<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1997
REGISTRATION NO. 333-23197
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
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 MAY 12, 1997
PROSPECTUS
3,125,000 SHARES
[AMERICAN RETIREMENT CORPORATION LOGO]
COMMON STOCK
------------------
All of the shares of Common Stock, par value $.01 per share (the "Common
Stock"), of American Retirement Corporation (the "Company") offered hereby (the
"Offering") are being offered by the Company. Prior to the Offering, there has
been no public market for the Common Stock. It is currently anticipated that the
initial public offering price will be between $15.00 and $17.00 per share. See
"Underwriting" for information relating to the factors to be considered in
determining the initial public offering price. Approximately $25.0 million of
the net proceeds of the Offering will be received by the existing shareholders
of the Company. See "The Company -- Pending Reorganization" and "Certain
Transactions -- Pending Reorganization." It is anticipated that approximately
500,000 shares of Common Stock will be offered outside of the United States.
The Common Stock has been approved for listing on The New York Stock
Exchange (the "NYSE") under the symbol "ACR." At the request of the Company, up
to 300,000 shares of Common Stock have been reserved for sale in the Offering to
certain individuals, including directors and employees of the Company, members
of their families, and other persons having business relationships with the
Company. See "Underwriting."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- -------------------------------------------------------------------------------------------------------------
Total(3)................................... $ $ $
=============================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $900,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 468,750 shares of Common Stock on the same terms and
conditions as set forth above solely to cover over-allotments, if any. See
"Underwriting." If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, and Proceeds to Company will
be $ , $ , and $ , respectively.
------------------
The shares of Common Stock are offered by the Underwriters when, as, and if
delivered to and accepted by the Underwriters, and subject to various prior
conditions, including the right to withdraw, cancel, or modify the Offering and
to reject orders in whole or in part. It is expected that delivery of stock
certificates will be made in New York, New York on or about , 1997.
------------------
NATWEST SECURITIES LIMITED
EQUITABLE SECURITIES CORPORATION
MCDONALD & COMPANY
SECURITIES, INC.
The date of this Prospectus is , 1997
<PAGE> 3
FOR UNITED KINGDOM PURCHASERS: This Prospectus has not been registered in
the United Kingdom and, accordingly, the shares of Common Stock offered hereby
may not be and are not being offered or sold in the United Kingdom other than to
persons whose ordinary activities involve them in acquiring, holding, managing,
or disposing of investments, whether as principal or agent (except in
circumstances that do not constitute an offer to the public within the meaning
of the Public Offers of Securities Regulations 1995 or the Financial Services
Act 1986), and this Prospectus may only be issued or passed on to any person in
the United Kingdom if that person is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996
or a person to whom this Prospectus may otherwise lawfully be passed on.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS, AND PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Prospective investors
should consider carefully the information set forth under "Risk Factors."
Immediately prior to the consummation of the Offering, American Retirement
Communities, L.P. ("ARCLP" or the "Predecessor") will be reorganized (the
"Reorganization") such that all of ARCLP's assets and liabilities will be
contributed to the Company in exchange for a total of 7,812,500 shares of Common
Stock, which will be immediately distributed to ARCLP's partners, and a
promissory note in the principal amount of $25.0 million (the "Reorganization
Note"). See "The Company -- Pending Reorganization." Unless otherwise indicated,
all information in this Prospectus (i) gives effect to the Reorganization, and
(ii) assumes no exercise of the Underwriters' over-allotment option. Unless the
context otherwise requires, references to the Company include the Company, its
subsidiary partnerships and corporations, and the Predecessor.
THE COMPANY
The Company is a national senior living and health care services company
providing a broad range of care and services to the elderly, including
independent living, assisted living, skilled nursing, and home health care
services. The Company has pioneered numerous developments in the provision of
care and services for the elderly since its inception in 1978, and believes it
ranks among the leading operators in the senior living and health care services
industry. Currently, the Company operates 19 senior living communities in 12
states, consisting of ten owned communities, two leased communities, and seven
managed communities, with an aggregate capacity for approximately 5,500
residents. In May 1997, the Company expects to acquire an additional community
with capacity for 90 residents and to commence operating an additional leased
community with capacity for 90 residents. The Company also owns and operates
eight home health care agencies. At March 31, 1997, the Company's owned
communities had an occupancy rate of 94%, its leased communities had an
occupancy rate of 95%, and its managed communities had an occupancy rate of 93%.
For the year ended December 31, 1996, and the three months ended March 31, 1997,
revenues attributable to the Company's senior living communities accounted for
91.5% and 90.5%, respectively, of the Company's total revenues, and revenues
attributable to the Company's home health care agencies accounted for 6.2% and
7.0%, respectively, of the Company's total revenues. Approximately 92.1% of the
Company's total revenues for the year ended December 31, 1996 and approximately
91.1% of the Company's total revenues for the three months ended March 31, 1997
were derived from private pay sources.
Since 1992, the Company has experienced significant growth, primarily
through the acquisition of 11 senior living communities. The Company's revenues
have grown from $17.8 million in 1992 to $75.6 million in 1996, an average
annual growth rate of 43.5%. During the same period, the Company's income from
operations has grown from $2.3 million to $15.6 million, an average annual
growth rate of 61.7%. The Company intends to continue its growth through a
combination of (i) development of free-standing assisted living residences,
including special living units and programs for residents with Alzheimer's and
other forms of dementia; (ii) selective acquisitions of senior living
communities, including assisted living residences; (iii) expansion of existing
communities; and (iv) development and acquisition of home health care agencies.
As part of its growth strategy, the Company is currently developing 21
free-standing assisted living residences, with an estimated aggregate capacity
for 1,826 residents, and is expanding eight of its existing communities to add
capacity to accommodate an additional 704 residents. The Company has also
entered into a letter of intent to acquire one additional home health care
agency and intends to commence operations at five additional home health care
agencies during 1997.
The Company was founded by Dr. Thomas F. Frist, Sr. and Jack C. Massey, the
principal founders of Hospital Corporation of America (now a subsidiary of
Columbia/HCA Healthcare Corporation). The Company's operating philosophy was
inspired by Dr. Frist's and Mr. Massey's vision to enhance the lives of the
elderly by providing the highest quality of care and services in well-operated
communities designed to improve and protect the quality of life, independence,
personal freedom, privacy, spirit, and dignity of its residents. The Company
believes that its senior management, led by W.E. Sheriff, its Chairman and Chief
3
<PAGE> 5
Executive Officer, and Christopher J. Coates, its President and Chief Operating
Officer, is one of the most experienced management teams in the senior living
industry. The Company's 12 senior officers have been employed by the Company for
an average of nine years and have an average of 14 years of industry experience.
The executive directors of the Company's communities have been employed by the
Company for an average of four years and have an average of 11 years of
experience in the senior living industry.
The Company's target market, which consists of seniors age 75 and older, is
one of the fastest growing segments of the United States population. According
to the United States Census Bureau, this age group is expected to grow from 13.2
million in 1990 to over 16.6 million by 2000, an increase of 26%. The Company
believes that the market for senior living and health care services, including
Alzheimer's and dementia care services, will continue to grow as a result of (i)
the aging of the U.S. population, (ii) rising public and private
cost-containment pressures, (iii) declining availability of traditional nursing
home beds as a result of nursing home operators focusing on higher acuity
patients, (iv) the quality of life advantages of assisted living residences over
traditional skilled nursing facilities, and (v) the decreasing availability of
family care as an option for elderly family members. The Company believes that
its experience, reputation, and market presence favorably position it to take
advantage of opportunities in the rapidly growing senior living and health care
industry.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........................ 3,125,000 shares
Common Stock to be outstanding after the Offering.......... 10,937,500 shares(1)
Use of proceeds............................................ To repay the Reorganization Note; to fund
development activities and possible future
acquisitions; and for general corporate
purposes, including working capital. See
"The Company -- Pending Reorganization"
and "Use of Proceeds."
NYSE symbol................................................ ACR
</TABLE>
- ---------------
(1) Includes 7,812,500 shares of Common Stock to be issued in the
Reorganization. Does not include 635,000 shares of Common Stock reserved
for issuance pursuant to outstanding stock options under the Company's 1997
Stock Incentive Plan, which options are exercisable at the initial public
offering price. See "Management -- Compensation Pursuant to Plans -- 1997
Stock Incentive Plan" and "Description of Capital Stock."
4
<PAGE> 6
SUMMARY COMBINED AND CONSOLIDATED FINANCIAL AND OTHER DATA
The following summary combined and consolidated financial and other data is
qualified in its entirety by the more detailed information in the financial
statements and pro forma financial information appearing elsewhere in this
Prospectus. The summary financial data for the year ended December 31, 1994 and
for the three months ended March 31, 1995 is derived from the combined financial
statements of certain affiliated partnerships and corporations (collectively,
the "Predecessor Entities"). The summary financial data for the nine months
ended December 31, 1995, the three months ended March 31, 1996, the year ended
December 31, 1996, and the three months ended March 31, 1997 is derived from the
consolidated financial statements of the Predecessor. See Note 1 to the Combined
and Consolidated Financial Statements.
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES
(COMBINED) PREDECESSOR
--------------------------- --------------------------------------------------------------
THREE MONTHS NINE MONTHS YEAR ENDED THREE MONTHS
YEAR ENDED ENDED ENDED DECEMBER 31, 1996 ENDED MARCH 31,
DECEMBER 31, MARCH 31, DECEMBER 31, ------------------------ -----------------
1994 1995 1995 ACTUAL PRO FORMA(1) 1996(2) 1997
------------ ------------ ------------ -------- ------------ ------- -------
(in thousands, except per share, community, and resident 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 $16,316 $21,510
Operating expenses............... 28,126 10,270 38,730 60,066 63,861 12,843 17,398
------- ------- ------- -------- -------- ------- -------
Income from operations......... 5,215 2,086 10,033 15,551 15,682 3,473 4,112
Other income (expense), net...... (5,053) (3,334) (6,682) (10,938) (11,353) (1,821) (3,137)
------- ------- ------- -------- -------- ------- -------
Income (loss) before income taxes
and extraordinary item......... 162 (1,248) 3,351 4,613 4,329 1,652 975
Income tax expense
(benefit)(3)................... -- 20 55 (920) (920) -- --
------- ------- ------- -------- -------- ------- -------
Income (loss) before
extraordinary item............. 162 (1,268) 3,296 5,533 5,249 1,652 975
Extraordinary item(4)............ -- -- -- (2,335) (2,335) (2,335) --
------- ------- ------- -------- -------- ------- -------
Net income (loss)................ $ 162 $(1,268) $ 3,296 $ 3,198 $ 2,914 $ (683) $ 975
======= ======= ======= ======== ======== ======= =======
Net income (loss) available for
distribution to partners and
shareholders................... $ 162 $(1,268) $ 2,171 $ 2,094 $ 2,590 $(1,058) $ 975
======= ======= ======= ======== ======== ======= =======
UNAUDITED PRO FORMA TAX DATA(5):
Income before income taxes and
extraordinary item............. $ 4,613 $ 4,329 $ 1,652 $ 975
Pro forma income tax expense..... 820 712 628 370
-------- -------- ------- -------
Pro forma income before
extraordinary item............. $ 3,793 $ 3,617 $ 1,024 $ 605
======== ======== ======= =======
Pro forma income before
extraordinary item available
for distribution to partners
and shareholders............... $ 2,689 $ 3,293 $ 649 $ 605
======== ======== ======= =======
Pro forma per share data:
Income per share before
extraordinary item........... $ 0.40 $ 0.39 $ 0.06
======== ======== =======
Shares used in computing pro
forma per share data(6)...... 9,375 9,375 9,375
======== ======== =======
Pro forma as adjusted per share
data(7):
Income per share before
extraordinary item........... $ 0.33 $ .06
======== =======
Shares used in computing pro
forma as adjusted per share
data........................... 10,938 10,938
======== =======
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1997
-------------------------------
COMPANY
---------------
PREDECESSOR PRO FORMA
----------- AS
ACTUAL(8) ADJUSTED(9)
----------- ---------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 8,854 $ 26,954
Working capital............................................. 1,651 22,251
Total assets................................................ 214,156 234,756
Long-term debt, including current portion................... 157,568 157,568
Partners' and shareholders' equity.......................... 36,357 43,441
</TABLE>
5
<PAGE> 7
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES
(COMBINED) PREDECESSOR
--------------------------- -------------------------------------------------------------
THREE MONTHS NINE MONTHS YEAR ENDED THREE MONTHS
YEAR ENDED ENDED ENDED DECEMBER 31, 1996 ENDED MARCH 31,
DECEMBER 31, MARCH 31, DECEMBER 31, ---------------------- ------------------
1994 1995 1995 ACTUAL PRO FORMA(1) 1996 1997
------------ ------------ ------------ ------ ------------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE, COMMUNITY, AND RESIDENT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Distribution to partners,
including preferred
distributions................. $2,580 $1,400 $5,189 $7,139 $6,359(10) $1,415 $2,500(11)
Revenue mix:
Private pay................... 93.0% 92.2% 91.2% 92.1% 92.5% 90.1% 91.1%
Medicare and other(12)........ 7.0 7.8 8.8 7.9 7.5 9.9 8.9
------ ------ ------ ------ ------ ------ ------
Total................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Communities (at period end):
Owned......................... 8 9 10 12 10 10 10
Leased........................ -- -- -- -- 2 -- 2
Managed....................... 11 10 10 7 7 10 7
------ ------ ------ ------ ------ ------ ------
Total................... 19 19 20 19 19 20 19
Resident capacity (at period end):
Owned......................... 2,141 2,386 2,594 3,369 2,886 2,584 2,912
Leased........................ -- -- -- -- 483 -- 483
Managed....................... 3,315 3,079 3,008 2,159 2,159 3,005 2,159
------ ------ ------ ------ ------ ------ ------
Total................... 5,456 5,456 5,602 5,528 5,528 5,589 5,554
Average occupancy rate:
Owned......................... 89% 91% 93% 94% 94% 93% 94%
Leased........................ -- -- -- -- 89 -- 95
Managed....................... 93 95 90 91 90 91 92
------ ------ ------ ------ ------ ------ ------
Total................... 91% 93% 92% 92% 92% 92% 94%
</TABLE>
- ---------------
(1) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the May 1996 acquisition (the "Carriage Club
Acquisitions") of Carriage Club of Charlotte, L.P. and Carriage Club of
Jacksonville, L.P. (collectively, "Carriage Club"), and (b) the January
1997 sale-leaseback by the Company of two senior living communities (the
"Sale-Leaseback Transactions") and the application of a portion of the net
proceeds therefrom to retire debt. See "Unaudited Pro Forma Condensed
Combined Financial Information."
(2) Giving pro forma effect to the transactions described in footnote (1) above
as if they had occurred on January 1, 1996, certain selected financial data
of the Predecessor for the three months ended March 31, 1996 would have
been as follows:
<TABLE>
<S> <C>
Total revenues.............................................. $19,281
Income from operations...................................... 4,070
Income before income taxes and extraordinary item........... 1,134
Pro forma income tax expense................................ 431
Pro forma income before extraordinary item.................. 703
Pro forma income before extraordinary item available for
distribution to partners and shareholders................. $ 523
</TABLE>
(3) Provision for income taxes reflects income tax expense of only one of the
Predecessor Entities because the Predecessor and the other Predecessor
Entities were partnerships. No income tax expense is reflected for periods
prior to 1995 because of losses or the availability of net operating loss
carryforwards ("NOLs"). Both periods in 1995 reflect a provision for
alternative minimum taxes. In 1996, the Company recorded an income tax
benefit and a deferred tax asset of $920,000 because of the anticipated
utilization of NOLs that will offset taxable gains recognized from the
Sale-Leaseback Transactions. See Note 12 to the Combined and Consolidated
Financial Statements.
(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 pro forma financial data reflects the effect on
certain income statement data of income tax expense that would have been
recorded had the Predecessor and the other Predecessor Entities not been
exempt from paying such income taxes. Pro forma income tax expense has been
calculated using the statutory U.S. Federal and state tax rates and gives
effect to the recognition in 1996 of the $920,000 deferred tax asset
described in footnote (3) above.
(6) Reflects 7,812,500 shares issuable in the Reorganization, plus 1,562,500
shares, representing the value of the $25.0 million principal amount of the
Reorganization Note (based upon the assumed initial public offering price
of $16.00 per share).
(7) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the Reorganization; and (b) the sale of the 3,125,000
shares of Common Stock offered hereby, at an assumed initial public
offering price of $16.00 per share, and the application of a portion of the
estimated net proceeds to retire the Reorganization Note, and (c) for the
year ended December 31, 1996 data, the transactions described in footnote
(1) above. The pro forma as adjusted per share data does not give effect to
a non-recurring $13.5 million ($1.23 per share) charge to income that will
be incurred at the time of the Reorganization in connection with the
conversion from a non-taxable to a taxable entity and the resulting
recognition of a deferred income tax liability for the differences between
the accounting and tax bases of the Company's assets and liabilities. See
Note 16 to the Combined and Consolidated Financial Statements.
(8) Reflects a $2.5 million reduction in partners' and shareholders' equity to
give effect to the accrual as of March 31, 1997 of the $2.5 million
distribution by the Predecessor to its partners (the "Tax Distribution"),
which was paid in April 1997. The Tax Distribution approximates the income
taxes associated with the Predecessor's anticipated earnings in 1997
through the date of the Reorganization. See "Dividend Policy and Prior
Distributions."
(9) Gives effect to the following transactions as if they had occurred at March
31, 1997: (a) the payment of the Tax Distribution, which had been accrued
as of March 31, 1997; (b) the Reorganization, including a $13.5 million
charge to income resulting in a reduction of shareholders' equity that will
be incurred at the time of the Reorganization in connection with the
conversion from a non-taxable
6
<PAGE> 8
to a taxable entity and the resulting recognition of a deferred tax
liability for the differences between the accounting and tax bases of the
Company's assets and liabilities; and (c) the sale of the 3,125,000 shares
of Common Stock offered hereby, at an assumed initial public offering price
of $16.00 per share, and the application of a portion of the estimated net
proceeds to retire the Reorganization Note.
(10) Reflects the elimination, on a pro forma basis, of the preferred
distributions paid with respect to $5.2 million of ARCLP's special
redeemable preferred limited partnership interests (the "Preferred
Partnership Interests"), which interests were redeemed with a portion of
the net proceeds from the Sale-Leaseback Transactions. The Company redeemed
$4.8 million of the Preferred Partnership Interests in June 1996 out of
operating cash flow and distributions of $324,000 paid from January 1996
through June 1996 with respect to such Preferred Partnership Interests were
not eliminated.
(11) Reflects the accrual of the Tax Distribution described in footnote (8)
above.
(12) Includes Medicare (including Medicare-related private co-insurance) and
Medicaid.
7
<PAGE> 9
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 March 31, 1997, the Company had long-term debt (including current
portion) of $157.6 million, of which $145.8 million was payable to one lender,
and was obligated to pay annual rental obligations of approximately $2.5 million
under long-term operating leases. The Company has entered into non-binding
letters of intent to establish operating lease facilities with Nationwide Health
Properties, Inc. ("NHP") and National Health Investors, Inc. ("NHI"), both
health care real estate investment trusts, pursuant to which NHP and NHI, at the
Company's request and upon 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"). The Company currently intends to finance
its growth through a combination of bank indebtedness, construction and mortgage
financing, transactions with NHP and NHI or other real estate investment trusts,
proceeds from the Offering, and joint venture arrangements. As a result, a
substantial portion of the Company's cash flow will be devoted to debt service
and lease payments and the Company will be subject to risks normally associated
with a high degree of financial leverage. There can be no assurance that the
Company will generate sufficient cash flows from operations to cover required
interest, principal, and operating lease payments. Any payment or other default
could cause the lender to foreclose upon the communities securing such
indebtedness, or, in the case of an operating lease, could terminate the lease,
with a consequent loss of income and asset value to the Company. Furthermore,
because most of the Company's mortgages and sale-leaseback agreements contain
cross-default provisions, a default by the Company on one of its payment
obligations could adversely affect a significant number of the Company's other
properties and, consequently the Company's business, results of operations, and
financial condition.
NEED FOR ADDITIONAL FINANCING; EXPOSURE TO RISING INTEREST RATES
The Company's ability to sustain any operating losses and to otherwise meet
its growth objectives will depend, in part, on its ability to obtain additional
financing on acceptable terms from available financing sources. Raising
additional funds through the issuance of equity securities could cause existing
shareholders to experience further dilution and could adversely affect the
market price of the Common Stock. There can be no assurance that the Company
will be successful in securing additional financing or that adequate financing
will be available and, if available, will be on terms that are acceptable to the
Company. The Company's inability to obtain additional financing on acceptable
terms could delay or eliminate some or all of the Company's growth plans.
At March 31, 1997, $42.9 million in principal amount, or approximately
27.3%, of the Company's indebtedness, bore interest at floating rates, with a
weighted average annual rate of 7.7%. In addition, it is anticipated that the
REIT Facilities will require operating lease payments that will be based on
prevailing interest rates. Future indebtedness, from commercial banks or
otherwise, and lease obligations are also expected to be based on interest rates
prevailing at the time such debt and lease arrangements are obtained. Therefore,
increases in prevailing interest rates could increase the Company's interest or
lease payment obligations and could have a material adverse effect on the
Company's business, financial condition, and results of operations.
DEPENDENCE ON PRIVATE PAY RESIDENTS
Approximately 92.1% of the Company's total revenues for the year ended
December 31, 1996 and approximately 91.1% of the Company's total revenues for
the three months ended March 31, 1997 were attributable to private pay sources.
For the same periods, 7.9% and 8.9%, respectively, of the Company's revenues
were attributable to reimbursement from third-party payors, including Medicare.
The Company
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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.
SUBSTANTIAL PORTION OF THE PROCEEDS OF THE OFFERING TO BENEFIT EXISTING
SHAREHOLDERS
The Company will use $25.0 million of the estimated net proceeds of the
Offering to repay the Reorganization Note, regardless of the price per share at
which the Common Stock is sold or the net proceeds received by the Company from
the Offering. The principal amount of the Reorganization Note was established by
the general partner of ARCLP in consultation with representatives of the limited
partners of ARCLP, and was not the result of arms length negotiation. See "The
Company -- Pending Reorganization" and "Use of Proceeds." ARCLP will distribute
in liquidation all amounts received from the repayment of the Reorganization
Note to its limited partners, who are the existing shareholders of the Company,
including approximately $17.4 million to the Company's non-employee directors
and their immediate family members and affiliates, and $1.5 million to the
Company's executive officers and their immediate family members and affiliates.
See "Certain Transactions -- Pending Reorganization."
NO ASSURANCE AS TO ABILITY TO MANAGE GROWTH
The Company intends to expand its operations through the development,
construction, and acquisition of free-standing assisted living residences and,
to a lesser extent, through the acquisition of other types of senior living
communities, as well as through the expansion of the Company's home health care
services. See "Business -- Growth Strategy." The success of the Company's growth
strategy will depend, in large part, on its ability to effectively operate any
newly acquired or developed residences, communities, or home health care
agencies, as to which there can be no assurance. The Company has limited
experience developing and operating assisted living residences on a
free-standing basis. The Company's growth plans will also place significant
demands on the Company's management and operating personnel. The Company's
ability to manage its future growth effectively will require it to improve its
operational, financial, and management information systems and to continue to
attract, retain, train, motivate, and manage key employees. If the Company is
unable to manage its growth effectively, its business, results of operations,
and financial condition will be adversely affected. See "Business -- Growth
Strategy" and "Management -- Directors and Executive Officers."
LOSSES FROM NEWLY DEVELOPED RESIDENCES AND ACQUISITIONS
Although the Company was profitable in 1994, 1995, and 1996, in view of its
growth plan for development and acquisitions, there can be no assurance that the
Company will continue to be profitable in any future period. Newly developed
assisted living residences are expected to incur operating losses during a
substantial portion of their first twelve months of operations, on average,
until the residences achieve targeted occupancy levels. Newly acquired
residences and communities may also incur losses pending their integration into
the Company's operations. The Company may also incur operating losses as a
result of the expansion of its existing home health care agencies and the
establishment of additional home health care agencies in new markets. See
"Business -- Growth Strategy" and "Business -- Development Activities."
NO ASSURANCE AS TO ABILITY TO DEVELOP ADDITIONAL ASSISTED LIVING RESIDENCES
An integral component of the Company's growth strategy is to develop and
operate free-standing assisted living residences. As part of its growth
strategy, the Company is currently developing 21 free-standing assisted living
residences, with an estimated aggregate capacity for 1,826 residents, and is
expanding eight of its existing senior living communities to add capacity to
accommodate an additional 704 residents. The Company's ability to develop
successfully assisted living residences will depend on a number of factors,
including, but not limited to, the Company's ability to acquire suitable
development sites at reasonable prices; the Company's success in obtaining
necessary zoning, licensing, and other required governmental permits and
authorizations; and the Company's ability to control construction costs and
project completion schedules. In
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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."
ACQUISITION OF COMMUNITIES AND COMPLEMENTARY BUSINESSES
The Company plans to make strategic acquisitions of senior living
communities (which may include a variety of independent living, assisted living,
and skilled nursing facilities), free-standing assisted living residences, home
health care agencies, and other properties or businesses that are complementary
to the Company's operations and growth strategy. The acquisition of existing
communities or other businesses involves a number of risks. Existing communities
available for acquisition frequently serve or target different markets than
those presently served by the Company. The Company may also determine that
renovations of acquired communities and changes in staff and operating
management personnel are necessary to successfully integrate such communities or
businesses into the Company's existing operations. The costs incurred to
reposition or renovate newly acquired communities may not be recovered by the
Company. In undertaking acquisitions, the Company also may be adversely impacted
by unforeseen liabilities attributable to the prior operators of such
communities or businesses, against whom the Company may have little or no
recourse. The success of the Company's acquisition strategy will be determined
by numerous factors, including the Company's ability to identify suitable
acquisition candidates, the competition for such acquisitions, the purchase
price, the requirement to make operational or structural changes and
improvements, the financial performance of the communities or businesses after
acquisition, the Company's ability to finance the acquisitions, and the
Company's ability to integrate effectively any acquired communities or
businesses into the Company's management, information, and operating systems.
There can be no assurance that the Company's acquisition of senior living
communities and complementary properties and businesses will be completed at the
rate currently expected, if at all, or, if completed, that any acquired
communities or businesses will be successfully integrated into the Company's
operations.
GEOGRAPHIC CONCENTRATION
The Company's growth strategy involves the development of assisted living
residences and the acquisition of senior living communities in concentrated
geographic service areas. See "Business -- Growth Strategy." Accordingly, the
Company's occupancy rates in existing, developed, or acquired communities may be
adversely affected by a number of factors, including regional and local economic
conditions, general real estate market conditions including the supply and
proximity of senior living communities, competitive conditions, and applicable
local laws and regulations. See "Business -- Operating Residences,"
"Business -- Development Activities," and "Business -- Government Regulation."
COMPETITION
The senior living and health care services industry is highly competitive,
and the Company expects that all segments of the industry will become
increasingly competitive in the future. The Company competes with other
companies providing independent living, assisted living, skilled nursing, home
health care, and other similar service and care alternatives. Although the
Company believes there is a need for assisted living residences in the markets
where the Company is operating and developing residences, the Company expects
that competition will increase from existing competitors and new market
entrants, some of whom may have substantially greater financial resources than
the Company. In addition, some of the Company's competitors
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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 the
Company. The Company has a key employee life insurance policy in the amount of
$2.0 million covering Mr. Sheriff. The loss by the Company of certain of its
executive officers and the inability to attract and retain qualified management
personnel could adversely affect the Company's business, financial condition,
and results of operations. See "Management -- Directors and Executive Officers."
RESIDENCE MANAGEMENT, STAFFING, AND LABOR COSTS
The Company competes with other providers of senior living and health care
services with respect to attracting and retaining qualified management personnel
responsible for the day-to-day operations of each of the Company's communities
and skilled technical personnel responsible for providing resident care. A
shortage of nurses or trained personnel may require the Company to enhance its
wage and benefits package in order to compete in the hiring and retention of
such personnel or to hire more expensive temporary personnel. The Company will
also be dependent on the available labor pool of semi-skilled and unskilled
employees in each of the markets in which it operates. No assurance can be given
that the Company's labor costs will not increase, or that, if they do increase,
they can be matched by corresponding increases in rates charged to residents.
Any significant failure by the Company to attract and retain qualified
management and staff personnel, to control its labor costs, or to pass on any
increased labor costs to residents through rate increases could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
CONTROL BY MANAGEMENT AND CERTAIN SHAREHOLDERS
Upon completion of the Offering, the Company's officers and directors and
entities controlled by them will, collectively, beneficially own approximately
42.4% of the outstanding shares of Common Stock (40.7% if the Underwriters'
over-allotment option is exercised in full). Accordingly, such persons will have
the ability, by voting their shares in concert, to influence the election of the
Company's Board of Directors and the outcome of all other matters submitted to
the Company's shareholders. Furthermore, such influence could preclude any
unsolicited acquisition of the Company and, consequently, adversely affect the
market price of the Common Stock. See "Principal Shareholders."
GOVERNMENT REGULATION
Federal and state governments regulate various aspects of the Company's
business. The development and operation of health care facilities and the
provision of health care services are subject to federal, state, and local
licensure, certification, and inspection laws that regulate, among other
matters, the number of licensed beds, the provision of services, the
distribution of pharmaceuticals, billing practices and policies, equipment,
staffing (including professional licensing), operating policies and procedures,
fire prevention measures, environmental matters, and compliance with building
and safety codes. Failure to comply with these laws and regulations could result
in the denial of reimbursement, the imposition of fines, temporary suspension of
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admission of new patients, suspension or decertification from the Medicare
programs, restrictions on the ability to acquire new facilities or expand
existing facilities, and, in extreme cases, the revocation of a community's
license or closure of a community. There can be no assurance that federal,
state, or local governments will not impose additional restrictions on the
Company's activities that could materially adversely affect the Company.
Many states, including several of the states in which the Company currently
operates, control the supply of licensed skilled nursing beds and home health
care agencies through certificate of need ("CON") programs. Presently, state
approval is required for the construction of new health care communities, the
addition of licensed beds, and certain capital expenditures at such communities,
as well as the opening of a home health care agency. To the extent that a CON or
other similar approval is required for the acquisition or construction of new
facilities, the expansion of the number of licensed beds, services, or existing
communities, or the opening of a home health care agency, the Company could be
adversely affected by the failure or inability to obtain such approval, changes
in the standards applicable for such approval, and possible delays and expenses
associated with obtaining such approval. In addition, in most states the
reduction of the number of licensed beds or the closure of a community requires
the approval of the appropriate state regulatory agency and, if the Company were
to seek to reduce the number of licensed beds at, or to close, a community, the
Company could be adversely affected by a failure to obtain or a delay in
obtaining such approval.
Federal and state anti-remuneration laws, such as "anti-kickback" laws,
govern certain financial arrangements among health care providers and others who
may be in a position to refer or recommend patients to such providers. These
laws prohibit, among other things, certain direct and indirect payments that are
intended to induce the referral of patients to, the arranging for services by,
or the recommending of, a particular provider of health care items or services.
Federal anti-kickback laws have been broadly interpreted to apply to certain
contractual relationships between health care providers and sources of patient
referral. Similar state laws vary, are sometimes vague, and seldom have been
interpreted by courts or regulatory agencies. Violation of these laws can result
in loss of licensure, civil and criminal penalties, and exclusion of health care
providers or suppliers from participation in the Medicare and Medicaid programs.
There can be no assurance that such laws will be interpreted in a manner
consistent with the practices of the Company.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state, and
local laws exist that also may require modifications to existing and planned
communities to create access to the properties by disabled persons. Although the
Company believes that its communities are substantially in compliance with
present requirements or are exempt therefrom, if required changes involve a
greater expenditure than anticipated or must be made on a more accelerated basis
than anticipated, additional costs would be incurred by the Company. Further
legislation may impose additional burdens or restrictions with respect to access
by disabled persons, the costs of compliance with which could be substantial.
See "Business -- Government Regulation."
POTENTIAL FOR ENVIRONMENTAL LIABILITY
Under various federal, state, and local environmental laws, ordinances, and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs incurred by such parties in connection with the contamination. Such
laws typically impose clean-up responsibility and liability without regard to
whether the owner knew of or caused the presence of the contaminants, and
liability under such laws has been interpreted to be joint and several unless
the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation, or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate such property, may adversely affect the owner's
ability to sell or lease such property or to borrow using such property as
collateral. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in
connection with the contamination. Persons who arrange for the disposal or
treatment of hazardous or toxic substances also may be liable for the costs of
removal or remediation of such
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substances at the disposal or treatment facility, whether or not such facility
is owned or operated by such person. Finally, the owner of a site may be subject
to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site.
LIABILITY AND INSURANCE
The provision of personal and health care services entails an inherent risk
of liability. In recent years, participants in the health care services industry
have become subject to an increasing number of lawsuits alleging negligence or
related legal theories, many of which involve large claims and result in the
incurrence of significant defense costs. Moreover, assisted living residences
offer residents a greater degree of independence in their daily living. This
increased level of independence may subject the resident and the Company to
certain risks that would be reduced in more institutionalized settings. The
Company currently maintains liability insurance in amounts it believes are
sufficient to cover such claims based on the nature of the risks, its historical
experience, and industry standards. There can be no assurance, however, that
claims in excess of the Company's insurance or claims not covered by the
Company's insurance, such as claims for punitive damages, will not arise. A
claim against the Company not covered by, or in excess of, the Company's
insurance could have a material adverse effect upon the Company. In addition,
the Company's insurance policies must be renewed annually. There can be no
assurance that the Company will be able to obtain liability insurance in the
future or that, if such insurance is available, it will be available on
acceptable economic terms. See "Business -- Insurance and Legal Proceedings."
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority, without action by the
shareholders, to issue up to 5,000,000 shares of preferred stock and to fix the
rights and preferences of such shares. This authority, together with certain
provisions of the Company's Charter (including provisions that implement
staggered terms for directors, limit shareholder ability to call a shareholders'
meeting or to remove directors, and require a supermajority vote to amend
certain provisions of the Charter), may delay, deter, or prevent a change in
control of the Company. In addition, as a Tennessee corporation, the Company is
subject to the provisions of the Tennessee Business Combination Act and the
Tennessee Greenmail Act, each of which may be deemed to have anti-takeover
effects and may delay, deter, or prevent a takeover attempt that might be
considered by the shareholders to be in their best interests. See "Description
of Capital Stock -- Certain Provisions of the Charter, Bylaws, and Tennessee
Law."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of Common Stock in the public market following
the Offering, or the perception that such sales could occur, could adversely
affect the prevailing market price of the Common Stock. Upon completion of the
Offering, the Company will have 10,937,500 shares of Common Stock outstanding.
Of these shares, the 3,125,000 shares sold in the Offering will be freely
tradeable without restriction or limitation under the Securities Act of 1933, as
amended (the "Securities Act"), except for shares purchased by "affiliates" of
the Company, as such term is defined in Rule 144 promulgated under the
Securities Act. The remaining 7,812,500 shares will be issued in the
Reorganization and will be "restricted securities" within the meaning of Rule
144 and may not be resold in the public markets unless registered under the
Securities Act or pursuant to an exemption, such as the safe harbor provided by
Rule 144. Holders of the restricted shares will have certain contractual
registration rights with respect thereto. The Company and all directors and
executive officers of the Company (who in the aggregate will beneficially own
4,637,986 shares of Common Stock) will agree prior to the Offering, and certain
holders of 5% or more of the Company's Common Stock outstanding after the
Offering will be asked to agree, subject to certain exceptions, not to offer,
sell, or otherwise dispose of any Common Stock for a period of 180 days after
the date hereof. See "Principal Shareholders," "Description of Capital
Stock -- Registration Rights," and "Shares Eligible for Future Sale."
As soon as practicable following the consummation of the Offering, the
Company intends to file a registration statement under the Securities Act to
register the issuance of an aggregate of 1,343,750 shares
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under the Company's 1997 Stock Incentive Plan and Employee Stock Purchase Plan.
As of the date hereof, options to purchase 635,000 shares of Common Stock have
been granted under the 1997 Stock Incentive Plan, which options are exercisable
at the initial public offering price. Following the effective date of such
registration statement, shares of Common Stock issued pursuant to either plan
will be freely tradeable in the open market, subject to lock-up agreements, if
applicable. See "Management -- Compensation Pursuant to Plans" and "Shares
Eligible For Future Sale."
ABSENCE OF PRIOR PUBLIC TRADING MARKET; POSSIBLE VOLATILITY OF MARKET PRICE
Prior to the Offering, there has been no public trading market for the
Common Stock. The public offering price for the Common Stock will be determined
by negotiations among the Company and the Underwriters based upon several
factors and will not necessarily bear any relationship to the Company's assets,
book value, results of operations, net worth, or any other generally accepted
criteria of value, and should not be considered as indicative of the actual
value of the Company. See "Underwriting." Although the Common Stock has been
approved for listing on the NYSE, there can be no assurance that an active
trading market will develop or be sustained after the Offering. To the extent
that an active trading market does develop, factors such as quarterly variations
in the Company's financial results, announcements by the Company or others,
general market conditions, or certain regulatory pronouncements may cause the
market price of the Common Stock to fluctuate substantially. There can be no
assurance that the Common Stock can be resold at or above the initial public
offering price.
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in the amount of $12.03 per share in the pro forma net
tangible book value of their shares of Common Stock, based upon the assumed
initial public offering price of $16.00 per share. See "Dilution."
------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Those statements include,
but may not be limited to, the discussions of the Company's expectations
concerning its future profitability and the discussion of the Company's
operating and growth strategy, including possible acquisitions. Investors are
cautioned that all forward-looking statements involve risks and uncertainties
including, without limitation, the factors set forth under the caption "Risk
Factors" in this Prospectus. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate and there can be no assurance that the
forward-looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved. The Company
undertakes no obligation to publicly release any revisions to any
forward-looking statements contained herein to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
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THE COMPANY
GENERAL
The Company is a national senior living and health care services company
providing a broad range of care and services to the elderly, including
independent living, assisted living, skilled nursing, and home health care
services. The Company has pioneered numerous developments in the provision of
care and services for the elderly since its inception in 1978, and believes it
ranks among the leading operators in the senior living and health care industry.
Currently, the Company operates 19 senior living communities in 12 states,
consisting of ten owned communities, two leased communities, and seven managed
communities, with an aggregate capacity for approximately 5,500 residents. In
May 1997, the Company expects to acquire an additional community with capacity
for 90 residents and to commence operating an additional leased community with
capacity for 90 residents. The Company also owns and operates eight home health
care agencies. At March 31, 1997, the Company's owned communities had an
occupancy rate of 94%, its leased communities had an occupancy rate of 95%, and
its managed communities had an occupancy rate of 93%. For the year ended
December 31, 1996 and the three months ended March 31, 1997, revenues
attributable to the Company's senior living communities accounted for 91.5% and
90.5%, respectively, of the Company's total revenues, and revenues attributable
to the Company's home health care agencies accounted for 6.2% and 7.0%,
respectively, of the Company's total revenues. Approximately 92.1% of the
Company's total revenues for the year ended December 31, 1996 and approximately
91.1% of the Company's total revenues for the three months ended March 31, 1997
were derived from private pay sources.
Since 1992, the Company has experienced significant growth, primarily
through the acquisition of 11 senior living communities. The Company's revenues
have grown from $17.8 million in 1992 to $75.6 million in 1996, an average
annual growth rate of 43.5%. During the same period, the Company's income from
operations has grown from $2.3 million to $15.6 million, an average annual
growth rate of 61.7%. The Company intends to continue its growth through a
combination of (i) development of free-standing assisted living residences,
including special living units and programs for residents with Alzheimer's and
other forms of dementia; (ii) selective acquisitions of senior living
communities, including assisted living residences; (iii) expansion of existing
communities; and (iv) development and acquisition of home health care agencies.
As part of its growth strategy, the Company is currently developing 21
free-standing assisted living residences, with an estimated aggregate capacity
for 1,826 residents, and is expanding eight of its existing communities to add
capacity to accommodate an additional 704 residents. The Company has also
entered into a letter of intent to acquire one additional home health care
agency and intends to commence operations at five additional home health care
agencies during 1997.
The Company was incorporated under the laws of the State of Tennessee in
February 1997 as a wholly-owned subsidiary of ARCLP in anticipation of the
Reorganization and the Offering. The Company's principal executive offices are
located at 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027, and its
telephone number at that address is (615) 221-2250.
THE 1995 ROLL-UP
The Company's predecessor, ARCLP, was formed in February 1995 in connection
with the reorganization (the "1995 Roll-Up") of certain Predecessor Entities
that owned, operated, or managed various senior living communities. Each of the
Predecessor Entities was organized at the direction of the members of the
Company's management and controlling shareholders. As a result of the 1995
Roll-Up, ARCLP issued partnership interests to the partners and shareholders of
the Predecessor Entities in exchange for their limited partnership interests and
stock, respectively, and thereby became the owner, directly or indirectly, of
all of the assets of the Predecessor Entities. The general partner of ARCLP is
American Retirement Communities, LLC, a Tennessee limited liability company (the
"LLC"), whose members include W.E. Sheriff, the Company's Chairman and Chief
Executive Officer, and other Company executive officers. See "Certain
Transactions -- The 1995 Roll-Up."
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PENDING REORGANIZATION
Prior to the consummation of the Offering, ARCLP will undergo a series of
transactions that will result in the Reorganization. Pursuant to the
Reorganization, ARCLP will contribute all of its assets, subject to all of its
liabilities, to the Company in exchange for 7,812,500 shares of Common Stock and
the Reorganization Note in the principal amount of $25.0 million. The number of
shares to be 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 to be
contributed to the Company. Immediately after consummation of the
Reorganization, ARCLP will distribute approximately 1,350,000 shares of Common
Stock to the LLC, as general partner of ARCLP, and an aggregate of approximately
6,412,500 shares of Common Stock to the limited partners of ARCLP, generally in
accordance with the limited partners' ARCLP contribution accounts. The actual
number of shares of Common Stock to be allocated to the LLC will be determined
at the time of the consummation of the Offering and will have a value, based on
the initial public offering price, equal to the sum of $15.0 million plus a
percentage of the value of the Company (including the principal amount of the
Reorganization Note) immediately prior to the Offering (the "Pre-IPO Valuation")
over $84.0 million. The Pre-IPO Valuation will be determined by the Company by
reference to the initial public offering price. See "Principal Shareholders" and
"Certain Transactions -- Pending Reorganization." Upon consummation of the
Offering, the Reorganization Note will be repaid by the Company out of the net
proceeds from the Offering and such amounts received by ARCLP will be
distributed to the limited partners of ARCLP in liquidation in accordance with
the limited partners' ARCLP contribution accounts. See "Risk
Factors -- Substantial Portion of the Proceeds of the Offering to Benefit
Existing Shareholders," "Use of Proceeds," and "Certain Transactions -- Pending
Reorganization."
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to be approximately $45.6 million (approximately $52.6 million if the
Underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $16.00 per share (the midpoint of the range shown on
the cover page of this Prospectus) and after deduction of the underwriting
discounts and commissions and estimated offering expenses payable by the
Company. The Company will use $25.0 million of the net proceeds to repay the
Reorganization Note. See "The Company -- Pending Reorganization" and "Certain
Transactions -- Pending Reorganization." The principal amount of the
Reorganization Note was established by ARCLP and the Company in connection with
the Reorganization based on a number of factors, including the value of the
assets to be contributed to the Company.
The Company intends to use the balance of the net proceeds, together with
funding available under the REIT Facilities, any future bank indebtedness, any
construction and mortgage financings, and funds from other sources for working
capital purposes, including the development and construction of free-standing
assisted living residences and possible acquisitions of businesses engaged in
activities similar or complementary to the Company's business, including the
anticipated acquisition of a home health care agency located in Corpus Christi,
Texas. See "Business -- Recent and Pending Acquisitions." The Company currently
has 21 assisted living residences under development with an aggregate capacity
for 1,826 residents. See "Business -- Development Activities." The Company
anticipates that the cost to develop its assisted living residences will range
from $65,000 to $90,000 per unit.
Pending the use of the net proceeds as described above, the net proceeds
will be invested in short-term, investment-grade securities.
16
<PAGE> 18
DIVIDEND POLICY AND PRIOR DISTRIBUTIONS
Following the Offering, it will be the policy of the Company's Board of
Directors to retain all future earnings to finance the operation and expansion
of the Company's business. Accordingly, the Company does not anticipate
declaring or paying cash dividends on the Common Stock in the foreseeable
future. The payment of cash dividends in the future will be at the sole
discretion of the Company's Board of Directors and will depend on, among other
things, the Company's earnings, operations, capital requirements, financial
condition, restrictions in then existing financing agreements, and other factors
deemed relevant by the Board of Directors.
Prior to the Offering, the Predecessor and the Predecessor Entities have
made periodic distributions to their respective partners or shareholders in
accordance with their ownership interests therein. During 1995 and 1996, ARCLP
made or accrued for distributions of approximately $6.6 million and $7.1
million, respectively, to its partners, including approximately $30,000 and
$59,000, respectively, to the LLC. In addition, in 1996 ARCLP redeemed its
Preferred Partnership Interests for $10.0 million. See "Certain Transactions --
Redemption of Preferred Partnership Interests." In April 1997, ARCLP made the
Tax Distribution of $2.5 million to its partners, which amount approximates the
income taxes associated with ARCLP's anticipated earnings in 1997 through the
date of the Reorganization. In addition, immediately following the consummation
of the Offering, and in connection with ARCLP's liquidation, the proceeds from
the repayment of the Reorganization Note will be distributed by ARCLP to its
limited partners, generally in accordance with their respective contribution
accounts. See "The Company -- Pending Reorganization" and "Certain
Transactions -- Pending Reorganization."
17
<PAGE> 19
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the
Predecessor at March 31, 1997, and (ii) the capitalization of the Company at
March 31, 1997 on a pro forma as adjusted basis to reflect (a) the
Reorganization (including a $13.5 million one-time charge to income resulting in
a reduction of shareholders' equity which will be incurred at the time of the
Reorganization in connection with the conversion from a non-taxable to a taxable
entity and the resulting recognition of a deferred income tax liability for the
differences between the accounting and tax bases of the Company's assets and
liabilities), and (b) the issuance and sale of the 3,125,000 shares of Common
Stock offered hereby, at an assumed initial public offering price of $16.00 per
share, and the application of a portion of the estimated net proceeds to retire
the Reorganization Note, as if all such events had occurred on March 31, 1997.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Combined and
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
-------------------------
COMPANY
PREDECESSOR -----------
----------- PRO FORMA
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current portion of long-term
debt...................................................... $ 3,189 $ 3,189
======== ========
Long-term debt, less current portion........................ $154,379 $154,379
Partners'/shareholders' equity:
Partners' equity.......................................... 36,357 --
Preferred Stock, no par value; 5,000,000 shares
authorized, no shares issued and outstanding........... -- --
Common Stock, par value $.01 per share; 50,000,000 shares
authorized; 10,937,500 shares issued and outstanding,
as adjusted(1)......................................... -- 109
Additional paid-in capital................................ -- 43,332
-------- --------
Total partners'/shareholders' equity................... 36,357 43,441
-------- --------
Total capitalization................................... $190,736 $197,820
======== ========
</TABLE>
- ---------------
(1) Includes 7,812,500 shares of Common Stock to be issued in the
Reorganization. Does not include 635,000 shares of Common Stock reserved
for issuance pursuant to outstanding stock options under the Company's
Stock Incentive Plan, which options are exercisable at the initial public
offering price. See "Management -- Compensation Pursuant to Plans -- 1997
Stock Incentive Plan" and "Description of Capital Stock."
18
<PAGE> 20
DILUTION
The net tangible book value of the Company at March 31, 1997 was
approximately $36.4 million, or $3.88 per share of Common Stock. Net tangible
book value per share represents the amount of the Company's total tangible
assets less total liabilities, divided by the number of shares of Common Stock
outstanding, which, for purposes of these calculations, is presumed to be
9,375,000 shares (which reflects 7,812,500 shares issuable in the
Reorganization, plus 1,562,500 shares, representing the value of the $25.0
million principal amount of the Reorganization Note, based upon an assumed
initial public offering price of $16.00 per share). After giving effect to (i)
the Reorganization (including a $13.5 million one-time charge to income
resulting in a reduction of shareholders' equity which will be incurred at the
time of the Reorganization in connection with the conversion from a non-taxable
to a taxable entity and the resulting recognition of a deferred income tax
liability for the differences between the accounting and tax bases of the
Company's assets and liabilities); (ii) the sale of the 3,125,000 shares of
Common Stock offered hereby, at an assumed initial public offering price of
$16.00 per share, and after deducting the underwriting discounts and commissions
and estimated offering expenses payable by the Company; and (iii) the
application of a portion of the estimated net proceeds to retire the
Reorganization Note, the net tangible book value of the Company as of March 31,
1997 would have been approximately $43.4 million, or $3.97 per share of Common
Stock. This represents an immediate increase in pro forma net tangible book
value per share of $0.09 to existing shareholders and an immediate dilution of
$12.03 per share to investors purchasing Common Stock in the Offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $16.00
Net tangible book value prior to the Offering............. $3.88
Increase in net tangible book value attributable to new
investors.............................................. 0.09
-----
Pro forma net tangible book value after the Offering........ 3.97
------
Dilution to new investors................................... $12.03
======
</TABLE>
The following table summarizes the number of shares of Common Stock issued
by the Company, the total consideration paid to the Company, and the average
price per share paid by the existing shareholders and to be paid by the new
investors. For purposes of the total consideration and average price per share
paid by the existing shareholders, the Company has based such valuation on the
aggregate amount of the partners' cash contributions to the Predecessor and the
Predecessor Entities, without deducting distributions paid to such partners.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.................... 7,812,500 71.4% $34,838,000 41.1% $ 4.46
New investors............................ 3,125,000 28.6% $50,000,000 58.9% $16.00
---------- ----- ----------- ------
Total.......................... 10,937,500 100.0% $84,838,000 100.0%
========== ===== =========== ======
</TABLE>
19
<PAGE> 21
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The accompanying Unaudited Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1996 reflects the pro forma effects of the
Carriage Club Acquisitions and the Sale-Leaseback Transactions and the
application of a portion of the net proceeds therefrom to retire debt, as if
these transactions had occurred on January 1, 1996. The Unaudited Pro Forma
Consolidated Statement of Operations for the year ended December 31, 1996 is
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 March 31, 1997
or for the three months then ended because there were no transactions for which
pro forma financial information is required for that period.
20
<PAGE> 22
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SALE-
CARRIAGE CLUB LEASEBACK
CARRIAGE CLUB ACQUISITIONS TRANSACTIONS
PREDECESSOR(A) ACQUISITIONS(B) ADJUSTMENTS(C) ADJUSTMENTS(D)
-------------- --------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Resident and health care revenue............... $ 73,878 $4,086 $ -- $ --
Management services revenue.................... 1,739 -- (160) --
-------- ------ -------- -------
Total revenues............................... 75,617 4,086 (160) --
Operating expenses:
Community operating expense.................... 46,960 2,498 (160) --
General and administrative..................... 6,200 -- -- --
Lease expense.................................. -- -- -- 2,090
Depreciation and amortization.................. 6,906 464 104 (1,201)
-------- ------ -------- -------
Total operating expenses..................... 60,066 2,962 (56) 889
-------- ------ -------- -------
Income (loss) from operations................ 15,551 1,124 (104) 889
Other income (expense):
Interest expense............................... (12,160) (833) (991) 1,388
Interest income................................ 434 21 -- --
Other.......................................... 788 -- -- --
-------- ------ -------- -------
Other income (expense), net.................. (10,938) (812) (991) 1,388
-------- ------ -------- -------
Income (loss) before income taxes and
extraordinary item......................... 4,613 312 (1,095) 499
Income tax expense (benefit)................. (920) -- -- --
-------- ------ -------- -------
Income (loss) before extraordinary item...... $ 5,533 $ 312 $ (1,095) $ 499
======== ====== ======== =======
PRO FORMA TAX DATA:
Income (loss) before income taxes and
extraordinary item............................. $ 4,613 $ 312 $ (1,095) $ 499
Pro forma income tax expense (benefit)(E)........ 820 119 (416) 189
-------- ------ -------- -------
Pro forma income (loss) before extraordinary
item........................................... $ 3,793 $ 193 $ (679) $ 310
======== ====== ======== =======
Pro forma per share data:
Income per share before extraordinary
item(F)...................................... $ 0.40
========
Shares used in computing pro forma per share
data(G)...................................... 9,375
========
Pro forma as adjusted per share data:
Income per share before extraordinary
item(H)......................................
Shares used in computing pro forma as adjusted
per share data(I)............................
<CAPTION>
PRO FORMA
---------
<S> <C>
Revenues:
Resident and health care revenue............... $ 77,964
Management services revenue.................... 1,579
--------
Total revenues............................... 79,543
Operating expenses:
Community operating expense.................... 49,298
General and administrative..................... 6,200
Lease expense.................................. 2,090
Depreciation and amortization.................. 6,273
--------
Total operating expenses..................... 63,861
--------
Income (loss) from operations................ 15,682
Other income (expense):
Interest expense............................... (12,596)
Interest income................................ 455
Other.......................................... 788
--------
Other income (expense), net.................. (11,353)
--------
Income (loss) before income taxes and
extraordinary item......................... 4,329
Income tax expense (benefit)................. (920)
--------
Income (loss) before extraordinary item...... $ 5,249
========
PRO FORMA TAX DATA:
Income (loss) before income taxes and
extraordinary item............................. $ 4,329
Pro forma income tax expense (benefit)(E)........ 712
--------
Pro forma income (loss) before extraordinary
item........................................... $ 3,617
========
Pro forma per share data:
Income per share before extraordinary
item(F)...................................... $ 0.39
========
Shares used in computing pro forma per share
data(G)...................................... 9,375
========
Pro forma as adjusted per share data:
Income per share before extraordinary
item(H)...................................... $ 0.33
========
Shares used in computing pro forma as adjusted
per share data(I)............................ 10,938
========
</TABLE>
- ---------------
(A) Reflects the historical consolidated statement of operations of the
Predecessor for the year ended December 31, 1996, including the operations
of Carriage Club for the period May 1, 1996 (the effective date of the
Carriage Club Acquisitions) through December 31, 1996.
(B) Reflects the historical combined statement of operations for Carriage Club
for the period January 1, 1996 through April 30, 1996.
(C) Includes the following adjustments relating to the Carriage Club
Acquisitions for the period January 1, 1996 through April 30, 1996: (i)
elimination of $160,000 in management fees paid to the Predecessor by
Carriage Club; (ii) additional depreciation expense of $104,000 attributable
to the increase in the carrying value of the acquired assets; and (iii)
additional interest costs of $991,000 associated with the financing of the
Carriage Club Acquisitions. Additional interest costs represent the
difference between the interest that would have been incurred by the Company
if the Company had acquired the Carriage Club properties on January 1, 1996,
and the actual interest cost incurred by the seller of these properties for
the period from January 1, 1996 through April 30, 1996.
(D) Includes the following adjustments relating to the Sale-Leaseback
Transactions: (i) elimination of $1.2 million of depreciation and
amortization expense on assets sold in the Sale-Leaseback Transactions; (ii)
lease expense of approximately $2.5 million, less $455,000 representing
amortization of the deferred gain on the Sale-Leaseback Transactions ($4.6
million over ten years); and (iii) elimination of $1.4 million of interest
expense on debt retired with a portion of the net proceeds from the
Sale-Leaseback Transactions.
(E) Reflects income tax expense that would have been recognized if the
Predecessor, the Predecessor Entities, and Carriage Club had been
corporations since January 1, 1996, filing a consolidated tax return.
(F) Income per share before extraordinary item is calculated before subtracting
the return on the Preferred Partnership Interests.
(G) Reflects 7,812,500 shares issuable in the Reorganization, plus 1,562,500
shares, representing the value of the $25.0 million principal amount of the
Reorganization Note (based upon an assumed initial public offering price of
$16.00 per share).
(H) Does not reflect a $13.5 million ($1.23 per share) one-time charge to income
which will be incurred at the time of the Reorganization in connection with
the conversion from a non-taxable to a taxable entity and the resulting
recognition of a deferred income tax liability for the differences between
the accounting and tax bases of the Company's assets and liabilities.
(I) Reflects 7,812,500 shares issuable in the Reorganization, plus the 3,125,000
shares offered hereby.
21
<PAGE> 23
SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data and pro forma data
of the Company, the Predecessor, and the Predecessor Entities. The selected
financial data as of and for the years ended December 31, 1992, 1993, and 1994
and the three months ended March 31, 1995 are derived from the combined
financial statements of the Predecessor Entities. The selected financial data as
of and for the nine months ended December 31, 1995 and as of and for the year
ended December 31, 1996 are derived from the consolidated financial statements
of the Predecessor. The selected data as of and for the periods ended December
31, 1994, March 31, 1995, December 31, 1995, and December 31, 1996 are derived
from the combined and consolidated financial statements of the Predecessor,
which financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The combined and consolidated
financial statements as of December 31, 1995 and 1996, and for the year ended
December 31, 1994, the three months ended March 31, 1995, the nine months ended
December 31, 1995, and the year ended December 31, 1996, and the report thereon,
are included elsewhere in this Prospectus. The selected statement of operations
and balance sheet data as of and for the three months ended March 31, 1996 and
as of and for the three months ended March 31, 1997 are derived from the
unaudited consolidated financial statements of the Predecessor. 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 three months ended March 31, 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
------------------------------------------- -------------------------------------
THREE MONTHS NINE MONTHS YEAR ENDED
YEARS ENDED DECEMBER 31, ENDED ENDED DECEMBER 31, 1996
--------------------------- MARCH 31, DECEMBER 31, ----------------------
1992 1993 1994 1995 1995 ACTUAL PRO FORMA(1)
------- ------- ------- ------------- ------------ ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Resident and health care
revenue................... $16,045 $23,162 $30,979 $11,761 $47,239 $73,878 $77,964
Management services
revenue................... 1,774 2,752 2,362 595 1,524 1,739 1,579
------- ------- ------- ------- ------- ------- -------
Total revenues........ 17,819 25,914 33,341 12,356 48,763 75,617 79,543
Operating expenses:
Community operating
expense................... 11,329 16,401 21,780 8,035 30,750 46,960 49,298
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)(3) 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)(4)................ -- -- -- 20 55 (920) (920)
------- ------- ------- ------- ------- ------- -------
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
-----------------
THREE MONTHS
ENDED MARCH 31,
-----------------
1996(2) 1997
------- -------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Resident and health care
revenue................... $15,803 $20,982
Management services
revenue................... 513 528
------- -------
Total revenues........ 16,316 21,510
Operating expenses:
Community operating
expense................... 10,270 13,399
Lease expense............... -- 528
General and
administrative............ 1,183 1,886
Depreciation and
amortization.............. 1,390 1,585
------- -------
Total operating
expenses................ 12,843 17,398
------- -------
Income from operations.... 3,473 4,112
------- -------
Other income (expense):
Interest expense............ (1,894) (3,257)
Interest income............. 79 150
Other....................... (6) (30)
------- -------
Other income (expense),
net..................... (1,821) (3,137)
------- -------
Income (loss) before
income taxes and
extraordinary item...... 1,652 975
Income tax expense
(benefit)(4)................ -- --
------- -------
Income (loss) before
extraordinary item.......... 1,652 975
Extraordinary item(5)......... (2,335) --
------- -------
Net income (loss)............. (683) 975
Preferred return on special
redeemable preferred limited
partnership interests(6).... (375) --
------- -------
Net income (loss) available
for distribution to partners
and shareholders............ $(1,058) $ 975
======= =======
Distribution to partners,
excluding preferred
distributions............... $ 1,415 $ 2,500(7)
======= =======
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------------------------
YEAR ENDED THREE MONTHS
DECEMBER 31, 1996 ENDED MARCH 31,
---------------------- -----------------
ACTUAL PRO FORMA(1) 1996(2) 1997
------ ------------ ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
UNAUDITED PRO FORMA TAX DATA(8):
Income before income taxes and extraordinary item........... $4,613 $4,329 $1,652 $ 975
Pro forma income tax expense................................ 820 712 628 370
------ ------ ------ ------
Pro forma income before extraordinary item.................. 3,793 3,617 1,024 605
Preferred return on special redeemable preferred limited
partnership interests(6).................................. (1,104) (324) (375) --
------ ------ ------ ------
Pro forma income before extraordinary item available for
distribution to partners and shareholders................. $2,689 $3,293 $ 649 $ 605
====== ====== ====== ======
Pro forma per share data:
Income before extraordinary item.......................... $ 0.40 $ 0.39 $ 0.06
Preferred return on special redeemable preferred limited
partnership interests................................... 0.12 0.03 --
------ ------ ------
Income before extraordinary item available for
distribution to partners and shareholders............... $ 0.29 $ 0.35 $ 0.06
====== ====== ======
Shares used in computing pro forma per share data(9)...... 9,375 9,375 9,375
====== ====== ======
Pro forma as adjusted per share data(10):
Income before extraordinary item.......................... $ 0.33 $ 0.06
Preferred return on special redeemable preferred limited
partnership interests................................... 0.03 --
------ ------
Income before extraordinary item available for
distribution to partners and shareholders............... $ 0.30 $ 0.06
====== ======
Shares used in computing pro forma as adjusted per share
data.................................................... 10,938 10,938
====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31, 1997
-------------------------------------------------- ----------------------------
PREDECESSOR ENTITIES
(COMBINED) PREDECESSOR COMPANY
---------------------------- -------------------------------- ---------------
PRO FORMA,
1992 1993 1994 1995 1996 ACTUAL(11) AS ADJUSTED(12)
------- ------- -------- -------- -------- ---------- ---------------
(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 $ 8,854 $ 26,954
Working capital (deficit).................. 1,545 2,529 3,168 (1,048) (14,289) 1,651 22,251
Total assets............................... 54,419 63,393 111,425 165,579 228,162 214,156 234,756
Long-term debt, including current
portion.................................. 38,469 43,335 89,414 102,245 170,689 157,568 157,568
Partners' and shareholders' equity......... 11,937 15,042 12,823 51,823 37,882 36,357 43,441
</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) Giving pro forma effect to the transactions described in footnote (1) above
as if they had occurred on January 1, 1996, certain selected financial data
of the Predecessor for the three months ended March 31, 1996 would have
been as follows:
<TABLE>
<S> <C>
Total revenues.............................................. $19,281
Income from operations...................................... 4,070
Income before income taxes and extraordinary item........... 1,134
Pro forma income tax expense................................ 431
Pro forma income before extraordinary item.................. 703
Pro forma income before extraordinary item available for
distribution to partners and shareholders................. $ 523
</TABLE>
(3) 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.
(4) Provision for income taxes reflects income tax expense of only one of the
Predecessor Entities because the Predecessor and the other Predecessor
Entities were partnerships. No income tax expense is reflected for periods
prior to 1995 because of losses or the availability of NOLs. Both periods
in 1995 reflect a provision for alternative minimum taxes. In 1996, the
Company recorded an income tax benefit and a deferred tax asset of $920,000
because of the anticipated utilization of NOLs that will offset taxable
gains recognized from the Sale-Leaseback Transactions. See Note 12 to the
Combined and Consolidated Financial Statements.
(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 distribution
23
<PAGE> 25
with respect to $4.8 million of the Preferred Partnership Interests which
were redeemed in June 1996 out of operating cash flow and were not
eliminated. The remaining $5.2 million of the Preferred Partnership
Interests were redeemed with a portion of the net proceeds from the
Sale-Leaseback Transactions, and therefore distributions with respect to
this $5.2 million portion of the Preferred Partnership Interests have been
eliminated in the Pro Forma Statement of Operations data.
(7) Reflects the accrual of 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 pro forma financial data reflects the effect on
certain income statement data of income tax expense that would have been
recorded had the Predecessor and the other Predecessor Entities not been
exempt from paying such income taxes. Pro forma income tax expense has been
calculated using statutory U.S. Federal and state tax rates and gives
effect to the recognition in 1996 of the $920,000 deferred tax asset
described in footnote (4) above.
(9) Reflects 7,812,500 shares issuable in the Reorganization, plus 1,562,500
shares, representing the value of the $25.0 million principal amount of the
Reorganization Note (based upon an assumed initial public offering price of
$16.00 per share).
(10) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the Reorganization, and (b) the sale of the 3,125,000
shares of Common Stock offered hereby, at an assumed initial public
offering price of $16.00 per share, and the application of a portion of the
estimated net proceeds to retire the Reorganization Note, and, (c) for the
year ended December 31, 1996 data, the transactions described in footnote
(1) above. The pro forma as adjusted per share data does not give effect to
a non-recurring $13.5 million ($1.23 per share) charge to income that will
be incurred at the time of the Reorganization in connection with the
conversion from a non-taxable to a taxable entity and the resulting
recognition of a deferred income tax liability for the differences between
the accounting and tax bases of the Company's assets and liabilities. See
Note 16 to the Combined and Consolidated Financial Statements.
(11) Gives effect to the accrual as of March 31, 1997 of the Tax Distribution,
which was paid in April 1997.
(12) Gives effect to the following transactions as if they had occurred on March
31, 1997: (a) the payment of the Tax Distribution which had been accrued as
of March 31, 1997; (b) the Reorganization, including a $13.5 million charge
to income resulting in a reduction of shareholders' equity which will be
incurred at the time of the Reorganization in connection with the
conversion from a non-taxable to a taxable entity and the resulting
recognition of a deferred income tax liability for the differences between
the accounting and tax bases of the Company's assets and liabilities; and
(c) the sale of the 3,125,000 shares of Common Stock offered hereby, at an
assumed initial public offering price of $16.00 per share, and the
application of a portion of the estimated net proceeds to retire the
Reorganization Note.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a national senior living and health care services company
providing a broad range of care and services to the elderly within a residential
setting. The Company currently operates 19 senior living communities in 12
states with an aggregate capacity for approximately 5,500 residents. In May
1997, the Company expects to acquire an additional community with capacity for
90 residents and to commence operating an additional leased community with
capacity for 90 residents. The Company currently owns ten communities, leases
two communities pursuant to long-term leases, and manages seven communities
pursuant to management agreements. The Company's total revenues have grown from
$17.8 million in 1992 to $75.6 million in 1996, an average annual growth rate of
43.5%. During the same period, the Company's income from operations has grown
from $2.3 million to $15.6 million, an average annual growth rate of 61.7%.
The Company and its predecessors have owned, operated, or managed senior
living communities since 1978. The Predecessor, ARCLP, was formed in February
1995 in connection with the 1995 Roll-Up. The 1995 Roll-Up, effective April 1,
1995, was accounted for as a purchase business combination by the Predecessor.
The Company was incorporated in February 1997 for purposes of effecting the
Reorganization and the Offering. See "The Company -- Pending Reorganization."
For the purposes of the following discussion, amounts for the year ended
December 31, 1995 represent the sum of the combined results of operations of the
Predecessor and Predecessor Entities for the period from January 1, 1995 through
March 31, 1995 and the consolidated results of operations of the Predecessor for
the period from April 1, 1995 (the effective date of the 1995 Roll-Up) through
December 31, 1995. See Note 1 to the Combined and Consolidated Financial
Statements.
In its early history, the Company focused its efforts on providing contract
management, marketing, and development services primarily to third parties.
Beginning in 1990 and continuing through 1996, the Company embarked on a
strategy of acquiring senior living communities through the Predecessor Entities
and the Predecessor. During that period, the Company acquired the 12 communities
it now owns or leases. Over the last three years, the Company acquired eight of
these senior living communities, with an aggregate capacity for 2,186 residents,
at a total cost of approximately $139.0 million. See Note 3 to the Combined and
Consolidated Financial Statements.
During the next three years, the Company intends to develop approximately
35 free-standing assisted living residences with an aggregate capacity for
approximately 2,900 residents at an aggregate estimated cost to complete and
lease-up such residences of approximately $250.0 million to $300.0 million. The
Company is currently constructing an $11.6 million expansion at one of its owned
communities and is constructing, on behalf of the lessor, a $14.0 million
expansion at one of its leased communities. In addition, the Company plans to
commence additional expansions at five of its owned communities, which are
expected to cost approximately $50.0 million to $60.0 million to complete and
lease-up. These seven expansion projects will add capacity to accommodate an
additional 615 residents. The development of assisted living residences
typically involves a substantial commitment of capital over a twelve month
construction period, during which no revenues are generated, followed by a
twelve month lease-up period. The Company anticipates that newly opened or
expanded communities will operate at a loss during a substantial portion of the
lease-up period. See " -- Liquidity and Capital Resources" and "Risk
Factors -- Losses from Newly Developed Residences and Acquisitions" and "Risk
Factors -- No Assurance as to Ability to Develop Additional Assisted Living
Residences." In addition to the expansion of its owned and leased communities,
the Company is currently managing the expansion of one of its managed
communities.
The Company's growth strategy also includes the acquisition of
free-standing assisted living residences and, to a lesser extent, other senior
living communities; home health care agencies; and other properties or
businesses that are complementary to the Company's operations and growth
strategy.
The Company's total revenues are comprised of (i) resident and health care
revenues, which include all resident and home health care agency fees, and (ii)
management services revenues, which include fees, net of
25
<PAGE> 27
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 75.0% and 71.4% of total
revenues for the three months ended March 31, 1997 and 1996, respectively, and
75.2%, 71.6%, and 61.9% of total revenues for the years ended December 31, 1996,
1995, and 1994, respectively; (ii) per diem charges from nursing patients,
representing 13.1% and 16.2% of total revenues for the three months ended March
31, 1997 and 1996, respectively, and 14.0%, 17.2%, and 29.1% of total revenues
for the years ended December 31, 1996, 1995, and 1994, respectively; and (iii)
per visit billings from home health care patients and companion services
clients, representing 9.4% and 9.3% of total revenues for the three months ended
March 31, 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 2.5% and 3.1% of total revenues for the
three months ended March 31, 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 91.1% and 90.1% of the Company's total revenues for
the three months ended March 31, 1997 and 1996, respectively, and 92.1%, 91.3%,
and 93.0% of the Company's total revenues for the years ended December 31, 1996,
1995, and 1994, respectively, were attributable to private pay sources, with the
balance attributable to Medicare (8.8% for the three months ended March 31, 1997
and 7.8% for the year ended December 31, 1996), including Medicare-related
private co-insurance, and Medicaid (0.1% for the three months ended March 31,
1997 and 0.1% for 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) general and administrative expense, which includes all
corporate office overhead; and (iii) depreciation and amortization expense. As a
result of the Sale-Leaseback Transactions in January 1997, the Company is
incurring lease expense for periods after such date.
RESULTS OF OPERATIONS
The Company operates senior living communities and home health care
agencies under three general types of arrangements: fee ownership, leases, and
management agreements. Currently, the Company owns ten senior living communities
and eight home health care agencies; leases two communities; and operates seven
communities pursuant to management agreements.
Ownership of senior living communities and home health care agencies
typically requires a larger capital investment than managed or leased
operations, but provides maximum control over operations and all growth in owned
community and agency revenues flows directly to the Company. The Company's lease
arrangements are typically for terms of ten to 15 years, include renewal
options, and provide for a contractually fixed rent, plus additional rent,
subject to certain limits, based upon the gross revenues of the community. The
Company's lease agreements also typically limit the Company's right to operate
other senior living communities within a limited geographic area adjacent to the
leased community during the term of the lease and for one year thereafter.
Leased communities require a longer commitment and a larger capital investment
by the Company than managed communities, but provide a more stable source of
revenue because of their longer terms and provide a greater opportunity for
long-term revenue growth.
The Company's management agreements are generally for terms of three to
five years, but may be canceled by the owner of the community, without cause, on
three to six months notice. Pursuant to the management agreements, the Company
is generally responsible for providing management personnel, marketing, nursing,
resident care and dietary services, accounting and data processing reports, and
other services for these communities at the owner's expense. The Company
receives a monthly fee for its services based on either a contractually fixed
amount or a percentage of revenues or income. Certain management agreements also
provide the Company with an incentive fee based on various performance goals.
The Company's current management agreements expire on various dates between June
1997 and July 2000.
26
<PAGE> 28
The following tables set forth, for the periods indicated, selected
Statements of Operations data in thousands of dollars and expressed as a
percentage of total revenues, and certain resident capacity and occupancy data.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
$ % $ % $ %
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Resident and health care revenue....................... $30,979 92.9% $59,000 96.5% $73,878 97.7%
Management services revenue............................ 2,362 7.1 2,119 3.5 1,739 2.3
------- ----- ------- ----- ------- -----
Total revenues................................ 33,341 100.0 61,119 100.0 75,617 100.0
Community operating expense............................ 21,780 65.3 38,785 63.5 46,960 62.1
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.................................................. 98 0.3 (94) (0.1) 788 1.0
------- ----- ------- ----- ------- -----
Other income (expense), net.......................... (5,053) (15.1) (10,016) (16.4) (10,938) (14.5)
------- ----- ------- ----- ------- -----
Income before income taxes and extraordinary item.... 162 0.5% 2,103 3.4% 4,613 6.1%
Income tax expense (benefit)........................... -- -- 75 (0.1) (920) 1.2
------- ----- ------- ----- ------- -----
Income before extraordinary item....................... 162 0.5% 2,028 3.3% 5,533 7.3%
Extraordinary item..................................... -- -- -- -- 2,335 3.1
------- ----- ------- ----- ------- -----
Net income............................................. $ 162 0.5% $ 2,028 3.3% $ 3,198 4.2%
======= ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
1996 1997
--------------- ---------------
$ % $ %
------- ----- ------- -----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Resident and health care revenue............................ $15,803 96.9% $20,982 97.5%
Management services revenue................................. 513 3.1 528 2.5
------- ----- ------- -----
Total revenues..................................... 16,316 100.0 21,510 100.0
Community operating expense................................. 10,270 62.9 13,399 62.3
Lease expense............................................... -- -- 528 2.5
General and administrative.................................. 1,183 7.3 1,886 8.8
Depreciation and amortization............................... 1,390 8.5 1,585 7.4
------- ----- ------- -----
Total operating expenses........................... 12,843 78.7 17,398 80.9
------- ----- ------- -----
Income from operations............................. 3,473 21.3 4,112 19.1
Interest expense............................................ (1,894) (11.6) (3,257) (15.1)
Interest income............................................. 79 0.5 150 0.7
Other....................................................... (6) -- (30) (0.1)
------- ----- ------- -----
Other income (expense), net............................... (1,821) (11.2) 3,137 14.6
Income before income taxes and extraordinary item......... 1,652 10.1 975 4.5
Income tax expense (benefit)................................ -- -- -- --
------- ----- ------- -----
Income before extraordinary item............................ 1,652 10.1 975 4.5
Extraordinary item.......................................... (2,335) (14.3) -- --
------- ----- ------- -----
Net income (loss)........................................... $ (683) (4.2)% $ 975 4.5%
======= ===== ======= =====
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------------- ----------------------------------
1994 1995 1996 1996 1997
--------------- ---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
End of period capacity:
Owned.......................... 2,141 2,594 2,886 2,584 2,912
Leased......................... -- -- 483 -- 483
Managed........................ 3,315 3,008 2,159 3,005 2,159
----- ----- ---- ---- ----
Total.................... 5,456 5,602 5,528 5,589 5,554
===== ===== ===== ==== ====
Average occupancy rate:
Owned.......................... 89% 93% 94% 93% 94%
Leased......................... -- -- -- -- 95
Managed........................ 93 91 90 91 92
---- ----- ---- ---- ----
Total.................... 91% 92% 92% 92% 94%
==== ===== ==== ==== ====
End period occupancy rate:
Owned.......................... 91% 94% 96% 93% 94%
Leased......................... -- -- -- -- 96
Managed........................ 96 91 92 91 93
---- --- ---- ---- ---
Total.................... 94% 92% 94% 92% 94%
==== === ==== ==== ====
Stabilized average occupancy
rate(1):)
Owned.......................... 89% 93% 95% 93% 96%
Leased......................... -- -- -- -- 95
Managed........................ 93 95 95 91 95
---- --- ---- ---- ---
Total.................... 91% 94% 95% 92% 96%
==== === ==== ==== ====
</TABLE>
- ---------------
(1) Excludes the effect of new communities or expansions of the Company's
existing communities, including: (i) the opening of a managed community in
1995 with a capacity for 242 residents; (ii) the opening of two expansions
of owned communities in mid-1996 with an aggregate additional capacity for
114 residents; and (iii) the opening of a managed community in mid-1996 with
a capacity for 76 residents. These openings resulted in decreased average
occupancy rates for the periods noted.
28
<PAGE> 30
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>
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
----------------- ----------------- -----------------
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% $14,280 $15,222 6.6%
Home health and
companion services
revenue............. 627 2,699 330.5% 2,699 3,789 40.4% 1,524 1,960 28.6%
------- ------- ------- ------- ------- -------
Resident and health
care revenue...... 27,011 31,739 17.5% 49,097 52,677 7.3% 15,804 17,182 8.7%
Community operating
expense............. 19,212 21,795 13.4% 32,854 34,314 4.4% 10,324 11,191 8.4%
------- ------- ------- ------- ------- -------
Resident income from
operations(1)..... $ 7,799 $ 9,944 27.5% $16,243 $18,363 13.1% 5,480 5,991 9.3%
======= ======= ======= ======= ======= =======
Resident income from
operations
margin(1)(2)...... 28.9% 31.3% 33.1% 34.9% 34.7% 34.9%
OTHER DATA:
Average occupancy
rate(3)............. 88% 91% 92% 94% 93% 96%
Average monthly
revenue per occupied
unit(4)............. $ 2,322 $ 2,467 6.2% $ 2,217 $ 2,295 3.5% 2,215 2,289 3.3%
Average monthly
expense per occupied
unit(5)............. 1,639 1,665 1.6% 1,465 1,475 0.7% 1,412 1,446 2.4%
</TABLE>
- ---------------
(1) "Resident income from operations" and "Resident income from operations
margin" are not measures of performance determined in accordance with
generally accepted accounting principles. This information is included
because the Company believes it is useful for investors in measuring
operating trends on a Same Facility basis. "Resident income from operations"
reflects resident and health care income from operations on a Same Facility
basis before depreciation and amortization, interest, general and
administrative expense, and other non-operating expenses. This information
should be considered in conjunction with the historical and pro forma
financial statements of the Company included elsewhere in this Prospectus,
which include certain significant items excluded from the foregoing
calculations for the Company as a whole.
(2) "Resident income from operations margin" represents "Resident income from
operations" as a percentage of "Resident and health care revenue."
(3) Average occupancy rate is based on the ratio of occupied apartments to
available apartments expressed on a monthly basis for independent and
assisted living residences, and occupied beds to available beds on a per
diem basis for nursing beds.
(4) Average monthly revenue per occupied unit is total annual resident and
health care revenues, excluding home health care agency and companion
services fees, divided by total occupied apartments and nursing beds,
expressed on a monthly basis.
(5) Average monthly expense per unit is total annual community operating
expenses, excluding home health care agency and companion services expenses,
divided by total occupied apartments and nursing beds, expressed on a
monthly basis.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996
Revenues. Total revenues were $21.5 million for the three months ended
March 31, 1997 compared to $16.3 million for the three months ended March 31,
1996, representing an increase of $5.2 million, or 31.8%. Resident and health
care revenues increased by $5.2 million and management services revenues
increased by $15,000. Of the increase in resident and health care revenues, $4.2
million, or 81.9%, was attributable to revenues derived from two senior living
communities acquired in May 1996, with the remaining $942,000, or 18.1%, of such
increase attributable to Same Facility growth.
Revenues attributable to Same Facilities were $17.2 million for the three
months ended March 31, 1997, representing an increase of $1.4 million, or 8.7%,
over the same period in 1996. Home health care agency and companion services
fees on a Same Facility basis increased by $436,000, or 28.6%, over the prior
period. Monthly/per diem service fee revenue on a Same Facility basis increased
$942,000, or 6.6%, over the three
29
<PAGE> 31
months ended March 31, 1996. Of this increase, 3.1% was due primarily to rate
increases and 3.5% was due to higher occupancy. Same Facility average occupancy
rates increased from 93% for the three months ended March 31, 1996 to 96% for
the three months ended March 31, 1997. Same Facility end of period occupancy
rates increased from 93% at March 31, 1996 to 95% at March 31, 1997.
Community Operating Expense. Community operating expense increased to
$13.4 million for the three months ended March 31, 1997, as compared to $10.3
million for the three months ended March 31, 1996, representing an increase of
$3.1 million, or 30.5%. Of the increase in community operating expense, $2.3
million, or 72.3%, was attributable to expenses from acquired senior living
communities, and 27.7% of this increase was attributable to Same Facility
operating expenses, which increased by $867,000, or 8.4%, over the prior period.
Of such increase, $353,000 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
5.6% for the three months ended March 31, 1997 as compared to the comparable
period in the prior year. Community operating expense as a percentage of
resident and health care revenues declined to 63.9% for the three months ended
March 31, 1997, from 65.0% for the three months ended March 31, 1996. Same
Facility community operating expense as a percentage of Same Facility resident
and health care revenues declined to 65.1% for the three months ended March 31,
1997 from 65.3% in the comparable period in the prior year, primarily due to
improved economies of scale resulting from higher occupancy.
General and Administrative. General and administrative expense increased
to $1.9 million for the three months ended March 31, 1997, as compared to $1.2
million for the three months ended March 31, 1996, representing an increase of
$703,000, or 59.4%. Of this increase, $448,000 was due to payroll cost increases
related to salary increases and the hiring of additional staff in the corporate
office, including staff to manage the Company's home health agencies. The
remaining increase of approximately $256,000 resulted primarily from development
activity related to the Company's growth plans. General and administrative
expense as a percentage of total revenues increased to 8.8% for the three months
ended March 31, 1997, from 7.3% for the comparable period in the prior year.
Lease Expense. The Company incurred lease expense of $528,000 for the
three months ended March 31, 1997, as a result of the Sale-Leaseback
Transactions in January 1997. The Company did not incur lease expense prior to
the Sale-Leaseback Transactions.
Depreciation and Amortization. Depreciation and amortization expense
increased to $1.6 million for the three months ended March 31, 1997, from $1.4
million for the three months ended March 31, 1996, representing an increase of
$195,000, or 14.0%. This increase was primarily the result of depreciation
associated with acquisitions and amortization of related financing costs. Same
Facility depreciation and amortization expense decreased to $1.1 million for the
three months ended March 31, 1997 from $1.3 million for the three months ended
March 31, 1996, as a result of the Sale-Leaseback Transactions effected in
January 1997. This decrease was offset in part by the increased lease expense
described in the preceding paragraph.
Other Income (Expense). Interest expense increased to $3.3 million in the
three months ended March 31, 1997, from $1.9 million for the three months ended
March 31, 1996, representing an increase of $1.4 million, or 72.0%. The increase
in interest expense was a result of indebtedness incurred in connection with the
acquisition of two senior living communities in May 1996 offset in part by a
reduction in indebtedness of $14.6 million in connection with the Sale-Leaseback
Transactions. Interest expense, as a percentage of total revenues, increased to
15.1% for the three months ended March 31, 1997 from 11.6% for the comparable
period in the prior year.
Extraordinary Loss. During the three months ended March 31, 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
$975,000 for the three months ended March 31, 1997 from a loss of $683,000 for
the comparable period in the prior year. Before the extraordinary item described
above, net income for the three months ended March 31, 1996 was $1.7 million.
30
<PAGE> 32
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995
Revenues. Total revenues were $75.6 million in 1996 compared to $61.1
million in 1995, representing an increase of $14.5 million, or 23.7%. Resident
and health care revenues increased by $14.9 million, which was offset, in part,
by a decrease in management services revenues of $380,000. Of the increase in
resident and health care revenues, $11.3 million, or 75.9%, was attributable to
revenues derived from acquired senior living communities, with the remaining
$3.6 million, or 24.1%, of such increase attributable to Same Facility growth.
During 1995 and 1996, the Company acquired four senior living communities that
the Company had previously managed, resulting in a decrease in management
services revenues in 1996 to $1.7 million, as compared to $2.1 million in 1995.
Revenues attributable to Same Facilities were $52.7 million in 1996,
representing an increase of $3.6 million, or 7.3%, over 1995. Home health care
agency and companion services fees on a Same Facility basis increased by $1.1
million, or 40.4%, over 1995. Monthly/per diem service fee revenue on a Same
Facility basis increased $2.5 million, or 5.4%, over 1995. Of this increase,
3.6% was due primarily to rate increases and 1.8% was due to higher occupancy.
Same Facility average occupancy rates increased from 92% in 1995 to 94% in 1996.
Same Facility end of year occupancy rates increased from 93% in 1995 to 96% in
1996.
Community Operating Expense. Community operating expense increased to
$47.0 million in 1996, as compared to $38.8 million in 1995, representing an
increase of $8.2 million, or 21.1%. Of the increase in community operating
expense, $6.7 million, or 82.0%, was attributable to expenses from acquired
senior living communities, and 18.0% of this increase was attributable to Same
Facility operating expenses, which increased by $1.5 million, or 4.4%, over
1995. Of such increase, $694,000 was attributable to increases in home health
care agency and companion services expenses. Same Facility operating expenses,
exclusive of home health care agency and companion services expenses, increased
2.5% in 1996 as compared to 1995. Community operating expense as a percentage of
resident and health care revenues declined to 63.6% in 1996 from 65.7% in 1995.
Same Facility community operating expense as a percentage of Same Facility
resident and health care revenues declined to 65.1% in 1996 from 66.9% in 1995,
primarily due to improved economies of scale resulting from higher occupancy.
General and Administrative. General and administrative expense increased
to $6.2 million in 1996, as compared to $4.6 million in 1995, representing an
increase of $1.6 million, or 36.1%. General and administrative expense as a
percentage of total revenues increased to 8.2% in 1996 from 7.5% in 1995. Of
this increase in general and administrative expense, $546,000 was directly
related to the creation of a new operating department by the Company in 1996 to
manage the Company's home health care agencies, which had previously been
managed by a third party. The remaining increase of approximately $1.1 million
resulted from continued investments in infrastructure necessary to support the
Company's growth, including the incurrence of costs related to personnel
training, the expansion of the development services department, the upgrade of
management information systems, and the centralization of the Company's
accounting staff and functions.
Depreciation and Amortization. Depreciation and amortization expense
increased to $6.9 million in 1996 from $5.7 million in 1995, representing an
increase of $1.2 million, or 22.0%. This increase was primarily the result of
depreciation associated with acquisitions and amortization of related financing
costs, offset in part by a decrease in amortization resulting from the write-off
of certain financing costs. As a result of the Sale-Leaseback Transactions
effected in January 1997, the Company expects Same Facility depreciation and
amortization expense to decrease in the future, which decrease will be offset,
in part, by increased lease expense.
Other Income (Expense). Interest expense increased to $12.2 million in
1996 from $10.3 million in 1995, representing an increase of $1.9 million, or
18.1%. The increase in interest expense was related to indebtedness incurred in
connection with the acquisition of senior living communities. Interest expense,
as a percentage of total revenues, declined to 16.1% in 1996 from 16.9% in 1995.
Interest income increased to $434,000 in 1996 from $378,000 in 1995. The Company
had other income of $788,000 in 1996, including a gain on the sale of assets of
$874,000, compared to other expense of $94,000 in 1995. The 1995 other expense
included: (i) $982,000 of nonrecurring expense related to the 1995 Roll-Up; (ii)
a gain on the sale of assets of
31
<PAGE> 33
$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 Company acquired six senior living communities, three
of which had been previously managed by the Company, resulting in a decrease in
management services revenues in 1995 to $2.1 million, as compared to $2.4
million in 1994.
Revenues attributable to Same Facilities were $31.7 million in 1995,
representing an increase of $4.7 million, or 17.5%, over 1994. Home health care
agency and companion services fees on a Same Facility basis increased by $2.1
million, or 330.5%, over 1994. Monthly/per diem service fee revenue on a Same
Facility basis increased $2.6 million, or 10.1%, over 1994. Of this increase,
6.5% was due primarily to rate increases and 3.6% was due to higher occupancy.
Same Facility average occupancy rates increased from 89% in 1994 to 91% in 1995.
Same Facility end of year occupancy rates increased from 90% in 1994 to 92% in
1995.
Community Operating Expense. Community operating expense increased to
$38.8 million in 1995, as compared to $21.8 million in 1994, representing an
increase of $17.0 million, or 78%. Of the increase in community operating
expense, $14.4 million, or 84.8%, was attributable to operating expenses from
acquired senior living communities, and 15.2% of this increase was attributable
to Same Facility operating expenses, which increased by $2.6 million, or 13.4%,
over 1994. Of such increase, $1.6 million was attributable to increases in home
health care agency and companion services expenses. Same Facility operating
expenses, exclusive of home health care agency and companion services expenses,
increased 5.2% in 1995 as compared to 1994. Community operating expense as a
percentage of resident and health care revenues declined to 65.7% in 1995 from
70.3% in 1994. Same Facility community operating expense as a percentage of Same
Facility resident and health care revenues increased to 71% in 1995 from 69% in
1994.
General and Administrative. General and administrative expense increased
to $4.6 million in 1995, as compared to $3.5 million in 1994, representing an
increase of $1.1 million, or 31.8%. General and administrative expense as a
percentage of total revenues decreased to 7.5% in 1995 from 10.4% in 1994. The
majority of the increase resulted from costs incurred in connection with
increased personnel costs incurred to support the Company's growth, including
costs associated with the upgrade of management information systems and the
centralization of the Company's accounting staff and functions.
Depreciation and Amortization. Depreciation and amortization expense
increased to $5.7 million in 1995 from $2.9 million in 1994, representing an
increase of $2.8 million, or 95.8%. This increase was primarily the result of
depreciation associated with acquisitions and amortization of related financing
costs.
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Other Income (Expense). Interest expense increased to $10.3 million in
1995 from $5.4 million in 1994, representing an increase of $4.9 million, or
92.4%. The increase in interest expense was related to indebtedness incurred in
connection with the acquisition of senior living communities. Interest expense,
as a percentage of total revenues, increased to 16.9% in 1995 from 16.1% in
1994. Interest income increased to $378,000 in 1995 from $203,000 in 1994. The
Company had other expense of $94,000 in 1995 compared to other income of $98,000
in 1994, primarily as a result of $981,000 of nonrecurring expenses related to
the 1995 Roll-Up, and $268,000 of other expenses associated with a 1995
acquisition, which was offset, in part, by a $1.1 million gain on sale of
assets.
Net Income. As a result of the foregoing factors, net income increased to
$2.0 million in 1995 from $162,000 in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has traditionally financed its activities from net proceeds
from private placements of equity interests, long-term mortgage borrowing, and
cash flows from operations. At March 31, 1997, the Company had $157.6 million of
indebtedness outstanding, including $145.8 million payable to General Electric
Capital Corporation ("GECC"), with fixed maturities ranging from December 31,
2001 to April 30, 2003. The Company has the capacity to borrow up to an
additional $15.9 million from GECC to finance future acquisitions or expansions.
The Company also maintains a $2.5 million line of credit with a bank that is
available for working capital and to secure various debt instruments. At March
31, 1997, approximately $1.6 million of this line of credit had been used to
obtain letters of credit. The Company also maintains a $5.0 million line of
credit with a bank that is available for land acquisitions. At March 31, 1997,
$825,000 was outstanding under this line of credit. Substantially all of the
Company's indebtedness is secured, is cross-defaulted with other indebtedness
and contains customary restrictive covenants. The Company does not believe that
these restrictive covenants materially limit its operations.
As of March 31, 1997, approximately 72.6% of the Company's indebtedness
bore interest at fixed rates, with a weighted average interest rate of 8.5%. The
Company's variable rate indebtedness carried an average rate of 7.7% as of March
31, 1997. Less than 12% of the Company's currently outstanding indebtedness
matures before December 31, 2002. The Sale-Leaseback Transactions resulted in
minimum annual lease obligations of $2.5 million, beginning in 1997. The Company
expects to service current outstanding indebtedness and lease obligations with
internally generated funds.
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 $1.6 million and $3.3 million for the three months ended March
31, 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 March 31, 1997, unrestricted cash balances were $8.9
million.
Net cash used by investing activities totaled $67.6 million, $11.0 million,
and $46.3 million 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 at its
owned properties in an aggregate amount of $8.9 million, including expansion
activity in the amount of $3.5 million. During the same period, the Company sold
an aggregate of $2.8 million of assets. Net cash provided by investing
activities was $24.0 million for the three months ended March 31, 1997, as
compared to net cash used of $746,000 for the three months ended March 31, 1996.
During the three months ended March 31, 1997, the Company sold $27.0 million of
assets in the Sale-Leaseback Transactions and made $3.3 million of capital
expenditures at certain of its owned communities.
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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 cash distributions
to its partners of $7.1 million, $6.6 million, and $2.6 million in 1996, 1995,
and 1994, respectively; and redeemed all of the outstanding Preferred
Partnership Interests for $10.0 million in 1996. Net cash used by financing
activities was $20.0 million and $973,000 for the three months ended March 31,
1997 and 1996, respectively. During the three months ended March 31, 1997, the
Company repaid $14.6 million of indebtedness with a portion of the proceeds from
the Sale-Leaseback Transactions and made $959,000 of principal payments on its
long-term debt. The Company made the $2.5 million Tax Distribution to its
partners in April 1997 (which was accrued as of March 31, 1997), which amount
approximates the income taxes associated with the Predecessor's anticipated
earnings in 1997 through the date of the Reorganization. Following the
Reorganization and conversion from partnership to corporate form, the Company
does not anticipate declaring or paying cash dividends on the Common Stock in
the foreseeable future. The Company intends to retain future earnings to finance
the operation and expansion of the Company's business. See "Dividend Policy and
Prior Distributions."
In January 1997, the Company effected the Sale-Leaseback Transactions with
respect to its Holley Court Terrace and Trinity Towers senior living communities
and realized net cash proceeds therefrom of $27.6 million. Of such proceeds,
$14.6 million were used to retire indebtedness and $5.2 million were used to
redeem the Predecessor's outstanding Preferred Partnership Interests (which
redemption had been accrued as of December 31, 1996). The Sale-Leaseback
Transactions resulted in a gain of approximately $4.6 million, which will be
recognized over the ten-year initial term of the lease.
In May 1997, the Company acquired an assisted living residence in Tarpon
Springs, Florida. The purchase price for the facility was $4.4 million and was
financed primarily through a $3.5 million mortgage loan provided by a bank.
The Company has entered into an acquisition agreement pursuant to which it
expects in May 1997 to acquire the Remington at Corpus Christi community and to
acquire a long-term leasehold in the Remington at Victoria community. The
purchase price for the Corpus Christi community will be approximately $5.7
million, and the Company intends to finance the acquisition primarily through a
$4.7 million mortgage loan provided by NHI. The purchase price for the Victoria
community leasehold will be approximately $900,000. The lease is expected to
provide for annual lease obligations of approximately $468,000.
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 entered into a non-binding letter of intent to acquire a
home health care agency located in Corpus Christi, Texas for a purchase price of
approximately $1.0 million. Subject to completion of additional due diligence,
the Company expects to complete the acquisition in the second quarter of 1997.
Capital expenditures planned for 1997 total approximately $55.0 million. Of
this amount, the Company anticipates that approximately $25.0 million will be
used for the development of approximately 21 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.
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The Company expects that its current cash and the net proceeds from the
Offering, together with cash flow from operations, the REIT Facilities, and the
proceeds of borrowings available to it under existing credit arrangements, will
be sufficient to meet its operating requirements and to fund its anticipated
growth for at least the next 12 to 18 months. The Company expects to use a wide
variety of financing sources to fund its future growth, including public and
private debt and equity, conventional mortgage financing, and unsecured bank
financing, among other sources. There can be no assurance that financing from
such sources will be available in the future or, if available, that such
financing will be available on terms acceptable to the Company.
DEFERRED TAX LIABILITY
The Company will incur a one-time $13.5 million ($1.23 per share) charge to
income resulting in a reduction of shareholders' equity at the time of the
Reorganization in connection with the conversion from a non-taxable to a taxable
entity and the resulting recognition of a deferred income tax liability for the
differences between the accounting and tax bases of the Company's assets and
liabilities.
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company.
Inflation could, however, affect the Company's future revenues and results of
operations because of, among other things, the Company's dependence on senior
residents, many of whom rely primarily on fixed incomes to pay for the Company's
services. As a result, during inflationary periods, the Company may not be able
to increase resident service fees to account fully for increased operating
expenses. In structuring its fees, the Company attempts to anticipate inflation
levels, but there can be no assurance that the Company will be able to
anticipate fully or otherwise respond to any future inflationary pressures.
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BUSINESS
OVERVIEW AND HISTORY
The Company is a national senior living and health care services company
providing a broad range of care and services to the elderly, including
independent living, assisted living, skilled nursing, and home health care
services. The Company has pioneered numerous developments in the provision of
care and services for the elderly since its inception in 1978, and believes it
ranks among the leading operators in the senior living and health care services
industry. Currently, the Company operates 19 senior living communities in 12
states, consisting of ten owned communities, two leased communities, and seven
managed communities, with an aggregate capacity for approximately 5,500
residents. In May 1997, the Company expects to acquire an additional community
with capacity for 90 residents and to commence operating an additional leased
community with capacity for 90 residents. The Company also owns and operates
eight home health care agencies. At March 31, 1997, the Company's owned
communities had an occupancy rate of 94%, its leased communities had an
occupancy rate of 95%, and its managed communities had an occupancy rate of 93%.
For the year ended December 31, 1996 and the three months ended March 31, 1997,
revenues attributable to the Company's senior living communities accounted for
91.5% and 90.5%, respectively, of the Company's total revenues, and revenues
attributable to the Company's home health care agencies accounted for 6.2% and
7.0%, respectively, of the Company's total revenues. Approximately 92.1% of the
Company's total revenues for the year ended December 31, 1996 and approximately
91.1% of the Company's total revenues for the three months ended March 31, 1997
were derived from private pay sources.
Since 1992, the Company has experienced significant growth, primarily
through the acquisition of 11 senior living communities. The Company's revenues
have grown from $17.8 million in 1992 to $75.6 million in 1996, an average
annual growth rate of 43.5%. During the same period, the Company's income from
operations has grown from $2.3 million to $15.6 million, an average annual
growth rate of 61.7%. The Company intends to continue its growth through a
combination of (i) development of free-standing assisted living residences,
including special living units and programs for residents with Alzheimer's and
other forms of dementia; (ii) selective acquisitions of senior living
communities, including assisted living residences; (iii) expansion of existing
communities; and (iv) development and acquisition of home health care agencies.
As part of its growth strategy, the Company is currently developing 21
free-standing assisted living residences, with an estimated aggregate capacity
for 1,826 residents, and is expanding eight of its existing communities to add
capacity to accommodate an additional 704 residents. The Company has also
entered into a letter of intent to acquire one additional home health care
agency and intends to commence operations at five additional home health care
agencies during 1997.
The Company was founded by Dr. Thomas F. Frist, Sr. and Jack C. Massey, the
principal founders of Hospital Corporation of America (now a subsidiary of
Columbia/HCA Healthcare Corporation). The Company's operating philosophy was
inspired by Dr. Frist's and Mr. Massey's vision to enhance the lives of the
elderly by providing the highest quality of care and services in well-operated
communities designed to improve and protect the quality of life, independence,
personal freedom, privacy, spirit, and dignity of its residents. The Company
believes that its senior management, led by W.E. Sheriff, its Chairman and Chief
Executive Officer, and Christopher J. Coates, its President and Chief Operating
Officer, is one of the most experienced management teams in the senior living
industry. The Company's 12 senior officers have been employed by the Company for
an average of nine years and have an average of 14 years of industry experience.
The executive directors of the Company's communities have been employed by the
Company for an average of four years and have an average of 11 years of
experience in the senior living industry.
GROWTH STRATEGY
The Company believes that the fragmented nature of the senior living
industry and the limited capital resources available to many small, private
operators provide a unique opportunity for the Company to expand its existing
base of senior living operations. The Company believes that its existing senior
living communities serve as the foundation on which the Company can build senior
living networks in targeted geographic markets
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and thereby provide a broad range of high quality care in a cost-efficient
manner. The following are the principal elements of the Company's growth
strategy:
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 21 free-
standing assisted living residences, with an estimated aggregate capacity for
1,826 residents. See "Business -- Development Activities."
The Company follows a disciplined development strategy that includes the
following sequential components: (i) a market demographic analysis is conducted
by the Company to assess and confirm the relative strength of a potential
market; (ii) cohesive neighborhoods and submarkets are identified within the
market; (iii) within each neighborhood and submarket, competitive projects are
identified and assessed as to their market niche, program of services and
pricing, physical condition, and likely financial condition; (iv) based on the
prior three steps, a determination is then made as to whether to participate in
the market by acquisition or development; (v) if the Company elects to develop
within the market, the Company then determines which submarkets to serve,
selects a specific design type for each submarket and determines the number of
assisted living units and dementia care units to develop; and (vi) specific
sites are analyzed, whereby the Company considers a number of factors including
site visibility, location within a submarket, the specific neighborhoods which
can be served from the site, probability of achieving zoning approvals and the
proximity of the site to the Company's other assisted living residences and
senior living communities. Architectural design and hands-on construction
functions are usually performed by outside architects and contractors with whom
the Company has an historical relationship. The Company expects that the average
construction time for a typical assisted living residence will be approximately
10 to 12 months. Once construction is completed, the Company estimates that it
will take approximately 12 months on average for the assisted living residence
to achieve a stabilized level of occupancy.
The Company's senior management and development staff have extensive
experience in the development of senior living communities, including assisted
living residences, real estate acquisition, engineering, general construction,
and project management. The Company's development team has the demonstrated
ability to target potential markets, perform appropriate market and demographic
studies, identify zoning and development issues, and determine the appropriate
size and configuration of residences to be developed.
Expand Existing Facilities
The Company plans to expand certain of its existing communities to include
additional assisted living residences (including special programs and living
units for residents with Alzheimer's and other forms of dementia), and skilled
nursing beds. The Company currently has three expansion projects under
construction (including one managed community) and five expansion projects under
development, representing an aggregate increase in capacity to accommodate an
additional 704 residents. The expansion of existing senior living communities
allows the Company to create operating efficiencies and capitalize on its local
presence, community familiarity, and reputation in markets in which the Company
currently operates.
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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 the Company's communities, and will
serve both the Company's communities and the surrounding area. The Company
believes that the expansion of its home health care services will enhance its
ability to provide a broad range of health care services, increase its market
visibility, and augment the creation of senior living networks in targeted
areas. The Company currently operates eight home health care agencies, four of
which are in their initial year of operation, and has entered into a letter of
intent to acquire an additional home health care agency in Corpus Christi,
Texas. The Company expects to complete such acquisition in the second quarter of
1997.
Expand Referral Networks and Strategic Alliances
The Company intends to continue to develop relationships (which, in certain
instances, may involve strategic alliances or joint ventures) with local and
regional hospital systems, managed care organizations, and other referral
sources to attract new residents to the Company's communities. The Company
believes that such arrangements or alliances, which could range from joint
marketing arrangements to priority transfer agreements, will enable it to be
strategically positioned within the Company's markets if, as the Company
believes, senior living programs become an integral part of the evolving health
care delivery system.
Pursue Additional Third-Party Management Opportunities
Although the Company intends to focus its efforts primarily on development
and acquisition activities, it may in certain instances pursue third-party
management opportunities as a means to enter new markets or expand its presence,
market knowledge, and influence in a targeted market. The Company currently
manages seven communities with an aggregate capacity for 2,159 residents
pursuant to management contracts. Furthermore, the Company intends to continue
its consulting and contract activities on a selective basis.
OPERATING STRATEGY
The Company's operating strategy is to provide high quality health care
services to its residents while achieving and sustaining a strong competitive
position within its chosen markets, as well as to continue to enhance the
performance of its operations.
Continue to Provide A Broad Range of High-Quality Personalized Care
Central to the Company's operating strategy is its focus on providing
high-quality care and services that are personalized and tailored to meet the
individual needs of each community resident. The Company's residences and
services are designed to provide a broad range of care that permits residents to
"age in place" as their needs change and as they develop further physical or
cognitive frailties. By creating an environment that maximizes resident autonomy
and provides individualized service programs, the Company seeks to attract
seniors at an earlier stage, before they need the higher level of care provided
in a skilled nursing facility. The
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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.
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
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residential community that offers health care and other services. The Company
currently owns 10 communities, leases two communities, and manages an additional
five communities which provide independent living services, with an aggregate
capacity for 2,290 residents, 374 residents, and 1,491 residents, respectively,
and intends in May 1997 to commence operating an additional leased community
with capacity for 60 independent living residents.
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.
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.
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<PAGE> 42
- 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 261 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 addition,
the Company has communities under development or expansion which will add
estimated additional capacity of 393 skilled nursing beds. In its skilled
nursing facilities, the Company provides traditional long-term care through
24-hour a day skilled nursing care by registered nurses, licensed practical
nurses, and certified nursing aides. The Company also offers a range of
sub-acute care services in certain of its communities. Sub-acute care is
generally short-term, goal-oriented rehabilitation care intended for individuals
who have a specific illness, injury or disease, but who do not require many of
the services provided in an acute care hospital. Sub-acute care is typically
rendered immediately after, or in lieu of, acute hospitalization in order to
treat such specific medical conditions.
Home Health Care
The Company provides home health care services to residents at certain of
its senior living communities and the surrounding areas through home health care
agencies based at certain of its existing senior living communities. The
services and products that the Company provides through its home health care
agencies include (i) general and specialty nursing services to individuals with
acute illnesses, long-term chronic health conditions, permanent disabilities,
terminal illnesses or post-procedural needs; (ii) therapy services consisting
of, among other things, physical, occupational, speech, and medical social
services; (iii) personal care services and assistance with ADLs; (iv) hospice
care for persons in the final phases of incurable disease; (v) respiratory,
monitoring, medical equipment services, and medical supplies to patients; and
(vi) a comprehensive range of home infusion and enteral therapies. The Company
intends to expand its home health care services to additional senior living
communities and to develop, acquire, or manage home health care service
businesses at other communities. In addition, the Company will make available to
residents certain physician, dentistry, podiatry, and other health related
services that will be offered by third-party providers. The Company may elect to
provide these services directly or through participation in managed care
networks or in joint ventures with other providers. The Company currently
operates eight home health care agencies, five of which are in their initial
year of operation.
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<PAGE> 43
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.
<TABLE>
<CAPTION>
AVERAGE OCCUPANCY
RESIDENT CAPACITY(1) COMMENCEMENT 1996 RATE AT
------------------------- OF OCCUPANCY MARCH 31,
COMMUNITY LOCATION IL AL SN TOTAL OPERATIONS(2) RATE 1997
- --------- -------- ----- --- --- ----- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OWNED(3):
Broadway Plaza....................... Ft. Worth, TX 252 40 122 414 Apr-92 94% 90%(4)
Carriage Club of Charlotte........... Charlotte, NC 355 54 50 459 May-96 91(5) 91(5)
Carriage Club of Jacksonville........ Jacksonville, FL 292 60 -- 352 May-96 89(5) 88(5)
The Hampton at Post Oak.............. Houston, TX 162 21 -- 183 Oct-94 94 95
Heritage Club........................ Denver, CO 220 35 -- 255 Feb-95 100 99
Parkplace............................ Denver, CO 195 48 -- 243 Oct-94 99 96
Remington at Corpus Christi(6)....... Corpus Christi, TX -- 90 -- 90 May-97 N/A N/A
Richmond Place....................... Lexington, KY 204 4 -- 208 Apr-95 98 98
Santa Catalina Villas................ Tucson, AZ 197 15 -- 212 Jun-94 90 94
The Summit at Westlake Hills......... Austin, TX 167 30 89 286 Apr-92 98 99
Westlake Village..................... Cleveland, OH 246 54 -- 300 Oct-94 94 94
----- --- --- ----- --- ---
Subtotal/Average................. 2,290 451 261 3,002 94% 94%
LEASED(7):
Holley Court Terrace................. Oak Park, IL 179 17 -- 196 Jul-93 81 94
Remington at Victoria(6)............. Victoria, TX 60 30 -- 90 May-97 N/A N/A
Trinity Towers....................... Corpus Christi, TX 195 32 60 287 Jan-90 94 96
----- --- --- ----- --- ---
Subtotal/Average................. 434 79 60 573 89% 95%
MANAGED(8):)
Burcham Hills........................ East Lansing, MI 138 71 133 342 Nov-78 92% 89%
Meadowood............................ Worcester, PA 355 51 59 465 Oct-89 94 95
Parklane West........................ San Antonio, TX -- 17 124 141 Oct-94 86 90
Reeds Landing........................ Springfield, MA 148 54 40 242 Aug-95 65(9) 91(9)
USAA Towers.......................... San Antonio, TX 505 -- -- 505 Oct-94 100 100
Weinberg Village..................... Tampa, FL -- 75 -- 75 May-96 25 59
Williamsburg Landing................. Williamsburg, VA 345 7 37 389 Sept-85 98 97
----- --- --- ----- --- ---
Subtotal/Average................. 1,491 275 393 2,159 89% 93%
----- --- --- ----- --- ---
Grand Total/Average.............. 4,215 805 714 5,734 92% 94%
===== === === ===== === ===
</TABLE>
<TABLE>
<CAPTION>
COMMENCEMENT
OF
HOME HEALTH CARE AGENCIES(10):) LOCATION OPERATIONS
- ------------------------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Westlake Village................... Westlake, OH January 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).
(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.
(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 March 31, 1997, was
99%.
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<PAGE> 44
(5) Communities at which expansions opened in 1996, which resulted in decreased
occupancy rates for the period. Excluding the effect of the expansions, the
average 1996 occupancy rate and the occupancy rate at March 31, 1997 would
have been 97% and 97%, respectively, at Carriage Club of Charlotte and 91%
and 93%, respectively, at Carriage Club of Jacksonville.
(6) In May 1997, the Company expects to acquire the Remington at Corpus Christi
community and to acquire a long-term leasehold in the Remington at Victoria
community. See " -- Recent and Pending Acquisitions."
(7) Leased pursuant to operating leases with initial terms of ten to 15 years
expiring December 31, 2006 and renewal options for up to three additional
ten year terms, provided that both leases are extended concurrently. The
Company pays contractually fixed rent, plus additional rent, subject to
certain limits, based upon the gross revenues of the community. Without the
lessor's consent, the Company may not operate any other type of senior care
facility within three miles of either of the premises during the term of
the leases and for one year thereafter.
(8) The Company'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.
(9) 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.
(10) Each of the home health care agencies is owned by the Company and is based
at one of the Company's senior living communities.
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 60 residents. The
purchase price for the facility was $4.4 million and was financed primarily
through a $3.5 million mortgage loan provided by a bank. The Tarpon Springs
facility is completed and will commence operations upon receipt of required
licenses. The Company expects to obtain such required licenses in July 1997.
The Company has entered into an acquisition agreement pursuant to which it
expects to acquire the Remington at Corpus Christi community, which is located
in Corpus Christi, Texas and has capacity for 90 residents, and to acquire a
long-term leasehold in the Remington at Victoria community, which is located in
Victoria, Texas and has capacity for 90 residents. The purchase price for the
Corpus Christi community will be approximately $5.7 million, and the Company
intends to finance the acquisition primarily through a $4.7 million mortgage
loan provided by NHI. The purchase price for the Victoria, Texas leasehold will
be approximately $900,000. The landlord under the Remington at Victoria lease
will be Healthcare Properties Investors, Inc., a health care real estate
investment trust, and the lease is expected to provide for annual rental
obligations of approximately $468,000. Although the closing of the transactions
is subject to a number of conditions, the Company anticipates completing such
transactions in May 1997.
The Company has entered into a non-binding letter of intent to acquire a
home health care agency located in Corpus Christi, Texas for a purchase price of
approximately $1.0 million. Subject to the completion of additional due
diligence, the Company expects to complete the acquisition in the second quarter
of 1997. In the event that the Company consummates such acquisition, the Company
currently intends to pay the purchase price from the net proceeds from the
Offering.
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<PAGE> 45
DEVELOPMENT ACTIVITIES
The table below summarizes information regarding the expansion of certain
of the Company's existing senior living communities and the residences and home
health care agencies currently under development.
<TABLE>
<CAPTION>
ADDITIONAL RESIDENT CAPACITY
SCHEDULED -----------------------------
COMMUNITIES COMPLETION IL AL SN TOTAL STATUS(1)
- ----------- ---------- ---- ------ ---- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
EXPANSION PROJECTS:
Santa Catalina Village, Tucson, AZ.................. 12/97 20 70 42 132 Construction
Williamsburg Landing, Williamsburg, VA(2)........... 12/97 10 58 21 89 Construction
Trinity Towers, Corpus Christi, TX.................. 3/98 27 68 16 111 Construction
Richmond Place, Lexington, KY....................... 4/98 -- 73 -- 73 Development
Carriage Club of Charlotte, Charlotte, NC........... 7/98 -- 30 -- 30 Development
Carriage Club of Jacksonville, Jacksonville, FL..... 10/98 -- 15 60 75 Development
The Hampton at Post Oak, Houston, TX................ 11/98 -- 15 76 91 Development
Westlake Village, Cleveland, Ohio................... 6/99 -- 15 88 103 Development
-- ----- --- -----
Subtotal................................... 57 344 303 704
-- ----- --- -----
DEVELOPMENT PROJECTS:
Tarpon Springs, FL(3)............................... 7/97 -- 64 -- 64 Licensure
Lady Lake, FL(4).................................... 11/97 -- 55 -- 55 Construction
Halls, TN(4)........................................ 1/98 -- 55 -- 55 Construction
Pearland, TX........................................ 2/98 -- 82 -- 82 Development
Spring Shadow, TX................................... 4/98 -- 67 -- 67 Development
Houston, TX (Willowchase)........................... 4/98 -- 67 -- 67 Development
Houston, TX (Northwest)............................. 4/98 -- 95 -- 95 Development
Knoxville, TN (Deane Hill)(4)....................... 4/98 -- 108 -- 108 Development
Marietta, GA........................................ 4/98 -- 60 -- 60 Development
Lakeway, TX......................................... 5/98 -- 70 -- 70 Development
Houston, TX (West).................................. 7/98 -- 85 -- 85 Development
Nashville, TN (West)................................ 8/98 -- 90 -- 90 Development
Tampa, FL(4)........................................ 8/98 -- 90 -- 90 Development
St. Petersburg, FL.................................. 9/98 -- 100 -- 100 Development
Aurora, CO.......................................... 10/98 -- 95 -- 95 Development
Lakewood, CO........................................ 10/98 -- 93 -- 93 Development
Del Ray Beach, FL................................... 10/98 -- 80 -- 80 Development
Greenwood Village, CO............................... 11/98 -- 85 90 175 Development
Austin, TX.......................................... 1/99 -- 95 -- 95 Development
Nashville, TN (Central)............................. 3/99 -- 115 -- 115 Development
Houston, TX (West University)....................... 7/99 -- 85 -- 85 Development
-- ----- --- -----
Subtotal................................... -- 1,736 90 1,826
-- ----- --- -----
Grand Total................................ 57 2,080 393 2,530
== ===== === =====
</TABLE>
<TABLE>
<CAPTION>
ANTICIPATED COMMENCEMENT
HOME HEALTH CARE AGENCIES LOCATION OF OPERATIONS
- ------------------------- -------- ------------------------
<S> <C> <C>
Carriage Club Jacksonville(5)........................... Jacksonville, FL(6) May 1997
Hale County(7).......................................... Greensboro, AL May 1997
The Summit at Westlake Hills(5)......................... Austin, TX(6) June 1997
Meadowood(7)............................................ Worcester, PA(6) July 1997
Air Force Village(7).................................... San Antonio, TX August 1997
Santa Catalina Villas(5)................................ Tucson, AZ(6) January 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. "Licensure" means that
the facility is completed and will open upon receipt of required licenses.
(2) Williamsburg Landing is a managed community. The Company is providing full
development services related to the expansion for the owner.
(3) The Company acquired the Tarpon Springs facility in May 1997. See
" -- Recent and Pending Acquisitions."
(4) Being developed by joint ventures in which the Company owns a 50% interest.
(5) Owned by the Company.
(6) Based at one of the Company's senior living communities.
(7) Managed by the Company for an unaffiliated third party.
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<PAGE> 46
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.
OPERATIONS
Centralized Management
The Company centralizes its corporate and other administrative functions so
that the community-based management and staff can focus their efforts on
resident care. The Company maintains centralized accounting, finance, human
resources, training, and other operational functions at its national corporate
office in Brentwood (Nashville), Tennessee. The Company's corporate office is
generally responsible for (i) establishing Company-wide policies and procedures
relating to, among other things, resident care and operations, (ii) performing
accounting functions, (iii) developing employee training programs and materials,
(iv) coordinating human resources and food service functions, (v) coordinating
marketing functions, and (vi) providing strategic direction. In addition,
financing, development, construction and acquisition activities, including
feasibility and market studies, residence design, development, and construction
management, are conducted by the Company's corporate office.
The Company seeks to control operational expenses for each of its
communities through standardized management reporting and centralized controls
of capital expenditures, asset replacement tracking, and purchasing for larger
and more frequently used supplies. Community expenditures are monitored by
regional operations teams headed by the Company's Regional Vice Presidents who
are accountable for the resident
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<PAGE> 47
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.
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
46
<PAGE> 48
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 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 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
47
<PAGE> 49
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.
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
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<PAGE> 50
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 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
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<PAGE> 51
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 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
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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 industry standards
based upon the nature and risks of the Company's business. The Company also has
an umbrella excess liability protection policy in the amount of $15.0 million
per location. There can be no assurance that a claim in excess of the Company's
insurance will not arise. A claim against the Company not covered by, or in
excess of, the Company's insurance could have a material adverse effect upon the
Company. In addition, the Company's insurance policies must be renewed annually.
There can be no assurance that the Company will be able to obtain liability
insurance in the future or that, if such insurance is available, it will be
available on acceptable terms.
Under various federal, state, and local environmental laws, ordinances, and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs. The Company is not aware of any environmental liability with respect
to any of its owned, leased, or managed communities that it believes would have
a material adverse effect on the Company's business, financial condition, or
results of operations. The Company believes that its communities are in
compliance in all material respects with all federal, state, and local laws,
ordinances, and regulations regarding hazardous or toxic substances or petroleum
products. The Company has not been notified by any governmental authority, and
is not otherwise aware of any material non-compliance, liability, or claim
relating to hazardous or toxic substances or petroleum products in connection
with any of the communities it currently operates.
The Company currently is not party to any legal proceeding that it believes
would have a material adverse effect on its business, financial condition, or
results of operations.
EMPLOYEES
The Company employs approximately 2,160 persons, of which approximately
1,350 are full-time employees (approximately 50 of whom are located at the
Company's corporate offices) and 810 are part-time employees. In addition, there
are approximately 535 full-time employees and 455 part-time employees who are
employed by the owners of communities managed by the Company who are under the
direction and supervision of the Company. None of the Company's employees is
currently represented by a labor union and the Company is not aware of any union
organizing activity among its employees. The Company believes that its
relationship with its employees is good.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
W.E. Sheriff.............................. 54 Chairman and Chief Executive Officer
Christopher J. Coates..................... 46 President and Chief Operating Officer
George T. Hicks........................... 39 Executive Vice President -- Finance, Chief
Financial Officer, Treasurer, and Secretary
H. Todd Kaestner.......................... 41 Executive Vice President -- Corporate Development
James T. Money............................ 49 Executive Vice President -- Development Services
Tom G. Downs.............................. 51 Senior Vice President -- Operations
Lee A. McKnight........................... 51 Senior Vice President -- Marketing
H. Lee Barfield II........................ 50 Director
Jack O. Bovender, Jr...................... 51 Director
Frank M. Bumstead......................... 54 Director
Robin G. Costa............................ 30 Director
Clarence Edmonds.......................... 63 Director
John A. Morris, Jr., M.D.................. 50 Director
Daniel K. O'Connell....................... 68 Director
Nadine C. Smith........................... 39 Director
Lawrence J. Stuesser...................... 54 Director
</TABLE>
W.E. Sheriff has served as Chairman and Chief Executive Officer of the
Company and its predecessors since April 1984. From 1973 to 1984, Mr. Sheriff
served in various capacities for Ryder System, Inc., including as president and
chief executive officer of its Truckstops of America division. Mr. Sheriff also
serves on the boards of various educational and charitable organizations and in
varying capacities with several trade organizations, including as a member of
the board of the National Association for Senior Living Industries, and as a
member of the American Association of Homes and Services for the Aging and the
American Senior Housing Association.
Christopher J. Coates has served as President and Chief Operating Officer
of the Company and its predecessors since January 1993. From 1988 to 1993, Mr.
Coates served as chairman of National Retirement Company ("NRC"), a senior
living management company acquired by a subsidiary of the Company in 1992. From
1985 to 1988, Mr. Coates was senior director of the Retirement Housing Division
of Radice Corporation, following that company's purchase in 1985 of National
Retirement Consultants, a company formed by Mr. Coates. Mr. Coates is chairman
of the board of directors of the American Senior Housing Association.
George T. Hicks, a certified public accountant, has served as the Executive
Vice President -- Finance, Chief Financial Officer, Treasurer, and Secretary
since September 1993. Mr. Hicks has served in various capacities for the
Company's predecessors since 1985, including Vice President -- Finance and
Treasurer from November 1989 to September 1993.
H. Todd Kaestner has served as Executive Vice President -- Corporate
Development since September 1993. Mr. Kaestner has served in various capacities
for the Company's predecessors since 1985, including Vice President -
Development from 1988 to 1993 and Chief Financial Officer from 1985 to 1988.
James T. Money has served as Executive Vice President -- Development
Services since September 1993. Mr. Money has served in various capacities for
the Company's predecessors since 1978, including Vice President -- Development
from 1985 to 1993. Mr. Money is a member of the board of directors and the
executive committee of the National Association for Senior Living Industries.
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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, as a member of ARCLP's limited partners committee since its formation
in 1995, and as director of various of the Company's predecessors since 1978.
Mr. Barfield is a member in the law firm of Bass, Berry & Sims PLC, the
Company's outside general counsel, and has served in various capacities for that
firm since 1974.
Jack O. Bovender, Jr. has served as a director of the Company since its
inception and as a member of ARCLP's limited partners committee since September
1996. Until his retirement in March 1994, Mr. Bovender worked for Hospital
Corporation of America for over 18 years in various capacities, including
Executive Vice President and Chief Operating Officer. Mr. Bovender is a director
of Response Oncology, Inc., a physician practice management company specializing
in oncology, and a director of Quorum Health Group, Inc., a hospital management
company.
Frank M. Bumstead has served as a director of the Company since its
inception and as a member of ARCLP's limited partners committee since June 1995.
Since 1989, Mr. Bumstead has been president and a principal shareholder of
Flood, Bumstead, McCready & McCarthy, Inc., a business management firm that
represents, among others, artists, songwriters, and producers in the music
industry. Since 1993, Mr. Bumstead has also served as the chairman and chief
executive officer of FBMS Financial, Inc., an investment advisor registered
under the Investment Company Act of 1940. Mr. Bumstead is vice chairman and a
director of Response Oncology, Inc., a physician practice management company
specializing in oncology, and a director of Nashville Country Club, Inc., an
owner and operator of restaurants and hotels. Mr. Bumstead also serves as a
director, secretary, and treasurer of Imprint Records, Inc., a music recording
company.
Robin G. Costa has served as a director of the Company since its inception
and as a member of ARCLP's limited partners committee since October 1996. Since
1994, Ms. Costa has served as chief operating officer of Maddox Companies, a
group of over 40 entities involved in oil and gas exploration, real estate
development and investment, and other investments. Ms. Costa has served in
various capacities for the Maddox Companies since 1985, including as Secretary
and Treasurer from 1992 to 1994.
Clarence Edmonds has served as a director of the Company since its
inception, as a member of ARCLP's limited partners committee since June 1995,
and as a director of various of the Company's predecessors since 1987. Mr.
Edmonds has served in various capacities, including vice president and
treasurer, of Massey Company, an investment services firm, since 1969.
John A. Morris, Jr., M.D. has served as a director of the Company since its
inception and as a member of ARCLP's limited partners committee since June 1995.
Dr. Morris has served in varying capacities of the medical profession since
1977, and is currently a Professor of Surgery and the Director of the Division
of Trauma and Surgical Critical Care at the Vanderbilt University School of
Medicine, the Medical Director of the Life Flight Air Ambulance Program at
Vanderbilt University Hospital, and an Associate in the Department of Health
Policy and Management at the Johns Hopkins University. Dr. Morris is also
chairman of the board of Sirrom Capital Corporation, a small business investment
company.
Daniel K. O'Connell has served as a director of the Company since its
inception, as a member of ARCLP's limited partners committee since June 1995,
and as a director of various of the Company's predecessors since 1985. Until his
retirement in 1990, Mr. O'Connell worked for Ryder System, Inc. for over 25
years in various capacities, including legal counsel and chief financial
officer.
Nadine C. Smith has served as a director of the Company since its inception
and as a member of ARCLP's limited partners committee since June 1995. Since
1990, Ms. Smith has been managing general partner of NC Smith & Co., a financial
and management consulting firm. Ms. Smith is also a director of UTI Energy
Corp., an oil services company.
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<PAGE> 55
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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<PAGE> 56
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by
ARCLP on behalf of the Chief Executive Officer and the four other most highly
paid executive officers (collectively, the "Named Executive Officers") for the
year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
----------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($)
--------------------------- ---------- --------- ----------------
<S> <C> <C> <C>
W.E. Sheriff.......................................... 212,400 30,515 84,000(2)
Chairman and Chief Executive Officer
Christopher J. Coates................................. 153,400 22,038 11,033(3)
President and Chief Operating Officer
George T. Hicks....................................... 100,300 14,410 7,214(3)
Executive Vice President -- Finance, Chief Financial
Officer, Treasurer and Secretary
H. Todd Kaestner...................................... 106,200 15,257 7,637(3)
Executive Vice President -- Corporate Development
James T. Money........................................ 100,300 14,410 7,214(3)
Executive Vice President -- Development Services
</TABLE>
- ---------------
(1) Does not include amounts distributed by the LLC to its members, including
Named Executive Officers. In 1996, ARCLP distributed to the LLC an
aggregate of approximately $59,000 and the LLC distributed approximately
$13,561 to Mr. Sheriff, $9,686 to Mr. Coates, and $7,749 to each of Messrs.
Hicks, Kaestner, and Money in accordance with their ownership interests in
the LLC.
(2) Reflects insurance premiums paid by the Company for insurance policies
benefiting Mr. Sheriff.
(3) Reflects contributions by the Company under the Company's Section 162 Plan.
See "-- Compensation Pursuant to Plans -- Section 162 Plan."
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors of the Company. Non-employee directors are
entitled to an annual retainer of $12,000 payable, in arrears, on the date of
each annual meeting of shareholders, commencing with the 1998 Annual Meeting of
Shareholders. Non-employee directors are also entitled to a fee of $500 for each
board meeting attended by such director, and $250 for each committee meeting
attended by such director that is not on the same day as a meeting of the Board
of Directors. All directors are entitled to reimbursement for their actual
out-of-pocket expenses incurred in connection with attending meetings. In
addition, non-employee directors receive options to purchase shares of Common
Stock in accordance with the provisions of the 1997 Stock Incentive Plan. See
"-- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan."
COMPENSATION PURSUANT TO PLANS
1997 Stock Incentive Plan
The Company has adopted a stock incentive plan (the "Stock Incentive Plan")
that will become effective upon the consummation of the Offering. The Stock
Incentive Plan was approved by the Board of Directors and shareholder of the
Company in February 1997. Under the Stock Incentive Plan, the Compensation
Committee has the authority to grant to key employees and consultants of the
Company, and the Board of Directors has the authority to grant to directors who
are not employed by the Company ("Outside Directors"), the following types of
awards: (1) stock options; (2) stock appreciation rights; (3) restricted stock;
and/or (4) other stock-based awards. Pursuant to the Stock Incentive Plan,
1,093,750 shares of Common Stock have been reserved and will be available for
issuance, which may include authorized and unissued shares or treasury shares.
The number of shares reserved and available for issuance pursuant to the Stock
Incentive Plan will, upon the consummation of any Equity Issuance (as defined in
the Plan), increase
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automatically by 10% of the number of shares of Common Stock issued in such
Equity Issuance; provided, however, that Incentive Stock Options ("ISOs") may
not be issued after 1,093,750 shares of Common Stock have been issued under the
Stock Incentive Plan. The maximum number of shares of Common Stock for which
awards may be made under the Stock Incentive Plan to any officer of the Company
or other person whose compensation may be subject to the limitations on
deductibility under Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), is 200,000 during any single year. As of the date hereof,
and subject to the consummation of the Offering, options to purchase 635,000
shares of Common Stock, exercisable at the initial public offering price, have
been awarded to 105 key employees, directors, and consultants of the Company.
Any shares as to which an option or other award expires, lapses unexpired, or is
forfeited, terminated, or canceled may become subject to a new option or other
award. The Stock Incentive Plan will terminate on, and no award may be granted
later than, the tenth anniversary of the date of adoption of the Stock Incentive
Plan, but the exercise date of awards granted prior to such tenth anniversary
may extend beyond that date.
The Stock Incentive Plan provides for automatic grants of non-qualified
stock options to purchase shares of Common Stock to Outside Directors. Options
to purchase 9,000 shares of Common Stock have been automatically granted to each
person serving as an Outside Director as of the consummation of the Offering at
an exercise price equal to the initial public offering price. If any person who
was not previously a member of the Board of Directors is elected or appointed an
Outside Director following the consummation of the Offering but prior to the
date of the Annual Meeting of Shareholders of the Company in the year 2000, such
Outside Director will automatically be granted an option to purchase 7,000
shares of Common Stock if such Outside Director's service begins prior to the
second anniversary of the Offering and 5,000 shares of Common Stock if such
Outside Director's service begins after the second anniversary of the Offering.
The Board of Directors may, in its discretion, increase or decrease the number
of shares subject to such option to reflect the extent to which such Outside
Director's expected service may exceed two years or may be less than one year.
Such options shall vest with respect to 5,000 shares on the date of the first
annual meeting of shareholders following the date of grant, 2,000 shares on the
date of the second annual meeting of shareholders following the date of grant,
and any remaining shares on the date of the third annual meeting of shareholders
following the date of grant.
On the date of each annual meeting of the shareholders of the Company
beginning with the annual meeting of shareholders held in the year 2000, unless
the Stock Incentive Plan has been terminated, each Outside Director who will
continue as a director following such meeting will receive an option to purchase
3,000 shares of Common Stock. Such options will vest with respect to all 3,000
shares on the date of the next annual meeting of shareholders. All options
automatically granted to an Outside Director will enable the optionee to
purchase shares of Common Stock at the fair market value of the Common Stock on
the date of grant. Outside Director optionees will not be able to transfer or
assign their options without the prior written consent of the Board of Directors
other than (i) transfers by the optionee to a member of his or her immediate
family or a trust for the benefit of the optionee or a member of his or her
immediate family, or (ii) transfers by will or by the laws of descent and
distribution. Options automatically granted to Outside Directors will have a
term of ten years from the date of grant. The exercise price may be paid in
cash, shares of Common Stock, or a combination thereof. The Board of Directors
has the discretion to reduce, but not increase, the number of shares awardable
to Outside Directors.
ISOs and non-qualified stock options may be granted for such number of
shares as the Board or Compensation Committee may determine and may be granted
alone, in conjunction with, or in tandem with other awards under the Stock
Incentive Plan or cash awards outside the Stock Incentive Plan. A stock option
will be exercisable at such times and subject to such terms and conditions as
the Compensation Committee will determine. In the case of an ISO, however, the
term will be no more than ten years after the date of grant (five years in the
case of ISOs for certain 10% shareholders). The option price for an ISO will not
be less than 100% (110% in the case of certain 10% shareholders) of the fair
market value of the Common Stock as of the date of grant and for any
non-qualified stock option will not be less than 50% of the fair market value as
of the date of grant. ISOs granted under the Stock Incentive Plan may not be
transferred or assigned other than by will or by the laws of descent and
distribution. Non-qualified stock options and stock appreciation rights may
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not be transferred or assigned without the prior written consent of the
Compensation Committee, other than (i) transfers by the optionee to a member of
his or her immediate family or a trust for the benefit of the optionee or a
member of his or her immediate family, or (ii) transfers by will or by the laws
of descent and distribution.
Stock appreciation rights may be granted under the Stock Incentive Plan in
conjunction with all or part of a stock option and will be exercisable only when
the underlying stock option is exercisable. Once a stock appreciation right has
been exercised, the related portion of the stock option underlying the stock
appreciation right will terminate. Upon the exercise of a stock appreciation
right, the Company will pay to the employee or consultant in cash, Common Stock,
or a combination thereof (the method of payment to be at the discretion of the
Committee), an amount equal to the excess of the fair market value of the Common
Stock on the exercise date over the option price, multiplied by the number of
stock appreciation rights being exercised.
Restricted stock awards may be granted alone, in addition to, or in tandem
with, other awards under the Stock Incentive Plan or cash awards made outside
the Plan. The provisions attendant to a grant of restricted stock may vary from
participant to participant. In making an award of restricted stock, the
Compensation Committee will determine the periods during which the restricted
stock is subject to forfeiture and may provide such other awards designed to
guarantee a minimum value for such stock. During the restriction period, the
employee or consultant may not sell, transfer, pledge, or assign the restricted
stock but will be entitled to vote the restricted stock and to receive, at the
election of the Compensation Committee, cash or deferred dividends.
The Compensation Committee also may grant other types of awards such as
performance shares, convertible preferred stock, convertible debentures, or
other exchangeable securities that are valued, as a whole or in part, by
reference to or otherwise based on the Common Stock. These awards may be granted
alone, in addition to, or in tandem with, stock options, stock appreciation
rights, restricted stock, or cash awards outside of the Stock Incentive Plan.
Awards will be made upon such terms and conditions as the Compensation Committee
may determine.
If there is a change in control or a potential change in control of the
Company (as defined in the Stock Incentive Plan), stock appreciation rights and
limited stock appreciation rights, and any stock options which are not then
exercisable, will become fully exercisable and vested and the restrictions and
deferral limitations applicable to restricted stock and other stock-based awards
may lapse and such shares and awards will be deemed fully vested. Stock options,
stock appreciation rights, limited stock appreciation rights, restricted stock
and other stock-based awards, will, unless otherwise determined by the
Compensation Committee in its sole discretion, be cashed out on the basis of the
change in control price (as defined in the Stock Incentive Plan and as described
below). The change in control price will be the highest price per share paid in
any transaction reported on the NYSE or paid or offered to be paid in any bona
fide transaction relating to a change in control or potential change in control
at any time during the immediately preceding 60-day period, as determined by the
Compensation Committee.
Employee Stock Purchase Plan
The Company has adopted an employee stock purchase plan (the "Stock
Purchase Plan") that will become effective on the later of July 1, 1997 or the
consummation of the Offering. The Stock Purchase Plan was approved by the Board
of Directors and shareholder of the Company in February 1997. An aggregate of
250,000 shares of Common Stock has been reserved for issuance pursuant to the
Stock Purchase Plan. Under the Stock Purchase Plan, employees, including
executive officers, who have been employed by the Company continuously for at
least one year are eligible, as of the first day of any option period (January 1
through June 30, or July 1 through December 31) (an "Option Period"), to
contribute on an after-tax basis up to 15% of their base pay per pay period
through payroll deductions and/or a single lump-sum contribution per Option
Period to be used to purchase shares of Common Stock. Notwithstanding the
foregoing, no employee who is a 5% or greater shareholder of the Company's
voting stock is eligible to participate in the Stock Purchase Plan. On the last
trading day of each Option Period (the "Exercise Date"), the amount contributed
by each participant over the course of the Option Period will be used to
purchase shares of Common Stock at a
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<PAGE> 59
purchase price per share equal to the lesser of (a) 85% of the closing market
price of the Common Stock on the Exercise Date, or (b) 85% of the closing market
price of the Common Stock on the first trading date of such Option Period. The
Stock Purchase Plan is intended to qualify for favorable tax treatment under
Section 423 of the Code.
401(k) Plan
Employees of the Company participate in a savings plan (the "401(k) Plan")
which is qualified under Sections 401(a) and 401(k) of the Code. To be eligible,
an employee must have been employed by the Company for at least three months.
The 401(k) Plan permits employees to make voluntary contributions up to
specified limits. Additional contributions may be made by the Company at its
discretion, which contributions vest ratably over a five-year period.
Section 162 Plan
The Company maintains a non-qualified deferred compensation plan which
allows employees who are "highly compensated" under IRS guidelines to make
after-tax contributions to an investment account established in such employee's
name. Additional contributions may be made by the Company at its discretion. All
contributions to the Section 162 Plan are subject to the claims of the Company's
creditors. Approximately 45 employees are eligible to participate in the Section
162 Plan, which is administered by the Compensation Committee. In each of 1995
and 1996, the Company contributed approximately $271,000 to the Section 162
Plan.
Officers' Incentive Compensation Plan
The officers of the Company participate in an Officers' Incentive
Compensation Plan which provides contingent incentive compensation. The plan
provides for a single annual incentive compensation payment in the amount of up
to 60% of an officer's base salary dependent upon the degree to which the
Company achieves its operational and financial objectives, or up to a maximum
total of 100%, contingent upon the degree to which the Company exceeds its
objectives.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Tennessee Business Corporation Act ("TBCA") provides that a corporation
may indemnify any of its directors and officers against liability incurred in
connection with a proceeding if (i) such person acted in good faith, (ii) the
director or officer reasonably believed, in the case of conduct in an official
capacity, that such conduct was in the corporation's best interests, or, in all
other cases, that such conduct was not opposed to the best interests of the
corporation, and (iii) in connection with any criminal proceeding, the director
or officer had no reasonable cause to believe his or her conduct was unlawful.
In actions brought by or in the right of the corporation, however, the TBCA
provides that no indemnification may be made if the director or officer was
adjudged liable to the corporation. The TBCA also provides that in connection
with any proceeding charging improper personal benefit to a director or officer,
no indemnification may be made if such director or officer is adjudged liable on
the basis that such personal benefit was improperly received. In cases where the
director or officer is wholly successful, on the merits or otherwise, in the
defense of any proceeding instigated because of his or her status as a director
or officer of a corporation, the TBCA mandates that the corporation indemnify
the director or officer against reasonable expenses incurred in the proceeding.
Notwithstanding the foregoing, the TBCA provides that a court of competent
jurisdiction, upon application, may order that a director or officer be
indemnified for reasonable expenses if, in consideration of all relevant
circumstances, the court determines that such individual is fairly and
reasonably entitled to indemnification, even if such director or officer (i) was
adjudged liable to the corporation in a proceeding by or in right of the
corporation, (ii) was adjudged liable on the basis that personal benefit was
improperly received, or (iii) breached his or her duty of care to the
corporation.
The Company's Charter provides that to the fullest extent permitted by
Tennessee law no director shall be personally liable to the Company or its
shareholders for monetary damages for breach of any fiduciary duty
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<PAGE> 60
as a director. Under the TBCA, this charter provision relieves the Company's
directors of personal liability to the Company or its shareholders for monetary
damages for breach of fiduciary duty as a director, except for liability arising
from a judgment or other final adjudication establishing (i) any breach of the
director's duty of loyalty, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, or (iii) any
unlawful distributions. In addition, the Company's Charter and Bylaws provide
that each director and officer of the Company shall be indemnified by the
Company to the fullest extent allowed by Tennessee law.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee, consisting of Messrs. O'Connell and Stuesser
and Ms. Smith, each an Outside Director, was established in February 1997. Prior
to the Offering, the Company's executive officers were compensated as employees
of ARCLP and compensation decisions were made by ARCLP's compensation committee,
which was comprised in 1996 of the persons who now constitute the Company's
Compensation Committee. No executive officer of the Company served during 1996
as a member of a compensation committee or as a director of any entity of which
any of the Company's directors or members of ARCLP's limited partners committee
serves as an executive officer.
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<PAGE> 61
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock after giving effect to the
Reorganization with respect to (i) each of the Named Executive Officers, (ii)
each of the Company's directors, (iii) each person known by the Company to own
beneficially more than 5% of the Common Stock, and (iv) all directors and
executive officers of the Company as a group, both before and after giving
effect to the Offering. Under the rules of the Securities and Exchange
Commission (the "Commission"), a person is deemed to be a "beneficial owner" of
a security if he or she has or shares the power to vote or direct the voting of
such security or the power to dispose of or direct the disposition of such
security. Accordingly, more than one person may be deemed to be a beneficial
owner of the same security. Shares of Common Stock subject to options held by
the directors and executive officers that are not exercisable within 60 days of
the date hereof are not, in accordance with beneficial ownership rules
promulgated by the Commission, deemed outstanding for the purpose of computing
such director's or executive officer's beneficial ownership.
<TABLE>
<CAPTION>
PERCENT OF
COMMON STOCK
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME BENEFICIALLY OWNED(1) OFFERING OFFERING
---- --------------------- -------- --------
<S> <C> <C> <C>
NAMED EXECUTIVE OFFICERS:
W.E. Sheriff........................................... 1,670,353(2)(3) 21.4% 15.3%
Christopher J. Coates.................................. 242,603(4) 3.1 2.2
George T. Hicks........................................ 170,259(5) 2.2 1.6
H. Todd Kaestner....................................... 180,244(6) 2.3 1.6
James T. Money......................................... 175,252(7) 2.2 1.6
DIRECTORS:
H. Lee Barfield II..................................... 602,661(8)(9) 7.7 5.5
Jack O. Bovender, Jr................................... -- -- --
Frank M. Bumstead...................................... -- -- --
Robin G. Costa......................................... 1,467,526(10)(11) 18.8 13.4
Clarence Edmonds....................................... 360,907(12) 4.6 3.3
John A. Morris, Jr., M.D............................... 358,490(13) 4.6 3.3
Daniel K. O'Connell.................................... 10,285 * *
Nadine C. Smith........................................ 29,956 * *
Lawrence J. Stuesser................................... 67,547(14) * *
OTHER 5% SHAREHOLDERS:
American Retirement Communities, LLC................... 1,350,000(15) 17.3 12.3
Dan Maddox............................................. 1,419,782(10)(16) 18.2 13.0
DMAR Limited Partnership............................... 1,372,037(17) 17.6 12.5
Mary Louise Frist Barfield............................. 602,661(18)(19) 7.7 5.5
Robert A. Frist, M.D................................... 573,872(20)(21) 7.3 5.2
All directors and executive officers as a group (16
persons)............................................. 4,637,986 59.4% 42.4%
</TABLE>
- ---------------
* Less than 1%.
(1) The information listed below with respect to the beneficial ownership of
the Common Stock is based upon the estimated allocation of the Common Stock
in the Reorganization. See "Certain Transactions -- Pending
Reorganization."
(2) Address: 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027.
(3) Includes 320,353 shares beneficially owned by a family limited partnership
in which Mr. Sheriff is a general partner and 1,350,000 shares beneficially
owned by the LLC. See Note 15. Mr. Sheriff is Chief Manager and a member of
the LLC. Mr. Sheriff disclaims beneficial ownership of the shares owned by
the LLC except to the extent of the 294,698 shares as to which he holds a
pecuniary interest.
(4) Includes 210,499 shares beneficially owned by the LLC and 1,860 shares
beneficially owned by Sylvester I, L.P. ("Sylvester I") as to which Mr.
Coates holds a pecuniary interest.
(5) Includes 168,399 shares beneficially owned by the LLC and 1,860 shares
beneficially owned by Sylvester I as to which Mr. Hicks holds a pecuniary
interest.
(6) Includes 168,399 shares beneficially owned by the LLC and 1,860 shares
beneficially owned by Sylvester I as to which Mr. Kaestner holds a
pecuniary interest.
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<PAGE> 62
(7) Includes 168,399 shares beneficially owned by the LLC and 1,860 shares
beneficially owned by Sylvester I as to which Mr. Money holds a pecuniary
interest.
(8) Address: 2700 First American Center, Nashville, Tennessee 37238.
(9) Includes 457,857 shares beneficially owned by Mr. Barfield's wife, Mary
Louise Frist Barfield. See Note 19. Mr. Barfield is the brother-in-law of
Robert A. Frist.
(10) Address: 3833 Cleghorn Avenue, Suite 400, Nashville, Tennessee 37215.
(11) Includes 1,372,037 shares beneficially owned by DMAR Limited Partnership
("DMAR") and 95,489 shares beneficially owned by Little Buck Limited
Partnership ("Little Buck"). Ms. Costa is a Vice President of Margaret
Energy, Inc., the general partner of DMAR and Little Buck. See Note 16.
(12) Includes 335,888 shares beneficially owned by The Jack C. Massey Foundation
("The Massey Foundation"), of which Mr. Edmonds serves as a co-trustee, and
25,019 shares beneficially owned by Mr. Edmonds' wife. Mr. Edmonds
disclaims beneficial ownership of his wife's shares.
(13) All shares are beneficially owned by partnerships owned and controlled by
Dr. Morris, his brother Alfred Morris, and members of Dr. Morris' family.
(14) All shares are beneficially owned by B&W Development Centers ("B&W"), of
which Mr. Stuesser is a director and 50% shareholder.
(15) Address: 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027. The
members of the LLC include the Named Executive Officers and other members
of management of the Company. See Notes 3, 4, 5, 6, and 7.
(16) Includes 1,372,037 shares beneficially owned by DMAR and 47,745 shares
beneficially owned by Little Buck as to which Mr. Maddox holds a pecuniary
interest. See Notes 11 and 17.
(17) The partners in DMAR include corporations and trusts owned by, or for the
benefit of, Mr. Maddox and his wife.
(18) Address: c/o H. Lee Barfield II, 2700 First American Center, Nashville,
Tennessee 37238.
(19) Includes 144,804 shares beneficially owned by Mrs. Barfield's husband, H.
Lee Barfield II, and an aggregate of 169,084 shares beneficially owned by
trusts for the benefit of Mrs. Barfield's children, of which Mrs. Barfield
serves as trustee. See Note 9. Mrs. Barfield is the sister of Robert A.
Frist.
(20) Address: 1326 Page Road, Nashville, Tennessee 37205.
(21) Includes 22,569 shares beneficially owned by Dr. Frist's wife. Does not
include an aggregate of 191,554 shares beneficially owned by Dr. Frist's
children who are 18 years of age or older. Dr. Frist is the brother of Mary
Louise Barfield Frist and the brother-in-law of H. Lee Barfield II.
CERTAIN TRANSACTIONS
THE 1995 ROLL-UP
ARCLP was formed in February 1995 in anticipation of the 1995 Roll-Up of
the Predecessor Entities. As a result of the 1995 Roll-Up, ARCLP issued
partnership interests to the partners and shareholders of the Predecessor
Entities, many of whom are directors, executive officers, and greater than 5%
shareholders of the Company, in exchange for their limited partnership interests
and stock in the Predecessor Entities and thereby became the owner, directly or
indirectly, of all of the assets of the Predecessor Entities. The LLC was
organized in connection with the formation of ARCLP and serves as its general
partner. The members of the LLC include each of the Named Executive Officers and
certain other members of management of the Company. Messrs. Sheriff and Coates
have LLC membership interests of approximately 21.8% and 15.6%, respectively,
and Messrs. Kaestner, Money, and Hicks have LLC membership interests of
approximately 14.5% each.
REDEMPTION OF PREFERRED PARTNERSHIP INTERESTS
In connection with the 1995 Roll-Up, partners in certain of the Predecessor
Entities exchanged promissory notes for the Preferred Partnership Interests. In
1996, the Company redeemed the Preferred Partnership Interests for an aggregate
amount of $10.0 million. In connection with the redemption of the Preferred
Partnership Interests, certain executive officers, directors, and certain other
limited partners who will be greater than five percent (5%) beneficial owners of
the Common Stock (including, unless otherwise noted, their immediate family
members and affiliates) received the following amounts in payment for the
redemption of their Preferred Partnership Interests: H. Lee Barfield II and Mary
Louise Frist Barfield -- $1.12 million (does not include amounts distributed to
Robert A. Frist or an aggregate of $780,000 distributed to Mrs. Barfield's
sister and trusts for the benefit of Mr. and Mrs. Barfield's nephews); Lawrence
J. Stuesser -- $150,000 (distributed to B&W); DMAR -- $2.16 million; Robert A.
Frist -- $1.57 million (does not include an aggregate of $1.24 million
distributed to Dr. Frist's children who are 18 years of age or older; amounts
distributed to H. Lee Barfield II and Mary Louise Frist Barfield, or an
aggregate of $780,000 distributed to Dr. Frist's sister and trusts for the
benefit of Dr. Frist's nephews); and Dan Maddox -- $2.52 million (includes
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<PAGE> 63
$2.16 million distributed to DMAR and $360,000 distributed to Little Buck; does
not include $240,000 distributed to a partnership controlled by Mr. Maddox's
son).
PENDING REORGANIZATION
In connection with the Reorganization, the Company will issue an aggregate
of 7,812,500 shares of Common Stock and the Reorganization Note to ARCLP. ARCLP
will distribute approximately 1,350,000 shares of Common Stock to the LLC, as
general partner of ARCLP, and an aggregate of approximately 6,462,500 shares of
Common Stock to the limited partners of ARCLP, generally in accordance with the
limited partners' ARCLP contribution accounts. The number of shares of Common
Stock allocated to the LLC will be determined at the time of the consummation of
the Offering and will have a value, based upon the initial public offering
price, equal to the sum of (i) $15.0 million, plus (ii) 10% of the value of the
Company (including the value of the Reorganization Note) immediately prior to
the Offering (the "Pre-IPO Valuation") between $84.0 million and $160.0 million,
plus (iii) 20% of the Pre-IPO Valuation over $160.0 million. The information
below assumes an initial public offering price of $16.00. In addition, ARCLP
will distribute, in liquidation, proceeds from the repayment of the
Reorganization Note to the limited partners of ARCLP, generally in accordance
with the limited partners' contribution accounts.
In connection with the Reorganization, certain executive officers,
directors, and other limited partners of ARCLP who will beneficially own more
than 5% of the Common Stock (and, in each case, their immediate family members
and affiliates), will receive shares of Common Stock and proceeds from the
Reorganization Note as set forth in the table below.
<TABLE>
<CAPTION>
NUMBER OF SHARES PROCEEDS FROM THE
NAME OF COMMON STOCK(1) REORGANIZATION NOTE($)
---- ------------------ ----------------------
<S> <C> <C>
W.E. Sheriff......................................... 1,670,353 $1,239,281.70(2)
Christopher J. Coates................................ 242,603(3) 124,191.71(4)
George T. Hicks...................................... 170,259(3) 7,194.55(4)
H. Todd Kaestner..................................... 180,244(3) 45,822.69(4)
James T. Money....................................... 175,252(3) 26,508.62(4)
H. Lee Barfield II................................... 602,661(5) 2,331,370.74(6)
Robin G. Costa....................................... 1,467,526 5,677,087.37(7)
Clarence Edmonds..................................... 360,907 1,396,160.43(8)
John A. Morris, Jr., M.D............................. 358,490 1,386,809.40(9)
Daniel K. O'Connell.................................. 10,285 39,786.98
Nadine C. Smith...................................... 29,956 115,884.42
Lawrence J. Stuesser................................. 67,547 261,302.67(10)
American Retirement Communities, LLC................. 1,350,000 --
Dan Maddox........................................... 1,419,782(11) 5,492,388.24(12)
DMAR Limited Partnership............................. 1,372,037 5,307,689.10
The Jack C. Massey Foundation........................ 335,888 1,299,375.88
Mary Louise Frist Barfield........................... 602,661(13) 2,331,370.74(14)
Robert A. Frist, M.D................................. 573,872(15) 2,220,008.29(16)
</TABLE>
- ---------------
(1) See Notes to "Principal Shareholders" for certain beneficial ownership
information.
(2) Amounts to be distributed to a family limited partnership in which Mr.
Sheriff is a general partner.
(3) Does not include shares to be distributed to other members of the LLC or
other partners in Sylvester I.
(4) Includes $7,194.55 which represents such person's pro rata portion of
amounts to be distributed to Sylvester I.
(5) Does not include shares to be distributed to Robert A. Frist or an
aggregate of 841,555 shares to be distributed to Mr. Barfield's
father-in-law, sister-in-law, and trusts for the benefit of Mr. Barfield's
brother-in-law and nephews.
(6) Includes $1,117,109.09 to be distributed to Mr. Barfield's wife, Mary
Louise Frist Barfield, and an aggregate of $654,092.04 to be distributed to
trusts for the benefit of Mr. Barfield's children, of which Mrs. Barfield
serves as trustee. See Note 12. Does not include amounts to be distributed
to Robert A. Frist, Mr. Barfield's brother-in-law, or an aggregate of
$3,255,533.84 to be distributed to Mr. Barfield's father-in-law,
sister-in-law, and trusts for the benefit of Mr. Barfield's brother-in-law
and nephews.
(7) Includes $5,307,689.10 to be distributed to DMAR and $369,398.27 to be
distributed to Little Buck. Ms. Costa is a Vice President of Margaret
Energy, Inc., the general partner of DMAR and Little Buck.
(8) Includes $1,299,375.88 to be distributed to The Massey Foundation and
$96,784.55 to be distributed to Mr. Edmonds' wife.
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<PAGE> 64
(9) All amounts to be distributed to partnerships owned and controlled by Dr.
Morris, his brother Alfred Morris, and members of Dr. Morris' family.
(10) Amounts to be received by B&W, of which Mr. Stuesser is a director and 50%
shareholder.
(11) Does not include 111,672 shares to be distributed to a partnership
controlled by Mr. Maddox's son or 47,745 shares to be distributed to Little
Buck as to which Mr. Maddox's son holds a pecuniary interest.
(12) Includes $5,307,689.10 to be distributed to DMAR and $184,699.14 which
represents Mr. Maddox's pro rata portion of amounts to be distributed to
Little Buck. Does not include $431,999.70 to be distributed to a
partnership controlled by Mr. Maddox's son and $184,699.14 which represents
Mr. Maddox's son's pro rata portion of amounts to be distributed to Little
Buck.
(13) Does not include shares to be distributed to Robert A. Frist or an
aggregate of 841,555 shares to be distributed to Ms. Barfield's father,
sister, and trusts for the benefit of Ms. Barfield's brother and nephews.
(14) Includes $560,169.61 to be distributed to Mrs. Barfield's husband, H. Lee
Barfield II, and an aggregate of $654,092.04 to be distributed to trusts
for the benefit of Mrs. Barfield's children, of which Mrs. Barfield serves
as trustee. See Note 5. Does not include amounts to be distributed to
Robert A. Frist, Mrs. Barfield's brother, or an aggregate of $3,255,533.84
to be distributed to Ms. Barfield's father, sister, and trusts for the
benefit of Ms. Barfield's brother and nephews.
(15) Does not include shares to be distributed to H. Lee Barfield II or Mary
Louise Frist Barfield, or an aggregate of 841,555 shares to be distributed
to Dr. Frist's father, sister, or trusts for the benefit of Dr. Frist's
brother and nephews.
(16) Includes $87,306.35 to be distributed to Dr. Frist's wife. Does not include
an aggregate of $741,022.43 to be distributed to Dr. Frist's children who
are 18 years of age or older. Dr. Frist is the brother of Mary Louise Frist
Barfield and the brother-in-law of H. Lee Barfield II. Does not include
amounts to be distributed to H. Lee Barfield II or Mary Louise Frist
Barfield, or an aggregate of $3,255,533.84 to be distributed to Dr. Frist's
father, sister, and trusts for the benefit of Dr. Frist's brother and
nephews.
POLICY OF THE BOARD OF DIRECTORS
The Board of Directors has adopted a policy providing that any transaction
between the Company and any of its directors, officers, or principal
shareholders or affiliates thereof must be on terms no less favorable to the
Company than can be obtained from unaffiliated parties. Management believes that
past transactions have complied with this policy.
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<PAGE> 65
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $.01 per share, and 5,000,000 shares of preferred stock, no par value per
share (the "Preferred Stock"). Upon consummation of the Offering, 10,937,500
shares of Common Stock will be issued and outstanding, no shares of Preferred
Stock will be outstanding, and 635,000 shares of Common Stock will be reserved
for issuance pursuant to outstanding stock options under the Stock Incentive
Plan.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders and are not entitled to cumulative voting
in the election of directors, which means that the holders of a majority of the
shares voting for the election of directors can elect all of the directors then
standing for election by the holders of Common Stock. The holders of Common
Stock are entitled to share ratably in such dividends, if any, as may be
declared from time to time by the Board of Directors in its discretion out of
funds legally available therefor. See "Dividend Policy and Prior Distributions."
The holders of Common Stock are entitled to share ratably in any assets
remaining after satisfaction of all prior claims upon liquidation of the
Company. The Company's Charter gives holders of Common Stock no preemptive or
other subscription or conversion rights, and there are no redemption provisions
with respect to such shares. All shares of Common Stock to be outstanding upon
consummation of the Offering, including the shares offered hereby, will be, when
issued and paid for, fully paid and nonassessable. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of holders of shares of any series of Preferred Stock
which the Company may designate and issue in the future.
PREFERRED STOCK
The authorized Preferred Stock may be issued from time to time in one or
more designated series or classes. The Board of Directors may issue shares of
Preferred Stock without approval of the shareholders, except as may be required
by applicable law or by the rules of the NYSE. The Board of Directors is also
authorized to establish the voting, dividend, redemption, conversion,
liquidation, and other relative provisions as may be provided in a particular
series or class. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could, among
other things, adversely affect the voting power of the holders of Common Stock
and, under certain circumstances, make it more difficult for a third party to
acquire, or discourage a third party from acquiring, a majority of the
outstanding voting stock of the Company. The Company has no present intention to
issue any series or class of Preferred Stock.
The Common Stock has been approved for listing on the NYSE. The current
rules of the NYSE effectively preclude the listing on the NYSE of any securities
of an issuer which has issued securities or taken other corporate action that
would have the effect of nullifying, restricting, or disparately reducing the
per share voting rights of holders of an outstanding class or classes of
securities registered under Section 12 of the Exchange Act. The Company does not
intend to issue any additional shares of stock that would make the Common Stock
ineligible for continued listing or cause the Common Stock to be delisted from
the NYSE.
CERTAIN PROVISIONS OF THE CHARTER, BYLAWS, AND TENNESSEE LAW
General
The provisions of the Charter, the Bylaws, and Tennessee statutory law
described in this section may delay or make more difficult acquisitions or
changes of control of the Company that are not approved by the Board of
Directors. Such provisions have been implemented to enable the Company,
particularly (but not exclusively) in the initial years of its existence as an
independent, publicly-owned company, to develop its business in a manner that
will foster its long-term growth without the disruption of the threat of a
takeover not deemed by the Board of Directors to be in the best interests of the
Company and its shareholders.
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<PAGE> 66
Directors
The Bylaws provide that the number of directors shall be no fewer than
three nor more than fifteen, with the exact number to be established by the
Board of Directors and subject to change from time to time as determined by the
Board of Directors. Vacancies on the Board of Directors (including vacancies
created by an increase in the number of directors) may be filled by the Board of
Directors, acting by a majority of the remaining directors then in office, or by
a plurality of the votes cast by the shareholders at a meeting at which a quorum
is present. Officers are elected annually by and serve at the pleasure of the
Board of Directors.
The Charter and Bylaws provide that the Board of Directors is divided into
three classes of as nearly equal size as possible, and the term of office of
each class expires in consecutive years so that each year only one class is
elected. The Charter also provides that directors may be removed only for cause
and only by (i) the affirmative vote of the holders of a majority of the voting
power of all the shares of the Company's capital stock then entitled to vote in
the election of directors, voting together as a single class, unless the vote of
a special voting group is otherwise required by law, or (ii) the affirmative
vote of a majority of the entire Board of Directors then in office. The overall
effect of these provisions in the Company's Charter and Bylaws may be to render
more difficult a change in control of the Company or the removal of incumbent
management.
Advance Notice for Shareholder Proposals or Making Nominations at Meetings
The Bylaws establish an advance notice procedure for shareholder proposals
to be brought before a meeting of shareholders of the Company and for
nominations by shareholders of candidates for election as directors at an annual
meeting or a special meeting at which directors are to be elected. Subject to
any other applicable requirements, only such business may be conducted at a
meeting of shareholders as has been brought before the meeting by, or at the
direction of, the Board of Directors, or by a shareholder who has given to the
Secretary of the Company timely written notice, in proper form, of the
shareholder's intention to bring that business before the meeting. The presiding
officer at such meeting has the authority to make such determinations. Only
persons who are selected and recommended by the Board of Directors, or the
committee of the Board of Directors designated to make nominations, or who are
nominated by a shareholder who has given timely written notice, in proper form,
to the Secretary prior to a meeting at which directors are to be elected will be
eligible for election as directors of the Company.
To be timely, notice of nominations or other business to be brought before
any meeting must be received by the Secretary of the Company not later than 120
days in advance of the anniversary date of the Company's proxy statement for the
previous year's annual meeting or, in the case of special meetings, at the close
of business on the tenth day following the date on which notice of such meeting
is first given to shareholders.
The notice of any shareholder proposal or nomination for election as
director must set forth various information required under the Bylaws. The
person submitting the notice of nomination and any person acting in concert with
such person must provide, among other things, the name and address under which
they appear on the Company's books (if they so appear) and the class and number
of shares of the Company's capital stock that are beneficially owned by them.
Amendment of the Bylaws and Charter
The Bylaws provide that a majority of the members of the Board of Directors
who are present at any regular or special meeting or, subject to greater voting
requirements imposed by the Charter, the holders of a majority of the voting
power of all shares of the Company's capital stock represented at regular or
special meeting have the power to amend, alter, change, or repeal the Bylaws.
Any proposal to amend, alter, change, or repeal provisions of the Charter
relating to staggered terms for directors, and limitations on the ability of
shareholders to call a shareholders' meeting or to remove directors require
approval by the affirmative vote of both a majority of the members of the Board
of Directors then in office and the holders of three-fourths of the voting power
of all of the shares of the Company's capital stock entitled to vote on the
amendments. Other amendments to the Charter require the affirmative vote of both
a
65
<PAGE> 67
majority of the members of the Board of Directors then in office and the holders
of a majority of the voting power of all of the shares of the Company's capital
stock entitled to vote on the amendments, with shareholders entitled to
dissenters' rights as a result of the Charter amendment voting together as a
single class. Shareholders entitled to dissenters' rights as a result of a
Charter amendment are those whose rights would be materially and adversely
affected because the amendment (i) alters or abolishes a preferential right of
the shares; (ii) creates, alters, or abolishes a right in respect of redemption;
(iii) alters or abolishes a preemptive right; (iv) excludes or limits the right
of the shares to vote on any matter, or to cumulate votes, other than a
limitation by dilution through issuance of shares or other securities with
similar voting rights; or (v) reduces the number of shares held by such holder
to a fraction if the fractional share is to be acquired for cash. In general,
however, under the TBCA no shareholder is entitled to dissenters' rights if the
security he or she holds is listed on a national securities exchange, such as
the NYSE.
ANTI-TAKEOVER LEGISLATION
The Tennessee Business Combination Act (the "Combination Act") provides,
among other things, that any corporation to which the Combination Act applies,
including the Company, shall not engage in any "business combination" with an
"interested shareholder" for a period of five years following the date that such
shareholder became an interested shareholder unless prior to such date the board
of directors of the corporation approved either the business combination or the
transaction which resulted in the shareholder becoming an interested
shareholder. The Combination Act defines "business combination," generally, to
mean any: (i) merger or consolidation; (ii) share exchange; (iii) sale, lease,
exchange, mortgage, pledge, or other transfer (in one transaction or a series of
transactions) of assets representing 10% or more of (A) the market value of
consolidated assets, (B) the market value of the corporation's outstanding
shares or (C) the corporation's consolidated net income; (iv) issuance or
transfer of shares from the corporation to the interested shareholder; (v) plan
of liquidation; (vi) transaction in which the interested shareholder's
proportionate share of the outstanding shares of any class of securities is
increased; or (vii) financing arrangements pursuant to which the interested
shareholder, directly or indirectly, receives a benefit except proportionately
as a shareholder. The Combination Act defines "interested shareholder,"
generally, to mean any person who is the beneficial owner, either directly or
indirectly, of 10% or more of any class or series of the outstanding voting
stock, or any affiliate or associate of the corporation who has been the
beneficial owner, either directly or indirectly, of 10% or more of the voting
power of any class or series of the corporation's stock at any time within the
five year period preceding the date in question. Consummation of a business
combination that is subject to the five-year moratorium is permitted after such
period if the transaction (i) complies with all applicable charter and bylaw
requirements and applicable Tennessee law and (ii) is approved by at least
two-thirds of the outstanding voting stock not beneficially owned by the
interested shareholder, or when the transaction meets certain fair price
criteria. The fair price criteria include, among others, the requirement that
the per share consideration received in any such business combination by each of
the shareholders is equal to the highest of (i) the highest per share price paid
by the interested shareholder during the preceding five-year period for shares
of the same class or series plus interest thereon from such date at a treasury
bill rate less the aggregate amount of any cash dividends paid and the market
value of any dividends paid other than in cash since such earliest date, up to
the amount of such interest, (ii) the highest preferential amount, if any, such
class or series is entitled to receive on liquidation, or (iii) the market value
of the shares on either the date the business combination is announced or the
date when the interested shareholder reaches the 10% threshold, whichever is
higher, plus interest thereon less dividends as noted above.
The Tennessee Control Share Acquisition Act (the "Acquisition Act")
prohibits certain shareholders from exercising in excess of 20% of the voting
power in a corporation acquired in a "control share acquisition," as defined in
the Acquisition Act, unless such voting rights have been previously approved by
the disinterested shareholders of the corporation. The Company has elected not
to make the Acquisition Act applicable to the Company. No assurance can be given
that such election, which must be expressed in a charter or bylaw amendment,
will not be made in the future.
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<PAGE> 68
The Tennessee Greenmail Act (the "Greenmail Act") prohibits the Company
from purchasing or agreeing to purchase any of its securities, at a price in
excess of fair market value, from a holder of 3% or more of any class of such
securities who has beneficially owned such securities for less than two years,
unless such purchase has been approved by the affirmative vote of a majority of
the outstanding shares of each class of voting stock issued by the Company or
the Company makes an offer of at least equal value per share to all holders of
shares of such class.
The effect of the Combination Act, the Acquisition Act, and the Greenmail
Act may be to render more difficult a change of control of the Company.
REGISTRATION RIGHTS
Following the consummation of the Offering, beneficial holders of an
aggregate of 7,812,500 shares of Common Stock will have contractual rights with
respect to the registration of the sale of such shares ("Registrable Shares").
Beginning one year after the date hereof (the "IPO Date"), holders of
Registrable Shares that may not otherwise be sold pursuant to Rule 144 of the
Securities Act will be entitled to two demand registrations upon the written
demand to the Company to register the sale of 25% or more of the Registrable
Shares; provided, however, that in no event will any holder of Registrable
Shares participating in such demand registrations be permitted to sell in excess
of 20% of such holder's Registrable Shares. In addition, until the second
anniversary of the IPO Date, holders of Registrable Shares that may not
otherwise be sold pursuant to Rule 144 of the Securities Act may require the
Company to include all or a portion of such holder's Registrable Shares in a
registration statement filed by the Company for its own account for cash,
provided, among other conditions, that the managing underwriter (if any) of such
offering has the right, subject to certain conditions, to limit the number of
Registrable Shares included in such registration statement. In general, all
fees, costs, and expenses of such registrations (other than the underwriting
commissions, dealers' fees, brokers' fees and concessions applicable to Common
Stock) will be borne by the Company.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company, New York, New York will be the
transfer agent and registrar for the Common Stock.
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<PAGE> 69
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has not been any public market for securities
of the Company. No prediction can be made as to the effect, if any, that market
sales of shares of Common Stock or the availability of shares of Common Stock
for sale will have on the market price prevailing from time to time. Sales of
substantial amounts of Common Stock of the Company in the public market after
the restrictions described below lapse could adversely affect the prevailing
market price and the ability of the Company to raise equity capital in the
future.
Upon completion of the Offering, the Company will have outstanding
10,937,500 shares of Common Stock (11,406,250 shares if the underwriters'
over-allotment option is exercised in full). Of these shares, the 3,125,000
shares of Common Stock sold in the Offering will be freely tradeable without
restriction or limitation under the Securities Act, except to the extent such
shares are subject to the Agreement with the representatives of the Underwriters
described below, and except for any shares purchased by "affiliates," as that
term is defined under the Securities Act, of the Company. The remaining
7,812,500 shares will be "restricted securities" within the meaning of Rule 144
adopted under the Securities Act (the "Restricted Shares"). The Restricted
Shares were issued by the Company in the Reorganization in reliance upon an
exemption from registration under the Securities Act and none of such shares may
be sold in the public market, except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, such as the exemption provided by Rule 144 under the Securities
Act. Upon consummation of the Offering, the beneficial holders of all of the
Restricted Shares will have demand and piggyback registration rights with
respect to the sale of such shares. See "Description of Capital Stock --
Registration Rights."
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least a one-year period (as computed under Rule 144) is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of Common Stock (109,375
shares after giving effect to the Offering), and (ii) the average weekly trading
volume in the Common Stock during the four calendar weeks immediately preceding
the date on which the notice of sale is filed with the Commission. Sales under
Rule 144 are also subject to certain provisions relating to the manner and
notice of sale and the availability of current public information about the
Company. A shareholder who is not an affiliate of the Company at any time during
the 90 days immediately preceding a sale, and who has beneficially owned his or
her shares for at least two years (as computed under Rule 144), is entitled to
sell such shares under Rule 144(k) without regard to the volume, manner and
notice of sale, and availability of public information limitations described
above. Shares properly sold in reliance upon Rule 144 to persons who are not
affiliates are thereafter freely tradeable without restrictions or registration
under the Securities Act.
The Company and all directors and executive officers of the Company (who in
the aggregate will beneficially own 4,637,986 shares of Common Stock) will agree
prior to the Offering, and certain holders of 5% or more of the shares of Common
Stock outstanding after the Offering will be asked to agree, with the
Underwriters that, for a period of 180 days following the Offering (the "Lock-up
Period"), they will not offer to sell, sell, contract to sell, grant an option
to purchase or otherwise dispose (or announce any offer, sale, grant of any
option or other distribution) of any shares of Common Stock or any securities
convertible into or exchangeable for shares of Common Stock without the prior
written consent of NatWest Securities Limited (except that the Company may grant
options to purchase or award shares of Common Stock under the Stock Incentive
Plan and the Stock Purchase Plan and issue privately placed shares in connection
with acquisitions). See "Principal Shareholders" and "Management -- Compensation
Pursuant to Plans."
As soon as practicable following the consummation of the Offering, the
Company intends to file a registration statement under the Securities Act to
register shares of Common Stock issuable pursuant to the Stock Incentive Plan
and the Stock Purchase Plan. See "Management -- Compensation Pursuant to Plans."
Shares of Common Stock issued pursuant to the Stock Incentive Plan and the Stock
Purchase Plan after the effective date of such registration statement will be
available for sale in the open market, subject to the Lock-up Period, if
applicable.
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<PAGE> 70
UNDERWRITING
The Underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company the number of shares of Common Stock set forth opposite their
names below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
NatWest Securities Limited..................................
Equitable Securities Corporation............................
McDonald & Company Securities, Inc..........................
Total.............................................
</TABLE>
The Underwriters are obligated to purchase all the shares of Common Stock
offered hereby, if any such shares are purchased.
The Underwriters propose to offer the shares directly to the public
initially at the public offering price set forth on the cover page of this
Prospectus, and to certain securities dealers at such price less a concession
not in excess of $ per share of Common Stock. Such dealers may re-allow a
concession not in excess of $ per share of Common Stock to certain
other brokers and dealers. After the public offering, the per share price and
such concessions may be changed by the Underwriters. The Underwriters have
informed the Company that they do not intend to confirm sales of shares of
Common Stock to any accounts over which they exercise discretionary authority.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including liabilities under
the federal securities laws, or will contribute to payments that the
Underwriters may be required to make in respect thereof.
The Company has granted an option to the Underwriters, exercisable for 30
days from the date of this Prospectus, to purchase up to 468,750 additional
shares of Common Stock at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriters may exercise such option only to cover over-allotments in the sale
of the shares of Common Stock offered hereby.
NatWest Securities Limited, a United Kingdom broker-dealer and a member of
the Securities and Futures Authority Limited, has agreed that, as part of the
distribution of the Common Stock offered hereby and subject to certain
exceptions, it will not offer or sell any Common Stock within the United States,
its territories or possessions or to persons who are citizens thereof or
residents therein. The Underwriting Agreement does not limit the sale of the
Common Stock offered hereby outside of the United States.
NatWest Securities Limited has further represented and agreed that (a) it
has not offered or sold and will not offer or sell any shares of Common Stock to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing, or disposing of investments
(whether as principal or agent) for the purposes of their businesses or
otherwise in circumstances that have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995 or the Financial Services Act 1986 (the
"Act"); (b) it has complied and will comply with all applicable provisions of
the Act with respect to anything done by it in relation to the shares of Common
Stock in, from, or otherwise involving the United Kingdom; and (c) it has only
issued or passed on and will only issue or pass on, in the United Kingdom, any
document that consists of or any part of listing
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<PAGE> 71
particulars, supplementary listing particulars, or any other document required
or permitted to be published by listing rules under Part IV of the Act, to a
person who is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom
the document may otherwise be lawfully issued or passed on.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
by negotiation between the Company and the Underwriters. Among the factors to be
considered in determining the initial public offering price, in addition to
prevailing market and general economic conditions, are the history of, and
prospects for, the industry in which the Company operates, the ability of the
Company's management, the Company's past and present operations, the Company's
historical results of operations, the Company's earnings prospects, the prices
of similar securities of comparable companies, and other relative factors. There
can be no assurance, however, that the price at which the Common Stock will sell
in the public market after the Offering will not be lower than the price at
which it is sold by the Underwriters. The Representatives, on behalf of the
Underwriters, have agreed to undertake to sell the Common Stock in such a manner
as to ensure that the distribution standards of the NYSE will be met. See "Risk
Factors -- Absence of Prior Public Trading Market."
The Company, directors and officers of the Company, and certain holders of
5% or more of the shares of Common Stock and options to purchase Common Stock
outstanding after the Offering will agree with the Underwriters that, for a
period of 180 days following the Offering, they will not offer to sell, sell,
contract to sell, grant an option to purchase or otherwise dispose (or announce
any offer, sale, grant of any option or other distribution) of any shares of
Common Stock or any securities convertible into or exchangeable for shares of
Common Stock without the prior written consent of NatWest Securities Limited
(except that the Company may grant options to purchase or award shares of Common
Stock under the Stock Incentive Plan and the Stock Purchase Plan and issue
privately placed shares in connection with acquisitions). See "Principal
Shareholders" and "Management -- Compensation Pursuant to Plans."
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions, and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specific maximum. Syndicate covering transactions involve purchases of the
securities in the open market after the distribution has been completed in order
to cover syndicate short positions. Penalty bids permit the Representatives to
reclaim a selling concession from a syndicate member when the securities
originally sold by such syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. Such stabilizing transactions,
syndicate covering transactions, and penalty bids may cause the price of the
securities to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on the NYSE or otherwise and,
if commenced, may be discontinued at any time.
At the request of the Company, up to 300,000 shares of Common Stock have
been reserved for sale in the Offering to certain individuals, including
directors and employees of the Company, members of their families, and other
persons having business relationships with the Company. The price of such shares
to such persons will be the initial public offering price set forth on the cover
of this prospectus. The number of shares available for sale to the general
public will be reduced to the extent these persons purchase such reserved
shares. Any reserved shares not purchased will be offered by the Underwriters to
the general public on the same basis as the other shares offered hereby.
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<PAGE> 72
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Bass, Berry & Sims PLC, Nashville, Tennessee. H. Lee
Barfield II, a member of Bass, Berry & Sims PLC, is a director of the Company.
Mr. Barfield and his wife and children beneficially own 602,661 shares of Common
Stock, and will receive approximately $2.3 million pursuant to ARCLP's
liquidation and distribution of the repayment of the Reorganization Note. See
"The Company -- Pending Reorganization," "Principal Shareholders," and "Certain
Transactions -- Pending Reorganization." Certain legal matters in connection
with the Offering will be passed upon for the Underwriters by Stroock & Stroock
& Lavan LLP, New York, New York.
EXPERTS
The Predecessor Entities' and the Predecessor's Combined and Consolidated
Financial Statements and schedule as of December 31, 1995 and 1996, and for the
year ended December 31, 1994, the three months ended March 31, 1995, the nine
months ended December 31, 1995, and the year ended December 31, 1996, and the
combined financial statements of Carriage Club for the four months ended April
30, 1996 have been included herein in reliance upon the reports of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG Peat Marwick LLP covering the Predecessor Entities'
and the Predecessor's Combined and Consolidated Financial Statements refers to a
change in cost basis as a result of a purchase business combination.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (herein, together with all amendments thereto, called the "Registration
Statement"), of which this Prospectus constitutes a part, under the Securities
Act and the rules and regulations promulgated thereunder, with respect to the
Common Stock offered hereby. This Prospectus omits certain information contained
in the Registration Statement, and reference is made to the Registration
Statement, including the exhibits thereto, for further information with respect
to the Company and the securities offered hereby. Statements contained herein
concerning the provisions of documents are necessarily summaries of such
documents; when any such document is an exhibit to the Registration Statement,
each such statement is qualified in its entirety by reference to the copy of
such document filed with the Commission. The Registration Statement and the
exhibits and schedules thereto may be reviewed without charge at the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the New York Regional Office located at Seven World Trade Center,
13th Floor, New York, New York 10048, and at the Chicago Regional Office located
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may be obtained, upon payment of the fee prescribed by the Commission,
at the Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Commission maintains a web site that contains reports, proxy statements, and
other information regarding registrants, including the Company. The address of
the Commission's web site is http://www.sec.gov.
---------------------
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by the Company's independent public
accountants.
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<PAGE> 73
AMERICAN RETIREMENT COMMUNITIES, L.P.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
American Retirement Communities, L.P.
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets -- December 31, 1995, and 1996,
and March 31, 1997 (unaudited)............................ 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, Year Ended December 31, 1996, Three
Months Ended March 31, 1996 (unaudited), and Three Months
Ended March 31, 1997 (unaudited).......................... 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,
Year Ended December 31, 1996, and Three Months Ended March
31, 1997 (unaudited)...................................... 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, Year Ended December 31, 1996, Three
Months Ended March 31, 1996 (unaudited), and Three Months
Ended March 31, 1997 (unaudited).......................... F-7
Notes to Combined and Consolidated Financial Statements..... F-9
Carriage Club of Charlotte, Limited Partnership and Carriage
Club of Jacksonville, Limited Partnership
Independent Auditors' Report................................ F-22
Combined Statement of Operations -- Four Months Ended April
30, 1996.................................................. F-23
Combined Statement of Partners' Equity -- Four Months Ended
April 30, 1996............................................ F-23
Combined Statement of Cash Flows -- Four Months Ended April
30, 1996.................................................. F-24
Notes to Combined Financial Statements...................... F-25
</TABLE>
F-1
<PAGE> 74
INDEPENDENT AUDITORS' REPORT
The Partners
American Retirement Communities, L.P.:
We have audited the accompanying consolidated balance sheets of American
Retirement Communities, L.P. and consolidated subsidiaries (the Predecessor) as
of December 31, 1995 and 1996, and the related consolidated statements of
operations, changes in partners' equity, and cash flows for the period April 1,
1995 through December 31, 1995 and for the year ended December 31, 1996
(Predecessor periods), and the related combined statements of operations,
changes in partners'/shareholders' equity, and cash flows of American Retirement
Corporation and combined entities (Predecessor Entities) for the year ended
December 31, 1994 and for the period from January 1, 1995 through March 31, 1995
(Predecessor Entities periods). These combined and consolidated financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined and consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned Predecessor consolidated financial
statements present fairly, in all material respects, the financial position of
American Retirement Communities, L.P. and consolidated entities as of December
31, 1995 and 1996, and the results of their operations and their cash flows for
the Predecessor periods, in conformity with generally accepted accounting
principles. Further, in our opinion, the aforementioned Predecessor Entities
combined financial statements present fairly, in all material respects, the
results of operations and cash flows of American Retirement Corporation and
combined entities for the Predecessor Entities periods, in conformity with
generally accepted accounting principles.
As discussed in note 1 to the combined and consolidated financial
statements, effective April 1, 1995, an exchange of common stock or partnership
interests for limited partnership interests in American Retirement Communities,
L.P. was accounted for as a purchase business combination (the Roll-up). As a
result of the Roll-up, net assets not previously owned by the acquirer were
recorded at fair value. Accordingly, consolidated financial information for
periods after the Roll-up is presented on a different cost basis than that for
periods before the Roll-up and, therefore, is not comparable.
KPMG PEAT MARWICK LLP
Nashville, Tennessee
January 22, 1997
F-2
<PAGE> 75
AMERICAN RETIREMENT COMMUNITIES, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 3,825 $ 3,222 $ 8,854
Assets limited as to use (note 5)...................... 2,411 1,022 975
Resident and health care receivables, less allowance
for doubtful accounts of $78 in 1995 and $108 in
1996................................................ 1,585 2,782 3,301
Management services receivables........................ 876 565 804
Inventory.............................................. 324 420 405
Prepaid expenses....................................... 233 340 1,002
Deferred income taxes (note 12)........................ -- 920 920
-------- -------- --------
Total current assets................................ 9,254 9,271 16,261
Assets limited as to use, excluding amounts classified as
current (note 5)....................................... 3,532 3,607 3,514
Land, buildings and equipment, net (notes 6, 9, and
15).................................................... 149,082 213,124 192,302
Marketable securities (note 4)........................... 102 52 52
Other assets (note 7).................................... 3,609 2,108 2,027
-------- -------- --------
Total assets................................... $165,579 $228,162 $214,156
======== ======== ========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 9)............. $ 1,800 $ 8,053 $ 3,189
Accounts payable....................................... 2,615 2,441 3,553
Redemption payable (note 10)........................... -- 5,195 --
Accrued expenses (note 8).............................. 4,442 6,239 5,368
Accrued partner distributions.......................... 1,445 1,632 2,500
-------- -------- --------
Total current liabilities........................... 10,302 23,560 14,610
Tenant deposits.......................................... 2,748 3,850 4,278
Long-term debt, excluding current portion (note 9)....... 100,445 162,636 154,379
Deferred gain on sale-leaseback transactions (note 15)... -- -- 4,302
Other long-term liabilities.............................. 261 234 230
-------- -------- --------
Total liabilities................................... 113,756 190,280 177,799
Partners' equity:
Special redeemable preferred partnership interests
(note 10)........................................... 10,000 -- --
Other general and limited partners' interests.......... 41,823 37,882 36,357
-------- -------- --------
Total partners' equity.............................. 51,823 37,882 36,357
-------- -------- --------
Commitments and contingencies (notes 13 and 14)
Total liabilities and partners' equity......... $165,579 $228,162 $214,156
======== ======== ========
</TABLE>
See accompanying notes to combined and consolidated financial statements.
F-3
<PAGE> 76
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 THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1994 1995 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Resident and health care
revenue.................... $30,979 $11,761 $47,239 $ 73,878 $15,803 $20,982
Management services
revenue.................... 2,362 595 1,524 1,739 513 528
------- ------- ------- -------- ------- -------
Total revenues............. 33,341 12,356 48,763 75,617 16,316 21,510
Expenses:
Community operating
expenses................... 21,780 8,035 30,750 46,960 10,270 13,399
Lease expense................ -- -- -- -- -- 528
General and administrative... 3,455 1,108 3,446 6,200 1,183 1,886
Depreciation and
amortization............... 2,891 1,127 4,534 6,906 1,390 1,585
------- ------- ------- -------- ------- -------
Total operating expenses... 28,126 10,270 38,730 60,066 12,843 17,398
------- ------- ------- -------- ------- -------
Income from operations..... 5,215 2,086 10,033 15,551 3,473 4,112
------- ------- ------- -------- ------- -------
Other income (expense):
Interest expense............. (5,354) (2,370) (7,930) (12,160) (1,894) (3,257)
Interest income.............. 203 49 329 434 79 150
Other (note 11).............. 98 (1,013) 919 788 (6) (30)
------- ------- ------- -------- ------- -------
Other income (expense),
net...................... (5,053) (3,334) (6,682) (10,938) (1,821) (3,137)
------- ------- ------- -------- ------- -------
Income (loss) before income
taxes and extraordinary
item..................... 162 (1,248) 3,351 4,613 1,652 975
Income tax expense (benefit)
(note 12).................... -- 20 55 (920) -- --
------- ------- ------- -------- ------- -------
Income (loss) before
extraordinary item....... 162 (1,268) 3,296 5,533 1,652 975
Extraordinary loss on
extinguishment of debt (note
9)........................... -- -- -- (2,335) (2,335) --
------- ------- ------- -------- ------- -------
Net income (loss).......... 162 (1,268) 3,296 3,198 (683) 975
Preferred return on special
redeemable preferred limited
partnership interests (note
10).......................... -- -- 1,125 1,104 375 --
------- ------- ------- -------- ------- -------
Net income (loss) available
for distribution to
partners and
shareholders............. $ 162 $(1,268) $ 2,171 $ 2,094 $(1,058) $ 975
======= ======= ======= ======== ======= =======
</TABLE>
(Continued)
F-4
<PAGE> 77
AMERICAN RETIREMENT COMMUNITIES, L.P.
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Pro forma earnings data (unaudited) (note 16):
Income before income taxes and extraordinary items, as
reported.................................................. $4,613 $ 975
Pro forma income taxes...................................... 820 370
------ ------
Pro forma income before extraordinary item................ 3,793 605
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 $ 605
====== ======
Pro forma earnings per common share (note 16):
Pro forma income before extraordinary item................ $ 0.40 $ 0.06
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 $ 0.06
====== ======
Shares used in computing pro forma income per common
share.................................................. 9,375 9,375
====== ======
</TABLE>
See accompanying notes to combined and consolidated financial statements.
F-5
<PAGE> 78
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; YEAR ENDED DECEMBER 31, 1996;
AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
(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
Earnings for the period January 1, 1997 through
March 31, 1997 (unaudited)..................... -- 975 975
Distribution to partners (unaudited)............. -- (2,500) (2,500)
-------- ------- --------
Consolidated balance, March 31, 1997
(unaudited).................................... $ -- $36,357 $ 36,357
======== ======= ========
</TABLE>
See accompanying notes to combined and consolidated financial statements.
F-6
<PAGE> 79
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 THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1994 1995 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................ $ 162 $(1,268) $ 3,296 $ 3,198 (683) 975
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 1,390 1,585
Amortization of deferred
gain......................... -- -- -- -- -- (111)
Deferred taxes................. -- -- -- (920) -- --
Extraordinary loss on
extinguishment of debt....... -- -- -- 2,335 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) 523 (757)
Inventory.................... (67) (6) (21) (56) 11 15
Prepaid expenses............. 27 (1,496) 1,894 (105) (256) (661)
Other assets................. (97) 382 -- 521 -- (115)
Accounts payable............. 586 381 948 (249) (649) 1,111
Accrued expenses............. 1,004 (157) 487 1,130 697 (819)
Tenant deposits.............. 344 60 279 202 40 426
Other long-term
liabilities................ (588) -- (87) (27) (63) (3)
-------- ------- ------- -------- ------- -------
Net cash provided (used) by
operating activities..... 3,454 (1,880) 10,888 11,696 3,345 1,646
-------- ------- ------- -------- ------- -------
Cash flows from (used by) investing
activities:
Additions to land, building and
equipment...................... (45,606) (3,237) (6,032) (71,545) (1,667) (3,317)
Proceeds from (purchases of)
assets limited as to use....... (904) 17 (2,915) 2,578 819 139
Proceeds from the sale of
assets......................... 205 6 1,214 1,346 -- 27,144
Proceeds from (purchases of)
marketable securities.......... (52) -- (50) -- 102 --
-------- ------- ------- -------- ------- -------
Net cash provided (used) by
investing activities..... (46,357) (3,214) (7,783) (67,621) (746) 23,966
-------- ------- ------- -------- ------- -------
</TABLE>
(Continued)
F-7
<PAGE> 80
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 THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1994 1995 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from financing
activities:
Contributions from partners...... -- 11,000 -- -- -- --
Distributions to partners........ (2,580) (485) (4,659) (6,952) (1,820) (1,632)
Payment of redeemable preferred
interests...................... -- -- -- (4,805) -- (5,195)
Proceeds from issuance of
long-term debt................. 48,979 1,636 1,614 73,922 1,610 2,423
Principal payments on long-term
debt........................... (2,471) (628) (3,720) (5,479) (422) (15,544)
Expenditures for financing
costs.......................... (1,535) (130) (346) (1,364) (341) (32)
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 (973) (19,980)
-------- ------- ------- -------- ------- -------
Net increase (decrease) in
cash and cash
equivalents.............. (311) 4,937 (4,006) (603) 1,626 5,632
Cash and cash equivalents at
beginning of period.............. 3,205 2,894 7,831 3,825 3,825 3,222
-------- ------- ------- -------- ------- -------
Cash and cash equivalents at end of
period........................... $ 2,894 $ 7,831 $ 3,825 $ 3,222 5,451 8,854
======== ======= ======= ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for
interest....................... $ 4,946 $ 2,381 $ 7,772 $ 11,907 $ 1,277 $ 2,037
======== ======= ======= ======== ======= =======
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> 81
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND MARCH 31, 1997
UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated balance sheet as of March 31, 1997, the consolidated
statements of operations and cash flows for the three months ended March 31,
1996 and 1997, and the consolidated statement of partners' equity for the three
months ended March 31, 1997 (1996 and 1997 interim financial information) have
been prepared by American Retirement Communities, L.P. (ARC-LP) and are
unaudited. In the opinion of the management of ARC-LP, the 1996 and 1997 interim
financial information includes all adjustments, consisting of only normal
recurring adjustments, necessary for a fair statement of the results of the 1996
and 1997 interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the 1996 and 1997 interim financial
information. The 1996 and 1997 interim financial information should be read in
conjunction with ARC-LP's audited financial statements appearing herein. The
results for the three months ended March 31, 1996 and March 31, 1997 may not be
indicative of operating results for the full year.
(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 is
planned for 1997.
F-9
<PAGE> 82
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(b) Recognition of Revenue
Resident and health care revenues are reported at the estimated net
realizable amounts from residents, third-party payors, and others for services
rendered, including estimated retroactive adjustments under reimbursement
agreements with third-party payors. Retroactive adjustments are accrued on an
estimated 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.
F-10
<PAGE> 83
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(g) Land, Buildings and Equipment
Land, buildings, and equipment are stated at cost. Depreciation is provided
over the estimated useful life of each class of depreciable asset and is
computed on the straight-line basis. Buildings and improvements are depreciated
over 15 to 40 years, and furniture, fixtures and equipment are depreciated over
5 to 7 years.
The Partnership adopted the provisions of Statement of Financial Accounting
Standard (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, on January 1, 1996. SFAS No. 121
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the
Partnership's financial position, results of operations, or liquidity.
(h) Other Assets
Other assets consist primarily of deferred financing charges being
amortized on the straight-line basis over the terms of the debt agreement and
management contract rights being amortized over the initial terms of the
management contracts.
(i) Income Taxes
Except for ARC, the entities included in these financial statements are
partnerships, and the income and losses of the partnerships and distributions
are allocated to the partners in accordance with the various partnership
agreements. Accordingly, no provision has been made in the accompanying
financial statements for federal and state income taxes related to the
partnerships since such taxes are the liabilities of the partners.
ARC follows the asset and liability method of accounting for income taxes,
under which deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
See note 16 for a discussion of pro forma taxes.
(j) Disclosure of Fair Value of Financial Instruments
The fair values of the financial instruments are estimates based upon
current market conditions and quoted market prices for the same or similar
instruments as of December 31, 1996. Book value approximates fair value for
substantially all of the Partnership's assets and liabilities meeting the
definition of a financial instrument.
(3) ACQUISITIONS
During 1994, Fort Austin Limited Partnership acquired the assets of four
retirement communities. Santa Catalina Villas was acquired on June 15, 1994 for
a purchase price of $10.9 million. Hampton at Post Oak, Park Place Retirement
Community, and Westlake Village were acquired on October 31, 1994 for a purchase
price of $34.7 million. The purchases were financed primarily through various
borrowings.
On February 1, 1995, ARC-LP acquired certain assets and assumed certain
liabilities of a retirement community in Denver, Colorado known as Heritage
Club. The purchase price was $22.0 million and was a combination of cash of
approximately $6.5 million and assumption of debt of $15.5 million.
F-11
<PAGE> 84
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective April 1, 1995, ARC-LP acquired all of the assets and all
contractual liabilities of a retirement community and related home health agency
in Lexington, Kentucky known as Richmond Place. The purchase price approximated
$10.3 million and included the payment of cash of $2.3 million and the
assumption of debt of $8.0 million.
Effective May 1, 1996, ARC-LP acquired all assets and all contractual
liabilities of a retirement community in Charlotte, North Carolina known as
Carriage Club of Charlotte and a retirement community in Jacksonville, Florida
known as Carriage Club of Jacksonville. The purchase price totaled $61.1 million
and was financed primarily through various borrowings. The purchase prices have
been allocated to the assets acquired and liabilities assumed based on fair
market value at the date of acquisition.
The above acquisitions were accounted for as purchases, and the
accompanying financial statements include the results of operations from the
date of the acquisitions. The following unaudited pro forma financial
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, MARCH 31,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Held-to-maturity:
U.S. Treasury securities............. $ 52 $52 $52
Exxon Capital Corporation marketable
corporate debt securities......... 50 -- --
---- --- ---
$102 $52 $52
==== === ===
</TABLE>
Maturities of marketable securities classified as held-to-maturity was due
between one and five years.
(5) ASSETS LIMITED AS TO USE
Assets limited as to use that are required for obligations classified as
current liabilities are reported as current assets. Assets limited as to use,
other than tenant deposits, are on deposit with the lender of the mortgage note
payable. The residency agreements which govern the terms under which some of the
communities lease apartments to residents require each resident to place a
tenant deposit with the Partnership in an amount equal to one month's rent. The
deposit functions as a security deposit. These deposits are carried
F-12
<PAGE> 85
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, MARCH 31,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Operating expense reserve................. $ 349 $ 349 $ 180
Tax escrow account........................ 1,904 285 206
Capital improvement escrow................ 890 218 88
Bond principal and interest escrow........ 617 862 589
Tenant deposits........................... 1,292 2,114 2,110
Collateral for letter of credit with
bank.................................... 891 801 1,316
------ ------ ------
5,943 4,629 4,489
Less amounts classified as current
assets.................................. 2,411 1,022 975
------ ------ ------
Assets limited as to use, excluding
amounts classified as current assets.... $3,532 $3,607 $3,514
====== ====== ======
</TABLE>
(6) LAND, BUILDINGS, AND EQUIPMENT
A summary of land, buildings and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Land...................................... $ 18,326 $ 26,519 $ 25,282
Buildings and improvements................ 132,775 187,239 167,428
Furniture, fixtures and equipment......... 8,960 11,512 10,054
-------- -------- --------
160,061 225,270 202,764
Less accumulated depreciation............. 11,141 17,423 14,050
-------- -------- --------
148,920 207,847 188,714
Construction in progress.................. 162 5,277 3,588
-------- -------- --------
Land, buildings and equipment, net........ $149,082 $213,124 $192,302
======== ======== ========
</TABLE>
(7) OTHER ASSETS
Other assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred financing costs, net of
accumulated amortization............... $2,649 $1,129 $1,053
Long term investments.................... 435 -- --
Other.................................... 525 979 974
------ ------ ------
$3,609 $2,108 $2,027
====== ====== ======
</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.
F-13
<PAGE> 86
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, MARCH 31,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Property taxes payable................... $2,454 $2,550 $1,630
Accrued payroll.......................... 628 1,439 1,761
Other.................................... 1,360 2,250 1,977
------ ------ ------
$4,442 $6,239 $5,368
====== ====== ======
</TABLE>
(9) LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <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 $ 8,010
Mortgage note payable bearing interest at a fixed rate of
8.2%. Interest is due monthly with principal payments due
monthly in varying amounts with remaining principal and
unpaid interest due at maturity on December 31, 2002. The
loan is secured by land, buildings, equipment and
assignment of rents and leases. See note (a) below. ..... 62,109 62,332 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 17,474
</TABLE>
F-14
<PAGE> 87
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
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 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 14,036
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. ......................................... -- 825 825
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 14,960
Note payable to a bank bearing interest at 7.6%. Interest
due quarterly with principal due at maturity on June 30,
1997. The loan is secured by land, buildings and
equipment and assignment of rents and leases, and is
guaranteed by certain limited partners. This debt
instrument was repaid during January 1997 (note 15). See
note (b) below. ......................................... 5,000 5,000 --
Term loan note to a bank with a fixed interest rate of
10.07%. Principal and interest of $288,822 due quarterly
through March 31, 1998. This debt instrument was repaid
during January 1997 (note 15). See note (b) below. ...... 9,768 9,585 --
</TABLE>
F-15
<PAGE> 88
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
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 2,470
Other long-term debt, generally payable monthly............ 98 410 461
-------- -------- --------
Total long-term debt..................................... 102,245 170,689 157,568
Less current portion..................................... 1,800 8,053 3,189
-------- -------- --------
Long-term debt, excluding current portion........ $100,445 $162,636 $154,379
======== ======== ========
</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.
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.
F-16
<PAGE> 89
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) EQUITY
As discussed in note 1, in connection with the Roll-up, the shareholders of
ARC and the partners in various partnerships exchanged their common stock or
partnership interests for limited partnership interests in the Partnership.
Additionally, holders of $10.0 million of notes payable by the Fort Austin
Limited Partnership exchanged these notes for special redeemable preferred
limited partnership interests. Such preferred interests were entitled to a
cumulative 15% preferred distribution. Such preferred interests were redeemable,
in whole or in part, at the option of the Partnership. During 1996, the
Partnership redeemed $4.8 million of the preferred interests and on December 4,
1996, the Partnership approved the redemption of the remaining $5.2 million.
Accordingly, the $5.2 million was removed from equity and shown as redemption
payable at December 31, 1996 (see note 15). During both 1995 and 1996, the
Partnership distributed $1.1 million of preferred distributions. There were no
cumulative unpaid preferred distributions at December 31, 1995 or 1996.
Distributions of all or any portion of the net cash flow from operations or
from the proceeds of capital transactions are at the discretion of the general
partner. Such distributions are made pursuant to formulas set forth in the
limited partnership agreement.
(11) OTHER INCOME (EXPENSE)
Other income (expense) consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES PREDECESSOR
--------------------------- ---------------------------
YEAR THREE MONTHS NINE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Gain on sale of assets........................ $155 $ -- $1,143 $874
Costs incurred for the roll-up (see note 1)... -- (964) (17) --
Other, net.................................... (57) (49) (207) (86)
---- ------- ------ ----
$ 98 $(1,013) $ 919 $788
==== ======= ====== ====
</TABLE>
The 1995 gain resulted primarily from the sale of certain assets and
liabilities of a retirement center by a general partnership in which ARC had an
investment, and the 1996 gain included a gain of approximately $865,000 from the
sale of land owned by ARC (see note 7).
F-17
<PAGE> 90
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> 91
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, ARC had unused net operating loss carryforwards of
approximately $5.4 million for regular tax purposes, and $5.0 million for
alternative minimum tax purposes, which expire in varying amounts from 2004 to
2009. Additionally, the Corporation had alternative minimum tax credit
carryovers in the amount of approximately $143,000 at December 31, 1996, to be
used to offset regular tax in the future in the event the regular tax expense
exceeds the alternative minimum tax expense.
See note 16 for a discussion of pro forma income taxes.
(13) RETIREMENT PLAN
The Partnership has established the American Retirement Communities, L.P.
401(k) Plan (the "Plan") for eligible employees who have completed ninety days
of service and are at least 21 years old. This Plan is administered by the
Partnership with a bank serving as trustee. A Plan participant may elect to
contribute up to 20% of his or her annual compensation, subject to certain
Internal Revenue Service limitations. The Partnership can elect to make
voluntary contributions to the Plan. Such contributions will be allocated to
each participant's account. Participants vest in Partnership contributions at
20% per year beginning the first year of employment becoming fully vested after
five years of service. The Partnership contributed $54,000 and $277,000 to the
Plan during the periods ended December 31, 1995 and 1996, respectively.
At retirement, the participant receives the balance in his or her
individual account. Upon termination of employment prior to retirement, the
participant receives 100% of his or her individual contributions plus related
earnings and the vested portion of the Partnership's contributions and related
earnings. The nonvested portion of a terminated employee's account is
reallocated among the remaining Plan participants.
The Partnership has also established a post tax deferral plan (the 162
plan) for highly compensated employees. The Partnership and the individual
participant can both make contributions to the 162 plan and the individual has
freedom of investment elections. The Partnership contributed $99,000 and
$274,000 to the 162 plan during 1995 and 1996, respectively.
(14) COMMITMENTS AND CONTINGENCIES
The Partnership is subject to claims for medical malpractice liabilities;
however, management is unaware of any incidents which would have a material
impact on the Partnership's financial position or results of operations.
Commercial insurance on a claims-made basis is maintained to cover any such
incidents.
In the normal course of business, the Partnership is a defendant in certain
litigation. However, management is unaware of any action which would have a
material adverse impact on the financial position or results of operation of the
Partnership.
The Partnership is self-insured for workers' compensation claims with
excess loss coverage of $250,000 per individual claim and $1.3 million for
aggregate claims. The Partnership utilizes a third party administrator to
process and pay filed claims. The Partnership has accrued $300,000 to cover open
claims not yet settled and incurred but not reported claims as of December 31,
1996. Management is of the opinion that such amounts are adequate to cover any
such claims.
The Partnership leases its corporate facilities. The current lease expires
December 31, 2001 and requires annual rentals of $252,000.
The Partnership maintains a $2.5 million line of credit with a bank which
is available to provide working capital and to secure various debt instruments.
At December 31, 1996, $925,000 of this line of credit had been used to obtain
letters of credit.
At December 31, 1996, the Partnership has construction in process at the
two retirement communities acquired during the year. The costs to complete the
construction approximates $600,000. The Partnership has
F-19
<PAGE> 92
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
an outstanding commitment from a mortgage lender of $1.1 million to complete the
construction. In December 1996, The Partnership began an expansion of another
retirement community. The total cost of construction is expected to be
approximately $11.6 million. The partnership has a construction loan commitment
from a bank, as well as a permanent loan commitment from a mortgage lender to
cover the construction.
(15) SUBSEQUENT EVENTS
In January 1997, the Partnership entered into a sale-leaseback transaction
with a third party for the property, plant, and equipment of Holley Court
Terrace and Trinity Towers retirement communities owned by the Partnership. The
net cash proceeds to the Partnership were approximately $27.5 million. The lease
is an operating lease with the gain from the transaction of approximately $4.4
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)
The Partnership intends to proceed with a reorganization and a concurrent
initial public offering of the common stock of the reorganized entity.
Immediately following the effective date of the registration statement covering
the planned public offering of newly issued shares of common stock, the
Partnership will be reorganized such that all of its assets and liabilities will
be contributed to a newly formed corporation known as American Retirement
Corporation (New ARC) in exchange for common stock totaling 7,812,500 shares and
a promissory note to the Partnership in the original principal amount
approximating $25.0 million. The Partnership will distribute its common stock of
New ARC to its partners. New ARC plans to sell up to an additional 3,593,750
shares of its common stock in the initial public offering, including the
overallotment option; the proceeds of which will be utilized to, among other
things, repay the approximately $25.0 million promissory note to the
Partnership. The Partnership will distribute to its limited partners all amounts
received upon repayment of the Reorganization Note. New ARC will only commence
operations and issue shares of common stock upon completion of the
reorganization and initial public offering. New ARC currently has no assets or
liabilities. The Partnership's historical carrying value for assets and
liabilities will carry over to New ARC upon consummation of the reorganization.
(a) Pro Forma Statement of Earnings Information (Unaudited)
The income taxes on earnings of the Partnership, other than for ARC, are
the responsibility of the partners. The pro forma adjustments reflected on the
statement of earnings provide for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, assuming
the Partnership was subject to income taxes. Pro forma income tax expense has
been calculated using statutory U.S. federal and state tax rates and gives
effect to the recognition in 1996 of the $920,000 deferred tax asset as
described in Note 12.
(b) Pro Forma Net Earnings Per Share (unaudited)
Pro forma net earnings per share are based on the number of shares which
would have been outstanding assuming the partners had been shareholders and is
based on the 7,812,500 the partners will receive when the reorganization is
effective plus 1,562,500 shares for the $25.0 million promissory note assuming
an offering price of $16.00 per share.
F-20
<PAGE> 93
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Tax Expense Charge to Income
At the time of the reorganization and as a result of the conversion from a
limited partnership to a corporation, New ARC will record, as a one-time charge
to income, a deferred income tax liability of approximately $13.5 million
resulting from the difference between the accounting and tax bases of New ARC's
assets and liabilities.
F-21
<PAGE> 94
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-22
<PAGE> 95
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-23
<PAGE> 96
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-24
<PAGE> 97
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-25
<PAGE> 98
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-26
<PAGE> 99
======================================================
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES, OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
The Company........................... 15
Use of Proceeds....................... 16
Dividend Policy and Prior
Distributions....................... 17
Capitalization........................ 18
Dilution.............................. 19
Unaudited Pro Forma Condensed Combined
Financial Information............... 20
Selected Combined and Consolidated
Financial Data...................... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 36
Management............................ 52
Principal Shareholders................ 60
Certain Transactions.................. 61
Description of Capital Stock.......... 64
Shares Eligible for Future Sale....... 68
Underwriting.......................... 69
Legal Matters......................... 71
Experts............................... 71
Additional Information................ 71
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------
UNTIL , 1997 (FOR 25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
3,125,000 SHARES
AMERICAN RETIREMENT CORPORATION (LOGO)
COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
NATWEST SECURITIES LIMITED
EQUITABLE SECURITIES CORPORATION
MCDONALD & COMPANY
SECURITIES, INC.
, 1997
======================================================
<PAGE> 100
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses of the
Registrant in connection with the Offering described in the Registration
Statement.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 18,514
NASD fee.................................................... 6,610
New York Stock Exchange listing fee......................... 112,600
Accounting fees and expenses................................ 150,000*
Legal fees and expenses..................................... 375,000*
Printing and engraving expenses............................. 150,000*
Blue sky fees and expenses.................................. 2,500*
Transfer agent and registrar fees........................... 10,000*
Miscellaneous fees and expenses............................. 74,776*
--------
Total............................................. $900,000
========
</TABLE>
- ---------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Tennessee Business Corporation Act ("TBCA") provides that a corporation
may indemnify any director or officer against liability incurred in connection
with a proceeding if (i) the director or officer acted in good faith, (ii) the
director or officer reasonably believed, in the case of conduct in his or her
official capacity with the corporation, that such conduct was in the
corporation's best interest, or, in all other cases, that his or her conduct was
not opposed to the best interests of the corporation, and (iii) in connection
with any criminal proceeding, the director or officer had no reasonable cause to
believe that his or her conduct was unlawful. In actions brought by or in the
right of the corporation, however, the TBCA provides that no indemnification may
be made if the director or officer is adjudged to be liable to the corporation.
Similarly, the TBCA prohibits indemnification in connection with any proceeding
charging improper personal benefit to a director or officer, if such director or
officer is adjudged liable on the basis that a personal benefit was improperly
received. In cases where the director or officer is wholly successful, on the
merits or otherwise, in the defense of any proceeding instigated because of his
or her status as a director or officer of a corporation, the TBCA mandates that
the corporation indemnify the director or officer against reasonable expenses
incurred in the proceeding. Notwithstanding the foregoing, the TBCA provides
that a court of competent jurisdiction, upon application, may order that a
director or officer be indemnified for reasonable expense if, in consideration
of all relevant circumstances, the court determines that such individual is
fairly and reasonably entitled to indemnification, whether or not the standard
of conduct set forth above was met.
The Charter and Bylaws of the Company provide that the Company will
indemnify from liability, and advance expenses to, any present or former
director or officer of the Company to the fullest extent allowed by the TBCA, as
amended from time to time, or any subsequent law, rule, or regulation adopted in
lieu thereof. Additionally, the Charter provides that no director of the Company
will be personally liable to the Company or any of its shareholders for monetary
damages for breach of any fiduciary duty except for liability arising from (i)
any breach of a director's duty of loyalty to the Company or its shareholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) any unlawful distributions, or (iv)
receiving any improper personal benefit.
The 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.
II-1
<PAGE> 101
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 will be
distributed to the Registrant's shareholders immediately prior to the
effectiveness of the Offering in connection with the transfer of assets to the
Registrant by an affiliated limited partnership and the simultaneous liquidation
of the affiliated limited partnership. Prior to such distribution, the
Registrant's shareholders have been partners of the affiliated limited
partnership. In accordance with the provisions of the limited partnership's
Partnership Agreement, the partners voted prior to the filing of this
Registration Statement to organize the Registrant and liquidate the limited
partnership, subject only to the effectiveness of the Offering. The Registrant
believes that the distribution of shares of Common Stock by the affiliated
limited partnership will be an exempt transaction in accordance with Section
4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D
promulgated thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of the Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1 -- Form of Underwriting Agreement
2.1 -- Limited Partnership Agreement of American Retirement
Communities, L.P., dated February 7, 1995, as amended April
1, 1995**
2.2 -- Articles of Share Exchange between American Retirement
Communities, L.P., and American Retirement Corporation,
dated March 31, 1995 (including attached Plan and Agreement
of Share Exchange)**
2.3 -- Reorganization Agreement, dated February 28, 1997*
3.1 -- Charter of the Registrant**
3.2 -- Bylaws of the Registrant**
4.1 -- Specimen Common Stock certificate*
4.2 -- Article 8 of the Registrant's Charter (included in Exhibit
3.1)
5 -- Opinion of Bass, Berry & Sims PLC*
10.1 -- American Retirement Corporation 1997 Stock Incentive Plan**
10.2 -- American Retirement Corporation Employee Stock Purchase
Plan**
10.3 -- American Retirement Corporation 401(k) Retirement Plan**
10.4 -- Officers' Incentive Compensation Plan**
10.5 -- Registration Rights Policy**
10.6 -- Lease and Security Agreement, dated January 2, 1997, by and
between Nationwide Health Properties, Inc. and American
Retirement Communities, L.P.**
10.7 -- Lease and Security Agreement, dated January 2, 1997, by and
between N.H. Texas Properties Limited Partnership and
Trinity Towers Limited Partnership**
10.8 -- Amended and Restated Loan Agreement, dated December 21,
1994, between Carriage Club of Denver, L.P. and General
Electric Capital Corporation**
10.9 -- Amended and Restated Promissory Note, dated December 21,
1994 between Carriage Club of Denver, L.P. and General
Electric Capital Corporation**
10.10 -- Assumption, Consent and Loan Modification Agreement, dated
February 8, 1995, by and among Carriage Club of Denver,
L.P., American Retirement Communities, and General Electric
Capital Corporation**
10.11 -- Loan Agreement, dated October 31, 1995, by and between
American Retirement Communities, L.P. and First Union
National Bank of Tennessee, as amended**
10.12 -- Amended and Restated Promissory Note, dated October 31,
1995, by American Retirement Communities, L.P. to First
Union National Bank of Tennessee, as amended**
10.13 -- Revolving Credit Promissory Note, dated October 31, 1995, by
American Retirement Communities, L.P. to First Union
National Bank of Tennessee, as amended**
</TABLE>
II-2
<PAGE> 102
<TABLE>
<C> <C> <S>
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
11 -- Statement re Computation of Per Share Earnings**
21 -- Subsidiaries of the Registrant**
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Bass, Berry & Sims PLC (to be included in Exhibit 5)
24 -- Power of Attorney**
27 -- Financial Data Schedule (for SEC use only)**
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person
II-3
<PAGE> 103
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> 104
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 May 12, 1997.
AMERICAN RETIREMENT CORPORATION
By: /s/ W.E. SHERIFF
------------------------------------
W.E. Sheriff
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ W.E. SHERIFF Chairman and Chief Executive May 12, 1997
- ----------------------------------------------------- Officer (Principal Executive
W.E. Sheriff Officer)
/s/ GEORGE T. HICKS Executive Vice May 12, 1997
- ----------------------------------------------------- President -- Finance, Chief
George T. Hicks Financial Officer (Principal
Financial and Accounting
Officer)
* Director May 12, 1997
- -----------------------------------------------------
H. Lee Barfield II
* Director May 12, 1997
- -----------------------------------------------------
Jack O. Bovender, Jr.
* Director May 12, 1997
- -----------------------------------------------------
Frank M. Bumstead
* Director May 12, 1997
- -----------------------------------------------------
Robin G. Costa
* Director May 12, 1997
- -----------------------------------------------------
Clarence Edmonds
* Director May 12, 1997
- -----------------------------------------------------
John A. Morris, Jr., M.D.
* Director May 12, 1997
- -----------------------------------------------------
Daniel K. O'Connell
* Director May 12, 1997
- -----------------------------------------------------
Nadine C. Smith
* Director May 12, 1997
- -----------------------------------------------------
Lawrence J. Stuesser
* /s/ W. E. SHERIFF
- -----------------------------------------------------
W.E. Sheriff, Attorney-in-fact
</TABLE>
II-5
<PAGE> 105
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> 106
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
1 -- Form of Underwriting Agreement
2.1 -- Limited Partnership Agreement of American Retirement
Communities, L.P., dated February 7, 1995, as amended April
1, 1995**
2.2 -- Articles of Share Exchange between American Retirement
Communities, L.P., and American Retirement Corporation,
dated March 31, 1995 (including attached Plan and Agreement
of Share Exchange)**
2.3 -- Reorganization Agreement, dated February 28, 1997*
3.1 -- Charter of the Registrant**
3.2 -- Bylaws of the Registrant**
4.1 -- Specimen Common Stock certificate*
4.2 -- Article 8 of the Registrant's Charter (included in Exhibit
3.1)
5 -- Opinion of Bass, Berry & Sims PLC*
10.1 -- American Retirement Corporation 1997 Stock Incentive Plan**
10.2 -- American Retirement Corporation Employee Stock Purchase
Plan**
10.3 -- American Retirement Corporation 401(k) Retirement Plan**
10.4 -- Officers' Incentive Compensation Plan**
10.5 -- Registration Rights Policy**
10.6 -- Lease and Security Agreement, dated January 2, 1997, by and
between Nationwide Health Properties, Inc. and American
Retirement Communities, L.P.**
10.7 -- Lease and Security Agreement, dated January 2, 1997, by and
between N.H. Texas Properties Limited Partnership and
Trinity Towers Limited Partnership**
10.8 -- Amended and Restated Loan Agreement, dated December 21,
1994, between Carriage Club of Denver, L.P. and General
Electric Capital Corporation**
10.9 -- Amended and Restated Promissory Note, dated December 21,
1994 between Carriage Club of Denver, L.P. and General
Electric Capital Corporation**
10.10 -- Assumption, Consent and Loan Modification Agreement, dated
February 8, 1995, by and among Carriage Club of Denver,
L.P., American Retirement Communities, and General Electric
Capital Corporation**
10.11 -- Loan Agreement, dated October 31, 1995, by and between
American Retirement Communities, L.P. and First Union
National Bank of Tennessee, as amended**
10.12 -- Amended and Restated Promissory Note, dated October 31,
1995, by American Retirement Communities, L.P. to First
Union National Bank of Tennessee, as amended**
10.13 -- Revolving Credit Promissory Note, dated October 31, 1995, by
American Retirement Communities, L.P. to First Union
National Bank of Tennessee, as amended**
10.14 -- Standby Note, dated October 31, 1995, by American Retirement
Communities, L.P. to First Union National Bank of North
Carolina**
10.15 -- Reimbursement Agreement, dated October 31, 1995, between
American Retirement Communities, L.P. and First Union
National Bank of North Carolina, as amended**
10.16 -- Loan Agreement, dated January 4, 1996, between General
Electric Capital Corporation and Fort Austin Limited
Partnership**
10.17 -- Promissory Note, dated January 4, 1996, by Fort Austin
Limited Partnership to General Electric Capital
Corporation**
10.18 -- Promissory Note, dated April 1, 1992, by Fort Austin Limited
Partnership to General Electric Capital Corporation, as
amended**
10.19 -- Loan Agreement, dated May 7, 1996, between ARCLP-Charlotte,
LLC, American Retirement Communities, L.P. and General
Electric Capital Corporation**
10.20 -- Junior Promissory Note, dated May 7, 1996, by
ARCLP-Charlotte, LLC and American Retirement Communities,
L.P. to General Electric Capital Corporation**
10.21 -- Senior Promissory Note, dated May 7, 1996, by
ARCLP-Charlotte, LLC and American Retirement Communities,
L.P. to General Electric Capital Corporation**
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.
</TABLE>
<PAGE> 107
<TABLE>
<S> <C> <C>
10.27 -- Letter of Intent, dated February 24, 1997, by Nationwide Health Properties, Inc. to American Retirement
Corporation
11 -- Statement re Computation of Per Share Earnings**
21 -- Subsidiaries of the Registrant**
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Bass, Berry & Sims PLC (to be included in Exhibit 5)
24 -- Power of Attorney**
27 -- Financial Data Schedule (for SEC use only)**
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
<PAGE> 1
Page 1
EXHIBIT 1
3,125,000 Shares
AMERICAN RETIREMENT CORPORATION
Common Stock
UNDERWRITING AGREEMENT
May __, 1997
NATWEST SECURITIES LIMITED
EQUITABLE SECURITIES CORPORATION
McDONALD & COMPANY SECURITIES, INC.
As Representatives of the several Underwriters
c/o NatWest Securities Limited
135 Bishopsgate
London EC2M 3XT
England
Ladies and Gentlemen:
AMERICAN RETIREMENT CORPORATION, a Tennessee corporation (the
"Company"), proposes to issue and sell an aggregate of 3,125,000 shares (the
"Firm Shares") of the Company's common stock, par value $.01 per share (the
"Common Stock"), to you and the other underwriters named in Schedule I hereto
(collectively, the "Underwriters"), for whom you are acting as representatives
(the "Representatives"). The Company has also agreed to grant to you and the
other Underwriters an option (the "Option") to purchase up to an additional
468,750 shares of Common Stock (the "Option Shares") on the terms and for the
purposes set forth in Section 1(b) hereto. The Firm Shares and the Option Shares
are hereinafter collectively referred to as the "Shares."
The Company hereby confirms as follows its agreements with the
Representatives and the several other Underwriters.
Agreement to Sell and Purchase
On the basis of the representations, warranties and agreements of the
Company herein contained and subject to all the terms and conditions of this
Agreement, (i) the Company agrees to sell to the several Underwriters and (ii)
each of the Underwriters, severally and nost jointly, agrees to purchase from
the Company, at a purchase price of
<PAGE> 2
Page 2
$_____ per share, the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto, plus such additional number of Firm Shares
which such Underwriter may become obligated to purchase pursuant to Section 10
hereof.
Subject to all the terms and conditions of this Agreement, the Company
grants the Option to the several Underwriters to purchase, severally and not
jointly, the Option Shares at the same price per share as the Underwriters shall
pay for the Firm Shares. The Option may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriters and may be
exercised in whole or in part at any time and from time to time on or before the
30th day after the date of this Agreement (or on the next business day if the
30th day is not a business day), upon notice (the "Option Shares Notice") in
writing or by telephone (confirmed in writing) by the Representatives to the
Company not later than 5:00 p.m., New York City time, at least two and not more
than five business days before the date specified for closing in the Option
Shares Notice (the "Option Closing Date") setting forth the aggregate number of
Option Shares to be purchased and the time and date for such purchase. On the
Option Closing Date, the Company will issue and sell to the Underwriters the
number of Option Shares set forth in the Option Shares Notice and each
Underwriter will purchase such percentage of the Option Shares as is equal to
the percentage of Firm Shares that such Underwriter is purchasing, as adjusted
by the Representatives in such manner as they deem advisable to avoid fractional
shares.
Delivery and Payment. Delivery of the Firm Shares shall be made to
the Representatives for the accounts of the Underwriters against payment of the
purchase price by certified or official bank checks payable in New York Clearing
House (next-day) funds to the order of the Company (the "Closing") at the office
of Stroock & Stroock & Lavan LLP, counsel to the Underwriters, 180 Maiden Lane,
New York, New York 10038. Such payment shall be made at 10:00 a.m., New York
City time, on the third full business day following the date of this Agreement,
or at such other time on such other date, not later than seven business days
after the date of this Agreement, as may be agreed upon by the Company and the
Representatives (such date is hereinafter referred to as the "Closing Date").
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the offices specified above for the Closing Date at the time and date
(which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form and
shall be registered in such names and in such denominations as the
Representatives shall request at least two business days prior to the Closing
Date or the Option Closing Date, as the case may be, by written notice to the
Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at least 24 hours prior to the Closing Date or the
Option Closing Date, as the case may be.
The cost of original issue tax stamps, if any, in connection with the
issuance,
<PAGE> 3
Page 3
sale and delivery of the Firm Shares and Option Shares by the Company to the
respective Underwriters shall be borne by the Company. The Company will pay
and save each Underwriter and any subsequent holder of the Shares harmless
from any and all liabilities, interest and penalties with respect to or
resulting from any failure or delay in paying Federal or state stamp and other
transfer taxes, if any, which may be payable or determined to be payable in
connection with the original issuance, sale or delivery to such Underwriter of
the Firm Shares and Option Shares.
Representations and Warranties of the Company. The Company represents,
warrants and covenants to each Underwriter that:
A registration statement on Form S-1 (Registration No. 333-23197)
relating to the Shares, including a preliminary prospectus relating to the
Shares 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 Shares, 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
Representatives. If such registration statement has not become effective, a
further amendment to such registration statement, including a form of 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 Shares
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 Shares 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 Shares included in the Registration
Statement at the Effective Date.
On the date that any Preliminary Prospectus was filed with the
Commission, the
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date the Prospectus is first filed with the Commission pursuant to Rule 424(b)
(if required), at all times subsequent to and including the Closing Date and, if
later, the 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 with all applicable provisions of the Act and the Rules and
Regulations and did or will contain 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 any Underwriter furnished in writing to the Company by the
Representatives specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto. 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
Shares, will not distribute, any offering material in connection with the
offering or sale of the Shares other than the Registration Statement, the
Preliminary Prospectus, the Prospectus or any other materials, if any, permitted
by the Act.
The Company currently is a wholly-owned subsidiary of American
Retirement Communities, L.P. ("ARCLP"). Prior to the consummation of the
offering of the shares of Common Stock (the "Offering"), ARCLP will be
reorganized (the "Reorganization") as contemplated by that certain
Reorganization Agreement dated as of [February 28, 1997] (the "Reorganization
Agreement"), a copy of which has been filed as Exhibit 2.3 to the Registration
Statement, pursuant to which ARCLP will contribute its assets, subject to all of
its liabilities, to the Company in exchange for a total of 7,812,500 shares of
Common Stock and a promissory note in the principal amount of $25.0 million (the
"Reorganization Note"). Immediately after consummation of the Reorganization,
ARCLP will distribute all such 7,812,500 shares of Common Stock to its limited
partners and to its general partner, American Retirement Communities, LLC (the
"LLC"). Concurrently with the consummation of the Offering, the Reorganization
Note will be repaid by the Company out of the net proceeds from the Offering and
such amounts received by ARCLP will be distributed to the limited partners of
ARCLP in liquidation. The Reorganization will be consummated prior to the
Closing and in accordance with the Reorganization Agreement.
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Set forth on Exhibit A attached hereto is a list of (A) each
corporation that is wholly owned by ARCLP and (B) each limited partnership in
which ARCLP has a general or limited partnership interest (collectively, the
"Subsidiaries"). Upon completion of the Reorganization on the Closing Date, each
of the Subsidiaries will become a [direct] wholly-owned subsidiary of the
Company. Each Subsidiary is listed in Exhibit 21 to the Registration Statement.
Each of the Company, ARCLP 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 the Tennessee. Each of the Company, ARCLP 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), assuming and giving effect to, in each case, the
consummation of the Reorganization. Each of the Company, ARCLP 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 (assuming, in each case, the consummation
of the Reorganization). Upon completion of the Reorganization and prior to the
Closing Date, the Company will beneficially own all of the outstanding equity
interests in each of the Subsidiaries, free and clear of all liens, security
interests, restriction, pledgees, encumbrances, charges, equities, claims,
easements, assessments and tenancies (collectively, "Encumbrances")[, except for
_____________]. Except with respect to the Subsidiaries upon completion of the
Reorganization on the Closing Date 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 articles of incorporation and the bylaws or partnership
agreements or other governing documents of the Company, ARCLP, each Subsidiary
and the LLC and all amendments thereto have been delivered to the
Representatives, 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,
except as contemplated by the Reorganization Agreement.]
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 Shares to be issued and sold by
the Company will be, upon such issuance and payment therefor, duly authorized,
validly issued, fully paid and nonassessable and will not be subject to any
preemptive or similar rights. The Company has, and, upon completion of the sale
of the Shares and the Reorganization, 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
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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 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.
The combined and consolidated financial statements and the related
notes and schedules of ARCLP 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 the financial condition of ARCLP as of
the dates indicated and the combined and consolidated results of operations,
changes in partners' and shareholders' equity and cash flows of ARCLP 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
Charlottesville 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 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. The selected financial data for the Company, ARCLP
and certain affiliated partnerships and corporations (collectively, the
"Predecessor Entities") set forth under the captions "Prospectus
Summary--Summary Combined and Consolidated Financial and Other Data" and
"Selected 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 ARCLP
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, ARCLP, 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, ARCLP, the Subsidiaries and the Carriage Clubs as required by the Act
and the Rules and Regulations.
Each of the Company, ARCLP and the Subsidiaries maintains a system of
internal accounting control sufficient to provide reasonable assurance that (i)
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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.
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 (after giving effect to the consummation of the Reorganization), any
change in the capitalization of the Company or any material adverse change in
the business, properties, prospects, condition (financial or otherwise), net
worth or results of operations of the Company, ARCLP or any Subsidiary arising
for any reason whatsoever, (ii) none the Company, ARCLP or any Subsidiary has
incurred, nor will any of them have incurred (after giving effect to the
consummation of the Reorganization), any material liabilities or obligations,
direct or contingent, (iii) none of the Company, ARCLP or any Subsidiary has
entered into, nor will any of them have entered into (after giving effect to the
consummation of the Reorganization), any material transactions, other than
pursuant to this Agreement or the Reorganization Agreement, and (iv) none of the
Company, ARCLP or any of the Subsidiaries has, nor will any of them have (after
giving effect to the consummation of the Reorganization), paid or declared any
dividends or other distributions of any kind on any class of its capital stock,
partnership interests or other equity securities.
Each of ARCLP or the Subsidiaries has good 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 Prospectus) as owned by them or by the Company (collectively, the
"Owned Properties"), in each case free and clear of all Encumbrances or leases
and without title company exceptions, disclaimers of liability or objections,
except as set forth in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). Each of ARCLP or 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).
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.
Upon consummation of the Reorganization, either the Company or a
Subsidiary
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will have good and marketable title to all properties and assets described in
the Registration Statement and Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) as to be owned by it,
including, but not limited to each Initial Property, free and clear of all
Encumbrances, except such as are described in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus). The
Company, ARCLP or the Subsidiaries each has valid, subsisting and enforceable
leases for the properties described in the Prospectus as to be leased by it,
free and clear of all Encumbrances, except such as are described in the
Registration Statement and Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). Upon consummation of the
Reorganization, title insurance in favor of the Company will be in full force
and effect with respect to each Initial Property in amounts prudent and
customary in the business in which the Company and the Subsidiaries are engaged.
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").
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, ARCLP, any Subsidiary, the LLC 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 might,
upon consummation of the Reorganization, adversely affect the business,
properties, prospects, condition (financial or otherwise), net worth or results
of operations of the Company or the Subsidiaries, taken as a whole.
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, ARCLP and the Subsidiaries has, and at the
Closing Date, the Option Closing Date (if any) and upon consummation of the
Reorganization 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, prospects, condition (financial or otherwise), net worth
or results of operations of the Company and the Subsidiaries, taken as a whole.
Each of the Company, ARCLP and the Subsidiaries has complied, and at the Closing
Date and the Option Closing Date (if any) and upon consummation of the
Reorganization 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, ARCLP or any Subsidiary is, and, at the Closing
Date, the Option Closing Date (if any) and upon
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consummation of the Reorganization, 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, or, upon consummation of
the Reorganization, will be, a party or by which any of their respective
properties is, or, upon consummation of the Reorganization, will be, bound or
affected, violation of which would individually or in the aggregate have a
material adverse effect on the business, properties, prospects, 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, the Option Closing Date (if any) or upon consummation of the
Reorganization, will be, in default in any material respect thereunder. Without
limiting the generality of the foregoing, each of the senior living communities
to be operated by the Company upon consummation of the Reorganization is, and,
upon consummation of the Reorganization, will be, certified to participate in
those Medicaid and Medicare programs, if any, in which such residences have
historically participated, and, upon consummation of the Reorganization, such
certification currently in effect will remain in full force and effect, without
interruption whatsoever. There are no governmental proceedings or actions
pending or threatened for the purpose of suspending, modifying or revoking any
License held, or, upon consummation of the Reorganization, to be held, by the
Company, ARCLP 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, ARCLP
or any Subsidiary is in violation of any provision of its articles of
incorporation or bylaws or partnership agreement or other governing instrument.
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 the Reorganization or in
connection with the issuance and sale of shares of Common Stock by the Company
in the Reorganization or the issuance of the Shares 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
Underwriters of the Shares to be sold by the Company. All consents of the
partners or shareholders of ARCLP, each Subsidiary and the LLC required for the
consummation of the Reorganization were duly and validly obtained prior to the
date the registration statement described in Section 3(a) hereof was first filed
with the Commission, have not been revoked and remain in full force and effect;
such consents were solicited on the basis of information supplied by such
entities and no such information included any untrue statement of a material
fact or omitted to state a material fact necessary to make the statements made,
in light of the circumstances under which they were made, not misleading.
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The Company has full corporate power and authority to enter into this
Agreement and the Reorganization Agreement and to carry out all the terms and
provisions hereof and thereof 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. The Reorganization Agreement and any other
documents required to be executed thereunder have been duly authorized, executed
and delivered and constitute valid and binding agreements of the parties thereto
and are enforceable against the parties thereto in accordance with the terms
thereof. 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 Reorganization Agreement and the consummation of the transactions
contemplated hereby and thereby 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, ARCLP or any Subsidiary pursuant to the 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 articles of incorporation or
bylaws or the partnership agreement or other organizational document of the
Company, ARCLP, any Subsidiary or the LLC, or (ii) any contract or other
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, or,
upon consummation of the Reorganization, will be, 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, ARCLP or any Subsidiary. The Company
has full corporate power and authority to authorize, issue, offer and sell the
Shares, as contemplated by this Agreement, free of any preemptive rights. The
offer, issuance and sale by the Company of shares of Common Stock in the
Reorganization will be exempt from the registration requirements of the Act and
applicable state securities, real estate syndication and Blue Sky laws.
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, or, upon consummation of the
Reorganization, will be, a party 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.
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 Shares or
otherwise.
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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.
The Shares have been approved for listing on the New York Stock
Exchange (the "NYSE"), subject only to notice of issuance.
No labor dispute with the employees of the Company or with the
employees of any Subsidiary exists or is threatened or imminent.
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 use, or, upon consummation of the Reorganization,
will own, be licensed or otherwise have the full exclusive right to 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.
None of the Company, ARCLP or any Subsidiary, nor, to the Company's
best knowledge, any employee or agent of the Company, ARCLP or any Subsidiary,
has made any payment of funds of the Company, ARCLP, any Subsidiary or the LLC
or received or retained any funds of the Company, ARCLP, any Subsidiary or the
LLC 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).
The Company is, or, upon consummation of the Reorganization, will be,
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, ARCLP 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 (or such coverage as will be in effect upon consummation of the
Reorganization) as and when such coverage expires.
The business, operations and facilities of the Company, ARCLP and each
Subsidiary have been, are being and, upon consummation of the Reorganization,
will be conducted in compliance 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,
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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, ARCLP 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, properties, prospects, condition (financial or otherwise), net worth
or results of operations of the Company and the Subsidiaries, taken as a whole.
Upon consummation of the Reorganization the Company will receive or the
Subsidiaries will retain good and marketable title in fee simple to the Owned
Properties, in each case, free and clear of all Encumbrances, other than those
described in the Registration Statement and Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus) and those that will
not materially affect the value of such properties and will not interfere with
the use made and proposed to be made of such properties by the Company. Upon the
consummation of the Reorganization, the Leased Properties will be held by the
Company or a Subsidiary under valid, subsisting and enforceable leases, free and
clear of all Encumbrances, other than those described in the Registration
Statement and Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) or which are not material and will not interfere
with the use made and proposed to be made of such property and buildings by the
Company. 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 best knowledge of the Company,
threatened condemnation, zoning change, environmental or other proceeding or
action that will in any material respect adversely affect the size of, use of,
improvements on, construction on, or access to the Owned Propertiesv or Leased
Properties.
Each of the Company, ARCLP, the Subsidiaries and the LLC 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.
Each officer and director of the Company, and each person who will,
upon consummation of the Reorganization and the liquidation of ARCLP, become a
beneficial holder of 5% or more of the shares of Common Stock, have delivered to
NatWest Securities Limited an agreement in the form set forth as Exhibit B
hereto to
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the effect that he or she will not, for a period of 180 days after the date
hereof, without the prior written consent of NatWest Securities Limited, 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.
Each certificate signed by any officer of the Company and delivered to
the Representatives or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
covered thereby.
Representations and Warranties of the Underwriters. Upon your
authorization of the release of the Firm Shares, the several Underwriters
propose to offer the Firm Shares for sale to the public upon the terms set forth
in the Prospectus. NatWest Securities Limited represents and agrees that (i) it
has not offered or sold and will not offer or sell any Shares to persons in the
United Kingdom, except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (whether as principal
or agent) for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities Regulations
1995 or the Financial Services Act 1986 (the "UK Act"); (ii) it has complied and
will comply with all applicable provisions of the UK Act with respect to
anything done by it in relation to the Shares in, from or otherwise involving
the United Kingdom; and (iii) it has only issued or passed on, and will only
issue or pass on, in the United Kingdom any document which consists of or any
part of listing particulars or any other document required or permitted to be
published by listing rules under Part IV of the UK Act, to a person who is of a
kind described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995 or is a person to whom the document may
otherwise lawfully be issued or passed on.
Agreements of the Company. The Company covenants and agrees with
each of the several Underwriters as follows:
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 Shares 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 Representatives within a
reasonable period of time prior to the filing thereof and the Representatives
shall not have objected thereto in good faith.
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 Representatives 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
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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(f) 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 Representatives and will file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
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 Representatives promptly of all such filings.
If, at any time when a Prospectus relating to the Shares 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 Representatives 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.
The Company will furnish to the Representatives, without charge, two
signed copies of the Registration Statement and of any post-effective amendment
thereto, including financial statements and schedules, and all exhibits thereto
and will furnish to the Representatives, without charge, for transmittal to each
of the other Underwriters, copies of the Registration Statement and any
post-effective amendment thereto, including financial statements and schedules
but without exhibits.
The Company will comply with all the provisions of all undertakings
contained in the Registration Statement.
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On the Effective Date, and thereafter from time to time for such period
as the Prospectus is required by the Act to be delivered, the Company will
deliver to each of the Underwriters, without charge, as many copies of the
Prospectus or any amendment or supplement thereto as the Representatives may
reasonably request. The Company consents to the use of the Prospectus or any
amendment or supplement thereto by the several Underwriters and by all dealers
to whom the Shares may be sold, both in connection with the offering or sale of
the Shares and for any period of time thereafter during which the Prospectus is
required by law to be delivered in connection therewith. If during such period
of time any event shall occur which in the judgment of the Company or counsel to
the Underwriters should be set forth in the Prospectus in order to make any
statement therein, in the light of the circumstances under which it was made,
not misleading, or in the Registration Statement in order to make any statement
therein not misleading, or if it is necessary to supplement or amend the
Prospectus or the Registration Statement to comply with law, the Company will
forthwith prepare and duly file with the Commission an appropriate supplement or
amendment thereto, and will deliver to each of the Underwriters, without charge,
such number of copies thereof as the Representatives may reasonably request.
Prior to any public offering of the Shares by the Underwriters, the
Company will cooperate with the Representatives and counsel to the Underwriters
in connection with the registration or qualification of the Shares for offer and
sale under the securities or Blue Sky laws of such jurisdictions as the
Representatives may request; provided, that in no event shall the Company be
obligated to qualify to do business in any jurisdiction where it is not now so
qualified or to take any action which would subject it to general service of
process in any jurisdiction where it is not now so subject.
During the period of five years commencing on the Effective Date, the
Company will furnish to each of the Representatives and each other Underwriter
who may so request copies 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 each of the
Representatives and each other Underwriter who may so request a copy of each
annual or other report it shall be required to file with the Commission.
The Company will make generally available to holders of its securities,
as soon as may be practicable, but in no event later than the last day of the
fifteenth full calendar month following the calendar quarter in which the
Effective Date falls, a consolidated earnings statement (which need not be
audited but shall be in reasonable detail) for a period of 12 months commencing
after the Effective Date, and satisfying the provisions of Section 11(a) of the
Act (including Rule 158 of the Rules and Regulations).
The Company will not at any time, directly or indirectly, take any
action intended, or which might reasonably be expected, to cause or result in,
or which will constitute, stabilization of the price of the shares of Common
Stock to facilitate the sale or resale of any of the Shares.
<PAGE> 16
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The Company will apply the net proceeds from the offering and sale of
the Shares to be sold by the Company in the manner set forth in the Prospectus
under "Use of Proceeds" and shall file such reports with the Commission with
respect to the sale of the Shares and the application of the proceeds therefrom
as may be required in accordance with Rule 463 of the Rules and Regulations
under the Act.
The Company will not for a period of 180 days after the date hereof,
without the prior written consent of NatWest Securities Limited, 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 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 may issue
privately placed shares in connection with acquisitions).
The Company will cause ARCLP to be dissolved and liquidated as promptly
as practicable following the Closing; and the Company will cause ARCLP to
distribute the shares of Common Stock to be issued by the Company as set forth
in the Reorganization Agreement, as promptly as practicable following the
Closing.
Expenses.
Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, the Company will pay, or reimburse
if paid by the Representatives, all costs and expenses incident to the
performance of the obligations of the Company under this Agreement, including
but not limited to costs and expenses of or relating to (1) the preparation,
printing and filing of the Registration Statement and exhibits thereto, each
Preliminary Prospectus, the Prospectus and any amendment or supplement to the
Registration Statement or the Prospectus, (2) the preparation and delivery of
certificates representing the Shares and the shares of Common Stock to be issued
in the Reorganization, (3) the printing of this Agreement, the Agreement among
Underwriters, any Dealer Agreements and any Underwriters' Questionnaire, (4)
furnishing (including costs of shipping and mailing) such copies of the
Registration Statement, the Prospectus and any Preliminary Prospectus, and all
amendments and supplements thereto, as may be requested for use in connection
with the offering and sale of the Shares by the Underwriters or by dealers to
whom Shares may be sold, (5) the listing of the Shares on the NYSE, (6) any
filings required to be made by the Underwriters with the National Association of
Securities Dealers, Inc., (7) the registration or qualification of the Shares
for offer and sale under the securities or Blue Sky laws of such jurisdictions
designated pursuant to Section 5(g), including the reasonable fees,
disbursements and other charges of counsel to the Underwriters in connection
therewith, and the preparation and printing of preliminary, supplemental and
final Blue Sky memoranda, (8) counsel and accountants to the Company and (9) the
transfer agent for the Shares.
If this Agreement shall be terminated by the Company pursuant to any of
the provisions hereof (otherwise than pursuant to Section 10) or if for any
reason the
<PAGE> 17
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Company shall be unable to perform its obligations hereunder, the Company will
reimburse the several Underwriters for all out-of-pocket expenses (including the
fees, disbursements and other charges of counsel to the Underwriters) incurred
by them in connection herewith.
Conditions of the Obligations of the Underwriters. The obligations of
each Underwriter hereunder are subject to the following conditions:
Notification that the Registration Statement has become effective shall
be received by the Representatives not later than 12:00 p.m., New York City
time, on the date of this Agreement or at such later date and time as shall be
consented to in writing by the Representatives and all filings required by Rule
424 of the Rules and Regulations and Rule 430A shall have been made.
(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 qualification or registration
of the Shares 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 Representatives and the Representatives did not object thereto
in good faith, and the Representatives 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 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).
Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change in the general affairs, business, business prospects,
properties, management, condition (financial or otherwise) or results of
operations of the Company, ARCLP or any Subsidiary, whether or not arising from
transactions in the ordinary course of business, and (ii) none of the Company,
ARCLP or any Subsidiary shall have sustained any material loss or interference
with its business or properties from fire, explosion, flood or other casualty,
whether or not covered by insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree, which is not set
forth in the Registration Statement and the Prospectus, if in the judgment of
the Representatives any such development makes it impracticable or inadvisable
to consummate the sale and delivery of the Shares by the Underwriters at the
initial public offering price.
Since the respective dates as of which information is given in the
Registration
<PAGE> 18
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Statement and the Prospectus, there shall have been no litigation or other
proceeding instituted against the Company, ARCLP or any Subsidiary or any of
their respective officers, directors, partners or shareholders in their
capacities as such, before or by any Governmental Body in which litigation or
proceeding an unfavorable ruling, decision or finding would materially and
adversely affect the business, properties, business prospects, condition
(financial or otherwise), net worth or results of operations of the Company,
ARCLP or any Subsidiary.
Each of the representations and warranties of the Company contained
herein shall be true and correct at the Closing Date and, with respect to the
Option Shares, at the Option Closing Date, as if made on such date, and all
covenants and agreements herein contained to be performed on the part of the
Company and all conditions herein contained to be fulfilled or complied with by
the Company at or prior to the Closing Date and, with respect to the Option
Shares, at or prior to the Option Closing Date, shall have been fully performed,
fulfilled or complied with.
The Representatives shall have received an opinion, dated the Closing
Date and the Option Closing Date, from Bass, Berry & Sims PLC, counsel for the
Company, to the following effect:
Each of the Company, ARCLP and the Subsidiaries (A) has been
duly incorporated or organized and is a validly existing corporation,
partnership or limited liability company in good standing under the
laws of its jurisdiction of incorporation or organized 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 (in the case of the Company, as
to be owned, leased, operated or conducted upon consummation of the
Reorganization), 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 (in the case of the Company,
as to be conducted upon consummation of the Reorganization) requires
such qualification and (y) in which it owns or leases property;
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 as set forth on Exhibit
A hereto;
The Company has authorized capital stock as set forth in the
Prospectus; the securities of the Company conform in all material
respects to the description thereof contained in the Registration
Statement and Prospectus; the outstanding shares of Common Stock have
been duly authorized and validly issued by the Company, are fully paid
and nonassessable and are free of any preemptive or other rights to
subscribe for any of the Shares; the Company has duly authorized the
issuance and sale of the Shares to be sold by it hereunder; such
Shares, when issued by the Company and paid for in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable and
will conform in all material respects to the description thereof
contained in the Registration
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Statement and Prospectus and will not be subject to any preemptive,
subscription or other similar rights; and the Shares have been duly
authorized for listing, subject to official notice of issuance, on the
NYSE;
The Registration Statement is effective under the Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made
in the manner and within the time period required by Rule 424(b); and
no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto has been issued, and no proceedings
for that purpose have been instituted or are pending or, to the best
knowledge of such counsel, are threatened or contemplated under the
Act; the registration statement originally filed with respect to the
Shares and each amendment thereto and the Prospectus and, if any, each
amendment and supplement thereto (except for the financial statements,
schedules and other financial data included therein, as to which such
counsel need not express any opinion), complied as to form in all
material respects with the requirements of the Act and the Rules and
Regulations; the descriptions contained and summarized in the
Registration Statement and the Prospectus of contracts and other
documents are accurate and fairly present in all material respects the
information required to be shown by the Act and the Rules and
Regulations; to the best knowledge of such counsel, there are no
contracts or documents which are required by the Act to be described in
the Registration Statement or the Prospectus or to be filed as exhibits
to the Registration Statement which are not described or filed as
required by the Act and the Rules and Regulations; to the best
knowledge of such counsel, there is not pending or threatened against
the Company any action, suit, proceeding or investigation before or by
any Governmental Body of a character required to be disclosed in the
Registration Statement or the Prospectus which is not so disclosed
therein; and the statements set forth under the headings "The
Company--The 1995 Roll-Up", "--Pending Reorganization,"
"Business--Government Regulation," "Business-Insurance and Legal
Proceedings," "Management--Limitation of Liability and
Indemnification," "Certain Transactions" and "Description of Capital
Stock" in the Registration Statement and Prospectus, insofar as such
statements constitute a summary of the legal matters, documents or
proceedings referred to therein, provide an accurate summary of such
legal matters, documents and proceedings;
The Company has full legal right, power, and authority to
enter into this Agreement and to consummate the transactions provided
for herein; this Agreement has been duly authorized, executed and
delivered by the Company; this Agreement, assuming due authorization,
execution and delivery by each other party hereto, is a valid and
binding agreement of the Company, enforceable in accordance with its
terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws now or hereafter in effect
relating to or affecting creditors' rights generally or by general
principles of equity relating to the availability of remedies and
except as rights to indemnity and contribution may be limited by
federal or state securities laws or the public policy underlying such
laws; none of the Company's execution or
<PAGE> 20
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delivery of this Agreement, its performance hereof, its consummation of
the transactions contemplated herein or its application of the net
proceeds of the offering in the manner set forth in the Prospectus
under the caption "Use of Proceeds", conflicts or will conflict with or
results or will result in any breach or violation of any of the terms
or provisions of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon, any
property or assets of the Company or any Subsidiary pursuant to (A) the
terms of the articles of incorporation or bylaws of the Company or any
Subsidiary; (B) the terms of any contract or other agreement known to
such counsel after reasonable investigation to which the Company or any
Subsidiary is (or, upon consummation of the Reorganization, will be) a
party or by which any of them is or may be (or, upon consummation of
the Reorganization, will or may be) bound or to which any of their
respective properties is or may be (or, upon consummation of the
Reorganization, will or may be) subject; (C) any statute, rule or
regulation of any Governmental Body having (or that, upon consummation
of the Reorganization, will have) jurisdiction over the Company or any
Subsidiary or any of their respective activities or properties; or (D)
the terms of any judgment, decree or order, known to such counsel after
reasonable investigation, of any arbitrator or Governmental Body having
(or that, upon consummation of the Reorganization, will have) such
jurisdiction; and no consent, approval, authorization or order of any
Governmental Body has been or is required for the Company's performance
of this Agreement or the consummation of the transactions contemplated
hereby, except such as have been obtained under the Act or may be
required under state securities or blue sky laws in connection with the
purchase and distribution by the Underwriters of the Shares;
To the best of such counsel's knowledge, the conduct of the
business of each of the Company and the Subsidiaries is not, and, upon
consummation of the Reorganization, will not be, in violation of any
federal, state or local statute, administrative regulation or other
law, where such violation is likely to have a material adverse effect
on the Company; and each of the Company and the Subsidiaries has
obtained all Licenses as are necessary or required for the ownership,
leasing and operation of its properties and the conduct of its business
as presently conducted and, in the case of the Company, as contemplated
by the Registration Statement and Prospectus upon consummation of the
Reorganization;
The Company is not (after giving effect to the Reorganization
and the sale of the Shares) 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;
Each of the Company, ARCLP, the Subsidiaries and the LLC has
full legal right, power, and authority to enter into the Reorganization
Agreement and each other agreement relating thereto to which it is a
party and to consummate the transactions provided for in each thereof;
the Reorganization Agreement has been duly authorized, executed and
delivered by the Company, ARCLP, the
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Subsidiaries and the LLC is a valid and binding agreement of the
Company, ARCLP, the Subsidiaries and the LLC, enforceable in accordance
with its terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws now or hereafter in effect
relating to or affecting creditors' rights generally or by general
principles of equity relating to the availability of remedies; none of
the execution or delivery of the Reorganization Agreement by the
Company, ARCLP, the Subsidiaries or the LLC, the performance by any
thereof of its obligations thereunder, or the consummation by any
thereof of the transactions contemplated therein or of any other
Reorganization transactions, conflicts or will conflict with or results
or will result in any breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under, or
results or will result in the creation or imposition of any lien,
charge or encumbrance upon, any property or assets of any of them
pursuant to (A) the terms of the articles of incorporation or bylaws or
partnership agreement or other governing instruments or documents of
any of them; (B) the terms of any contract or other agreement known to
such counsel after reasonable investigation to which any of them is
(or, upon consummation of the Reorganization, will be) a party or by
which any of them is or may be (or, upon consummation of the
Reorganization, will or may be) bound or to which any of their
respective properties is or may be (or, upon consummation of the
Reorganization, will or may be) subject; (C) any statute, rule or
regulation of any Governmental Body having (or that, upon consummation
of the Reorganization, will have) jurisdiction over any of them or any
of their respective activities or properties; or (D) the terms of any
judgment, decree or order, known to such counsel after reasonable
investigation, of any arbitrator or Governmental Body having (or that,
upon consummation of the Reorganization, will have) such jurisdiction;
and no consent, approval, authorization or order of any Governmental
Body has been or is required for the performance of the Reorganization
Agreement or the consummation of the transactions contemplated thereby
or the consummation of any other Reorganization transaction, in each
case by any of the Company, ARCLP, the Subsidiaries or the LLC, except
such as have been obtained under the Act or may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution by the Underwriters of the Shares;
The Shares have been duly authorized for listing on the NYSE,
subject only to official notice of issuance;
The offer, issuance and sale by the Company of shares of
Common Stock (other than the Shares) in the Reorganization is exempt
from the registration requirements of the Act and applicable state
securities, real estate syndication and Blue Sky laws; and
None of the Company, ARCLP, any Subsidiary or the LLC is in
any breach or violation of any of the terms or provisions of, or in
default under (nor has an event occurred which with notice or lapse of
time or both would constitute a default or acceleration under), (A) the
terms of its articles of incorporation or
<PAGE> 22
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bylaws, partnership agreement or other governing documents; (B) the
terms of any contract or other agreement known to such counsel after
reasonable investigation to which any of them is a party or by which
any of them is or may be bound or to which any of their respective
properties or assets is or may be subject; (C) any statute, rule or
regulation of any Governmental Body having jurisdiction over any of
them or any of their respective activities or properties; or (D) the
terms of any judgment, decree or order, known to such counsel after
reasonable investigation, of any arbitrator or Governmental Body having
such jurisdiction.
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 Company's independent public 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 (iv) above) and, except as stated in the foregoing
opinion, without assuming 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 not
misleading (it being understood that such counsel need not express any opinion
with respect to the financial statements, schedules and other financial 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 laws of any State other than Tennessee (to the extent
satisfactory in form and scope to counsel for the Underwriters) such counsel may
rely upon the opinion of local counsel to the Company. The foregoing opinion
shall also state that the Underwriters are justified in relying upon such
opinion of local counsel, and copies of such opinion shall be delivered to the
Representatives and counsel for the Underwriters.
References to the Registration Statement and the Prospectus in this
paragraph (f) shall include any amendment or supplement thereto at the date of
such opinion.
The Representatives shall have received an opinion, dated the Closing
Date and the Option Closing Date, from Stroock & Stroock & Lavan LLP, counsel to
the Underwriters, which opinion shall be satisfactory in all respects to the
Representatives. 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.
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Concurrently with the execution and delivery of this Agreement, or, if
the Company elects to rely on Rule 430A, on the date of the Prospectus, the
Accountants shall have furnished to the Representatives a letter, dated the date
of its delivery (the "Original Letter"), addressed to the Representatives and in
form and substance satisfactory to the Representatives, confirming that (i) they
are independent public accountants with respect to the Company, ARCLP and its
consolidated subsidiaries and the Carriage Clubs within the meaning of the Act
and the Rules and Regulations; (ii) in their opinion, the financial statements
and any supplementary financial information and schedules (and pro forma
financial information) included in the Registration Statement and examined by
them comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations; (iii) on the basis of
procedures, not constituting an examination in accordance with generally
accepted auditing standards, set forth in detail in the Original Letter,
including a "SAS 71" review, a reading of the unaudited financial statements and
other information referred to below, a reading of the latest available interim
financial statements of ARCLP and its consolidated subsidiaries, inspections of
the minute books and partnership records of ARCLP and its consolidated
subsidiaries since the latest audited financial statements included in the
Registration Statement and Prospectus, inquiries of officials of ARCLP and its
consolidated subsidiaries and the Carriage Clubs responsible for financial and
accounting matters and such other inquiries and procedures as may be specified
in the Original Letter to a date not more than five days prior to the date of
the Original Letter, nothing came to their attention that caused them to believe
that: (A) the unaudited consolidated financial statements and schedules of ARCLP
and its consolidated subsidiaries included in the Prospectus do not comply as to
form in all material respects with the applicable accounting requirements of the
Act and the Rules and Regulations, or are not fairly presented in conformity
with GAAP applied on a basis substantially consistent with the basis for the
audited financial statements included in the Registration Statement and
Prospectus; (B) any other unaudited income statement data and balance sheet
items included in the Registration Statement and Prospectus do not agree with
the corresponding items in the unaudited financial statements from which such
data and items were derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the basis for the
corresponding amounts in the audited financial statements included in the
Registration Statement and Prospectus; (C) the unaudited financial statements
which were not included in the Registration Statement and Prospectus but from
which were derived any unaudited financial statements referred to in Clause (A)
and any unaudited income statement data and balance sheet items included in the
Registration Statement and Prospectus and referred to in Clause (B) were not
determined on a basis substantially consistent with the basis for the audited
financial statements included in the Registration Statement and Prospectus; (D)
the unaudited consolidated pro forma financial statements included in the
Registration Statement and Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Act and the Rules
and Regulations or the pro forma adjustments have not been properly applied to
the historical amounts in the compilation of those statements; (E) as of a
specified date not more than five days prior to the date of the Original Letter,
there have been any changes in
<PAGE> 24
Page 24
the capital stock or partnership interests of the Company, ARCLP, the
Subsidiaries or the LLC or any increase in the long-term debt of the Company,
ARCLP or the Subsidiaries, or any decreases in net current assets or net assets
or other items specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with amounts shown in
the latest balance sheet included in the Registration Statement and Prospectus,
except in each case for changes, increases or decreases which the Registration
Statement and the Prospectus disclose have occurred or may occur or which are
described in the Original Letter; and (F) for the period from the date of the
latest financial statements included in the Registration Statement and
Prospectus to the specified date referred to in Clause (E), there were any
decreases in revenues, income from operations, income before extraordinary items
or the total or per share amounts of net income or other items specified by the
Representatives, or any increases in any items specified by the Representatives,
in each case as compared with the comparable period of the preceding year and
with any other period of corresponding length specified by the Representatives,
except in each case for decreases or increases which the Prospectus discloses
have occurred or may occur or which are described in the Original Letter; and
(iv) in addition to the examination referred to in their reports included in the
Registration Statements and Prospectus and the procedures referred to in clause
(iii) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the general
accounting, financial or other records of ARCLP or the Subsidiaries, as the case
may be, which appear in the Prospectus or in Part II of, or in exhibits or
schedules to, the Registration Statement, and have compared such amounts,
percentages and financial information with such accounting, financial and other
records and have found them to be in agreement. At the Closing Date and, as to
the Option Shares, the Option Closing Date, the Accountants shall have furnished
to the Representatives a letter, dated the date of its delivery, which shall
confirm, on the basis of a review in accordance with the procedures set forth in
the Original Letter, that nothing has come to their attention during the period
from the date of the Original Letter referred to in the prior sentence to a date
(specified in the letter) not more than five days prior to the Closing Date or
the Option Closing Date, as the case may be, which would require any change in
the Original Letter if it were required to be dated and delivered at the Closing
Date or the Option Closing Date, as the case may be. At the Closing Date and, as
to the Option Shares, the Option Closing Date, there shall be furnished to the
Representatives 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 satisfactory to the Representatives, to the effect that:
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 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;
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
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
<PAGE> 25
Page 25
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.
The Shares shall be qualified for sale in such states as the
Representatives may reasonably request, each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Closing Date
and the Option Closing Date.
Prior to the Closing Date, the Shares shall have been approved for
listing on the NYSE, subject only to notice of issuance.
The Reorganization shall have been consummated or shall be consummated
in accordance with the Reorganization Agreement prior to the closing of the
purchase and sale of the Shares hereunder.
On or before the date hereof, the Company shall have delivered to you
executed copies of all of the documents relating to the closing of the
Reorganization.
On or before the date hereof, the Company shall have delivered to you
the lock-up agreements described in Section 3(cc) hereof.
The Company shall have furnished to the Representatives such
certificates, letters and other documents, in addition to those specifically
mentioned herein, as the Representatives may have reasonably requested as to the
accuracy and completeness at the Closing Date and the Option Closing Date of any
statement in the Registration Statement or the Prospectus as to the accuracy at
the Closing Date and the Option Closing Date of the representations and
warranties of the Company, as to the performance by the Company of its
obligations hereunder, or as to the fulfillment of the conditions concurrent and
precedent to the obligations hereunder of the Underwriters.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you and your counsel. The Company will furnish you with such
conformed copies of such opinions, certificates, letters and other documents as
you shall reasonably request.
Indemnification and Contribution.
The Company agrees to indemnify and hold harmless each Underwriter, the
directors, officers, employees and agents of each Underwriter and each person,
if any, who controls each Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), from and against any and all losses, claims, damages or
liabilities, joint or several (and actions in respect thereof), to which they,
or any of them, may become subject under the Act or other Federal or state
statutory law or regulation, at common law 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 made by the
Company in Section 3 of this Agreement, (ii) any untrue statement or alleged
untrue statement of any material fact contained in (A) any Preliminary
Prospectus, the
<PAGE> 26
Page 26
Registration Statement or the Prospectus or any amendment or supplement to the
Registration Statement or the Prospectus or (B) any application or other
document, or any amendment or supplement thereto, executed by the Company or
based upon written information furnished by or on behalf of the Company filed in
any jurisdiction in order to qualify the Shares under the securities or blue sky
laws thereof or filed with the Commission or any securities association or
securities exchange (each, an "Application"), or (iii) the omission or alleged
omission to state in any Preliminary Prospectus, the Registration Statement or
the Prospectus or any amendment or supplement to the Registration Statement or
the Prospectus or any Application a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse,
as incurred, each Underwriter and each such other person for any legal or other
expenses reasonably incurred by such Underwriter or such other person in
connection with investigating, defending or appearing as a third-party witness
in connection with any such loss, claim, damage, liability or action; provided,
however, that the Company will not be liable in any such case to the extent that
any such loss, claim, damage or liability is based solely upon an untrue
statement or omission or alleged untrue statement or omission in any of such
documents made in reliance upon and in conformity with information relating to
any Underwriter furnished in writing to the Company by the Representatives on
behalf of any Underwriter expressly for inclusion therein; provided, further,
that such indemnity with respect to any Preliminary Prospectus shall not inure
to the benefit of any Underwriter (or any such other person) from whom the
person asserting any such loss, claim, damage, liability or action purchased
Shares which are the subject thereof to the extent that any such loss, claim,
damage or liability (i) results from the fact that such Underwriter failed to
send or give a copy of the Prospectus (as amended or supplemented) to such
person at or prior to the confirmation of the sale of such Shares to such person
in any case where such delivery is required by the Act and (ii) arises out of or
is based upon an untrue statement or omission of a material fact contained in
such Preliminary Prospectus that was corrected in the Prospectus (or any
amendment or supplement thereto), unless such failure to deliver the Prospectus
(as amended or supplemented) was the result of noncompliance by the Company with
Section 5(f). This indemnity agreement will be in addition to any liability that
the Company might otherwise have. The Company will not, without the prior
written consent of each Underwriter, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to
each claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of each Underwriter and each such
other person from all liability arising out of such claim, action, suit or
proceeding. Each Underwriter will indemnify and hold harmless the Company, each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act, each director of the Company and each
officer of the Company who signed the Registration Statement against any losses,
claims, damages or liabilities (or actions in respect thereof) to which the
Company and any such director, officer or controlling person may become subject
under the Act or other federal or state statutory law or regulation, at common
law 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
<PAGE> 27
Page 27
any amendment or supplement to the Registration Statement or the Prospectus or
any Application, or material fact required to be stated therein or (ii) the
omission or the alleged omission to state in the Registration Statement, any
Preliminary Prospectus or the Prospectus or any amendment or supplement to the
Registration Statement or the Prospectus, or any Application, 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 reliance upon and in conformity with written information furnished to the
Company by such Underwriter through the Representatives expressly for use
therein; and, subject to the limitation set forth immediately preceding this
clause, will reimburse, as incurred, any legal or other expenses reasonably
incurred by the Company and any such director, officer or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or any action in respect thereof. The Company acknowledges that, for
all purposes under this Agreement, the statements set forth in [the third, sixth
and seventh paragraphs] under the heading "Underwriting" and the information in
[the two paragraphs on the inside front cover] of any Preliminary Prospectus and
the Prospectus constitute the only information relating to any Underwriter
furnished in writing to the Company by the Representatives on behalf of the
Underwriters expressly for inclusion in the Registration Statement, any
Preliminary Prospectus or the Prospectus. This indemnity agreement will be in
addition to any liability that each Underwriter might otherwise have.
Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party or parties
under this Section 8, notify such indemnifying party or parties of the
commencement thereof; but the omission so to notify the indemnifying party or
parties will not relieve it or them from any liability which it or they may have
to any indemnified party under the foregoing provisions of this Section 8 or
otherwise unless, and only to the extent that, such omission results in the
forfeiture of substantive rights or defenses by the indemnifying party. If any
such action is brought against an indemnified party and it notifies an
indemnifying party or parties of its commencement, the indemnifying party or
parties against which a claim is made will be entitled to participate therein
and, to the extent that it or they may wish, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party; provided, however,
that if the defendants in any such action include both the indemnified party and
the indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnifying party shall not have the right to
direct the defense of such action on behalf of such indemnified party or parties
and such indemnified party or parties shall have the right to select separate
counsel to defend such action on behalf of such indemnified party or parties.
After notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof and approval by such indemnified party
of counsel appointed to defend such action, the indemnifying party will not be
liable to such indemnified party under this Section 8 for any legal or other
expenses other than reasonable costs of investigation subsequently incurred by
such indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that in
connection with such action the indemnifying party shall not be liable for the
expenses of more than one separate counsel (in addition to local counsel) in any
one action or separate but substantially similar actions in the same
jurisdiction arising out of the same general allegations or circumstances,
designated by the
<PAGE> 28
Page 28
Representatives in the case of paragraph (a) of this Section 8, representing the
indemnified parties under such paragraph (a) who are parties to such action or
actions), or (ii) the indemnifying party has authorized in writing the
employment of counsel for the indemnified party at the expense of the
indemnifying party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the costs and
expenses of any settlement of such action effected by such indemnified party
without the consent of the indemnifying party, unless such indemnified party
waived its rights under this Section 8 in which case the indemnified party may
effect such a settlement without such consent.
If the indemnification provided for in the foregoing paragraphs of this
Section 8 is unavailable or insufficient to hold harmless an indemnified party
under paragraph (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) (i) in such proportion as is appropriate to reflect
the relative benefits received by the indemnifying party or parties, on the one
hand, and the indemnified party, on the other, from the offering of the Shares
or (ii) if, but only if, the allocation provided by the foregoing clause (i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the indemnifying party or parties, on the one hand, and the
indemnified party, on the other, in connection with the statements or omissions
or alleged statements or omissions that 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 Underwriters, on the other, shall be deemed to be in the same
proportion as the total proceeds from the offering of the Shares (before
deducting expenses) bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. Relative fault shall be determined by reference to
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 or the Representatives on behalf of the Underwriters,
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 8(d) were to be determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, 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), no Underwriter shall be
required to contribute any amount in excess of the total underwriting discounts
received by it with respect to the Shares purchased by such Underwriter under
this Agreement, less the aggregate amount of any damages that such Underwriter
has otherwise been required to pay in respect of the same or any substantially
similar claim.
<PAGE> 29
Page 29
No person found guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) will be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute as provided in this Section 8(d) are several in
proportion to their respective underwriting obligations and not joint. For
purposes of this Section 8(d), each person, if any, who controls an Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
will have the same rights to contribution as such Underwriter, and each director
of the Company, each officer of the Company who signed the Registration
Statement and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, will have the same
rights to contribution as the Company, subject in each case to the provisions of
this paragraph (d). Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim for contribution may be made under this
Section 8(d), will notify any such party or parties from whom contribution may
be sought, but the omission so to notify will not relieve the party or parties
from whom contribution may be sought from any other obligation(s) it or they may
have hereunder or otherwise than under this paragraph (d) or (y) to the extent
that such party or parties were not adversely affected by such omission. The
contribution agreement set forth above shall be in addition to any liabilities
which any indemnifying party may otherwise have. No party will be liable for
contribution with respect to any action or claim settled without its written
consent (which consent will not be unreasonably withheld). The indemnity and
contribution agreements contained in this Section 8 and the representations and
warranties of the Company contained in this Agreement shall remain operative and
in full force and effect regardless of (i) any investigation made by or on
behalf of the Underwriters, (ii) acceptance of any of the Shares and payment
therefor or (iii) any termination of this Agreement.
Termination. The obligations of the several Underwriters under this
Agreement may be terminated at any time prior to the Closing Date (or, with
respect to the Option Shares, on or prior to the Option Closing Date), by notice
to the Company from the Representatives, without liability on the part of any
Underwriter to the Company if, prior to delivery and payment for the Firm Shares
(or the Option Shares, as the case may be), in the sole judgment of the
Representatives, (i) trading in any of the equity securities of the Company
shall have been suspended by the Commission or by an exchange that lists the
Shares, (ii) trading in securities generally on the NYSE, the American Stock
Exchange or the International Stock Exchange of the United Kingdom and the
Republic of Ireland, Limited shall have been suspended or limited or minimum or
maximum prices shall have been generally established on any of such exchanges,
or additional material governmental restrictions, not in force on the date of
this Agreement, shall have been imposed upon trading in securities generally by
any of such exchanges or by order of the Commission or any court or other
governmental authority, (iii) a general banking moratorium shall have been
declared by Federal, New York State or United Kingdom authorities or (iv) any
material adverse change in the financial or securities markets in the United
States or United Kingdom or any outbreak or material escalation of hostilities
or declaration by the United States or the United Kingdom of a national
emergency or war or other calamity or crisis shall have occurred, the effect of
any of which is such as to make it, in the sole judgment of the Representatives,
impracticable or inadvisable to market the Shares on the terms and in the manner
contemplated by the Prospectus. Any termination pursuant to Section 9 shall be
without liability of any party to any other party except as provided in Sections
6(a) and 8.
Default of Underwriters. If one or more Underwriters default in their
obligations to purchase Firm Shares or Option Shares hereunder and the
aggregate number of such Shares that such defaulting Underwriter or Underwriters
agreed but failed to purchase is ten percent or less of the aggregate number of
Firm Shares or Option Shares to be purchased by all of the Underwriters at such
time hereunder, the other Underwriters may make arrangements satisfactory to the
Representatives for the purchase of such Shares by other persons (who may
include one or more of the
<PAGE> 30
Page 30
non-defaulting Underwriters, including the Representatives), but if no such
arrangements are made by the Firm Closing Date or the related Option Closing
Date, as the case may be, the other Underwriters shall be obligated severally
in proportion to their respective commitments hereunder to purchase the Firm
Shares or Option Shares that such defaulting Underwriter or Underwriters agreed
but failed to purchase. If one or more Underwriters so default with respect to
an aggregate number of Shares that is more than ten percent of the aggregate
number of Firm Shares or Option Shares, as the case may be, to be purchased by
all of the Underwriters at such time hereunder, and if arrangements
satisfactory to the Representatives are not made within 36 hours after such
default for the purchase by other persons (who may include one or more of the
non-defaulting Underwriters, including one or more of the Representatives) of
the Shares with respect to which such default occurs, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or
the Company other than as provided in Section 11 hereof. In the event of any
default by one or more Underwriters as described in this Section 10, the
Representatives shall have the right to postpone the Firm Closing Date or the
Option Closing Date, as the case may be, established as provided in Section 2
hereof for not more than seven business days in order that any necessary
changes may be made in the arrangements or documents for the purchase and
delivery of the Firm Shares or Option Shares, as the case may be. As used in
this Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section 10. Nothing herein shall relieve any defaulting
Underwriter from liability for its default.
Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, its officers and
the several Underwriters 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 (i) any investigation made by or on behalf of the
Company, any of its officers or directors, any Underwriter or any controlling
person referred to in Section 8 hereof and (ii) delivery of and payment for
the Shares. The respective agreements, covenants, indemnities and other
statements set forth in Sections 6 and 8 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.
Notices. Notice given pursuant to any of the provisions of this
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered (a) if to the Company, at the office of the Company, 111 Westwood
Place, Suite 402, Brentwood, Tennessee 37027, Attention: Chief Executive
Officer, or (b) if to the Underwriters, to the Representatives at the offices of
NatWest Securities Limited, 135 Bishopsgate, London EC2M 3XT England, Attention:
Melvin Rowe. Any such notice shall be effective only upon receipt. Any notice
under Section 8 or 9 may be made by telex or telephone, but if so made shall be
subsequently confirmed in writing.
Successors. This Agreement shall inure to the benefit of and
shall be binding upon the several Underwriters, the Company and their respective
successors and legal representatives, and nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any other person any legal
or equitable right, remedy or claim under or in respect of this Agreement, or
any provisions herein contained, this
<PAGE> 31
Page 31
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of such persons and for the benefit of
no other person except that (i) the indemnities of the Company contained in
Section 8 of this Agreement shall also be for the benefit of any person or
persons who control any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters
contained in Section 8 of this Agreement shall also be for the benefit of the
directors of the Company, the officers of the Company who have signed the
Registration Statement and any person or persons who control the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No
purchaser of Shares from any Underwriter shall be deemed a successor because of
such purchase. This Agreement shall not be assignable by either party hereto
without the prior written consent of the other party.
APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS
AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS.
Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(Signature page follows)
<PAGE> 32
Page 32
Please confirm that the foregoing correctly sets forth the agreement
among the Company and the several Underwriters.
Very truly yours,
AMERICAN RETIREMENT
CORPORATION
By:
------------------------------
Name:
Title:
Confirmed as of the date first above mentioned:
By: NATWEST SECURITIES LIMITED
EQUITABLE SECURITIES CORPORATION
MCDONALD & COMPANY SECURITIES, INC.
By: NATWEST SECURITIES LIMITED
By:
--------------------------------
Name:
Title:
Acting on behalf of themselves
and as the Representatives of the
other several Underwriters named
in Schedule I hereto.
<PAGE> 33
Page 33
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm
Shares to be
Purchased
------------
<S> <C>
NatWest Securities Limited
Equitable Securities Corporation
McDonald & Company Securities, Inc
Total 3,125,000
=========
</TABLE>
<PAGE> 34
Page 34
EXHIBIT A
SUBSIDIARIES
<PAGE> 35
EXHIBIT B
May __, 1997
NATWEST SECURITIES LIMITED
EQUITABLE SECURITIES CORPORATION
MCDONALD & COMPANY SECURITIES, INC.
As Representatives of the
several Underwriters
c/o NatWest Securities Limited
135 Bishopsgate
London EC2M 3XT England
Ladies and Gentlemen:
In order to induce the several underwriters, for which NatWest
Securities Limited, Equitable Securities Corporation and McDonald & Company
Securities, Inc. (the "Representatives") intend to act as Representatives, to
underwrite a proposed initial public offering (the "Offering") of shares of
common stock, $.01 par value per share (the "Common Stock"), 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. 33-23197), the undersigned hereby agrees that the
undersigned will not, directly or indirectly, for a period of 180 days after the
commencement of the Offering, without the prior written consent of NatWest
Securities Limited, 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 any
securities convertible into, or exercisable or exchangeable for, shares of
Common Stock.
This letter shall have no further force or effect if the Company and
the several Underwriters shall not have executed and delivered an underwriting
agreement related to the Offering by [June 30, 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 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:
<PAGE> 1
EXHIBIT 10.22
CONSTRUCTION LOAN AGREEMENT
This Construction Loan Agreement is entered into as of the 14th day of
March, 1997, by and between FORT AUSTIN LIMITED PARTNERSHIP ("Borrower"), a
Texas limited partnership; and FIRST UNION NATIONAL BANK OF TENNESSEE
("Lender"), a national banking association.
RECITALS
WHEREAS, Lender has agreed to extend credit to Borrower, on certain terms
and conditions, as set forth in detail in this Agreement;
NOW, THEREFORE, as an inducement to cause Lender to extend credit to
Borrower, and for other valuable consideration, the receipt and sufficiency of
which are acknowledged, it is agreed as follows:
I. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have the
following meanings, unless the context expressly requires otherwise:
"AFFILIATE" means, with respect to any Person, another Person that,
directly or indirectly, (i) has an equity interest in that Person, in any
degree, (ii) has common ownership with that Person, in any degree, (iii)
Controls that Person, or (iv) shares common Control with that Person.
"AGREEMENT" means this Loan Agreement (including all schedules and exhibits
hereto), as the same may be amended from time to time.
"ARC ENTITIES" means Borrower; American Retirement Communities, L.P., a
Tennessee limited partnership ("ARC, LP"), American Retirement Communities, LLC
("ARC, LLC"), a Tennessee limited liability company; American Retirement
Corporation II, formerly known as "American Retirement Corporation ("ARC"), a
Tennessee corporation; A.R.C. Management Corporation ("ARCM"), a Tennessee
corporation; ARC Chattanooga, Inc., a Tennessee corporation; ARC Fort Austin
Properties, Inc., a Tennessee corporation; ARC Corpus Christi, Inc., a Tennessee
corporation; ARC Oak Park, Inc., a Tennessee corporation; Trinity Towers Limited
Partnership, a Tennessee limited partnership; Holley Court Terrace Limited
Partnership, a _____________ limited partnership; ARCLP-Charlotte, L.L.C., a
________________ limited liability company; and all other Subsidiaries of
Borrower from time to time.
<PAGE> 2
"BANKRUPTCY CODE" means Title I of the Bankruptcy Reform Act of 1978, as it
may be amended from time to time.
"BORROWER" means Fort Austin Limited Partnership, a Texas limited
partnership, its successors and assigns. This definition does not abrogate the
requirement set forth below restricting Borrower's ability to assign its rights
under this Agreement.
"CAPITAL LEASE" means a lease that would be characterized as a financed
sale under GAAP.
"CHANGE OF CONTROL" means the occurrence, after the date of this Agreement,
of the acquisition of Control of any ARC Entity by any Person which does not
presently Control such entity.
"CLOSING DATE" means the date of this Agreement.
"COLLATERAL" means all Property now or hereafter securing the Obligations.
"CONSTRUCTION LOAN" has the meaning assigned in Article II hereof.
"CONSTRUCTION LOAN ADDENDUM" means the Construction Loan Addendum between
Borrower and Lender of even date herewith, which Addendum is an integral part of
this Agreement and is incorporated herein by this reference.
"CONSTRUCTION LOAN NOTE" means the Construction Loan Note made by Borrower
dated the date of this Agreement in the principal amount of Eleven Million Six
Hundred Thousand and 00/100 Dollars ($11,600,000.00), and all modifications,
amendments, extensions, renewals and restatements thereof.
"CONTROL" or "CONTROLLED" means that a Person has the power to conduct or
govern the policies of another Person.
"DEBT" means, with respect to any Person, all obligations, contingent or
otherwise, that would be classified under GAAP as a liability of that Person
including, but not limited to, any nonrecourse obligations secured by Property
of that Person.
"DEFAULT RATE" means the lesser of four per cent (4%) above the Prime Rate
or the highest lawful rate.
"EVENT OF DEFAULT" means the occurrence of any of the events specified in
Section 8.1 hereof, as to which any requirement for notice or lapse of time has
been satisfied.
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"ENCUMBRANCE" means any interest in Property in favor of one not the owner
thereof, whether voluntary or involuntary, including, but not limited to, (i)
the lien or security interest arising from a deed of trust, mortgage, pledge,
security agreement, conditional sale, Capital Lease, consignment, or bailment
for security purposes, and (ii) reservations, exceptions, encroachments,
easements, rights-of-way, covenants, conditions, restrictions, leases, and other
title exceptions.
"ENVIRONMENTAL LAWS" means the Environmental Protection Act, the Resource
Conservation and Recovery Act of 1976, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Hazardous Materials Transportation
Act and any other federal, state or municipal law, rule or regulation relating
to air emissions, water discharge, noise emissions, solid or liquid waste
disposal, hazardous or toxic waste or materials, or other environmental or
health matters.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, including (unless the context otherwise requires) any
rules or regulations promulgated thereunder.
"ERISA AFFILIATE" means any Person who for purposes of Title IV of ERISA is
a member of Borrower's controlled group, or under common control with Borrower,
within the meaning of Section 414 of the IRC, and the regulations promulgated
pursuant thereto and the rulings issued thereunder.
"ERISA EVENT" means (i) the occurrence of a reportable event, within the
meaning of Section 4043 of ERISA, unless the 30-day notice requirement with
respect thereto has been waived by the PBGC; (ii) the provision by the
administrator of any Plan of a notice of intent to terminate such Plan, pursuant
to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan
amendment referred to in Section 4041(e) of ERISA); (iii) the cessation of
operations at a facility in the circumstances described in Section 4068(f) of
ERISA; (iv) the withdrawal by Borrower or an ERISA Affiliate from a Multiple
Employer Plan during a plan year for which it was a substantial employer, as
defined in 4001(a)(2) of ERISA; (v) the failure by Borrower or any ERISA
Affiliate to make a material payment to a Plan required under Section 302(f)(1)
of ERISA; (vi) the adoption of an amendment to a Plan requiring the provision of
initial or additional security to such Plan, pursuant to Section 307 of ERISA;
or (vii) the institution by the PBGC of proceedings to terminate a Plan,
pursuant to Section 4042 of ERISA, or the occurrence of any event or condition
which might constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, a Plan.
"FACILITY" means the Santa Catalina Villas Retirement Community in Tucson,
Arizona.
"FINANCIAL STATEMENTS" means the consolidated balance sheet and income
statement for ARC, L.P. and the consolidating balance sheet and income statement
for ARC, LP represented as Richmond Place, Heritage Club, Carriage Club
Charlotte, Carriage Club
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Jacksonville, ARCLP-Charlotte L.L.C. representing Carriage Club Charlotte,
Trinity Towers Limited Partnership, Borrower, Holley Court Terrace, L.P. and
ARC, dated December 31, 1996, delivered by Borrower to Lender, and all
subsequent financial statements delivered to Lender pursuant to this Agreement
as of the date hereof, including all notes thereto.
"FUNB-NC" means First Union National Bank of North Carolina, a national
banking association and the issuer of the Richmond Place Letter of Credit.
"GAAP" means generally accepted accounting principles pronounced by the
Financial Accounting Standards Board or any successor thereto, as in effect from
time to time.
"GOVERNMENTAL AUTHORITY OR AUTHORITIES" shall mean any governmental or
quasi-governmental entity, court or tribunal including, without limitation, any
department, commission, board, bureau, agency, administration, service or other
instrumentality of any foreign or domestic governmental entity.
"HAZARDOUS SUBSTANCES" means those substances included from time to time
within the definition of hazardous substances, hazardous materials, toxic
substances, or solid waste under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 as amended, 42 U.S.C. ss. 9601 et seq.;
the Resource Conservation and Recovery Act of 1976, 42 U.S.C. ss. 6901 et seq.;
the Hazardous Materials Transportation Act, 49 U.S.C. ss. 1801 et seq.; the
Clean Water Act, 33 U.S.C. Section 1251 et. seq.; the Toxic Substances Control
Act, 15 U.S.C. Section 2601 et. seq., and in the regulations promulgated
pursuant to such acts and laws; and such other substances that are or become
regulated under any applicable local, state, or federal law or regulation
addressing environmental hazards.
"INTEREST EXPENSE" means expenses for interest (including current charges
on Capital Leases) and expenses for any interest rate swaps or similar
derivative contracts used for the management of interest expense, letter of
credit fees, remarketing and guaranty fees.
"IRC" means the Internal Revenue Code of 1986, as amended from time to
time.
"LAW" or "LAWS" means all applicable constitutional provisions, statutes,
codes, acts, ordinances, orders, judgments, decrees, injunctions, rules,
regulations, and requirements of all Governmental Authorities.
"LENDER" means First Union National Bank of Tennessee, its successors and
assigns.
"LOAN" means an extension of credit under the Construction Loan.
"LOAN DOCUMENTS" means, collectively, each written agreement executed and
delivered by any ARC Entity to Lender in connection with the Construction Loan.
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"MATERIAL ADVERSE CHANGE" means any material and adverse change in the
business, Properties, or operations of Borrower or ARC, LP individually or of
the ARC Entities on a consolidated basis.
"MATERIAL ADVERSE EFFECT" means any event or condition which, singly or in
the aggregate with other events or conditions, materially and adversely affects
the business, Properties, or operations of Borrower or ARC, LP individually or
of the ARC Entities on a consolidated basis.
"OBLIGATIONS" means all present and future debts and other obligations of
Borrower to Lender, whether arising by contract, tort, guaranty, overdraft, or
otherwise; whether or not the advances or events creating such debts or other
obligations are presently foreseen; and regardless of the class of the debts or
other obligations, be they otherwise secured or unsecured. Without limiting the
foregoing, the "Obligations" specifically includes the obliga tions of Borrower
under this Agreement and the other Loan Documents.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"PERMITTED ENCUMBRANCES" means all of the following:
(a) Encumbrances securing the payment of any of the Obligations.
(b) Encumbrances securing taxes, assessments, or other governmental
charges not yet due or which are being contested in good faith by
appropriate action promptly initiated and diligently conducted,
if Borrower has made reserve therefor as required by GAAP.
(c) Mechanics', repairmen's, materialmen's, warehousemen's and other
like liens arising by operation of law securing accounts that are
not delinquent.
(d) Encumbrances on real property used by Borrower not securing
monetary obligations, provided that the Encumbrances are of a
type customarily placed on real property and do not materially
impair the value of the affected property.
(e) Pledges or deposits in the ordinary course of business to secure
nondelinquent obligations under workman's compensation or
unemployment laws or similar legislation or
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to secure the performance of leases or contracts entered into in
the ordinary course of business.
(f) Encumbrances described on the attached Schedule 1.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization,
government, governmental agency or political subdivision thereof, or any other
form of entity.
"PLAN" means any employee benefit or other plan established or maintained,
or to which contributions have been made, by Borrower or any Subsidiary and
covered by Title IV of ERISA or to which Section 412 of the IRC applies.
"PRIME RATE" shall be that rate announced by Lender from time to time as
its Prime Rate and is one of several interest rate bases used by Lender. Lender
lends at rates both above and below Lender's Prime Rate and Borrower
acknowledges that Lender's Prime Rate is not represented or intended to be the
lowest or most favorable rate of interest offered by Lender.
"PROPERTY" or "PROPERTIES" means any interest in any kind of property,
whether real, personal, or mixed, or tangible or intangible.
"REIMBURSEMENT AGREEMENT" means the Reimbursement Agreement dated as of
October 31, 1995 by ARC, LP in favor of Lender and FUNB-NC, pursuant to which
the Richmond Place Letter of Credit has been issued.
"RICHMOND PLACE LETTER OF CREDIT" means the Irrevocable Direct Pay Letter
of Credit issued by FUNB-NC for the account of ARC, LP to Third National Bank in
Nashville as Trustee under the Trust Indenture dated as of April 1, 1987, as
amended and restated as of November 1, 1994, governing the issuance of the
Lexington-Fayette Urban County Government Residential Facilities Refunding
Revenue Bonds (Richmond Place Associates, L.P. Project) Series 1987.
"SOLVENT" shall mean, as to any Person, that as of any date of
determination, (i) the then fair value of the assets of such Person is (a)
greater than the then total amount of liabilities (including subordinated
liabilities) of such Person and (b) greater than the amount that will be
required to pay such Person's probable liability on such Person's then existing
debts as they become absolute and matured, (ii) such Person's capital is not
unreasonably small in relation to its business, and (iii) such Person does not
intend to incur, or believe or reasonably should believe that it will incur,
debts beyond its ability to pay such debts as they become due.
"SUBSIDIARY" means any present or future corporation, partnership or other
entity at least a majority of whose outstanding voting stock shall at the time
be owned directly or indirectly by Borrower, by one or more Subsidiaries of
Borrower or a combination thereof, or any partnership in which Borrower or a
Subsidiary of Borrower is a general partner.
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"TAXES" means all taxes and assessments whether general or special,
ordinary or extraordinary, or foreseen or unforeseen, which at any time may be
assessed, levied, confirmed or imposed on Borrower or on any of its properties
or assets or any part thereof or in respect of any of its franchises,
businesses, income or profits.
"UCC" means the Uniform Commercial Code as adopted in Tennessee, as it may
be amended from time to time.
"UNMATURED DEFAULT" means any event or condition that, but for the giving
of any required notice by Lender and/or the passing of time, would be an Event
of Default hereunder.
II. LOAN
2.1 Construction Loan. Concurrently with the execution of this Agreement,
Lender shall make a Construction Loan (the "Construction Loan") available to
Borrower under the following terms:
2.1.1 Amount of Construction Loan. The original principal indebtedness
of Borrower to Lender under the Construction Loan shall be Eleven Million
Six Hundred Thousand and 00/100 Dollars.
2.1.2 Use of Proceeds of Construction Loan. The proceeds of the
Construction Loan shall be used by Borrower to finance the expansion of the
Santa Catalina Retirement Community in Tucson, Arizona. Such proceeds shall
be advanced in accordance with the terms of the Construction Loan Addendum.
2.1.3 Construction Loan Note. Borrower's obligations under the
Construction Loan shall be evidenced by the Construction Loan Note.
2.1.4 Interest Rate Applicable to Construction Loan. The principal
amount of the Construction Loan outstanding shall bear interest at Lender's
Prime Rate, as it may change from time to time.
2.1.5 Calculation of Interest. Interest for Prime Rate Loans shall be
computed on the basis of a 360-day year counting the actual number of days
elapsed.
2.1.6 Default Rate. Notwithstanding the foregoing, upon the occurrence
of an Event of Default and during the continuation of such Event of Default
until it is cured or waived, interest shall be charged at the Default Rate,
regardless of whether Lender has elected to exercise any other remedies
available to Lender, including, without limitation, acceleration of the
maturity of the
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outstanding principal of the Construction Loan. All such interest shall be
paid at the time of and as a condition precedent to the curing of any such
Event of Default to the extent any right to cure is given in this
Agreement.
2.1.7 Usury Savings Provision. It is the intention of the parties that
all charges under or in connection with this Agreement and the Obligations,
however denominated, and including (without limitation) all interest,
commitment fees, late charges and loan charges, shall be limited to the
maximum lawful amount that may be assessed under Tennessee law or, if
higher, applicable federal law. Such charges shall be characterized and all
provisions of the Loan Documents shall be construed as to uphold the
validity of charges provided for therein and, all such charges shall be
spread over the entire term of the Loans to the extent permitted by law. If
for any reason whatsoever, however, any charges paid or contracted to be
paid in respect of the Construction Loan shall exceed the maximum amounts
collectible under applicable laws in effect from time to time, then, ipso
facto, the obligation to pay such interest and/or other charges shall be
reduced to the maximum lawful amount in effect from time to time, and any
amounts collected by Lender that exceed the maximum lawful amount shall be
applied to the reduction of the principal balance of the Construction Loan
and/or refunded to Borrower so that at no time shall the interest or loan
charges paid or payable in respect of the Construction Loan exceed the
maximum lawful amount. This provision shall control every other provision
herein and in any and all other agreements and instruments now existing or
hereafter arising between Borrower and Lender with respect to the
Construction Loan.
2.2 Repayment. Monthly payments of interest only shall be due during the
term of this Agreement.
2.2.1 Initial Repayment Schedule. Payments of interest only shall be
made monthly in arrears, with the entire principal balance due at the
earlier of completion of construction of the Facility or April 30, 1998.
2.2.2 All Amounts Due. All remaining principal, interest and expenses
under the Construction Loan will be due at the earlier of the date that is
thirty (30) days subsequent to the completion of construction of the
Facility (as evidenced by the issuance of a certificate of occupancy for
the new portion of the Facility) or June 30, 1998.
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2.3 Fees.
2.3.1 Construction Loan Commitment Fee. Concurrently with the
execution hereof, Borrower shall pay Lender the sum of $58,000.00 as a
commitment fee for the Construction Loan.
2.4 Release. So long as Borrower and the ARC Entities are not in default
with respect to any obligation to Lender, Lender shall release its Deed of Trust
upon payment in full of Borrower's obligations under the Construction Loan and
Borrower shall have no further obligation under this Agreement or the Loan
Documents except as expressly provided herein or therein.
III. CONDITIONS PRECEDENT
3.1 Conditions to Closing. Lender shall not be obligated to make its
initial Loan pursuant to this Agreement unless and until Borrower provides
Lender with the documents and other items required by the Construction Addendum.
IV. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Lender that, as of the Closing Date:
4.1 Capacity. Each ARC Entity is a limited partnership, limited liability
company ("LLC") or corporation, as applicable, duly organized, validly existing
and in good standing under the laws of the state of its formation or
organization, as applicable. Each ARC Entity is qualified or authorized to do
business in all jurisdictions in which its ownership of property or conduct of
business requires such qualification or authorization. Each ARC Entity has the
power and authority to own its Properties and to carry on its business as now
being conducted and as proposed to be conducted after the execution hereof, to
execute and deliver this Agreement and/or such of the other Loan Documents as
they are required to execute, and to perform its obligations hereunder and under
such other Loan Documents. References in this Article IV to the execution,
delivery and performance by the ARC Entities shall be limited in each instance
to the ARC Entities which are parties to such documents.
4.2 Authorization. Each ARC Entity's execution, delivery and performance of
this Agreement and the other Loan Documents, as applicable, have been duly
authorized by all requisite partnership, LLC and corporate action.
4.3 Binding Obligations. This Agreement is and the other Loan Documents,
when executed and delivered to Lender, will be, legal, valid and binding upon
each ARC Entity, enforceable in accordance with their respective terms, subject
only to principles of equity and laws applicable to creditors generally,
including bankruptcy laws.
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4.4 No Conflicting Law or Agreement. Each ARC Entity's execution, delivery
and performance of the Loan Documents do not constitute a breach of or default
under, and will not violate or conflict with, any provisions of the corporate
charter of any ARC Entity; any contract, financing agreement, lease, or other
agreement to which any ARC Entity is a party or by which its Properties may be
affected; or any Law to which any ARC Entity is subject or by which its
Properties may be affected; nor will the same result in the creation or
imposition of any Encumbrance upon any Properties of any ARC Entity, other than
those contemplated by the Loan Documents.
4.5 No Consent Required. Each ARC Entity's execution, delivery, and
performance of this Agreement and the other Loan Documents do not require the
consent or approval of or the giving of notice to any Person except for those
consents which have been duly obtained and are in full force and effect on the
date hereof.
4.6 Financial Statements. The Financial Statements are complete and
correct, have been prepared in accordance with GAAP, and present fairly the
financial condition and results of operations of the ARC Entities as of the date
and for the period stated therein, subject to year-end adjustments. No Material
Adverse Change has occurred since the date of the Financial Statements. Borrower
acknowledges that Lender has advanced (or shall advance) the Loans in reliance
upon the Financial Statements.
4.7 Fiscal Year. Each ARC Entity's fiscal year ends on December 31 of each
year.
4.8 Litigation. Except as disclosed on Schedule 4.8 hereto, there is no
litigation, arbitration, legal or administrative proceeding, tax audit,
investigation, or other action or proceeding of any nature pending or, to the
knowledge of Borrower, threatened against, likely to be instituted against or
affecting any ARC Entity or any of its Properties, except any such proceeding
involving only a claim for money damages less than $100,000. No ARC Entity is
subject to any outstanding court, arbitral or administrative order, writ or
injunction. To the best of Borrower's knowledge, information and belief, no
facts exist under which third parties have unasserted claims against any ARC
Entity that would involve a claim for injunctive relief or payment of money
damages in excess of $100,000.
4.9 Taxes; Governmental Charges. Each ARC Entity has filed or caused to be
filed all tax returns and reports required to be filed. Each ARC Entity has
paid, or made adequate provision for the payment of, all Taxes that have or may
have become due pursuant to such returns or otherwise, or pursuant to any
assessment received by Borrower, except such Taxes, if any, as are being
contested in good faith by appropriate proceedings and for which adequate
reserves have been provided. Borrower knows of no proposed material tax
assessment against any ARC Entity. No extension of time for the assessment of
federal, state or local taxes of borrower is in effect or has been requested,
except as disclosed in the Financial Statements. Each ARC Entity has timely made
all required remittances of withholding deposits and other assessments against
payroll expenditures.
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4.10 Title to Properties. Each ARC Entity has good and marketable title to,
or a valid leasehold interest in, its Properties, free and clear of all
Encumbrances except for Permitted Encumbrances.
4.11 No Default. No ARC Entity is in default (beyond applicable grace
and/or periods of notice and cure) in any material respect that affects its
business, Properties, operations, or condition, financial or otherwise, under
any document evidencing an obligation for the repayment of borrowed money. No
ARC Entity is in default in any respect under any other instrument to which any
ARC Entity is a party or by which its Properties are bound, except to the extent
that such default could not reasonably be expected to have a Material Adverse
Effect. To the best of Borrower's knowledge, information and belief, no other
party to any contract with any ARC Entity is in default or breach thereof and no
circumstances exist which, with the giving of notice and/or the passing of time
would constitute such default or breach which would have a Material Adverse
Effect. No Event of Default or Unmatured Default exists under this Agreement.
4.12 Casualties; Taking of Properties. Neither the business nor the
Property of any ARC Entity is presently impaired as a result of any fire,
explosion, earthquake, flood, drought, windstorm, accident, strike or other
labor disturbance, embargo, requisition or taking of property, cancellation of
contracts, permits, concessions by any domestic or foreign government or any
agency thereof, riot, activities of armed forces or acts of God or of any public
enemy.
4.13 Compliance with Laws. No ARC Entity is in violation of any Law to
which any ARC Entity, its business or any of its Properties are subject, the
violation of which would likely have a Material Adverse Effect, and there are no
outstanding citations, notices or orders of noncompliance issued to any ARC
Entity under any such Law, the violation of which would likely have a Material
Adverse Effect. Each ARC Entity has obtained all licenses, permits, franchises,
or other governmental authorizations necessary to the ownership of its
Properties or to the conduct of any ARC Entity's business.
4.14 ERISA. No ERISA Event has occurred with respect to any Plan or is
reasonably expected to occur with respect to any Plan.
4.15 Full Disclosure of Material Facts. Borrower has fully advised Lender
of all matters involving Borrower's, ARC, LP's and the consolidated ARC
Entities' financial condition, business, operations, Properties or industry that
would be reasonably expected to have a Material Adverse Effect. No information,
exhibit, or report furnished or to be furnished by Borrower to Lender in
connection with this Agreement contains, as of the date thereof, any
misrepresentation of fact or failed or will fail to state any material fact, the
omission of which would render the statements therein materially false or
misleading.
4.16 Accuracy of Projections. With respect to all business plans and other
forecasts and projections furnished by or on behalf of Borrower and made
available to Lender relating to the financial condition, business, operations,
Properties or prospects of the ARC
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Entities, to the best of Borrower's knowledge, information and belief, all facts
stated as such therein are true and complete in all material respects and all
estimates and assumptions were made in good faith and believed to be reasonable
at the time made.
4.17 Investment Company Act. No ARC Entity is an "investment company" under
the Investment Company Act of 1940, as amended.
4.18 Personal Holding Company. No ARC Entity is a "personal holding
company" as defined in Section 542 of the IRC.
4.19 Solvency. Each ARC Entity is Solvent as of the Closing Date and will
remain Solvent upon the consummation of the transactions contemplated hereby.
4.20 Chief Executive Office. The address designated herein to which notices
are to be sent under this Agreement is the chief executive office for each ARC
Entity within the meaning of Tennessee Code Annotated Section 47-9-103(3)(d).
4.21 Subsidiaries. Borrower has no Subsidiaries.
4.22 Ownership of Patents, Licenses, Etc. Each ARC Entity owns all
licenses, permits, franchises, registrations, patents, copyrights, trademarks,
trade names or service marks, or the rights to use the foregoing, that are
necessary for the continued operation of its business.
4.23 Environmental Compliance. Each ARC Entity has duly complied with, and
its Properties are owned and operated in compliance with, all Environmental
Laws, the violation of which would have a Material Adverse Effect. There have
been no citations, notices or orders of non-compliance issued to any ARC Entity
or, to Borrower's knowledge, relating to any ARC Entity's business or Properties
pursuant to any Environmental Law. Each ARC Entity has obtained all required
federal, state and local licenses, certificates or permits relating to it and
its Properties as required by applicable Environmental Laws.
4.24 Labor Matters. No ARC Entity is subject to any collective bargaining
agreements or any agreements, contracts, decrees or orders requiring it to
recognize, deal with or employ any Person. No demand for collective bargaining
has been asserted against any ARC Entity by any union or organization. No ARC
Entity has experienced any strike, labor dispute, slowdown or work stoppage due
to labor dispute and, to the best knowledge of Borrower, there is no such
strike, dispute, slowdown or work stoppage threatened against any ARC Entity.
Each ARC Entity is in compliance in all material respects with the Fair Labor
Standards Act of 1938, as amended.
4.25 OSHA Compliance. Each ARC Entity is in compliance in all material
respects with the Federal Occupational Safety and Health Act, as amended, and
all regulations under the foregoing.
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4.26 Regulation U. No ARC Entity is engaged in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulation U issued by the Board of Governors of the Federal Reserve
System). No proceeds of any Revolving Loan will be used to purchase or carry any
margin stock (within the meaning of Regulation U issued by the Board of
Governors of the Federal Reserve System) in violation of applicable law,
including, without limitation, Regulation U issued by the Board of Governors of
the Federal Reserve System.
V. AFFIRMATIVE COVENANTS
Borrower covenants that, during the term of this Agreement (and thereafter
where such covenants expressly require), it will observe and cause the other ARC
Entities to observe the affirmative covenants set forth in Article V of the Loan
Agreement dated October 31, 1995, between Lender and ARC, LP, as the same may be
amended from time to time. This obligation shall survive the repayment of the
obligations evidenced by the October 31, 1995, Loan Agreement.
VI. NEGATIVE COVENANTS
Borrower covenants and agrees that, without Lender's prior written consent,
neither it nor any of the other ARC Entities will violate any of the negative
covenants contained in Article VI of the Loan Agreement dated October 31, 1995,
between Lender and ARC, LP, as the same may be amended from time to time. This
obligation shall survive the repayment of the obligations evidenced by the
October 31, 1995, Loan Agreement.
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VII. FINANCIAL COVENANTS
Borrower acknowledges that certain of the ARC Entities are subject to
financial covenants in other agreements that they have entered into with Lender,
and covenants with Lender that it will cause such entities to comply with those
financial covenants; this obligation shall survive the repayment of the
obligations evidenced by those other agreements so long as the Construction Loan
is outstanding. Borrower further covenants with Lender as follows:
7.1 Debt Service Coverage Ratio. On a rolling 4 quarter basis, tested
quarterly, Borrower shall maintain a debt service coverage ratio of no less than
1.35:1. This ratio shall be determined as follows:
NIBT + D/A + INT. EXP. + LEASE EXP.
-----------------------------------
INT. EXP. (incl. Letter of Credit, Remarketing & Guaranty fees, as appl.) +
CURRENT MATURITIES OF LTD (including required escrow payments) + LEASE EXP.
As used in the formula above, NIBT means net income plus tax expense; D/A means
expenses for depreciation and amortization, and other non-cash items; INT.EXP
means Interest Expense; LEASE EXP. means expenses under leases other than
Capital Leases; LTD means long-term Debt and CURRENT MATURITIES OF LTD means
principal and escrow payments actually due and payable within the applicable
test period.
7.2 Security Deposit Escrows. Borrower shall maintain tenant security
deposits in full compliance with its contractual agreements and all applicable
laws.
VIII. EVENTS OF DEFAULT
8.1 Events of Default. Any of the following events shall be considered an
Event of Default under this Agreement:
8.1.1 Payments. Borrower's failure to make payment of any installment
of principal, interest or expenses to Lender within 10 days of the date
when due.
8.1.2 Representations and Warranties. Lender's determination that any
material representation or warranty made by any Borrower or any other ARC
Entity in any Loan Document was incorrect in any material respect as of the
date thereof.
8.1.3 Negative Covenants. The failure of Borrower or any other ARC
Entity to comply in any material respect with any of the material
requirements of Article VI hereof.
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8.1.4 Reporting Requirements. The failure of Borrower or any other
party to timely perform all covenants in the Loan Documents requiring the
furnishing of notices, financial reports or other information to Lender.
8.1.5 Other Covenants. The failure of Borrower or any other ARC Entity
to observe or perform any covenant contained in any Loan Document, which
covenant is not subject to any specific provision in this Article VIII;
provided, however, as to any such breach that is reasonably susceptible to
being cured (a "Curable Default"), the occurrence of such Curable Default
shall not constitute an Event of Default hereunder if such Curable Default
is fully cured and/or corrected within thirty days (five (5) days, if such
Curable Default may be cured by the payment of a sum of money) after the
earlier of Borrower's knowledge of the facts giving rise thereto or
Lender's written notice thereof to Borrower given in accordance with the
provisions hereof.
8.1.6 Involuntary Bankruptcy or Receivership Proceedings. The
appointment of a receiver, custodian, liquidator, or trustee for Borrower
or any other ARC Entity, or for any of its Property, by the order or decree
of any court or agency or supervisory authority having jurisdiction; or
Borrower's or any other ARC Entity's adjudication as being bankrupt or
insolvent; or the sequestering of any of the Property of Borrower or any
other ARC Entity by court order or the filing of a petition against
Borrower or any other ARC Entity under any state or federal bankruptcy,
reorganization, debt arrangement, insolvency, readjustment of debt,
dissolution, liquidation, or receivership law of any jurisdiction, whether
now or hereafter in effect, if such involuntary proceedings are not
dismissed within 60 days.
8.1.7 Voluntary Petitions. Borrower's or any other ARC Entity's filing
of a petition in voluntary bankruptcy or to seek relief under any provision
of any bankruptcy, reorganization, debt arrangement, insolvency,
receivership, readjustment of debt, dissolution, or liquidation law of any
jurisdiction, whether now or hereafter in effect, or its consent to the
filing of any petition against it under any such law.
8.1.8 Discontinuance of Business. Borrower's or any other ARC Entity's
discontinuance of its usual business or its dissolution.
8.1.9 Default on Other Debt. Borrower or any other ARC Entity shall
fail to make any payment due from it on any indebtedness or other security
for borrowed money in excess of $100,000.00 beyond any applicable cure
period (whether its liability therefor is direct or contingent), or if any
other event (other than the mere passage of time) or any other condition in
respect of any indebtedness or other security for borrowed money of
Borrower or any other ARC Entity in a principal amount in excess of
$100,000 (whether its liability therefor
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<PAGE> 16
is direct or contingent) or under any agreement securing or relating to
such indebtedness or other security for borrowed money shall occur the
effect of which, after the giving of any required notice and the expiration
of any applicable cure period, is to cause (or permit any holder of such
indebtedness or other security or a trustee to cause) such indebtedness or
other security, or a portion thereof, to become due prior to its stated
maturity or prior to its regularly scheduled dates of payment, or if any
such indebtedness or other security for borrowed money otherwise is
accelerated and becomes due prior to its stated maturity or prior to its
regularly scheduled dates of payment.
8.1.10 Undischarged Judgments. Any judgment against Borrower or any
other ARC Entity or any attachment or levy against the property of Borrower
any other ARC Entity with respect to a claim for an amount in excess of
$25,000 not adequately insured or indemnified against, remains unpaid,
unstayed on appeal, undischarged, unbonded or undismissed for a period of
twenty (20) days.
8.1.11 Insolvency. Borrower's or any ARC Entity's no longer being
Solvent. For purposes of making the determination of solvency hereunder,
Borrower or any ARC Entity may include funds available from Borrower or any
other ARC Entity to the extent permitted under the terms of this Agreement.
8.1.12 Attachment. The issuance of an attachment or other process
against any Property of Borrower or any other ARC Entity, unless removed
(by bond or otherwise) within twenty (20) days.
8.1.13 Insurance. Borrower's or any other ARC Entity's failure to
maintain any insurance required in the Construction Loan Addendum or in any
other Loan Document.
8.1.14 Other Event. The occurrence of any event or condition which, in
Lender's reasonable discretion, materially and adversely affects the
ability of Borrower to perform the Obligations.
8.1.15 Cross-Default. The occurrence of an Event of Default under (i)
the Reimbursement Agreement or (ii) any document evidencing or securing
obligations of any of the ARC Entities to Lender or its affiliates.
8.2 Remedies. Upon the happening of any Event of Default:
8.2.1 Default Rate. Lender may declare the Obligations to thereafter
bear interest at the Default Rate.
8.2.2 Acceleration. Lender may declare the entire principal amount of
all Obligations then outstanding, including interest accrued thereon, to be
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<PAGE> 17
immediately due and payable without presentment, demand, protest, notice of
protest, or dishonor or other notice of default of any kind, all of which
are hereby expressly waived.
8.2.3 Exercise of Setoff. Lender may exercise its right of setoff
against Borrower.
8.2.4 Other Remedies. Lender may exercise its remedies under any or
all of the Loan Documents and all other rights afforded a creditor under
applicable law.
IX. GENERAL PROVISIONS
9.1 Notices. All communications relating to this Agreement or any of the
other Loan Documents shall be in writing and shall effective when be delivered
by mail, overnight courier, special courier or otherwise to the following
addresses:
if to Borrower:
Fort Austin Limited Partnership
Attn: Mr. W.E. Sheriff
111 Westwood Place, Suite 400
Brentwood, Tennessee 37027
With a Copy To:
Bass, Berry & Sims
Attn: T. Andrew Smith, Esq.
First American Center
Nashville, Tennessee 37238
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<PAGE> 18
if to Lender:
First Union National Bank of Tennessee
Attn: Andrew C. Tompkins
150 Fourth Avenue North
Nashville, Tennessee 37219
With a Copy To:
Boult, Cummings, Conners & Berry
Attn: Richard F. Warren
414 Union Street, Suite 1600
Nashville, Tennessee 37219
Any party may change its address for receipt of notice by written direction
to the other parties hereto.
9.2 Renewal, Extension, or Rearrangement. All provisions of this Agreement
relating to Obligations shall apply with equal force and effect to each and all
promissory notes executed hereafter which in whole or in part represent a
renewal, extension for any period, increase, or rearrangement of any part of the
Obligations originally represented by any part of such other Obligations.
9.3 Application of Payments. Amounts received with respect to the
Obligations shall be applied (i) first, to any expenses due Lender, (ii) second,
to accrued interest under any of the Obligations, and (iii) third, to reduce
principal of the Obligations, in such manner as determined by Lender.
9.4 Computations; Accounting Principles. Where the character or amount of
any asset or liability or item of income or expense is required to be
determined, or any consolidation or other accounting computation is required to
be made for the purposes of this Agreement, such determination or calculation,
to the extent applicable and except as otherwise specified in this Agreement,
shall be made in accordance with GAAP.
9.5 Counterparts. This Agreement may be executed in counterparts with all
signatures or by counterpart signature pages, and it shall not be necessary that
the signatures of all parties be contained on any one counterpart. Each
counterpart shall be deemed an original, but all of them together shall
constitute one and the same instrument.
9.6 Negotiated Document. This Agreement and the other Loan Documents have
been negotiated by the parties with full benefit of counsel and should not be
construed against any party as author.
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<PAGE> 19
9.7 Consent to Jurisdiction; Exclusive Venue. Borrower hereby irrevocably
consents to the jurisdiction of the United States District Court for the Middle
District of Tennessee and of all Tennessee state courts sitting in Davidson
County, Tennessee, for the purpose of any litigation to which Lender may be a
party and which concerns this Agreement or the Obligations. It is further
agreed, subject to the provisions of Section 9.26, that venue for any such
action shall lie exclusively with courts sitting in Davidson County, Tennessee,
except for matters relating to the Property, which may be heard in a court
sitting in the State of Arizona, unless Lender agrees to the contrary in
writing.
9.8 Not Partners; No Third Party Beneficiaries. The relationship of Lender
and Borrower and the other ARC Entities is that of lender and borrower only, and
neither is a fiduciary, partner or joint venturer of the other for any purpose.
Except as described in the immediately succeeding sentence, this Agreement has
been executed for the sole benefit of Lender, and no third party is authorized
to rely upon Lender's rights or duties hereunder.
9.9 No Reliance on Lender's Analysis. Borrower acknowledges and represents
that, in connection with the Obligations, Borrower has not relied upon any
financial projection, budget, assessment or other analysis by Lender or upon any
representation by Lender as to the risks, benefits or prospects of Borrower's
business activities or present or future capital needs incidental thereto, all
such considerations having been examined fully and independently by Borrower.
9.10 No Marshalling of Assets. Lender may proceed against collateral
securing the Obligations and against parties liable therefor in such order as it
may elect, and neither Borrower nor any surety or guarantor for Borrower nor any
creditor of Borrower shall be entitled to require Lender to marshal assets. The
benefit of any rule of law or equity to the contrary is hereby expressly waived.
9.11 Impairment of Collateral. Lender may, in its sole discretion, release
any collateral securing the Obligations or release any party liable therefor.
The defenses of impairment of collateral and impairment of recourse and any
requirement of diligence on Lender's part in collecting the Obligations are
hereby waived.
9.12 Business Days. If any payment date under the Obligations falls on a
day that is not a Business Day, or if the last day of any notice period falls on
such a day, the payment shall be due and the notice period shall end on the next
following Business Day.
9.13 Participations. Lender may, from time to time, in its sole discretion,
and without notice to Borrower or any other Person, sell participations in any
credit subject hereto to such other investors or financial institutions as it
may elect. Lender may from time to time disclose to any participant or
prospective participant such information as Lender may have regarding the
financial condition, operations, and prospects of Borrower.
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<PAGE> 20
9.14 Standard of Care; Limitation of Damages. Lender shall be liable to the
Borrower only for matters arising from this Agreement or otherwise related to
the Obligations resulting from Lender's gross negligence or willful misconduct,
and liability for all other matters is hereby waived. Lender shall not in any
event be liable to Borrower for special or consequential damages arising from
this Agreement or otherwise related to the Obligations.
9.15 Incorporation of Schedules. All Schedules and Exhibits referred to in
this Agreement are incorporated herein by this reference.
9.16 Indulgence Not Waiver. Lender's indulgence in the existence of a
default hereunder or any other departure from the terms of this Agreement shall
not prejudice Lender's rights to declare a default or otherwise demand strict
compliance with this Agreement.
9.17 Cumulative Remedies. The remedies provided Lender in this Agreement
are not exclusive of any other remedies that may be available to Lender under
any other document or at law or equity.
9.18 Amendment and Waiver in Writing. No provision of this Agreement can be
amended or waived, except by a statement in writing signed by the party against
whom enforcement of the amendment or waiver is sought.
9.19 Assignment. This Agreement shall be binding upon and inure to the
benefit of the respective successors and assigns of Borrower and Lender, except
that Borrower shall not assign any rights or delegate any obligations arising
hereunder without the prior written consent of Lender. Any attempted assignment
or delegation by Borrower without the required prior consent shall be void.
9.20 Entire Agreement. This Agreement and the other written agreements
between the Borrower and Lender represent the entire agreement between the
parties concerning the subject matter hereof, and all oral discussions and prior
agreements are merged herein. Provided, if there is a conflict between this
Agreement and any other document executed contemporaneously herewith with
respect to the Obligations, the provision in this Agreement shall control.
9.21 Severability. Should any provision of this Agreement be declared
invalid or unenforceable for any reason, the remaining provisions hereof shall
remain in full effect.
9.22 Time of Essence. Time is of the essence of this Agreement, and all
dates and time periods specified herein shall be strictly observed.
9.23 Applicable Law. The validity, construction and enforcement of this
Agreement and all other documents executed with respect to the Obligations shall
be determined according to the laws of Tennessee applicable to contracts
executed and performed entirely within
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<PAGE> 21
that state, except for the Deed of Trust, which the parties have agreed shall be
governed by the laws of the State of Arizona.
9.24 Gender and Number. Words used herein indicating gender or number shall
be read as context may require.
9.25 Captions Not Controlling. Captions and headings have been included in
this Agreement for the convenience of the parties, and shall not be construed as
affecting the content of the respective Sections.
9.26 Arbitration. Upon demand of any party hereto, whether made before or
after institution of any judicial proceeding, any dispute, claim or controversy
arising out of, connected with or relating to this Loan Agreement and other Loan
Documents ("Disputes") between or among parties to this Loan Agreement shall be
resolved by binding arbitration as provided herein. Institution of a judicial
proceeding by a party does not waive the right of that party to demand
arbitration hereunder. Disputes may include, without limitation, tort claims,
counterclaims, disputes as to whether a matter is subject to arbitration, claims
brought as class actions, claims arising from Loan Documents executed in the
future, or claims arising out of or connected with the transaction reflected by
this Loan Agreement.
Arbitration shall be conducted under and governed by the Commercial
Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American
Arbitration Association (the "AAA") and Title 9 of the U.S. Code. All
arbitration hearings shall be conducted in the city in which the office of Bank
first stated above is located. The expedited procedures set forth in Rule 51 et
seq. of the Arbitration Rules shall be applicable to claims of less than
$1,000,000. All applicable statutes of limitation shall apply to any Dispute. A
judgment upon the award may be entered in any court having jurisdiction. The
panel from which all arbitrators are selected shall be comprised of licensed
attorneys. The single arbitrator selected for expedited procedure shall be a
retired judge from the highest court of general jurisdiction, state or federal,
of the state where the hearing will be conducted or if such person is not
available to serve, the single arbitrator may be a licensed attorney.
Notwithstanding the foregoing, this arbitration provision does not apply to
disputes under or related to swap agreements.
9.27 Preservation and Limitation of Remedies. Notwithstanding the preceding
binding arbitration provisions, Bank and Grantor agree to preserve, without
diminution, certain remedies that any party hereto may employ or exercise
freely, independently or in connection with an arbitration proceeding or after
an arbitration action is brought. Bank and Grantor shall have the right to
proceed in any court of proper jurisdiction or by self-help to exercise or
prosecute the following remedies, as applicable: (i) all rights to foreclose
against any real or personal property or other security by exercising a power of
sale granted under Loan Documents or under applicable law or by judicial
foreclosure and sale, including a proceeding to confirm the sale; (ii) all
rights of self-help including peaceful occupation of real property and
collection of rents, set-off, and peaceful possession of personal property;
(iii) obtaining provisional or ancillary remedies including injunctive relief,
sequestration, garnishment, attachment, appointment of receiver and
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filing an involuntary bankruptcy proceeding; and (iv) when applicable, a
judgment by confession of judgment. Preservation of these remedies does not
limit the power of an arbitrator to grant similar remedies that may be requested
by a party in a Dispute. Grantor and Bank agree that they shall not have a
remedy of punitive or exemplary damages against the other in any Dispute and
hereby waive any right or claim to punitive or exemplary damages they have now
or which may arise in the future in connection with any Dispute whether the
Dispute is resolved by arbitration or judicially.
9.28 Federal Reserve. Nothing in this or other documents with respect to
this transaction shall prohibit Lender from pledging or assigning the
obligations evidencing this transaction including the collateral securing those
obligations to any Federal reserve Bank in accordance with applicable law.
Executed as of the date first written above.
FORT AUSTIN LIMITED PARTNERSHIP
By: ARC Fort Austin Properties, Inc.
General Partner
By:____________________________________
Title:_________________________________
FIRST UNION NATIONAL BANK OF TENNESSEE,
Lender
By:____________________________________
Title:_________________________________
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<PAGE> 1
EXHIBIT 10.23
CONSTRUCTION LOAN ADDENDUM
This Construction Loan Addendum is hereby incorporated into that certain
Construction Loan Agreement dated March 28, 1997, between FIRST UNION
NATIONAL BANK OF TENNESSEE ("Lender"), and FORT AUSTIN LIMITED PARTNERSHIP
("Borrower").
W I T N E S S E T H
WHEREAS, Lender has agreed to extend a construction loan to Borrower, on
certain terms and conditions; and
WHEREAS, one condition to Lender's agreement to extend credit to Borrower
is that Lender and Borrower must enter into a comprehensive agreement setting
forth the terms and conditions of Borrower's construction loan;
NOW, THEREFORE, as an inducement to cause Lender to extend credit to
Borrower, and for other valuable consideration, the receipt and sufficiency of
which are acknowledged, it is agreed as follows:
ARTICLE I.
DEFINITIONS
As used in this Agreement, in addition to the definitions contained in the
Agreement, the following words have the definitions indicated below unless
context clearly requires otherwise:
1.1. Appraisal means that Appraisal dated December 3, 1996, whereby Alan C.
Plush, MAI, of Gulf/Atlantic Valuation Services, Inc. appraises the value of the
Project, "as completed," as $11,100,000.00 and "future stabilized" as
$13,200,000.00.
1.2. Architect means Earl Swensson Associates, Inc.
1.3. Architect Contract means that contract for architectural services
relative to the construction of the Improvements dated February 20, 1997,
between Borrower and the Architect.
1.4. Budget means a written schedule of the Construction Costs and the
Non-construction costs as estimated by Borrower for completion of the Project.
<PAGE> 2
1.5. Building Permit means all permits necessary for the completion of the
Improvements according to the Plans and Specifications.
1.6. Business Day means any day on which Lender is open for business.
1.7. Completion Date means April 30, 1998.
1.8. Construction Contract means that contract for the construction of the
Improvements on a "fixed price" basis (or "cost plus" basis with guaranteed
maximum) dated _________________, 199_, between Borrower and the Contractor.
1.9. Construction Costs means all costs set forth in the Budget for
construction labor, materials, fixtures and furnishings incurred and to be
incurred in the development of the Project.
1.10. Construction Inspector means EMJ Construction Consultants, Inc.
1.11. Contractor means The Weitz Company, Inc.
1.12. Dual Obligee Performance Bond means that dual obligee bond issued by
American Home Assurance Company in favor of Borrower and Lender insuring
construction of the Improvements according to the Plans and Specifications.
1.13. Encumbrances means the liens of all real estate taxes, personal
property taxes, and other taxes and assessments; deeds of trust; mortgages;
judgment liens; restrictive covenants; easements; and other presently existing
or hereafter created restrictions or other encumbrances.
1.14. GECC means General Electric Capital Corporation.
1.15. Improvements means a building of approximately 97,500 square feet to
be constructed upon the Land according to the Plans and Specifications and all
other improvements to the Land incident thereto.
1.16. Land means the real property described in Exhibit A hereto.
1.17. Non-Construction Costs means all costs set forth in the Budget for
interest, architects fees, surveyors fees, attorneys fees, loan fees, costs for
land acquisition or the release of prior encumbrances and other costs, other
than Construction Costs, to be incurred in the development of the Project.
1.18. Plans means those plans dated November 20, 1996, with revisions dated
January 14, 1997, prepared by the Architect.
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<PAGE> 3
1.19. Project means the Land and the Improvements.
1.20. Project Manager means Knestrick Management, Inc. (KMI).
1.21. Specifications means those specifications dated November 20, 1996,
prepared by the Architect.
1.22. Survey means that survey of the Land dated December 20, 1995,
prepared by Ashby Survey & Drafting, Inc.
1.23. Title Company means First American Title Insurance Company.
1.24. Tri-Party Agreement means that agreement among Borrower, Lender, and
GECC relating to the Project.
ARTICLE II.
LOAN DOCUMENTS
2.1. Security Documents. Concurrently with the execution of this Agreement,
Borrower shall provide Lender with the following documents to evidence and
secure the Construction Loan, in form and substance satisfactory to Lender:
(a) Promissory Note made by Borrower in the original principal amount
of Eleven Million Six Hundred Thousand Dollars ($11,600,000.00),
payable to the order of Lender.
(b) Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing encumbering the Project in favor of Lender,
subject only to the Permitted Encumbrances.
(c) Collateral Assignment of Construction Contract granting Lender a
first priority security interest in the Construction Contract.
(d) Collateral Assignment of Architect Contract granting Lender a
first priority security interest in the Architect Contract.
(e) Collateral Assignment of Project Management Contract granting
lender a first priority security interest in the Project
Management Contract.
(f) U.C.C. Financing Statements for filing with the Arizona Secretary
of State and the Office of the County Recorder for Pima County,
Arizona.
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<PAGE> 4
(g) Other Documents as Lender may require to evidence and secure the
Construction Loan.
2.2. Other Closing Documents. Concurrently with the execution of this
Agreement, Borrower shall provide Lender with the following additional
documents, in form and substance satisfactory to Lender:
(a) Certificate of Borrower's Good Standing under applicable law
issued by the Secretary of State within thirty (30) days of the
date hereof.
(b) Certified Copy of Resolution of Borrower's Board of Directors
executed by Borrower's Secretary authorizing a named officer or
officers of Borrower to enter into this Agreement and to execute
all related documents on Borrower's behalf, and including the
Secretary's certification of the incumbency of such officer or
officers.
(c) Closing Statement listing disbursements for all closing expenses
and for the initial draw under the Construction Loan.
(d) Legal Opinion executed by Borrower's counsel addressing such
matters as Lender shall require.
(e) Evidence of Insurance as required by Article _____ hereof.
(f) Commitment of the Title Company to issue a mortgagee title
insurance policy naming Lender as the holder of a first lien on
the Project, subject only to the Permitted Encumbrances.
(g) Owner's Affidavit sufficient to induce the title company to
delete all standard exceptions from Lender's mortgagee title
insurance policy.
(h) Construction Inspector's Contract among Borrower, Lender, GECC,
and the Construction Inspector providing for inspections of the
Project by the Construction Inspector.
(i) Program Management Consultant Agreement between Borrower and
Project Manager providing for certain construction management
services.
(j) Contractor's Acknowledgment of assignment of the Construction
Contract.
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<PAGE> 5
(k) Architect's Acknowledgment of assignment of the Architect
Contract.
(l) The Plans.
(m) The Specifications.
(n) The Budget.
(o) The Construction Contract.
(p) The Architect Contract.
(q) The Appraisal.
(r) The Survey and Surveyor's Report sufficient to induce the Title
Insurance Company to delete any exception for matters
determinable by survey from Lender's mortgagee title insurance
policy.
(s) The Dual Obligee Performance Bond.
(t) Copies of all Building Permits.
(t) Unlimited Guaranties by each of the ARC Entities other than
Borrower and ARCLP-Charlotte, L.L.C. Such guaranties shall be
secured by all collateral currently securing obligations of such
entities to Lender.
(u) Tri-Party Agreement among Borrower, Lender and GECC.
(u) Other Documents as Lender may require in connection with the
closing of the Construction Loan.
2.3. Delivery of Closing Documents as Conditions Precedent to Advances. If
any of the Loan Documents are not delivered to Lender concurrently with the
execution hereof, the delivery of the remainder of the Loan Documents in form
and substance acceptable to Lender shall be an express condition precedent to
Lender's making of any advances under the Construction Loan. Lender may waive
this condition as to an advance for closing costs or for any other advance by
allowing the funding thereof; provided, however, Lender's making of any such
advance(s) shall not be considered a waiver of this condition as to future
advance requests, unless Lender specifically so agrees in writing.
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<PAGE> 6
ARTICLE III.
INSURANCE
3.1. Insurance During Construction. During construction of the Project, the
following insurance policies shall be maintained in force:
(a) The Improvements and all related construction equipment, supplies
and materials shall be insured against "all risks of physical
loss," including collapse and transit coverage, under a builder's
risk insurance policy in "replacement cost" or "completed value"
form. The deductible under said policy shall not exceed
$1,000.00. The provisional value stated in said policy, if in
"completed value" form, shall not be less than the maximum
insurable value of the Project "as completed." Said policy shall
also contain the "permission to occupy upon completion of work"
endorsement.
(b) The employees of the contractor and all subcontractors employed
with respect to the Project shall be covered by worker's
compensation insurance in such amounts as the law requires.
(c) Public liability insurance shall be maintained covering the acts
of Borrower, the general contractor, subcontractors, and their
employees. Such policy shall insure against all claims for
personal injury and death on an occurrence basis in an amount not
less than $1,000,000 per occurrence.
3.2. Insurance After Construction. Borrower covenants to keep the following
insurance policies in force upon the substantial completion of the Improvements:
(a) The Improvements shall be insured against fire and other hazards
included in coverage against "all risks of physical loss," under
a policy with a deductible of not more than $10,000.00 and with
the "replacement cost" endorsement.
(b) All employees of Borrower whose employment pertains to the
Project shall be covered by worker's compensation insurance in
such amounts as are required by law.
(c) Borrower shall be covered by a comprehensive public liability
insurance policy including coverage for elevators and escalators
and providing completed operations coverage. Such policy shall
insure against all claims for personal injury and death on an
occurrence basis in an amount not less than $1,000,000.00 per
occurrence.
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<PAGE> 7
(d) Borrower shall maintain business interruption insurance and/or
"loss of rental value" insurance providing coverage for at least
a six (6) month period.
(e) Borrower shall insure all personalty on the Project against,
fire, theft, and other hazards as Lender may require.
(f) Borrower shall maintain such other insurance as Lender may
reasonably require.
3.3. Insured Mortgagee. All required policies of property insurance shall
name Lender as insured first mortgagee under a noncontributing mortgagee clause
acceptable to Lender. All liability policies shall name Lender as an additional
insured. Said policies shall also provide that they will not be canceled or the
coverage thereunder reduced or restricted in any way without Lender being given
at least thirty (30) days prior written notice.
3.4. Delivery of Policies, Payment of Premiums. All required policies of
insurance shall be issued by companies and in amounts, form and substance
satisfactory to Lender. Borrower shall furnish Lender with the originals of all
required insurance policies. At least thirty (30) days prior to the expiration
of each such policy, Borrower shall furnish Lender with evidence satisfactory to
Lender of the insurer's agreement to reissue said policy and of the payment of
the premium for reissuance. If Borrower fails to maintain and furnish to Lender
the policies of insurance required by this Article, Lender may obtain such
insurance or single-interest insurance for such risks covering Lender's
interest. All expenses incurred by Lender in obtaining such insurance shall be
deemed additional advances for the benefit of Borrower under the Construction
Loan.
3.5. Insurance Proceeds. Borrower agrees to give Lender prompt written
notice of any casualty to the Project. The proceeds of any insurance policy
pertaining to the Project shall be paid directly to Lender, but may be used by
Borrower to restore the Project so long as no Event of Default has occurred and
is continuing. If an Event of Default has occurred and is continuing, then
Lender may apply said proceeds, in its sole discretion, (i) to the reduction of
the Obligations, (ii) to the restoration of the Improvements, or (iii) to
Borrower with or without restriction. Borrower hereby directs all issuers of
insurance policies relating to the Project to pay all amounts due thereunder
directly to Lender and Borrower hereby appoints Lender as Borrower's
attorney-in-fact to receive any sums due under insurance policies concerning the
Project, to endorse any drafts or instruments received under such policies, and
to make proof of loss for, settle, and give binding acquittances for claims
under such policies.
3.6. Assignment of Policies Upon Foreclosure. If all or part of Project is
sold at foreclosure, all policies of insurance pertaining to the Project and
then in force shall pass to the purchaser at such sale.
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ARTICLE IV.
DISBURSEMENTS
4.1. Disbursement Requests. The administration of disbursements under the
Construction Loan shall be conducted according to the following:
(a) Form and Delivery of Requests. Disbursement requests shall be
submitted in writing on AIA Form G702 (with schedules attached)
to the following address or such other address as Lender may
direct:
First Union Corporation
Construction Loan Administration
Attention: Lisa Brown
P.O. Box 740074
Atlanta, GA 30374
or
200 East Ponce de Leon
First Floor
Decatur, GA 30030
If Lisa Brown is not available, disbursement requests may be submitted
to any other officer at that office of Lender. Each disbursement
request must be signed by Borrower, the Contractor, the Project
Manager, and the Architect, and must be accompanied by a certificate
signed by the Construction Inspector in form and substance
satisfactory to Lender. If Borrower satisfies the conditions stated in
herein, disbursements shall be funded within five (5) Business Days of
request. Invoices shall be submitted for disbursements of $5,000.00 or
more.
(b) Frequency and Amount of Disbursements. Lender shall not be
obligated to make disbursements more frequently than monthly.
Borrower shall request no disbursement (except the final
disbursement) for an amount less than $500,000.00.
(c) Application of Disbursements; Retainage. Borrower's draw requests
shall be made only for Non-Construction Costs actually incurred
and for Construction Costs actually incurred and arising from
labor performed and materials incorporated into the Project, with
advances for Construction Costs to be subject to a ten percent
(10%) retainage (other than the contractor's fee and general
conditions) to be administered in accordance with applicable law
until such time as the Project is fifty percent (50%) complete,
after which subsequent draws shall not be subject any further
retainage.
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<PAGE> 9
No disbursements shall be made for materials stored off the
Project site. Borrower shall apply each disbursement to the
expenses itemized in the disbursement request.
(d) Additional Documents. Lender may require that affidavits,
certificates, receipts or other written evidence satisfactory to
Lender of any or all of the following be submitted with
disbursement requests:
(i) The percentage of completion of the Improvements and the
value of the Improvements already completed;
(ii) That Borrower is not in default under any document
pertaining to the Obligations;
(iii) That all construction has been performed in accordance with
the Plans and Specifications;
(iv) That the Dual Obligee Performance Bond is in full effect;
(v) That all funds previously disbursed by Lender have been
applied directly to the costs of construction of the
Improvements or to the payment of other costs permitted
under this Agreement, allocated as represented in the
disbursement requests submitted to Lender;
(vi) That the amount of undisbursed Construction Loan proceeds is
sufficient to pay the costs of completing the Improvements
in accordance with the Plans and Specifications; and
(vii) That the time remaining before the Completion Date is
sufficient to allow the timely completion of construction of
the Project.
(viii) Such other matters as Lender may reasonably require.
4.2. Conditions Precedent to Disbursements. Lender's obligation to disburse
proceeds of the Construction Loan is subject to the following conditions:
(a) Truth of Warranties. All warranties made herein and in the other
Loan Documents must be true as of the date of the submission of
the disbursement request.
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<PAGE> 10
(b) Compliance with Covenants. All covenants made herein and in the
other Loan Documents must be fully complied with as of the date
of submission of the disbursement request.
(c) No Default. Borrower must not be in default under this Agreement
or under any other of the Loan Documents and no condition shall
exist that with the giving of notice, the passing of time, or
both, would constitute a default under this Agreement or under
any other of the Loan Documents.
(d) Disbursement Documentation. Lender must be satisfied that the
requirements stated herein above have been satisfied.
(e) Compliance with Budget. The requested disbursement must not cause
any expense itemized in the Budget to exceed its budgeted amount
or violate the terms of the Tri-Party Agreement.
(f) Warranties Implied in Request. The submission of a request for
advance hereunder shall constitute a warranty by Borrower that
conditions stated in (a), (b) and (c) above are satisfied as of
the date of the request.
4.3. Additional Conditions to Final Disbursement. In addition to the other
conditions set forth above, the delivery of the following documents to Lender
shall be a condition precedent to the final disbursement of retainage amounts:
(a) Architect's Certificate. A certificate of the Architect addressed
to Lender stating that the construction of the Project has been
completed in a good and workmanlike manner and in material
compliance with the Plans and Specifications.
(b) Construction Inspector's Certificate. A certificate of the
Construction Inspector addressed to Lender stating that the
construction of the Project has been completed in a good and
workmanlike manner and in material compliance with the Plans and
Specifications.
(c) Certificate of Occupancy. The original permanent Certificate of
Occupancy for the Project.
(d) Contractor's Affidavit. An affidavit of the Contractor addressed
to Lender stating that all suppliers of labor and/or materials
for the Project have been paid without any continuing dispute
over the charges or value of their materials or services, or that
the final
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<PAGE> 11
disbursement will be sufficient to pay all such charges in full,
with no such dispute. Lender may also require the filing of a
notice of completion to determine the remaining claims against
the Project for labor and materials.
(e) Final Survey. A final updated survey of the Project, showing all
Improvements.
4.4. Disposition of Advances. All disbursements under the Construction Loan
shall be made by crediting a special account of Borrower at Lender, which
account shall only be used by Borrower for depositing and disbursing
Construction Loan proceeds. Lender, in its sole discretion, may choose to make
any or all disbursements under the Construction Loan directly to the appropriate
general contractor, subcontractor, laborer or materials furnisher, whether or
not a disbursement has been requested by Borrower. Any amounts advanced by
Lender directly to any of such persons or entities shall be deemed additional
advances under the Construction Loan.
4.5. Advance Not Waiver. No advance of Construction Loan proceeds hereunder
shall constitute a continuing waiver of any of the conditions to Lender's right
to declare a default or otherwise demand strict compliance with this Agreement,
unless Lender agrees to the contrary in a writing specifically referring to this
Paragraph.
4.6. Draws by Debit Memorandum. Lender may, without prior notice to
Borrower, draw any amount available under the Construction Loan to pay any
interest or expenses that are not timely paid by Borrower.
ARTICLE V.
ADDITIONAL WARRANTIES AND COVENANTS
5.1. Leases. Borrower covenants to deliver to Lender, prior to their
execution, copies of all leases of the Project which shall be in form and
content satisfactory to Lender.
5.2. Lien Waivers and Contractor Affidavits. Upon Lender's request,
Borrower shall cause the Contractor to furnish to Lender copies of all
subcontracts and purchase orders relating to construction of the Project.
Borrower shall also cause the Contractor to furnish to Lender, upon request,
statements from the Contractor and from each subcontractor and supplier (i)
stating the amount of its contract and the amount paid to date; and (ii) stating
the amount currently due for work done and materials supplied.
5.3. Plans and Specifications. The construction of the Improvements shall
be performed according to the Plans and Specifications. No changes shall be made
in the Plans and Specifications without the prior written approval of Lender,
except for changes which meet the requirements set forth in the Tri-Party
Agreement for changes not requiring prior approval. All change orders shall be
submitted on standard AIA forms.
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<PAGE> 12
5.4. Access to Project. Borrower agrees to give the Construction Inspector
and Lender's agents and independent contractors access to the Project at all
times for the purpose of inspecting the progress of construction of the
Improvements. Any inspection conducted on behalf of Lender shall be for Lender's
benefit alone, and Lender's continued funding of construction after any
inspection does not imply that Lender has determined or assured that the
Improvements are being constructed in a safe manner or in accordance with the
Plans and Specifications.
5.5. Indemnification. Borrower acknowledges that it has already begun site
preparation work on the Project and agrees to provide an Indemnification
Agrement to the Title Insurance Company and to take such other actions as the
Title Insurance Company may require to affirmatively insure Lender against
mechanic's liens.
5.6. Zoning. Borrower warrants that the Project is suitably zoned to permit
construction on the Project pursuant to the Plans and Specification, and to
permit the operation of the Project for its intended use as a retirement living
facility.
5.7. Utilities. Borrower warrants that all adequate utility services for
water, sewerage, electricity, gas, and telephone services are available at the
Project and can be accessed upon payment of only the ordinary tap or hook-up
fees charged by the respective utility companies.
5.8. Subsurface Conditions. Borrower warrants that it has tested subsurface
conditions on the Project and that no condition exists that may reasonably be
expected to interfere with or delay the construction of the Improvements or the
operation thereof after completion. Without limiting the foregoing, Borrower
warrants that excavation for the Improvements is not expected to require the
blasting and/or removal of rock in excess of the amount, if any, itemized in the
Budget.
5.9. No Flood Risk. Borrower warrants that except as shown on the survey
provided to Lender, none of the Project is within the 100-year flood plain or
flood way as determined by the Department of Housing and Urban Development or by
the Army Corps of Engineers, and that the Project is not otherwise known or
believed to be a flood risk.
5.10. No Off-Site Construction. Borrower warrants that the construction of
the Improvements and the operation thereof when completed does not require the
construction of any sewer lines, water detention ponds, sewage treatment plants,
roads, or other improvements that will not be located on the Project.
5.11. Adequacy of Budget. Borrower warrants that the Budget provides
sufficient funds to complete construction of the Improvements according to the
Plans and Specifications, which provide for all of the improvements that
Borrower intends to make on the Project.
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<PAGE> 13
5.12. Commencement and Completion of Construction. Borrower agrees to
commence construction of the Improvements within ten (10) days after the date of
this Agreement, and to diligently pursue such construction to completion on or
before the Completion Date in one continuous operation.
5.13. Construction Sign. Borrower agrees to promptly erect and maintain on
the Project a conspicuous project identification sign, which shall be at least
four feet by eight feet in size and which shall name Lender as construction
lender, in a format to be approved by Lender.
5.14. Books and Records. Borrower covenants to maintain complete and
accurate books and records reflecting all items of income and expense in
connection with the acquisition and construction of the Project. Borrower agrees
to make its books and records available to Lender for inspection upon request.
5.15. Notification of Claims by Subcontractors and Materialmen. Borrower
agrees to give Lender prompt written notice if Borrower receives any notice,
whether written or oral, from any laborer, subcontractor or materialman to the
effect that such party has not been paid when due for any labor or materials
furnished in connection with the construction of the Improvements.
5.16. No Violation of Laws; Permits. Borrower warrants that the
construction and operation of the Improvements will not violate in any material
respect any applicable law or regulation including, but not limited to, any law
or regulation pertaining to sewage disposal or any other environmental impact of
the Project. Borrower further warrants that all permits from necessary health
departments and other regulatory agencies that will be required to allow the
construction or operation of the Project have been obtained or, if not, the
appropriate aspect of the Plans and Specifications have been approved in writing
by such departments or agencies.
5.17. Update of Survey. After completion of the foundation stage of
construction, Lender shall be provided with an updated survey of the Project
showing the location of all improvements. Upon completion of the Project, Lender
shall be provided with a final survey of the Project so as to show the
Improvements and all appurtenances as constructed.
5.18. Capacity. Borrower warrants that it is and shall remain a duly
organized Texas limited partnership. Borrower further warrants that the
execution of all necessary consents, partnership resolutions, or other documents
has been duly performed so that the partner signing this Agreement and all
related documents on behalf of Borrower is duly authorized to bind Borrower by
his signature.
5.19. Changes in Financial Condition. Borrower covenants to give Lender
prompt written notice of the creation or discovery of any additional contingent
liability or the occurrence of any other material adverse change in the
financial condition of Borrower or of any guarantor or other person or entity
presently or hereafter liable for payment of all or part of the Obligations.
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<PAGE> 14
5.20. Default Certificates. Within two (2) business days after written
request by Lender, Borrower shall provide Lender with the written certificate of
Borrower's president, general partner or other appropriate representative
stating whether, to the best of the representative's knowledge, information, and
belief, a default exists hereunder, or whether any condition or event exists
which, with the giving of notice, the passage of time, or both, would constitute
such a default. Any such defaults, events or conditions shall be described with
particularity. The certificate shall further address any specific matters
inquired of by Lender regarding possible defaults under this Agreement.
5.21. No Unpaid Taxes. Borrower warrants that Borrower is not presently
delinquent in the payment of any taxes imposed by any governmental authority or
in the filing of any tax return and that Borrower is not involved in a dispute
with any taxing authority over tax amounts due. Borrower covenants that all
future taxes assessed against Borrower shall be timely paid and that all tax
returns required of Borrower shall be timely filed.
5.22. Compliance with Law. Borrower warrants that Borrower's business
activities are conducted in accordance in all material respects with all
applicable laws and regulations, the violation of which would have a Material
Adverse Effect, and Borrower covenants that such activities shall continue to be
so conducted.
5.23. Assistance in Litigation. Borrower covenants to, upon request,
cooperatively participate in any proceeding in which Borrower is not an adverse
party to Lender and which concerns Lender's rights regarding the Obligations or
any collateral securing its payment.
5.24. Name. Borrower warrants that Borrower has not been known under or
done business (except that project referred to as ______________) under any name
other than the name used by Borrower in executing this Agreement. Borrower
agrees to give Lender at least fifteen (15) days prior written notice before
Borrower begins using any name other than that used in executing this Agreement.
5.25. Security Interest; Setoff. In order to further secure the payment of
the Obligations, Borrower hereby grants to Lender a security interest and right
of setoff against all of Borrower's presently owned or hereafter acquired
monies, items, credits, deposits and instruments (including certificates of
deposit) presently or hereafter in the possession of Lender. By maintaining any
such accounts or other property at Lender, Borrower acknowledges that Borrower
voluntarily subjects the property to Lender's rights hereunder.
5.26. Expenses. Upon demand, Borrower will advance to Lender or, at
Lender's option, reimburse Lender for, the following expenses:
(a) Taxes. All taxes that Lender may be required to pay because of
the Obligations (other than income taxes) or because of Lender's
interest in any property securing the payment of the Obligations;
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<PAGE> 15
(b) Administration. All expenses that Lender may incur in connection
with the preparation, execution, or enforcement of this Agreement
or of any other document pertaining to the Obligations;
(c) Protection of Collateral. All costs of preserving, insuring,
preparing for sale (whether by improvement, repair or otherwise)
or selling any collateral securing the Obligations;
(d) Costs of Collection. All court costs and other costs of
collecting any debt, overdraft or other obligation included in
the Obligations, including compensation for time spent by
employees of Lender;
(e) Litigation. All costs arising from any litigation, investigation,
or administrative proceeding (whether or not Lender is a party
thereto) that Lender may incur as a result of the Obligations or
as a result of Lender's association with Borrower, including, but
not limited to, expenses incurred by Lender in connection with a
case or proceeding involving Borrower under any chapter of the
Bankruptcy Code or any successor statute thereto;
(f) Attorneys Fees. Reasonable attorneys' fees incurred in connection
with any of the foregoing.
If Lender pays any of the foregoing expenses, they shall become a part of the
Obligations and shall bear interest at the lower rate of Prime plus 4% per annum
or the highest lawful rate. This Paragraph shall remain in full effect
regardless of the full payment of the Obligations, the purported termination of
this Agreement, the delivery of the executed original of this Agreement to
Borrower, or the content or accuracy of any representation made by Borrower to
Lender. Provided, Lender may terminate this Paragraph by executing and
delivering to Borrower a written instrument of termination specifically
referring to this Paragraph.
5.27. Further Assurances. Borrower covenants to execute such other
assignments, security agreements, financing statements, and other documents that
Lender may deem necessary to further evidence the obligations provided for
herein or to perfect, extend, or clarify Lender's rights in any property
securing or intended to secure the Obligations. Lender is hereby appointed as
Borrower's attorney-in-fact for the signing of such documents. Borrower
acknowledges that this power of attorney is coupled with an interest and is
irrevocable.
5.28. Recitals. Borrower warrants and agrees that the recitals set forth at
the beginning of this Agreement are true.
5.29. No Burdensome Agreements. Borrower warrants that Borrower is not a
party to any contract or agreement and is not subject to any contingent
liability that does or may impair Borrower's ability to perform under the terms
of this Agreement. Borrower further
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<PAGE> 16
warrants that the execution and performance of this Agreement will not cause a
default under any other contract or agreement to which Borrower or any property
securing the Obligations or any other property of Borrower is subject.
5.30. Legal and Binding Agreement. Borrower warrants that the execution and
performance of this Agreement will not violate any judicial or administrative
order or governmental law or regulation, and that this Agreement is valid and
binding in every respect according to its terms.
5.31. No Consent Required. Borrower warrants that Borrower's execution and
performance of this Agreement do not require the consent of or the giving of
notice to any third party including, but not limited to, any other lender,
governmental body or regulatory authority.
ARTICLE VI.
DEFAULT
6.1. Remedies Upon Default. Upon the occurrence of a default under this
Agreement that continues for more than thirty (30) days after the earlier of (i)
Borrower's actual knowledge of such default, or (ii) written notice thereof from
Lender, Lender may pursue any or all of the following remedies, without notice
to Borrower:
(a) Possession of Project. Lender may take exclusive possession of
the Project without the appointment of a receiver and without
prior notice to Borrower. Borrower hereby waives the benefit of
any rule of law or equity requiring notice or delay in Lender's
taking possession of the Project upon default. Lender shall not
be liable to Borrower or to any third party for any damages,
including damages for breach of any contract, that might result
from Lender's exercise of its remedies hereunder and its
ejectment, by detainer action or otherwise, of Borrower or of any
general contractor, subcontractor, or other party from the
Project. Lender may, but shall not be obligated to, retain
security guards or take other measures to protect the Project.
(b) Additional Construction. Lender may continue or resume
construction on the Project pursuant to the Plans and
Specifications or pursuant to such variations thereof or other
plans or specifications as Lender may deem appropriate. Any
construction so caused by Lender may be terminated by Lender at
any time, in its discretion. In furtherance of construction,
Lender may take any of the following action:
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<PAGE> 17
(i) Lender may retain such contractors, subcontractors,
architects, engineers, laborers, and other persons and firms
as it may elect. Lender shall not be required to use any
particular person or firm because the person or firm had a
prior contract with Borrower.
(ii) Lender may purchase construction materials and supplies from
such sources as it may elect. Lender shall not be required
to use any particular supplier, because the supplier had a
prior contract with Borrower.
(iii) Lender may pay, litigate or compromise any claim for labor,
professional services or materials that may result in a lien
upon the Project.
(iv) Lender may make any applications or give any certificates
with respect to the Project including, but not limited to,
applications pertaining to zoning variances and other
applications to regulatory agencies.
(v) Lender may take any other action it may deem necessary to
protect the Project, to promote construction thereon, or to
enhance the value or marketability of the Project.
(c) Marketing of Project. Lender may retain a broker or real estate
agent to attempt to seek a buyer for all or part of the Project
on commission terms deemed reasonable by Lender, including a
retainer that may be paid whether or not the Project is sold as a
result of the broker or agent's efforts.
(d) Preservation of Financing. Lender may take any action necessary
to cure or prevent a default under any other lender's commitment
to provide financing with respect to any or all of the Project.
(e) Attorney-in-Fact. Any action taken by Lender pursuant to its
remedies hereunder may be taken by Lender in its own name or in
the name of Borrower. Borrower hereby appoints Lender as
Borrower's attorney-in-fact, with full power of substitution, to
take any action authorized by this Agreement on Borrower's
behalf. The parties acknowledge that this power of attorney is
coupled with an interest and is irrevocable. Without limiting the
foregoing, Lender is specifically authorized to initiate, pursue,
settle or dismiss judicial or administrative proceedings
pertaining to the Project.
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<PAGE> 18
(f) Expenses. All expenses incurred by Lender in the pursuit of
remedies hereunder, including, but not limited to, the expenses
of construction and reasonable attorneys' fees, shall be deemed
additional advances for the benefit of Borrower under the
Construction Loan.
(g) Setoff. Lender may exercise its lien upon and right of setoff
against any monies, items, credits, deposits or instruments that
Lender may have in its possession and which belong to Borrower or
any other person or entity liable for the payments of any or all
of the Secured Indebtedness.
(h) Other Remedies. Lender may pursue any other remedies available
under any other document evidencing or securing the Obligations
or otherwise available to Lender at law or equity.
6.2. Application of Proceeds. All amounts received by Lender for Borrower's
account shall be applied as follows: First, to the payment of all expenses
incurred by Lender in exercising its rights hereunder, including attorney's
fees, and any other expenses due Lender from Borrower; Second, to the payment of
all interest due Lender; Third, to the payment of all principal due Lender, in
such order as Lender may elect; and Fourth, surplus to Borrower.
FORT AUSTIN LIMITED PARTNERSHIP
By: ARC Fort Austin Properties, Inc.
General Partner
By:___________________________________________
Title:________________________________________
FIRST UNION NATIONAL BANK OF TENNESSEE, Lender
By:___________________________________________
Title:________________________________________
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<PAGE> 1
EXHIBIT 10.24
CONSTRUCTION LOAN PROMISSORY NOTE
$11,600,000.00 Nashville, Tennessee March 28, 1997
FOR VALUE RECEIVED, FORT AUSTIN LIMITED PARTNERSHIP ("Maker"), a Texas
limited partnership, promises to pay to the order of First Union National Bank
of Tennessee ("Payee"), a national banking association, the sum of Eleven
Million Six Hundred Thousand Dollars ($11,600,000.00) together with interest
thereon as provided in that certain Construction Loan Agreement of even date
herewith between Maker and Payee (the "Construction Loan Agreement"). Payments
of principal and interest on the outstanding principal balance hereunder shall
be made as provided in the Construction Loan Agreement. All remaining principal
and interest shall be due and payable on June 30, 1998.
Interest hereunder shall be calculated based upon a 360-day year and actual
days elapsed. The interest rate required hereby shall not exceed the maximum
rate permissible under applicable law, and any amounts paid in excess of such
rate shall be applied to reduce the principal amount hereof or shall be refunded
to Maker, at the option of the holder of this Note.
All amounts due under this Note are payable at par in lawful money of the
United States of America, at the principal place of business of Payee in
Nashville, Tennessee, or at such other address as the Payee or other holder
hereof (herein "Holder") may direct.
To the maximum extent permitted under applicable law, any payment not made
within fifteen (15) days of its due date will be subject to assessment of a late
charge equal to five percent (5%) of such payment. Holder's right to impose a
late charge does not evidence a grace period for the making of payments
hereunder.
The occurrence of any Event of Default under the Construction Loan
Agreement shall constitute an Event of Default hereunder. Upon the occurrence of
an Event of Default, as so defined, Holder may, at its option and without
notice, declare all principal and interest provided for under this Note, and any
other obligations of Maker to Holder, to be presently due and payable, and
Holder may enforce any remedies available to Holder under any documents securing
or evidencing debts of Maker to Holder. Holder may waive any Event of Default
before or after it occurs and may restore this Note in full effect without
impairing the right to declare it due for a subsequent Event of Default, this
right being a continuing one. Following the occurrence of an Event of Default,
the remaining unpaid principal balance of the indebtedness evidenced hereby and
all expenses due Holder shall bear interest at the default rate set forth in the
Construction Loan Agreement.
All amounts received for payment of this Note shall be first applied to any
expenses due Holder under this Note or under any other documents evidencing or
securing obligations of Maker to Holder, then to accrued interest, and finally
to the reduction of principal. Prepayment of principal or accrued interest may
be made, in whole or in part, at any time, without premium or penalty. Any
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<PAGE> 2
partial prepayment(s) shall reduce the final payment(s) and shall not reduce or
defer installments next due.
This Note may be freely transferred by Holder.
Maker and all sureties, guarantors, endorsers and other parties to this
instrument hereby consent to any and all renewals, waivers, modifications, or
extensions of time (of any duration) that may be granted by Holder with respect
to this Note and severally waive demand, presentment, protest, notice of
dishonor, and all other notices that might otherwise be required by law. All
parties hereto waive the defense of impairment of collateral and all other
defenses of suretyship.
Maker and all sureties, guarantors, endorsers and other parties hereto
agree to pay reasonable attorneys' fees and all court and other costs that
Holder may incur in the course of efforts to collect the debt evidenced hereby
or to protect Holder's interest in any collateral securing the same.
The validity and construction of this Note shall be determined according to
the laws of Tennessee applicable to contracts executed and performed within that
state. If any provision of this Note should for any reason be invalid or
unenforceable, the remaining provisions hereof shall remain in full effect.
The provisions of this Note may be amended or waived only by instrument in
writing signed by the Holder and Maker and attached to this Note.
Words used herein indicating gender or number shall be read as context may
require.
Arbitration. Upon demand of any party hereto, whether made before or after
institution of any judicial proceeding, any dispute, claim or controversy
arising out of, connected with or relating to this Note and other Loan Documents
("Disputes") between or among parties to this Note shall be resolved by binding
arbitration as provided herein. Institution of a judicial proceeding by a party
does not waive the right of that party to demand arbitration hereunder. Disputes
may include, without limitation, tort claims, counterclaims, disputes as to
whether a matter is subject to arbitration, claims brought as class actions,
claims arising from Loan Documents executed in the future, or claims arising out
of or connected with the transaction reflected by this Note.
Arbitration shall be conducted under and governed by the Commercial
Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American
Arbitration Association (the "AAA") and Title 9 of the U.S. Code. All
arbitration hearings shall be conducted in Nashville, Tennessee. The expedited
procedures set forth in Rule 51 et seq. of the Arbitration Rules shall be
applicable to claims of less than $1,000,000. All applicable statutes of
limitation shall apply to any Dispute. A judgment upon the award may be entered
in any court having jurisdiction. The panel from which all arbitrators are
selected shall be comprised of licensed attorneys. The single arbitrator
selected for expedited procedure shall be a retired judge from the highest court
of general jurisdiction, state or federal, of the state where the hearing will
be conducted or if such person is not available to serve,
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<PAGE> 3
the single arbitrator may be a licensed attorney. Notwithstanding the foregoing,
this arbitration provision does not apply to disputes under or related to swap
agreements.
Preservation and Limitation of Remedies. Notwithstanding the preceding
binding arbitration provisions, Payee and Maker agree to preserve, without
diminution, certain remedies that any party hereto may employ or exercise
freely, independently or in connection with an arbitration proceeding or after
an arbitration action is brought. Payee and Maker shall have the right to
proceed in any court of proper jurisdiction or by self-help to exercise or
prosecute the following remedies, as applicable: (i) all rights to foreclose
against any real or personal property or other security by exercising a power of
sale granted under Loan Documents or under applicable law or by judicial
foreclosure and sale, including a proceeding to confirm the sale; (ii) all
rights of self-help including peaceful occupation of real property and
collection of rents, set-off, and peaceful possession of personal property;
(iii) obtaining provisional or ancillary remedies including injunctive relief,
sequestration, garnishment, attachment, appointment of receiver and filing an
involuntary bankruptcy proceeding; and (iv) when applicable, a judgment by
confession of judgment. Preservation of these remedies does not limit the power
of an arbitrator to grant similar remedies that may be requested by a party in a
Dispute.
Maker and Payee agree that they shall not have a remedy of punitive or exemplary
damages against the other in any Dispute and hereby waive any right or claim to
punitive or exemplary damages they have now or which may arise in the future in
connection with any Dispute whether the Dispute is resolved by arbitration or
judicially.
Federal Reserve. Nothing in this or other documents with respect to this
transaction shall prohibit Lender from pledging or assigning the obligations
evidencing this transaction including the collateral securing those obligations
to any Federal Reserve Bank in accordance with applicable law.
FORT AUSTIN LIMITED PARTNERSHIP
By: ARC Fort Austin Properties, Inc.
General Partner
By:______________________________
Title:___________________________
Page 3 of 3
<PAGE> 1
EXHIBIT 10.25
[NATIONAL HEALTH INVESTORS, INC. LETTERHEAD]
April 3, 1997
Mr. Bill Sheriff, President
American Retirement Corporation
111 Westwood Place, Suite 402
Brentwood, TN 37027
Via Facsimile: 221-2269
Re: Construction and Leaseback Financing for Independent Living,
Assisted Living and Licensed Nursing Home Projects
Dear Bill:
National Health Investors, Inc. (NHI) is pleased to offer this Letter of Intent
to provide both construction and leaseback financing for the above, subject to
the following terms and conditions:
AMOUNT OF COMMITMENT: Up to $100,000,000 to be applied toward the
construction and financing of the Projects with
related closing costs to include $100,000
Owner's Development Fee per project. No proposed
projects will be financed unless i) ARC is not in
default on any financial obligation, and ii)
proforma on proposed project indicates obtaining a
1.25 debt coverage ratio within 24 months of
completion.
Usage: This development line will be i) valid for 36
months from date of definitive agreement, ii)
must be drawn at least $30 million dollars per year
with short fall reducing undrawn commitment, and
iii) must be a 50/50 mix of new projects and
acquisitions measured annually on a cumulative
basis.
RATE DURING CONSTRUCTION: Prime
POINTS AND DISCOUNT: Zero if ARC has at least $35,000,000 in
shareholders' equity and 50 Basis Points if not.
INITIAL LEASE TERM & RATE: Ten to fifteen year initial term at Lessee's option,
with rate to be set based upon Lessor's original
cost times the Ten(10) to Fifteen(15) Year Treasury
rate at time of Certificate of Occupancy plus 325
Basis Points if ARC has at least $35,000,000 in
shareholders' equity, but if not, then applicable
Treasury plus 350 Basis Points. The equity
requirement will increase $1,000,000 per year, with
rate adjustments (if any) to be made effective
January 1 based upon the prior year audit.
RENEWAL LEASE TERM & RATE: Each renewal term shall be for ten to fifteen years
and the rate shall be set at the Ten to Fifteen
Year Treasury plus 300 Basis Points (or 325 Basis
points if, at that time, ARC does not have at least
$45,000,000 in shareholders' equity) times the Fair
Market Value, but not to exceed 125% of the prior
term's ending rate. Fair Market Value is the
lesser of the Project value established by a MAI
appraisal or Lessor's original cost inflated by 50%
of the CPI cumulative over the prior term, but in
no event less than Lessor's original cost.
<PAGE> 2
ANNUAL LEASE ESCALATOR: Greater of C.P.I. or 5% of revenue increase over first
complete year of occupancy, with a maximum increase of
2.5% per year. Home care revenues are excluded from
calculation.
LEASE TERM: 10 TO 15 years from Certificate of Occupancy with three
(3) 10 to 15-year renewal options at ARC's discretion.
LESSEE: ARC
GUARANTOR: ARC
LESSOR: National Health Investors, Inc.
GENERAL TERMS:
a. Lease is net, net to Lessor. First six months lease payments are accrued
and included in cost of Project then amortized over the remaining term of
the initial lease term.
b. There will be a 3-mile non-compete around each Project.
c. At Closing a six(6) months lease service reserve will be provided in a
Letter of Credit. The lease service reserve will be reduced to three
months once $25,000,000 has been funded and then no incremental
requirement once $50,000,000 has been funded.
d. Lease shall commit on an ongoing basis to a capital improvement expenditure
equal to $200 per unit per year, excluding i) the cost of capital
improvements to HVAC, roof, and other structural items, and ii)
expenditures on licensed healthcare beds.
e. Borrower is responsible for all costs incurred in closing each project
transaction, excluding counsel fees of NHI.
f. ARC has right of first refusal upon sale by Lessor.
g. NHI agrees to accept only a $100,000 prepayment fee for its existing
$4,700,000 first mortgage loan to Remington Retirement Corporation if it is
acquired by ARC using capital provided by NHI in accordance with the terms
of this Agreement. For any future transactions between ARC and a health
care provider financed by NHI, the parties will negotiate for similar
discounts on prepayment fees.
h. Subject to satisfactory review (at the sole discretion of NHI) of all due
diligence items, including site visits, physical plant approval to include
any plans or specifications, proformaed financial performance with
verification of all rates and occupancy, and all supportive documentation.
There will be a separate due diligence for each project.
This Letter of Intent is valid through Friday, April 4, 1997. Upon acceptance
the parties will then have sixty (60) days to enter into a definitive agreement
and prototype documents. We look forward to working with you and should you
have any questions, please do not hesitate to contact David H. Jones at (615)
890-9100.
<PAGE> 3
Sincerely yours,
NATIONAL HEALTH INVESTORS, INC.
/s/ Richard F. LaRoche, Jr.
- ------------------------------
Richard F. LaRoche, Jr.
Vice President
Accepted this 7th day of April, 1997
By: /s/
---------------------------------
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<PAGE> 1
EXHIBIT 10.26
MASTER LOAN AGREEMENT
THIS MASTER LOAN AGREEMENT, is made and entered into as of the 23rd day
of December, 1996, between First American National Bank, a national banking
association with its principal place of business at First American Center,
Nashville, Tennessee, 37237 (the "Bank") and American Retirement Communities,
L.P., a Tennessee limited partnership (the "Borrower").
RECITALS
The Bank has agreed to make available to Borrower a non-revolving line
of credit of up to $5,000,000, the proceeds of which are to be used to finance
real estate acquisitions, subject to the terms and conditions set forth in this
Agreement (the "Credit Facility").
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained in this Agreement, the Bank and the Borrower
agree as follows:
1. DEFINITIONS
As used in this Agreement, the term:
1.1 "Applicable Environmental Laws" means any and all applicable
local, state, and federal environmental laws, regulations, ordinances, and
administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport, or disposal of any Hazardous
Substances.
1.2 "Borrowing Base" means, with respect to each Project to be
financed with proceeds of the Credit Facility, seventy-five percent (75%) of
the lesser of (i) the appraised value of the Project, as determined by Bank or
(ii) the actual costs incurred in connection with the acquisition of such
Project.
1.3 "Compliance Certificate" means the Compliance Certificate required
by Section 3.2(e) of this Agreement.
1.4 "Default" means any of the events specified in Section 8 which,
with the passage of time, or giving of notice, or both, would constitute an
Event of Default.
1.5 "Event of Default" means any of the events specified in Section 8,
provided that any requirement for notice or lapse of time or any other
condition has been satisfied.
1.6 "Hazardous Substances" means any substance or material defined or
designated as hazardous or toxic waste, hazardous or toxic material, a
hazardous or toxic substance, or other similar term, by any federal, state or
local environmental statute, regulation, or ordinance presently in effect or
that may be promulgated in the future, as such statutes, regulations, and
ordinances may be amended from time to time, including, without limitation,
asbestos in any form, urea formaldehyde foam insulation, petroleum products,
and polychlorinated biphenyls (PCBs).
1.7 "Indebtedness" means all loans or advances, now or in the future
under this Loan Agreement, and all other indebtedness and obligations of
Borrower to Bank created hereunder or otherwise, now existing or hereafter
incurred, matured or unmatured, and direct contingent, including all
<PAGE> 2
modifications, extensions and renewals thereof, and specifically including,
without limitation, the indebtedness evidenced by each Project Note.
1.8 "Index Rate" is that rate announced by Bank from time to time as
the Bank's Index Rate and is not necessarily the lowest rate charged by Bank.
1.9 "Project" means a tract or parcel of real estate purchased by
Borrower with the proceeds of the Credit Facility.
1.10 "Project Loan" means each advance made under the Credit Facility
to finance the acquisition of a Project.
1.11 "Project Note" means each note (substantially in the form of
Exhibit A attached hereto) executed by the Borrower in favor of the Bank and
evidencing a Project Loan, together with all renewals, extensions and
modifications thereof.
1.12 "Security Instruments" means all mortgages, deeds of trust, deeds
to secure debt, financing statements and other documents and instruments deemed
necessary by Bank to evidence the Bank's liens and security interests in the
Projects, as described in Section 2.6 of this Agreement.
2. CREDIT FACILITY
2.1 Purposes. Bank shall make available to Borrower, on a
non-revolving basis, up to $5,000,000 to finance the acquisition of Projects.
So long as no Default exists, and subject to the terms and conditions set forth
in this Agreement, Borrower may borrow funds under the Credit Facility to
finance the acquisition of a Project, provided the amount advanced for the
acquisition of a Project shall not exceed the Borrowing Base for such Project,
as reasonably determined by Bank.
2.2 Interest. Interest shall accrue on the outstanding principal
balance of each Project Loan at a floating rate per annum equal to the Index
Rate, such interest rate to adjust automatically to reflect adjustments in the
Index Rate. Notwithstanding the foregoing, to the extent the Borrower has not
received new equity investments in Borrower in a minimum amount of $10,000,000
on or before September 30, 1997, then effective October 1, 1997, interest shall
accrue on the outstanding principal balance of each Project Loan at a floating
rate per annum equal to the Index Rate plus one-half of one percent (.50%),
such interest rate to adjust automatically to reflect adjustments in the Index
Rate. In no event shall the interest payable under the Credit Facility exceed
the maximum amount permitted by applicable law.
2.3 Note: Repayment Terms. Each advance under the Credit Facility for
a Project shall be evidenced by a separate Project Note. Each Project Note
shall have a maturity date of December 31, 1998. Interest accruing under each
Project Note shall be due and payable quarterly in arrears on the last day of
each calendar quarter, beginning with the calendar quarter and immediately
following funding under the specific Project Note. In addition, with respect
to each Project Note, beginning September 30, 1997, and on each calendar
quarter end thereafter, a quarterly principal payment equal to twenty percent
(20%) of the difference between the amount which represents a seventy-five
percent (75%) loan to value ratio for the Project, and the amount which
represents a fifty percent (50%) loan to value ratio for the Project shall
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<PAGE> 3
be due and payable. By way of example, if a Project has a recognized value of
$1,000,000, as determined by Bank, and the outstanding principal balance of the
Project Loan for such Project is $750,000, the quarterly principal payment due
with respect to such Project Loan shall be $50,000 per quarter (20% X 750,000 -
500,000 = 50,000).
2.4 Maturity Date. All Project Loans shall mature and shall be due
and payable in full on December 31, 1998.
2.5 Commitment Fee. In consideration for the Bank reserving the funds
necessary to fund the Credit Facility over the period of the permitted
disbursements, Borrower shall pay to Bank a commitment fee equal to one
quarter of one percent (.25%) of each Project Loan, such fee to be due and
payable at the funding of the Project Loan, provided, however, the commitment
fee for the first Project Loan shall be due on the later of (i) the funding of
the Project Loan, or (ii) January 2, 1997.
2.6 Security. All advances under the Credit Facility shall be
secured by (i) a first priority lien on the Projects acquired by Borrower with
proceeds of the Credit Facility, including the real property, fixtures, rents,
leases and profits arising from each Project. The liens in favor of Bank shall
be evidenced by the Security Instruments which shall be in form and substance
acceptable to Bank. The Security Instruments shall consist of:
a. Mortgage. A mortgage, deed of trust or other appropriate
mortgage instrument executed by Borrower (hereinafter the "Mortgage") granting
Bank (1) a first priority lien on each Project, together with all appurtenances
thereto, (2) a first priority security interest in all of Borrower's right,
title, and interest in and to all machinery, equipment, furniture, fixtures and
furnishings owned by Borrower and located at the Project, if any, and all of
the proceeds therefrom (the "Collateral"). The priority of the lien of the
Mortgage as a good and valid first lien on each Project shall be evidenced by a
mortgage title insurance policy (ALTA-B) issued by a title company acceptable
to Bank. The policy shall be subject to no exception other than the current
year's taxes and such other exceptions as Bank shall agree to in writing, and
specifically containing no exception for unfiled mechanics', materialmen's, or
laborers' liens, matters which would be disclosed by an accurate survey,
exception for parties in possession, or other exceptions not acceptable to
counsel for the Bank. Such policy shall include such endorsements as bank
deems necessary and customary for the Project. The title policy shall be in
the face amount of the Project Loan. The above-mentioned security interest in
the Collateral shall be perfected by the signing of all financing statements
deemed reasonably necessary by Bank.
b. Assignment of Rentals and Leases. A first priority
collateral, conditional assignment of the landlord's interest in all present
and future leases with respect to each Project, together with the rental income
to be derived therefrom from Borrower to Bank (hereinafter referred to as the
"Assignment of Rents").
c. UCC Financing Statements. Statements giving notice of and
perfecting, when appropriately filed, the security interest of Bank in all
fixtures and personal property described in the Loan Documents, executed by the
Borrower as necessary to perfect Bank's interest in such fixtures and personal
property (hereinafter referred to as "Financing Statements").
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<PAGE> 4
d. Other Documents. Such other documents or instruments as Bank
deems necessary to evidence or secure the Credit Facility.
2.7 Prepayment. The Borrower may prepay all or any of the
indebtedness created pursuant to this Agreement at any time without penalty.
3. CONDITIONS TO ADVANCES UNDER THE CREDIT FACILITY.
3.1 Draw Request. As a condition to Bank's obligation to fund any
monies under the Credit Facility to the Borrower with respect to a Project
Loan, the Borrower shall provide to the Bank, with respect to each requested
Project Loan, the following (all of which shall be in form and substance
acceptable to Bank):
a. A Draw Request completed by the Borrower in the form of
Exhibit B attached hereto;
b. A copy of the Real Estate Purchase Contract for the Project
which Borrower proposes to finance with proceeds from the Credit Facility; and
c. A current appraisal of the Project, completed by an appraiser
acceptable to the Bank.
Based upon Bank's review of the Draw Request, the purchase
contract and the appraisal submitted by the Borrower, the Bank shall determine
the Borrowing Base for the proposed Project Loan. In no event shall the
Borrowing Base for a Project Loan exceed seventy-five percent (75%) of the
lesser of (i) the actual costs (including all acquisition and closing costs)
incurred by Borrower in connection with the acquisition of the Project, or (ii)
the appraised value for the Project, as determined by Bank, based upon the
appraisal submitted by the Borrower.
3.2 Conditions to Funding Advances. Upon receipt of a Draw Request
acceptable to the Bank, together with the other information required by Section
3.1 of this Agreement, the obligations of the Bank to fund the Project Loan
shall be subject to Borrower complying with the following conditions precedent,
all to be satisfied in a manner acceptable to Bank, in Bank's discretion:
a. Survey. Delivery to Bank of a current boundary survey (as-
built if Project includes improvements) of the Project, in form and substance
acceptable to Bank, prepared and certified by a duly registered land surveyor,
in form acceptable to Bank.
b. Title Insurance. Delivery to Bank of the binding commitment
of a title insurance company acceptable to Bank to issue a mortgage title
insurance policy in the form described in Section 2.6(a) hereof, conditioned
only upon payment of the premium and recordation of the appropriate Security
Instruments.
c. Insurance. Delivery to Bank of original policies of insurance
(or certified copies), evidencing general liability, hazard loss, rent loss,
and such other insurance on the Project, in such amounts as may be required by
Bank, including, without limitation, flood insurance, if necessary. All
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<PAGE> 5
policies shall contain appropriate mortgagee endorsements, and shall otherwise
be in amount, form and substance acceptable to Bank.
d. Environmental Compliance. Delivery to Bank of proof, reasonable
satisfactory to Bank in all respects, that the Project has not been used for
the storage or disposal of any toxic or hazardous substances and that the
Improvements will be in compliance with all federal, state and local laws,
ordinances, regulations and statutes imposing environmental or ecological
protection restrictions on the Improvements, including without limitation,
delivery to Bank of a Phase I environmental report in form and substance
reasonably acceptable to Bank.
e. No Material Adverse Changes. Delivery to Bank, prior to Closing, of
a Compliance Certificate from Borrower, in form and substance acceptable to
Bank, confirming to the best of the borrower's knowledge and belief, there have
been no material, adverse changes in the financial condition of the Borrower,
since the date of the cost recent financial statements delivered to Bank, and
no Default exists under this Agreement as of the date of this Certificate.
f. Loan Documents. Execution and delivery by Borrower of a Project Note
and such Security Instruments as Bank shall deem necessary, all of which shall
be in form and substance acceptable to Bank.
g. Additional Documents. Delivery to Bank of such other documents or
information as Bank shall deem necessary in connection with the evidencing,
securing, or funding of the Project Loan.
4. BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants to Bank as follows:
4.1 Borrower's Partnership Status. Borrower is and shall remain a limited
partnership duly organized and existing and in good standing under the laws of
the State of Tennessee, and is and shall remain duly qualified to do business in
each state other than Tennessee in which qualification is necessary.
4.2 No Defaults; Authorization. Neither the execution, the delivery nor the
performance of this Agreement and all related documents by Borrower will
constitute a default under or conflict with Borrower's partnership agreement,
or any other agreement, contract, document, or instrument to which Borrower is
now a party. The execution of all necessary resolutions and other
prerequisites of partnership actions have been duly performed so that the
individual executing this Agreement and related documents on behalf of Borrower
is duly authorized to bind Borrower by his signature.
4.3 Place of Business. Borrower's principal place of business and chief
executive office is at the address appearing after Borrower's signature hereto.
Any notices to Borrower may be sent to that address and shall be deemed
received by Borrower one (1) business day following the date of mailing by Bank
of such notice in the U.S. mail, postage prepaid, addressed to Borrower at such
address. Borrower will notify Bank promptly in writing of any change in the
location of its principal place of business or any other place of business or
the establishment of any new place of business.
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<PAGE> 6
4.4 Records. Borrower at all times will keep accurate and complete records
of Borrower's accounts.
4.5 No Litigation. There is no litigation or proceeding pending against
Borrower or, to the knowledge of Borrower, threatened that, if decidedly
adversely to Borrower, would have a material effect upon Borrower's financial
condition. Borrower is not subject to any outstanding court or administrative
order.
4.6 Financial Disclosures. The statement of condition of Borrower dated
____________, fairly and accurately reflects the financial condition and
capital structure of Borrower as of said date. Since said date, no material
adverse change in either has occurred or, to the knowledge of Borrower, is
threatened. All financial statements delivered to Bank have been prepared in
accordance with generally accepted accounting principles, consistently applied,
and are true, accurate and complete in every respect. Without limiting the
foregoing, Borrower warrants that such financial statements disclose all known
contingent liabilities as well as direct liabilities. Borrower acknowledges
that Bank has advanced (or committed to advance) the Indebtedness in reliance
upon such financial statements, and Borrower warrants that no material adverse
change has occurred in the financial condition of any person or entity as set
forth in such financial statements. Borrower warrants that Borrower has good
and absolute title to the assets disclosed on Borrower's balance sheet
disclosed to Bank, subject only to liens, security interests and other
encumbrances noted thereon.
4.7 Taxes. Borrower is not presently delinquent in the payment of any taxes
imposed by any governmental authority or in the filing of any tax return and
that Borrower is not involved in a dispute with any taxing authority over tax
amounts due, except for good faith disputes.
4.8 ERISA. Borrower is in compliance with the Employee Retirement Income
Security Act of 1974 ("ERISA") and all other applicable laws governing any
pension or profit sharing plan or arrangement to which the Borrower is a party.
Borrower has not incurred any "accumulated funding deficiency" within the
meaning of ERISA.
4.9 Name. Borrower has not been known under or done business under any name
other than name used by Borrower in executing this Agreement.
4.10 Consents. Borrower's execution and performance of this Agreement or
any of the other Loan Documents do not require the consent of or the giving of
notice to any third party including, but not limited to, any account debtor,
other lendor, governmental body or regulatory authority.
4.11 Environmental Matters. Borrower has no actual knowledge of (i) the
presence of any Hazardous Substances on any property owned, leased or otherwise
controlled by the Borrower, including, without limitation, all Projects
(collectively, the "Property"); (ii) any spills, releases, discharges, or
disposal of Hazardous Substance that have occurred or are presently occurring
on or onto the Property; (iii) the presence of transformers or other electrical
equipment on the Property which contain or may contain polychlorinated
biphenyls (pCBs); (iv) the presence of underground or above-ground storage
tanks or pipelines which are required to be licensed by any local, state or
federal agency; or (v) any spills or disposal of Hazardous Substances that have
occurred or are occurring off the Property as a result of any construction on
or operation and use of the Property; (vi) any failure by the Borrower to
comply with all
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Applicable Environmental Laws: (vii) any notices related to the Borrower or the
Property, claiming a violation of Applicable Environmental Laws, or the
commencement of any action or proceeding against the Borrower or related to the
Property, in connection with an alleged violation of Applicable Environmental
Laws; (viii) notices related to the Borrower or the Property requiring
compliance with Applicable Environmental Laws; (ix) notices related to the
Borrower or the Property, demanding payment or contribution for injury to the
environment or human health; or (x) any outstanding notices or citations
relating to violations by any former owner or operator of the Property.
4.12 Licenses and Permits; Business Conducted in Accordance with Law.
Borrower possesses all necessary licenses, permits and other governmental or
regulatory approvals necessary to the conduct of its business. Borrower's
business activities are conducted in accordance with all applicable laws and
regulations.
4.13 No Burdensome Agreements. Borrower is not a party to any contract or
agreement and is not subject to any contingent liability that does or may
impair Borrower's ability to perform under the terms of this Agreement. This
execution and performance of this Agreement will not cause a default under any
other contract or agreement to which Borrower or any property of Borrower is
subject, and will not result in the imposition of any charge, penalty, lien or
other encumbrance against any of Borrower's property except in favor of bank.
4.14 Indebtedness. Borrower is not currently indebted to any party other
than trade debt incurred in the ordinary course of business and other than as
set forth in Borrower's financial statements provided to Bank.
4.15 Brokerage Commissions. Any brokerage commissions due in connection
with the transaction contemplated hereby have been paid in full and any such
commissions coming due in the future will be promptly paid by Borrower.
Borrower agrees to and shall indemnify Bank from any liability, claims or
losses arising by reason of any such brokerage commissions. This provision
shall survive the repayment of the Credit Facility, and shall continue in full
force and effect so long as the possibility of such liability, claims or losses
exists.
4.16 Expenses. Borrower shall pay all reasonable costs of closing the
Credit Facility and all expenses of Bank with respect thereto, including but
not limited to, legal fees of Bank's counsel (including legal fees incurred by
Bank subsequent to the closing of the Credit Facility but incurred in
connection with the disbursement, enforcement or collection of the Credit
Facility), advances, recording expenses, surveys, intangible taxes, other
recording taxes, expenses of foreclosure (including reasonable attorney's fees)
and similar items, and to allow all closing papers, Loan Documents and other
legal matters to be subject to the approval of Bank's counsel.
4.17 Right of Bank to Inspect Projects. Bank and its representatives and
agents shall have the right, but not the duty, to enter upon a Project and to
inspect the Project; provided, however, that this provision shall not be deemed
to impose upon Bank any obligation to undertake such inspections. Any such
inspections and the results therefrom shall be solely for the use and benefit
of Bank.
4.18 Restriction on Secondary Financing and Sale of Projects. Borrower
shall keep the Projects upon which Bank has a first lien as evidenced by the
Security Instruments, free and clear of all
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<PAGE> 8
other encumbrances, liens, mortgages, security interests and secondary
financing, except those approved in writing by Bank, Borrower shall not,
without the prior written consent of Bank, voluntarily or by operation of law,
sell, transfer or convey all or any part of its interest in the Project, or any
portion thereof, except as permitted in the Security Instruments.
4.19 Non-Waiver. Borrower acknowledges that any condition precedent
to closing contained herein or in any Loan Document which is not satisfied at
the time required hereunder shall not be deemed waived unless done so in
writing by Bank, and if the closing occurs, such unfulfilled conditions shall
thereafter be and become conditions precedent to Bank's obligation to advance
any further funds under the Credit Facility.
5. BORROWER'S COVENANTS
5.1 Affirmative Covenants. Borrower hereby covenants that:
a. Financing Statements. At the request of Bank, Borrower will
join with Bank in executing one or more financing statements pursuant to the
Uniform Commercial Code, in form satisfactory to Bank, and will pay the cost of
filing or recording the same or this Agreement in all public offices wherever
filing or recording is deemed by Bank to be necessary or desirable. A copy of
this Agreement or copies of any financing statements executed herewith may be
filed in lieu of originals in any public office.
b. Litigation. Borrower covenants to give Bank prompt written
notice of any litigation, arbitration, administrative proceeding or
investigation that may hereafter be instituted or threatened against Borrower,
whether or not Borrower's liability under such proceeding would be covered by
insurance.
c. Taxes. Borrower covenants that all future taxes assessed
against Borrower or any Project shall be paid prior to the delinquency date and
that all tax returns required of Borrower shall be timely filed.
d. Compliance with Laws. Borrower will comply with all statutes
and government regulations applicable to Borrower's operations and pay promptly
all taxes, assessments, claims for labor, supplies, rent, and other obligations
that, if unpaid, might become a lien against a Project. In the event any such
liability or obligation is contested by Borrower in good faith, Borrower, at
the request of Bank, shall establish reserves in amounts satisfactory to Bank
to meet such obligation.
e. Payment of Debts. Borrower will pay when due (or within
applicable grace periods) all indebtedness due third parties, except when the
amount thereof is being contested in good faith by the appropriate proceedings
and with adequate reserves being set aside on the books of Borrower.
f. Insurance. Borrower will maintain insurance, in form,
amounts, and with companies in all respects satisfactory to Bank, insuring the
Projects against loss from fire, theft, and other risks determined by Bank.
Bank shall be designated as an additional insured and loss payee under the
terms of the policies evidencing such insurance. Upon request by Bank,
Borrower will execute such additional instruments as Bank deems necessary to
perfect in Bank a lien on Borrower's rights under such policies.
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g. Borrower Financial Statements. Borrower will furnish Bank
with the following financial statements:
(i) Within one hundred twenty (120) days of Borrower's fiscal
year end, each year, complete certified audited financial statements prepared
in accordance with generally accepted accounting principles, consistently
applied, prepared by a certified public accountant acceptable to Bank with such
accountant giving an unqualified opinion as to all statements. In addition,
Borrower will furnish to Bank with such financial statements a copy of the
management letter delivered to the Borrower by the certified public accountant.
Borrower shall also deliver to Bank with such financial statements a
certificate executed by a responsible officer of Borrower certifying to Bank
that no Default exists with respect to any of the terms, conditions, and
covenants of this Agreement or the other Loan Documents. At Bank's request,
Borrower will furnish Bank copies of all of Borrower's federal income tax
returns within fifteen (15) days after they are filed by Borrower.
(ii) Within thirty (30) days after the end of each month,
Borrower shall furnish to Bank monthly interim financial and operating
statements for the preceding month, in form and content satisfactory to Bank,
which shall be certified by a responsible officer of Borrower and shall reflect
accurately the financial condition of Borrower.
h. Discovery of Liability. Borrower will give Bank prompt
written notice within three (3) days of (i) the creation of, or discovery of,
any material additional contingent liability or the occurrence of any other
material adverse change in the financial condition of Borrower or of any
guarantor or other person or entity presently or hereafter liable for payment
of all or part of the Indebtedness, and (ii) the occurrence of any event, or
presence of any condition, which constitutes a default hereunder or which
within the giving of notice, the passage of time, or both, would constitute a
default.
i. Payment of Expenses. Upon demand, Borrower will advance to
Bank, or, at Bank's option, reimburse Bank, for the following expenses:
(i) All taxes that Bank may be required to pay because of the
Indebtedness or because of Bank's interest in any collateral securing the
payment of the Indebtedness (excluding federal or state income tax);
(ii) All expenses that Bank may incur in connection with the
preparation, execution, audit, or enforcement of this Agreement or of any other
document pertaining to the Indebtedness;
(iii)All costs of preserving, insuring, preparing for sale
(whether by improvement, repair or otherwise) or selling any Collateral
securing the Indebtedness;
(iv) All court costs and other costs of collecting any debt,
overdraft or other obligation included in the Indebtedness, including
compensation for time spent by employees of Bank;
(v) All costs arising form any litigation investigation, or
administrative proceeding (whether or not Bank is a party thereto) that Bank
may incur as a result of the Indebtedness or as a result of Bank's association
with Borrower, including, but not limited to, expenses incurred by Bank
-9-
<PAGE> 10
in connection with a case or proceeding involving Borrower under any chapter of
the Bankruptcy Code or any successor statute thereto;
(vi) Reasonable attorney's fees incurred in connection with
any of the foregoing.
If Bank pays any of the foregoing expenses, they shall become part of the
Indebtedness and shall bear interest at the highest lawful rate until paid.
j. Maintenance of Records. Borrower will maintain current
corporate minute books and stock ledgers and agrees to allow Bank to inspect
the same at any time.
k. ERISA. Borrower shall provide Bank with written notice of any
"reportable event" or "prohibited transaction" or the imposition of any
"withdrawal liability" within the meaning of ERISA. Borrower further covenants
that it will not establish any further such plans without Bank's prior written
consent, which will not be unreasonably withheld or delayed.
l. Further Assurances. Borrower will execute such other
assignments, security agreements, financing statements, and other documents
that Bank may deem necessary to further evidence the obligations provided for
herein or to perfect, extend, or clarify Bank's rights in any property securing
or intended to secure the Indebtedness. Any Vice President of Bank is hereby
appointed as Borrower's attorney-in-fact with full power of substitution for
the signing of financing statements and other similar filings with government
offices for perfecting security interests granted hereby. Borrower
acknowledges that this power of attorney is coupled with an interest and is
irrevocable.
m. Environmental Compliance. Borrower covenants that during the
term of this Agreement, the Borrower will not operate a Project in violation
of, or otherwise violate any Applicable Environmental Laws, and will promptly
notify the Bank of (i) any notices related to the Borrower or a Project,
claiming a violation of Applicable Environmental Laws, or the commencement of
any action or proceeding against the Borrower or related to a Project, in
connection with an alleged violation of applicable Environmental Laws, (ii)
notices related to the Borrower or a Project requiring compliance with
Applicable Environmental Laws, (iii) notices related to the Borrower or a
Project, demanding payment or contribution for injury to the environment or
human health.
n. Indemnification. Borrower will indemnify the Bank and its
officers, directors, employees, agents, advisors and affiliates against any and
all liabilities, obligations, losses, damages, penalties, costs and expenses of
any kind or nature whatsoever (including, without limitation, the reasonable
fees and expenses of counsel) imposed on, incurred by, or asserted against Bank
in any manner related to or arising out of the Credit Facility, except for such
liabilities, losses or damages resulting from gross negligence or willful
misconduct on the part of the Bank.
5.2 Negative Covenants. So long as any Indebtedness secured hereby is
outstanding, Borrower covenants and warrants that, without the prior written
consent of Bank, it will not:
a. Name Change. Change its name without giving Bank at least
thirty (30) days' prior written notice.
-10-
<PAGE> 11
b. Partnership Changes. Amend or modify the Borrower's
Partnership Agreement, except for changes necessitated in connection with a
public equity offering by the Borrower, provided Borrower shall give Bank
notice of such offering.
c. Disposition of Assets. Sell, lease, convey, or otherwise
dispose of any Project, except in the ordinary course of business.
d. Liquidation. Suffer or permit, in whole or in part,
dissolution or liquidation of the Borrower.
e. ERISA. Establish any plan qualified under ERISA.
f. No Further Encumbrances. Suffer or permit a Project to become
subject to any security interest, lien, or other encumbrance, except for the
following:
(i) Any lien created by virtue of this Agreement, the
Security Instruments, or any other lien in favor of Bank;
(ii) A pledge or deposit in connection with or to secure
workman's compensation, unemployment insurance, pensions, or other employee
benefits accruing under the provisions of law or under agreements now in force
and disclosed to Bank.
g. Other Warranties and Covenants. Take any action, or suffer or
permit any action to be taken, that would violate any of the warranties and
covenants contained in this Agreement or cause any of said warranties and
covenants to be or become untrue.
h. Misstatements, Omissions. Submit to Bank any certificate or
other document that contains any untrue statement of material fact or omits to
state a material fact necessary to make it not misleading.
i. Borrowing Base. Suffer or permit the Borrowing Base for any
Project to be less than the outstanding balance of the Project Loan for such
Project.
6. CONDITIONS PRECEDENT
6.1 In addition to other conditions set forth in Section 3 with
respect to funding individual Project Loans, as conditions precedent to Bank's
obligations under this Agreement, Borrower shall furnish to Bank, in form
satisfactory to Bank:
a. Appropriate resolutions authorizing Borrower to enter into
this Agreement, together with authorizations for the general partner to execute
all documents necessary to effectuate the loan transaction described herein.
b. Execution and delivery of the Loan Documents.
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<PAGE> 12
c. Current financial statements for the Borrower, which shall be in form
and substance acceptable to Bank.
d. A certifled copy of the Borrower's partnership agreement, together with
any consents of limited partners to the transactions contemplated by this
Agreement, to the extent required by the partnership agreement.
e. Such other documents or information as Bank shall deem necessary in
connection with the evidencing, securing, or funding of the Credit Facility.
7. PROTECTIVE ACTION
7.1 At its option, to the extent Borrower fails to do so, Bank may
discharge taxes, liens, security interests, or other encumbrances at any time
levied or placed against any property or assets of Borrower securing the Credit
Facility, and may pay for insurance on the Projects. Borrower agrees to
reimburse Bank on demand for any payment made, or any expense incurred, by
Bank pursuant to the foregoing authorization, together with interest thereon
from date of payment at the maximum rate permitted by law.
8. DEFAULT
8.1 Regardless of the terms of any Project Note or notes issued in
connection herewith, the occurrence of any of the events specified hereinbelow
(sometimes hereinafter referred to as in "Event of Default") shall immediately
terminate any obligations on the part of Bank to make or continue to fund,
advance or readvance any sums to Borrower and, at the option of Bank, shall
make all sums of interest and principal remaining on the Indebtedness
immediately due and payable, without notice of Default, presentment or demand
for payment, protest or notice of nonpayment or dishonor, or other notices or
demands of any kind or character, except as hereinafter specified:
a. Default in the payment of any portion of the Indebtedness, within
ten (10) days of the date when due;
b. Default in performance of any of the covenants, warranties, terms,
or provisions contained or referred to in this Agreement, the Security
Instruments, the Project Notes, or in any other document evidencing, securing
or otherwise related to the Indebtedness or any portion thereof, which is not
cured within thirty (30) days of receipt by Borrower of written notice from
Bank setting forth the nature of such Default;
C. Any covenant, warranty, representation, or statement made or
furnished to Bank by or on behalf of Borrower in connection with this Agreement
or the other Loan Documents proving to have been false in any material respect
when made or furnished;
d. The occurrence of an Event of Default under the other Loan
Documents;
-12-
<PAGE> 13
e. Dissolution, liquidation, cessation of business, termination of
existence. insolvency, failure to pay debts as they mature, business failure,
or appointment of a receiver of any part of the property of, assignment for
the benefit of creditors by, or the commencement of any proceeding under any
bankruptcy or insolvency law by or against Borrower; or
f.. The entry of a final judgment against Borrower in excess of
$100,000, which remains unsatisfied for thirty (30) days after execution may
first issue.
g. The occurrence of an Event of Default under the Borrower's existing
credit facility with General Electric Capital Corporation and First Union
National Bank of Tennessee, which is not cured within any applicable cure
period.
9. REMEDIES
9.1 Upon the occurrence of an Event of Default and at any time thereafter.
Bank shall have all the rights and remedies of a secured party under the
Uniform Commercial Code, all rights and remedies set forth in the Loan
Documents, and any other right Bank may have at law or equity. Bank may
exercise its lien upon and right of setoff against any monies, credits,
deposits or instruments that Bank may have in its possession and which belong
to Borrower or to any other person or entity liable for the payment of any or
all of the Indebtedness. The remedies provided Bank in this Agreement are not
exclusive of any other remedies that may be available to Bank under any other
document or at law or equity.
9.2 No delay or omission on the part of Bank in exercising any right
hereunder or in demanding strict compliance with the terms of this Agreement
shall operate as a waiver of such right or of any other right under this
Agreement or of demanding strict compliance with the terms of this Agreement.
No waiver by Bank of any default shall operate as a waiver of any other
default or of the same default on a future occasion.
9.3 All amounts received by Bank for Borrower's account by exercise of its
remedies hereunder shall be applied as follows first, to the payment of all
expenses incurred by Bank in exercising its rights hereunder, including
reasonable attorney's fees, and any other expenses due Bank from Borrower;
second, to the payment of all interest included in the Indebtedness, in such
order as Bank may elect; and the remainder to the Borrower or other party
entitled thereto,
10. MISCELLANEOUS
10.1 The captions contained in this Agreement are inserted only as a
matter of convenience and shall not be construed as defining, limiting,
extending, or describing the scope of this Agreement, any section hereof, or
the intent of any provision hereof.
10.2 All rights of Bank hereunder shall inure to the benefit of its
successors and assigns, and all obligations of Borrower shall bind Borrower's
successors and assigns.
10.3 Time is of the essence with regard to each and every provision of
this Agreement.
-13-
<PAGE> 14
10.4 Nothing in this Agreement shall be deemed a waiver or prohibition of
Bank's right of banker's lien or setoff.
10.5 This Agreement, and the documents executed and delivered pursuant
hereto, constitute the entire agreement between the parties, and may be amended
only by a writing signed by all parties.
10.6 If any provision of this Agreement shall be held invalid under any
applicable law, such invalidity shall not affect any other provision of this
Agreement that ran be given effect without the invalid provision, and, to this
end, the provisions hereof are severable.
10.7 Borrower hereby irrevocably consents to the jurisdiction of the
United States District Court for the Middle District of Tennessee and of all
Tennessee state courts sitting in Davidson County. Tennessee, for the purpose
of any litigation to which Bank may be a party and which concerns this
Agreement or the Indebtedness. It is further agreed that venue for any such
action shall lie exclusively with courts sitting in Davidson County,
Tennessee, unless Bank agrees to the contrary in writing.
10.8 Nothing contained herein or in any related document shall be deemed
to render Bank a partner of Borrower for any purpose. This Agreement has been
executed for the sole benefit of Bank, and no third party is authorized to rely
upon Bank's rights hereunder or to rely upon an assumption that Bank has or
will exercise its rights under this Agreement or under any document referred to
herein.
10.9 Bank may proceed against collateral securing the Indebtedness and
against parties liable therefor in such order as it may elect, and neither
Borrower nor any surety or guarantor for Borrower shall be entitled to require
Bank to marshall assets. The benefit of any rule of law or equity to the
contrary is hereby expressly waived.
10.10 Bank may, in its sole discretion, release any collateral securing
the Indebtedness or release any party liable therefor. The defenses of
impairment of recourse and any requirement of diligence on Bank's part in
collecting the Indebtedness are hereby waived
10.11 If any payment date under the Indebtedness falls on a day that is
not a business day of Bank, or if the last day of any notice period falls on
such a day, the payment shall be due and the notice period shall end on Bank's
next following business day.
10.12 The validity, construction and enforcement of this Agreement and all
other documents executed with respect to the Indebtedness shall be determined
to the maximum extent permissible according to the laws of Tennessee, in which
state this Agreement has been executed and delivered.
10.13 WAIVER OF JURY-TRIAL. THE BANK AND THE BORROWER HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE (TO THE EXTENT PERMITTED BY APPLICABLE LAW)
ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE ARISING UNDER,
RELATING TO, OR CONNECTED WITH THIS AGREEMENT, THE COLLATERAL OR ANY OTHER
AGREEMENT, INSTRUMENT OR DOCUMENT CONTEMPLATED HEREBY OR DELIVERED IN
CONNECTION HEREWITH AND AGREE THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A
JUDGE SITTING WITHOUT A JURY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE
PARTIES TO ENTER INTO THIS AGREEMENT.
-14-
<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered on their behalf by their duly authorized officers on
the date first set out above.
FIRST AMERICAN NATIONAL BANK AMERICAN RETIREMENT
COMMUNITIES, L.P., Tennessee
limited partnership
By: /s/ Frank O. Keener BY: American Retirement Communities,
------------------------------ LLC, General Partner
Frank O. Keener
Sr. Vice President BY: /s/ H. Todd Kaestner
-------------------------------
TITLE: Executive Vice President
----------------------------
First American Center
Nashvile, TN 37237 Chief Executive Office:
111 Westwood Place, Suite 402
Brentwood, TN 37027
"BANK" "BORROWER"
-15-
<PAGE> 16
EXHIBIT A
PROMISSORY NOTE
$ Nashville, Tennessee
-----------
, 1996
-------
FOR VALUE RECEIVED, the undersigned, American Retirement Communities,
L.P., a Tennessee limited partnership (the "Borrower"), promises to pay to the
order of First American National Bank, a national banking association (the
"Bank"), the sum of _______________ Dollars ($_______) together with interest
at a floating rate per annum equal to the Index Rate, such interest rate to be
automatically adjusted to reflect changes in the Index Rate. For purposes
hereof, the "Index Rate" is that rate announced by Bank from time to time as
Bank's Index Rate and is not necessarily the lowest rate charged by Bank.
This Project Note is entered into pursuant to the terms of a Master Loan
Agreement dated as of December ___ , 1996, between Borrower and Bank (the "Loan
Agreement"). Effective October 1, 1997, the interest rate payable hereunder may
adjust in accordance with the provisions of Section 2.2 of the Loan Agreement.
Interest shall be computed for the actual number of days elapsed on the
basis of a year consisting of 360 days. In no event shall the interest rate
charged herein (the "Stated Rate") exceed the maximum rate of interest
permitted to be charged by Bank under the laws in effect from time to time (the
"Maximum Rate"). In the event that the Stated Rate ever exceeds the Maximum
Rate, interest shall accrue hereunder at a floating rate equal to the Maximum
Rate until such time as the Stated Rate no longer exceeds the Maximum Rate.
Interest accruing on the outstanding principal balance hereof shall be due
and payable quarterly in arrears on each calendar quarter end, the first
payment being due and payable on _____, _____. In addition, beginning ____,
quarterly principal payments calculated in accordance with Section of___ the
Loan Agreement, shall be due and payable.
The unpaid principal balance hereof, together with all accrued but unpaid
interest shall be due and payable on December 31, 1998 (the "Maturity Date").
This Note may be prepaid at any time, in whole or in part, without premium
or penalty. Both principal and interest due on this Note are payable in
Nashville, Tennessee, at par in lawful money of the United States of America,
in the Main Office of Bank, or at such other place as Bank may designate in
writing from time to time.
This Note is secured by [describe Security Instruments] (the "Security
Instruments").
Time is of the essence of this Note. It is hereby expressly agreed that in
the event that any default be made in the payment of any part of interest or
principal in accordance with the terms hereof, or upon failure of the
undersigned to keep and perform all the covenants, promises, agreements,
conditions and provisions of (i) this Note, (ii) the Loan Agreement, (iii) the
Security Instruments, or (iii) any other instrument or document now or
hereafter evidencing, securing or otherwise relating to The indebtedness
<PAGE> 17
evidenced hereby or the Credit Facility (as defined in the Loan Agreement);
then, in any such case, the entire unpaid principal sum evidenced by this Note,
together with all accrued interest, shall, at the option of any holder, without
notice, become due and payable forthwith, regardless of the stipulated Maturity
Date. Upon the occurrence of any default as set forth herein, at the option of
holder and without notice to obligor, the entire outstanding principal balance
shall bear interest thereafter until paid at an annual rate equal to the
Maximum Rate, regardless of whether or not there has been an acceleration of
the payment of principal as set forth herein. All such interest shall be paid
at the time of and as a condition precedent to the curing of any such default.
Failure of the holder to exercise this right of accelerating the maturity of
the debt, or indulgence granted from time to time, shall in no event be
considered as a waiver of said right of acceleration or stop the holder from
exercising said right.
If any payment is past due by five (5) days or more, the undersigned shall
pay to Bank a late charge of (i) five percent (5%) of any such payment amount
or (ii) any lesser maximum amount permitted under applicable law. No late
charge, however, shall be imposed on any payment made on time and in full
solely by reason of any previously accrued and unpaid late charge.
All persons, partnerships or corporations now or at any time liable,
whether primarily or secondarily, for the payment of the indebtedness hereby
evidenced, for themselves, their heirs, legal representatives and assigns,
waive demand, presentment for payment, notice of dishonor, protest, notice of
protest, and diligence in collection and all other notices or demands
whatsoever with respect to this Note or the enforcement hereof, and consent
that the time of said payments or any part thereof may be extended by the
holder hereof and assent to any substitution, exchange, or release of
collateral permitted by the holder hereof, all without in any wise modifying,
altering, releasing, affecting or limiting their respective liability. This
Note may not be changed orally, but only by an agreement in writing signed by
the party against whom enforcement of any waiver, change, modification or
discharge is sought.
The term obligor, as used in this Note, shall mean all parties, and each
of them, directly or indirectly obligated for the indebtedness that this Note
evidences, whether as principal, maker, endorser, surety, guarantor or
otherwise.
It is expressly understood and agreed by all parties hereto, including
obligors, that if it is necessary to enforce payment of this Note through an
attorney or by suit, undersigned or any obligors shall pay reasonable
attorney's fees, court costs and all costs of collection.
This obligation is made and intended as a Tennessee contract and is to be
so construed.
PAGE 2 OF A 3 PAGE NOTE
<PAGE> 18
IN WITNESS WHEREOF, this Note has been duly executed by the undersigned
the day and year first above written.
AMERICAN RETIREMENT
COMMUNITIES, L.P., Tennessee
limited partnership
BY: American Retirement Communities,
LLC, General Partner
BY:
--------------------------
TITLE:
-----------------------
PAGE 3 OF A 3 PAGE NOTE
<PAGE> 19
EXHIBIT B
DRAW REQUEST
Borrower hereby requests an advance of $_________ under the Master Loan
Agreement dated as: of December 23, 1996, to finance the acquisition of certain
real property located at:
- -------------------------------------------------------------------------------
(Street Address)
Attached hereto (or delivered separately to Bank) are the following:
(1) Copy of current appraisal for the Property;
(2) Copy of environmental site assessment for the Property; and
(3) Copy of Purchase Contract for the Property.
The acquisition is scheduled to close on .
-----------------------------
AMERICAN RETIREMENT COMMUNITIES, L.P.,
a Tennessee limited partnership
BY: American Retirement Communities, LLC,
General Partner
BY:
---------------------------------------
TITLE:
-------------------------------------
<PAGE> 1
Exhibit 10.27
NHP
NATIONWIDE HEALTH PROPERTIES, INC.
February 24, 1997
Via Telecopy and Overnight Delivery
H. Todd Kaestner
American Retirement Communities, L.P.
111 Westwood Place
Suite 402
Brentwood, TN 37027
Dear Todd:
The purpose of this letter is to outline the terms under which Nationwide
Health Properties, Inc. ("Nationwide") would provide to American Retirement
Corporation ("ARC") lease financing for the acquisition of existing long-term
care facilities ("Acquisition Properties") and the de novo development of long
term care facilities ("Development Properties"). Based on the information
available to us and subject to the conditions precedent contained in this
letter, Nationwide is prepared to provide such financing under the following
salient terms.
TENANT(S) - American Retirement Corporation, its controlled subsidiaries, or
other party acceptable to Nationwide.
GUARANTIES AND CROSS-DEFAULTS - Guarantee of ARC, cross-guaranties and
cross-defaults between and among ARC leased properties financed by Nationwide.
FACILITY AMOUNT - Approximately $110,000,000.
DEVELOPMENT FUNDING - Actual direct and indirect costs which are incurred for
the Development Properties and which are paid to unrelated parties for: land;
easements; entitlements; fees including impact fees; permits; utility hook-ups;
site preparation; landscaping; construction; fixtures; equipment; design;
architectural and engineering services and inspections; construction period
rent; insurance, taxes; and utilities; as-built survey; reasonable legal and
accounting fees; reasonable Tenant(s) or Guarantor(s) overhead and
out-of-pockets.
DEVELOPER - ARC will plan, design, develop, build, obtain licences for, and
open the Development Properties 1) for a maximum amount agreed to in advance
for each Development Property and 2) complete each Development Property by a
date certain agreed to in advance.
TERM - Initial lease term to expire 10 years from closing the Transaction;
renewals of all, but not fewer than all, the Properties for 4 terms of 10 years
each at the option of ARC.
<PAGE> 2
Todd Kaestner
February 24, 1997
Page 2
TRANSACTION COSTS - Nationwide and ARC will each pay their respective ancillary
transaction costs. Nationwide will pay for environmental, survey, title
insurance, site inspections, and its own legal costs up to a reasonable level
agreed to in advance for each Property.
OTHER FEES - None.
MINIMUM RENT - 320 basis points for Acquisition Properties, 340 basis points
for Development Properties after completion, both over the 20 trading day
average 10-year Treasury rate; for Development Properties prior to completion,
30-day Libor plus 150 basis points.
ADDITIONAL RENT - Beginning in Year 2, Additional Rent will equal 10% of
increases in revenue over revenue in the first year but not less than 0% and
not to exceed 2.5% annual increases.
RENEWAL RENT - Fair market value as of renewal date (but not more than
Nationwide's investment increased by 2.5% per year) times the then 10-year
Treasury rate (20 day average) plus 300 basis points; total rent may not
decrease from the prior year, nor may total rent increase by more than 25% from
the prior year.
SECURITY DEPOSIT - Equal to 6 months Minimum Rent for the first $40,000,000 of
Facility usage; 3 months for the next $30,000,000, none thereafter, in cash or
letter of credit from mutually acceptable bank. Nationwide will pay interest on
cash, if any, held as a Security Deposit, at a rate equal to income earned
thereon.
MAINTENANCE AND UPKEEP EXPENDITURES - Tenant will, by a mutually agreeable
mechanism, fund expenditures to insure that the Properties remains in high
quality and competitive position.
TENANT'S OPTION - ARC will have the option to purchase all, but not fewer than
all, the Properties at the end of the initial lease term and all renewal terms
for fair market value but not less than Nationwide's investment.
CONDITIONS PRECEDENT - Satisfaction and fulfillment of conditions precedent
customary and appropriate for transactions of this type, including but not
limited to:
Inspection and approval of each Acquisition Property and the site for each
Development Property by Nationwide;
Approval of each Property and each transaction by Nationwide's board of
directors.
Prior approval by Nationwide of Development Property plans, specifications,
material contracts, schedules, and budgets.
<PAGE> 3
Todd Kaestner
February 24, 1997
Page 3
Receipt and approval by Nationwide of most recent Medicaid, Medicare, and/or
regulatory inspection reports, as well as financial statements and operating
reports on each Acquisition Property and Guarantor(s).
Satisfaction of Nationwide with the material terms and conditions of all
necessary documents including, but not limited to, supporting documentation
such as guaranties, trust agreement(s), partnership agreement(s), corporate
charter(s), bylaws, resolutions, certificates, and security documents in
addition to purchase agreement(s), development agreement(s), and lease(s), and
the execution, delivery and, where applicable, public recordation, of all
necessary documents.
No material adverse change from the date of due diligence to closing.
Accuracy of representations and warranties and absence of default or other
material breach.
Satisfaction of Nationwide with the final organization of and structure of each
transaction, Developer, Tenant(s), Guarantor(s), and title to respective
assets.
Receipt and approval by Nationwide of evidence satisfactory to Nationwide as to
the due formation, power and authority of Developer, Tenant(s), Guarantor(s),
and other parties to each transaction to participate in each transaction; the
enforceability of all documents and agreements; and the absence of material
actions, suits, judgments, or proceedings.
Repayment of outstanding liens, encumbrances and debt on each Property and
satisfaction of Nationwide with unencumbered title thereon. Such title to be
insured by ALTA 1970 Form B extended coverage in amount equal to Nationwide's
investment. Nationwide to receive surveys on each Property.
Receipt and approval by Nationwide of satisfactory evidence that each
Acquisition Property has passed all inspections and has received all licenses,
permits, access approvals, certificates of need, provider agreements, Medicare,
Medicaid and third party payor agreements and other authorizations and
approvals as are needed for the operation of each Property as a
skilled/intermediate nursing facility, assisted/independent living facility,
personal care facility, continuing care retirement community, or adult
congregate living facility as the case may be.
Receipt and approval by Nationwide of satisfactory Phase 1 Environmental
Assessment Reports (or appropriate updates) prepared by qualified experts
approved by Nationwide showing no presence or potential of hazardous materials
in, on, under or around each Property.
<PAGE> 4
Todd Kaestner
February 24, 1997
Page 4
Receipt by Nationwide of satisfactory certificates of compliance with respect
to material obligations of Developer, Tenant(s) and Guarantor(s) as are
customary with transactions of this nature.
Receipt and approval by Nationwide of certificates of insurance satisfactory to
Nationwide naming Nationwide as additionally insured.
Receipt by Nationwide of representations and warranties customary and
appropriate for transactions of this nature.
This letter is not a commitment. Such a commitment can only be granted by
Nationnwide's board of directors, which has not considered any Property or any
transaction contemplated herein. We look forward to working with you in the
future.
Sincerely,
T. Andrew Stokes
- ----------------------
T. Andrew Stokes
Senior Vice President
TAS:pb f:\users\andy\ARC\acqdevpr\terms2
AGREED AND ACCEPTED:
H Todd Kaestner 2/26/97
- --------------------- ----------------
Signature Date
Name (printed): H Todd Kaestner
--------------------------------
Title: EVP Corporate Development
----------------------------------------
Company: American Retirement Communities, L.P.
--------------------------------------
<PAGE> 1
Exhibit 23.1
The Partners
American Retirement Communities, L.P.:
The audits of American Retirement Communities, L.P. referred to in our report
dated January 22, 1997, included the related financial statement schedule for
the year ended December 31, 1994, the three months ended March 31, 1995, the
nine months ended December 31, 1995, and the year ended December 31, 1996,
included in the registration statement. The financial statement schedule is the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic combined and consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein. Our
report dated January 22, 1997 contains an explanatory paragraph which refers to
a change in cost basis as a result of a purchase business combination.
We consent to the use of our reports included herein on (1) American Retirement
Communities L.P. and (2) Carriage Club of Charlotte, Limited Partnership and
Carriage Club of Jacksonville, Limited Partnership and to the reference to our
firm under the headings "Selected Combined and Consolidated Financial Data" and
"Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Nashville, Tennessee
May 12, 1997
