<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 28, 1998 (July 14, 1998)
AMERICAN RETIREMENT CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
Tennessee 01-13031 62-1674303
- ---------------------------------------------- ------------------------ ------------------
(State or Other Jurisdiction of Incorporation) (Commission File Number) (I.R.S. Employer
Identification No.)
</TABLE>
111 Westwood Place, Brentwood, Tennessee 37027
- -------------------------------------------- --------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (615) 221-2250
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
Item 2. Acquisition or Disposition of Assets.
- --------------------------------------------------------------------------------
On July 14, 1998, American Retirement Corporation (the "Company")
consummated the previously disclosed acquisition of 100% of the ownership
interests in Freedom Group, Inc. ("FGI") and certain entities affiliated with
FGI and with Robert G. Roskamp, FGI's founder and chairman, and entered into
certain related transactions (collectively, the "FGI Transaction"). The Company
used borrowings under existing lines of credit to fund the cash portion of the
purchase price. See the Company's press release dated July 16, 1998, included as
Exhibit 99 to this Form 8-K, for additional information with respect to the FGI
Transaction.
2
<PAGE> 3
Item 7. Financial Statements, Pro Forma Financial Information, and Exhibits.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
(a) Financial Statements of Business Acquired
Independent Auditors' Report 5
Combined Balance Sheet of Freedom Group, Inc. and Subsidiaries and Freedom
Village of Holland, Michigan at December 31, 1997 6
Combined Statement of Income of Freedom Group, Inc. and Subsidiaries and
Freedom Village of Holland, Michigan for the year ended December 31, 1997 7
Combined Statement of Changes in Stockholders' Equity (Deficit) and Partnership
Capital of Freedom Group, Inc. and Subsidiaries and Freedom Village of Holland,
Michigan for the year ended December 31, 1997 8
Combined Statement of Cash Flows of Freedom Group, Inc. and Subsidiaries and
Freedom Village of Holland, Michigan for the year ended December 31, 1997 9
Notes to Combined Financial Statements of Freedom Group, Inc. and Subsidiaries
and Freedom Village of Holland, Michigan at December 31, 1997 10
Condensed Combined Balance Sheets of Freedom Group, Inc. and Subsidiaries and
Freedom Village of Holland, Michigan at March 31, 1998 (Unaudited) and
December 31, 1997 27
Condensed Combined Statements of Income of Freedom Group, Inc. and Subsidiaries
and Freedom Village of Holland, Michigan for the three months ended March 31,
1998 and 1997 (Unaudited) 28
Condensed Combined Statements of Cash Flows of Freedom Group, Inc. and
Subsidiaries and Freedom Village of Holland, Michigan for the three months ended
March 31, 1998 and 1997 (Unaudited) 29
Notes to Condensed Combined Financial Statements of Freedom Group, Inc. and
Subsidiaries and Freedom Village of Holland, Michigan for the three months ended
March 31, 1998 and 1997 (Unaudited) 30
(b) Pro Forma Financial Information 33
Unaudited Pro Forma Condensed Combined Balance Sheet of American Retirement
Corporation at March 31, 1998 34
</TABLE>
3
<PAGE> 4
<TABLE>
<S> <C> <C>
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet of American
Retirement Corporation at March 31, 1998 35
Unaudited Pro Forma Condensed Combined Statement of Operations of American
Retirement Corporation for the year ended December 31, 1997 36
Notes to Unaudited Pro Forma Condensed Combined Statement of Operations of
American Retirement Corporation for the year ended December 31, 1997 37
Unaudited Pro Forma Condensed Combined Statement of Operations of American
Retirement Corporation for the three months ended March 31, 1998 38
Notes to Unaudited Pro Forma Condensed Combined Statement of Operations of
American Retirement Corporation for the three months ended March 31, 1998 39
</TABLE>
4
<PAGE> 5
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Freedom Group, Inc. and Subsidiaries:
We have audited the accompanying combined balance sheet of Freedom Group,
Inc. (the Company) and subsidiaries and Freedom Village of Holland, Michigan, a
general partnership, as of December 31, 1997, and the related combined
statements of income, changes in stockholders' equity (deficit) and partnership
capital, and cash flows for the year then ended. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Freedom Group, Inc.
and subsidiaries and Freedom Village of Holland, Michigan as of December 31,
1997, and the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
St. Petersburg, Florida
March 6, 1998, except as to note 17,
which is as of July 14, 1998
5
<PAGE> 6
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
COMBINED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 4,481,884
Investment securities (note 9)............................ 2,363,273
Accounts receivable:
Resident services...................................... 3,519,529
Affiliates (note 6).................................... 198,305
Assets whose use is limited -- current portion (note 8)... 9,967,157
Deferred income taxes (note 11)........................... 325,117
Prepaid expenses and other current assets................. 670,747
------------
Total current assets.............................. 21,526,012
Assets whose use is limited -- noncurrent portion (note
8)..................................................... 4,289,138
Investment in unconsolidated affiliates (note 5).......... 2,157,703
Property, plant and equipment, net (notes 3 and 4)........ 195,901,281
Deferred lifecare fee receivable (note 2)................. 9,539,864
Costs in excess of net assets acquired.................... 10,631,057
Other assets.............................................. 12,419,386
------------
Total assets...................................... $256,464,441
============
LIABILITIES, STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERSHIP CAPITAL
Current liabilities:
Current installments of long-term debt (note 4)........... $ 9,917,248
Current installments of master trust (note 2)............. 1,967,675
Accounts payable.......................................... 1,916,888
Accrued expenses.......................................... 5,294,170
Residents deposits........................................ 4,998,724
Income taxes payable...................................... 581,765
------------
Total current liabilities......................... 24,676,470
Long-term debt, excluding current installments (note 4)..... 56,148,315
Refundable portion of life estate purchase price............ 62,688,081
Deferred life estate income................................. 85,552,325
Capital lease obligations, excluding current installments
(note 7).................................................. 5,135,958
Note payable -- stockholder (note 6)........................ 5,000,000
Deferred income taxes (note 11)............................. 2,737,612
Other liabilities........................................... 12,536,424
------------
Total liabilities................................. 254,475,185
------------
Cumulative preferred stock redeemable at fair value (note
12)....................................................... 10,200,000
Stockholders' equity (deficit) and partnership capital (note
13):
Common stock, $1.00 par value; 2,500 authorized shares;
1,848 shares issued and outstanding, including treasury
stock.................................................. 1,848
Additional paid-in capital................................ 1,569,810
Retained earnings......................................... --
Net unrealized gains on investment securities............. 642,974
Treasury stock, 446 common shares, at cost................ (10,425,376)
------------
Total stockholders' equity (deficit) and
partnership capital.............................. (8,210,744)
Commitments and contingencies (note 14).....................
------------
Total liabilities, stockholders' equity (deficit)
and partnership capital.......................... $256,464,441
============
</TABLE>
See accompanying notes to combined financial statements.
6
<PAGE> 7
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenues:
Resident and healthcare revenue........................... $47,098,235
Management fees........................................... 1,400,858
Construction management and architectural fees............ 929,386
-----------
Total revenues.................................... 49,428,479
-----------
Expenses:
Community operating expense............................... 35,035,290
General and administrative................................ 4,094,068
Depreciation and amortization............................. 7,796,965
Lease expense............................................. 887,000
-----------
Total expenses.................................... 47,813,323
-----------
Income from operations............................ 1,615,156
Other income (expense):
Equity in earnings of unconsolidated affiliates........... 785,339
Minority interest in net income of subsidiaries........... 1,130,909
Investment income......................................... 1,194,529
Interest expense.......................................... (4,339,578)
-----------
Income before income taxes........................ 386,355
Income tax expense (note 11)................................ 180,729
-----------
Net income........................................ $ 205,626
===========
Net income attributable to common stockholders, after
preferred dividends....................................... $ (594,374)
===========
Basic loss per common share................................. $ (321.63)
===========
</TABLE>
See accompanying notes to combined financial statements.
7
<PAGE> 8
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIT) AND PARTNERSHIP CAPITAL
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
TOTAL
NET STOCKHOLDERS'
UNREALIZED (DEFICIT)
ADDITIONAL RETAINED GAIN ON AND EQUITY
COMMON PAID-IN EARNINGS INVESTMENTS TREASURY PARTNERSHIP
STOCK CAPITAL (DEFICIT) SECURITIES STOCK CAPITAL
------ ---------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $1,848 1,951,934 212,250 472,845 (10,425,376) (7,786,499)
Change in unrealized gain
on investment
securities............. -- -- -- 170,129 -- 170,129
Net income............... -- -- 205,626 -- -- 205,626
Preferred stock dividends
(note 12).............. -- (382,124) (417,876) -- -- (800,000)
------ --------- -------- ------- ----------- ----------
Balance at December 31,
1997................... $1,848 1,569,810 -- 642,974 (10,425,376) (8,210,744)
====== ========= ======== ======= =========== ==========
</TABLE>
See accompanying notes to combined financial statements.
8
<PAGE> 9
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash provided by operating activities (note 15)............. $ 1,236,715
------------
Cash flows from investing activities, net of amounts
acquired through acquisition:
Purchase of property, plant and equipment................. (54,601,207)
Investment in unconsolidated affiliates................... (2,611,458)
Purchase of investment securities, net.................... (273,617)
Increase in assets whose use is limited, net.............. (93,622)
Distributions and loan repayments from unconsolidated
affiliates............................................. 2,828,598
Capital contributions from minority interests............. 2,265,000
Capital distributions to minority interests............... (446,771)
Costs of acquiring initial lifecare and life estate sales
contracts.............................................. (2,589,175)
------------
Net cash used in investing activities............. (55,522,252)
------------
Cash flows from financing activities:
Proceeds from long-term debt.............................. 52,891,851
Proceeds from lifecare contracts and related deposits..... 41,439,268
Proceeds in notes payable -- stockholders................. 5,000,000
Payments on long-term debt................................ (41,880,772)
Preferred stock dividends................................. (600,000)
Payments upon termination of life estate sales
contracts.............................................. (2,147,574)
------------
Net cash provided by financing activities......... 54,702,773
------------
Net increase in cash and cash equivalents......... 417,236
Cash and cash equivalents at beginning of year.............. 4,064,648
------------
Cash and cash equivalents at end of year.................... $ 4,481,884
============
</TABLE>
See accompanying notes to combined financial statements.
9
<PAGE> 10
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Basis of Presentation
Freedom Group, Inc. (the Company) was formed on January 4, 1988 to provide
senior housing, health care, and other related services to residents through the
development and operation of retirement communities, assisted living facilities
and nursing centers. The Company has developed and manages senior living
communities in Florida, Michigan, and Arizona. During 1997, the Company
completed development of its Grandview Terrace community in Arizona and is
actively developing communities in Florida and Pennsylvania.
At December 31, 1997, the Company's working capital deficit of $3,150,458
includes current debt obligations of approximately $5,040,000 which would be
funded upon the closing of the anticipated merger (note 16). In the event the
merger is not completed, the terms of the stock redemption notes (note 4) with
current amounts due of $4,170,150, allow for payment of deferrals if working
capital amounts are not sufficient to meet current obligations.
(b) Principles of Consolidation
The combined financial statements include the consolidated accounts of
Freedom Group, Inc. (the Company) and all subsidiaries and partnerships in which
the Company has more than 50 percent equity ownership, and Freedom Village of
Holland, Michigan. All significant intercompany transactions have been
eliminated except as discussed in note 6. The following subsidiaries and
partnerships are included in the combined financial statements:
<TABLE>
<CAPTION>
OWNERSHIP
NAME PERCENTAGE
- ---- ----------
<S> <C>
Freedom Village of Holland, Michigan........................ 38%
Freedom Plaza Limited Partnership (Freedom Plaza) (note
14)....................................................... 69%
Freedom Group -- Lake Seminole Square, Inc. (the
Developer)................................................ 93%
Lake Seminole Square Management Co., Inc.
(the Management Company).................................. 93%
Freedom Village of Sun City Center, Ltd. (Sun City
Center)................................................... 55%
S & S Building Materials, Inc. (S & S)...................... 100%
Freedom Forms, Inc. (FF).................................... 100%
Freedom Communities at Sun City West, Inc. (Grandview
Terrace).................................................. 100%
Freedom Group at Philadelphia, Inc. (Brandywine)............ 100%
Freedom Group at Sarasota, Inc. (Sarasota Bay Club)......... 100%
</TABLE>
The Company's share of earnings or losses of partnerships of which they own
at least 20 percent or of which they are a general partner is included in
investment in unconsolidated subsidiaries and in combined income under the
equity method of accounting.
(c) Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
10
<PAGE> 11
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Property, Plant, and Equipment
Property, plant, and equipment are stated at historical cost. Project costs
associated with the acquisition, development, and construction of the facilities
are capitalized as part of the facility cost. Additions and betterments that
extend the life of an asset are capitalized. Interest incurred during the
construction period is capitalized as part of the asset to which it relates and
is amortized over the asset's estimated useful life. Maintenance and repair
expenditures are expensed as incurred. Provisions for depreciation are computed
using the straight-line method, generally using the following estimated
composite useful lives:
<TABLE>
<S> <C>
Land improvements.......................................... 27.5 years
Buildings and improvements................................. 20-40 years
Furniture, equipment and vehicles.......................... 5-7 years
</TABLE>
Provisions for the amortization of the capital lease obligations is based
on the estimated useful life of the leased assets, as it is shorter than the
lease term. Amortization is included in depreciation and amortization expense in
the combined financial statements.
(e) Assets Whose Use is Limited
Assets whose use is limited consists of refundable resident entrance fees
and deposits, minimum liquid reserve accounts established under the State of
Florida and Arizona insurance regulations, and funds pledged in accordance with
a debt agreement (note 8).
(f) Costs of Acquiring Initial Lifecare and Life Estate Sales Contracts
Costs of acquiring initial lifecare and life estate sales contracts that
are expected to be recovered from such contracts are capitalized and are
amortized to expense on a straight-line basis over the average expected
remaining lives of the residents under contract. Costs of acquiring lifecare and
life estate sales contracts after the facility is substantially occupied are
expensed as incurred. The gross costs and the related accumulated amortization
as of December 31, 1997 amounted to $15,848,113 and $5,868,019, respectively.
The remaining net costs of acquiring initial lifecare and life estate sales
contracts of $9,980,094 are included in other assets.
The Company analyzes costs of acquiring initial lifecare and life estate
sales contracts periodically to determine whether any impairment has occurred in
the value of such assets. Based upon the anticipated future income and cash from
operations of the various communities that include these amounts, Company
management believes there has been no impairment.
(g) Costs in Excess of Net Assets Acquired
Costs in excess of net assets acquired represents the excess of the
consideration paid to former limited partners of Sun City Center and Freedom
Plaza over the fair market value of the limited partners' interest in assets and
liabilities of the Partnerships. This amount is being amortized over 27.5 years
and is included in other assets. Accumulated amortization as of December 31,
1997 amounted to $1,143,872.
The Company analyzes costs in excess of net assets acquired on a specific
identification basis to determine whether any impairment has occurred in the
value of such assets. Based upon the anticipated future income and cash from
operations of Sun City Center and Freedom Plaza, Company management believes
there has been no impairment.
11
<PAGE> 12
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(h) Refundable Portion of Life Estate Purchase Price and Deferred Life Estate
Income
The refundable portion of life care fees represents the amount which is due
and refundable to the resident or the resident's estate upon contract
termination. Refunds that have been paid by proceeds received subsequent to year
end, are reported as noncurrent in the accompanying combined financial
statements. The remaining purchase price is recorded as deferred life estate
income at the time of purchase and amortized into income over the resident's
estimated life expectancy, adjusted annually.
Lifecare fee income related to residency agreements which are fully
refundable upon resale, is recognized using the average life of the related
buildings and improvements.
(i) Investment Securities
Investment securities consist of U.S. Treasuries, municipal debt and
various equity and trust securities. Under Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, the Company classifies its investment securities in one of three
categories: trading, available-for-sale, or held-to-maturity. Trading securities
are bought and held principally for the purpose of selling them in the near
term. Held-to-maturity securities are those securities which the Company has the
ability and intent to hold the security until maturity. All other securities not
included in trading are classified as available-for-sale. At December 31, 1997,
all investment securities held by the Company are classified as
available-for-sale.
Available-for-sale securities are recorded at fair value. Unrealized
holding gains and losses on available-for-sale securities are excluded from
earnings and are reported as a separate component of stockholders' equity until
realized. Realized gains and losses from the sale of available-for-sale
securities are determined on a specific identification basis. Dividend and
interest income are recognized when earned.
(j) Patient Service Revenue
Patient service revenue derived from the Company's nursing and assisted
living centers are reported at the estimated realizable amounts from its
residents, third party payors, and others for services rendered. Revenue
received under the Medicare program is subject to audit and provisions are
recorded to estimate any settlements that may result from such audits.
(k) Minority Interest
The combined financial statements include 100% of the assets, liabilities
and earnings of the combined companies described in note 1(b). The ownership in
these companies that is not attributable to Freedom Group, Inc. is reflected as
minority interest in combined subsidiaries and partnerships in the accompanying
combined balance sheet. Total minority interest in the combined financial
statements amounted to $6,037,883 at December 31, 1997 and is included in other
liabilities.
(l) Obligation to Provide Future Services
Under the terms of certain lifecare and life estate sales contracts,
subsidiaries of the Company are obligated to provide future services to their
residents. These subsidiaries 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 is recorded (obligation to provide
12
<PAGE> 13
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
future services and use of facilities) with the corresponding charge to income.
The obligation is discounted at 6.5 percent, based on the expected long-term
rate of return on government obligations. As of December 31, 1997, none of the
subsidiaries had a liability associated with their obligation to provide future
services and use of facilities.
(m) Income Taxes
The Company has adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (Statement
109). Under the asset and liability method of Statement 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(n) Year 2000
The Company does not anticipate being adversely impacted by Year 2000
compliance. The Company is currently converting its computer systems that are
not already compliant to be compliant by the end of 1999. The total cost of
compliance measures is not estimated to be material and its being funded through
operating cash flows and expensed as incurred.
(o) Financial Instruments
The Company believes the carrying value of its debt obligations
approximates their fair value as the stated interest rates approximate rates at
which similar types of borrowing arrangements could be currently obtained by the
Company.
The Company holds a variety of investment securities which include
municipal bonds, mortgage-backed securities, equity securities, and a beneficial
interest in an investment trust. The fair value of investment securities is
included in notes 8 and 9.
(p) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from these estimates.
(q) Loss Per Common Share
Loss per common share is computed by dividing net income, less preferred
dividends of $800,000, by the weighted average number of common shares
outstanding during the period.
13
<PAGE> 14
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(r) Recent Accounting Pronouncements
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). The Company believes the application of the SOP will not be significant
to the financial statements.
(2) DEFERRED LIFECARE FEE RECEIVABLE AND 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. These funds were then available to the Company in the form
of a non-interest bearing loan. This loan provides permanent financing for the
facility and are collateralized by the property, plant, and equipment of Freedom
Plaza, Sun City Center, and Freedom Village of Holland, Michigan. As of December
31, 1997, the remaining obligation under the Master Trust agreements is
$68,976,422 and is payable monthly based on a 40-year amortization of each
residents' balance. The current installment due in 1998, and for the subsequent
five-year period is $1,967,675. The annual obligation is reduced as individual
residency agreements terminate.
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 beginning with the date of occupancy by the
resident. The amortization of the lifecare fees is included in life estate
income in the combined statement of operations and deferred lifecare fee
receivable on the combined balance sheet. The Company reports the long-term
obligation under the Master Trust Agreements as a refundable portion of life
estate purchase price and deferred life estate income based on the applicable
residency agreements. The obligation to the Master Trust is classified as
follows in the accompanying balance sheet:
<TABLE>
<CAPTION>
OTHER
MASTER RESIDENCY
TRUST AGREEMENTS TOTAL
----------- ----------- ------------
<S> <C> <C> <C>
Current installments of master trust....... $ 1,967,675 $ -- $ 1,967,675
Refundable portion of life estate purchase
price.................................... 29,359,365 33,328,716 62,688,081
Deferred life estate income................ 37,649,382 47,902,943 85,552,325
----------- ----------- ------------
$68,976,422 $81,231,659 $150,208,081
=========== =========== ============
</TABLE>
14
<PAGE> 15
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(3) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment as of December 31, 1997 consists of the
following:
<TABLE>
<S> <C>
Land and improvements....................................... $ 24,026,081
Buildings and improvements.................................. 169,848,631
Furniture, equipment and vehicles........................... 14,939,986
------------
208,814,698
Less accumulated depreciation............................. (38,084,462)
------------
170,730,236
Projects under development.................................. 25,171,045
------------
$195,901,281
============
</TABLE>
The Company capitalizes interest cost as a component of the cost of
constructing its facilities. Interest cost capitalized during the year ended
December 31, 1997 amounted to $1,563,796.
The Company estimates the remaining cost of construction at Brandywine to
be approximately $26,000,000 which will be funded by a construction loan
commitment (note 4).
(4) LONG-TERM DEBT
Long-term debt as of December 31, 1997 consists of the following:
<TABLE>
<S> <C>
Promissory construction note payable, convertible into a
bridge loan in February 1999 for an additional one year
period, interest payable monthly at 9%, secured by
security interest in real property of Brandywine.......... $12,440,963
Promissory note payable, interest at 8% payable in monthly
installments of $91,462, including interest, through
February 2021, secured by land and buildings of Freedom
Plaza Nursing Center...................................... 11,555,788
Promissory note payable, interest at 8% payable in monthly
installments of $66,798, including interest, through 2021,
secured by mortgage on real estate and security agreement
encumbering the land and buildings of Freedom Village of
Holland, Michigan......................................... 8,491,413
Promissory construction note payable, converted into a
bridge loan in December 1997 for an additional one-year
period, interest at prime plus .75% payable monthly,
principal payable based on entrance fee collections,
secured by security interest in real property of Grandview
Terrace................................................... 7,785,155
Promissory note payable, interest at 10% through December
31, 1998, 15% thereafter, payable monthly through December
31, 1999, at which time the principal becomes due, secured
by land of Sarasota Bay Club.............................. 7,745,000
Construction and health center loans and related accrued
interest payable to a bank, interest at 8.625% and prime
plus .75%, principal and interest due in monthly
installments through 1998 (see below), secured by
mortgages on real estate of Sun City Center............... 3,721,530
Unsecured notes payable to former stockholders (note 12),
interest at 8.0% payable quarterly through July 2001,
principal amounts payable annually beginning April 1998
through July 2001......................................... 10,425,376
</TABLE>
15
<PAGE> 16
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
Unsecured notes payable, interest at 8.5%, payable quarterly
through June 1998, at which time the principal balance is
due....................................................... 870,000
Property and equipment line of credit, maximum balance
of $1,000,000, interest at 9.25%, payable monthly
through 2003, secured by equipment.................... 945,610
Note payable to bank, due on demand, variable interest
payable monthly....................................... 640,421
Unsecured notes payable to residents of the Developer,
interest at 8.75% payable quarterly, principal amounts
payable through 1998.................................. 380,000
Other notes payable.................................... 1,064,307
-----------
66,065,563
Less current installments due..................... (9,917,248)
-----------
Long-term debt, excluding current portion....... $56,148,315
===========
</TABLE>
Scheduled maturities of long-term debt at December 31, 1997 is as follows:
<TABLE>
<S> <C>
1998....................................................... $ 9,917,248
1999....................................................... 28,991,602
2000....................................................... 3,160,298
2001....................................................... 2,893,270
2002....................................................... 852,340
Thereafter................................................. 20,250,805
-----------
$66,065,563
===========
</TABLE>
The Company is currently obligated under construction loans at Sun City
Center for its third phase, Golfview Terrace, and at Grandview Terrace which was
completed in June 1997 and in the process of completing sales on its unoccupied
units. In connection with these construction loans, entrance fees collected are
utilized to decrease the construction loan obligations based on specific terms
of the loan agreements. During 1997, construction loans were decreased by
$33,057,000 as entrance fees were collected for these newly constructed
developments and recorded as deferred entrance fees. It is management's policy,
based on historical experience from the other Company developments and terms of
the related construction loan agreements, to classify that portion of the
construction loans as long-term which will be satisfied through entrance fee
amounts to be collected subsequent to December 31, 1997. Accordingly, management
has classified a portion of the construction loan obligation amounting to
$7,050,239 as noncurrent and payable in 1998 in the scheduled maturities.
During 1996, Brandywine obtained a construction loan commitment from a bank
for $42,100,000 to be used to finance the construction of the facility. The
anticipated completion date of the construction is July 1998.
Scheduled principal payments of $4,170,150 on the unsecured note payable to
former stockholders became due in 1997. In accordance with the agreement for
redemption, these payments have been deferred until cash flow of the Company is
available to make the payments without hindering the Company's ability to meet
its other current obligations.
The Company is also obligated under non-interest bearing first mortgage
notes payable to the Master Trust with principal due monthly based on a 40-year
amortization of each resident's balance which becomes payable upon termination
of the related residency agreements. The notes are
16
<PAGE> 17
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
collateralized by property, plant, and equipment of Freedom Plaza, Sun City
Center, and Freedom Village of Holland, Michigan. The obligation under the
Master Trust is reported as refundable life estate purchase price and deferred
income due to the nature of this underlying residency agreements (note 2).
(5) INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Investments in unconsolidated affiliates at December 31, 1997 consist of
ownership interests in the following:
<TABLE>
<CAPTION>
OWNERSHIP CARRYING
INTEREST VALUE
--------- ----------
<S> <C> <C>
Peoria Retirement Residence (a limited liability
corporation) (Peoria Retirement).......................... 50.00% $1,099,532
Surprise Retirement Residence (a limited liability
corporation) (Surprise)................................... 50.00% 612,000
Freedom Plaza Limited Partnership (note 14)................. 50.00% --
Freedom Properties West (a general partnership) with an
interest in Casa Pacifica (a general partnership)......... 20.00% (261,632)
Freedom Properties -- Hemet (a general partnership)......... 18.03% 505,682
Freedom Group -- Naples Limited Partnership................. 50.00% 202,121
----------
$2,157,703
==========
</TABLE>
Peoria Retirement and Surprise were acquired in 1997 and are organized for
the purpose of constructing and operating rental lifecare facilities. Operations
of Peoria Retirement commenced in 1997 and Surprise is currently under
development. These communities are developed and managed by an unrelated third
party.
During 1996, the Company acquired an additional partnership interest in
Freedom Plaza Limited Partnership which required the Partnership to be combined
into the financial statements of the Company (note 14).
The Company's general partnership interest in Freedom Management Company
was sold in 1996.
Summary unaudited financial information for the unconsolidated partnerships
as of December 31, 1997 is as follows:
<TABLE>
<S> <C>
Current assets............................................ $ 3,566,872
Current liabilities....................................... (3,516,332)
------------
Working capital................................. 50,540
Property, plant and equipment............................. 60,078,086
Accumulated depreciation.................................. (12,384,929)
------------
Property, plant and equipment, net........................ 47,693,157
Other assets.............................................. 3,061,522
Long-term debt and other liabilities...................... (49,874,609)
------------
Partnership equity.............................. 930,610
------------
Net income...................................... $ 5,053,894
============
</TABLE>
17
<PAGE> 18
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(6) RELATED PARTY TRANSACTIONS
The Company has various transactions with the unconsolidated partnerships
described in note 5, as well as with other affiliated companies in which they
have no direct ownership interest. Accounts receivable from affiliates are
non-interest bearing and relate to unpaid management fees and expenses paid on
the affiliates' behalf.
In a prior year, the Company issued a promissory note to a stockholder in
the amount of $5,000,000. This amount was repaid in January 1996 and included
interest at 10 percent. The Company also has an unsecured line of credit in the
amount of $5,000,000 from this stockholder which was outstanding at December 31,
1997. The line of credit has been renewed on an annual basis and will be repaid
after the construction loan at Brandywine (note 4) is satisfied during 1999.
Accordingly, this obligation is reflected as noncurrent in the accompanying
combined financial statements. This line of credit bears interest at 10 percent
payable monthly. Interest expense on these obligations amounted to approximately
$340,000 for the year ending December 31, 1997.
At December 31, 1997, the Company has accounts and loans payable to its
limited partner at Grandview Terrace in the amount of $1,154,266 which is
included in other liabilities. This obligation is reflected as long-term as the
repayment will not occur until construction loan obligations are met.
The Company provides management services to combined companies and
unconsolidated affiliates. Management fee revenues from consolidated entities
and Freedom Village of Holland, Michigan have been eliminated. The Company also
provides construction management and architectural services to combined
companies and unconsolidated affiliates. Related intercompany profits or losses,
if any, have been eliminated.
The Company has entered into operating and capital lease agreements with
affiliates of its limited partners at Freedom Plaza and Grandview Terrace. The
operating lease agreements relate to each lifecare facilities land with payments
due in monthly installments. Rental expense under these agreements was
approximately $535,000 in 1997. Minimum lease payment obligations on these
leases is included in note 7. The capital lease agreements relate to Grandview
Terrace (note 7).
(7) LEASES
The Company leases its corporate offices under an operating lease agreement
that extends through November 30, 2000 and is also obligated under other
operating leases for land and equipment through its subsidiaries and affiliates.
Rental expense under these noncancelable operating lease agreements, including
affiliate leases (note 6) was approximately $887,000 for year ending December
31, 1997.
The Company is also obligated under a capital lease at Grandview Terrace
consisting of a 45-year lease agreement with an affiliate of the Grandview
Terrace limited partners for the land and building used for skilled nursing and
assisted living care. As of December 31, 1997, the gross amount of plant and
equipment, included in the buildings and improvements in the combined financial
statements, and related accumulated amortization recorded under this capital
lease was as follows:
<TABLE>
<S> <C>
Land and building........................................... $5,077,227
Less accumulated amortization.......................... (52,888)
----------
$5,024,339
==========
</TABLE>
18
<PAGE> 19
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under the noncancelable operating lease and
future minimum capital lease payments as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASE LEASES
------------------------ ----------- -----------
<S> <C> <C>
1998..................................................... $ 377,412 $ 1,022,000
1999..................................................... 462,024 989,000
2000..................................................... 507,720 783,000
2001..................................................... 507,720 533,000
2002..................................................... 507,720 533,000
Later years, through 2003................................ 20,054,940 18,450,000
----------- -----------
Total minimum lease payments................... 22,417,536 $22,310,000
===========
Less amount representing interest at 9.4%................ 17,281,578
-----------
Present value of net minimum capital lease payments...... 5,135,958
Less current installments................................ --
-----------
Obligations under capital leases, including accrued
interest, excluding current installments............... $ 5,135,958
===========
</TABLE>
(8) ASSETS WHOSE USE IS LIMITED
At December 31, 1997, assets whose use is limited consists of the
following:
<TABLE>
<S> <C>
Entrance fee escrow account................................ $ 9,151,842
Minimum liquid reserve..................................... 3,496,202
Resident deposits and other................................ 1,608,251
-----------
14,256,295
Less amounts that are required for current liabilities... (9,967,157)
-----------
Noncurrent portion.................................... $ 4,289,138
===========
</TABLE>
The entrance fee escrow accounts consist of cash and cash equivalents held
at banks for entrance fees which are refundable within a statutory seven-day
period after move-in and entrance fee deposits on residential units in
communities under development which are refundable upon notice. Deposits of
residents who have entered into the facilities are reflected as noncurrent
entrance fee deposits.
The minimum liquid reserve account is established under the Florida
Department of Insurance regulations for continuing care facilities (note 13).
The minimum liquid reserve account was invested in investment securities as of
December 31, 1997.
19
<PAGE> 20
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The cost, gross unrealized holding gains, gross unrealized holding losses
and fair value for assets whose use is limited which are classified as available
for sale, at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Cash and equivalents................. $10,086,534 $ -- $ -- $10,086,534
Municipal bonds...................... 854,872 15,043 -- 869,915
U.S. Treasury notes.................. 504,004 4,922 (707) 508,219
Equity securities.................... 2,273,368 520,667 (2,408) 2,791,627
----------- -------- ------- -----------
$13,718,778 $540,632 $(3,115) $14,256,295
=========== ======== ======= ===========
</TABLE>
Maturities of the municipal bonds and U.S. Treasury notes classified as
available for sale are as follows at December 31, 1997:
<TABLE>
<CAPTION>
FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Due after one year through five years....................... $ 920,763 $ 927,179
Due after five years through ten years...................... 436,113 450,955
---------- ----------
$1,356,876 $1,378,134
========== ==========
</TABLE>
Proceeds from the sale of investment securities available for sale were
$5,420,395 in 1997, and gross realized gains included in 1997 investment income
were $440,008. No realized losses were incurred in 1997.
(9) INVESTMENT SECURITIES
The cost, gross unrealized holding gains, gross unrealized holding losses
and fair value of available for sale securities by security type at December 31,
1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Money Market........................... $ 407,669 $ -- $ -- $ 407,669
U.S. Treasury notes.................... 57,219 4,817 -- 62,036
Municipal bonds........................ 428,473 2,765 -- 431,238
Equity securities...................... 1,335,288 157,661 (30,619) 1,462,330
---------- -------- -------- ----------
$2,228,649 $165,243 $(30,619) $2,363,273
========== ======== ======== ==========
</TABLE>
Maturities of U.S. Treasuries and municipal bonds classified as available
for sale are as follows at December 31, 1997:
<TABLE>
<CAPTION>
FAIR
COST VALUE
-------- --------
<S> <C> <C>
Due within one year......................................... $ 70,517 $ 75,243
Due after one year through five years....................... 317,544 319,679
Due after five years........................................ 97,631 98,352
-------- --------
$485,692 $493,274
======== ========
</TABLE>
20
<PAGE> 21
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
During 1997, proceeds from the sale of investment securities available for
sale were $1,690,408 with realized gains of $372,727 and no realized losses.
(10) EMPLOYEE BENEFIT PLANS
The Company has established a defined contribution profit sharing plan,
including features under Section 401(k) of the Internal Revenue Code, and a
nonqualified voluntary incentive plan for eligible employees of the Company and
its affiliates. These plans provide employees with the opportunity to defer a
portion of their salaries for the purpose of providing retirement benefits. The
Company contributes to the plans a matching amount of 25% of the participant's
contribution not to exceed 1% of the participant's annual salary. The
contributions vest at 20% per year for each year of service with the Company.
The nonqualified plan's vested balances earn interest at a rate determined
prior to each plan year. The interest rate is to be no less than the prime
lending rate. In 1996, vested contributions earned interest at 8.75%. As of
December 31, 1997, the accrued liability relating to this plan is approximately
$1,274,000, which includes participants' contributions, the vested portion of
the Company's contributions and plan earnings. The accrued liability for
employees no longer employed by the Company is recorded as a current liability
which amounted to $759,000 at December 31, 1997. The Company has acquired life
insurance policies on the participants for the purpose of funding the plan. The
cash surrender value of the insurance policies is included in other assets on
the balance sheet. The employees are considered general creditors of the
Company.
The Company has expensed approximately $202,000 in 1997 relating to its
portion of employee contributions under these plans.
(11) INCOME TAXES
Income tax attributable to income from continuing operations for the year
ended December 31, 1997 consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- --------- --------
<S> <C> <C> <C>
U.S. Federal....................................... $403,968 $(194,465) $209,503
State and local.................................... 7,471 (36,245) (28,774)
-------- --------- --------
$411,439 $(230,710) $180,729
======== ========= ========
</TABLE>
Income tax expense attributable to income from operations for the year
ended December 31, 1997 principally differed from the amounts computed by
applying the U.S. federal income tax rate of 34 percent to pretax income from
operations as a result of the following:
<TABLE>
<S> <C>
Computed expected tax expense at the federal rate of 34%.... $131,360
State income taxes, net of federal income tax benefit....... 49,369
--------
$180,729
========
</TABLE>
21
<PAGE> 22
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31 are as follows:
<TABLE>
<CAPTION>
CURRENT NONCURRENT
-------- -----------
<S> <C> <C>
Deferred tax assets --
Accrued expenses.......................................... $325,117 $ --
Minimum tax credit carryforwards.......................... -- --
-------- -----------
Total gross deferred assets....................... 325,117 --
-------- -----------
Deferred tax liabilities --
Plant and equipment, principally due to differences in
depreciation........................................... -- (103,718)
Life estate income, principally due to accrual of
revenue................................................ -- 527,532
Investment in Partnerships................................ -- (3,357,077)
Pre-opening costs......................................... -- 195,651
-------- -----------
Total gross deferred liabilities.................. -- (2,737,612)
-------- -----------
Net deferred asset (liability).................... $325,117 $(2,737,612)
======== ===========
</TABLE>
There was no valuation allowance for the deferred tax assets as of December
31, 1997 and, therefore, no change in the valuation allowance for the year ended
December 31, 1997.
(12) REDEEMABLE PREFERRED STOCK
Series A preferred stock consists of 500 shares authorized and outstanding.
The holders of preferred stock have voting rights, a preference senior to the
common stockholders in the event of voluntary or involuntary liquidation of the
Company, and are entitled to receive cumulative dividends of $400 per share on a
quarterly basis. Dividends in arrears shall be paid prior to current dividends.
Preferred stock dividends of $600,000 were paid in 1997 and $200,000 is the
remaining obligation related to 1997. There are no arrearages of unpaid
dividends prior to 1997.
The preferred stock also includes options for redemption or conversion of
all outstanding shares. The holders of preferred stock may exercise a redemption
option, whereby all of the then outstanding shares of preferred stock would be
redeemed by the Company at a price per share equal to the fair market value of
such shares on the date the option is exercised. This amount, including accrued
and unpaid dividends, would be paid in sixty equal monthly payments, including
interest at 10%. The conversion option provides for conversion of one share of
preferred stock into .924 shares of Class B common stock.
(13) STOCKHOLDERS' EQUITY
The Company is authorized to issue 3,000 shares of stock divided among the
following types: Common, Class A and Class B; and Preferred, Series A.
Class A common stock consists of 2,000 authorized shares, 1,848 of which
are issued and outstanding. Class B consists of 500 shares held in reserve for
the conversion of preferred stock (note 12). With the exception of special
voting rights granted to Class B stockholders, the rights and privileges of both
Class A and Class B common stockholders are equal.
22
<PAGE> 23
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(14) COMMITMENTS AND CONTINGENCIES
The States of Florida and Arizona have certain rules for providers of
continuing care services including the maintenance of liquid reserves at
specified levels and certain financial ratios. Management believes the Company
is in compliance with these rules based on its latest regulatory filings.
During the normal course of business, the Company may be subject to
liability claims related to providing services to its residents. The Company has
professional liability coverage with a commercial insurance carrier for
potential losses related to these matters, if any.
Certain subsidiaries of the Company have entered into residency agreements
whereby the Partnership is liable for a repurchase price of at least 100% of the
original purchase price for that resident, payable solely from the proceeds of
resale. The total potential refund liability related to these agreements is
approximately $19,145,000 at December 31, 1997. Based on current year sales
prices and anticipated market conditions in the coming year, management believes
its resale prices on these units will exceed its related refund obligation in
material respects.
During 1997, Sun City Center was named in a lawsuit by an adjacent golf
course owner alleging misrepresentations about the number of units to be
developed by the Partnership. This matter is in the preliminary stages of
discovery and no provision for settlement has been recorded in the financial
statements. The Company believes these claims are without merit and intends to
vigorously defend this claim.
As of December 31, 1997, property tax assessments at Freedom Village of
Holland, Michigan totaling $180,000 for 1992 and 1993 have been contested by the
Company and are under appeal in the Michigan Court of Appeals and the Michigan
Tax Tribunal. Management has not recorded any liabilities related to these
assessments as the outcome of this matter cannot be determined at this time.
(15) FREEDOM PLAZA LIMITED PARTNERSHIP
On January 2, 1996, the Company acquired an additional partnership interest
of 49.9% in Freedom Plaza Limited Partnership for $10,000,000 and subsequently
admitted a new limited partner resulting in a general partner interest of 81.95%
(note 5). As a result of the purchase, Freedom Plaza Limited Partnership is
combined in the Company's operations subsequent to the date of acquisition in
fiscal year 1996. Prior to the acquisition, the Company accounted for its 50%
interest under the equity method. The acquisition has been accounted for as a
purchase, and accordingly, the purchase price has been allocated to the
partnership interest acquired in Freedom Plaza Limited Partnership's assets and
liabilities based on their estimated fair values at January 2, 1996. The effect
of the purchase was to record cost in excess of fair value of assets acquired in
the amount of approximately $9,460,000 during 1996. During 1997, the limited
partner increased its ownership interest to approximately 31% through a
contribution of land and cash totaling $2,265,000.
23
<PAGE> 24
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(16) CASH FLOWS FROM OPERATING ACTIVITIES AND SUPPLEMENTAL INFORMATION
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income............................................... $ 205,626
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 7,796,965
Deferred income taxes................................. (230,710)
Equity in earnings of unconsolidated affiliates....... (785,339)
Minority interest in net income of subsidiaries....... (1,130,909)
Life estate income.................................... (7,224,530)
Changes in operating assets and liabilities:
Decrease in accounts receivable -- affiliates....... 108,651
Increase in accounts receivable..................... (859,064)
Increase in prepaid expenses and other current
assets........................................... (237,252)
Increase in income taxes............................ 374,067
Increase in other assets............................ (825,840)
Increase in accounts payable and accrued expenses... 3,008,508
Increase in other liabilities....................... 1,036,542
-----------
Net cash provided by operating activities........ $ 1,236,715
===========
</TABLE>
Supplemental schedule of cash flow information:
<TABLE>
<S> <C>
Interest paid during the year, net of amounts
capitalized............................................ $5,394,336
----------
Income tax paid (net of refunds received)................. $ (148,399)
==========
Schedule of noncash activities -- Contribution of land for
minority interest......................................... $ 850,000
----------
Capital lease obligation assumed.......................... $5,135,998
==========
</TABLE>
24
<PAGE> 25
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(17) SUBSEQUENT EVENT
On July 14, 1998, American Retirement Corporation (ARC) acquired all of the
Company's common stock, Freedom Village of Holland, Michigan and certain
entities affiliated with the Company and/or its chairman in exchange for
1,370,000 shares of ARC common stock, valued at $19,779,000, and cash totaling
approximately $23,214,000. Prior to consummation, certain subsidiaries and
unconsolidated affiliates were spun off from the Company. The spin-off entities
included Freedom Plaza, Grandview Terrace, Brandywine, Sarasota Bay Club, and
certain unconsolidated affiliates. In addition, ARC assumed certain debt
obligations that became due upon change in ownership. At this time, no
adjustments to the combined financial statements of the Company have been made.
An unaudited summary of the anticipated effect of the spin-off as of December
31, 1997 and the year then ended is as follows:
<TABLE>
<CAPTION>
COMBINED
FREEDOM GROUP, INC.
AND SUBSIDIARIES AND ENTITY
FREEDOM VILLAGE OF ENTITIES ADJUSTMENTS/ ACQUIRED BY
BALANCE SHEET HOLLAND, MICHIGAN EXCLUDED ELIMINATIONS ARC
- ------------- -------------------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 4,481,884 $ 1,418,402 $ -- $ 3,063,482
Accounts receivable, net............... 3,717,834 1,300,272 916,303 3,333,865
Deferred income taxes.................. 325,117 -- -- 325,117
Other current assets................... 13,001,177 7,123,221 -- 5,877,956
------------ ------------ ------------ ------------
Total current assets............ 21,526,012 9,841,895 916,303 12,600,420
------------ ------------ ------------ ------------
Property, plant and equipment, net....... 195,901,281 102,512,080 -- 93,389,201
Deferred lifecare receivable............. 9,539,864 5,295,614 -- 4,244,250
Costs in excess of net assets acquired... 10,631,057 8,772,600 -- 1,858,457
Other assets............................. 18,866,227 9,457,977 9,408,250
------------ ------------ ------------ ------------
Total assets.................... $256,464,441 $135,880,166 $ 916,303 $121,500,578
============ ============ ============ ============
Current liabilities:
Current installments of long-term
debt................................. $ 9,917,248 $ 2,963,742 $ -- $ 6,953,506
Current installments of Master Trust... 1,967,675 528,408 -- 1,439,267
Accounts payable and accrued expenses.. 7,211,058 2,194,982 (104,120) 4,911,956
Other current liabilities.............. 5,580,489 4,049,324 167,758 1,698,923
------------ ------------ ------------ ------------
Total current liabilities....... 24,676,470 9,736,456 63,638 15,003,652
------------ ------------ ------------ ------------
Long-term debt, excluding current
portion................................ 56,148,315 37,887,711 -- 18,260,604
Refundable portion of life estate
purchase price......................... 62,688,081 15,230,839 -- 47,457,242
Deferred life estate income.............. 85,552,325 42,037,803 -- 43,514,522
Deferred income taxes.................... 2,737,612 -- (942,915) 1,794,697
Other liabilities........................ 22,672,382 14,932,872 (5,720,693) 2,018,817
------------ ------------ ------------ ------------
Total liabilities............... 254,475,185 119,825,681 (6,599,970) 128,049,534
Redeemable cumulative preferred stock.... 10,200,000 (10,200,000) --
Total stockholders' equity
(deficit) and partnership
capital................................ (8,210,744) 16,054,485 17,716,273 (6,548,956)
------------ ------------ ------------ ------------
Total liabilities, stockholders'
equity and partnership
capital....................... $256,464,441 $135,880,166 $ 916,303 $121,500,578
============ ============ ============ ============
</TABLE>
25
<PAGE> 26
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
COMBINED
FREEDOM GROUP, INC.
AND SUBSIDIARIES AND ENTITY
FREEDOM VILLAGE OF ENTITIES ADJUSTMENTS/ ACQUIRED BY
STATEMENT OF INCOME HOLLAND, MICHIGAN EXCLUDED ELIMINATIONS ARC
- ------------------- -------------------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Resident and healthcare
revenue...................... $47,098,235 $17,280,806 $ -- $29,817,429
Management fees................. 1,400,858 -- 820,226 2,221,084
Construction management and
architectural fees........... 929,386 -- -- 929,386
----------- ----------- ----------- -----------
Total revenues.......... 49,428,479 17,280,806 820,226 32,967,899
----------- ----------- ----------- -----------
Operating expenses:
Community operating expense..... 35,035,290 14,382,819 -- 20,652,471
General and administrative...... 4,094,068 -- -- 4,094,068
Depreciation and amortization... 7,796,965 2,891,944 -- 4,905,021
Lease expense................... 887,000 486,000 -- 401,000
----------- ----------- ----------- -----------
Total operating
expenses.............. 47,813,323 17,760,763 -- 30,052,560
----------- ----------- ----------- -----------
Income (loss) from
operations................. 1,615,156 (479,957) 820,226 2,915,339
----------- ----------- ----------- -----------
Other income (expense):
Interest expense................ (4,339,578) (2,408,315) 168,780 (1,762,483)
Minority interest in net income
of subsidiaries.............. 1,130,909 -- (1,381,363) (250,454)
Other income (expenses)......... 1,979,868 944,215 (168,780) 866,873
----------- ----------- ----------- -----------
Total other income
(expense)............. (1,228,801) (1,464,100) (1,381,363) (1,146,064)
Income before taxes..... 386,355 (1,944,057) (561,137) 1,769,275
Income tax expense................ 180,729 -- 509,286 690,015
----------- ----------- ----------- -----------
Net income.............. $ 205,626 $(1,944,057) $(1,070,423) $ 1,079,260
=========== =========== =========== ===========
</TABLE>
26
<PAGE> 27
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
CONDENSED COMBINED BALANCE SHEETS
MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and equivalents...................................... $ 2,974,818 $ 4,481,884
Accounts receivable, net.................................. 4,006,504 3,717,834
Deferred income taxes..................................... 325,117 325,117
Assets whose use is limited -- current portion............ 12,174,559 9,967,157
Other current assets...................................... 2,131,030 3,034,020
------------ ------------
Total current assets.............................. 21,612,028 21,526,012
Assets whose use is limited -- noncurrent portion........... 5,612,699 4,289,138
Investment in consolidated affiliates....................... 2,503,702 2,157,703
Property, plant and equipment, net.......................... 204,149,519 195,901,281
Deferred lifecare fees receivable........................... 9,909,875 9,539,864
Cost in excess of net assets acquired, net.................. 10,339,611 10,631,057
Other assets................................................ 11,619,956 12,419,386
------------ ------------
Total assets...................................... $265,747,390 $256,464,441
============ ============
Current liabilities:
Current portion of long term debt......................... $ 9,917,248 $ 9,917,248
Current portion of master trust........................... 1,967,675 1,967,675
Accounts payable and accrued expenses..................... 8,418,912 7,211,058
Other current liabilities................................. 89,800 581,765
Resident deposits......................................... 6,153,095 4,998,724
------------ ------------
Total current liabilities......................... 26,546,730 24,676,470
Long-term debt, excluding current portion................... 63,772,332 56,148,315
Refundable portion of life estate purchase price............ 65,183,365 62,688,081
Deferred life estate income................................. 86,075,815 85,552,325
Capital lease obligations excluding current installments.... 5,172,312 5,135,958
Note payable -- stockholder................................. 5,000,000 5,000,000
Deferred income taxes....................................... 2,466,180 2,737,612
Other liabilities........................................... 9,240,396 12,536,424
------------ ------------
Total liabilities................................. 263,457,130 254,475,185
------------ ------------
Redeemable cumulative preferred stock....................... 10,400,000 10,200,000
Stockholders' equity and partnership capital:
Common stock.............................................. 1,848 1,848
Additional paid-in capital................................ 1,369,810 1,569,810
Other shareholders' equity................................ (9,481,398) (9,782,402)
------------ ------------
Total stockholders' equity and partnership
capital......................................... (8,109,740) (8,210,744)
------------ ------------
Total liabilities and stockholders' equity and
partnership capital............................. $265,747,390 $256,464,441
============ ============
</TABLE>
See accompanying notes to financial statements.
27
<PAGE> 28
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
CONDENSED COMBINED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Resident and healthcare revenue........................... $13,025,932 $10,530,590
Management fees........................................... 414,592 308,807
Construction fees......................................... 121,848 76,029
----------- -----------
Total revenues.................................... 13,562,372 10,915,426
----------- -----------
Expenses:
Community operating expenses.............................. 9,695,246 7,440,530
General and administrative................................ 947,743 807,292
Depreciation and amortization............................. 2,072,129 1,573,053
Lease expense............................................. 440,715 129,432
----------- -----------
Total expenses.................................... 13,155,833 9,950,307
----------- -----------
Income from operations............................ 406,539 965,119
Other income (expense):
Merger expenses........................................... (96,000) --
Interest expense.......................................... (1,181,859) (589,992)
Minority interest in losses of subsidiaries............... 341,167 (13,600)
Investment income......................................... 138,596 70,972
Other..................................................... 58,719 --
----------- -----------
Total other income (expense)...................... (739,377) (532,620)
Income (loss) before income taxes................. (332,838) 432,499
Income tax benefit (expense)................................ 126,472 (168,675)
----------- -----------
Net income (loss)................................. $ (206,366) $ 263,824
=========== ===========
Net (loss) income attributable to common
stockholders, after preferred dividends........ $ (406,366) $ 63,824
=========== ===========
Basic (loss) income per common share.............. $ (219.89) $ 34.54
=========== ===========
</TABLE>
See accompanying notes to financial statements.
28
<PAGE> 29
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ (206,366) $ 263,824
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 2,072,129 1,573,053
Deferred income taxes.................................. (271,432) --
Equity in earnings of unconsolidated affiliates........ (58,717) (184,740)
Minority interest in net income of subsidiaries........ (341,167) 13,214
Life estate income..................................... (2,251,306) (1,752,547)
Changes in operating assets and liabilities:
Decrease in accounts receivable...................... (288,670) (383,086)
Increase in other assets............................. 281,704 304,962
Increase in income taxes............................. (491,962) --
Increase in other taxes.............................. -- (7,625)
Increase in other assets............................. 1,812,988 --
Increase (decrease) in accrued expenses.............. 1,207,835 (920,168)
(Decrease) increase in other liabilities............. (2,035,038) 566,772
------------ -----------
Net cash used in operating activities............. (570,002) (526,341)
------------ -----------
Cash flows from investing activities, net of amounts
acquired through acquisition
Purchase of property, plant and equipment................. (10,320,367) (9,000,325)
Investment in unconsolidated affiliates................ (513,966) (23,598)
Sale of investment securities, net..................... 926,148 23,923
Increase in assets whose use is limited, net........... (3,530,962) (618,757)
Distributions and loan repayments from unconsolidated
affiliates........................................... 226,699 128,341
Capital contributions from minority interests.......... 1,000,000 1,140,000
Capital distributions to minority interests............ (170,067) (64,707)
Costs of acquiring initial lifecare and life estate
sales contracts...................................... (723,030) (580,872)
------------ -----------
Net cash used in investing activities............. (13,105,545) (8,995,995)
------------ -----------
Cash flows from financing activities:
Proceeds from long-term debt and master trust............. 4,146,364 11,921,754
Proceeds from lifecare contracts and related deposits..... 9,875,366 2,930,210
Payments on long-term debt................................ (713,802) (3,722,664)
Preferred stock dividends................................. -- (200,000)
Payments upon termination of life estate sales
contracts.............................................. (1,139,447) (796,080)
------------ -----------
Net cash provided by financing activities......... $ 12,168,481 $10,133,220
============ ===========
Net (decrease) increase in cash and cash
equivalents..................................... (1,507,066) 610,884
Cash and cash equivalents at beginning of year.............. 4,481,884 4,064,648
------------ -----------
Cash and cash equivalents at end of year.................... $ 2,974,818 $ 4,675,532
============ ===========
</TABLE>
See accompanying notes to financial statements.
29
<PAGE> 30
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed combined financial statements of
Freedom Group, Inc. and Subsidiaries and Freedom Village of Holland, Michigan
(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. Operating results for the
quarter ended March 31, 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 financial statements
and the notes thereto included herein for the year ended December 31, 1997.
(2) SUBSEQUENT EVENT
On July 14, 1998, American Retirement Corporation (ARC) acquired all of the
Company's common stock, Freedom Village of Holland, Michigan and certain
entities affiliated with the Company and/or its chairman in exchange for
1,370,000 shares of ARC common stock, valued at $19,779,000, and cash totaling
approximately $23,214,000. Prior to consummation, certain subsidiaries and
unconsolidated affiliates were spun off from the Company. The spin-off entities
included Freedom Plaza, Grandview Terrace, Brandywine, Sarasota Bay Club, and
certain unconsolidated affiliates. In addition, ARC assumed certain debt
obligations that became due upon change in ownership. At this time, no
adjustments to the combined financial statements of the Company have been made.
An unaudited summary of the anticipated effect of the spin-off as of March 31,
1998 and the three months then ended is as follows:
30
<PAGE> 31
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED
FREEDOM GROUP ENTITY
AND FREEDOM VILLAGE ENTITIES ADJUSTMENTS/ ACQUIRED
OF HOLLAND EXCLUDED ELIMINATIONS BY ARC
------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.... $ 2,974,818 $ 694,690 $ -- $ 2,280,128
Accounts receivable, net..... 4,006,504 1,429,895 546,505 3,123,114
Deferred income taxes........ 325,117 -- -- 325,117
Other current assets......... 14,305,589 7,338,860 -- 6,966,729
------------ ------------ ------------ ------------
Total current
assets............. 21,612,028 9,463,445 546,505 12,695,088
Land, buildings and equipment,
net.......................... 204,149,519 110,435,823 -- 93,713,696
Deferred lifecare receivable... 9,909,875 5,590,878 -- 4,318,997
Costs in excess of net assets
acquired, net................ 10,339,611 8,502,193 -- 1,837,418
Other assets................... 19,736,357 10,288,280 -- 9,448,077
------------ ------------ ------------ ------------
Total assets......... $265,747,390 $144,280,619 $ 546,505 $122,013,276
============ ============ ============ ============
Current portion of long-term
debt......................... $ 9,917,248 $ 1,853,933 $ -- $ 8,063,315
Current portion of master
trust........................ 1,967,675 528,408 -- 1,439,267
Accrued expenses............... 8,418,912 2,787,762 365,133 5,996,283
Other current liabilities...... 6,242,895 4,713,177 -- 1,529,718
------------ ------------ ------------ ------------
Total current
liabilities........ 26,546,730 9,883,280 365,133 17,028,583
------------ ------------ ------------ ------------
Long term debt, excluding
current portion.............. 63,772,332 45,016,370 -- 18,755,962
Refundable portion of life
estate purchase price........ 65,183,365 16,432,393 -- 48,750,972
Deferred life estate income.... 86,075,815 43,634,378 -- 42,441,437
Deferred income taxes.......... 2,466,180 -- (786,941) 1,679,239
Other long term liabilities.... 19,412,708 13,452,364 (5,202,918) 757,426
------------ ------------ ------------ ------------
Total liabilities.... 263,457,130 128,418,785 (5,624,726) 129,413,619
Redeemable preferred stock..... 10,400,000 -- (10,400,000) --
Total stockholders equity and
partnership capital.......... (8,109,740) 15,861,834 16,571,231 (7,400,343)
------------ ------------ ------------ ------------
Total liabilities and
stock-holder's
equity and
partnership
capital............ $265,747,390 $144,280,619 $ 546,505 $122,013,276
============ ============ ============ ============
</TABLE>
31
<PAGE> 32
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED
FREEDOM GROUP, INC.
AND SUBSIDIARIES AND ENTITY
FREEDOM VILLAGE OF ENTITIES ADJUSTMENTS/ ACQUIRED BY
STATEMENT OF INCOME HOLLAND, MICHIGAN EXCLUDED ELIMINATIONS ARC
- ------------------- -------------------- ----------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Resident and healthcare revenue.... $13,025,932 $5,484,609 $ -- $7,541,323
Management fees.................... 414,592 -- 279,442 694,034
Construction management fee........ 121,848 -- -- 121,848
----------- ---------- --------- ----------
Total revenues............. 13,562,372 5,484,609 279,442 8,357,205
----------- ---------- --------- ----------
Operating expenses:
Community operating expense........ 9,695,246 4,217,463 -- 5,477,783
General and administrative......... 947,743 -- -- 947,743
Depreciation and amortization...... 2,072,129 906,460 -- 1,165,669
Lease expense...................... 440,715 387,386 -- 53,329
----------- ---------- --------- ----------
Total operating expenses... 13,155,833 5,511,309 -- 7,644,524
----------- ---------- --------- ----------
Income (loss) from
operations............... 406,539 (26,700) 279,442 712,681
----------- ---------- --------- ----------
Other income (expense)
Interest expense................... (1,181,859) (550,228) -- (631,631)
Merger expenses.................... (96,000) -- -- (96,000)
Minority interest in net income of
subsidiaries.................... 341,167 -- (346,053) (4,886)
Other income (expenses)............ 197,315 101,826 -- 95,489
----------- ---------- --------- ----------
Total other income
(expense)................ (739,377) (448,402) (346,053) (637,028)
----------- ---------- --------- ----------
Income before taxes........ (332,838) (475,102) (66,611) 75,653
Income tax expense................... 126,472 -- (155,974) (29,502)
----------- ---------- --------- ----------
Net income................. $ (206,366) $ (475,102) $(222,585) $ 46,151
=========== ========== ========= ==========
</TABLE>
32
<PAGE> 33
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
and explanatory notes set forth the pro forma effects on the historical
financial position and results of operations of the Company in connection with
the consummation of the FGI Transaction.
The following Unaudited Pro Forma Condensed Combined Balance Sheet gives
effect to the consummation of the FGI Transaction as if it had occurred as of
March 31, 1998. The Unaudited Pro Forma Condensed Combined Statement of
Operations reflects the pro forma effect of the combined results of operations
for the year ended December 31, 1997 and the three months ended March 31, 1998
assuming consummation of the FGI Transaction as of January 1, 1997. The Company
has accounted for the FGI Transaction as a purchase.
The following unaudited pro forma condensed combined financial information
was prepared by the Company based on the adjusted historical balance sheet and
statement of income reflected in the unaudited condensed combined financial
statements of FGI and Freedom Village of Holland, one of the FGI Communities
acquired pursuant to the FGI Transaction (collectively, the "Freedom Group
Entities"), which financial statements are included elsewhere in this report.
The unaudited pro forma condensed combined financial information is based upon
historical information, preliminary estimates, and certain assumptions regarding
the ongoing operations of the acquired entities. Estimates relating to the fair
value of certain assets, liabilities, and other items have been made as more
fully described in the notes to the unaudited pro forma condensed combined
financial information. Actual adjustments, which may include adjustments to
additional assets, liabilities, and other items, will be made on the basis of
appraisals or other evaluations as of the effective date of the acquisition and,
therefore, may differ from those reflected in the unaudited pro forma condensed
combined financial information.
The following unaudited pro forma condensed combined financial information
is not necessarily indicative of the actual results that would have been
achieved if the FGI Transaction had been completed as of the dates indicated or
that may be realized in the future.
The unaudited pro forma condensed combined financial information should be
read in conjunction with the audited and unaudited financial statements and
related notes thereto of the Company (previously filed with the Securities and
Exchange Commission on Form 10-K for the fiscal year ended December 31, 1997 and
on Form 10-Q for the quarter ended March 31, 1998) and the Freedom Group
Entities (included herein).
33
<PAGE> 34
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AT MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTED
COMBINED
FREEDOM GROUP PRO FORMA PRO FORMA
THE COMPANY ENTITIES(A) ADJUSTMENTS COMBINED
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 29,050 $ 2,280 $ -- $ 31,330
Accounts receivable, net............................ 6,681 3,123 -- 9,804
Deferred income taxes............................... 3,521 325 -- 3,846
Other current assets................................ 6,185 6,967 -- 13,152
-------- -------- -------- --------
Total current assets.............................. 45,437 12,695 -- 58,132
Land, buildings and equipment, net.................. 240,643 93,714 47,213(B) 381,570
Deferred lifecare fee receivable.................... -- 4,319 (1,763)(B) 2,556
Goodwill............................................ 2,772 1,837 29,729(B) 34,338
Other assets........................................ 28,325 9,448 4,000(B) 41,773
-------- -------- -------- --------
Total assets...................................... $317,177 $122,013 $ 79,179 $518,369
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................... $ 318 $ 8,063 $ (5,460)(C) $ 2,921
Current portion of refundable life estate purchase
price............................................. -- 1,440 -- 1,440
Accrued expenses.................................... 6,281 5,996 2,000(B) 14,277
Other current liabilities........................... 2,112 1,530 9,365(B) 13,007
-------- -------- -------- --------
Total current liabilities......................... 8,711 17,029 5,905 31,645
Long-term debt, excluding current portion........... 101,516 18,756 40,429(C) 154,446
(6,255)(C)
Convertible debentures.............................. 138,000 -- -- 138,000
Refundable portion of life estate purchase price.... -- 48,751 -- 48,751
Deferred life estate income......................... -- 42,441 -- 42,441
Deferred income taxes............................... 3,567 1,679 11,920(B) 17,166
Other long-term liabilities......................... 9,946 758 -- 10,704
-------- -------- -------- --------
Total liabilities................................. 261,740 129,414 51,999 443,153
Shareholders' equity:
Common Stock........................................ 114 2 (2)(B) 128
14(B)
Additional paid-in capital.......................... 60,205 1,370 (1,370)(B) 79,970
19,765(B)
Other shareholders' equity, net..................... (4,882) (8,773) 8,773(B) (4,882)
-------- -------- -------- --------
Total shareholders' equity........................ 55,437 (7,401) 27,180 75,216
-------- -------- -------- --------
Total liabilities and shareholders' equity........ $317,177 $122,013 $ 79,179 $518,369
======== ======== ======== ========
</TABLE>
34
<PAGE> 35
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AT MARCH 31, 1998
(DOLLARS IN THOUSANDS)
(A) Reflects the pro forma condensed combined balance sheet of the Freedom Group
Entities as of March 31, 1998, as adjusted to give effect to the
distribution of certain assets subject to certain liabilities prior to the
consummation of the FGI Transaction. See Note 2 to the combined financial
statements of the Freedom Group Entities.
(B) To record the acquisition costs related to the FGI Transaction giving
effect to such transaction as of March 31, 1998 as follows:
<TABLE>
<S> <C>
Purchase price:
Discounted value of stock consideration................... $19,779
Consideration to be paid in cash.......................... 32,579
Reduction to cash consideration for working capital
adjustment.............................................. (9,365)
Cash consideration for purchase options................... 4,000
Cash consideration for management contracts............... 1,500
Transaction costs......................................... 2,000
-------
Total FGI Transaction Costs........................... $50,493
=======
</TABLE>
The discounted value of the stock consideration of $19,779 was computed
using the closing market price on the date of execution of definitive
agreements for the 1,370,000 FGI Shares, reduced to reflect the fair value
discount attributable to marketability restrictions. In addition to the
$32,579 cash portion of the purchase price for the FGI Entities, the Company
also paid $4,000 in cash, to entities affiliated with a major shareholder of
FGI, for options to purchase the entities' CCRCs currently under
development, $1,500 to acquire a management contract, and incurred
approximately $2,000 of transaction costs. In addition, the cash portion of
the consideration will be increased by $1.0 million upon the satisfaction
of certain conditions and will be reflected as additional goodwill.
The purchase premium will be allocated to the net assets acquired in
accordance with generally accepted accounting principles as follows:
<TABLE>
<S> <C>
Land, buildings and equipment, net.......................... $47,213
Deferred lifecare fee receivable............................ (1,763)
Other assets................................................ 4,000
Other current liabilities................................... (9,365)
Deferred income taxes....................................... (11,920)
Elimination of Freedom Group Entities' equity............... (7,401)
Purchase price in excess of net assets acquired............. 29,729
-------
Total FGI Transaction Costs............................. $50,493
=======
</TABLE>
Purchase accounting adjustments include: (i) an increase of $47,213 to
reflect the fair market value of land, buildings, and equipment; (ii) an
adjustment of $1,763 to the fair value of certain deferred lifecare fee
receivables; (iii) the recognition of $29,729 of goodwill; (iv) the
recognition of $4,000 of other assets reflecting the purchase options; (v)
the recognition of $9,365 of additional current liabilities; (vi) the
recognition of $11,920 of deferred taxes reflecting the difference between
financial reporting and income tax bases of certain assets acquired; and
(vii) the elimination of Freedom Group Entities' equity prior to the
acquisition, including $2 of common stock, $1,370 of additional paid-in
capital, and $8,773 of other shareholders' equity.
(C) For purposes of the pro forma financial information, it is assumed that as
of March 31, 1998, the Company borrowed $40,429 of the cash requirements for
the FGI Transaction. The Company repaid $11,715 of FGI's long-term
indebtedness, including $5,460 of current maturities.
35
<PAGE> 36
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTED
COMBINED
THE FREEDOM GROUP PRO FORMA PRO FORMA
COMPANY ENTITIES(D) ADJUSTMENTS COMBINED
-------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Resident and health care revenue........................ $92,217 $29,817 $ -- $122,034
Management services and other revenue................... 1,995 3,150 (29)(E) 5,116
-------- ------- ------- --------
Total revenues........................................ 94,212 32,967 (29) 127,150
Expenses:
Community operating expense............................. 57,838 20,652 -- 78,490
Lease expense........................................... 3,405 401 -- 3,806
General and administrative.............................. 8,051 4,094 -- 12,145
Depreciation and amortization........................... 6,855 4,905 191(F) 11,951
-------- ------- ------- --------
Total operating expenses.............................. 76,149 30,052 191 106,392
-------- ------- ------- --------
Income (loss) from operations......................... 18,063 2,915 (220) 20,758
Interest expense, net................................... (12,188) (881) (1,146)(G) (14,215)
Minority interest in net income of subsidiaries......... -- (250) 250(H) --
Other expense........................................... (1) (15) -- (16)
-------- ------- ------- --------
Income (loss) before income taxes and extraordinary
item................................................ 5,874 1,769 (1,116) 6,527
Income tax expense (benefit)............................ 4,340 690 (142)(I) 4,888
-------- ------- ------- --------
Income before extraordinary item...................... 1,534 1,079 (974) 1,639
Extraordinary loss on extinguishment of debt, net of
tax................................................... 6,334 -- -- 6,334
-------- ------- ------- --------
Net income (loss)..................................... $(4,800) $ 1,079 $ (974) $ (4,695)
======== ======= ======= ========
Pro forma earnings data(J):
Income before income taxes and extraordinary item....... $ 5,874 $ 1,769 $(1,116) $ 6,527
Pro forma income tax expense (benefit).................. 2,115 690 (142) 2,663
-------- ------- ------- --------
Pro forma income (loss) before extraordinary item....... $ 3,759 $ 1,079 $ (974) $ 3,864
======== ======= ======= ========
Pro forma basic earnings per share........................ $ 0.36 $ 0.32
======== ========
Pro forma diluted earnings per share...................... $ 0.35 $ 0.32
======== ========
Weighted average shares used for basic earnings per share
data.................................................... 10,577 1,370(K) 11,947
Effect of dilutive common stock options................... 98 98
-------- --------
Weighted average shares used for diluted earnings per
share data.............................................. 10,675 12,045
======== ========
</TABLE>
36
<PAGE> 37
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(D) Reflects the pro forma condensed combined statement of operations of the
Freedom Group Entities for the year ended December 31, 1997, as adjusted to
reflect the exclusion of the operations of certain entities distributed
prior to the consummation of the FGI Transaction. See Note 17 to the audited
combined financial statements of the Freedom Group Entities.
(E) Reflects a $29 decrease in management services revenue to give effect to the
terms of the Company's management contracts entered into in connection with
the FGI Transaction.
(F) Reflects a net increase in depreciation and amortization of $191 relating to
purchase accounting adjustments for the FGI Transaction of (i) $1,349
increase in depreciation attributable to the increase in the values of
buildings and equipment (depreciated using the straight-line method over the
estimated useful lives of 40 years for buildings and seven years for
furniture, fixtures, and equipment); (ii) $1,901 decrease in depreciation
and amortization to reflect the impact of a change in the estimated
remaining lives of buildings and equipment and costs of acquiring lifecare
contracts to conform to the accounting methods used by the Company; and
(iii) $743 increase in amortization attributable to goodwill (amortized over
40 years).
(G) Reflects an aggregate increase in net interest expense of $1,146 comprised
of (i) $2,570 of additional interest expense associated with the aggregate
assumed borrowings as of January 1, 1997 through existing lines of credit of
$40,429 at 6.9% for purposes of the pro forma financial information (net of
interest earnings of $220 on the purchase option payments); (ii) a $956
reduction of interest expense associated with the $11,715 of FGI
indebtedness repaid by the Company; (iii) a $340 reduction of interest
expense associated with a line of credit with a shareholder that was not
assumed by the Company; and (iv) the recognition of $128 of interest income
on the deferred lifecare fee receivables assuming an interest earnings rate
of 5.0%.
(H) Reflects the elimination of a $250 minority interest in net income from
Freedom Village of Holland and Lake Seminole Square as a result of the
acquisition by the Company of 100% ownership in the CCRCs in connection with
the FGI Transaction.
(I) Reflects a pro forma income tax benefit of $142 (excluding non-deductible
goodwill) assuming an effective tax rate of 38%.
(J) Reflects pro forma income taxes excluding the effects of a one-time non-cash
tax charge of $3.0 million relating to the conversion from a non-taxable
limited partnership to a taxable corporation and assuming the Company was a
taxable entity for all of 1997 at an effective tax rate of 36%.
(K) Reflects the issuance of the 1,370,000 FGI Shares as part of the purchase
consideration in the FGI Transaction.
37
<PAGE> 38
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTED
COMBINED
THE FREEDOM GROUP PRO FORMA PRO FORMA
COMPANY ENTITIES(L) ADJUSTMENTS COMBINED
------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Resident and health care revenue........................ $26,398 $ 7,541 $ -- $33,939
Management services and other revenue................... 1,679 816 390(M) 2,885
------- ------- ------- -------
Total revenues........................................ 28,077 8,357 390 36,824
Expenses:
Community operating expense............................. 17,018 5,478 -- 22,496
Lease expense........................................... 1,685 53 -- 1,738
General and administrative.............................. 2,053 1,043 (312)(N) 2,784
Depreciation and amortization........................... 1,974 1,166 48(O) 3,188
------- ------- ------- -------
Total operating expenses.............................. 22,730 7,740 (264) 30,206
------- ------- ------- -------
Income from operations................................ 5,347 617 654 6,618
Interest expense, net..................................... (2,951) (631) (246)(P) (3,828)
Minority interest in net income of subsidiaries........... -- (5) 5(Q) --
Other income (expense).................................... (26) 95 -- 69
------- ------- ------- -------
Income before income taxes............................ 2,370 76 413 2,859
Income tax expense........................................ 853 30 228(R) 1,111
------- ------- ------- -------
Net income............................................ $1,517 $ 46 $ 185 1,748
======= ======= ======= =======
Basic earnings per share.................................. $ 0.13 $ 0.14
======= =======
Diluted earnings per share................................ $ 0.13 $ 0.13
======= =======
Weighted average shares used for basic earnings per share
data.................................................... 11,421 1,370(S) 12,791
Effect of dilutive common stock options................... 212 212
------- -------
Weighted average shares used for diluted earnings per
share data.............................................. 11,633 13,003
======= =======
</TABLE>
38
<PAGE> 39
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(L) Reflects the pro forma condensed combined statement of operations of the
Freedom Group Entities for the three months ended March 31, 1998, as
adjusted to reflect the exclusion of the operations of certain entities
distributed prior to the consummation of the FGI Transaction. See Note 2
to the unaudited condensed combined financial statements of the Freedom
Group Entities.
(M) Reflects a $390 increase in management services revenue to give effect to
the terms of the Company's management contracts entered into in connection
with the FGI Transaction.
(N) Reflects anticipated reduction, in general and administrative costs of $312
from the elimination of certain FGI corporate positions pursuant to
contractual arrangements.
(O) Reflects a net increase in depreciation and amortization of $48 relating to
purchase accounting adjustments for the FGI Transaction of (i) $337 increase
in depreciation attributable to the increase in the values of buildings and
equipment (depreciated using the straight-line method over the estimated
useful lives of 40 years for buildings and seven years for furniture,
fixtures, and equipment); (ii) a decrease in depreciation and amortization
of $475 to reflect the impact of a change in the estimated remaining lives
of buildings and equipment and costs of acquiring lifecare contracts to
conform to the accounting methods used by the Company; and (iii) $186
increase in amortization attributable to goodwill (amortized over 40 years).
(P) Reflects an aggregate increase in net interest expense of $246 comprised of
(i) $642 of additional interest expense associated with the aggregate
assumed borrowings as of January 1, 1997 through existing lines of credit of
$40,429 at 6.9% for purposes of the pro forma financial information (net of
interest earnings of $55 on the purchase option payments); (ii) a $239
reduction of interest expense associated with the $11,715 of FGI
indebtedness repaid by the Company; (iii) a $125 reduction of interest
expense associated with a line of credit with a shareholder that was not
assumed by the Company; and (iv) the recognition of $32 of interest income
on the deferred lifecare fee receivables assuming an interest earnings rate
of 5.0%.
(Q) Reflects the elimination of a $5 minority interest in net income from
Freedom Village of Holland and Lake Seminole Square as a result of the
acquisition by the Company of 100% ownership in the CCRCs in connection with
the FGI Transaction.
(R) Reflects a pro forma income tax expense of $228 (excluding non-deductible
goodwill) assuming an effective tax rate of 38%.
(S) Reflects the issuance of the 1,370,000 FGI Shares as part of the purchase
consideration in the FGI Transaction.
(c) Exhibits
2 Agreement and Plan of Merger, dated as of May 24, 1998, by and
among American Retirement Corporation, Freedom Group, Inc.,
and the shareholders of Freedom Group, Inc.*
23 Consent of KPMG Peat Marwick LLP
99 Press Release, dated July 16, 1998
*Incorporated by reference to the Company's Current Report on Form 8-K as filed
with the Securities and Exchange Commission on May 29, 1998.
39
<PAGE> 40
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 hereunto duly authorized.
AMERICAN RETIREMENT CORPORATION
Date: July 27, 1998 By: /s/ W.E. Sheriff
------------------------------------
W.E. Sheriff
Chairman and Chief Executive Officer
40
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Exhibit
- --------- -------------------------------------------------------------
<S> <C>
2 Agreement and Plan of Merger, dated as of May 29, 1998, by
and among American Retirement Corporation, Freedom Group,
Inc., and the shareholders of Freedom Group, Inc.*
23 Consent of KPMG Peat Marwick LLP
99 Press Release, dated July 16, 1998
</TABLE>
*Incorporated by reference to the Company's Current Report on Form 8-K as filed
with the Securities and Exchange Commission on May 29, 1998.
41
<PAGE> 1
EXHIBIT 23
ACCOUNTANTS' CONSENT
The Board of Directors and Stockholders
Freedom Group, Inc. and Subsidiaries:
We consent to the incorporation by reference in the registration statement
(No. 333-28657) on Form S-8 and in the registration statement (No. 333-54015) on
Form S-3 of American Retirement Corporation of our report dated March 6, 1998
except as to note 17 which is as of July 14, 1998, with respect to the combined
balance sheet of Freedom Group, Inc. and subsidiaries and Freedom Village of
Holland, Michigan, a general partnership, as of December 31, 1997 and the
related combined statements of income, changes in stockholders' equity (deficit)
and partnership capital, and cash flows for the year then ended, which report
appears in the Form 8-K of American Retirement Corporation dated July 28, 1998.
/s/ KPMG PEAT MARWICK LLP
-----------------------------
KPMG Peat Marwick LLP
St. Petersburg, Florida
July 28, 1998
<PAGE> 1
EXHIBIT 99
AMERICAN RETIREMENT CORPORATION COMPLETES FREEDOM GROUP TRANSACTION
NASHVILLE, Tenn.-(BUSINESS WIRE)-JULY 16, 1998-American Retirement Corporation
(NYSE-ACR-news) today announced that it completed its acquisition of Freedom
Group, Inc. and certain entities affiliated with FGI and its chairman ("FGI"),
and entered into certain related transactions. The Company now operates 35
senior living communities in 14 states with an aggregate capacity for
approximately 11,400 residents. Pursuant to its growth strategy, the Company is
also developing and constructing 36 senior living communities and expansion
projects at six of its existing communities, which in aggregate will add
capacity for 4,300 residents.
The purchase consideration consisted of 1,370,000 shares of common stock and
$23.2 million of cash. The cash portion of the purchase price was reduced from
$32.6 million to reflect an estimated net working capital deficit of FGI. In
addition, the Company paid $1.5 million and $4.0 million, respectively, in
connection with the execution of two management agreements and the acquisition
of options to purchase two of the FGI communities. the acquisition was accounted
for as a purchase.
The FGI communities have an aggregate capacity to accommodate 3,700 residents,
of which 2,100 will be managed by the Company and 1,590 owned (although 570 will
be managed for an interim period pending receipt of final regulatory approvals).
The current stabilized occupancy rate for the FGI communities is 94%. In
addition, the Company entered into a development and management agreement for,
and acquired an option to purchase, one additional CCRC currently under
development, which will have capacity for approximately 410 residents.
Certain statements contained in this press release and related statements by the
Company's management (including statements concerning regulatory approvals, pro
forma operating and financial data, and the impact of the transaction on the
Company's results of operations) constitute forward-looking information made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements may be affected by certain
risks and uncertainties described in the Company's filings with the Securities
and Exchange Commission. The Company's actual results could differ materially
from such forward-looking statements, and the Company undertakes not obligation
to update such foward-looking information.
American Retirement Corporation is a national senior living and health care
services provider offering a broad range of care and services to seniors,
including independent living, assisted living, skilled nursing, and home health
care services.
- --------------------
Contact:
American Retirement Corporation, Nashville
Bill Sheriff, 615/221-2259
George Hicks, 615/221-2260
