-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SM/lXqEadJT1kbQiWnIHXMJBmDvnlU0OMEEkEOaCrJBT9PNmMk28b7nXym2U3vAQ 5qbSliq29uOXLuo4oZ8vcA== 0000950144-99-003411.txt : 19990330 0000950144-99-003411.hdr.sgml : 19990330 ACCESSION NUMBER: 0000950144-99-003411 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN RETIREMENT CORP CENTRAL INDEX KEY: 0000787784 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 621674303 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13031 FILM NUMBER: 99576275 BUSINESS ADDRESS: STREET 1: 111 WESTWOOD PLACE STREET 2: SUITE 402 CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 6152212250 10-K 1 AMERICAN RETIREMENT CORPORATION 1 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 - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Tennessee 62-1674303 - --------- ---------- (State or Other Jurisdiction of (I.R.S. Employer ID No.) Incorporation or Organization) 111 Westwood Place, Suite 402, Brentwood, TN 37027 - -------------------------------------------- ----- (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 - ------------------- ------------------- 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 ---- ---- 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. --------- 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. 2 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 2 3 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 3 4 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. 4 5 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. 5 6 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 6 7 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 7 8 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. 8 9 EXECUTIVE OFFICERS The following table sets forth certain information concerning the executive officers of the Company.
NAME AGE POSITION ---- --- -------- 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
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. 9 10 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 10 11 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 11 12 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; 12 13 - 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 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 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 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 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 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 19 ITEM 2. PROPERTIES The table below sets forth certain information with respect to the senior living communities currently operated by the Company.
Resident Capacity(1) -------------------------------- Commencement Community Location IL AL SN Total of Operations(2) - --------- -------- -- -- -- ----- ---------------- Owned(3): - --------- Broadway Plaza Ft. Worth, TX 252 40 122 414 Apr-92 Carriage Club of Charlotte Charlotte, NC 355 54 50 459 May-96 Carriage Club of Jacksonville Jacksonville, FL 292 60 -- 352 May-96 Freedom Plaza 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 ----- --- --- -----
19 20
Resident Capacity(1) -------------------- Commencement Community Location IL AL SN Total of Operations(2) - --------- -------- -- -- -- ----- ---------------- Managed(12): - ------------ 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 ===== ===== ===== ======
- ----------------------- (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 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.
Year Ended December 31, 1998 High Low ------------------------------------------------------------------------------------ First Quarter $23.250 $20.000 Second Quarter 22.375 17.750 Third Quarter 19.625 14.063 Fourth Quarter 18.000 12.938 Year Ended December 31, 1997 High Low ------------------------------------------------------------------------------------ Second Quarter (beginning May 30, 1997) $17.875 $14.250 Third Quarter 21.875 17.750 Fourth Quarter 21.250 19.000
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 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.
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) 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 ========= ======== ======== ======== ======== ========
22 23
Consolidated -------------------------------------- Predecessor ----------- Years Ended December 31, -------------------------------------- 1998 1997 1996 ---- -------- ------ (in thousands, except per share data) 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 ====== ======== ======
Consolidated Combined ----------------------------------- ----------------------- Predecessor Predecessor Entities ----------- ----------------------- At December 31, ---------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- --------- --------- -------- (in thousands) 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
23 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 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 25 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. 26 27 The following table sets forth, for the periods indicated, certain resident capacity and occupancy data:
Years Ended December 31, 1998 1997 1996 ------ ----- ----- 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% ====== ===== =====
- --------------- (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. 27 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:
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------- 1998 1997 % CHG 1997 1996 % CHG ------- ------- ------ ------- -------- ----- (dollars in thousands, except other data) 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%
- --------------------- (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. 28 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 29 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 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 31 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, 32 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. 33 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 34 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 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 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 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 39 AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)
December 31 ----------------------- 1998 1997 -------- --------- 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 ======== =========
See accompanying notes to consolidated financial statements. 39 40 AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Predecessor --------------- Years ended December 31, ------------------------------------------- 1998 1997 1996 ------------------------------------------- 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 =============================
See accompanying notes to consolidated financial statements. 40 41 AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED (in thousands, except per share data)
Predecessor --------------- Years ended December 31, ------------------------------------------- 1998 1997 1996 ------------------------------------------- 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 ===========================================
See accompanying notes to consolidated financial statements. 41 42 AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS'/SHAREHOLDERS' EQUITY (in thousands, except share data)
Special General Redeemable and Preferred Retained Limited Limited Common Stock Additional Earnings Partners' Partnership ------------------ Paid-In (Accumulated Interests Interests Shares Amount Capital Deficit) Total ---------------------------------------------------------------------------------- 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 =================================================================================
See accompanying notes to consolidated financial statements. 42 43 AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Predecessor ----------- Years ended December 31, -------------------------------------- 1998 1997 1996 -------------------------------------- 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)
See accompanying notes to consolidated financial statements. 43 44 AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Predecessor ----------- Years ended December 31, -------------------------------------- 1998 1997 1996 -------------------------------------- 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 =====================================
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: 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 --
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 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 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 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 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 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 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 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. 51 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.
Years ended December 31, 1998 1997 -------- -------- 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
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):
1998 1997 -------- -------- 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 ======== ========
52 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):
1998 1997 ------- ------- 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 ======= =======
(8) LONG-TERM DEBT A summary of long-term debt is as follows (in thousands):
1998 1997 -------- -------- 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
53 54 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 --
54 55 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 ======== ========
The aggregate scheduled maturities of long-term debt at December 31, 1998 were as follows (in thousands): 1999 $ 1,426 2000 3,165 2001 14,859 2002 219,337 2003 1,882 Thereafter 59,998 -------- $300,667 ========
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 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 57 applicable residency agreements. The obligation to the Master Trust is classified as follows at December 31, 1998.
Other Residency Master Trust Agreements Total ------------ ---------- ------- 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 ======= ======= =======
(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. 57 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 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):
Average Exercise Options Shares Price ------------------------------------------------------------------------- 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 -------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 1998 (shares in thousands):
Weighted Average Weighted Remaining Average Range of Number Contractual Exercise Exercise Prices Outstanding Life (Years) Price - ---------------------------------------------------------------------------------- $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 - ----------------------------------------------------------------------------------
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 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):
1998 1997 ------------------------------- ------------------------------- SFAS 123 SFAS 123 As Reported Pro Forma Reported Pro Forma ----------- --------- -------- --------- 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)
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. 60 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:
Predecessor ----------- Years Ended December 31, --------------------------------------------- 1998 1997 1996 ------- ------- ----- 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) ======= ======= =====
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). 61 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):
Predecessor ----------- Years Ended December 31, --------------------------------------------- 1998 1997 1996 ------- ------- ----- 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) ======= ====== =====
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):
1998 1997 -------- ------ 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 ======== ======
62 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:
1998 1997 1996 ------ ---- --- 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)% ====== === ===
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 63 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): 1999 $ 11,420 2000 11,425 2001 11,431 2002 10,980 2003 8,576 Thereafter 105,569 -------- $159,401 ========
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 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. 65 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. 66 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 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.
1998 Quarter Ended 1997 Quarter Ended ------------------------------------- -------------------------------------- Dec 31 Sept 30 June 30 Mar 31 Dec 31 Sept 30 June 30 Mar 31 ------- ------- ------- ------- -------- ------- ------- ------- 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
68 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. 69 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) 70 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) 71 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 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 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
SIGNATURE TITLE DATE --------- ----- ---- /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.
74 75 /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
75 EX-2.5 2 SUPPLEMENTAL AGREEMENT 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 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 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 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 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 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 7 EDGAR AND ELSA PRINCE FOUNDATION, a Michigan corporation By: /s/ Robert Haveman ----------------------------------- Name: Robert Haveman --------------------------------- Title: Secretary/Treasurer -------------------------------- 7 EX-2.6 3 AMENDMENT TO AGREEMENT 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] 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 ----------------------------------- EX-3.2 4 ARTICLES OF AMENDMENT 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. 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 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. 3 4 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 -------------------------------- 4 EX-3.3 5 BYLAWS 1 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. 2 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. 2 3 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 3 4 (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 4 5 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. 5 6 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. 6 7 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. 7 8 (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 8 9 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. 9 10 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. 10 11 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 11 12 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. 12 13 (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 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 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 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 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 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 EX-21 6 SUBSIDIARIES OF THE REGISTRANT 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 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 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 EX-23 7 CONSENT OF KPMG 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 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 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. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 20,400 0 11,158 0 826 54,446 419,093 27,625 595,854 28,642 299,241 0 0 171 145,671 595,854 0 142,357 0 113,361 162 0 17,924 15,002 5,652 9,350 2,146 0 304 6,900 0.49 0.49
EX-27.2 9 FINANCIAL DATA SCHEDULE
5 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. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 44,583 0 6,178 0 483 60,285 248,546 18,648 317,154 12,541 237,038 0 0 114 53,804 317,154 0 90,181 0 71,675 1 0 15,056 6,124 4,435 1,689 155 0 0 1,534 0 0
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