, except that nothing in this Article XI shall apply to claims
for, or payments to, the Trustee under or pursuant to Article VII of this
Indenture.
(4) No right of any holder of any Senior Indebtedness to
enforce subordination as herein provided shall at any time or in any way be
affected or impaired by any failure to act on the part of the Company, any
Paying Agent, the Holders of the Securities, the Trustee or the holders of the
Senior Indebtedness, or by any noncompliance by the Company, any Paying Agent,
the Holders of the Securities or the Trustee with any of the terms, provisions
and covenants of the Securities or this Indenture, regardless of any knowledge
thereof that any such holder of Senior Indebtedness may have or be otherwise
charged with.
SECTION 11.2. Company Not to Make Payments with Respect to
Securities in Certain Circumstances.
No Payment or Distribution shall be made by the Company, the
Trustee or any Paying Agent on account of principal of, premium, if any, or
interest on the Securities, whether upon stated maturity, upon redemption or
acceleration, or otherwise, or on account of the purchase or other acquisition
of Securities, whether upon stated maturity, upon redemption or acceleration, or
otherwise, if there shall have occurred and be continuing a default with respect
to
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any Senior Indebtedness permitting the acceleration thereof or with respect to
the payment of any Senior Indebtedness and (a) such default is the subject of a
judicial proceeding or (b) written notice of such default has been given to the
Company by any holder or holders of any Senior Indebtedness, unless and until
such default or event of default shall have been cured or waived or shall have
ceased to exist.
Upon any acceleration of the principal of the Securities or
any payment by the Company or distribution of assets of the Company of any kind
or character, whether in cash, property or securities, to creditors upon any
dissolution or winding up or liquidation or reorganization of the Company,
whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or
other proceedings, all amounts due or to become due upon all Senior Indebtedness
shall first be paid in full in cash, or payment thereof provided for to the
satisfaction of the holders thereof, before any Payment or Distribution is made
on account of the redemption price or principal of (and premium, if any) or
interest on the Securities; and (subject to the power of a court of competent
jurisdiction to make other equitable provision, which shall have been determined
by such court to give effect to the rights conferred in this Article upon the
Senior Indebtedness and the holders thereof with respect to the Securities or
the Holders thereof or the Trustee, by a lawful plan of reorganization or
readjustment under applicable law) upon any such dissolution or winding up or
liquidation or reorganization, any Payment or Distribution by the Company or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities (other than securities of the Company as reorganized or
readjusted or securities of the Company or any other company, trust or
corporation provided for by a plan of reorganization or readjustment, the
payment of which is junior or otherwise subordinate, at least to the extent
provided in this Article XI with respect to the Securities to the payment of all
Senior Indebtedness at the time outstanding and to the payment of all securities
issued in exchange therefor to the holders of the Senior Indebtedness at the
time outstanding, and the rights of the holders of Senior Indebtedness of the
Company are not altered by such plan of reorganization or readjustment), to
which the Holders of the Securities or the Trustee would be entitled except for
the provisions of this Article XI, shall be paid by the Company or by any
receiver, trustee in bankruptcy, liquidating trustee, agent or other Person
making such Payment or Distribution directly to the holders of Senior
Indebtedness of the Company or their representative or representatives, or to
the trustee or trustees under any indenture pursuant to which any instruments
evidencing any Senior Indebtedness may have been issued, as their respective
interests may appear, to the extent necessary to pay all Senior Indebtedness in
full in cash, after giving effect to any concurrent payment or distribution to
or for the holders of Senior Indebtedness, before any Payment or Distribution is
made to the Holders of the Securities or to the Trustee, except that the Trustee
will have a first priority lien for the payment of its fees, expenses and any
right to indemnity provided for herein.
In the event that, notwithstanding the foregoing, any Payment
or Distribution by the Company of any kind or character, (whether such payment
shall be in cash, property or securities) which is prohibited by the foregoing,
shall have been made to the Trustee or the Holders of the Securities before all
Senior Indebtedness is paid in full in cash, or provision is made for such
payment to the satisfaction of the holders thereof, and if such fact shall then
have been or thereafter be made known to a Trust Officer of the Trustee or, as
the case may be, such
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Holder, then and in such event such Payment or Distribution shall be paid over
by the Trustee (if the Notice required by Section 11.5 has been timely received
by the Trustee) or such Holder or delivered to the holders of Senior
Indebtedness or their representative or representatives, or to the trustee or
trustees under any indenture pursuant to which any instruments evidencing any
Senior Indebtedness may have been issued, as their respective interests may
appear, for application to the payment of all Senior Indebtedness remaining
unpaid to the extent necessary to pay all Senior Indebtedness in full in cash,
after giving effect to any concurrent Payment or Distribution to or for the
holders of such Senior Indebtedness, and, until so delivered, the same shall be
held in trust by any Holder of a Security as the property of the holders of
Senior Indebtedness..
The consolidation of the Company with, or the merger of the
Company into, another Person or the liquidation or dissolution of the Company
following the conveyance or transfer of its property as an entirety, or
substantially as an entirety, to another corporation upon the terms and
conditions provided in Article V shall not be deemed a dissolution, winding up,
liquidation or reorganization for the purposes of this Section 11.2 if such
other Person shall, as a part of such consolidation, merger, conveyance or
transfer, comply with the conditions stated in Article V. Nothing in this
Section shall apply to claims of, or payments to, the Trustee under or pursuant
to Section 7.7.
The holders of Senior Indebtedness may, at any time and from
time to time, without the consent of or notice to the Holders of the Securities,
without incurring responsibility to the Holders of the Securities and without
impairing or releasing the obligations of the Holders of the Securities
hereunder to the holders of Senior Indebtedness: (i) change the manner, place or
terms of payment or change or extend the time of payment of, or renew or alter,
Senior Indebtedness, or otherwise amend in any manner Senior Indebtedness or any
instrument evidencing the same or any agreement under which Senior Indebtedness
is outstanding; (ii) sell, exchange, release or otherwise deal with any property
pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any
Person liable in any manner for the collection of Senior Indebtedness; (iv)
apply any amounts received to any liability of the Company owing to holders of
Senior Indebtedness; and/or (v) exercise or refrain from exercising any rights
against the Company and any other Person.
SECTION 11.3. Subrogation of Securities.
Subject to the payment in full in cash of all amounts then due
(whether by acceleration of the maturity thereof or otherwise) on account of all
Senior Indebtedness at the time outstanding, the Holders of the Securities shall
be subrogated to the rights of the holders of Senior Indebtedness to receive
Payments or Distributions of cash, property or securities of the Company
applicable to the Senior Indebtedness until the principal of, premium, if any,
and interest on the Securities shall be paid in full; and, for the purposes of
such subrogation, no Payments or Distributions to the holders of Senior
Indebtedness to which the Holders of the Securities would be entitled except for
the provisions of this Article XI, and no payments over pursuant to the
provisions of this Article XI to the holders of Senior Indebtedness by Holders
of the Securities, shall, as between the Company, the Company's creditors other
than holders of Senior Indebtedness, and the Holders of the Securities, be
deemed to be a payment by the
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Company to or on account of the Senior Indebtedness. It is understood that the
provisions of this Article XI are and are intended solely for the purpose of
defining the relative rights of the Holders of the Securities, on the one hand,
and the holders of Senior Indebtedness, on the other hand.
Nothing contained in this Article XI or elsewhere in this
Indenture or in the Securities is intended to or shall impair, as among the
Company, its creditors other than the holders of Senior Indebtedness, and the
Holders of the Securities, the obligation of the Company, which is absolute and
unconditional, to pay to the Holders of the Securities the principal of,
premium, if any, and interest on the Securities as and when the same shall
become due and payable in accordance with their terms, or is intended to or
shall affect the relative rights of the Holders of the Securities and creditors
of the Company other than the holders of Senior Indebtedness, nor shall anything
herein or therein prevent the Trustee or the Holder of any Security from
exercising all remedies otherwise permitted by applicable law upon default under
this Indenture, subject to the rights, if any, under this Article XI of the
holders of Senior Indebtedness in respect of cash, property or securities of the
Company received upon the exercise of any such remedy. Nothing in this Article
XI shall prevent conversions of Securities pursuant to Article X.
Upon any payment or distribution of assets of the Company
referred to in this Article XI, the Trustee, subject to the provisions of
Section 7.1, and the Holders of the Securities shall be entitled to rely upon
any order or decree made by any court of competent jurisdiction in which any
dissolution, winding up, liquidation or reorganization proceedings are pending,
or certificate of the receiver, trustee in bankruptcy, liquidating trustee,
agent or other Person making such payment or distribution, delivered to the
Trustee or to the Holders of the Securities, for the purpose of ascertaining the
Persons entitled to participate in such distribution, the holders of Senior
Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all other
facts pertinent thereto or to this Article XI.
SECTION 11.4. Authorization by Holders of Securities.
Each holder of a Security by his acceptance thereof authorizes
and directs the Trustee on his behalf to take such action as it believes is
necessary or appropriate to effectuate, as between the Holder of the Security
and the holders of Senior Indebtedness, the subordination provided in this
Article XI and appoints the Trustee his attorney-in-fact for any and all such
purposes including, without limitation, to execute, verify, deliver and file any
proofs of claim which any holder of Senior Indebtedness may at any time require
in order to prove and realize upon any rights or claims pertaining to the
Securities and to effectuate the full benefit of the subordination contained
herein. If the Trustee shall fail to do so prior to 30 days prior to the
expiration of the period for filing such claims, any such holder of Senior
Indebtedness shall be deemed to be irrevocably appointed the agent and
attorney-in-fact of the Holder to execute, verify, deliver and file any such
proofs of claim; provided that no holder of Senior Indebtedness shall incur any
liability for any failure to exercise its right to file any such proofs of
claim.
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SECTION 11.5. Notices to Trustee.
The Company shall give prompt written notice to the Trustee of
any fact known to it which would prohibit the making of any payment of moneys to
or by the Trustee in respect of the Securities pursuant to the provisions of
this Article XI. Notwithstanding the provisions of this Article XI or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts which would prohibit the making of any payment of
moneys to or by the Trustee in respect of the Securities pursuant to the
provisions of this Article XI unless and until a Trust Officer of the Trustee
shall have received at its Corporate Trust Office written notice thereof from
the Company or a holder or holders of Senior Indebtedness or from any trustee or
agent therefor; and, prior to the receipt of any such written notice, the
Trustee, subject to the provisions of Section 7.1, shall be entitled in all
respects to assume that no such facts exist; provided, however, that if a Trust
Officer of the Trustee shall not have received at least three Business Days
prior to the date upon which by the terms hereof any such moneys may become
payable for any purpose (including, without limitation, the payment of the
principal of, premium, if any, or interest on any Security) with respect to such
moneys the notice provided for in this Section 11.5, then, anything herein
contained to the contrary notwithstanding, the Trustee shall have the full power
and authority to receive such moneys and to apply the same to the purpose for
which they were received and shall not be affected by any notice to the contrary
which may be received by it within three Business Days prior to such date or at
any time thereafter.
The Trustee shall be entitled to rely conclusively on the
delivery to it of a written notice by a Person representing himself to be a
holder of Senior Indebtedness (or a trustee on behalf of such holder) to
establish that such notice has been given by a holder of Senior Indebtedness or
a trustee or agent on behalf of any such holder. In the event that the Trustee
determines in good faith that further evidence is required with respect to the
right of any Person as a holder of Senior Indebtedness to participate in any
payment or distribution pursuant to this Article XI, the Trustee may request
such Person to furnish evidence to the reasonable satisfaction of the Trustee as
to the amount of Senior Indebtedness held by such Person, the extent to which
such Person is entitled to participate in such payment or distribution and any
other facts pertinent to the rights of such Person under this Article XI, and if
such evidence is not furnished, the Trustee may defer any payment to such Person
pending judicial determination as to the right of such Person to receive such
payment.
SECTION 11.6. Trustee's Relation to Senior Indebtedness.
The Trustee in its individual capacity shall be entitled to
all the rights set forth in this Article XI in respect of any Senior
Indebtedness at any time held by it, to the same extent as any other holder of
Senior Indebtedness, and nothing in Section 7.11 or elsewhere in this Indenture
shall deprive the Trustee of any of its rights as such holder.
With respect to the holders of Senior Indebtedness, the
Trustee undertakes to perform or to observe only such of its covenants and
obligations as are specifically set forth in this Article XI, and no implied
covenants or obligations with respect to the holders of Senior
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Indebtedness shall be read into this Indenture against the Trustee. The Trustee
and Paying Agent shall not owe any duty to the holders of Senior Indebtedness
and shall not be liable to any such holder or representative if any sums are
paid over or distributed to Holders of the Securities or the Company or any
other Person money or assets to which any holder of Senior Indebtedness shall be
entitled by virtue of this Article XI or otherwise.
SECTION 11.7. No Impairment of Subordination.
No right of any present or future holder of any Senior
Indebtedness to enforce subordination as herein provided shall at any time in
any way be prejudiced or impaired by any act or failure to act on the part of
the Company, the Trustee or the Holder of any of the Securities or by any act,
or failure to act, in good faith, by any such holder of Senior Indebtedness, or
by any noncompliance by the Company, the Trustee or the Holder of any of the
Securities with the terms, provisions and covenants of this Indenture,
regardless of any knowledge thereof which any such holder may have or otherwise
be charged with.
SECTION 11.8. Article XI Not To Prevent Events of Default.
The failure to make a payment on account of principal of,
premium, if any, or interest on the Securities by reason of any provision in
this Article XI shall not be construed as preventing the occurrence of an Event
of Default with respect to such Securities under Section 6.1.
SECTION 11.9. Paying Agents other than the Trustee.
In any case at any time any Paying Agent other than the
Trustee shall have been appointed by the Company and be then acting hereunder,
the term "Trustee" as used in this Article XI shall in such case (unless the
context shall otherwise require) be construed as extending to and including such
Paying Agent within its meaning as fully for all intents and purposes as if such
Paying Agent were named in this Article XI in addition to or in place of the
Trustee.
SECTION 11.10. Securities Senior to Subordinated
Indebtedness.
The indebtedness represented by the Securities will be senior
and prior in right of payment to all Subordinated Indebtedness, to the extent
and in the manner provided in such Subordinated Indebtedness.
ARTICLE XII.
CHANGE IN CONTROL
SECTION 12.1. Right to Require Repurchase.
In the event that there shall occur a Change in Control (as
defined in Section 12.5), each Holder shall have the right, at such Holder's
option, to require the Company to purchase, and upon the exercise of such right,
the Company shall, subject to the provisions of
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Article XI, purchase, all or any part of such Holder's Securities on the date
(the "Repurchase Date") that is 75 days after the date the Company gives notice
of the Change in Control as contemplated in Section 12.2(1) at a price (the
"Repurchase Price") equal to 101% of the principal amount thereof, together with
accrued and unpaid interest to the Repurchase Date. In connection with the
exercise of the repurchase right by a Holder prior to a Redemption Date, a
Holder's right to exercise his repurchase right shall terminate at the close of
business on the Business Day prior to the Redemption Date.
SECTION 12.2. Notice; Method of Exercising Repurchase Right.
(1) On or before the 15th day after the occurrence of a Change
in Control, the Company or, at the written request of the Company, the Trustee
(in the name and at the expense of the Company), shall give notice of the
occurrence of the Change in Control and of the repurchase right set forth herein
arising as a result thereof by first-class mail, postage prepaid, to each Holder
at such Holder's address appearing in the Security Register. The Company shall
also deliver a copy of such notice of a repurchase right to the Trustee.
Each notice of a repurchase right shall state:
(a) the event constituting the Change in Control and
the date thereof;
(b) the Repurchase Date;
(c) the date by which the repurchase right must be
exercised;
(d) the Repurchase Price; and
(e) the procedures a Holder must follow to exercise a
repurchase right.
No failure of the Company to give the foregoing notice shall
limit any Holder's right to exercise a repurchase right. The Trustee shall have
no affirmative obligation to determine if there shall have occurred a Change in
Control.
(2) To exercise a repurchase right, a Holder shall deliver to
the Company (or an agent designated by the Company for such purpose in the
notice referred to in (1) above) and to the Trustee on or before the tenth day
prior to the Repurchase Date (a) written notice of the Holder's exercise of such
right, which notice shall set forth the name of the Holder, the principal amount
of the Security or Securities (or portion of a Security) to be repurchased and a
statement that an election to exercise the repurchase right is being made
thereby and (b) the Security or Securities with respect to which the repurchase
right is being exercised, duly endorsed for transfer to the Company. Such
written notice shall be irrevocable. If the Repurchase Date falls between any
Regular Record Date and the next succeeding Interest Payment Date, Securities to
be repurchased must be accompanied by payment from the Holder of an amount equal
to the interest thereon which the registered Holder thereof is to receive on
such Interest Payment Date. A Holder that fails to exercise a repurchase right
in accordance with the terms hereof shall waive
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such repurchase right but the rights of such Holder to receive principal of and
interest on the Securities and all other rights of such Holder under this
Indenture shall not be affected thereby.
(3) In the event a repurchase right shall be exercised in
accordance with the terms hereof, the Company shall on the Repurchase Date pay
or cause to be paid in cash to the Holder thereof the Repurchase Price of the
Security or Securities as to which the repurchase right has been exercised. In
the event that a repurchase right is exercised with respect to less than the
entire principal amount of a surrendered Security, the Company shall execute and
deliver to the Trustee and the Trustee shall authenticate for issuance in the
name of the Holder a new Security or new Securities in the aggregate principal
amount of the unrepurchased portion of such surrendered Security.
SECTION 12.3. Deposit Of Repurchase Price .
On or prior to the Repurchase Date, the Company shall deposit
with the Trustee or with a Paying Agent (or, if the Company is acting as its own
Paying Agent, segregate and hold in trust as provided in Section 2.4) an amount
of money sufficient to pay the Repurchase Price of the Notes which are to be
repaid on the Repurchase Date.
SECTION 12.4. Securities Not Repurchased On Repurchase Date.
If any Security surrendered for repurchase shall not be so
paid on the Repurchase Date, the principal shall, until paid, bear interest to
the extent permitted by applicable law from the Repurchase Date at the rate per
annum borne by such Security.
SECTION 12.5 "Change In Control" Defined
For purposes of this Article, "Change In Control" means any of
the following events that occur after the date of this Indenture and on or prior
to such date as no Securities remain outstanding:
(1) all or substantially all of the Company's assets are sold
as an entirety to any person or related group of persons;
(2) there shall be consummated any consolidation or merger of
the Company (a) in which the Company is not the continuing or surviving
corporation (other than a consolidation or merger with a wholly-owned subsidiary
of the Company in which all Common Stock outstanding immediately prior to the
effectiveness thereof are changed into or exchanged for the same consideration)
or (b) pursuant to which the Common Stock are converted into cash, securities
or other property, in each case other than a consolidation or merger of the
Company in which the holders of the Common Stock immediately prior to the
consolidation or merger have, directly or indirectly, at least a majority of the
common stock of the continuing or surviving corporation immediately after such
consolidation or merger; or
(3) any person, or any persons acting together which would
constitute a "group" for purposes of Section 13(d) of the Securities Exchange
Act of 1934 (a "Group"), together with
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any Affiliates thereof, shall acquire beneficial ownership (as defined in Rule
13d-3 under the Securities Exchange Act of 1934) of at least 50% of the total
voting power of all classes of Capital Stock of the Company entitled to vote
generally in the election of directors of the Company.
Notwithstanding anything to the contrary set forth in this
definition, a Change in Control shall not be deemed to have occurred:
(A) under paragraph (3) above, solely by virtue of the
Company, any Subsidiary, any employee share purchase plan, share option plan or
other share incentive plan or program, retirement plan or automatic dividend
reinvestment plan or any substantially similar plan of the Company or any
Subsidiary or any Person holding securities of the Company for or pursuant to
the terms of any such employee benefit plan, filing or becoming obligated to
file a report under or in response to Schedule 13D or Schedule 14D-1 (or any
successor schedule, form or report) under the Securities Exchange Act of 1934
disclosing beneficial ownership by it of Capital Stock of the Company, whether
at least 50% of the total voting power referred to in paragraph (3) above, or
otherwise; or
(B) under paragraphs (1), (2) or (3) above if:
(i) the Current Market Price of the Common Stock
on the date the Change in Control shall have occurred is at least equal to 105%
of the conversion price in effect immediately preceding the time of such Change
in Control; or
(ii) all of the consideration (excluding cash
payments for fractional shares) in the transaction giving rise to such Change in
Control to the holders of Common Stock consists of common stock that is, or
immediately upon issuance will be, listed on a national securities exchange or
quoted on the Nasdaq National Market, and as a result of such transaction the
Securities become convertible solely into such common stock; or
(iii) the consideration in the transaction giving
rise to such Change in Control to the holders of Common Stock consists of cash,
securities that are, or immediately upon issuance will be, listed on a national
securities exchange or quoted on the Nasdaq National Market, or a combination of
cash and such securities, and the aggregate fair market value of such
consideration (which, in the case of such securities, shall be equal to the
average of the daily Closing Prices of such securities during the ten
consecutive Trading Days commencing with the sixth Trading Day following
consummation of such transaction) is at least 105% of the conversion price in
effect on the date immediately preceding the closing date of such transaction.
If a Change in Control shall have occurred under paragraph (2)
above, the Company shall deliver the Officers' Certificate and Opinion of
Counsel called for under Section 13.4 as well as the notices called for under
Section 10.5.
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For purposes of this definition of Change of Control, "Current
Market Price" on any date means the average daily Closing Prices for the five
consecutive Trading Days selected by the Company commencing not more than ten
Trading Days before, and ending not later than, the date in question; and
"Trading Day", with respect to any stock exchange or securities market, means
any Monday, Tuesday, Wednesday, Thursday or Friday on which such stock exchange
or securities market is open for business.
ARTICLE XIII.
MISCELLANEOUS
SECTION 13.1. Trust Indenture Act Controls.
If any provision of this Indenture limits, qualifies or
conflicts with another provision which is required to be included in this
Indenture by the TIA, the required provisions shall control. The provisions of
TIA Sections 310 through 317 that impose duties on any Person (including the
provisions automatically deemed included herein unless expressly excluded by
this Indenture) are a part of and govern this Indenture, whether or not
physically contained herein.
SECTION 13.2. Notices.
Any notices or other communications required or permitted
hereunder shall be in writing, and shall be sufficiently given if made by hand
delivery, or first class mail, postage prepaid (except that any notice by the
Trustee to the Company of a default or an Event of Default under this Indenture
shall be by registered or certified mail, postage prepaid, return receipt
requested), or by a nationally-recognized overnight express courier service
(which notices or communications shall be deemed received, in the case of the
Company, the business day after the receipt thereof by such service and, in the
case of the Trustee, upon receipt), addressed as follows:
if to the Company:
American Retirement Corporation
111 Westwood Place
Suite 402
Brentwood, Tennessee 37027
Attention: Chief Financial Officer
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Telephone: 615-221-2250
Telecopier: 615-221-2269
if to the Trustee:
IBJ Schroder Bank & Trust Company
Corporate Trust Office
One State Street
New York, New York 10004
Telephone: 212-858-2815
Telecopier: 212-858-2952
The Company or the Trustee by notice to the other may designate additional or
different addresses as shall be furnished in writing by either party. Any notice
or communication to the Company or the Trustee shall be deemed to have been
given or made as of the date so delivered if personally delivered, and five (5)
calendar days after mailing if sent by registered or certified mail (except that
a notice of change of address shall not be deemed to have been given until
actually received by the addressee).
Any notice or communication mailed to a Securityholder shall
be mailed to the address of such Securityholder as it appears on the
registration books of the Registrar and shall be sufficiently given if so mailed
within the time prescribed.
Failure to mail a notice or communication to a Securityholder
or any defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
In case by reason of the suspension of regular mail service,
or by reason of any other cause, it shall be impossible to mail any notice, as
required by this Indenture, then such method of notification as shall be made
with the approval of the Trustee shall constitute a sufficient mailing of such
notice.
If the Company mails any notice or communication to
Securityholders, it shall mail a copy to the Trustee and all Agents at the same
time.
SECTION 13.3. Communications by Holders with Other Holders.
Securityholders may communicate pursuant to TIA ss. 312(b)
with other Securityholders with respect to their rights under this Indenture or
the Securities. The Company, the Trustee, the Registrar and anyone else shall
have the protection of TIA ss. 312(c).
SECTION 13.4. Certificate and Opinion as to Conditions
Precedent.
Upon any request or application by the Company to the Trustee
to take any action under this Indenture, or upon the request of the Trustee with
respect to any matter relating to the
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performance of its rights, duties or obligations hereunder, the Company shall
furnish to the Trustee:
(1) an Officers' Certificate (which shall include the
statements set forth in Section 13.5) stating that, in the
opinion of the signers, all conditions precedent, if any,
provided for in this Indenture relating to the proposed action
have been complied with; and
(2) an Opinion of Counsel (which shall include the
statements set forth in Section 13.5) stating that, in the
opinion of such counsel, all such conditions precedent have
been complied with.
SECTION 13.5. Statements Required in Certificate and Opinion.
Each Certificate and Opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(1) a statement that the Person making such
certificate or opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of
the examination or investigation upon which the statements or
opinions contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such Person,
he has made such examination or investigation as is necessary
to enable him to express an informed opinion as to whether or
not such covenant or condition has been complied with; and
(4) a statement as to whether or not, in the opinion
of such Person, such covenant or condition has been complied
with.
SECTION 13.6. Rules by Trustee and Agents.
The Trustee may make reasonable rules for action by or at a
meeting of Securityholders. The Registrar, Paying Agent or Conversion Agent may
make reasonable rules for its functions.
SECTION 13.7. Record Date.
Whenever the Company or the Trustee solicits an act of
Securityholders, the Company or the Trustee may fix in advance of the
solicitation of such act a date as the record date for determining
Securityholders entitled to perform said act. The record date shall be not more
than 15 days prior to the date fixed for the solicitation of said act.
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SECTION 13.8. Legal Holidays.
A "Legal Holiday" is a Saturday, a Sunday or a day on which
banks or trust companies in the city in which either the Trustee or the Company
is located are not required to be open. If a payment date is a Legal Holiday at
a place of payment, payment may be made at that place on the next succeeding day
that is not a Legal Holiday, and no interest shall accrue for the intervening
period.
SECTION 13.9. Governing Law.
The laws of the State of New York shall govern this Indenture
and the Securities without regard to principles of conflicts of law. Each of the
parties hereto agrees to submit to the jurisdiction of the Courts of the State
of New York and the U.S. Federal Courts, in each case sitting in the Borough of
Manhattan, and waives any objection as to venue or forum non conveniens.
SECTION 13.10. No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture,
loan or debt agreement of the Company or a Subsidiary. Any such indenture, loan
or debt agreement may not be used to interpret this Indenture.
SECTION 13.11. No Recourse Against Others.
No shareholder, director or officer, as such, past, present or
future, of the Company or of any successor corporation or trust shall have any
liability for any obligation of the Company under the Securities or the
Indenture or for any claim based on, in respect of or by reason of, such
obligations or their creation. Each Holder of a Security by accepting a Security
waives and releases all such liability. The waiver and release are part of the
consideration for the issuance of the Securities.
SECTION 13.12. Successors.
All agreements of the Company in this Indenture and the
Securities shall bind its successor. All agreements of the Trustee in this
Indenture shall bind its successor.
SECTION 13.13. Multiple Counterparts.
The parties may sign multiple counterparts of this Indenture.
Each signed counterpart shall be deemed an original, but all of them together
represent the same agreement.
SECTION 13.14. Table of Contents, Headings, etc.
The table of contents, cross-reference sheet and headings of
the Articles and Sections of this Indenture have been inserted for convenience
of reference only, are not to be considered a part hereof, and shall in no way
modify or restrict any of the terms or provisions hereof.
-53-
<PAGE> 59
SECTION 13.15. Severability.
In case any provision in this Indenture or in the Securities
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby, and a Holder shall have no claim therefor against any party
hereto.
(Signature page follows.)
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<PAGE> 60
IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed, all as of the date first written above.
AMERICAN RETIREMENT CORPORATION,
a Tennessee corporation
By:
------------------------------------
Name:
Title:
By:
------------------------------------
Name:
Title:
IBJ SCHRODER BANK & TRUST COMPANY,
----------------------------,
as Trustee
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<PAGE> 61
EXHIBIT A
FORM OF SECURITY
[Attached]
<PAGE> 62
FORM OF SECURITY
[FORM OF FACE OF SECURITY]
AMERICAN RETIREMENT CORPORATION
___% Convertible Subordinated Debenture Due 2002
AMERICAN RETIREMENT CORPORATION, a Tennessee corporation,
promises to pay to ________________________________ or registered assigns, the
principal sum of _____________ Dollars, on _______, 2002.
Interest Payment Dates: _________ and ___________
Record Dates: __________ and ___________
Additional provisions of this Security are set forth on other
side of this Security.
Dated:
CERTIFICATE OF AUTHENTICATION AMERICAN RETIREMENT CORPORATION
IBJ SCHRODER BANK & TRUST
COMPANY
as Trustee, certifies that this
is one of the Securities referred By:
to in the within mentioned -----------------------------
Indenture.
By: By:
------------------------------ -----------------------------
Authorized Signatory
<PAGE> 63
[FORM OF REVERSE OF SECURITY]
AMERICAN RETIREMENT CORPORATION
___% Convertible Subordinated Debenture Due 2002
1. Interest. American Retirement Corporation, a Tennessee
corporation (the "Company"), promises to pay interest on the principal amount of
this Security at the rate per annum shown above. The Company will pay interest
semiannually on _________ and _________ of each year beginning __________, 1998.
Interest on the Securities will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from ___________, 1997;
provided that, if there is no existing Default in the payment of interest, and
if this Security is authenticated between a record date referred to on the face
hereof and the next succeeding interest payment date, interest shall accrue from
such interest payment date. Interest will be computed on the basis of a 360 day
year of twelve 30-day months.
2. Method of Payment. The Company will pay interest on the
Securities (except defaulted interest) to the persons who are the registered
Holders of the Securities at the close of business on the ________ or __________
immediately preceding the interest payment date. Holders must surrender
Securities to a Paying Agent to collect final principal and premium payments.
The Company will pay principal, premium and interest in money of the United
States that at the time of payment is legal tender for payment of public and
private debts. The Company, however, may pay principal, premium and interest by
its check payable in such money. It may mail an interest check to a Holder's
registered address.
The payment of principal of and premium, if any, on this
Security shall be payable only upon surrender of this Security at the office or
agency of the Paying Agent in the Borough of Manhattan, City and State of New
York. Payments of principal of, premium, if any, and interest on this Security
shall be made at the office or agency of the Trustee maintained in the Borough
of Manhattan, City and State of New York, or, in the case of any such payments
other than the payment of principal and premium, if any, at the Company's
option, by check mailed to the Person entitled thereto at such Person's address
last appearing on the Company's register.
3. Registrar and Agents. Initially, IBJ Schroder Bank & Trust
Company ("IBJ") will act as Registrar, Paying Agent, Conversion Agent and agent
for service of notices and demands. The Company may change any Registrar,
co-registrar, Paying Agent, Conversion Agent and agent for service of notices
and demands without notice. The Company or any of its Subsidiaries may act as
Paying Agent or Conversion Agent. The address of IBJ is One State Street, New
York, New York 10004.
4. Indenture; Limitations. The Company issued the Securities
under an Indenture, dated as of ___________, 1997 (the "Indenture"), between the
Company and IBJ (the "Trustee"). Capitalized terms herein are used as defined in
the Indenture unless otherwise defined herein. The terms of the Securities
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (15 U.S. Code ss.ss. 77aaa-
<PAGE> 64
77bbbb) as in effect on the date of the Indenture. The Securities are subject to
all such terms, and the Holders of the Securities are referred to the Indenture
and said Act for a statement of them.
The Securities are general unsecured obligations of the Company
limited to $_____________ principal amount. The Indenture imposes certain
limitations on the ability of the Company to, among other things, make payments
in respect of its Capital Stock, merge or consolidate with any other Person or
transfer substantially all of its assets.
5. Optional Redemption by the Company. The Company may, at its
option, redeem the Securities at any time or from time to time, in whole or in
part, together with accrued and unpaid interest to the Redemption Date, on or
after _________, 2000 at a redemption price equal to 100% of the principal
amount thereof.
6. Notice of Redemption. Notice of redemption will be mailed at
least 30 days but not more than 60 days before the Redemption Date to each
Holder of Securities to be redeemed at his registered address. Securities in
denominations larger than $1,000 principal amount may be redeemed in part, but
only in whole multiples thereof. On and after the Redemption Date interest
ceases to accrue on Securities or portions of them called for redemption.
7. Conversion. A Holder of a Security may convert such Security
into shares of common stock of the Company at any time on or after December 31,
1997 until the close of business on _________, 2002. If the Security is called
for redemption, the Holder may convert it at any time before the close of
business on the date fixed for such redemption. The initial conversion price is
$_____ per share, subject to adjustment in certain events. To determine the
number of shares issuable upon conversion of a Security, divide the principal
amount to be converted by the conversion price in effect on the conversion date.
The Company will deliver a check for any fractional share.
To convert a Security, a Holder must (1) complete and sign the
conversion notice on the back of the Security, (2) surrender the Security to the
Conversion Agent, (3) furnish appropriate endorsements and transfer documents if
required by the Registrar or Conversion Agent, and (4) pay any transfer or
similar tax if required. No payment or adjustment is to be made on conversion
for interest accrued hereon or for dividends on shares of common stock issued on
conversion; provided, however, that if a Security is surrendered for conversion
after the record date for a payment of interest and on or before the interest
payment date, then, notwithstanding such conversion, the interest falling due to
such interest payment date will be paid to the Person in whose name the Security
is registered at the close of business on such record date and any Security
surrendered for conversion during the period from the close of business on any
regular record date to the opening of business on the corresponding interest
payment date must be accompanied by payment of an amount equal to the interest
payable on such interest payment date. A Holder may convert a portion of a
Security if the portion is $1,000 principal amount or an integral multiple
thereof.
-2-
<PAGE> 65
If the Company is a party to a consolidation or merger or a
transfer or lease of all or substantially all of its assets, the right to
convert a Security into shares of common stock may be changed into a right to
convert it into securities, cash or other assets of the Company or another
Person.
8. Subordination. This Security is subordinated to all Senior
Indebtedness of the Company. To the extent and in the manner provided in the
Indenture, Senior Indebtedness must be paid before any payment may be made to
any Holders of Securities. Any Securityholder by accepting this Security agrees
to such subordination and authorizes the Trustee to give it effect.
In addition to all other rights of Senior Indebtedness described
in the Indenture, the Senior Indebtedness shall continue to be Senior
Indebtedness and entitled to the benefits of the subordination provisions
irrespective of any amendment, modification or waiver of any term of any
instrument relating to the Senior Indebtedness or extension or renewal of the
Senior Indebtedness.
9. Right to Require Repurchase. In certain circumstances
involving the occurrence of a Change in Control (as defined in the Indenture),
the Holder hereof shall have the right to require the Company to repurchase this
Security at 101% of the principal amount hereof, together with accrued
interest to the Repurchase Date, or as provided in the Indenture. In connection
with the exercise of the repurchase right by a Holder prior to a Redemption
Date, a Holder's right to exercise such repurchase right shall terminate at the
close of business on the Business Day prior to the Redemption Date.
10. Denominations, Transfer, Exchange. The Securities issued
under the Indenture are in the aggregate principal amount of up to
$100,000,000. The Securities are in registered form without coupons in
denominations of $1,000 principal amount and integral multiples thereof. A
Holder may register the transfer of or exchange Securities in accordance with
the Indenture. The Registrar may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and to pay any taxes and
fees required by law or permitted by the Indenture. The Registrar need not
register the transfer of or exchange any Securities selected for redemption or
register the transfer of or exchange any Securities for a period of 15 days
before a selection of Securities to be redeemed.
11. Persons Deemed Owners. The registered Holder of a Security
may be treated as its owner for all purposes.
12. Unclaimed Money. If money for the payment of principal or
interest on any Securities remains unclaimed for two years, the Trustee and the
Paying Agent will pay the money back to the Company at its written request.
After that, Holders may look only to the Company for payment.
13. Discharge Prior to Redemption or Maturity. The Indenture
will be discharged and canceled except for certain sections thereof upon payment
of all the Securities, or upon the irrevocable deposit with the Trustee of funds
or U.S. Government Obligations maturing
-3-
<PAGE> 66
on or before such payment date or Redemption Date, sufficient to pay principal,
premium, if any, and interest on such payment or redemption.
14. Amendment and Waiver. Subject to certain exceptions, without
notice to the Holders of the Securities, the Indenture or the Securities may be
amended with the consent of the Holders of at least 66-2/3% in principal amount
of the Securities then outstanding and any existing default or compliance with
any provision may be waived with the consent of the Holders of a majority in
principal amount of the Securities then outstanding. Without the consent of or
notice to any Securityholder, the Company may amend or supplement the Indenture
or the Securities to, among other things, provide for uncertificated Securities,
to cure any ambiguity, defect or inconsistency or make any other change that
does not adversely affect the rights of any Securityholder.
15. Successors. When a successor assumes all the obligations of
its predecessor under the Securities and the Indenture, the predecessor will be
released from those obligations.
16. Defaults and Remedies. If an Event of Default, as defined in
the Indenture (other than a Event of Default relating to bankruptcy of the
Company), occurs and is continuing, the Trustee or the Holders of a majority in
principal amount of Securities may declare all the Securities to be due and
payable immediately in the manner and with the effect provided in the Indenture.
If an Event of Default relating to bankruptcy of the Company occurs, then all
Securities shall become immediately due and payable without any declaration or
act on the part of the Trustee or any Holder. Holders of Securities may not
enforce the Indenture or the Securities except as provided in the Indenture. The
Trustee may require indemnity satisfactory to it, subject to the provisions of
the TIA, before it enforces the Indenture or the Securities. Subject to certain
limitations, Holders of a majority in principal amount of the Securities then
outstanding may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Holders of Securities notice of any continuing default
(except a default in payment of principal or interest) if it determines that
withholding notice is in their interests. The Company is required to file
periodic reports with the Trustee as to the absence of any Default or Event of
Default.
17. Trustee Dealings with the Company. IBJ Schroder Bank & Trust
Company, the Trustee under the Indenture, in its individual or any other
capacity, may make loans to, accept deposits from, and perform services for the
Company or its Affiliates, and may otherwise deal with the Company or its
Affiliates, as if it were not Trustee.
18. No Recourse Against Others. No shareholder, director,
officer or incorporator, as such, past, present or future, of the Company or any
successor corporation shall have any liability for any obligation of the Company
under the Securities or the Indenture or for any claim based on, in respect of
or by reason of, such obligations or their creation. Each Holder of a Security
by accepting a Security waives and releases all such liability. The waiver and
release are part of the consideration for the issuance of the Securities.
-4-
<PAGE> 67
19. Authentication. This Security shall not be valid until the
Trustee signs the certificate of authentication on the other side of this
Security.
20. Abbreviations. Customary abbreviations may be used in the
name of a Securityholder or an assignee, such as: TEN COM (=tenants in common),
TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with rights of
survivorship and not as tenants in common), CUST (=Custodian), and U/G/M/A
(=Uniform Gifts to Minors Act).
The Company will furnish to any Securityholder upon written
request and without charge a copy of the Indenture. It also will furnish the
text of this Security in larger type. Requests may be made to: American
Retirement Corporation, 111 Westwood Place, Suite 402, Brentwood, Tennessee
37027. Attention: Chief Financial Officer.
-5-
<PAGE> 68
TRANSFER NOTICE
If you, the Holder, want to assign this Security, fill in the form below and
have your signature guaranteed:
- --------------------------------------------------------------------------------
For value received, I or we assign and transfer this Security to
(INSERT ASSIGNEE'S SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
agent
- --------------------------------------------------------------------------
to transfer this Security on the books of the Company. The agent may substitute
another to act for him.
Date:
--------------------------------------------------------------------------
Your signature:
----------------------------------------------------------------
(Sign exactly as your name appears on the other side of this Security)
Signature Guaranteed by*:
------------------------------------------------------
* Signature must be guaranteed by an eligible guarantor institution within the
meaning of Securities and Exchange Commission Rule 17Ad-15 (including banks,
stock brokers, savings and loan associations, national securities exchanges,
registered securities associations, clearing agencies and credit unions) with
membership or participation in the Securities Transfer Agents Medallion Program
("STAMP") or such other signature guarantee medallion program as may be approved
by the Registrar in addition to, or substitution for, STAMP, if this Security is
to be delivered other than to and in the name of the registered holder.
<PAGE> 69
CONVERSION NOTICE
To convert this Security into shares of common stock of the
Company, check the box:
[ ]
To convert only part of this Security, state the principal amount to be
converted (which must be a minimum of $1,000 or any multiple thereof):
[$ ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If you want the Security certificate, if any, made out in another person's name,
fill in the form below:
(INSERT OTHER PERSON'S SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER)
[ ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
Date:
---------------------------------------------------------------------------
Your signature:
-----------------------------------------------------------------
(Sign exactly as your name appears on the other side of this Security)
Signature Guaranteed By*:_______________________________________________________
*Signature must be guaranteed by an eligible guarantor institution within the
meaning of Securities and Exchange Commission Rule 17Ad-15 (including banks,
stock brokers, savings and loan associations, national securities exchanges,
registered securities associations, clearing agencies and credit unions) with
membership or participation in the Securities Transfer Agents Medallion Program
("STAMP") or such other signature guarantee medallion program as may be approved
by the Registrar in addition to, or substitution for, STAMP, if this Security is
to be delivered other than to and in the name of the registered holder.
<PAGE> 1
B A S S, B E R R Y & S I M S P L C
A PROFESSIONAL LIMITED LIABILITY COMPANY
ATTORNEYS AT LAW
2700 FIRST AMERICAN CENTER 1700 RIVERVIEW TOWER
NASHVILLE, TENNESSEE 37238-2700 POST OFFICE BOX 1509
TELEPHONE (615) 742-6200 KNOXVILLE, TENNESSEE 37901-1509
TELECOPIER (615) 742-6293 TELEPHONE (423) 521-6200
TELECOPIER (423) 521-6234
September 22, 1997
American Retirement Corporation
111 Westwood Place, Suite 402
Brentwood, Tennessee 37027
Re: Registration Statement on Form S-1 (File No. 333-34339)
Ladies and Gentlemen:
We have acted as your counsel in connection with your preparation of a
Registration Statement on Form S-1 (the "Registration Statement") filed by you
with the Securities and Exchange Commission on August 26, 1997, covering
$115,000,000 principal amount of Convertible Subordinated Debentures (the
"Debentures") of American Retirement Corporation (the "Company") to be sold by
the Company to Schroder & Co. Inc. (the "Underwriter") for public distribution
pursuant to the Underwriting Agreement between the Company and the Underwriter
filed as an exhibit to the Registration Statement. Such $115,000,000 principal
amount of Debentures includes $15,000,000 principal amount of Debentures that
may be purchased by the Underwriter pursuant to the exercise of an option to
cover over-allotments.
In connection with this opinion, we have examined and relied upon such
records, documents, certificates, and other instruments as in our judgment are
necessary or appropriate in order to express the opinions hereinafter set forth
and have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, and the conformity to original documents
of all documents submitted to us as certified or photostatic copies.
Based on the foregoing and such other matters as we have deemed
relevant, we are of the opinion that the Debentures to be sold by the Company,
when issued and delivered in the manner and on the terms described in the
Registration Statement, will be validly issued, fully paid, and nonassessable.
We hereby consent to the reference to our law firm in the Registration
Statement under the caption "Legal Matters" and to the use of this opinion as an
exhibit to the Registration Statement.
Very truly yours,
/s/ Bass, Berry & Sims PLC
<PAGE> 1
EXHIBIT 23.1
The Board Of Directors of
American Retirement Corporation:
The audits of American Retirement Communities, L.P. referred to in our report
dated January 22, 1997, except for Note 16, which is as of June 4, 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, except for Note 16, which is as of June 4, 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.
/s/ KPMG PEAT MARWICK LLP
------------------------
KPMG Peat Marwick LLP
Nashville, Tennessee
September 22, 1997
