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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
___X___ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission file number 01-13031
American Retirement Corporation
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(Exact Name of Registrant as Specified in its Charter)
Tennessee 62-1674303
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(State or Other Jurisdiction of (I.R.S. Employer ID No.)
Incorporation or Organization)
111 Westwood Place, Suite 402, Brentwood, TN 37027
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (615) 221-2250
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, par value $.01 per share ...................... NYSE
5 3/4% Convertible Subordinated Debentures due 2002.......... NYSE
Series A Preferred Stock Purchase Rights..................... NYSE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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As of March 1, 1999, 17,118,385 shares of the registrant's common
stock were outstanding and the aggregate market value of such common stock held
by non-affiliates was $185.4 million, based on the closing sale price of the
common stock of $15.56 on the New York Stock Exchange on that date. For purposes
of this calculation, shares held by non-affiliates excludes only those shares
beneficially owned by officers, directors, and shareholders owning 10% or more
of the outstanding common stock (and, in each case, their immediate family
members and affiliates).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for use in connection
with the Annual Meeting of Shareholders to be held on May 12, 1999 are
incorporated by reference into Part III of this report.
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PART I
ITEM 1. BUSINESS
THE COMPANY
American Retirement Corporation is a national senior living and
health care services provider offering a broad range of care and services to
seniors, including independent living, assisted living, skilled nursing, and
home health care services. Established in 1978, the Company currently operates
40 senior living communities in 15 states, consisting of 19 owned communities,
eight leased communities, and 13 managed communities, with an aggregate capacity
for approximately 12,100 residents.
The Company has experienced significant growth since the early 1990s,
primarily through the acquisition of senior living communities. The Company
intends to continue its growth by developing senior living networks throughout
the United States through a combination of (i) selective acquisitions of senior
living communities, including continuing care retirement communities ("CCRCs")
and assisted living residences; (ii) development of senior living communities,
including special living units and programs for residents with Alzheimer's and
other forms of dementia; (iii) expansion of existing communities; and (iv)
selective development and acquisition of other properties and businesses that
are complementary to the Company's operations and growth strategy. Pursuant to
its growth strategy, the Company is currently developing 35 senior living
communities, with an estimated aggregate capacity for approximately 3,900
residents, and plans to expand nine of its existing communities to add capacity
to accommodate approximately 600 additional residents.
Business History and Past Operations
The Company's operating philosophy was inspired by the vision of its
founders, Dr. Thomas F. Frist, Sr. and Jack C. Massey, to enhance the lives of
seniors by providing the highest quality of care and services in well-operated
communities designed to improve and protect the quality of life, independence,
personal freedom, privacy, spirit, and dignity of its residents.
The Company's predecessor, American Retirement Communities, L.P. (the
"Predecessor" or "ARCLP"), was formed in February 1995 in connection with a 1995
roll-up transaction of certain entities (the "Predecessor Entities") that owned,
operated, or managed various senior living communities. Each of the Predecessor
Entities was organized at the direction of the members of the Company's
management and controlling shareholders. As a result of the roll-up, ARCLP
issued partnership interests to the partners and shareholders of the Predecessor
Entities in exchange for their limited partnership interests and stock,
respectively, and thereby became the owner, directly or indirectly, of all of
the assets of the Predecessor Entities.
The Company was incorporated in February 1997 as a wholly-owned
subsidiary of ARCLP in anticipation of the Reorganization (defined below) and
the Company's initial public offering in May 1997 (the "IPO"). ARCLP was
reorganized (the "Reorganization") concurrent with the IPO such that all of its
assets and liabilities were contributed to the Company in
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exchange for 7,812,500 shares of the Company's Common Stock and a promissory
note in the original principal amount of approximately $21.9 million (the
"Reorganization Note"). The Company issued 3,593,750 shares of Common Stock in
the IPO, resulting in net proceeds of $45.0 million. The Company used a portion
of the net proceeds from the IPO to repay the Reorganization Note.
CARE AND SERVICES PROGRAMS
The Company provides a wide array of senior living and health care
services to seniors at its communities, including independent living, assisted
living (with special programs and living units for residents with Alzheimer's
and other forms of dementia), skilled nursing, and home health care services. By
offering a variety of services and involving the active participation of the
resident and the resident's family and medical consultants, the Company is able
to customize its service plan to meet the specific needs and desires of each
resident. As a result, the Company believes that it is able to maximize customer
satisfaction and avoid the high cost of delivering all services to every
resident without regard to need, preference, or choice.
Independent Living Services
The Company provides independent living services to seniors who do not
yet need assistance or support with the activities of daily life ("ADLs"), but
who prefer the physical and psychological comfort of a residential community
that offers health care and other services. The Company currently owns 15
communities, leases seven communities, and manages an additional ten communities
that provide independent living services, with an aggregate capacity for
approximately 3,900 residents, 1,900 residents, and 3,000 residents,
respectively. In addition, the Company has communities under development or
expansion that will add estimated additional capacity for approximately 900
independent living residents.
Independent living services provided by the Company include daily
meals, transportation, social and recreational activities, laundry,
housekeeping, security, and health care monitoring. The Company also fosters the
wellness of its residents by offering health screenings such as blood pressure
checks, periodic special services such as influenza inoculations, chronic
disease management (such as diabetes with its attendant blood glucose
monitoring), and dietary and similar programs, as well as ongoing exercise and
fitness classes. Classes are given by health care professionals to keep
residents informed about health and disease management. Subject to applicable
government regulation, personal care and medical services are available to
independent living residents through either community staff or through the
Company's or independent home health care agencies. The Company's contracts with
its independent living residents are generally for a term of one year and are
terminable by the resident upon 60 days' notice.
Assisted Living and Memory Impaired Services
The Company offers a wide range of assisted living care and services 24
hours per day, including personal care services, support services, and
supplemental services at 18 owned communities, five leased communities, and 12
managed communities, with an aggregate capacity
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for approximately 850, 380, and 2,010 residents, respectively. In addition, the
Company has communities under development or expansion that will add estimated
additional capacity for approximately 3,300 assisted living residents. The
residents of the Company's assisted living residences generally need help with
some or all ADLs, but do not require the more acute medical care traditionally
given in nursing homes. Upon admission to the Company's assisted living
residences, and in consultation with the resident and the resident's family and
medical consultants, each resident is assessed to determine his or her health
status, including functional abilities, and need for personal care services.
Each resident also completes a lifestyles assessment to determine the resident's
preferences. From these assessments, a care plan is developed for each resident
to ensure that all staff members who render care meet the specific needs and
preferences of each resident when possible. Each resident's care plan is
reviewed periodically to determine when a change in care is needed.
The Company has adopted a philosophy of assisted living care that
allows a resident to maintain a dignified independent lifestyle. Residents and
their families are encouraged to be partners in their care and to take as much
responsibility for their well being as possible. The basic type of assisted
living services offered by the Company include the following:
Personal Care Services. These services include assistance with
ADLs such as ambulation, bathing, dressing, eating, grooming, personal
hygiene, monitoring or assistance with medications, and confusion
management.
Support Services. These services include meals, assistance
with social and recreational activities, laundry services, general
housekeeping, maintenance services, and transportation services.
Supplemental Services. These services include extra
transportation services, extra laundry services, non-routine care
services, and special care services, such as services for residents
with Alzheimer's and other forms of dementia.
The Company maintains programs and special units at its assisted living
residences for residents with Alzheimer's and other forms of dementia that
provide the attention, care, and services needed to help those residents
maintain a higher quality of life. Specialized services include assistance with
ADLs, behavior management, and a lifeskills-based activities program, the goal
of which is to provide a normalized environment that supports residents'
remaining functional abilities. Whenever possible, residents assist with meals,
laundry, and housekeeping. Special units for residents with Alzheimer's and
other forms of dementia are located in a separate area of the community and have
their own dining facilities, resident lounge areas, and specially trained staff.
The special care areas are designed to allow residents the freedom to ambulate
while keeping them safely contained within a secure area, with a minimum of
disruption to other residents. Special nutritional programs are used to help
ensure caloric intake is maintained in residents whose constant movement
increases their caloric expenditure. Resident fees for these special units are
dependent on the size of the unit, the design type, and the level of services
provided.
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Skilled Nursing and Sub-Acute Services
The Company provides traditional skilled nursing services in six
communities owned by the Company, two communities leased by the Company, and
nine communities managed by the Company, with an aggregate capacity for
approximately 420 residents at the Company's owned communities, approximately
140 residents at the Company's leased communities, and approximately 800
residents at the Company's managed communities. In addition, the Company has
communities under development or expansion that will add estimated additional
capacity of approximately 300 skilled nursing beds. In its skilled nursing
facilities, the Company provides traditional long-term care through 24-hour a
day skilled nursing care by registered nurses, licensed practical nurses, and
certified nursing aides. The Company also offers a range of sub-acute care
services in certain of its communities. Sub-acute care is generally short-term,
goal-oriented rehabilitation care intended for individuals who have a specific
illness, injury, or disease, but who do not require many of the services
provided in an acute care hospital. Sub-acute care is typically rendered
immediately after, or in lieu of, acute hospitalization in order to treat such
specific medical conditions.
GOVERNMENT REGULATION
The health care industry is subject to extensive regulation and
frequent regulatory change. At this time, no federal laws or regulations
specifically regulate assisted or independent living residences. While a number
of states have not yet enacted specific assisted living regulations, the
Company's communities are subject to regulation, licensing, and certificate of
need (CON) and permitting by state and local health and social service agencies
and other regulatory authorities. While such requirements vary from state to
state, they typically relate to staffing, physical design, required services,
and resident characteristics. The Company believes that such regulation will
increase in the future. In addition, health care providers are receiving
increased scrutiny under anti-trust laws as integration and consolidation of
health care delivery increases and affects competition. The Company's
communities are also subject to various zoning restrictions, local building
codes, and other ordinances, such as fire safety codes. Regulation of the
assisted living industry is evolving and is likely to become more burdensome on
the Company; however, the Company is unable to predict the content of new
regulations or their effect on its business.
The Balanced Budget Act ("BBA") of 1997, Public Law 105-33, included
sweeping changes to Medicare and Medicaid, significantly reducing rates of
increase for payments to home health agencies and skilled nursing facilities.
Under the BBA, beginning in the year 2001, skilled nursing facilities will no
longer be reimbursed under a cost based system. A prospective payment system
under which facilities are reimbursed on a per diem basis is being phased in
over the next three years. The BBA, as revised, also requires the Secretary of
Health and Human Services to establish and implement a prospective payment
system for home health care services for cost reporting periods beginning on and
after October 1, 2000. Approximately 4.7%, 6.9%, and 4.6% of the Company's total
revenues from continuing operations for the years ended December 31, 1998, 1997,
and 1996, respectively, were attributable to Medicare, including
Medicare-related private co-insurance.
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Federal and state anti-remuneration and anti-referral laws, such as
anti-kickback laws, govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
such providers. These laws prohibit, among other things, certain direct and
indirect payments that are intended to induce the referral of patients to, the
arranging for services by, or the recommending of, a particular provider of
health care items or services. Federal anti-kickback laws have been broadly
interpreted to apply to certain contractual relationships between health care
providers and sources of patient referrals. Similar state laws vary, are
sometimes vague, and seldom have been interpreted by courts or regulatory
agencies. In addition, there are various federal and state laws prohibiting
other types of fraud by health care providers, including criminal provisions
that prohibit filing false claims or making false statements to receive payment
or certification under Medicare or Medicaid, or failing to refund overpayments
or improper payments. Violation of these laws can result in loss of licensure,
civil and criminal penalties, and exclusion of health care providers or
suppliers from participation in Medicare, Medicaid, and other state and federal
reimbursement programs. There can be no assurance that such laws will be
interpreted in a manner consistent with our current or past practices.
The Company believes that its communities are in substantial compliance
with applicable regulatory requirements. In the ordinary course of business, one
or more of the Company's communities could be cited for deficiencies. In such
cases, the appropriate corrective action would be taken. To the Company's
knowledge, no material regulatory actions are currently pending with respect to
any of the Company's communities.
Certain of the communities operated by the Company are currently
operating a number of skilled nursing beds as "shelter beds" under a Florida
statute and certificate of need that generally limits the use of such beds to
residents of the community. Such communities are not currently in full
compliance with these shelter bed certificate of need requirements. A violation
of the shelter bed statutes may, among other things, subject the owner of the
facility to fines of up to $1,500 per day. Although the Company is evaluating a
number of alternatives relating to these shelter bed issues, the Company does
not anticipate that the communities will be in full compliance with the shelter
bed requirements in the foreseeable future. There can be no assurance that the
State of Florida will not enforce the shelter bed requirements strictly against
the Company in the future or impose penalties for prior or continuing
violations.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state, and
local laws exist that also may require modifications to existing and planned
communities to permit access to the properties by disabled persons. While the
Company believes that its communities are substantially in compliance with
present requirements or are exempt therefrom, if required changes involve a
greater expenditure than anticipated or are required to be made on a more
accelerated basis than anticipated, the Company will incur additional costs.
Further legislation may impose additional burdens or restrictions with respect
to access by disabled persons, the costs of compliance with which could be
substantial.
In addition, the Company is subject to various Federal, state, and
local environmental laws and regulations. Such laws and regulations often impose
liability whether or not the owner or
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operator knew of, or was responsible for, the presence of hazardous or toxic
substances. The costs of any required remediation or removal of these substances
could be substantial and the liability of an owner or operator as to any
property is generally not limited under such laws and regulations and could
exceed the property's value and the aggregate assets of the owner or operator.
The presence of these substances or failure to remediate such contamination
properly may also adversely affect the owner's ability to sell or rent the
property, or to borrow using the property as collateral. Under these laws and
regulations, an owner, operator, or an entity that arranges for the disposal of
hazardous or toxic substances, such as asbestos-containing materials, at a
disposal site may also be liable for the costs of any required remediation or
removal of the hazardous or toxic substances at the disposal site. In connection
with the ownership or operation of its properties, the Company could be liable
for these costs, as well as certain other costs, including governmental fines
and injuries to persons or properties.
The Company believes that the structure and composition of government,
and specifically health care, regulations will continue to change and, as a
result, regularly monitors developments in the law. The Company expects to
modify its agreements and operations from time to time as the business and
regulatory environment changes. While the Company believes it will be able to
structure its agreements and operations in accordance with applicable law, there
can be no assurance that its arrangements will not be successfully challenged.
COMPETITION
The senior living and health care services industry is highly
competitive and the Company expects that all segments of the industry will
become increasingly competitive in the future. Although there are a number of
substantial companies active in the senior living and health care industry, the
industry continues to be very fragmented and characterized by numerous small
operators. The Company believes that the primary competitive factors in the
senior living and health care services industry are (i) reputation for and
commitment to a high quality of care; (ii) quality of support services offered;
(iii) price of services; (iv) physical appearance and amenities associated with
the communities; and (v) location. The Company competes with other companies
providing independent living, assisted living, skilled nursing, home health
care, and other similar service and care alternatives, some of whom may have
greater financial resources than the Company. Because seniors tend to choose
senior living communities near their homes, the Company's principal competitors
are other senior living and long-term care communities in the same geographic
areas as the Company's communities. The Company also competes with other health
care businesses with respect to attracting and retaining nurses, technicians,
aides, and other high quality professional and non-professional employees and
managers.
INSURANCE AND LEGAL PROCEEDINGS
The provision of personal and health care services entails an inherent
risk of liability. In recent years, participants in the senior living and health
care services industry have become subject to an increasing number of lawsuits
alleging negligence or related legal theories, many of which involve large
claims and result in the incurrence of significant defense costs. The Company
currently maintains property, liability, and professional medical malpractice
insurance policies for
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the Company's owned and certain of its managed communities under a master
insurance program in amounts and with such coverages and deductibles that the
Company believes are within normal industry standards based upon the nature and
risks of the Company's business. The Company also has umbrella excess liability
protection policies in the amount of at least $35.0 million per location. There
can be no assurance that a claim in excess of the Company's insurance will not
arise. A claim against the Company not covered by, or in excess of, the
Company's insurance could have a material adverse effect upon the Company. In
addition, the Company's insurance policies must be renewed annually. There can
be no assurance that the Company will be able to obtain liability insurance in
the future or that, if such insurance is available, it will be available on
acceptable terms.
Under various federal, state, and local environmental laws, ordinances,
and regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs. The Company is not aware of any environmental liability with respect
to any of its owned, leased, or managed communities that it believes would have
a material adverse effect on the Company's business, financial condition, or
results of operations. The Company believes that its communities are in
compliance in all material respects with all federal, state, and local laws,
ordinances, and regulations regarding hazardous or toxic substances or petroleum
products. The Company has not been notified by any governmental authority, and
is not otherwise aware of any material non-compliance, liability, or claim
relating to hazardous or toxic substances or petroleum products in connection
with any of the communities it currently operates.
The Company currently is not a party to any legal proceeding that it
believes would have a material adverse effect on its business, financial
condition, or results of operations.
TRADEMARKS
The Company has registered its corporate logo with the United States
Patent and Trademark Office (the "USPTO"). The Company intends to develop and
market certain free-standing assisted living residences under the tradename
"Homewood Residence". The Company has filed an application with the USPTO to
register the "Homewood Residence" tradename and logo, but there can be no
assurance that such registration will be granted or that the Company will be
able to use such tradename.
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EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
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<S> <C> <C>
W. E. Sheriff 56 Chief Executive Officer
Christopher J. Coates 48 President and Chief Operating Officer
George T. Hicks 41 Executive Vice President-Finance
Chief Financial Officer
H. Todd Kaestner 43 Executive Vice President-Corporate Development
James T. Money 51 Executive Vice President-Senior Living Network
Development
Frank L. Herold 42 Executive Vice President
Tom G. Downs 53 Senior Vice President-Operations
Lee A. McKnight 53 Senior Vice President-Marketing
</TABLE>
W.E. SHERIFF has served as Chairman and Chief Executive Officer of the
Company and its predecessors since April 1984. From 1973 to 1984, Mr. Sheriff
served in various capacities for Ryder System, Inc., including as president and
chief executive officer of its Truckstops of America division. Mr. Sheriff also
serves on the boards of various educational and charitable organizations and in
varying capacities with several trade organizations, including as a member of
the board of the National Association for Senior Living Industries.
CHRISTOPHER J. COATES has served as President and Chief Operating
Officer of the Company and its predecessors since January 1993 and as a director
of the Company since January 1998. From 1988 to 1993, Mr. Coates served as
chairman of National Retirement Company, a senior living management company
acquired by a subsidiary of the Company in 1992. From 1985 to 1988, Mr. Coates
was senior director of the Retirement Housing Division of Radice Corporation,
following that company's purchase in 1985 of National Retirement Consultants, a
company formed by Mr. Coates. Mr. Coates is a former chairman of the board of
directors of the American Senior Housing Association.
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GEORGE T. HICKS, a certified public accountant, has served as the
Executive Vice President - Finance, Chief Financial Officer, Treasurer, and
Secretary since September 1993. Mr. Hicks has served in various capacities for
the Company's predecessors since 1985, including Vice President - Finance and
Treasurer from November 1989 to September 1993.
H. TODD KAESTNER has served as Executive Vice President - Corporate
Development since September 1993. Mr. Kaestner has served in various capacities
for the Company's predecessors since 1985, including Vice President -
Development from 1988 to 1993 and Chief Financial Officer from 1985 to 1988.
JAMES T. MONEY has served as Executive Vice President - Development
Services since September 1993. Mr. Money has served in various capacities for
the Company's predecessors since 1978, including Vice President - Development
from 1985 to 1993. Mr. Money is a member of the board of directors and the
executive committee of the National Association for Senior Living Industries.
FRANK L. HEROLD has served as an Executive Vice President of ARC since
July 1998. Mr. Herold served as president of Freedom Group, Inc. from July 1988
until its acquisition by the Company in July 1998.
TOM G. DOWNS has served as Senior Vice President - Operations since
1989. Mr. Downs has served in various capacities for the Company's predecessors
since 1979.
LEE A. MCKNIGHT has served as Senior Vice President - Marketing since
September 1991. Mr. McKnight has served in various capacities for the Company's
predecessors since 1979.
EMPLOYEES
The Company employs approximately 5,175 persons. None of the Company's
employees is currently represented by a labor union and the Company is not aware
of any union organizing activity among its employees. The Company believes that
its relationship with its employees is good.
RISK FACTORS
Substantial Debt and Operating Lease Payment Obligations
At December 31, 1998, the Company had long-term debt, including current
portion, of $300.7 million, of which $91.9 million was payable to one lender,
and was obligated to pay annual rental obligations of approximately $11.4
million under long-term operating leases. The Company currently intends to
finance its growth through a combination of bank indebtedness, construction and
mortgage financing, transactions with real estate investment trusts ("REITs"),
and joint venture and other arrangements. As a result, a substantial portion of
the Company's cash flow will be devoted to debt service and lease payments. Debt
and annual
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rental obligations will increase as the Company pursues its growth strategy.
There can be no assurance that the Company will generate sufficient cash flows
from operations to meet required interest, principal, and lease payments. Any
payment or other default with respect to such obligations could cause the lender
to foreclose upon the communities securing such indebtedness or, in the case of
an operating lease, could terminate the lease, with a consequent loss of income
and asset value to the Company. Furthermore, because of cross-default and
cross-collateralization provisions in certain of the Company's mortgages, debt
instruments, and leases, a default by the Company on one of its payment
obligations could result in acceleration of other obligations. Consequently,
such a default could adversely affect a significant number of the Company's
other properties and, in turn, the Company's business, results of operations,
and financial condition. See "-- Need for Additional Financing; Exposure to
Rising Interest Rates."
Need for Additional Financing; Exposure to Rising Interest Rates
The Company's ability to sustain any operating losses and to otherwise
meet its growth objectives will depend, in part, on its ability to obtain
additional financing on acceptable terms from available financing sources. The
Company's future debt instruments may include covenants restricting the
Company's ability to incur additional debt. Moreover, raising additional funds
through the issuance of equity securities could dilute the ownership interests
of existing shareholders and adversely affect the market price of the Company's
common stock. There can be no assurance that the Company will be successful in
securing additional financing or that adequate financing will be available and,
if available, will be on terms that are acceptable to the Company. The Company's
inability to obtain additional financing on acceptable terms could delay or
eliminate some or all of the Company's growth plans.
Future indebtedness, from commercial banks or otherwise, and lease
obligations, including those related to REIT facilities, are also expected to be
based on interest rates prevailing at the time such debt and lease arrangements
are obtained. Therefore, increases in prevailing interest rates could increase
the Company's interest or lease payment obligations and could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
Risks Associated With Lifecare Benefits
Certain communities owned or operated by the Company are lifecare CCRCs
that offer residents a limited lifecare benefit. Residents of these 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, which is typically (a) a
certain number of free days in the community's health center during the
resident's lifetime, (b) a discounted rate for such services, or (c) a
combination of the two. The lifecare benefit varies based upon the extent to
which the resident's entrance fee is refundable. The pricing of entrance fees,
refundability provisions, monthly service fees, and lifecare benefits are
determined from actuarial projections of the expected morbidity and mortality of
the resident population. In the event the entrance fees and monthly service
payments established for the
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communities are not sufficient to cover the cost of lifecare benefits granted to
residents, the results of operations and financial condition of the communities
will be adversely affected.
Residents of the Company's lifecare CCRCs are guaranteed an independent
living unit and nursing care at the community during their lifetime, even if the
resident exhausts his or her financial resources and becomes unable to satisfy
his or her obligations to the community. In addition, in the event a resident
requires nursing care and there is insufficient capacity for the resident in the
nursing facility at the community where the resident lives, the community must
contract with a third party to provide such care. Although the Company screens
potential residents to ensure that 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 in all cases. To
the extent that the financial resources of some of the residents are not
sufficient to pay for the cost of facilities and services provided to them, or
in the event that the communities must pay third parties to provide nursing care
to residents of the communities, the Company's results of operations and
financial condition would be adversely affected.
No Assurance as to Ability to Manage Growth
The Company has an aggressive growth strategy that includes the
development, construction, and acquisition of senior living communities,
including assisted living residences. The success of the Company's growth
strategy will depend, in large part, on its ability to effectively operate any
newly acquired or developed communities, as to which there can be no assurance.
The Company's growth plans will also place significant demands on its management
and operating personnel. The Company's ability to manage its future growth
effectively will require it to improve its operational, financial, and
management information systems and to continue to attract, retain, train,
motivate, and manage key employees. If the Company is unable to manage its
growth effectively, its business, results of operations, and financial condition
will be adversely affected.
Difficulties of Acquiring and Integrating Communities and Complementary
Businesses
The Company plans to continue to make strategic acquisitions of senior
living communities, which may include a variety of CCRCs and independent living,
assisted living, and skilled nursing facilities, and other properties or
businesses that are complementary to the Company's operations and growth
strategy. The acquisition of existing communities or other businesses involves a
number of risks, including the following:
- existing communities available for acquisition frequently
serve or target different markets than those presently served
by the Company;
- renovations of acquired communities and changes in staff and
operating management personnel are necessary to successfully
integrate such communities or businesses into the Company's
existing operations;
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- costs incurred to reposition or renovate newly acquired
communities may not be recovered; and
- the Company may be adversely impacted by unforeseen
liabilities attributable to the prior operators of such
communities or businesses, against whom the Company may have
little or no recourse.
The success of the Company's acquisition strategy will be determined by numerous
factors, including:
- the Company's ability to identify suitable acquisition
candidates;
- the competition for such acquisitions;
- the purchase price;
- the requirement to make operational or structural changes and
improvements;
- the financial performance of the communities or businesses
after acquisition;
- the Company's ability to finance the acquisitions; and
- the Company's ability to integrate effectively any acquired
communities or businesses into the Company's management,
information, and operating systems.
There can be no assurance that the Company's acquisition of senior living
communities and complementary properties and businesses will be completed at the
rate currently expected, if at all, or, if completed, that any acquired
communities or businesses will be successfully integrated into the Company's
operations.
No Assurance as to Ability to Develop Additional Senior Living Communities
An integral component of the Company's growth strategy is to develop
and operate senior living communities. The Company's ability to develop
successfully additional senior living communities will depend on a number of
factors, including, but not limited to:
- the Company's ability to acquire suitable development sites at
reasonable prices;
- the Company's success in obtaining necessary zoning,
licensing, and other required governmental permits and
authorizations; and
- the Company's ability to control construction costs and
project completion schedules.
13
<PAGE> 14
In addition, the Company's development plans are subject to numerous factors
over which it has little or no control, including:
- competition for suitable development properties;
- shortages of labor or materials;
- changes in applicable laws or regulations or their
enforcement;
- the failure of general contractors or subcontractors to
perform under their contracts;
- strikes; and
- adverse weather conditions.
As a result of these factors, there can be no assurance that the Company will
not experience construction delays, that it will be successful in developing and
constructing currently planned or additional communities, or that any developed
senior living communities will be economically successful. If the Company's
development schedule is delayed, the Company's growth plans could be adversely
affected. Additionally, the Company anticipates that the development and
construction of additional senior living communities will involve a substantial
commitment of capital with little or no revenue associated with communities
under development, the consequence of which could be an adverse impact on the
Company's liquidity.
Losses from Newly Developed Residences and Acquisitions
In view of the Company's aggressive growth plan for development and
acquisitions, there can be no assurance that the Company will continue to be
profitable in any future period. Newly developed senior living communities are
expected to incur operating losses during a substantial portion of their first
12 months of operations, on average, until the communities achieve targeted
occupancy levels. Newly acquired communities may also incur losses pending their
integration into the Company's operations.
Risks of Development in Concentrated Geographic Areas
Part of the Company's growth strategy is to develop and acquire senior
living communities in concentrated geographic service areas. Accordingly, the
Company's occupancy rates in existing, developed, or acquired communities may be
adversely affected by a number of factors, including regional and local economic
conditions, competitive conditions, applicable local laws and regulations, and
general real estate market conditions, including the supply and proximity of
senior living communities.
14
<PAGE> 15
Dependence on Attracting Residents with Sufficient Resources to Pay
Approximately 95.3% of the Company's total revenues for the year ended
December 31, 1998 were attributable to private pay sources. For the same period,
4.7% of the Company's revenues were attributable to reimbursement from
third-party payors, including Medicare and Medicaid. The Company expects to
continue to rely primarily on the ability of residents to pay for the Company's
services from their own or familial financial resources. Inflation or other
circumstances that adversely affect the ability of seniors to pay for the
Company's services could have a material adverse effect on the Company's
business, financial condition, and results of operations.
Pricing Pressures
The health care services industry is currently experiencing
market-driven reforms from forces within and outside the industry that are
exerting pressure on health care and related companies to reduce health care
costs. These market-driven reforms are resulting in industry-wide consolidation
that is expected to increase the downward pressure on health care service
providers' margins, as larger buyer and supplier groups, including government
programs such as Medicare and Medicaid, exert pricing pressure on health care
providers. The Company cannot predict the ultimate timing or effect of
market-driven reforms. In addition, the Company cannot guarantee that any such
reforms will not have a material adverse effect on the Company's business,
results of operations, or financial condition.
Increasing Competition
The senior living and health care services industry is highly
competitive, and the Company expects that all segments of the industry will
become increasingly competitive in the future. The Company competes with other
companies providing independent living, assisted living, skilled nursing, and
other similar service and care alternatives. Although the Company believes there
is a need for senior living communities in the markets where the Company is
operating and developing communities, the Company expects that competition will
increase from existing competitors and new market entrants, some of whom may
have substantially greater financial resources than the Company. In addition,
some of the Company's competitors operate on a not-for-profit basis or as
charitable organizations and have the ability to finance capital expenditures on
a tax-exempt basis or through the receipt of charitable contributions, neither
of which are readily available to the Company. Furthermore, if the development
of new senior living communities outpaces the demand for such communities in the
markets in which the Company has or is developing senior living communities,
such markets may become saturated. An oversupply of such communities in the
Company's markets could cause the Company to experience decreased occupancy,
reduced operating margins, and lower profitability. Consequently, there can be
no assurance that the Company will not encounter increased competition that
would adversely affect its occupancy rates, pricing for services, and growth
prospects.
15
<PAGE> 16
Community Management, Staffing, and Labor Costs
The Company competes with other providers of senior living and health
care services with respect to attracting and retaining qualified management
personnel responsible for the day-to-day operations of each of the Company's
communities and skilled technical personnel responsible for providing resident
care. A shortage of nurses or trained personnel may require the Company to
enhance its wage and benefits package in order to compete in the hiring and
retention of such personnel or to hire more expensive temporary personnel. The
Company will also be dependent on the available labor pool of semi-skilled and
unskilled employees in each of the markets in which it operates. The Company
cannot be sure its labor costs will not increase, or that, if they do increase,
they can be matched by corresponding increases in rates charged to residents. If
the Company is unable to attract and retain qualified management and staff
personnel, to control its labor costs, or to pass on any increased labor costs
to residents through rate increases, such failures could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
Government Regulation and the Burdens of Compliance
Federal and state governments regulate various aspects of the Company's
business. The development and operation of health care facilities and the
provision of health care services are subject to federal, state, and local
licensure, certification, and inspection laws that regulate, among other
matters, the number of licensed beds, the provision of services, the
distribution of pharmaceuticals, billing practices and policies, equipment,
operating policies and procedures, fire prevention measures, environmental
matters, compliance with building and safety codes, and staffing, including
professional licensing. Failure to comply with these laws and regulations could
result in the denial of reimbursement, the imposition of fines, temporary
suspension of admission of new patients, suspension or decertification from
Medicare, Medicaid, or other state or Federal reimbursement programs,
restrictions on the Company's ability to acquire new communities or expand
existing communities, and, in extreme cases, the revocation of a community's
license or closure of a community. While the Company endeavors to comply with
all applicable regulatory requirements, from time to time certain of the
Company's communities have been subject, like others in the industry, to various
penalties as a result of deficiencies alleged by state survey agencies. There
can be no assurance that the Company will not be subject to similar penalties in
the future, or that federal, state, or local governments will not impose
additional restrictions on the Company's activities that could materially
adversely affect the Company's business, financial condition, or results of
operations.
The Balanced Budget Act ("BBA") of 1997, Public Law 105-33, included
sweeping changes to Medicare and Medicaid, significantly reducing rates of
increase for payments to home health agencies and skilled nursing facilities.
Under the BBA, beginning in the year 2001, skilled nursing facilities will no
longer be reimbursed under a cost based system. A prospective payment system
under which facilities are reimbursed on a per diem basis is being phased in
over the next three years. The BBA, as revised, also requires the Secretary of
Health and Human Services to establish and implement a prospective payment
system for home health care services for cost reporting periods beginning on and
after October 1, 2000.
16
<PAGE> 17
Approximately 4.7%, 6.9%, and 4.6% of the Company's total revenues from
continuing operations for the years ended December 31, 1998, 1997, and 1996,
respectively, were attributable to Medicare, including Medicare-related private
co-insurance.
Many states, including several of the states in which the Company
currently operates, control the supply of licensed skilled nursing beds and home
health care agencies through certificate of need ("CON") programs. Presently,
state approval is required for the construction of new health care communities,
the addition of licensed beds, and certain capital expenditures at such
communities. To the extent that a CON or other similar approval is required for
the acquisition or construction of new facilities or the expansion of the number
of licensed beds, services, or existing communities, the Company could be
adversely affected by the failure or inability to obtain such approval, changes
in the standards applicable for such approval, and possible delays and expenses
associated with obtaining such approval. In addition, in most states the
reduction of the number of licensed beds or the closure of a community requires
the approval of the appropriate state regulatory agency and, if the Company were
to seek to reduce the number of licensed beds at, or to close, a community, the
Company could be adversely affected by a failure to obtain or a delay in
obtaining such approval.
Certain of the communities operated by the Company are currently
operating a number of nursing beds as "shelter beds" under a Florida statute and
CON that generally limits the use of such beds to residents of the community.
Such communities are not currently in full compliance with these shelter bed CON
requirements. A violation of the shelter bed statutes may, among other things,
subject the owner of the facility to fines of up to $1,500 per day. Although the
Company is evaluating a number of alternatives relating to these shelter bed
issues, the Company does not anticipate that the communities will be in full
compliance with the shelter bed requirements in the foreseeable future, if ever.
There can be no assurance that the State of Florida will not enforce the shelter
bed requirements strictly against the Company in the future or impose penalties
for prior or continuing violations.
Federal and state anti-remuneration and anti-referral laws, such as
"anti-kickback" laws, govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
such providers. These laws prohibit, among other things, certain direct and
indirect payments that are intended to induce the referral of patients to, the
arranging for services by, or the recommendation of, a particular provider of
health care items or services. Federal anti-kickback laws have been broadly
interpreted to apply to certain contractual relationships between health care
providers and sources of patient referral. Similar state laws vary, are
sometimes vague, and seldom have been interpreted by courts or regulatory
agencies. In addition, there are various federal and state laws prohibiting
other types of fraud by health care providers, including criminal provisions
that prohibit (a) filing false claims or making false statements to receive
payment or certification under Medicare and Medicaid, and (b) failing to refund
overpayments or improper payments. Violation of these laws can result in loss of
licensure, civil and criminal penalties, and exclusion of health care providers
or suppliers from participation in the Medicare, Medicaid, and other state and
federal reimbursement programs. There can be no assurance that such laws will be
interpreted in a manner consistent with the practices of the Company.
17
<PAGE> 18
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state, and
local laws exist that also may require modifications to existing and planned
communities to create access to the properties by disabled persons. Although the
Company believes that its communities are substantially in compliance with
present requirements or are exempt therefrom, if required changes involve a
greater expenditure than anticipated or must be made on a more accelerated basis
than anticipated, the Company will incur additional costs. Further legislation
may impose additional burdens or restrictions with respect to access by disabled
persons, the costs of compliance with which could be substantial.
18
<PAGE> 19
ITEM 2. PROPERTIES
The table below sets forth certain information with respect to the
senior living communities currently operated by the Company.
<TABLE>
<CAPTION>
Resident Capacity(1)
-------------------------------- Commencement
Community Location IL AL SN Total of Operations(2)
- --------- -------- -- -- -- ----- ----------------
Owned(3):
- ---------
<S> <C> <C> <C> <C> <C> <C>
Broadway Plaza Ft. Worth, TX 252 40 122 414 Apr-92
Carriage Club of Charlotte Charlotte, NC 355 54 50 459 May-96
Carriage Club of Jacksonville Jacksonville, FL 292 60 -- 352 May-96
Freedom Plaza Florida Sun City Center, FL 521 27 42 590 Jul-98
Freedom Village Holland Holland, MI 450 56 72 578 Jul-98
The Hampton at Post Oak Houston, TX 162 21 -- 183 Oct-94
Heritage Club Denver, CO 220 35 -- 255 Feb-95
Homewood at Corpus Christi Corpus Christi, TX 60 30 -- 90 May-97
Homewood at Deane Hill(4) Knoxville, TN -- 108 -- 108 Oct-98
Homewood at Halls(4) Knoxville, TN -- 53 -- 53 Jul-98
Homewood at Tarpon Springs Tarpon Springs, FL -- 64 -- 64 Aug-97
Lake Seminole Square Seminole, FL 395 34 -- 429 Jul-98
Parkplace Denver, CO 195 48 -- 243 Oct-94
Richmond Place Lexington, KY 206 4 -- 210 Apr-95
Santa Catalina Villas Tucson, AZ 217 85 42 344 Jun-94
The Summit at Westlake Hills Austin, TX 167 30 89 286 Apr-92
Village of Homewood(4) Lady Lake, FL -- 50 -- 50 Apr-98
Westlake Village Cleveland, OH 246 54 -- 300 Oct-94
Wilora Lake Lodge Charlotte, NC 142 -- -- 142 Dec-97
----- --- --- -----
Subtotal 3,880 853 417 5,150
----- --- --- -----
Leased:
Bahia Oaks Lodge(5) Sarasota, FL --- 100 -- 100 Jun-98
Holley Court Terrace(6) Oak Park, IL 179 17 -- 196 Jul-93
Homewood at Victoria(7) Victoria, TX 60 30 -- 90 May-97
Imperial Plaza(8) Richmond, VA 850 152 -- 1,002 Oct-97
Oakhurst Towers(9) Denver, CO 220 -- -- 220 Feb-99
Park Regency(10) Chandler, AZ 154 -- 66 220 Sep-98
Rossmoor Regency(11) Laguna Hills, CA 210 -- -- 210 May-98
Trinity Towers(6) Corpus Christi, TX 195 84 76 355 Jan-90
----- --- --- -----
Subtotal 1,868 383 142 2,393
----- --- --- -----
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
Resident Capacity(1)
-------------------- Commencement
Community Location IL AL SN Total of Operations(2)
- --------- -------- -- -- -- ----- ----------------
Managed(12):
- ------------
<S> <C> <C> <C> <C> <C> <C>
Burcham Hills East Lansing, MI 138 71 133 342 Nov-78
Freedom Plaza Arizona(13) Peoria, AZ 455 78 128 661 Jul-98
Freedom Square(14) Seminole, FL 497 178 192 867 Jul-98
Freedom Village Brandywine(15) Glenmore, PA 380 32 47 459 Jul-98
Glenview at Pelican Bay Naples, FL 150 10 25 185 Jul-98
Homewood at Pearland(16) Houston, TX 15 67 -- 82 Jun-98
Homewood at Pinegate(16) Houston, TX -- 95 -- 95 Jul-98
Homewood at West Cobb(16) Marietta, GA -- 60 -- 60 Apr-98
Meadowood Worcester, PA 355 51 59 465 Oct-89
Parklane West San Antonio, TX -- 17 124 141 Oct-94
Reeds Landing Springfield, MA 148 54 40 242 Aug-95
USAA Towers San Antonio, TX 505 -- -- 505 Oct-94
Williamsburg Landing Williamsburg, VA 345 65 58 468 Sep-85
----- ----- ----- ------
Subtotal 2,988 778 806 4,572
----- ----- ----- ------
Grand Total 8,736 2,014 1,365 12,115
===== ===== ===== ======
</TABLE>
- -----------------------
(1) Independent living residences (IL), assisted living residences (including
areas dedicated to residents with Alzheimer's and other forms of dementia) (AL),
and skilled nursing beds (SN).
(2) Indicates the date on which the Company acquired each of its owned and
leased communities, or commenced operating its managed communities. The Company
operated certain of its communities pursuant to management agreements prior to
acquiring the communities.
(3) All of the Company's owned communities are subject to mortgage liens. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
(4) Owned by a joint venture in which the Company owns a 50% interest.
(5) Leased pursuant to a five-year operating lease (with five one-year renewal
options) from an unaffiliated special purpose entity that acquired the community
from a general partnership of which Robert G. Roskamp, a director of the
Company, is a partner. The Company also acquired an option to purchase the
community at the expiration of the lease term.
(6) Leased pursuant to an operating lease with an initial term of ten years
expiring December 31, 2006.
(7) Leased pursuant to an operating lease expiring July 2011, with renewal
options for up to two additional ten year terms.
(8) Leased pursuant to an operating lease expiring October 2017, with a seven
year renewal option.
(9) Leased pursuant to a 14 year operating lease expiring February 2013, from an
unaffiliated special purpose entity. The Company also acquired an option to
purchase the community at the expiration of the lease term.
(10) Leased pursuant to a five year operating lease expiring September 2003,
with renewal options for up to two additional one-year terms, from an
unaffiliated special purpose entity. The Company also acquired an option to
purchase the community at the expiration of the lease term.
(11) Leased pursuant to a five-year operating lease expiring May 2003, with
renewal options for up to five additional one-year terms, from an unaffiliated
special purpose entity that acquired the community. The Company made a
subordinated loan to the special purpose entity in the amount of $440,000 and
will receive interest income on such loan at 2.0% over LIBOR. The Company also
acquired an option to purchase the community at the expiration of the lease
term.
(12) Except as noted below, the Company's management agreements are generally
for terms of three to five years, but may be canceled by the owner of the
community, without cause, on three to six months' notice. Pursuant to the
management agreements, the Company is generally responsible for providing
management personnel, marketing, nursing, resident care and dietary services,
accounting and data processing reports, and other services for these communities
at the owner's expense and receives a monthly fee for its services based either
on a contractually fixed amount or percentage of revenues or income. Except as
noted below, the communities managed by the Company are not owned by an
affiliate of the Company.
(13) Operated pursuant to a management agreement with a 20-year term, with two
renewal options for additional ten-year terms, that provides for a management
fee equal to all revenue of the community in excess of operating expenses,
refunds of entry fees, capital expenditure reserves, debt service, and certain
payments to the community's owners, including an entity affiliated with Mr.
Roskamp.
(14) Operated pursuant to a management agreement with a 20-year term, with two
renewal options for additional ten-year terms, that provides for a management
fee equal to all revenue of the community in excess of operating expenses,
refunds of entry fees, capital expenditure reserves, debt service, and certain
payments to the community's owners, Mr. Roskamp and an entity affiliated with
Mr. Roskamp. The Company has an option to purchase the community at a
predetermined price.
(15) Operated pursuant to a management agreement with a three-year term that
provides for a management fee equal to a fixed percentage of the community's
gross revenues. The Company has an option to purchase the community for a
predetermined price. The community is owned by an entity affiliated with Mr.
Roskamp.
(16) The communities are owned by an unaffiliated third-party and leased by John
Morris, a director of the Company. The communities are operated pursuant to
management agreements that provide for the payment of management fees based on a
percentage of the gross revenues of each community and require the Company to
fund operating losses above a specified amount.
20
<PAGE> 21
ITEM 3. LEGAL PROCEEDINGS
The Company currently is not a party to any legal proceeding that it
believes would have a material adverse effect on its business, financial
condition, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since the Company's initial public offering, the Common Stock has
traded on the New York Stock Exchange under the symbol "ACR." The following
table sets forth, for the periods indicated, the high and low sales prices for
the Common Stock.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 High Low
------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter $23.250 $20.000
Second Quarter 22.375 17.750
Third Quarter 19.625 14.063
Fourth Quarter 18.000 12.938
<CAPTION>
Year Ended December 31, 1997 High Low
------------------------------------------------------------------------------------
<S> <C> <C>
Second Quarter (beginning May 30, 1997) $17.875 $14.250
Third Quarter 21.875 17.750
Fourth Quarter 21.250 19.000
</TABLE>
As of March 3, 1999, there were 571 shareholders of record and
approximately 1,409 persons or entities holding Common Stock in nominee name.
It is the current policy of the Company's Board of Directors to retain
all future earnings to finance the operation and expansion of the Company's
business. Accordingly, the Company does not anticipate declaring or paying cash
dividends on the Common Stock in the foreseeable future. The payment of cash
dividends in the future will be at the sole discretion of the Company's Board of
Directors and will depend on, among other things, the Company's earnings,
operations, capital requirements, financial condition, restrictions in then
existing financing agreements, and other factors deemed relevant by the Board of
Directors.
21
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated and combined financial data presented below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
Consolidated
-------------------------------------
Combined
--------------------------
Predecessor Predecessor Entities
----------------------- --------------------------
Nine Months Three Months
Years Ended December 31, Ended Ended Year Ended
------------------------------------- December 31, March 31, December 31,
1998 1997 1996 1995 1995 1994
--------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Resident and health care $ 130,036 $ 88,416 $ 71,409 $ 47,239 $ 11,761 $ 30,979
Management and development services 12,321 1,765 1,739 1,524 595 2,362
--------- -------- -------- -------- -------- --------
Total revenues 142,357 90,181 73,148 48,763 12,356 33,341
Operating expenses:
Community operating expense 82,698 54,921 45,084 30,750 8,035 21,780
Lease expense, net 9,063 3,405 -- -- -- --
General and administrative 10,581 6,717 5,657 3,446 1,108 3,455
Depreciation and amortization 10,025 6,632 6,900 4,534 1,127 2,891
Merger related costs 994 -- -- -- -- --
--------- -------- -------- -------- -------- --------
Total operating expenses 113,361 71,675 57,641 38,730 10,270 28,126
--------- -------- -------- -------- -------- --------
Operating income 28,996 18,506 15,507 10,033 2,086 5,215
--------- -------- -------- -------- -------- --------
Other income (expense):
Interest expense (17,924) (15,056) (12,160) (7,930) (2,370) (5,354)
Interest income 4,092 2,675 434 329 49 203
Other (162) (1) 788 919 (1,013) 98
--------- -------- -------- -------- -------- --------
Other expense, net (13,994) (12,382) (10,938) (6,682) (3,334) (5,053)
--------- -------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes, extraordinary item and
cumulative effect of change in
accounting principle 15,002 6,124 4,569 3,351 (1,248) 162
Income taxes 5,652 4,435 (920) 55 20 --
--------- -------- -------- -------- -------- --------
Income (loss) from continuing operations
before extraordinary item and cumulative
effect of Change in accounting principle 9,350 1,689 5,489 3,296 (1,268) 162
Discontinued operations, net of tax:
Income (loss) from home health operations (1,244) (155) 44 -- -- --
Write-off of home health assets (902) -- -- -- -- --
--------- -------- -------- -------- -------- --------
Income before extraordinary item and
cumulative effect of change in accounting
principle 7,204 1,534 5,533 3,296 (1,268) 162
Extraordinary item, net of tax -- (6,334) (2,335) -- -- --
Cumulative effect of change in accounting for
start-up costs, net of tax (304) -- -- -- -- --
--------- -------- -------- -------- -------- --------
Net income (loss) 6,900 (4,800) 3,198 3,296 (1,268) 162
Preferred return on special redeemable
preferred limited partnership interests -- -- (1,104) (1,125) -- --
--------- -------- -------- -------- -------- --------
Net income (loss) available for distribution
to partners and shareholders $ 6,900 $ (4,800) $ 2,094 $ 2,171 $ (1,268) $ 162
========= ======== ======== ======== ======== ========
Distribution to partners, excluding preferred
distributions $ -- $ 2,500 $ 6,035 $ 4,064 $ 1,400 $ 2,580
========= ======== ======== ======== ======== ========
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
Consolidated
--------------------------------------
Predecessor
-----------
Years Ended December 31,
--------------------------------------
1998 1997 1996
---- -------- ------
(in thousands, except per share data)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Pro forma earnings data:
Income from continuing operations before income taxes
and extraordinary item $ 6,124 $4,569
Pro forma income tax expense 2,210 1,644
-------- ------
Pro forma income from continuing operations
before extraordinary item 3,914 2,925
Income (loss) from home health operations, net of pro forma tax (155) 27
-------- ------
Pro forma income before extraordinary item 3,759 2,952
Preferred return on special redeemable preferred
limited partnership interests $ -- $1,104
-------- ------
Pro forma income before extraordinary item available
for distribution to partners and shareholders $ 3,759 $1,848
======== ======
EARNINGS PER SHARE:
Basic earnings per share from continuing operations before
extraordinary item and cumulative effect of change in
accounting principle $ 0.67
======
Basic earnings per share $ 0.49
======
Pro forma basic earnings per share before extraordinary item
available for distribution to partners and shareholders $ 0.36 $ 0.20
======== ======
Weighted average shares outstanding 13,947 10,577 9,375
====== ======== ======
Diluted earnings per share from continuing operations before extraordinary item
and cumulative effect of change in accounting principle $ 0.66
======
Diluted earnings per share $ 0.49
======
Pro forma diluted earnings per share before extraordinary item
available for distribution to partners and shareholders $ 0.35 $ 0.20
======== ======
Weighted average shares outstanding 14,074 10,675 9,375
====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
Consolidated Combined
----------------------------------- -----------------------
Predecessor Predecessor Entities
----------- -----------------------
At December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- --------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 20,400 $ 44,583 $ 3,222 $ 3,825 $ 2,894
Working capital (deficit) 25,804 47,744 (14,289) (1,048) 3,168
Land, buildings and equipment, net 391,468 229,898 213,124 149,082 95,399
Total assets 595,854 317,154 228,162 165,579 111,425
Long-term debt, including current portion 300,667 237,354 170,689 102,245 89,414
Refundable portion of life estate fees 48,805 -- -- -- --
Partners' and shareholders' equity 145,842 53,918 37,882 51,823 12,823
</TABLE>
23
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a national senior living and health care services
provider offering a broad range of care and services to seniors within a
residential setting. The Company currently operates 40 senior living communities
in 15 states with an aggregate capacity for approximately 12,100 residents. The
Company currently owns 19 communities, leases eight communities pursuant to
long-term leases, and manages 13 communities pursuant to management agreements.
At December 31, 1998, the Company's owned communities had a stabilized occupancy
rate of 95%, its leased communities had a stabilized occupancy rate of 93%, and
its managed communities had a stabilized occupancy rate of 92%.
Effective July 1, 1998, the Company acquired privately-held Freedom
Group Inc. ("FGI") and certain entities affiliated with FGI and with its
chairman. The acquisition resulted in the ownership of three CCRCs and
management of four additional CCRCs. The Company also acquired options to
purchase two of the managed CCRCs. Additionally, the Company entered into a
development and management contract for, and acquired an option to purchase, one
additional CCRC currently under development. The aggregate resident capacity for
the owned and managed communities included in this transaction was approximately
3,700. The development project will add capacity for approximately 400
residents. The consideration paid at closing was approximately $43.0 million,
including $23.2 million of cash and 1,370,000 shares of the Company's common
stock valued at $19.8 million. The Company paid an additional $4.0 million for
the purchase options and $1.5 million as consideration for entering into the two
management contracts. The transaction was accounted for as a purchase.
For the purposes of the following discussion, amounts for the year
ended December 31, 1996 represent the consolidated results of ARCLP and amounts
for the year ended December 31, 1997 represent the sum of the results of
operations of ARCLP for the period from January 1, 1997 through May 28, 1997 and
the results of operations of the Company for the period from May 29, 1997
through December 31, 1997.
The Company is currently developing or constructing 35 senior living
communities with an aggregate capacity for approximately 3,900 residents with an
estimated cost to complete and lease-up of approximately $400.0 million to
$425.0 million. In addition, the Company plans to expand nine of its communities
with an estimated cost to complete and lease-up of approximately $70.0 million.
The nine current expansion projects will add capacity to accommodate
approximately 600 additional residents.
In addition to the development of new free-standing senior living
communities and expansions of existing communities, the Company's growth
strategy also includes the acquisition of senior living communities and the
acquisition or development of other properties or businesses that are
complementary to the Company's operations and growth strategy.
24
<PAGE> 25
RESULTS OF CONTINUING OPERATIONS
The Company's total revenues from continuing operations are comprised
of (i) resident and health care revenues and (ii) management and development
services revenues, which include fees, net of reimbursements, for the
development, marketing, and management of communities owned by third parties.
The Company's resident and health care revenues are derived from four principal
sources: (i) monthly service fees and ancillary revenues from independent living
residents, representing 66.5%, 67.8%, and 69.2% of total revenues for the years
ended December 31, 1998, 1997, and 1996, respectively; (ii) monthly service fees
and ancillary revenues from assisted living residents, representing 15.3%,
13.6%, and 13.1% of total revenues for the years ended December 31, 1998, 1997,
and 1996, respectively; (iii) per diem charges from nursing patients,
representing 15.3%, 18.6%, and 17.7% of total revenues for the years ended
December 31, 1998, 1997, and 1996, respectively; and (iv) the amortization of
entrance fees over each resident's actuarially determined life expectancy,
representing 2.9% of total revenues for the year ended December 31, 1998. The
Company did not have entrance fee amortization in 1997 or 1996. Approximately
95.3%, 93.1%, and 95.4% of the Company's total revenues for the years ended
December 31, 1998, 1997, and 1996, respectively, were attributable to private
pay sources, with the balance attributable to Medicare, including
Medicare-related private co-insurance.
The Company's management agreements are generally for terms of three
to 20 years, but certain of such agreements may be canceled by the owner of the
community, without cause, on three to six months notice. Pursuant to the
management agreements, the Company is generally responsible for providing
management personnel, marketing, nursing, resident care and dietary services,
accounting and data processing services, and other services for these
communities at the owners' expense; and receives a monthly fee for its services
based either on a contractually fixed amount or a percentage of revenues or
income. Two of the Company's management agreements are for communities with
aggregate resident capacity for approximately 1,530 residents and terms of
twenty-years with two ten-year renewals and a purchase option for one of the
communities. The management fee for these two agreements is equal to all revenue
from the communities in excess of operating expenses and certain cash flows. The
Company's existing management agreements expire at various times through June
2018.
The Company's operating expenses are comprised, in general, of (i)
community operating expense, which includes all operating expenses of the
Company's owned or leased communities; (ii) lease expense; (iii) general and
administrative expense, which includes all corporate office overhead; and (iv)
depreciation and amortization expense.
Certain communities provide housing and health care services through
entrance fee agreements with the residents. Under these agreements, residents
pay an entrance fee upon entering into a lifecare contract. The entrance fee
obligates the Company to provide certain levels of future health care services
to the resident for life. The agreement terminates when the unit is VACATED. A
portion of the fee is refundable to the resident or the resident's estate upon
termination of the agreement. The refundable amount is recorded by the Company
as refundable portion of life estate fees, a long-term liability, until
termination of the agreement. The remainder of the fee is recorded as deferred
life estate income and is amortized into revenue using the straight-line method
over the estimated remaining life expectancy of the resident, based
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<PAGE> 26
upon annually adjusted actuarial projections. Additionally, under these
agreements the residents pay a monthly service fee which entitles them to the
use of certain amenities and services. They may also elect to obtain additional
services, which are paid for on a monthly basis or as the services are received.
The Company recognizes these additional fees as revenue on a monthly basis when
earned.
The Company also provides housing to residents at certain communities
under an entrance fee agreement whereby the entrance fee is fully refundable to
the resident or the resident's estate contingent upon the occupation of the unit
by the next resident. The resident also shares in a percentage, typically 50%,
of any appreciation in the entrance fee from the succeeding resident. The
entrance fee is recorded by the Company as refundable portion of life estate
fees and is amortized into revenue using the straight-line method over 40 years,
the life of the buildings. Additionally, under these agreements the residents
pay a monthly service fee, which entitles them to the use of certain amenities
and services. They may also elect to obtain additional services, which are paid
for on a monthly basis or as the services are received. The Company recognizes
these additional fees as revenue on a monthly basis when earned. If a resident
terminates the agreement, they are required to continue to pay their monthly
service fee for the lesser of one year or the date of reoccupation of the unit.
The Company provides development services to owners of senior living
communities. Fees are based upon a percentage of the total construction costs of
the community. Development services revenue is recognized under the
percentage-of-completion method based upon the Company's costs of providing such
services.
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<PAGE> 27
The following table sets forth, for the periods indicated, certain
resident capacity and occupancy data:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
OPERATING DATA:
End of period resident capacity:
Owned 5,150 3,210 3,369
Leased 2,173 1,531 --
Managed 4,572 2,159 2,159
------ ----- -----
Total 11,895 6,900 5,528
====== ===== =====
Average occupancy rate:
Owned 90% 93% 94%
Leased 90% 90% --
Managed 87% 94% 91%
------ ----- -----
Total 89% 93% 92%
====== ===== =====
End of period occupancy rate:
Owned 91% 94% 96%
Leased 90% 93% --
Managed 87% 96% 92%
------ ----- -----
Total 89% 94% 94%
====== ===== =====
Stabilized average occupancy rate:(1)
Owned 94% 97% 94%
Leased 93% 96% --
Managed 94% 96% 95%
------ ----- -----
Total 94% 96% 95%
====== ===== =====
</TABLE>
- ---------------
(1) Includes communities or expansions thereof that have either (i) achieved 95%
occupancy or (ii) been open at least 12 months. In the table above, the
stabilized average occupancy rate for the year ended December 31, 1996 excludes
a large managed community with a capacity for over 240 residents that opened in
August 1995 and continued to stabilize throughout 1996.
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<PAGE> 28
SAME COMMUNITY RESULTS
The following table sets forth certain selected financial and operating
data on a Same Community basis. For purposes of the following discussion, "Same
Community basis" refers to communities that were owned and/or leased by the
Company throughout each of the periods being compared. Same Community operating
results for the comparative periods ended December 31, 1998 and 1997 exclude two
communities at which significant expansions were opened during 1998. These two
communities will return to the Same Community group upon stabilization of the
expansions. Home health operations have also been excluded for all periods
presented.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1998 1997 % CHG 1997 1996 % CHG
------- ------- ------ ------- -------- -----
(dollars in thousands, except other data)
<S> <C> <C> <C> <C> <C> <C>
Resident and health care revenue $75,682 $70,770 6.9% $64,749 $ 60,117 7.7%
Community operating expenses 44,974 42,820 5.0% 40,501 37,934 6.8%
------- ------- ------- -------- -----
Resident income from operations $30,708 $27,950 9.9% $24,248 $ 22,183 9.3%
======= ======= ======= ========
Resident income from operations margin(1) 40.6% 39.5% 37.4% 36.9%
Lease expense $ 1,037 $ 1,037 -- $ 2,209 $ -- n/a
Depreciation and amortization 5,807 5,666 2.5% 4,220 5,329 (20.8)%
------- ------- ------- -------- -----
Income from operations $23,864 $21,247 12.3% $17,819 $ 16,854 5.7%
======= ======= ======= ========
Other data:
Number of communities 10 10 10 10
Resident capacity 3,397 3,397 2,586 2,586
Average occupied units 2,461 2,431 2,215 2,183
Average occupancy rate(2) 96% 95% 96% 95%
Average monthly revenue per occupied unit(3) $ 2,563 $ 2,426 5.6% $ 2,436 $ 2,295 6.2%
Average monthly expense per occupied unit(4) $ 1,523 $ 1,468 3.7% $ 1,524 $ 1,448 5.2%
</TABLE>
- ---------------------
(1) "Resident income from operations margin" represents "Resident income from
operations" as a percentage of "Resident and health care revenue."
(2) "Average occupancy rate" is based on the ratio of occupied apartments to
available apartments expressed on a monthly basis for independent and assisted
living residences, and occupied beds to available beds on a per diem basis for
nursing beds.
(3) "Average monthly revenue per occupied unit" is total "Resident and health
care revenues" divided by "Average occupied units" expressed on a monthly basis.
(4) "Average monthly expense per occupied unit" is total "Community operating
expenses" divided by"Average occupied units", expressed on a monthly basis.
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<PAGE> 29
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
Revenues. Total revenues were $142.4 million in 1998, compared to $90.2
million in 1997, representing an increase of $52.2 million, or 57.9%. Resident
and health care revenues increased by $41.6 million, and management and
development services revenue increased by $10.6 million during the period. Of
the increase in resident and health care revenues, $4.9 million, or 11.8%, of
such increase was attributable to Same Community growth. Approximately $35.1
million, or 84.4%, of the increase was attributable to new senior living
communities leased or acquired, including $16.6 million from FGI communities
acquired in July 1998. The remaining increase of $1.6 million, or 3.8%, was
attributable to increases in resident and health care revenues at the two
communities with large expansions that opened in 1998 that were excluded from
the Same Community group.
Resident and health care revenues attributable to Same Communities
were $75.7 million in 1998, as compared to $70.8 million in 1997, representing
an increase of $4.9 million, or 6.9%. This increase was derived from a 5.6%
increase in average rates and a 1.2% increase in occupied units. Same Community
average occupancy rates increased to 96% for 1998 from 95% in 1997
Of the $10.6 million increase in management and development services
revenue, $3.0 million, or 28.4%, was attributable to revenues from management
fees related to agreements entered into pursuant to the FGI acquisition and $7.6
million, or 71.6%, related to fees earned from development services provided to
third parties.
Community Operating Expense. Community operating expense increased to
$82.7 million in 1998, as compared to $54.9 million in 1997, representing an
increase of $27.8 million, or 50.6%. Of the increase in community operating
expense, $2.2 million, or 7.9%, of the increase was attributable to Same
Community operating expenses, which increased by 5.0% during the period.
Approximately $23.0 million, or 82.7%, was attributable to expenses from new
leased or acquired senior living communities, including $11.1 million from
acquired FGI communities. The remaining increase of $2.6 million, or 9.4%, was
attributable to increases in operating expenses at the two communities with
large expansions that opened in 1998 that were excluded from the Same Community
group.
Community operating expense as a percentage of resident and health care
revenues increased to 63.6% for 1998 from 62.1% for 1997. This increase was
attributable to increased operating expenses at the two communities with 1998
expansion openings and lower operating margins from recently acquired FGI
lifecare communities. Because the FGI lifecare communities are in essence
financed interest-free by up-front resident entrance fees, their monthly service
fee revenues and operating margins are generally lower than those of comparable
rental communities. Same Community operating expenses as a percentage of Same
Community resident and health care revenues decreased to 59.4% in 1998 from
60.5% in 1997.
General and Administrative. General and administrative expense
increased to $10.6 million for 1998, as compared to $6.7 million for 1997,
representing an increase of $3.9 million, or 58.2%. The increase was primarily
related to increases in salaries and benefits including corporate personnel
retained
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<PAGE> 30
as a result of the FGI acquisition and related integration costs. General and
administrative expense as a percentage of total revenues was 7.4% for 1998 and
1997.
Lease Expense. Lease expense increased to $9.1 million for 1998, as
compared to $3.4 million for 1997, representing an increase of $5.7 million. Of
this increase, approximately $2.6 million of the increase related to leases
entered into during 1998 for three senior living communities and the completion
of an expansion at one community and approximately $3.1 million related to
Imperial Plaza, which was leased in October 1997.
Depreciation and Amortization. Depreciation and amortization expense
increased to $10.0 million in 1998 from $6.6 million in 1997. The increase is
primarily related to communities acquired during 1998 and amortization of costs
in excess of assets acquired in the FGI transaction. Same Community depreciation
and amortization expense increased to $5.8 million for 1998, from $5.7 million
for 1997.
Merger Related Expenses. On January 31, 1999, the Company terminated
its previously announced merger agreement with Assisted Living Concepts, Inc.
and recorded a charge to earnings of approximately $1.0 million during the
fourth quarter ended December 31, 1998 for merger related costs.
Other Income (Expense). Interest expense increased to $17.9 million in
1998 from $15.1 million in 1997, representing an increase of $2.8 million, or
19.0%. The increase in interest expense was primarily attributable to the
issuance in September 1997 of the 5 3/4% fixed rate convertible subordinated
debentures due October 2002 (the "Convertible Debentures") and additional
indebtedness incurred in connection with acquisitions, partially offset by the
repayment of certain indebtedness in December 1997. Interest expense, as a
percentage of total revenues, decreased to 12.6% for 1998 from 16.7% in 1997.
This decrease primarily relates to the interest-free up-front resident entrance
fee financing on the FGI communities. Interest income increased to $4.1 million
for 1998 from $2.7 million for 1997, primarily due to income generated from the
investment of public offering proceeds and certificates of deposit associated
with certain leasing transactions and management agreements.
Income Tax Expense. Income tax expense related to continuing operations
in 1998 was $5.7 million, or an effective rate of 37.7%, as compared to $4.4
million in 1997 (including the $3.0 million charge recorded as a result of the
reorganization of ARCLP from a non-taxable limited partnership into the Company,
which is a taxable corporation). Excluding the effect of the $3.0 million
charge, on a pro forma basis assuming the Company was a taxable entity for all
of 1997, income taxes related to continuing operations would have been $2.2
million assuming the Company's effective tax rate of 36%.
Extraordinary Loss. In December 1997, the Company recorded an
extraordinary loss of $6.3 million, net of taxes, related to costs associated
with the prepayment of $65.1 million of indebtedness. The 1997 amount expensed
included yield maintenance fees, the buy-out of the lender's participation
interest in two of the Company's communities, and the write-off of unamortized
financing costs. The Company did not incur any extraordinary losses in 1998.
30
<PAGE> 31
Cumulative Effect of Change in Accounting Principle. The Company
elected early adoption of the AICPA's Statement of Position 98-5, Reporting on
the Costs of Start-Up Activities (the "SOP"). The SOP requires that costs
incurred during start-up activities be expensed as incurred. Initial application
of the SOP is as of the beginning of the fiscal year in which the SOP is first
adopted. Accordingly, in 1998 the Company wrote off $304,000, net of tax, of
unamortized start-up and organizational costs as the cumulative effect of a
change in accounting principle effective January 1, 1998. The Company's
unconsolidated joint ventures also adopted the SOP effective January 1, 1998 and
the effect of such adoption is included in other expense for 1998. The impact of
the adoption, excluding the $304,000 write-off, was not material to 1998
operations.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996
Revenues. Total revenues were $90.2 million in 1997, compared to $73.1
million in 1996, representing an increase of $17.1 million, or 23.4%. Resident
and health care revenues increased by $17.0 million, and management and
development services revenues increased by $26,000 during the period. Of the
increase in resident and health care revenues, $4.6 million, or 27.1%, of such
increase was attributable to Same Community growth and $12.4 million, or 72.9%,
was attributable to revenues from acquired or leased senior living communities.
Resident and health care revenues attributable to Same Communities
were $64.7 million in 1997, as compared to $60.1 million in 1996, representing
an increase of $4.6 million, or 7.7%. This increase was derived from a 6.2%
increase in average rates and a 1.5% increase in occupied units. Same Community
average occupancy rates increased to 96% for 1997 from 95% in 1996.
Community Operating Expense. Community operating expense increased to
$54.9 million in 1997, as compared to $45.1 million in 1996, representing an
increase of $9.8 million, or 21.7%. Of the increase in community operating
expense, $2.6 million, or 26.5%, was attributable to Same Community operating
expenses, which increased by 6.8% during the period, and $7.2 million, or 73.5%,
was attributable to expenses from acquired or leased senior living communities.
Community operating expense as a percentage of resident and health care revenues
decreased to 62.1% for 1997 from 63.1% for 1996. Same Community operating
expenses as a percentage of Same Community resident and health care revenues
declined to 62.6% in 1997 from 63.1% in 1996.
General and Administrative. General and administrative expense
increased to $6.7 million for the year ended December 31, 1997, as compared to
$5.7 million for 1996, representing an increase of $1.0 million, or 17.5%. Of
this increase, approximately $700,000 was related to increases in salaries and
benefits and the remaining increase of approximately $300,000 resulted from
continued investments in infrastructure necessary to support the Company's
growth. General and administrative expense as a percentage of total revenues
decreased to 7.4% for 1997 from 7.7% for 1996.
Lease Expense. The Company incurred lease expense of $3.4 million for
the year ended December 31, 1997, primarily as a result of the sale-leaseback by
the Company of two of its communities in January 1997 (the "Sale-Leaseback
Transaction"), as well as new leases entered into for an assisted living
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<PAGE> 32
residence in May 1997 and a senior living community in October 1997. The Company
did not incur lease expense in 1996.
Depreciation and Amortization. Depreciation and amortization expense
decreased by $270,000 to $6.6 million in 1997 from $6.9 million in 1996.
Reductions in depreciation and amortization resulting from the Sale-Leaseback
Transaction were largely offset by increases relating to acquisitions. Same
Community depreciation and amortization expense decreased to $4.2 million for
the year ended December 31, 1997, from $5.3 million for 1996, as a result of the
Sale-Leaseback Transaction.
Other Income (Expense). Interest expense increased to $15.1 million in
1997 from $12.2 million in 1996, representing an increase of $2.9 million, or
23.8%. The increase in interest expense was primarily attributable to the
issuance in 1997 of $138.0 million of Convertible Debentures and additional
indebtedness incurred in connection with the acquisition of two senior living
communities in May 1996 and the acquisition of two assisted living residences in
May 1997, partially offset by the repayment of certain indebtedness in
connection with the Sale-Leaseback Transaction. Interest expense, as a
percentage of total revenues, increased to 16.7% for 1997 from 16.6% in 1996.
Interest income increased to $2.7 million for 1997 from $434,000 for 1996,
primarily as a result of income generated during 1997 from the investment of net
proceeds of the Company's initial public offering and the issuance of the
Convertible Debentures.
Income Tax Expense. Income tax expense related to continuing operations
in 1997 was $4.4 million (including the $3.0 million charge recorded as a result
of the reorganization of ARCLP from a non-taxable limited partnership into the
Company, a taxable corporation) as compared to income tax benefit of $920,000 in
1996. Excluding the effect of the $3.0 million tax charge, on a pro forma basis
assuming the Company was a taxable entity for all of 1997, income taxes related
to continuing operations would have been $2.2 million assuming the Company's
effective tax rate of 36%. A pro forma adjustment has been reflected to provide
for comparative income taxes as though the Company had been subject to corporate
income taxes in 1996. In 1996, the Predecessor recorded an income tax benefit
and a deferred tax asset of $920,000 because of the anticipated utilization of
net operating loss carryforwards that would offset taxable gains from the
sale-leaseback transaction.
Extraordinary Loss. In December 1997, the Company recorded an
extraordinary loss of $6.3 million, net of taxes, related to costs associated
with the prepayment of $65.1 million of indebtedness. The 1997 amount expensed
included yield maintenance fees, the buy-out of the lender's participation
interest in two of the Company's communities, and the write-off of unamortized
financing costs. In 1996, the Company wrote off $2.3 million of unamortized
financing costs in connection with the refinancing of $62.0 million of mortgage
financing.
DISCONTINUED OPERATIONS
During 1998, the Company suspended operations of certain of its home
health care agencies pending either institution of a prospective pay system
acceptable to the Company, or major revisions to the United States interim
payment system now in effect. During the fourth quarter ended December 31, 1998,
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<PAGE> 33
the Company determined that an acceptable reimbursement system will not be
implemented in the near term and discontinued its home health care operations.
The operating results and cash flows of the home health care division for the
years ended December 31, 1998, 1997, and 1996 have been reclassified to
discontinued operations. The Company recorded losses from home health care
operations, net of tax, of $1.2 million and $155,000 for the years ended
December 31, 1998 and 1997, respectively, and income of $44,000 for the year
ended December 31, 1996. During the fourth quarter ended December 31, 1998, the
Company also recorded an after tax charge of $902,000, or $0.06 per share,
related primarily to the impairment of unamortized costs in excess of net assets
acquired in home health care agency acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its activities with the net
proceeds from public offerings of debt and equity, long-term mortgage
borrowings, and cash flows from operations. At December 31, 1998, the Company
had $300.7 million of indebtedness outstanding, including $138.0 million of
Convertible Debentures and $91.9 million of indebtedness to a capital
corporation, with fixed maturities ranging from October 2000 to April 2028. As
of December 31, 1998, approximately 91.2% of the Company's indebtedness bore
interest at fixed rates, with a weighted average interest rate of 6.8%. The
Company's variable rate indebtedness carried an average rate of 6.6% as of
December 31, 1998. As of December 31, 1998, the Company had working capital of
$25.8 million.
Net cash provided by operating activities was $18.3 million for the
year ended December 31, 1998, as compared with $11.1 million and $11.7 million
for the years ended December 31, 1997 and 1996, respectively. The Company's
unrestricted cash balance was $20.4 million as of December 31, 1998, as compared
to $44.6 and $3.2 million as of December 31, 1997 and 1996, respectively.
Net cash used by investing activities was $151.1 million for the year
ended December 31, 1998, as compared with $22.6 million and $67.6 million,
respectively, for the years ended December 31, 1997 and 1996. During the year
ended December 31, 1998, the Company acquired FGI, including payments for
related purchase options, management contracts and transaction costs, net of
cash acquired, for $37.4 million, made additions to land, buildings, and
equipment, including construction activity, of $31.9 million, advanced
construction funds of $11.1 million to third parties, and increased notes
receivable by $19.7 million and assets limited as to use by $45.0 million,
primarily as a result of certain leasing transactions. Additionally, during the
year ended December 31, 1998, the Company made investments in joint ventures of
$3.1 million and made other investments, primarily purchase options, of $4.7
million.
Net cash provided by financing activities was $108.5 million for the
year ended December 31, 1998, as compared with $52.8 million and $55.3 million,
respectively, for the years ended December 31, 1997 and 1996. The Company had
net proceeds from its July 1998 public equity offering of $64.8 million,
borrowings of $53.7 million under long-term debt arrangements, and made
principal payments on its indebtedness of $12.8 million during the year ended
December 31, 1998. The principal payments primarily related to debt assumed in
the FGI transaction, which was repaid immediately after closing of the FGI
transaction. The Company also received $4.2 million from the sale of life estate
contracts and made principal payments under master trust agreements of $1.7
million.
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<PAGE> 34
In July 1998, the Company entered into a $36.0 million fixed rate first
mortgage secured by one of its senior living communities. The mortgage bears
interest at a fixed rate of 6.87% and matures in July 2008.
The Company maintains a $50.0 million revolving credit facility and a
$4.0 million line of credit secured by certain of the Company's existing
communities, which are available for general use. As of December 31, 1998, $15.0
million was outstanding under the $50.0 million facility and approximately $1.7
million of the $4.0 million line had been used to obtain letters of credit.
Subsequent to December 31, 1998, the Company received a commitment to expand the
$50.0 million revolving credit facility to $70.0 million.
The $50.0 million revolving credit facility contains financial
covenants that require the Company to maintain certain prescribed debt service
coverage, liquidity and capital expenditure reserve levels at certain of its
communities and a financial covenant requiring a minimum net worth level for the
Company. All of the Company's owned communities are subject to mortgages, seven
of which serve as blanket collateral for the indebtedness payable to a capital
corporation and as collateral for the $50.0 million revolving credit facility.
Each of the Company's debt agreements contains restrictive covenants that
generally relate to the use, operation, and disposition of the communities that
serve as collateral for the subject indebtedness, and prohibit the further
encumbrance of such community or communities without the consent of the
applicable lender. The Company does not believe such restrictions are material
to its business because the Company does not intend to further encumber its
owned properties and does not believe the covenants relating to the use,
operation, and disposition of its communities materially limit its operations.
Additionally, substantially all of such indebtedness is cross-defaulted.
The Company entered into a $4.5 million secured term loan and a $6.0
million unsecured acquisition line of credit with a bank subsequent to December
31, 1998. The current balance of the term loan is $4.7 million which matures
December 31, 1999 and is secured by mortgage. The line of credit matures May 1,
2001. The $4.5 million and $6.0 million credit facilities contain restrictive
covenants respecting the Company. The Company is also currently negotiating an
additional $50.0 million acquisition and development line of credit with a bank.
The aggregate estimated cost to complete and lease-up the 35 senior
living communities currently under construction or development is approximately
$400.0 million to $425.0 million. In addition, the Company plans to expand nine
of its communities, which is expected to cost approximately $70.0 million to
complete and lease-up.
The Company expects that its current cash, together with cash flow from
operations and borrowings available to it under existing and aforementioned
pending credit arrangements, will be sufficient to meet its operating
requirements and to fund its anticipated growth for at least the next 12 months.
The Company expects to use a wide variety of financing sources to fund its
future growth, including public and private debt and equity, conventional
mortgage financing, and unsecured bank financing, among other sources. There can
be no assurance that financing from such sources will be
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<PAGE> 35
available in the future or, if available, that such financing will be available
on terms acceptable to the Company.
YEAR 2000
The Company has assessed the impact of Year 2000 issues on the
Company's business, results of operations, and financial condition. The majority
of the Company's critical information systems were purchased from outside
vendors who have upgraded their applications to be Year 2000 compliant. The
Company anticipates substantially completing the testing of its information
systems by the second quarter of 1999. The Company is also evaluating other Year
2000 implications associated with its community operations, such as elevators,
security systems, HVAC systems, utilities and other major services or supplies.
The Company anticipates substantially completing the remediation of such systems
and services by the second quarter of 1999.
The potential impact of Year 2000 issues is also dependent upon
corrective measures taken by the businesses and other entities that the Company
deems critical to its operations. Communication with significant third parties
has been initiated to determine the status of their Year 2000 compliance;
however, it is not possible, at present, to determine the effect on the Company
if third party remediation efforts are not completed in a timely manner.
While the Company expects to adequately resolve all Year 2000 issues,
a "reasonably likely worst case" scenario could include supplier disruption and
potential delay in reimbursement from certain agencies. The Company intends to
address the possible consequences of these issues through community-specific
supplier contingency plans and a prudent level of liquidity.
The Company is unable to quantify the potential effect of Year 2000
issues on its results of operations, liquidity, and financial position. The
total cost of compliance measures is not estimated to be material and is being
funded through operating cash flows and expensed as incurred.
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company.
Inflation could, however, affect the Company's future revenues and results of
operations because of, among other things, the Company's dependence on senior
residents, many of whom rely primarily on fixed incomes to pay for the Company's
services. As a result, during inflationary periods, the Company may not be able
to increase resident service fees to account fully for increased operating
expenses. In structuring its fees, the Company attempts to anticipate inflation
levels, but there can be no assurance that the Company will be able to
anticipate fully or otherwise respond to any future inflationary pressures.
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
This report and the letter accompanying it contain certain
forward-looking statements within the meaning of the federal securities laws,
which are intended to be covered by the safe harbors created
35
<PAGE> 36
thereby. Those statements include, but may not be limited to, the discussions
of the Company's business and operating and growth strategies, including its
development and acquisition plans. Investors are cautioned that all
forward-looking statements involve risks and uncertainties. These risks include
the risks discussed in "Business -- Risk Factors" in this report. Although the
Company believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could prove to be
inaccurate, and therefore, there can be no assurance that the forward-looking
statements included in this report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved. The Company undertakes no obligation to
publicly release any revisions to any forward-looking statements contained
herein to reflect events and circumstances occurring after the date hereof or to
reflect the occurrence of unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Disclosure About Interest Rate Risk: The Company is subject to market
risk from exposure to changes in interest rates based on its financing,
investing, and cash management activities. The Company utilizes a balanced mix
of debt maturities along with both fixed-rate and variable-rate debt to manage
its exposures to changes in interest rates. (See Note 8 to the Consolidated
Financial Statements and Management's Discussion and Analysis - Liquidity and
Capital Resources appearing elsewhere in this Form 10-K.) The Company does not
expect changes in interest rates to have a material effect on income or cash
flows in fiscal 1999, although there can be no assurances that interest rates
will not significantly change.
36
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements 37
Independent Auditors' Report 38
Consolidated Balance Sheets --- December 31, 1998 and 1997 39
Consolidated Statements of Operations --- Years ended December 31,
1998, 1997 and 1996 40
Consolidated Statements of Changes in Partners'/Shareholders' Equity
--- Years ended December 31, 1998, 1997 and 1996 42
Consolidated Statements of Cash Flows --- Years ended December 31,
1998, 1997 and 1996 43
Notes to Consolidated Financial Statements 45
37
<PAGE> 38
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Retirement Corporation:
We have audited the accompanying consolidated balance sheets of
American Retirement Corporation and subsidiaries as of December 31,
1998 and 1997 and the related consolidated statements of operations,
changes in partners'/shareholders' equity, and cash flows for the years
ended December 31, 1998 and 1997 and the related consolidated
statements of operations, changes in partners'/shareholders' equity and
cash flows of American Retirement Communities, L.P. and its
consolidated entities (the Predecessor) for the year ended December 31,
1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
American Retirement Corporation and subsidiaries as of December 31,
1998 and 1997 and the results of their operations and their cash flows
for the years then ended, and the results of operations and cash flows
of American Retirement Communities, L.P. and its consolidated entities
for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for costs of start-up
activities to adopt the provisions of Statement of Position No. 98-5,
Reporting on the Costs of Start-up Activities, effective January 1,
1998.
KPMG LLP
Nashville, Tennessee
February 17, 1999
38
<PAGE> 39
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31
-----------------------
1998 1997
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,400 $ 44,583
Assets limited as to use 4,747 2,654
Accounts receivable, net 11,158 6,178
Advances for development projects 11,136 --
Inventory 826 483
Prepaid expenses 1,627 1,052
Deferred income taxes 1,580 4,332
Other current assets 2,972 1,003
-------- ---------
Total current assets 54,446 60,285
Assets limited as to use, excluding amounts classified as current 58,035 7,332
Land, buildings and equipment, net 391,468 229,898
Notes receivable 19,731 --
Marketable securities -- 52
Costs in excess of net assets acquired, net 37,790 1,656
Other assets 34,384 17,931
-------- ---------
Total assets $595,854 $ 317,154
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,426 $ 316
Accounts payable 6,543 2,429
Accrued expenses 15,376 9,796
Other current liabilities 5,297 --
-------- ---------
Total current liabilities 28,642 12,541
Long-term debt, excluding current portion 161,261 99,038
Convertible subordinated debentures 137,980 138,000
Refundable portion of life estate fees 48,805 --
Deferred life estate income 43,715 --
Tenant deposits 6,865 5,290
Deferred gain on sale-leaseback transactions 3,620 4,073
Deferred income taxes 16,631 3,689
Other liabilities 2,493 605
-------- ---------
Total liabilities 450,012 263,236
Shareholders' equity
Preferred stock, no par value; 5,000,000 shares authorized, no shares issued
or outstanding -- --
Common stock, $.01 par value; 50,000,000 shares authorized, 17,118,385
and 11,420,860 shares issued and outstanding, respectively 171 114
Additional paid-in capital 145,170 60,203
Retained earnings (accumulated deficit) 501 (6,399)
-------- ---------
Total shareholders' equity 145,842 53,918
-------- ---------
Total liabilities and shareholders' equity $595,854 $ 317,154
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 40
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Predecessor
---------------
Years ended December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Revenues:
Resident and health care $ 130,036 $ 88,416 $ 71,409
Management and development services 12,321 1,765 1,739
-------------------------------------------
Total revenues 142,357 90,181 73,148
Operating expenses:
Community operating expense 82,698 54,921 45,084
Lease expense, net 9,063 3,405 --
General and administrative 10,581 6,717 5,657
Depreciation and amortization 10,025 6,632 6,900
Merger related costs 994 -- --
-------------------------------------------
Total operating expenses 113,361 71,675 57,641
-------------------------------------------
Operating income 28,996 18,506 15,507
Other income (expense):
Interest expense (17,924) (15,056) (12,160)
Interest income 4,092 2,675 434
Other (162) (1) 788
-------------------------------------------
Other expense, net (13,994) (12,382) (10,938)
Income from continuing operations before income taxes, extraordinary item
and cumulative effect of change in accounting principle 15,002 6,124 4,569
Income taxes 5,652 4,435 (920)
-------------------------------------------
Income from continuing operations before extraordinary item and cumulative
effect of change in accounting principle 9,350 1,689 5,489
Discontinued operations
Income (loss) from home health operations, net of tax (1,244) (155) 44
Write-off of home health assets, net of tax (902) -- --
-------------------------------------------
Income before extraordinary item and cumulative effect of change
in accounting principal 7,204 1,534 5,533
Extraordinary item - loss on extinguishment of debt, net of tax -- 6,334 2,335
Cumulative effect of change in accounting for start-up costs, net of tax (304) -- --
-------------------------------------------
Net income (loss) $ 6,900 $ (4,800) $ 3,198
===========================================
Preferred return on special redeemable preferred limited partnership interests -- -- 1,104
-------------------------------------------
Net income (loss) available for distribution to partners and shareholders $ 6,900 $ (4,800) $ 2,094
===========================================
Pro forma earnings data:
Income from continuing operations before income taxes and extraordinary item $ 6,124 $ 4,569
Pro forma income tax expense 2,210 1,644
-----------------------------
Pro forma income from continuing operations before extraordinary item 3,914 2,925
Income (loss) from discontinued operations, net of pro forma tax (155) 27
-----------------------------
Pro forma income before extraordinary item 3,759 2,952
Preferred return on special redeemable preferred limited partnership interests -- 1,104
-----------------------------
Pro forma income before extraordinary item available for distribution to partners
and shareholders $ 3,759 $ 1,848
=============================
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 41
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
(in thousands, except per share data)
<TABLE>
<CAPTION>
Predecessor
---------------
Years ended December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Basic earnings per share:
Basic earnings per share from continuing operations before extraordinary item and
cumulative effect of change in accounting principle $ 0.67
Loss from home health operations, net of tax (0.09)
Write-off of home health assets, net of tax (0.06)
Cumulative effect of change in accounting principle, net of tax (0.02)
--------------
Basic earnings per share $ 0.49
==============
Diluted earnings per share:
Diluted earnings per share from continuing operations before extraordinary item $ 0.66
Loss from home health operations, net of tax (0.09)
Write-off of home health assets, net of tax (0.06)
Cumulative effect of change in accounting principle, net of tax (0.02)
--------------
Diluted earnings per share $ 0.49
==============
Pro forma basic earnings per share:
Pro forma basic earnings per share from continuing operations before extraordinary item $ 0.37 $ 0.31
Loss from home health operations, net of tax (0.01) --
Preferred return on special redeemable preferred limited partnership interests -- 0.12
-----------------------------
Pro forma basic earnings per share before extraordinary item available for
distribution to partners and shareholders $ 0.36 $ 0.20
=============================
Pro forma diluted earnings per share:
Pro forma diluted earnings per share from continuing operations before extraordinary item $ 0.37 $ 0.31
Loss from home health operations, net of tax (0.01) --
Preferred return on special redeemable preferred limited partnership interests -- 0.12
-------------------------------
Pro forma diluted earnings per share before extraordinary item available for
distribution to partners and shareholders $ 0.35 $ 0.20
===============================
Weighted average shares used for basic earnings per share data 13,947 10,577 9,375
Effect of dilutive common stock options 127 98 --
-------------------------------------------
Weighted average shares used for diluted earnings per share data 14,074 10,675 9,375
===========================================
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 42
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS'/SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Special
General Redeemable
and Preferred Retained
Limited Limited Common Stock Additional Earnings
Partners' Partnership ------------------ Paid-In (Accumulated
Interests Interests Shares Amount Capital Deficit) Total
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 41,823 $ 10,000 -- $ -- $ -- $ -- $ 51,823
Net income 2,094 1,104 3,198
Redemption of preferred partnership interests (10,000) (10,000)
Distribution to partners (6,035) (1,104) (7,139)
---------------------------------------------------------------------------------
Balance at December 31, 1996 37,882 -- -- -- -- -- 37,882
Net income (loss) 1,599 (6,399) (4,800)
Distribution to partners (2,500) (2,500)
Reorganization Note (21,875) (21,875)
Transfer of partnership equity for shares of
common stock (15,106) 7,812,500 78 15,028 --
Net proceeds from initial public offering 3,593,750 36 44,954 44,990
Issuance of common stock pursuant to employee
stock purchase plan 14,610 221 221
---------------------------------------------------------------------------------
Balance at December 31, 1997 -- -- 11,420,860 114 60,203 (6,399) 53,918
Net income 6,900 6,900
Conversion of subordinated debentures 832 20 20
Issuance of common stock in FGI Transaction 1,370,000 14 19,765 19,779
Net proceeds from public offering 4,297,500 43 64,762 64,805
Issuance of common stock pursuant to employee
stock purchase plan 16,190 235 235
Issuance of common stock pursuant to stock options
exercised 13,003 185 185
---------------------------------------------------------------------------------
Balance at December 31, 1998 $ -- $ -- 17,118,385 $ 171 $145,170 $ 501 $145,842
=================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE> 43
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Predecessor
-----------
Years ended December 31,
--------------------------------------
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 6,900 $ (4,800) $ 3,198
(Income) loss from discontinued operations, net of tax 1,244 155 (44)
Write-off of home health assets, net of tax 902 -- --
Cumulative effect of change in accounting principle, net of tax 304 -- --
Extraordinary loss on extinguishment of debt, net of tax -- 6,334 2,335
--------------------------------------
Income from continuing operations 9,350 1,689 5,489
Adjustments to reconcile net income from continuing operations to net
cash and cash equivalents provided by continuing operations:
Depreciation and amortization 10,025 6,632 6,900
Amortization of deferred financing costs 754 193 --
Amortization of deferred entrance fees (2,932) -- --
Deferred income taxes 3,923 4,162 (920)
Amortization of deferred gain on sale-leaseback transactions (453) (341) --
Write-down of value of insurance policies -- -- 66
Gain on sale of assets (80) (35) (874)
Losses from unconsolidated joint ventures 608 -- --
Changes in assets and liabilities, net of effects from
acquisitions:
Increase in accounts receivable (3,642) (2,831) (431)
Increase in inventory (95) (63) (56)
Increase in prepaid expenses (346) (584) (105)
(Increase) decrease in other assets (2,195) (1,956) 521
Increase (decrease) in accounts payable 2,907 (12) (249)
Increase in accrued expenses and other current liabilities 2,135 3,322 1,130
Increase in tenant deposits 496 673 202
Increase (decrease) in other liabilities (172) 371 (27)
--------------------------------------
Net cash and cash equivalents provided by continuing operations 20,283 11,220 11,646
Net cash and cash equivalents provided by (used in) discontinued operations (1,941) (125) 50
--------------------------------------
Net cash and cash equivalents provided by operating activities 18,342 11,095 11,696
Cash flows from investing activities:
Additions to land, buildings and equipment (31,888) (29,307) (8,361)
Expenditures for acquisitions, net of cash received (37,358) (17,489) (63,184)
Advances for development projects (11,136) -- --
Investments in joint ventures (3,143) (1,411) --
Notes receivable (19,731) -- --
Proceeds from (purchases of) assets whose use is limited (44,975) (3,916) 2,578
Purchases of other investments (4,704) (859) --
Proceeds from the maturity of marketable securities 132 -- --
Proceeds from the sale of assets 1,736 30,412 1,346
--------------------------------------
Net cash and cash equivalents used in investing activities (151,067) (22,570) (67,621)
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE> 44
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Predecessor
-----------
Years ended December 31,
--------------------------------------
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from public offerings 64,805 44,990 --
Net proceeds from convertible debenture offering -- 134,220 --
Proceeds from issuance of stock through employee stock purchase plan 235 221 --
Proceeds from exercise of stock options 185 -- --
Repayment of reorganization note -- (21,875) --
Payment of redeemable preferred interests -- (5,195) (4,805)
Distribution to partners -- (4,132) (6,952)
Expenditures for financing costs (77) (333) (1,364)
Costs paid in connection with extinguishment of debt -- (9,534) --
Proceeds from life estate sales 4,161 -- --
Proceeds from the issuance of long-term debt 53,717 14,275 73,922
Principal reductions in master trust liability (1,732) -- --
Principal payments on long-term debt (12,752) (99,801) (5,479)
--------------------------------------
Net cash and cash equivalents provided by financing activities 108,542 52,836 55,322
Net increase (decrease) in cash and cash equivalents (24,183) 41,361 (603)
--------------------------------------
Cash and cash equivalents at beginning of year 44,583 3,222 3,825
--------------------------------------
Cash and cash equivalents at end of year $ 20,400 $ 44,583 $ 3,222
=====================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest (including capitalized
interest) $ 18,359 $ 13,130 $ 11,907
=====================================
Income taxes paid $ 249 $ 86 $ 55
=====================================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
During the respective years, the Company (and Predecessor) acquired certain
communities and entered into certain lease transactions. In conjunction with the
transactions, assets and liabilities were assumed as follows:
<TABLE>
<S> <C> <C> <C>
Current assets $ 7,378 $ 128 $ 497
Costs in excess of net assets acquired 35,938 -- --
Other assets 151,875 12,869 674
Current liabilities 15,471 235 502
Long-term debt 22,368 14,191 --
Other liabilities 74,793 767 --
</TABLE>
During the year ended December 31, 1998, 1,370,000 shares of common stock were
issued as partial consideration in the FGI transaction and 832 shares of common
stock were issued upon the conversion of $20 of convertible subordinated
debentures.
See accompanying notes to consolidated financial statements.
44
<PAGE> 45
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND PRESENTATION
The accompanying financial statements as of and for the years ended December 31,
1998 and 1997 include the consolidated financial statements of American
Retirement Corporation (the Corporation) and its wholly-owned and majority owned
subsidiaries (collectively referred to as the Company). The accompanying
financial statements for the year ended December 31, 1996 include the
consolidated financial statements of American Retirement Communities, L.P.
(ARCLP) and its wholly-owned subsidiaries (collectively referred to as the
Predecessor). All material intercompany transactions and balances have been
eliminated in consolidation.
In February 1997, the Corporation was incorporated for purposes of effecting a
reorganization of ARCLP and to complete an initial public offering (IPO). In the
reorganization, all of ARCLP's assets and liabilities were contributed to the
Corporation in exchange for 7,812,500 shares of common stock and a promissory
note to ARCLP in the original principal amount of $21.9 million. ARCLP's
historical carrying values for assets and liabilities were carried over to the
Corporation upon consummation of the reorganization. As a result of the
conversion from a limited partnership to a corporation, the Corporation recorded
a deferred income tax liability of approximately $3.0 million resulting from the
difference between the accounting and the tax bases of the assets and
liabilities carried over from ARCLP. Such amount is included in the Company's
1997 income tax expense. Immediately prior to the IPO, which was completed on
May 30, 1997, ARCLP distributed its common stock of the Corporation to its
partners. The Corporation sold an additional 3,593,750 shares of its common
stock in the IPO. Total proceeds to the Corporation from the IPO were $45.0
million, after underwriting and issuance costs. A portion of the proceeds was
utilized on June 4, 1997 to repay the $21.9 million promissory note to ARCLP and
ARCLP distributed such amount to its limited partners.
The income taxes on earnings of ARCLP were the responsibility of the partners.
The pro forma adjustments reflected on the consolidated statements of operations
for the years ended December 31, 1997 and 1996 provides for income taxes, at an
effective tax rate of 36%, assuming ARCLP was subject to taxes and excludes the
$3.0 million charge resulting from the difference between the accounting and tax
bases of ARCLP's assets and liabilities at the time of the conversion from a
limited partnership to a taxable corporation. Pro forma earnings per share is
based on the number of shares that would have been outstanding assuming the
partners had been shareholders and is based on the 7,812,500 shares received as
a result of the reorganization plus 1,562,500 shares representing the value of
the $21.9 million promissory note at the IPO price of $14.00 per share.
45
<PAGE> 46
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
The Company principally provides housing, health care, and other related
services to residents through the operation and management of numerous senior
living communities located throughout the United States. The communities provide
a combination of independent living, assisted living and skilled nursing
services. The Company is subject to competition from other senior living
providers within its markets. The following is a summary of significant
accounting policies.
Use of Estimates and Assumptions: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
Recognition of Revenue: The Company provides residents with housing and health
care services through various types of agreements.
The majority of the communities provide housing and health care services through
annually renewable agreements with the residents. Under these agreements, the
residents pay a monthly housing fee, which entitles them to the use of certain
amenities and services. Residents may elect to obtain additional services, which
are paid for on a monthly basis or as the services are received. The Company
recognizes revenues under these agreements on a monthly basis when earned.
Certain communities provide housing and health care services through entrance
fee agreements with the residents. Under these agreements, residents pay a fee
upon entering into a lifecare contract. The fee obligates the Company to provide
certain levels of future health care services to the resident for life. The
agreement terminates when the unit is vacated. A portion of the fee is
refundable to the resident or the resident's estate upon termination of the
agreement. The refundable amount is recorded by the Company as refundable
portion of life estate fees, a long-term liability, until termination of the
agreement. The remainder of the fee is recorded as deferred life estate income
and is amortized into revenue using the straight-line method over the estimated
remaining life expectancy of the resident, based upon annually adjusted
actuarial projections. Additionally, under these agreements the residents pay a
monthly service fee, which entitles them to the use of certain amenities and
services. They may also elect to obtain additional services, which are paid for
on a monthly basis or as the services are received. The Company recognizes these
additional fees as revenue on a monthly basis when earned.
The Company also provides housing to residents at certain communities under an
entrance fee agreement whereby the fee is fully refundable to the resident or
the resident's estate upon the occupation of the unit by the next resident. The
resident also shares in a percentage, typically 50%, of the appreciation in the
entrance fee from the succeeding resident. The entrance fee is recorded by the
Company as refundable portion of life estate fees and is amortized into revenue
using the straight-line method over 40 years, the life of the buildings.
Additionally, under these agreements the residents pay a monthly service fee,
which entitles them to the use of certain amenities and services. They may also
elect to obtain additional
46
<PAGE> 47
services, which are paid for on a monthly basis or as the services are received.
The Company recognizes these additional fees as revenue on a monthly basis when
earned. If a resident terminates the agreement, they are required to continue to
pay their monthly service fee for the lesser of one year or until the date of
reoccupation of the unit.
Resident and health care revenues are reported at the estimated net realizable
amounts from residents, third-party payors, and others for services rendered,
including estimated retroactive adjustments under reimbursement agreements with
third-party payors. Retroactive adjustments are accrued on an estimated basis in
the period the related services are rendered and adjusted in future periods as
final settlements are determined. Resident and health care revenues, primarily
Medicare, subject to retroactive adjustments were 4.7%, 6.9%, and 4.6% of
resident and health care revenues in 1998, 1997, and 1996, respectively.
Management services revenue is recorded monthly as earned and relates to
providing certain management and administrative support services under
management agreements with the owners of senior living communities. Such fees
are based on a percentage of revenues, income or cash flows of the managed
community, or a negotiated fee per the management agreement.
The Company provides development services to owners of senior living
communities. Fees are based upon a percentage of the total construction costs of
the community. Development services revenue is recognized under the
percentage-of-completion method based upon the Company's costs of providing such
services.
Cash and Cash Equivalents: The Company considers highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
Marketable Securities: Marketable securities consist of U.S. Treasury securities
classified as held-to-maturity securities, which are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or discounts.
Assets Limited as to Use: Assets limited as to use include assets held by
lenders under loan agreements in escrow for property taxes and property
improvements, operating reserves required by certain state licensing
authorities, certificates of deposit held as collateral for letters of credit or
in conjunction with leasing activity or to support operating deficit agreements,
and resident deposits.
Inventory: Inventory consists of supplies and is stated at the lower of cost
(first-in, first-out) or market.
Land, Buildings, and Equipment: Land, buildings, and equipment are recorded at
cost and include interest capitalized on long-term construction projects during
the construction period, as well as other costs directly related to the
development and construction of the communities. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the related assets. Buildings and improvements are depreciated over 15 to 40
years, and furniture, fixtures and equipment are depreciated over five to seven
years. Leasehold improvements are amortized over the shorter of their useful
life or remaining lease term. Construction in progress includes costs incurred
related to the
47
<PAGE> 48
development and construction of senior living communities. If a project is
abandoned, any costs previously capitalized are expensed.
Notes Receivable: Notes receivable are recorded at cost, less any related
allowance for impaired notes receivable. Management, considering current
information and events regarding the borrowers' ability to repay their
obligations, considers a note to be impaired when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the note agreement. When a loan is considered to be impaired, the
amount of the impairment is measured based on the present value of expected
future cash flows discounted at the note's effective interest rate. Impairment
losses are included in the allowance for doubtful accounts through a charge to
bad debt expense. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such notes until the principal has been recovered
and are recognized as interest income, thereafter.
Costs in Excess of Net Assets Acquired: Costs in excess of net assets acquired,
is amortized on a straight-line basis over the expected periods to be benefited,
generally 40 years. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability will be impacted if estimated future operating cash flows are not
achieved. Costs in excess of net assets acquired is net of accumulated
amortization of $604,000 and $72,000 at December 31, 1998 and 1997,
respectively. Amortization expense was $532,000 and $72,000 for the years ended
December 31, 1998 and 1997, respectively. There was no amortization of costs in
excess of net assets acquired in 1996.
Other Assets: Other assets consists primarily of security deposits, purchase
options, deferred financing costs (including convertible debenture offering
costs), costs of acquiring lifecare contracts and investments in joint ventures.
Deferred financing costs are being amortized using the straight-line method over
the terms of the related debt agreements. Costs of acquiring initial lifecare
contracts are amortized over the life expectancy of the initial residents of a
lifecare community.
Investments in joint ventures includes the Company's investments in joint
ventures organized to develop senior living communities. The Company is
providing full development services related to, and has entered into management
agreements to manage, the related communities. The Company accounts for its
investments in 20-50% owned joint ventures under the equity method. At December
31, 1998 and 1997, the Company's investment in joint ventures was approximately
$3.9 million and $1.4 million, respectively.
Start-up Costs: On April 3, 1998, the AICPA Accounting Standards Executive
Committee issued Statement of Position (SOP) No. 98-5, Reporting on the Costs of
Start-up Activities. SOP No. 98-5 requires that costs incurred during start-up
activities, including organization costs, be expensed as incurred. SOP No. 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
48
<PAGE> 49
business with a new class of customer or beneficiary; initiating a new process
in an existing facility; or commencing some new operation. Start-up activities
also include activities related to organizing a new entity (costs of such
activities are commonly referred to as organization costs). SOP No. 98-5 is
effective January 1, 1999, however early application is permitted. Initial
application of SOP No. 98-5 must be as of the beginning of the fiscal year in
which it is first adopted, and restatement of previously issued financial
statements is not permitted. Previously capitalized start-up costs must be
written-off upon adoption of SOP No. 98-5.
The Company elected to adopt the provisions of SOP No. 98-5 in 1998.
Accordingly, effective January 1, 1998, the Company recorded a cumulative effect
of the change in accounting for start-up costs of $304,000, net of tax, in the
consolidated statement of operations. Start-up costs subsequent to the adoption
of SOP No. 98-5 are expensed as incurred. The impact of the adoption was not
material to operating results for the year ended December 31, 1998.
Obligation to Provide Future Services: Under the terms of certain lifecare
contracts, the Company is obligated to provide future services to its residents.
The Company calculates the present value of the net cost of future services and
use of facilities annually and compares that amount with the present value of
future resident cash inflows. If the present value of the net cost of future
services and use of facilities exceeds discounted future cash inflows, a
liability will be recorded with a corresponding charge to income. As of December
31, 1998, the Company did not have a liability associated with its obligation to
provide future services and use of facilities.
Income Taxes: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are recorded using enacted tax rates expected to apply to taxable
income in the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Earnings per Share: Basic earnings per share ("EPS") is computed by dividing
income available for distribution to partners and common shareholders
(numerator) by the weighted average number of common shares outstanding
(denominator). The denominator used in computing diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Company. The
effect from assumed conversion of the Company's convertible debentures would
have been anti-dilutive in 1998 and 1997 and was therefore not included in the
computation of diluted EPS.
Stock-Based Compensation: The Company accounts for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. The
Company
49
<PAGE> 50
adopted Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
Fair Value of Financial Instruments: The carrying amount of cash and cash
equivalents approximates fair value because of the short-term nature of these
accounts and because amounts are invested in accounts earning market rates of
interest. The carrying value of assets limited as to use, accounts receivable,
marketable securities, and tenant deposits approximate their fair values because
of the short-term nature of these accounts. The carrying value of notes
receivable approximate their fair value because the notes earn interest at a
variable rate based on LIBOR. The carrying value of debt approximates fair value
as the interest rates approximate the current rates available to the Company.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of: The
Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1,
1996. This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
Comprehensive Income: The Company adopted SFAS No. 130, "Reporting Comprehensive
Income" during the year ended December 31, 1998. The statement establishes
standards for the reporting and display of comprehensive income and its
components. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. During 1998, 1997 and 1996, the Company's only component of
comprehensive income was net income (loss).
Segment Disclosures: During 1998, Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures About Segments of an Enterprise and Related
Information became effective for the Company. SFAS No. 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 requires that a public business enterprise report financial and
descriptive
50
<PAGE> 51
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision-maker in
deciding how to allocate resources and in assessing performance. The Company
operates in one business segment.
Reclassifications: Certain 1997 and 1996 amounts have been reclassified to
conform with the 1998 presentation.
(3) DISCONTINUED OPERATIONS
During 1998, the Company suspended operations of certain of its home health care
agencies pending either institution of prospective pay or major revisions to the
United States interim payment system now in effect. During the fourth quarter
ended December 31, 1998, the Company determined that an acceptable reimbursement
system will not be implemented in the near term and discontinued its home health
care operations. The operating results and cash flows of the home health care
division for the years ended December 31, 1998, 1997, and 1996 have been
reclassified to discontinued operations. The Company recorded losses from home
health operations, net of tax, of $1.2 million and $155,000 for the years ended
December 31, 1998 and 1997, respectively, and income of $44,000 for the year
ended December 31, 1996. Additionally, during the fourth quarter ended December
31, 1998, the Company recognized an after tax charge of $902,000, or $0.06 per
share, related primarily to the impairment of unamortized costs in excess of net
assets acquired in home health care agency acquisitions.
(4) ACQUISITIONS
On July 14, 1998, the Company acquired privately-held Freedom Group, Inc.
("FGI") and certain entities affiliated with FGI and with Robert G. Roskamp,
FGI's Chairman. The acquisition resulted in the ownership of three continuing
care retirement communities ("CCRCs") and the management of four additional
CCRCs. The Company also acquired options to purchase two of the managed CCRCs.
Additionally, the Company entered into a development and management contract
for, and acquired an option to purchase, one additional CCRC currently under
development. The consideration paid at closing was approximately $43.0 million,
including $23.2 million of cash and 1,370,000 shares of the Company's common
stock valued at $19.8 million. The Company paid an additional $4.0 million for
the purchase options and $1.5 million to enter into two of the management
contracts. The transaction was accounted for as a purchase and the consolidated
financial statements include the operations of the acquired entities effective
July 1, 1998. The transaction resulted in costs in excess of net assets acquired
of approximately $35.9 million which is being amortized on a straight-line basis
over forty years.
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<PAGE> 52
The following unaudited condensed consolidated pro forma results of continuing
operations assumes the above referenced acquisition had been consummated as of
the beginning of the periods presented. The 1997 data is before extraordinary
item and also includes the pro forma tax adjustment and pro forma shares
outstanding as described in Note 1.
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997
-------- --------
<S> <C> <C>
Total revenues $159,801 $127,150
Net income $ 6,873 $ 3,864
Diluted earnings per share $ 0.47 $ 0.32
Weighted average diluted shares 14,747 12,045
</TABLE>
In May 1997, the Company acquired senior living communities in Tarpon Springs,
Florida and Corpus Christi, Texas. In December 1997, the Company acquired a
senior living community in Charlotte, North Carolina. The aggregate
consideration for these transactions was approximately $19.9 million,
approximately $14.3 million of which was financed through mortgage loans and the
remaining $5.6 million was paid in cash. The transactions were accounted for as
purchases and the purchase price was allocated to land, buildings, and
equipment. The operations of these communities were included in the earnings of
the Company from the date of their acquisitions. The 1997 acquisitions did not
meet the requirements for presentation of pro forma operating results.
(5) NOTES RECEIVABLE
The Company finances the cost of certain retirement communities owned by others
that are leased or managed by the Company. The notes receivable generally earn
interest at variable rates based on 200 basis points in excess of the 30 day
LIBOR rate, which is recalculated monthly. Interest and principal are due
monthly based on a 25 year amortization. The notes receivable mature from March
2005 through December 2005 and are secured by the related retirement
communities. None of the notes receivable were impaired at December 31, 1998.
(6) LAND, BUILDINGS, AND EQUIPMENT
A summary of land, buildings, and equipment is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Land $ 63,262 $ 37,584
Buildings and improvements 320,109 183,920
Furniture, fixtures, and equipment 21,518 12,320
Leasehold improvements 515 240
-------- --------
405,404 234,064
Less accumulated depreciation and amortization 27,625 18,648
-------- --------
377,779 215,416
Construction in progress 13,689 14,482
-------- --------
Total $391,468 $229,898
======== ========
</TABLE>
52
<PAGE> 53
The Company capitalized $1.5 million and $554,000 of interest costs during 1998
and 1997, respectively. No interest was capitalized in 1996.
Depreciation expense was $9.1 million, $6.3 million and $6.9 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
In January 1997, ARCLP entered into sale-leaseback transactions with a third
party for the land, buildings, and equipment of two senior living communities.
The net cash proceeds to ARCLP from the sale of the communities were $27.5
million. The proceeds from the sale were used to retire debt totaling $14.6
million and to fund the redemption of redeemable preferred limited partnership
interests of $5.2 million. ARCLP entered into a ten-year operating lease for the
communities. Lease payments consist of base rent aggregating $2.5 million per
year and additional rent based upon an increase in revenues from the leased
communities not to exceed 2.5% of the prior year's rent. The leases contain
three separate ten-year renewal options. ARCLP realized a gain on the sale of
these communities of $4.6 million, which was deferred and is being amortized
against rent expense on a straight-line basis over the lease term.
(7) OTHER ASSETS
Other assets at December 31, 1998 and 1997 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Security deposits $ 6,306 $ 6,093
Purchase options 11,600 4,600
Costs of acquiring lifecare contracts, net 3,466 --
Deferred lifecare fee receivable 3,467 --
Deferred financing costs, net of accumulated amortization 3,736 4,395
Investments in joint ventures 3,946 1,411
Other 1,863 1,432
------- -------
Total $34,384 $17,931
======= =======
</TABLE>
(8) LONG-TERM DEBT
A summary of long-term debt is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Lexington-Fayette Urban County Government Residential Facilities Revenue Bonds
refinanced May 1, 1987, collateralized by mortgage liens on certain property and
equipment. The refinancing bond issue is remarketed to set the coupon rate on
April 1 of each year (3.9% for the year ended March 31, 1999) until the bonds
mature on April 1, 2015. Interest is due semi-annually on April 1 and October 1 $ 8,010 $ 8,010
</TABLE>
53
<PAGE> 54
<TABLE>
<S> <C> <C>
Mortgage note payable bearing interest at a fixed rate of 8.2%. Interest is due
monthly with principal payments due monthly in varying amounts with remaining
principal and unpaid interest due at maturity on December 31, 2002. The loan is
secured by certain land, buildings, equipment, and assignment of rents and leases. 62,330 62,330
Mortgage note payable bearing interest at a fixed rate of 8.2%. Interest is due
monthly with principal payments of $20,000 per month with remaining principal
and unpaid interest due at maturity on December 31, 2001. The loan is secured by
certain land, buildings, equipment, and assignment of rents and leases. 14,540 14,780
Mortgage note payable bearing interest at a fixed rate of 9.25%. Principal and
interest of $49,467 due monthly through April 1, 2028. The loan is secured by
certain land, buildings, equipment, and assignment of rents and leases. 5,987 6,025
Mortgage note payable bearing interest at a floating rate equal
to two hundred seventy-five basis points in excess of the ninety-day LIBOR rate
recalculated on the third monthly payment date (8.25% at December 31, 1998)
Principal and interest of $28,597 is due monthly with remaining principal and
unpaid interest due on May 9, 2002. The note is secured by certain land,
buildings, equipment, and assignment of rents and leases. 3,430 3,477
Mortgage note payable bearing interest at a fixed rate of 9.95%. Interest is due
monthly with principal due at maturity on May 31, 2007. The loan is secured by
certain land, buildings, equipment, and assignment of rents and leases. 4,700 4,700
Mortgage note payable bearing interest at a fixed rate of 6.87%. Principal and
interest of $262,747 is due monthly with remaining principal and unpaid interest
due on July 31, 2008. The note is secured by certain land, buildings, equipment,
and assignment of rents and leases. 35,892 --
Revolving line of credit in the amount of $50.0 million bearing interest at the
rate of LIBOR plus 175 basis points, or 7.0% at December 31, 1998. Interest only
is paid monthly and the loan matures on December 31, 2002. 15,000 --
</TABLE>
54
<PAGE> 55
<TABLE>
<S> <C> <C>
Mortgage note payable bearing interest at a fixed rate of 8.00%. Principal and
interest of $66,798 is due monthly with remaining principal and unpaid interest
due on July 10, 2021. The note is secured by certain land, buildings, equipment,
and assignment of rents and leases. 8,365 --
Mortgage note payable bearing interest at a fixed rate of 8.65%. Principal and
interest of $19,949 is due monthly with remaining principal and unpaid interest
due on December 24, 2002. The note is secured by certain land, buildings,
equipment, and assignment of rents and leases. 1,638 --
Convertible debentures bearing interest at a fixed rate of 5.75%
Interest is due semi-annually on April 1 and October 1 through October 1, 2002. 137,980 138,000
Other long-term debt, generally payable monthly 2,795 32
-------- --------
Total long-term debt 300,667 237,354
Less current portion of long-term debt 1,426 316
-------- --------
Long-term debt, excluding current portion $299,242 $237,038
======== ========
</TABLE>
The aggregate scheduled maturities of long-term debt at December 31, 1998 were
as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 1,426
2000 3,165
2001 14,859
2002 219,337
2003 1,882
Thereafter 59,998
--------
$300,667
========
</TABLE>
During 1997, the Company issued $138.0 million of 5 3/4% fixed rate convertible
subordinated debentures due October 2002 in a public offering. The debentures
are non-callable for three years and are convertible at any time by the holders
into shares of the Company's common stock at a conversion price of $24.00 per
share. The Company received proceeds of $134.2 million, net of offering costs,
from the issuance of the debentures. The offering costs were capitalized as
deferred financing costs and are being amortized using the straight-line method
over the term of the debentures. During 1998, debentures totaling $20,000 were
converted into 832 shares of common stock.
During the fourth quarter of 1997, the Company refinanced its mortgage notes
with a capital corporation by prepaying a $65.1 million note and refinancing a
$62.3 million term loan. The notes were restructured with a $112.3 million
credit facility from the capital corporation, of which $62.3 million is a new
term loan bearing interest at a fixed rate of 8.2% and $50.0 million is a new
revolving line of credit bearing interest
55
<PAGE> 56
at a variable rate of 1.75% over the lender's composite commercial paper rate,
both maturing on December 31, 2002. In conjunction with the prepayment, the
Company was required to pay $9.5 million for the buyout of the capital
corporation's participation rights to future earnings of two of the Company's
senior living communities and a prepayment penalty. The Company recognized an
extraordinary after-tax charge of $6.3 million, or $.60 per share, for the
prepayment penalty, participating rights buyout, and the write-off of
unamortized deferred financing costs related to the previous notes. At December
31, 1998, $35.0 million of the revolving line of credit was available to provide
working capital and for the construction or acquisition of additional senior
living communities.
In 1996, ARCLP refinanced two of its notes held with a capital corporation. The
debt was in the form of two notes, one for $38.5 million and one for $23.5
million, both of which had a variable interest rate of 4.5% above the lender's
composite commercial paper rate. The maturity date of both notes was October 31,
2001. The refinancing combined the two notes into a single $62.5 million loan
bearing interest at a fixed rate of 8.2%. The maturity of the loan is December
31, 2002. In conjunction with the refinancing, ARCLP wrote off unamortized
deferred financing costs related to the previous notes of $2.3 million. This
write-off was recorded as an extraordinary loss in 1996.
The Company is required to comply with certain restrictive financial and other
covenants. Under the terms of various long-term debt agreements, the Company is
required to maintain certain deposits with trustees. Such deposits are included
in "assets limited as to use" in the financial statements.
(9) REFUNDABLE ENTRANCE FEES AND DEFERRED LIFE ESTATE INCOME
Under certain of the Company's residency and health care agreements for its
lifecare communities recently acquired pursuant to the FGI transaction,
residents entered into a Master Trust Agreement whereby amounts were paid by the
resident into a trust account. These funds were then made available to the
related communities in the form of a non-interest bearing loan to provide
permanent financing for the related communities and are collateralized by such
land, buildings and equipment. As of December 31, 1998, the remaining obligation
under the Master Trust Agreements is $51.4 million and is payable monthly based
on a 40-year amortization of each residents' balance. The current installment
due in 1999, and annually for the subsequent five-year period, is approximately
$1.5 million. 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 a payment of the remaining loan balance from the trust and pays
a lifecare fee to the community based on a formula in the residency and health
care agreement, not to exceed a specified percentage of the resident's original
amount paid to the trust. This lifecare fee is amortized by the Company into
revenue on a straight-line basis 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 resident and health care revenue in the
consolidated statement of operations. The Company reports the long-term
obligation under the Master Trust Agreements as a refundable portion of life
estate fees and deferred life estate income based on the
56
<PAGE> 57
applicable residency agreements. The obligation to the Master Trust is
classified as follows at December 31, 1998.
<TABLE>
<CAPTION>
Other Residency
Master Trust Agreements Total
------------ ---------- -------
<S> <C> <C> <C>
Other current liabilities $ 1,479 $ -- $ 1,479
Refundable portion of life estate fees 24,307 24,498 48,805
Deferred life estate income 25,641 18,074 43,715
------- ------- -------
$51,427 $42,572 $93,999
======= ======= =======
</TABLE>
(10) PARTNERS'/SHAREHOLDERS' EQUITY
As discussed in Note 1, in connection with a 1995 roll-up transaction, the
shareholders of a predecessor corporation and the partners in various
partnerships exchanged their common stock or partnership interests for limited
partnership interests in ARCLP. Additionally, holders of $10.0 million of notes
payable from an affiliated limited partnership exchanged these notes for special
redeemable preferred limited partnership interests in ARCLP. Such preferred
interests were entitled to a cumulative 15% preferred distribution. The
preferred interests were redeemable, in whole or in part, at the option of
ARCLP. During 1996, ARCLP redeemed $4.8 million of the preferred limited
interests, and on December 4, 1996, ARCLP approved the redemption of the
remaining $5.2 million. Accordingly, the $5.2 million was removed from equity
and recorded as redemption payable at December 31, 1996. It was redeemed in
January 1997. ARCLP distributed $2.5 million and $7.1 million in 1997 and 1996,
respectively, including $1.1 million of preferred distributions during 1996.
ARCLP was reorganized concurrent with the IPO.
On August 4, 1998, the Company completed a public offering of 4,500,000 shares
of common stock, of which 4,297,500 were sold by the Company and 202,500 shares
were sold by certain selling shareholders. Net proceeds to the Company were
approximately $64.8 million, net of underwriting and issuance costs.
The Company is authorized to establish and issue, from time to time, up to 5
million shares of no par value preferred stock, in one or more series, with such
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), redemption price or
prices, and liquidation preference as authorized by the Board of Directors. At
December 31, 1998, no preferred shares have been issued.
On November 18, 1998, the Board of Directors of the Company declared a
distribution of one stock purchase right (ARC Right) for each outstanding share
of the Company's common stock, to shareholders of record at the close of
business on December 7, 1998 and for each share of the Company's common stock
issued thereafter. Each ARC Right entitles the holder, subject to the terms of
the Rights Agreement, to purchase from the Company, one one-hundredth of a share
(Unit) of ARC Series A Preferred Stock at a purchase price of $86.25 per Unit,
subject to adjustment. The ARC Rights may cause substantial dilution to a person
or group that attempts to acquire the Company on terms not approved by a
majority of the Board of Directors. Thus, the ARC Rights are intended to
encourage persons who may seek to acquire control of the Company to initiate
such an acquisition through negotiations with the Company's Board of Directors.
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<PAGE> 58
The ARC Rights attach to all certificates representing outstanding shares of
Company common stock and no separate ARC Rights certificates will be
distributed. The ARC Rights will separate from the common stock, and will be
distributed, if certain persons acquire, obtain the right to acquire, or
otherwise obtain beneficial ownership of 15% or more of the outstanding shares
of the Company's common stock. If distributed, each holder of an ARC Right will
thereafter have the right to receive, upon exercise, shares of Company common
stock (or, in certain circumstances at the discretion of the Board of Directors,
assets of the Company) having a value equal to two times the exercise price of
the ARC Right.
The ARC Rights are not exercisable until distributed and will expire at the
close of business on November 18, 2008, unless earlier redeemed by the Company.
The Board of Directors may redeem the ARC Rights in whole, but not in part, at a
price of $.001 per ARC Right, payable, at the election of the Board of
Directors, in cash or shares of Company common stock. Until an ARC Right is
exercised, the holder will have no rights as a shareholder.
A total of 2,000,000 shares of ARC Series A Preferred Stock have been reserved
for issuance upon exercise of the ARC Rights, subject to adjustment. The Units
of ARC Series A Preferred Stock that may be acquired upon exercise of the ARC
Rights will be nonredeemable and subordinate to any other shares of preferred
stock that may be issued by the Company.
(11) STOCK-BASED COMPENSATION
Stock Option Plan
In 1997, the Company adopted a stock incentive plan (the "1997 Plan") providing
for the grant of stock options, stock appreciation rights, restricted stock,
and/or other stock-based awards. Pursuant to the 1997 Plan, 1,707,375 shares of
common stock have been reserved and are available for issuance. The option
exercise price and vesting provisions of such options are fixed when the option
is granted. The options generally expire ten years from the date of grant and
vest over a three-year period. The option exercise price is generally not less
than the fair market value of a share of common stock on the date the option is
granted.
58
<PAGE> 59
A summary of the Company's stock option activity, and related information for
the years ended December 31, 1998 and 1997, is presented below (shares in
thousands):
<TABLE>
<CAPTION>
Average
Exercise
Options Shares Price
-------------------------------------------------------------------------
<S> <C> <C>
Granted 801 $15.51
Forfeited (21) 14.00
-------------------------------------------------------------------------
Outstanding at December 31, 1997 780 $15.55
-------------------------------------------------------------------------
Granted 963 $16.93
Exercised (13) 14.00
Forfeited (240) 19.20
-------------------------------------------------------------------------
Outstanding at December 31, 1998 1,490 $15.86
-------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998 (shares in thousands):
<TABLE>
<CAPTION>
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Exercise
Exercise Prices Outstanding Life (Years) Price
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
$14.000-14.000 538 8.42 $14.000
$16.063-16.063 725 9.62 $16.063
$17.375-22.875 220 9.41 $19.545
$23.000-23.000 7 9.05 $23.000
- ----------------------------------------------------------------------------------
$14.000-23.000 1,490 9.15 $15.864
- ----------------------------------------------------------------------------------
</TABLE>
There were 176,864 options exercisable at an average exercise price of $14.08 as
of December 31, 1998.
As discussed in Note 2, the Company accounts for stock-based employee
compensation in accordance with APB No. 25 and related interpretations as
permitted by SFAS No. 123. Accordingly, no compensation expense has been
recognized for its stock option awards because the option grants are generally
for a fixed number of shares with an exercise price generally equal to the fair
value of the shares at the date of grant. In accordance with SFAS No. 123, pro
forma information regarding net income (loss) and earnings (loss) per share has
been determined by the Company using the "Black-Scholes" option pricing model
with the following weighted average assumptions: 4.55% risk-free interest rate,
0% dividend yield, 39.7% volatility rate, and an expected life of the options
equal to the remaining vesting period.
59
<PAGE> 60
The weighted average fair value of options granted during 1998 and 1997 was
$5.38 and $7.25, respectively. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period. The Company's pro forma information follows (in thousands except
per share amounts, 1997 earnings per share amounts are based upon pro forma
shares outstanding - see Note 1):
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
SFAS 123 SFAS 123
As Reported Pro Forma Reported Pro Forma
----------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ 6,900 $ 5,559 $ (4,800) $ (5,450)
Basic earnings per share $ 0.49 $ 0.40 $ (0.45) $ (0.52)
Diluted earnings per share $ 0.49 $ 0.39 $ (0.45) $ (0.52)
</TABLE>
Stock Purchase Plan
In 1997, the Company adopted an employee stock purchase plan ("ESPP") pursuant
to which an aggregate of 219,200 shares remain authorized and available for
issuance to employees at December 31, 1998. Under the ESPP, employees, including
executive officers, who have been employed by the Company continuously for at
least 90 days are eligible, subject to certain limitations, as of the first day
of any option period (January 1 through June 30, or July 1 through December 31)
(an "Option Period") to contribute on an after-tax basis up to 15% of their base
pay per pay period through payroll deductions and/or a single lump sum
contribution per Option Period to be used to purchase shares of common stock. On
the last trading day of each Option Period (the "Exercise Date"), the amount
contributed by each participant over the course of the Option Period will be
used to purchase shares of common stock at a purchase price per share equal to
the lesser of (a) 85% of the closing market price of the common stock on the
Exercise Date; or (b) 85% of the closing market price of the common stock on the
first trading date of such Option Period. The ESPP is intended to qualify for
favorable tax treatment under Section 423 of the Internal Revenue Code (Code).
During 1998 and 1997, 16,190 and 14,610 shares were issued pursuant to the ESPP
at an average purchase price of $14.52 and $15.30 per share, respectively.
(12) RETIREMENT PLANS
401 (k) Plan
Employees of the Company participate in a savings plan (the "401(k) Plan") which
is qualified under Sections 401 (a) and 401(k) of the Code. To be eligible, an
employee must have been employed by the Company for at least three months. The
401(k) Plan permits employees to make voluntary contributions up to specified
limits. Additional contributions may be made by the Company at its discretion,
which contributions vest ratably over a five-year period. The Company
contributed $521,000, $269,000, and $277,000, for 1998, 1997, and 1996,
respectively.
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<PAGE> 61
Section 162 Plan
The Company maintains a non-qualified deferred compensation plan (the "162
Plan") which allows employees who are "highly compensated" under IRS guidelines
to make after-tax contributions to an investment account established in such
employees' name. Additional contributions may be made by the Company at its
discretion. All contributions to the 162 Plan are subject to the claims of the
Company's creditors. Approximately 52 employees are eligible to participate in
the 162 Plan. The Company contributed approximately $191,000, $96,000, and
$274,000, to the 162 Plan in 1998, 1997, and 1996, respectively.
(13) INCOME TAXES
Prior to the IPO, taxes on the Predecessor's income were the responsibility of
the individual partners. Pursuant to the reorganization, all assets of ARCLP
were transferred to the Company. Therefore, all income generated subsequent to
the IPO is subject to Federal and state income taxes. Income taxes for periods
prior to the IPO relate only to the income of a taxable entity within the
Predecessor.
Total income tax expense (benefit) for the years ended December 31, 1998, 1997
and 1996 were attributable to the following:
<TABLE>
<CAPTION>
Predecessor
-----------
Years Ended December 31,
---------------------------------------------
1998 1997 1996
------- ------- -----
<S> <C> <C> <C>
Income from continuing operations $ 5,652 $ 4,435 $(920)
Income (loss) from home health operations (762) (95) --
Write-off of home health assets (553) -- --
Extraordinary item -- (3,883) --
Cumulative effect of change in accounting
principle (186) -- --
------- ------- -----
Total income taxes $ 4,151 $ 457 $(920)
======= ======= =====
</TABLE>
In 1996, the Predecessor recorded an income tax benefit and a deferred tax asset
of $920,000 because of the anticipated utilization of net operating loss
carryforwards that would offset taxable gains from the sale-leaseback
transaction (See Note 6).
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<PAGE> 62
The income tax expense (benefit), attributable to income from continuing
operations before extraordinary item and cumulative effect of change in
accounting principle consists of the following (in thousands):
<TABLE>
<CAPTION>
Predecessor
-----------
Years Ended December 31,
---------------------------------------------
1998 1997 1996
------- ------- -----
<S> <C> <C> <C>
U.S. Federal
Current $ 1,138 $ -- $ --
Deferred 3,925 3,819 (823)
------- ------ -----
Total U.S. Federal 5,063 3,819 (823)
------- ------ -----
State:
Current 591 178 --
Deferred (2) 438 (97)
------- ------ -----
Total State 589 616 (97)
------- ------ -----
Total $ 5,652 $4,435 $(920)
======= ====== =====
</TABLE>
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1998 and 1997 are
presented below (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- ------
<S> <C> <C>
Deferred tax assets:
Federal and state operating loss carryforwards $ 2,636 $4,141
AMT credit carryforward 499 150
Charitable contributions carryforward 6,653 --
Deferred gains on sale/leaseback transactions 1,574 1,536
Accrued expenses not deductible for tax 392 --
Intangible assets 519 --
Deferred life estate income 620 --
Federal benefit of deferred state tax liabilities 887 --
Other 39 132
-------- ------
Total gross deferred tax assets 13,819 5,959
Less valuation allowance (6,653) --
-------- ------
Total deferred tax assets, net of valuation allowance 7,166 5,959
Deferred tax liabilities:
Buildings and equipment 20,617 5,316
Earned entrance fees receivable 1,420 --
Other 180 --
-------- ------
Total gross deferred tax liabilities 22,217 5,316
-------- ------
Net deferred tax asset (liability) $(15,051) $ 643
======== ======
</TABLE>
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<PAGE> 63
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes on income from continuing operations before income taxes,
extraordinary item and cumulative effect of change in accounting principle:
<TABLE>
<CAPTION>
1998 1997 1996
------ ---- ---
<S> <C> <C> <C>
Statutory tax rate 35% 34% 34%
Income attributable to non-taxable entities -- (9)% (34)%
Federal tax charge for conversion to taxable entities -- 47% --
Tax goodwill amortization in excess of book amortization -- (4)% --
State income taxes, net of Federal benefit 2.5% 7% (1)%
Change in beginning of the year valuation allowance -- (6)% (19)%
Other 0.2% 3% --
------ --- ---
Total 37.7% 72% (20)%
====== === ===
</TABLE>
At December 31, 1998, the Company had unused net operating loss carryforwards of
approximately $6.9 million for regular tax purposes, which expire in 2012. The
Company has no net operating loss carryforward for alternative minimum tax
purposes. At December 31, 1998 the Company had alternative minimum tax credit
carryforwards of approximately $499,000. The Company also had an unused
charitable contribution carryforward of approximately $19 million, which carried
over from the acquisition of FGI. The charitable contribution carryover expires
in 2003.
The valuation allowance for deferred tax assets as of December 31, 1998 was $6.7
million. The net change in the total valuation allowance for the years ended
December 31, 1998 and 1997 was an increase of $6.7 million and a decrease of
$339,000, respectively. The increase in the valuation allowance during 1998
related to deductible carryforwards acquired in the FGI acquisition. At such
time as it becomes more likely than not that the benefit of the deductible
carryforwards will be realized, the costs in excess of net assets acquired
resulting from the FGI acquisition will be reduced by an amount equal to the
related tax benefit. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. In order to fully realize the deferred tax asset related to the net
operating loss carryforward, the Company would need to generate future taxable
income of approximately $6.9 million prior to the expiration of the carryforward
in 2012. Based upon the level of projected future taxable income over the
periods which the net operating loss carryforward is deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences, and no valuation allowance is necessary at
December 31, 1998. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced. In order to fully realize the
benefit of the charitable contribution carryforward, the Company would need to
generate future taxable income of $190 million prior to the expiration of the
carryforward in 2003. Based upon the level of projected future taxable income
over the period in which the charitable contribution
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<PAGE> 64
carryforward is deductible, management does not believe that it is more likely
than not that the tax benefit of the carryforward will be fully realized prior
to expiration.
(14) COMMITMENTS AND CONTINGENCIES
The Company maintains commercial insurance on a claims-made basis for medical
malpractice liabilities. Management is unaware of any incidents which could
ultimately result in a loss in excess of the Company's insurance coverage.
In the normal course of business, the Company is a defendant in certain
litigation. However, management is unaware of any action that would have a
material adverse impact on the financial position or results of operations of
the Company.
The Company is self-insured for workers' compensation claims with excess loss
coverage of $250,000 per individual claim and $2.0 million for aggregate claims.
The Company utilizes a third party administrator to process and pay filed
claims. The Company has accrued $469,000 to cover open claims not yet settled
and incurred but not reported claims as of December 31, 1998. Management is of
the opinion that such amounts are adequate to cover any such claims.
The Company has entered into operating leases for seven of its senior living
communities and its corporate offices. The remaining lease terms vary from three
to 19 years. Certain of the leases provide for renewal and purchase options.
Lease expense was $9.1 million and $3.4 million for 1998 and 1997, respectively.
The Company had no lease expense in 1996.
Future minimum lease payments under operating leases as of December 31, 1998
were as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 11,420
2000 11,425
2001 11,431
2002 10,980
2003 8,576
Thereafter 105,569
--------
$159,401
========
</TABLE>
The Company maintains a $50.0 million revolving credit facility and a $4.0
million secured line of credit which are available for general use. As of
December 31, 1998, $15.0 million was outstanding under the $50.0 million
facility and approximately $1.7 million of the $4.0 million line had been used
to obtain letters of credit.
At December 31, 1998, the Company was developing or constructing 35 senior
living communities. Management estimates that the aggregated estimated cost to
complete and lease-up such communities is approximately $400.0 million to $425.0
million. The Company also plans to expand nine of its senior
64
<PAGE> 65
living communities which management estimates aggregated estimated costs to
complete and lease-up of approximately $70.0 million.
The Company's management agreements are generally for terms of three to 20
years, but certain of the agreements may be canceled by the owner of the
community, without cause, on three to six months' notice. Pursuant to the
management agreements, the Company is generally responsible for providing
management personnel, marketing, nursing, resident care and dietary services,
accounting and data processing services, and other services for these
communities at the owner's expense and receives a monthly fee for its services
based on either a contractually fixed amount, a percentage of revenues or
income, or cash flows in excess of operating expenses and certain cash flows of
the community. The Company's existing management agreements expire at various
times through June 2018.
In connection with the execution of management contracts pursuant to the FGI
transaction, the Company assumed debt guaranties on mortgage debt of two managed
communities. At December 31, 1998, $27.2 million was outstanding under the
related debt agreements.
The Company finances the costs of certain senior living communities owned by
others which are leased or managed by the Company. The Company is obligated to
and anticipates providing approximately $128.1 million of additional financing
for these communities.
During 1998, the Company began providing development services to 29 senior
living communities owned by others. Under the terms of the development
agreements, the Company receives a fixed fee of approximately 3.75% to 5% of the
total construction costs of the communities. Such fees are recognized over the
terms of the development agreements using the percentage-of-completion method.
The Company recognized $7.6 million of development fee revenue during 1998.
Failure to perform under the development agreements may require the Company to
acquire the senior living communities. The Company owns the land upon which
thirteen of these senior living communities are located, and has leased the land
for terms of 50 years.
Upon completion of the construction, the owners of the senior living communities
lease the properties to various special purpose entities (SPEs). The Company has
entered into management agreements with the SPEs to manage the operations of the
leased senior living communities. The management agreements provide for the
payment of management fees to the Company based on a percentage of each
communities' gross revenues and requires the Company to fund the SPEs' operating
deficits above specified amounts. The Company is required to pledge to the
lessors certificates of deposit as collateral to support the Company's
agreements to fund operating deficits of the SPEs. At December 31, 1998, the
Company has pledged certificates of deposit in the aggregate of $29.3 million
which are classified as non-current assets limited as to use. The Company
receives the interest income earned on these certificates of deposit. The
Company did not fund any operating deficits during 1998. The management
agreements also provide the Company with a right of first refusal to assume the
SPEs' interest in the leases at a formula price. During 1998, the Company did
not assume any of the SPEs' lease interests.
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<PAGE> 66
Federal and state governments regulate various aspects of the Company's
business. The development and operation of health care facilities and the
provision of health care services are subject to federal, state, and local
licensure, certification, and inspection laws that regulate, among other
matters, the number of licensed beds, the provision of services, the
distribution of pharmaceuticals, billing practices and policies, equipment,
staffing (including professional licensing), operating policies and procedures,
fire prevention measures, environmental matters, and compliance with building
and safety codes. Failure to comply with these laws and regulations could result
in the denial of reimbursement, the imposition of fines, temporary suspension of
admission of new patients, suspension or decertification from the Medicare
programs, restrictions on the ability to acquire new facilities or expand
existing facilities, and, in extreme cases, the revocation of a community's
license or closure of a community. Except as noted below, management believes
the Company was in compliance with such federal and state regulations at
December 31, 1998.
Certain of the communities operated by the Company are currently operating a
number of skilled nursing beds as "shelter beds" under a Florida statute and
certificate of need that generally limits the use of such beds to residents of
the community. Such communities are not currently in full compliance with these
shelter bed certificate of need requirements. A violation of the shelter bed
statutes may, among other things, subject the owner of the facility to fines up
to $1,500 per day. Although management is evaluating a number of alternatives
relating to these shelter bed issues, management does not anticipate that the
communities will be in full compliance with the shelter bed requirements in the
foreseeable future. There can be no assurance that the State of Florida will not
enforce the shelter bed requirements strictly against the Company in the future
or impose penalties for prior or continuing violations.
(15) RELATED PARTY TRANSACTIONS
The Company has agreed to develop ten assisted living residences for an
unaffiliated third-party. Following the completion of construction, these
residences will be leased to affiliates of John Morris, a director of the
Company. The Company has agreed to manage such residences pursuant to management
agreements that provide for the payment of management fees to the Company based
on a percentage of the gross revenues of each residence and require the Company
to fund operating losses above a specified amount. The Company has agreements
with similar terms with unaffiliated parties. During 1998, the Company did not
make any payments for operating losses and recognized $19,000 of management fees
pursuant to the management agreements.
As part of the FGI Transaction, the Company entered into a 20-year management
agreement (with two ten-year renewal options) for a senior living community
located in Peoria, Arizona. Mr. Roskamp, a director of the Company, is a
director of a charitable foundation that owns an interest in 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. The Company recognized $1.2 million
of management fees in 1998 pursuant to this agreement.
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<PAGE> 67
The Company also entered into a 20-year management agreement (with two ten-year
renewal options) for a senior living community located in Seminole, Florida. In
connection with the management agreement, the Company paid a $1.2 million fee to
the owner of the community, which is a general partnership in which Mr. Roskamp
owns a 98.0% interest, and assumed FGI's existing guaranty of approximately
$19.9 million of the mortgage debt associated with 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 owner. As part of the FGI transaction, the Company also
acquired an option to purchase the community upon the occurrence of certain
events (including the expiration of the agreement) for a formula purchase price.
The Company recognized $1.7 million of management fees in 1998 pursuant to this
agreement.
The Company also entered into a three-year management agreement for a senior
living community located in Glenmore, Pennsylvania, that is owned by a
partnership in which Mr. Roskamp owns a 70.0% interest. Pursuant to the
management agreement, the Company will receive a management fee equal to 5.0% of
the gross revenues of the community. The Company paid a non-refundable deposit
of $2.0 million to acquire an option to purchase the community for a purchase
price of $14.0 million, plus the assumption of certain specified liabilities.
The Company's deposit will be credited against the purchase price if the Company
exercises its purchase option. In connection with the execution of the
management and option agreements, the Company assumed FGI's mortgage debt
guaranty associated with the community. Approximately $7.3 million was
outstanding at December 31, 1998. The Company also assumed FGI's remaining
development obligations relating to the community. In return for its development
services and costs associated therewith, the Company received a fee of $200,000
in 1998. Additionally, the Company recognized $82,000 in management fees.
Pursuant to the FGI Transaction, the Company also entered into an agreement to
provide development services related to the development and construction of a
proposed senior living community in Sarasota, Florida that is currently in the
development and planning phase. The community is owned by a limited liability
company in which Mr. Roskamp owns a 57.5% interest. 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 community following
its completion pursuant to a five-year management agreement that provides for a
management fee equal to 5.0% of the gross revenues of the community. In
consideration of the Company's payment of a $2.0 million fully-refundable
deposit, the Company acquired 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 purchase option is exercised. The Company
recognized $450,000 of development fees in 1998.
In connection with the FGI Transaction, Mr. Roskamp entered into a three-year
consulting agreement with ARC that provides for annual payments of $150,000 to
Mr. Roskamp. In addition, pursuant to a shareholder's agreement entered into by
the Company and Mr. Roskamp, the Company caused Mr. Roskamp to be elected to the
Board of Directors of the Company and its Executive Committee and has agreed to
use its best efforts to cause Mr. Roskamp, or a designee of Mr. Roskamp, to be
recommended to the Company's shareholders for election as a director at each
annual meeting of ARC shareholders at
67
<PAGE> 68
which Mr. Roskamp stands for election for so long as Mr. Roskamp, or permitted
transferees, owns greater than 411,000 shares of the Company's common stock and
the shares of common stock owned by Mr. Roskamp and his affiliates constitute 1%
or more of the Company's outstanding common stock.
In June 1998, the Company entered into an agreement to operate a senior living
community located in Sarasota, Florida. In connection with the execution of the
agreement, an unaffiliated SPE purchased the community from a general
partnership in which Mr. Roskamp owns a 43.3% interest. The aggregate
consideration paid by such unaffiliated SPE to acquire the community was $9.0
million and the SPE assumed approximately $3.8 million of mortgage indebtedness
associated with the community.
(16) QUARTERLY DATA (UNAUDITED)
The following table presents unaudited quarterly operating results for each of
the Company's last eight fiscal quarters. The Company believes that all
necessary adjustments have been included in the amounts stated below to present
fairly the quarterly results when read in conjunction with the consolidated
financial statements. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year or predictive of
future periods.
<TABLE>
<CAPTION>
1998 Quarter Ended 1997 Quarter Ended
------------------------------------- --------------------------------------
Dec 31 Sept 30 June 30 Mar 31 Dec 31 Sept 30 June 30 Mar 31
------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $44,172 $41,325 $29,820 $27,040 $ 25,332 $22,428 $21,684 $20,737
Income from continuing operations
before extraordinary item
and cumulative effect of change
in accounting principle 2,816 2,601 2,230 1,703 1,500 1,013 738 662
Net income (loss) 1,797 2,311 1,638 1,155 (4,973) 1,037 (1,839) 975
EARNINGS PER SHARE:
Basic - actual $ 0.11 $ 0.15 $ 0.14 $ 0.10 $ (0.44) $ 0.09 -- --
Pro forma basic earnings per share
from continuing
operations before extraordinary item
and cumulative effect of change in
accounting principle $ 0.16 $ 0.17 $ 0.20 $ 0.15 $ 0.13 $ 0.09 $ 0.07 $0.07
Weighted average basic shares outstanding 17,109 15,603 11,422 11,421 11,406 11,406 10,089 9,375
Diluted - actual $ 0.10 $ 0.15 $ 0.14 $ 0.10 $ (0.43) $ 0.09 -- --
Pro forma diluted earnings per share
from continuing
operations before extraordinary item
and cumulative effect of change in
accounting principle $ 0.16 $ 0.17 $ 0.19 $ 0.15 $ 0.13 $ 0.09 $ 0.07 $0.07
Weighted average diluted shares outstanding 17,149 15,695 11,587 11,633 11,579 11,584 10,124 9,375
</TABLE>
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<PAGE> 69
(17) SUBSEQUENT EVENTS
During the year ended December 31, 1998 the Company entered into a merger
agreement with Assisted Living Concepts, Inc. On January 31, 1999, the Company
terminated such merger agreement and recorded a pre-tax charge of approximately
$1.0 million for costs associated with the terminated merger in the fourth
quarter ended December 31, 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the directors
of the Company is incorporated herein by reference to the Company's definitive
proxy statement for its Annual Meeting of Shareholders to be held May 12, 1999
to be filed with the Securities and Exchange Commission (the "SEC"). Pursuant to
General Instruction G(3), certain information concerning the executive officers
of the Company is included in Part I of this report under the caption "Executive
Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the section entitled "Executive Compensation" in the Company's
definitive proxy statement for its Annual Meeting of Shareholders to be held May
12, 1999 to be filed with the SEC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the section entitled "Security Ownership of Management and Certain
Beneficial Owners" in the Company's definitive proxy statement for its Annual
Meeting of Shareholders to be held May 12, 1999 to be filed with the SEC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the section entitled "Certain Transactions" in the Company's
definitive proxy statement for its Annual Meeting of Shareholders to be held May
12, 1999 to be filed with the SEC.
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<PAGE> 70
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Item 14. (a) (1) Financial Statements: See Item 8
(2) Financial Statement Schedules: Not applicable
(3) Exhibits required by item 601 of Regulation S-K are as follows:
Exhibit
Number Description
- ------ -----------
2.1 Limited Partnership Agreement of American Retirement Communities, L.P.
dated February 7, 1995, as amended April 1, 1995.(1)
2.2 Articles of Share Exchange between American Retirement Communities,
L.P., and American Retirement Corporation, dated March 31, 1995.(1)
2.3 Reorganization Agreement, dated February 29, 1997.(1)
2.4 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.(3)
2.5 Supplemental Agreement, dated July 14, 1998, among American Retirement
Corporation, Freedom Group, Inc., Robert G. Roskamp, PHC, L.L.C., and
The Edgar and Elsa Price Foundation
2.6 Amendment to Agreement and Plan of Merger, dated October 12, 1998, by
and among American Retirement Corporation and each of the former
shareholders of Freedom Group, Inc.
3.1 Charter of the Registrant(1)
3.2 Articles of Amendment to the Charter of the Registrant
3.3 Bylaws of the Registrant, as amended
4.1 Specimen Common Stock certificate(1)
4.2 Article 8 of the Registrant's Charter (included in Exhibit 3.1)
4.3 Form of Indenture between the Company and IBJ Schroder Bank and Trust
Company, as Trustee, relating to the 5 3/4% Convertible Subordinated
Debentures due 2002 of the Company.(3)
4.4 Rights Agreement, dated November 18, 1998, between American Retirement
Corporation and American Stock Transfer and Trust Company.(4)
10.1 American Retirement Corporation 1997 Stock Incentive Plan(1)
10.2 First Amendment to Employee Stock Incentive Plan(5)
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<PAGE> 71
Exhibit
Number Description
- ------ -----------
10.3 American Retirement Corporation Employee Stock Purchase Plan(1)
10.4 First Amendment to Employee Stock Purchase Plan(5)
10.5 American Retirement Corporation 401(k) Retirement Plan(1)
10.6 Officers' Incentive Compensation Plan(1)
10.7 Registration Rights Policy(1)
10.8 Registration Rights Agreement, dated July 14, 1998, by and between
American Retirement Corporation and Robert G. Roskamp, PHC, LLC, and
the Edgar and Elsa Prince Foundation(6)
10.9 Shareholder Agreement, dated July 14, 1998, by and between American
Retirement Corporation and Robert G. Roskamp(6)
10.10 Consulting Agreement, dated July 14, 1998, by and between American
Retirement Corporation and Robert G. Roskamp(6)
10.11 Lease and Security Agreement, dated January 2, 1997, by and between
Nationwide Health Properties, Inc. and American Retirement Communities,
L.P. (1)
10.12 Lease and Security Agreement, dated January 2, 1997, by and between
N.H. Texas Properties Limited Partnership and Trinity Towers Limited
Partnership(1)
10.13 Amended and Restated Loan Agreement, dated December 21, 1994, between
Carriage Club of Denver, L.P. and General Electric Capital
Corporation(1)
10.14 Amended and Restated Promissory Note, dated December 21, 1994, between
Carriage Club of Denver, L.P. and General Electric Capital
Corporation(1)
10.15 Assumption, Consent and Loan Modification Agreement, dated February 9,
1995, by and among Carriage Club of Denver, L.P. and General Electric
Capital Corporation(1)
10.16 Loan Agreement, dated October 31, 1995, by and between American
Retirement Communities, L.P. and First Union National Bank of
Tennessee, as amended.(1)
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<PAGE> 72
Exhibit
Number Description
- ------ -----------
10.17 Amended and Restated Promissory Note, dated October 31, 1995, by
American Retirement Communities, L.P. and First Union National Bank of
Tennessee, as amended.(1)
10.18 Revolving Credit Promissory Note, dated October 31, 1995, by American
Retirement Communities, L.P. and First Union National Bank of
Tennessee, as amended.(1)
10.19 Standby Note, dated October 31, 1995, by American Retirement
Communities, L.P. and First Union National Bank of North Carolina(1)
10.20 Reimbursement Agreement, dated October 31, 1995, by American Retirement
Communities, L.P. and First Union National Bank of North Carolina(1)
10.21 Letter of Intent, dated April 3, 1997, by National Health Investors,
Inc. to American Retirement Corporation(1)
10.22 Master Loan Agreement, dated December 23, 1996 between First American
National Bank and American Retirement Communities, L.P.(1)
10.23 Letter of Intent, dated February 24, 1997, by National Health
Investors, Inc. to American Retirement Corporation(1)
10.24 Deed of Lease, dated as of October 23, 1997, between Daniel U.S.
Properties Limited Partnership, as Lessor, and ARC Imperial Plaza, Inc.
as Lessee(5)
10.25 Loan Agreement, dated as of December 31, 1997, between General Electric
Capital Corporation and Fort Austin Limited Partnership(5)
10.26 Promissory Note, dated December 31, 1997, by Fort Austin Limited
Partnership to General Electric Capital Corporation in the original
principal amount of $62,330,000(5)
10.27 Promissory Note, dated December 31, 1997, by Fort Austin Limited
Partnership to General Electric Capital Corporation in the original
principal amount of $50,000,000(5)
10.28 Fixed Rate Program Promissory Note Secured by Mortgage, dated July 9,
1998, by ARCLP-Charlotte, LLC to Heller Financial, Inc. in the
original principal amount of $36,000,000(6)
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP
27.1 Financial Data Schedule for the year ended December 31, 1998
(For SEC use only)
27.2 Financial Data Schedule for the year ended December 31, 1997
(For SEC use only)
72
<PAGE> 73
- --------------
1 Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-23197)
2 Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-34339)
3 Incorporated by reference to the Registrant's Current Report on Form
8-K, dated May 29, 1998
4 Incorporated by reference to the Registrant's Current Report on Form
8-K, dated November 24, 1998
5 Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997
6 Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998
(b) Reports on Form 8-K filed during the quarter ended December 31, 1998:
The Company filed a Current Report on Form 8-K on November 24,
1998 to announce, pursuant to Item 5, that the Board of Directors of
the Company had declared a distribution of one stock purchase right for
each outstanding share of the Company's Common Stock to shareholders of
record at the close of business on December 7, 1998, and for each share
of Company Common Stock issued thereafter.
The Company filed a Current Report on Form 8-K on November 30,
1998 to announce, pursuant to Item 5, that the Company had entered into
a definitive merger agreement pursuant to which a newly formed
wholly-owned subsidiary of the Company would merge with and into
Assisted Living Concepts, Inc. The merger agreement was terminated on
January 31, 1999.
73
<PAGE> 74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this registration to be
signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN RETIREMENT CORPORATION
By: /s/ W.E. Sheriff
------------------------------------
W.E. Sheriff
Chief Executive Officer and Chairman
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ W.E. SHERIFF Chairman and March 29, 1999
- ----------------------------------------- Chief Executive Officer
W.E. Sheriff (Principal Executive Officer)
/s/ GEORGE T. HICKS Executive Vice President - March 29, 1999
- ----------------------------------------- Finance, Chief Financial
George T. Hicks Officer (Principal Financial
and Accounting Officer)
/s/ H. LEE BARFIELD II Director March 29, 1999
- -----------------------------------------
H. Lee Barfield II
/s/ JACK O. BOVENDER Director March 29, 1999
- -----------------------------------------
Jack O. Bovender
/s/ FRANK M. BUMSTEAD Director March 29, 1999
- -----------------------------------------
Frank M. Bumstead
/s/ CHRISTOPHER J. COATES Director March 29, 1999
- -----------------------------------------
Christopher J. Coates
Director
- -----------------------------------------
Robin G. Costa
/s/ CLARENCE EDMONDS Director March 29, 1999
- -----------------------------------------
Clarence Edmonds
/s/ JOHN A. MORRIS, JR., M.D. Director March 29, 1999
- -----------------------------------------
John A. Morris, Jr., M.D.
</TABLE>
74
<PAGE> 75
<TABLE>
<S> <C> <C>
/s/ DANIEL K. O'CONNELL Director March 29, 1999
- -----------------------------------------
Daniel K. O'Connell
/s/ ROBERT G. ROSKAMP Director March 29, 1999
- -----------------------------------------
Robert G. Roskamp
Director
- -----------------------------------------
Nadine C. Smith
/s/ LAWRENCE J. STUESSER Director March 29, 1999
- -----------------------------------------
Lawrence J. Stuesser
</TABLE>
75
<PAGE> 1
Exhibit 2.5
SUPPLEMENTAL AGREEMENT
This is a Supplemental Agreement, dated July 14, 1998, among American
Retirement Corporation, a Tennessee corporation ("ARC"), Freedom Group, Inc., a
Florida corporation ("FGI"), and Robert G. Roskamp, PHC, L.L.C., a Michigan
limited liability company, and The Edgar and Elsa Prince Foundation, a Michigan
not-for-profit corporation (collectively, the "FGI Shareholders"). This
Supplemental Agreement amends and supplements the Agreement and Plan of Merger,
dated as of May 29, 1998, among ARC, FGI, and the FGI Shareholders (the "Merger
Agreement"). Certain capitalized terms defined in the Merger Agreement are used
herein as defined in the Merger Agreement.
FGI has historically prepared interim financial statements at the end
of the each calendar month. The parties acknowledge that a closing of FGI's
accounting books on other than on a month-end basis and a determination of Net
Working Capital for purposes of Section 8.7 of the Merger Agreement would impose
severe administrative burdens upon FGI, would result in a significant delay in
determining Net Working Capital, and could lead to disagreement among the
parties concerning appropriate revenue and expense allocations. Therefore,
notwithstanding that the Closing of the Merger is occurring on the date hereof,
the parties desire to provide for certain accounting and price adjustments as of
July 1, 1998, in order to avoid these problems.
In addition, the parties desire to make certain other amendments to the
Merger Agreement as hereinafter set forth.
Therefore, in accordance with Section 11.4 of the Merger Agreement, and
in consideration of their mutual agreements, the parties agree as follows:
1. Closing Date. ARC, FGI, and the FGI Shareholders agree that
the Closing Date, for all purposes of the Merger Agreement, is July 14, 1998,
and that the parties will take all actions (including the filing of Articles of
Merger in Tennessee and Florida) necessary to cause the Effective Time to occur
simultaneously with the Closing. This Supplemental Agreement does not in any way
change or otherwise affect the Closing Date or the Effective Time, and except as
expressly and specifically provided herein, this Supplemental Agreement has no
effect on the rights or obligations of the parties on the Closing Date or with
respect to the periods preceding or following the Closing Date.
2. Amendment of Section 8.7 of the Merger Agreement. Section
8.7 of the Merger Agreement, entitled "Net Working Capital Adjustments," is
hereby amended in its entirety to read as follows:
(a) ARC and the FGI Shareholders shall adjust (up or down)
the cash portion of the Merger Consideration based upon
the extent to which the Net Working Capital on July 1, 1998
(the "Adjustment Date") is less than or greater than zero. The
cash portion of the Merger Consideration shall be reduced
(dollar
<PAGE> 2
for dollar) by the amount by which the Net Working Capital on
the Adjustment Date (the "Adjustment Date Net Working
Capital") is less than zero. The cash portion of the Merger
Consideration shall be increased (dollar for dollar) by the
amount by which the Adjustment Date Net Working Capital is
greater than zero.
(b) On the Closing Date, ARC and the FGI Shareholders
shall estimate the amount of the Net Working Capital on the
Adjustment Date (the "Estimated Net Working Capital"). The
Estimated Net Working Capital shall be determined 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 FGI Entities) included in the latest
available monthly financial statements delivered pursuant to
Section 6.2(h). ARC and the FGI Shareholders shall tentatively
adjust (up or down) the cash portion of the Merger
Consideration payable to the FGI Shareholders on the Closing
Date (the "Initial Net Working Capital Adjustment"), based on
the extent to which the Estimated Net Working Capital is less
than or greater than zero. The cash portion of the Merger
Consideration payable to the FGI Shareholders on the Closing
Date shall be reduced (dollar for dollar) by the amount by
which the Estimated Net Working Capital is less than zero. The
cash portion of the Merger Consideration payable to the FGI
Shareholders on the Closing Date shall be increased (dollar
for dollar) by the amount by which the Estimated Net Working
Capital is greater than zero. 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 the Adjustment Date Net Working Capital
shall be consistent with that shown on Exhibit I. Attached
hereto as Exhibit A is the Initial Net Working Capital
Adjustment that the parties have agreed upon, which results in
an Estimated Net Working Capital deficit (and accordingly a
downward adjustment to the cash portion of the Merger
Consideration) of $9,365,000.
(c) Within ninety (90) days after the Closing Date,
ARC and the FGI Shareholders shall re-compute, and determine
the definitive amount of, the Adjustment Date Net Working
Capital 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. If
the amount of the Adjustment Date Net Working Capital,
as finally determined, is greater than the Estimated Net
Working Capital on which the Initial Net Working Capital
Adjustment was based, then ARC shall pay to the FGI
Shareholders the amount by which Adjustment Date Net Working
Capital, as finally determined, exceeds the Estimated Net
Working Capital on which the Initial Net Working Capital
Adjustment was based. If the amount of the Estimated Net
Working Capital on which the Initial Net Working Capital
Adjustment was based is greater than the Adjustment Date Net
Working Capital,
2
<PAGE> 3
as finally determined, then the FGI Shareholders, jointly and
severally, shall pay to ARC the amount by which the Estimated
Net Working Capital on which the Initial Net Working Capital
Adjustment was based exceeds the Adjustment Date Net Working
Capital, as finally determined. Any amounts to be paid to the
FGI Shareholders pursuant to this Section 8.7(c) shall be paid
to the FGI Shareholders in accordance with their proportional
interest in the cash portion of the Merger Agreement paid on
the Closing Date. Any such refund or payment shall be by wire
transfer of immediately available funds to a bank account
designated by the payee to the 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
definitive amount of the Adjustment Date Net Working Capital,
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.
3. FGI Final Tax Return. For federal and state income tax purposes, the
final fiscal year of FGI and the FGI Subsidiaries (other than the Excluded FGI
Entities) shall terminate at the Effective Time on the Closing Date. ARC, on
behalf of FGI, shall prepare and file the final federal and state income tax
returns for FGI and such FGI Subsidiaries covering their final fiscal year
(collectively the "Final Return"), and shall pay all Taxes due thereunder.
Notwithstanding the foregoing, nothing in this Section 3 shall affect, nor
impair or limit the FGI Shareholders' indemnification obligations under the
Merger Agreement.
4. Allocation of Revenues and Expenses. Notwithstanding the Merger
Agreement, all items of revenue, income, gain, expense, cost, and loss of FGI
and the FGI Subsidiaries (other than the Excluded FGI Entities) received,
realized, paid, or incurred on or after July 1, 1998, shall be allocated to, and
be retained by, ARC. ARC shall pay all operating costs and expenses (including
without limitation all interest on indebtedness and all Taxes), and shall be
entitled to retain all income and revenues, of FGI and the FGI Subsidiaries
(other than the Excluded FGI Entities) received, realized, paid, or incurred
from and after July 1, 1998; provided, however, that
3
<PAGE> 4
ARC shall not be obligated to pay any costs or expenses for which the FGI
Shareholders are required to indemnify the ARC Indemnified Parties under Section
9.2 of the Merger Agreement (as amended hereby), and the provisions of this
Section 4 shall not limit, affect or impair the provisions of Section 9.2 of the
Merger Agreement (as amended hereby).
5. Amendment of Section 9.2(b) of the Merger Agreement. The
following provision is hereby inserted at the end of Section 9.2(b) of the
Merger Agreement:
; provided, further, that the indemnification by the FGI
Shareholders under this Section 9.2(b) for Taxes for the short
period covered by the Final Return (but for no other period)
shall not include the amount of any income Tax liability that
would be reported on hypothetical federal and state tax
returns for FGI and the FGI Subsidiaries (other than the
Excluded FGI Entities) covering the period beginning on July
1, 1998 and ending on the Closing Date (collectively the
"Hypothetical July Return"). The income Tax liability on the
Hypothetical July Return shall be determined using the
following assumptions: (i) that current FGI tax accounting
methods and practices are continued; (ii) that the rate of tax
applicable to taxable income is the highest marginal rate of
tax applicable to taxable income reported on the Final Return;
(iii) that the Merger is a tax-free reorganization under
Section 368(a)(1)(A) of the Code; and (iv) that income
arising, directly or indirectly, from the distribution or
transfer of the Excluded Assets is disregarded (as is any
charitable contribution deduction arising from such
distribution or transfer). Nothing in the foregoing sentence
shall diminish, alter, impair or affect the parties'
indemnification obligations relating to the tax-free nature of
the Merger, any such charitable contribution deduction or any
other indemnification provision hereof.
6. Adjustment of Merger Consideration. In order to compensate the
FGI Shareholders for any earnings of FGI and the FGI Subsidiaries that they will
forego as a result of the allocations under Section 4 of this Supplemental
Agreement, ARC shall pay to the FGI Shareholders additional cash consideration
as provided in this Section 5 (the "Additional Consideration"). The Additional
Consideration shall be added to, and shall constitute a part of, the Merger
Consideration. The amount of the Additional Consideration shall be determined by
(a) dividing 6.87% by 365, in order to determine a daily rate of interest (the
"Daily Rate"), (b) multiplying the Daily Rate by the cash portion of the Merger
Consideration (other than the Additional Consideration and as adjusted by the
Initial Net Working Capital Adjustment) that is payable to the FGI Shareholders
on the Closing Date pursuant to Section 3.1 of the Merger Agreement, in order to
determine a daily price adjustment, and (c) multiplying the amount of the daily
price adjustment by the number of days within the period running from July 1,
1998, through the date
4
<PAGE> 5
on which such cash portion of the Merger Consideration (as adjusted by the
Initial Net Working Capital Adjustment) is paid to the FGI Shareholders. The
Additional Consideration shall be allocated among and distributed to the FGI
Shareholders in accordance with Schedule 3.1 of the Merger Agreement and shall
be due and payable, by wire transfer of immediately available funds, on the
Closing Date.
7. Adjustment of Cash Portion of the Consideration Under
Companion Securities Purchase Agreements.
(a) Section 3.1 of the Merger Agreement is hereby amended by
deleting the numeral $20,647,951 appearing therein, and inserting in
its place $20,179,669. As such, the cash portion of the Merger
Consideration is $20,179,669 before adjustment pursuant to Section 8.7
of the Merger Agreement as amended hereby, or Section 7(b) below.
(b) In order to compensate the partners of the Target
Entities, other than FGI and the FGI Shareholders (the "Target Entity
Partners"), for any earnings of the Target Entities that they will
forego as a result of the allocations under Section 4 of this
Supplemental Agreement and for the income tax effects of such
allocations, ARC shall pay to the Target Entity Partners additional
cash consideration as provided in this Section 7 (the "Additional
Partner Consideration"). The Additional Partner Consideration shall be
added to, and shall constitute a part of, the consideration paid to the
Target Entity Partners under the Companion Securities Purchase
Agreements. The amount of the Additional Partner Consideration shall be
determined by (a) multiplying the Daily Rate by the amount of the
consideration (other than the Additional Partner Consideration) that is
payable to the Target Entity Partners on the Closing Date pursuant to
the Companion Securities Purchase Agreements, in order to determine a
daily price adjustment, and (b) multiplying the amount of the daily
price adjustment by the number of days within the period running from
July 1, 1998, through the date on which the consideration is paid to
the Target Entity Partners under the Companion Securities Purchase
Agreements. The Additional Partner Consideration shall be due and
payable, by wire transfers of immediately available funds, on the
Closing Date.
8. Amendment to Section 9.9(a) of the Merger Agreement. Section
9.9(a) and Exhibit J of the Merger Agreement are hereby deleted in their
entirety. In lieu of said Section 9.9(a) and Exhibit J, the parties have entered
into an Escrow Agreement dated the Closing Date, pursuant to which the FGI
Shareholders have deposited shares of ARC Common Stock with the escrow agent
thereunder for the purposes specified therein.
9. Effect of Supplemental Agreement. Except as expressly and
specifically provided in this Supplemental Agreement, the Merger Agreement
continues in full force and effect, without modification.
5
<PAGE> 6
10. Counterparts. This Supplemental 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.
IN WITNESS WHEREOF, the parties have executed this Supplemental
Agreement and caused the same to be duly delivered on their behalf on the day
and year first written above.
AMERICAN RETIREMENT CORPORATION
By: /s/ James T. Money
-----------------------------------
Name: James T. Money
---------------------------------
Title: EVP Dev. Services
--------------------------------
FREEDOM GROUP, INC.
By: /s/ Robert G. Roskamp
-----------------------------------
Name: Robert G. Roskamp
---------------------------------
Title: CEO
--------------------------------
THE FGI SHAREHOLDERS:
/s/ Robert G. Roskamp
---------------------------------------
ROBERT G. ROSKAMP, individually
PHC, L.L.C., a Michigan limited liability
company
By: /s/ Robert Haveman
-----------------------------------
Name: Robert Haveman
---------------------------------
Title: President/Manager
--------------------------------
6
<PAGE> 7
EDGAR AND ELSA PRINCE FOUNDATION, a
Michigan corporation
By: /s/ Robert Haveman
-----------------------------------
Name: Robert Haveman
---------------------------------
Title: Secretary/Treasurer
--------------------------------
7
<PAGE> 1
Exhibit 2.6
AMENDMENT
TO
AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT TO AGREEMENT AND PLAN OF MERGER (the "Amendment") is
dated as of the 12th day of October, 1998, by and among American Retirement
Corporation, a Tennessee corporation ("ARC"), and each of the former
shareholders of Freedom Group, Inc., formerly a Florida corporation ("FGI"), as
identified on the signature pages attached hereto (the "FGI Shareholders").
RECITALS
WHEREAS, ARC, FGI, and the FGI Shareholders entered into that certain
Agreement and Plan of Merger, dated as of the 29th day of May, 1998 (the
"Merger Agreement"), whereby, inter alia, FGI was merged with and into ARC; and
WHEREAS, ARC and the FGI Shareholders, being all of the remaining
parties to the Merger Agreement, desire to amend Section 8.7(c) of the Merger
Agreement.
NOW, THEREFORE, in consideration of the foregoing, the parties hereto
hereby agree as follows:
1. The first sentence of Section 8.7(c) shall be deleted in its
entirety and replaced with the following sentence;
Within one hundred twenty (120) 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
an methodologies set forth above.
2. The foregoing amendment to Section 8.7(c) shall take effect as of
the Closing Date (as defined in the Merger Agreement).
3. Except as expressly and specifically provided in this Amendment,
the Merger Agreement shall continue in full force and effect, without
modification.
[Signature Page Follows]
<PAGE> 2
IN WITNESS WHEREOF, the parties have executed this Amendment and
caused the same to be duly executed on their behalf on the day and year first
written above.
AMERICAN RETIREMENT CORPORATION
By: /s/ H. Todd Kaestner
---------------------------------------
Name: H. Todd Kaestner
--------------------------------------
Title: Executive Vice President Corporation
Development
------------------------------------
THE FGI SHAREHOLDERS:
/s/ Robert G. Roskamp
-------------------------------------------
Robert G. Roskamp, Individually
Address: 1401 Manatee Avenue West
Bradenton, Florida 34205
PHC, L.L.C.,
a Michigan limited liability company
By: /s/ Robert Haveman
----------------------------------------
Name: Robert Haveman
--------------------------------------
Title: President
------------------------------------
Address: 190 River Avenue, Suite 300
-----------------------------------
Holland, MI 49423
-----------------------------------
EDGAR AND ELSA PRINCE FOUNDATION,
a Michigan corporation
By: /s/ Robert Haveman
----------------------------------------
Name: Robert Haveman
-------------------------------------
Title: Secretary/Treasurer
-------------------------------------
Address: 190 River Avenue, Suite 300
-----------------------------------
Holland, MI 49423
-----------------------------------
<PAGE> 1
EXHIBIT 3.2
ARTICLES OF AMENDMENT TO THE CHARTER
OF
AMERICAN RETIREMENT CORPORATION
Pursuant to the provisions of Section 48-16-102 of the Tennessee
Business Corporation Act, the undersigned corporation adopts the following
articles of amendment to its charter:
1. The name of the corporation is American Retirement Corporation.
2. The text of each amendment adopted is:
The following shall be inserted at the end of Article 8(b):
Pursuant to the authority vested in the Board of Directors in
accordance with the provisions of this Article 8 of the Charter, the
Board of Directors does hereby create, authorize and provide for the
issuance of the Series A Junior Preferred Stock out of the class of
5,000,000 shares of preferred stock, no par value per share (the
"Preferred Stock"), having the voting powers, designation, relative,
participating, optional and other special rights, preferences, and
qualifications, limitations and restrictions thereof that are set forth
as follows:
Section 1. Designation and Amount. The shares of such series
shall be designated as Series A Junior Preferred Stock ("Series A
Preferred Stock") and the number of shares constituting such series
shall be 2,000,000. Such number of shares may be adjusted by
appropriate action of the Board of Directors.
Section 2. Dividends and Distributions. Subject to the prior
and superior rights of the holders of any shares of any other series of
Preferred Stock or any other shares of Preferred Stock of the
corporation ranking prior and superior to the shares of Series A
Preferred Stock with respect to dividends, each holder of one
one-hundredth (1/100) of a share (a "Unit") of Series A Preferred Stock
shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for that purpose, dividends at
the same rate as dividends are paid with respect to the Common Stock.
In the event that the corporation shall at any time after December 7,
1998 (the "Rights Dividend Declaration Date") (i) declare or pay any
dividend on outstanding shares of Common Stock payable in shares of
Common Stock, or (ii) subdivide outstanding shares of Common Stock or
(iii) combine outstanding shares of Common Stock into a smaller number
of shares, then in each such case the amount to which the holder of a
Unit of Series A Preferred Stock was entitled immediately prior to such
event pursuant to the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which shall be
the number of shares of Common Stock that are outstanding immediately
after such event and the denominator of which shall be the number of
shares of Common Stock that were outstanding immediately prior to such
event.
<PAGE> 2
Section 3. Voting Rights. The holders of Units of Series A
Preferred Stock shall have the following voting rights.
(A) Subject to the provision for adjustment hereinafter set
forth, each Unit of Series A Preferred Stock shall entitle the holder
thereof to one vote on all matters submitted to a vote of the
shareholders of the corporation. In the event the corporation shall at
any time after the Rights Dividend Declaration Date (i) declare any
dividend on outstanding shares of Common Stock payable in shares of
Common Stock, (ii) subdivide outstanding shares of Common Stock or
(iii) combine the outstanding shares of Common Stock into a smaller
number of shares, then in each such case the number of votes per Unit
to which holders of Units of Series A Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such
number by a fraction the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such event and
the denominator of which shall be the number of shares of Common Stock
that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders
of Units of Series A Preferred stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted
to a vote of shareholders of the corporation.
(C) Except as set forth herein or required by law, holders of
Units of Series A Preferred Stock shall have no special voting rights
and their consent shall not be required (except to the extent they are
entitled to vote with holders of shares of Common Stock as set forth
herein) for the taking of any corporate action.
Section 4. Reacquired Shares. Any Units of Series A Preferred
Stock purchased or otherwise acquired by the corporation in any manner
whatsoever shall be retired and cancelled promptly after the
acquisition thereof. All such Units shall, upon their cancellation,
become authorized but unissued Units of Preferred Stock to be created
by resolution or resolutions of the Board of Directors, subject to the
conditions and restrictions on issuance set forth herein.
Section 5. Liquidation. Upon any liquidation, dissolution or
winding up of the corporation, whether voluntary or involuntary, the
holders of Units of Series A Preferred Stock shall be entitled to share
in any assets remaining ratably with the holders of the Common Stock.
In the event the corporation shall at any time after the Rights
Dividend Declaration Date (i) increase by way of stock split or similar
transaction the number of outstanding shares of Common Stock, (ii)
subdivide the outstanding shares of Common Stock, or (iii) combine the
outstanding shares of Common Stock into a smaller number of
2
<PAGE> 3
shares, then in each such case the aggregate amount to which holders of
Units of Series A Preferred Stock were entitled prior to such event
shall be adjusted by multiplying such amount by a fraction, the
numerator of which shall be the number of shares of Common Stock that
are outstanding immediately after such event and the denominator of
which shall be the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 6. Share Exchange, Merger, Etc. In case the
corporation shall enter into any share exchange, merger, combination or
other transaction in which the shares of Common Stock are exchanged for
or converted into other stock or securities, cash and/or any other
property, then in any such case Units of Series A Preferred Stock shall
at the same time be similarly exchanged for or converted into an amount
per Unit (subject to the provision for adjustment hereinafter set
forth) equal to the aggregate amount of stock, securities, cash and/or
any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is converted or exchanged. In the
event the corporation shall at any time after the Rights Dividend
Declaration Date (i) declare any dividend on outstanding shares of
Common Stock payable in shares of Common Stock, or (ii) subdivide
outstanding shares of Common Stock, or (iii) combine outstanding Common
Stock into a smaller number of shares, then in each such case the
amount set forth in the immediately preceding sentence with respect to
the exchange or conversion of Units of Series A Preferred Stock shall
be adjusted by multiplying such amount by a fraction the numerator of
which shall be the number of shares of Common Stock that are
outstanding immediately after such event and the denominator of which
shall be the number of shares of Common Stock that were outstanding
immediately prior to such event.
Section 7. Redemption. The Units of Series A Preferred Stock
shall not be redeemable at the option of the corporation or any holder
thereof. Notwithstanding the foregoing sentence of this Section, the
corporation may acquire Units of Series A Preferred Stock in any other
manner permitted by law and the Charter or Bylaws of the corporation.
Section 8. Ranking. The Units of Series A Preferred Stock
shall rank junior to all other series of the Preferred Stock and to any
other class of preferred stock that hereafter may be issued by the
corporation as to the payment of dividends and the distribution of
assets, unless the terms of any such series or class shall provide
otherwise.
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Section 9. Amendment. The Charter, including without
limitation the provisions hereof, shall not hereafter be amended,
either directly or indirectly, or through merger or share exchange with
another corporation, in any manner that would alter or change the
powers, preferences or special rights of the Series A Preferred Stock
so as to affect the holders thereof adversely without the affirmative
vote of the holders of a majority or more of the outstanding Units of
Series A Preferred Stock, voting separately as a class.
Section 10. Fractional Shares. The Series A Preferred Stock
may be issued in Units or other fractions of a share, which Units or
fractions shall entitle the holder, in proportion to such holder's
fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other
rights of holders of Series A Preferred Stock.
3. The amendment was duly adopted on November 18, 1998 by the board of
directors at a duly called meeting of the board of directors.
Date: November 19, 1998
AMERICAN RETIREMENT CORPORATION
/s/ H. Todd Kaestner
---------------------------------------
By: H. Todd Kaestner
-----------------------------------
Title: EVP - Corporate Development
--------------------------------
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EXHIBIT 3.3
BYLAWS
OF
AMERICAN RETIREMENT CORPORATION
(THE "CORPORATION")
(AS AMENDED THROUGH NOVEMBER 18, 1998)
ARTICLE I.
OFFICES
The Corporation may have such offices, either within or without the
State of Tennessee, as the Board of Directors may designate or as the business
of the Corporation may require from time to time.
ARTICLE II.
SHAREHOLDERS
2.1 ANNUAL MEETING.
An annual meeting of the shareholders of the Corporation shall be held
on such date as may be determined by the Board of Directors; provided, that, the
first annual meeting of shareholders shall not be held until 1998. The business
to be transacted at such meeting shall be the election of directors and such
other business as shall be properly brought before the meeting.
2.2 SPECIAL MEETINGS.
Unless otherwise required by law or the Corporation's Charter (the
"Charter"), as amended from time to time, a special meeting of shareholders
shall be held only on the call of the Board of Directors or if the holders of at
least twenty-five percent (25%) of all the votes entitled to be cast on any
issue proposed to be considered at the proposed special meeting sign, date, and
deliver to the Corporation's Secretary one or more written demands for the
meeting describing the purpose or purposes for which such special meeting is to
be held, including all statements necessary to make any statement of such
purpose not incomplete, false, or misleading, and include any other information
specified in Schedule 14A, Rule 14a-3, Rule 14a-8, or Rule 14a-11 (or such
successor schedules or rules) of the Rules and Regulations of the Securities and
Exchange Commission. Only business within the purpose or purposes described in
the meeting notice may be conducted at a special shareholders' meeting.
2.3 PLACE OF MEETINGS.
The Board of Directors may designate any place, either within or
without the State of Tennessee, as the place of meeting for any annual meeting
or for any special meeting. If no place is fixed by the Board of Directors, the
meeting shall be held at the principal office of the Corporation.
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2.4 NOTICE OF MEETINGS; WAIVER.
(a) NOTICE. Notice of the date, time, and place of each annual
and special shareholders' meeting and, in the case of a special meeting, a
description of the purpose or purposes for which the meeting is called, shall be
given no fewer than ten days nor more than two months before the date of the
meeting. Such notice shall comply with the requirements of Article XI of these
Bylaws.
(b) WAIVER. A shareholder may waive any notice required by
law, the Charter, or these Bylaws before or after the date and time stated in
such notice. Except as provided in the next sentence, the waiver must be in
writing, be signed by the shareholder entitled to the notice and be delivered to
the Corporation for inclusion in the minutes or filing with the corporate
records. A shareholder's attendance at a meeting: (i) waives objection to lack
of notice or defective notice of the meeting, unless the shareholder at the
beginning of the meeting (or promptly upon his arrival) objects to holding the
meeting or transacting business at the meeting; and (ii) waives objection to
consideration of a particular matter at the meeting that is not within the
purpose or purposes described in the meeting notice, unless the shareholder
objects to considering the matter when it is presented.
2.5 RECORD DATE.
The Board of Directors shall fix as the record date for the
determination of shareholders entitled to notice of a shareholders' meeting, to
demand a special meeting, to vote, or to take any other action, a date not more
than seventy days before the meeting or action requiring a determination of
shareholders. A record date fixed for a shareholders' meeting is effective for
any adjournment of such meeting unless the Board of Directors fixes a new record
date, which it must do if the meeting is adjourned to a date more than four
months after the date fixed for the original meeting.
2.6 SHAREHOLDERS' LIST.
After the record date for a meeting has been fixed, the Corporation
shall prepare an alphabetical list of the names of all shareholders who are
entitled to notice of a shareholders' meeting. Such list will show the address
of and number of shares held by each shareholder. The shareholders' list will be
available for inspection by any shareholder, beginning two business days after
notice of the meeting is given for which the list was prepared and continuing
through the meeting, at the Corporation's principal office or at a place
identified in the meeting notice in the city where the meeting will be held. A
shareholder or his agent or attorney is entitled on written demand to inspect
and, subject to the requirements of the Tennessee Business Corporation Act (the
"Act"), to copy the list, during regular business hours and at his expense,
during the period it is available for inspection.
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2.7 VOTING OF SHARES.
Unless otherwise provided by the Act or the Charter, each outstanding
share is entitled to one vote on each matter voted on at a shareholders'
meeting. Only shares are entitled to vote. Unless otherwise provided in the
Charter, directors are elected by a plurality of the votes cast by the shares
entitled to vote in the election at a meeting at which a quorum is present.
2.8 PROXIES.
A shareholder may vote his or her shares in person or by proxy. A
shareholder may appoint a proxy to vote or otherwise act for him or her by
signing an appointment either personally or through an attorney-in-fact. An
appointment of a proxy is effective when received by the Secretary or other
officer or agent authorized to tabulate votes. An appointment is valid for
eleven months unless another period is expressly provided in the appointment
form. An appointment of a proxy is revocable by the shareholder unless the
appointment form conspicuously states that it is irrevocable and the appointment
is coupled with an interest.
2.9 ACCEPTANCE OF SHAREHOLDER DOCUMENTS.
If the name signed on a shareholder document (a vote, consent, waiver,
or proxy appointment) corresponds to the name of a shareholder, the Corporation,
if acting in good faith, is entitled to accept such shareholder document and
give it effect as the act of the shareholder. If the name signed on such
shareholder document does not correspond to the name of a shareholder, the
Corporation, if acting in good faith, is nevertheless entitled to accept such
shareholder document and to give it effect as the act of the shareholder if:
(a) the shareholder is an entity and the name signed purports
to be that of an officer or agent of the entity;
(b) the name signed purports to be that of a fiduciary
representing the shareholder and, if the Corporation requests, evidence
of fiduciary status acceptable to the Corporation has been presented
with respect to such shareholder document;
(c) the name signed purports to be that of a receiver or
trustee in bankruptcy of the shareholder and, if the Corporation
requests, evidence of this status acceptable to the Corporation has
been presented with respect to the shareholder document;
(d) the name signed purports to be that of a pledgee,
beneficial owner, or attorney-in-fact of the shareholder and, if the
Corporation requests, evidence acceptable to the Corporation of the
signatory's authority to sign for the shareholder has been presented
with respect to such shareholder document; or
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(e) two or more persons are the shareholder as co-tenants or
fiduciaries and the name signed purports to be the name of at least one
of the co-owners and the person signing appears to be acting on behalf
of all the co-owners.
The Corporation is entitled to reject a shareholder document if the
Secretary or other officer or agent authorized to tabulate votes, acting in good
faith, has a reasonable basis for doubt about the validity of the signature on
such shareholder document or about the signatory's authority to sign for the
shareholder.
2.10 ACTION WITHOUT MEETING.
No action required or permitted by the Act to be taken at a
shareholders' meeting may be taken without a meeting, unless the total number of
shareholders is less than ten. If there are fewer than ten shareholders and all
such shareholders consent to taking such action without a meeting, the
affirmative vote of the number of shares that would be necessary to authorize or
take such action at a meeting is the act of the shareholders.
The action must be evidenced by one or more written consents describing
the action taken, at least one of which is signed by each shareholder entitled
to vote on the action in one or more counterparts, indicating such signing
shareholder's vote or abstention on the action and delivered to the Corporation
for inclusion in the minutes or for filing with the corporate records.
If the Act or the Charter requires that notice of a proposed action be
given to nonvoting shareholders and the action is to be taken by consent of the
voting shareholders, then the Corporation shall give its nonvoting shareholders
written notice of the proposed action at least ten days before such action is
taken. Such notice shall contain or be accompanied by the same material that
would have been required to be sent to nonvoting shareholders in a notice of a
meeting at which the proposed action would have been submitted to the
shareholders for action.
2.11 PRESIDING OFFICER AND SECRETARY.
Meetings of the shareholders shall be presided over by the Chairman, or
if the Chairman is not present or if the Corporation shall not have a Chairman,
by the President or Chief Executive Officer, or if neither the Chairman nor the
President or Chief Executive Officer is present, by a chairman chosen by a
majority of the shareholders entitled to vote at such meeting. The Secretary or,
in the Secretary's absence, an Assistant Secretary shall act as secretary of
every meeting, but if neither the Secretary nor an Assistant Secretary is
present, a majority of the shareholders entitled to vote at such meeting shall
choose any person present to act as secretary of the meeting.
2.12 NOTICE OF NOMINATIONS.
Nominations for the election of directors may be made by the Board of
Directors or a committee appointed by the Board of Directors authorized to make
such nominations or by any
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shareholder entitled to vote in the election of directors generally. Any such
shareholder nomination may be made, however, only if written notice of such
nomination has been given, either by personal delivery or the United States
mail, postage prepaid, to the Secretary of the Corporation not later than (a)
with respect to an election to be held at an annual meeting of shareholders, one
hundred twenty days in advance of the anniversary date of the proxy statement
for the previous year's annual meeting, and (b) with respect to an election to
be held at a special meeting of shareholders for the election of directors
called other than by written request of a shareholder, the close of business on
the tenth day following the date on which notice of such meeting is first given
to shareholders, and (c) in the case of a special meeting of shareholders duly
called upon the written request of a shareholder to fill a vacancy or vacancies
(then existing or proposed to be created by removal at such meeting), within ten
business days of such written request. In the case of any nomination by the
Board of Directors or a committee appointed by the Board of Directors authorized
to make such nominations, compliance with the proxy rules of the Securities and
Exchange Commission shall constitute compliance with the notice provisions of
the preceding sentence.
In the case of any nomination by a shareholder, each such notice shall
set forth: (a) as to each person whom the shareholder proposes to nominate for
election or re-election as a director, (i) the name, age, business address, and
residence address of such person, (ii) the principal occupation or employment of
such person, (iii) the class and number of shares of the Corporation which are
beneficially owned by such person, and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies with
respect to nominees for election as directors, pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (including without limitation
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director, if elected); and (b) as to the shareholder giving
the notice (i) the name and address, as they appear on the Corporation's books,
of such shareholder, and (ii) the class and number of shares of the Corporation
which are beneficially owned by such shareholder; and (c) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder. The presiding
officer of the meeting may refuse to acknowledge the nomination of any person
not made in compliance with the foregoing procedure.
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2.13 NOTICE OF NEW BUSINESS.
At an annual meeting of the shareholders only such new business shall
be conducted, and only such proposals shall be acted upon, as have been properly
brought before the meeting. To be properly brought before the annual meeting
such new business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors, or (c) otherwise properly brought before the meeting by a
shareholder. For a proposal to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation and the proposal and the shareholder must
comply with Regulation 14A under the Securities Exchange Act of 1934. To be
timely, a shareholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than one hundred
twenty calender days in advance of the anniversary date of the proxy statement
for the previous year's annual meeting. If the Corporation did not hold an
annual meeting the previous year, or if the date of the annual meeting has been
changed by more than thirty (30) calendar days from the date of the previous
year's annual meeting, then, in order to be timely, a shareholder's notice must
be received at the principal executive offices of the Corporation not later than
one hundred twenty calendar days before the date of such annual meeting or the
tenth day following the date on which public announcement of such annual meeting
is first made. In no event shall the public announcement of an adjournment of an
annual meeting commence a new time period for the giving of a shareholder's
notice as described above.
A shareholder's notice to the Secretary shall set forth as to each
matter the shareholder proposes to bring before the annual meeting (a) a brief
description of the proposal desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the Corporation's books, of the shareholder proposing
such business, (c) the class and number of shares of the Corporation which are
beneficially owned by the shareholder, and (d) any financial interest of the
shareholder in such proposal.
Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this Section 2.13. The presiding officer of the meeting shall, if
the facts warrant, determine and declare to the meeting that new business or any
shareholder proposal was not properly brought before the meeting in accordance
with the provisions of this Section 2.13, and if he or she should so determine,
he or she shall so declare to the meeting and any such business or proposal not
properly brought before the meeting shall not be acted upon at the meeting. This
provision shall not prevent the consideration and approval or disapproval at the
annual meeting of reports of officers, directors and committees, but in
connection with such reports no new business shall be acted upon at such annual
meeting unless stated and filed as herein provided.
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2.14 CONDUCT OF MEETINGS.
Meetings of the shareholders generally shall follow accepted rules of
parliamentary procedure subject to the following:
(a) The presiding officer of the meeting shall have absolute authority
over the matters of procedure, and there shall be no appeal from the ruling of
the presiding officer. If, in his or her absolute discretion, the presiding
officer deems it advisable to dispense with the rules of parliamentary procedure
as to any meeting of shareholders or part thereof, he or she shall so state and
shall state the rules under which the meeting or appropriate part thereof shall
be conducted.
(b) If disorder should arise which prevents the continuation of the
legitimate business of the meeting, the presiding officer may quit the chair and
announce the adjournment of the meeting, and upon so doing, the meeting will
immediately be adjourned.
(c) The presiding officer may ask or require that anyone not a bona
fide shareholder or proxy leave the meeting.
(d) The resolution or motion shall be considered for vote only if
proposed by a shareholder or a duly authorized proxy and seconded by a
shareholder or duly authorized proxy other than the individual who proposed the
resolution or motion.
(e) Except as the President, Chief Executive Officer, or chairman may
permit, no matter shall be presented to the meeting which has not been submitted
for inclusion in the agenda at least thirty (30) days prior to the meeting.
ARTICLE III.
DIRECTORS
3.1 POWERS AND DUTIES.
All corporate powers shall be exercised by or under the authority of
and the business and affairs of the Corporation managed under the direction of
the Board of Directors.
3.2 NUMBER AND TERM.
(a) NUMBER. The Board of Directors shall consist of no fewer
than three or more than fifteen members. The exact number of directors, within
the minimum and maximum, or the range for the size of the Board, or whether the
size of the Board shall be fixed or variable-range, may be fixed, changed, or
determined from time to time by the Board of Directors.
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(b) TERM. The directors shall be divided into three classes,
designated Class I, Class II and Class III. Each class shall consist, as nearly
as may be possible, of one-third of the total number of directors constituting
the entire Board of Directors. At the 1998 annual meeting of shareholders, Class
I directors shall be elected; at the 1999 annual meeting of shareholders, Class
II directors shall be elected; and at the 2000 annual meeting of shareholders,
Class III directors shall be elected. At each succeeding annual meeting of
shareholders beginning with the annual meeting in 1998, successors to the class
of directors whose term expires at that annual meeting shall be elected for
three year terms. If the number of directors is changed, any increase or
decrease shall be apportioned among the classes so as to maintain the number of
directors in each class as nearly equal as possible, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
A director shall hold office until the annual meeting of shareholders for the
year in which his or her term expires and until his or her successor shall be
elected and shall qualify, subject, however, to prior death, resignation,
retirement, disqualification, or removal from office.
3.3 MEETINGS; NOTICE.
The Board of Directors may hold regular and special meetings either
within or without the State of Tennessee. The Board of Directors may permit any
or all directors to participate in a regular or special meeting by, or conduct
the meeting through the use of, any means of communication by which all
directors participating may simultaneously hear each other during the meeting. A
director participating in a meeting by this means is deemed to be present in
person at the meeting.
(a) REGULAR MEETINGS. Unless the Charter otherwise provides,
regular meetings of the Board of Directors may be held without notice of the
date, time, place, or purpose of the meeting.
(b) SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the Chairman, the President, or a majority of the
directors. Unless the Charter otherwise provides, special meetings must be
preceded by at least twenty-four (24) hours' notice of the date, time, and place
of the meeting but need not describe the purpose of such meeting. Such notice
shall comply with the requirements of Article XI of these Bylaws.
(c) ADJOURNED MEETINGS. Notice of an adjourned meeting need
not be given if the time and place to which the meeting is adjourned are fixed
at the meeting at which the adjournment is taken, and if the period of
adjournment does not exceed one month in any one adjournment.
(d) WAIVER OF NOTICE. A director may waive any required notice
before or after the date and time stated in the notice. Except as provided in
the next sentence, the waiver must be in writing, signed by the director, and
filed with the minutes or corporate records. A director's attendance at or
participation in a meeting waives any required notice to him or her of such
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meeting unless the director at the beginning of the meeting (or promptly upon
his arrival) objects to holding the meeting or transacting business at the
meeting and does not thereafter vote for or assent to action taken at the
meeting.
3.4 QUORUM.
Unless the Charter requires a greater number, a quorum of the Board of
Directors consists of a majority of the fixed number of directors if the
Corporation has a fixed board size or a majority of the number of directors
prescribed, or if no number is prescribed, the number in office immediately
before the meeting begins, if the Corporation has a variable range board.
3.5 VOTING.
If a quorum is present when a vote is taken, the affirmative vote of a
majority of directors present is the act of the Board of Directors, unless the
Charter or these Bylaws require the vote of a greater number of directors. A
director who is present at a meeting of the Board of Directors when corporate
action is taken is deemed to have assented to such action unless:
(a) he or she objects at the beginning of the meeting (or
promptly upon his or her arrival) to holding the meeting or transacting
business at the meeting;
(b) his or her dissent or abstention from the action taken is
entered in the minutes of the meeting; or
(c) he or she delivers written notice of his or her dissent or
abstention to the presiding officer of the meeting before its
adjournment or to the Corporation immediately after adjournment of the
meeting. The right of dissent or abstention is not available to a
director who votes in favor of the action taken.
3.6 ACTION WITHOUT MEETING.
Unless the Charter otherwise provides, any action required or permitted
by the Act to be taken at a Board of Directors meeting may be taken without a
meeting. If all directors consent to taking such action without a meeting, the
affirmative vote of the number of directors that would be necessary to authorize
or take such action at a meeting is the act of the Board of Directors. Such
action must be evidenced by one or more written consents describing the action
taken, at least one of which is signed by each director, indicating the
director's vote or abstention on the action, which consents shall be included in
the minutes or filed with the corporate records reflecting the action taken.
Action taken by consent is effective when the last director signs the consent,
unless the consent specifies a different effective date.
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3.7 COMPENSATION.
Directors and members of any committee created by the Board of
Directors shall be entitled to such reasonable compensation for their services
as directors and members of such committee as shall be fixed from time to time
by the Board or a committee thereof, and shall also be entitled to reimbursement
for any reasonable expenses incurred in attending meetings of the Board or of
any such committee meetings. Any director receiving such compensation shall not
be barred from serving the Corporation in any other capacity and receiving
reasonable compensation for such other services.
3.8 RESIGNATION.
A director may resign at any time by delivering written notice to the
Board of Directors or to the Chairman or President. A resignation is effective
when the notice is delivered unless the notice specifies a later effective date.
3.9 VACANCIES.
Unless the Charter otherwise provides, if a vacancy occurs on the Board
of Directors, including a vacancy resulting from an increase in the number of
directors or a vacancy resulting from the removal of a director with or without
cause, either the shareholders or the Board of Directors may fill such vacancy.
If the vacancy is filled by the shareholders, it shall be filled by a plurality
of the votes cast at a meeting at which a quorum is present. If the directors
remaining in office constitute fewer than a quorum of the Board of Directors,
they may fill such vacancy by the affirmative vote of a majority of all the
directors remaining in office.
3.10 REMOVAL OF DIRECTORS.
(a) BY SHAREHOLDERS. The shareholders may remove one (1) or
more directors with or without cause unless the Charter provides that directors
may be removed only for cause. If cumulative voting is authorized, a director
may not be removed if the number of votes sufficient to elect him or her under
cumulative voting is voted against his or her removal. If cumulative voting is
not authorized, a director may be removed only if the number of votes cast to
remove him exceeds the number of votes cast not to remove him or her.
(b) BY DIRECTORS. If so provided by the Charter, any of the
directors may be removed for cause by the affirmative vote of a majority of the
entire Board of Directors.
(c) GENERAL. A director may be removed by the shareholders or
directors only at a meeting called for the purpose of removing him or her, and
the meeting notice must state that the purpose, or one of the purposes, of the
meeting is removal of directors.
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ARTICLE IV.
COMMITTEES
Unless the Charter otherwise provides, the Board of Directors may
create one or more committees, each consisting of one or more members. All
members of committees of the Board of Directors which exercise powers of the
Board of Directors must be members of the Board of Directors and serve at the
pleasure of the Board of Directors.
The creation of a committee and appointment of a member or members to
it must be approved by the greater of (i) a majority of all directors in office
when the action is taken or (ii) the number of directors required by the Charter
or these Bylaws to take action.
Unless otherwise provided in the Act, to the extent specified by the
Board of Directors or in the Charter, each committee may exercise the authority
of the Board of Directors. All such committees and their members shall be
governed by the same statutory requirements regarding meetings, action without
meetings, notice and waiver of notice, quorum, and voting requirements as are
applicable to the Board of Directors and its members.
ARTICLE V.
OFFICERS
5.1 NUMBER.
The officers of the Corporation shall be a Chairman, a President, a
Chief Executive Officer, a Chief Financial Officer, a Secretary and such other
officers as may be from time to time appointed by the Board of Directors or by
the Chairman with the Board of Directors' approval. One person may
simultaneously hold more than one office, except the President may not
simultaneously hold the office of Secretary.
5.2 APPOINTMENT.
The principal officers shall be appointed annually by the Board of
Directors at the first meeting of the Board following the annual meeting of the
shareholders, or as soon thereafter as is conveniently possible. Each officer
shall serve at the pleasure of the Board of Directors and until his or her
successor shall have been appointed, or until his or her death, resignation, or
removal.
5.3 RESIGNATION AND REMOVAL.
An officer may resign at any time by delivering notice to the
Corporation. Such resignation is effective when such notice is delivered unless
such notice specifies a later effective date. An officer's resignation does not
affect the Corporation's contract rights, if any, with the
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officer. The Board of Directors may remove any officer at any time with or
without cause, but such removal shall not prejudice the contract rights, if any,
of the person so removed.
5.4 VACANCIES.
Any vacancy in an office for any reason may be filled for the unexpired
portion of the term by the Board of Directors.
5.5 DUTIES.
(a) CHAIRMAN. The Chairman shall preside at all meetings of
the shareholders and the Board of Directors and shall see that all orders and
resolutions of the Board of Directors are carried into effect.
(b) VICE CHAIRMAN. The Vice Chairman, if such an officer be
elected, shall, if present in the absence of the Chairman, preside at all
meetings of the Board of Directors and exercise and perform such other powers
and duties as may be from time to time assigned to him or her by the Board of
Directors or prescribed by these Bylaws.
(c) CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of
the Corporation shall have general supervision over the active management of the
business of the Corporation.
(d) PRESIDENT. The President shall have the general powers and
duties of supervision and management usually vested in the office of the
President of a corporation and shall perform such other duties as the Board of
Directors may from time to time prescribe.
(e) VICE PRESIDENT. The Vice President or Vice Presidents (if
any) shall assist the Chairman, President, and Chief Executive Officer in the
active management of the business, and shall perform such other duties as the
Board of Directors may from time to time prescribe.
(f) CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall
have the custody of the Corporation's funds and securities, shall keep or cause
to be kept full and accurate account of receipts and disbursements in books
belonging to the Corporation, and shall deposit or cause to be deposited all
monies and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of Directors.
The Chief Financial Officer shall disburse or cause to be disbursed the funds of
the Corporation as required in the ordinary course of business or as may be
ordered by the Board, taking proper vouchers for such disbursements, and shall
render to the Chairman, the President, the Chief Executive Officer, and
directors at the regular meetings of the Board, or whenever they may require it,
an account of all of his or her transactions as Chief Financial Officer and the
financial condition of the Corporation. He or she shall perform such other
duties as may be incident to the office or as prescribed from time to time by
the Board of Directors.
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(g) SECRETARY AND ASSISTANT SECRETARY. The Secretary or
Assistant Secretary shall attend all meetings of the Board of Directors and all
meetings of the shareholders and shall prepare and record all votes and all
minutes of all such meetings in a book to be kept for that purpose. He or she
shall also perform like duties for any committee when required. The Secretary or
Assistant Secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the Board of Directors when required, and unless
directed otherwise by the Board of Directors, shall keep a stock record
containing the names of all persons who are shareholders of the Corporation,
showing their place of residence and the number of shares held by each of them.
The Secretary or Assistant Secretary shall have the responsibility of
authenticating records of the Corporation. The Secretary or Assistant Secretary
shall perform such other duties as may be prescribed from time to time by the
Board of Directors.
(h) OTHER OFFICERS. Other officers appointed by the Board of
Directors shall exercise such powers and perform such duties as may be delegated
to them.
(i) DELEGATION OF DUTIES. In case of the absence or disability
of any officer of the Corporation or of any person authorized to act in his or
her place, the Board of Directors may from time to time delegate the powers and
duties of such officer to any officer, or any director, or any other person whom
it may select, during such period of absence or disability.
5.6 INDEMNIFICATION, ADVANCEMENT OF EXPENSES, AND INSURANCE.
(a) INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. The
Corporation shall indemnify and advance expenses to each director and officer of
the Corporation, or any person who may have served at the request of the
Corporation's Board of Directors or its President or Chief Executive Officer as
a director or officer of another corporation (and, in either case, such person's
heirs, executors, and administrators), to the full extent allowed by the laws of
the State of Tennessee, both as now in effect and as hereafter adopted. The
Corporation may indemnify and advance expenses to any employee or agent of the
Corporation who is not a director or officer (and such person's heirs,
executors, and administrators) to the same extent as to a director or officer,
if the Board of Directors determines that doing so is in the best interests of
the Corporation.
(b) NON-EXCLUSIVITY OF RIGHTS. The indemnification and expense
advancement provisions of subsection (a) of this Section 5.6 shall not be
exclusive of any other right which any person (and such person's heirs,
executors and administrators) may have or hereafter acquire under any statute,
provision of the Charter, provision of these Bylaws, resolution adopted by the
shareholders, resolution adopted by the Board of Directors, agreement, or
insurance (purchased by the Corporation or otherwise), both as to action in such
person's official capacity and as to action in another capacity.
(c) INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any individual who is or was a director, officer,
employee, or agent of the
13
<PAGE> 14
Corporation, or who, while a director, officer, employee, or agent of the
Corporation, is or was serving at the request of the Corporation's Board of
Directors or its Chief Executive Officer as a director, officer, partner,
trustee, employee, or agent of another corporation, partnership, joint venture,
trust, employee benefit plan, or other enterprise against any expense,
liability, or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability, or loss under this
Article or the Act.
ARTICLE VI.
SHARES OF STOCK
6.1 SHARES WITH OR WITHOUT CERTIFICATES.
The Board of Directors may authorize that some or all of the shares of
any or all of the Corporation's classes or series of stock be evidenced by a
certificate or certificates of stock. The Board of Directors may also authorize
the issue of some or all of the shares of any or all of the Corporation's
classes or series of stock without certificates. The rights and obligations of
shareholders with the same class and/or series of stock shall be identical
whether or not their shares are represented by certificates.
(a) SHARES WITH CERTIFICATES. If the Board of Directors
chooses to issue shares of stock evidenced by a certificate or certificates,
each individual certificate shall include the following on its face: (i) the
Corporation's name, (ii) the fact that the Corporation is organized under the
laws of the State of Tennessee, (iii) the name of the person to whom the
certificate is issued, (iv) the number of shares represented thereby, (v) the
class of shares and the designation of the series, if any, which the certificate
represents, and (vi) such other information as applicable law may require or as
may be lawful.
If the Corporation is authorized to issue different classes of
shares or different series within a class, the designations, relative rights,
preferences, and limitations determined for each series (and the authority of
the Board of Directors to determine variations for future series) shall be
summarized on the front or back of each certificate. Alternatively, each
certificate shall state on its front or back that the Corporation will furnish
the shareholder this information in writing, without charge, upon request.
Each certificate of stock issued by the Corporation shall be
signed (either manually or in facsimile) by any two officers of the Corporation.
If the person who signed a certificate no longer holds office when the
certificate is issued, the certificate is nonetheless valid.
(b) SHARES WITHOUT CERTIFICATES. If the Board of Directors
chooses to issue shares of stock without certificates, the Corporation, if
required by the Act, shall, within a reasonable time after the issue or transfer
of shares without certificates, send the shareholder a written statement of the
information required on certificates by Section 6.1(a) of these Bylaws and any
other information required by the Act.
14
<PAGE> 15
6.2 SUBSCRIPTIONS FOR SHARES.
Subscriptions for shares of the Corporation shall be valid only if they
are in writing. Unless the subscription agreement provides otherwise,
subscriptions for shares, regardless of the time when they are made, shall be
paid in full at such time, or in such installments and at such periods, as shall
be determined by the Board of Directors. All calls for payment on subscriptions
shall be uniform as to all shares of the same class or of the same series,
unless the subscription agreement specifies otherwise.
6.3 TRANSFERS.
Transfers of shares of the capital stock of the Corporation shall be
made only on the books of the Corporation by (i) the holder of record thereof,
(ii) his or her legal representative, who, upon request of the Corporation,
shall furnish proper evidence of authority to transfer, or (iii) his or her
attorney, authorized by a power of attorney duly executed and filed with the
Secretary of the Corporation or a duly appointed transfer agent. Such transfers
shall be made only upon surrender, if applicable, of the certificate or
certificates for such shares properly endorsed and with all taxes thereon paid.
6.4 LOST, DESTROYED, OR STOLEN CERTIFICATES.
No certificate for shares of stock of the Corporation shall be issued
in place of any certificate alleged to have been lost, destroyed, or stolen
except on production of evidence, satisfactory to the Board of Directors, of
such loss, destruction, or theft, and, if the Board of Directors so requires,
upon the furnishing of an indemnity bond in such amount and with such terms and
such surety as the Board of Directors may in its discretion require.
ARTICLE VII.
CORPORATE ACTIONS
7.1 CONTRACTS.
Unless otherwise required by the Board of Directors, the Chairman, the
President, the Chief Executive Officer, or any Vice President shall execute
contracts or other instruments on behalf of and in the name of the Corporation.
The Board of Directors may from time to time authorize any other officer,
assistant officer, or agent to enter into any contract or execute any instrument
in the name of and on behalf of the Corporation as it may deem appropriate, and
such authority may be general or confined to specific instances.
15
<PAGE> 16
7.2 LOANS.
No loans shall be contracted on behalf of the Corporation and no
evidence of indebtedness shall be issued in its name unless authorized by the
Chairman, the President, the Chief Executive Officer, or the Board of Directors.
Such authority may be general or confined to specific instances.
7.3 CHECKS, DRAFTS, ETC.
Unless otherwise required by the Board of Directors, all checks,
drafts, bills of exchange, and other negotiable instruments of the Corporation
shall be signed by either the Chairman, the President, the Chief Executive
Officer, a Vice President or such other officer, assistant officer, or agent of
the Corporation as may be authorized so to do by the Board of Directors. Such
authority may be general or confined to specific business, and, if so directed
by the Board, the signatures of two or more such officers may be required.
7.4 DEPOSITS.
All funds of the Company not otherwise employed shall be deposited from
time to time to the credit of the Corporation in such banks or other
depositories as the Board of Directors may authorize.
7.5 VOTING SECURITIES HELD BY THE CORPORATION.
Unless otherwise required by the Board of Directors, the Chairman,
President, or Chief Executive officer shall have full power and authority on
behalf of the Corporation to attend any meeting of security holders, or to take
action on written consent as a security holder, of other corporations in which
the Corporation may hold securities. In connection therewith the Chairman, the
President, or the Chief Executive Officer shall possess and may exercise any and
all rights and powers incident to the ownership of such securities which the
Corporation possesses. The Board of Directors may, from time to time, confer
like powers upon any other person or persons.
7.6 DIVIDENDS.
The Board of Directors may, from time to time, declare, and the
Corporation may pay, dividends on its outstanding shares of capital stock in the
manner and upon the terms and conditions provided by applicable law. The record
date for the determination of shareholders entitled to receive the payment of
any dividend shall be determined by the Board of Directors, which in no event
will be less than ten days prior to the date of such payment.
16
<PAGE> 17
ARTICLE VIII.
FISCAL YEAR
The fiscal year of the Corporation shall be determined by the Board of
Directors, and in the absence of such determination, shall be the calendar year.
ARTICLE IX.
CORPORATE SEAL
The Corporation shall not have a corporate seal.
ARTICLE X.
AMENDMENT OF BYLAWS
These Bylaws may be altered, amended, repealed, or restated, and new
Bylaws may be adopted, at any meeting of the shareholders by the affirmative
vote of the holders of a majority of the voting power of the shares entitled to
vote for the election of directors, or by the affirmative vote of a majority of
the members of the Board of Directors who are present at any regular or special
meeting.
ARTICLE XI.
NOTICE
Unless otherwise provided for in these Bylaws, any notice required
shall be in writing except that oral notice is effective if it is reasonable
under the circumstances and not prohibited by the Charter or these Bylaws.
Notice may be communicated in person, by telephone, telegraph, teletype or other
form of wire or wireless communication, or by mail or private carrier. If these
forms of personal notice are impracticable, notice may be communicated by a
newspaper of general circulation in the area where published, or by radio,
television, or other form of public broadcast communication. Written notice to a
domestic or foreign corporation authorized to transact business in Tennessee may
be addressed to its registered agent at its registered office or to the
corporation or its secretary at its principal office as shown in its most recent
annual report or, in the case of a foreign corporation that has not yet
delivered an annual report, in its application for a certificate of authority.
Written notice to shareholders, if in a comprehensible form, is
effective when mailed, if mailed postpaid and correctly addressed to the
shareholder's address shown in the Corporation's current record of shareholders.
Except as provided above, written notice, if in a comprehensible form, is
effective at the earliest of the following: (a) when received; (b) five days
after its deposit in the United States mail, if mailed correctly addressed and
with first class postage affixed thereon; (c) on the date shown on the return
receipt, if sent by registered or certified mail, return receipt requested, and
the receipt is signed by or on behalf of the addressee; or (d) twenty days after
its deposit in the United States mail, as evidenced by the postmark if mailed
correctly
17
<PAGE> 18
addressed, and with other than first class, registered, or certified postage
affixed. Oral notice is effective when communicated if communicated in a
comprehensible manner.
18
<PAGE> 1
Exhibit 21
Subsidiaries of the Registrant
1. ARC Greenwood Village, Inc., a Tennessee corporation
2. ARC Rossmoor, Inc., a Tennessee corporation
3. Plaza Professional Pharmacy, Inc., a Virginia corporation
4. Assisted Care of the Villages, a Florida general partnership
5. Maryarc LLC, a Tennessee limited liability company
6. ARC Bahia Oaks, Inc., a Tennessee corporation
7. ARC Wilora Lake, Inc., a Tennessee corporation
8. ARC Tarpon Springs, Inc., a Tennessee corporation
9. ARC Imperial Plaza, Inc., a Tennessee corporation
10. ARC Imperial Services, Inc., a Tennessee corporation
11. ARC Sun City Center Inc., a Tennessee corporation
12. Lebarc, L.P., a Tennessee limited partnership
13. Fort Austin Limited Partnership, a Texas limited partnership
14. ARC Fort Austin Properties, Inc., a Tennessee corporation
15. ARCLP - Charlotte, LLC, a Tennessee limited liability company
16. ARC Management Corporation, a Tennessee corporation
17. ARC Corpus Christi, Inc., a Tennessee corporation
18. Trinity Towers Limited Partnership, a Tennessee limited partnership
19. ARC Partners, Inc., a Florida corporation
20. ARC Services, L.P., a Tennessee limited partnership
21. Pioneer Merger Corporation, a Tennessee corporation
<PAGE> 2
22. ARC Park Regency, Inc., a Tennessee corporation
23. ARC Capital Corporation, a Tennessee corporation
24. ARC Home Care, Inc. (f/k/a Guilding Light Health Care, Inc.), a Texas
corporation
25. ARC San Antonio, Inc., a Tennessee corporation
26. ARC Richmond Place, Inc., a Tennessee corporation
27. ARC Freedom, Inc., a Tennessee corporation
28. Freedom Group-Naples Management Company, Inc., a Tennessee corporation
29. Freedom Group Management Company, Inc., a Tennessee corporation
30. Freedom Group Development Company, Inc. (d/b/a Freedom Development
Corporation), a Tennessee corporation
31. S&S Building Materials of Pinellas, Inc., a Tennessee corporation
32. ARC Holland, Inc., a Tennessee corporation
33. Freedom Village of Holland, Michigan, a Michigan general partnership
34. ARC Seminole, Inc., a Tennessee corporation
35. Lake Seminole Square Management Company, Inc., a Tennessee corporation
36. Freedom Group-Lake Seminole Square, Inc., a Tennessee corporation
37. Freedom Village of Sun City Center, Ltd., a Florida limited partnership
38. ARC SCC, Inc., a Tennessee corporation
39. Flint Michigan Retirement Housing, LLC, a Tennessee limited liability
company
40. ARC Flint, Inc., a Tennessee corporation
41. ARC Lady Lake, Inc., a Tennessee corporation
42. ARC Charlotte, Inc., a Tennessee corporation
2
<PAGE> 3
43. Homewood at Brookmont Terrace, LLC, a Tennessee limited liability
company
44. ARC LifeMed, Inc., a Tennessee corporation
45. LifeMed LLC, a Delaware limited liability company
46. ARC Oakhurst, Inc., a Tennessee corporation
3
<PAGE> 1
Exhibit 23
ACCOUNTANTS' CONSENT
The Board of Directors
American Retirement Corp.
We consent to incorporation by reference in the Registration Statement Nos.
333-28657 and 333-66821 on Form S-8 of American Retirement Corporation of our
report dated February 17, 1999, relating to the consolidated balance sheets of
American Retirement Corporation and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, changes in
partners'/shareholders' equity, and cash flows for the years ended December 31,
1998 and 1997 and the related consolidated statements of operations, changes in
partners'/shareholders' equity and cash flows of American Retirement
Communities, L.P. and its consolidated entities for the year ended December 31,
1996, which report appears in the December 31, 1998 annual report on Form 10-K
of American Retirement Corporation.
Our report contains an explanatory paragraph that states that the Company
changed its method of accounting for costs of start-up activities to adopt the
provisions of Statement of Position No. 98-5, Reporting on the Costs of Start-up
Activities, effective January 1, 1998.
KPMG LLP
Nashville, Tennessee
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,400
<SECURITIES> 0
<RECEIVABLES> 11,158
<ALLOWANCES> 0
<INVENTORY> 826
<CURRENT-ASSETS> 54,446
<PP&E> 419,093
<DEPRECIATION> 27,625
<TOTAL-ASSETS> 595,854
<CURRENT-LIABILITIES> 28,642
<BONDS> 299,241
0
0
<COMMON> 171
<OTHER-SE> 145,671
<TOTAL-LIABILITY-AND-EQUITY> 595,854
<SALES> 0
<TOTAL-REVENUES> 142,357
<CGS> 0
<TOTAL-COSTS> 113,361
<OTHER-EXPENSES> 162
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,924
<INCOME-PRETAX> 15,002
<INCOME-TAX> 5,652
<INCOME-CONTINUING> 9,350
<DISCONTINUED> 2,146
<EXTRAORDINARY> 0
<CHANGES> 304
<NET-INCOME> 6,900
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FORM 10-K.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 44,583
<SECURITIES> 0
<RECEIVABLES> 6,178
<ALLOWANCES> 0
<INVENTORY> 483
<CURRENT-ASSETS> 60,285
<PP&E> 248,546
<DEPRECIATION> 18,648
<TOTAL-ASSETS> 317,154
<CURRENT-LIABILITIES> 12,541
<BONDS> 237,038
0
0
<COMMON> 114
<OTHER-SE> 53,804
<TOTAL-LIABILITY-AND-EQUITY> 317,154
<SALES> 0
<TOTAL-REVENUES> 90,181
<CGS> 0
<TOTAL-COSTS> 71,675
<OTHER-EXPENSES> 1
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,056
<INCOME-PRETAX> 6,124
<INCOME-TAX> 4,435
<INCOME-CONTINUING> 1,689
<DISCONTINUED> 155
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,534
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
