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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 29, 1998 (May 29, 1998)
AMERICAN RETIREMENT CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Tennessee 01-13031 62-1674303
- ---------------------------- ------------------------ -------------------
(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
111 Westwood Place, Suite 402, Brentwood, Tennessee 37027
- --------------------------------------------------- ----------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (615) 221-2250
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
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Item 5. Other Events
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FGI TRANSACTION
On May 29, 1998, American Retirement Corporation (the "Company")
entered into definitive agreements to acquire 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 to enter into certain related
transactions (the "FGI Transaction"). The aggregate consideration to be paid by
the Company to acquire such ownership interests is $32.6 million of cash and
1,370,000 shares of the Company's common stock, $.01 par value per share. The
cash portion of the purchase price is subject to adjustment to the extent that
net working capital of FGI (as contractually defined) is less than or exceeds
zero. The parties have estimated that there will be a deficit of approximately
$7.8 million, reducing the cash purchase price to $24.8 million. In addition,
the cash portion of the consideration will be increased by $1.0 million upon the
satisfaction of certain conditions. The Company also will pay an additional $1.5
million and $4.0 million, respectively, in connection with the execution of two
management agreements and options to purchase two communities. Certain of FGI's
consolidated indebtedness and liabilities will be reflected on the Company's
balance sheet from and after the closing of the FGI Transaction, including
approximately $50.2 million of the refundable portion of life estate purchase
price (including current portion) and approximately $26.8 million of long-term
indebtedness (including current portion). The Company intends to repay
approximately $11.7 million of such long-term indebtedness immediately following
the closing of the FGI Transaction. Pursuant to the FGI Transaction, FGI will
merge into the Company and the Company will contemporaneously acquire all of the
ownership interests of certain entities affiliated with FGI. Certain of FGI's
existing assets and liabilities are to be excluded from the FGI Transaction.
Accordingly, prior to the consummation of the FGI Transaction, those excluded
assets of FGI will be distributed to FGI's shareholders or transferred to other
entities and FGI will be released from certain of its liabilities relating to
such excluded assets. The transaction will be accounted for as a purchase.
The FGI Transaction would result in the ownership of three lifecare
continuing care retirement centers ("CCRCs"), with an aggregate capacity for
approximately 1,590 residents, and the management of three lifecare CCRCs, with
an aggregate capacity for approximately 1,710 residents (collectively, the "FGI
Communities"). The FGI Communities to be acquired are Freedom Plaza (Florida),
Inn at Freedom Village (Michigan), and Lake Seminole Square (Florida). The
Freedom Communities to be managed are Freedom Plaza (Arizona), Freedom Square
(Florida), and Glenview of Pelican Bay (Florida). As a result of the FGI
Transaction, the Company's aggregate capacity will increase to approximately
10,700 residents.
The FGI Communities are CCRCs that offer residents a limited lifecare
benefit. 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
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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 has agreed to enter into a
20-year management agreement (with two ten-year renewal options) for Freedom
Plaza, a lifecare CCRC with an aggregate capacity for approximately 660
residents, located in Peoria, Arizona. In connection with the management
agreement, the Company will pay a $300,000 fee to the owners of the community.
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 has also agreed to enter
into a 20-year management agreement (with two ten-year renewal options) for
Freedom Square, a lifecare CCRC with an aggregate capacity for 860 residents,
located in Seminole, Florida, which is currently managed by FGI. In connection
with the management agreement, the Company will pay a $1.2 million fee to the
owner of the community, which is a general partnership affiliated with Mr.
Roskamp. 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 will also acquire an option to purchase
Freedom Square upon the occurrence of certain events (including the expiration
of the agreement) for a formula purchase price.
In connection with the FGI Transaction, the Company would assume FGI's
existing management agreement for Glenview of 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 has agreed to assume FGI's
development obligations relating to Freedom Village Brandywine, a lifecare CCRC
that is owned by an entity controlled by FGI, with a capacity for approximately
390 residents. The community is nearing completion and is expected to open in
mid-1998. In return for its development services and costs associated therewith,
the Company will receive a fee of $200,000. Following opening, the Company will
manage Freedom Village Brandywine pursuant to a three-year management agreement
that will provide the Company with a management fee equal to a fixed percentage
of the community's gross revenues. The Company will pay 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.
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In connection with the FGI Transaction, the Company has also agreed to
complete FGI's development services for a community located in Sun City West,
Arizona and in return the Company will receive a development fee of $400,000.
In addition, the Company expects to enter 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 will acquire 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 will enter 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. The
Company will also grant certain contractual registration rights to the current
shareholders of FGI.
RISKS ASSOCIATED WITH THE FGI TRANSACTION
No Assurance as to Consummation of the FGI Transaction or Successful
Integration of Acquired Operations
The FGI Transaction is expected to close early in the third quarter of
1998, but is subject to the satisfaction of customary closing conditions,
including the receipt of regulatory and other third party approvals and
consents. There can be no assurance that such conditions will be met or that the
FGI Transaction will be successfully completed during the third quarter of 1998,
if at all. Moreover, if the FGI Transaction is consummated, there can be no
assurance that the communities to be acquired or managed as a result of the FGI
Transaction will be successfully integrated into the Company's operations.
Risks Associated With Lifecare Benefits
The FGI Communities are 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). 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
for the
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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 (including his or her
refundable deposit) 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 FGI Communities and, following completion of the
FGI Transaction the Company will, screen 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.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report and related statements by
the Company's management, including statements regarding the acquisition's
impact on future results of operations, are of a forward-looking nature. These
forward-looking statements may be affected by certain risks and uncertainties
described herein and in the Company's filings with the Securities and Exchange
Commission. The Company's actual results could differ materially from such
forward-looking statements. The Company undertakes no obligation to update this
forward-looking information.
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Item 7. Financial Statements and Exhibits
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<TABLE>
<S> <C>
(a) Financial Statements of Business Acquired
Independent Auditors' Report
Combined Balance Sheet of Freedom Group, Inc. and Subsidiaries and Freedom
Village of Holland, Michigan as of December 31, 1997
Combined Statement of Income of Freedom Group, Inc. and Subsidiaries and
Freedom Village of Holland, Michigan for the year ended December 31, 1997
Combined Statement of Changes in Stockholders' Equity (Deficit) and Partnership Capital
of Freedom Group, Inc. and Subsidiaries and Freedom Village of Holland,
Michigan for the year ended December 31, 1997
Combined Statement of Cash Flows of Freedom Group, Inc. and Subsidiaries and
Freedom Village of Holland, Michigan for the year ended December 31, 1997
Notes to Combined Financial Statements of Freedom Group, Inc. and Subsidiaries
and Freedom Village of Holland, Michigan at December 31, 1997
Combined Balance Sheet of Freedom Group, Inc. and Subsidiaries and Freedom
Village of Holland, Michigan as of March 31, 1998 (Unaudited) and December 31,
1997
Combined Statements of Income of Freedom Group, Inc. and Subsidiaries and Freedom
Village of Holland, Michigan for the three months ended March 31, 1998 and 1997
(Unaudited)
Combined Statements of Cash Flows of Freedom Group, Inc. and Subsidiaries and Freedom
Village of Holland, Michigan for the three months ended March 31, 1998 and 1997
(Unaudited)
Notes to Combined Financial Statements of Freedom Group, Inc. and Subsidiaries
and Freedom Village of Holland, Michigan for the three months ended March
31, 1998 and 1997
(b) Pro Forma Financial Information
Unaudited Pro Forma Condensed Combined Balance Sheet of American Retirement
Corporation at March 31, 1998
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet of American
Retirement Corporation at March 31, 1998
</TABLE>
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<TABLE>
<S> <C>
Unaudited Pro Forma Condensed Combined Statement of Operations
of American Retirement Corporation for the year ended December
31, 1997
Notes to Unaudited Pro Forma Condensed Combined Statement of
Operations of American Retirement Corporation for the year
ended December 31, 1997
Unaudited Pro Forma Condensed Combined Statement of Operations
of American Retirement Corporation for the three months ended
March 31, 1998
Notes to Unaudited Pro Forma Condensed Combined Statement of
Operations of American Retirement Corporation for the three
months ended March 31, 1998
(c) Exhibits
2 Agreement and Plan of Merger, dated as of May 29, 1998, by and
among American Retirement Corporation, Freedom Group, Inc.,
and the shareholders of Freedom Group, Inc.
23 Consent of KPMG Peat Marwick LLP
</TABLE>
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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.
As discussed in note 17, the Company entered into an Agreement and Plan of
Merger with an unrelated party. Prior to consummation, certain affiliates will
be spun off from the Company. The sale has not been finalized at this time and
no adjustments to the financial statements have been made.
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 May 29, 1998
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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 portion of long-term debt (note 4)................ $ 9,917,248
Current portion of refundable life estate purchase
price (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 portion (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.
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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.
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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.
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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.
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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.
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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.
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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
15
<PAGE> 16
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.
16
<PAGE> 17
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 portion of refundable life
estate purchase price.................... $ 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>
17
<PAGE> 18
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>
18
<PAGE> 19
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
19
<PAGE> 20
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 the 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>
20
<PAGE> 21
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>
21
<PAGE> 22
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.
22
<PAGE> 23
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>
23
<PAGE> 24
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>
24
<PAGE> 25
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.
25
<PAGE> 26
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.
26
<PAGE> 27
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 May 29, 1998, the Company entered into an Agreement and Plan of Merger
with American Retirement Corporation (ARC), whereby all of the Company's common
stock will be acquired by ARC in exchange for 1,370,000 shares of ARC common
stock, valued at $19,779,000, and cash totaling approximately $24,827,000. Prior
to consummation, certain subsidiaries and unconsolidated affiliates would be
spun off from the Company. The spin-off entities would include Freedom Plaza,
Grandview Terrace, Brandywine, Sarasota Bay Club, and certain unconsolidated
affiliates. In addition, ARC will assume certain debt obligations that become
due upon change in ownership. At this time, the sale has not been finalized and
no adjustments to the combined financial statements of the Company have been
27
<PAGE> 28
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
made. The merger is anticipated to be consummated in July 1998. 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) (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 portion of long-term
debt...................... $ 9,917,248 $ 2,963,742 $ -- $ 6,953,506
Current portion of refundable
life estate purchase
price..................... 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>
28
<PAGE> 29
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) (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)
loss 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 (loss) 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) $(1,159,938) $ 1,079,260
=========== =========== =========== ===========
</TABLE>
29
<PAGE> 30
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
COMBINED BALANCE SHEET
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 refundable life estate purchase
price.................................................. 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.
30
<PAGE> 31
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
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.
31
<PAGE> 32
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (206,366) $ 263,824
Adjustments to reconcile net income (loss) 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.
32
<PAGE> 33
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO COMBINED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed combined financial statements of
Freedom Group, Inc. and Subsidiaries and Freedom Village of Holland, Michigan
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
quarter ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 1998. These financial
statements should be read in conjunction with the combined financial statements
and the notes thereto included herein for the year ended December 31, 1997.
(2) SUBSEQUENT EVENT
On May 29, 1998, the Company entered into an Agreement and Plan of Merger
with an unrelated party, American Retirement Corporation (ARC), whereby all of
the Company's common stock will be acquired by ARC in exchange for 1,370,000
shares of ARC common stock, valued at $19,779,000, and cash totaling
approximately $24,827,000. Prior to consummation, certain subsidiaries and
unconsolidated affiliates would be spun off from the Company. The spin-off
entities would include Freedom Plaza, Grandview Terrace, Brandywine, Sarasota
Bay Club, and certain unconsolidated affiliates. In addition, ARC will assume
certain debt obligations that become due upon change in ownership. At this time,
the sale has not been finalized and no adjustments to the combined financial
statements of the Company have been made. The merger is anticipated to be
consummated in July 1998. An unaudited summary of the anticipated effect of the
spin-off as of March 31, 1998 and the three months then ended is as follows:
33
<PAGE> 34
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO 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 refundable
life estate purchase price... 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
stockholders'
equity and
partnership
capital............ $265,747,390 $144,280,619 $ 546,505 $122,013,276
============ ============ ============ ============
</TABLE>
34
<PAGE> 35
FREEDOM GROUP, INC. AND SUBSIDIARIES
AND FREEDOM VILLAGE OF HOLLAND, MICHIGAN
NOTES TO 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
- ------------------- -------------------- ----------- ------------ -----------
<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......... 1,043,743 -- -- 1,043,743
Depreciation and amortization...... 2,072,129 906,460 -- 1,165,669
Lease expense...................... 440,715 387,386 -- 53,329
----------- ---------- --------- ----------
Total operating expenses... 13,251,833 5,511,309 -- 7,740,524
----------- ---------- --------- ----------
Income (loss) from
operations............... 317,539 (26,700) 279,442 616,681
----------- ---------- --------- ----------
Other income (expense)
Interest expense................... (1,181,859) (550,228) -- (631,631)
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)................ (643,377) (448,402) (346,053) (541,028)
----------- ---------- --------- ----------
Income (loss) before taxes. (332,838) (475,102) (66,611) 75,653
Income tax expense (benefit)......... 126,472 -- (155,974) (29,502)
----------- ---------- --------- ----------
Net income (loss).......... $ (206,366) $ (475,102) $(222,585) $ 46,151
=========== ========== ========= ==========
</TABLE>
35
<PAGE> 36
AMERICAN RETIREMENT CORPORATION
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 assuming
consummation of the FGI Transaction. There is no assurance that the Company will
consummate the FGI Transaction.
The following Unaudited Pro Forma Condensed Combined Balance Sheet gives
effect to the consummation of the FGI Transaction as if it had occurred as of
March 31, 1998. The Unaudited Pro Forma Condensed Combined Statement of
Operations reflects the pro forma effect of the combined results of operations
for the year ended December 31, 1997 and the three months ended March 31, 1998
assuming consummation of the FGI Transaction as of January 1, 1997. The Company
will account 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 operations reflected in the combined financial statements of FGI
and Freedom Village of Holland, one of the FGI Communities to be acquired
pursuant to the FGI Transaction (collectively, the "Freedom Group Entities"),
which financial statements are included elsewhere in this prospectus. The
unaudited pro forma condensed combined financial information are based upon
historical information, preliminary estimates, and certain assumptions regarding
the ongoing operations of the acquired entities. Estimates relating to the fair
value of certain assets, liabilities, and other items have been made as more
fully described in the notes to the unaudited pro forma condensed combined
financial information. Actual adjustments, which may include adjustments to
additional assets, liabilities, and other items, will be made on the basis of
appraisals or other evaluations as of the effective date of the acquisition and,
therefore, may differ from those reflected in the unaudited pro forma condensed
combined financial information.
The following unaudited pro forma condensed combined financial information
is not necessarily indicative of the actual results that would have been
achieved if the FGI Transaction had been completed as of the dates indicated or
that may be realized in the future.
The unaudited pro forma condensed combined financial information should be
read in conjunction with the financial statements and related notes thereto of
the Company (previously filed with the Securities and Exchange Commission on
Form 10-K for the fiscal year ended December 31, 1997 and on Form 10-Q for the
quarter ended March 31, 1998) and the Freedom Group Entities (included herein).
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AT MARCH 31, 1998
(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 $(29,050)(B) $ 2,280
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 (29,050) 29,082
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 $ 50,129 $489,319
======== ======== ======== ========
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 7,758 (B) 11,400
-------- -------- -------- --------
Total current liabilities......................... 8,711 17,029 4,298 30,038
Long-term debt, excluding current portion............. 101,516 18,756 12,986 (C) 127,003
(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 22,949 414,103
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 $ 50,129 $489,319
======== ======== ======== ========
</TABLE>
36
<PAGE> 37
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AT MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
(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 unaudited combined
financial statements of the Freedom Group Entities for the three months
ended March 31, 1998 and 1997.
(B) To record the acquisition costs related to the FGI Transaction assuming
consummation as of March 31, 1998 as follows:
<TABLE>
<S> <C>
Discounted value of stock consideration for ownership
interests............................................... $19,779
Consideration to be paid in cash for ownership interests.. 32,579
Reduction to cash consideration for working capital
adjustment.............................................. (7,758)
Cash consideration for purchase options................... 4,000
Cash consideration for management contracts............... 1,500
Transaction costs......................................... 2,000
-------
Total FGI Transaction Costs........................... $52,100
=======
</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 shares of the Company's common stock, 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 will also pay $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 management
contracts, and incur $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................................... (7,758)
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............................. $52,100
=======
</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 $7,758 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 to be 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 the
Company borrowed, through existing lines of credit, $12,986 of the cash
requirements for the FGI Transaction. The Company intends to repay $11,715
of FGI's long-term indebtedness immediately following consummation of the
FGI Transaction, including $5,460 of current maturities.
37
<PAGE> 38
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(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 expenses............................ 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) (718)(G) (13,787)
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 (688) 6,955
Income tax expense (benefit)............................ 4,340 690 (21)(I) 5,051
-------- ------- ------- --------
Income (loss) before extraordinary item............... 1,534 1,079 (709) 1,904
Extraordinary loss on extinguishment of debt, net of
tax................................................... 6,334 -- -- 6,334
-------- ------- ------- --------
Net income (loss)..................................... $(4,800) $ 1,079 $ (709) $ (4,430)
======== ======= ======= ========
Pro forma earnings data(J):
Income (loss) before income taxes and extraordinary
item.................................................. $ 5,874 $ 1,769 $ (688) $ 6,955
Pro forma income tax expense (benefit).................. 2,115 690 21 2,826
-------- ------- ------- --------
Pro forma income (loss) before extraordinary item....... $ 3,759 $ 1,079 $ (709) $ 4,129
======== ======= ======= ========
Pro forma basic earnings per share........................ $ 0.36 $ 0.35
======== ========
Pro forma diluted earnings per share...................... $ 0.35 $ 0.34
======== ========
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>
38
<PAGE> 39
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(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 to be
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 and other revenue to give
effect to the terms of the contracts to be entered into as a condition of
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 lines 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 $718 comprised of
(i) $1,453 of foregone interest income associated with $29,050 of the cash
portion of the transaction costs to be paid in the FGI Transaction; (ii)
$689 of additional interest expense associated with the aggregate assumed
borrowings through existing lines of credit of $12,986 at 7.0% for purposes
of the pro forma financial information (net of interest earnings of $220 on
the purchase option payments); (iii) a $956 reduction of interest expense
associated with the $11,715 of FGI indebtedness to be repaid by the Company;
(iv) a $340 reduction of interest expense associated with a line of credit
with a shareholder that is not being assumed by the Company; and (v) 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 due to the acquisition
by the Company of 100% ownership in the CCRCs.
(I) Reflects a pro forma income tax expense of $21 (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 shares of the Company's common stock
as part of the purchase consideration of the FGI Transaction.
39
<PAGE> 40
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(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 expenses............................ 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) (139)(P) (3,721)
Minority interest in net income of subsidiaries........... -- (5) 5 (Q) --
Other income (expense).................................... (26) 95 -- 69
------- ------- ------- -------
Income before income taxes............................ 2,370 76 520 2,966
Income tax expense........................................ 853 30 268 (R) 1,151
------- ------- ------- -------
Net income............................................ $ 1,517 $ 46 $ 252 1,815
======= ======= ======= =======
Basic earnings per share.................................. $ 0.13 $ 0.14
======= =======
Diluted earnings per share................................ $ 0.13 $ 0.14
======= =======
Weighted average shares used for basic earnings per
share................................................... 11,421 1,370 (S) 12,791
Effect of dilutive common stock options................... 212 212
------- -------
Weighted average shares used for diluted earnings per
share................................................... 11,633 13,003
======= =======
</TABLE>
40
<PAGE> 41
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(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 to
be distributed prior to the consummation of the FGI Transaction. See Note 2
to the unaudited combined financial statements of the Freedom Group Entities
for the three months ended March 31, 1998 and 1997.
(M) Reflects a $390 increase in management services and other revenue to give
effect to the terms of the contracts to be entered into as a condition of
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 $139 comprised of
(i) $363 of foregone interest income associated with $29,050 of the cash
portion of the acquisition costs to be paid in the FGI Transaction; (ii)
$172 of additional interest expense associated with the aggregate assumed
borrowings through existing lines of credit of $12,986 at 7.0% for purposes
of the pro forma financial information (net of interest earnings of $55 on
the purchase option payments); (iii) a $239 reduction of interest expense
associated with the $11,715 of FGI indebtedness to be repaid by the Company;
(iv) a $125 reduction of interest expense associated with a line of credit
with a shareholder that is not being assumed by the Company; and (v) 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.
(R) Reflects a pro forma income tax expense of $268 (excluding non-deductible
goodwill) assuming an effective tax rate of 38%.
(S) Reflects the issuance of the 1,370,000 shares of the Company's common stock
as part of the purchase consideration of the FGI Transaction.
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN RETIREMENT CORPORATION
Date: May 29, 1998 By: /s/ W.E. Sheriff
-------------------------------------
W.E. Sheriff
Chairman and Chief Executive Officer
42
<PAGE> 43
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Exhibit
- --------- -----------------------------------------------------------------------
<S> <C>
2 Agreement and Plan of Merger, dated as of May 29,
1998, by and among American Retirement Corporation,
Freedom Group, Inc., and the shareholders of Freedom
Group, Inc.
23 Consent of KPMG Peat Marwick LLP
</TABLE>
43
<PAGE> 1
Exhibit 2
================================================================================
AGREEMENT AND PLAN OF MERGER
AMONG
AMERICAN RETIREMENT CORPORATION,
FREEDOM GROUP, INC.,
AND
THE SHAREHOLDERS OF
FREEDOM GROUP, INC.
DATED AS OF MAY 29, 1998
================================================================================
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE 1.
DEFINITIONS.........................................................................1
ARTICLE 2.
THE MERGER..........................................................................9
2.1 The Merger.................................................................9
2.2 The Closing................................................................9
2.3 Effective Time............................................................10
ARTICLE 3.
CONVERSION OF FGI STOCK............................................................10
3.1 Conversion of FGI Shares in the Merger....................................10
3.2 Exchange of Certificates..................................................10
3.3 Stock Splits, Etc. of ARC Common Stock....................................10
3.4 Consent to Merger; Waiver of Dissenters' Rights. ........................11
3.5 Additional Merger Consideration...........................................11
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF FGI AND THE
FGI SHAREHOLDERS...................................................................11
4.1 Organization, Qualification, and Power and Authority. ....................12
4.2 Authorization, Validity, and Effect of Agreements.........................13
4.3 Capitalization............................................................13
4.4 Prior Sales of Securities.................................................14
4.5 Noncontravention..........................................................14
4.6 Brokers' Fees.............................................................14
4.7 Title to Assets...........................................................14
4.8 Subsidiaries..............................................................14
4.9 Financial Statements......................................................15
4.10 Subsequent Events.........................................................16
4.11 Undisclosed Liabilities...................................................19
4.12 Legal Compliance..........................................................19
4.13 Tax Matters...............................................................19
4.14 Real Property.............................................................22
4.15 Intellectual Property.....................................................24
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
4.16 Tangible Assets...........................................................25
4.17 Contracts.................................................................25
4.18 Residency Agreements......................................................27
4.19 Notes and Accounts Receivable.............................................27
4.20 Powers of Attorney........................................................27
4.21 Insurance.................................................................27
4.22 Litigation................................................................28
4.23 Employees.................................................................28
4.24 Employee Benefits.........................................................29
4.25 Guaranties................................................................30
4.26 Environmental, Health, and Safety Matters.................................30
4.27 Licenses and Permits......................................................32
4.28 Inspections and Investigations............................................34
4.29 Investment................................................................34
4.30 Certain Payments..........................................................34
4.31 Ownership of ARC Securities...............................................35
4.32 Disclosure................................................................35
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF ARC..............................................35
5.1 Organization of ARC.......................................................35
5.2 Authorization of Transaction..............................................35
5.3 Capitalization............................................................36
5.4 Noncontravention..........................................................36
5.5 Brokers' Fees.............................................................36
5.6 SEC Reports...............................................................36
5.7 Governmental Authorizations...............................................37
5.8 Certain Payments..........................................................37
5.9 Legal Compliance..........................................................37
ARTICLE 6.
PRE-CLOSING COVENANTS..............................................................38
6.1 Covenants of ARC, FGI, and the FGI Shareholders...........................38
6.2 Covenants of FGI and the FGI Shareholders.................................39
6.3 Covenants of ARC..........................................................42
ARTICLE 7.
CONDITIONS.........................................................................42
7.1 Conditions to Obligation of ARC...........................................42
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
7.2 Conditions to Obligations of FGI and the FGI Shareholders.................47
7.3 Preparation of Certain Transaction Documents..............................48
ARTICLE 8.
POST-CLOSING COVENANTS.............................................................49
8.1 General...................................................................49
8.2 Litigation Support........................................................49
8.3 Transition................................................................49
8.4 Confidentiality...........................................................50
8.5 ARC Stock Certificates....................................................50
8.6 Post-Closing Repayment of Certain Promissory Notes; Loan Assumption Fees..51
8.7 Net Working Capital Adjustments...........................................51
8.8 Insurance.................................................................52
8.9 ARC Change of Accounting Method...........................................52
ARTICLE 9.
SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; INDEMNIFICATION........................................................53
9.1 Survival of Representations and Warranties................................53
9.2 Indemnification Obligations of the FGI Shareholders.......................53
9.3 Procedure for Matters Involving Third Parties.............................55
9.4 Indemnification Obligations of ARC........................................57
9.5 Notice of Claim...........................................................58
9.6 Certain Limitations on the FGI Shareholders' Indemnification Liability....58
9.7 Option to Pay in ARC Common Stock.........................................59
9.8 Determination of Adverse Consequences.....................................59
9.9 Right of Set-Off..........................................................60
9.10 Other Remedies; FGI Shareholders Release..................................60
9.11 FGI Representations and Warranties........................................61
ARTICLE 10.
TERMINATION........................................................................61
10.1 Termination of Agreement..................................................61
10.2 Effect of Termination.....................................................62
10.3 Extension; Waiver.........................................................63
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C> <C>
ARTICLE 11.
GENERAL PROVISIONS.................................................................63
11.1 Notices...................................................................63
11.2 Assignment; Binding Effect; Benefit.......................................64
11.3 Entire Agreement..........................................................64
11.4 Amendment.................................................................65
11.5 Governing Law.............................................................65
11.6 Counterparts..............................................................65
11.7 Waivers...................................................................65
11.8 Incorporation of Exhibits.................................................65
11.9 Severability..............................................................65
11.10 Expenses..................................................................66
11.11 Construction..............................................................66
11.12 Enforcement of Agreement..................................................66
11.13 Section Headings..........................................................66
11.14 Submission to Jurisdiction................................................66
</TABLE>
iv
<PAGE> 6
ATTACHMENTS AND EXHIBITS
FGI Disclosure Letter
ARC Disclosure Letter
Exhibit A-1 Articles of Merger (Tennessee)
Exhibit A-2 Articles of Merger (Florida)
Exhibit A-3 Plan of Merger
Exhibit B Acceptable Grandview Management Agreement Terms
Exhibit C Agreement for Management Services (Freedom Square)
Exhibit D Agreement to Enter Into Management Agreement and Purchase Option
(Freedom Square)
Exhibit E Agreement for Management Services (Freedom Plaza)
Exhibit F Shareholder Agreement (Roskamp)
Exhibit G Shareholder Agreement (Prince Entities)
Exhibit H Registration Rights Agreement
Exhibit I Illustrative Calculation of Initial Working Capital Adjustment
Exhibit J Set-off and Escrow Agreement Terms
v
<PAGE> 7
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (the "Agreement") is executed as of
the 29th day of May, 1998, by and among American Retirement Corporation, a
Tennessee corporation ("ARC"), Freedom Group, Inc., a Florida corporation
("FGI"), and each of the shareholders of FGI as identified on the signature
pages hereto (individually, a "FGI Shareholder," and collectively the "FGI
Shareholders").
RECITALS
WHEREAS, the Boards of Directors of ARC and FGI each have determined
that a business combination between ARC and FGI is in the best interests of
their respective companies and shareholders and presents an opportunity for
their respective companies to achieve long-term strategic and financial
benefits, and accordingly have agreed to effect the merger provided for herein
upon the terms and subject to the conditions set forth herein; and
WHEREAS, for federal income tax purposes, it is intended that the
merger provided for herein shall qualify as a reorganization within the meaning
of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the
"Code").
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants, and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1.
DEFINITIONS
1.1 Certain Definitions. In addition to the terms defined elsewhere in
this Agreement, the following terms shall have the meanings set forth below:
"ACCREDITED INVESTOR" has the meaning set forth in Regulation D
promulgated under the Securities Act.
"ADVERSE CONSEQUENCES" means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, diminution in value, dues, penalties, fines,
costs, amounts paid in settlement, Liabilities, obligations, Taxes, liens,
losses, expenses, and fees, including, but not limited to, court costs and
reasonable attorneys' fees and expenses; provided, however, that a diminution in
value of ARC Common Stock shall not by itself constitute an Adverse Consequence.
"AFFILIATE" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
<PAGE> 8
"AFFILIATED GROUP" means any affiliated group within the meaning of
Code Section 1504(a) or any similar group defined under a similar provision of
state, local or foreign law.
"APPLICABLE RATE" means the prime rate of interest publicly announced
from time to time by First Union National Bank of Tennessee, Nashville,
Tennessee.
"ARC STOCK PRICE" means $21.00 per share of ARC Common Stock, subject
to adjustment as set forth in this Agreement.
"BASIS" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms or could form the basis for
any specified consequence.
"CLAIM NOTICE" shall have the meaning ascribed to such term in Section
9.5 of this Agreement.
"COMPANION SECURITIES PURCHASE AGREEMENTS" means the Securities
Purchase Agreements to be entered into by ARC (or its Affiliates) relating to
the acquisition by ARC (or its Affiliates) of all of the equity interests in the
Target Entities that are not owned by FGI. The aggregate purchase prices payable
under each of the Companion Securities Purchase Agreements shall be as follows:
Freedom Village of Holland $7,907,522
Freedom Plaza - Sun City Center, Florida $2,500,000
Lake Seminole $1,523,527
"COMMUNITIES" means the following retirement and senior living
communities and all assets associated therewith (i) Lake Seminole Square located
in Seminole, Florida, (ii) Freedom Village located in Holland, Michigan, (iii)
Freedom Plaza located in Sun City Center, Florida, and (iv) Freedom Plaza
located in Peoria, Arizona.
"CONFIDENTIAL INFORMATION" means any information concerning the
businesses and affairs of FGI, the FGI Subsidiaries, and the Excluded FGI
Entities, or ARC and its subsidiaries and Affiliates, as the case may be, that
is not generally available to the public.
"DEFERRED INTERCOMPANY TRANSACTION" has the meaning set forth in Treas.
Reg. Section 1.1502-13.
"EMPLOYEE BENEFIT PLAN" means any (a) nonqualified deferred
compensation or retirement plan or arrangement that is an Employee Pension
Benefit Plan, (b) qualified defined contribution retirement plan or arrangement
that is an Employee Pension Benefit Plan, (c) qualified defined
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<PAGE> 9
benefit retirement plan or arrangement that is an Employee Pension Benefit Plan
(including any Multiemployer Plan), or (d) Employee Welfare Benefit Plan or
material fringe benefit plan or program.
"EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in ERISA
Section 3(2).
"EMPLOYEE WELFARE BENEFIT PLAN" has the meaning set forth in ERISA
Section 3(1).
"ENVIRONMENTAL, HEALTH, AND SAFETY REQUIREMENTS" shall mean all
federal, state, local and foreign statutes, regulations, ordinances and other
provisions having the force or effect of law, all judicial and administrative
orders and determinations, all contractual obligations and all common law
concerning public health and safety, worker health and safety, and pollution or
protection of the environment, including without limitation all those relating
to reporting requirements for, or the presence, use, production, generation,
handling, transportation, treatment, storage, disposal, distribution, labeling,
testing, processing, discharge, release, threatened release, control, or cleanup
of, any hazardous materials, substances or wastes, chemical substances or
mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum
products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation,
each as amended and as now or hereafter in effect.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder.
"ERISA AFFILIATE" means any entity required to be aggregated with FGI
or any of the FGI Subsidiaries under Code Section 414(b), (c), (m), or (o).
"EXCESS LOSS ACCOUNT" has the meaning set forth in Treas. Reg.
Section 1.1502-19.
"EXCLUDED ASSETS" means (a) FGI's interests in the Excluded FGI
Entities, (b) the retirement communities, assets, and other property interests
owned by the Excluded FGI Entities, and (c) the other assets and other equity
interests currently owned, directly or indirectly, by FGI that are specifically
identified as Excluded Assets in the FGI Disclosure Letter.
"EXCLUDED FGI ENTITIES" means Freedom Plaza; Freedom Properties -
Hemet, a California general partnership; Freedom Properties West, a California
general partnership; Casa Pacifica, a California general partnership; Grandview
Terrace Limited Partnership, an Arizona limited partnership; Freedom Communities
at Sun City Center West, Inc., an Arizona corporation; Freedom Group of
Sarasota, Inc., a Florida corporation; Freedom Group Healthcare, Inc., a Florida
corporation; Gulf Coast Health Care, Inc., a Florida corporation; Freedom Group
at Philadelphia, Inc., a Pennsylvania corporation; Freedom Village at Brandywine
Limited Partnership, a Pennsylvania limited partnership; Freedom Group Naples
Limited Partnership, a Florida limited partnership; Freedom Group - FVB
Management Company, Inc., a Pennsylvania
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corporation; Freedom Group - SCW Management Company, Inc., an Arizona
corporation; Freedom Group - Arizona, Inc., a Florida corporation; and Freedom
Group - California, Inc., a Florida corporation. The businesses currently
operated by the Excluded FGI Entities are generally described in Schedule 4.8 of
the FGI Disclosure Letter.
"FGI 1998 BUSINESS PLAN" means the business plan for calendar year 1998
of FGI, each of the FGI Subsidiaries and the Communities, a true, correct and
complete copy of which is attached to the FGI Disclosure Letter.
"FGI MATERIAL ADVERSE EFFECT" means a material adverse effect on the
business, operations, prospects or condition (financial or otherwise) of FGI,
any of the FGI Subsidiaries, or any Community.
"FGI SUBSIDIARIES" means Freedom Group Management Company, Inc., a
Florida corporation, Freedom Group Development Company, Inc., a Florida
corporation, S&S Building Materials of Pinellas, Inc., a Florida corporation,
Freedom Group - Naples Management Company, Inc., a Florida corporation, and each
of the Target Entities.
"FIDUCIARY" has the meaning set forth in ERISA Section 3(21).
"FREEDOM MANAGEMENT AGREEMENT" means the Agreement for Management
Services, substantially in the form attached hereto as Exhibit E, relating to
the Freedom Plaza retirement community located in Peoria, Arizona.
"FREEDOM PLAZA" means Freedom Plaza Limited Partnership, an Arizona
limited partnership.
"FREEDOM SQUARE" means the Freedom Square retirement community located
in Seminole, Florida, which is owned by Seminole Properties.
"FREEDOM SQUARE DEVELOPMENTS" means Freedom Square Developments, a
Florida general partnership, of which Roskamp has a 97.03% interest and Frank L.
Herold has a 2.97% interest.
"FREEDOM SQUARE GROCERY PARCEL" means that certain tract of real estate
having an address of 7880 Seminole Boulevard, Seminole, Florida 33772.
"GAAP" means United States generally accepted accounting principles
consistently applied in accordance with historical practice.
"GRANDVIEW" means the Grandview Terrace retirement community located in
Sun City, Arizona.
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"HART-SCOTT-RODINO ACT" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations promulgated
thereunder.
"INTELLECTUAL PROPERTY" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations in part revisions, extensions, and
reexaminations relating thereto, (b) all trademarks, service marks, trade dress,
logos, trade names, and corporate names, and all goodwill associated therewith,
together with all translations, adaptations, derivations, and combinations,
applications, registrations, and renewals relating thereto, (c) all copyrights,
and all applications, registrations, and renewals relating thereto, (d) all
trade secrets and confidential business information (including ideas, research
and development, know-how, formulas, compositions, manufacturing and production
processes and techniques, technical data, designs, drawings, specifications,
customer and supplier lists, pricing and cost information, and business and
marketing plans and proposals), (e) all computer software (including data and
related documentation), (f) all other proprietary rights, and (g) all copies and
tangible embodiments of the foregoing (in whatever form or medium).
"KNOWLEDGE" means: (a) when used in reference to the knowledge of a
natural person the person's actual knowledge without investigation, except as
set forth in (b) below; (b) when used in reference to the knowledge of FGI or
the FGI Shareholders, the actual knowledge of Roskamp, Frank L. Herold, Gregory
L. Patterson, Robert Havemen, Andree Huffine, James Corbett, Rick Kamminga,
William W. Nickel, and Steve Roskamp after reasonable, good faith inquiry of the
employee(s) of FGI, the FGI Subsidiaries, or Freedom Plaza who are responsible
for, or whose duties include, the matter(s) to which the subject statement,
representation, warranty, or covenant relates; and (c) when used in reference to
the knowledge of ARC, the knowledge of W.E. Sheriff, Christopher J. Coates,
George T. Hicks, H. Todd Kaestner, and Debbie Elliott after reasonable, good
faith inquiry of the employee(s) of ARC who are responsible for, or whose duties
include, the matter(s) to which the subject statement, representation, warranty,
or covenant relates.
"LAW" means all applicable Federal, state, and local laws, including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder, of federal, state, local, and foreign
governments (and all agencies thereof).
"LIABILITY" means any liability or obligation (whether known or
unknown, whether asserted or unasserted, whether absolute or contingent, whether
accrued or unaccrued, whether liquidated or unliquidated, and whether due or to
become due), including without limitation any liability or obligation for Taxes.
"LIEN" means any mortgage, pledge, lien, encumbrance, charge, or
security interest.
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"MASTER TRUST ACCOUNTING METHOD" refers to the method of accounting
used for federal income tax purposes (including the practices or procedures for
reporting items on a Tax Return) utilized prior to the Closing by certain of the
Target Entities and Excluded FGI Entities pertaining to payments under, and
amounts due from, master trust arrangements and Residency Agreements, including
the initial deposits by residents to the master trust, loan of these deposits,
repayments of the loan, application by residents of monthly principal repayments
received from the master trust as a credit on the monthly service fee and
payment by the resident of a life-care fee pursuant to a Residency Agreement
upon termination of a resident's occupancy.
"MOST RECENT FINANCIAL STATEMENTS" has the meaning set forth in
Section 4.9 hereof.
"MULTIEMPLOYER PLAN" has the meaning set forth in ERISA Section 3(37).
"NET WORKING CAPITAL" means the difference between the aggregate
current assets and the aggregate current liabilities of FGI and the FGI
Subsidiaries (excluding the current assets and current liabilities of the
Excluded FGI Entities), calculated on a combined basis in accordance with GAAP.
Notwithstanding the foregoing, the following adjustments and reclassifications
shall be made in determining Net Working Capital:
(i) the Shareholder Notes, the Resident Notes and the Michigan
Loan Assumption Fee referenced in Section 8.6 shall not be current
liabilities (and shall be paid by ARC pursuant to Section 8.6);
(ii) current maturities of long-term debt shall be excluded
from current liabilities; provided, however, that amounts owed by FGI
or any FGI Subsidiary to its shareholders or partners shall be
considered current liabilities (including amounts owed by FGI to PHC,
L.L.C. and amounts owed by Freedom Village of Holland, Michigan to FVH,
Inc., Vanderbilt Family Investments, Inc. and GJV Corporation)
(collectively, the "Related Party Notes");
(iii) to the extent not otherwise accrued as current
liabilities on the balance sheets being used to determine Net Working
Capital, the following items shall be considered current liabilities:
(A) all Taxes associated with the transfer of the Excluded Assets as
described in Section 6.2 (c), (B) all severance costs pursuant to the
severance arrangements listed on Schedules 4.10(r) and 4.17(i), and (C)
all costs associated with the termination, modification, or
acceleration of payments under any Employee Benefit Plan of FGI or any
FGI Subsidiary; (D) amounts outstanding under FGI's approximately
$640,000 Line of Credit with Baird & Co.; (E) additional property taxes
due to the State of Michigan for years 1991 and 1992 in the amount of
$178,000; (F) FGI's commitment to make donations to the University of
South Florida through the Closing Date; and (G) all
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closing expenses of FGI related to the transactions contemplated hereby
(including any investment banking fees due or owing to McDonald &
Company Securities, Inc.);
(iv) any charitable contribution carryovers associated with or
derived from the transfer of the Excluded Assets shall not be
considered current assets nor result in a reduction in current
liabilities;
(v) none of the rescission escrow deposits relating to the
Golfview Terrace Apartments located in Sun City Center, Florida shall
be considered current assets; and
(vi) any earned entry fees shall be excluded from current
assets.
"ORDINARY COURSE OF BUSINESS" means the good faith, ordinary course of
business consistent with past experience, custom and practice (including with
respect to quantity, quality and frequency).
"POST-SIGNING EVENT" means any fact, event, occurrence or circumstance
that first arises or comes into existence after the date of this Agreement,
including any lawsuit filed after the date of this Agreement, the Basis of which
either (i) first came into existence after the date of this Agreement or (ii)
first came to the Knowledge of FGI or the FGI Shareholders after the date of
this Agreement.
"PRINCE ENTITIES" means PHC, L.L.C., a Michigan limited liability
company, and the Edgar and Elsa Prince Foundation, a Michigan corporation.
"PROHIBITED TRANSACTION" has the meaning set forth in ERISA Section 406
and Code Section 4975.
"RESIDENCY AGREEMENT" means any lease, residency, occupancy, health
center admission, or similar agreements relating to residents or patients at the
Communities.
"ROSKAMP" means Robert G. Roskamp, an individual whose principal place
of residence is in the State of Florida.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
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"SEMINOLE NURSING PAVILION" means Seminole Nursing Pavilion retirement
community located in Seminole, Florida, which is owned by Seminole Nursing
Pavilion, a Florida general partnership, of which Roskamp has a 33.33% interest
and Freedom Square Developments has a 66.67% interest.
"SEMINOLE PROPERTIES" means Seminole Properties, a Florida general
partnership, of which Roskamp has a 33.33% interest and Freedom Square
Developments has a 66.67% interest.
"TARGET ENTITIES" means collectively the following entities:
(i) Freedom Village of Holland, Michigan, a Michigan general partnership of
which FGI owns a 37.5% general partnership interest; (ii) Freedom Village of Sun
City Center, Ltd., a Florida limited partnership of which FGI owns a 55.0%
general partnership interest; (iii) Freedom Group - Lake Seminole Square, Inc.,
a Florida corporation of which FGI owns approximately 93% of the outstanding
capital stock; and (iv) Lake Seminole Square Management Company, Inc., a Florida
corporation of which FGI owns approximately 93% of the outstanding capital
stock.
"TAX" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Section 59A of
the Code, customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or
add-on-minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"TAX RETURN" means any return, report, information return, or other
document (including any related or supporting information) filed or required to
be filed with any taxing authority in connection with its determination,
assessment, collection, administration, or imposition of any Tax.
"TREAS. REG." means the proposed, temporary and final regulations
promulgated under the Code.
1.2 Interpretation. In this Agreement, unless the context otherwise
requires:
(a) references to this Agreement shall include this Agreement
and the FGI Disclosure Letter and the ARC Disclosure Letter (as
hereinafter defined);
(b) references to Articles and Sections are references to articles
and sections of this Agreement;
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(c) references to any party to this Agreement shall include
references to its respective successors and permitted assigns;
(d) references to a judgment shall include references to any
order, writ, injunction, decree, determination or award of any court or
tribunal;
(e) the terms "hereof," "herein," "hereby," and derivative or
similar words will refer to this entire Agreement;
(f) references to any document (including this Agreement) are
references to that document as amended, consolidated, supplemented,
novated or replaced by the parties from time to time in accordance with
the application provisions of this Agreement;
(g) the word "including" shall mean including without limitation;
(h) references to time are references to local Nashville, Tennessee
time;
(i) reference to any gender shall include all genders; and
(j) references in this Agreement to schedules refer to the
schedules in the FGI Disclosure Letter or the ARC Disclosure Letter,
as applicable.
ARTICLE 2.
THE MERGER
2.1 The Merger. Subject to the terms and conditions of this Agreement,
at the Effective Time (as defined in Section 2.3), FGI shall be merged with and
into ARC in accordance with this Agreement and the separate corporate existence
of FGI shall thereupon cease (the "Merger"). ARC shall be the surviving
corporation in the Merger. The Merger shall have the effects specified in
Section 48-21-108 of the Tennessee Business Corporation Act (the "TBCA") and
Section 607.1106 of the Florida Business Corporation Act (the "FBCA").
2.2 The Closing. Subject to the terms and conditions of this Agreement,
the closing of the Merger (the "Closing") shall take place at the offices of
Bass, Berry & Sims PLC, First American Center, Nashville, Tennessee, at 9:00
a.m., local time, on the second business day immediately following the day on
which the last to be fulfilled or waived of the conditions set forth in Article
7 shall be fulfilled or waived in accordance herewith or at such other time,
date, or place
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as ARC and FGI may agree. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date."
2.3 Effective Time. If all of the conditions to the Merger set forth in
Article 7 shall have been fulfilled or waived in accordance herewith and this
Agreement shall not have been terminated as provided in Article 10, the parties
hereto shall cause Articles of Merger, in the forms attached hereto as Exhibit
A-1 and Exhibit A-2, and a Plan of Merger, in the form attached hereto as
Exhibit A-3, to be properly executed and filed in accordance with the applicable
provisions of the TBCA and the FBCA on the Closing Date. The Merger shall become
effective upon the later of the filing of the Articles of Merger with the
Secretary of State of the State of Tennessee and the Secretary of State of the
State of Florida, or at such later time that the parties hereto shall have
agreed upon and designated in such filings as the effective time of the Merger
(the "Effective Time").
ARTICLE 3.
CONVERSION OF FGI STOCK
3.1 Conversion of FGI Shares in the Merger. At the Effective Time, by
virtue of the Merger and without any action on the part of the shareholders of
FGI, the issued and outstanding shares of (a) Class A Common Stock, par value
$1.00 per share (the "FGI Class A Common Stock"), and Class B Common Stock, par
value $1.00 per share (the "FGI Class B Common Stock"), of FGI (collectively,
the "FGI Common Stock"), and (b) Series A Preferred Stock, par value $20,000 per
share ("Series A Preferred Stock"), shall be converted into and become
exchangeable for, the right to receive an aggregate of (i) 1,370,000 shares of
validly issued, fully paid, and nonassessable common stock, par value $.01 per
share, of ARC ("ARC Common Stock"), and (ii) subject to the adjustment
provisions of Section 8.7, $20,647,951 in cash by wire transfer of immediately
available funds (such shares of ARC Common Stock and cash are collectively
referred to herein as the "Merger Consideration"). The Merger Consideration
shall be allocated among and distributed to the FGI Shareholders in accordance
with Schedule 3.1.
3.2 Exchange of Certificates. At the Closing, each holder of an
outstanding certificate or certificates theretofore representing outstanding FGI
Common Stock or Series A Preferred Stock upon surrender thereof to ARC shall be
entitled to receive in exchange therefor (i) a certificate or certificates
representing the number of whole shares of ARC Common Stock set forth opposite
such holder's name on Schedule 3.1 and (ii) the amount in cash set forth
opposite such holder's name on Schedule 3.1.
3.3 Stock Splits, Etc. of ARC Common Stock. In the event ARC changes
the number of shares of ARC Common Stock issued and outstanding after the date
hereof but prior to the
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Effective Time as a result of a stock split, stock dividend, recapitalization,
reorganization or any similar transaction and the record date therefor is after
the date of this Agreement and prior to the Effective Time, the number of shares
of ARC Common Stock to be issued pursuant to Section 3.1 hereof shall be
adjusted to reflect such stock split, stock dividend, recapitalization, etc.
3.4 Consent to Merger; Waiver of Dissenters' Rights. By their execution
of this Agreement each FGI Shareholder (a) consents to the terms of the Merger
and to the taking of shareholder action to approve the Merger without a meeting,
(b) acknowledges that he or it is aware of his or its rights to dissent to the
Merger and demand payment for his or its shares of FGI Common Stock or Series A
Preferred Stock in accordance with the FBCA, and (c) waives such rights to
dissent and demand payment.
3.5 Additional Merger Consideration. If, prior to December 31, 1998,
Grandview Terrace, Ltd. shall offer to allow ARC to manage Grandview pursuant to
an Acceptable Grandview Management Agreement (as hereinafter defined), ARC shall
pay $1,000,000 in cash to the FGI Shareholders (the "Additional Cash
Consideration"). The Additional Cash Consideration shall be allocated among, and
distributed to, the FGI Shareholders in accordance with Schedule 3.1, and shall
be paid by ARC by wire transfer of immediately available funds within three (3)
days after the Acceptable Grandview Management Agreement is executed by ARC (or
its Affiliate). As used herein, an "Acceptable Grandview Management Agreement"
means a management agreement that (i) has the basic terms set forth on Exhibit B
hereto, (ii) otherwise contains customary and usual terms and conditions, and
(iii) is reasonably satisfactory to ARC. ARC's execution of an agreement with
Grandview Terrace, Ltd. containing substantially the basic terms set forth in
Exhibit B shall constitute conclusive evidence that the agreement is
satisfactory to ARC and that the FGI Shareholders are entitled to the Additional
Cash Consideration.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF FGI AND THE
FGI SHAREHOLDERS
Except as expressly set forth in the disclosure letter delivered to ARC
at the execution hereof or in the supplement thereto to be delivered to ARC
pursuant to Section 6.2(j) (collectively, the "FGI Disclosure Letter"), FGI and
the FGI Shareholders, severally and jointly, represent and warrant to ARC that
the statements contained in this Article 4 are correct and complete as of the
date hereof and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date hereof
throughout this Article 4); provided, however, that (a) in no event shall any
FGI Shareholder have any Liability for any representation or warranty made by
any other FGI Shareholder that relates solely to such other FGI Shareholder, and
(b) the liability of the FGI Shareholders with respect to Post-Signing Events
shall be limited
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as provided in Section 9.6(a). Nothing in the FGI Disclosure Letter shall be
deemed adequate to disclose an exception to a representation or warranty made
herein, unless the FGI Disclosure Letter identifies the exception with
reasonable particularity (including a specific reference to the representation
or warranty being excepted), and describes the relevant facts or circumstances
in reasonable detail. The FGI Disclosure Letter will be arranged to correspond
to the numbered and lettered sections contained in this Article 4, and will
identify the Community or FGI Subsidiary with respect to which the exception
relates.
4.1 Organization, Qualification, and Power and Authority. FGI is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Florida. Schedule 4.8 of the FGI Disclosure Letter sets
forth the name and jurisdiction of organization of each of the FGI Subsidiaries,
and any other subsidiary of FGI or any other entity in which FGI has an equity
interest. Each of the FGI Subsidiaries is duly organized, validly existing, and,
in the case of a corporation or limited partnership, in good standing under the
laws of the jurisdiction of its organization. Each of FGI and the FGI
Subsidiaries is duly authorized to conduct business and is in good standing
under the laws of each jurisdiction where such qualification is required, except
where the failure to be so qualified would not have a FGI Material Adverse
Effect. Freedom Plaza is duly organized, validly existing, and in good standing
under the laws of the jurisdiction of its organization and is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to be so
qualified would not have a material adverse effect on Freedom Plaza. Each of
FGI, the FGI Subsidiaries, and Freedom Plaza has full power and authority and
all licenses, permits, and authorizations necessary to carry out the
business(es) in which it is engaged and to own and use the properties owned and
used by it. Schedule 4.1 of the FGI Disclosure Letter lists the directors,
officers, members, or partners, as the case may be, of FGI and each of the FGI
Subsidiaries. FGI has delivered to ARC correct and complete copies of the
articles of incorporation and bylaws of FGI and the articles of incorporation
and bylaws or partnership agreement of each of the FGI Subsidiaries (as amended
to date). The minute books (containing the records of meetings of the
shareholders, the board of directors, any committees of the board of directors,
the members, or the partners, as the case may be) and the stock or ownership
records of FGI and each of the FGI Subsidiaries are correct and complete.
Neither FGI nor any of the FGI Subsidiaries is in default under or in violation
of any provision of its articles of incorporation, bylaws, or partnership
agreement. With respect to each FGI Shareholder that is not a natural person,
such FGI Shareholder has been duly organized, is validly existing, and is in
good standing under the laws of the jurisdiction of its organization.
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4.2 Authorization, Validity, and Effect of Agreements. Except for the
filings described in Section 2.3 and the consents or approvals listed on
Schedules 4.2 or 4.27(b), FGI and each FGI Shareholder has full power and
authority to execute and deliver this Agreement and all agreements and documents
contemplated hereby or associated with the transactions contemplated hereby
(collectively, the "Transaction Documents") to which FGI or such FGI Shareholder
is a party and to perform his or its obligations thereunder. Except for the
filings described in Section 2.3 and the consents or approvals listed on
Schedules 4.2 or 4.27(b), Freedom Plaza has full power and authority to execute
and deliver the Freedom Management Agreement and to perform its obligations
thereunder. Each of FGI, each FGI Shareholder, and Freedom Plaza has taken all
action required by law, its constituent documents, and otherwise to authorize
the execution and delivery by him or it of the Transaction Documents to which he
or it is a party. This Agreement constitutes, and each of the other Transaction
Documents, when executed and delivered by FGI or such FGI Shareholder, will
constitute, the valid and legally binding obligation of FGI and the FGI
Shareholders, enforceable in accordance with its terms subject to the effect of
bankruptcy, insolvency, receivership, moratorium, and other similar laws
affecting the rights and remedies of creditors generally. The Freedom Management
Agreement, when executed and delivered by Freedom Plaza, will constitute the
valid and legally binding obligation of Freedom Plaza, enforceable in accordance
with its terms subject to the effect of bankruptcy, insolvency, receivership,
moratorium, and other similar laws affecting the rights and remedies of
creditors generally. Except for the filings described in Section 2.3 and the
consents or approvals listed on Schedule 4.2 or 4.27(b), FGI, the FGI
Subsidiaries, the FGI Shareholders, and Freedom Plaza need not give any notice
to, make any filing with, or obtain any authorization, consent, or approval of
any government or governmental agency in order to consummate the transactions
contemplated by the Transaction Documents.
4.3 Capitalization. Schedule 4.3 of the FGI Disclosure Letter sets
forth the authorized securities of FGI and the total number of securities that
are issued and outstanding (collectively, the "FGI Securities"). All issued and
outstanding FGI Securities have been duly authorized, are validly issued, fully
paid, and nonassessable, and are held of record and owned beneficially by the
FGI Shareholders as set forth on Schedule 4.3. Each FGI Shareholder holds the
number of FGI Securities set forth opposite his or its name free and clear of
any restrictions on transfer (other than any restrictions under the Securities
Act or state securities laws), Taxes, Liens, options, warrants, purchase rights,
contracts, commitments, equities, claims, and demands. There are no outstanding
or authorized options, warrants, purchase rights, subscription rights,
conversion rights (other than the rights of the holders of Series A Preferred
Stock to convert such Series A Preferred Stock into Class B Common Stock),
exchange rights, or other contracts or commitments that could require FGI to
issue, sell, or otherwise cause to become outstanding any FGI Securities or
require any FGI Shareholder to sell, transfer, or otherwise dispose of any FGI
Securities owned by him or it (other than pursuant to this Agreement). There are
no outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to FGI. There are
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no voting trusts, proxies, or other agreements or understandings with respect to
the voting of FGI Securities.
4.4 Prior Sales of Securities. All offers and sales of FGI Securities
and securities of the FGI Subsidiaries prior to the date hereof were at all
relevant times exempt from the registration requirements of the Securities Act
and were duly registered or the subject of an available exemption from the
registration requirements of the applicable state securities or Blue Sky laws,
except where the absence of such an exemption or registration will not result in
a FGI Material Adverse Effect.
4.5 Noncontravention. Except as set forth on Schedule 4.5, neither the
execution and the delivery of the Transaction Documents, nor the consummation of
the transactions contemplated thereby, will (a) violate any constitution,
statute, regulation, rule, injunction, judgment, order, decree, ruling, charge,
or other restriction of any government, governmental agency, or court to which
any of FGI, the FGI Subsidiaries, the FGI Shareholders, or Freedom Plaza is
subject or any provision of the articles of incorporation, bylaws, or other
constituent documents of any of FGI, the FGI Subsidiaries, the FGI Shareholders,
or Freedom Plaza, as applicable, or (b) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, or require any notice
under any agreement, contract, lease, license, instrument, or other arrangement
to which any of FGI, the FGI Subsidiaries, the FGI Shareholders, or Freedom
Plaza is a party or by which it is bound, or to which any of its assets is
subject (or result in the imposition of any Lien upon any of its assets). Except
as set forth on Schedule 4.5, FGI, the FGI Subsidiaries, the FGI Shareholders,
and Freedom Plaza need not give any notice to, make any filing with, or obtain
any authorization, consent, or approval from, any third party (other than any
government or governmental agency) in order to consummate the transactions
contemplated by the Transaction Documents.
4.6 Brokers' Fees. None of FGI, the FGI Subsidiaries, the FGI
Shareholders, or Freedom Plaza has any Liability to pay any fees or commissions
to any broker, investment banker, finder, or agent with respect to the
transactions contemplated by the Transaction Documents for which ARC, FGI, or
any of the FGI Subsidiaries could be held liable.
4.7 Title to Assets. Except as set forth on Schedule 4.7, FGI, the FGI
Subsidiaries and Freedom Plaza have good and marketable title to, or a valid
leasehold interest in, the properties and assets claimed to be owned or leased
by them or shown on the Most Recent Financial Statements or acquired or leased
after the date thereof, free and clear of all Liens, except for properties and
assets disposed of in the Ordinary Course of Business since the Most Recent
Fiscal Month End (as defined in subsection 4.9(ii)).
4.8 Subsidiaries. Schedule 4.8 of the FGI Disclosure Letter sets forth
for each of the FGI Subsidiaries (a) its name and jurisdiction of organization,
(b) a description of its authorized
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securities, and (c) the amount of its issued and outstanding securities, the
names of the holders thereof, and the amount of securities held by each such
holder. All of the issued and outstanding securities of each of the FGI
Subsidiaries have been duly authorized and are validly issued and, in the case
of the FGI Subsidiaries that are corporations, fully paid and nonassessable. The
outstanding securities of each of the FGI Subsidiaries are held of record and
owned beneficially as set forth on Schedule 4.8. FGI owns the outstanding
securities of each of the FGI Subsidiaries set forth opposite its name on
Schedule 4.8 free and clear of any restrictions on transfer (other than
restrictions under the Securities Act and state securities laws), Taxes, Liens,
options, warrants, purchase rights, contracts, commitments, equities, claims,
and demands. There are no outstanding or authorized options, warrants, purchase
rights, subscription rights, conversion rights, exchange rights, or other
contracts or commitments that could require any of FGI and the FGI Subsidiaries
to sell, transfer, or otherwise dispose of any securities of any of the FGI
Subsidiaries or that could require any of the FGI Subsidiaries to issue, sell,
or otherwise cause to become outstanding any of its own securities. There are no
outstanding stock appreciation, phantom stock, profit participation, or similar
rights with respect to any of the FGI Subsidiaries. There are no voting trusts,
proxies, or other agreements or understandings with respect to the voting of any
security of any of the FGI Subsidiaries. None of FGI and the FGI Subsidiaries
controls directly or indirectly or has any direct or indirect equity
participation in any entity that is not a FGI Subsidiary or an Excluded FGI
Entity.
4.9 Financial Statements. Schedule 4.9 of the FGI Disclosure Letter
contains the following financial statements (collectively the "Financial
Statements"):
(i) audited consolidated and unaudited consolidating balance
sheets and statements of income, changes in shareholders' or partners'
equity, and cash flows as of and for the fiscal years ended December
31, 1994, 1995, 1996, and 1997 (the fiscal year ended December 31,
1997 is referred to hereinafter as the "Most Recent Fiscal Year End")
for FGI and each of the FGI Subsidiaries that is not included in FGI's
consolidated financial statements (collectively with the Audited
Freedom Plaza Financial Statements, the "Audited Financial
Statements").
(ii) unaudited consolidated and consolidating balance sheets and
statements of income, changes in shareholders' or partners' equity,
and cash flows (collectively with the Most Recent Freedom Plaza
Financial Statements, the "Most Recent Financial Statements") as of
and for the month ended March 31, 1998 (the "Most Recent Fiscal Month
End") for FGI and each of the FGI Subsidiaries that is not included in
FGI's consolidated financial statements.
(iii) for Freedom Plaza, the audited balance sheets, statements
of income, changes in partners' equity and cash flows for the fiscal
years ended December 31, 1994, 1995, 1996 and 1997 (the "Audited
Freedom Plaza Financial Statements")
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<PAGE> 22
and the unaudited balance sheet, statement of income, changes in
partners' equity and cash flows for the Most Recent Fiscal Month End
(the "Most Recent Freedom Plaza Financial Statements") (collectively,
the "Freedom Plaza Financial Statements").
The Audited Financial Statements (including the notes thereto) have
been prepared in accordance with GAAP applied on a consistent basis
throughout the periods covered thereby. The Financial Statements
present fairly the financial condition of FGI, the FGI Subsidiaries,
and Freedom Plaza as of such dates and the results of operations of
FGI, the FGI Subsidiaries, and Freedom Plaza for such periods and are
consistent in all material respects with the books and records of FGI,
the FGI Subsidiaries, and Freedom Plaza (which books and records are
correct and complete in all material respects); provided, however, that
the Most Recent Financial Statements are subject to normal year-end
adjustments (which will not be material individually or in the
aggregate) and lack footnotes and other presentation items.
4.10 Subsequent Events. Except as set forth in Schedule 4.10 of the FGI
Disclosure Letter, since the Most Recent Fiscal Year End there has not been any
material adverse change in the business, condition (financial or otherwise),
operations, results of operations, or future prospects of FGI, any of the FGI
Subsidiaries, or Freedom Plaza, and no event has occurred or circumstance exists
that may result in such a material adverse change. Without limiting the
generality of the foregoing, except with respect to the transfer of the Excluded
Assets contemplated by Section 6.2(c), since that date:
(a) none of FGI, the FGI Subsidiaries, or Freedom Plaza has sold,
leased, transferred, or assigned any assets, tangible or intangible,
other than for a fair consideration in the Ordinary Course of
Business;
(b) except for Residency Agreements entered into in the Ordinary
Course of Business, none of FGI, the FGI Subsidiaries, or Freedom
Plaza has entered into any agreement, contract, lease, or license (or
series of related agreements, contracts, leases, and licenses) either
involving more than $100,000 or outside the Ordinary Course of
Business;
(c) no party (including any of FGI, the FGI Subsidiaries, or
Freedom Plaza) has accelerated, terminated, modified, or canceled any
agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) involving more than
$100,000 to which any of FGI, the FGI Subsidiaries, and Freedom Plaza
is a party or by which any of them is bound;
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(d) none of FGI, the FGI Subsidiaries, or Freedom Plaza has
imposed any Lien upon any of its assets, tangible or intangible,
involving more than $10,000, except in the Ordinary Course of
Business;
(e) except as set forth in Schedule 4.10 or in the FGI 1998
Business Plan, none of FGI, the FGI Subsidiaries, or Freedom Plaza has
made any capital expenditure (or series of related capital
expenditures) either involving more than $100,000 or outside the
Ordinary Course of Business;
(f) except as set forth on Schedule 4.10, none of FGI, the FGI
Subsidiaries, or Freedom Plaza has made any capital investment in, any
loan to, or any acquisition of the securities or assets of, any other
person (other than FGI, the FGI Subsidiaries, or Freedom Plaza) (or
series of related capital investments, loans, and acquisitions) either
involving more than $100,000 or outside the Ordinary Course of
Business;
(g) none of FGI, the FGI Subsidiaries, or Freedom Plaza has
issued any note, bond, or other debt security or created, incurred,
assumed, or guaranteed any indebtedness for borrowed money or
capitalized lease obligation of any person other than FGI, the FGI
Subsidiaries, or Freedom Plaza, except for refund obligations entered
into in the Ordinary Course of Business in connection with Residency
Agreements;
(h) none of FGI, the FGI Subsidiaries, or Freedom Plaza has
delayed or postponed the payment of accounts payable and other
liabilities outside the Ordinary Course of Business;
(i) none of FGI, the FGI Subsidiaries, or Freedom Plaza has
canceled, compromised, waived, or released any right or claim (or
series of related rights and claims) either involving more than
$100,000 or outside the Ordinary Course of Business;
(j) none of FGI, the FGI Subsidiaries, or Freedom Plaza has
granted any license or sublicense of any rights under or with respect
to any Intellectual Property;
(k) there has been no change made or authorized in the articles
of incorporation, bylaws, or other constituent documents of FGI, the
FGI Subsidiaries, or Freedom Plaza;
(l) none of FGI, the FGI Subsidiaries, or Freedom Plaza has
issued, sold, or otherwise disposed of any of its securities, or
granted any options, warrants, or other rights to purchase or obtain
(including upon conversion, exchange, or exercise) any of its
securities;
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(m) except in connection with distributions from the FGI
Subsidiaries or Freedom Plaza to FGI, none of FGI, the FGI
Subsidiaries, or Freedom Plaza has declared, set aside, or paid any
dividend or made any distribution with respect to its securities
(whether in cash or in kind) or redeemed, purchased, or otherwise
acquired any of its securities;
(n) none of FGI, the FGI Subsidiaries, or Freedom Plaza has
experienced any material damage, destruction, or loss (whether or not
covered by insurance) to its properties in excess of $10,000;
(o) none of FGI, the FGI Subsidiaries, or Freedom Plaza has made
any loan to, or entered into any other transaction with, any of its
directors, officers, members, partners, or employees outside the
Ordinary Course of Business;
(p) none of FGI, the FGI Subsidiaries, or Freedom Plaza has
entered into any employment contract or collective bargaining
agreement, written or oral, or modified the terms of any existing such
contract or agreement;
(q) none of FGI, the FGI Subsidiaries, or Freedom Plaza has
granted any increase in the base compensation of any of its directors,
officers, members, partners, or employees outside the Ordinary Course
of Business;
(r) none of FGI, the FGI Subsidiaries, or Freedom Plaza has
adopted, amended, modified, or terminated any bonus, profit-sharing,
incentive, severance, or other plan, contract, or commitment for the
benefit of any of its directors, officers, members, partners, or
employees (or taken any such action with respect to any other Employee
Benefit Plan);
(s) none of FGI, the FGI Subsidiaries, or Freedom Plaza has made
any other change in employment terms for any of its directors,
officers, members, partners, or employees outside the Ordinary Course
of Business;
(t) except as set forth on Schedule 4.10, none of FGI, the FGI
Subsidiaries, or Freedom Plaza has made or pledged to make any
charitable or other capital contribution outside the Ordinary Course
of Business;
(u) there has not been any other material occurrence, event,
incident, action, failure to act, or transaction outside the Ordinary
Course of Business involving FGI, any of the FGI Subsidiaries, or
Freedom Plaza; and
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(v) none of FGI, the FGI Subsidiaries, or Freedom Plaza has
committed or agreed to any of the foregoing.
4.11 Undisclosed Liabilities. Neither FGI, the FGI Subsidiaries, or
Freedom Plaza has any Liability (and, to the Knowledge of FGI and the FGI
Shareholders, there is no Basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand against
FGI, the FGI Subsidiaries, or Freedom Plaza giving rise to any Liability),
except for (a) liabilities set forth in the Most Recent Financial Statements,
(b) liabilities that have arisen after the Most Recent Fiscal Month End in the
Ordinary Course of Business (none of which results from, arises out of, relates
to, is in the nature of, or was caused by any breach of contract, breach of
warranty, tort, infringement, or violation of Law), and (c) any Basis for a
liability actually disclosed in the surveys of FGI, the FGI Subsidiaries,
Freedom Plaza or their facilities delivered to ARC pursuant to Section 4.27(a).
4.12 Legal Compliance. Each of FGI, the FGI Subsidiaries, Freedom
Plaza, and their respective predecessors and Affiliates has complied with all
applicable Laws, and they have not received notice that any action, suit,
proceeding, hearing, investigation, charge, complaint, claim, demand, or notice
has been filed or commenced against any of them alleging any failure to so
comply. Neither FGI, any of the FGI Subsidiaries, nor Freedom Plaza has, during
the past five (5) years, been the subject of any investigation, audit,
monitoring or other similar form of review by any governmental regulatory body,
authority or agency, or any accrediting organization or agency in connection
with any alleged improper activity with respect to the operations of FGI, any
FGI Subsidiary, Freedom Plaza or their businesses, nor has FGI, any of the FGI
Subsidiaries, nor Freedom Plaza received any notice from any governmental
regulatory body, authority or agency, or any accrediting organization or agency
of any material deficiency in connection with its operations, other than
deficiencies identified in connection with routine surveys and inspections, all
of which have been corrected in all material respects. No governmental
authorities are currently conducting proceedings against FGI, any of the FGI
Subsidiaries, or Freedom Plaza, and, to the Knowledge of FGI and the FGI
Shareholders, no investigation or proceeding is pending or being threatened
against them. As used in this Section 4.12, "proceedings" means any litigation,
arbitration, hearing, or any other formal action by a governmental authority.
4.13 Tax Matters.
(a) Each of FGI and the FGI Subsidiaries has filed all Tax
Returns that it is or was required to file. All such Tax Returns were
correct and complete in all respects. All Taxes owed by any of FGI and
the FGI Subsidiaries (whether or not shown on any Tax Return) have been
paid or accrued on the Financial Statements. None of FGI and the FGI
Subsidiaries currently is the beneficiary of any extension of time
within which to file any Tax Return. Neither FGI nor any of the FGI
Subsidiaries has received notice from any authority in a jurisdiction
where any of FGI and the FGI Subsidiaries does not file Tax
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Returns that it is or may be subject to taxation by that jurisdiction.
There are no Liens on any of the assets of any of FGI and the FGI
Subsidiaries that arose in connection with any failure (or alleged
failure) to pay any Tax.
(b) Each of FGI and the FGI Subsidiaries has withheld and paid
all Taxes required to have been withheld and paid in connection with
amounts paid or owed to any employee, independent contractor, creditor,
shareholder, member, partner, or other third party.
(c) Neither FGI nor any FGI Shareholder expects any authority
to assess any additional Taxes for any period for which Tax Returns
have been filed or for the period from January 1, 1998 through the
Closing Date in excess of amounts paid or accrued on the Financial
Statements. None of FGI, the FGI Subsidiaries, or the FGI Shareholders
has received notice of any dispute or claim concerning any Tax
Liability of any of FGI and the FGI Subsidiaries. Schedule 4.13(c) of
the FGI Disclosure Letter lists all Tax Returns filed with respect to
any of FGI and the FGI Subsidiaries for taxable periods ended on or
after December 31, 1993, indicates those Tax Returns that have been
audited, and indicates those Tax Returns that currently are the subject
of audit. FGI has delivered to ARC correct and complete copies of all
federal income Tax Returns, examination reports, and statements of
deficiencies assessed against or agreed to by any of FGI and the FGI
Subsidiaries since December 31, 1993.
(d) None of FGI or the FGI Subsidiaries has waived any statute
of limitations in respect of Taxes or agreed to any extension of time
with respect to a Tax assessment or deficiency.
(e) None of FGI or the FGI Subsidiaries has filed a consent
under Code Section 341(f) concerning collapsible corporations.
(f) The Merger will not result in the payment or a series of
payments by FGI, any of the FGI Subsidiaries, or Freedom Plaza to any
employee or other person of an "excess parachute payment" within the
meaning of Section 280G of the Code.
(g) None of FGI or the FGI Subsidiaries has been a United
States real property holding corporation within the meaning of Code
Section 897(c)(2) during the applicable period specified in Code
Section 897(c)(1)(A)(ii).
(h) Each of FGI or the FGI Subsidiaries has disclosed on its
federal income Tax Returns all positions taken therein that could give
rise to a substantial understatement of federal income Tax within the
meaning of Code Section 6662.
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(i) of FGI or the FGI Subsidiaries is a party to any Tax
allocation or sharing agreement.
(j) None of FGI or the FGI Subsidiaries (i) has been a member
of an Affiliated Group filing a consolidated federal income Tax Return
(other than a group the common parent of which was FGI) or (ii) has any
Liability for the Taxes of any person (other than any of FGI and the
FGI Subsidiaries) under Treas. Reg. Section 1.1502-6 (or any similar
provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise.
(k) Schedule 4.13(k) of the FGI Disclosure Letter sets forth
the following information with respect to each of FGI and the FGI
Subsidiaries (or, in the case of clause (ii), with respect to each of
the FGI Subsidiaries) as of the most recent practicable date (as well
as on an estimated pro forma basis as of the Closing giving effect to
the consummation of the transactions contemplated by the Transaction
Documents): (i) the basis of FGI and each of the FGI Subsidiaries in
its assets; (ii) the basis of FGI in the securities of each of the FGI
Subsidiaries owned by it (or the amount of any Excess Loss Account),
including FGI's basis in the partnership interests in the Target
Entities that are partnerships; (iii) the amount of any net operating
loss, net capital loss, unused investment or other credit, unused
foreign tax, or excess charitable contribution allocable to FGI or any
of the FGI Subsidiaries; and (iv) the amount of any deferred gain or
loss allocable to FGI or any of the FGI Subsidiaries arising out of any
Deferred Intercompany Transaction.
(l) The unpaid Taxes of FGI and the FGI Subsidiaries (i) did
not, as of the Most Recent Fiscal Month End, exceed the reserve for Tax
Liability (rather than any reserve for deferred Taxes established to
reflect timing differences between book and Tax income) set forth on
the face of the Most Recent Financial Statements (rather than in any
notes thereto) and (ii) do not exceed that reserve as adjusted for the
passage of time through the Closing Date in accordance with the past
custom and practice of FGI and the FGI Subsidiaries in filing their Tax
Returns.
(m) As of December 31, 1997, the Deferred Revenue (as
hereinafter defined) for federal income tax purposes related to the
Master Trust Accounting Method does not exceed the amounts specified
immediately below for each of the following Communities:
<TABLE>
<CAPTION>
Maximum Amount of
Community Deferred Revenue
--------------------------------------------------------- -----------------
<S> <C>
Freedom Plaza - Peoria, AZ $13,000,000
Freedom Plaza - Sun City, FL (excluding Golfview Terrace) 18,000,000
Golfview Terrace - Sun City, FL 800,000
Freedom Village - Holland, MI 8,000,000
</TABLE>
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As used in this Section 4.13(m), the term "Deferred Revenue" means the
total, maximum non-refundable portion of master trust entrance fees
relating to a particular community, less trust amortization previously
included in the taxable income of the owner(s) of such community in
partial payment of the monthly service fee.
(n) Except as set forth in Section 4.13(m) above, the FGI
Shareholders and FGI make no representations or warranties with regard
to whether the Master Trust Accounting Method as utilized by Freedom
Plaza or any of the Target Entities clearly reflects income or is a
permissible method of accounting within the meaning of Section 446 of
the Code. The provisions of this Section 4.13(n) control every other
provision of Section 4.11 and this Section 4.13, other than Section
4.13(m).
4.14 Real Property.
(a) Schedule 4.14(a) of the FGI Disclosure Letter lists and
describes briefly all real property owned by any of FGI, the FGI
Subsidiaries and Freedom Plaza including without limitation a brief
description of the use of such property and the number and type of all
units thereon. With respect to each such parcel of owned real property:
(i) except as set forth on Schedule 4.14(a), the
identified owner has good and marketable title to the parcel
of real property, free and clear of any Lien, easement,
covenant, or other restriction, except for ad valorem,
property taxes, or special assessments not yet delinquent and
recorded easements, covenants, and other restrictions that do
not impair the current use, occupancy, or value, or the
marketability of title, of the property subject thereto;
(ii) there are no pending or, to the Knowledge of any
of FGI and the FGI Shareholders, threatened condemnation
proceedings, lawsuits, or administrative actions relating to
the property or other matters affecting adversely the current
use, occupancy, or value thereof;
(iii) the buildings and improvements on the parcel
are not in violation of applicable setback requirements,
zoning laws, and ordinances (and none of the properties or
buildings or improvements thereon are subject to "permitted
non-conforming use" or "permitted non-conforming structure"
classifications), except for violations that in the aggregate
are not material to the use, value or operation of the
buildings and improvements thereon, and do not encroach on any
easement that may burden the land, and the land does not serve
any adjoining property for any purpose inconsistent with the
use of the land, and the property is
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not located within any flood plain or subject to any similar
type restriction for which any permits or licenses necessary
to the use thereof have not been obtained;
(iv) except for Residency Agreements disclosed in
Schedule 4.18, there are no leases, subleases, licenses,
concessions, or other agreements, written or oral, granting to
any party or parties the right of use or occupancy of any
portion of the parcel of real property;
(v) there are no outstanding options or rights of
first refusal to purchase the parcel of real property, or any
portion thereof or interest therein;
(vi) there are no parties (other than FGI, the FGI
Subsidiaries, and Freedom Plaza) in possession of the parcel
of real property, other than the residents under Residency
Agreements disclosed in Schedule 4.18 or tenants described in
Schedule 4.14(a)(vi) who, in each case, are in possession only
of the space to which they are entitled;
(vii) all facilities located on the parcel of real
property are supplied with adequate utilities and other
services necessary for the operation of such facilities and
are provided via public roads or via permanent, irrevocable,
appurtenant easements benefitting the parcel of real property;
and
(viii) each parcel of real property abuts on or has
lawful vehicular access to a paved public road.
(b) Schedule 4.14(b) lists and describes briefly all real
property leased or subleased to any of FGI, the FGI Subsidiaries, and
Freedom Plaza. FGI has delivered to ARC correct and complete copies of
the leases and subleases listed in Schedule 4.14(b) (as amended to
date). With respect to each lease and sublease listed in Schedule
4.14(b):
(i) the lease or sublease is legal, valid, binding,
enforceable, and in full force and effect, subject to the
effect of bankruptcy, insolvency, receivership, moratorium and
other similar laws affecting the rights and remedies of
creditors generally;
(ii) to the Knowledge of FGI and the FGI Shareholders, no
party to the lease or sublease is in breach or default, and no
event has occurred which, with notice or lapse of time, would
constitute a breach or default or permit termination,
modification, or acceleration thereunder;
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(iii) no party to the lease or sublease has repudiated
any provision thereof;
(iv) there are no disputes, oral agreements, or
forbearances in effect as to the lease or sublease;
(v) none of FGI, the FGI Subsidiaries, and Freedom
Plaza has assigned, transferred, conveyed, mortgaged, deeded
in trust, encumbered or granted a Lien in any interest in the
leasehold or subleasehold;
(vi) all facilities leased or subleased thereunder
have received all approvals of governmental authorities
(including licenses and permits) required in connection with
the operation thereof and have been operated and maintained in
accordance with applicable Laws; and
(vii) all facilities leased or subleased thereunder
are supplied with utilities and other services necessary for
the operation of said facilities.
(c) Schedule 4.14(c) of the FGI Disclosure Letter contains a
description of (i) all title insurance policies of FGI, any of the FGI
Subsidiaries, or Freedom Plaza relating to any real property described
in Section 4.14(a) or (b) above, and (ii) the most recent surveys
relating to such real property. True and correct copies of such title
policies (including all endorsements thereto) and all such surveys have
been delivered to ARC.
4.15 Intellectual Property.
(a) Except as set forth on Schedule 4.15, neither FGI, any of
the FGI Subsidiaries, nor Freedom Plaza owns, licenses, or uses any
Intellectual Property that is material to the conduct of its business,
including computer software programs or software systems, except for
computer software programs or software systems that are available in
consumer retail stores.
(b) None of FGI, the FGI Subsidiaries or Freedom Plaza has
interfered with, infringed upon, misappropriated, or otherwise come
into conflict with any Intellectual Property rights of third parties,
and none of FGI, the FGI Subsidiaries, Freedom Plaza, and the FGI
Shareholders has ever received any charge, complaint, claim, demand, or
notice alleging any such interference, infringement, misappropriation,
or violation (including any claim that any of FGI, the FGI Subsidiaries
or Freedom Plaza must license or refrain from using any Intellectual
Property rights of any third party). To the Knowledge of FGI and any
FGI Shareholder, no third party has interfered with, infringed
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upon, misappropriated, or otherwise come into conflict with any
Intellectual Property rights of any of FGI, the FGI Subsidiaries or
Freedom Plaza.
4.16 Tangible Assets. FGI, the FGI Subsidiaries, and Freedom Plaza own
or lease all buildings, machinery, equipment, and other tangible assets
necessary for the conduct of their businesses as presently conducted. Each such
tangible asset has been maintained in accordance with normal industry practice,
is in good operating condition and repair (subject to normal wear and tear), is
not subject to deferred maintenance (except for maintenance items arising in the
Ordinary Course of Business or maintenance items specifically set forth in the
FGI 1998 Business Plan), and is suitable for the purposes for which it presently
is used.
4.17 Contracts. Schedule 4.17 of the FGI Disclosure Letter lists the
following contracts and other agreements (written or oral) to which any of FGI,
the FGI Subsidiaries or Freedom Plaza is a party:
(a) any agreement (or group of related agreements) for the lease
of personal property to or from any person providing for lease
payments in excess of $25,000 per annum;
(b) any agreement (or group of related agreements) for the
purchase or sale of raw materials, commodities, supplies, products, or
other personal property, or for the furnishing or receipt of services,
the performance of which will result in a material loss to any of FGI,
the FGI Subsidiaries or Freedom Plaza or involve consideration in
excess of $25,000 within any one year period;
(c) any agreement concerning a partnership or joint venture
(other than an agreement relating to the Excluded Assets);
(d) any agreement (or group of related agreements) under which it
has created, incurred, assumed, or guaranteed any indebtedness for
borrowed money, or any capitalized lease obligation, in excess of
$25,000 or under which it has imposed a Lien on any of its assets,
tangible or intangible involving more than $25,000;
(e) any agreement concerning confidentiality, noncompetition or
exclusive dealing;
(f) any agreement with any referral source;
(g) any preferred admission or transfer agreements;
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(h) any agreement with any FGI Shareholder or their Affiliates
(other than FGI, the FGI Subsidiaries, and Freedom Plaza);
(i) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other similar
material plan or arrangement for the benefit of its current or former
directors, officers, members, partners, or employees;
(j) any collective bargaining agreement;
(k) any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis providing annual
compensation in excess of $50,000 or providing severance benefits;
(l) any agreement under which it has advanced or loaned any
amount to any of its directors, officers, members, partners, or
employees outside the Ordinary Course of Business, which amount has
not been repaid;
(m) any agreement under which the consequences of a default or
termination could be reasonably expected to have Adverse Consequences
in excess of $50,000; or
(n) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $50,000 and
which cannot be terminated by FGI, the FGI Subsidiaries or Freedom
Plaza without penalty within 90 days or less.
FGI has delivered to ARC a correct and complete copy of each written
agreement listed in Schedule 4.17 (as amended to date) and a written summary
setting forth the terms and conditions of each oral agreement referred to in
Schedule 4.17. With respect to each such agreement:
(a) the agreement is legal, valid, binding, enforceable, and in
full force and effect, subject to the effect of bankruptcy,
insolvency, receivership, moratorium and other similar laws affecting
the rights and remedies of creditors generally;
(b) neither FGI, the FGI Subsidiaries or Freedom Plaza nor, to
the Knowledge of FGI and the FGI Shareholders, any other party, is in
breach or default, and no event has occurred that, with notice or
lapse of time would constitute a breach or default, or permit
termination, modification, or acceleration, under the agreement; and
(c) no party has repudiated any provision of the agreement.
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4.18 Residency Agreements. Schedule 4.18 of the FGI Disclosure Letter
contains the name of each resident of the Communities as of February 28, 1998,
the monthly sums due from each resident, and any resident deposits related to
such resident. There is no resident of the Communities that is not a party to,
and subject to, a Residency Agreement (either individually or through an
authorized representative). Except for names, identification matters, dates,
unit numbers, terms, and the monthly sums due from each resident and deposits,
all Residency Agreements are in the general forms that have heretofore been
delivered to ARC by FGI. Except as disclosed on Schedule 4.18 hereof, to the
Knowledge of FGI and the FGI Shareholders there is no material dispute, breach,
default or event of default under or with respect to any Residency Agreement.
Neither the Closing nor the consummation of the transactions contemplated by the
Transaction Documents will result in a right to terminate any Residency
Agreement or a breach or default thereof, or require the consent of the resident
that is a party thereto.
4.19 Notes and Accounts Receivable. All notes and accounts receivable
of FGI and the FGI Subsidiaries are reflected properly on their books and
records, are valid receivables subject to no setoffs or counterclaims, are
current and collectible, and will be collected by ARC (or by FGI prior to the
Closing Date) in accordance with their terms, subject only to the reserve for
bad debts set forth on the face of the Most Recent Financial Statements (rather
than in any notes thereto) as adjusted for the passage of time through the
Closing Date in accordance with the past custom and practice of FGI and the FGI
Subsidiaries.
4.20 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of any of FGI, the FGI Subsidiaries or Freedom Plaza (other
than appointments of agents for receipt of service of process).
4.21 Insurance. Schedule 4.21 lists each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which any of FGI, the FGI
Subsidiaries or Freedom Plaza has been, within the past six years, a party, a
named insured, or otherwise the beneficiary of coverage. For each such insurance
policy, Schedule 4.21 sets forth:
(a) the name of the insurer, the name of the policyholder, and
the name of each covered insured,
(b) the policy number and the period of coverage;
(c) the scope (including an indication of whether the coverage
was on a claims made, occurrence, or other basis) and amount
(including a description of how deductibles and ceilings are
calculated and operate) of coverage; and
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(d) a description of any retroactive premium adjustments or other
loss-sharing arrangements.
With respect to each current insurance policy:
(a) the consummation of the transactions contemplated by the
Transaction Documents will not impair the rights of FGI and the FGI
Subsidiaries under such policies;
(b) neither any of FGI and the FGI Subsidiaries nor, to the
Knowledge of FGI and the FGI Subsidiaries, any other party to the
policy is in breach or default (including with respect to the payment
of premiums or the giving of notices), and no event has occurred that,
with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under
the policy; and
(c) no party to the policy has repudiated any provision thereof.
Each of FGI, the FGI Subsidiaries and Freedom Plaza has been covered
during the past six years by insurance in scope and amount customary and
reasonable for the businesses in which it has engaged during the aforementioned
period. Schedule 4.21 describes any self-insurance arrangements affecting any of
FGI, the FGI Subsidiaries or Freedom Plaza.
4.22 Litigation. Schedule 4.22 sets forth each instance in which any of
FGI, the FGI Subsidiaries or Freedom Plaza (a) is subject to any outstanding
injunction, judgment, order, decree, ruling, or charge or (b) is a party or, to
the Knowledge of FGI and the FGI Shareholders, is threatened to be made a party
to any action, suit, proceeding, hearing, or investigation of, in, or before any
court or quasi-judicial or administrative agency of any federal, state, local,
or foreign jurisdiction or before any arbitrator or mediator. Except for
disputes involving residents or their families under Residency Agreements that
have arisen in the Ordinary Course of Business, to the Knowledge of FGI and the
FGI Shareholders, there is no Basis for any such action, suit, proceeding,
hearing, or investigation.
4.23 Employees. To the Knowledge of FGI and the FGI Shareholders, no
executive, key employee, or group of employees intends to terminate employment
with any of FGI, the FGI Subsidiaries or Freedom Plaza. None of FGI, the FGI
Subsidiaries or Freedom Plaza is a party to or bound by any collective
bargaining agreement, nor has any of them experienced any strikes, grievances,
claims of unfair labor practices, or other collective bargaining disputes. None
of FGI, the FGI Subsidiaries or Freedom Plaza has committed any unfair labor
practice. To the Knowledge of FGI and the FGI Shareholders, no organizational
effort is presently being made or threatened by or on behalf of any labor union
with respect to employees of any of FGI, the FGI Subsidiaries or Freedom Plaza.
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4.24 Employee Benefits.
(a) Schedule 4.24 lists each Employee Benefit Plan that any of
FGI, the FGI Subsidiaries or Freedom Plaza maintains or to which any of
FGI, the FGI Subsidiaries or Freedom Plaza contributes.
(b) None of FGI, the FGI Subsidiaries, and any ERISA Affiliate
maintains or contributes to, ever has maintained or contributed to, or
ever has been required to contribute to any Employee Benefit Plan
(including a Multiemployer Plan) which is, or was, subject to Title IV
of ERISA or Section 412 of the Code.
(c) Each such Employee Benefit Plan (and each related trust,
insurance contract, or fund) complies in form and in operation in all
respects with the applicable requirements of ERISA, the Code, and other
applicable laws.
(d) All required reports and descriptions (including Form 5500
Annual Reports, Summary Annual Reports, and Summary Plan Descriptions)
have been filed or distributed appropriately with respect to each such
Employee Benefit Plan. The requirements of Part 6 of Subtitle B of
Title I of ERISA and of Code Section 4980B have been met with respect
to each such Employee Benefit Plan which is an Employee Welfare Benefit
Plan.
(e) All contributions (including all employer contributions
and employee salary reduction contributions) which are due have been
paid to each such Employee Benefit Plan which is an Employee Pension
Benefit Plan and all contributions for any period ending on or before
the Closing Date which are not yet due have been paid to each such
Employee Pension Benefit Plan or accrued in accordance with the past
custom and practice of FGI, the FGI Subsidiaries, and Freedom Plaza.
All premiums or other payments for all periods ending on or before the
Closing Date have been paid with respect to each such Employee Benefit
Plan which is an Employee Welfare Benefit Plan.
(f) Each such Employee Benefit Plan which is an Employee
Pension Benefit Plan meets the requirements of a "qualified plan" under
Code Section 401(a) and has received, within the last two years, a
favorable determination letter from the Internal Revenue Service.
(g) FGI has delivered to ARC correct and complete copies of
the plan documents and summary plan descriptions, the most recent
determination letter received from the Internal Revenue Service, the
three most recent Form 5500 Annual Reports, the most recent actuarial
report, and all related trust agreements, insurance contracts, and
other funding agreements which implement each such Employee Benefit
Plan.
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(h) With respect to each Employee Benefit Plan that any of FGI
the FGI Subsidiaries or Freedom Plaza maintains or ever has maintained
or to which any of them contributes, ever has contributed, or ever has
been required to contribute:
(i) there have been no Prohibited Transactions with
respect to any such Employee Benefit Plan;
(ii) No Fiduciary has any Liability for breach of
fiduciary duty or any other failure to act or comply in
connection with the administration or investment of the
assets of any such Employee Benefit Plan. No action, suit,
proceeding, hearing, or investigation with respect to the
administration or the investment of the assets of any such
Employee Benefit Plan (other than routine claims for
benefits) is pending or, to the Knowledge of FGI or any FGI
Shareholder, threatened; and
(iii) none of FGI and the FGI Shareholders has any
Knowledge of any Basis for any such action, suit,
proceeding, hearing, or investigation;
(i) None of FGI, the FGI Subsidiaries or Freedom Plaza
maintains or ever has maintained or contributes, ever has contributed,
or ever has been required to contribute to any Employee Welfare Benefit
Plan providing medical, health, or life insurance or other welfare-type
benefits for current or future retired or terminated employees, their
spouses, or their dependents (other than in accordance with Code
Section 4980B).
(j) The Merger will not (i) entitle any employee or former
employee of FGI, any of the FGI Subsidiaries, or Freedom Plaza to
severance pay, unemployment compensation, or any other payment, or (ii)
accelerate the time of payment or vesting of any stock option, stock
appreciation right, deferred compensation, or employee benefits under
any Employee Benefit Plan (including vacation and sick pay).
4.25 Guaranties. None of FGI and the FGI Subsidiaries is a guarantor or
otherwise is liable for any Liability of any person other than (i) FGI, (ii) the
FGI Subsidiaries, and (iii) the Excluded FGI Entities of which FGI serves as
general partner to the extent such Liability is imposed by operation of law.
4.26 Environmental, Health, and Safety Matters.
(a) Each of FGI, the FGI Subsidiaries, Freedom Plaza and their
respective Affiliates and, to the Knowledge of FGI and the FGI
Shareholders, their respective predecessors, have complied and are in
compliance with all Environmental, Health, and Safety Requirements.
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(b) Without limiting the generality of Section 4.26(a), each
of FGI, the FGI Subsidiaries, Freedom Plaza, and their respective
Affiliates and, to the Knowledge of FGI and the FGI Shareholders, their
respective predecessors, has obtained, has complied with, and is in
compliance with, all permits, licenses, approvals, registrations, and
other authorizations that are required pursuant to Environmental,
Health, and Safety Requirements for the occupation of its facilities
and the operation of its business (collectively, the "Environmental
Permits"). A list of all such Environmental Permits is set forth in
Schedule 4.26(b).
(c) Neither FGI, the FGI Subsidiaries, Freedom Plaza, nor any
of their respective Affiliates and, to the Knowledge of FGI and the FGI
Shareholders, their respective predecessors, has received any written
or oral notice, report or other information regarding any actual,
threatened, or alleged violation of Environmental, Health, and Safety
Requirements, or Liabilities including without limitation any
investigatory, remedial, clean up, or corrective obligations, relating
to any of them or its facilities arising under any Environmental,
Health, and Safety Requirements.
(d) None of the following exists at any property or facility
owned, operated, or leased by FGI, the FGI Subsidiaries, or Freedom
Plaza: (i) underground storage tanks, (ii) asbestos containing material
in any form or condition, (iii) materials or equipment containing
polychlorinated biphenyls, or (iv) landfills, surface impoundments, or
disposal areas.
(e) None of FGI, the FGI Subsidiaries, Freedom Plaza, or their
respective Affiliates and, to the Knowledge of FGI and the FGI
Shareholders, their respective predecessors, has treated, stored,
disposed of, arranged for or permitted the disposal of, transported,
handled, or released any substance, including without limitation any
hazardous substance, or owned or operated any property or facility (and
no such property or facility is contaminated by any such substance) in
a manner that has given or would give rise to Liability, including
without limitation any Liability for response costs, oversight costs,
corrective action costs, personal injury, property damage, natural
resources damages or attorney fees, pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. Sec. 9601 et seq., as amended, the Solid Waste Disposal Act, 42
U.S.C. Sec. 6901 et seq., as amended, or any comparable state law or
any other Environmental, Health, and Safety Requirements.
(f) Neither FGI, the FGI Subsidiaries, Freedom Plaza, nor any
of their respective Affiliates has, either expressly or, to the
Knowledge of FGI and the FGI Shareholders, by operation of law, assumed
or undertaken any Liability, including without limitation any
obligation for corrective or remedial action, of any other person
relating to Environmental, Health, and Safety Requirements. To the
Knowledge of FGI and the FGI
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Shareholders, their respective predecessors have not, either expressly
or by operation of law, assumed or undertaken any Liability, including
without limitation any obligation for corrective or remedial action, of
any other person relating to Environmental, Health, and Safety
Requirements.
(g) No facts, events or conditions relating to the past or
present facilities, properties, or operations of FGI, the FGI
Subsidiaries, Freedom Plaza, or any of their respective Affiliates and,
to the Knowledge of FGI and the FGI Shareholders, their respective
predecessors, will prevent, hinder, or limit continued compliance with
Environmental, Health, and Safety Requirements, give rise to any
investigatory, remedial, or corrective obligations pursuant to
Environmental, Health, and Safety Requirements, or give rise to any
other Liability pursuant to Environmental, Health, and Safety
Requirements, including without limitation any relating to onsite or
offsite releases or threatened releases of hazardous materials,
substances or wastes, personal injury, property damage, or natural
resources damage.
4.27 Licenses and Permits.
(a) FGI, each of the FGI Subsidiaries, and Freedom Plaza is
the holder of all valid licenses, permits, and other rights and
authorizations required by law, ordinance, regulation, ruling, or
otherwise of any governmental regulatory authority necessary to operate
its business (each, a "Governmental Authorization"). Schedule 4.27(a)
sets forth a correct and complete list of entities that are certified
for participation and reimbursement under Titles XVIII or XIX of the
Social Security Act (the "Medicare and Medicaid programs") (Medicare
and Medicaid programs and such other similar federal, state or local
reimbursement or governmental programs for which FGI, any of the FGI
Subsidiaries or Freedom Plaza is eligible are hereinafter referred to
collectively as the "Government Programs") and have current provider
agreements for such Government Programs and with such private
non-governmental programs, including without limitation any private
insurance program, under which FGI, any of the FGI Subsidiaries or
Freedom Plaza directly or indirectly is presently receiving payments
(such non-governmental programs are herein referred to as "Private
Programs"). Set forth on Schedule 4.27 is a correct and complete list
of such Governmental Authorizations and provider agreements under all
Government Programs and Private Programs, complete and correct copies
of which have been provided to ARC. True, complete and correct copies
of all surveys of FGI, any of the FGI Subsidiaries, Freedom Plaza or
their facilities conducted in connection with any Government Program,
Private Program or licensing or accrediting body during the past three
years have been provided to ARC.
(b) Each Governmental Authorization listed on Schedule 4.27 is
valid and in full force and effect. No violation, default, order or
deficiency exists with respect to any
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of the items listed on Schedule 4.27. Neither FGI, any of the FGI
Subsidiaries, or Freedom Plaza has received any notice of any action
pending or recommended by any state or federal agencies having
jurisdiction over the items listed on Schedule 4.27, either to revoke,
withdraw or suspend any Governmental Authorization, or to terminate the
participation of FGI, any of the FGI Subsidiaries, or Freedom Plaza in
any Government Program or Private Program. To the Knowledge of FGI and
the FGI Shareholders, no event has occurred which, with the giving of
notice, the passage of time, or both, would constitute grounds for a
violation, order or deficiency with respect to any of the items listed
on Schedule 4.27 or to revoke, withdraw or suspend any Governmental
Authorization or terminate or modify the participation of FGI, any of
the FGI Subsidiaries, or Freedom Plaza in any Government Program or
Private Program. To the Knowledge of FGI and the FGI Shareholders,
there has been no decision of any other party not to renew any provider
or third-party payor agreement of FGI, any of the FGI Subsidiaries, or
Freedom Plaza. Except as listed on Schedule 4.27(b), no consent or
approval of, prior filing with or notice to, or any action by, any
governmental body or agency or any other third party is required in
connection with any such Governmental Authorization, or Government
Program or Private Program, by reason of the consummation of the
transactions contemplated by this Agreement or the other Transaction
Documents, and the continued operation of the business of FGI, each of
the FGI Subsidiaries, and Freedom Plaza thereafter on a basis
consistent with past practices.
(c) FGI, each of the FGI Subsidiaries, and Freedom Plaza has
timely filed all reports required to be filed prior to the date hereof
with respect to the Government Programs and Private Programs, all
fiscal intermediaries and other insurance carriers and all such reports
are complete and accurate in all material respects and have been
prepared in accordance with all applicable laws and regulations
governing reimbursement and payment claims. True and complete copies of
such reports filed by FGI, each of the FGI Subsidiaries, and Freedom
Plaza for the most recent year have heretofore been delivered to ARC.
There are no other reports required to be filed by FGI, any of the FGI
Subsidiaries, or Freedom Plaza in order to be paid under any Government
Program or Private Program for services rendered, except for reports
not yet due.
(d) FGI, each of the FGI Subsidiaries, and Freedom Plaza has
paid or caused to be paid or has properly reflected in the Most Recent
Financial Statements all known and undisputed refunds, overpayments,
discounts, or adjustments which have become due pursuant to such
reports, and has no Liability under any Government Program or Private
Program for any refund, overpayment, discount or adjustment other than
those arising in the Ordinary Course of Business, and no interest or
penalties accruing with respect thereof, except as has been
specifically reserved for in the Most Recent Financial Statements.
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(e) FGI, each of the FGI Subsidiaries, and Freedom Plaza has
reserved (as reflected on the Most Recent Financial Statements) all
amounts required to be reserved with respect to the Communities or the
Residency Agreements associated therewith (including any reserves
required under Section 20-1801 et seq. of the Arizona Statutes, Section
651.011 et seq. of the Florida Statutes, and Section 14.1301 et seq. of
the Michigan Statutes Annotated).
4.28 Inspections and Investigations. Neither FGI's, any of the FGI
Subsidiaries', or Freedom Plaza's rights to receive reimbursements pursuant to
any Government Program or Private Program has been terminated or otherwise
adversely affected as a result of any investigation or action whether by any
federal or state governmental regulatory authority or other third party. Neither
FGI, any of the FGI Subsidiaries, nor Freedom Plaza has received any notice of
any claim, requirement or demand of any licensing or certifying agency or other
third party supervising or having authority over FGI, any of the FGI
Subsidiaries, or Freedom Plaza or its operations to rework or redesign any part
thereof or to provide additional furniture, fixtures, equipment, appliances, or
inventory so as to conform to or comply with any existing law, code, rule,
regulation, or standard. Schedule 4.28 contains copies of all reports,
correspondence, and notices relating to any matter described or referenced
therein.
4.29 Investment. Each FGI Shareholder (a) understands that the shares
of ARC Common Stock to be issued pursuant this Agreement have not been, and,
unless registered pursuant to the registration rights granted by ARC to the FGI
Shareholders pursuant to the Registration Rights Agreement attached as an
exhibit hereto, will not be, registered under the Securities Act or under any
state securities laws and are being offered and sold in reliance upon federal
and state exemptions for transactions not involving any public offering, (b) is
acquiring ARC Common Stock solely for such FGI Shareholder's own account for
investment purposes, and not with a view to the distribution thereof, (c) is a
sophisticated investor with knowledge and experience in business and financial
matters, (d) has received certain information concerning ARC (including, but not
limited to, ARC's Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1998, ARC's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, ARC's 1997 Annual Report to Shareholders, ARC's Prospectus,
dated September 24, 1997, relating to the public offering of ARC's 5 3/4%
Convertible Subordinated Debentures Due 2002) and ARC's Proxy Statement for its
Annual Meeting of Shareholders to be held May 5, 1998 and has had the
opportunity to obtain additional information as desired in order to evaluate the
merits and the risks inherent in holding ARC Common Stock, (e) is able to bear
the economic risk and lack of liquidity inherent in holding unregistered ARC
Common Stock, and (f) is an Accredited Investor.
4.30 Certain Payments. Neither FGI, the FGI Subsidiaries, Freedom
Plaza, any FGI Shareholder, any agent or employee of FGI, the FGI Subsidiaries
or Freedom Plaza, or any person acting for or on behalf of FGI, the FGI
Subsidiaries, Freedom Plaza or the FGI Shareholders has, directly or indirectly,
made any unlawful contribution, gift, rebate, payment, commission or other
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payment, or any bribe, payoff, or kickback, to any person, private or public,
regardless of form, whether in money, property, or services, (i) to obtain
favorable treatment, (ii) to pay for favorable treatment, (iii) to obtain
special concessions or for special concessions already obtained for or in
respect of FGI, the FGI Subsidiaries or Freedom Plaza, or (iv) that is illegal
under any applicable law.
4.31 Ownership of ARC Securities. Schedule 4.31 sets forth the number
of shares of ARC Common Stock and the dollar value of ARC's 5 3/4% Convertible
Subordinated Debentures Due 2002 beneficially owned as of the date hereof by
each FGI Shareholder and their respective Affiliates.
4.32 Disclosure. The representations and warranties of FGI and the FGI
Shareholders contained in this Article 4 and the representations and warranties
of FGI, the FGI Shareholders, the FGI Subsidiaries, and Freedom Plaza set forth
in the other Transaction Documents do not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements and information contained in this Article 4 not misleading.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF ARC
ARC represents and warrants to FGI and the FGI Shareholders that the
statements contained in this Article 5 are correct and complete as of the date
hereof and will be correct and complete as of the Closing Date (as though made
then and as though the Closing Date were substituted for the date hereof
throughout this Article 5), except as expressly set forth in the disclosure
letter delivered prior to the execution hereof to FGI (the "ARC Disclosure
Letter"). Nothing in the ARC Disclosure Letter shall be deemed adequate to
disclose an exception to a representation or warranty made herein, unless the
ARC Disclosure Letter identifies the exception with reasonable particularity
(including a specific reference to the representation or warranty being
excepted) and describes the relevant facts or circumstances in reasonable
detail. The ARC Disclosure Letter will be arranged to correspond to the numbered
and lettered sections contained in this Article 5.
5.1 Organization of ARC. ARC is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Tennessee.
5.2 Authorization of Transaction. ARC has full power and authority to
execute and deliver this Agreement and each other Transaction Document and to
perform its obligations thereunder. ARC has taken all action required by law,
its charter and bylaws, or otherwise to authorize the execution and delivery by
ARC of the Transaction Documents. This Agreement
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constitutes, and each other Transaction Document, when executed and delivered by
ARC, will constitute, the valid and legally binding obligation of ARC,
enforceable in accordance with its terms. Except for the filings described in
Section 2.3, ARC need not give any notice to, make any filing with, or obtain
any authorization, consent, or approval of any government or governmental agency
in order to consummate the transactions contemplated by the Transaction
Documents.
5.3 Capitalization. The authorized capital stock of ARC consists of
5,000,000 shares of preferred stock, none of which is issued and outstanding,
and 50,000,000 shares of ARC Common Stock, of which 11,420,860 shares are issued
and outstanding as of the date hereof. All of the issued and outstanding shares
of ARC Common Stock have been duly authorized, are validly issued, fully paid,
and nonassessable. The shares of ARC Common Stock to be delivered as part of the
Merger Consideration, when issued in accordance with this Agreement, will be
duly authorized, validly issued, fully paid, and nonassessable.
5.4 Noncontravention. Neither the execution and the delivery of the
Transaction Documents, nor the consummation of the transactions contemplated
thereby, will (a) violate any constitution, statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which ARC is subject or any
provision of its charter or bylaws or (b) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, or require any notice
under any agreement, contract, lease, license, instrument, or other arrangement
to which ARC is a party or by which it is bound or to which any of its assets is
subject (or result in the imposition of any Lien upon any of its assets).
5.5 Brokers' Fees. ARC has no Liability or obligation to pay any fees
or commissions to any broker, finder, or agent with respect to the transactions
contemplated by the Transaction Documents for which FGI or any FGI Shareholder
could become liable or obligated.
5.6 SEC Reports. Schedule 5.6 of the ARC Disclosure Letter contains a
true and complete list of all registration statements, prospectuses, proxy
statements, and other material documents, including all amendments thereto
(collectively, the "SEC Filings"), filed or required to be filed, by ARC with
the Securities and Exchange Commission (the "SEC"), pursuant to the Securities
Act or the Securities Exchange Act since ARC's inception. ARC has provided to
FGI true and complete copies of all SEC Filings (in the case of registration
statements, ARC has provided copies of such registration statements in the form
in which they were declared effective by the SEC, without exhibits) and shall
provide FGI true and complete copies of all SEC Filings filed or required to be
filed with the SEC prior to the Closing Date. Since May 30, 1997, ARC has filed
with the SEC all material forms, reports, and other documents required to be
filed by ARC under the Securities Exchange Act of 1934, as amended (the "SEC
Reports"). The SEC Reports, as of their respective dates, did not contain any
untrue statement of a material fact or omit
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to state any material fact required to be stated therein or necessary to make
the statements contained therein, in light of the circumstances in which they
were made, not misleading.
5.7 Governmental Authorizations. ARC has every material approval,
consent, license, permit, waiver, Medicare or Medicaid participation agreement,
and other authorization ("ARC Authorizations") of governmental or
quasi-governmental authorities required by law to permit ARC to operate its
business as it is presently conducted. Each of the ARC Authorizations is in full
force and effect, and ARC has not received any notice of any governmental action
that may result in the suspension, revocation, termination, or nonrenewal of any
material ARC Authorization. ARC has timely filed all material reports that it is
required to file prior to the date hereof in order to comply with applicable
laws and requirements of governmental health care programs in which ARC
materially participates. ARC has no material liability under Medicare, Medicaid,
or any other governmental health care program for any refund or overpayment,
except for liabilities arising in the Ordinary Course of Business.
5.8 Certain Payments. Neither ARC nor any agent or employee of ARC or
any person acting for or on behalf of ARC has, directly or indirectly, made any
unlawful contribution, gift, rebate, payment, commission, or other payment, or
any bribe, payoff, or kickback, to any person, private or public, regardless of
form, whether in money, property, or services, (i) to obtain favorable
treatment, (ii) to pay for favorable treatment, (iii) to obtain special
concessions or for special concessions already obtained for or in respect of
ARC, or (iv) that is illegal under any applicable law.
5.9 Legal Compliance. ARC has complied in all material respects with
all applicable Laws, and it has not received notice that any action, suit,
proceeding, hearing, investigation, charge, complaint, claim, demand, or notice
that would be material to the conduct of its business has been filed or
commenced against it alleging any failure to so comply. ARC has never been the
subject of any material investigation, audit, monitoring, or other similar form
of review by any governmental regulatory body, authority or agency, or any
accrediting organization or agency in connection with any alleged improper
activity with respect to the operations of ARC, nor has ARC received any notice
from any governmental regulatory body, authority or agency, or accrediting
organization or agency of any material deficiency in connection with its
operations, other than deficiencies identified in connection with routine
surveys and inspections, all of which have been corrected in all material
respects. No governmental authorities are currently conducting proceedings
against ARC and, to the Knowledge of ARC, no governmental investigation or
proceeding is pending or being threatened against ARC. As used in this Section
5.9, "proceedings" has the meaning specified in Section 4.12.
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ARTICLE 6.
PRE-CLOSING COVENANTS
6.1 Covenants of ARC, FGI, and the FGI Shareholders. During the period
from the date hereof and continuing until the Effective Time (except as
expressly contemplated or permitted hereby, or to the extent that the other
parties shall otherwise specifically consent in writing) each of ARC, FGI, and
the FGI Shareholders covenants with the other that, insofar as the obligations
relate to it:
(a) Each of ARC, FGI, and the FGI Shareholders will use their
reasonable best efforts to take all action and to do all things
necessary in order to consummate and make effective the transactions
contemplated by the Transaction Documents (including satisfaction, but
not waiver, of the closing conditions set forth in Article 7 herein).
(b) FGI and the FGI Shareholders will promptly cause FGI, the FGI
Subsidiaries, and Freedom Plaza to give any notices to third parties
and will use their best efforts to obtain any third party consents
that are required in connection with the consummation of the
transactions contemplated by the Transaction Documents, as set forth
on Schedule 4.5. FGI and the FGI Shareholders will cause FGI and the
FGI Subsidiaries to be released from the Liabilities of FGI and the
FGI Subsidiaries set forth on Schedule 6.1(b). Each of ARC, FGI, and
the FGI Shareholders will (and will cause the FGI Subsidiaries and
Freedom Plaza to) give any notices to, make any filings with, and use
their best efforts to obtain any authorizations, consents, and
approvals of governments and governmental agencies required in
connection with the consummation of the transactions contemplated by
the Transaction Documents, as set forth on Schedule 4.27(b). Without
limiting the generality of the foregoing, (i) ARC shall apply for and
use its best efforts to obtain the issuance of all licenses, permits,
certifications, and certificates of authority required in connection
with the transactions contemplated by the Transaction Documents, and
(ii) each of ARC, FGI, and the FGI Shareholders will (and will cause
the FGI Subsidiaries and Freedom Plaza to) file any Notification and
Report Forms and related material that he or it may be required to
file with the Federal Trade Commission and the Antitrust Division of
the United States Department of Justice under the Hart-Scott-Rodino
Act, will use its reasonable best efforts to obtain an early
termination of the applicable waiting period, and will make any
further filings pursuant thereto that may be necessary in connection
therewith.
(c) Except as and to the extent required by law, including
Federal securities laws, each of ARC, FGI, and the FGI Shareholders
hereby agrees not to disclose or use, and each shall cause its
representatives not to disclose or use, any Confidential Information
with respect to any other party hereto furnished, or to be furnished,
by such other party
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or its representatives in connection herewith at any time or in any
manner other than in connection with their respective evaluations of
the Merger. Except as required by law, neither FGI nor any of the FGI
Shareholders or their representatives shall make any public statements
regarding the Merger or this Agreement without the prior written
approval of ARC. In the event the Merger does not occur for any
reason, the parties shall continue to be bound by the terms of
Paragraph II(G) of the Letter of Intent, dated January 29, 1998,
between ARC, FGI, and the FGI Shareholders (the "Letter of Intent").
(d) Notwithstanding anything herein to the contrary, FGI (on
behalf of itself, the FGI Subsidiaries and the Excluded FGI Entities)
and the FGI Shareholders consent to the inclusion in any registration
statement filed by ARC under applicable securities laws (including the
Securities Act) of the Audited Financial Statements, the Most Recent
Financial Statements and any other financial information or data
relating to FGI, the FGI Subsidiaries, the Target Entities or the
Communities.
6.2 Covenants of FGI and the FGI Shareholders. FGI and the FGI
Shareholders covenant and agree that between the date hereof and continuing
until the Effective Time (except as expressly contemplated or permitted hereby,
or to the extent that ARC shall otherwise specifically consent in writing):
(a) FGI will (and will cause the FGI Subsidiaries and Freedom
Plaza to) (i) carry on its business in substantially the same manner
as heretofore conducted and only in the Ordinary Course of Business,
(ii) maintain usual levels of inventories and supplies, (iii) keep its
business and properties substantially intact, including its present
operations, physical facilities, working conditions, insurance
policies, and relationships with lessors, licensors, suppliers,
customers, residents, and employees, (iv) make no new elections with
respect to Taxes or any changes in current elections or accounting
methods with respect to Taxes, except for elections that relate solely
to the Excluded Assets (but do not change the Master Trust Accounting
Method) if such elections must be made before the Closing Date in
order not to be lost or be delinquent, (v) confer with ARC concerning
operational matters of a material nature, (vi) otherwise report
periodically to ARC concerning the status of the businesses and
affairs of FGI, the FGI Subsidiaries, and Freedom Plaza, and (vii) use
their best efforts to terminate, release, cancel, or modify the
agreements that are so designated or indicated on the FGI Disclosure
Letter as being subject to termination, release, cancellation or
modification prior to the Closing Date.
(b) Except in connection with the transfer or distribution of the
Excluded Assets as contemplated by Section 6.2(c) below, FGI and the
FGI Shareholders will not cause or permit any of FGI, the FGI
Subsidiaries or Freedom Plaza to engage in any practice, take any
action, or enter into any transaction outside the Ordinary Course of
Business. Without limiting the generality of the foregoing, except in
connection with the transfer or
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distribution of the Excluded Assets as contemplated by Section 6.2(c)
below, FGI and the FGI Shareholders will not cause or permit any of
FGI, the FGI Subsidiaries or Freedom Plaza to (i) declare, set aside,
or pay any dividend or make any distribution with respect to its
securities or redeem, purchase, or otherwise acquire any of its
securities, or (ii) otherwise engage in any practice, take any action,
or enter into any transaction of the sort described in Section 4.10.
(c) FGI will (and will cause the FGI Subsidiaries to) complete
the transfer or distribution of the Excluded Assets on terms that are
acceptable to both ARC and FGI in their sole and absolute discretion
(including, without limitation, the receipt of tax appraisals as
required by the Internal Revenue Service). As of the Closing, FGI and
the FGI Subsidiaries shall have a charitable contribution carryover
described in Section 170(d)(2)(A) of the Code of at least $7,000,000,
which shall be applicable to periods following the Closing Date.
(d) Each of FGI and the FGI Shareholders will permit
representatives of ARC to have full access at all reasonable times and
upon reasonable notice, and in a manner so as not to interfere with
the normal business operations of FGI, the FGI Subsidiaries or Freedom
Plaza, to all premises, properties, personnel, books, records
(including Tax records), contracts, and documents of or pertaining to
each of FGI, the FGI Subsidiaries or Freedom Plaza .
(e) Except for the Companion Securities Purchase Agreements, none
of FGI or the FGI Shareholders will (or will permit the FGI
Subsidiaries or Freedom Plaza to) (a) solicit, initiate, or encourage
the submission of any proposal or offer from any person relating to
the acquisition of any securities, or any material portion of the
assets, of any of FGI, the FGI Subsidiaries, or Freedom Plaza
(including any acquisition structured as a merger, consolidation,
share or security exchange, or reorganization) or relating to a
business combination, partnership, joint venture, or similar
arrangement with any person or entity or (b) participate in any
discussions or negotiations regarding, furnish any information with
respect to, assist or participate in, or facilitate in any other
manner any effort or attempt by any person to do or seek any of the
foregoing. None of the FGI Shareholders will vote its FGI Securities
in favor of any such acquisition (whether structured as a merger,
consolidation, share or security exchange, or reorganization) or such
business combination, partnership, joint venture, or similar
arrangement. FGI and the FGI Shareholders will notify ARC immediately
if any person makes any proposal, offer, inquiry, or contact with
respect to any of the foregoing.
(f) Neither FGI nor the FGI Shareholders shall take any action
that would cause or tend to cause the conditions upon the obligations
of the parties hereto to effect the transactions contemplated hereby
not to be fulfilled including, without limitation, taking,
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causing to be taken, or permitting or suffering to be taken or to
exist any action or condition, that would cause the representations
and warranties made by them herein not to be true, correct, complete,
and accurate as of the Closing Date.
(g) FGI and the FGI Shareholders will give prompt written notice
to ARC of any material adverse development relating to the business,
affairs, operations, prospects, or assets of FGI, any of the FGI
Subsidiaries, or Freedom Plaza, and of any breach of any of the
representations and warranties of FGI and the FGI Shareholders in
Article 4 or the breach of any representation or warranty by FGI, the
FGI Shareholders, the FGI Subsidiaries, or Freedom Plaza under any
other Transaction Document. No disclosure by any party pursuant to
this Section 6.2(g) shall be deemed to amend or supplement the FGI
Disclosure Letter or to cure any misrepresentation, breach of
warranty, or breach of covenant.
(h) Prior to the Effective Time, FGI shall promptly provide to
ARC monthly and quarterly unaudited financial statements of FGI, each
of the FGI Subsidiaries that is not included in FGI's consolidated
financial statements for periods from and after December 31, 1997, and
Freedom Plaza, prepared in accordance with each entity's historical
practices for monthly and quarterly financial statements.
(i) Prior to the Effective Time, the FGI Shareholders and their
Affiliates will not, directly or indirectly: (i) acquire, or offer or
propose to acquire, beneficial ownership of any shares of ARC Common
Stock or other securities of ARC (other than shares or other
securities owned beneficially or of record by the FGI Shareholders or
their Affiliates on the date hereof); (ii) solicit proxies, seek to
induce any other person, firm, corporation, or other entity to solicit
proxies, or become a "participant" in a "solicitation" of proxies, as
those terms are defined in Item 4 of Schedule 14A and Rule 14a-1 under
the Exchange Act, in respect of any shares of capital stock of ARC or
call any shareholders meeting or initiate or propose, or otherwise
solicit shareholders of ARC to approve or disapprove, any shareholder
proposal; (iii) enter into any shareholders' agreement or other
agreement of similar effect or deposit any securities in a voting
trust or subject such securities to a voting trust agreement or any
other agreement of similar effect with respect to ARC; (iv) take any
action (or permit any investment banker, attorney, accountant, or any
other representative retained by any of the FGI Shareholders or their
Affiliates to take any action on behalf of such FGI Shareholder or any
of its Affiliates), directly or indirectly, to (a) acquire or affect
control of ARC, (b) participate in or affect the management of ARC,
(c) participate in, or encourage the formation of, any Group (as
defined in Rule 13d-5 under the Exchange Act) with respect to any
shares of capital stock of ARC, or (d) initiate contact with any
person or entity in an effort to solicit, encourage, or assist that
person or entity in any proposal for a merger or other business
combination involving ARC or for the acquisition of any of ARC's
equity or any of ARC's assets; or (v) enter into any oral
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or written contract, arrangement, or understanding (including, without
limitation, any contract, arrangement, or understanding referred to in
Item 6 of Schedule 13D under the Exchange Act) with respect to any of
the foregoing.
(j) Within twenty (20) days following the date of execution
hereof, FGI shall deliver to ARC a supplement to the FGI Disclosure
Letter delivered at the execution hereof that shall contain exceptions
to the representations and warranties contained in Article 4 relating
solely to Freedom Plaza; provided, however, not later than thirty (30)
days after the date hereof such supplement may be updated once to
include any information that is not reasonably available during such
twenty (20) day period. Notwithstanding anything in the previous
sentence to the contrary, no disclosure in such supplement to the FGI
Disclosure Letter shall be deemed to update or modify the FGI
Disclosure Letter with respect to exceptions to the representations
and warranties relating to any person or entity other than Freedom
Plaza. FGI and the FGI Shareholders shall not be deemed to be in
breach of any representation, warranty, or covenant under this
Agreement as a result of the failure to disclose in the FGI Disclosure
Letter, as delivered at the execution hereof, any matter pertaining to
only Freedom Plaza that is disclosed in the FGI Disclosure Letter
supplement delivered pursuant to this Section 6.2(j).
6.3 Covenants of ARC. ARC covenants and agrees that between the date
hereof and continuing until the Effective Time (except as expressly contemplated
or permitted hereby, or to the extent that FGI shall otherwise consent in
writing) ARC shall not take any action that would cause or tend to cause the
conditions upon the obligations of the parties hereto to effect the transactions
contemplated hereby not to be fulfilled including, without limitation, taking,
causing to be taken, or permitting or suffering to be taken or to exist any
action or condition, that would cause the representations and warranties made by
it herein not to be true, correct, complete and accurate in all material
respects as of the Closing Date. ARC will give prompt written notice to FGI and
the FGI Shareholders of any material adverse development causing a breach of any
of the representations and warranties in Article 5. No disclosure by ARC
pursuant to this Section 6.3 shall be deemed to amend or supplement the ARC
Disclosure Letter or to prevent or cure any misrepresentation, breach of
warranty, or breach of covenant.
ARTICLE 7.
CONDITIONS
7.1 Conditions to Obligation of ARC. The obligation of ARC to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
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(a) the representations and warranties of FGI and the FGI
Shareholders set forth in this Agreement and the representations and
warranties of the parties to the other Transaction Documents (other
than ARC and its Affiliates) shall be true and correct in all material
respects when made, and at and as of the Closing Date, without giving
effect to any supplement to the FGI Disclosure Letter (other than the
supplement to be delivered to ARC pursuant to Section 6.2(i) and as
specifically limited thereby); provided, however, that a breach of any
such representation or warranty shall not be considered to be material
unless it could reasonably result in potential Adverse Consequences to
the ARC Indemnified Parties (as defined below) in excess of $300,000 in
the aggregate;
(b) FGI and the FGI Shareholders shall have performed and
complied with all of their covenants hereunder in all material respects
through the Closing;
(c) No material adverse change shall have occurred in the
business, condition (financial or otherwise), operations, or results of
operations of FGI, any FGI Subsidiary, Freedom Square, or Freedom
Plaza;
(d) FGI, the FGI Subsidiaries, and Freedom Plaza shall have
procured all of the consents specified in Schedules 4.2 and 4.5.
(e) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency
of any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree,
ruling, or charge could (i) prevent consummation of any of the
transactions contemplated by the Transaction Documents, (ii) cause any
of the transactions contemplated by the Transaction Documents to be
rescinded following consummation, or (iii) affect adversely the right
of any of FGI, the FGI Subsidiaries or Freedom Plaza to own its assets
and to operate its businesses in substantially the same manner as
heretofore conducted (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect);
(f) FGI shall have delivered to ARC a certificate to the
effect that each of the conditions specified in Section 7.1(a)-(e) is
satisfied in all material respects;
(g) FGI shall have delivered to ARC (i) a copy of the articles
of incorporation, bylaws, or other constituent documents of FGI, each
of the FGI Subsidiaries, and Freedom Plaza certified by an appropriate
authority of the jurisdiction of its organization (certified by the
Secretary of such entity with respect to such entity's bylaws, if any),
and (ii) certificates of good standing or existence of FGI, each of the
FGI Subsidiaries, and Freedom Plaza for each jurisdiction in which FGI,
any of the FGI Subsidiaries, or
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Freedom Plaza is qualified to do business, certified by an appropriate
authority of the jurisdiction issuing such certificate;
(h) all applicable waiting periods (and any extensions
thereof) under the Hart- Scott-Rodino Act shall have expired or
otherwise been terminated and the parties shall have received all other
authorizations, consents, and approvals of governments and governmental
agencies referred to in Section 4.2;
(i) contemporaneously with the closing of the transactions
contemplated by this Agreement, ARC (or its Affiliates) shall close the
acquisition pursuant to the Companion Securities Purchase Agreements of
all of the outstanding securities of the Target Entities that are not
owned by FGI;
(j) ARC (or its Affiliates) and Freedom Village at Brandywine
Limited Partnership shall have entered into reasonably acceptable forms
of a Management Agreement and an Option Agreement relating to the
Freedom Village at Brandywine retirement community, and the existing
Brandywine development agreement shall be amended to ARC's reasonable
satisfaction;
(k) ARC (or its Affiliates) and Freedom Group of Sarasota,
Inc. ("FGS"), Freedom Group Healthcare, Inc. ("FGH"), and the owners of
equity interests in FGS and FGH shall have entered into reasonably
acceptable forms of a Development Agreement, a Management Agreement, an
Option Agreement, and a Marketing Services Agreement relating to the
Sarasota Bay Club;
(l) ARC (or its Affiliates) and Seminole Nursing Pavilion and
Seminole Properties shall have entered into the Agreement for
Management Services and the Agreement to Enter Into Management
Agreement and Purchase Option, substantially in the forms attached
hereto as Exhibits C and D, respectively, relating to the Freedom
Square Project;
(m) ARC (or its Affiliates) and Freedom Plaza shall have
entered into the Agreement for Management Services, substantially in
the form attached hereto as Exhibit E, relating to the Freedom Plaza
retirement community located in Peoria, Arizona;
(n) Intentionally deleted;
(o) ARC (or its Affiliates) and Roskamp (or his Affiliates)
shall have entered into a reasonably acceptable form of a Development
Agreement relating to the Freedom Square Grocery Parcel;
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(p) ARC (or its Affiliates) and Roskamp (or his Affiliates)
shall have entered into a reasonably acceptable form of a Development
Agreement relating to the Freedom Plaza at Sun City Center, Florida
Golfview Terrace Apartments (which shall include a $1.3 million
contingent obligation relating to the reimbursement of previously
incurred development costs), as generally described in the Letter of
Intent;
(q) ARC and Roskamp (or his Affiliates) shall have entered
into a reasonably acceptable agreement providing Roskamp (or his
Affiliates) with a right of first refusal to serve as the developer of
the currently undeveloped portion of the Freedom Plaza at the Sun City
Center, Florida community (other than the Golfview Terrace Apartments
development parcels);
(r) ARC and Roskamp (or his Affiliates) shall have entered
into a reasonably acceptable form of a Use Restriction Agreement
relating to the approximately 6 acre tract of real property across the
street from the Freedom Plaza at the Sun City, Florida Community;
(s) ARC and Roskamp shall have entered into a reasonably
acceptable form of a Consulting Agreement;
(t) ARC and Roskamp shall have entered into the Shareholder
Agreement, substantially in the form attached hereto as Exhibit F;
(u) ARC and the Prince Entities shall have entered into the
Shareholder Agreement, substantially in the form attached hereto as
Exhibit G;
(v) ARC and the FGI Shareholders shall have entered into the
Registration Rights Agreement, substantially in the form attached
hereto as Exhibit H;
(w) ARC and the FGI Shareholders shall have entered into a
reasonably acceptable form of Brandywine Set-off and Escrow Agreement
as contemplated by Section 9.9(a) hereof and in accordance with the
general terms attached hereto as Exhibit J;
(x) ARC shall have approved any amendments to the partnership
agreements of Freedom Plaza Limited Partnership, and ARC shall have
entered into a reasonably acceptable form of development agreement with
respect to the Grandview Terrace providing for the payment of a
$400,000 development fee to ARC;
(y) ARC shall have received (A) from counsel to FGI, the FGI
Subsidiaries, Freedom Plaza, and the FGI Shareholders an opinion(s) in
form and substance reasonably satisfactory to ARC and its counsel, and
dated as of the Closing Date, and (B) from ARC's
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tax counsel an opinion that the Merger qualifies as a reorganization
within the meaning of Section 368(a)(1)(A) of the Code;
(z) all actions to be taken by FGI, the FGI Subsidiaries,
Freedom Plaza, and the FGI Shareholders in connection with consummation
of the transactions contemplated hereby or by the Transaction Documents
and all certificates, opinions, instruments, and other documents
required to effect the transactions contemplated hereby will be
satisfactory in form and substance to ARC, provided that ARC shall not
unreasonably withhold or delay its approval of such documents;
(aa) ARC shall have obtained all authorizations, consents, and
approvals of governments and governmental agencies required in
connection with the consummation of the transactions contemplated by
the Transaction Documents;
(bb) the transfer or distribution of the Excluded Assets shall
have been completed on terms acceptable to ARC in its sole and absolute
discretion (including, without limitation, the receipt of tax
appraisals as required by the Internal Revenue Service);
(cc) ARC and the Retired Officers Foundation and the Retired
Officers Corporation shall have entered into agreements reasonably
acceptable to ARC in accordance with the letter agreement, dated April
24, 1998, between ARC, Freedom Village of Sun City Center, Ltd., and
the Retired Officers Corporation, which agreement shall include a
consent by the Retired Officers Corporation to the transactions
contemplated hereby;
(dd) ARC shall, at its own expense, have received title
commitments reasonably acceptable to it for each of the Communities
disclosing no liens or encumbrances except those set forth in the title
commitments included in Schedule 4.14(a);
(ee) ARC shall have received the updated opinion of J.C.
Bradford & Co., L.L.C. as of the Closing Date to the effect that as of
such date, the consideration to be paid or issued by ARC pursuant to
the Merger and the other Transaction Documents is fair to ARC's
shareholders from a financial point of view;
(ff) The owner(s) of the Excluded Assets shall have executed
and delivered assumption agreements in reasonably acceptable form
relating to all Liabilities associated with the Excluded Assets or
Excluded Entities; and FGI and the FGI Subsidiaries shall have been
released from the Liabilities of FGI and the FGI Subsidiaries set forth
on Schedule 6.1(b); and
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(gg) The agreements that are designated or indicated on the FGI
Disclosure Letter as being subject to termination, release,
cancellation or modification prior to the Closing Date shall have been
so terminated, released, canceled or modified.
ARC may waive any condition specified in this Section 7.1 if it executes a
writing so stating at or prior to the Closing.
7.2 Conditions to Obligations of FGI and the FGI Shareholders. The
obligations of FGI and the FGI Shareholders to consummate the transactions to be
performed by them in connection with the Closing is subject to satisfaction of
the following conditions:
(a) the representations and warranties set forth in Article 5 and
the representations and warranties of ARC or its Affiliates in the
other Transaction Documents shall be true and correct in all material
respects when made, and at and as of the Closing Date, without giving
effect to any supplement to the ARC Disclosure Letter; provided,
however, that any breach of any such representation or warranty shall
not be considered to be material unless it could reasonably result in
potential Adverse Consequences to the FGI Indemnified Parties (as
defined below) in excess of $300,000 in the aggregate;
(b) ARC shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(c) No material adverse change shall have occurred in the
business, condition (financial or otherwise), operations, or results
of operations of ARC;
(d) no action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree,
ruling, or charge could (i) prevent consummation of any of the
transactions contemplated by the Transaction Documents, or (ii) cause
any of the transactions contemplated by the Transaction Documents to
be rescinded following consummation (and no such injunction, judgment,
order, decree, ruling, or charge shall be in effect);
(e) ARC shall have delivered to FGI and the FGI Shareholders a
certificate to the effect that each of the conditions specified in
Section 7.2(a)-(d) is satisfied in all material respects;
(f) ARC shall have delivered to FGI and the FGI shareholders (i)
a copy of the Charter of ARC certified by the Secretary of the State
of Tennessee, and (ii) a certificate of existence certified by the
Secretary of the State of Tennessee;
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(g) all applicable waiting periods (and any extensions thereof)
under the Hart-Scott-Rodino Act shall have expired or otherwise been
terminated and the parties shall have received all other
authorizations, consents, and approvals of governments and
governmental agencies referred to in Section 4.2;
(h) ARC (or its Affiliates) shall have entered into the
agreements referred to in Sections 7.1(j) through (w) hereof, which
agreements shall be reasonably acceptable to FGI and the FGI
Shareholders;
(i) the FGI Shareholders shall have received (A) from counsel to
ARC an opinion in form and substance reasonably satisfactory to the
FGI Shareholders and their counsel, and dated as of the Closing Date;
and (B) from the FGI Shareholders' tax counsel an opinion that the
Merger qualifies as a reorganization within the meaning of Section
368(a)(1)(A) of the Code;
(j) ARC shall have obtained all authorizations, consents, and
approvals of governments and governmental agencies required in
connection with the consummation of the transactions contemplated by
the Transaction Documents, or shall have agreed to indemnify the FGI
Indemnified Parties (as defined in Section 9.4(a)) in a manner
reasonably satisfactory to the FGI Shareholders from and against the
entirety of any Adverse Consequences the FGI Indemnified Parties may
reasonably be expected to suffer as a result of the failure to obtain
such authorizations, consents, and approvals prior to the Merger;
(k) all actions to be taken by ARC in connection with
consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be satisfactory in
form and substance to FGI and the FGI Shareholders, provided that they
shall not unreasonably withhold or delay their approval of such
documents; and
(l) ARC shall have approved the distribution or transfer of the
Excluded Assets as contemplated by Section 6.2(c).
FGI and the FGI Shareholders may waive any condition specified in this Section
7.2 if they execute a writing so stating at or prior to the Closing.
7.3 Preparation of Certain Transaction Documents. Within twenty (20)
days of the date hereof, the parties shall use their best efforts to agree upon
the form of the agreements described in subsections 7.1(j), (k), (o), (p), (q),
(r), (s) and (w), each of which shall be mutually acceptable to the parties
thereto. ARC and the FGI Shareholders shall confirm their agreement as to the
form of such agreements by written correspondence between them.
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ARTICLE 8.
POST-CLOSING COVENANTS
The parties agree as follows with respect to the period following the
Closing:
8.1 General. In case at any time after the Closing any further action
is necessary to carry out the purposes of this Agreement or any other
Transaction Document, each of the parties will take such further action
(including the execution and delivery of such further instruments and documents)
as any other party reasonably may request, all at the sole cost and expense of
the requesting party (unless the requesting party is entitled to indemnification
therefor under Article 9). FGI and the FGI Shareholders acknowledge and agree
that from and after the Closing, ARC will be entitled to possession of all
documents, books, records (including Tax records), agreements, and financial
data of any sort relating to FGI or the FGI Subsidiaries (other than those
relating solely to the Excluded Assets), provided that ARC shall make such
documents, books, records, agreements, and financial data available to the FGI
Shareholders upon reasonable notice for proper purposes. Each of the parties
hereto shall have the right to record (at its expense) in the appropriate real
estate record office any of the Transaction Documents that are of the type that
is customarily so recorded.
8.2 Litigation Support. In the event and for so long as any party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(a) any transaction contemplated under any Transaction Document or (b) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving any of FGI or the FGI Subsidiaries, each of the
other parties will cooperate with such party and such party's counsel in the
contest or defense, make available their personnel, and provide such testimony
and access to their books and records as shall be necessary in connection with
the contest or defense, at the sole cost and expense of the contesting or
defending party (unless the contesting or defending party is entitled to
indemnification therefor under Article 9).
8.3 Transition. The FGI Shareholders will not take any action that is
designed or intended to have the effect of discouraging any lessor, licensor,
customer, supplier, or other business associate of any of FGI, the FGI
Subsidiaries, and Freedom Plaza from maintaining the same business relationships
with ARC after the Closing as it maintained with FGI, the FGI Subsidiaries, and
Freedom Plaza prior to the Closing. Each of the FGI Shareholders will refer all
inquiries relating to the businesses of FGI, the FGI Subsidiaries, and Freedom
Plaza to ARC from and after the Closing.
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8.4 Confidentiality. Each of ARC, FGI, and the FGI Shareholders will
treat and hold as such all of the Confidential Information received concerning
the other parties hereto, refrain from using any of the Confidential Information
except in connection with the Transaction Documents, and, in the event this
Agreement is terminated pursuant to Article 10, deliver promptly to the other
parties or destroy, at the request and option of such other party, all tangible
embodiments (and all copies) of the Confidential Information concerning such
other party that are in the possession of ARC, FGI, or the FGI Shareholders, as
the case may be. In the event that any director, officer, member, partner or
agent of ARC, FGI, or the FGI Subsidiaries or a FGI Shareholder is requested or
required (by oral question or request for information or documents in any legal
proceeding, interrogatory, subpoena, civil investigative demand, or similar
process) to disclose any Confidential Information concerning another party
hereto, he or it will notify such other party promptly of the request or
requirement so that such party may seek an appropriate protective order or waive
compliance with the provisions of this Section 8.4. If, in the absence of a
protective order or the receipt of a waiver hereunder, any director, officer,
member, partner or agent of ARC, FGI, or the FGI Subsidiaries or a FGI
Shareholder is, on the advice of counsel, compelled to disclose any Confidential
Information to any tribunal or else stand liable for contempt, he or it may
disclose the Confidential Information to the tribunal; provided, however; that
he or it shall use his or its reasonable best efforts to obtain, at the request
of such other party, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as such other party shall designate. The foregoing provisions shall
not apply to any Confidential Information that is generally available to the
public immediately prior to the time of disclosure.
8.5 ARC Stock Certificates. Each stock certificate delivered by ARC to
the FGI Shareholders will be imprinted with a legend substantially in the
following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES
HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE,
SOLD, DELIVERED AFTER SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT COVERING SUCH SHARES
UNDER THE SECURITIES ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
Each holder desiring to transfer ARC Common Stock issued pursuant to this
Agreement without registration first must furnish ARC with a written opinion
satisfactory to ARC in form and substance from counsel satisfactory to ARC by
reason of experience to the effect that the holder may transfer the ARC Common
Stock as desired without registration under the Securities Act.
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8.6 Post-Closing Repayment of Certain Promissory Notes; Loan Assumption
Fees. Immediately following Closing, ARC shall cause FGI to repay (i) the $10.4
million of promissory notes held by former FGI shareholders (the "Shareholder
Notes"), and (ii) the $1.3 million of promissory notes held by residents of the
Communities (the "Resident Notes"), all of which notes are described in Schedule
4.17(d) of the FGI Disclosure Letter. Immediately following Closing, ARC shall
also cause FGI to pay the loan assumption fee payable to the Aid Association for
Lutherans as a result of the change in the partners of the Freedom Village of
Holland, Michigan in the maximum amount of $85,000 (the "Michigan Loan
Assumption Fee"). To the extent necessary, ARC shall make funds available to FGI
to enable FGI to make such repayments.
8.7 Net Working Capital Adjustments.
(a) ARC and the FGI Shareholders shall adjust (up or down) the
cash portion of the Merger Consideration on the Closing Date based upon
the extent to which the estimated Net Working Capital on the Closing
Date is less than, or greater than, zero (the "Initial Net Working
Capital Adjustment"). The cash portion of the Merger Consideration
shall be reduced (dollar for dollar) by the amount by which the
estimated Net Working Capital, as so determined, is less than zero. The
cash portion of the Merger Consideration shall be increased (dollar for
dollar) by the amount by which the estimated Net Working Capital, as so
determined, is greater than zero.
(b) The Initial Net Working Capital Adjustment shall be
calculated in accordance with GAAP and shall be based upon the entries
in the balance sheets for FGI and the FGI Subsidiaries (other than the
Excluded Entities) included in the latest available monthly financial
statements delivered pursuant to Section 6.2(h). For purposes of
illustration, Exhibit I sets forth a hypothetical Initial Net Working
Capital Adjustment using the balance sheets included in the Most Recent
Financial Statements. The methodology for calculating the Initial Net
Working Capital Adjustment and for finally determining Net Working
Capital as of the Closing Date shall be consistent with that shown on
Exhibit I.
(c) Within ninety (90) days of the Closing Date, ARC and the
FGI Shareholders shall re-compute the amount of Net Working Capital as
of the Closing Date in accordance with the procedures and methodologies
set forth above. Within thirty (30) days following receipt by the FGI
Shareholders of such calculation, the parties shall settle any amounts
owing as a result of such calculation. The FGI Shareholders, jointly
and severally, shall pay to ARC the amount, if any, by which Net
Working Capital as of the Closing Date is less than zero. In the event
Net Working Capital as of the Closing Date exceeds zero, ARC shall pay
to the FGI Shareholders the amount by which Net Working Capital exceeds
zero. Any amounts to be paid to the FGI Shareholders pursuant to this
Section 8.7(c) shall be paid to the FGI Shareholders based upon the
percentages set forth on Schedule 3.1.
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Any such refund or payment shall be by wire transfer of immediately
available funds to a bank account designated by payee to payor or by
such other method as to which ARC and the FGI Shareholders shall agree.
(d) If, within ninety (90) days after the Closing Date, ARC
and the FGI Shareholders are unable to agree on the amount of Net
Working Capital as of the Closing Date, ARC and the FGI Shareholders
shall each have the right to require that such disputed determinations
be submitted to such independent certified public accounting firm as
ARC and the FGI Shareholders may then mutually agree upon in writing,
for computation or verification in accordance with the provisions of
this Agreement and otherwise, where applicable, in accordance with
GAAP. The foregoing provisions for certified public accounting firm
review shall be specifically enforceable by the parties; the decision
of such accounting firm shall be final and binding upon the parties;
there shall be no right of appeal from such decision; and such
accounting firm's fees and expenses for each disputed determination
shall be borne by the party whose determination has been modified by
such accounting firm's report or by both parties in proportion to the
relative amount each party's determination has been modified. Any
additional payments due under this Agreement shall bear interest until
paid in full at the Applicable Rate.
8.8 Insurance. Following the Closing, ARC will use its best efforts to
continue to carry insurance consistent with ARC's Ordinary Course of Business.
For a period of six years after the Closing Date, at the request and sole
expense of the FGI Shareholders, ARC will use its bests efforts to purchase such
additional insurance as the FGI Shareholders may request.
8.9 ARC Change of Accounting Method. If any ARC Indemnified Party (as
hereinafter defined in Section 9.2(a)) or the Internal Revenue Service should
change the Master Trust Accounting Method utilized by Freedom Plaza or the
Target Entities known as Freedom Village of Holland, Michigan and Freedom
Village of Sun City Center, Ltd., and if such change should result in an
increase in the Taxes for partners (other than FGI or the FGI Subsidiaries) of
Freedom Plaza or either of these two Target Entities (the "Non-FGI Partners")
arising from partnership tax returns for periods ending on or before the Closing
Date, then ARC shall reimburse the Non-FGI Partners for all taxes so imposed
(including interest and penalties) as a result of the change in Master Trust
Accounting Method. ARC shall reimburse the Non-FGI Partners within 30 days of
such change (or, if later, within 30 days of a final determination by the
Internal Revenue Service accepting such change). The Non-FGI Partners are
express, intended third-party beneficiaries of this Section 8.9 and are entitled
to enforce it for their own benefit.
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ARTICLE 9.
SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; INDEMNIFICATION
9.1 Survival of Representations and Warranties. All of the
representations and warranties of the FGI Shareholders contained in Article 4
and all of the representations and warranties of ARC contained in Article 5
shall survive the Closing (even if the FGI Shareholders or ARC knew or had
reason to know of any misrepresentation or breach of warranty or covenant at the
time of Closing) and continue in full force and effect for a period of two years
thereafter, except the representations and warranties set forth in Sections
4.13, 4.26, and 4.27 shall continue in full force and effect until the
applicable statute of limitations expires (or a period of four years if there is
no applicable statute of limitations). Notwithstanding the foregoing to the
contrary, the representations of ARC in Sections 5.7, 5.8, and 5.9 shall only be
deemed to be conditions to the Merger, and shall not survive Closing or serve as
a separate basis for indemnification under Section 9.4 hereof.
9.2 Indemnification Obligations of the FGI Shareholders.
(a) If (i) FGI or any FGI Shareholder breaches (or in the
event any third party alleges facts that, if true, would mean FGI or a
FGI Shareholder has breached) any representations, warranties, and
covenants of FGI and/or the FGI Shareholders contained herein, (ii)
there is an applicable survival period pursuant to Section 9.1, and
(iii) ARC issues a Claim Notice pursuant to Section 9.5 hereof within
such survival period, then the FGI Shareholders agree, jointly and
severally, to indemnify ARC, its subsidiaries and Affiliates and,
following the Closing, FGI and the FGI Subsidiaries and their
respective subsidiaries and Affiliates (individually and collectively
the "ARC Indemnified Parties") from and against the entirety of any
Adverse Consequences that the ARC Indemnified Parties may suffer
(including any Adverse Consequences suffered after the end of any
applicable survival period) resulting from, arising out of, relating
to, in the nature of, or caused by the breach (or the alleged breach)
specified or identified in the Claim Notice; provided, however, that
(i) in no event shall any FGI Shareholder have any Liability or
obligation as a result of a breach or alleged breach of any
representation or warranty by any other FGI Shareholder that relates
solely to such other FGI Shareholder; and (ii) the FGI Shareholders
shall have no duplicative liability under this Section 9.2(a) with
respect to matters for which the ARC Indemnified Parties have asserted
claims for indemnification under Sections 9.2(b), (c), (d), (e), (f) or
(g).
(b) Each of the FGI Shareholders agrees, jointly and
severally, to indemnify the ARC Indemnified Parties from and against
the entirety of any Adverse Consequences that the ARC Indemnified
Parties may suffer resulting from, arising out of, relating to, in the
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nature of, or caused by any Liability of FGI or any of the FGI
Subsidiaries for any Taxes of FGI, any of the FGI Subsidiaries, or any
of the Excluded FGI Entities with respect to any Tax year or portion
thereof ending on or before the Closing Date (or for the period prior
to the Closing Date for any Tax year beginning before and ending after
the Closing Date) to the extent such Taxes are not taken into account
in determining the Net Working Capital for purposes of the adjustment
described in Section 8.7; provided, however, that the FGI Shareholders
shall not indemnify the ARC Indemnified Parties with respect to Adverse
Consequences that may result from any change in the Master Trust
Accounting Method utilized by Freedom Plaza or the Target Entities
known as Freedom Village of Holland, Michigan and Freedom Village of
Sun City Center, Ltd., whether initiated by any ARC Indemnified Party
or by the Internal Revenue Service after the Closing.
(c) Without limiting any provision of Sections 9.2(a) and (b)
above, each of the FGI Shareholders agrees, jointly and severally, to
indemnify the ARC Indemnified Parties from and against the entirety of
any Adverse Consequences that the ARC Indemnified Parties may suffer
resulting from, arising out of, relating to, in the nature of, or
caused by any Liability of FGI or any of the FGI Subsidiaries relating
to (i) any Liability of the Excluded FGI Entities or the Excluded
Assets, or (ii) for any Taxes arising, directly or indirectly, from or
out of, the distribution or transfer of the Excluded Assets as
contemplated by Section 6.2(c) hereof (including any transfers or
transactions undertaken as a condition thereto, or in connection
therewith), to the extent that such Taxes are not taken into account in
determining the Net Working Capital adjustment pursuant to Section 8.7,
or (iii) any liability for a change in the Master Trust Accounting
Method initiated by the taxpayer controlling the Excluded FGI Entities
(as opposed to ARC or the Internal Revenue Service).
(d) Without limiting any provision of Section 9.2(a), (b) and
(c) above, if any Excluded Asset is transferred to a charitable
organization prior to the Closing, whether directly or after first
transferring such Excluded Asset to a subsidiary of FGI, then each of
the FGI Shareholders agrees, jointly and severally, to indemnify the
ARC Indemnified Parties from and against any Adverse Consequences that
the ARC Indemnified Parties may suffer resulting from, arising out of,
relating to, in the nature of, or caused by the Internal Revenue
Service disallowing any such charitable contribution as a Tax deduction
by FGI or any FGI Subsidiary for a period ending on or before the
Closing or the disallowance as a carryforward of such charitable
contribution as a Tax deduction by ARC or its Affiliated Group for any
period ending after the Closing, but only to the extent such
carryforward was not allowed as a carryforward to the first tax year
following the Closing Date in the minimum amount specified in Section
6.2(c).
(e) Without limiting any provision of Section 9.2(a) above,
each of the FGI Shareholders agree, jointly and severally, to indemnify
the ARC Indemnified Parties from
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and against the entirety of any Adverse Consequences that the ARC
Indemnified Parties may suffer resulting from, arising out of, relating
to, in the nature of, or caused by any claim by any shareholder or
partner of any FGI Subsidiary or any Excluded FGI Entity (other than
FGI or any FGI Shareholder) for breach of fiduciary duty or other
similar claim as a result of the transactions contemplated by the
Transaction Documents.
(f) Without limiting any provision of Section 9.2(a) above,
each of the FGI Shareholders agree, jointly and severally, to indemnify
the ARC Indemnified Parties from and against the entirety of any
Adverse Consequences that the ARC Indemnified Parties may suffer
resulting from, arising out of, relating to, in the nature of, or
caused by any Liability of FGI and the FGI Subsidiaries for (i) the
litigation set forth on Schedules 4.14(a)(ii) and 4.22 of the FGI
Disclosure Letter, (ii) the severance agreements set forth on Schedules
4.10(r) and 4.17(i) of the FGI Disclosure Letter, or (iii) the
termination, modification, or acceleration of payments under any
Employee Benefit Plan of FGI or the FGI Subsidiaries, in each case to
the extent such Liability is not taken into account in determining the
Net Working Capital adjustment pursuant to Section 8.7.
(g) Without limiting any provision of Section 9.2(a) above,
each of the FGI Shareholders agree, jointly and severally, to indemnify
the ARC Indemnified Parties in the event that the FGI Shareholders
breach their obligations under Section 8.7 of this Agreement.
Notwithstanding anything herein to the contrary, the limitations set
forth in Section 9.6(a) and (b) shall not apply to, affect or limit the
Liability of the FGI Shareholders for indemnification pursuant to, or under,
Sections 9.2(b), (c), (d), (e), (f) or (g) above.
9.3 Procedure for Matters Involving Third Parties.
(a) If any third party shall notify an ARC Indemnified Party with
respect to any matter (a "Third Party Claim") which may give rise to a claim for
indemnification against the FGI Shareholders under this Article 9, then ARC
shall promptly issue a Claim Notice to the FGI Shareholders with respect thereto
in accordance with the provisions of Section 9.5 hereof.
(b) The FGI Shareholders will have the right to defend the ARC
Indemnified Parties against the Third Party Claim with counsel chosen by the FGI
Shareholders and reasonably satisfactory to ARC, provided that (i) the FGI
Shareholders notify ARC in writing within 15 days following the receipt of the
Claim Notice (the "Notice Period") that the FGI Shareholders will indemnify the
ARC Indemnified Parties from and against the entirety of any Adverse
Consequences the ARC Indemnified Parties may suffer resulting from, arising out
of, relating to, in the nature of, or caused by the Third Party Claim, and (ii)
the FGI Shareholders provide ARC with evidence reasonably acceptable to ARC that
the FGI Shareholders will have the financial resources to defend
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against the Third Party Claim and fulfill their indemnification obligations
hereunder, and (iii) the FGI Shareholders conduct the defense of the Third Party
Claim actively, diligently, and in good faith.
(c) If the FGI Shareholders fail to notify ARC in accordance with
clause (i) of Section 9.3(b), or the FGI Shareholders fail to provide ARC with
reasonable evidence of financial resources pursuant to clause (ii) of Section
9.3(b), then ARC will have the right to defend against the Third Party Claim
with counsel of its choice.
(d) Notwithstanding Section 9.3(b), (i) if the Third Party Claim seeks
an injunction or other equitable relief that would have a material adverse
effect on any of the ARC Indemnified Parties, or if ARC determines, reasonably
and in good faith, that a settlement of, or an adverse judgment with respect to,
the Third Party Claim likely would establish a precedential custom or practice
materially adverse to the continuing business interests of any of the ARC
Indemnified Parties, and (ii) if ARC states in the Claim Notice that the Third
Party Claim seeks such equitable relief or that ARC has made such a
determination and that ARC, on that basis, has elected to assume the defense of
the Third Party Claim, then ARC will have the right to defend against the Third
Party Claim with counsel of its choice reasonably satisfactory to the FGI
shareholders, provided that ARC conducts the defense of the Third Party Claim
actively, diligently, and in good faith.
(e) In any circumstance in which the FGI Shareholders are conducting
the defense of the Third Party Claim, the ARC Indemnified Parties may retain
separate co-counsel at their sole cost and expense and participate fully in the
defense of the Third Party Claim. If ARC is conducting the defense of the Third
Party Claim in accordance with Section 9.3(d), the FGI Shareholders may retain
separate co-counsel at their sole cost and expense and participate fully in the
defense of the Third Party Claim. In the event the FGI Shareholders are
conducting the defense of a Third Party Claim in accordance with Section 9.3(b)
or ARC is conducting the defense of the Third Party Claim in accordance with
Section 9.3(d), neither the ARC Indemnified Parties nor the FGI Shareholders
will consent to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent of the other
(not to be withheld unreasonably). ARC and the FGI Shareholders and their
respective counsel shall consult with each other, shall allow the other to
participate fully and meaningfully, and shall cooperate, diligently and in good
faith, in the defense of the Third Party Claim. In any situation in which either
party is entitled to retain co-counsel as described in this Section 9.3(e), then
all parties shall negotiate reasonably and in good faith to attempt to enter
into a mutually acceptable joint defense agreement.
(f) In the event that the FGI Shareholders are conducting the defense
of a Third Party Claim in accordance with Section 9.3(b) or ARC is conducting
the defense of the Third Party Claim in accordance with Section 9.3(d) and (i) a
Qualifying Settlement Offer (as hereinafter defined) is made to settle or
compromise a Third Party Claim that the FGI Shareholders propose in writing to
accept, and (ii) the ARC Indemnified Parties refuse to consent to such
Qualifying Settlement Offer, then: (1) the FGI Shareholders shall be excused
from, and the ARC Indemnified Parties shall
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thereafter be solely responsible for, all further defense of such Third Party
Claim, and (2) the maximum liability of the FGI Shareholders relating to such
Third Party Claim shall be limited to the amount of the Qualifying Settlement
Offer (plus any costs of defense incurred up to the date of the Qualifying
Settlement Offer). As used herein, the term "Qualifying Settlement Offer" shall
mean a firm, written offer to settle completely and unconditionally a Third
Party Claim, which offer (A) the FGI Shareholders acknowledge in writing that
they have the obligation to pay in full (including all associated expenses), (B)
includes a full and unconditional release of each of the ARC Indemnified Parties
with respect to all aspects of the Third Party Claim (including the release of
any injunction or court order relating to such Third Party Claim), and (C) does
not provide for any injunctive or other equitable relief adversely affecting any
ARC Indemnified Party in any material respect.
(g) If any party that has elected to assume the defense of a Third
Party Claim pursuant to Section 9.3(b) or 9.3(d) fails to conduct the defense of
the Third Party Claim actively, diligently, and in good faith, then the other
party may take control of the defense of the Third Party Claim and settle or
compromise the same without consent. If ARC, reasonably and in good faith,
assumes the defense of the Third Party Claim pursuant to this Section 9.3(g)
because of the failure of the FGI Shareholders to conduct the defense of the
Third Party Claim actively, diligently, and in good faith, then the FGI
Shareholders will reimburse the ARC Indemnified Parties promptly and
periodically for the reasonable costs of defending against the Third Party claim
(including reasonable attorneys' fees and expenses), and the FGI Shareholders
will remain responsible for any Adverse Consequences the ARC Indemnified Parties
may suffer resulting from, arising out of, relating to, in the nature of, or
caused by the Third Party Claim to the fullest extent provided in this Article
9.
9.4 Indemnification Obligations of ARC.
(a) If (i) ARC breaches any representations, warranties, and
covenants of ARC contained herein, and (ii) if there is an applicable
survival period pursuant to Section 9.1, and (iii) the FGI Shareholders
issue a Claim Notice pursuant to Section 9.5 within such survival
period, then ARC agrees to indemnify the FGI Shareholders and their
representatives, and Affiliates (individually and collectively the "FGI
Indemnified Parties") from and against the entirety of any Adverse
Consequences that the FGI Indemnified Parties may suffer through and
after the date of the claim for indemnification (including any Adverse
Consequences suffered after the end of any applicable survival period)
resulting from, arising out of, relating to, in the nature of, or
caused by the breach (or the alleged breach) specified or identified in
the Claim Notice; provided, however, that the FGI Shareholders shall
not be entitled to indemnification for any breach or alleged breach of
any representation or warranty that relates to a Post-Signing Event and
that is disclosed to FGI and the FGI Shareholders on a supplement to
the ARC Disclosure Letter delivered to FGI and the FGI Shareholders
prior to five days before Closing and that do not arise out of an
intentional breach of this Agreement by ARC unless, until and only to
the extent that
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the aggregate Adverse Consequences suffered by the FGI Indemnified
Parties as a result thereof exceeds $150,000 in the aggregate;
provided, further, that ARC's liability for indemnification claims for
any such Post-Signing Events that are disclosed to FGI and the FGI
Shareholders on a supplement to the ARC Disclosure Letter delivered to
FGI and the FGI Shareholders prior to five days before Closing shall
not exceed $150,000 in the aggregate.
(b) Notwithstanding anything herein to the contrary, except in
cases of actual fraud, intentional misrepresentation, intentional
breach, or willful misconduct, ARC's aggregate Liability for
indemnification claims under this Section 9.4 shall not exceed $20.0
million in the aggregate.
(c) If any third party shall notify the FGI Shareholders with
respect to a Third Party Claim which may give rise to a claim for
indemnification against ARC under this Article 9, then the FGI
Shareholders shall promptly issue a Claim Notice to ARC with respect
thereto in accordance with Section 9.5 hereof. The procedures set forth
in Section 9.3(b), (c), (e), (f) and (g) hereof shall govern the
defense of such claim; provided, however, that for purposes of this
Section 9.4(c), all references to ARC and the ARC Indemnified Parties
in such sections shall mean the FGI Indemnified Parties and all
references to the FGI Shareholders shall mean ARC.
9.5 Notice of Claim. In the event an ARC Indemnified Party or a FGI
Indemnified Party suffers Adverse Consequences that gives or could give rise to
a claim for indemnification under this Article 9, ARC shall promptly notify the
FGI Shareholders, or the FGI Shareholders shall promptly notify ARC, as the case
may be, in writing (a "Claim Notice") in accordance with Section 11.1 of this
Agreement. The Claim Notice shall contain a brief description of the nature of
the Adverse Consequences suffered and, if practicable, an aggregate dollar value
estimate of the Adverse Consequence suffered. No delay in the issuance of a
Claim Notice shall relieve any party from any obligation under this Article 9,
unless and solely to the extent such party is thereby prejudiced.
9.6 Certain Limitations on the FGI Shareholders' Indemnification
Liability.
(a) The FGI Shareholders shall have no Liability for
indemnification claims under Section 9.2(a) that relate solely to
Post-Signing Events that are specifically disclosed to ARC in a
supplement to the FGI Disclosure Letter delivered to ARC prior to five
days before Closing and that do not arise out of an intentional breach
of this Agreement by FGI or the FGI Shareholders unless, until and only
to the extent that the Adverse Consequences suffered or to be suffered
by the ARC Indemnified Parties as a result thereof exceeds $150,000 in
the aggregate. The limitations set forth in this Section 9.6(a) shall
not limit
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the FGI Shareholders' liability for any claim pursuant to Sections
9.2(b), (c), (d), (e), (f) or (g).
(b) Except for indemnification claims described in Section 9.6
(a) above, and except in cases of actual fraud, intentional
misrepresentation, intentional breach or willful misconduct (including
without limitation the willful failure to disclose a Post-Signing
Event), the FGI Shareholders shall have no Liability for
indemnification claims under Section 9.2(a) unless, until and only to
the extent that the Adverse Consequences claimed under Section 9.2(a)
exceeds $750,000 in the aggregate. The limitations set forth in this
Section 9.6(b) shall not limit the FGI Shareholders' liability for any
claim pursuant to Sections 9.2(b), (c), (d), (e), (f) or (g).
(c) Notwithstanding anything herein to the contrary, except in
cases of actual fraud, intentional misrepresentation, intentional
breach, or willful misconduct, (i) the FGI Shareholders' aggregate
Liability for indemnification claims relating solely to Post-Signing
Events that are specifically disclosed to ARC in a supplement to the
FGI Disclosure Letter delivered to ARC prior to five days before
Closing shall not exceed $150,000 in the aggregate, (ii) the FGI
Shareholder's aggregate Liability for indemnification claims under this
Article 9 shall not exceed $20.0 million in the aggregate, and (iii) in
no event shall any FGI Shareholder be required to pay to the ARC
Indemnified Parties under Section 9.2 hereof an aggregate amount that
exceeds the aggregate consideration received by such FGI Shareholder in
the Merger, as set forth on Schedule 3.1.
(d) If (i) the FGI Shareholders have Liability for
indemnification claims relating to Post-Signing Events and (ii) the
Adverse Consequences to the ARC Indemnified Parties associated with
such claims are quantifiable with reasonable certainty, then the cash
portion of the Merger Consideration shall be reduced by the amount by
which such quantifiable amount exceeds $150,000, provided that the
maximum reduction in the Merger Consideration pursuant to this Section
9.2(d) shall be $150,000.
9.7 Option to Pay in ARC Common Stock. In the event any FGI Shareholder
has an indemnification obligation to ARC solely under Section 9.2(a) (but not
otherwise), such FGI Shareholder may satisfy the indemnification obligation by
delivery to ARC of that quantity of shares of ARC Common Stock equal in value to
the Adverse Consequences suffered by the ARC Indemnified Parties. For purposes
of this Section 9.7, the value of ARC Common Stock shall be valued at the ARC
Stock Price. In the event of any stock split, stock dividend, recapitalization
or similar transaction involving ARC Common Stock, an appropriate adjustment
shall be made in the ARC Stock Price for purposes of this Section 9.7.
9.8 Determination of Adverse Consequences. In determining Adverse
Consequences for purposes of this Article 9, the parties shall make appropriate
adjustments for actual net
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insurance payments or recoveries (after giving effect to the costs, other than
premiums paid, of obtaining the same and any retrospective or prospective
premium adjustments resulting directly from the events resulting in the
insurance claim(s)). The parties shall also make appropriate adjustments for tax
refunds relating to periods prior to the Closing Date and any reimbursement from
any Governmental Program, Private Program, or any governmental or
quasi-governmental body relating to periods prior to the Closing Date that, in
both cases, are not disclosed in the Financial Statements or included in the
calculation of Net Working Capital.
9.9 Right of Set-Off.
(a) At Closing, ARC and Freedom Village at Brandywine Limited
Partnership shall enter into a mutually acceptable form of set-off and
escrow agreement (the "Brandywine Set-Off and Escrow Agreement") for
purposes of satisfying claims by the ARC Indemnified Parties for
indemnification under Sections 9.2 (c) and (d). The Brandywine Set-Off
and Escrow Agreement shall have the general terms set forth on Exhibit
J.
(b) Upon notice to the FGI Shareholders or the non-ARC parties
to the Transaction Documents specifying in reasonable detail the basis
for such set-off, ARC or its Affiliates may set off any amount to which
any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or any arbitrator determines it
is entitled under this Article 9 against amounts otherwise payable
under the Transaction Documents. The exercise of such right of set-off
by ARC or its Affiliates in good faith, whether or not ultimately
determined to be justified, will not constitute an event of default
under the Transaction Documents.
(c) Neither the exercise of nor the failure to exercise such
right of set-off will constitute an election of remedies or limit ARC
or its Affiliates in any manner in the enforcement of any other
remedies that may be available to it.
9.10 Other Remedies; FGI Shareholders Release. The foregoing
indemnification provisions are in addition to, and not in derogation of, any
statutory, equitable, or common law remedy (including without limitation any
such remedy arising under Environmental, Health, and Safety Requirements) the
ARC Indemnified Parties or FGI Indemnified Parties may have with respect to the
transactions contemplated by this Agreement. Each FGI Shareholder hereby
releases, and agrees not to make any claim for indemnification against, FGI or
any of the FGI Subsidiaries by reason of the fact that such FGI Shareholder was
a director, officer, member, partner, employee, or agent of any such entity or
was serving at the request of any such entity as a partner, member, trustee,
director, officer, employee, or agent of another entity (whether such claim is
for judgments, damages, penalties, fines, costs, amounts paid in settlement,
losses, expenses, or otherwise and whether such claim is pursuant to any
statute, charter document,
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bylaw, agreement, or otherwise) with respect to any action, suit, proceeding,
complaint, claim, or demand brought against such FGI Shareholder (whether such
action, suit proceeding, complaint, claim, or demand is pursuant to this
Agreement, applicable law or otherwise).
9.11 FGI Representations and Warranties. All representations and
warranties of FGI in this Agreement are separate, distinct, and independent of
the representations and warranties of the FGI Shareholders. All representations
and warranties of FGI in this Agreement or in any instrument delivered pursuant
to this Agreement shall be conditions to the Merger and shall not survive the
Merger. Effective upon Closing, the FGI Shareholders hereby waive any right to
claim, and hereby release any claim that they may have, based upon
indemnification or contribution against FGI or any of the FGI Subsidiaries
arising out of any misrepresentation or breach by FGI under this Agreement or
the other Transaction Documents.
ARTICLE 10.
TERMINATION
10.1 Termination of Agreement. Certain of the parties may terminate
this Agreement as provided below:
(a) ARC, FGI, and the FGI Shareholders may terminate this
Agreement by mutual written consent at any time prior to the Closing;
(b) ARC may terminate this Agreement by giving written notice to
FGI and the FGI Shareholders on or before the 30th day following the
date hereof if ARC is not reasonably satisfied in its sole discretion
with the results of, and its due diligence investigations with respect
to, the operations, affairs, prospects, properties, assets, existing
and potential liabilities, obligations, profits or condition
(financial or otherwise) of FGI and the FGI Subsidiaries;
(c) ARC may terminate this Agreement by giving written notice to
FGI and the FGI Shareholders at any time prior to the Closing (i) in
the event any of FGI and the FGI Shareholders has breached any
representation, warranty, or covenant contained herein in any material
respect, ARC has notified FGI and the FGI Shareholders of the breach,
and the breach has continued without cure for a period of 30 days
after the notice of such breach, (ii) if the Closing shall not have
occurred on or before October 31, 1998, by reason of the failure of
any condition precedent under Section 7.1 (unless the failure results
primarily from ARC itself breaching any representation, warranty, or
covenant contained herein), or (iii) a United States federal or state
court of competent jurisdiction or United States federal or state
governmental, regulatory, or administrative agency or commission shall
have issued an
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order, decree or ruling or taken any other action permanently
restraining, enjoining, or otherwise prohibiting the transactions
contemplated by the Transaction Documents, and such order, decree,
ruling, or other action shall have become final and non-appealable;
provided, that ARC shall have used all reasonable efforts to remove
such injunction, order, or decree.
(d) FGI and the FGI Shareholders may terminate this Agreement by
giving written notice to ARC at any time prior to the Closing (i) in
the event ARC has breached any representation, warranty, or covenant
contained herein in any material respect, FGI and the FGI Shareholders
have notified ARC of the breach, and the breach has continued without
cure for a period of 30 days after the notice of such breach, (ii) if
the Closing shall not have occurred on or before October 31, 1998, by
reason of the failure of any condition precedent under Section 7.2
(unless the failure results primarily from any of FGI and the FGI
Shareholders themselves breaching any representation, warranty, or
covenant contained herein), or (iii) a United States federal or state
court of competent jurisdiction or United States federal or state
governmental, regulatory, or administrative agency or commission shall
have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by the Transaction Documents, and such
order, decree, ruling, or other action shall have become final and
non-appealable; provided, that FGI and the FGI Shareholders shall have
used all reasonable efforts to remove such injunction, order, or
decree.
10.2 Effect of Termination.
(a) If any party terminates this Agreement pursuant to Section
10.1, except for Sections 4.6, 5.5, 6.1(c), and 11.10 and this Section
10.2, which shall survive termination of this Agreement, all rights
and obligations of the parties hereunder shall terminate without any
Liability of any party to any other party (except for any Liability of
any party then in breach pursuant to Article 9 or otherwise).
(b) In the event ARC terminates this Agreement pursuant to
Section 10.1(c)(i) hereof or FGI and the FGI Shareholders terminate
this Agreement pursuant to Section 10.1(d)(i) hereof, each of ARC,
FGI, and the FGI Shareholders agree that for a period of 60 days
thereafter they will negotiate in good faith to amend this Agreement
on terms mutually acceptable to the parties that will cure or remedy
the matters giving rise to termination. If the event giving rise to
termination of this Agreement may be readily cured or remedied solely
by the payment of a sum certain (which does not exceed $300,000), then
the terminating party shall reasonably and in good faith consider the
non-terminating party's offer (if any) to reduce or increase (as
appropriate) the Merger Consideration. During such 60-day period, none
of FGI and the FGI Shareholders will (a) solicit, initiate, or
encourage the submission of any proposal or offer from any person
relating to the acquisition of any securities, or any material portion
of the assets, of any of FGI, the FGI
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Subsidiaries, or Freedom Plaza (including any acquisition structured
as a merger, consolidation, share or security exchange, or
reorganization) or relating to a business combination, partnership,
joint venture, or similar arrangement with any person or entity or (b)
participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate
in any other manner any effort or attempt by any person to do or seek
any of the foregoing; (c) vote its FGI Securities in favor of any such
acquisition (whether structured as a merger, consolidation, share or
security exchange, or reorganization) or such business combination,
partnership, joint venture, or similar arrangement. FGI and the FGI
Shareholders will notify ARC immediately if any person makes any
proposal, offer, inquiry, or contact with respect to any of the
foregoing during such 60-day period.
10.3 Extension; Waiver. At any time prior to the Effective Time, any
party hereto may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (c)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be voluntary, and shall be valid only if set
forth in an instrument in writing signed on behalf of such party.
ARTICLE 11.
GENERAL PROVISIONS
11.1 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given on the earlier of
(a) receipt thereof by the intended recipient, or (b) three business days after
it is sent by registered or certified mail, return receipt requested, postage
prepaid, and addressed to the intended recipient as set forth below:
If to ARC: If to FGI:
W.E. Sheriff Robert G. Roskamp
American Retirement Corporation 1401 Manatee Avenue West, Suite 800
111 Westwood Place Bradenton, Florida 34205
Suite 402 Telecopy No.: 941/747-9389
Brentwood, TN 37027
Telecopy No.: 615/221-2269
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<TABLE>
<S> <C>
with a copy to: If to the FGI Shareholders:
T. Andrew Smith To the address set forth beneath their names
Bass, Berry & Sims PLC on the signature pages of this Agreement
2700 First American Center
Nashville, TN 37238
Telecopy No.: 615/742-6298
with a copy in all cases to:
Morris H. Miller
Holland & Knight LLP
315 Calhoun Street, Suite 600
Tallahassee, FL 32301
Telecopy No.: 850/224-8832
</TABLE>
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other parties
notice in the manner herein set forth.
11.2 Assignment; Binding Effect; Benefit. Neither this Agreement nor
any of the rights, interests, or obligations hereunder shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties; provided, however, that ARC may
designate one or more of its Affiliates to perform its obligations hereunder or
to enter into certain Transaction Documents on its behalf (in any or all cases
ARC shall remain responsible for the performance of all of its obligations
hereunder). Subject to the preceding sentence, this Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns.
11.3 Entire Agreement. This Agreement, the Exhibits, the FGI Disclosure
Letter, the ARC Disclosure Letter, and the Transaction Documents constitute the
entire agreement among the parties with respect to the subject matter hereof and
supersede all prior and contemporaneous agreements and understandings among the
parties with respect thereto. No addition to or modification of any provision of
this Agreement shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
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11.4 Amendment. This Agreement may be amended by the parties hereto, by
action taken by their respective Boards of Directors, if applicable. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
11.5 Governing Law. The validity of this Agreement, the construction of
its terms and the determination of the rights and duties of the parties hereto
shall be governed by and construed in accordance with the laws of the State of
Tennessee applicable to contracts made and to be performed wholly within such
state.
11.6 Counterparts. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
11.7 Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties,
covenants, or agreements contained in this Agreement. The waiver by any party
hereto of a breach of any provision hereunder shall not operate or be construed
as a waiver of any prior or subsequent breach of the same or any other provision
hereunder.
11.8 Incorporation of Exhibits.
(a) The FGI Disclosure Letter, the ARC Disclosure Letter, and
the Exhibits attached hereto and referred to herein are hereby
incorporated herein and made a part hereof for all purposes as if fully
set forth herein.
(b) All capitalized terms used in the ARC Disclosure Letter or
the FGI Disclosure Letter (together, the "Disclosure Letters") shall
have the meanings set forth in this Agreement. For convenience, some
disclosures maybe cross-referenced to other portions of the Disclosure
Letters.
11.9 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
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11.10 Expenses. Each party to this Agreement shall bear its own
expenses in connection with the Merger and the transactions contemplated hereby.
11.11 Construction. The parties have participated jointly in the
negotiation and drafting of the Transaction Documents. In the event an ambiguity
or question of intent or interpretation arises, the Transaction Documents shall
be construed as if drafted jointly by the parties and no presumption or burden
of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of the Transaction Documents. The parties
intend that each representation, warranty, and covenant contained herein shall
have independent significance. If any party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) that the party
has not breached shall not detract from or mitigate the fact that the party is
in breach of the first representation, warranty, or covenant.
11.12 Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of competent
jurisdiction, this being in addition to any other remedy to which they are
entitled by contract, at law, or in equity.
11.13 Section Headings. The headings of sections in this Agreement are
provided for convenience only and will not affect its construction or
interpretation. All references to "Section" or "Sections" refer to the
corresponding section or sections of this Agreement.
11.14 Submission to Jurisdiction. Each of the parties submits to the
jurisdiction of any state or federal court sitting in Nashville, Tennessee, in
any action or proceeding arising out of or relating to this Agreement and agrees
that all claims in respect of the action or proceeding may be heard and
determined in any such court. Each party also agrees not to bring any action or
proceeding arising out of or relating to this Agreement in any other court. Each
of the parties waives any defense of inconvenient forum to the maintenance of
any action or proceeding so brought and waives any bond, surety, or other
security that might be required of any other party with respect thereto.
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IN WITNESS WHEREOF, the parties have executed this Agreement and caused
the same to be duly delivered on their behalf on the day and year first written
above.
AMERICAN RETIREMENT CORPORATION
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
FREEDOM GROUP, INC.
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
THE FGI SHAREHOLDERS:
----------------------------------------------
Robert G. Roskamp, Individually
Address: 1401 Manatee Avenue West
Bradenton, Florida 34205
PHC, L.L.C., a Michigan limited liability company
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
Address:
-------------------------------------
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EDGAR AND ELSA PRINCE FOUNDATION, a
Michigan corporation
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
Address:
-------------------------------------
68
<PAGE> 1
Exhibit 23
ACCOUNTANTS' CONSENT
The Board of Directors and Stockholders
Freedom Group, Inc. and Subsidiaries:
We consent to the incorporation by reference in the registration statement (No.
333-28657) on Form S-8 of American Retirement Corporation of our report dated
March 6, 1998 except as to note 17 which is as of May 29, 1998, with respect to
the combined balance sheet of Freedom Group, Inc. and subsidiaries and Freedom
Village of Holland, Michigan, a general partnership, as of December 31, 1997 and
the related combined statements of income, changes in stockholders' equity
(deficit) and partnership capital, and cash flows for the year then ended, which
report appears in the Form 8-K of American Retirement Corporation dated May 29,
1998.
Our report contains an explanatory paragraph that states that the Company has
entered into an agreement and plan of merger for the merger of the Company with
an unrelated party. The sale has not been finalized and no adjustments to the
combined financial statements have been made.
KPMG PEAT MARWICK LLP
St. Petersburg, Florida
May 29, 1998
