<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-54015
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JULY 9, 1998)
4,500,000 SHARES
(AMERICAN RETIREMENT CORPORATION LOGO)
COMMON STOCK
------------------
Of the 4,500,000 shares of common stock, par value $.01 per share (the
"Common Stock"), offered hereby (the "Offering"), 4,297,500 shares are being
sold by American Retirement Corporation (the "Company") and 202,500 shares are
being sold by certain shareholders of the Company (the "Selling Shareholders").
The Company will not receive any proceeds from the sale of Common Stock by the
Selling Shareholders. See "Use of Proceeds" and "Principal and Selling
Shareholders." It is anticipated that approximately 450,000 shares of Common
Stock to be sold in the Offering will be offered initially outside of the United
States.
The Common Stock is traded on the New York Stock Exchange (the "NYSE")
under the symbol "ACR." On July 29, 1998, the last sale price of the Common
Stock, as reported by the NYSE, was $17.5625 per share. See "Price Range of
Common Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE S-8 OF THIS PROSPECTUS SUPPLEMENT FOR
A DISCUSSION OF CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............. $16.00 $0.76 $15.24 $15.24
- ----------------------------------------------------------------------------------------------------------------------
Total(3).............. $72,000,000 $3,420,000 $65,493,900 $3,086,100
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $600,000.
(3) The Company and certain Selling Shareholders have granted to the
Underwriters a 30-day option to purchase up to an additional 592,900 and
82,100 shares, respectively, of Common Stock at the price to public less
underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, Proceeds to
Company, and Proceeds to Selling Shareholders will be $82,800,000,
$3,933,000, $74,529,696, and $4,337,304, respectively. See "Principal and
Selling Shareholders" and "Underwriting."
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as, and if accepted by them and
subject to certain prior conditions including the right of the Underwriters to
reject orders in whole or in part. It is expected that delivery of such shares
will be made in New York, New York, on or about August 4, 1998.
SCHRODER & CO. INC.
SALOMON SMITH BARNEY
J.C. BRADFORD & CO.
JEFFERIES & COMPANY, INC.
MCDONALD & COMPANY
SECURITIES, INC.
RAYMOND JAMES & ASSOCIATES, INC.
SUNTRUST EQUITABLE SECURITIES
The date of this Prospectus Supplement is July 30, 1998.
<PAGE> 2
Omitted Graphic and Image Material
The following graphic and image material is omitted from the form of the
prospectus filed electronically:
A map of the United States depicting the location of the Company's
operating home health care agencies, and the location and resident capacity of
the Company's operating communities, communities under development, and
communities acquired or managed by the Company pursuant to recent acquisitions.
The following caption accompanies the map: "The above map shows the locations of
the Company's existing owned, leased, and managed senior living communities and
home health care agencies, including those under development, and recent
acquisitions."
------------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS, AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto contained or incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus. Prospective investors should
consider carefully the information set forth under "Risk Factors." Unless
otherwise indicated, all information in this Prospectus Supplement assumes no
exercise of the Underwriters' over-allotment option. Unless the context
otherwise requires, references to the Company include the Company, its
subsidiary partnerships and corporations, and the Company's predecessor,
American Retirement Communities, L.P. ("ARCLP" or the "Predecessor").
THE COMPANY
The Company 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.
Established in 1978, the Company currently operates 35 senior living communities
in 14 states, consisting of 17 owned communities, six leased communities, and 12
managed communities, with an aggregate capacity for approximately 11,400
residents. The Company also operates seven home health care agencies, including
two agencies managed for third parties. At March 31, 1998, the Company's owned
communities had a stabilized occupancy rate of 93%, its leased communities had a
stabilized occupancy rate of 93%, and its managed communities had a stabilized
occupancy rate of 96% (stabilized communities are generally defined as
communities or expansions thereof that have (i) achieved 95% occupancy or (ii)
been open at least 12 months). Approximately 89.4% and 92.3% of the Company's
total revenues for the year ended December 31, 1997 and the three months ended
March 31, 1998, respectively, were derived from private pay sources.
Since 1992, the Company has experienced significant growth, primarily
through the acquisition of senior living communities. The Company's revenues
have grown from $17.8 million in 1992 to $94.2 million in 1997, an annual growth
rate of 40%. During the same period, the Company's income from operations has
grown from $2.3 million to $18.1 million, an annual growth rate of 51%. The
Company intends to continue its growth by establishing senior living networks
throughout the United States through a combination of (i) selective acquisitions
of senior living communities, including continuing care retirement communities
("CCRCs") and assisted living residences; (ii) development of senior living
communities, including special living units and programs for residents with
Alzheimer's and other forms of dementia; (iii) expansion of existing
communities; and (iv) selective development and acquisition of other properties
and businesses that are complementary to the Company's operations and growth
strategy. Pursuant to its growth strategy, the Company recently completed three
transactions that added three owned, two leased, and four managed communities
with an aggregate capacity for approximately 4,000 residents. See "-- Recent
Transactions" and "The Company -- Recent Transactions." In addition, the Company
is currently developing 36 communities, with an estimated aggregate capacity for
approximately 4,000 residents, and is expanding or is planning to commence
expansions at seven of its existing communities to add capacity to accommodate a
total of approximately 560 additional residents.
The Company's operating philosophy was inspired by the vision of its
founders, Dr. Thomas F. Frist, Sr. and Jack C. Massey, to enhance the lives of
the elderly by providing the highest quality of care and services in
well-operated communities designed to improve and protect the quality of life,
independence, personal freedom, privacy, spirit, and dignity of its residents.
The Company believes that its senior management, led by W.E. Sheriff, its
Chairman and Chief Executive Officer, and Christopher J. Coates, its President
and Chief Operating Officer, is one of the most experienced management teams in
the senior living industry. The Company's ten senior officers have been employed
by the Company for an average of 15 years and have an average of 16 years of
industry experience. The executive directors of the Company's communities have
been employed by the
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<PAGE> 4
Company for an average of four years and have an average of 11 years of
experience in the senior living industry.
The Company's target market, which consists of seniors age 75 and older, is
one of the fastest growing segments of the United States population. According
to the United States Census Bureau, this age group is expected to grow from 13.2
million in 1990 to over 16.6 million by 2000, an increase of 26%. The Company
believes that the market for senior living and health care services, including
Alzheimer's and dementia care services, will continue to grow as a result of (i)
the aging of the U.S. population; (ii) rising public and private
cost-containment pressures; (iii) declining availability of traditional nursing
home beds as a result of nursing home operators focusing on higher acuity
patients; (iv) a growing consumer awareness of the quality of life advantages of
assisted living residences over traditional skilled nursing facilities; and (v)
the decreasing availability of family care as an option for elderly family
members. The Company believes that its experience, reputation, and market
presence favorably position it to take advantage of opportunities in the rapidly
growing senior living and health care industry.
RECENT TRANSACTIONS
Rossmoor Transaction. In May 1998, the Company entered into an agreement
to operate the Rossmoor Regency, a retirement community located in Laguna Hills,
California, with a capacity for approximately 210 residents (the "Rossmoor
Transaction"). The transaction was structured as a five-year operating lease
(with five one-year renewal options) to the Company from an unaffiliated special
purpose entity that purchased the community as part of the Rossmoor Transaction.
The lease is structured such that the payments are level throughout the term of
the lease, and the Company is entitled to depreciation deductions for tax
purposes. The Company also acquired an option to purchase the community at the
expiration of the lease term for a formula purchase price. At the time of the
closing of the Rossmoor Transaction, Rossmoor Regency had an occupancy rate of
93%.
Bahia Transaction. In June 1998, the Company entered into an agreement to
operate Bahia Oaks Lodge, an assisted living residence located in Sarasota,
Florida, with a capacity for approximately 100 residents (the "Bahia
Transaction"). The transaction was structured as a five-year operating lease
(with five one-year renewal options) to the Company from an unaffiliated special
purpose entity that purchased the community as part of the Bahia Transaction.
The lease is structured such that the payments are level throughout the term of
the lease, and the Company is entitled to depreciation deductions for tax
purposes. The Company also acquired an option to purchase the community at the
expiration of the lease term for a formula purchase price. At the time of the
closing of the Bahia Transaction, Bahia Oaks Lodge had an occupancy rate of 95%.
FGI Transaction. In July 1998, the Company consummated the 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"). Pursuant to the FGI Transaction, the Company acquired three
lifecare CCRCs, with an aggregate capacity for approximately 1,590 residents,
and entered into agreements to manage four lifecare CCRCs, with an aggregate
capacity for approximately 2,100 residents (collectively, the "FGI
Communities"). The FGI Communities are CCRCs that offer a limited lifecare
benefit ("Lifecare CCRCs"). The Company also acquired options to purchase two of
the FGI Communities. In addition, as part of the FGI Transaction, the Company
entered into a development and management agreement for, and acquired an option
to purchase, one additional Lifecare CCRC currently under development, which
will have capacity for approximately 410 residents. The Company also intends to
expand one of the acquired FGI Communities to add additional capacity for
approximately 230 residents. The Company has accounted for the FGI Transaction
as a purchase. At the time of the closing of the FGI Transaction, the FGI
Communities
S-4
<PAGE> 5
had a stabilized occupancy rate of 94%. See "Risk Factors -- Risks Associated
With Provision of Lifecare Benefits" and "Risk Factors -- No Assurance as to
Ability to Manage Growth."
For additional information with respect to these transactions, see "The
Company -- Recent Transactions," "Pro Forma Financial Information," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RECENT OPERATING RESULTS
Total revenues for the quarter ended June 30, 1998 increased by 32.5%, to
$30.3 million from $22.9 million for the second quarter of 1997. For the quarter
ended June 30, 1998, net income was $1.6 million, or $0.14 diluted earnings per
share (fully taxed), compared to pro forma net income of $768,000, or $0.08 pro
forma diluted earnings per share (fully taxed), for the same period in 1997. For
purposes of comparison, pro forma adjustments to 1997 net income have been made
to exclude a one-time charge related to the Company's conversion from a
non-taxable limited partnership to a taxable corporation in connection with the
Company's initial public offering, and to provide for income taxes as though the
Predecessor had been subject to corporate income taxes for the entire 1997
period.
As used in this discussion,"Same Community basis" refers to communities
that were owned and/or leased by the Company throughout the periods compared. On
a Same Community basis, prior to giving effect to the Company's home health care
operations, which have been negatively impacted by recent changes in Medicare
reimbursement policies, revenues increased by 8.1% from $19.7 million to $21.4
million, and Same Community resident income from operations (defined as resident
and health care revenue minus community operating expense) increased by 9.3%
from $7.6 million to $8.3 million during the period. Including the effect of its
home health operations, Same Community revenues increased by 2.8% while Same
Community resident income from operations decreased by 1.8% over the comparable
period. Average stabilized occupancy for the Company's Same Communities
increased to 95% for the quarter ended June 30, 1998, as compared to 94% for the
comparable period of the prior year.
THE OFFERING
Common Stock offered by:
The Company................. 4,297,500 shares
The Selling Shareholders.... 202,500 shares
-------------------------
Total............... 4,500,000 shares
Common Stock to be outstanding
after the Offering.......... 17,103,452 shares(1)
Use of proceeds by the
Company....................... To fund possible future acquisitions and
development activities and for general
corporate purposes, including working capital
and the possible future repayment of
indebtedness. See "Use of Proceeds."
NYSE symbol................... ACR
- ---------------
(1) Includes 1,370,000 shares of Common Stock issued pursuant to the FGI
Transaction (the "FGI Shares"). Does not include (i) 804,832 shares of
Common Stock reserved for issuance pursuant to outstanding stock options
under the Company's 1997 Stock Incentive Plan (the "Stock Incentive Plan")
at an average exercise price of $16.00 per share and (ii) 5,750,000 shares
issuable upon conversion of the Company's outstanding 5 3/4% Convertible
Subordinated Debentures Due 2002 (the "Convertible Debentures") at a
conversion price of $24.00 per share (the "Conversion Price").
S-5
<PAGE> 6
SUMMARY FINANCIAL AND OTHER DATA
The following summary consolidated and combined financial and other data is
qualified in its entirety by the more detailed information in the financial
statements and pro forma financial information appearing elsewhere in this
Prospectus Supplement.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------- ---------------------------------------------------
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1995(1) 1996 1997(2) 1997(3) 1997 1998 1998(3)
------- ------- ------- --------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................................. $61,119 $75,617 $94,212 $127,150 $21,510 $28,077 $36,824
Income from operations......................... 12,119 15,551 18,063 20,758 4,112 5,347 6,618
Income before income taxes and extraordinary
item......................................... 2,103 4,613 5,874 6,527 975 2,370 2,859
Net income (loss)(4)........................... 2,028 3,198 (4,800) (4,695) 975 1,517 1,748
Pro forma income before extraordinary item
available for distribution to partners and
shareholders(5).............................. $ -- $ 1,848 $ 3,759 $ 3,864 $ 594 $ 1,517 $ 1,748
EARNINGS PER SHARE DATA:
Pro forma diluted earnings per share before
extraordinary item available for distribution
to partners and shareholders(5).............. $ -- $ 0.20 $ 0.35 $ 0.32 $ 0.06 $ 0.13 $ 0.13
Shares used in computing diluted earnings per
share(6)..................................... -- 9,375 10,675 12,045 9,375 11,633 13,003
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1998
------------------------------------
PRO PRO FORMA
ACTUAL FORMA(7) AS ADJUSTED(8)
-------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................................... $ 29,050 $ 31,330 $ 96,224
Working capital.................................................................... 36,726 26,487 91,381
Land, building and equipment, net.................................................. 240,643 381,570 381,570
Total assets....................................................................... 317,177 518,369 583,263
Long-term debt, including current portion.......................................... 239,834 295,367 295,367
Refundable portion of life estate purchase price, including
current portion.................................................................. -- 50,191 50,191
Shareholders' equity............................................................... 55,437 75,216 140,110
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------- --------------------------------------------------
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------- -------------------------
PRO FORMA PRO FORMA
1995(1) 1996 1997(2) 1997(3) 1997 1998 1998(3)
------- ----- ------- ------------ ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue mix:
Private pay...................................... 91.2% 92.4% 89.4% 90.3% 91.1% 92.3% 92.7%
Medicare and other(9)............................ 8.8 7.6 10.6 9.7 8.9 7.7 7.3
----- ----- ----- ------ ----- ----- ------
Total.......................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Resident capacity (at period end):
Owned............................................ 2,594 3,369 3,210 4,800 2,912 3,342 4,932
Leased........................................... -- -- 1,531 1,531 483 1,563 1,563
Managed.......................................... 3,008 2,159 2,159 3,868 2,159 2,084 3,793
----- ----- ----- ------ ----- ----- ------
Total.......................................... 5,602 5,528 6,900 10,199 5,554 6,989 10,288
Average occupancy rate:
Owned............................................ 93% 94% 93% 94% 94% 90% 91%
Leased........................................... -- -- 90 90 95 91 91
Managed.......................................... 91 91 94 95 94 96 95
----- ----- ----- ------ ----- ----- ------
Total.......................................... 92% 92% 93% 94% 94% 92% 93%
</TABLE>
- ---------------
(1) Financial data for the year ended December 31, 1995 represents the sum of
the combined results of operations of certain affiliated partnerships and
corporations (the "Predecessor Entities") for the period from January 1,
1995 through March 31, 1995 and the Predecessor for the period from April
1, 1995 through December 31, 1995. See "The Company -- The 1995 Roll-Up."
S-6
<PAGE> 7
(2) Financial data for the year ended December 31, 1997 represents the sum of
the combined results of operations of the Predecessor for the period
January 1, 1997 through May 28, 1997 and the Company for the period May 29,
1997 (the day following the reorganization of the Predecessor into the
Company (the "Reorganization")) through December 31, 1997. See "The
Company -- Reorganization."
(3) Gives effect to the FGI Transaction as if it had occurred on January 1,
1997. See " -- Recent Transactions -- FGI Transaction," "The
Company -- Recent Transactions -- FGI Transaction," and "Pro Forma
Financial Information."
(4) The 1995 and 1996 periods reflect income tax expense of only one of the
Predecessor Entities because the Predecessor and the other Predecessor
Entities were partnerships. The 1995 period reflects a provision for
alternative minimum taxes. In 1996, the Company recorded an income tax
benefit and a deferred tax asset of $920,000 because of the anticipated
utilization of net operating loss carryforwards ("NOLS") that offset
taxable gains recognized from the January 1997 sale-leaseback by the
Company of two communities (the "Sale-Leaseback Transaction"). Income tax
expense for 1997 reflects income taxes incurred by the Company during the
period May 29, 1997 through December 31, 1997. During the period January 1,
1997 through the date of the Reorganization (May 28, 1997), the Predecessor
did not incur income tax expense because it was a partnership. See Note 11
to the Consolidated and Combined Financial Statements. At the time of the
Reorganization and as a result of the conversion from a non-taxable to a
taxable entity, the Company recorded as a one-time charge to income a net
deferred income tax expense of approximately $3.0 million resulting from
the differences between the accounting and tax bases of the Company's
assets and liabilities. See Note 1 to the Consolidated and Combined
Financial Statements. The 1996 and 1997 amounts reflect loss on early
extinguishment of debt of $2.3 million and $6.3 million, respectively. See
"Selected Financial Data" and Note 6 to the Consolidated and Combined
Financial Statements.
(5) For periods prior to the Reorganization, reflects the pro forma effect on
certain income statement data of income tax expense that would have been
recorded had the Predecessor and the other Predecessor Entities not been
exempt from paying U.S. Federal and state income taxes.
(6) The Predecessor and all but one of the other Predecessor Entities were
partnerships. Shares used in computing diluted earnings per share have been
calculated as follows: for the year ended December 31, 1996 and the three
months ended March 31, 1997, reflects 7,812,500 shares issued in the
Reorganization (the "Reorganization Shares"), plus 1,562,500 shares (the
"Note Shares"), representing the share equivalent value of the principal
amount of a promissory note issued in connection with the Reorganization
("the Reorganization Note"); for the year ended December 31, 1997, reflects
the Reorganization Shares, plus the Note Shares for the period through the
date of the Reorganization, and the Reorganization Shares, plus the
weighted average effect of the 3,593,750 shares sold by the Company in its
initial public offering (the "IPO") and Common Stock equivalents for the
period following the Reorganization and the IPO; and for the three months
ended March 31, 1998, reflects actual shares outstanding plus Common Stock
equivalents. The pro forma data includes the 1,370,000 FGI Shares.
(7) Gives effect to the FGI Transaction as if it had occurred at March 31,
1998.
(8) Gives effect to the sale of the Common Stock offered hereby by the Company
and the FGI Transaction as if each had occurred at March 31, 1998.
(9) Includes Medicare (including Medicare-related private co-insurance).
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<PAGE> 8
RISK FACTORS
Prospective investors should consider carefully the following factors, as
well as the more detailed information contained or incorporated by reference in
this Prospectus Supplement and in the accompanying Prospectus, before making a
decision to invest in the Common Stock offered hereby.
SUBSTANTIAL DEBT AND OPERATING LEASE PAYMENTS
At March 31, 1998, the Company had long-term debt (including current
portion) of approximately $239.8 million (including $138.0 million of
Convertible Debentures), of which $77.0 million was payable to one lender,
General Electric Capital Corporation ("GECC"), and was obligated to pay annual
rental obligations of approximately $7.7 million under long-term operating
leases. The Company has entered into non-binding letters of intent to establish
operating lease facilities with Nationwide Health Properties, Inc. ("NHP") and
National Health Investors, Inc. ("NHI"), both health care real estate investment
trusts, pursuant to which NHP and NHI, at the Company's request and upon
satisfaction of certain conditions, would develop, construct, or acquire up to
$110.0 million and $74.7 million, respectively, of senior living communities and
lease the communities to the Company (collectively, the "REIT Facilities").
Currently, the Company has been allocated $41.6 million and $4.7 million,
respectively, in commitments under the REIT Facilities. The Company also
maintains a $50.0 million revolving credit facility with GECC, a $4.0 million
revolving credit facility with a bank, and a $5.0 million revolving credit
facility with a bank that is available for land acquisitions. The Company
currently intends to finance its growth through a combination of bank
indebtedness, construction and mortgage financing, transactions with NHP and NHI
or other real estate investment trusts, the net proceeds of the Offering, and
joint venture and other arrangements. As a result, a substantial portion of the
Company's cash flow will be devoted to debt service and lease payments. As of
March 31, 1998, the Company's existing debt and lease agreements required
aggregate annual payments for the years ending December 31, 1998, 1999, 2000,
2001, and 2002, assuming no change in the Company's average interest cost (6.8%
at March 31, 1998), ranging from approximately $23.9 million to $86.3 million
(approximately $224.3 million for the year ending December 31, 2002 including
the $138.0 million principal amount of the Convertible Debentures due in October
2002). As a result of the FGI Transaction, an additional $55.5 million of
long-term indebtedness (including current portion), as well as an additional
$50.2 million of refundable life estate purchase prices (including current
portion), are now reflected on the Company's balance sheet. In addition, as part
of the FGI Transaction the Company assumed certain of FGI's existing guaranties
relating to approximately $73.5 million of existing mortgage loans. As a result
of the Rossmoor Transaction and the Bahia Transaction, the Company is now
obligated to pay approximately $2.7 million of additional lease obligations per
year. The Company intends to continue to incur significant additional
indebtedness and lease obligations and therefore expects its annual debt service
and lease obligations over the next five fiscal years to be significantly
greater than the amounts set forth in the preceding sentences. For the fiscal
year ended December 31, 1997, the Company's net cash provided by operating
activities, before giving effect to the payment of interest expense on the
Company's outstanding indebtedness, was approximately $24.2 million. There can
be no assurance that the Company will generate sufficient cash flows from
operations to cover required interest, principal, and operating lease payments.
Any payment or other default could cause the lender to foreclose upon the
communities securing such indebtedness, or, in the case of an operating lease,
could terminate the lease, with a consequent loss of income and asset value to
the Company. Furthermore, because most of the Company's mortgages and
sale-leaseback agreements contain cross-default provisions, a default by the
Company on one of its payment obligations could adversely affect a significant
number of the Company's other properties and, consequently the Company's
business, results of operations, and financial condition.
S-8
<PAGE> 9
NEED FOR ADDITIONAL FINANCING; EXPOSURE TO RISING INTEREST RATES
The Company's ability to sustain any operating losses and to otherwise meet
its growth objectives will depend, in part, on its ability to obtain additional
financing on acceptable terms from available financing sources. There can be no
assurance that future debt instruments will not include covenants restricting
the Company's ability to incur additional debt. Moreover, raising additional
funds through the issuance of equity securities could cause existing
shareholders to experience dilution and could adversely affect the market price
of the Common Stock. There can be no assurance that the Company will be
successful in securing additional financing or that adequate financing will be
available and, if available, will be on terms that are acceptable to the
Company. The Company's inability to obtain additional financing on acceptable
terms could delay or eliminate some or all of the Company's growth plans.
Future indebtedness, from commercial banks or otherwise, and lease
obligations, including those related to the REIT Facilities, are also expected
to be based on interest rates prevailing at the time such debt and lease
arrangements are obtained. Therefore, increases in prevailing interest rates
could increase the Company's interest or lease payment obligations and could
have a material adverse effect on the Company's business, financial condition,
and results of operations.
RISKS ASSOCIATED WITH PROVISION OF LIFECARE BENEFITS
The FGI Communities are Lifecare CCRCs. Residents of the FGI Communities
pay an upfront entrance fee upon occupancy (which generally is partially
refundable), and a monthly service fee while living in the community. Residents
are generally entitled to a limited lifecare benefit (typically either a certain
number of free days in the community's health center during the resident's
lifetime or a discounted rate for such services or a combination of the two).
The lifecare benefit varies based upon the extent to which the resident's
entrance fee is refundable. The pricing of entrance fees, refundability
provisions, monthly service fees, and the lifecare benefits are determined from
actuarial projections of the expected morbidity and mortality of the resident
population. In the event the entrance fees and monthly service payments
established for the FGI Communities are not sufficient to cover the cost of
lifecare benefits granted to residents, the results of operations and financial
condition of the Company will be adversely affected.
Residents of the FGI Communities are guaranteed an independent living unit
and nursing care at the FGI Community during their lifetime, even if the
resident exhausts his or her financial resources and becomes unable to satisfy
his or her obligations to the community. In addition, in the event a resident
requires nursing care and there is not available capacity at the nursing
facility at the FGI Community at which the resident lives, the FGI Community
must contract with a third party to provide such care. Although the Company
screens potential residents to determine whether they have adequate assets,
income, and reimbursements from government programs and third-parties to pay
their obligations to the communities during their lifetime, there can be no
assurance that such assets, income, and reimbursements will be sufficient. To
the extent that the financial resources of some of the residents were to be
insufficient to pay for the cost of facilities and services provided to them or
in the event the FGI Communities must pay third parties to provide nursing care
to residents of the FGI Communities, the results of operations and financial
condition of the Company would be adversely affected.
NO ASSURANCE AS TO ABILITY TO MANAGE GROWTH
The Company intends to continue to expand its operations through the
development, construction, and acquisition of senior living communities, as well
as through the selective expansion of the Company's home health care services.
See "Business -- Growth Strategy." The success of the Company's growth strategy
will depend, in large part, on its ability to effectively operate any newly
acquired or developed communities or home health care agencies, including the
communities acquired, leased, or managed in connection with the Rossmoor
Transaction, the Bahia Transaction,
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and the FGI Transaction, as to which there can be no assurance. The Company has
limited experience developing and operating assisted living residences on a
free-standing basis. The Company's growth plans will also place significant
demands on the Company's management and operating personnel. The Company's
ability to manage its future growth effectively will require it to improve its
operational, financial, and management information systems and to continue to
attract, retain, train, motivate, and manage key employees. If the Company is
unable to manage its growth effectively, its business, results of operations,
and financial condition will be adversely affected. See "The Company -- Recent
Transactions," "Business -- Growth Strategy," and "Management -- Directors and
Executive Officers."
RISKS IN ACQUISITIONS OF COMMUNITIES AND COMPLEMENTARY BUSINESSES; DIFFICULTIES
OF INTEGRATION
The Company plans to continue to make strategic acquisitions of senior
living communities (which may include a variety of CCRCs and Lifecare CCRCs and
independent living, assisted living, and skilled nursing facilities) and other
properties or businesses that are complementary to the Company's operations and
growth strategy. The acquisition of existing communities or other businesses
involves a number of risks. Existing communities available for acquisition
frequently serve or target different markets than those presently served by the
Company. The Company may also determine that renovations of acquired communities
and changes in staff and operating management personnel are necessary to
successfully integrate such communities or businesses into the Company's
existing operations. The costs incurred to reposition or renovate newly acquired
communities may not be recovered by the Company. In undertaking acquisitions,
the Company also may be adversely impacted by unforeseen liabilities
attributable to the prior operators of such communities or businesses, against
whom the Company may have little or no recourse. The success of the Company's
acquisition strategy will be determined by numerous factors, including the
Company's ability to identify suitable acquisition candidates, the competition
for such acquisitions, the purchase price, the requirement to make operational
or structural changes and improvements, the financial performance of the
communities or businesses after acquisition, the Company's ability to finance
the acquisitions, and the Company's ability to integrate effectively any
acquired communities or businesses into the Company's management, information,
and operating systems. There can be no assurance that the Company's acquisition
of senior living communities and complementary properties and businesses will be
completed at the rate currently expected, if at all, or, if completed, that any
acquired communities or businesses will be successfully integrated into the
Company's operations.
NO ASSURANCE AS TO ABILITY TO DEVELOP ADDITIONAL SENIOR LIVING COMMUNITIES
An integral component of the Company's growth strategy is to develop and
operate senior living communities. As part of its growth strategy, the Company
is currently developing 36 senior living communities, with an estimated
aggregate capacity for approximately 4,000 residents, and is expanding or is
planning to commence expansions at seven of its existing senior living
communities to add capacity to accommodate approximately 560 additional
residents. The Company's ability to develop successfully additional senior
living communities will depend on a number of factors, including, but not
limited to, the Company's ability to acquire suitable development sites at
reasonable prices; the Company's success in obtaining necessary zoning,
licensing, and other required governmental permits and authorizations; and the
Company's ability to control construction costs and project completion
schedules. In addition, the Company's development plans are subject to numerous
factors over which it has little or no control, including competition for
developable properties; shortages of labor or materials; changes in applicable
laws or regulations or their enforcement; the failure of general contractors or
subcontractors to perform under their contracts; strikes; and adverse weather
conditions. As a result of these factors, there can be no assurance that the
Company will not experience construction delays, that it will be successful in
developing and constructing currently planned or additional communities, or that
any developed communities will be economically successful. If the Company's
development schedule is delayed, the Company's growth
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plans could be adversely affected. Additionally, the Company anticipates that
the development and construction of additional senior living communities will
involve a substantial commitment of capital with little or no revenue associated
with communities under development, the consequence of which could be an adverse
impact on the Company's liquidity. See "Business -- Development Activities."
LOSSES FROM NEWLY DEVELOPED COMMUNITIES AND ACQUISITIONS
Although the Company was profitable in 1994, 1995, 1996, and 1997 (before
giving effect to a non-recurring tax charge incurred in 1997 in connection with
the Reorganization and the extraordinary charge relating to the prepayment of
indebtedness in December 1997), in view of its growth plan for development and
acquisitions, there can be no assurance that the Company will continue to be
profitable in any future period. Newly developed senior living communities are
expected to incur operating losses during a substantial portion of their first
12 months of operations, on average, until the communities achieve targeted
occupancy levels. Newly acquired communities, such as Rossmoor Regency, Bahia
Oaks Lodge, and the FGI Communities, may also incur losses pending their
integration into the Company's operations. The Company may also incur operating
losses as a result of the expansion of its existing home health care agencies.
See "Business -- Growth Strategy" and "Business -- Development Activities."
RISKS OF DEVELOPMENT IN CONCENTRATED GEOGRAPHIC AREAS
The Company's growth strategy involves the development and acquisition of
senior living communities in concentrated geographic service areas. See
"Business -- Growth Strategy." Accordingly, the Company's occupancy rates in
existing, developed, or acquired communities may be adversely affected by a
number of factors, including regional and local economic conditions, general
real estate market conditions including the supply and proximity of senior
living communities, competitive conditions, and applicable local laws and
regulations. See "Business -- Operating Residences," "Business -- Development
Activities," and "Business -- Government Regulation."
DISCRETIONARY USE OF PROCEEDS
The Company will have broad discretion as to the application of the net
proceeds of the Offering. The Company intends to use the net proceeds of the
Offering to fund possible future acquisitions of senior living communities and
businesses engaged in activities that are similar or complementary to the
Company's business and for the development and construction of new senior living
communities and expansions at the Company's existing communities and for general
corporate purposes, including working capital and the possible future repayment
of indebtedness. See "Use of Proceeds."
BENEFITS TO INSIDERS
Certain officers, directors, and significant shareholders of the Company
(and their immediate family members and affiliates)who are Selling Shareholders
will receive net proceeds of approximately $3.1 million (after deduction of the
underwriting discounts and commissions) for the shares of Common Stock to be
sold by them in the Offering. If the over-allotment option is fully exercised,
such shareholders will receive aggregate net proceeds of approximately $4.3
million. The Company will not receive any of the proceeds from the sale of
shares of Common Stock by the Selling Shareholders.
DEPENDENCE ON PRIVATE PAY RESIDENTS
Approximately 89.4% of the Company's total revenues for the year ended
December 31, 1997 and approximately 92.3% of the Company's total revenues for
the three months ended March 31, 1998 were attributable to private pay sources.
For the same periods, 10.6% and 7.7%, respectively, of the Company's revenues
were attributable to reimbursement from third-party payors, including
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Medicare. The Company expects to continue to rely primarily on the ability of
residents to pay for the Company's services from their own or familial financial
resources. Inflation or other circumstances that adversely affect the ability of
seniors to pay for the Company's services could have a material adverse effect
on the Company's business, financial condition, and results of operations.
INCREASING COMPETITION
The senior living and health care services industry is highly competitive,
and the Company expects that all segments of the industry will become
increasingly competitive in the future. The Company competes with other
companies providing independent living, assisted living, skilled nursing, home
health care, and other similar service and care alternatives. Although the
Company believes there is a need for senior living communities in the markets
where the Company is operating and developing residences, the Company expects
that competition will increase from existing competitors and new market
entrants, some of whom may have substantially greater financial resources than
the Company. In addition, some of the Company's competitors operate on a
not-for-profit basis or as charitable organizations and have the ability to
finance capital expenditures on a tax-exempt basis or through the receipt of
charitable contributions, neither of which are readily available to the Company.
Furthermore, if the development of new senior living communities (particularly
given the rapid pace of development of new assisted living residences) outpaces
the demand for such communities in the markets in which the Company has or is
developing senior living communities, such markets may become saturated. An
oversupply of such communities in the Company's markets could cause the Company
to experience decreased occupancy, reduced operating margins, and lower
profitability. Consequently, there can be no assurance that the Company will not
encounter increased competition that would adversely affect its occupancy rates,
pricing for services, and growth prospects. See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the services of its executive officers,
particularly the Company's Chairman and Chief Executive Officer, W.E. Sheriff,
and the Company's President and Chief Operating Officer, Christopher J. Coates,
for the management of the Company. Neither Mr. Sheriff, Mr. Coates, nor any of
the Company's other executive officers has an employment agreement with the
Company. The Company has a key employee life insurance policy in the amount of
$2.0 million covering Mr. Sheriff. The loss by the Company of certain of its
executive officers and the inability to attract and retain qualified management
personnel could adversely affect the Company's business, financial condition,
and results of operations. See "Management -- Directors and Executive Officers."
RESIDENCE MANAGEMENT, STAFFING, AND LABOR COSTS
The Company competes with other providers of senior living and health care
services with respect to attracting and retaining qualified management personnel
responsible for the day-to-day operations of each of the Company's communities
and skilled technical personnel responsible for providing resident care. A
shortage of nurses or trained personnel may require the Company to enhance its
wage and benefits package in order to compete in the hiring and retention of
such personnel or to hire more expensive temporary personnel. The Company will
also be dependent on the available labor pool of semi-skilled and unskilled
employees in each of the markets in which it operates. No assurance can be given
that the Company's labor costs will not increase, or that, if they do increase,
they can be matched by corresponding increases in rates charged to residents.
Any significant failure by the Company to attract and retain qualified
management and staff personnel, to control its labor costs, or to pass on any
increased labor costs to residents through rate increases could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
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CONTROL BY MANAGEMENT AND CERTAIN SHAREHOLDERS
Upon completion of the Offering, the Company's executive officers and
directors and entities controlled by them will, collectively, beneficially own
approximately 25.6% of the outstanding shares of Common Stock (24.2% if the
Underwriters' over-allotment option is exercised in full). Accordingly, such
persons will continue to have the ability, by voting their shares in concert, to
influence the election of the Company's Board of Directors and the outcome of
all other matters submitted to the Company's shareholders. Furthermore, such
influence could preclude any unsolicited acquisition of the Company and,
consequently, adversely affect the market price of the Common Stock. The Company
has agreed to cause Robert G. Roskamp to be elected to the Company's Board of
Directors. Assuming Mr. Roskamp becomes a director of the Company, the Company's
executive officers and directors and entities controlled by them would,
collectively, beneficially own approximately 30.4% of the outstanding shares of
Common Stock (28.9% if the Underwriters' over-allotment option is exercised in
full). See "The Company -- Recent Transactions -- FGI Transaction,"
"Management -- Future Board Expansion," and "Principal and Selling
Shareholders."
GOVERNMENT REGULATION AND THE BURDENS OF COMPLIANCE
Federal and state governments regulate various aspects of the Company's
business. The development and operation of health care facilities and the
provision of health care services are subject to federal, state, and local
licensure, certification, and inspection laws that regulate, among other
matters, the number of licensed beds, the provision of services, the
distribution of pharmaceuticals, billing practices and policies, equipment,
staffing (including professional licensing), operating policies and procedures,
fire prevention measures, environmental matters, and compliance with building
and safety codes. Failure to comply with these laws and regulations could result
in the denial of reimbursement, the imposition of fines, temporary suspension of
admission of new patients, suspension or decertification from the Medicare
programs, restrictions on the ability to acquire new facilities or expand
existing facilities, and, in extreme cases, the revocation of a community's
license or closure of a community. There can be no assurance that federal,
state, or local governments will not impose additional restrictions on the
Company's activities that could materially adversely affect the Company.
The Balanced Budget Act ("BBA") of 1997, Public Law 105-33, included
sweeping changes to Medicare and Medicaid, significantly reducing rates of
increase for payments to home health agencies and skilled nursing facilities.
Under the BBA, beginning in the year 2001, skilled nursing facilities will no
longer be reimbursed under a cost based system. A prospective payment system
under which facilities are reimbursed on a per diem basis will be phased in over
the next three years. The BBA also requires the Secretary of Health and Human
Services to establish and implement a prospective payment system for home health
services for cost reporting periods beginning on and after October 1, 1999. The
Company believes that the phase-in period will allow it to make timely operating
adjustments appropriate under the new system, but does not know the magnitude of
the effect that these changes ultimately will have on skilled nursing and home
health operations. However, pending either institution of prospective pay or
major revisions to the interim payment system now in effect, the Company has
suspended the operation of six of its recently established home health care
agencies. Approximately 7.7% of the Company's total revenues for the three
months ended March 31, 1998 and approximately 10.6%, 7.9%, and 8.8% of the
Company's total revenues for the years ended December 31, 1997, 1996, and 1995,
respectively, were attributable to Medicare, including Medicare-related private
co-insurance.
Many states, including several of the states in which the Company currently
operates, control the supply of licensed skilled nursing beds and home health
care agencies through certificate of need ("CON") programs. Presently, state
approval is required for the construction of new health care communities, the
addition of licensed beds, and certain capital expenditures at such communities,
as well as the opening of a home health care agency. To the extent that a CON or
other similar approval is required for the acquisition or construction of new
facilities, the expansion of the number
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of licensed beds, services, or existing communities, or the opening of a home
health care agency, the Company could be adversely affected by the failure or
inability to obtain such approval, changes in the standards applicable for such
approval, and possible delays and expenses associated with obtaining such
approval. In addition, in most states the reduction of the number of licensed
beds or the closure of a community requires the approval of the appropriate
state regulatory agency and, if the Company were to seek to reduce the number of
licensed beds at, or to close, a community, the Company could be adversely
affected by a failure to obtain or a delay in obtaining such approval.
Certain of the FGI Communities are currently operating a number of nursing
beds as "shelter beds" under a Florida statute and CON that generally limits the
use of such beds to residents of the subject FGI Community. As part of its due
diligence in connection with the FGI Transaction, the Company discovered that
the FGI Communities are not currently in full compliance with these shelter bed
CON requirements. A violation of the shelter bed statutes may, among other
things, subject the owner of the facility to fines of up to $1,500 per day.
Although the Company is evaluating a number of alternatives relating to these
shelter bed issues, the Company does not anticipate that the subject FGI
Communities will be in full compliance with the shelter bed requirements in the
foreseeable future, if ever. There can be no assurance that the State of Florida
will not enforce the shelter bed requirements strictly against the Company in
the future or impose penalties for prior or continuing violations.
Federal and state anti-remuneration laws, such as "anti-kickback" laws,
govern certain financial arrangements among health care providers and others who
may be in a position to refer or recommend patients to such providers. These
laws prohibit, among other things, certain direct and indirect payments that are
intended to induce the referral of patients to, the arranging for services by,
or the recommending of, a particular provider of health care items or services.
Federal anti-kickback laws have been broadly interpreted to apply to certain
contractual relationships between health care providers and sources of patient
referral. Similar state laws vary, are sometimes vague, and seldom have been
interpreted by courts or regulatory agencies. Violation of these laws can result
in loss of licensure, civil and criminal penalties, and exclusion of health care
providers or suppliers from participation in the Medicare and Medicaid programs.
There can be no assurance that such laws will be interpreted in a manner
consistent with the practices of the Company.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state, and
local laws exist that also may require modifications to existing and planned
communities to create access to the properties by disabled persons. Although the
Company believes that its communities are substantially in compliance with
present requirements or are exempt therefrom, if required changes involve a
greater expenditure than anticipated or must be made on a more accelerated basis
than anticipated, additional costs would be incurred by the Company. Further
legislation may impose additional burdens or restrictions with respect to access
by disabled persons, the costs of compliance with which could be substantial.
See "Business -- Government Regulation."
POTENTIAL FOR ENVIRONMENTAL LIABILITY
Under various federal, state, and local environmental laws, ordinances, and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and
clean-up costs incurred by such parties in connection with the contamination.
Such laws typically impose clean-up responsibility and liability without regard
to whether the owner knew of or caused the presence of the contaminants, and
liability under such laws has been interpreted to be joint and several unless
the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation, or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate such property, may adversely
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affect the owner's ability to sell or lease such property or to borrow using
such property as collateral. In addition, some environmental laws create a lien
on the contaminated site in favor of the government for damages and costs it
incurs in connection with the contamination. Persons who arrange for the
disposal or treatment of hazardous or toxic substances also may be liable for
the costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not such facility is owned or operated by such
person. Finally, the owner of a site may be subject to common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from a site.
LIABILITY AND INSURANCE
The provision of personal and health care services entails an inherent risk
of liability. In recent years, participants in the health care services industry
have become subject to an increasing number of lawsuits alleging negligence or
related legal theories, many of which involve large claims and result in the
incurrence of significant defense costs. Moreover, assisted living residences
offer residents a greater degree of independence in their daily living than
skilled nursing facilities. This increased level of independence may subject the
resident and the Company to certain risks that would be reduced in more
institutionalized settings. The Company currently maintains liability insurance
in amounts it believes are sufficient to cover such claims based on the nature
of the risks, its historical experience, and industry standards. There can be no
assurance, however, that claims in excess of the Company's insurance or claims
not covered by the Company's insurance, such as claims for punitive damages,
will not arise. A claim against the Company not covered by, or in excess of, the
Company's insurance could have a material adverse effect upon the Company. In
addition, the Company's insurance policies must be renewed annually. There can
be no assurance that the Company will be able to obtain liability insurance in
the future or that, if such insurance is available, it will be available on
acceptable economic terms. See "Business -- Insurance and Legal Proceedings."
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority, without action by the
shareholders, to issue up to 5,000,000 shares of preferred stock and to fix the
rights and preferences of such shares. This authority, together with certain
provisions of the Company's Charter (including provisions that implement
staggered terms for directors, limit shareholder ability to call a shareholders'
meeting or to remove directors, and require a supermajority vote to amend
certain provisions of the Charter), may delay, deter, or prevent a change in
control of the Company. In addition, as a Tennessee corporation, the Company is
subject to the provisions of the Tennessee Business Combination Act and the
Tennessee Greenmail Act, each of which may be deemed to have anti-takeover
effects and may delay, deter, or prevent a takeover attempt that might be
considered by the shareholders to be in their best interests. In the event of
any change in control of the Company, each of the holders of the Convertible
Debentures will have the right, at such holder's option and subject to certain
conditions and restrictions, to require the Company to repurchase all or any
part of such holder's Convertible Debentures. The right to require the Company
to repurchase Convertible Debentures may delay, deter, or prevent a change in
control of the Company.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of Common Stock in the public market following
the Offering, or the perception that such sales could occur, could adversely
affect the prevailing market price of the Common Stock. Upon completion of the
Offering, the Company will have 17,103,452 shares of Common Stock outstanding.
Of these shares, approximately 9,114,122 shares are "restricted securities"
within the meaning of Rule 144 promulgated under the Securities Act of 1933, as
amended (the "Securities Act"), and may not be resold in the public markets
unless registered under the Securities Act or pursuant to an exemption, such as
the safe harbor provided by Rule 144.
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Approximately 7,744,122 of such restricted shares may be sold in the public
market pursuant to Rule 144, subject to the volume and resale restrictions of
such rule and subject to the 90 day lock-up agreement discussed below. In
addition, certain holders of such shares have certain contractual registration
rights with respect thereto. Notwithstanding the foregoing, the Company, the
Selling Shareholders, and the directors and executive officers of the Company
(who in the aggregate own 4,943,130 shares of Common Stock) have agreed, subject
to certain exceptions, not to offer, sell, or otherwise dispose of any shares of
Common Stock for a period of 90 days after the date hereof. See "The
Company -- Recent Transactions -- FGI Transaction" and "Principal and Selling
Shareholders."
Holders of the Convertible Debentures have the right to convert such
Convertible Debentures into shares of Common Stock at the Conversion Price. If
holders elect to convert all of the Convertible Debentures into shares of Common
Stock, the Company would issue an additional 5,750,000 shares of Common Stock,
all of which would be freely tradeable.
POSSIBLE PRICE VOLATILITY OF THE COMMON STOCK
The market price of the Common Stock offered hereby could be subject to
significant fluctuations in response to various factors and events, including
the liquidity of the market for the Common Stock offered hereby, variations in
the Company's operating results, and new statutes or regulations or changes in
the interpretation of existing statutes or regulations affecting the health care
industry generally or the assisted living industry in particular. In addition,
the stock market in recent years has experienced broad price and volume
fluctuations that often have been unrelated to the operating performance of
particular companies. These market fluctuations also may adversely affect the
market price of the Common Stock.
FORWARD-LOOKING STATEMENTS
This Prospectus Supplement contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which are intended to be covered by the safe
harbors created thereby. Those statements include, but may not be limited to,
the discussions of the Company's operating and growth strategy, including its
development plans and possible acquisitions. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, the factors set forth under the caption "Risk Factors" in this
Prospectus Supplement. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate and, therefore, there can be no assurance
that the forward-looking statements included in this Prospectus Supplement will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved. The Company,
however, undertakes no obligation to revise such forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurence of unanticipated events.
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THE COMPANY
GENERAL
The Company 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.
Established in 1978, the Company currently operates 35 senior living communities
in 14 states, consisting of 17 owned communities, six leased communities, and 12
managed communities, with an aggregate capacity for approximately 11,400
residents. The Company also operates seven home health care agencies, including
two agencies managed for third parties. At March 31, 1998, the Company's owned
communities had a stabilized occupancy rate of 93%, its leased communities had a
stabilized occupancy rate of 93%, and its managed communities had a stabilized
occupancy rate of 96%. Approximately 89.4% and 92.3% of the Company's total
revenues for the year ended December 31, 1997 and the three months ended March
31, 1998, respectively, were derived from private pay sources.
Since 1992, the Company has experienced significant growth, primarily
through the acquisition of senior living communities. The Company's revenues
have grown from $17.8 million in 1992 to $94.2 million in 1997, an annual growth
rate of 40%. During the same period, the Company's income from operations has
grown from $2.3 million to $18.1 million, an annual growth rate of 51%. The
Company intends to continue its growth by establishing senior living networks
throughout the United States through a combination of (i) selective acquisitions
of senior living communities, including CCRCs and assisted living residences;
(ii) development of senior living communities, including special living units
and programs for residents with Alzheimer's and other forms of dementia;(iii)
expansion of existing communities; and (iv) selective development and
acquisition of other properties and businesses that are complementary to the
Company's operations and growth strategy. Pursuant to its growth strategy, the
Company recently completed the Rossmoor Transaction, the Bahia Transaction, and
the FGI Transaction, which added three owned, two leased, and four managed
communities with an aggregate capacity for approximately 4,000 residents. See
"-- Recent Transactions." In addition, the Company is currently developing 36
communities, with an estimated aggregate capacity for approximately 4,000
residents, and is expanding or is planning to commence expansions at seven of
its existing communities to add capacity to accommodate a total of approximately
560 additional residents.
The Company was incorporated under the laws of the State of Tennessee in
February 1997 as a wholly-owned subsidiary of ARCLP in anticipation of the
Reorganization and the IPO. The Company's principal executive offices are
located at 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027, and its
telephone number at that address is (615) 221-2250.
THE 1995 ROLL-UP
ARCLP was formed in February 1995 in connection with the reorganization
(the "1995 Roll-Up") of certain Predecessor Entities that owned, operated, or
managed various senior living communities. Each of the Predecessor Entities was
organized at the direction of the members of the Company's management and
controlling shareholders. As a result of the 1995 Roll-Up, ARCLP issued
partnership interests to the partners and shareholders of the Predecessor
Entities in exchange for their limited partnership interests and stock,
respectively, and thereby became the owner, directly or indirectly, of all of
the assets of the Predecessor Entities. The general partner of ARCLP was
American Retirement Communities, LLC, a Tennessee limited liability company (the
"LLC"), whose members included W.E. Sheriff, the Company's Chairman and Chief
Executive Officer, and certain other Company executive officers.
REORGANIZATION
Prior to the IPO, ARCLP completed a series of transactions resulting in the
Reorganization. Pursuant to the Reorganization, ARCLP contributed all of its
assets, subject to all of its liabilities, to
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the Company in exchange for the Reorganization Shares and the Reorganization
Note in the principal amount of $21.9 million. The number of shares issued to
ARCLP and the principal amount of the Reorganization Note were established by
ARCLP and the Company in connection with the Reorganization based on a number of
factors, including the value of the assets contributed to the Company. Following
the Reorganization, ARCLP distributed 1,350,000 Reorganization Shares to the
LLC, as general partner of ARCLP, and an aggregate of 6,462,500 Reorganization
Shares to the limited partners of ARCLP, generally in accordance with the
limited partners' ARCLP contribution accounts. See "Principal and Selling
Shareholders." Immediately after completion of the IPO, the Reorganization Note
was repaid by the Company out of the net proceeds from the IPO and such amount
was distributed to the limited partners of ARCLP in liquidation, generally in
accordance with the limited partners' ARCLP contribution accounts.
RECENT TRANSACTIONS
Rossmoor Transaction
In May 1998, the Company entered into an agreement to operate the Rossmoor
Regency, a retirement community located in Laguna Hills, California, with
capacity for approximately 210 residents. The transaction was structured as a
five-year operating lease (with five one-year renewal options) to the Company
from an unaffiliated special purpose entity that purchased the community as part
of the Rossmoor Transaction. The Company is obligated to make annual rental
payments of approximately $2.0 million and has made a security deposit of
approximately $4.6 million. In connection with the Rossmoor Transaction, the
Company made a subordinated loan to the special purpose entity in the amount of
$440,000 and will receive interest income on such loan at 2.0% over LIBOR. The
lease is structured such that the payments are level throughout the term of the
lease, and the Company is entitled to depreciation deductions for tax purposes.
The Company also acquired an option to purchase the community at the expiration
of the lease term for a formula purchase price equal to the unamortized mortgage
balance at the time of the exercise of such option. In addition, the Company
paid $1.2 million in cash to acquire the rights to receive a portion of the
entry-fee turnover cash flow from an unrelated CCRC. See
"Business -- Development Activities."
Bahia Transaction
In June 1998, the Company entered into an agreement to operate Bahia Oaks
Lodge, an assisted living residence located in Sarasota, Florida, with capacity
for approximately 100 residents. The transaction was structured as a five-year
operating lease (with five one-year renewal options) to the Company from an
unaffiliated special purpose entity that purchased the community in connection
with the Bahia Transaction. Prior to the Bahia Transaction, Bahia Oaks Lodge was
owned by a general partnership, of which Mr. Roskamp is a partner. The Company
is obligated to make annual rental payments of approximately $700,000 and has
made an interest bearing security deposit of approximately $5.4 million. The
lease is structured such that the payments are level throughout the term of the
lease, and the Company is entitled to depreciation deductions for tax purposes.
The Company also acquired an option to purchase the community at the expiration
of the lease term for a formula purchase price equal to the unamortized mortgage
balance at the time of the exercise of such option. See "Business -- Development
Activities."
FGI Transaction
In July 1998, the Company consummated the acquisition of 100% of the
ownership interests in FGI and certain entities affiliated with FGI and with
Robert G. Roskamp, FGI's founder and chairman, and entered into certain related
transactions. The Company has accounted for the FGI Transaction as a purchase.
The aggregate consideration paid by the Company to acquire such ownership
interests was $32.6 million of cash and the 1,370,000 FGI Shares. The cash
portion of the purchase price is subject to adjustment to the extent that net
working capital (as contractually defined) is less
S-18
<PAGE> 19
than or greater than zero. At closing, the parties estimated that there was a
$9.4 million deficit, resulting in an adjusted cash purchase price of $23.2
million. In addition, the cash portion of the consideration will be increased by
$1.0 million upon the satisfaction of certain post-closing conditions. The
Company also paid an additional $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 communities. As a result of the FGI Transaction, an
additional $55.5 million of long-term indebtedness (including current portion),
as well as an additional $50.2 million of refundable life estate purchase prices
(including current portion), are now reflected on the Company's balance sheet.
Pursuant to the FGI Transaction, FGI merged into the Company and the
Company contemporaneously acquired all of the ownership interests of certain
entities affiliated with FGI. Certain of FGI's assets and liabilities were
excluded from the FGI Transaction. Accordingly, prior to the consummation of the
FGI Transaction, those excluded assets of FGI were distributed to FGI's
shareholders or transferred to other entities and FGI was released from certain
of its liabilities relating to such excluded assets.
Pursuant to the FGI Transaction, the Company acquired three Lifecare CCRCs,
with an aggregate capacity for approximately 1,590 residents, and entered into
agreements to manage four Lifecare CCRCs, with an aggregate capacity for
approximately 2,100 residents. The FGI Communities acquired are Freedom Plaza
(Florida), Freedom Village of Holland (Michigan), and Lake Seminole Square
(Florida). The FGI Communities under management are Freedom Plaza (Arizona),
Freedom Square (Florida), Glenview at Pelican Bay (Florida), and Freedom Village
Brandywine (Pennsylvania).
The FGI Communities are Lifecare CCRCs. Residents of the FGI Communities
pay an upfront entrance fee upon occupancy, a portion of which is generally
refundable, and a monthly service fee while living in the community. Residents
are generally entitled to either a certain number of free days in the
community's health center or a discounted rate for such services. The extent of
the lifecare benefit varies based upon the level of refundability of the
resident's entrance fee. The pricing of entrance fees, refundability provisions,
monthly service fees, and the lifecare benefits are determined from actuarial
projections of the expected morbidity and mortality of the resident population.
As part of the FGI Transaction, the Company entered into a 20-year
management agreement (with two ten-year renewal options) for Freedom Plaza, a
Lifecare CCRC with a capacity for approximately 660 residents, located in
Peoria, Arizona ("Freedom Plaza Arizona"). In connection with the management
agreement, the Company paid a $300,000 fee to the owners of the community and
assumed FGI's existing guaranty of approximately $11.6 million of the mortgage
debt associated with the community. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." Pursuant to the management agreement, the Company will receive a
management fee equal to all revenue from the community that is in excess of
operating expenses, refunds of entrance fees, capital expenditure reserves, debt
service, and certain payments to the community's owners.
As part of the FGI Transaction, the Company also entered into a 20-year
management agreement (with two ten-year renewal options) for Freedom Square, a
Lifecare CCRC with a capacity for approximately 860 residents, located in
Seminole, Florida. In connection with the management agreement, the Company paid
a $1.2 million fee to the owner of the community, which is a general partnership
affiliated with Mr. Roskamp, and assumed FGI's existing guaranty of
approximately $19.9 million of the mortgage debt associated with the community.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations --Liquidity and Capital Resources." Pursuant to the management
agreement, the Company will receive a management fee equal to all revenue from
the community that is in excess of operating expenses, refunds of entrance fees,
capital expenditure reserves, debt service, and certain payments to the
community's owner. As part of its management agreement, the Company also
acquired an option to
S-19
<PAGE> 20
purchase Freedom Square upon the occurrence of certain events (including the
expiration of the agreement) for a formula purchase price.
Pursuant to the FGI Transaction, the Company assumed FGI's existing
management agreement for Glenview at Pelican Bay, a cooperative community with a
capacity for approximately 190 residents. The Pelican Bay management agreement
expires in January 1999.
As part of the FGI Transaction, the Company also entered into a three-year
management agreement for the recently opened Freedom Village Brandywine
community, a Lifecare CCRC that is owned by an entity affiliated with Mr.
Roskamp, with a capacity for approximately 390 residents, that provides the
Company with a management fee equal to a fixed percentage of the community's
gross revenues. The Company paid a non-refundable deposit of $2.0 million to
acquire an option to purchase the Freedom Village Brandywine community for a
purchase price of $14.0 million, plus the assumption of certain specified
liabilities. The Company's deposit will be credited against the purchase price
if the Company exercises its purchase option. In connection with the execution
of the Freedom Village Brandywine management and option agreements, the Company
assumed FGI's existing guaranty of approximately $42.1 million of the mortgage
debt associated with the community. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The Company also assumed FGI's remaining development obligations
relating to Freedom Village Brandywine. In return for its development services
and costs associated therewith, the Company will receive a fee of $200,000.
Pursuant to the FGI Transaction, the Company also entered into an agreement
to provide development services related to the development and construction of a
proposed Lifecare CCRC to be known as the Sarasota Bay Club in Sarasota,
Florida, with a capacity for approximately 410 residents. The Sarasota Bay Club
is owned by an entity affiliated with Mr. Roskamp and is currently in the
development and planning phase. It is anticipated that construction of the
community will commence in late 1998. In return for its development services and
costs associated therewith, the Company will receive a development fee of $2.4
million. The Company will manage the Sarasota Bay Club following its completion
pursuant to a five-year, fixed percentage fee management agreement. In
consideration of the Company's payment of a $2.0 million fully-refundable
deposit, the Company acquired a right of first refusal for the Sarasota Bay Club
and an option to purchase the community for a price to be negotiated. The
Company will receive a credit against the purchase price in the amount of its
deposit if the Company exercises its right of first refusal or purchase option.
In connection with the FGI Transaction, Mr. Roskamp entered into a
three-year consulting agreement with the Company. It is also contemplated that
Mr. Roskamp will become a member of the Company's Board of Directors and a
member of the executive committee of the Company's Board of Directors.
In connection with the FGI Transaction, the Company granted certain
contractual registration rights to the former shareholders of FGI. Beginning one
year following the closing of the FGI Transaction, PHC, L.L.C. and The Edgar and
Elsa Prince Foundation (collectively, the "Prince Entities") and Mr. Roskamp
will each be entitled to one demand registration upon the written request to
register the sale of 25% or more of the FGI Shares then owned by the party
requesting the registration. In addition, until July 2001, the Prince Entities
and Mr. Roskamp may require the Company to include FGI Shares in a registration
statement filed by the Company for its own account to issue Common Stock for
cash, provided, among other conditions, that the managing underwriter (if any)
of such offering has the right, subject to certain conditions, to limit the
number of FGI Shares owned by the Prince Entities and Mr. Roskamp included in
such registration statement. The Prince Entities and Mr. Roskamp are not
entitled to request registration of the FGI Shares in connection with this
Offering. In general, all fees, costs, and expenses of such registrations (other
than the underwriting commissions, dealers' fees, brokers' fee and concessions
applicable to the FGI Shares) will be borne by the Company.
S-20
<PAGE> 21
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,297,500 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$64.9 million (approximately $73.9 million if the Underwriters' over-allotment
option is exercised in full), after deduction of the underwriting discounts and
commissions and estimated offering expenses payable by the Company.
The Company intends to use the net proceeds to fund possible future
acquisitions of senior living communities and businesses engaged in activities
that are similar or complementary to the Company's business, for the development
and construction of additional senior living communities and expansions at the
Company's existing communities, and for general corporate purposes, including
working capital and the possible future repayment of indebtedness.
The Company currently is expanding or is planning to commence expansions at
seven of its existing communities and has 36 communities under development. The
estimated cost to complete and lease-up the Company's existing expansion and
development projects ranges from $495.0 million to $520.0 million. The Company
believes cash on hand, the net proceeds from the Offering, funding available
under the REIT Facilities and the Company's revolving credit facility, future
bank indebtedness, construction and mortgage financings, and funds from other
sources will be sufficient to fund the Company's current development and
acquisition plans. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Business -- Development Activities."
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Shareholders. Selling Shareholders who are affiliates of the Company
will receive net proceeds from the Offering of approximately $2.3 million
(approximately $3.6 million if the Underwriters' over-allotment option is
exercised in full). See "Principal and Selling Shareholders."
Pending the use of the net proceeds as described above, the net proceeds
will be invested in short-term, investment-grade securities.
S-21
<PAGE> 22
PRICE RANGE OF COMMON STOCK
The Company sold shares of Common Stock in the IPO at a price per share of
$14.00. Since the date of the IPO (May 30, 1997), the Common Stock has traded on
the NYSE under the symbol "ACR." The following table sets forth the range of
high and low closing sales prices for the Common Stock for the periods indicated
on the NYSE.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1997
Second Quarter (beginning May 30, 1997)..................... $17.8750 $14.2500
Third Quarter............................................... 21.8750 17.8750
Fourth Quarter.............................................. 21.2500 19.0000
1998
First Quarter............................................... $23.2500 $20.0000
Second Quarter.............................................. 22.3750 17.7500
Third Quarter (through July 29, 1998)....................... 19.6250 17.5625
</TABLE>
On July 29, 1998, the last reported sale price for the Common Stock on the
NYSE was $17.5625 per share. As of July 8, 1998, there were approximately 426
holders of record of the Common Stock.
DIVIDEND POLICY AND PRIOR DISTRIBUTIONS
It is the policy of the Company's Board of Directors to retain all future
earnings to finance the operation and expansion of the Company's business.
Accordingly, the Company does not anticipate declaring or paying cash dividends
on the Common Stock in the foreseeable future. The payment of cash dividends in
the future will be at the sole discretion of the Company's Board of Directors
and will depend on, among other things, the Company's earnings, operations,
capital requirements, financial condition, restrictions in then existing
financing agreements, and other factors deemed relevant by the Board of
Directors.
Prior to the Reorganization, the Predecessor and the Predecessor Entities
made periodic distributions to their respective partners or shareholders in
accordance with their ownership interests therein. During 1995 and 1996, ARCLP
made or accrued for distributions of approximately $6.6 million and $7.1
million, respectively, to its partners, including approximately $30,000 and
$59,000, respectively, to the LLC. In addition, in 1996 ARCLP redeemed its
Preferred Partnership Interests for $10.0 million. In the second quarter of
1997, ARCLP distributed an aggregate of $2.5 million to its partners, which
approximated the income taxes associated with the Predecessor's earnings in 1997
through the date of the Reorganization. In addition, immediately following the
consummation of the IPO, and in connection with ARCLP's liquidation, the
proceeds from the repayment of the Reorganization Note were distributed by ARCLP
to its limited partners, generally in accordance with their respective
contribution accounts. See "The Company -- Reorganization."
S-22
<PAGE> 23
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998 (i) on an actual basis; (ii) on a pro forma basis giving effect to the
FGI Transaction; and (iii) on a pro forma as adjusted basis giving effect to the
issuance and sale of the Common Stock offered hereby by the Company and the FGI
Transaction. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated and Combined Financial Statements and Notes thereto included
elsewhere in this Prospectus Supplement.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-------------------------------
PRO
FORMA
PRO AS
ACTUAL FORMA ADJUSTED
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash........................................................ $ 29,050 $ 31,330 $ 96,224
======== ======== ========
Short-term debt, including current portion of long-term
debt...................................................... $ 318 $ 2,921 $ 2,921
======== ======== ========
Current portion of life estate purchase price(1)............ $ -- $ 1,440 $ 1,440
======== ======== ========
Long-term debt:
Long-term senior debt, less current portion............... $101,516 $154,446 $154,446
5 3/4% Convertible Subordinated Debentures due 2002....... 138,000 138,000 138,000
-------- -------- --------
Total long-term debt, less current portion.............. 239,516 292,446 292,446
Refundable life estate purchase price, less current
portion(1)................................................ -- 48,751 48,751
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares
authorized, no shares issued and outstanding............ -- -- --
Common Stock, par value $.01 per share; 50,000,000 shares
authorized; 11,420,860 shares issued and outstanding,
actual; 12,790,860 shares issued and outstanding, pro
forma; and 17,080,860 shares issued and outstanding, pro
forma as adjusted(2).................................... 114 128 171
Additional paid-in capital................................ 60,205 79,970 144,821
Accumulated deficit....................................... (4,882) (4,882) (4,882)
-------- -------- --------
Total shareholders' equity.............................. 55,437 75,216 140,110
-------- -------- --------
Total capitalization.................................... $294,953 $416,413 $481,307
======== ======== ========
</TABLE>
- ---------------
(1) Reflects the refundable portion of resident entrance fees at the FGI
Communities. See "Risk Factors -- Risks Associated With Provision of
Lifecare Benefits" and "Business -- Care and Services Programs -- Lifecare."
(2) Does not include 815,500 shares of Common Stock reserved for issuance at
March 31, 1998 pursuant to outstanding stock options under the Company's
Stock Incentive Plan at an average exercise price of $16.02 per share. Also
does not include 5,750,000 shares issuable upon conversion of the
outstanding Convertible Debentures at the Conversion Price.
S-23
<PAGE> 24
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 FGI Transaction. See "The Company -- Recent Transactions -- FGI
Transaction." The unaudited pro forma condensed combined financial information
does not give effect to the consummation of the Offering. For information
regarding the effects of the Offering on the Company's balance sheet, see
"Summary Financial and Other Data," "Capitalization," and "Selected Consolidated
and Combined Financial Data."
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 Prospectus
Supplement. 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited and unaudited financial
statements of the Company and the Freedom Group Entities and the related notes
thereto included elsewhere in this Prospectus Supplement. See "Index to
Financial Statements."
S-24
<PAGE> 25
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>
S-25
<PAGE> 26
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.
S-26
<PAGE> 27
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>
S-27
<PAGE> 28
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 of the FGI Transaction.
S-28
<PAGE> 29
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>
S-29
<PAGE> 30
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 due to 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 of the FGI Transaction.
S-30
<PAGE> 31
SELECTED CONSOLIDATED AND COMBINED FINANCIAL DATA
The following table sets forth selected and pro forma financial data of the
Company, the Predecessor, and the Predecessor Entities. The selected financial
data as of and for the years ended December 31, 1993 and 1994 and the three
months ended March 31, 1995 are derived from the combined financial statements
of the Predecessor Entities. The selected financial data as of and for the nine
months ended December 31, 1995 and as of and for the year ended December 31,
1996 are derived from the consolidated financial statements of the Predecessor.
The selected financial data as of and for the year ended December 31, 1997 are
derived from the consolidated financial statements of the Company and includes
the operations of the Predecessor for the period January 1, 1997 through May 28,
1997 and the Company for the period May 29, 1997 through December 31, 1997. Such
financial statements have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The selected financial data for the three months
ended March 31, 1997 and 1998 are derived from the unaudited financial
statements of the Company which, in the opinion of management, include all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the Company's financial condition and results of operations. The
pro forma financial data for the year ended December 31, 1997 and the three
months ended March 31, 1998 gives effect to the FGI Transaction on the basis set
forth in the footnotes below. The information below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated and combined financial
statements of the Company and the related notes thereto.
<TABLE>
<CAPTION>
COMBINED CONSOLIDATED
----------------------------- -------------------------------------------------
PREDECESSOR ENTITIES PREDECESSOR COMPANY
----------------------------- ----------------------- -----------------------
YEARS ENDED
THREE DECEMBER 31,
YEARS ENDED MONTHS NINE MONTHS ----------------------------------
DECEMBER 31, ENDED ENDED
----------------- MARCH 31, DECEMBER 31, PRO FORMA
1993 1994 1995 1995 1996 1997 1997(1)
------- ------- --------- ------------ -------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Resident and health care revenue... $23,162 $30,979 $11,761 $47,239 $ 73,878 $ 92,217 $122,034
Management services revenue........ 2,752 2,362 595 1,524 1,739 1,995 5,116
------- ------- ------- ------- -------- -------- --------
Total revenues................... 25,914 33,341 12,356 48,763 75,617 94,212 127,150
Operating expenses:
Community operating expense........ 16,401 21,780 8,035 30,750 46,960 57,838 78,490
Lease expense...................... -- -- -- -- -- 3,405 3,806
General and administrative......... 3,290 3,455 1,108 3,446 6,200 8,051 12,145
Depreciation and amortization...... 2,251 2,891 1,127 4,534 6,906 6,855 11,951
------- ------- ------- ------- -------- -------- --------
Total operating expenses......... 21,942 28,126 10,270 38,730 60,066 76,149 106,392
------- ------- ------- ------- -------- -------- --------
Income from operations........... 3,972 5,215 2,086 10,033 15,551 18,063 20,758
------- ------- ------- ------- -------- -------- --------
Other Income (expense):
Interest expense, net.............. (3,447) (5,151) (2,321) (7,601) (11,726) (12,188) (14,215)
Other.............................. 189 98 (1,013)(2) 919 788 (1) (16)
------- ------- ------- ------- -------- -------- --------
Income (loss) before income taxes
and extraordinary item........... 714 162 (1,248) 3,351 4,613 5,874 6,527
Income tax expense (benefit)(3)..... -- -- 20 55 (920) 4,340 4,888
------- ------- ------- ------- -------- -------- --------
Income (loss) before extraordinary
item............................... 714 162 (1,268) 3,296 5,533 1,534 1,639
Extraordinary item(4)............... -- -- -- -- (2,335) (6,334) (6,334)
------- ------- ------- ------- -------- -------- --------
Net income (loss)................... 714 162 (1,268) 3,296 3,198 (4,800) (4,695)
Preferred return on special
redeemable preferred limited
partnership interests(5)........... -- -- -- (1,125) (1,104) -- --
Net income (loss) available for
distribution to partners and
shareholders....................... $ 714 $ 162 $(1,268) $ 2,171 $ 2,094 $ (4,800) $ (4,695)
======= ======= ======= ======= ======== ======== ========
Distribution to partners, excluding
preferred distributions............ $ 5,708 $ 2,580 $ 1,400 $ 4,064 $ 6,035 $ 2,500 $ 2,500
======= ======= ======= ======= ======== ======== ========
<CAPTION>
CONSOLIDATED
-----------------------------
COMPANY
-----------------------------
THREE MONTHS
ENDED MARCH 31,
-----------------------------
PRO FORMA
1997 1998 1998
------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Resident and health care revenue... $20,982 $26,398 $33,939
Management services revenue........ 528 1,679 2,885
------- ------- -------
Total revenues................... 21,510 28,077 36,824
Operating expenses:
Community operating expense........ 13,399 17,018 22,496
Lease expense...................... 528 1,685 1,738
General and administrative......... 1,886 2,053 2,784
Depreciation and amortization...... 1,585 1,974 3,188
------- ------- -------
Total operating expenses......... 17,398 22,730 30,206
------- ------- -------
Income from operations........... 4,112 5,347 6,618
------- ------- -------
Other Income (expense):
Interest expense, net.............. (3,107) (2,951) (3,828)
Other.............................. (30) (26) 69
------- ------- -------
Income (loss) before income taxes
and extraordinary item........... 975 2,370 2,859
Income tax expense (benefit)(3)..... -- 853 1,111
------- ------- -------
Income (loss) before extraordinary
item............................... 975 1,517 1,748
Extraordinary item(4)............... -- -- --
------- ------- -------
Net income (loss)................... 975 1,517 1,748
Preferred return on special
redeemable preferred limited
partnership interests(5)........... -- -- --
Net income (loss) available for
distribution to partners and
shareholders....................... $ 975 $ 1,517 $ 1,748
======= ======= =======
Distribution to partners, excluding
preferred distributions............ $ -- $ -- $ --
======= ======= =======
</TABLE>
S-31
<PAGE> 32
<TABLE>
<CAPTION>
CONSOLIDATED
-----------------------------------------------------------------------
PREDECESSOR COMPANY
------------ --------------------------------------------------------
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------------- -------------------------------
PRO FORMA PRO FORMA
1996 1997 1997(1) 1997 1998 1998
------------ ------- ------------ --------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
TAX DATA(6):
Income before income taxes and extraordinary item...... $4,613 $ 5,874 $ 6,527 $ 975 $ 2,370 $ 2,859
Pro forma income tax expense(7)........................ 1,661 2,115 2,663 381 853 1,111
------ ------- ------- ------ ------- -------
Pro forma income before extraordinary item............. 2,952 3,759 3,864 594 1,517 1,748
Preferred return on special redeemable preferred
partnership interests................................ $1,104 $ -- $ -- $ -- $ -- $ --
------ ------- ------- ------ ------- -------
Pro forma income before extraordinary item available
for distribution to partners and shareholders........ $1,848 $ 3,759 $ 3,864 $ 594 $ 1,517 $ 1,748
====== ======= ======= ====== ======= =======
EARNINGS PER SHARE DATA(6):
Pro forma basic earnings per share before extraordinary
item available for distribution to partners and
shareholders........................................... $ 0.20 $ 0.36 $ 0.32 $ 0.06 $ 0.13 $ 0.14
====== ======= ======= ====== ======= =======
Shares used in computing pro forma basic earnings per
share(8)............................................... 9,375 10,577 11,947 9,375 11,421 12,791
====== ======= ======= ====== ======= =======
Pro forma diluted earnings per share before
extraordinary item available for distribution to
partners and shareholders.............................. $ 0.20 $ 0.35 $ 0.32 $ 0.06 $ 0.13 $ 0.13
====== ======= ======= ====== ======= =======
Shares used in computing pro forma diluted earnings per
share(9)............................................... 9,375 10,675 12,045 9,375 11,633 13,003
====== ======= ======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
------------------------------------------------------ ------------------------
PREDECESSOR ENTITIES COMPANY
COMBINED PREDECESSOR -----------------------------------
--------------------- ------------------- PRO FORMA
1993 1994 1995 1996 1997 1998 1998(10)
--------- --------- -------- -------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 3,205 $ 2,894 $ 3,825 $ 3,222 $ 44,583 $ 29,050 $ 31,330
Working capital (deficit)..................... 2,529 3,168 (1,048) (14,289) 47,744 36,726 26,487
Land, building and equipment, net............. 51,995 95,399 149,082 213,124 229,898 240,643 381,570
Total assets.................................. 63,393 111,425 165,579 228,162 317,154 317,177 518,369
Long-term debt, including current portion..... 43,335 89,414 102,245 170,689 237,354 239,834 295,367
Refundable portion of life estate purchase
price, including current portion............. -- -- -- -- -- -- 50,191
Partners' and shareholders' equity............ 15,042 12,823 51,823 37,882 53,918 55,437 75,216
</TABLE>
- ---------------
(1) Gives effect to the FGI Transaction as if it had occurred on January 1,
1997. See "The Company -- Recent Transactions -- FGI Transaction" and "Pro
Forma Financial Information."
(2) Includes a one-time expense of $964,000 incurred in connection with the
1995 Roll-Up.
(3) Periods prior to 1997 reflect income tax expense of only one of the
Predecessor Entities because the Predecessor and the other Predecessor
Entities were partnerships. No income tax expense is reflected for periods
prior to 1995 because of losses or the availability of NOLs. Both periods
in 1995 reflect a provision for alternative minimum taxes. In 1996, the
Company recorded an income tax benefit and a deferred tax asset of $920,000
because of the anticipated utilization of NOLs that will offset taxable
gains recognized from the Sale-Leaseback Transaction. Income tax expense
for the year ended December 31, 1997 reflects income taxes incurred by the
Company during the period from May 29, 1997 (the day following the
Reorganization) through December 31, 1997. During the period from January
1, 1997 through the date of the Reorganization (May 28, 1997), the
Predecessor did not incur income tax expense because it was a partnership.
See Note 11 to the Consolidated and Combined Financial Statements. At the
time of the Reorganization and as a result of the conversion from a
non-taxable to a taxable entity, the Company recorded as a one-time charge
to income a net deferred income tax expense of approximately $3.0 million
resulting from the differences between the accounting and tax bases of the
Company's assets and liabilities. See Note 1 to the Consolidated and
Combined Financial Statements.
(4) Amount represents loss on early extinguishment of debt. See Note 6 to the
Consolidated and Combined Financial Statements.
(5) In connection with the 1995 Roll-Up, $10.0 million of promissory notes were
exchanged for $10.0 million of Preferred Partnership Interests bearing a
15% cumulative distribution right. From October 1994 (when such notes were
created) through the 1995 Roll-Up, interest expense at 15% was recorded and
paid. Following the 1995 Roll-Up, the Company has paid preferred 15%
distributions to the holders of the Preferred Partnership Interests. From
January 1996 to June 1996, the Company paid $324,000 of distributions with
respect to $4.8 million of the Preferred Partnership Interests which were
redeemed in June 1996 and were not eliminated. The remaining $5.2 million
of the Preferred Partnership Interests were redeemed with a portion of the
net proceeds from the Sale-Leaseback Transaction, and therefore
distributions with respect to this $5.2 million portion of the Preferred
Partnership Interests have been eliminated in the Pro Forma Statement of
Operations data.
(6) Except for one of the Predecessor Entities, the Predecessor and the
Predecessor Entities, as partnerships, were exempt from U.S. Federal and
state income taxes. For periods prior to the Reorganization, reflects the
pro forma effect on certain income statement data of income tax expense
that would have been recorded had the Predecessor and the other Predecessor
Entities not been exempt from paying such income taxes.
(7) For the year ended December 31, 1997, does not give effect to a
non-recurring $3.0 million charge to income incurred at the time of the
Reorganization in connection with the conversion from a non-taxable to a
taxable entity and the resulting
S-32
<PAGE> 33
recognition of a deferred income tax liability for the differences between
the accounting and tax bases of the Company's assets and liabilities. See
footnote (3) above and Note 1 to the Consolidated and Combined Financial
Statements.
(8) The Predecessor and all but one of the other Predecessor Entities were
partnerships. Shares used in computing earnings per share have been
calculated as follows: for the year ended December 31, 1996 and the three
months ended March 31, 1997, reflects the Reorganization Shares, plus the
Note Shares; for the year ended December 31, 1997, reflects the
Reorganization Shares, plus the Note Shares for the period through the date
of the Reorganization and the Reorganization Shares, plus the weighted
average effect of the 3,593,750 shares sold by the Company in the IPO for
the period following the date of the Reorganization and the IPO; and for
the three months ended March 31, 1998, reflects actual shares outstanding.
The pro forma data includes the 1,370,000 FGI Shares.
(9) Reflects the shares set forth in footnote (8) above plus the Common Stock
equivalents.
(10) Gives effect to the FGI Transaction as if it had occurred at March 31,
1998.
S-33
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a national senior living and health care services company
providing a broad range of care and services to seniors within a residential
setting. The Company currently operates 35 senior living communities in 14
states with an aggregate capacity for approximately 11,400 residents. The
Company currently owns 17 communities, leases six communities pursuant to long-
term leases, and manages 12 communities pursuant to management agreements. The
Company's revenues have grown from $17.8 million in 1992 to $94.2 million in
1997, an annual growth rate of 40%. During the same period, the Company's income
from operations has grown from $2.3 million to $18.1 million, an annual growth
rate of 51%. At March 31, 1998, the Company's owned communities had a stabilized
occupancy rate of 93%, its leased communities had a stabilized occupancy rate of
93%, and its managed communities had a stabilized occupancy rate of 96%.
The Company completed the IPO and the Reorganization in the second quarter
of 1997. The Company and its predecessors have owned, operated, or managed
senior living communities since 1978. The Predecessor, ARCLP, was formed in
February 1995 in connection with the 1995 Roll-Up. The 1995 Roll-Up, effective
April 1, 1995, was accounted for as a purchase business combination by the
Predecessor. The Company was incorporated in February 1997 for purposes of
effecting the Reorganization and the IPO. See "The Company -- Reorganization."
For the purposes of the following discussion, amounts for the year ended
December 31, 1995 represent the sum of the combined results of operations of the
Predecessor and the Predecessor Entities for the period from January 1, 1995
through March 31, 1995 and the consolidated results of operations of the
Predecessor for the period from April 1, 1995 through December 31, 1995 and the
year ended December 31, 1996, and amounts for the year ended December 31, 1997
represent the sum of the results of operations of the Predecessor for the period
from January 1, 1997 through May 28, 1997 and the results of operations of the
Company for the period from May 29, 1997 through December 31, 1997. See Note 1
to the Consolidated and Combined Financial Statements.
The Company consummated the Rossmoor Transaction and the Bahia Transaction
in May 1998 and June 1998, respectively. In addition, the Company consummated
the FGI Transaction in July 1998. The aggregate consideration paid by the
Company in the FGI Transaction was $32.6 million of cash and the 1,370,000 FGI
Shares. The cash portion of the purchase price is subject to adjustment to the
extent that net working capital (as contractually defined) is less than or
greater than zero. At closing, the parties estimated that there was a $9.4
million deficit, resulting in an adjusted cash purchase price of $23.2 million.
In addition, the cash portion of the consideration will be increased by $1.0
million upon the satisfaction of certain post-closing conditions. The Company
also paid an additional $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 communities. Pursuant to the FGI Transaction, the
Company acquired three Lifecare CCRCs and entered into agreements to manage four
Lifecare CCRCs, with an aggregate capacity for approximately 3,700 residents.
The Company also acquired options to purchase two of the FGI Communities. In
addition, the Company entered into a development and management agreement for,
and acquired an option to purchase, one additional Lifecare CCRC currently under
development, which will have capacity for approximately 410 residents. The
Company has accounted for the FGI Transaction as a purchase. See "-- Liquidity
and Capital Resources," "The Company -- Recent Transactions," and "Pro Forma
Financial Information."
The Company is currently developing or constructing 36 senior living
communities with an aggregate capacity for approximately 4,000 residents with an
estimated cost to complete and lease-up of approximately $440.0 million to
$465.0 million. In addition, the Company is expanding or is planning to commence
expansions at seven of its existing communities, which are expected to cost
approximately $55.0 million to complete and lease-up. The seven current
expansion projects will
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<PAGE> 35
add capacity to accommodate a total of approximately 560 additional residents.
The development of senior living communities typically involves a substantial
commitment of capital over a twelve month construction period, during which no
revenues are generated, followed by a twelve month lease-up period. The Company
anticipates that newly opened or expanded communities will operate at a loss
during a substantial portion of the lease-up period. See "-- Liquidity and
Capital Resources" and "Risk Factors -- Losses from Newly Developed Communities
and Acquisitions" and "Risk Factors -- No Assurance as to Ability to Develop
Additional Senior Living Communities."
In addition to the development of new senior living communities and
expansions of existing retirement communities, the Company's growth strategy
also includes the acquisition of senior living communities and other properties
or businesses that are complementary to the Company's operations and growth
strategy.
RESULTS OF OPERATIONS
The Company's total revenues are comprised of (i) resident and health care
revenues, which include all resident revenues and home health care agency fees,
and (ii) management services and other revenues, which include fees, net of
reimbursements, for the development, marketing, and management of communities
owned by third parties. The Company's resident and health care revenues are
derived from three principal sources: (i) monthly service fees from independent
and assisted living residents, representing 74.0% and 75.0% of the Company's
total revenues for the three months ended March 31, 1998 and 1997, respectively,
and 74.2%, 75.3%, and 71.6% of total revenues for the years ended December 31,
1997, 1996, and 1995, respectively; (ii) per diem charges from nursing patients,
representing 11.9% and 13.1% of the Company's total revenues for the three
months ended March 31, 1998 and 1997, respectively, and 13.7%, 13.9%, and 17.2%
of total revenues for the years ended December 31, 1997, 1996, and 1995,
respectively; and (iii) per visit billings from home health care patients and
companion services clients, representing 8.1% and 9.4% of the Company's total
revenues for the three months ended March 31, 1998 and 1997, respectively, and
10.0%, 8.5%, and 8.8% of total revenues for the years ended December 31, 1997,
1996, and 1995, respectively. Management services revenues represented 6.0% and
2.5% of the Company's total revenues for the three months ended March 31, 1998
and 1997, respectively, and 2.1%, 2.3%, and 3.5% of total revenues for the years
ended December 31, 1997, 1996, and 1995, respectively. Approximately 92.3% and
91.1% of the Company's total revenues for the three months ended March 31, 1998
and 1997, respectively, and 89.4%, 92.1%, and 91.2% of the Company's total
revenues for the years ended December 31, 1997, 1996, and 1995, respectively,
were attributable to private pay sources, with the balance attributable to
Medicare, including Medicare-related private co-insurance.
The Company's management agreements are generally for terms of three to 20
years, but certain of such agreements may be canceled by the owner of the
community, without cause, on three to six months' notice. Pursuant to the
management agreements, the Company is generally responsible for providing
management personnel, marketing, nursing, resident care and dietary services,
accounting and data processing services, and other services for these
communities at the owners' expense and receives a monthly fee for its services
based either on a contractually fixed amount, a percentage of revenues or
income, or the amount of cash flows in excess of certain expenses. Certain
management agreements also provide the Company with an incentive fee based on
various performance goals. The Company's existing management agreements expire
at various times through July 2018.
The Company's operating expenses are comprised, in general, of (i)
community operating expense, which includes all operating expenses of the
Company's owned or leased communities, including the expenses of its home health
care agencies; (ii) lease expense; (iii) general and administrative expense,
which includes all corporate office overhead; and (iv) depreciation and
amortization expense.
S-35
<PAGE> 36
The FGI Communities are Lifecare CCRCs that offer residents a limited
lifecare benefit. Residents of the FGI Communities pay an upfront entrance fee
upon occupancy (which generally is partially refundable), and a monthly service
fee while living in the community. Residents are generally entitled to a limited
lifecare benefit (typically either a certain number of free days in the
community's health center during the resident's lifetime or a discounted rate
for such services) that varies based upon the degree of refundability of the
entrance fees. FGI's total revenues are comprised of (i) resident and health
care revenues and (ii) management services revenues, which includes fees related
to management services and construction management and architectural services
provided to a third party and to certain affiliates. Resident and health care
revenues are comprised of: (i) monthly service fees from independent and
assisted living residents; (ii) per diem charges from nursing patients; and
(iii) the amortization of non-refundable entrance fees over each resident's
actuarially determined life expectancy.
The following tables set forth, for the periods indicated, selected
Statement of Operations data in thousands of dollars and expressed as a
percentage of total revenues, and certain resident capacity and occupancy data.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997
---------------- ---------------- ----------------
$ % $ % $ %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Resident and health care revenue............................ $ 59,000 96.5% $ 73,878 97.7% $ 92,217 97.9%
Management services revenue................................. 2,119 3.5 1,739 2.3 1,995 2.1
-------- ----- -------- ----- -------- -----
Total revenues.......................................... 61,119 100.0 75,617 100.0 94,212 100.0
Community operating expense................................. 38,785 63.5 46,960 62.1 57,838 61.4
Lease expense............................................... -- -- -- -- 3,405 3.6
General and administrative.................................. 4,554 7.5 6,200 8.2 8,051 8.5
Depreciation and amortization............................... 5,661 9.3 6,906 9.1 6,855 7.3
-------- ----- -------- ----- -------- -----
Total operating expenses................................ 49,000 80.2 60,066 79.4 76,149 80.8
-------- ----- -------- ----- -------- -----
Income from operations.................................. 12,119 19.8 15,551 20.6 18,063 19.2
Interest expense............................................ (10,300) (16.9) (12,160) (16.1) (14,863) 15.8
Interest Income............................................. 378 0.6 434 0.6 2,675 2.8
Other income (expense)...................................... (94) (0.1) 788 1.0 (1) --
-------- ----- -------- ----- -------- -----
Other expense, net...................................... (10,016) (16.4) (10,938) (14.5) (12,189) (12.9)
-------- ----- -------- ----- -------- -----
Income before income taxes and extraordinary item....... 2,103 3.4 4,613 6.1 5,874 6.2
Income tax expense (benefit)................................ 75 (0.1) (920) 1.2 4,340 4.6
-------- ----- -------- ----- -------- -----
Income before extraordinary item............................ 2,028 3.3 5,533 7.3 1,534 1.6
Extraordinary item.......................................... -- -- (2,335) 3.1 (6,334) 6.7
-------- ----- -------- ----- -------- -----
Net income (loss)........................................... $ 2,028 3.3% $ 3,198 4.2% $ (4,800) (5.1)%
======== ===== ======== ===== ======== =====
</TABLE>
S-36
<PAGE> 37
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
1997 1998
--------------- ---------------
$ % $ %
------- ----- ------- -----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Resident and health care revenue............................ $20,982 97.5% $26,398 94.0%
Management services and other revenue....................... 528 2.5 1,679 6.0
------- ----- ------- -----
Total revenues.......................................... 21,510 100.0 28,077 100.0
Community operating expense................................. 13,399 62.3 17,018 60.6
Lease expense, net.......................................... 528 2.5 1,685 6.0
General and administrative.................................. 1,886 8.8 2,053 7.3
Depreciation and amortization............................... 1,585 7.4 1,974 7.0
------- ----- ------- -----
Total operating expenses................................ 17,398 81.0 22,730 81.0
------- ----- ------- -----
Income from operations.................................. 4,112 19.0 5,347 19.0
Interest expense............................................ (3,107) (14.4) (2,951) (10.5)
Other income (expense)...................................... (30) (0.1) (26) (0.1)
------- ----- ------- -----
Income before income taxes.............................. 975 4.5 2,370 8.4
Income tax expense (benefit)................................ -- -- 853 3.0
------- ----- ------- -----
Net income.................................................. $ 975 4.5% $ 1,517 5.4%
======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
End of period resident capacity:
Owned..................................................... 2,594 3,369 3,210 2,912 3,056
Leased.................................................... -- -- 1,531 483 1,473
Managed................................................... 3,008 2,159 2,159 2,159 2,084
----- ----- ----- ----- -----
Total................................................... 5,602 5,528 6,900 5,554 6,613
===== ===== ===== ===== =====
Average occupancy rate:
Owned..................................................... 93% 94% 93% 94% 90%
Leased.................................................... -- -- 90 95 91
Managed................................................... 91 91 94 94 96
----- ----- ----- ----- -----
Total................................................... 92% 92% 93% 94% 92%
===== ===== ===== ===== =====
End of period occupancy rate:
Owned..................................................... 94% 96% 94% 94% 88%(2)
Leased.................................................... -- -- 93 95 90 (2)
Managed................................................... 91 92 96 94 96
----- ----- ----- ----- -----
Total................................................... 92% 94% 94% 94% 91%
===== ===== ===== ===== =====
Stabilized average occupancy rate:(1)
Owned..................................................... 93% 94% 97% 96% 95%
Leased.................................................... -- -- 96 95 95
Managed................................................... 95 95 96 94 96
----- ----- ----- ----- -----
Total................................................... 94% 95% 96% 95% 95%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Includes communities or expansions thereof that have either (i) achieved 95%
occupancy or (ii) been open at least 12 months. In the table above, the
stabilized average occupancy rate for the year ended December 31, 1996
excludes a large managed community with a capacity for over 240 residents
which opened in August 1995 and continued to stabilize throughout 1996.
(2) End of period occupancy for the three months ended March 31, 1998 includes
the dilutive effect of expansions that opened during the period. Excluding
the effect of these expansions, end of period occupancy for owned
communities would have been 91% and leased communities would have been 92%.
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<PAGE> 38
Same Community Results
The following table sets forth certain selected financial and operating
data on a Same Community basis. For purposes of the following discussion, "Same
Community basis" refers to communities that were owned and/or leased by the
Company throughout each of the periods being compared. Revenues on a Same
Community basis do not include any management services revenues.
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------------------------------------------- ----------------------------
1995 1996 % CHANGE 1996 1997 % CHANGE 1997 1998 % CHANGE
------- ------- -------- ------- ------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Monthly/per diem service
fees.................. $46,398 $48,888 5.4% $58,405 $62,679 7.3% $18,963 $20,114 6.1%
Home health/companion
services revenue...... 2,699 3,789 40.4% 6,437 9,006 39.9% 2,019 1,928 (4.5)%
------- ------- ------- ------- ------- -------
Resident and health
care revenues....... 49,097 52,677 7.3% 64,842 71,685 10.6% 20,982 22,042 5.0%
Community operating
expense............... 32,854 34,314 4.4% 41,695 45,770 9.8% 13,399 14,131 5.5%
------- ------- ------- ------- ------- -------
Resident income from
operations.......... $16,243 $18,363 13.1% $23,147 $25,915 12.0% $ 7,583 $ 7,911 4.3%
======= ======= ======= ======= ======= =======
Resident income from
operations
margin(1)........... 33.1% 34.9% 35.7% 36.2% 36.1% 35.9%
Lease expense........... -- -- -- -- 2,209 -- 528 559 5.9%
Depreciation and
amortization.......... 4,648 4,332 (6.8)% 5,329 4,220 (20.8)% 1,522 1,565 2.8%
------- ------- ------- ------- ------- -------
Income from
operations.......... $11,595 $14,031 21.0% $17,818 $19,486 9.4% $ 5,533 $ 5,787 4.6%
======= ======= ======= ======= ======= =======
OTHER DATA:
Number of communities... 8 8 10 10 12 12
Resident capacity....... 2,121 2,121 2,586 2,586 3,397 3,529
Average occupied units.. 1,744 1,775 2,183 2,209 2,812 2,859
Average occupancy
rate(2)............... 92% 94% 95% 96% 94% 94%
Average monthly revenue
per occupied
unit(3)............... $ 2,217 $ 2,295 3.5% $ 2,230 $ 2,365 6.1% $ 2,248 $ 2,345 4.3%
Average monthly expense
per occupied
unit(4)............... $ 1,465 $ 1,475 0.7% $ 1,399 $ 1,468 4.9% $ 1,394 $ 1,436 3.0%
</TABLE>
- ---------------
(1) "Resident income from operations margin" represents "Resident income from
operations" as a percentage of "Resident and health care revenue."
(2) "Average occupancy rate" is based on the ratio of occupied apartments to
available apartments expressed on a monthly basis for independent and
assisted living residences, and occupied beds to available beds on a per
diem basis for nursing beds.
(3) "Average monthly revenue per occupied unit" is total resident and health
care revenues, excluding home health care agency and companion services
fees, divided by total occupied apartments and nursing beds expressed on a
monthly basis.
(4) "Average monthly expense per occupied unit" is total community operating
expenses, excluding home health care agency and companion services expenses,
divided by total occupied apartments and nursing beds, expressed on a
monthly basis.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1997
Revenues Total revenues were $28.1 million for the three months ended
March 31, 1998 compared to $21.5 million for the three months ended March 31,
1997, representing an increase of $6.6 million, or 30.5%. Resident and health
care revenues increased by $5.4 million and management services and other
revenues increased by $1.2 million. Of the increase in resident and health care
revenues, $4.3 million, or 80.4%, was attributable to revenues derived from
senior living
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<PAGE> 39
communities, assisted living residences, and home health agencies acquired or
leased after March 31, 1997. The remaining $1.1 million, or 19.6%, of such
increase was attributable to Same Community growth. Management services and
other revenue increased as a percentage of total revenue to 6.0% from 2.5% and
includes development fees, which increased to $550,000 from $318,000 for the
three months ended March 31, 1998, as compared to the prior year.
Revenues attributable to Same Communities were $22.0 million for the three
months ended March 31, 1998, representing an increase of $1.1 million, or 5.0%,
over the same period in 1997. Monthly/per diem service fee revenue on a Same
Community basis increased $1.2 million, or 6.1%, over the three months ended
March 31, 1997. Of this increase, 4.4% was due primarily to increases in average
rates (including adjustments to Medicare rates) and 1.7% was due to higher
occupancy. Same Community average occupancy rates were 94% for the first quarter
of 1998 and 1997 including the dilutive effect in 1998 of the opening of a
127-unit expansion at an owned community.
Home health care agency and companion services fees on a Same Community
basis decreased by $91,000, or 4.5%, from the prior period as a result of
significant reductions in reimbursement rates for home health care agencies and
the elimination of certain qualifying services. The BBA included sweeping
changes to Medicare and Medicaid, significantly reducing rates of reimbursement
for home health agencies. The BBA includes disqualification of certain services
such as venipuncture resulting in reduced visit counts; enactment of, and
subsequent further reduction to, per beneficiary limits; and significant
reductions to other cost limits. The combination of these changes impacted the
Company's home health operations during the three months ended March 31, 1998.
In response to the negative effects of the BBA on certain of the Company's home
health care agencies, in July 1998, the Company suspended the operation of six
of its recently established home health care agencies pending either institution
of prospective pay or major revisions to the interim payment system now in
effect. Approximately 7.7% and 8.9% of the Company's revenues for the quarters
ended March 31, 1998 and 1997, respectively, were attributable to Medicare,
including Medicare-related private co-insurance.
Community Operating Expenses Community operating expenses increased to
$17.0 million for the three months ended March 31, 1998, as compared to $13.4
million for the three months ended March 31, 1997, representing an increase of
$3.6 million, or 27.0%. Of the increase in community operating expenses, $2.9
million, or 79.8%, was attributable to expenses from senior living communities,
assisted living residences, and home health agencies acquired or leased after
March 31, 1997. Approximately 20.2% of the increase was attributable to Same
Community operating expenses, which increased by $732,000 over the comparable
period of the prior year. Same Community operating expenses, exclusive of home
health care agency and companion services expenses, increased 4.7% for the three
months ended March 31, 1998, as compared to the comparable period in the prior
year. Community operating expense as a percentage of resident and health care
revenues increased to 64.5% for the three months ended March 31, 1998, from
63.9% for the three months ended March 31, 1997. Same Community operating
expense as a percentage of Same Community resident and health care revenues
increased to 64.1% for the three months ended March 31, 1998 from 63.9% in the
comparable period in the prior year. Same Community operating expenses exclusive
of home health agency and companion services expenses as a percentage of Same
Community revenues exclusive of home health and companion services revenue
decreased to 61.2% for the three months ended March 31, 1998 from 62.0% for the
comparable period in 1997, primarily as a result of a higher number of occupied
units.
Same Community resident income from operations, defined as resident and
health care revenue minus community operating expense, increased 4.3% to $7.9
million for the three months ended March 31, 1998 as compared to $7.6 million
for the same period of 1997. Same Community resident income from operations,
excluding home health and companion services, increased 8.3% to $7.8 million for
the three months ended March 31, 1998 as compared to $7.2 million for the three
months ended March 31, 1997.
S-39
<PAGE> 40
General and Administrative General and administrative expense increased to
$2.1 million for the three months ended March 31, 1998, as compared to $1.9
million for the three months ended March 31, 1997, representing an increase of
$167,000, or 8.9%. The increase was primarily related to increases in salaries
and benefits. General and administrative expense as a percentage of total
revenues decreased to 7.3% for the three months ended March 31, 1998, from 8.8%
for the comparable period in the previous year.
Lease Expense Lease expense increased to $1.7 million for the three months
ended March 31, 1998, from $528,000 for the three months ended March 31, 1997.
The increase of $1.2 million was primarily attributable to leases entered into
for an assisted living residence in May 1997 and a large senior living community
in October 1997. Same Community lease expense remained largely unchanged.
Depreciation and Amortization Depreciation and amortization expense
increased to $2.0 million for the three months ended March 31, 1998, from $1.6
million for the three months ended March 31, 1997, representing an increase of
$389,000, or 24.5%. The increase was primarily attributable to senior living
communities and assisted living residences acquired or leased after March 31,
1997. Same Community depreciation and amortization expense remained largely
unchanged.
Other Income (Expense) Interest expense increased to $3.6 million, net of
capitalized interest of $452,000, for the three months ended March 31, 1998,
from $3.3 million for the three months ended March 31, 1997, representing an
increase of $321,000, or 9.9%. The increase in interest expense was primarily
attributable to the issuance in 1997 of $138.0 million of the Company's
Convertible Debentures and additional indebtedness incurred in connection with
acquisitions made in 1997, partially offset by the early extinguishment of $65.1
million of fixed rate indebtedness at December 31, 1997. Interest expense, as a
percentage of total revenues, decreased to 12.7% for the three months ended
March 31, 1998 from 15.1% for the comparable period in the prior year. Interest
income increased to $627,000 in the three months ended March 31, 1998 from
$150,000 for the comparable period in the previous year, primarily due to income
generated from the investment of the net proceeds of the convertible debt
offering.
Income Tax Expense From inception through May 30, 1997, the Company was a
partnership and accordingly incurred no federal or state income tax liability. A
pro forma adjustment has been reflected to provide for income taxes as though
the Company had been subject to corporate income taxes for the three months
ended March 31, 1997.
Net Income As a result of the foregoing factors, the Company reported net
income of $1.5 million for the three months ended March 31, 1998. For the three
months ended March 31, 1997, the Company reported pro forma income of $594,000.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996
Revenues Total revenues were $94.2 million in 1997, compared to $75.6
million in 1996, representing an increase of $18.6 million, or 24.6%. Resident
and health care revenues increased by $18.3 million, and management services
revenues increased by $256,000 during the period. Of the increase in resident
and health care revenues, $11.5 million, or 62.7%, was attributable to revenues
derived from two senior living communities acquired in May 1996, and three
assisted living residences and two senior living communities acquired or leased
in 1997. The remaining $6.8 million, or 37.3%, of such increase was attributable
to Same Community growth.
Revenues attributable to Same Communities were $71.7 million in 1997,
representing an increase of $6.8 million, or 10.6%, over 1996. Home health care
agency and companion service fees on a same community basis increased by $2.5
million, or 39.9%, during the same period. Monthly/per diem service fee revenues
on a same community basis increased by $4.3 million, or 7.3%, over 1996. Of this
increase, approximately 6.1% was attributable to increases in average rates
S-40
<PAGE> 41
and 1.2% was attributable to increases in occupancy. Same Community average
occupancy rates increased to 96% for 1997 from 95% in 1996.
Community Operating Expense Community operating expense increased to $57.8
million in 1997, as compared to $47.0 million in 1996, representing an increase
of $10.8 million, or 23.2%. Of the increase in community operating expense, $6.7
million, or 62.5%, was attributable to expenses from acquired or leased senior
living communities and assisted living residences, and 37.5% of the increase was
attributable to Same Community operating expenses, which increased by $4.1
million, or 9.8%, over 1996. The increase in Same Community operating expenses
of $1.8 million was attributable to increases in home health care agency and
companion services expenses. Same Community operating expenses, exclusive of
home health care agency and companion services expenses, increased 6.1% for
1997, as compared to 1996. Community operating expense as a percentage of
resident and health care revenues decreased to 62.7% for 1997 from 63.6% for
1996. Same Community operating expenses as a percentage of Same Community
resident and health care revenues declined to 63.8% in 1997 from 64.3% in 1996.
Excluding home health care agencies and companion services expenses, Same
Community operating expenses decreased, as a percentage of Same Community
revenues, to 62.1% in 1997 from 62.8% in 1996, primarily as a result of higher
occupancy.
Same Community resident income from operations increased 12.0% to $25.9
million in 1997 compared to $23.1 million in 1996. Same Community resident
income from operations, excluding home health and companion services, increased
9.3% to $23.8 million in 1997 from $21.7 million in 1996.
General and Administrative General and administrative expense increased to
$8.1 million for the year ended December 31, 1997, as compared to $6.2 million
for 1996, representing an increase of $1.9 million, or 29.9%. Of this increase,
$821,000 was attributable to the growth of the Company's home health care
agencies and approximately $755,000 of the increase was related to increases in
salaries and benefits. The remaining increase of approximately $324,000 resulted
from continued investments in infrastructure necessary to support the Company's
growth. General and administrative expense as a percentage of total revenues
increased to 8.5% for 1997 from 8.2% for 1996.
Lease Expense The Company incurred lease expense of $3.4 million for the
year ended December 31, 1997, primarily as a result of the Sale-Leaseback
Transaction as well as new leases entered into for an assisted living residence
in May 1997 and a senior living community in October 1997. The Company did not
incur lease expense in 1996.
Depreciation and Amortization Depreciation and amortization expense
remained largely unchanged at $6.9 million in 1997. Reductions in depreciation
and amortization resulting from the Sale-Leaseback Transaction were largely
offset by increases relating to acquisitions. Same Community depreciation and
amortization expense decreased to $4.2 million for the year ended December 31,
1997, from $5.3 million for 1996, as a result of the Sale-Leaseback Transaction.
Other Income (Expense) Interest expense increased to $14.9 million in 1997
from $12.2 million in 1996, representing an increase of $2.7 million, or 22.2%.
The increase in interest expense was primarily attributable to the issuance in
1997 of $138.0 million of Convertible Debentures and additional indebtedness
incurred in connection with the acquisition of two senior living communities in
May 1996 and the acquisition of two assisted living residences in May 1997,
partially offset by the repayment of certain indebtedness in connection with the
Sale-Leaseback Transaction. Interest expense, as a percentage of total revenues,
decreased to 15.8% for 1997 from 16.1% in 1996. Interest income increased to
$2.7 million for 1997 from $434,000 for 1996, primarily as a result of income
generated during 1997 from the investment of net proceeds of the IPO and the
issuance of the Convertible Debentures.
Income Tax Expense Income tax expense in 1997 was $4.3 million (including
a $3.0 million one-time charge) as compared to income tax benefit of $920,000 in
1996. In May 1997, in
S-41
<PAGE> 42
connection with the IPO, the Company incurred 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 the corresponding recognition of a net deferred
income tax liability for the amount of the difference between the accounting and
tax bases of the Company's assets and liabilities. Excluding the effect of the
one-time tax charge, on a pro forma basis assuming the Company was a taxable
entity for all of 1997, income taxes would have been $2.1 million assuming the
Company's effective tax rate of 36%. A pro forma adjustment has been reflected
to provide for comparative income taxes as though the Company had been subject
to corporate income taxes in 1996.
Extraordinary Loss In December 1997, the Company recorded an extraordinary
loss of $6.3 million, net of taxes, related to costs associated with the
prepayment of $65.1 million of indebtedness. The 1997 amount expensed included
yield maintenance fees, the buy-out of the lender's participation interest in
two of the Company's communities, and the write-off of unamortized financing
costs. Primarily as a result of the extraordinary loss, the Company has a net
operating loss carryforward of approximately $10.9 million as of December 31,
1997. In 1996, the Company wrote off $2.3 million of unamortized financing costs
in connection with the refinancing of $62.1 million of mortgage financing.
Net Income As a result of the foregoing factors, the Company reported a
net loss of $4.8 million for 1997 as compared to net income of $3.2 million for
1996. Adjusting for the effect of the one-time income tax charge referenced
above, the Company reported pro forma income before extraordinary item for the
year ended December 31, 1997 of $3.8 million, or $0.35 diluted earnings per
share, compared to $3.0 million, or $0.31 diluted earnings per share, in 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995
Revenues Total revenues were $75.6 million in 1996 compared to $61.1
million in 1995, representing an increase of $14.5 million, or 23.7%. Resident
and health care revenues increased by $14.9 million, which was offset, in part,
by a decrease in management services revenues of $380,000. Of the increase in
resident and health care revenues, $11.3 million, or 75.9%, was attributable to
revenues derived from acquired senior living communities, with the remaining
$3.6 million, or 24.1%, of such increase attributable to Same Community growth.
During 1995 and 1996, the Company acquired four senior living communities that
the Company had previously managed, resulting in a decrease in management
services revenues in 1996 to $1.7 million, as compared to $2.1 million in 1995.
Revenues attributable to Same Communities were $52.7 million in 1996,
representing an increase of $3.6 million, or 7.3%, over 1995. Home health care
agency and companion services fees on a Same Community basis increased by $1.1
million, or 40.4%, over 1995. Monthly/per diem service fee revenue on a Same
Community basis increased $2.5 million, or 5.4%, over 1995. Of this increase,
3.3% was attributable to rate increases and 2.1% was attributable to higher
occupancy. Same Community average occupancy rates increased from 92% in 1995 to
94% in 1996. Same Community end of year occupancy rates increased from 93% in
1995 to 96% in 1996.
Community Operating Expense Community operating expense increased to $47.0
million in 1996, as compared to $38.8 million in 1995, representing an increase
of $8.2 million, or 21.1%. Of the increase in community operating expense, $6.7
million, or 82.0%, was attributable to expenses from acquired senior living
communities, and 18.0% of this increase was attributable to Same Community
operating expenses, which increased by $1.5 million, or 4.4%, over 1995. Of such
increase, $695,000 was attributable to increases in home health care agency and
companion services expenses. Same Community operating expense, exclusive of home
health care agency and companion services expenses, increased 2.5% in 1996 as
compared to 1995. Community operating expense as a percentage of resident and
health care revenues declined to 63.6% in 1996 from 65.7% in 1995. Same
Community operating expenses as a percentage of Same Community resident
S-42
<PAGE> 43
and health care revenues declined to 65.1% in 1996 from 66.9% in 1995, primarily
as a result of improved economies of scale resulting from higher occupancy.
Same Community resident income from operations increased 13.1% to $18.4
million in 1996 compared to $16.2 million in 1995. Same Community resident
income from operations, excluding home health and companion services, increased
10.9% to $17.5 million in 1996 from $15.8 million in 1995.
General and Administrative General and administrative expense increased to
$6.2 million in 1996, as compared to $4.6 million in 1995, representing an
increase of $1.6 million, or 36.1%. General and administrative expense as a
percentage of total revenues increased to 8.2% in 1996 from 7.5% in 1995. Of
this increase in general and administrative expense, $546,000 was directly
related to the creation of a new operating department by the Company in 1996 to
manage the Company's home health care agencies, which had previously been
managed by a third party. The remaining increase of approximately $1.1 million
resulted from continued investments in infrastructure necessary to support the
Company's growth, including costs related to personnel training, the expansion
of the development services department, the upgrade of management information
systems, and the centralization of the Company's accounting staff and functions.
Depreciation and Amortization Depreciation and amortization expense
increased to $6.9 million in 1996 from $5.7 million in 1995, representing an
increase of $1.2 million, or 22.0%. This increase was primarily the result of
depreciation associated with acquisitions and amortization of related financing
costs, offset in part by a decrease in amortization resulting from the write-off
of certain financing costs.
Other Income (Expense) Interest expense increased to $12.2 million in 1996
from $10.3 million in 1995, representing an increase of $1.9 million, or 18.1%.
The increase in interest expense was related to indebtedness incurred in
connection with the acquisition of senior living communities. Interest expense,
as a percentage of total revenues, declined to 16.1% in 1996 from 16.9% in 1995.
Interest income increased to $434,000 in 1996 from $378,000 in 1995. The Company
had other income of $788,000 in 1996, including a gain on the sale of assets of
$874,000, compared to other expense of $94,000 in 1995. The 1995 other expense
included: (i) $981,000 of nonrecurring expense related to the 1995 Roll-Up; (ii)
a gain on the sale of assets of $1.1 million; and (iii) other non-operating
expenses of $256,000.
Income Tax Expense (Benefit) At December 31, 1996, the Company had a net
operating loss carryforward of approximately $5.4 million. In 1996, the Company
recognized an income tax benefit of $920,000 because of the anticipated
utilization of such net operating loss carryforwards to offset taxable gains
related to the Sale-Leaseback Transaction. The provision for income taxes
reflects income tax expense of only one of the Predecessor Entities, because
ARCLP and the other Predecessor Entities were partnerships.
Extraordinary Loss In 1996, the Company wrote off $2.3 million of
financing costs in connection with the refinancing of $62.1 million of mortgage
financing.
Net Income As a result of the foregoing factors, net income increased to
$3.2 million ($5.5 million before extraordinary item) in 1996 from $2.0 million
in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its activities with private
placements of equity interests, the net proceeds from its IPO, the net proceeds
from the Convertible Debenture offering, long-term mortgage borrowing, and cash
flows from operations. At March 31, 1998, the Company had $239.8 million of
indebtedness outstanding, including $138.0 million of Convertible Debentures and
$77.0 million of indebtedness to GECC with fixed maturities ranging from
December 2001 to April 2028. As of March 31, 1998, approximately 95.2% of the
Company's indebtedness bore interest at fixed rates, with a weighted average
interest rate of 6.8%. The Company's variable rate indebtedness carried an
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average rate of 6.2% as of March 31, 1998. As of March 31, 1998, the Company had
working capital of $36.7 million.
Net cash provided by operating activities was $11.1 million for the year
ended December 31, 1997, as compared with $11.7 million and $9.0 million for the
years ended December 31, 1996 and 1995, respectively. Net cash used in operating
activities was $743,000 for the three months ended March 31, 1998, as compared
to $1.6 million provided by operating activities for the three months ended
March 31, 1997. The Company's unrestricted cash balance was $29.1 million as of
March 31, 1998, as compared to $44.6 million, $3.2 million and $3.8 million as
of December 31, 1997, 1996 and 1995, respectively, primarily as a result of the
remaining proceeds from the Convertible Debenture offering.
Net cash used by investing activities was $22.6 million for the year ended
December 31, 1997, as compared with $67.6 million and $11.0 million,
respectively, for the years ended December 31, 1996 and 1995. During the year
ended December 31, 1997, the Company acquired an aggregate of $17.5 million of
senior living assets, made capital expenditures, including construction
activity, in an aggregate amount of $29.3 million, and sold an aggregate of
$30.4 million of assets, primarily in connection with the Sale-Leaseback
Transaction. Net cash used in investing activities was $17.3 million for the
three months ended March 31, 1998, as compared with $24.0 million provided by
investing activities for the three months ended March 31, 1997. During the three
months ended March 31, 1998, the Company made additions to land, building and
equipment of $12.4 million, including construction activity, and purchased
assets limited as to use of $4.1 million.
Net cash provided by financing activities was $52.8 million for the year
ended December 31, 1997, as compared with $55.3 million and $2.9 million,
respectively, for the years ended December 31, 1996 and 1995. The Convertible
Debenture offering resulted in net proceeds of approximately $134.2 million
during the year ended December 31, 1997. Net proceeds from the IPO, after
repayment of the Reorganization Note, were approximately $23.1 million. In
December 1997, the Company prepaid $65.1 million of fixed rate indebtedness and
incurred costs of $9.5 million related to the prepayment and the repurchase of
the lender's participating interest in two of the Company's communities.
Additionally, during the year ended December 31, 1997, the Company repaid term
loans and made principal payments on its long-term debt of $34.7 million. During
1997, the Company incurred $14.3 million of new long-term debt in connection
with the acquisition of senior living communities during the year and
construction related activity. In 1997, the Company redeemed the remaining $5.2
million of preferred partnership interests in ARCLP, and made final cash
distributions to the limited and general partnership owners of ARCLP. Net cash
provided by financing activities was $2.5 million for the three months ended
March 31, 1998, as compared with $20.0 million used in financing activities for
the three months ended March 31, 1997. The Company had borrowings of $2.6
million and made principal payments on its long-term debt of $90,000 during the
three months ended March 31, 1998.
The Company maintains a $50.0 million revolving credit facility that is
available for acquisitions, a $5.0 million secured line of credit with a bank
that is available for land acquisitions, and a $4.0 million secured line of
credit with a bank that is available for working capital and to secure various
debt instruments, of which approximately $2.2 million had been used at March 31,
1998 to obtain letters of credit. No borrowings were outstanding under the $50.0
million revolving credit facility and the $5.0 million line of credit at March
31, 1998. Subsequent to March 31, 1998, the Company borrowed $15.0 million under
the $50.0 million revolving credit facility.
The $50.0 million revolving credit facility contains financial covenants
that require the Company to maintain certain prescribed debt service coverage,
liquidity, net worth, and capital expenditure reserve levels. All of the
Company's owned communities are subject to mortgages. Seven of the Company's
thirteen owned communities serve as blanket collateral for the indebtedness
payable to the capital corporation described above. Each of the Company's debt
agreements contains
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restrictive covenants that generally relate to the use, operation, and
disposition of the communities that serve as collateral for the subject
indebtedness, and prohibit the further encumbrance of such community or
communities without the consent of the applicable lender. Additionally,
substantially all of such indebtedness is cross-defaulted. The Company does not
believe such restrictions are material to its business because the Company does
not intend to further encumber its owned properties and does not believe the
covenants relating to the use, operation, and disposition of its communities
materially limit its operations.
The Company has entered into the REIT Facilities pursuant to which NHP and
NHI, at the Company's request and upon satisfaction of certain conditions, would
develop, construct, or acquire up to $110.0 million and $74.7 million,
respectively, of senior living communities and lease the communities to the
Company. Currently, the Company has been allocated $41.6 million and $4.7
million, under the REIT Facilities.
In early July 1998, the Company entered into a $36.0 million fixed rate
first mortgage secured by one of its senior living communities. The mortgage
bears interest at a rate of 6.87% and matures in July 2008.
In May 1998, the Company entered into an agreement to operate the Rossmoor
Regency, a retirement community located in Laguna Hills, California, with
capacity for approximately 210 residents. The transaction was structured as a
five-year operating lease (with five one-year renewal options) to the Company
from an unaffiliated special purpose entity that purchased the community as part
of the Rossmoor Transaction. The Company is obligated to make annual rental
payments of approximately $2.0 million and has made a security deposit of
approximately $4.6 million. In connection with the Rossmoor Transaction, the
Company made a subordinated loan to the owner of the community in the amount of
$440,000 and will receive interest income on such loan at 2.0% over LIBOR. The
lease is structured such that the payments are level throughout the term of the
lease, and the Company is entitled to depreciation deductions for tax purposes.
The Company also acquired an option to purchase the community at the expiration
of the lease term for a formula purchase price. In addition, the Company paid
$1.2 million in cash to acquire the rights to receive a portion of the entry-fee
turnover cash flow from an unrelated CCRC. See "The Company -- Recent
Transactions -- Rossmoor Transaction."
In June 1998, the Company entered into an agreement to operate Bahia Oaks
Lodge, an assisted living residence located in Sarasota, Florida, with capacity
for approximately 100 residents. The transaction was structured as a five-year
operating lease (with five one-year renewal options) to the Company from an
unaffiliated special purpose entity that purchased the community as part of the
Bahia Transaction. The Company is obligated to make annual rental payments of
approximately $700,000 and has made a security deposit of approximately $5.4
million. The lease is structured such that the payments are level throughout the
term of the lease, and the Company is entitled to depreciation deductions for
tax purposes. The Company also acquired an option to purchase the community at
the expiration of the lease term for a formula purchase price. See "The
Company -- Recent Transactions -- Bahia Transaction."
In July 1998, the Company consummated the FGI Transaction. The FGI
Transaction was accounted for as a purchase. The aggregate consideration paid by
the Company in the FGI Transaction was $32.6 million of cash and the 1,370,000
FGI Shares. The cash portion of the purchase price is subject to adjustment to
the extent that net working capital (as contractually defined) is less than or
greater than zero. At closing, the parties estimated that there was a $9.4
million deficit, resulting in an adjusted cash purchase price of $23.2 million.
In addition, the cash portion of the consideration will be increased by $1.0
million upon the satisfaction of certain post-closing conditions. Immediately
following consummation of the FGI Transaction, the Company repaid approximately
$11.7 million of indebtedness of FGI. As a result of the FGI Transaction, an
additional $55.5 million of long-term indebtedness (including current portion),
as well as an
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additional $50.2 million of refundable life estate purchase prices (including
current portion), are now reflected on the Company's balance sheet.
Pursuant to the FGI Transaction, the Company acquired three Lifecare CCRCs
and entered into agreements to manage four Lifecare CCRCs, with an aggregate
capacity for approximately 3,700 residents. The Company also entered into
development agreements relating to three Lifecare CCRCs, pursuant to which the
Company will receive aggregate fees of $3.0 million for its development
services. The Company paid a non-refundable deposit of $2.0 million to acquire
an option to purchase the Freedom Village Brandywine community for a purchase
price of $14.0 million, plus the assumption of certain specified liabilities,
and paid a fully-refundable deposit of $2.0 million to acquire a right of first
refusal for the Sarasota Bay Club and an option to purchase the Community for a
to be negotiated price. The Company will receive a credit against the purchase
prices in the amount of its deposits if the Company exercises its purchase
options. In connection with the execution of the management agreement for the
Freedom Village Brandywine community, the Company assumed FGI's guaranty of
approximately $42.1 million of mortgage debt relating to the Freedom Village
Brandywine construction loan. The Company also paid fees of $300,000 and $1.2
million to the owners of Freedom Plaza Arizona and Freedom Square, respectively,
in connection with the execution of long-term management agreements with respect
to such communities, and assumed FGI's guaranties relating to an aggregate of
$31.4 million of mortgage debt relating to such communities. See "The
Company -- Recent Transactions."
The aggregate estimated cost to complete and lease-up the 36 communities
currently under development by the Company is approximately $440.0 million to
$465.0 million. In addition, the Company is expanding or is planning to commence
expansions at seven of its communities, which are expected to cost approximately
$55.0 million to complete and lease-up.
The Company expects that the net proceeds from the Offering, its current
cash, together with cash flow from operations, the REIT Facilities, and
borrowings available to it under other existing credit arrangements, will be
sufficient to meet its operating requirements and to fund its anticipated growth
for at least the next 12 to 18 months. The Company expects to use a wide variety
of financing sources to fund its future growth, including public and private
debt and equity, conventional mortgage financing, and unsecured bank financing,
among other sources. There can be no assurance that financing from such sources
will be available in the future or, if available, that such financing will be
available on terms acceptable to the Company.
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 is being funded through
operating cash flows and expensed as incurred.
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company.
Inflation could, however, affect the Company's future revenues and results of
operations because of, among other things, the Company's dependence on senior
residents, many of whom rely primarily on fixed incomes to pay for the Company's
services. As a result, during inflationary periods, the Company may not be able
to increase resident service fees to account fully for increased operating
expenses. In structuring its fees, the Company attempts to anticipate inflation
levels, but there can be no assurance that the Company will be able to
anticipate fully or otherwise respond to any future inflationary pressures.
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BUSINESS
OVERVIEW AND HISTORY
The Company is a national senior living and health care services provider
offering a broad range of care and services to seniors, including independent
living, assisted living, skilled nursing, and home health care services.
Established in 1978, the Company currently operates 35 senior living communities
in 14 states, consisting of 17 owned communities, six leased communities, and 12
managed communities, with an aggregate capacity for approximately 11,400
residents. The Company also operates seven home health care agencies, including
two agencies managed for third parties. At March 31, 1998, the Company's owned
communities had a stabilized occupancy rate of 93%, its leased communities had a
stabilized occupancy rate of 93%, and its managed communities had a stabilized
occupancy rate of 96%. Approximately 89.4% and 92.3% of the Company's total
revenues for the year ended December 31, 1997 and the three months ended March
31, 1998, respectively, were derived from private pay sources.
Since 1992, the Company has experienced significant growth, primarily
through the acquisition of senior living communities. The Company's revenues
have grown from $17.8 million in 1992 to $94.2 million in 1997, an annual growth
rate of 40%. During the same period, the Company's income from operations has
grown from $2.3 million to $18.1 million, an annual growth rate of 51%. The
Company intends to continue its growth by establishing senior living networks
throughout the United States through a combination of (i) selective acquisitions
of senior living communities, including CCRCs and assisted living residences;
(ii) development of senior living communities, including special living units
and programs for residents with Alzheimer's and other forms of dementia; (iii)
expansion of existing communities; and (iv) selective development and
acquisition of properties and businesses that are complementary to the Company's
operations and growth strategy. Pursuant to its growth strategy, the Company has
recently completed the Rossmoor Transaction, the Bahia Transaction, and the FGI
Transaction, which added three owned, two leased, and four managed communities
with an aggregate capacity for approximately 4,000 residents. See "The
Company -- Recent Transactions." In addition, the Company is currently
developing 36 communities, with an estimated aggregate capacity for
approximately 4,000 residents, and is expanding or is planning to commence
expansions at seven of its existing communities to add capacity to accommodate a
total of approximately 560 additional residents.
The Company's operating philosophy was inspired by the vision of its
founders, Dr. Thomas F. Frist, Sr. and Jack C. Massey, to enhance the lives of
the elderly by providing the highest quality of care and services in
well-operated communities designed to improve and protect the quality of life,
independence, personal freedom, privacy, spirit, and dignity of its residents.
The Company believes that its senior management, led by W.E. Sheriff, its
Chairman and Chief Executive Officer, and Christopher J. Coates, its President
and Chief Operating Officer, is one of the most experienced management teams in
the senior living industry. The Company's ten senior officers have been employed
by the Company for an average of 15 years and have an average of 16 years of
industry experience. The executive directors of the Company's communities have
been employed by the Company for an average of four years and have an average of
11 years of experience in the senior living industry.
GROWTH STRATEGY
The Company believes that the fragmented nature of the senior living
industry and the limited capital resources available to many small, private
operators provide a unique opportunity for the Company to expand its existing
base of senior living operations. The Company believes that its existing senior
living communities serve as the foundation on which the Company can build senior
living networks in targeted geographic markets. The development of a senior
living network involves the clustering of assisted living residences and other
senior living communities within a particular geographic service area,
complemented by one or more of the Company's home health care
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agencies, thereby providing residents with a broad range of high quality care in
a cost-efficient manner. The following are the principal elements of the
Company's growth strategy:
Pursue Strategic Acquisitions
The Company intends to continue to pursue single or portfolio acquisitions
of assisted living residences and other senior living and long-term care
communities. Through strategic acquisitions, the Company plans to enter new
markets or acquire communities in existing markets as a means to increase market
share, augment existing clusters, strengthen its ability to provide a broad
range of care, and create operating efficiencies. The Company believes that the
current fragmentation of the industry, combined with the Company's financial
resources and extensive contacts within the industry, should provide it with the
opportunity to consider a number of potential acquisition opportunities.
Pursuant to the Company's growth strategy, the Company has recently consummated
the Bahia Transaction, which added capacity for approximately 100 residents, the
Rossmoor Transaction, which added capacity for approximately 210 residents, and
the FGI Transaction, which added capacity for approximately 3,700 residents
(plus capacity for approximately 640 additional residents under development and
expansion). See "The Company -- Recent Transactions."
Develop New Senior Living Communities
The Company has implemented an aggressive growth plan to expand through the
development and construction of new senior living communities, including special
living units and programs for residents with Alzheimer's and other forms of
dementia. The Company intends to develop and market a significant number of its
newly developed assisted living residences under the tradename "Homewood
Residence." See "-- Trademarks." The Company's primary strategy is to develop a
cluster of communities within a particular geographic service area and thereby
achieve regional density. In this regard, the Company believes that its existing
senior living communities and its extensive knowledge of the local markets in
which the Company operates provide the Company with a strong platform from which
to expand its operations. In addition, the Company believes that through
clustering its communities it can maximize operational, marketing, and
management efficiencies while achieving economies of scale. The Company believes
that regional density also provides strengthened local presence, community
familiarity, and reputation, and will enhance the Company's opportunities in the
evolving managed care environment. The Company currently is developing 36 senior
living communities, with an estimated aggregate capacity for approximately 4,000
residents. See "Business -- Development Activities."
The Company follows a disciplined development strategy that includes the
following sequential components: (i) a market demographic analysis is conducted
by the Company to assess and confirm the relative strength of a potential
market; (ii) cohesive neighborhoods and submarkets are identified within the
market; (iii) within each neighborhood and submarket, competitive projects are
identified and assessed as to their market niche, program of services and
pricing, physical condition, and likely financial condition; (iv) based on the
prior three steps, a determination is then made as to whether to participate in
the market by acquisition or development; (v) if the Company elects to develop
within the market, the Company then determines which submarkets to serve,
selects a specific design type for each submarket and determines the number of
senior living units and dementia care units to develop; and (vi) specific sites
are analyzed, whereby the Company considers a number of factors including site
visibility, location within a submarket, the specific neighborhoods which can be
served from the site, probability of achieving zoning approvals and the
proximity of the site to the Company's other senior living communities.
Architectural design and hands-on construction functions are usually performed
by outside architects and contractors with whom the Company has an historical
relationship. The Company expects that the average construction time for a
typical senior living community will be approximately 10 to 12 months. Once
construction is completed, the Company estimates that it will take approximately
12 months on average for the senior living community to achieve a stabilized
level of occupancy.
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The Company's senior management and development staff have extensive
experience in the development of senior living communities, real estate
acquisition, engineering, general construction, and project management. The
Company's development team has the demonstrated ability to target potential
markets, perform appropriate market and demographic studies, identify zoning and
development issues, and determine the appropriate size and configuration of
communities to be developed.
Expand Existing Facilities
The Company plans to expand certain of its existing communities to include
additional assisted living residences (including special programs and living
units for residents with Alzheimer's and other forms of dementia), and skilled
nursing beds. The Company currently has two expansion projects under
construction (including one managed community) and five expansion projects under
development, representing an aggregate increase in capacity to accommodate
approximately 560 additional residents. The expansion of existing senior living
communities allows the Company to create operating efficiencies and capitalize
on its local presence, community familiarity, and reputation in markets in which
the Company currently operates. In reviewing acquisition opportunities, the
Company will consider, among other things, geographic location, competitive
climate, reputation and quality of management and residences, and the need for
renovation or improvement of the residences.
Expand Referral Networks and Strategic Alliances
The Company intends to continue to develop relationships (which, in certain
instances, may involve strategic alliances or joint ventures) with local and
regional hospital systems, managed care organizations, and other referral
sources to attract new residents to the Company's communities. The Company
believes that such arrangements or alliances, which could range from joint
marketing arrangements to priority transfer agreements, will enable it to be
strategically positioned within the Company's markets if, as the Company
believes, senior living programs become an integral part of the evolving health
care delivery system.
Pursue Additional Third-Party Management Opportunities
Although the Company intends to focus its efforts primarily on development
and acquisition activities, it may in certain instances pursue third-party
management opportunities as a means to enter new markets or expand its presence,
market knowledge, and influence in a targeted market. The Company currently
manages 12 communities with an aggregate capacity for approximately 4,400
residents pursuant to management contracts. Furthermore, the Company intends to
continue its consulting and contract activities on a selective basis, including
entering into agreements whereby the Company will provide development services
for third parties that will generally include a management contract and an
option to purchase the subject community, and may include the Company taking a
minority ownership interest in the community.
OPERATING STRATEGY
The Company's operating strategy is to provide high quality health care
services to its residents while achieving and sustaining a strong competitive
position within its chosen markets, as well as to continue to enhance the
performance of its operations.
Continue to Provide A Broad Range of High-Quality Personalized Care
Central to the Company's operating strategy is its focus on providing
high-quality care and services that are personalized and tailored to meet the
individual needs of each community resident. The Company's residences and
services are designed to provide a broad range of care that permits residents to
"age in place" as their needs change and as they develop further physical or
cognitive frailties. The FGI Communities are Lifecare CCRCs that offer residents
a limited lifecare benefit
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(typically either a certain number of free days in the community's health center
during the resident's lifetime or a discounted rate for such services) that
varies based upon the degree of refundability of the entrance fee. The FGI
Communities also guarantee residents an independent living unit and nursing care
at the FGI Community during their lifetime, regardless of whether the resident
has the financial resources to satisfy his obligations to the community. These
lifecare benefits and care-for-life programs appeal to seniors who desire
assurance that they will not "outlive their assets." By creating an environment
that maximizes resident autonomy and provides individualized service programs,
the Company seeks to attract seniors at an earlier stage, before they need the
higher level of care provided in a skilled nursing facility. The Company also
maintains a comprehensive quality assurance program designed to ensure the
satisfaction of its residents and their family members.
Offer Services Across a Range of Pricing Options
The Company is continually expanding its range of personal, health care,
and support services to meet the evolving needs of its residents. The Company
has developed several different care plans and residence designs which may, in
each instance, be customized to serve the upper income and moderate income
markets of a particular targeted geographic area. By offering a range of pricing
options that are customized for each target market, the Company believes it can
develop synergies, economies of scale, and operating efficiencies in its efforts
to serve a larger percentage of the elderly population within a particular
geographic market.
Maintain and Improve Occupancy Rates
The Company also seeks to maintain and improve occupancy rates by (i)
retaining residents as they "age in place" by emphasizing quality and breadth of
care and service; (ii) attracting new residents through marketing programs
directed towards family decision makers, namely adult children, and prospective
residents; and (iii) actively seeking referrals from hospitals, rehabilitation
hospitals, physicians' clinics, home health care agencies, and other acute and
sub-acute health care providers in the markets served by the Company.
Improve Operating Efficiencies
The Company will seek to improve operating efficiencies at its communities
by continuing to actively monitor and manage operating costs. By concentrating
residences within selected geographic regions, the Company believes it will be
able to achieve operating efficiencies through economies of scale and reduced
corporate overhead, and provide more effective management supervision and
financial controls.
Emphasize Employee Training
The Company devotes special attention to the hiring, screening, training,
and supervising of its employees and caregivers to ensure that quality standards
are achieved. In 1995, the Company, together with Dr. Frist, founded The Frist
Center at Belmont University in Nashville, Tennessee. The Frist Center is a
non-profit foundation providing training, education, and career services for
management and front line personnel involved in the senior living and health
care services industry. The Company works closely with The Frist Center and the
Company's employees actively participate in the training programs, seminars, and
classes sponsored by The Frist Center. In addition, professional training
programs designed to be delivered on-site by The Frist Center staff have been
and are being developed by the Company and The Frist Center. The Company
believes its commitment to and emphasis on employee training differentiates the
Company from many of its competitors.
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CARE AND SERVICES PROGRAMS
The Company provides a wide array of senior living and health care services
to the elderly at its communities, including independent living, assisted living
(with special programs and living units for residents with Alzheimer's and other
forms of dementia), skilled nursing, and home health care services. By offering
a variety of services and involving the active participation of the resident and
the resident's family and medical consultants, the Company is able to customize
its service plan to meet the specific needs and desires of each resident. As a
result, the Company believes that it is able to maximize customer satisfaction
and avoid the high cost of delivering all services to every resident without
regard to need, preference, or choice.
Independent Living Services
The Company provides independent living services to seniors who do not yet
need assistance or support with the activities of daily life ("ADLs"), but who
prefer the physical and psychological comfort of a residential community that
offers health care and other services. The Company currently owns 15
communities, leases five communities, and manages an additional ten communities
that provide independent living services, with an aggregate capacity for 3,880
residents, 1,494 residents, and 2,903 residents, respectively.
Independent living services provided by the Company include daily meals,
transportation, social and recreational activities, laundry, housekeeping,
security, and health care monitoring. The Company also fosters the wellness of
its residents by offering health screenings such as blood pressure checks,
periodic special services such as influenza inoculations, chronic disease
management (such as diabetes with its attendant blood glucose monitoring),
dietary and similar programs, as well as ongoing exercise and fitness classes.
Classes are given by health care professionals to keep residents informed about
health and disease management. Subject to applicable government regulation,
personal care and medical services are available to independent living residents
through either community staff or through the Company's or independent home
health care agencies. The Company's independent living residents pay a fee
ranging from $565 to $4,540 per month, in general depending on the specific
community, program of services, size of the units, and amenities offered. The
Company's contracts with its independent living residents are generally for a
term of one year and are terminable by the resident upon 60 days' notice.
Assisted Living and Memory Impaired Services
The Company offers a wide range of assisted living care and services 24
hours per day, including personal care services, support services, and
supplemental services, at 16 of its owned communities, five of its leased
communities, and ten of its managed communities with an aggregate capacity for
678, 412, and 638 residents, respectively. The residents of the Company's
assisted living residences generally need help with some or all ADLs, but do not
require the more acute medical care traditionally given in nursing homes. Upon
admission to the Company's assisted living residences, and in consultation with
the resident and the resident's family and medical consultants, each resident is
assessed to determine his or her health status, including functional abilities,
and need for personal care services, and completes a lifestyles assessment to
determine the resident's preferences. From these assessments, a care plan is
developed for each resident to ensure that all staff members who render care
meet the specific needs and preferences of each resident where possible. Each
resident's care plan is reviewed periodically to determine when a change in care
is needed.
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The Company has adopted a philosophy of assisted living care that allows a
resident to maintain a dignified independent lifestyle. Residents and their
families are encouraged to be partners in their care and to take as much
responsibility for their well being as possible. The basic type of assisted
living services offered by the Company include the following:
Personal Care Services. These services include assistance with ADLs
such as ambulation, bathing, dressing, eating, grooming, personal hygiene,
monitoring or assistance with medications, and confusion management.
Support Services. These services include meals, assistance with
social and recreational activities, laundry services, general housekeeping,
maintenance services, and transportation services.
Supplemental Services. These services include extra transportation
services, personal maintenance, extra laundry services, non-routine care
services, and special care services, such as services for residents with
Alzheimer's and other forms of dementia. Certain of these services require
an extra charge in addition to the pricing levels described below.
In pricing its services, the Company has developed the following three
levels or tiers of assisted living care:
- Level I typically provides for minimum levels of care and service, for
which the Company generally charges a monthly fee per resident ranging
from $1,650 to $3,070 depending upon apartment size and the project
design type. Typically, Level I residents need minimal assistance with
ADLs.
- Level II provides for relatively higher levels and increased frequency of
care, for which the Company generally charges a monthly fee per resident
ranging from $1,850 to $3,380, depending upon the apartment size and the
project design type. Typically, Level II residents require moderate
assistance with ADLs and may need additional personal care, support, and
supplemental services.
- Level III provides for the highest level of care and service, for which
the Company generally charges a monthly fee per resident ranging from
$2,250 to $4,390, depending upon the apartment size and the project
design type. Typically, Level III residents are either very frail or
impaired and utilize many of the Company's services on a regular basis.
The Company maintains programs and special units at its assisted living
residences for residents with Alzheimer's and other forms of dementia, which
provide the attention, care, and services needed to help those residents
maintain a higher quality of life. Specialized services include assistance with
ADLs, behavior management, and a lifeskills based activities program, the goal
of which is to provide a normalized environment that supports residents'
remaining functional abilities. Whenever possible, residents assist with meals,
laundry, and housekeeping. Special units for residents with Alzheimer's and
other forms of dementia are located in a separate area of the community and have
their own dining facilities, resident lounge areas, and specially trained staff.
The special care areas are designed to allow residents the freedom to ambulate
as they wish while keeping them safely contained within a secure area with a
minimum of disruption to other residents. Special nutritional programs are used
to help ensure caloric intake is maintained in residents whose constant movement
increases their caloric expenditure. Resident fees for these special units are
dependent on the size of the unit, the design type, and the level of services
provided.
Skilled Nursing and Sub-Acute Services
The Company provides traditional skilled nursing services in six
communities owned by the Company, one community leased by the Company, and nine
communities managed by the Company, with an aggregate capacity for 429 residents
at the Company's owned communities, 114 residents at the Company's leased
community, and 897 residents at the Company's managed
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<PAGE> 53
communities. In addition, the Company has communities under development or
expansion that will add estimated additional capacity of 238 skilled nursing
beds. In its skilled nursing facilities, the Company provides traditional
long-term care through 24-hour a day skilled nursing care by registered nurses,
licensed practical nurses, and certified nursing aides. The Company also offers
a range of sub-acute care services in certain of its communities. Sub-acute care
is generally short-term, goal-oriented rehabilitation care intended for
individuals who have a specific illness, injury or disease, but who do not
require many of the services provided in an acute care hospital. Sub-acute care
is typically rendered immediately after, or in lieu of, acute hospitalization in
order to treat such specific medical conditions.
Lifecare
Three communities currently owned and seven communities currently managed
by the Company are Lifecare CCRCs. Residents of such communities pay an upfront
entrance fee upon occupancy (which generally is partially refundable), and a
monthly service fee while living in the community. Residents are generally
entitled to a limited lifecare benefit (typically either a certain number of
free days in the community's health center during the resident's lifetime or a
discounted rate for such services). The lifecare benefit varies based upon the
extent to which the resident's entrance fee is refundable. The pricing of
entrance fees, refundability provisions, monthly service fees, and the lifecare
benefits are determined from actuarial projections of the expected morbidity and
mortality of the resident population.
Certain of these communities also guarantee residents an independent living
unit and nursing care at the community during their lifetime even if the
resident does not have the financial resources to satisfy his or her payment
obligations to the community. In addition, in the event a resident requires
nursing care and there is not available capacity at the nursing facility at the
community in which the resident lives, the community must contract with a third
party to provide such care.
Home Health Care
The Company provides home health care services to residents at certain of
its senior living communities and the surrounding areas through home health care
agencies based at or near certain of its existing senior living communities and
manages home health care agencies owned by third parties. The services and
products that the Company provides through its home health care agencies include
(i) general and specialty nursing services to individuals with acute illnesses,
long-term chronic health conditions, permanent disabilities, terminal illnesses
or post-procedural needs; (ii) therapy services consisting of, among other
things, physical, occupational, speech, and medical social services; (iii)
personal care services and assistance with ADLs; (iv) hospice care for persons
in the final phases of incurable disease; (v) respiratory, monitoring, medical
equipment services, and medical supplies to patients; and (vi) a comprehensive
range of home infusion and enteral therapies. In addition, the Company will make
available to residents certain physician, dentistry, podiatry, and other health
related services that will be offered by third-party providers. The Company may
elect to provide these services directly or through participation in managed
care networks or in joint ventures with other providers. Pending either
institution of prospective pay, currently scheduled for October 1999, or major
revisions to the interim payment system now in effect, the Company has suspended
the operation of six of its prestabilized home health agencies. The Company
currently operates seven agencies, including two agencies managed for third
parties.
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<PAGE> 54
OPERATING COMMUNITIES
The table below sets forth certain information with respect to the senior
living communities currently operated by the Company. For the three months ended
March 31, 1998, the Company's owned communities had a stabilized average
occupancy rate of 95%, its leased communities had a stabilized average occupancy
rate of 94%, and its managed communities had a stabilized average occupancy rate
of 96%. At the date of the respective acquisitions by the Company, Rossmoor
Regency had an occupancy rate of 93%, Bahia Oaks Lodge had an occupancy rate of
95%, and the FGI Communities had a stabilized occupancy rate of 94%.
<TABLE>
<CAPTION>
RESIDENT CAPACITY(1) COMMENCEMENT
------------------------------ OF
COMMUNITY LOCATION IL AL SN TOTAL OPERATIONS(2)
- --------- -------- ----- ----- ----- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
OWNED(3):
Broadway Plaza................................. Ft. Worth, TX 252 40 122 414 Apr-92
Carriage Club of Charlotte..................... Charlotte, NC 355 54 50 459 May-96
Carriage Club of Jacksonville.................. Jacksonville, FL 292 60 -- 352 May-96
Freedom Plaza(4)............................... Sun City Center, FL 521 28 42 591 Jul-98
The Hampton at Post Oak........................ Houston, TX 162 21 -- 183 Oct-94
Heritage Club.................................. Denver, CO 220 35 -- 255 Feb-95
Freedom Village of Holland(4).................. Holland, MI 450 35 84 569 Jul-98
Lake Seminole Square(4)........................ Seminole, FL 395 35 -- 430 Jul-98
Parkplace...................................... Denver, CO 195 48 -- 243 Oct-94
Homewood Residence at Corpus Christi........... Corpus Christi, TX 60 30 -- 90 May-97
The Village of Homewood(5)..................... Lady Lake, FL -- 55 -- 55 Apr-98
Richmond Place................................. Lexington, KY 206 4 -- 210 Apr-95
Santa Catalina Villas.......................... Tucson, AZ 217 85 42 344 Jun-94
The Summit at Westlake Hills................... Austin, TX 167 30 89 286 Apr-92
Homewood Residence at Tarpon Springs........... Tarpon Springs, FL -- 64 -- 64 Aug-97
Westlake Village............................... Cleveland, OH 246 54 -- 300 Oct-94
Wilora Lake Lodge.............................. Charlotte, NC 142 -- -- 142 Dec-97
----- ----- ----- ------
Subtotal................................... 3,880 678 429 4,987
LEASED:
Bahia Oaks(6).................................. Sarasota, FL -- 100 -- 100 Jun-98
Holley Court Terrace(7)........................ Oak Park, IL 179 17 -- 196 Jul-93
Homewood Residence at Victoria(8).............. Victoria, TX 60 30 -- 90 May-97
Imperial Plaza(9).............................. Richmond, VA 850 152 -- 1,002 Oct-97
Rossmoor Regency(10)........................... Laguna Hills, CA 210 -- -- 210 May-98
Trinity Towers(7).............................. Corpus Christi, TX 195 113 114 422 Jan-90
----- ----- ----- ------
Subtotal................................... 1,494 412 114 2,020
MANAGED(11):
Burcham Hills.................................. East Lansing, MI 138 71 133 342 Nov-78
Freedom Plaza(12).............................. Peoria, AZ 455 78 128 661 Jul-98
Freedom Square(13)............................. Seminole, FL 497 123 240 860 Jul-98
Freedom Village at Brandywine(14).............. Glenmore, PA 292 45 53 390 Jul-98
Homewood Residence at Pearland-South Belt...... Pearland, TX 15 67 -- 82 Jul-98
Glenview at Pelican Bay(15).................... Naples, FL 153 -- 35 188 Jul-98
Homewood Residence at West Cobb(16)............ Marietta, GA -- 60 -- 60 Apr-98
Meadowood...................................... Worcester, PA 355 51 59 465 Oct-89
Parklane West.................................. San Antonio, TX -- 17 124 141 Oct-94
Reeds Landing.................................. Springfield, MA 148 54 40 242 Aug-95
USAA Towers.................................... San Antonio, TX 505 -- -- 505 Oct-94
Williamsburg Landing........................... Williamsburg, VA 345 72 85 502 Sept-85
----- ----- ----- ------
Subtotal................................... 2,903 638 897 4,438
----- ----- ----- ------
Total...................................... 8,277 1,728 1,440 11,445
===== ===== ===== ======
</TABLE>
- ---------------
(1) Independent living residences (IL), assisted living residences (including
areas dedicated to residents with Alzheimer's and other forms of dementia)
(AL), and skilled nursing beds (SN).
(2) Indicates the date on which the Company acquired each of its owned and
leased communities, or commenced operating its managed communities. The
Company operated certain of its communities pursuant to management
agreements prior to acquiring the communities. The Company operated the
following communities pursuant to management agreements for the period
indicated prior to the acquisition of such communities by the Company:
Carriage Club of Charlotte -- July 1988 to May 1996; Carriage Club of
Jacksonville -- January 1990 to May 1996; Heritage Club -- April 1988 to
February 1995; Holley Court Terrace -- April 1992 to July 1993; Richmond
Place --
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October 1983 to April 1995; Santa Catalina Villas -- November 1991 to June
1994; and Trinity Towers -- November 1986 to November 1990.
(3) Each of the Company's owned communities is subject to a mortgage lien. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(4) Acquired in the FGI Transaction. See "The Company -- Recent
Transactions -- FGI Transaction."
(5) Owned by a joint venture in which the Company owns a 50% interest.
(6) Leased to the Company pursuant to a five-year operating lease (with five
one-year renewal options) from an unaffiliated special purpose entity that
acquired the community in connection with the Bahia Transaction. Prior to
the Bahia Transaction, Bahia Oaks Lodge was owned by a general partnership,
of which Robert G. Roskamp is a partner. The Company is obligated to make
annual rental payments of approximately $700,000 and an interest bearing
security deposit of approximately $5.4 million. The Company also acquired
an option to purchase the community at the expiration of the lease term for
a formula purchase price equal to the unamortized mortgage balance at the
time of the exercise of such option. See "The Company -- Recent
Transactions -- Bahia Transaction" and "Management -- Future Board
Expansion."
(7) Leased to the Company pursuant to an operating lease with an initial term
of ten years expiring December 31, 2006, with renewal options for up to
three additional ten year terms, provided that both leases are extended
concurrently. The Company pays contractually fixed rent, plus additional
rent, subject to certain limits, based upon the gross revenues of the
community. Without the lessor's consent, the Company may not operate any
other type of senior care facility within three miles of either of the
premises during the term of the leases and for one year thereafter.
(8) Leased to the Company pursuant to an operating lease expiring in July 2011,
with renewal options for up to two additional ten year terms. The Company
pays contractually fixed rent, plus additional rent, subject to certain
limits, based upon the gross revenues of the community. Without the
lessor's consent, the Company may not operate any other type of senior care
facility within the county in which the community is located during the
term of the lease and for two years thereafter.
(9) Leased to the Company pursuant to an operating lease with an initial term
of 20 years expiring October 23, 2017, with a renewal option for one
additional seven year term. The Company pays contractually fixed rent, plus
the Company is required to maintain a capital reserve account with payments
of approximately $300,000 annually.
(10) Leased to the Company pursuant to a five-year operating lease expiring May
2008, with renewal options for up to five additional one-year terms, from
an unaffiliated special purpose entity that acquired the community in
connection with the Rossmoor Transaction. The Company is obligated to make
annual rental payments of approximately $2.0 million and has made a
security deposit of approximately $4.6 million. In connection with the
Rossmoor Transaction, the Company made a subordinated loan to the special
purpose entity in the amount of $440,000 and will receive interest income
on such loan at 2.0% over LIBOR. The Company also acquired an option to
purchase the community at the expiration of the lease term for a formula
purchase price equal to the unamortized mortgage balance at the time of the
exercise of such option. See "The Company -- Recent
Transactions -- Rossmoor Regency."
(11) Except as noted below, the Company's management agreements are generally
for terms of three to five years, but may be canceled by the owner of the
community, without cause, on three to six months' notice. Pursuant to the
management agreements, the Company is generally responsible for providing
management personnel, marketing, nursing, resident care and dietary
services, accounting and data processing reports, and other services for
these communities at the owner's expense and receives a monthly fee for its
services based either on a contractually fixed amount or a percentage of
revenues or income. Certain management agreements also provide the Company
with an incentive fee based on various performance goals. The Company's
existing management agreements expire at various times through June 2002.
Except as noted below, the communities managed by the Company are not owned
by an affiliate of the Company.
(12) Operated pursuant to a management agreement with a 20-year term, with two
renewal options for additional ten-year terms, that provides for a
management fee equal to all revenue of the community in excess of operating
expenses, refunds of entry fees, capital expenditure reserves, debt
service, and certain payments to the community's owner, an entity
affiliated with Mr. Roskamp. See "The Company -- Recent Transactions -- FGI
Transaction."
(13) Operated pursuant to a management agreement with a 20-year term, with two
renewal options for additional ten-year terms, which provides for a
management fee equal to all revenue of the community in excess of operating
expenses, refunds of entry fees, capital expenditure reserves, debt
service, and certain payments to the community's owners, Mr. Roskamp and an
entity affiliated with Mr. Roskamp. The Company has an option to purchase
the Freedom Square community at a predetermined price. See "The
Company -- Recent Transactions -- FGI Transaction."
(14) Operated pursuant to a management agreement with a three-year term that
provides for a management fee equal to a fixed percentage of the
community's gross revenues. The company has an option to purchase the
community for a predetermined price. The community is owned by an entity
affiliated with Mr. Roskamp. See "The Company -- Recent Transactions -- FGI
Transaction" and "Management -- Recent Board Expansion."
(15) Operated pursuant to a management agreement that expires in January 1999.
See "The Company -- Recent and Pending Transactions -- FGI Transaction."
(16) The community is owned by an affiliate of John A. Morris, Jr., MD, a
director of the Company. The Company has an option to purchase the
community for a predetermined price.
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<PAGE> 56
DEVELOPMENT ACTIVITIES
The table below summarizes information regarding the expansion of certain
of the Company's senior living communities and the communities currently under
development.
<TABLE>
<CAPTION>
ADDITIONAL
RESIDENT CAPACITY
SCHEDULED -------------------------
COMMUNITIES OPENING IL AL SN TOTAL STATUS(1)
- ----------- --------- --- ----- --- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
EXPANSION PROJECTS:
Carriage Club of Charlotte, Charlotte, NC................... 7/99 -- 30 -- 30 Development
Richmond Place, Lexington, KY............................... 7/99 -- 73 -- 73 Construction
Wilora Lake Lodge, Charlotte, NC............................ 7/99 -- 44 -- 44 Development
The Hampton at Post Oak, Houston, TX........................ 10/99 -- 18 38 56 Construction
Imperial Plaza, Richmond, VA................................ 5/00 -- 34 -- 34 Development
The Summit at Westlake Hills, Austin, TX.................... 4/00 -- 95 -- 95 Development
Freedom Plaza, Sun City Center, FL(2)....................... 6/03 160 -- 70 230
--- ----- --- -----
Subtotal............................................ 160 294 108 562
--- ----- --- -----
DEVELOPMENT PROJECTS:
Halls, TN(3)................................................ 7/98 -- 55 -- 55 Construction
Houston, TX (Northwest)(4).................................. 8/98 -- 95 -- 95 Construction
Knoxville, TN (Deane Hill)(3)............................... 10/98 -- 108 -- 108 Construction
Lakeway, TX(4).............................................. 12/98 -- 77 -- 77 Construction
Naples, FL(4)............................................... 12/98 -- 100 -- 100 Construction
Spring Shadow, TX(4)........................................ 12/98 -- 67 -- 67 Construction
Houston, TX (West)(4)....................................... 1/99 -- 95 -- 95 Construction
Houston, TX (Willowchase)(4)................................ 3/99 -- 67 -- 67 Construction
Aurora, CO(4)............................................... 4/99 -- 95 -- 95 Construction
Tampa, FL(3)................................................ 4/99 -- 90 -- 90 Construction
Birmingham, AL(6)........................................... 6/99 120 120 -- 240 Construction
Flint, MI(7)................................................ 7/99 -- 110 -- 110 Construction
Greenwood, CO(4)............................................ 7/99 -- 90 90 180 Construction
Huntsville, AL(7)........................................... 7/99 90 48 -- 138 Construction
Boynton Beach, FL(4)........................................ 8/99 -- 93 -- 93 Construction
Coconut Creek, FL........................................... 8/99 -- 95 -- 95 Development
Greenville, SC(4)........................................... 8/99 -- 79 -- 79 Development
St. Petersburg, FL(3)....................................... 8/99 -- 101 -- 101 Development
San Antonio, TX............................................. 8/99 -- 55 -- 55 Development
Boca Raton, FL.............................................. 9/99 -- 75 -- 75 Development
Cleveland (Heights), OH(4).................................. 9/99 -- 150 -- 150 Construction
Delray Beach, FL............................................ 9/99 -- 82 -- 82 Development
Fort Worth, TX.............................................. 9/99 -- 91 -- 91 Development
Nashville, TN (West)(5)..................................... 9/99 -- 90 -- 90 Development
Richmond Heights (Cleveland), OH............................ 9/99 -- 93 -- 93 Development
Arlington, TX............................................... 10/99 -- 95 -- 95 Development
Lakewood, CO(4)............................................. 10/99 -- 93 -- 93 Development
Shavano Park, TX............................................ 10/99 -- 75 -- 75 Development
Austin, TX.................................................. 12/99 -- 121 -- 121 Development
Castle Hills, TX............................................ 12/99 -- 95 -- 95 Development
Olney, MD(3)................................................ 12/99 -- 95 -- 95 Development
Sarasota Bay Club, Sarasota, FL(8).......................... 12/99 320 50 40 410 Development
Clearwater, FL.............................................. 2/00 -- 95 -- 95 Development
Nashville, TN (Central)..................................... 2/00 -- 128 -- 128 Development
Houston, TX................................................. 4/00 -- 120 -- 120 Development
Houston, TX (West University)............................... 4/00 -- 120 -- 120 Development
--- ----- --- -----
Subtotal............................................ 530 3,308 130 3,968
--- ----- --- -----
Total............................................... 690 3,602 238 4,530
=== ===== === =====
</TABLE>
- ---------------
(1) "Development" means that development activities, such as site surveys,
preparation of architectural plans, or initiation of zoning processes, have
commenced (but construction has not commenced). "Construction" means that
construction activities, such as ground-breaking activities, exterior
construction, or interior build-out, have commenced.
(2) The community has an expansion underway consisting of nine new buildings,
each with a capacity for 18 units, and a 70 unit addition to the health
center. Each of the nine buildings are scheduled to be completed on various
dates beginning March 1999 and ending June 2003, and the health center
addition is scheduled to be completed in December 1999.
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(3) Being developed by a joint venture in which the Company owns a 50% interest.
(4) Indicates a community at which the Company is providing full development
services for the owner, who is an affiliate of the Company. The Company will
manage the community after completion of construction. In each case, the
Company has an option to purchase the community.
(5) Being developed by a joint venture in which the Company owns approximately a
60% interest.
(6) The Company has entered into a ten-year marketing and management agreement
with the owner of the community which will provide for a fixed marketing fee
and a management fee equal to a percentage of the community's gross
revenues. The Company will have an option to purchase the community upon
achievement of stabilized occupancy at a formula-derived price.
(7) Being developed by a joint venture in which the Company owns a 34% interest.
(8) Being developed and subsequently to be managed by the Company pursuant to a
five-year management agreement that provides for a management fee equal to a
fixed percentage of the community's gross revenues. The Company is providing
development services for the owner and will have a right of first refusal to
purchase the community and an option to purchase the community for a price
to be negotiated. See "The Company -- Recent Transactions -- FGI
Transactions."
The Company has developed a portfolio of flexible designs for its assisted
living residences, each of which may be configured in a number of different ways
thereby providing the Company with flexibility in adapting to a particular
geographic market, neighborhood, or site. In addition, each design has been
developed to facilitate the prompt, efficient, cost-effective delivery of health
care and personal services. Site requirements for the various designs range from
2.5 to 6.0 acres. Each of the Company's designs also provide for specially
designed residential units, common areas, and dining rooms for residents with
Alzheimer's and other forms of dementia.
The Company believes that its designs meet the desire of many of its
residents to move into a new residence that approximates, as nearly as possible,
the comfort of their prior home. The Company also believes that its designs
achieve several other objectives, including (i) lessening the trauma of change
for residents and their families; (ii) facilitating resident mobility and
caregiver access; (iii) enhancing operating efficiencies; (iv) enhancing the
Company's ability to match its products to targeted markets; and (v)
differentiating the Company from its competitors. The Company intends to develop
and market a significant number of its newly developed assisted living
residences under the trade name "Homewood Residence." See "-- Trademarks."
The Company intends to develop new assisted living residences by using a
combination of in-house development personnel and experienced third-party
project managers and by acquiring newly constructed residences from developers
under "turnkey" purchase and sale agreements. To the extent the Company acquires
newly developed residences from a developer on a "turnkey" basis, it intends to
enter into a purchase and sale agreement whereby the Company, subject to
construction of the residence to the Company's designs and specifications and
satisfaction of typical purchase and sale contingencies for the Company's
benefit, will commit to purchase the residence upon completion at an agreed upon
price.
The Company has also entered into contractual arrangements with
established, regional real estate development contractors pursuant to which such
developers will provide assistance in the development process. These
arrangements are intended to enable the Company to develop and construct
additional assisted living residences while reducing the investment of, and
associated risk to, the Company. The Company's development contractors provide
construction management experience, knowledge of local state and building codes
and zoning laws, and assistance with site locations. As a result, the Company's
development staff is able to evaluate and direct overall development activity
more efficiently.
The Company intends to enter into development and management agreements
with one or more developers which provide that the Company will manage a number
of assisted living residences to be developed using the Company's residence
designs and grant the Company an option to purchase the residences. In addition,
the Company has entered into joint venture arrangements with development
partners to develop assisted living residences and may enter into additional
joint ventures in the future.
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Home Health Care Agencies
The Company currently operates five home health agencies based at or near
the Company's senior living communities. Additionally, the Company manages two
agencies for third parties pursuant to management agreements with initial terms
of three years. The Company receives a contractual fee per visit. Neither of the
home health agencies managed by the Company is owned by an affiliate of the
Company. In response to negative effects of the BBA on certain of the Company's
home health care agencies, the Company suspended the operation of six of its
recently established home health care agencies in July 1998 pending either
institution of prospective pay or major revisions to the interim payment system
now in effect. See "Business -- Government Regulation."
OPERATIONS
Centralized Management
The Company centralizes its corporate and other administrative functions so
that the community-based management and staff can focus their efforts on
resident care. The Company maintains centralized accounting, finance, human
resources, training, and other operational functions at its national corporate
office in Brentwood (Nashville), Tennessee. The Company's corporate office is
generally responsible for (i) establishing Company-wide policies and procedures
relating to, among other things, resident care and operations; (ii) performing
accounting functions; (iii) developing employee training programs and materials;
(iv) coordinating human resources, food service and marketing functions; and (v)
providing strategic direction. In addition, financing, development, construction
and acquisition activities, including feasibility and market studies, residence
design, development, and construction management, are conducted by the Company's
corporate office.
The Company seeks to control operational expenses for each of its
communities through standardized management reporting and centralized controls
of capital expenditures, asset replacement tracking, and purchasing for larger
and more frequently used supplies. Community expenditures are monitored by
regional operations teams headed by the Company's Regional Vice Presidents who
are accountable for the resident satisfaction and financial performance of the
communities in their region.
Community-Based Management
An executive director manages the day-to-day operations at each senior
living community, including oversight of the quality of care, delivery of
resident services, and monitoring of financial performance, and is responsible
for all personnel, including food service, maintenance, activities, security,
assisted living, housekeeping, and, where applicable, nursing. Executive
directors are compensated based on certain quality of service goals and on the
financial performance of the community. In most cases, each senior living
community also has department managers that direct the environmental services,
nursing or care services, business management functions, dining services,
activities, transportation, housekeeping, and marketing functions.
A residence manager manages the day-to-day operations at each assisted
living residence. While the residence managers have many of the same operational
responsibilities as the Company's executive directors, their primary
responsibility is to oversee resident care. For its assisted living residences,
the Company has adopted the concept of universal workers whereby each employee's
responsibilities span a number of traditional job descriptions. For example, an
assisted living residence employee may, during the course of a day, provide
housekeeping, food service, activities, and assistance with ADLs services to
residents. As a result, and because the Company's senior living communities
located near assisted living residences provide certain support personnel and
services on an on-going basis, each assisted living residence employs fewer
associates. On-site care managers and residents' assistants provide most of the
actual resident care in conjunction with a small support team consisting of a
housekeeper, a maintenance helper, an administrative
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coordinator, and a small dining service team. In most assisted living
residences, the residence manager is also a licensed nurse.
The Company actively recruits personnel to maintain adequate staffing
levels at its existing communities as well as new staff for new or acquired
communities prior to opening. The Company has adopted comprehensive recruiting
and screening programs for management positions that utilize personnel
profiling, corporate office interviews, and drug screening company-wide. The
Company offers system-wide training and orientation for its front line
employees, department level managers, and executive staff at the community level
through a combination of Company-sponsored seminars and conferences and through
its contract for training services with The Frist Center.
Home Health Management
The Company centralizes all home health financial and clinical data through
an electronic data collection system. This data warehouse allows corporate
regional directors to identify emerging trends, establish critical pathways, and
develop and monitor cost and utilization controls. All accounting functions
including claims submission and processing are performed at the corporate
office.
The Company's centralized approach allows its home health care agencies to
achieve a more efficient delivery of care. Each community-based agency is
operated under the auspices of the community's executive director and under the
direct control of an agency director. This director and his or her team of
nurses, personal care aides, physical therapists, speech therapists,
occupational therapists, and social workers focus on assessing the health care
needs of residents in the Company's senior living or assisted living
communities, as well as clients in the surrounding market.
Quality Assurance
The Company's quality assurance program is designed to achieve and maintain
a high degree of resident and family satisfaction with the care and services the
Company provides. The Company coordinates the implementation of its quality
assurance program at each of its communities through its corporate office. The
Company encourages resident and family participation and seeks feedback from
families and residents through surveys conducted on a regular basis. In
addition, inspections of each community are conducted regularly by corporate
staff. These inspections, performed periodically, review all aspects of
operations, care, and services provided, and the overall appearance and
cleanliness of the community.
Marketing
The Company's marketing efforts are implemented on a regional and local
level, all under the supervision of the corporate marketing staff, and are
intended to create awareness of the Company and its services among prospective
residents, their families, professional referral sources, and other key decision
makers. The corporate marketing staff conducts regional and state-wide surveys
of age- and income-qualified seniors to ensure that the Company understands the
needs and demands of that marketplace. To further both market awareness of the
Company by prospective residents and to more accurately assess the needs and
demands of seniors in that market, the Company periodically conducts regional
focus groups. Corporate office personnel develop the overall marketing
strategies for each community, produce all marketing materials, maintain
marketing databases, oversee direct mailings, place all media advertising, and
assist community personnel in the initial development and continuing refinement
of marketing plans for each community.
Before opening a new assisted living residence, the Company makes referral
source contacts and conducts marketing programs such as lead-generating media
consisting of direct mail, telemarketing follow-up, and print media advertising.
These public awareness campaigns usually begin with the start of construction
and intensify several months before the opening of the
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residence. An on-site marketing person is at the residence approximately six
months prior to the opening of the residence and is supported by the Company's
corporate marketing department.
Once the residence opens, the Company believes that satisfied residents and
their families are the most important referral sources. Accordingly, the Company
believes that its emphasis on high-quality services and resident satisfaction
will result in a strong referral base for its existing communities. In addition,
the Company focuses on enhancing the reputation of the communities and the
services provided among potential referral sources, such as hospitals, home
health care agencies, physicians, therapy companies, and other health care
professionals.
INDUSTRY BACKGROUND
The senior living and health care services industry encompasses a broad and
diverse range of living accommodations and health care services that are
provided primarily to persons 75 years of age or older. For the elderly who
require limited services, care in their own or family members' homes or in
independent living residences or retirement centers, supplemented at times by
home health care, offers a viable option. For the elderly who are interested in
a community housing option, most independent living residences and retirement
centers typically offer a basic services package limited to meals, housekeeping,
and laundry. As a senior's need for assistance increases, care in an assisted
living residence is often preferable and more cost-effective than home-based
care or nursing home care. Assisted living residents usually enter a residence
when other living accommodations no longer provide the level of care required by
the individual. Typically, assisted living represents a combination of housing
and 24-hour a day personal support services designed to aid elderly residents
with ADLs. Certain assisted living residences may also provide assistance to
residents with low acuity medical needs, or may offer higher levels of personal
assistance for incontinent residents or residents with Alzheimer's disease or
other forms of dementia. Generally, assisted living residents require higher
levels of care than residents of independent living residences and retirement
living centers, but require lower levels of care than patients in skilled
nursing facilities. For seniors who need the constant attention of a skilled
nurse or medical practitioner, a skilled nursing facility may be required.
Estimates of annual expenditures in the assisted living sector of the
senior living and health care services industry for 1996 range from $12.0
billion to $14.0 billion and include facilities ranging from "board and care"
(generally 12 or fewer residents with little or no services) to full-service
assisted living residences such as those operated by the Company. The assisted
living sector is highly fragmented and characterized by numerous small
operators. Moreover, the scope of assisted living services varies substantially
from one operator to another. Many smaller assisted living providers do not
operate in purpose-built residences, do not have professional training for
staff, and provide only limited assistance with low-level care activities. The
Company believes that few assisted living operators provide the required
comprehensive range of assisted living services, such as dementia care and other
services designed to permit residents to "age in place" within the community as
they develop further physical or cognitive frailties.
The Company believes there will continue to be significant growth
opportunities in the senior living market for providing health care and other
services to the elderly, particularly in the assisted living segment of the
market. The Company believes that a number of demographic, regulatory, and other
trends will contribute to the continued growth in the assisted living market,
the Company's targeted market for future development and expansion, including
the following:
Consumer Preference
The Company believes that assisted living is increasingly becoming the
setting preferred by prospective residents and their families for the care of
the frail elderly. Assisted living offers residents greater independence and
allows them to age in place in a residential setting, which the
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Company believes results in a higher quality of life than that experienced in
more institutional or clinical settings.
Demographics
The primary market for the Company's senior living and health care services
is comprised of persons age 75 and older. This age group is one of the fastest
growing segments of the United States population. According to United States
Census Bureau information, this population segment will increase from
approximately 13.2 million in 1990 to over 16.6 million by 2000, an increase of
26%. The population of seniors aged 85 and over is expected to increase from
approximately 3.1 million in 1990 to over 4.3 million by 2000, an increase of
39%. As the number of persons aged 75 and over continues to grow, the Company
believes that there will be corresponding increases in the number of persons who
need assistance with ADLs. According to the United States General Accounting
Office, there are approximately 6.5 million people age 65 and older in the
United States who needed assistance with ADLs, and the number of people needing
such assistance is expected to double by the year 2020. According to the
Alzheimer's Association the number of persons afflicted with Alzheimer's disease
is expected to grow from the current 4.0 million to 14.0 million by the year
2050.
Restricted Supply of Nursing Beds
The majority of states in the United States have adopted CON or similar
statutes generally requiring that, prior to the addition of new beds, the
addition of new services, or the making of certain capital expenditures, a state
agency must determine that a need exists for the new beds or the proposed
activities. The Company believes that this CON process tends to restrict the
supply and availability of licensed nursing facility beds. High construction
costs, limitations on government reimbursement for the full costs of
construction, and start-up expenses also act to constrain growth in the supply
of such facilities. At the same time, nursing facility operators are continuing
to focus on improving occupancy and expanding services to sub-acute patients
requiring significantly higher levels of nursing care. As a result, the Company
believes that there has been a decrease in the number of skilled nursing beds
available to patients with lower acuity levels and that this trend should
increase the demand for the Company's senior living communities, including
particularly the Company's assisted living residences and skilled nursing
facilities.
Cost-Containment Pressures
In response to rapidly rising health care costs, governmental and private
pay sources have adopted cost-containment measures that have reduced admissions
and encouraged reduced lengths of stays in hospitals and other acute care
settings. The federal government had previously acted to curtail increases in
health care costs under Medicare by limiting acute care hospital reimbursement
for specific services to pre-established fixed amounts. Private insurers have
begun to limit reimbursement for medical services in general to predetermined
reasonable charges, and managed care organizations (such as health maintenance
organizations) are attempting to limit the hospitalization costs by negotiating
for discounted rates for hospital and acute care services and by monitoring and
reducing hospital use. In response, hospitals are discharging patients earlier
and referring elderly patients, who may be too sick or frail to manage their
lives without assistance, to nursing homes and assisted living residences where
the cost of providing care is typically lower than hospital care. In addition,
third-party payors are increasingly becoming involved in determining the
appropriate health care settings for their insureds or clients based primarily
on cost and quality of care. Based on industry data, the annual cost per patient
for skilled nursing care averages approximately $40,000, in contrast to the
annual per patient cost for assisted living care of approximately $26,000.
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Senior Affluence
The average net worth of senior citizens is higher than non-senior
citizens, primarily as a result of accumulated equity through home ownership.
The Company believes that a substantial portion of the senior population thus
has significant resources available for their retirement and long-term care
needs. The Company's target population is comprised of middle- to upper-income
seniors who have, either directly or indirectly through familial support, the
financial resources to pay for senior living communities, including an assisted
living alternative to traditional long-term care.
Reduced Reliance on Family Care
Historically, the family has been the primary provider of care for seniors.
The Company believes that the increase in the percentage of women in the work
force, the reduction of average family size, and the increased mobility in
society will reduce the role of the family as the traditional care-giver for
aging parents. The Company believes that this trend will make it necessary for
many seniors to look outside the family for assistance as they age.
GOVERNMENT REGULATION
Changes in existing laws and regulations, adoption of new laws and
regulations, and new interpretations of existing laws and regulations could have
a material effect on the Company's operations. Failure by the Company to comply
with applicable regulatory requirements could have a material adverse effect on
the Company's business, financial condition, and results of operations.
Accordingly, the Company devotes significant resources to monitoring legal and
regulatory developments on local and national levels.
The BBA included sweeping changes to Medicare and Medicaid, significantly
reducing rates of increase for payments to home health agencies and skilled
nursing facilities. Under the BBA, beginning in the year 2001, skilled nursing
facilities will no longer be reimbursed under a cost based system. A prospective
payment system under which facilities are reimbursed on a per diem basis will be
phased in over the next three years. The BBA also requires the Secretary of
Health and Human Services to establish and implement a prospective payment
system for home health services for cost reporting periods beginning on and
after October 1, 1999. The Company believes that the phase-in period will allow
it to make timely operating adjustments appropriate under the new system, but
does not know the magnitude of the effect that these changes ultimately will
have on its skilled nursing and home health operations. However, pending either
institution of prospective pay or major revisions to the interim payment system
now in effect, the Company has suspended the operation of six of its recently
established home health care agencies. Approximately 7.7% and 8.9% of the
Company's total revenues for the three months ended March 31, 1998 and 1997,
respectively, and 10.6%, 7.9%, and 8.8% of the Company's total revenues for the
years ended December 31, 1997, 1996, and 1995, respectively, were attributable
to Medicare, including Medicare-related private co-insurance.
On January 5, 1998, HCFA issued regulations effective January, 1, 1998,
under the authority of the BBA imposing additional requirements on home health
agencies that participate in Medicare or Medicaid. The regulations require all
home health care agencies participating in Medicare or Medicaid to obtain a
surety bond in the amount of the greater of (i) $50,000 or (ii) 15.0% of the
annual Medicare or Medicaid payments made to the home health care agency in the
most recent fiscal year. The bond is for the purpose of securing HCFA against
unpaid claims or civil monetary penalties or assessments. Additionally, the
regulations create capitalization requirements which must be met by all home
health care agencies entering the Medicare program on or after January 1, 1998,
including a new home health care agency resulting from a change of ownership of
an existing home health care agency, if the change of ownership results in a new
provider number being issued. These new home health care agencies must have
sufficient funds available to operate the home health care agency for the three
month period after their Medicare or Medicaid provider agreement
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becomes effective, without taking into consideration actual or projected
accounts receivable from Medicare or other health insurers.
The health care industry is subject to extensive regulation and frequent
regulatory change. At this time, no federal laws or regulations specifically
regulate assisted or independent living residences. While a number of states
have not yet enacted specific assisted living regulations, the Company's
communities are subject to regulation, licensing, CON and permitting by state
and local health and social service agencies and other regulatory authorities.
While such requirements vary from state to state, they typically relate to
staffing, physical design, required services, and resident characteristics. The
Company believes that such regulation will increase in the future. In addition,
health care providers are receiving increased scrutiny under anti-trust laws as
integration and consolidation of health care delivery increases and affects
competition. The Company's communities are also subject to various zoning
restrictions, local building codes, and other ordinances, such as fire safety
codes. Failure by the Company to comply with applicable regulatory requirements
could have a material adverse effect on the Company's business, financial
condition, and results of operations. Regulation of the assisted living industry
is evolving. The Company is unable to predict the content of new regulations and
their effect on its business. There can be no assurance that the Company's
operations will not be adversely affected by regulatory developments.
Certain of the FGI Communities are currently operating a number of nursing
beds as "shelter beds" under a Florida statute and CON that generally limits the
use of such beds to residents of the subject FGI Community. As part of its due
diligence in connection with the FGI Transaction, the Company discovered that
the FGI Communities are not currently in full compliance with these shelter bed
CON requirements. A violation of the shelter bed statutes may, among other
things, subject the owner of the facility to fines of up to $1,500 per day.
Although the Company is evaluating a number of alternatives relating to these
shelter bed issues, the Company does not anticipate that the subject FGI
Communities will be in full compliance with the shelter bed requirements in the
foreseeable future, if ever. The Company believes that Florida authorities have
not vigorously enforced the shelter bed requirements. There can be no assurance
that the State of Florida will not enforce the shelter bed requirements strictly
against the Company in the future or impose penalties for prior or continuing
violations.
Federal and state anti-remuneration laws, such as the Medicare/Medicaid
anti-kickback law, govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
such providers. These laws prohibit, among other things, certain direct and
indirect payments that are intended to induce the referral of patients to, the
arranging for services by, or the recommending of, a particular provider of
health care items or services. The Medicare/Medicaid anti-kickback law has been
broadly interpreted to apply to certain contractual relationships between health
care providers and sources of patient referral. Similar state laws, which vary
from state to state, are sometimes vague and seldom have been interpreted by
courts or regulatory agencies. Violation of these laws can result in loss of
licensure, civil and criminal penalties, and exclusion of health care providers
or suppliers from participation in the Medicare and Medicaid program. There can
be no assurance that such laws will be interpreted in a manner consistent with
the practices of the Company.
The Company believes that its communities are in substantial compliance
with applicable regulatory requirements. However, in the ordinary course of
business, one or more of the Company's communities could be cited for
deficiencies. In such cases, the appropriate corrective action would be taken.
To the Company's knowledge, no material regulatory actions are currently pending
with respect to any of the Company's communities.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state, and
local laws exist which also may require modifications to existing and planned
properties to permit access to the properties by disabled persons. While the
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Company believes that its communities are substantially in compliance with
present requirements or are exempt therefrom, if required changes involve a
greater expenditure than anticipated or must be made on a more accelerated basis
than anticipated, additional costs would be incurred by the Company. Further
legislation may impose additional burdens or restrictions with respect to access
by disabled persons, the costs of compliance with which could be substantial.
In addition, the Company is subject to various Federal, state and local
environmental laws and regulations. Such laws and regulations often impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of hazardous or toxic substances. The costs of any required
remediation or removal of these substances could be substantial and the
liability of an owner or operator as to any property is generally not limited
under such laws and regulations and could exceed the property's value and the
aggregate assets of the owner or operator. The presence of these substances or
failure to remediate such contamination properly may also adversely affect the
owner's ability to sell or rent the property, or to borrow using the property as
collateral. Under these laws and regulations, an owner, operator or an entity
that arranges for the disposal of hazardous or toxic substances, such as
asbestos-containing materials, at a disposal site may also be liable for the
costs of any required remediation or removal of the hazardous or toxic
substances at the disposal site. In connection with the ownership or operation
of its properties, the Company could be liable for these costs, as well as
certain other costs, including governmental fines and injuries to persons or
properties.
The Company believes that the structure and composition of government, and
specifically health care, regulations will continue to change and, as a result,
regularly monitors developments in the law. The Company expects to modify its
agreements and operations from time to time as the business and regulatory
environment changes. While the Company believes it will be able to structure all
its agreements and operations in accordance with applicable law, there can be no
assurance that its arrangements will not be successfully challenged.
COMPETITION
The senior living and health care services industry is highly competitive,
and the Company expects that all segments of the industry will become
increasingly competitive in the future. Although there are a number of
substantial companies active in the senior living and health care industry, the
industry continues to be very fragmented and characterized by numerous small
operators. The Company believes that the primary competitive factors in the
senior living and health care services industry are (i) reputation for and
commitment to a high quality of care; (ii) quality of support services offered
(such as food services); (iii) price of services; (iv) physical appearance and
amenities associated with the communities; and (v) location. The Company
competes with other companies providing independent living, assisted living,
skilled nursing, home health care, and other similar service and care
alternatives, some of whom may have greater financial resources than the
Company. Because seniors tend to choose senior living communities near their
homes, the Company's principal competitors are other senior living and long-term
care communities in the same geographic areas as the Company's communities. The
Company also competes with other health care businesses with respect to
attracting and retaining nurses, technicians, aides, and other high quality
professional and non-professional employees and managers.
TRADEMARKS
The Company has registered its corporate logo with the United States Patent
and Trademark Office (the "USPTO"). The Company intends to develop and market a
significant number of new assisted living residences under the tradename
"Homewood Residence." The Company has filed an application with the USPTO to
register the "Homewood Residence" tradename and logo, but there can be no
assurance that such registration will be granted or that the Company will be
able to use such tradename.
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INSURANCE AND LEGAL PROCEEDINGS
The provision of personal and health care services entails an inherent risk
of liability. In recent years, participants in the senior living and health care
services industry have become subject to an increasing number of lawsuits
alleging negligence or related legal theories, many of which involve large
claims and result in the incurrence of significant defense costs. The Company
currently maintains property, liability, and professional medical malpractice
insurance policies for the Company's owned and certain of its managed
communities under a master insurance program in amounts and with such coverages
and deductibles that the Company believes are within normal industry standards
based upon the nature and risks of the Company's business. The Company also has
an umbrella excess liability protection policy in the amount of $20.0 million
per location. There can be no assurance that a claim in excess of the Company's
insurance will not arise. A claim against the Company not covered by, or in
excess of, the Company's insurance could have a material adverse effect upon the
Company. In addition, the Company's insurance policies must be renewed annually.
There can be no assurance that the Company will be able to obtain liability
insurance in the future or that, if such insurance is available, it will be
available on acceptable terms.
Under various federal, state, and local environmental laws, ordinances, and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs. The Company is not aware of any environmental liability with respect
to any of its owned, leased, or managed communities that it believes would have
a material adverse effect on the Company's business, financial condition, or
results of operations. The Company believes that its communities are in
compliance in all material respects with all federal, state, and local laws,
ordinances, and regulations regarding hazardous or toxic substances or petroleum
products. The Company has not been notified by any governmental authority, and
is not otherwise aware of any material non-compliance, liability, or claim
relating to hazardous or toxic substances or petroleum products in connection
with any of the communities it currently operates.
The Company currently is not party to any legal proceeding that it believes
would have a material adverse effect on its business, financial condition, or
results of operations.
EMPLOYEES
The Company employs approximately 4,740 persons, of which approximately
2,860 are full-time employees (approximately 115 of whom are located at the
Company's corporate offices) and 1,880 are part-time employees. In addition,
there are approximately 500 full-time employees and 400 part-time employees who
are employed by the owners of communities managed by the Company and who are
under the direction and supervision of the Company. None of the Company's
employees is currently represented by a labor union and the Company is not aware
of any union organizing activity among its employees. The Company believes that
its relationship with its employees is good.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
W.E. Sheriff.............................. 55 Chairman of the Board and Chief Executive Officer
Christopher J. Coates..................... 47 President, Chief Operating Officer, and Director
George T. Hicks........................... 40 Executive Vice President -- Finance, Chief Financial
Officer, Treasurer, and Secretary
H. Todd Kaestner.......................... 42 Executive Vice President -- Corporate Development
James T. Money............................ 50 Executive Vice President -- Development Services
Tom G. Downs.............................. 52 Senior Vice President -- Operations
Lee A. McKnight........................... 52 Senior Vice President -- Marketing
H. Lee Barfield II........................ 51 Director
Jack O. Bovender, Jr...................... 52 Director
Frank M. Bumstead......................... 56 Director
Robin G. Costa............................ 31 Director
Clarence Edmonds.......................... 64 Director
John A. Morris, Jr., M.D.................. 51 Director
Daniel K. O'Connell....................... 69 Director
Nadine C. Smith........................... 40 Director
Lawrence J. Stuesser...................... 56 Director
</TABLE>
W.E. Sheriff has served as Chairman and Chief Executive Officer of the
Company and its predecessors since April 1984. From 1973 to 1984, Mr. Sheriff
served in various capacities for Ryder System, Inc., including as president and
chief executive officer of its Truckstops of America division. Mr. Sheriff also
serves on the boards of several privately-held companies and various educational
and charitable organizations and in varying capacities with several trade
organizations, including as a member of the board of the National Association
for Senior Living Industries, and as a member of the American Association of
Homes and Services for the Aging and the American Senior Housing Association.
Christopher J. Coates has served as President and Chief Operating Officer
of the Company and its predecessors since January 1993 and as a director of the
Company since January 1998. From 1988 to 1993, Mr. Coates served as chairman of
National Retirement Company ("NRC"), a senior living management company acquired
by a subsidiary of the Company in 1992. From 1985 to 1988, Mr. Coates was senior
director of the Retirement Housing Division of Radice Corporation, following
that company's purchase in 1985 of National Retirement Consultants, a company
formed by Mr. Coates.
George T. Hicks, a certified public accountant, has served as the Executive
Vice President -- Finance, Chief Financial Officer, Treasurer, and Secretary
since September 1993. Mr. Hicks has served in various capacities for the
Company's predecessors since 1985, including Vice President -- Finance and
Treasurer from November 1989 to September 1993.
H. Todd Kaestner has served as Executive Vice President -- Corporate
Development since September 1993. Mr. Kaestner has served in various capacities
for the Company's predecessors since 1985, including Vice President --
Development from 1988 to 1993 and Chief Financial Officer from 1985 to 1988.
James T. Money has served as Executive Vice President -- Development
Services since September 1993. Mr. Money has served in various capacities for
the Company's predecessors since 1978, including Vice President -- Development
from 1985 to 1993. Mr. Money is a member of the board of directors and the
executive committee of the National Association for Senior Living Industries.
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Tom G. Downs has served as Senior Vice President -- Operations since 1989.
Mr. Downs has served in various capacities for the Company's predecessors since
1979.
Lee A. McKnight has served as Senior Vice President -- Marketing since
September 1991. Mr. McKnight has served in various capacities for the Company's
predecessors since 1979.
H. Lee Barfield II has served as a director of the Company since its
inception and as director of various of the Company's predecessors since 1978.
Mr. Barfield is a member in the law firm of Bass, Berry & Sims PLC, the
Company's outside general counsel, and has served in various capacities for that
firm since 1974.
Jack O. Bovender, Jr. has served as a director of the Company since its
inception. Mr. Bovender has been president and chief operating officer of
Columbia/HCA Healthcare Corporation ("Columbia/HCA") since August 1997. From
March 1994 to August 1997, Mr. Bovender was retired. Prior to March 1994, Mr.
Bovender worked for Hospital Corporation of America, a predecessor to
Columbia/HCA, for over 18 years in various capacities, including executive vice
president and chief operating officer. Mr. Bovender is a director of America
Service Group, Inc., a provider of managed health care services to correctional
facilities.
Frank M. Bumstead has served as a director of the Company since its
inception. Since 1989, Mr. Bumstead has been president and a principal
shareholder of Flood, Bumstead, McCready & McCarthy, Inc., a business management
firm that represents, among others, artists, songwriters, and producers in the
music industry. Since 1993, Mr. Bumstead has also served as the chairman and
chief executive officer of FBMS Financial, Inc., an investment advisor
registered under the Investment Company Act of 1940. Mr. Bumstead is vice
chairman and a director of Response Oncology, Inc., a physician practice
management company specializing in oncology, and a director of TBA
Entertainment, Inc., an owner and operator of restaurants and hotels. Mr.
Bumstead also serves as a director, secretary, and treasurer of Imprint Records,
Inc., a music recording company.
Robin G. Costa has served as a director of the Company since its inception.
Since 1994, Ms. Costa has served as chief operating officer of Maddox Companies,
a group of over 40 entities involved in oil and gas exploration, real estate
development and investment, and other investments. Ms. Costa has served in
various capacities for the Maddox Companies since 1985, including as secretary
and treasurer from 1992 to 1994.
Clarence Edmonds has served as a director of the Company since its
inception and as a director of various of the Company's predecessors since 1987.
Mr. Edmonds has served in various capacities, including vice president and
treasurer, of Massey Company, an investment services firm, since 1969.
John A. Morris, Jr., M.D. has served as a director of the Company since its
inception. Dr. Morris has served in varying capacities of the medical profession
since 1977, and is currently a Professor of Surgery and the Director of the
Division of Trauma and Surgical Critical Care at the Vanderbilt University
School of Medicine, the Medical Director of the Life Flight Air Ambulance
Program at Vanderbilt University Hospital, and an Associate in the Department of
Health Policy and Management at the Johns Hopkins University. Dr. Morris is also
chairman of the board of Sirrom Capital Corporation, a small business investment
company.
Daniel K. O'Connell has served as a director of the Company since its
inception and as a director of various of the Company's predecessors since 1985.
Until his retirement in 1990, Mr. O'Connell worked for Ryder System, Inc. for
over 25 years in various capacities, including legal counsel and chief financial
officer.
Nadine C. Smith has served as a director of the Company since its
inception. Ms. Smith is president and chief executive officer of Enidan Capital
Partners, L.P., an investment company that makes equity investments in public
and privately held companies ("Enidan"). Prior to co-founding Enidan, Ms. Smith
was managing general partner of NC Smith & Co., a financial and management
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consulting firm, from 1990 to 1997. Ms. Smith also is president and chief
executive officer of Sirrom Resource Funding L.P., which provides financing to
environmental companies.
Lawrence J. Stuesser has served as a director of the Company since its
inception and as a member of ARCLP's limited partners committee since June 1995.
Since June 1996, Mr. Stuesser has been the president and chief executive officer
and a director of Computer People, Inc., an information technology professional
services and staffing company and a subsidiary of Delphi Group plc, of which Mr.
Stuesser serves as a director. From August 1993 to May 1996, Mr. Stuesser was a
private investor and independent business consultant. From January 1991 to July
1993, Mr. Stuesser was chairman and chief executive officer of Kimberly Quality
Care, Inc., a home health care services company. Mr. Stuesser is chairman of the
board of Curative Health Services Inc., a disease management company in the
chronic wound care market, and a director of IntegraMed America, Inc., an owner
and operator of clinical ambulatory care facilities.
The Company's Board of Directors, currently consisting of 11 members, is
divided into three classes of as nearly equal size as possible. At each annual
meeting of shareholders, directors constituting one class are elected for a
three-year term. The terms of Messrs. Bumstead and Edmonds and Ms. Smith will
expire at the 1999 Annual Meeting of Shareholders, the terms of Messrs. Sheriff
and Barfield, Dr. Morris, and Ms. Costa will expire at the 2000 Annual Meeting
of Shareholders, and the terms of Messrs. Bovender, Coates, O'Connell, and
Stuesser will expire at the 2001 Annual Meeting of Shareholders. Executive
officers serve at the discretion of the Board of Directors.
The Board of Directors has established a policy of holding meetings on a
regular quarterly basis and on other occasions when required by special
circumstances. Certain directors also devote their time and attention to the
Board's principal standing committees. The committees and their primary
functions are as follows:
Executive Committee. The Executive Committee is authorized generally
to act on behalf of the Board of Directors between scheduled meetings,
subject to certain limitations established by the Board of Directors and
applicable corporate law. The Executive Committee currently consists of
Messrs. Bovender, Bumstead, and Sheriff and Dr. Morris.
Audit Committee. The Audit Committee makes recommendations to the
Board of Directors with respect to the Company's financial statements and
the appointment of independent accountants, reviews significant audit and
accounting policies and practices, meets with the Company's independent
accountants concerning, among other things, the scope of audits and
reports, and reviews the performance of the overall accounting and
financial controls of the Company. The Audit Committee currently consists
of Messrs. Barfield and Edmonds and Ms. Costa.
Compensation Committee. The Compensation Committee has the
responsibility for reviewing and approving salaries, bonuses, and other
compensation and benefits of executive officers, advising management
regarding benefits and other terms and conditions of compensation, and
administering the Company's stock incentive, employee stock purchase,
401(k), and other executive compensation plans. The Compensation Committee
currently consists of Messrs. O'Connell and Stuesser and Ms. Smith.
FUTURE BOARD EXPANSION
Pursuant to the terms of the FGI Transaction, the Company has agreed to
cause Robert G. Roskamp to be elected to the Company's Board of Directors and to
the Executive Committee of the Board of Directors. The Company anticipates that
the Company's Board will vote to increase the number of directors by one and
elect Robert G. Roskamp as a director.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of the date hereof and as adjusted
to reflect the sale of Common Stock offered hereby with respect to (i) each of
the Named Executive Officers; (ii) each of the Company's current directors;
(iii) Mr. Roskamp, who the Company has agreed to cause to be elected to the
Board of Directors; (iv) each person known by the Company to own beneficially
more than 5% of the Common Stock; (v) all current directors and executive
officers of the Company as a group; (vi) all current directors and executive
officers of the Company, plus Mr. Roskamp, as a group, and (vii) the Selling
Shareholders. Under the rules of the Securities and Exchange Commission (the
"Commission"), a person is deemed to be a "beneficial owner" of a security if he
or she has or shares the power to vote or direct the voting of such security or
the power to dispose of or direct the disposition of such security. Accordingly,
more than one person may be deemed to be a beneficial owner of the same
security.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY
OWNED PRIOR TO THE SHARES OWNED AFTER THE
OFFERING(1)(2) TO BE SOLD OFFERING
------------------------ IN THE ---------------------
NAME NUMBER PERCENT OFFERING(3) NUMBER PERCENT
- ---- --------- ------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
NAMED EXECUTIVE OFFICERS:
W.E. Sheriff........................................ 639,217(4)(5) 5.0% -- 639,217 3.7%
Christopher J. Coates............................... 258,303(6) 2.0 1,860(7) 256,443 1.5
George T. Hicks..................................... 182,505(6) 1.4 17,507(7) 164,998 *
H. Todd Kaestner.................................... 191,910(6) 1.5 17,887(7) 174,023 1.0
James T. Money...................................... 186,918(6) 1.5 17,460(7) 169,458 *
DIRECTORS:
H. Lee Barfield II.................................. 625,577(8)(9) 4.9 -- 625,577 3.7
Jack O. Bovender, Jr................................ 5,000 * -- 5,000 *
Frank M. Bumstead................................... 10,000 * -- 10,000 *
Robin G. Costa...................................... 1,443,259(10)(11) 11.3 48,222(12) 1,395,037 8.2
Clarence Edmonds.................................... 370,073(13) 2.9 -- 370,073 2.2
John A. Morris, Jr., M.D............................ 363,490(14) 2.8 -- 363,490 2.1
Daniel K. O'Connell................................. 18,285 * -- 18,285 *
Nadine C. Smith..................................... 34,956 * -- 34,956 *
Lawrence J. Stuesser................................ 72,547(15) * -- 72,547 *
All current directors and executive officers as a
group (16 persons)................................ 4,643,961 35.9 136,856 4,507,105 26.1
Robert G. Roskamp................................... 822,000(16) 6.4 -- 822,000 4.8
All current directors and executive officers, plus
Mr. Roskamp, as a group (17 persons).............. 5,465,961 42.2 136,856 5,329,105 30.9
OTHER 5% SHAREHOLDERS:
DMAR Limited Partnership............................ 1,372,037(10) 10.7 -- 1,372,037 8.0
OTHER SELLING SHAREHOLDERS:
Joseph H. Baron(17)................................. 53,444 * 7,000 46,444 *
Tom G. Downs(17).................................... 122,953(6) * 16,960(7) 105,993 *
William H. Frist Annuity Trust -- 1997.............. 329,677 2.6 50,000 279,677 1.6
Davis Hunt(17)...................................... 17,893 * 2,000 15,893 *
Don Husi(17)........................................ 44,088 * 3,000 41,088 *
Lee A. McKnight(17)................................. 118,968(6) * 16,960(7) 102,008 *
Sylvester I, L.P.................................... 14,804 * 14,804 -- --
</TABLE>
- ---------------
* Less than one percent.
(1) Pursuant to the rules of the Securities and Exchange Commission (the
"SEC"), shares of Common Stock that certain persons presently have the
right to acquire pursuant to the conversion provisions of the Debentures
("Conversion Shares") are deemed outstanding for the purpose of computing
such person's percentage ownership, but not deemed outstanding for the
purpose of computing the percentage ownership of the other persons shown in
the table. Likewise, shares subject to options held by directors and
executive officers of the Company that are exercisable within 60 days of
the date hereof are deemed outstanding for the purpose of computing such
director's and executive officer's beneficial ownership and the beneficial
ownership of all directors and executive officers as a group.
(2) Includes the following shares of Common Stock issuable upon the exercise of
options granted pursuant to the 1997 Stock Plan which the following persons
are entitled to exercise within 60 days of the date hereof: Mr. Sheriff,
20,000; Mr. Coates, 15,000; each of Messrs. Hicks, Kaestner, and Money,
11,666; each of Mses. Costa and Smith, Dr. Morris, and Messrs. Barfield,
Bovender, Bumstead, Edmonds, O'Connell, and Stuesser, 5,000; each of
Messrs. Downs and McKnight, 6,666; all directors and executive officers as
a group (16 persons), 128,330; and each of Messrs. Baron, Hunt, and Husi,
3,333.
S-69
<PAGE> 70
(3) Messrs. Hicks, Kaestner, Money, Baron, Downs, Hunt, Husi, and McKnight have
agreed to sell up to 7,500, 20,400, 20,400, 4,000, 13,400, 1,000, 2,000 and
13,400 shares of Common Stock, respectively, pursuant to the Underwriters'
over-allotment option. See "Underwriting."
(4) Address: 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027.
(5) Includes 324,519 shares, including 4,166 Conversion Shares, beneficially
owned by W.E. Sheriff Family Limited Partnership, of which Mr. Sheriff is a
general partner.
(6) Includes 1,860 shares beneficially owned by Sylvester I, L.P. ("Sylvester
I") as to which such person holds a pecuniary interest.
(7) Includes 1,860 shares to be sold by Sylvester I. See Note 6.
(8) Address: 2700 First American Center, Nashville, Tennessee 37238.
(9) Includes 2,708 Conversion Shares. Also includes 473,065 shares (including
208 Conversion Shares) beneficially owned by Mr. Barfield's wife, Mary
Louise Frist Barfield. Mr. Barfield is the brother-in-law of William H.
Frist.
(10) Address: 3833 Cleghorn Avenue, Suite 400, Nashville, Tennessee 37215.
(11) Includes 1,372,037 shares beneficially owned by DMAR Limited Partnership
("DMAR"). Ms. Costa is a Vice President of Margaret Energy, Inc., the
general partner of DMAR. Also includes an aggregate of 18,000 shares
beneficially owned by trusts as to which Ms. Costa exercises voting and
dispositive power and 48,222 shares held by the estate of Dan W. Maddox
(the "Maddox Estate") as to which Ms. Costa is co-executor.
(12) All shares to be sold by the Maddox Estate. See Note 11.
(13) Includes 4,166 Conversion Shares beneficially owned by Mr. Edmonds, 335,888
shares beneficially owned by The Jack C. Massey Foundation, of which Mr.
Edmonds serves as a co-trustee, 5,000 shares beneficially owned by a trust
of which Mr. Edmonds and his wife serve as co-trustees and are lifetime
beneficiaries, and 20,019 shares beneficially owned by Mr. Edmonds's wife.
Mr. Edmonds disclaims beneficial ownership of his wife's shares.
(14) Includes 209,114 and 149,376 shares beneficially owned by Sirrom Limited
and Sirrom Partners, L.P., respectively, which are partnerships owned and
controlled by Dr. Morris, his brother, and other members of Dr. Morris
family.
(15) Includes 67,547 shares beneficially owned by B&W Development Centers, Inc.,
a corporation of which Mr. Stuesser is a director and 50% shareholder.
(16) Address: 1401 Manatee Avenue West, Suite 800, Bradenton, Florida 34205.
(17) Each of Messrs. Baron, Downs, Hunt, Husi, and McKnight are currently
serving as officers of the Company.
S-70
<PAGE> 71
UNDERWRITING
The Underwriters named below (the "Underwriters") have severally and not
jointly agreed, subject to the terms and conditions of the Underwriting
Agreement, to purchase, and the Company and the Selling Shareholders have agreed
to sell to the Underwriters, the number of shares of Common Stock set forth
opposite their names below.
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Schroder & Co. Inc.......................................... 1,125,000
Smith Barney Inc............................................ 1,125,000
J.C. Bradford & Co.......................................... 450,000
Jefferies & Company, Inc.................................... 450,000
McDonald & Company Securities, Inc.......................... 450,000
Raymond James & Associates, Inc............................. 450,000
SunTrust Equitable Securities............................... 450,000
---------
Total............................................. 4,500,000
=========
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all the shares of Common Stock offered hereby, if any such shares are
purchased.
The Underwriters have advised the Company that they propose to offer the
shares directly to the public, initially at the public offering price set forth
on the cover page of this Prospectus Supplement; that the Underwriters propose
initially to allow a concession not in excess of $0.45 per share of Common Stock
to certain dealers; and that the Underwriters and such dealers may initially
allow a concession not in excess of $0.10 per share of Common Stock to other
dealers. After the initial offering, the public offering price and such
concessions may be changed by the Underwriters.
The Company and certain Selling Shareholders have granted an option to the
Underwriters, exercisable for 30 days from the date of this Prospectus
Supplement, to purchase up to 592,900 and 82,100 additional shares,
respectively, of Common Stock at the public offering price less the underwriting
discount set forth on the cover page of this Prospectus Supplement. The
Underwriters may exercise such option only to cover over-allotments in the sale
of the shares of Common Stock offered hereby.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act.
The Company, its executive officers and directors, and the Selling
Shareholders have agreed with the Underwriters that, for a period of 90 days
following the Offering, they will not offer, sell, contract to sell, grant an
option to purchase, or otherwise dispose (or announce any offer, sale, grant of
any option, or other distribution) of any shares of Common Stock or any
securities convertible into or exchangeable for shares of Common Stock without
the prior written consent of Schroder & Co. Inc. (except that the Company may
grant options to purchase or award shares of Common Stock under the Stock
Incentive Plan and the Company's Employee Stock Purchase Plan and issue
privately placed shares in connection with acquisitions). See "Principal and
Selling Shareholders."
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in accordance with Regulation
M under the Exchange Act. Over-allotment involves syndicate sales in excess of
the offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specific maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession
S-71
<PAGE> 72
from a syndicate member when the securities originally sold by such syndicate
member are purchased in a syndicate covering transaction to cover syndicate
short positions. Such stabilizing transactions, syndicate covering transactions,
and penalty bids may cause the price of the securities to be higher than it
would otherwise be in the absence of such transactions. These transactions may
be effected on the NYSE or otherwise and, if commenced, may be discontinued at
any time.
Schroder & Co. Inc., McDonald & Company Securities, Inc., and SunTrust
Equitable Securities acted as representatives of the underwriters in connection
with previous public offerings by the Company and have performed other
investment banking services for the Company from time to time. J.C. Bradford
acted as financial advisor to the Company in connection with the FGI
transaction. McDonald & Company Securities, Inc. acted as financial advisor to
FGI and to certain entities affiliated with FGI and with Robert G. Roskamp,
FGI's founder and Chairman, in connection with the FGI Transaction.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Shareholders by Bass, Berry & Sims PLC,
Nashville, Tennessee. H. Lee Barfield II, a member of Bass, Berry & Sims PLC, is
a director of the Company. Mr. Barfield and his wife and children beneficially
own 625,577 shares of Common Stock. See "Principal and Selling Shareholders."
Certain legal matters will be passed upon for the Underwriters by Stroock &
Stroock & Lavan LLP, New York, New York.
S-72
<PAGE> 73
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AMERICAN RETIREMENT CORPORATION
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets -- December 31, 1997 and 1996... F-3
Consolidated Statements of Operations -- Years ended
December 31, 1997 and 1996, Nine Months ended December 31,
1995 and Combined Statements of Operations -- Three Months
ended March 31, 1995...................................... F-4
Consolidated Statements of Partners'/Shareholders'
Equity -- Years ended December 31, 1997 and 1996, Nine
Months ended December 31, 1995 and Combined Statements of
Partners'/Shareholders' Equity -- Three Months ended March
31, 1995.................................................. F-6
Consolidated Statements of Cash Flows -- Years ended
December 31, 1997 and 1996, Nine Months ended December 31,
1995 and Combined Statements of Cash Flows -- Three Months
ended March 31, 1995...................................... F-7
Notes to Consolidated and Combined Financial Statements..... F-9
Condensed Consolidated Balance Sheets -- March 31, 1998 and
December 31, 1997 (Unaudited)............................. F-24
Condensed Consolidated Statements of Operations -- Three
Months Ended March 31, 1998 and 1997 (Unaudited).......... F-25
Condensed Consolidated Statements of Cash Flows -- Three
Months Ended March 31, 1998 and 1997 (Unaudited).......... F-26
Notes to Condensed Consolidated Financial Statements........ F-27
FREEDOM GROUP, INC. AND SUBSIDIARIES AND FREEDOM VILLAGE OF
HOLLAND, MICHIGAN
Independent Auditors' Report................................ F-30
Combined Balance Sheet -- December 31, 1997................. F-31
Combined Statement of Income -- Year Ended December 31,
1997...................................................... F-32
Combined Statement of Changes in Stockholders' Equity
(Deficit) and Partnership Capital -- Year Ended December
31, 1997.................................................. F-33
Combined Statement of Cash Flows -- Year Ended December 31,
1997...................................................... F-34
Notes to Combined Financial Statements...................... F-35
Condensed Combined Balance Sheets -- March 31, 1998 and
December 31, 1997 (Unaudited)............................. F-52
Condensed Combined Statements of Income -- Three Months
Ended March 31, 1998 and 1997 (Unaudited)................. F-53
Condensed Combined Statements of Cash Flows -- Three Months
Ended March 31, 1998 and 1997 (Unaudited)................. F-54
Notes to Condensed Combined Financial Statements............ F-55
</TABLE>
F-1
<PAGE> 74
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Retirement Corporation:
We have audited the accompanying consolidated balance sheet of American
Retirement Corporation and subsidiaries as of December 31, 1997 and the
consolidated balance sheet of American Retirement Communities, L.P. and its
consolidated entities (the Predecessor) as of December 31, 1996, and the related
consolidated statements of operations, changes in partners'/ shareholders'
equity, and cash flows for the year ended December 31, 1997, for the year ended
December 31, 1996 and for the period April 1, 1995 through December 31, 1995
(Predecessor periods), and the related combined statements of operations,
changes in partners'/shareholders' equity, and cash flows of American Retirement
Corporation and combined entities (Predecessor Entities) for the period from
January 1, 1995 through March 31, 1995 (Predecessor Entities period). These
consolidated and combined financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
consolidated and combined statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements
present fairly, in all material respects, the financial position of American
Retirement Corporation and subsidiaries as of December 31, 1997 and American
Retirement Communities, L.P. and consolidated entities as of December 31, 1996,
and the results of their operations and their cash flows for the year ended
December 31, 1997 and for the Predecessor periods, in conformity with generally
accepted accounting principles. Further, in our opinion, the aforementioned
Predecessor Entities combined financial statements present fairly, in all
material respects, the results of operations and cash flows of American
Retirement Corporation and combined entities for the Predecessor Entities
period, in conformity with generally accepted accounting principles.
As discussed in note 1 to the consolidated and combined financial
statements, effective April 1, 1995, an exchange of common stock or partnership
interests for limited partnership interests in American Retirement Communities,
L.P. was accounted for as a purchase business combination (the Roll-up). As a
result of the Roll-up, net assets not previously owned by the acquirer were
recorded at fair value. Accordingly, consolidated financial information for the
period after the Roll-up is presented on a different cost basis than that for
periods before the Roll-up and, therefore, is not comparable.
KPMG PEAT MARWICK LLP
Nashville, Tennessee
February 11, 1998, except as to
note 14, which is as of July 14, 1998
F-2
<PAGE> 75
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 44,583 $ 3,222
Assets limited as to use (Note 6)......................... 2,654 1,022
Resident and health care receivables, net................. 4,979 2,782
Management services receivables........................... 1,199 565
Inventory................................................. 483 420
Prepaid expenses.......................................... 1,052 340
Deferred income taxes (Note 11)........................... 4,332 920
Other current assets...................................... 1,003 --
-------- --------
Total current assets.............................. 60,285 9,271
Assets limited as to use, excluding amounts classified as
current................................................... 7,332 3,607
Land, buildings and equipment, net (Notes 4 and 6).......... 229,898 213,124
Marketable securities....................................... 52 52
Other assets (Note 5)....................................... 19,587 2,108
-------- --------
Total assets...................................... $317,154 $228,162
======== ========
LIABILITIES AND PARTNERS' AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 6)................ $ 316 $ 8,053
Accounts payable.......................................... 2,429 2,441
Accrued expenses.......................................... 9,796 6,239
Redemption payable........................................ -- 5,195
Accrued partner distributions............................. -- 1,632
-------- --------
Total current liabilities......................... 12,541 23,560
Tenant deposits............................................. 5,290 3,850
Long-term debt, excluding current portion (Note 6).......... 237,038 162,636
Deferred gain on sale-leaseback transactions (Note 4)....... 4,073 --
Deferred income taxes (Note 11)............................. 3,689 --
Other long-term liabilities................................. 605 234
-------- --------
Total liabilities................................. 263,236 190,280
Commitments and contingencies (Notes 4, 6, 9, 10, 12 and 14)
Partners' and shareholders' equity (Notes 7 and 8):
General and limited partners' interests................... -- 37,882
Common stock, $.01 par value; 50,000,000 shares
authorized, 11,420,860 shares issued and outstanding at
December 31, 1997...................................... 114 --
Additional paid-in capital................................ 60,203 --
Accumulated deficit....................................... (6,399) --
-------- --------
Total partners' and shareholders' equity.......... 53,918 37,882
-------- --------
Total liabilities and partners' and shareholders'
equity.......................................... $317,154 $228,162
======== ========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-3
<PAGE> 76
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
---------------------------------- ------------
PREDECESSOR
PREDECESSOR ENTITIES
------------ ------------
YEARS ENDED NINE MONTHS THREE MONTHS
DECEMBER 31, ENDED ENDED
------------------- DECEMBER 31, MARCH 31,
1997 1996 1995 1995
-------- -------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Resident and health care revenue.................... $ 92,217 $ 73,878 $47,239 $11,761
Management services revenue (Note 12)............... 1,995 1,739 1,524 595
-------- -------- ------- -------
Total revenues.................................... 94,212 75,617 48,763 12,356
Expenses:
Community operating expense......................... 57,838 46,960 30,750 8,035
Lease expense (Note 4).............................. 3,405 -- -- --
General and administrative.......................... 8,051 6,200 3,446 1,108
Depreciation and amortization....................... 6,855 6,906 4,534 1,127
-------- -------- ------- -------
Total operating expenses.......................... 76,149 60,066 38,730 10,270
-------- -------- ------- -------
Income from operations............................ 18,063 15,551 10,033 2,086
Other income (expense):
Interest expense.................................... (14,863) (12,160) (7,930) (2,370)
Interest income..................................... 2,675 434 329 49
Other............................................... (1) 788 919 (1,013)
-------- -------- ------- -------
Other income (expense), net....................... (12,189) (10,938) (6,682) (3,334)
Income (loss) before income taxes and
extraordinary item.............................. 5,874 4,613 3,351 (1,248)
Income tax expense (benefit) (Note 11)................ 4,340 (920) 55 20
-------- -------- ------- -------
Income (loss) before extraordinary item........... 1,534 5,533 3,296 (1,268)
Extraordinary loss on extinguishment of debt, net of
tax (Note 6)........................................ 6,334 2,335 -- --
-------- -------- ------- -------
Net income (loss)................................. ($ 4,800) $ 3,198 $ 3,296 ($1,268)
======== ======== ======= =======
Preferred return on special redeemable preferred
limited partnership interests....................... -- 1,104 1,125 --
-------- -------- ------- -------
Net income (loss) available for distribution to
partners and shareholders....................... ($ 4,800) $ 2,094 $ 2,171 ($1,268)
======== ======== ======= =======
Pro forma earnings data (Note 1):
Income before income taxes and extraordinary item... $ 5,874 $ 4,613
Pro forma income tax expense........................ 2,115 1,661
-------- --------
Pro forma income before extraordinary item.......... 3,759 2,952
Preferred return on special redeemable preferred
limited partnership interests..................... -- 1,104
-------- --------
Pro forma income before extraordinary item available
for distribution to partners and shareholders..... $ 3,759 $ 1,848
======== ========
</TABLE>
(Continued)
F-4
<PAGE> 77
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS CONTINUED
<TABLE>
<CAPTION>
CONSOLIDATED
---------------------
PREDECESSOR
-----------
YEARS ENDED
DECEMBER 31,
---------------------
1997 1996
------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Pro forma basic earnings per share:
Pro forma income before extraordinary item................ $ 0.36 $ 0.31
Preferred return on special redeemable preferred limited
partnership interests................................... -- (0.12)
------- ------
Pro forma income before extraordinary item available for
distribution to partners and shareholders............... $ 0.36 $ 0.20
======= ======
Pro forma diluted earnings per share:
Pro forma income before extraordinary item................ $ 0.35 $ 0.31
Preferred return on special redeemable preferred limited
partnership interests................................... -- (0.12)
------- ------
Pro forma income before extraordinary item available for
distribution to partners and shareholders............... $ 0.35 $ 0.20
======= ======
Weighted average shares used for basic earnings per share
data ..................................................... 10,577 9,375
Effect of dilutive common stock options..................... 98 --
------- ------
Weighted average shares used for diluted earnings per share
data...................................................... 10,675 9,375
======= ======
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-5
<PAGE> 78
AMERICAN RETIREMENT CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF PARTNERS'/SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SPECIAL
GENERAL REDEEMABLE
AND PREFERRED
LIMITED LIMITED COMMON STOCK ADDITIONAL
PARTNERS' PARTNERSHIP ------------------- PAID-IN ACCUMULATED
INTERESTS INTERESTS SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ----------- ---------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Combined balance at December
31, 1994.................. $ 12,823 $ 12,823
Combined loss for the three
months ended March 31,
1995...................... (1,268) (1,268)
Exercise of stock options
(ARC)..................... 257 257
Acquisition of treasury
stock by ARC.............. (1,619) (1,619)
Contribution by ARCLP
partners.................. 11,000 11,000
Distribution to partners.... (1,400) (1,400)
-------- -------- ---------- ---- ------- ------- --------
Combined balance at March
31, 1995.................. 19,793 19,793
Adjustment to equity as a
result of business
combination (Note 1)...... 23,923 23,923
Conversion of debt to
special redeemable
preferred partnership
interests (Note 1)........ $ 10,000 10,000
Net income for the nine
months ended December 31,
1995...................... 2,171 1,125 3,296
Distribution to partners for
the nine months ended
December 31, 1995......... (4,064) (1,125) (5,189)
-------- -------- ---------- ---- ------- ------- --------
Consolidated balance at
December 31, 1995......... 41,823 10,000 -- -- -- -- 51,823
Net income for 1996......... 2,094 1,104 3,198
Redemption of preferred
partnership interests..... (10,000) (10,000)
Distribution to partners.... (6,035) (1,104) (7,139)
-------- -------- ---------- ---- ------- ------- --------
Consolidated balance at
December 31, 1996......... 37,882 -- -- -- -- -- 37,882
Net income (loss) for
1997...................... 1,599 $(6,399) (4,800)
Distribution to partners.... (2,500) (2,500)
Reorganization Note (Note
1)........................ (21,875) (21,875)
Transfer of partnership
equity for shares of
common stock (Note 7)..... (15,106) 7,812,500 $ 78 $15,028 --
Net proceeds from initial
public offering (Note
7)........................ 3,593,750 36 44,954 44,990
Issuance of common stock
pursuant to employee stock
purchase plan (Note 9).... 14,610 221 221
-------- -------- ---------- ---- ------- ------- --------
Balance at December 31,
1997...................... -- -- 11,420,860 $114 $60,203 $(6,399) $ 53,918
======== ======== ========== ==== ======= ======= ========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-6
<PAGE> 79
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
---------------------------------- ------------
PREDECESSOR
PREDECESSOR ENTITIES
----------------------- ------------
YEARS ENDED NINE MONTHS THREE MONTHS
DECEMBER 31, ENDED ENDED
------------------- DECEMBER 31, MARCH 31,
1997 1996 1995 1995
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ (4,800) $ 3,198 $ 3,296 $(1,268)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 6,855 6,906 4,534 1,127
Deferred income taxes............................ 4,162 (920) -- --
Extraordinary loss on extinguishment of debt, net
of tax......................................... 6,334 2,335 -- --
Amortization of deferred gain on sale-leaseback
transactions................................... (341) -- -- --
Write-down of value of insurance policies........ -- 66 -- --
Gain on sale of assets........................... (35) (874) (1,143) --
Changes in assets and liabilities, net of effects
from acquisitions:
(Increase) decrease in receivables............... (2,831) (431) 701 (903)
Increase in inventory............................ (63) (56) (21) (6)
(Increase) decrease in prepaid expenses.......... (584) (105) 1,894 (1,496)
(Increase) decrease in other assets.............. (1,956) 521 -- 382
Increase (decrease) in accounts payable.......... (12) (249) 948 381
Increase (decrease) in accrued expenses.......... 3,322 1,130 487 (157)
Increase in tenant deposits...................... 673 202 279 60
Increase (decrease) in other long-term
liabilities.................................... 371 (27) (87) --
-------- -------- ------- -------
Net cash provided by (used in) operating
activities......................................... 11,095 11,696 10,888 (1,880)
Cash flows from investing activities:
Additions to land, buildings and equipment......... (29,307) (8,361) (6,032) (3,237)
Costs to acquire or lease retirement communities... (17,489) (63,184) -- --
Investments in joint ventures...................... (1,411) -- -- --
Proceeds from (purchases of) assets whose use is
limited.......................................... (3,916) 2,578 (2,915) 17
Purchases of other investments................... (859) -- -- --
Purchases of marketable securities............... -- -- (50) --
Proceeds from the sale of assets................. 30,412 1,346 1,214 6
-------- -------- ------- -------
Net cash used in investing activities................ (22,570) (67,621) (7,783) (3,214)
</TABLE>
(Continued)
F-7
<PAGE> 80
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
--------------------------------- ------------
PREDECESSOR
PREDECESSOR ENTITIES
---------------------- ------------
YEARS ENDED NINE MONTHS THREE MONTHS
DECEMBER 31, ENDED ENDED
------------------ DECEMBER 31, MARCH 31,
1997 1996 1995 1995
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from initial public offering........... 44,990 -- -- --
Net proceeds from convertible debenture offering.... 134,220 -- -- --
Proceeds from issuance of stock through employee
stock purchase plan............................... 221 -- -- --
Proceeds from exercise of stock options (ARC)....... -- -- -- 257
Acquisition of treasury stock....................... -- -- -- (1,619)
Repayment of reorganization note.................... (21,875) -- -- --
Contributions by partners........................... -- -- -- 11,000
Payment of redeemable preferred interests........... (5,195) (4,805) -- --
Distribution to partners............................ (4,132) (6,952) (4,659) (485)
Expenditures for financing costs.................... (333) (1,364) (346) (130)
Costs paid in connection with extinguishment of
debt.............................................. (9,534) -- -- --
Proceeds from the issuance of long-term debt........ 14,275 73,922 1,614 1,636
Principal payments on long-term debt................ (99,801) (5,479) (3,720) (628)
-------- ------- ------- -------
Net cash provided by (used in) financing activities... 52,836 55,322 (7,111) 10,031
Net increase (decrease) in cash and cash
equivalents....................................... 41,361 (603) (4,006) 4,937
-------- ------- ------- -------
Cash and cash equivalents at beginning of period...... 3,222 3,825 7,831 2,894
-------- ------- ------- -------
Cash and cash equivalents at end of period............ $ 44,583 $ 3,222 $ 3,825 $ 7,831
======== ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest............ $ 13,130 $11,907 $ 7,772 $ 2,381
======== ======= ======= =======
Income taxes paid................................... $ 86 $ 55 $ 20 $ --
======== ======= ======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
During the respective periods, the Company (and predecessor entities)
acquired certain communities and entered into certain lease transactions. In
conjunction with the transactions, net assets and liabilities were assumed as
follows:
<TABLE>
<S> <C> <C> <C> <C>
Current assets.................................. $ 128 $ 497 $ 892 $ 486
Other assets.................................... 12,869 674 -- --
Debt............................................ (14,191) -- (8,010) (15,480)
Current liabilities............................. (235) (502) (384) --
Other liabilities............................... (767) -- -- (77)
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-8
<PAGE> 81
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(1) ORGANIZATION AND PRESENTATION
The accompanying financial statements as of and for the year ended December
31, 1997, include the consolidated financial statements of American Retirement
Corporation (the Corporation) and its wholly owned subsidiaries (collectively
referred to as the Company). The accompanying financial statements as of and for
the year ended December 31, 1996, and for the period April 1, 1995 through
December 31, 1995, include the consolidated financial statements of American
Retirement Communities, L.P. (ARCLP) and its wholly owned subsidiaries
(collectively referred to as the Predecessor). All material intercompany
transactions and balances have been eliminated in consolidation.
The accompanying financial statements for the period January 1, 1994
through March 31, 1995 include the combined financial statements of (1) American
Retirement Corporation II, formerly known as American Retirement Corporation
(ARC) and its wholly owned subsidiaries; (2) Trinity Towers Limited Partnership;
(3) Fort Austin Limited Partnership; (4) Holley Court Terrace L.P.; and (5)
ARCLP (collectively referred to as the Predecessor Entities). All material
intercompany transactions and balances have been eliminated in combination.
Prior to March 31, 1995, ARCLP and three limited partnerships (Trinity
Towers Limited Partnership, Fort Austin Limited Partnership, and Holley Court
Terrace L.P.) were entities that were each managed and/or partially owned by
ARC. ARC provided management services to ARCLP and was the managing general
partner of and had contracts to provide management services to each of the other
three limited partnerships.
Effective March 31, 1995, substantially all of the shareholders of ARC and
the non-ARC partners of the three limited partnerships exchanged their common
stock or partnership interests for limited partnership interests in ARCLP (the
Roll-up). Certain minority shareholders of ARC tendered their common stock for
approximately $1.6 million of cash. The Roll-up was accounted for as a purchase
business combination in which ARC was determined to be the accounting acquirer.
Accordingly, the ownership interests in ARCLP and the three operating
partnerships not previously owned by ARC were recorded at fair value as of the
date of the Roll-up. The net assets acquired were allocated as follows:
land -- $2.6 million; buildings and improvements -- $20.4 million; and furniture
and fixtures -- $1.0 million. The general partner of ARCLP was American
Retirement Communities, LLC, whose members were the senior management of ARC.
Concurrent with the Roll-up, holders of $10.0 million of notes receivable from
Fort Austin Limited Partnership exchanged their notes for an equivalent amount
of preferred limited partnership interests in the ARCLP (see Note 7).
In February 1997, the Corporation was incorporated for purposes of
effecting a reorganization of ARCLP and to complete an initial public offering
(IPO). In the reorganization, all of ARCLP's assets and liabilities were
contributed to the Corporation in exchange for 7,812,500 shares of common stock
and a promissory note to ARCLP in the original principal amount of $21.9
million. ARCLP's historical carrying value for assets and liabilities were
carried over to the Corporation upon consummation of the reorganization.
Immediately prior to the IPO, which was completed on May 30, 1997, ARCLP
distributed its common stock of the Corporation to its partners. The Corporation
sold an additional 3,593,750 shares of its common stock in the IPO. Total
proceeds to the Corporation from the IPO were $45.0 million, after underwriting
and issuance costs. A portion of the proceeds was utilized on June 4, 1997 to
repay the $21.9 million promissory note to ARCLP and ARCLP distributed such
amount to its limited partners.
F-9
<PAGE> 82
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(a) Pro Forma Statement of Operations Information (Unaudited)
The income taxes on earnings of ARCLP, other than for ARC, are the
responsibility of the partners. The pro forma adjustments reflected on the
statement of operations provide for income taxes assuming ARCLP was subject to
income taxes. Pro forma income tax expense has been calculated using the
Company's effective tax rate of 36% for 1997 and 1996.
(b) Pro Forma Earnings Per Share (Unaudited)
Pro forma earnings per share is based on the number of shares which would
have been outstanding, assuming the partners had been shareholders, and is based
on the 7,812,500 shares of the Corporation's common stock which the partners
received when the reorganization became effective, plus 1,562,500 shares
representing the value of the $21.9 million promissory note at the IPO price of
$14.00 per share.
(c) Tax Expense Charge to Income
At the time of the reorganization and as a result of the conversion from a
limited partnership to a corporation, the Corporation recorded, as a one-time
charge to income, a deferred income tax liability of approximately $3.0 million
resulting from the difference between the accounting and tax bases of the
Corporation's assets and liabilities. Such amount is included in the Company's
income tax expense.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Use of Estimates and Assumptions: The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
Recognition of Revenue: Resident and health care revenues are reported at
the estimated net realizable amounts from residents, third-party payors, and
others for services rendered, including estimated retroactive adjustments under
reimbursement agreements with third-party payors. Retroactive adjustments are
accrued on an estimated basis in the period the related services are rendered
and adjusted in future periods as final settlements are determined. Resident and
health care revenues, primarily Medicare, subject to retroactive adjustments
were 10.5%, 7.8%, and 9.0% of resident and health care revenues in 1997, 1996,
and 1995, respectively.
Management services revenue is recorded as earned and relates to providing
certain management and administrative support services under management
agreements. Revenues are shown net of reimbursed expenses. Such fees are based
either on a percentage of revenues of the managed community or a negotiated fee
per the managed community.
Cash and Cash Equivalents: The Company considers highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Marketable Securities: Marketable securities consist of U.S. Treasury
securities classified as held-to-maturity securities which are recorded at
amortized cost, adjusted for the amortization or accretion of premiums or
discounts.
Assets Limited as to Use: Assets limited as to use include assets held by
lenders under loan agreements in escrow for property taxes and property
improvements, certificates of deposit held as collateral for letters of credit,
and resident deposits.
F-10
<PAGE> 83
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Inventory: Inventory consists of supplies and is stated at the lower of
cost (first-in, first-out) or market.
Land, Buildings, and Equipment: Land, buildings, and equipment are
recorded at cost and include interest capitalized on long-term construction
projects during the construction period, as well as other costs directly related
to the development and construction of the communities. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the related assets. Buildings and improvements are depreciated
over 15 to 40 years, and furniture, fixtures and equipment are depreciated over
five to seven years. Leasehold improvements are amortized over the shorter of
their useful life or remaining lease term. Construction in progress includes
costs incurred related to the development and construction of assisted living
residences. If a project is abandoned, any costs previously capitalized are
expensed.
Other Assets: Other assets consists primarily of security deposits,
purchase options, deferred financing costs (including convertible debenture
offering costs), and investments in joint ventures. Deferred financing costs are
being amortized using the straight-line method over the terms of the related
debt agreements.
Investments in joint ventures includes the Company's investments in joint
ventures organized to develop assisted living residences. The Company is
providing full development services related to, and has entered into management
agreements to manage, the related assisted living residences. As of December 31,
1997, the residences were under construction and had not commenced operations;
no development or management fees were recorded in 1997. The Company accounts
for its investments in 20-50% owned joint ventures under the equity method.
Income Taxes: Income taxes are accounted for under the asset and liability
method. 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 and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are recorded using enacted tax rates expected to apply to taxable
income in the year 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.
Earnings (Loss) per Share: The Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" on December 31, 1997. The
Statement establishes standards for computing and presenting earnings per share
("EPS") and applies to companies with publicly held common stock and requires
dual presentation of basic and diluted EPS on the face of the income statement.
Basic EPS is computed by dividing income available to common shareholders
(numerator) by the weighted average number of common shares outstanding
(denominator). The denominator used in computing diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. The
effect from assumed conversion of the Company's convertible debentures would
have been anti-dilutive in 1997 and was therefore not included in the
computation of diluted EPS. Prior period pro forma EPS data has been restated to
reflect implementation of SFAS 128.
Stock-Based Compensation: The Company accounts for stock-based employee
compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related interpretations as permitted by Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Accordingly, no compensation expense has been
recognized for its stock option awards and its stock purchase plan because the
F-11
<PAGE> 84
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
option grants are generally for a fixed number of shares with an exercise price
generally equal to the fair value of the shares at the date of grant.
Fair Value of Financial Instruments: The carrying amount of cash and cash
equivalents approximates fair value because of the short-term nature of these
accounts and because amounts are invested in accounts earning market rates of
interest. The carrying value of assets limited as to use, receivables,
marketable securities, accounts and redemption payable, and tenant deposits
approximate their fair values because of the short-term nature of these
accounts. The carrying value of debt approximates fair value as the interest
rates approximate the current rates available to the Company.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of: The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
Recent Accounting Pronouncements: In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income." The statement establishes standards for
the reporting and display of comprehensive income and its components.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. SFAS No.
130 will be effective for the Company's fiscal year ending December 31, 1998.
Adoption of SFAS No. 130 will not impact the Company's financial position or
results of operations. It will require comparative presentation for prior
periods.
Reclassification: Certain 1996 and 1995 amounts have been reclassified to
conform with the 1997 presentation.
(3) ACQUISITIONS
In May 1997, the Company acquired assisted living residences in Tarpon
Springs, Florida, and Corpus Christi, Texas. In December 1997, the Company
acquired a 136 unit retirement community with adjoining land and zoning rights
to construct approximately 40 assisted living units in Charlotte, North
Carolina. The aggregate consideration for the transactions was approximately
$19.9 million, of which approximately $14.3 million was financed through
mortgage loans and the remaining $5.6 million was paid in cash. The transactions
were accounted for as purchases and the purchase price was allocated to land,
buildings, and equipment. Pro forma results of operations for 1997 and 1996, as
if the Company had completed the acquisitions on January 1, 1996, are not
presented because the effect was not material.
F-12
<PAGE> 85
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LAND, BUILDINGS, AND EQUIPMENT
A summary of land, buildings, and equipment is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land............................................... $ 37,584 $ 26,519
Buildings and improvements......................... 183,920 187,239
Furniture, fixtures, and equipment................. 12,320 11,512
Leasehold improvements............................. 240 --
-------- --------
234,064 225,270
Less accumulated depreciation...................... 18,648 17,423
-------- --------
215,416 207,847
Construction in progress........................... 14,482 5,277
-------- --------
Total.................................... $229,898 $213,124
======== ========
</TABLE>
The Company capitalized $554,000 of interest costs during 1997. No interest
was capitalized in 1996 or 1995.
In January 1997, ARCLP entered into a sale-leaseback transaction with a
third party for the property, plant, and equipment of the Holley Court Terrace
and Trinity Towers retirement communities owned by ARCLP. The net cash proceeds
to ARCLP were $27.5 million. The leases are operating leases with the gain from
the transaction of $4.6 million to be recognized over the life of the leases,
which is ten years. Lease payments consist of a base rent which totals $2.5
million per year in the aggregate and additional rent, not to exceed 2.5% over
the prior year's rent, based on an increase in revenues at the leased
facilities. The leases contain three separate ten-year renewal options. The
proceeds from the sale were used to retire debt of $14.6 million and to fund the
redemption of the special redeemable preferred limited partnership interests of
$5.2 million.
(5) OTHER ASSETS
Other assets at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Security deposit...................................... $ 6,093 $ --
Purchase option....................................... 4,600 --
Deferred financing costs, net of accumulated amortiza-
tion................................................ 4,395 1,129
Investments in joint ventures......................... 1,411 --
Other................................................. 3,088 979
------- ------
Total....................................... $19,587 $2,108
======= ======
</TABLE>
F-13
<PAGE> 86
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(6) LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Lexington-Fayette Urban County Government Residential
Facilities Revenue Bonds refinanced May 1, 1987,
collateralized by mortgage liens on property and
equipment. The refinancing bond issue is remarketed to set
the coupon rate on April 1 of each year (3.65% for the
year ended March 31, 1997) until the bonds mature on April
1, 2015. Interest is due semi-annually on April 1 and
October 1................................................. $ 8,010 $ 8,010
Mortgage note payable bearing interest at a fixed rate of
8.2%. Interest is due monthly with principal payments due
monthly in varying amounts with remaining principal and
unpaid interest due at maturity on December 31, 2002. The
loan is secured by land, buildings, equipment, and
assignment of rents and leases. This debt was restructured
on December 31, 1997...................................... 62,330 62,332
Mortgage note payable bearing interest at 2.65% above the
lender's composite commercial paper rate, as defined in
the promissory note (8.16% at December 31, 1996). The note
was repaid in 1997........................................ -- 16,767
Mortgage note payable bearing interest at a fixed rate of
9.28%. The note was repaid in 1997........................ -- 37,000
Mortgage note payable bearing interest at 3.25% above the
lender's composite commercial paper rate, as defined in
the promissory note (8.76% at December 31, 1996). The note
was repaid in 1997........................................ -- 13,110
Note payable to a bank bearing interest at a floating rate
equal to the bank's index rate (8.25% at December 31,
1996). The note was repaid in 1997........................ -- 825
Mortgage note payable bearing interest at a fixed rate of
8.2%. Interest is due monthly with principal payments of
$20,000 per month with remaining principal and unpaid
interest due at maturity on December 31, 2001. The loan is
secured by land, buildings, equipment, and assignment of
rents and leases.......................................... 14,780 15,020
Note payable to a bank bearing interest at 7.6%. The note
was repaid in 1997........................................ -- 5,000
Term loan note to a bank with a fixed interest rate of
10.07%. The note was repaid in 1997....................... -- 9,585
Term loan note payable to a bank at a variable rate of
interest (8.04% at December 31, 1996). The note was repaid
in 1997................................................... -- 2,630
Mortgage note payable bearing interest at a fixed rate of
9.25%. Principal and interest of $49,467 due monthly
through April 1, 2028. The loan is secured by land,
buildings, equipment, and assignment of rents and
leases.................................................... 6,025 --
</TABLE>
F-14
<PAGE> 87
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Mortgage note payable bearing interest at a floating rate
equal to two hundred seventy-five basis points in excess
of the ninety day LIBOR rate recalculated on the third
monthly payment date (8.69% at December 31, 1997).
Principal and interest of $28,597 is due monthly with
remaining principal and unpaid interest due on May 9,
2002. The note is secured by land, buildings, equipment,
and assignment of rents and leases........................ 3,477 --
Mortgage note payable bearing interest at a fixed rate of
9.95%. Interest is due monthly with principal due at
maturity on May 31, 2007. The loan is secured by land,
buildings, equipment, and assignment of rents and
leases.................................................... 4,700 --
Convertible debentures bearing interest at a fixed rate of
5.75%. Interest is due semi-annually on April 1 and
October 1 through October 1, 2002......................... 138,000 --
Other long-term debt, generally payable monthly............. 32 410
-------- --------
Total long-term debt...................................... 237,354 170,689
Less current portion of long-term debt.................... 316 8,053
-------- --------
Long-term debt, excluding current portion................. $237,038 $162,636
======== ========
</TABLE>
The aggregate scheduled maturities of long-term debt at December 31, 1997
were as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 316
1999........................................................ 355
2000........................................................ 331
2001........................................................ 14,160
2002........................................................ 203,685
Thereafter.................................................. 18,507
--------
$237,354
========
</TABLE>
During 1997, the Company issued $138.0 million of 5 3/4% fixed rate
convertible subordinated debentures, due October 2002, in a public offering. The
debentures are non-callable for three years and are convertible into shares of
the Company's common stock at a conversion price of $24.00 per share. The
Company received proceeds of $134.2 million, net of offering costs, from the
issuance of the debentures. The offering costs were capitalized as deferred
financing costs and are being amortized using the straight-line method over the
term of the debentures.
During the fourth quarter of 1997, the Company refinanced its mortgage
notes with a capital corporation by prepaying a $65.1 million note and
refinancing a $62.3 million term loan. The notes were restructured with a $112.3
million credit facility from the capital corporation, of which $62.3 million is
a new term loan bearing interest at a fixed rate of 8.2%, and $50.0 million is a
new revolving line of credit bearing interest at a variable rate of 1.75% over
the lenders' composite commercial paper rate, both maturing on December 31,
2002. In conjunction with the prepayment, the Company was required to pay $9.5
million for the buyout of the capital corporation's participation rights to
future earnings of two of the Company's communities and a prepayment penalty.
The Company recognized an extraordinary after-tax charge of $6.3 million, or
$.60 per share, for the prepayment
F-15
<PAGE> 88
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
penalty, participating rights buyout, and the write-off of unamortized deferred
financing costs related to the previous notes.
At December 31, 1997, the entire $50.0 million revolving line of credit was
available to provide working capital and for the construction or acquisition of
additional retirement communities.
In 1996, ARCLP refinanced two of its notes held with a capital corporation.
The debt was in the form of two notes, one for $38.5 million and one for $23.5
million, both of which had a variable interest rate of 4.5% above the lender's
composite commercial paper rate. The maturity date of both notes was October 31,
2001. The refinancing combined the two notes into a single loan with a $62.5
million initial advance and a $35.0 million commitment for additional borrowing.
In 1996, ARCLP borrowed $17.7 million against the remaining commitment. The
initial $62.0 million advance bears interest at a fixed rate of 8.2%. Borrowings
against the remaining commitment bear interest at a variable rate of 2.65% over
the lenders' composite commercial paper rate. All principal reductions under the
advances are first applied to any balance outstanding under the variable rate
portion of the advances. The maturity of the loan is December 31, 2002. In
conjunction with the refinancing, ARCLP wrote off unamortized deferred financing
costs related to the previous notes of $2.3 million. This write-off was recorded
as an extraordinary loss in 1996.
The Company is required to comply with certain restrictive financial and
other covenants. At December 31, 1997, the Company was in compliance with such
covenants. Under the terms of various long-term debt accounts, the Company is
required to maintain certain deposits with trustees. Such deposits are included
in "assets limited as to use" in the financial statements.
(7) PARTNERS'/SHAREHOLDERS' EQUITY
As discussed in Note 1, in connection with the Roll-up, the shareholders of
ARC and the partners in various partnerships exchanged their common stock or
partnership interests for limited partnership interests in ARCLP. Additionally,
holders of $10.0 million of notes payable by the Fort Austin Limited Partnership
exchanged these notes for special redeemable preferred limited partnership
interests. Such preferred interests were entitled to a cumulative 15% preferred
distribution. Such preferred interests were redeemable, in whole or in part, at
the option of ARCLP. During 1996, ARCLP redeemed $4.8 million of the preferred
limited interests, and on December 4, 1996, ARCLP approved the redemption of the
remaining $5.2 million. Accordingly, the $5.2 million was removed from equity
and shown as redemption payable at December 31, 1996, and redeemed in January
1997. ARCLP (and the Predecessor Entities for the period from January 1, 1995 to
March 31, 1995) distributed $2.5 million, $7.1 million, and $6.6 million in
1997, 1996, and 1995, respectively, including $1.1 million of preferred
distributions during 1996 and 1995.
ARCLP was reorganized concurrent with the IPO such that all of its assets
and liabilities were contributed to the Company in exchange for 7,812,500 shares
of common stock. On May 30, 1997, the Company issued 3,593,750 shares of common
stock pursuant to the IPO.
(8) STOCK-BASED COMPENSATION
Stock Option Plan
The Company has adopted a stock incentive plan (the "1997 Plan") providing
for the grant of stock options, stock appreciation rights, restricted stock,
and/or other stock-based awards. Pursuant to the 1997 Plan, 1,140,625 shares of
common stock have been reserved and will be available for issuance. The option
exercise price and vesting provisions of such options are fixed when the option
is granted. The options generally expire ten years from the date of grant and
vest
F-16
<PAGE> 89
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
over a three-year period. The option exercise price is generally not less than
the fair market value of a share of common stock on the date the option is
granted.
A summary of the Company's stock option activity, and related information
for the year ended December 31, 1997, is presented below:
<TABLE>
<CAPTION>
AVERAGE
EXERCISE
SHARES PRICE
------ --------
(IN THOUSANDS)
<S> <C> <C>
Options
Granted................................................ 801 $15.51
Forfeited.............................................. (21) 14.00
--- ------
Outstanding -- end of year............................... 780 $15.55
=== ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE
--------------- ----------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
$14.00 - $21.25..................................... 780 9.50 $15.55
</TABLE>
There were no options exercisable as of December 31, 1997.
As discussed in Note 2, the Company accounts for stock-based employee
compensation in accordance with APB 25 and related interpretations as permitted
by SFAS 123. Accordingly, no compensation expense has been recognized for its
stock option awards because the option grants are generally for a fixed number
of shares with an exercise price generally equal to the fair value of the shares
at the date of grant. In accordance with SFAS 123, pro forma information
regarding net income (loss) and earnings (loss) per share has been determined by
the Company using the "Black-Scholes" option pricing model with the following
weighted average assumptions: 6.35% risk-free interest rate, 0% dividend yield,
26.7% volatility rate, and an expected life of the options equal to the
remaining vesting period.
The weighted average fair value of options granted during 1997 was $7.25.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
SFAS 123
YEARS ENDED DECEMBER 31, 1997 AS REPORTED PRO FORMA
- ----------------------------- ----------- ---------
<S> <C> <C>
Net loss.................................................... $(4,800) $(5,450)
Pro forma income before extraordinary item.................. 3,759 3,109
Basic earnings per share -- pro forma before extraordinary
item...................................................... 0.36 0.29
Diluted earnings per share -- pro forma before extraordinary
item...................................................... 0.35 0.29
</TABLE>
Stock Purchase Plan
The Company has adopted an employee stock purchase plan ("ESPP") pursuant
to which an aggregate of 235,390 shares remain authorized and available for
issuance to employees at December 31, 1997. Under the ESPP, employees, including
executive officers, who have been employed by the Company continuously for at
least 90 days are eligible, as of the first day of any
F-17
<PAGE> 90
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
option period (January 1 through June 30, or July 1 through December 31) (an
"Option Period") to contribute on an after-tax basis up to 15% of their base pay
per pay period through payroll deductions and/or a single lump sum contribution
per Option Period to be used to purchase shares of Common Stock. On the last
trading day of each Option Period (the "Exercise Date"), the amount contributed
by each participant over the course of the Option Period will be used to
purchase shares of common stock at a purchase price per share equal to the
lesser of (a) 85% of the closing market price of the common stock on the
Exercise Date; or (b) 85% of the closing market price of the common stock on the
first trading date of such Option Period. The ESPP is intended to qualify for
favorable tax treatment under Section 423 of the Code. During 1997, 14,610
shares were issued pursuant to the ESPP at $15.30 per share.
(9) RETIREMENT PLANS
401(k) Plan
Employees of the Company participate in a savings plan (the "401(k) Plan")
which is qualified under Sections 401 (a) and 401(k) of the Code. To be
eligible, an employee must have been employed by the Company for at least three
months. The 401(k) Plan permits employees to make voluntary contributions up to
specified limits. Additional contributions may be made by the Company at its
discretion, which contributions vest ratably over a five-year period. The
Company contributed $269,000, $277,000, and $54,000 for 1997, 1996, and 1995,
respectively.
Section 162 Plan
The Company maintains a non-qualified deferred compensation plan (the "162
Plan") which allows employees who are "highly compensated" under IRS guidelines
to make after-tax contributions to an investment account established in such
employees' name. Additional contributions may be made by the Company at its
discretion. All contributions to the 162 Plan are subject to the claims of the
Company's creditors. Approximately 45 employees are eligible to participate in
the 162 Plan, which is administered by the Compensation Committee. The Company
contributed approximately $96,000, $274,000, and $99,000 to the 162 Plan in
1997, 1996, and 1995, respectively.
(10) COMMITMENTS AND CONTINGENCIES
The Company maintains commercial insurance on a claims-made basis for
medical malpractice liabilities. Management is unaware of any incidents which
could ultimately result in a loss in excess of the Company's insurance coverage.
In the normal course of business, the Company is a defendant in certain
litigation. However, management is unaware of any action which would have a
material adverse impact on the financial position or results of operation of the
Company.
The Company is self-insured for workers' compensation claims with excess
loss coverage of $250,000 per individual claim and $1.2 million for aggregate
claims. The Company utilizes a third party administrator to process and pay
filed claims. The Company has accrued $420,000 to cover open claims not yet
settled and incurred but not reported claims as of December 31, 1997. Management
is of the opinion that such amounts are adequate to cover any such claims.
In December 1997, the Company entered into an operating lease for a 917
unit senior living community in Richmond, Virginia with an initial term of 20
years and a seven-year renewal option. The Company has the option to acquire the
community at its fair market value at the expiration of the lease. The cost of
the purchase option is $8.3 million; $4.6 million of which was paid in 1997,
with the remaining amount payable over the next two years. The Company will be
obligated to make
F-18
<PAGE> 91
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
annual rental payments of approximately $4.3 million under the lease. In
addition, the Company will be required to maintain a capital reserve account
with payments of approximately $300,000 annually.
The Company has entered into operating leases for four of its retirement
communities (including the Richmond, Virginia community) and its corporate
office. The remaining lease terms vary from four to 20 years . Certain of the
leases provide for renewal options. Lease expense was $3.4 million for 1997. The
Company had no lease expense in 1996 and 1995.
Future minimum lease payments under operating leases as of December 31,
1997 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998.................................................... $ 7,696
1999.................................................... 7,700
2000.................................................... 7,703
2001.................................................... 7,707
2002.................................................... 7,378
Thereafter.............................................. 108,585
--------
$146,769
========
</TABLE>
The Company maintains a $2.5 million line of credit with a bank which is
available to provide working capital and to secure various debt instruments. At
December 31, 1997, $2.2 million of this line of credit had been used to obtain
letters of credit. The Company also has a $5.0 million line of credit with a
bank which is available for land acquisitions. No borrowings were outstanding
under this line of credit at December 31, 1997.
At December 31, 1997, the Company was developing or constructing 36 new
assisted living residences with an aggregated estimated cost to complete and
lease-up of approximately $300.0 million to $325.0 million. At December 31,
1997, the Company had expansion projects planned at four of its owned retirement
communities with an aggregated estimated cost to complete and lease-up of
approximately $31.0 million.
During 1997, the Company entered into non-binding letters of intent with
two third-party REITs pursuant to which, at the Company's request and upon
satisfaction of certain conditions, the REITs would develop, construct, or
acquire up to $110.0 million and $100.0 million, respectively, of senior living
communities and lease the communities to the Company. At December 31, 1997, the
Company has been allocated $41.6 million and $4.7 million, respectively, in
commitments under the REIT facilities.
The Company's management agreements are generally for terms of three to
five years, but may be canceled by the owner of the community, without cause, on
three to six months' notice. Pursuant to the management agreements, the Company
is generally responsible for providing management personnel, marketing, nursing,
resident care and dietary services, accounting and data processing services, and
other services for these communities at the owner's expense and receives a
monthly fee for its services based on either a contractually fixed amount or a
percentage of revenues or income. Certain management agreements also provide the
Company with an incentive fee based on various performance goals. The Company's
existing management agreements expire at various times through June 2002.
F-19
<PAGE> 92
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(11) INCOME TAXES
Prior to the IPO, taxes on the Predecessor's income were the responsibility
of the individual partners. Pursuant to the reorganization, all assets of ARCLP
were transferred to the Company. Therefore, all income generated subsequent to
the IPO is subject to Federal and state income taxes. Income taxes for periods
prior to the IPO relate only to the income of the Company.
The income tax expense (benefit), attributable to income (loss) before
income taxes and extraordinary item consists of the following:
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
----------------------------- --------------------
PREDECESSOR PREDECESSOR ENTITIES
-------------------- --------------------
YEARS ENDED NINE MONTHS THREE MONTHS
DECEMBER 31, ENDED ENDED
-------------- DECEMBER 31, MARCH 31,
1997 1996 1995 1995
------ ----- ------------ --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Federal:
Current............................. $ -- $ -- $55 $20
Deferred............................ 3,724 (823) --
------ ----- --- ---
Total Federal............... 3,724 (823) 55 20
------ ----- --- ---
State:
Current............................. 178 -- -- --
Deferred............................ 438 (97) -- --
------ ----- --- ---
Total state................. 616 (97) -- --
------ ----- --- ---
Total....................... $4,340 $(920) $55 $20
====== ===== === ===
</TABLE>
In 1996, ARC recorded an income tax benefit and a deferred tax asset of
$920,000 because of the anticipated utilization of net operating loss
carryforwards that would offset taxable gains from the Sale-Leaseback
Transaction (See Note 4).
The income tax expense (benefit), attributable to the 1997 extraordinary
item consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
---------------
(IN THOUSANDS)
<S> <C>
U.S. Federal:
Current................................................. $ --
Deferred................................................ (3,474)
-------
Total Federal................................... (3,474)
-------
State:
Current................................................. --
Deferred................................................ (409)
-------
Total state..................................... (409)
-------
Total........................................... $(3,883)
=======
</TABLE>
F-20
<PAGE> 93
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997 and
1996 are presented below (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets:
Federal and state operating loss carryforwards............ $4,141 $2,052
Deferred gains on sale/leaseback transactions............. 1,536 --
Other..................................................... 282 78
------ ------
Total gross deferred tax assets........................... 5,959 2,130
Less valuation allowance.................................. -- (339)
------ ------
5,959 1,791
------ ------
Deferred tax liabilities:
Partnership income........................................ -- 847
Buildings and equipment................................... 5,316 24
------ ------
Total gross deferred tax liabilities...................... 5,316 871
------ ------
Net deferred tax asset...................................... $ 643 $ 920
====== ======
</TABLE>
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes on income before extraordinary item:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate.......................................... 34% 34% 34%
Income attributable to non-taxable entities................. (9)% (34)% (30)%
Federal tax charge for conversion to taxable entities....... 47% -- --
Tax goodwill amortization in excess of book amortization.... (4)% -- --
State income taxes, net of Federal benefit.................. 7% (1)% --
Change in beginning of the year valuation allowance......... (6)% (19)% --
Other....................................................... 5% -- --
-- --- ---
Total............................................. 74% (20)% 4%
== === ===
</TABLE>
At December 31, 1997, ARC had unused net operating loss carryforwards of
approximately $10.9 million for regular tax purposes and $10.0 million for
alternative minimum tax purposes, which expire in varying amounts from 2003 to
2012.
The valuation allowance for deferred tax assets as of January 1, 1997, and
1996 was $339,000 and $1.1 million, respectively. The net change in the total
valuation allowance for the years ended December 31, 1997, and 1996 was a
decrease of $339,000 and $825,000, respectively. In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. In order to fully realize the deferred tax asset, the
Company will need to generate future taxable income of approximately $1.7
million prior to the expiration of the net operating loss carryforward in 2012.
Based upon the level of projected future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more likely
than not the Company will realize the benefits of these deductible differences,
and no valuation allowance is necessary at December 31, 1997. The amount of the
deferred tax asset considered realizable,
F-21
<PAGE> 94
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
(12) RELATED PARTY TRANSACTIONS
The Company is providing full development services related to, and has
entered into management agreements to manage, five assisted living residences
with an aggregate capacity for 389 residents owned by affiliates of the son of a
significant shareholder of the Company. Three of the residences are currently
under construction and two of the residences are under development. Such
management agreements provide for the payment of management fees to the Company
based on a percentage of each residences' gross revenues and require the Company
to guarantee operating deficits above a specified amount. The management
agreements also provide the Company with the option to purchase the residences.
The Company expects to enter into additional management agreements with this
related party. No management fees or development fees were recorded in 1997.
F-22
<PAGE> 95
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(13) QUARTERLY DATA (UNAUDITED)
The following table presents unaudited quarterly operating results for each
of the Company's last eight fiscal quarters. The Company believes that all
necessary adjustments have been included in the amounts stated below to present
fairly the quarterly results when read in conjunction with the consolidated
financial statements. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year or predictive of
future periods.
<TABLE>
<CAPTION>
1997 QUARTER ENDED 1996 QUARTER ENDED
-------------------------------------- --------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31
------- -------- ------- ------- ------- -------- ------- -------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues.............. $26,180 $23,643 $22,879 $21,510 $20,783 $20,028 $18,490 $16,316
Income (loss) before
extraordinary item........ 1,360 1,037 (1,839) 976 2,227 422 1,232 1,652
Net income (loss)........... (4,974) 1,037 (1,839) 976 2,227 422 1,232 (683)
Pro forma income before
extraordinary item........ 1,360 1,037 768 594 901 262 764 1,025
Pro forma income before
extraordinary item
available for distribution
to partners and
shareholders.............. 1,360 1,037 768 594 706 67 425 650
Earnings per share:
Basic -- actual............. ($ 0.44) $ 0.09 -- -- -- -- -- --
Basic -- pro forma income
before extraordinary item
available for distribution
to partners and
shareholders.............. $ 0.12 $ 0.09 $ 0.08 $ 0.06 $ 0.08 $ 0.01 $ 0.05 $ 0.07
Basic -- weighted average
shares outstanding........ 11,406 11,406 10,089 9,375 9,375 9,375 9,375 9,375
Diluted -- actual........... ($ 0.44) $ 0.09 -- -- -- -- -- --
Diluted -- pro forma income
before extraordinary item
available for distribution
to partners and
shareholders.............. $ 0.12 $ 0.09 $ 0.08 $ 0.06 $ 0.08 $ 0.01 $ 0.05 $ 0.07
Diluted -- weighted average
shares outstanding........ 11,579 11,584 10,124 9,375 9,375 9,375 9,375 9,375
</TABLE>
(14) SUBSEQUENT EVENTS (UNAUDITED)
On July 14, 1998, the Company acquired privately-held Freedom Group, Inc.
("FGI") and certain entities affiliated with FGI and/or its Chairman. The
acquisition resulted in the ownership of three continuing care retirement
communities ("CCRCs") and management of four additional CCRCs. The Company also
acquired options to purchase two of the managed CCRCs. Additionally, the Company
entered into a development and management contract for, and acquired an option
to purchase, one additional CCRC currently under development. The aggregate
resident capacity for the owned and managed communities included in the
transaction is approximately 3,700. The development project will add resident
capacity of approximately 400. The consideration paid was approximately $43.0
million, including $23.2 million of cash and 1,370,000 shares of the Company's
common stock valued at $19.8 million. The Company paid an additional $4.0
million for the purchase options and $1.5 million to assume the management
contracts. The transaction was accounted for as a purchase effective July 1,
1998 and resulted in a purchase price in excess of net assets acquired of
approximately $29.7 million, which has been recorded as goodwill and will be
amortized over 40 years.
F-23
<PAGE> 96
AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 29,050 $ 44,583
Assets limited as to use.................................. 3,032 2,654
Accounts receivable, net.................................. 6,681 6,178
Inventory................................................. 615 483
Prepaid expenses.......................................... 1,714 1,052
Deferred income taxes..................................... 3,521 4,332
Other current assets...................................... 824 1,003
-------- --------
Total current assets.............................. 45,437 60,285
Assets limited as to use, excluding amounts classified as
current................................................ 11,009 7,332
Land, buildings and equipment, net........................ 240,643 229,898
Marketable securities..................................... 52 52
Other assets.............................................. 20,036 19,587
-------- --------
Total assets...................................... $317,177 $317,154
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 318 $ 316
Accounts payable.......................................... 2,112 2,429
Accrued expenses.......................................... 6,281 9,796
-------- --------
Total current liabilities......................... 8,711 12,541
Tenant deposits........................................... 5,248 5,290
Long-term debt, excluding current portion................. 101,516 99,038
Convertible subordinated debentures....................... 138,000 138,000
Deferred gain on sale-leaseback transactions.............. 3,959 4,073
Deferred income taxes..................................... 3,567 3,689
Other long-term liabilities............................... 739 605
-------- --------
Total liabilities................................. 261,740 263,236
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares
authorized, no shares issued or outstanding........... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 11,420,860 shares issued and
outstanding........................................... 114 114
Additional paid-in capital............................. 60,205 60,203
Accumulated deficit.................................... (4,882) (6,399)
-------- --------
Total shareholders' equity........................ 55,437 53,918
-------- --------
Total liabilities and shareholders' equity........ $317,177 $317,154
======== ========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE> 97
AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
1998 1997
--------- ---------
<S> <C> <C>
Revenues:
Resident and health care revenue.......................... $26,398 $20,982
Management services and other revenue..................... 1,679 528
------- -------
Total revenues.................................... 28,077 21,510
Expenses:
Community operating expenses.............................. 17,018 13,399
Lease expense (net)....................................... 1,685 528
General and administrative................................ 2,053 1,886
Depreciation and amortization............................. 1,974 1,585
------- -------
Total operating expenses.......................... 22,730 17,398
------- -------
Income from operations...................................... 5,347 4,112
Other income (expense):
Interest expense.......................................... (3,578) (3,257)
Interest income........................................... 627 150
Other..................................................... (26) (30)
------- -------
Other income (expense), net............................... (2,977) (3,137)
------- -------
Income before income taxes................................ 2,370 975
Income tax expense.......................................... 853 --
------- -------
Net income........................................ $ 1,517 $ 975
======= =======
Basic earnings per share.................................... $ 0.13
=========
Diluted earnings per share.................................. $ 0.13
=========
Pro forma earnings data:
Income before income taxes, as reported................... $ 975
Pro forma income tax expense.............................. 381
---------
Pro forma net income...................................... $ 594
=========
Pro forma basic earnings per share.......................... $ 0.06
=========
Pro forma diluted earnings per share........................ $ 0.06
=========
Weighted average shares used:
Basic earnings per share.................................. 11,421 9,375
Common stock equivalents.................................. 212 --
------- -------
Diluted earnings per share................................ 11,633 9,375
======= =======
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE> 98
AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,517 $ 975
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization.......................... 1,974 1,585
Amortization of deferred gain.......................... (113) (111)
Increase (decrease), net of acquisitions, in cash due to
changes in:
Accounts receivable.................................... (363) (757)
Inventory.............................................. (32) 15
Prepaid expenses....................................... (657) (661)
Other assets........................................... 49 (115)
Deferred income taxes.................................. 689 --
Accounts payable....................................... (383) 1,111
Accrued expenses....................................... (3,513) (819)
Tenant deposits........................................ (43) 426
Other long-term liabilities............................ 132 (3)
-------- --------
Net cash (used in) provided by operating
activities...................................... (743) 1,646
Cash flows from investing activities:
Additions to land, buildings and equipment................ (12,400) (3,317)
Proceeds from (purchases of) assets limited as to use..... (4,055) 139
Proceeds from the sale of assets.......................... 5 27,144
Other investing activities................................ (822) --
-------- --------
Net cash (used in) provided by investing
activities...................................... (17,272) 23,966
Cash flows from financing activities:
Distributions to partners................................. -- (1,632)
Payment of redeemable preferred interests................. -- (5,195)
Proceeds from the issuance of long-term debt.............. 2,570 2,423
Principal payments on long-term debt...................... (90) (15,544)
Other financing activities................................ 2 (32)
-------- --------
Net cash provided by (used in) financing
activities...................................... 2,482 (19,980)
Net (decrease) increase in cash and cash
equivalents..................................... (15,533) 5,632
-------- --------
Cash and cash equivalents at beginning of period............ 44,583 3,222
-------- --------
Cash and cash equivalents at end of period.................. $ 29,050 $ 8,854
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 5,934 $ 2,037
======== ========
Income taxes paid......................................... $ 270 --
======== ========
</TABLE>
See accompanying notes to financial statements
F-26
<PAGE> 99
AMERICAN RETIREMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
American Retirement Corporation (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Certain 1997 amounts have been reclassified to conform with the 1998
presentation. Operating results for the 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 and consolidated financial statements and the
notes thereto included in the Company's annual report on Form 10-K for the year
ended December 31, 1997.
Prior to its initial public offering in May 1997 (the "IPO"), the Company's
communities were owned, managed and/or operated by one or more limited
partnerships affiliated with the Company's predecessor, American Retirement
Communities, LP (the "Partnership" or "Predecessor"). References to the Company
in connection with historical financial data or otherwise include the
Predecessor.
(2) FORMATION OF AMERICAN RETIREMENT CORPORATION, REORGANIZATION AND PRO FORMA
ADJUSTMENTS
The Partnership was reorganized concurrent with its IPO such that all of
its assets and liabilities were contributed to the Company in exchange for
7,812,500 shares of common stock and a promissory note in the original principal
amount of approximately $21.9 million (the "Reorganization"). The promissory
note was subsequently paid with net proceeds from the IPO.
(a) Pro Forma Earnings Data
The pro forma adjustment reflected on the statement of operations for the
quarter ended March 31, 1997 provides for income taxes assuming the Partnership
was subject to taxes.
(b) Pro Forma Earnings per Share
Pro forma earnings per share for the quarter ended March 31, 1997 is based
on the number of shares which would have been outstanding assuming the partners
had been shareholders and is based on the 7,812,500 shares received as a result
of the Reorganization plus 1,562,500 shares representing the value of the $21.9
million promissory note.
(3) EARNINGS PER SHARE
Basic earnings per share for the quarter ended March 31, 1998 has been
computed on the basis of the weighted average number of shares outstanding.
Diluted earnings per share also includes common stock equivalents, which consist
of stock options. Pro forma earnings per share data for the quarter ended March
31, 1997 is based upon the number of shares which would have been outstanding
assuming the partners had been shareholders prior to the Reorganization as
discussed in Note 2.
F-27
<PAGE> 100
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No.
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements and
requires that all components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income is defined as the change in equity of a
business enterprise, during a period, associated with transactions and other
events and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. During the three month periods ended March 31, 1998 and
1997, the Company had no components of comprehensive income. Accordingly,
comprehensive income for each of the periods was the same as net income.
(5) COMMITMENTS
During the three month period ended March 31, 1998, the Company entered
into a lease agreement whereby it will lease a parcel of land to a third party
(the "Developer") for the purpose of constructing an assisted living residence.
The lease is for a term of 50 years. Concurrent with the land lease, the Company
entered into a construction management and guaranty agreement with the Developer
to manage the construction of the residence for a fee of 3.75% of development
costs, one half of which was recognized during the three month period ended
March 31, 1998. The Company also entered into a loan agreement with the
Developer to provide up to 85% of the funding for the construction of the
residence. The loan will bear interest at 200 basis points over 30 day LIBOR,
and will amortize over a 25 year schedule beginning at the completion of
construction.
The Developer entered into an operating lease on the facility with an
affiliate of a director of the Company (the "Lessee"). The lease is for a five
year initial term and has six one year renewal options, as well as an option to
acquire the residence for agreed-upon terms and conditions. The Company entered
into a contract with the Lessee to manage the residence for a fee of 6% of its
revenues. The Company did not recognize any management fees for the three month
period ended March 31, 1998. In conjunction with the management agreement, the
Company entered into an operating deficits agreement whereby the Company will
make payments under the operating lease in the event that the Lessee sustains
operating deficits in excess of its initial and ongoing investment in the
residence. The Company pledged a certificate of deposit in the amount of $3.3
million as collateral for the operating deficits agreement. The Company also
entered into an assumption agreement with the Lessee which provides the Company
with an option to assume the leasehold interest.
(6) RECENT ACCOUNTING PRONOUNCEMENT
On April 3, 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities (SOP
98-5). The SOP requires that costs incurred during start-up activities,
including organization costs, be expensed as incurred. SOP 98-5 defines start-up
activities broadly to include those one-time activities related to: opening a
new facility; introducing a new product or service; conducting business in a new
territory; conducting business with a new class of customer or beneficiary;
initiating a new process in an existing facility; or commencing some new
operation. Start-up activities also include activities related to organizing a
new entity (costs of such activities are commonly referred to as organization
costs).
SOP 98-5 is effective for financial statements for fiscal years beginning
after December 15, 1998. Earlier application is encouraged in fiscal years for
which annual financial statements have not been issued. Initial application of
the SOP should be as of the beginning of the fiscal year in which
F-28
<PAGE> 101
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the SOP is first adopted. Restatement of previously issued financial statements
is not permitted. Entities that previously capitalized start-up costs, such as
the types of costs described above, or organization costs, are required to
write-off the unamortized portion of such capitalized costs as the cumulative
effect of a change in accounting principle upon adoption of SOP 98-5. Subsequent
to adoption of the SOP, these types of costs must be expensed as incurred. The
Company has not yet determined when it will adopt SOP 98-5. At March 31, 1998,
the unamortized portion of capitalized start-up costs totaled $609,000.
(7) SUBSEQUENT EVENTS
On July 14, 1998, the Company acquired privately-held Freedom Group, Inc.
("FGI") and certain entities affiliated with FGI and/or its Chairman. The
acquisition resulted in the ownership of three continuing care retirement
communities ("CCRCs") and management of four additional CCRCs. The Company also
acquired options to purchase two of the managed CCRCs. Additionally, the Company
entered into a development and management contract for, and acquired an option
to purchase, one additional CCRC currently under development. The aggregate
resident capacity for the owned and managed communities included in the
transaction is approximately 3,700. The development projects will add resident
capacity of approximately 400. The consideration paid was approximately $43.0
million, including $23.2 million of cash and 1,370,000 shares of the Company's
common stock valued at $19.8 million. The Company paid an additional $4.0
million for the purchase options and $1.5 million to assume the management
contracts. The transaction was accounted for as a purchase effective July 1,
1998 and resulted in a purchase price in excess of net assets acquired of
approximately $29.7 million, which has been recorded as goodwill and will be
amortized over 40 years.
F-29
<PAGE> 102
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
F-30
<PAGE> 103
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.
F-31
<PAGE> 104
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.
F-32
<PAGE> 105
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.
F-33
<PAGE> 106
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.
F-34
<PAGE> 107
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.
F-35
<PAGE> 108
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.
F-36
<PAGE> 109
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
F-37
<PAGE> 110
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.
F-38
<PAGE> 111
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>
F-39
<PAGE> 112
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>
F-40
<PAGE> 113
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
F-41
<PAGE> 114
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>
F-42
<PAGE> 115
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>
F-43
<PAGE> 116
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.
F-44
<PAGE> 117
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>
F-45
<PAGE> 118
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>
F-46
<PAGE> 119
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.
F-47
<PAGE> 120
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.
F-48
<PAGE> 121
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>
(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
F-49
<PAGE> 122
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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>
F-50
<PAGE> 123
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>
F-51
<PAGE> 124
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.
F-52
<PAGE> 125
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.
F-53
<PAGE> 126
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
<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.
F-54
<PAGE> 127
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
(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 year then ended is as follows:
F-55
<PAGE> 128
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
<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>
F-56
<PAGE> 129
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
<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>
F-57
<PAGE> 130
PROSPECTUS
(AMERICAN RETIREMENT CORPORATION LOGO)
---------------------
American Retirement Corporation, a Tennessee corporation (the "Company"),
may offer from time to time, in one or more series (individually, an "Offering,"
and collectively, "Offerings"), its debt securities (the "Debt Securities"),
shares of its preferred stock, no par value per share (the "Preferred Stock"),
and/or shares of its common stock, par value $.01 per share (the "Common
Stock"). The Debt Securities, Preferred Stock, and Common Stock are collectively
referred to herein as the "Securities." The Securities will have an aggregate
offering price of up to $350,000,000 and will be offered on terms to be
determined at the time of each Offering.
In the case of Debt Securities, the specific title, the aggregate principal
amount, the ranking, the purchase price, the maturity, the rate and time of
payment of any interest, any redemption or sinking fund provisions, any
conversion provisions, and any other specific term of the series of Debt
Securities will be set forth in an accompanying supplement to this Prospectus (a
"Prospectus Supplement"). In the case of Preferred Stock, the specific number of
shares, designation, stated value per share, liquidation preference per share,
issuance price, dividend rate (or method of calculation), dividend payment
dates, any redemption or sinking fund provisions, any conversion rights, and any
other specific term of the series of Preferred Stock will be set forth in an
accompanying Prospectus Supplement. In the case of Common Stock, the specific
number of shares and issuance price per share will be set forth in an
accompanying Prospectus Supplement. Each Prospectus Supplement will also
disclose whether the subject Securities will be listed on a national securities
exchange and, if they are not to be listed, the possible effects thereof on
their marketability.
The Securities may be sold: (i) directly by the Company; (ii) through
underwriting syndicates represented by one or more managing underwriters, or
through one or more underwriters without a syndicate; and (iii) through agents
designated from time to time. The names of any underwriters or agents of the
Company involved in the sale of the Securities in respect of which this
Prospectus is being delivered and any applicable commissions or discounts will
be set forth in an accompanying Prospectus Supplement. See "Plan of
Distribution." The net proceeds to the Company from such sale will be set forth
in such Prospectus Supplement.
This Prospectus also relates to an aggregate of 345,000 shares of Common
Stock (the "Shareholder Shares") that are held by certain shareholders of the
Company (the "Selling Shareholders") and that may be offered for the account of
the Selling Shareholders from time to time hereby. The Shareholder Shares will
be offered pursuant to this Prospectus and an accompanying Prospectus Supplement
only in connection with an underwritten Offering of shares of Common Stock by
the Company. The Company will not receive any proceeds from the sale of the
Shareholder Shares by the Selling Shareholders. Any sales of Shareholder Shares
pursuant to this Prospectus will be included in the aggregate offering price of
Securities set forth above. See "Use of Proceeds" and "Selling Shareholders."
The Company's Common Stock and 5 3/4% Convertible Subordinated Debentures
Due 2002 (the "Convertible Debentures") are traded on the New York Stock
Exchange (the "NYSE") under the symbols "ACR" and "ACR 02," respectively. On
July 7, 1998, the closing sale price of the Common Stock on the NYSE was
$18.9375 per share.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
THE DATE OF THIS PROSPECTUS IS JULY 9, 1998.
<PAGE> 131
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Securities offered hereby. This Prospectus and any
accompanying Prospectus Supplement do not contain all of the information set
forth in the Registration Statement and the exhibits thereto. Certain items are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Securities, reference is
hereby made to the Registration Statement, including the exhibits and schedules
thereto. Statements contained in this Prospectus and any accompanying Prospectus
Supplement concerning the provisions or contents of any contract, agreement, or
any other document referred to herein or therein are not necessarily complete.
With respect to each such contract, agreement, or document, reference is made to
such document for a more complete description, and each statement is deemed to
be qualified in all respects by such reference. The Registration Statement,
including the exhibits and schedules thereto, may be inspected without charge at
the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C.
and copies of it or any part thereof may be obtained from such office, upon
payment of the fees prescribed by the Commission.
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files proxy statements, reports, and other information
with the Commission. The Registration Statement (with exhibits), as well as such
proxy statements, reports, and other information filed by the Company may be
inspected and copied at the public reference facilities of the Commission
located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at the Northeast Regional Office of the Commission, Seven World Trade
Center, Suite 1300, New York, New York 10048, and at the Midwest Regional Office
of the Commission, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can also be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains a web
site that contains reports, proxy and information statements, and other
information regarding registrants, including the Company, that file
electronically with the Commission at http://www.sec.gov. The Company's Common
Stock and Convertible Debentures are listed on the NYSE and proxy statements,
reports, and other information concerning the Company may be inspected at the
offices of the NYSE, 20 Broad Street, New York, New York 10005.
2
<PAGE> 132
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission, are incorporated herein by reference:
(i) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
(ii) the Company's Quarterly Report on Form 10-Q/A for the quarter
ended June 30, 1997, as filed with the Commission on February 17, 1998;
(iii) the Company's Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1997, as filed with the Commission on February 17,
1998;
(iv) the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998;
(v) the Company's Current Report on Form 8-K, dated May 29, 1998; and
(vi) the description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A, filed with the Commission on
May 22, 1997.
Each document filed by the Company pursuant to Sections 13(a), 13(c), 14,
or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the Offerings shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date such
document is filed with the Commission. Any statement contained herein, or in any
document, all or a portion of which is incorporated or deemed to be incorporated
by reference herein, shall be deemed to be modified or superseded for purposes
of the Registration Statement and this Prospectus to the extent that a statement
contained herein, or in any subsequently filed document that also is or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute part of the Registration
Statement or this Prospectus. All information appearing in this Prospectus is
qualified in its entirety by the information and financial statements (including
notes thereto) appearing in the documents incorporated herein by reference.
This Prospectus incorporates documents by reference that are not presented
herein or delivered herewith. These documents (other than exhibits to such
documents that are not specifically incorporated by reference into such
documents) are available without charge, upon written or oral request by any
person to whom this Prospectus has been delivered, from George T. Hicks,
Secretary, 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027, telephone
(615) 221-2250.
3
<PAGE> 133
FORWARD-LOOKING STATEMENTS
This Prospectus, any accompanying Prospectus Supplement, and the Company's
filings under the Exchange Act contain certain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, which are intended to be covered by the safe harbors created thereby. Those
statements include, but may not be limited to, the discussions of the Company's
operating and growth strategy, including its development plans and possible
acquisitions. Investors are cautioned that all forward-looking statements
involve risks and uncertainties including, without limitation, the factors set
forth under the caption "Risk Factors" in this Prospectus. Although the Company
believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate and,
therefore, there can be no assurance that the forward-looking statements
included in this Prospectus, any accompanying Prospectus Supplement, or the
Company's filings under the Exchange Act will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included herein or therein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved. In addition, updated
information will be periodically provided by the Company as required by the
Securities Act and the Exchange Act. The Company, however, undertakes no
obligation to publicly release the results of any revisions to such
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
4
<PAGE> 134
THE COMPANY
GENERAL
The Company 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.
Established in 1978, the Company currently operates 28 senior living communities
in 13 states, consisting of 14 owned communities, six leased communities, and
eight managed communities, with an aggregate capacity for approximately 7,800
residents. The Company also operates seven home health care agencies, including
two agencies managed for third parties. At March 31, 1998, the Company's owned
communities had a stabilized occupancy rate of 93%, its leased communities had a
stabilized occupancy rate of 93%, and its managed communities had a stabilized
occupancy rate of 96% (stabilized communities are generally defined as
communities or expansions thereof that have (i) achieved 95% occupancy or (ii)
been open at least 12 months). Approximately 89.4% and 92.3% of the Company's
total revenues for the year ended December 31, 1997 and the three months ended
March 31, 1998, respectively, were derived from private pay sources.
Since 1992, the Company has experienced significant growth, primarily
through the acquisition of senior living communities. The Company's revenues
have grown from $17.8 million in 1992 to $94.2 million in 1997, an annual growth
rate of 40%. During the same period, the Company's income from operations has
grown from $2.3 million to $18.1 million, an annual growth rate of 51%. The
Company intends to continue its growth by establishing senior living networks
throughout the United States through a combination of (i) selective acquisitions
of senior living communities, including CCRCs and assisted living residences;
(ii) development of senior living communities, including special living units
and programs for residents with Alzheimer's and other forms of dementia;(iii)
expansion of existing communities; and (iv) selective development and
acquisition of other properties and businesses that are complementary to the
Company's operations and growth strategy. The Company is currently developing 35
senior living communities with an estimated aggregate capacity for approximately
3,600 residents, and is expanding or is planning to commence expansions at six
of its existing communities to add capacity to accommodate a total of
approximately 300 additional residents.
The Company was incorporated under the laws of the State of Tennessee in
February 1997 as a wholly-owned subsidiary of the Predecessor in anticipation of
the Reorganization and the Company's initial public offering. The Company's
principal executive offices are located at 111 Westwood Place, Suite 402,
Brentwood, Tennessee 37027, and its telephone number at that address is (615)
221-2250.
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RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratios of earnings to fixed charges of
certain affiliated partnerships and corporations of the Company (the
"Predecessor Entities"), the Predecessor, and the Company. The ratios as of and
for the years ended December 31, 1993 and 1994 and the three months ended March
31, 1995 are derived from the combined financial statements of the Predecessor
Entities. The ratios as of and for the nine months ended December 31, 1995 and
as of and for the year ended December 31, 1996 are derived from the consolidated
financial statements of the Predecessor. The ratios as of and for the three
months ended March 31, 1997, as of and for the year ended December 31, 1997, and
as of and for the three months ended March 31, 1998 are derived from the
consolidated financial statements of the Company and include the operations of
the Predecessor for the period January 1, 1997 though May 28, 1997 and the
Company for the period May 29, 1997 through March 31, 1998.
<TABLE>
<CAPTION>
COMBINED CONSOLIDATED
--------------------------------- ----------------------------------------------------------
PREDECESSOR ENTITIES PREDECESSOR COMPANY
--------------------------------- ------------------------ ------------------------------
YEARS ENDED YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, THREE MONTHS ENDED DECEMBER 31, MARCH 31,
------------ MARCH 31, NINE MONTHS ENDED ------------ --------------------
1993 1994 1995 DECEMBER 31, 1995 1996 1997 1997 1998
---- ---- ------------------ ----------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratios of earnings to
fixed charges(1)(2).. 1.2x 1.0x 0.5x 1.4x 1.4x 1.3x 1.3x 1.2x
</TABLE>
- ---------------
(1) The ratios of fixed earnings to combined fixed charges and preferred stock
dividends is identical to the ratios of earnings to fixed charges for each
period listed because the Company has not yet issued any shares of Preferred
Stock.
(2) For purposes of this computation, earnings are defined as income (loss)
before income taxes and extraordinary item and fixed charges (excluding
capitalized interest). Fixed charges are defined as interest expensed and
capitalized, amortization of capitalized financing costs, and the portion of
operating lease rental expense that is representative of the interest
factor. Earnings were inadequate to cover fixed charges for the three months
ended March 31, 1995 by $1.2 million.
USE OF PROCEEDS
Unless otherwise specified in a Prospectus Supplement that accompanies this
Prospectus, the net proceeds from the sale of the Securities offered from time
to time hereby will be used to fund possible acquisitions of senior living
communities and businesses engaged in activities similar or complementary to the
Company's business, for the development and construction of additional senior
living communities and expansions of the Company's existing communities, and for
general corporate purposes, including working capital. The Company will not
receive any proceeds from the sale of the Shareholder Shares. See "Selling
Shareholders."
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DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $.01 per share, and 5,000,000 shares of Preferred Stock, no par value per
share. Currently, 11,435,952 shares of Common Stock are issued and outstanding,
no shares of Preferred Stock are outstanding, and 804,832 shares of Common Stock
are reserved for issuance pursuant to outstanding stock options under the
Company's 1997 Stock Incentive Plan. In addition, an aggregate of 5,750,000
shares of Common Stock are reserved for issuance upon conversion of the
Convertible Debentures.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders and are not entitled to cumulative voting
in the election of directors, which means that the holders of a majority of the
shares voting for the election of directors can elect all of the directors then
standing for election by the holders of Common Stock. The holders of Common
Stock are entitled to share ratably in such dividends, if any, as may be
declared from time to time by the Board of Directors in its discretion out of
funds legally available therefor. The holders of Common Stock are entitled to
share ratably in any assets remaining after satisfaction of all prior claims
upon liquidation of the Company. The Company's Charter gives holders of Common
Stock no preemptive or other subscription or conversion rights, and there are no
redemption provisions with respect to such shares. All outstanding shares of
Common Stock are, and the shares offered hereby will be, when issued and paid
for, fully paid and nonassessable. The rights, preferences, and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of holders of shares of any series of Preferred Stock that the Company
may designate and issue in the future.
The Common Stock is listed on the NYSE. The transfer agent and registrar
for the Common Stock is American Stock Transfer and Trust Company, New York, New
York.
PREFERRED STOCK
General
The following description of the Preferred Stock sets forth certain
anticipated general terms and provisions of the Preferred Stock to which any
Prospectus Supplement may relate. Certain other terms of any series of the
Preferred Stock offered by any Prospectus Supplement (which terms may be
different than those stated below) will be described in such Prospectus
Supplement. The description of certain provisions of the Preferred Stock set
forth below and in any Prospectus Supplement does not purport to be complete and
is subject to and qualified in its entirety by reference to the Company's
Charter and the Board of Directors' resolution relating to each series of the
Preferred Stock that will be filed with the Commission and incorporated by
reference to the Registration Statement of which this Prospectus is a part at or
prior to the time of the issuance of such series of Preferred Stock.
Under the Charter, the Board of Directors of the Company is authorized to
establish and issue, from time to time, up to 5,000,000 shares of Preferred
Stock, in one or more series, with such dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price or prices, and the liquidation
preference as shall be stated in the resolution providing for the issue of a
series of such stock, adopted, at any time or from time to time, by the Board of
Directors of the Company.
The Preferred Stock shall have the dividend, liquidation, redemption, and
voting rights set forth below unless otherwise provided in a Prospectus
Supplement relating to a particular series of the Preferred Stock. Reference is
made to the Prospectus Supplement relating to the particular series of the
Preferred Stock offered thereby for specific terms, including: (i) the
designation and stated value per share of such Preferred Stock and the number of
shares offered; (ii) the amount of liquidation preference per share; (iii) the
initial public offering price at which such Preferred Stock
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<PAGE> 137
will be issued; (iv) the dividend rate (or method of calculation), the dates on
which dividends shall be payable, and the dates from which dividends shall
commence to cumulate, if any; (v) any redemption or sinking fund provisions;
(vi) any conversion rights; and (vii) any additional voting, dividend,
liquidation, redemption, sinking fund, and other rights, preferences,
privileges, limitations, and restrictions.
The Preferred Stock will, when issued, be fully paid and nonassessable and
will have no preemptive rights. Unless otherwise stated in a Prospectus
Supplement relating to a particular series of the Preferred Stock, each series
of the Preferred Stock will rank on a parity as to dividends and distributions
of assets with each other series of the Preferred Stock. The rights of the
holders of each series of Preferred Stock will be subordinate to those of the
Company's general creditors.
The Common Stock is listed on the NYSE. The current rules of the NYSE
effectively preclude the listing on the NYSE of any securities of an issuer that
has issued securities or taken other corporate action that would have the effect
of nullifying, restricting, or disparately reducing the per share voting rights
of holders of an outstanding class or classes of securities registered under
Section 12 of the Exchange Act. The Company does not intend to issue any
additional shares of stock that would make the Common Stock ineligible for
continued listing or cause the Common Stock to be delisted from the NYSE.
Dividend Rights
Unless otherwise stated in a Prospectus Supplement relating to a particular
series of the Preferred Stock, holders of shares of the Preferred Stock of each
series will be entitled to receive, when, as, and if declared by the Board of
Directors of the Company, out of funds of the Company legally available
therefor, cash dividends on such dates and at such rates as will be set forth
in, or as are determined by the method described in, the Prospectus Supplement
relating to such series of the Preferred Stock. Such rate may be fixed or
variable or both. Each such dividend will be payable to the holders of record as
they appear on the stock books of the Company on such record dates, fixed by the
Board of Directors of the Company, as specified in the Prospectus Supplement
relating to such series of Preferred Stock.
Such dividends may be cumulative or noncumulative, as provided in the
Prospectus Supplement relating to such series of Preferred Stock. If the Board
of Directors of the Company fails to declare a dividend payable on a dividend
payment date on any series of Preferred Stock for which dividends are
noncumulative, then the holders of such series of Preferred Stock will have no
right to receive a dividend in respect of the dividend period ending on such
dividend payment date, and the Company shall have no obligation to pay the
dividend accrued for such period, whether or not dividends on such series are
declared payable on any future dividend payment dates. Dividends on the shares
of each series of Preferred Stock for which dividends are cumulative will accrue
from the date on which the Company initially issues shares of such series.
Unless otherwise stated in a Prospectus Supplement relating to a particular
series of the Preferred Stock, so long as the shares of any series of the
Preferred Stock shall be outstanding, unless (i) full dividends (including if
such Preferred Stock is cumulative, dividends for prior dividend periods) shall
have been paid or declared and set apart for payment on all outstanding shares
of the Preferred Stock of such series and all other classes and series of
Preferred Stock (other than Junior Stock, as defined below) and (ii) the Company
is not in default or in arrears with respect to the mandatory or optional
redemption or mandatory repurchase or other mandatory retirement of, or with
respect to any sinking or other analogous fund for, any shares of Preferred
Stock of such series or any shares of any other Preferred Stock of any class or
series (other than Junior Stock), the Company may not declare any dividends on
any shares of Common Stock or any other stock of the Company ranking as to
dividends or distributions of assets junior to such series of Preferred Stock
(the Common Stock and any such other stock being herein referred to as "Junior
Stock"), or make any payment on account of, or set apart money for, the
purchase, redemption, or other
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retirement of, or for a sinking or other analogous fund for, any shares of
Junior Stock or make any distribution in respect thereof, whether in cash or
property or in obligations or stock of the Company, other than Junior Stock that
is neither convertible into, nor exchangeable or exercisable for, any securities
of the Company other than Junior Stock.
Liquidation Preference
In the event of any liquidation, dissolution, or winding up of the Company,
voluntary or involuntary, the holders of each series of the Preferred Stock will
be entitled to receive out of the assets of the Company available for
distribution to shareholders, before any distribution of assets or payment is
made to the holders of Common Stock or any other shares of stock of the Company
ranking junior as to such distribution or payment to such series of Preferred
Stock, the amount set forth in the Prospectus Supplement relating to such series
of the Preferred Stock. Upon any voluntary or involuntary liquidation,
dissolution, or winding up of the Company, the Preferred Stock of such series
and such other shares of Preferred Stock will share ratably in any such
distribution of assets of the Company in proportion to the full respective
preferential amounts to which they are entitled. After payment to the holders of
the Preferred Stock of each series of the full preferential amounts of the
liquidating distribution to which they are entitled, the holders of each such
series of the Preferred Stock will be entitled to no further participation in
any distribution of assets by the Company.
If such payment shall have been made in full to all holders of shares of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of any other classes of stock ranking junior to the Preferred Stock
upon liquidation, dissolution, or winding up, according to their respective
rights and preferences and in each case according to their respective number of
shares. For such purposes, the consolidation or merger of the Company with or
into any other corporation, or the sale, lease, or conveyance of all or
substantially all of the property or business of the Company, shall not be
deemed to constitute a liquidation, dissolution, or winding up of the Company.
Redemption
A series of the Preferred Stock may be redeemable, in whole or from time to
time in part, at the option of the Company, and may be subject to mandatory
redemption pursuant to a sinking fund or otherwise, in each case upon terms, at
the times and at the redemption prices set forth in the Prospectus Supplement
relating to such series. Shares of the Preferred Stock redeemed by the Company
will be restored to the status of authorized but unissued shares of Preferred
Stock of the Company.
In the event that fewer than all of the outstanding shares of a series of
the Preferred Stock are to be redeemed, whether by mandatory or optional
redemption, the number of shares to be redeemed will be determined by lot or pro
rata (subject to rounding to avoid fractional shares) as may be determined by
the Company or by any other method as may be determined by the Company in its
sole discretion to be equitable. From and after the redemption date (unless the
Company defaults in the payment of the redemption price plus accumulated and
unpaid dividends, if any), dividends shall cease to accumulate on the shares of
the Preferred Stock called for redemption and all rights of the holders thereof
(except the right to receive the redemption price plus accumulated and unpaid
dividends, if any) shall cease.
So long as any dividends on shares of any series of the Preferred Stock or
any other series of Preferred Stock of the Company ranking on a parity as to
dividends and distributions of assets with such series of the Preferred Stock
are in arrears, no shares of any such series of the Preferred Stock or such
other series of Preferred Stock of the Company will be redeemed (whether by
mandatory or optional redemption) unless all such shares are simultaneously
redeemed, and the Company will not purchase or otherwise acquire any such
shares; provided, however, that the
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foregoing will not prevent the purchase or acquisition of such shares of
Preferred Stock of such series or of shares of such other series of Preferred
Stock pursuant to a purchase or exchange offer made on the same terms to holders
of all outstanding shares of Preferred Stock of such series and, unless the full
cumulative dividends on all outstanding shares of any cumulative Preferred Stock
of such series and any other stock of the Company ranking on a parity with such
series as to dividends and upon liquidation shall have been paid or
contemporaneously are declared and paid for all past dividend periods, the
Company shall not purchase or otherwise acquire directly or indirectly any
shares of Preferred Stock of such series (except by conversion into or exchange
for stock of the Company ranking junior to the Preferred Stock of such series as
to dividends and upon liquidation).
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of shares of Preferred
Stock to be redeemed at the address shown on the stock transfer books of the
Company.
Conversion Rights
The terms, if any, on which shares of Preferred Stock of any series may be
exchanged for or converted (mandatorily or otherwise) into shares of Common
Stock or another series of Preferred Stock will be set forth in the Prospectus
Supplement relating thereto.
Voting Rights
Except as indicated below or in a Prospectus Supplement relating to a
particular series of the Preferred Stock, or except as required by applicable
law, the holders of the Preferred Stock will not be entitled to vote for any
purpose.
Unless otherwise stated in a Prospectus Supplement relating to a particular
series of the Preferred Stock, so long as any shares of Preferred Stock remain
outstanding, the Company shall not, without the consent or the affirmative vote
of the holders of a majority of the shares of each series of Preferred Stock
outstanding at the time given in person or by proxy, either in writing or at a
meeting (such series voting separately as a class) (i) authorize, create, or
issue, or increase the authorized or issued amount of, any class or series of
stock ranking prior to such series of Preferred Stock with respect to payment of
dividends, or the distribution of assets on liquidation, dissolution, or winding
up or reclassifying any authorized stock of the Company into any such shares, or
create, authorize, or issue any obligation or security convertible into or
evidencing the right to purchase any such shares and (ii) to repeal, amend, or
otherwise change any of the provisions applicable to the Preferred Stock of such
series in any manner that materially and adversely affects the powers,
preferences, voting power, or other rights or privileges of such series of the
Preferred Stock or the holders thereof; provided, however, that any increase in
the amount of the authorized Preferred Stock or the creation or issuance of
other series of Preferred Stock, or any increase in the amount of authorized
shares of such series or of any other series of Preferred Stock, in each case
ranking on a parity with or junior to the Preferred Stock of such series, shall
not be deemed to materially and adversely affect such rights, preferences,
privileges, or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of the Preferred Stock shall have been
redeemed or called for redemption and sufficient funds shall have been deposited
in trust to effect such redemption.
Transfer Agent and Registrar
The transfer agent, dividend and redemption price disbursement agent, and
registrar for shares of each series of the Preferred Stock will be set forth in
the Prospectus Supplement relating thereto.
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CERTAIN PROVISIONS OF THE CHARTER, BYLAWS, AND TENNESSEE LAW
General
The provisions of the Charter, the Bylaws, and Tennessee statutory law
described in this section may delay or make more difficult acquisitions or
changes of control of the Company that are not approved by the Board of
Directors. Such provisions have been implemented to enable the Company,
particularly (but not exclusively) in the initial years of its existence as an
independent, publicly-owned company, to develop its business in a manner that
will foster its long-term growth without the disruption of the threat of a
takeover not deemed by the Board of Directors to be in the best interests of the
Company and its shareholders.
Directors
The Bylaws provide that the number of directors shall be no fewer than
three nor more than fifteen, with the exact number to be established by the
Board of Directors and subject to change from time to time as determined by the
Board of Directors. Vacancies on the Board of Directors (including vacancies
created by an increase in the number of directors) may be filled by the Board of
Directors, acting by a majority of the remaining directors then in office, or by
a plurality of the votes cast by the shareholders at a meeting at which a quorum
is present. Officers are elected annually by and serve at the pleasure of the
Board of Directors.
The Charter and Bylaws provide that the Board of Directors is divided into
three classes of as nearly equal size as possible, and the term of office of
each class expires in consecutive years so that each year only one class is
elected. The Charter also provides that directors may be removed only for cause
and only by (i) the affirmative vote of the holders of a majority of the voting
power of all the shares of the Company's capital stock then entitled to vote in
the election of directors, voting together as a single class, unless the vote of
a special voting group is otherwise required by law; or (ii) the affirmative
vote of a majority of the entire Board of Directors then in office. The overall
effect of these provisions in the Company's Charter and Bylaws may be to render
more difficult a change in control of the Company or the removal of incumbent
management.
Advance Notice for Shareholder Proposals or Making Nominations at Meetings
The Bylaws establish an advance notice procedure for shareholder proposals
to be brought before a meeting of shareholders of the Company and for
nominations by shareholders of candidates for election as directors at an annual
meeting or a special meeting at which directors are to be elected. Subject to
any other applicable requirements, only such business may be conducted at a
meeting of shareholders as has been brought before the meeting by, or at the
direction of, the Board of Directors, or by a shareholder who has given to the
Secretary of the Company timely written notice, in proper form, of the
shareholder's intention to bring that business before the meeting. The presiding
officer at such meeting has the authority to make such determinations. Only
persons who are selected and recommended by the Board of Directors, or the
committee of the Board of Directors designated to make nominations, or who are
nominated by a shareholder who has given timely written notice, in proper form,
to the Secretary prior to a meeting at which directors are to be elected will be
eligible for election as directors of the Company.
To be timely, notice of nominations or other business to be brought before
any meeting must be received by the Secretary of the Company not later than 120
days in advance of the anniversary date of the Company's proxy statement for the
previous year's annual meeting or, in the case of special meetings, at the close
of business on the tenth day following the date on which notice of such meeting
is first given to shareholders.
The notice of any shareholder proposal or nomination for election as
director must set forth various information required under the Bylaws. The
person submitting the notice of nomination and any person acting in concert with
such person must provide, among other things, the name and
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address under which they appear on the Company's books (if they so appear) and
the class and number of shares of the Company's capital stock that are
beneficially owned by them.
Amendment of the Bylaws and Charter
The Bylaws provide that a majority of the members of the Board of Directors
who are present at any regular or special meeting or, subject to greater voting
requirements imposed by the Charter, the holders of a majority of the voting
power of all shares of the Company's capital stock represented at a regular or
special meeting have the power to amend, alter, change, or repeal the Bylaws.
Any proposal to amend, alter, change, or repeal provisions of the Charter
relating to staggered terms for directors, and limitations on the ability of
shareholders to call a shareholders' meeting or to remove directors require
approval by the affirmative vote of both a majority of the members of the Board
of Directors then in office and the holders of three-fourths of the voting power
of all of the shares of the Company's capital stock entitled to vote on the
amendments. Other amendments to the Charter require the affirmative vote of both
a majority of the members of the Board of Directors then in office and the
holders of a majority of the voting power of all of the shares of the Company's
capital stock entitled to vote on the amendments, with shareholders entitled to
dissenters' rights as a result of the Charter amendment voting together as a
single class. Shareholders entitled to dissenters' rights as a result of a
Charter amendment are those whose rights would be materially and adversely
affected because the amendment (i) alters or abolishes a preferential right of
the shares; (ii) creates, alters, or abolishes a right in respect of redemption;
(iii) alters or abolishes a preemptive right; (iv) excludes or limits the right
of the shares to vote on any matter, or to cumulate votes, other than a
limitation by dilution through issuance of shares or other securities with
similar voting rights; or (v) reduces the number of shares held by such holder
to a fraction if the fractional share is to be acquired for cash. In general,
however, under the TBCA no shareholder is entitled to dissenters' rights if the
security he or she holds is listed on a national securities exchange, such as
the NYSE.
Anti-Takeover Legislation
The Tennessee Business Combination Act (the "Combination Act") provides,
among other things, that any corporation to which the Combination Act applies,
including the Company, shall not engage in any "business combination" with an
"interested shareholder" for a period of five years following the date that such
shareholder became an interested shareholder unless prior to such date the board
of directors of the corporation approved either the business combination or the
transaction which resulted in the shareholder becoming an interested
shareholder. The Combination Act defines "business combination," generally, to
mean any: (i) merger or consolidation; (ii) share exchange; (iii) sale, lease,
exchange, mortgage, pledge, or other transfer (in one transaction or a series of
transactions) of assets representing 10% or more of (A) the market value of
consolidated assets, (B) the market value of the corporation's outstanding
shares or (C) the corporation's consolidated net income; (iv) issuance or
transfer of shares from the corporation to the interested shareholder; (v) plan
of liquidation; (vi) transaction in which the interested shareholder's
proportionate share of the outstanding shares of any class of securities is
increased; or (vii) financing arrangements pursuant to which the interested
shareholder, directly or indirectly, receives a benefit except proportionately
as a shareholder. The Combination Act defines "interested shareholder,"
generally, to mean any person who is the beneficial owner, either directly or
indirectly, of 10% or more of any class or series of the outstanding voting
stock, or any affiliate or associate of the corporation who has been the
beneficial owner, either directly or indirectly, of 10% or more of the voting
power of any class or series of the corporation's stock at any time within the
five year period preceding the date in question. Consummation of a business
combination that is subject to the five-year moratorium is permitted after such
period if the transaction (i) complies with all applicable charter and bylaw
requirements and applicable Tennessee law and (ii) is approved by at least two-
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thirds of the outstanding voting stock not beneficially owned by the interested
shareholder, or when the transaction meets certain fair price criteria. The fair
price criteria include, among others, the requirement that the per share
consideration received in any such business combination by each of the
shareholders is equal to the highest of (i) the highest per share price paid by
the interested shareholder during the preceding five-year period for shares of
the same class or series plus interest thereon from such date at a treasury bill
rate less the aggregate amount of any cash dividends paid and the market value
of any dividends paid other than in cash since such earliest date, up to the
amount of such interest; (ii) the highest preferential amount, if any, such
class or series is entitled to receive on liquidation; or (iii) the market value
of the shares on either the date the business combination is announced or the
date when the interested shareholder reaches the 10% threshold, whichever is
higher, plus interest thereon less dividends as noted above.
The Tennessee Control Share Acquisition Act (the "Acquisition Act")
prohibits certain shareholders from exercising in excess of 20% of the voting
power in a corporation acquired in a "control share acquisition," as defined in
the Acquisition Act, unless such voting rights have been previously approved by
the disinterested shareholders of the corporation. The Company has elected not
to make the Acquisition Act applicable to the Company. No assurance can be given
that such election, which must be expressed in a charter or bylaw amendment,
will not be made in the future.
The Tennessee Greenmail Act (the "Greenmail Act") prohibits the Company
from purchasing or agreeing to purchase any of its securities, at a price in
excess of fair market value, from a holder of 3% or more of any class of such
securities who has beneficially owned such securities for less than two years,
unless such purchase has been approved by the affirmative vote of a majority of
the outstanding shares of each class of voting stock issued by the Company or
the Company makes an offer of at least equal value per share to all holders of
shares of such class.
The effect of the Combination Act, the Acquisition Act, and the Greenmail
Act may be to render more difficult a change of control of the Company.
REGISTRATION RIGHTS
Certain beneficial holders of shares of Common Stock issued pursuant to the
Reorganization have contractual rights with respect to the registration of the
sale thereof. Holders of shares of Common Stock issued in the Reorganization
that may not otherwise be sold pursuant to Rule 144 of the Securities Act are
entitled to two demand registrations upon the written demand to the Company to
register the sale of 25% or more of such shares; provided, however, that in no
event will any holder of such shares participating in such demand registrations
be permitted to sell in excess of 20% of such holder's shares. In addition,
until May 30, 1999, holders of shares of Common Stock issued in the
Reorganization that may not otherwise be sold pursuant to Rule 144 of the
Securities Act may require the Company to include all or a portion of such
holder's Reorganization Shares in a registration statement filed by the Company
for its own account to issue Common Stock for cash, provided, among other
conditions, that the managing underwriter (if any) of such offering has the
right, subject to certain conditions, to limit the number of such shares or
other shares of Common Stock subject to registration rights granted by the
Company included in such registration statement. In general, all fees, costs,
and expenses of such registrations (other than the underwriting commissions,
dealers' fees, brokers' fees, and concessions applicable to Common Stock) will
be borne by the Company.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities are to be issued under an indenture (the "Indenture")
to be executed by the Company and a specified trustee (the "Trustee"), a form of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The following summaries of certain anticipated provisions
of the Indenture and the Debt Securities do not purport to be complete. The
particular terms of the Debt Securities offered by any Prospectus Supplement
(which terms may be
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different than those stated below) and the extent, if any, to which such general
provisions may apply to the Debt Securities so offered will be described in the
Prospectus Supplement relating to such Debt Securities. Accordingly, for a
description of the terms of a particular issue of Debt Securities, reference
must be made to both the Prospectus Supplement relating thereto and the
following description. Capitalized terms not otherwise defined herein shall have
the meaning ascribed to them in the Indenture. Whenever particular sections or
defined terms of the Indenture are referred to, it is intended that such
sections or defined terms shall be incorporated herein by reference.
GENERAL
The Indenture does not limit the aggregate principal amount of Debt
Securities that may be issued thereunder and provides that Debt Securities may
be issued from time to time in one or more series. The Prospectus Supplement
will describe certain terms of any Debt Securities offered thereby, including
(i) the title of such Debt Securities; (ii) any limit on the aggregate principal
amount of such Debt Securities and their purchase price; (iii) the date or dates
on which such Debt Securities will mature; (iv) the rate or rates per annum (or
manner in which interest is to be determined) at which such Debt Securities will
bear interest, if any, and the date from which such interest, if any, will
accrue; (v) the dates on which such interest, if any, on such Debt Securities
will be payable and the regular record dates for such interest payment dates;
(vi) any mandatory or optional sinking fund or analogous provisions; (vii)
additional provisions, if any, for the defeasance of such Debt Securities;
(viii) the date, if any, after which and the price or prices at which such Debt
Securities may, pursuant to any optional or mandatory redemption or repayment
provisions, be redeemed and the other detailed terms and provisions of any such
optional or mandatory redemption or repayment provisions; (ix) whether such Debt
Securities are to be issued in whole or in part in registered form represented
by one or more registered global securities (a "Registered Global Security")
and, if so, the identity of the depository for such Registered Global Security
or Debt Securities; (x) certain applicable United States federal income tax
consequences; (xi) any provisions relating to security for payments due under
such Debt Securities; (xii) any provisions relating to the conversion or
exchange of such Debt Securities into or for shares of Common Stock or Debt
Securities of another series; (xiii) any provisions relating to the ranking of
such Debt Securities in right of payment as compared to other obligations of the
Company; (xiv) the denomiations in which such Debt Securities are authorized to
be issued; (xv) the place or places where principal of, premium, if any, and
interest, if any, on such Debt Securities will be payable; and (xvi) any other
specific term of such Debt Securities, including any additional events of
default or covenants provided for with respect to such Debt Securities, and any
terms that may be required by or advisable under applicable laws or regulations.
The Indenture does not contain any provision requiring the Company to
repurchase the Debt Securities of any series at the option of the holders
thereof in the event of a leveraged buyout, recapitalization or similar
restructuring of the Company, even though the Company's creditworthiness and the
market value of the Debt Securities may decline significantly as a result of
such transaction. The Indenture does not protect holders of the Debt Securities
of any series against any decline in credit quality, whether resulting from any
such transaction or from any other cause. The Company may at any time buy Debt
Securities of any series on the open market.
CONVERSION RIGHTS
The terms, if any, on which Debt Securities of any series may be exchanged
for or converted into shares of Common Stock or Debt Securities of another
series will be set forth in the Prospectus Supplement relating thereto.
The conversion price will be subject to adjustment under certain
conditions, including (i) the payment of dividends (and other distributions) in
shares of Common Stock on any class of capital stock of the Company; (ii)
subdivisions, combinations, and reclassifications of the Common Stock; (iii) the
issuance to all or substantially all holders of Common Stock of rights or
warrants entitling
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<PAGE> 144
them to subscribe for or purchase shares of Common Stock at a price per share
(or having a conversion price per share) less than the then current market
price; and (iv) distributions to all or substantially all holders of shares of
Common Stock of evidences of indebtedness or assets (including securities, but
excluding those rights, warrants, dividends, and distributions referred to above
and dividends and distributions not prohibited under the terms of the Indenture)
of the Company, subject to the limitation that all adjustments by reason of any
of the foregoing would not be made until they result in a cumulative change in
the conversion price of at least 1.0%. No adjustments in the conversion price of
the Debt Securities will be made for regular quarterly or other periodic or
recurring cash dividends or distributions. In the event the Company shall effect
any capital reorganization or reclassification of its shares of Common Stock or
shall consolidate or merge with or into any trust or corporation (other than a
consolidation or merger in which the Company is the surviving entity) or shall
sell or transfer substantially all of its assets to any other trust or
corporation, the holders of the Debt Securities of any series shall, if entitled
to convert such Debt Securities at any time after such transaction, receive upon
conversion thereof, in lieu of each share of Common Stock into which the Debt
Securities of such series would have been convertible prior to such transaction,
the same kind and amount of stock and other securities, cash, or property as
shall have been issuable or distributable in connection with such transaction
with respect to each share of Common Stock.
A conversion price adjustment made according to the provisions of the Debt
Securities of any series (or the absence of provisions for such an adjustment)
might result in a constructive distribution to the holders of Debt Securities of
such series or holders of shares of Common Stock that would be subject to
taxation as a dividend. The Company may, at its option, make such reductions in
the conversion price, in addition to those set forth above, as the Board of
Directors of the Company deems advisable to avoid or diminish any income tax to
holders of shares of Common Stock resulting from any dividend or distribution of
shares of Common Stock (or rights to acquire shares of Common Stock) or from any
event treated as such for income tax purposes or for any other reason. The Board
of Directors will also have the power to resolve any ambiguity or correct any
error in the adjustments made pursuant to these provisions and its actions in so
doing shall be final and conclusive.
Fractional shares of Common Stock will not be issued upon conversion but,
in lieu thereof, the Company will pay a cash adjustment based upon market price.
The holders of Debt Securities of any series at the close of business on an
interest payment record date shall be entitled to receive the interest payable
on such Debt Securities on the corresponding interest payment date
notwithstanding the conversion thereof. Debt Securities surrendered for
conversion during the period from the close of business on any record date for
the payment of interest to the opening of business on the corresponding interest
payment date, however, must be accompanied by payment of an amount equal to the
interest payable on such interest payment date. Holders of Debt Securities of
any series who convert Debt Securities of such series on an interest payment
date will receive the interest payable by the Company on such date and need not
include payment in the amount of such interest upon surrender of such Debt
Securities for conversion. Except as set forth above, no payment or adjustment
is to be made on conversion for interest accrued on the Debt Securities of any
series or for dividends on shares of Common Stock.
OPTIONAL REDEMPTION
The Debt Securities of any series may be subject to redemption as permitted
or required by the terms of such Debt Securities on at least 30 days' prior
notice by mail.
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<PAGE> 145
SUBORDINATION
The indebtedness evidenced by the Debt Securities of any series may be
subordinated and junior in right of payment to the extent set forth in the
Indenture to the prior payment in full of amounts then due or thereafter created
on all Senior Indebtedness (as defined). The terms, if any, on which the Debt
Securities of any series may be subordinated and junior in right of payment to
the prior payment in full of amounts then due or thereafter created on all
Senior Indebtedness will be set forth in the Prospectus Supplement relating
thereto. No payment shall be made by the Company on account of principal of (or
premium, if any) or interest on the Debt Securities of any series or on account
of the purchase or other acquisition of Debt Securities of any series, if there
shall have occurred and be continuing a default with respect to any Senior
Indebtedness permitting the holders to accelerate the maturity thereof or with
respect to the payment of any Senior Indebtedness, and such default shall be the
subject of a judicial proceeding or the Company shall have received notice of
such default from any holder of Senior Indebtedness, unless and until such
default or event of default shall have been cured or waived or shall have ceased
to exist. By reason of these provisions, in the event of default on any Senior
Indebtedness, whether now outstanding or hereafter issued, payment of principal
of (and premium, if any) and interest on the Debt Securities of any series may
not be permitted to be made until such Senior Indebtedness is paid in full, or
the event of default on such Senior Indebtedness is cured or waived.
Upon any acceleration of the principal of the Debt Securities or any
distribution of assets of the Company upon any receivership, dissolution,
winding-up, liquidation, reorganization, or similar proceedings of the Company,
whether voluntary or involuntary, or in bankruptcy or insolvency, all amounts
due or to become due upon all Senior Indebtedness must be paid in full before
the holders of the Debt Securities of any series or the Trustee are entitled to
receive or retain any assets so distributed in respect of the Debt Securities.
By reason of this provision, in the event of insolvency, holders of the Debt
Securities of any series may recover less, ratably, than holders of Senior
Indebtedness.
"Senior Indebtedness" is defined to mean the principal, premium, if any,
and interest on, and all other amounts payable under or in respect of,
Indebtedness of the Company (other than Indebtedness owed to a subsidiary of the
Company, Indebtedness of the Company that is expressly pari passu with the Debt
Securities, or Indebtedness that is expressly subordinated to the Debt
Securities). There is no limit on the amount of Senior Indebtedness that the
Company may incur.
"Indebtedness" with respect to any Person is defined to mean:
(i) all indebtedness for money borrowed whether or not evidenced by a
promissory note, draft, or similar instrument;
(ii) that portion of obligations with respect to any lease that is
properly classified as a liability on a balance sheet in accordance with
generally accepted accounting principles;
(iii) notes payable and drafts accepted representing extensions of
credit;
(iv) any balance owed for all or any part of the deferred purchase
price of property or services, which purchase price is due more than six
months from the date of incurrence of the obligation in respect thereof
(except any such balance that constitutes (a) a trade payable or an accrued
liability arising in the ordinary course of business or (b) a trade draft
or note payable issued in the ordinary course of business in connection
with the purchase of goods or services), if and to the extent such debt
would appear as a liability upon a balance sheet of such person prepared in
accordance with generally accepted accounting principles;
(v) tenant deposits;
(vi) any debt of others described in the preceding clauses (i) though
(v) that such person has guaranteed or for which it is otherwise liable;
and
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<PAGE> 146
(vii) any deferral, amendment, renewal, extension, supplement, or
refunding of any of the foregoing indebtedness described in any of the
preceding clauses (i) through (vi);
provided, however, that, in computing the "Indebtedness" of any Person, there
shall be excluded any particular indebtedness if, upon or prior to the maturity
thereof and at the time of determination of such indebtedness, there shall have
been deposited with a depositary in trust money (or evidence of indebtedness if
permitted by the instrument creating such indebtedness) in the necessary amount
to pay, redeem, or satisfy such indebtedness as it becomes due, and the amount
so deposited shall not be included in any computation of the assets of such
Person.
DIVIDENDS, DISTRIBUTIONS, AND ACQUISITIONS OF COMMON STOCK
The Company will not (i) declare or pay any dividend, or make any
distribution on its Common Stock to its shareholders (other than dividends or
distributions payable in Common Stock of the Company) or (ii) purchase, redeem,
or otherwise acquire or retire for value any of its Common Stock, or any
warrants, rights, or options to purchase or acquire any shares of its Common
Stock (other than the Debt Securities of any series or any other convertible
indebtedness of the Company that is neither secured nor subordinated to the Debt
Securities of any series), if at the time of such action an Event of Default has
occurred and is continuing or would exist immediately after such action. The
foregoing, however, will not prevent (i) the payment of any dividend within 60
days after the date of declaration when the payment would have complied with the
foregoing provision on the date of declaration; or (ii) the Company's retirement
of any of its Common Stock by exchange for, or out of the proceeds of the
substantially concurrent sale of, other Common Stock.
ADDITIONAL COVENANTS
Any additional covenants of the Company with respect to a series of the
Debt Securities will be set forth in the Prospectus Supplement relating thereto.
MODIFICATION OF THE INDENTURE
Under the Indenture, with certain exceptions, the rights and obligations of
the Company with respect to any series of Debt Securities and the rights of
Holders of such series may only be modified by the Company and the Trustee with
the consent of the Holders of at least a majority in principal amount of the
outstanding Debt Securities of such series. Without the consent of each Holder
of any Debt Securities affected, however, an amendment, waiver, or supplement
may not (i) reduce the principal of, or rate of interest on, any Debt
Securities; (ii) change the stated maturity date of the principal of, or any
installment of interest on, any Debt Securities; (iii) waive a default in the
payment of the principal amount of, or the interest on, or any premium payable
on redemption of, any Debt Securities; (iv) change the currency for payment of
the principal of, or premium or interest on, any Debt Securities; (v) impair the
right to institute suit for the enforcement of any such payment when due; (vi)
adversely affect any right to convert any Debt Securities; (vii) reduce the
amount of outstanding Debt Securities necessary to consent to an amendment,
supplement, or waiver provided for in the Indenture; or (viii) modify any
provisions of the Indenture relating to the modification and amendment of the
Indenture or waivers of past defaults, except as otherwise specified.
EVENTS OF DEFAULT, NOTICE, AND WAIVER
Except as otherwise set forth in the accompanying Prospectus Supplement,
the following is a summary of certain provisions of the Indenture relating to
Events of Default, notice, and waiver.
The following are Events of Default under the Indenture with respect to any
series of Debt Securities: (i) default in the payment of interest on the Debt
Securities of such series when due and payable, which continues for 30 days;
(ii) default in the payment of principal of (and premium, if any) on the Debt
Securities when due and payable, at maturity, upon redemption, or otherwise,
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<PAGE> 147
which continues for five Business Days; (iii) failure to perform any other
covenant of the Company contained in the Indenture or the Debt Securities of
such series that continues for 60 days after written notice as provided in the
Indenture; (iv) default under any bond, debenture or other Indebtedness (as
defined in the Indenture) of the Company or any subsidiary if (a) either (x)
such Event of Default results from the failure to pay any such Indebtedness at
maturity or (y) as a result of such Event of Default, the maturity of such
Indebtedness has been accelerated prior to its expressed maturity and such
acceleration shall not be rescinded or annulled or the accelerated amount paid
within ten days after notice to the Company of such acceleration, or such
Indebtedness having been discharged, and (b) the principal amount of such
Indebtedness, together with the principal amount of any other such Indebtedness
in default for failure to pay principal or interest thereon, or the maturity of
which has been so accelerated, aggregates $10.0 million or more; and (v) certain
events of bankruptcy, insolvency, or reorganization relating to the Company.
If an Event of Default occurs and is continuing with respect to the Debt
Securities of any series, either the Trustee or the Holders of a majority in
aggregate principal amount of the outstanding Debt Securities of such series may
declare the Debt Securities due and payable immediately.
The Indenture provides that the Trustee will, within 90 days after the
occurrence of any Default or Event of Default with respect to the Debt
Securities of any series, give to the Holders of Debt Securities notice of all
uncured Defaults and Events of Default known to it, but the Trustee will be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interest of such Holders, except in the
case of a default in the payment of the principal of (or premium, if any) or
interest on any of the Debt Securities of such series.
The Indenture provides that the Holders of a majority in aggregate
principal amount of the Debt Securities of any series then outstanding may
direct the time, method, and place of conducting any proceedings for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Debt Securities of such series. The right of a
Holder to institute a proceeding with respect to the Indenture is subject to
certain conditions precedent including notice and indemnity to the Trustee, but
the Holder has an absolute right to receipt of principal of (and premium, if
any) and interest on such Holder's Debt Securities on or after the respective
due dates expressed in the Debt Securities, and to institute suit for the
enforcement of any such payments.
The Holders of a majority in principal amount of the outstanding Debt
Securities of any series then outstanding may on behalf of the Holders of all
Debt Securities of such series waive certain past defaults, except a default in
payment of the principal of (or premium, if any) or interest on any Debt
Securities of such series or in respect of certain provisions of the Indenture
that cannot be modified or amended without the consent of the Holder of each
outstanding Debt Security of such series affected thereby.
The Company will be required to furnish to the Trustee annually a statement
of certain officers of the Company stating whether or not they know of any
Default or Events of Default and, if they have knowledge of a Default or Event
of Default, a description of the efforts to remedy the same.
CONSOLIDATION, MERGER, SALE, OR CONVEYANCE
The Indenture provides that the Company may merge or consolidate with, or
sell or convey all, or substantially all, of its assets to any other trust or
corporation, provided that (i) either the Company shall be the continuing
entity, or the successor entity (if other than the Company) shall be any entity
organized and existing under the laws of the United States or a state thereof or
the District of Columbia (although it may, in truth, be owned by a foreign
entity) and such entity shall expressly assume by supplemental indenture all of
the obligations of the Company under the Debt Securities of any series and the
Indenture; (ii) immediately after giving effect to such transactions, no Default
or Event of Default shall have occurred and be continuing; and (iii) the Company
shall have delivered to the Trustee an Officers' Certificate and opinion of
counsel, stating that the transaction and supplemental indenture comply with the
Indenture.
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<PAGE> 148
GLOBAL SECURITIES
The Debt Securities may be issued in whole or in part in global form (the
"Global Securities"). The Global Securities will be deposited with a depository
(the "Depository"), or with a nominee for a Depository, identified in the
Prospectus Supplement. In such case, one or more Global Securities will be
issued in a denomination or aggregate denominations equal to the portion of the
aggregate principal amount of outstanding Debt Securities to be represented by
such Global Security or Securities. Unless and until it is exchanged in whole or
in part for Debt Securities in definitive form, a Global Security may not be
transferred except as a whole by the Depository for such Global Security to a
nominee of such Depository or by a nominee of such Depository to such Depository
or another nominee of such Depository or by such Depository or any such nominee
to a successor for such Depository or a nominee of such successor.
The specific material terms of the depository arrangement with respect to
any portion of a series of Debt Securities to be represented by a Global
Security will be described in the Prospectus Supplement related thereto. The
Company anticipates that the following provisions will apply to all depository
arrangements.
So long as the Depository for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depository or such nominee as the
case may be, will be considered the sole owner or Holder of the Debt Securities
represented by such Global Security for all purposes under the Indenture;
provided, however, that for purposes of obtaining any consents or directions
required to be given by the Holders of the Debt Securities, the Company, the
Trustee, and its agents will treat a person as the holder of such principal
amount of Debt Securities as specified in a written statement of the Depository.
Principal, premium, if any, and interest payments, if any, on Debt
Securities represented by a Global Security registered in the name of a
Depository or its nominee will be made directly to the owners of beneficial
interests of such Global Security, except as may be limited by the terms of the
resolution of the Board of Directors of the Company that authorizes such series
of Debt Securities.
The Company expects that the depository for any Debt Securities represented
by a Global Security, upon receipt of any payment of principal, premium, if any,
or interest will immediately credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of such Global Security as shown on the records of such Depository. The
Company also expects that payments by participants will be governed by standing
instructions and customary practices, as is now the case with the securities
held for the accounts of customers registered in "street names," and will be the
responsibility of such participants.
If the Depository for any Debt Securities represented by a Global Security
is at any time unwilling or unable to continue as Depository and a successor
Depository is not appointed by the Company within 90 days, the Company will
issue each Debt Security in definitive form to the beneficial owners thereof in
exchange for such Global Security. In addition, the Company may at any time and
in its sole discretion determine not to have any of the Debt Securities of a
series represented by one or more Global Securities and, in such event, will
issue Debt Securities of such series in definitive form in exchange for all of
the Global Security or Securities representing such Debt Securities.
GOVERNING LAW
The Indenture and the Debt Securities will be governed by and construed in
accordance with the laws of the State of New York.
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<PAGE> 149
SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
maximum number of shares that may be offered for sale by the Selling
Shareholders, as well as the beneficial ownership of the Common Stock as of July
7, 1998 and as adjusted to reflect the sale of all of the Shareholder Shares
with respect to each of the Selling Shareholders. This table does not reflect
any changes in beneficial ownership that would result from the sale of shares of
Common Stock by the Company. Under the rules of the Commission, a person is
deemed to be a "beneficial owner" of a security if he or she has or shares the
power to vote or direct the voting of such security or the power to dispose of
or direct the disposition of such security. Accordingly, more than one person
may be deemed to be a beneficial owner of the same security. Certain of the
Shareholder Shares offered in connection with an underwritten Offering of shares
of Common Stock by the Company may be offered pursuant to an over-allotment
option granted to the underwriters. The applicable Prospectus Supplement will
supplement the information set forth in the following table when any portion of
the Shareholder Shares are offered in connection with an underwritten Offering
of shares of Common Stock by the Company.
<TABLE>
<CAPTION>
MAXIMUM SHARES BENEFICIALLY
SHARES BENEFICIALLY NUMBER OF OWNED AFTER THE SALE
OWNED PRIOR TO THE SHARES OF ALL THE SHAREHOLDER
OFFERINGS(1)(2) TO BE SOLD SHARES
------------------------ IN THE -----------------------
NAME NUMBER PERCENT OFFERINGS NUMBER PERCENT
- ---- --------- ------- --------------- ---------- --------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS:
W.E. Sheriff..................................... 639,217(3)(4) 5.6 20,000(5) 619,217 5.4
Christopher J. Coates............................ 258,303(6) 2.3 21,860(7) 236,443 2.1
Tom G. Downs..................................... 122,953(6) 1.1 30,360(7) 92,593 *
George T. Hicks.................................. 182,505(6) 1.6 37,860(7) 144,645 1.3
H. Todd Kaestner................................. 191,910(6) 1.7 38,287(7) 153,623 1.3
Lee A. McKnight.................................. 118,968(6) 1.0 30,360(7) 88,608 *
James T. Money................................... 186,918(6) 1.6 37,860(7) 149,058 1.3
DIRECTORS:
Robin G. Costa................................... 1,443,259(8)(9) 12.6 48,222(10) 1,395,037 12.2
Lawrence J. Stuesser............................. 72,547(11) * 7,547(12) 65,000 *
OTHER SELLING SHAREHOLDERS:
Joseph H. Baron.................................. 53,444 * 11,000 46,444 *
William H. Frist Annuity Trust -- 1997........... 329,677 2.9 50,000 279,677 2.4
Davis Hunt....................................... 17,893 * 3,000 15,893 *
Don Husi......................................... 44,088 * 5,000 41,088 *
Sylvester I, L.P................................. 14,804 * 14,804 -- --
</TABLE>
- ---------------
* Less than one percent.
(1) Pursuant to the rules of the Commission, shares of Common Stock that
certain persons presently have the right to acquire pursuant to the
conversion provisions of the Debentures ("Conversion Shares") are deemed
outstanding for the purpose of computing such person's percentage
ownership, but not deemed outstanding for the purpose of computing the
percentage ownership of the other persons shown in the table. Likewise,
shares subject to options held by directors and executive officers of the
Company that are exercisable within 60 days of the date hereof are deemed
outstanding for the purpose of computing such director's and executive
officer's beneficial ownership.
(2) Includes the following shares of Common Stock issuable upon the exercise of
options granted pursuant to the Company's 1997 Stock Incentive Plan which
the following persons are entitled to exercise within 60 days of the date
hereof: Mr. Sheriff, 20,000; Mr. Coates, 15,000; each of Messrs. Hicks,
Kaestner, and Money, 11,666; each of Ms. Costa and Mr. Stuesser, 5,000;
each of Messrs. Downs and McKnight, 6,666; and each of Messrs. Baron, Hunt,
and Husi, 3,333.
(3) Address: 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027.
(4) Includes 324,519 shares, including 4,166 Conversion Shares, beneficially
owned by W.E. Sheriff Family Limited Partnership, of which Mr. Sheriff is a
general partner.
(5) All shares to be sold by W.E. Sheriff Family Limited Partnership. See Note
4.
(6) Includes 1,860 shares beneficially owned by Sylvester I, L.P. ("Sylvester
I") as to which such person holds a pecuniary interest.
(7) Includes up to 1,860 shares that may be sold by Sylvester I. See Note 6.
(8) Address: 3833 Cleghorn Avenue, Suite 400, Nashville, Tennessee 37215.
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<PAGE> 150
(9) Includes 1,372,037 shares beneficially owned by DMAR Limited Partnership
("DMAR"). Ms. Costa is a Vice President of Margaret Energy, Inc., the
general partner of DMAR. Also includes an aggregate of 18,000 shares
beneficially owned by trusts as to which Ms. Costa exercises voting and
dispositive power and 48,222 shares held by the estate of Dan W. Maddox
(the "Maddox Estate") as to which Ms. Costa is co-executor.
(10) All shares to be sold by the Maddox Estate. See Note 9.
(11) Includes 67,547 shares beneficially owned by B&W Development Centers, Inc.,
a corporation of which Mr. Stuesser is a director and 50% shareholder.
(12) All shares to be sold by B&W Development Centers, Inc. See Note 11.
PLAN OF DISTRIBUTION
The Company may sell Securities in any of three ways: (i) directly to
investors; (ii) through underwriting syndicates represented by one or more
managing underwriters, or by one or more underwriters without a syndicate; or
(iii) through agents designated from time to time. The names of any underwriters
or agents of the Company involved in the sale of the Securities in respect of
which this Prospectus is being delivered and any applicable commissions or
discounts will be set forth in the Prospectus Supplement. The net proceeds to
the Company from each such sale will also be set forth in the Prospectus
Supplement.
Agents and underwriters may be entitled under agreements entered into with
the Company to indemnification by the Company against certain civil liabilities,
including liabilities under the Securities Act, or to contribution with respect
to payments that the agents or underwriters may be required to make in respect
thereof. Agents and underwriters may engage in transactions with or perform
services for the Company in the ordinary course of business.
The Shareholder Shares will be offered pursuant to this Prospectus and an
accompanying Prospectus Supplement only in connection with an underwritten
Offering of shares of Common Stock by the Company. Information relating to the
number of shares of Common Stock being sold by each Selling Shareholder and the
net proceeds to the Selling Shareholders will be set forth in the accompanying
Prospectus Supplement.
LEGAL MATTERS
The validity of the Securities offered from time to time hereby will be
passed upon for the Company and the Selling Shareholders by Bass, Berry & Sims
PLC, Nashville, Tennessee. H. Lee Barfield II, a member of Bass, Berry & Sims
PLC, is a director of the Company. Mr. Barfield and his wife and children
beneficially own 625,577 shares of Common Stock.
EXPERTS
The Consolidated and Combined Financial Statements of American Retirement
Corporation and subsidiaries and American Retirement Communities, L.P. and its
consolidated entities as of December 31, 1997 and 1996, for each of the years
ended December 31, 1997 and 1996, for the three months ended March 31, 1995, and
the nine months ended December 31, 1995 have been incorporated by reference
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing. The report of KPMG Peat Marwick LLP covering the Consolidated and
Combined Financial Statements contains an explanatory paragraph that refers to a
change in the presentation of the cost basis of financial information for
periods subsequent to a purchase business combination effected on April 1, 1995.
The Combined Financial Statements of Freedom Group, Inc. and subsidiaries
and Freedom Village of Holland, Michigan, a general partnership, as of December
31, 1997 and for the year then ended have been incorporated by reference herein
and in the registration statement in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
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NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY
OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE THEREOF OR THAT THE
INFORMATION CONTAINED THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
THEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH THEY RELATE, OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON
IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
---------------------
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.............................. S-3
Risk Factors.................................... S-8
Forward-Looking Statements...................... S-16
The Company..................................... S-17
Use of Proceeds................................. S-21
Price Range of Common Stock..................... S-22
Dividend Policy and Prior Distributions......... S-22
Capitalization.................................. S-23
Pro Forma Financial Information................. S-24
Selected Consolidated and Combined Financial
Data.......................................... S-31
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... S-34
Business........................................ S-47
Management...................................... S-66
Principal and Selling Shareholders.............. S-69
Underwriting.................................... S-71
Legal Matters................................... S-72
Index to Financial Statements................... F-1
Prospectus
Available Information........................... 2
Incorporation of Certain Documents by
Reference..................................... 3
Forward-Looking Statements...................... 4
The Company..................................... 5
Ratios of Earnings to Fixed Charges............. 6
Use of Proceeds................................. 6
Description of Capital Stock.................... 7
Description of Debt Securities.................. 13
Selling Shareholders............................ 20
Plan of Distribution............................ 21
Legal Matters................................... 21
Experts......................................... 21
</TABLE>
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4,500,000 SHARES
[AMERICAN RETIREMENT CORPORATION (LOGO)]
COMMON STOCK
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PROSPECTUS SUPPLEMENT
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SCHRODER & CO. INC.
SALOMON SMITH BARNEY
J.C. BRADFORD & CO.
JEFFERIES & COMPANY, INC.
MCDONALD & COMPANY
SECURITIES, INC.
RAYMOND JAMES & ASSOCIATES, INC.
SUNTRUST EQUITABLE SECURITIES
JULY 30, 1998
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