<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission file number 01-13031
AMERICAN RETIREMENT CORPORATION
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Tennessee 62-1674303
--------- ------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
111 Westwood Place, Suite 402, Brentwood, TN 37027
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(615) 221-2250
---------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ----
As of November 3, 1998 there were 17,107,453 shares of the Registrant's common
stock, $.01 par value, outstanding.
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 .........................................3
Condensed Consolidated Statements of
Operations for the Three Months Ended
September 30, 1998 and September 30, 1997 ........................................4
Condensed Consolidated Statements of
Operations for the Nine Months Ended
September 30, 1998 and September 30, 1997 ........................................5
Condensed Consolidated Statements of Partners'/
Shareholders' Equity for the Nine Months Ended
September 30, 1998 and September 30, 1997 ........................................6
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended September 30,
1998 and September 30, 1997 ......................................................7
Notes to Condensed Consolidated Financial Statements .............................9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................12
Item 3. Quantitative and Qualitative Disclosure About Market Risk .......................24
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds .......................................24
Item 6. Exhibits and Reports on Form 8-K.................................................25
Signatures .................................................................................26
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands, except share data) September 30, 1998 December 31, 1997
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 52,231 $ 44,583
Assets limited as to use 3,503 2,654
Accounts receivable, net 8,860 6,178
Inventory 866 483
Prepaid expenses 2,362 1,052
Deferred income taxes 3,542 4,332
Other current assets 8,942 1,003
--------- ---------
Total current assets 80,306 60,285
Assets limited as to use, excluding amounts classified as current 50,571 7,332
Land, buildings and equipment, net 384,937 229,898
Notes receivable 15,517 --
Marketable securities -- 52
Costs in excess of net assets acquired, net 36,377 --
Other assets 30,672 19,587
--------- ---------
Total assets $ 598,380 $ 317,154
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,326 $ 316
Accounts payable 5,849 2,429
Accrued expenses 15,398 9,796
Other current liabilities 6,087 --
--------- ---------
Total current liabilities 28,660 12,541
Tenant deposits 6,566 5,290
Long-term debt, excluding current portion 161,989 99,038
Convertible subordinated debentures 138,000 138,000
Refundable portion of life estate purchase price 49,715 --
Deferred life estate income 44,774 --
Deferred gain on sale-leaseback transactions 3,733 4,073
Deferred income taxes 20,634 3,689
Other long-term liabilities 434 605
--------- ---------
Total liabilities 454,505 263,236
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized, no
shares issued or outstanding -- --
Common stock, $.01 par value; 50,000,000 shares authorized,
17,106,786 and 11,420,860 shares issued and outstanding,
respectively 171 114
Additional paid-in capital 144,996 60,203
Accumulated deficit (928) (6,399)
Net unrealized losses on investment securities (364) --
--------- ---------
Total shareholders' equity 143,875 53,918
--------- ---------
Total liabilities and shareholders' equity $ 598,380 $ 317,154
========= =========
</TABLE>
3
See accompanying notes to financial statements.
<PAGE> 4
AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------
September 30, 1998 September 30, 1997
------------------- -----------------------
<S> <C> <C>
Revenues:
Resident and health care revenue $ 37,816 $ 23,146
Management services and other revenue 3,748 497
-------- --------
Total revenues 41,564 23,643
Expenses:
Community operating expenses 24,431 14,708
Lease expense, net 2,561 653
General and administrative 3,497 1,971
Depreciation and amortization 3,479 1,685
-------- --------
Total operating expenses 33,968 19,017
-------- --------
Income from operations 7,596 4,626
Other income (expense):
Interest expense (5,087) (3,391)
Interest income 1,307 421
Other (25) 4
-------- --------
Other income (expense), net (3,805) (2,966)
-------- --------
Income before income taxes 3,791 1,660
Income tax expense 1,459 623
-------- --------
Net income $ 2,332 $ 1,037
======== ========
Basic earnings per share $ 0.15 $ 0.09
======== ========
Diluted earnings per share $ 0.15 $ 0.09
======== ========
Weighted average shares used:
Basic earnings per share 15,603 11,406
Common stock equivalents 92 178
======== ========
Diluted earnings per share 15,695 11,584
======== ========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
-------------------------------------------
September 30, 1998 September 30, 1997
-------------------------------------------
<S> <C> <C>
Revenues:
Resident and health care revenue $ 92,281 $ 66,570
Management services and other revenue 7,673 1,462
---------------------------------------
Total revenues 99,954 68,032
Expenses:
Community operating expenses 59,771 42,227
Lease expense, net 6,208 1,725
General and administrative 7,868 6,041
Depreciation and amortization 7,572 4,891
---------------------------------------
Total operating expenses 81,419 54,884
---------------------------------------
Income from operations 18,535 13,148
Other income (expense):
Interest expense (12,395) (10,002)
Interest income 2,494 785
Other 62 (56)
---------------------------------------
Other income (expense), net (9,839) (9,273)
---------------------------------------
Income before income taxes 8,696 3,875
Income tax expense 3,225 3,701
---------------------------------------
Net income $ 5,471 $ 174
=======================================
Basic earnings per share $ 0.42
===============
Diluted earnings per share $ 0.42
===============
Pro forma earnings data:
Income before income taxes, as reported $ 3,875
Pro forma income tax expense 1,472
--------
Pro forma net income $ 2,403
========
Pro forma basic earnings per share $ 0.23
========
Pro forma diluted earnings per share $ 0.23
========
Weighted average shares used:
Basic earnings per share 12,893 10,298
Common stock equivalents 171 161
---------------------------------------
Diluted earnings per share 13,064 10,459
=======================================
</TABLE>
5
See accompanying notes to financial statements.
<PAGE> 6
AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS'/SHAREHOLDERS' EQUITY (UNAUDITED)
(in thousands, except share data)
<TABLE>
<CAPTION>
General and
Limited Common Stock Additional
Partners' -------------------- Paid-in Accumulated
Interests Shares Amount Capital Deficit
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 $ 37,882
Net income 1,599 $ (1,425)
Distribution to partners (2,500)
Reorganization note (21,875)
Stock issued for:
Transfer of partnership equity (15,106) 7,812,500 $ 78 $ 15,028
Initial public offering 3,593,750 36 45,185
-------------------------------------------------------------
Balance as of September 30, 1997 -- 11,406,250 $114 $ 60,213 $ (1,425)
-------------------------------------------------------------
Balance as of December 31, 1997 11,420,860 $114 $ 60,203 $ (6,399)
Comprehensive income:
Net income 5,471
Net unrealized losses on
investment securities
Comprehensive income
Stock issued for:
Public offering 4,297,500 43 64,757
Acquisition of FGI 1,370,000 14 19,765
Employee stock options exercised 9,335 131
Employee stock purchase plan 9,091 140
-------------------------------------------------------------
Balance as of September 30, 1998 --- 17,106,786 $171 $144,996 $ (928)
-------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Net Unrealized
Losses on
Investment Comprehensive
Securities Income Total
----------------------------------------------
<S> <C> <C> <C>
Balance as of December 31, 1996 $ 37,882
Net income 174
Distribution to partners (2,500)
Reorganization note (21,875)
Stock issued for:
Transfer of partnership equity 0
Initial public offering 45,221
----------------------------------------------
Balance as of September 30, 1997 -- -- $ 58,902
----------------------------------------------
Balance as of December 31, 1997 $ 53,918
Comprehensive income:
Net income $5,471 5,471
Net unrealized losses on
investment securities $ (364) (364) (364)
------
Comprehensive income $5,107
------
Stock issued for:
Public offering 64,800
Acquisition of FGI 19,779
Employee stock options exercised 131
Employee stock purchase plan 140
----------------------------------------------
Balance as of September 30, 1998 $ (364) $143,875
----------------------------------------------
</TABLE>
6
See accompanying notes to financial statements.
<PAGE> 7
AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
---------------------------------------------
September 30, 1998 September 30, 1997
---------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,471 $ 174
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 7,572 4,891
Amortization of deferred entrance fee revenue (1,261) --
Deferred income taxes 3,077 3,562
Gain on sale of marketable securities (80) --
Amortization of deferred gain on sale-leaseback transactions (340) (228)
Losses from unconsolidated joint ventures 184 --
Increase (decrease), net of acquisitions, in cash due to changes in:
Accounts receivable (1,345) (1,909)
Inventory (135) (1)
Prepaid expenses (1,082) (568)
Other assets (1,332) (359)
Accounts payable 2,212 178
Accrued expenses (2,640) 1,760
Tenant deposits 359 611
Other liabilities (171) (47)
--------------------------------------
Net cash provided by operating activities 10,489 8,064
Cash flows from investing activities:
Net additions to land, buildings and equipment (20,100) (16,370)
Expenditures for acquisitions, net of cash received (29,166) (11,524)
Advances for development projects (6,705) --
Investments in joint ventures (1,213) (1,030)
Purchases of assets limited as to use (36,630) (4,329)
Proceeds from the sale of marketable securities 132 --
Increase in notes receivable (15,517) --
Proceeds from the sale of assets -- 28,789
Other investing activities (1,678) --
--------------------------------------
Net cash used by investing activities (110,877) (4,464)
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 8
AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
------------------------------------------------
September 30, 1998 September 30, 1997
------------------------------------------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from public offerings, net of expenses 64,800 45,221
Proceeds from convertible debenture offering, net of expenses -- 116,600
Repayment of reorganization note -- (21,875)
Payment of redeemable preferred interests -- (5,195)
Distributions to partners -- (4,132)
Expenditures for financing costs (75) (32)
Proceeds from exercise of stock options 131 --
Proceeds from issuance of stock through employee stock
purchase plan 140 --
Proceeds from the issuance of long-term debt 53,673 22,441
Proceeds from life estate sales 2,298 --
Principal payments on indebtedness (12,931) (26,570)
--------- ---------
Net cash provided by financing activities 108,036 126,458
Net increase in cash and cash equivalents 7,648 130,058
--------- ---------
Cash and cash equivalents at beginning of period 44,583 3,222
--------- ---------
Cash and cash equivalents at end of period $ 52,231 $ 133,280
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 10,981 $ 9,668
========= =========
Income taxes paid $ 249 --
========= =========
</TABLE>
Supplemental disclosure of non-cash transactions:
During 1998, the Company acquired Freedom Group, Inc. In conjunction with the
transaction, net assets and liabilities were assumed as follows:
<TABLE>
<S> <C>
Current assets $ 7,378 --
Other assets 152,204 --
Current liabilities 15,471 --
Debt 22,368 --
Other liabilities 74,793 --
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 9
AMERICAN RETIREMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
American Retirement Corporation (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Certain 1997 amounts have been reclassified to conform with the 1998
presentation. Operating results for the three and nine months ended September
30, 1998 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1998. These financial statements should be
read in conjunction with the combined and consolidated financial statements and
the notes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1997.
Prior to its initial public offering in May 1997 (the "IPO"), the Company's
communities were owned, managed and/or operated by one or more limited
partnerships affiliated with the Company's predecessor, American Retirement
Communities, LP (the "Partnership" or "Predecessor"). The Partnership was
reorganized concurrent with the IPO such that all of its assets and liabilities
were contributed to the Company in exchange for 7,812,500 shares of common stock
and a promissory note in the original principal amount of approximately $21.9
million (the "Reorganization"). The promissory note was subsequently paid with
net proceeds from the IPO. References to the Company in connection with
historical financial data or otherwise include the Predecessor.
The pro forma adjustment reflected on the statement of operations for the nine
months ended September 30, 1997 provides for income taxes assuming the
Partnership was subject to taxes. Pro forma earnings per share for the nine
months ended September 30, 1997 is based on the number of shares that would have
been outstanding assuming the partners had been shareholders and is based on the
7,812,500 shares received as a result of the Reorganization plus 1,562,500
shares representing the value of the $21.9 million promissory note.
2. EARNINGS PER SHARE
Basic earnings per share for the three months ended September 30, 1998 and 1997
and the nine months ended September 30, 1998 has been computed on the basis of
the weighted average number of shares outstanding. Diluted earnings per share
also includes dilutive common stock equivalents, which consist of stock options.
9
<PAGE> 10
3. ACQUISITIONS
On July 14, 1998, the Company acquired privately-held Freedom Group, Inc.
("FGI") and certain entities affiliated with FGI and with its Chairman. The
acquisition resulted in the ownership of three lifecare continuing care
retirement communities ("CCRCs") and the management of four additional CCRCs.
The Company also acquired options to purchase two of the managed CCRCs.
Additionally, the Company entered into a development and management contract
for, and acquired an option to purchase, one additional CCRC currently under
development. The aggregate resident capacity for the owned and managed
communities included in this transaction is approximately 3,700. The development
project will add capacity for approximately 400 residents. The consideration
paid was approximately $43.0 million, including $23.2 million of cash and
1,370,000 shares of the Company's common stock valued at $19.8 million. The
Company paid an additional $4.0 million for the purchase options and $1.5
million to enter into two of the management contracts. The transaction was
accounted for as a purchase and includes the operations of the acquired entities
effective July 1, 1998. The transaction resulted in costs in excess of net
assets acquired of approximately $33.9 million which is being amortized on a
straight-line basis over forty years.
The following unaudited condensed consolidated pro forma results of continuing
operations assumes the above referenced acquisition had been consummated as of
the beginning of the periods presented. The 1997 data also includes the pro
forma tax adjustment and pro forma shares outstanding as described in Note 1.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
------------------------------------------
<S> <C> <C>
Total revenues $117,398 $92,736
Net income 5,444 2,481
Diluted earnings per share 0.39 0.21
Weighted average number of
diluted shares outstanding 13,972 11,829
</TABLE>
4. COMMITMENTS
During the nine month period ending September 30, 1998, the Company entered into
various commitments related to the development of 19 assisted living residences
(the "Developments"). The Company entered into loan agreements for an aggregate
amount of $100.2 million with the owners of 10 of the Developments to provide
funding for their construction. Typically, these loans bear interest at 200
basis points over 30 day LIBOR and require amortization over a 25 year term. As
of September 30, 1998, $5.4 million was advanced under the loan agreements.
The owners of the Developments ("the Lessors") have entered into construction
agreements and operating leases with various third parties (the "Lessees") for
the construction and operation of the Developments. In eight of these
transactions, the
10
<PAGE> 11
Lessee is an affiliate of a director of the Company. The operating leases have
initial terms of five years and include renewal and purchase options. The
Lessees have entered into construction management and guaranty agreements with
the Company whereby the Company will manage the construction of the Developments
for a fee equal to approximately 3.75% of total development costs. The Company
has pledged certificates of deposit in the amount of $22.2 million as collateral
for its agreement to fund operating deficits of the Lessees in excess of certain
agreed-upon limits. These deposits are reflected on the Company's consolidated
balance sheet as "non-current assets limited as to use." The Company has also
entered into agreements with the Lessees to manage the Developments for a fee
based on a percentage of revenues and to acquire the leasehold interests of the
Lessees. The Company owns the land upon which four of the Developments are
located and has leased the land to the owners for a term of 50 years.
In connection with the execution of management contracts pursuant to the FGI
transaction, the Company assumed debt guaranties on mortgage debt of three
managed communities. At September 30, 1998, $46.3 million was outstanding under
the related debt agreements.
5. LIFECARE AND MASTER TRUST ACCOUNTING
Refundable Portion of Life Estate Purchase Price and Deferred Life Estate
Income: The refundable portion of life estate purchase price represents the
amount that is due and refundable to the resident or the resident's estate upon
contract termination. The portion of the purchase price that is not refundable
is recorded as deferred life estate income at the time of purchase and amortized
into income over the resident's estimated life expectancy, estimated annually
based upon actuarial projections. Lifecare income related to residency
agreements that are fully refundable and contingent upon resale is recognized
using the average life of the related buildings and improvements.
Master Trust Agreements: Under certain of the Company's residency and care
agreements, each resident entered into a master trust agreement whereby amounts
were paid by the resident into a trust account ("Trust"). These funds were then
available to the communities in the form of a non-interest bearing loan. The
loans provided permanent financing and are collateralized by the property,
plant, and equipment of the related communities.
Upon termination of the resident's occupancy, the resident or the resident's
estate receives payment of the remaining loan balance from the Trust and agrees
to pay a lifecare fee based on a formula in the residency and care agreement,
not to exceed a specified percentage of the resident's original deposit to the
Trust. This lifecare fee is recognized ratably over the estimated life
expectancy of the resident. The amortization of the lifecare fees is included in
resident and health care revenue in the statement of operations and deferred
lifecare fee receivable (included in other noncurrent assets) on the balance
sheet. The Company reports the obligation under the master trust agreements as
11
<PAGE> 12
refundable portion of life estate purchase price and deferred life estate income
based on the applicable residency agreements.
Obligation to Provide Future Services: Under the terms of certain lifecare and
life estate sales contracts the Company is obligated to provide future services
to its residents. The Company is required to calculate the present value of the
net cost of future services and use of facilities annually and compare that
amount with the present value of future cash inflows. If the present value of
the net cost of future services and use of facilities exceeds discounted future
cash inflows, a liability must be recorded with a corresponding charge to
income. As of September 30, 1998, the Company did not have a liability
associated with its obligation to provide future services and use of facilities.
6. RECENT ACCOUNTING PRONOUNCEMENT
On April 3, 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities (SOP
98-5). The SOP requires that costs incurred during start-up activities,
including organization costs, be expensed as incurred. SOP 98-5 defines start-up
activities broadly to include those one-time activities related to: opening a
new facility; introducing a new product or service; conducting business in a new
territory; conducting business with a new class of customer or beneficiary;
initiating a new process in an existing facility; or commencing some new
operation. Start-up activities also include activities related to organizing a
new entity (costs of such activities are commonly referred to as organization
costs).
SOP 98-5 is effective for financial statements for fiscal years beginning after
December 15, 1998. Earlier application is encouraged in fiscal years for which
annual financial statements have not been issued. Initial application of the SOP
should be as of the beginning of the fiscal year in which the SOP is first
adopted. Restatement of previously issued financial statements is not permitted.
Entities that previously capitalized start-up costs, such as the types of costs
described above, or organization costs, are required to write-off the
unamortized portion of such capitalized costs as the cumulative effect of a
change in accounting principle upon adoption of SOP 98-5. Subsequent to adoption
of the SOP, these types of costs must be expensed as incurred. The Company will
adopt SOP 98-5 effective January 1, 1999. At September 30, 1998, the unamortized
portion of capitalized start-up costs totaled approximately $690,000.
ITEM 2: 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 seniors within a residential
setting. The Company currently operates 39 senior living communities in 15
states with an aggregate capacity
12
<PAGE> 13
for approximately 11,800 residents. The Company currently owns 19 communities,
leases seven communities pursuant to long-term leases, and manages 13
communities pursuant to management agreements. The Company is currently
constructing or developing 33 senior living communities with an estimated
aggregate capacity for 3,700 residents and expanding seven of its communities
which will add capacity for approximately 600 residents. Additionally, the
Company currently operates four home health agencies based in or near its
communities, and manages two home health agencies for third parties.
The Company reported net income of $2.3 million, or $0.15 diluted earnings per
share, on revenues of $41.6 million for the quarter ended September 30, 1998, as
compared with net income of $1.0 million, or $0.09 diluted earnings per share,
on revenues of $23.6 million for the comparable prior year period.
The Company's growth strategy includes: (i) selective acquisitions of senior
living communities, including continuing care retirement communities ("CCRCs")
and assisted living residences; (ii) development of senior living communities,
including special living units and programs for residents with Alzheimer's and
other forms of dementia; (iii) expansion of existing communities; and (iv)
selective development and acquisition of other properties and businesses that
are complementary to the Company's operations and growth strategy.
RESULTS OF OPERATIONS
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 and other revenue, which include fees, net of
reimbursements, for the development, marketing and management of retirement
communities and home health care agencies. The Company's resident and health
care revenues are comprised of (i) monthly service fees from independent and
assisted living residents representing 70.0% and 71.7% of total revenues for the
three months ended September 30, 1998 and 1997, respectively, and 72.3% and
72.9% of total revenues for the nine months ended September 30, 1998 and 1997,
respectively; (ii) per diem charges from residents receiving nursing care
representing 13.1% and 14.2% of total revenues for the three months ended
September 30, 1998 and 1997, respectively, and 12.6% and 14.1% of total revenues
for the nine months ended September 30, 1998 and 1997, respectively; (iii) the
amortization of entrance fees over each resident's actuarially determined life
expectancy representing 4.1% and 1.7% of total revenues for the three months and
nine months ended September 30, 1998, respectively (the Company did not own
entrance fee communities prior to July 1, 1998); and (iv) per visit billings
from home health care patients and companion services clients representing 3.8%
and 12.0% of total revenues for the three months ended September 30, 1998 and
1997, respectively, and 5.7% and 10.9% of total revenues for the nine months
ended September 30, 1998 and 1997, respectively. Management services and other
revenue represented 9.0% and 2.1% of total revenues for the three months ended
September 30, 1998 and 1997, respectively, and 7.7% and 2.1% of total revenues
for the nine months ended September 30, 1998 and 1997, respectively.
Approximately
13
<PAGE> 14
95.2% and 87.1% of the Company's total revenues for the three months ended
September 30, 1998 and 1997, respectively, and 93.7% and 88.5% of the Company's
total revenues for the nine months ended September 30, 1998 and 1997,
respectively, were attributable to private pay sources, with the balance
attributable to Medicare, including Medicare-related private pay co-insurance.
The Company's operating expenses are comprised of (i) community operating
expenses, which includes all operating expenses of the Company's owned or leased
communities, including the expenses of its home health care agencies; (ii)
general and administrative expense, which includes all corporate office
overhead; (iii) lease expense; and (iv) depreciation and amortization expense.
The following table sets forth, for the periods indicated, certain resident
capacity and occupancy data for the periods indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
END OF PERIOD CAPACITY STABLE(1) TOTAL STABLE(1) TOTAL
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Owned 4,727 5,042 2,914 3,068
Leased 2,073 2,173 483 573
Managed 3,797 4,493 2,159 2,159
------ ------ ------ ------
Total 10,597 11,708 5,556 5,800
====== ====== ====== ======
END OF PERIOD OCCUPANCY
Owned 94% 91% 96% 92%
Leased 92% 89% 92% 83%
Managed 93% 84% 96% 96%
------ ------ ------ ------
Total 93% 88% 95% 92%
</TABLE>
- --------------------
(1) Includes communities or expansions thereof that have (i) achieved 95%
occupancy or (ii) have been open at least 12 months.
14
<PAGE> 15
SAME COMMUNITY RESULTS
The following table sets forth certain selected financial and operating data on
a Same Community basis. For purposes of the following discussion, "Same
Community basis" refers to communities that were owned and/or leased by the
Company throughout each of the periods being compared. Revenues on a Same
Community basis do not include any management services revenues.
STATEMENT OF OPERATIONS DATA FOR SAME COMMUNITIES:
(DOLLARS IN THOUSANDS, EXCEPT OTHER DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 % +/- 1998 1997 % +/-
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Monthly/per diem service fees $21,792 $20,298 7.4% $62,744 $58,649 7.0%
Home health and companion services revenue 1,313 2,842 -53.8% 4,809 7,405 -35.1%
------- ------- ------- -------
Resident and health care revenue 23,106 23,140 -0.2% 67,553 66,053 2.3%
Community operating expense 14,670 14,581 0.6% 43,098 41,517 3.8%
------- ------- ------- -------
Resident income from operations 8,435 8,560 -1.5% 24,455 24,537 -0.3%
Resident income from operations margin(1) 36.5% 37.0% 36.2% 37.1%
Lease expense 781 719 8.6% 1,774 1,658 7.0%
Depreciation and amortization 1,758 1,561 12.6% 4,872 4,531 7.5%
------- ------- ------- -------
Income from operations 5,897 6,280 -6.1% 17,809 18,348 -2.9%
Other data:
Resident Capacity 3,777 3,577 3,597 3,397
Number of communities 14 14 12 12
Average occupancy rate(2) 90% 92% 92% 95%
Average monthly revenue per occupied unit(3) $2,412 $2,327 3.7% $2,422 $2,309 4.9%
Average monthly expense per occupied unit(4) $1,496 $1,447 3.4% $1,481 $1,419 4.3%
</TABLE>
(1) "Resident income from operations margin" represents "Resident income from
operations" as a percentage of "Resident and health care revenue."
(2) "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.
(3) "Average monthly revenue per occupied unit" is total 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.
(4) "Average monthly expense per occupied unit" is total 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.
15
<PAGE> 16
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Revenues Total revenues were $41.6 million for the three months ended September
30, 1998 compared to $23.6 million for the three months ended September 30,
1997, representing an increase of $17.9 million, or 75.8%. Resident and health
care revenue increased by $14.7 million and management services and other
revenue increased by $3.2 million. The increase in resident and health care
revenue was attributable to revenues derived from senior living communities
acquired or leased after September 30, 1997, including $8.1 million from
acquired FGI communities. Management services and other revenue increased as a
percentage of total revenue to 9.0% from 2.1% and includes development fees of
$2.5 million for the three months ended September 30, 1998 and management fees
which increased to $1.2 million from $467,000 for the three months ended
September 30, 1998 as compared to the prior year period. The increase in
development fees is a result of the significant increase in development services
being provided to third parties. The increase in management fees is related to
new management agreements entered into in the FGI transaction.
Revenues attributable to Same Communities were $23.1 million for the three
months ended September 30, 1998. Monthly/per diem service fee revenue on a Same
Community basis increased $1.5 million, or 7.4%, over the three months ended
September 30, 1997. Of this increase, 3.7% was due primarily to increases in
average rates and 3.7% was due to a higher number of occupied units. Same
Community average occupancy rates were 90% for the three months ended September
30, 1998 as compared to 92% for 1997. The Same Community average occupancy in
1998 includes the dilutive effect of the third quarter opening of an expansion
at a leased community.
In response to the negative effects of The Balanced Budget Act of 1997, Public
Law 105-33BBA, on certain of the Company's home health care agencies, during the
three months ended September 30, 1998, the Company suspended the operation of
seven of its recently established home health care agencies pending either
institution of prospective pay or major revisions to the interim payment system
now in effect. As a result of this, home health and companion services fees on a
Same Community basis decreased by $1.5 million, or 53.8%, over the prior period.
Community Operating Expenses Community operating expenses increased to $24.4
million for the three months ended September 30, 1998, as compared to $14.7
million for the three months ended September 30, 1997, representing an increase
of $9.7 million, or 66.1%. The increase in community operating expenses was
primarily attributable to expenses from senior living communities acquired or
leased after September 30, 1997, including $5.6 million from acquired FGI
communities. Community operating expenses as a percentage of resident and health
care revenues increased to 64.6% for the three months ended September 30, 1998,
from 63.5% for the three months ended September 30, 1997. The increase primarily
relates to lower operating margins from recently acquired FGI lifecare CCRCs.
The retirement communities are financed interest-free by
16
<PAGE> 17
up-front resident entrance fees; therefore, the monthly service fee revenues are
generally lower than comparable rental communities.
Same Community operating expenses increased to $14.7 million for the three
months ended September 30, 1998, as compared to $14.6 million for the three
months ended September 30, 1997. Same Community operating expenses, exclusive of
home health and companion services expenses, increased 7.0% for the three months
ended September 30, 1998, as compared to the three months ended September 30,
1997 primarily as a result of costs at communities with recent expansion
openings. Excluding the two communities with recent expansion openings, Same
Community operating expenses increased by 2.8%. Same Community operating expense
as a percentage of Same Community resident and health care revenues increased to
63.5% for the three months ended September 30, 1998 from 63.0% in the comparable
period in the prior year. Same Community operating expenses exclusive of home
health and companion services expenses as a percentage of Same Community
revenues exclusive of home health and companion services revenue decreased to
62.0% for the three months ended September 30, 1998 from 62.2% for the
comparable period in 1997, primarily as a result of a higher number of occupied
units.
Same Community resident income from operations decreased 1.5% to $8.4 million
for the three months ended September 30, 1998 as compared to $8.6 million for
the comparable period of 1997. Same Community resident income from operations
excluding home health and companion services increased 7.9% to $8.3 million for
the three months ended September 30, 1998 as compared to $7.7 million for the
three months ended September 30, 1997.
General and Administrative General and administrative expense increased to $3.5
million for the three months ended September 30, 1998, as compared to $2.0
million for the three months ended September 30, 1997, representing an increase
of $1.5 million, or 77.4%. The increase was primarily related to increases in
salaries and benefits including corporate personnel retained as a result of the
FGI acquisition and related integration costs. General and administrative
expense as a percentage of total revenues increased to 8.4% for the three months
ended September 30, 1998 as compared to 8.3% for the three months ended
September 30, 1997.
Lease Expense Lease expense increased to $2.6 million for the three months ended
September 30, 1998, from $653,000 for the three months ended September 30, 1997.
The increase of $1.9 million was attributable to leases entered into after
September 30, 1997 for Imperial Plaza, Rossmoor Regency, Bahia Oaks, and Park
Regency. Same Community lease expense was increased $62,000 related to the
completion of the expansion at a leased community.
Depreciation and Amortization Depreciation and amortization expense increased
to $3.5 million for the three
17
<PAGE> 18
months ended September 30, 1998, from $1.7 million for the three months ended
September 30, 1997, representing an increase of $1.8 million, or 106.5%. The
increase was primarily attributable to senior living communities acquired or
leased after September 30, 1997, amortization of the issuance costs incurred in
connection with the Company's 5 3/4% Convertible Subordinated Debentures due
2002 (the "Convertible Debentures") and amortization of goodwill resulting from
the FGI acquisition. Same Community depreciation and amortization expense
increased to $1.8 million for the three months ended September 30, 1998, from
$1.6 million for the three months ended September 30, 1997, representing an
increase of $196,000, or 12.6%, primarily related to expenditures for the
expansion of a community.
Other Income (Expense) Interest expense increased to $5.1 million, net of
capitalized interest of $250,000, for the three months ended September 30, 1998,
from $3.4 million for the three months ended September 30, 1997, representing an
increase of $1.7 million, or 50.0%. The increase in interest expense was
primarily attributable to the issuance in 1997 of $138.0 million of Convertible
Debentures and additional indebtedness incurred in connection with acquisitions,
partially offset by the early extinguishment of $65.1 million of fixed rate
indebtedness at December 31, 1997. Interest income increased to $1.3 million in
the three months ended September 30, 1998 from $421,000 for the comparable
period of the prior year, primarily due to income generated from the investment
of the net proceeds of the public offering closed in August 1998 and
certificates of deposits associated with certain leasing transactions.
Income Tax Expense The provision for income taxes was $1.5 million for the three
months ended September 30, 1998 as compared to $623,000 for the three months
ended September 30, 1997. The Company's effective tax rate was 38% for each of
the comparative periods.
Net Income As a result of the foregoing factors, the Company reported net income
of $2.3 million for the three months ended September 30, 1998 compared to net
income of $1.0 million for the three months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Revenues Total revenues were $100.0 million for the nine months ended September
30, 1998 compared to $68.0 million for the nine months ended September 30, 1997,
representing an increase of $31.9 million, or 46.9%. Resident and health care
revenue increased by $25.7 million and management services and other revenue
increased by $6.2 million. Of the increase in resident and health care revenue,
$24.2 million, or 94.2%, was attributable to revenues derived from senior living
communities acquired or leased after September 30, 1997, including $8.1 million
from acquired FGI communities. The remaining $1.5 million, or 5.8%, of such
increase was attributable to Same Community growth. Management services and
other revenue increased as a percentage of total revenue to 7.7% from 2.2% and
includes development fees which increased to $4.5 million from $270,000 for the
nine months ended September 30, 1998 as compared to the prior year and
management fees which increased to $2.9 million from $1.2 million for the
18
<PAGE> 19
nine months ended September 30, 1998 as compared to the prior year period. The
increase in development fees is a result of the significant increase in
development services being provided to third parties. The increase in management
fees is primarily related to new management agreements entered into in the FGI
transaction.
Revenues attributable to Same Communities were $67.6 million for the nine months
ended September 30, 1998, representing an increase of $1.5 million, or 2.3%,
over the same period in 1997. Monthly/per diem service fee revenue on a Same
Community basis increased $4.1 million, or 7.0% over the nine months ended
September 30, 1997. Of this increase, 4.9% was due primarily to increases in
average rates and 2.1% was due to a higher number of occupied units. Same
Community average occupancy rates were 92% for the nine months ended September
30, 1998 as compared to 95% for 1997. The Same Community average occupancy in
1998 includes the dilutive effect of expansions that opened in the first and
third quarters of 1998.
Home health and companion services fees on a Same Community basis decreased by
$2.6 million, or 35.1%, over the prior period due to significant reductions in
reimbursement rates and the elimination of certain qualifying services which
resulted in the suspension of operations at seven of the Company's home health
care agencies in the third quarter of 1998.
Community Operating Expenses Community operating expenses increased to $59.8
million for the nine months ended September 30, 1998, as compared to $42.2
million for the nine months ended September 30, 1997, representing an increase
of $17.5 million, or 41.6%. Of the increase in community operating expenses,
$16.0 million, or 91.0%, was attributable to expenses from senior living
communities acquired or leased after September 30, 1997, including $5.6 million
related to acquired FGI communities. Approximately 9.0% of the increase was
attributable to Same Community operating expenses, which increased by $1.6
million over the comparable period of the prior year.
Community operating expenses as a percentage of resident and health care
revenues increased to 64.8% for the nine months ended September 30, 1998, from
63.4% for the nine months ended September 30, 1997. Same Community operating
expense as a percentage of Same Community resident and health care revenues
increased to 63.8% for the nine months ended September 30, 1998 from 62.9% in
the comparable period in the prior year. The increase primarily relates to lower
operating margins from recently acquired FGI lifecare CCRCs. The retirement
communities are financed interest-free by up-front resident entrance fees;
therefore, the monthly service fee revenues are generally lower than comparable
rental communities.
Same Community operating expenses, exclusive of home health care agency and
companion services expenses, increased 6.4% for the nine months ended September
30, 1998, as compared to the comparable period in the prior year. Same Community
operating expenses exclusive of home health and companion services expenses as a
percentage of Same Community revenues exclusive of home health and companion
19
<PAGE> 20
services revenue decreased to 61.2% for the nine months ended September 30, 1998
from 61.5% for the comparable period in 1997, primarily as a result of a higher
number of occupied units.
Same Community resident income from operations remained was $24.5 million for
the nine months ended September 30, 1998 and 1997. Same Community resident
income from operations excluding home health and companion services increased
7.9% to $24.4 million for the nine months ended September 30, 1998 as compared
to $22.6 million for the nine months ended September 30, 1997.
General and Administrative General and administrative expense increased to $7.9
million for the nine months ended September 30, 1998, as compared to $6.0
million for the nine months ended September 30, 1997, representing an increase
of $1.8 million, or 30.2%. The increase was primarily related to increases in
salaries and benefits, including corporate personnel retained as a result of the
FGI acquisition and related integration costs. General and administrative
expense as a percentage of total revenues decreased to 7.9% for the nine months
ended September 30, 1998, from 8.9% for the comparable period in the previous
year.
Lease Expense Lease expense increased to $6.2 million for the nine months ended
September 30, 1998, from $1.7 million for the nine months ended September 30,
1997. The increase of $4.5 million was attributable to leases entered into after
September 30, 1997 for Imperial Plaza, Rossmoor Regency, Bahia Oaks, and Park
Regency. Same Community lease expense increased to $1.8 million for the nine
months ended September 30, 1998, from $1.7 million for the nine months ended
September 30, 1997 related to the completion of an expansion at a leased
community.
Depreciation and Amortization Depreciation and amortization expense increased to
$7.6 million for the nine months ended September 30, 1998, from $4.9 million for
the nine months ended September 30, 1997, representing an increase of $2.7
million, or 54.8%. The increase was primarily attributable to senior living
communities acquired or leased after September 30, 1997, amortization of the
issuance costs in connection with the Convertible Debentures, and amortization
of goodwill resulting from the FGI acquisition. Same Community depreciation and
amortization expense increased to $4.9 million for the nine months ended
September 30, 1998, from $4.5 million for the nine months ended September 30,
1997, representing an increase of $341,000, or 7.5%, primarily related to
expenditures for the expansion of a community.
Other Income (Expense) Interest expense increased to $12.4 million, net of
capitalized interest of $1.1 million, for the nine months ended September 30,
1998, from $10.0 million for the nine months ended September 30, 1997,
representing an increase of $2.4 million, or 23.9%. The increase in interest
expense was primarily attributable to the issuance in 1997 of $138.0 million of
Convertible Debentures and additional indebtedness incurred in connection with
acquisitions, partially offset by the early extinguishment of $65.1 million of
fixed rate indebtedness at December 31, 1997.
20
<PAGE> 21
Interest income increased to $2.5 million in the nine months ended September 30,
1998 from $785,000 for the comparable period of the prior year, primarily due to
income generated from the investment of net proceeds of the public offering
closed in August 1998 and certificates of deposits associated with certain
leasing transactions.
Income Tax Expense The conversion from a non-taxable limited partnership to a
taxable corporation in connection with the Company's IPO resulted in a one-time
$3.0 million charge related to the recognition of a deferred income tax
liability for the difference between accounting and tax bases of the Company's
assets and liabilities. For comparability, pro forma adjustments have been made
to exclude the $3.0 million one-time tax charge related to the conversion from a
limited partnership to a taxable corporation and to provide for income taxes as
though the Company had been subject to corporate income taxes for the entire
nine months ended September 30, 1997.
Net Income As a result of the foregoing factors, the Company reported net income
of $5.5 million for the nine months ended September 30, 1998 and pro forma net
income of $174,000 for the nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its activities with the net proceeds from
public offerings of debt and equity, long-term mortgage borrowings, and cash
flows from operations. At September 30, 1998, the Company had $301.3 million of
indebtedness outstanding, including $138.0 million of Convertible Debentures,
and $91.9 million of indebtedness to a capital corporation, with fixed
maturities ranging from October 2000 to April 2028. As of September 30, 1998,
approximately 91.2% of the Company's indebtedness bore interest at fixed rates,
with a weighted average interest rate of 6.8%. The Company's variable rate
indebtedness also carried an average rate of 6.8% as of September 30, 1998. As
of September 30, 1998, the Company had working capital of $51.6 million.
Net cash provided by operating activities was $10.5 million for the nine months
ended September 30, 1998 as compared to $8.1 million provided by operating
activities for the nine months ended September 30, 1997. The Company's
unrestricted cash balance was $52.2 million as of September 30, 1998.
Net cash used by investing activities was $110.9 million for the nine months
ended September 30, 1998, as compared with $4.5 million for the nine months
ended September 30, 1997. Effective July 1, 1998, the Company acquired FGI
including related purchase option and management contract payments, net of cash
acquired, for $29.2 million, made additions to land, buildings and equipment
including construction activity, net of reimbursements, of $20.1 million, and
increased notes receivable by $15.5 million, and purchased $36.6 million of
assets limited as to use pursuant to certain leasing transactions.
21
<PAGE> 22
Net cash provided by financing activities was $108.0 million for the nine months
ended September 30, 1998, as compared with $126.5 million for the nine months
ended September 30, 1997. The Company had net proceeds from its public offering
of $64.8 million, borrowings of $53.7 million under long-term debt arrangements,
and made principal payments on its indebtedness of $12.9 million during the nine
months ended September 30, 1998. The principal payments primarily related to
debt assumed in the FGI transaction and repaid immediately after closing.
In early July 1998, the Company entered into a $36.0 million fixed rate first
mortgage secured by one of its senior living communities. The mortgage bears
interest at a rate of 6.87% and matures in July 2008.
The Company maintains a $50.0 million revolving credit facility and a $4.0
million secured line of credit which are available for general use. As of
September 30, 1998, $15.0 million was outstanding under the $50.0 million
facility and approximately $470,000 of the $4.0 million line had been used to
obtain letters of credit. Additionally, a $5.0 million secured line of credit is
available for land acquisitions. No borrowings are outstanding under the $5.0
million line of credit.
The $50.0 million revolving credit facility contains financial covenants that
require the Company to maintain certain prescribed debt service coverage,
liquidity, net worth, and capital expenditure reserve levels. All of the
Company's owned communities are subject to mortgages. Seven of the Company's
fourteen owned communities serve as blanket collateral for the indebtedness
payable to a capital corporation and as collateral for the $50.0 million
revolving credit facility. Each of the Company's debt agreements contains
restrictive covenants that generally relate to the use, operation, and
disposition of the communities that serve as collateral for the subject
indebtedness, and prohibit the further encumbrance of such community or
communities without the consent of the applicable lender. The Company does not
believe such restrictions are material to its business because the Company does
not intend to further encumber its owned properties and does not believe the
covenants relating to the use, operation, and disposition of its communities
materially limit its operations. Additionally, substantially all of such
indebtedness is cross-defaulted.
The Company has entered into non-binding letters of intent (the "REIT
Facilities") pursuant to which two real estate investment trusts, at the
Company's request and upon satisfaction of certain conditions, would develop,
construct, or acquire up to $110.0 million and $74.7 million, respectively, of
senior living communities and lease the communities to the Company. Currently,
the Company has been allocated $41.6 million and $4.7 million, respectively, in
commitments under the REIT Facilities.
Effective July 1, 1998, the Company acquired privately-held FGI and certain
entities affiliated with FGI and with its chairman. The acquisition resulted in
the ownership of three lifecare CCRCs and management of four additional CCRCs.
The Company also acquired options to purchase two of the managed CCRCs.
Additionally, the Company
22
<PAGE> 23
entered into a development and management contract for, and acquired an option
to purchase, one additional CCRC currently under development. The aggregate
resident capacity for the owned and managed communities included in this
transaction was approximately 3,700. The development project will add capacity
for approximately 400 residents. The consideration paid was approximately $43.0
million, including $23.2 million of cash and 1,370,000 shares of the Company's
Common Stock valued at $19.8 million. The Company paid an additional $4.0
million for the purchase options and $1.5 million as consideration for entering
into the two management contracts. The transaction was accounted for as a
purchase.
On August 4, 1998, the Company completed a public offering of 4,500,000 shares
of common stock, of which 4,297,500 were sold by the Company and 202,500 shares
were sold by certain selling shareholders. Net proceeds to the Company were
approximately $64.8 million, net of underwriting commissions and offering costs.
The aggregate estimated cost to complete and lease-up the 33 senior living
communities currently under development is approximately $410.0 million to
$435.0 million. In addition, the Company plans to expand seven of its owned or
leased communities, which are expected to cost approximately $55.0 million to
complete and lease-up.
The Company expects that its current cash, together with cash flow from
operations, the proceeds of the offering completed in August 1998, and credit
available under the $50.0 million revolving credit facility, the REIT
Facilities, and other existing credit arrangements, will be sufficient to meet
its operating requirements and to fund its anticipated growth for at least the
next 12 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.
YEAR 2000 COMPLIANCE
The Company has assessed the impact of Year 2000 issues on the Company's
business, results of operations, and financial condition. The Company
anticipates substantially completing the testing of its information systems by
the first quarter of 1999. The majority of the Company's critical information
systems were purchased from outside vendors who have upgraded their applications
to be Year 2000 compliant. The Company is also evaluating other Year 2000
implications associated with its community operations, such as elevators,
security systems, HVAC systems and utilities, which will include contacting the
providers of such systems and services to determine the status of their Year
2000 compliance and is developing contingency plans for those systems and
services that may not be Year 2000 compliant. The Company anticipates
substantially completing the testing of such systems and services by the second
quarter of 1999. The total cost of
23
<PAGE> 24
compliance measures is not estimated to be material and is being funded through
operating cash flows and expensed as incurred.
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements within the meaning of
the federal securities laws, which are intended to be covered by the safe
harbors created thereby. Those statements include, but may not be limited to,
the discussions of the Company's operating and growth strategy, including its
development plans and possible acquisitions. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, those set forth under the caption "Risk Factors" in the Company's
Prospectus Supplement, dated July 30, 1998, and the accompanying Prospectus,
dated July 9, 1998. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could prove to be inaccurate, and therefore, there can be no
assurance that the forward-looking statements included in this Form 10-Q 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 and circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 14, 1998, the Company issued an aggregate of 1,370,000 shares of Common
Stock to the former shareholders of FGI in connection with the merger of FGI
with and into the Company. The shares of Common Stock were issued in reliance on
Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
a. Exhibits
<S> <C>
10.1 Fixed Rate Program Promissory Note Secured by Mortgage, dated July
9, 1998, by ARCLP - Charlotte, LLC to Heller Financial, Inc. in
the original principal amount of $36,000,000.
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C>
10.2 Registration Rights Agreement, dated July 14, 1998, by and between
American Retirement Corporation and Robert G. Roskamp, PHC, LLC, and
The Edgar and Elsa Prince Foundation.
10.3 Shareholder Agreement, dated July 14, 1998, by and between American
Retirement Corporation and Robert G. Roskamp.
10.4 Consulting Agreement dated July 14, 1998, by and Additionally,
substantially all of such indebtedness is cross-defaulted.
27 Financial Data Schedule for SEC use only.
</TABLE>
b. Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated July 28, 1998, to
report pursuant to Item 2 that the Company acquired 100% of the ownership
interests in FGI and certain entities affiliated with FGI and with its
chairman, and to enter into certain related transactions. The Current
Report contained audited financial statements for the entities acquired
pursuant to the FGI transaction and pro forma financial statements for the
Company giving effect to the FGI transaction.
The Company filed a Current Report on Form 8-K, dated July 30, 1998, to
report the announcement of selected results of operations for the quarter
ended June 30, 1998. The press release was filed as an exhibit to such Form
8-K.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
American Retirement Corporation
Date: November 5, 1998 By: /s/ George T. Hicks
------------------------------
George T. Hicks
Executive Vice President
and Chief Financial Officer
(principal financial and
accounting officer)
<PAGE> 1
Exhibit 10.1
FIXED RATE PROGRAM
PROMISSORY NOTE SECURED BY MORTGAGE
<TABLE>
<S> <C>
LOAN NO. 98-216 July 9, 1998
Brentwood, Tennessee
MAKER: ARCLP - Charlotte, LLC,
a Tennessee limited liability company
MAKER'S ADDRESS: 111 Westwood Place, Suite 402
Brentwood, Tennessee 37027
PRINCIPAL AMOUNT: THIRTY-SIX MILLION AND NO/100 DOLLARS ($36,000,000.00), together with all
other amounts added thereto pursuant to this Note or otherwise payable
in accordance with the Loan Documents.
PAYEE AND HOLDER: Heller Financial, Inc., a Delaware corporation, and its successors and assigns.
PAYMENT ADDRESS: 500 West Monroe Street, 31st Floor
Chicago, Illinois 60661
or such other address as Holder may hereafter designate in writing to Maker.
PRINCIPAL(S): American Retirement Corporation, a Tennessee corporation
111 Westwood Place, Suite 402
Brentwood, Tennessee 37027
INITIAL PAYMENT DATE: August 1, 1998
MATURITY DATE: July 1, 2008, or any earlier date on which the entire unpaid Principal
Amount shall be paid or required to be paid in full, whether by prepayment,
acceleration or otherwise.
AMORTIZATION PERIOD: 30 Years.
AMORTIZATION SCHEDULE: The amortization schedule attached hereto as Exhibit A.
CONTRACT RATE: A rate of interest equal to six and 87/100 percent (6.87%) per annum.
DEFAULT RATE: The Contract Rate plus 500 basis points per annum.
LATE CHARGE: Five percent (5%) of each delinquent payment.
PROPERTY: Carriage Club of Charlotte
5800 Old Providence Road
Charlotte, Mecklenburg County, North Carolina
MORTGAGE: The mortgage or deed of trust, assignment of rents and security
agreement and fixture filing of even date herewith (and any modification,
renewal or extension thereof) securing repayment of the Loan and
encumbering, among other things, the Property.
LOAN: The loan from Holder to Maker evidenced by this Note and secured by the
other Loan Documents.
LOAN DOCUMENTS: This Note, the Mortgage and any other documents evidencing or securing the
Loan or executed in connection therewith, and any modification, renewal or
extension thereof.
NOTE: This Fixed Rate Program Promissory Note Secured by Mortgage and any
modifications, renewals or extensions hereof and any substitutions therefor.
</TABLE>
1. PROMISE TO PAY.
FOR VALUE RECEIVED, Maker promises to pay to the order of Holder at the
Payment Address the Principal Amount (or so much thereof as may from time to
time be outstanding) on or before the Maturity Date, together with interest
thereon as hereinafter set forth, payable in lawful money of the United States
of America.
<PAGE> 2
2. PRINCIPAL AND INTEREST.
So long as no Event of Default exists, interest shall accrue on the
Principal Amount from time to time outstanding at the Contract Rate based on the
actual number of days in each given month and a 360 day year. Principal and
interest shall be paid to the Holder hereof as follows: (a) On the Initial
Payment Date and on the first day of each month thereafter, Maker shall pay to
Holder monthly payments of principal and interest due for such period based upon
the Amortization Schedule; and (b) the outstanding Principal Amount of this
Note, together with all accrued and unpaid interest, shall be due and payable in
full on the Maturity Date. Whenever any payment is stated to be due or a
computation is to be made on a day which is not a business day, such payment or
computation will be made on the next succeeding business day, and such extension
of time will be included in the computation of interest.
3. PREPAYMENT AND DEFEASANCE.
3.1 Prepayments.
This Note may not be prepaid in whole or in part during the
term hereof, except as otherwise specifically provided herein.
3.2 Prepayment Fee.
In the event the principal amount of this Note is paid prior
to July 1, 2008 as a result of Holder's exercise of its rights upon
Maker's default and acceleration of the Maturity Date of this Note
(irrespective of whether foreclosure proceedings have been commenced),
Holder shall be entitled to collect and Maker shall pay to Holder, in
addition to any other sums due hereunder or under any of the other Loan
Documents, a prepayment fee in an amount equal to the Yield Maintenance
Amount.
"YIELD MAINTENANCE AMOUNT" means an amount, never less than zero, equal
to the present value of a series of "Monthly Amounts", assumed to be
paid at the end of each month remaining from the date of prepayment
through July 1, 2008, discounted at the U.S. Securities Rate.
"MONTHLY AMOUNT" shall mean the following:
(A) The Contract Rate,
MINUS
(B) The yield ("U.S. SECURITIES RATE"), as of the date of
such prepayment, as published by the Federal Reserve System
in its "Statistical Release H.15(519), Selected Interest
Rates" under the caption "U.S. Government Securities/Treasury
Constant Maturities", for a U.S. Government Security with a
term equal to that remaining on this Note on the date of such
prepayment (which term may be obtained by interpolating
between the yields published for specific whole years),
DIVIDED BY TWELVE (12) AND THE
QUOTIENT THEREOF THEN MULTIPLIED BY
(C) The amount prepaid on the date of such prepayment.
All percentages shall be rounded to the nearest one
hundred thousandth percent and dollar amounts to the nearest
whole dollar.
3.3 End of Term.
Notwithstanding the foregoing, the Loan may be paid without a
prepayment fee or premium during the last ninety (90) days of the loan
term. If the Loan has been defeased pursuant to Subparagraph 3.4, it
may not be prepaid prior to July 1, 2008.
3.4 Defeasance.
Notwithstanding any provision of this Paragraph 3 to the
contrary, at any time after the later of (a) three (3) years after the
closing of the Loan or (b) if Holder securitizes the Loan within three
(3) years after the closing of the Loan, two (2) years after the
"startup day," within the meaning of Section 860G(a)(9) of the Internal
Revenue Code of 1986, as amended from time to time or any successor
statute (the "CODE"), of a "real estate mortgage investment conduit"
("REMIC"), within the meaning of Section 860D of the Code, that holds
this Note, and provided no Event of Default has occurred and is
continuing hereunder or under any of the other Loan Documents, Maker
may cause the release of the Property from the lien of the Mortgage and
the other Loan Documents upon the satisfaction of the following
conditions (the "DEFEASANCE"):
(i) Not less than thirty (30) days prior written notice
shall be given to Holder specifying a date (the
"RELEASE DATE") on which the Defeasance Deposit (as
hereinafter defined) is to be made, such date
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<PAGE> 3
being a day on which a regularly scheduled monthly
installment of principal and interest is required to
be paid pursuant to Paragraph 2 above (a "DEBT
SERVICE PAYMENT DATE");
(ii) All accrued and unpaid interest and all other sums
due under this Note and under the other Loan
Documents up to and including the Release Date,
including, without limitation, all costs and expenses
incurred by Holder or its agents in connection with
the Defeasance (including, without limitation, the
purchase of the Defeasance Collateral [as hereinafter
defined] and the preparation of the Defeasance
Security Agreement [as hereinafter defined] and
related documentation, including reasonable
attorneys' fees and expenses), shall be paid in full
on or prior to the Release Date;
(iii) Maker shall deliver to Holder on or prior to the
Release Date:
a) The estimated amount necessary to purchase
the Defeasance Collateral (the "DEFEASANCE
DEPOSIT");
b) A pledge and security agreement, in form and
substance satisfactory to Holder in its sole
discretion, creating a first priority
security interest in favor of Holder in the
Defeasance Deposit and the Defeasance
Collateral (the "DEFEASANCE SECURITY
AGREEMENT");
c) A certificate of Maker certifying that it is
requesting the lien against the Property be
released to facilitate a disposition or
refinancing of, or other customary
commercial transaction involving, the
Property and that all of the other
requirements set forth in this Paragraph 3.4
have been satisfied;
d) An opinion of counsel for Maker in form and
substance and delivered by counsel
satisfactory to Holder in its sole
discretion stating, among other things, that
(i) the Defeasance Deposit has been duly and
validly assigned and delivered to Holder;
(ii) the posting of the Defeasance Deposit
will not adversely affect the tax status of
the REMIC under the Code; and (iii) Holder
has a perfected first priority security
interest in the Defeasance Collateral and
that the Defeasance Security Agreement is
enforceable against Maker in accordance with
its terms; and
e) Such other certificates, documents or
instruments as Holder may reasonably
require; and
(iv) Holder receives reasonable assurances that the
securities of the REMIC ("SECURITIES") that directly
or indirectly holds this Note will not have a
downgrade, withdrawal or qualification of the credit
rating then assigned to the Securities by any rating
agencies ("APPLICABLE RATING AGENCIES") as a result
of the Defeasance; and
(v) The holder of the Defeasance Collateral, which shall
be Maker or a designee of Maker, shall be a single
purpose entity, which shall not own any other assets
or have any other liabilities or operate any other
property.
Notwithstanding anything that may be contained herein to the
contrary, the Loan may not be defeased during the last ninety (90) days
of the loan term if the Loan has not previously been defeased.
3.5 Defeasance Collateral.
Upon compliance with the requirements of Subparagraph 3.4
above:
(i) Holder shall use the Defeasance Deposit in accordance
with Maker's express written instructions to purchase
direct, non-callable obligations of the United States
of America that provide, without reinvestment, for
payments not later than the due dates of all
successive monthly Debt Service Payment Dates
occurring after the Release Date, with each such
payment being equal to or greater than the amount
of the corresponding installment of principal and
interest required to be paid under this Note
(including all amounts due on July 1, 2008 for the
balance of the term hereof (the "DEFEASANCE
COLLATERAL") as certified by an independent
accountant satisfactory to Holder, each of which
shall be duly endorsed as directed by Holder or
accompanied by a written instrument of transfer in
form and substance wholly satisfactory to Holder
(including, without limitation, such instruments as
may be required by the depository institution
holding such securities to effectuate book-entry
transfers and pledges through the book-entry
facilities of such institution) in order to create a
first priority security interest therein in favor of
Holder in conformity with all applicable state and
federal laws governing granting of such security
interests. In connection with the conditions set
forth above, Maker hereby appoints Holder as its
agent and attorney-in-fact for the purpose of
purchasing the Defeasance Collateral with the
Defeasance Deposit. Maker, pursuant to the Defeasance
Security Agreement, shall authorize and direct the
payments received from the direct, non-callable
obligations of the United States of America to be
made directly to Holder and applied to satisfy the
obligations of Maker under this Note. Any portion of
the Defeasance Deposit in excess of the amount
necessary to purchase the Defeasance Collateral and
satisfy all of Maker's obligations to Holder shall be
returned to Maker without interest.
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<PAGE> 4
(ii) The Property shall be released from the lien of the
Mortgage and the other Loan Documents, and the
Defeasance Collateral shall constitute collateral
which shall secure this Note and all other
obligations under the Loan Documents.
3.6 Assignment.
Upon the release of the Property in accordance with this
Paragraph 3, Maker may assign all its obligations and rights under this
Note, together with the pledged Defeasance Collateral, to a successor
entity designated by Maker and approved by Holder in its sole
discretion. Such successor entity shall execute an assumption agreement
in form and substance satisfactory to Holder in its sole discretion
pursuant to which it shall assume Maker's obligations under this Note
and the Defeasance Security Agreement. As conditions to such
assignments and assumption, Maker shall (i) deliver to Holder an
opinion of counsel in form and substance and delivered by counsel
satisfactory to Holder in its sole discretion stating, among other
things, that such assumption agreement is enforceable against Maker and
such successor entity in accordance with its terms and that this Note,
the Defeasance Security Agreement and the other Loan Documents, as so
assumed, are enforceable against such successor entity in accordance
with their respective terms, (ii) if required by the Applicable Rating
Agencies, pay the reasonable legal expenses of Holder's counsel
incurred in connection with the delivery of a non-consolidation opinion
with respect to the successor entity, if any, in form and substance
satisfactory to the Applicable Rating Agencies, and (iii) pay all costs
and expenses incurred by Holder or its agents in connection with such
assignment and assumption (including, without limitation, the review of
the proposed transferee and the preparation of the assumption agreement
and related documentation). Upon such assumption, Maker shall be
relieved of its obligations hereunder, under the other Loan Documents
and under the Defeasance Security Agreement.
3.7 No Further Rights.
Upon the release of the Property in accordance with this
Paragraph 3, Maker shall have no further right to prepay this Note
pursuant to the other provisions of this Paragraph 3 or otherwise.
Notwithstanding the foregoing, the application of any insurance
proceeds or condemnation awards to the Indebtedness in accordance with Paragraph
5 of the Mortgage shall not result in the payment of any prepayment fee, or
Yield Maintenance Amount.
4. DEFAULT.
4.1 Events of Default.
The following shall constitute an "Event of Default" under
this Note: (i) failure to pay any amounts owed pursuant to this Note
within five (5) calendar days after such payment is due; or (ii) the
occurrence of any Event of Default under any of the other Loan
Documents.
4.2 Remedies.
So long as an Event of Default remains outstanding: (a)
interest shall accrue at the Default Rate and, to the extent not paid
when due, shall be added to the Principal Amount; (b) Holder may, at
its option and without notice (such notice being expressly waived),
declare the unpaid Principal Amount immediately due and payable.
Holder's rights, remedies and powers, as provided in this Note and the
other Loan Documents, are cumulative and concurrent, and may be pursued
singly, successively or together against Maker, the security described
in the other Loan Documents, any guarantor(s) hereof and any other
security given at any time to secure the payment hereof, all at the
sole discretion of Holder. Additionally, Holder may resort to every
other right or remedy available at law or in equity without first
exhausting the rights and remedies contained herein, all in Holder's
sole discretion. Failure of Holder, for any period of time or on more
than one occasion, to exercise its option to accelerate the Maturity
Date shall not constitute a waiver of the right to exercise the same at
any time during the continued existence of any Event of Default or any
subsequent Event of Default.
5. LATE CHARGE.
If payments of principal and/or interest, or any other amounts under
the other Loan Documents are not timely made and remain overdue for a period of
five days, Maker, without notice or demand by Holder, promptly shall pay the
Late Charge computed on such past due amounts. Until paid, the Late Charge shall
be added to the Principal Amount. Nothing in this Note shall be construed as an
obligation on the part of Holder to accept, at any time, less than the full
amount then due hereunder, or as a waiver or limitation of Holder's right to
compel prompt performance.
6. JURY TRIAL WAIVER.
MAKER, AND HOLDER BY ITS ACCEPTANCE OF THIS NOTE, HEREBY WAIVE THEIR
RESPECTIVE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR
RELATED TO, THE SUBJECT MATTER OF THIS NOTE AND THE BUSINESS RELATIONSHIP THAT
IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY
MADE BY MAKER AND HOLDER, AND MAKER ACKNOWLEDGES THAT NEITHER THE HOLDER NOR ANY
PERSON ACTING ON BEHALF OF THE HOLDER HAS MADE ANY REPRESENTATIONS OF FACT TO
INDUCE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN
-4-
<PAGE> 5
ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. MAKER AND HOLDER
ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS
RELATIONSHIP, THAT MAKER AND HOLDER HAVE ALREADY RELIED ON THIS WAIVER IN
ENTERING INTO THIS NOTE AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS
WAIVER IN THEIR RELATED FUTURE DEALINGS. MAKER AND HOLDER FURTHER ACKNOWLEDGE
THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED)
IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT
LEGAL COUNSEL.
7. WAIVER.
Maker, for itself and all endorsers, guarantors and sureties of this
Note, and each of them, and their heirs, legal representatives, successors and
assigns, respectively hereby waives presentment for payment, demand, notice of
nonpayment, notice of dishonor, protest of any dishonor, notice of protest and
protest of this Note, and all other notices in connection with the delivery,
acceptance, performance, default or enforcement of the payment of this Note, and
agrees that its liability shall be unconditional and without regard to the
liability of any other party and shall not be in any manner affected by any
indulgence, extension of time, renewal, waiver or modification granted or
consented to by the Holder. Maker, for itself and all endorsers, guarantors and
sureties of this Note, and each of them, and their heirs, legal representatives,
successors and assigns, respectively hereby consents to every extension of time,
renewal, waiver or modification that may be granted by Holder with respect to
the payment or other provisions of this Note, and to the release of any makers,
endorsers, guarantors or sureties, or of any collateral given to secure the
payment hereof, or any part hereof, with or without substitution, and agrees
that additional makers or guarantors or endorsers may become parties hereto
without notice to Maker and without affecting the liability of Maker hereunder.
8. SECURITY, APPLICATION OF PAYMENTS.
This Note is secured by the liens, encumbrances, and obligations
created hereby and by the other Loan Documents and the terms and provisions of
the other Loan Documents are hereby incorporated herein. Each payment on the
Loan is to be applied when received first to the payment of any fees, expenses
or other costs Maker is obligated to pay hereunder or under the terms of the
other Loan Documents, second to the payment of any accrued and unpaid Late
Charge, third to the payment of interest on the Principal Amount from time to
time remaining unpaid, and the remainder of such payment shall be used to reduce
the Principal Amount.
9. MISCELLANEOUS.
9.1 Amendments.
This Note may not be terminated or amended orally, but only
by a termination or amendment in writing signed by Holder.
9.2 Lawful Rate of Interest.
In no event whatsoever shall the amount of interest paid or
agreed to be paid to Holder pursuant to this Note exceed the highest
lawful rate of interest permissible under applicable law. If, from any
circumstances whatsoever, fulfillment of any provision of this Note and
the other Loan Documents shall involve exceeding the lawful rate of
interest which a court of competent jurisdiction may deem applicable
hereto, then ipso facto, the obligation to be fulfilled shall be
reduced to the highest lawful rate of interest permissible under such
law and if, for any reason whatsoever, Holder shall receive, as
interest, an amount which would be deemed unlawful under such
applicable law, such interest shall be applied to the Principal Amount
(whether or not due and payable), and not to the payment of interest,
or refunded to Maker if such Principal Amount has been paid in full.
9.3 Captions; Definitions.
The captions of the Paragraphs of this Note are for
convenience only and shall not be deemed to modify, explain, enlarge or
restrict any of the provisions hereof. Each of the terms defined before
Paragraph 1 hereof shall have the meaning set forth following such term
when used throughout this Note.
9.4 Severable Provisions.
Every provision of this Note is intended to be severable. If
any term or provision hereof is declared by a court of competent
jurisdiction to be illegal, invalid or unenforceable for any reason
whatsoever, such illegality, invalidity or unenforceability shall not
affect the balance of the terms and provisions hereof, which terms and
provisions shall remain binding and enforceable.
9.5 Notices.
Notices shall be given under this Note in conformity with
the terms and conditions of the Mortgage.
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<PAGE> 6
9.6 Joint and Several.
The obligations of Maker in this Note shall be joint and
several obligations of Maker and of each Maker, if more than one, and
of each Maker's heirs, personal representatives, successors and
assigns.
9.7 Time of Essence.
Time is of the essence of this Note and the performance of
each of the covenants and agreements contained herein.
9.8 Governing Law.
This Note shall be governed by the laws of the State of
Illinois.
10. EXCULPATION.
Except as set forth below, neither Maker nor any Principal shall be
personally liable to pay the Principal Amount, or any other amount due, or to
perform any obligation, under the Loan Documents, and Holder agrees to look
solely to the Property and any other collateral heretofore, now, or hereafter
pledged by any party to secure the Loan. Maker and each Principal, jointly and
severally, shall be personally liable for all losses, damages, costs and
expenses including attorneys' fees and expenses incurred by Holder as a result
of:
(i) the collection and receipt of proceeds and income
from the Property and the other assets and
obligations securing the Loan by or for the benefit
of Maker or any Principal following an Event of
Default which are not paid to Holder or applied to
the Property in the ordinary course of business;
(ii) fraud;
(iii) material misrepresentation;
(iv) misapplication or misappropriation of funds which
come into the possession of Maker or any Principal;
(v) intentional or material waste to the Property;
(vi) the breach of the obligations set forth in the
Hazardous Substance Indemnification Agreement from
Maker and Principals to Holder of even date herewith,
as hereafter amended, if at all;
(vii) the breach of the provisions contained in Paragraph
15 (transfers of the property or beneficial interest
in Maker; assumption) of the Mortgage;
(viii) the breach of the provisions contained in Paragraph
16 (no additional liens) of the Mortgage; or
(ix) the breach of the provisions contained in Paragraph
17 (single asset entity) of the Mortgage.
The foregoing shall in no way limit or impair the enforcement against
the Property or any other security granted by the Loan Documents of any of the
Holder's rights and remedies pursuant to the Loan Documents.
IN WITNESS WHEREOF, Maker does execute this Note as of the date set
forth above.
MAKER:
ARCLP - CHARLOTTE, LLC, (SEAL) a Tennessee limited
liability company
By: ARC CHARLOTTE, INC., a Tennessee
corporation, its Managing Member
Attest:
By: By:
----------------------- ---------------------------------------
Name: Name: George T. Hicks
--------------------- ---------------------------------------
Its: , Secretary Its: Executive Vice President - Finance
---------------------- ----------------------------------
(CORPORATE SEAL)
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<PAGE> 7
EXHIBIT A
AMORTIZATION SCHEDULE
<PAGE> 1
EXHIBIT 10.2
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of the
14th day of July, 1998, by and among AMERICAN RETIREMENT CORPORATION, a
Tennessee corporation (the "Company"), and the shareholders of the Company
listed on Exhibit A attached hereto (the "Shareholders").
WITNESSETH:
WHEREAS, Freedom Group, Inc., a Florida corporation ("FGI"), the
Shareholders, and the Company are parties to that certain Agreement and Plan of
Merger, dated as of May 29, 1998 (the "Merger Agreement"), pursuant to which the
Company has agreed to grant to the Shareholders certain registration rights with
respect to shares of the common stock, par value $.01 per share, of the Company
("Common Stock") into which the Shareholders' shares of the capital stock of FGI
shall be converted;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto agree as follows:
1. Definitions - As used in this Agreement, the following terms shall
have the following meanings:
"Affiliate" shall have the meaning set forth in Rule 144
promulgated under the Securities Act.
"Holder" means each Shareholder that owns Registrable
Securities, including their respective permitted successors and assigns who
acquire Registrable Securities, directly or indirectly, from a Shareholder;
provided, however, that a successor or assign will become a Holder and thereby
be entitled to rights under this Agreement only if such successor or assign is a
family member of a Holder, a trust for the benefit of a Holder or a family
member of a Holder, or a transferee who receives such Registrable Securities as
part of a pro rata distribution by a Holder that is not a natural person. For
purposes of this Agreement, the Company may deem and treat the holder of a
Registrable Security reflected on the Company's transfer agent's records as the
Holder and absolute owner thereof and the Company shall not be affected by any
notice to the contrary.
"Prince Entities" means PHC, L.L.C., a Michigan limited
liability company, and The Edgar and Elsa Prince Foundation, a Michigan
corporation.
"Registrable Securities" means (a) shares of Common Stock to
be delivered to the Shareholders pursuant to the Merger Agreement (the "Merger
Shares") and (b) any shares of Common Stock issued or issuable in respect of the
Merger Shares by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, reclassification, merger, or
consolidation, and any other securities of the Company issued pursuant to any
pro rata distribution
<PAGE> 2
with respect to such Merger Shares. For purposes of this Agreement, a
Registrable Security ceases to be a Registrable Security upon the earlier of:
(x) when its offer and sale has been effectively registered under the Securities
Act and it has been sold or distributed in accordance with such effective
registration statement; (y) when it has been or may be sold or distributed to
the public in one transaction with all other Merger Shares owned by the Holder
thereof pursuant to Rules 144 or 145 (or any successor or similar provisions)
under the Securities Act; or (z) on the third anniversary of the date of this
Agreement.
"Roskamp" means Robert G. Roskamp.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended
from time to time.
2. Demand Registration.
(a) Subject to the terms and conditions set forth herein, if, at any
time on or after July 14, 1999, the Company is and continues to be eligible to
effect a Registration Statement on Form S-3 covering resales of Common Stock by
the Company's shareholders and the Company shall receive a written request from
Roskamp to register under the Securities Act twenty-five percent (25%) or more
of the Registrable Securities held by Roskamp and his Affiliates, within 15
business days of receipt of such request the Company shall give written notice
of such registration request to all other Holders and the Company will include
in such registration all Registrable Securities of such Holders with respect to
which the Company has received written requests for inclusion therein within 15
days after the date of such notice.
(b) Subject to the terms and conditions set forth herein, if, at any
time on or after July 14, 1999, the Company is and continues to be eligible to
effect a Registration Statement on Form S-3 covering resales of Common Stock by
the Company's shareholders and the Company shall receive a written request from
the Prince Entities to register under the Securities Act twenty-five percent
(25%) or more of the Registrable Securities held by the Prince Entities, within
15 business days of receipt of such request the Company shall give written
notice of such registration request to all other Holders and the Company will
include in such registration all Registrable Securities of such Holders with
respect to which the Company has received written requests for inclusion therein
within 15 days after the date of such notice (any Holder electing to include
Registrable Securities in a registration statement pursuant to Section 2(a) or
(b) is referred to herein as a "Requesting Holder").
(c) In the event the Company receives a request pursuant to Section
2(a) or (b), the Company shall use all reasonable efforts to cause to be filed
and declared effective as soon as reasonably practicable a registration
statement, on such appropriate form as the Company in its discretion shall
determine, providing for the sale of the Registrable Securities requested to be
included by each of such Requesting Holders; provided, however, that such
requests shall express the present intention of the Requesting Holders to offer
or cause the offering of such Registrable Securities for
2
<PAGE> 3
distribution and shall state the intended method of distribution thereof. Each
registration statement filed pursuant to Section 2(a) or (b) is hereinafter
referred to as a "Demand Registration Statement."
The Company's obligation to use all reasonable efforts to cause
Registrable Securities to be registered in accordance with Section 2(a) or (b)
is subject to each of the following limitations, conditions, and qualifications:
(i) If the Company shall have previously filed a Demand
Registration Statement by reason of a request pursuant to this Section
2 that shall have become effective and remained effective for the
period specified in Section 4(a)(ii), then the Company shall not be
required to effect any additional registration requested pursuant to
this Section 2 for a period of twelve months from the date of the
termination of the effectiveness of such prior Demand Registration
Statement.
(ii) If the Company shall have previously given notice of a
proposed registration to the Holders pursuant to Section 3 hereof, then
the Company shall not be required to effect any registration requested
pursuant to Section 2(a) or (b) for a period of 180 days from the date
of such notice; provided, however, that if the registration statement
filed in connection therewith becomes effective within such 180-day
period, such 180-day period shall be extended for such period as may be
required pursuant to the terms and conditions of any underwriting
agreement entered into in connection with such proposed registration.
(iii) The Company may postpone for a period of 90 days the
filing or the effectiveness of a registration requested pursuant to
Section 2(a) or (b) if (A) such registration is demanded within 90 days
following the effective date of a registration statement filed by the
Company or (B) the Board of Directors of the Company determines in good
faith that such registration might have an adverse effect on any plan
or proposal by the Company or any of its subsidiaries with respect to
any financing, acquisition, recapitalization, reorganization, or other
material transaction or that the Company is in possession of material
non-public information and disclosure of such information is not in the
best interests of the Company or any of its subsidiaries; provided,
however, that as soon as the conditions permitting such delay no longer
exist, the Company shall give notice of that fact to the Requesting
Holders and shall proceed with the registration unless the Requesting
Holders shall have elected, at any time prior to the close of business
on the tenth business day after the Company has so notified the
Requesting Holders, to withdraw their request for registration, and
such withdrawn request shall not constitute a request hereunder.
(iv) The Company shall not be required to effect any
registration pursuant to Section 2(a) or (b) unless such registration
relates to Registrable Securities representing at least twenty-five
percent (25%) of the then outstanding shares of such Registrable
Securities. In addition, the Company shall not be required to effect
any registration pursuant to Section 2(a) or (b) with respect to
Registrable Securities which may be sold by the Holder thereof in
3
<PAGE> 4
a single transaction pursuant to Rule 144 or 145 (or any successor or
similar provisions) under the Securities Act.
(v) The obligation of the Company to register the offer and
sale of Registrable Securities pursuant to Section 2(a) or (b) shall
expire with respect to such subsection after a Demand Registration
Statement filed by reason of a request pursuant to such subsection
shall have become effective and remained effective for the period
specified in Section 4(a)(ii) hereof.
(d) The Company agrees that, except as otherwise permitted by Section
2(f) hereof, it will not effect any public sale or distribution (or any
registration with respect thereto) of any of its Common Stock during a period
beginning on the 15th day prior to, and ending on the earlier of the 45th day
after, the date such Demand Registration Statement is declared effective or the
date when attempts to effect such registration are abandoned by or at the
request of the Required Holders (the "Hold-Back Period").
(e) The Company may, at its option and in its sole discretion, require
that all shares proposed to be sold pursuant to a Demand Registration Statement
be sold in a firm-commitment underwriting. The Company shall have the right to
select any nationally recognized investment banking firm(s) to underwrite the
offering.
(f) The Company and, at the Company's election, any other holders of
Common Stock with registration rights, may include in any registration requested
pursuant to Section 2(a) or (b) any shares of Common Stock that it or they shall
determine so to include (the "Additional Registrable Securities") and the
consent of the Requesting Holders shall not be required with respect thereto;
provided, however, that, if, in the opinion of the managing underwriter(s) of
such offering, the inclusion in such registration statement of all Additional
Registrable Securities would materially interfere with the successful marketing
of the Requesting Holders' Registrable Securities, then the number of the
Additional Registrable Securities shall be reduced to such number, if any, that,
in the opinion of such managing underwriter(s), can be included in such
underwriting without such interference with the successful marketing of the
Requesting Holders' Registrable Securities.
3. Incidental Registration. Subject to the terms and conditions set
forth herein, if the Company proposes on or after January 14, 1999 to register
the offer and sale of shares of Common Stock for its own account (the "Initially
Proposed Shares") for cash under the Securities Act in an underwritten public
offering, the Company will promptly give written notice to the Holders of its
intention to effect such registration (such notice to specify, to the extent
known, the proposed offering price, the number of shares of Common Stock
proposed to be registered, and the distribution arrangements, including
indemnification of underwriters), and the Holders shall be entitled to include
in such registration statement, as a part of such underwritten offering, such
number of Registrable Securities (the "Holder Shares") to be sold for the
account of the Holders (on the same terms and conditions as the Initially
Proposed Shares) as shall be specified in a request in writing delivered to the
Company within 15 days after the date upon which the Company gave the
aforementioned notice.
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<PAGE> 5
The Company's obligations to include Holder Shares in a registration
statement pursuant to this Section 3 is subject to each of the following
limitations, conditions, and qualifications:
(a) If, at any time after giving written notice of its intention to
effect a registration of any of its shares of Common Stock prior to the
effective date of any registration statement filed in connection with such
registration, the Company shall determine for any reason not to register the
offer and sale of such shares, the Company may, at its election, give written
notice of such determination to the Holders of Holder Shares and thereupon it
shall be relieved of its obligation to use any efforts to register any Holder
Shares in connection with such aborted registration.
(b) If, in the opinion of the managing underwriter(s) of such offering,
the distribution of all or a specified portion of the Holder Shares would
materially interfere with the registration and sale, in accordance with the
intended method thereof, or materially adversely affect the pricing of the
Initially Proposed Shares, then the number of Holder Shares and shares of Common
Stock to be registered on behalf of any person (other than the Company) entitled
to exercise incidental registration rights with respect to such registration
("Other Holders") to be included in such registration statement shall be reduced
(pro rata among the Holders and Other Holders on the basis of the number of
shares that each such Holder and Other Holder requested be included unless such
Other Holder's rights are being exercised pursuant to a demand registration
right or are expressly superior to the rights of the Holders pursuant to this
Agreement, in which case such Other Holder's number of shares shall not be
reduced pursuant to this Section 3(b)) to such number, if any, that, in the
opinion of such managing underwriter(s), can be included without such
interference. If, as a result of the provisions of the preceding sentence, any
Holder is not entitled to include all of the Holder Shares in such registration,
such Holder may elect to withdraw its request to include any Holder Shares in
such registration (a "Withdrawal Election"); provided, however, that a
Withdrawal Election shall be irrevocable and such Holder shall no longer have
any right to include any Holder Shares in the registration as to which such
Withdrawal Election was made.
(c) As a condition to each Holder's right to include Holder Shares in a
registration pursuant to this Section 3, such Holder shall, if requested by the
Company or the managing underwriter(s) in connection with such registration and
distribution, (A) agree to sell the Holder Shares on the basis provided in any
underwriting arrangements entered into in connection therewith and (B) complete
and execute all questionnaires, powers of attorney, indemnities, underwriting
agreements, and other documents that are customary in similar transactions and
required under the terms of such underwriting arrangements.
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<PAGE> 6
4. Registration Procedures.
(a) Whenever the Company is required to use all reasonable efforts to
effect the registration of any Registrable Securities under the Securities Act
pursuant to the terms and conditions of Section 2(a) or (b) regarding demand
registrations, the Company will use all reasonable efforts to effect the
registration and sale of the Registrable Securities in accordance with the
intended method of disposition thereof. Without limiting the generality of the
foregoing, the Company will as soon as practicable:
(i) prepare and file with the SEC a registration statement on
any appropriate form under the Securities Act with respect to the
Registrable Securities and use all reasonable efforts to cause such
registration statement to become effective;
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities
Act with respect to the disposition of all the Registrable Securities
and other securities covered by such registration statement until the
earlier of (A) the expiration of 60 days after the Holders are notified
by the Company that they may commence the sale of the Registrable
Securities covered by such registration statement and (B) until the
Company has received written notice from all of the participating
Holders that they do not intend to sell additional securities;
provided, that, if the offering of Registrable Securities pursuant to
such registration statement is terminated or suspended by any stop
order, injunction, or other order or requirement of the SEC or any
other governmental agency or court, the foregoing time period shall be
extended by the number of days during the period from and including the
date such stop order, injunction, or other order or requirement becomes
effective to and including the date when such termination or suspension
no longer exists;
(iii) furnish the Holders of the Registrable Securities
covered by such registration statement, without charge, such number of
conformed copies of such registration statement and of each such
amendment and supplement thereto (in each case without exhibits unless
specifically requested), such number of copies of the prospectus and
each supplement thereto included in such registration statement
(including each preliminary prospectus), such documents incorporated by
reference in such registration statement or prospectus, and such other
documents, as such Holders may reasonably request;
(iv) use all reasonable efforts to register, qualify, or
exempt the Registrable Securities covered by such registration
statement under the securities or blue sky laws of such jurisdictions
as the managing underwriter(s) shall reasonably recommend, and do any
and all other acts and things that may be reasonably necessary or
advisable to enable the Holders to consummate the disposition in such
jurisdictions of the Registrable Securities covered by such
registration statement, except that the Company shall not for any such
purpose be required to (A) qualify generally to do business as a
foreign corporation in any jurisdiction wherein it
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<PAGE> 7
is not so qualified; (B) subject itself to taxation in any such
jurisdiction wherein it is not so subject; or (C) consent to general
service of process in any such jurisdiction or otherwise take any
action that would subject it to the general jurisdiction of the courts
of any jurisdiction in which it is not so subject;
(v) otherwise use all reasonable efforts to comply with all
applicable rules and regulations of the SEC;
(vi) furnish, at the Company's expense, unlegended
certificates representing ownership of the securities being sold in
such denominations as shall be requested and instruct the transfer
agent to release any stop transfer orders with respect to the
Registrable Securities being sold;
(vii) notify each Requesting Holder at any time when a
prospectus relating to the Registrable Securities is required to be
delivered under the Securities Act of the happening of any event as a
result of which the prospectus included in such Registration Statement
contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein (in the case of
the prospectus or any preliminary prospectus, in light of the
circumstances under which they were made) not misleading, and the
Company will, as promptly as practicable thereafter, prepare and file
with the SEC and furnish a supplement or amendment to such prospectus
so that, as thereafter delivered to the purchasers of Registrable
Securities such prospectus will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
(viii) enter into customary agreements (including an
underwriting agreement in customary form in the case of an underwritten
offering) and make such representations and warranties to the
Requesting Holders and underwriter(s) (in the case of underwritten
offerings) in form, substance, and scope as are customarily made by
issuers to sellers or underwriter(s) in similar offerings;
(ix) make available for inspection by the Requesting Holders,
any underwriter or agent participating in any disposition pursuant to
such Registration Statement, and any attorney, accountant, or other
similar professional advisor retained by any such Requesting Holders,
underwriter(s) or agents (collectively, the "Inspectors"), all
pertinent financial and other records, pertinent corporate documents
and properties of the Company (collectively, the "Records"), as shall
be reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the Company's officers, directors, and
employees to supply all information reasonably requested by any such
Inspectors in connection with such Registration Statement. The
Requesting Holders agree that the Records and other information which
the Company determines to be confidential and of which determination
the Inspectors are so notified shall not be disclosed by the Inspectors
unless (A) the release of such Records is ordered pursuant to a
subpoena, court order, or regulatory or agency request, or (B) the
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<PAGE> 8
information in such Records has been generally disseminated to the
public. Each Requesting Holder agrees that it will, upon learning that
disclosure of such Record is sought in a court of competent
jurisdiction or by a governmental agency, give notice to the Company
and allow the Company, at the Company's expense, to undertake
appropriate action to prevent disclosure of the Records deemed
confidential;
(x) obtain for delivery to the Company, the underwriter(s) or
agent, with copies to the Requesting Holders, a "comfort" letter from
the Company's independent public accountants in customary form and
covering such matters of the type customarily covered by "comfort"
letters as the Requesting Holders or the managing underwriter(s)
reasonably request;
(xi) obtain for delivery to the Requesting Holders and the
underwriter(s) or agent an opinion or opinions from counsel for the
Company in customary form and reasonably satisfactory to the Requesting
Holders, underwriter(s) or agents and their counsel;
(xii) make available to its security holders earnings
statements, which need not be audited, satisfying the provisions of
Section 11(a) of the Securities Act no later than 90 days after the end
of the 12-month period beginning with the first month of the Company's
first quarter commencing after the effective date of any Demand
Registration Statement, which earnings statements shall cover said 12
month period;
(xiii) make every reasonable effort to prevent the issuance
of any stop order suspending the effectiveness of the registration
statement or of any order preventing or suspending the effectiveness of
such registration statement at the earliest possible moment;
(xiv) cause the Registrable Securities to be registered with
or approved by such other governmental agencies or authorities within
the United States as may be reasonably necessary to enable the sellers
or the underwriter(s) to consummate the disposition of such securities;
(xv) cooperate with the Requesting Holders and the managing
underwriter(s), or any other interested party (including any interested
broker-dealer) in making any filings or submission reasonably required
to be made, and the furnishing of all appropriate information in
connection therewith, with the National Association of Securities
Dealers, Inc. ("NASD");
(xvi) effect the listing of the Registrable Securities on the
New York Stock Exchange or such other national securities exchange or
quotation system, on which shares of the Company's Common Stock shall
then be listed or authorized for quotation; and
(xvii) take all other reasonable steps necessary to effect
the registration of the Registrable Securities contemplated hereby.
(b) Each Holder shall provide (in writing and signed by each Holder and
stated to be specifically for use in the related registration statement,
preliminary prospectus, prospectus, or other document incident thereto) all such
information and materials, including without limitation the
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<PAGE> 9
intended plan of distribution, and take all such action as may be required in
order to permit the Company to comply with all applicable requirements of the
SEC and any applicable state securities laws and to obtain any desired
acceleration of the effective date of any registration statement prepared and
filed by the Company in which such Holder's Registrable Securities will be
included.
(c) If a registration pursuant to Section 2 involves an underwritten
offering, and in connection with any registration by the Company of any class of
equity securities of the Company for sale for its own account, including
pursuant to Section 3 hereof, each Holder hereby agrees (and agrees to execute
any additional documents reasonably requested by the underwriters for the
Company to such effect), whether or not any of such Holder's Registrable
Securities are included in such registration, not to effect any sale or
distribution, including any sale pursuant to Section 144 of the Securities Act,
of any securities of the Company which are similar to the securities included in
such registration (other than as part of such underwritten offering), without
the consent of the managing underwriter(s), for a period of 180 days after the
date a request for registration is made pursuant to Section 2(a) or (b) hereof
or the date the Company notifies the Holders of its intent to register such
equity securities for its own account, including pursuant to Section 3 hereof,
as the case may be; provided, however, that if the registration statement filed
in connection therewith becomes effective within such 180-day period, such
180-day period shall be extended for such period as may be required pursuant to
the terms and conditions of any underwriting agreement entered into in
connection with such proposed registration.
(d) Upon receipt of any notice from the Company that the Company has
become aware that the prospectus (including any preliminary prospectus) included
in any registration statement filed pursuant to Section 2(a) or (b) or Section 3
hereof, as then in effect, contains any untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, the Holders shall immediately
discontinue disposition of the Registrable Securities pursuant to the
registration statement covering the same until the Holders' receipt of copies of
a supplemented or amended prospectus and, if so directed by the Company, deliver
to the Company all copies other than permanent file copies then in the Holder's
possession, of the prospectus covering the Registrable Securities that was in
effect prior to such amendment or supplement.
(e) The Company shall pay all expenses incurred in connection with any
Demand Registration Statement filed pursuant to Section 2(a) or (b) hereof and
any registration statement filed pursuant to Section 3 hereof, including,
without limitation, all SEC and blue sky registration and filing fees (including
NASD fees), printing expenses, transfer agents and registrar's fees, fees and
disbursements of the Company's counsel and accountants, and fees and
disbursements of experts used by the Company in connection with such
registration statement, except that each Holder shall pay all underwriting
discounts, commissions, and expenses attributable to his, her, or its
Registrable Securities sold pursuant to any such registration statement and any
fees and expenses of his, her, or its own counsel.
(f) Upon the filing of a registration statement that includes a
Holder's Registrable Securities pursuant to a request from such Holder delivered
to the Company in accordance with Section 2(a) or (b) or Section 3, such Holder
shall be deemed to have irrevocably committed to sell
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<PAGE> 10
such Holder's Registrable Securities pursuant to the registration statement and
shall be obligated to sell such Registrable Securities on the terms set forth in
the registration statement.
5. Indemnification; Contribution.
(a) The Company agrees to indemnify and hold harmless, to the extent
permitted by law, each Holder of Registrable Securities, its officers and
directors, and each person, if any, who controls such Holder (within the meaning
of the Securities Act) against all losses, claims, damages, liabilities, and
expenses arising out of any untrue or alleged untrue statement of a material
fact contained in any registration statement under which Registrable Securities
owned by such Holder were registered under the Securities Act, or in any related
prospectus or preliminary prospectus, or any amendment thereof or supplement
thereto, or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein (in
the case of a prospectus or preliminary prospectus, in the light of the
circumstances under which they were made) not misleading, except insofar as the
same are caused by or contained in any information or affidavit with respect to
such Holder furnished in writing to the Company by such Holder expressly for use
therein or by such Holder's failure to furnish the Company upon request with the
information with respect to such Holder or such Holder's plan of distribution
that is the subject of the untrue statement or omission or by such Holder's
failure to deliver a copy of the applicable registration statement or prospectus
(exclusive of the documents, if any, from which information is incorporated by
reference) after the Company has furnished such Holder with a sufficient number
of copies of the same. In connection with an underwritten offering, the Company
will also indemnify the underwriters thereof, their officers and directors, and
each person who controls (within the meaning of the Securities Act) such
underwriters to the same extent as provided above with respect to the
indemnification of the Holders of Registrable Securities.
(b) In connection with any registration statement in which a Holder of
Registrable Securities is participating, each such Holder agrees to indemnify
and hold harmless, to the extent permitted by law, the Company, the directors
and officers of the Company, the underwriters participating in the offering, the
underwriters' directors and officers, and each person, if any, who controls
(within the meaning of the Securities Act) the Company or the underwriters
against any losses, claims, damages, liabilities, and expenses arising out of
any untrue or alleged untrue statement of a material fact contained in any
registration statement under which Registrable Securities owned by such Holder
were registered under the Securities Act, or in any related prospectus or
preliminary prospectus, or any amendment thereof or supplement thereto, or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein (in the case of a
prospectus, or preliminary prospectus, in the light of the circumstances under
which they were made) not misleading, to the extent that such untrue statement
or omission is contained in any information or affidavit with respect to such
Holder furnished to the Company by such Holder expressly for use therein or such
untrue statement or omission relates to such Holder or such Holder's plan of
distribution and such Holder failed to furnish such information to the Company
upon request, or arising out of the Holder's failure to deliver a copy of the
applicable registration statement or prospectus (exclusive of the documents, if
any, from which information is incorporated by reference) after the Company has
furnished such Holder with a sufficient number of copies of the same.
Notwithstanding the provisions of this Section 5(b), the indemnification
required from any Holder shall be limited to the amount of the proceeds received
by such Holder from the sale of the
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<PAGE> 11
Registrable Securities. The Company and, to the extent customary in underwriting
agreements at the time, its directors and officers and each person, if any, who
controls (within the meaning of the Securities Act) the Company, shall be
entitled to receive indemnities from underwriters, selling brokers, dealer
managers, and similar securities industry professionals participating in the
distribution to the same extent as provided above with respect to information so
furnished by such persons specifically for inclusion in any prospectus or
registration statement, or the failure by such underwriters, selling brokers,
dealer managers, and similar securities industry professionals to deliver a copy
of the applicable registration statement or prospectus (exclusive of the
documents, if any, from which information is incorporated by reference) after
the Company has furnished such persons with a sufficient number of copies of the
same.
(c) Any person entitled to indemnification hereunder agrees to give
prompt written notice to the indemnifying party after the receipt by such person
of any written notice of the commencement of any action, suit, proceeding or
investigation or threat thereof made in writing for which such person will claim
indemnification or contribution pursuant to this Agreement and permit the
indemnifying party to participate therein and, to the extent that it shall wish,
jointly with any other indemnifying party similarly situated, to assume the
defense of such claim with counsel reasonably satisfactory to such indemnified
party. If the indemnifying party elects to assume the defense of a claim, it
shall not be liable to such indemnified party for legal expenses subsequently
incurred by such indemnified party in connection with the defense thereof other
than reasonable costs of investigation. If the indemnifying party is not
entitled to, or elects not to, assume the defense of a claim, it will not be
obligated to pay the fees and expenses of more than one counsel with respect to
such claim. The indemnifying party will not be subject to any liability for any
settlement made without its consent, which consent shall not be unreasonably
withheld. If the failure of any person to give prompt notice to the indemnifying
party of any claim with respect to which it seeks indemnification prejudices
such indemnifying party, such indemnifying party shall be relieved of its
obligation to indemnify such person to the extent that such indemnifying party
has been prejudiced. No indemnifying party will consent to entry of any judgment
or enter into any settlement agreement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect of such claim or
litigation.
(d) If the indemnification provided for in this Section 5 from the
indemnifying party is unavailable to an indemnified party hereunder in respect
of any losses, claims, damages, liabilities, or expenses referred to therein,
then the indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities, or expenses in such
proportion as is appropriate to reflect not only the relative benefits received
by the indemnifying party on the one hand and the indemnified party on the other
but also the relative fault of the indemnifying party and the indemnified party
as well as any other relevant equitable considerations. The relative fault of
such indemnifying party and indemnified parties shall be determined by reference
to, among other things, whether any action in question, including any untrue or
alleged untrue statements of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
such indemnifying party or indemnified parties, and the parties' relative
intent, knowledge, access to information, and opportunity to correct or prevent
such action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include,
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subject to the limitation set forth in Section 5(c), any legal or other fees or
expenses reasonably incurred by such party in connection with any investigation
or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who is not guilty of such fraudulent misrepresentation.
6. Conditions Precedent to Registration. The Company's obligations
under this Agreement to effect the registration of any Registrable Securities
are subject to the agreement to and the performance by the Holders of such
Registrable Securities of the obligations of such Holders contained in this
Agreement, including, without limitation, the agreement by such Holders to pay
certain expenses incurred in connection with the sale of the Registrable
Securities pursuant to Section 4(e) hereof and the agreement by such Holders to
indemnify the Company pursuant to Section 5(b) hereof. Unless a Holder shall, if
requested by the Company, complete, execute and deliver all agreements,
questionnaires, indemnities, powers of attorney, underwriting agreements, and
other documents customary in a proposed registration or deemed necessary by the
Company to evidence such Holder's agreements and obligation under this
Agreement, the Company will have no obligation to register such Holder's
Registrable Securities.
7. Effect of Breach. In addition to any other statutory, equitable, or
common law remedy the Company may have, in the event a Holder materially
breaches any of its obligations pursuant to this Agreement and fails to cure the
breach within ten days of its receipt of notice from the Company of such breach,
such Holder shall have no further rights under Section 2 and 3 hereof and this
Agreement will thereupon terminate with respect to such Holder and be of no
continued force or effect. Notwithstanding the foregoing, in the event a Holder
materially breaches any of its obligations hereunder and the Company reasonably
determines that such breach may adversely affect the timing or other aspects of
any offering, this Agreement shall terminate immediately with respect to such
Holder and be of no continued effect. Additionally, in no event will a Holder
have the rights set forth in Section 2 and 3 hereof during any period in which
such Holder is in material breach of or material default under any other written
agreement between such Holder and the Company.
8. Notices. Any notice or other communication required or permitted to
be given hereunder shall be in writing and shall be effective upon the earlier
of (a) hand delivery or delivery by telecopy or facsimile at the address or
number designated below if delivered on a business day during normal business
hours where such notice is to be received, or the first business day following
such delivery if delivered other than on a business day during normal business
hours where such notice is to be received and (b) on the third business day
following the date of mailing, by registered or certified mail, return receipt
requested, postage prepaid, addressed as set forth below:
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If to the Company:
American Retirement Corporation
111 Westwood Place, Suite 402
Brentwood, Tennessee 37027
Telecopy (615) 221-2269
Attention: Chief Executive Officer
with a copy to:
Bass, Berry and Sims PLC
2700 First American Center
Nashville, Tennessee 37238
Telecopy (615) 742-6266
Attention: T. Andrew Smith
If to a Holder,
to the address of such Holder shown on the
stock records of the Company.
The Company may from time to time change its address for notices under
this Section 8 by giving at least 10 days' written notice of such changed
address to each of the Holders. Each Holder may from time to time change his,
her, or its address for notices under this Section 8 by giving at least 10 days'
written notice of such changed address to the Company.
9. Additional Registration Rights. Nothing in this Agreement shall
limit the Company's right to authorize or grant demand or incidental
registration rights to other persons who own or have the right to acquire
securities of the Company (including Common Stock), regardless of whether such
registration rights are senior, pari passu, or subordinate to the rights of the
Holders hereunder; provided, however, that the Company shall not, without the
prior consent of the Holders of at least fifty percent (50%) of the Registrable
Securities, grant to any holder of Common Stock incidental registration rights
superior to the rights of the Holders under Section 3 hereof.
10. Headings. The headings herein are for convenience of reference
only, do not constitute a part of this Agreement, and shall not be deemed to
limit or affect any of the provisions hereof.
11. Successors and Assigns; Amendments. This Agreement shall be binding
upon and inure to the benefit of the Company and the Holders and their
respective successors and assigns, including each subsequent Holder of any
Registrable Securities; provided, however, that the Company may amend, modify,
supplement, or revoke this Agreement at any time with the consent of the Holders
of at least fifty percent (50%) of the Registrable Securities.
12. No Third Party Beneficiaries. This Agreement is intended for the
benefit of the Company and the Holders and their respective permitted successors
and assigns and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
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13. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the internal laws of the State of Tennessee
applicable to agreements made and to be performed wholly within that
jurisdiction without regard to the principles of conflict of laws thereof.
14. Entire Agreement; Integration. This Agreement supersedes all prior
and contemporaneous agreements between or among any of the parties hereto with
respect to the subject matter contained herein and therein and this Agreement
embodies the entire understanding among the parties relating to such subject
matter.
15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, and all of which shall
together constitute one and the same instrument. All signatures need not be on
the same counterpart.
16. Severability. If any provision of this Agreement shall be invalid
or unenforceable, such invalidity or unenforceability shall not affect the
validity and enforceability of the remaining provisions of this Agreement,
unless the result thereof would be unreasonable, in which case the parties
hereto shall negotiate in good faith as to appropriate amendments hereto.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, this Agreement has been duly executed as of the
date first written above.
AMERICAN RETIREMENT CORPORATION
By: /s/ H. Todd Kaestner
--------------------------------
Name: H. Todd Kaestner
--------------------------------
Title: Executive Vice President
--------------------------------
SHAREHOLDERS:
/s/ Robert G. Roskamp
---------------------------------------
Robert G. Roskamp
PHC, L.L.C.
By: /s/ Robert Haveman
--------------------------------
Name: Robert Haveman
--------------------------------
Title: President
--------------------------------
THE EDGAR AND ELSA PRINCE FOUNDATION
By: /s/ Robert Haveman
--------------------------------
Name: Robert Haveman
--------------------------------
Title: Secretary/Treasurer
--------------------------------
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EXHIBIT A
Robert G. Roskamp
PHC, L.L.C., a Michigan limited liability company
The Edgar and Elsa Prince Foundation, a Michigan corporation
16
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EXHIBIT 10.3
SHAREHOLDERS' AGREEMENT
This SHAREHOLDERS' AGREEMENT (the "Agreement"), dated as of July 14,
1998, is made by and among American Retirement Corporation, a Tennessee
corporation ("ARC"), and Robert G. Roskamp ("Roskamp").
WHEREAS, Roskamp has received 822,000 shares of common stock, par value
$.01 per share, of ARC (the "Common Stock") in connection with the merger of
Freedom Group, Inc., a Florida corporation ("FGI"), with and into ARC pursuant
to that certain Agreement and Plan of Merger, dated May 29, 1998, by and among
ARC, FGI, and the shareholders of FGI (the "Merger Agreement"); and
WHEREAS, ARC and Roskamp desire to enter into this Agreement to set
forth certain rights and obligations of Roskamp.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, ARC and Roskamp agree as
follows:
1. Definitions. As used in this Agreement, the following terms shall
have the meanings set forth below:
"Affiliate" means (a) any member of Roskamp's immediate
family, or (b) any Person that, directly or indirectly through one or more
intermediaries, is controlled by Roskamp or any member of his immediate family,
with control being presumed by a greater than 10% ownership interest.
"Disinterested Members of the Board of Directors of ARC" means
the members of the Board of Directors of ARC other than Roskamp, any Affiliate
of Roskamp, and the director appointed pursuant to Section 2 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
"Holder" means Roskamp and his Permitted Transferee(s), if
any.
"Merger Shares" means shares of Common Stock received by
Roskamp pursuant to the Merger Agreement.
"Permitted Transferee" means a family member of Roskamp or a
trust for the benefit of Roskamp or a family member of Roskamp; provided such
transferee agrees to be bound by the terms of this Agreement as if such
transferee were originally named as a party herein and delivers to ARC the
agreement set forth as Exhibit A hereto.
<PAGE> 2
"Person" means an individual, a corporation, a limited
liability company, a partnership, an association, a joint stock company, a
trust, or any unincorporated organization.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated the date hereof, between ARC and certain of the former
shareholders of FGI.
2. Board Representation.
(a) As soon as practicable following the date hereof, the
Board of Directors of ARC shall take action to enlarge the Board of Directors
and appoint Roskamp to serve as a Class II director of ARC, which class will
stand for reelection at ARC's annual meeting of shareholders to be held during
1999. During the term of this Agreement and for so long as the Holders own
greater than fifty percent (50%) of the Merger Shares (the "Director Term"), ARC
shall use its best efforts to cause Roskamp or Roskamp's designee (the "Roskamp
Designee") to be recommended to ARC's shareholders for election as a Class II
director at each annual meeting of ARC's shareholders at which Class II
directors stand for reelection. In the event the Roskamp Designee serving as a
director ceases to serve as a director of ARC during the Director Term as a
result of death or resignation, ARC shall appoint as a Class II director such
other person as Roskamp may designate.
(b) ARC shall have the right to approve the Roskamp Designee,
such approval not to be unreasonably withheld.
3. Disposition of Shares. So long as this Agreement remains in effect,
except for transfers by Roskamp to a Permitted Transferee or in connection with
the sale of Merger Shares pursuant to the terms of the Registration Rights
Agreement, no Holder or any of his or its Affiliates will, directly or
indirectly, without the prior written consent of the majority of the
Disinterested Members of the Board of Directors of ARC, sell, transfer, pledge,
or otherwise dispose, by gift or otherwise, during any thirty day (30) period a
number of shares of Common Stock which exceeds the greater of: (x) one percent
of the shares of Common Stock then outstanding, and (y) the average weekly
reported trading volume of the Common Stock on the New York Stock Exchange or
such other exchange or quotation system on which the Common Stock is then traded
for the four calender weeks preceding the date of the first such sale, transfer,
pledge, or other disposition.
4. Restrictions on Certain Other Transactions. So long as this
Agreement remains in effect, no Holder or any of his or its Affiliates will,
directly or indirectly, without the prior written consent of the majority of the
Disinterested Members of the Board of Directors of ARC:
(a) acquire, or offer or propose to acquire, beneficial
ownership of any shares of Common Stock or other securities of ARC (or direct or
indirect rights or options to acquire any securities of ARC), except by way of
stock dividends or other distributions made in respect of the Merger Shares;
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<PAGE> 3
(b) acquire or agree to acquire, by purchase or otherwise,
more than one percent (1%) of any class of equity securities of any Person that,
prior to the time of such acquisition, is publicly disclosed (by filing with the
Securities and Exchange Commission or otherwise) or is otherwise known by such
Holder or his or its Affiliate to be the beneficial owner of more than five
percent (5%) of the outstanding shares of Common Stock or other securities of
ARC (or direct or indirect rights or options to acquire any securities of ARC);
(c) solicit proxies, seek to induce any other Person to
solicit proxies, or become a "participant" in a "solicitation" of proxies, as
those terms are defined in Item 4 of Schedule 14A and Rule 14A-1 under the
Exchange Act, in respect of any shares of capital stock of ARC or call any
shareholders meeting or initiate or propose, or otherwise solicit shareholders
of ARC to approve or disapprove, any shareholder proposal;
(d) enter into any shareholders' agreement or other agreement
of similar effect with respect to the ownership or disposition of any shares of
Common Stock, the voting of any shares of Common Stock, or the control of ARC,
or deposit any securities in a voting trust or subject such securities to a
voting trust agreement or any other agreement of similar effect with respect to
ARC, other than, in each such case, an agreement, voting trust, or other
arrangement involving only Holders and their respective Affiliates;
(e) seek to advise, encourage, or influence any Person with
respect to the voting of any securities of ARC, or induce, attempt to induce, or
in any manner assist any other Person in initiating any shareholder proposal for
a tender or exchange offer for securities of ARC or any change of control of
ARC, or for the purpose of convening a shareholders meeting of ARC;
(f) take any action (or permit any investment banker,
attorney, accountant, or any other representative retained by any Holder or
their respective Affiliates to take any action on behalf of such Holder or
Affiliate), directly or indirectly, to (A) acquire or affect control of ARC, (B)
participate in, or encourage the formation of, any "group" (as defined in Rule
13d-5 under the Exchange Act) with respect to any shares of capital stock of ARC
(other than a group consisting solely of Holders and their Affiliates), or (C)
initiate contact with any Person in an effort to solicit, encourage, or assist
that Person in any proposal for a merger or other business combination involving
ARC or for the acquisition of any of ARC's capital stock or any of ARC's assets;
(g) make any public announcement or make any written or oral
proposal or invitation to discuss any possibility, intention, plan, or
arrangement relating to a tender or exchange offer for securities of ARC or a
business combination (or other similar transaction that would result in a change
of control), sale of assets, liquidation, or other extraordinary corporate
transaction between the Holders or any of their respective Affiliates and ARC or
take any action that might require ARC to make a public announcement regarding
any of the foregoing; or
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<PAGE> 4
(h) enter into any oral or written contract, arrangement, or
understanding (including, without limitation, any contract, arrangement, or
understanding referred to in Item 6 of Schedule 13D under the Exchange Act) with
respect to any of the foregoing, except for this Agreement and the Registration
Rights Agreement.
5. Voting of Shares of Common Stock. During the Director Term, the
Holders shall vote, and shall use their best efforts to cause their Affiliates
to vote, at all meetings of shareholders of ARC, all shares of Common Stock then
owned by them in favor of the persons nominated by ARC's Board of Directors to
serve on the Board of Directors of ARC.
6. Termination of this Agreement. This Agreement shall terminate upon
the earlier of (a) the execution and delivery by ARC and the Holders of a
written agreement terminating this Agreement, or (b) such time as the Holders
and their Affiliates own less than 1% of the then outstanding Common Stock.
7. Share Certificates. The certificates representing the Merger Shares
subject to this Agreement shall bear the following legend:
"NOTICE: THE SALE, ASSIGNMENT, TRANSFER, OR OTHER DISPOSITION OR
ENCUMBRANCE OF THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE AND
THE VOTING THEREOF ARE SUBJECT TO CERTAIN TERMS AND RESTRICTIONS CONTAINED IN A
SHAREHOLDERS' AGREEMENT, DATED AS OF JULY 14, 1998, BY AND AMONG AMERICAN
RETIREMENT CORPORATION AND ROBERT G. ROSKAMP."
8. Assignment; Benefit. This Agreement and all of the provisions hereof
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective heirs, assigns, executors, administrators, or successors.
Neither ARC nor Roskamp shall assign its respective rights or obligations
hereunder without the written consent of the other parties hereto.
9. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of Tennessee
applicable to agreements made and to be performed wholly within that
jurisdiction, without regard to the conflict of laws principles thereof.
10. Notices. All notices or other communications required or permitted
to be given hereunder shall be in writing and shall be effective upon the
earlier of (a) hand delivery or delivery by telecopy or facsimile at the address
or number designated below if delivered on a business day during normal business
hours where such notice is to be received, or the first business day following
such delivery if delivered other than on a business day during normal business
hours where such notice is to be received or (b) on the third business day
following the
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<PAGE> 5
date of mailing, by registered or certified mail, return receipt requested,
postage prepaid, addressed as set forth below:
If to ARC:
American Retirement Corporation
111 Westwood Place, Suite 402
Brentwood, Tennessee 37027
Telecopy: (615) 221-2269
Attention: Chief Executive Officer
With a copy to:
Bass, Berry & Sims PLC
2700 First American Center
Nashville, Tennessee 37238
Telecopy: (615) 742-2766
Attention: T. Andrew Smith
If to Roskamp:
Robert G. Roskamp
1401 Manatee Avenue West, Suite 800
Bradenton, FL 34205
Telecopy:
ARC may from time to time change its address for notices under this
Section 10 by giving at least 10 days' written notice of such changed address to
Roskamp. Roskamp may from time to time change his address for notices under this
Section 10 by giving at least 10 days' written notice of such changed address to
ARC.
11. Entire Agreement; Integration. This Agreement supersedes all prior
and contemporaneous agreements between or among any of the parties hereto with
respect to the subject matter contained herein and therein and this Agreement
embodies the entire understanding among the parties relating to such subject
matter.
12. Injunctive Relief. Each of the parties hereto acknowledges that in
the event of a breach by any of them of any material provision of this
Agreement, the aggrieved party may be without an adequate remedy at law. Each of
the parties therefore agrees that in the event of such a breach hereof the
aggrieved party may elect to institute and prosecute proceedings in any court of
competent jurisdiction to enforce specific performance or to enjoin the
continuing breach hereof. By seeking or obtaining any such relief, the aggrieved
party shall not be precluded from seeking or obtaining any other relief to which
it may be entitled.
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<PAGE> 6
13. Headings. The headings are for convenience of reference only, do
not constitute a part of this Agreement, and shall not be deemed to limit or
affect any of the provisions hereof.
14. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, and all of which shall
together constitute one and the same instrument. All signatures need not be on
the same counterpart.
15. Severability. If any provision of this Agreement shall be invalid
or unenforceable, such invalidity or unenforceability shall not affect the
validity and enforceability of the remaining provisions of this Agreement,
unless the result thereof would be unreasonable, in which case the parties
hereto shall negotiate in good faith as to appropriate amendments hereto.
16. Amendment and Waiver. This Agreement may be amended, and the
observance of any term hereof may be waived, only with the written consent of
ARC and Roskamp, or their respective successors and assigns. No such amendment
or waiver will extend to or affect any obligation, covenant, or agreement not
expressly amended or waived or impair any right consequent thereon. No course of
dealing between ARC and Roskamp, or their respective successors and assigns, nor
any delay in exercising any rights hereunder shall operate as a waiver of any
rights hereunder.
17. Attorneys' Fees. In any action or proceeding brought to enforce any
provision of this Agreement, or where any provision hereof is validly asserted
as a defense, the successful party shall be entitled to recover reasonable
attorneys' fees (including any fees incurred in any appeal) in addition to its
costs and expenses and any other available remedy.
18. No Third Party Beneficiaries. This Agreement is intended for the
benefit of ARC and Roskamp and his Permitted Transferees and is not for the
benefit of, nor may any provision hereof be enforced by, any other person.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 7
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto as of the date first written above.
AMERICAN RETIREMENT CORPORATION
By: /s/ H. Todd Kaestner
----------------------------------
Name: /s/ H. Todd Kaestner
----------------------------------
Title: Executive Vice President
----------------------------------
ROBERT G. ROSKAMP
/s/ Robert G. Roskamp
-----------------------------------------
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<PAGE> 8
Exhibit A
AGREEMENT TO BE BOUND
BY THE SHAREHOLDERS' AGREEMENT
The undersigned, being the transferee of __________ shares of the
common stock, par value $.01 per share, of American Retirement Corporation, a
Tennessee corporation (the "Company"), as a condition to the receipt of such
securities, acknowledges that matters pertaining to such securities are governed
by the Shareholders' Agreement, dated as of _______________, 1998 (the
"Agreement"), initially between the Company and Robert G. Roskamp ("Roskamp")
and the undersigned hereby (1) acknowledges receipt of a copy of the Agreement,
and (2) agrees to be bound by the terms of the Agreement, with the same effect
as if the undersigned were originally named as a party under the Agreement.
Agreed to this _____ day of ______________, ______.
________________________________
________________________________*
________________________________*
*Include address for notices.
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<PAGE> 1
EXHIBIT 10.4
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made and entered into as
of the 14th day of July, 1998, by and between Robert G. Roskamp ("Roskamp") and
American Retirement Corporation, a Tennessee corporation ("ARC").
WITNESSETH:
WHEREAS, ARC, Freedom Group, Inc., a Florida corporation ("FGI"), and
the shareholders of FGI have entered into that certain Agreement and Plan of
Merger, dated as of May 29, 1998 (the "Merger Agreement"), to provide for the
merger of FGI with and into ARC (the "Merger"); and
WHEREAS, the closing of the transactions contemplated by the Merger
Agreement (the "Closing") are taking place as of the date hereof.
NOW, THEREFORE, to induce ARC to proceed with the Closing and the
Merger and in consideration of such Closing and Merger, and in further
consideration of the mutual covenants and agreements contained herein and in the
Merger Agreement, and intending to be legally bound thereby, the parties hereto
do hereby agree as follows:
1. Engagement as Consultant.
a. ARC hereby retains and engages Roskamp to render to ARC
consulting services in respect of the operations, properties, and
business of ARC as reasonably requested by ARC for a period ending on
the third anniversary of the date hereof (the "Consulting Term"). Such
services shall include, without limitation, (i) consultation with
respect to the development of new ARC projects, (ii) assistance in the
transition and integration of the operations of FGI with and into ARC,
and (iii) consultation in connection with applications for master trust
or condominium life estate concepts in developed or acquired
communities. Roskamp hereby accepts such engagement and agrees to
render such services upon the terms and conditions herein set forth.
b. At any time and from time to time during the Consulting
Term, at ARC's request, Roskamp agrees to assist and support ARC in any
manner reasonably requested in order to effectuate the transactions
contemplated by the Merger Agreement.
c. It is understood that Roskamp is to act as a consultant and
adviser to ARC and is not an employee, agent of, or co-venturer with
ARC in any respect. Roskamp shall have no right, authority, or power to
act for or on ARC's behalf. The relationship between ARC and Roskamp
shall be that of independent contractor.
2. Noncompetition and Nonsolicitation. For a period of three (3) years
from the date hereof, Roskamp will not, directly or indirectly:
<PAGE> 2
a. own, manage, operate, control, or participate in the
ownership, management, operation, or control of, or be connected as an
officer, employee, partner, director, consultant, or otherwise with, or
have any financial interest in or aid or assist anyone else in the
conduct of any independent living, assisted living, nursing home,
retirement community or any other business that is in competition in
any way with ARC, or any affiliate thereof (a "Competing Business"),
within a ten (10) mile radius of the operations or facilities of ARC,
or any affiliate thereof.
b. for so long as Roskamp is a director of ARC, and in
addition to subsection (a) above, own, manage, operate, control, or
participate in the ownership, management, operation, or control of, or
be connected as an officer, employee, partner, director, consultant, or
otherwise with, or have any financial interest in or aid or assist
anyone else in the conduct of any Competing Business outside of a ten
(10) mile radius of the operations or facilities of ARC, or any
affiliate thereof unless, prior to entering into, or agreeing to, any
such matter or arrangement, Roskamp first offers to ARC the right to
manage and acquire such Competing Business.
c. Notwithstanding anything in subsection 2(a) or (b) above to
the contrary, Roskamp shall be permitted to (i) retain his ownership
interests in the Currently Owned Communities, and (ii) own, manage,
operate, control, finance and be involved with any business or
enterprise that is located in Maricopa County, Arizona and that is
operated by a joint venture, partnership or company in which Sun Health
Properties Investment or its affiliates has a significant and
meaningful ownership and financial interest. As used herein, "Currently
Owned Communities" shall mean (i) Freedom Square, located in Seminole,
Florida, (ii) Seminole Nursing Pavilion, located in Seminole, Florida,
(iii) Freedom Village at Brandywine, located in Brandywine,
Pennsylvania, (iv) Sarasota Bay Club, located in Sarasota, Florida, (v)
Grandview Terrace, located in Sun City, Arizona, (vi) Freedom Plaza,
located in Peoria, Arizona, (vii) Freedom Village, located in Lake
Forrest, California, and (viii) The Village, located in Hemet,
California.
d. solicit or accept business from any of ARC's, or any
affiliate thereof's, former or current customers, including actively
sought prospective customers, for purposes of providing products or
services in competition with ARC, or any affiliate thereof; or
e. solicit, interfere with, or endeavor to entice away any
employee of ARC, or any affiliate thereof, other than Steve Roskamp or
Brian Roskamp.
f. Nothing in this Agreement shall be deemed to define,
describe, alter, diminish, minimize or affect any fiduciary duty or
duty of loyalty that Roskamp may now or hereafter owe to ARC or its
affiliates.
3. Consideration and Compensation. In consideration of the performance
by Roskamp of his obligations under Section 1 above and the agreements of
Roskamp contained in Section 2
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<PAGE> 3
above, ARC agrees to pay Roskamp $150,000 per annum during the term of this
Agreement, payable bi-weekly.
4. Nondisclosure. Roskamp shall not disclose to any person any
confidential information possessed or obtained by him with respect to FGI's or
ARC's, or any affiliate thereof's, services, products, improvements,
intellectual property, designs or styles, processes, customers, methods of
marketing or distribution, systems, procedures, plans, proposals, policies, or
methods, the disclosure of which would be damaging to ARC, or any affiliate
thereof, nor shall he make any false statements regarding FGI or ARC, or any
affiliate thereof, or take any other action that would be damaging to ARC, or
any affiliate thereof.
5. Remedies Upon Breach; Reasonableness of Provisions.
a. In the event of a breach of this Agreement by Roskamp, ARC
shall be entitled to any remedy available to it at law or in equity. In
addition, in the event of such breach, Roskamp shall resign from his
position as a member of ARC's board of directors (and any committee(s)
thereof).
b. ARC acknowledges that if ARC fails to make a payment
required hereunder for any reason other than (i) Roskamp's breach
hereof or (ii) as permitted by the terms of the Merger Agreement, this
Agreement shall, at the election of Roskamp, be null and void and
Roskamp shall be entitled to enforce Section 3 hereof by any remedy
available to him at law or in equity.
6. Termination Upon a Change in Control. Upon a Change in Control (as
defined below) of ARC, Roskamp shall have the right to terminate this Agreement
and neither party shall have any further obligation hereunder. For purposes of
this Agreement, a "Change in Control" means the happening of any of the
following: any person or entity, including a "group" as defined in Section
13(d)(3) of the Exchange Act, other than ARC or a wholly-owned subsidiary of ARC
or any employee benefit plan of ARC or any of its subsidiaries, becomes the
beneficial owner of ARC's securities having greater than 50% of the combined
voting power of the then outstanding securities of ARC that may be cast for the
election of directors of ARC (other than as a result of an issuance of
securities initiated by ARC in the ordinary course of business); (ii) as the
result of, or in connection with, any cash tender or exchange offer, merger or
other business combination, sales of assets or contested election, or any
combination of the foregoing transactions, less than a majority of the combined
voting power of the then outstanding securities of ARC or any successor
corporation or entity entitled to vote generally in the election of the
directors of ARC or such other corporation or entity after such transaction are
held in the aggregate by the holders of ARC's securities entitled to vote
generally in the election of directors of ARC immediately prior to such
transaction; or (iii) during any period of two consecutive years, individuals
who at the beginning of any such period constitute the Board of Directors of ARC
cease for any reason to constitute at least a majority thereof, unless the
election, or the nomination for election by ARC's shareholders, of each director
of ARC first elected during such period was
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<PAGE> 4
approved by a vote of at least two-thirds of the directors of ARC then still in
office who were directors of ARC at the beginning of any such period.
7. Severability; Headings. In the event that any provision of this
Agreement is declared invalid or unenforceable, such invalidity or
unenforceability shall in no way effect the validity or enforceability of any
other provision. The clauses and provisions of this Agreement that are deemed to
be invalid or unenforceable shall be limited so that they shall remain in effect
to the extent permitted by law. The headings herein are for reference purposes
only and are not intended in any way to describe, interpret, define, or limit
the extent or intent of this Agreement or any part hereof.
8. Modification. No modification, amendment, or waiver of any of the
provisions of this Agreement shall be effective unless made in a writing
specifically referring to this Agreement, and signed by each of the parties
hereto.
9. Successors and Assigns. The rights and obligations of ARC hereunder
shall be binding upon and run in favor of the successors and assigns of ARC. The
rights and obligations of Roskamp hereunder shall be binding upon, shall inure
to the benefit of, and shall be enforceable by the heirs, successors, assigns,
and legal or personal representatives of Roskamp. Roskamp may not assign,
transfer, or otherwise dispose of any of his rights or obligations without the
prior written consent of ARC.
10. Notices. All notices and other communications pursuant to this
Agreement shall be in writing and shall be deemed given if delivered personally,
sent by nationally recognized, overnight courier, or mailed by registered or
certified mail (return receipt requested), postage prepaid, or sent by facsimile
(followed with a copy sent by courier or registered or certified mail) to the
parties at the following addresses (or at such address for a party as shall be
specified by notice hereunder):
To ARC:
American Retirement Corporation
111 Westwood Place, Suite 402
Brentwood, TN 37027
Attention: W.E. Sheriff
Telephone: (615) 221-2250
Fax: (615) 221-2269
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<PAGE> 5
with a copy to:
Bass, Berry & Sims PLC
2700 First American Center
Nashville, TN 37238
Attention: T. Andrew Smith
Telephone: (615) 742-6266
Fax: (615) 742-2766
To Roskamp:
Robert G. Roskamp
1401 Manatee Avenue West
Bradenton, FL 34205
Telephone: (941) 746-2201
Fax: (941) 747-9389
with a copy to:
Holland & Knight LLP
315 Calhoun Street, Suite 600
Tallahassee, FL 32301
Attention: Morris H. Miller
Telephone: (850) 425-5655
Fax: (850) 224-8832
All such notices and other communications shall be deemed to have been received
(a) in the case of personal delivery, on the date of such delivery, (b) in the
case of delivery by nationally recognized, overnight courier, on the business
day following dispatch, (c) in the case of mailing, on the fifth business day
following such mailing, and (d) in the case of a facsimile, when the party
receiving such facsimile shall have confirmed receipt of the communication (or
when the copy sent by courier or registered or certified mail shall have been
deemed to have been received pursuant to clause (a), (b), or (c)).
11. Entire Agreement; Governing Law. This Agreement shall constitute
the entire Agreement between the parties with respect to the subject matter
hereof and shall be governed by the laws of the State of Tennessee as such laws
are applied to agreements between Tennessee residents entered into and to be
performed entirely in Tennessee without regard to the principles of conflict of
laws thereof.
12. Prevailing Party. In the event of any dispute that results in a
suit or other legal proceeding to construe or enforce any provision of this
Agreement or because of an alleged breach, default, or misrepresentation in
connection with any of the provisions of this Agreement, the parties
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<PAGE> 6
agree that the prevailing party (in addition to all other amounts and relief to
which such party may be entitled) shall be entitled to recover reasonable
attorneys' fees and other costs incurred in any action or proceeding.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall constitute an original
hereof, but all of which together shall constitute one agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed on the date and year first above written.
AMERICAN RETIREMENT CORPORATION
By: /s/ H. Todd Kaestner
---------------------------------
Name: H. Todd Kaestner
---------------------------------
Title: Executive Vice President
---------------------------------
ROBERT G. ROSKAMP
/s/ Robert G. Roskamp
----------------------------------------
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 52,231
<SECURITIES> 0
<RECEIVABLES> 8,860
<ALLOWANCES> 0
<INVENTORY> 866
<CURRENT-ASSETS> 80,306
<PP&E> 409,858
<DEPRECIATION> 24,921
<TOTAL-ASSETS> 598,380
<CURRENT-LIABILITIES> 28,660
<BONDS> 349,704
0
0
<COMMON> 171
<OTHER-SE> 143,704
<TOTAL-LIABILITY-AND-EQUITY> 598,380
<SALES> 0
<TOTAL-REVENUES> 99,954
<CGS> 0
<TOTAL-COSTS> 81,419
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,901
<INCOME-PRETAX> 8,696
<INCOME-TAX> 3,225
<INCOME-CONTINUING> 5,471
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,741
<EPS-PRIMARY> $.42
<EPS-DILUTED> $.42
</TABLE>
