-----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, F1vzmOs1hVLWu1b8k77C/89b/+P6kDQPDY8pgg+c/7ZCXHyv/52qGkP1wdJUOgLR 97vvbuF36sq3KdnCr3/ruA== 0000950144-97-005399.txt : 19970513 0000950144-97-005399.hdr.sgml : 19970513 ACCESSION NUMBER: 0000950144-97-005399 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19970512 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN RETIREMENT CORP CENTRAL INDEX KEY: 0000787784 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-23197 FILM NUMBER: 97600100 BUSINESS ADDRESS: STREET 1: 111 WESTWOOD PLACE CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 6152212250 S-1/A 1 AMERICAN RETIREMENT CORP. AMEND # 2 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1997 REGISTRATION NO. 333-23197 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- AMERICAN RETIREMENT CORPORATION (Exact Name of Registrant as Specified in Its Charter) TENNESSEE 8059 62-1674303 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Number)
111 WESTWOOD PLACE, SUITE 402 BRENTWOOD, TENNESSEE 37027 (615) 221-2250 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) --------------------- W.E. SHERIFF CHAIRMAN AND CHIEF EXECUTIVE OFFICER 111 WESTWOOD PLACE, SUITE 402 BRENTWOOD, TENNESSEE 37027 (615) 221-2250 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) --------------------- COPIES OF COMMUNICATIONS TO: T. ANDREW SMITH JEFFREY S. LOWENTHAL BASS, BERRY & SIMS PLC STROOCK & STROOCK & LAVAN LLP FIRST AMERICAN CENTER 180 MAIDEN LANE NASHVILLE, TENNESSEE 37238 NEW YORK, NEW YORK 10038 (615) 742-6200 (212) 806-5400
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____________. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____________. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MAY 12, 1997 PROSPECTUS 3,125,000 SHARES [AMERICAN RETIREMENT CORPORATION LOGO] COMMON STOCK ------------------ All of the shares of Common Stock, par value $.01 per share (the "Common Stock"), of American Retirement Corporation (the "Company") offered hereby (the "Offering") are being offered by the Company. Prior to the Offering, there has been no public market for the Common Stock. It is currently anticipated that the initial public offering price will be between $15.00 and $17.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. Approximately $25.0 million of the net proceeds of the Offering will be received by the existing shareholders of the Company. See "The Company -- Pending Reorganization" and "Certain Transactions -- Pending Reorganization." It is anticipated that approximately 500,000 shares of Common Stock will be offered outside of the United States. The Common Stock has been approved for listing on The New York Stock Exchange (the "NYSE") under the symbol "ACR." At the request of the Company, up to 300,000 shares of Common Stock have been reserved for sale in the Offering to certain individuals, including directors and employees of the Company, members of their families, and other persons having business relationships with the Company. See "Underwriting." SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
============================================================================================================= UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - ------------------------------------------------------------------------------------------------------------- Per Share.................................. $ $ $ - ------------------------------------------------------------------------------------------------------------- Total(3)................................... $ $ $ =============================================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated to be $900,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to an additional 468,750 shares of Common Stock on the same terms and conditions as set forth above solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Company will be $ , $ , and $ , respectively. ------------------ The shares of Common Stock are offered by the Underwriters when, as, and if delivered to and accepted by the Underwriters, and subject to various prior conditions, including the right to withdraw, cancel, or modify the Offering and to reject orders in whole or in part. It is expected that delivery of stock certificates will be made in New York, New York on or about , 1997. ------------------ NATWEST SECURITIES LIMITED EQUITABLE SECURITIES CORPORATION MCDONALD & COMPANY SECURITIES, INC. The date of this Prospectus is , 1997 3 FOR UNITED KINGDOM PURCHASERS: This Prospectus has not been registered in the United Kingdom and, accordingly, the shares of Common Stock offered hereby may not be and are not being offered or sold in the United Kingdom other than to persons whose ordinary activities involve them in acquiring, holding, managing, or disposing of investments, whether as principal or agent (except in circumstances that do not constitute an offer to the public within the meaning of the Public Offers of Securities Regulations 1995 or the Financial Services Act 1986), and this Prospectus may only be issued or passed on to any person in the United Kingdom if that person is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or a person to whom this Prospectus may otherwise lawfully be passed on. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS, AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information set forth under "Risk Factors." Immediately prior to the consummation of the Offering, American Retirement Communities, L.P. ("ARCLP" or the "Predecessor") will be reorganized (the "Reorganization") such that all of ARCLP's assets and liabilities will be contributed to the Company in exchange for a total of 7,812,500 shares of Common Stock, which will be immediately distributed to ARCLP's partners, and a promissory note in the principal amount of $25.0 million (the "Reorganization Note"). See "The Company -- Pending Reorganization." Unless otherwise indicated, all information in this Prospectus (i) gives effect to the Reorganization, and (ii) assumes no exercise of the Underwriters' over-allotment option. Unless the context otherwise requires, references to the Company include the Company, its subsidiary partnerships and corporations, and the Predecessor. THE COMPANY The Company is a national senior living and health care services company providing a broad range of care and services to the elderly, including independent living, assisted living, skilled nursing, and home health care services. The Company has pioneered numerous developments in the provision of care and services for the elderly since its inception in 1978, and believes it ranks among the leading operators in the senior living and health care services industry. Currently, the Company operates 19 senior living communities in 12 states, consisting of ten owned communities, two leased communities, and seven managed communities, with an aggregate capacity for approximately 5,500 residents. In May 1997, the Company expects to acquire an additional community with capacity for 90 residents and to commence operating an additional leased community with capacity for 90 residents. The Company also owns and operates eight home health care agencies. At March 31, 1997, the Company's owned communities had an occupancy rate of 94%, its leased communities had an occupancy rate of 95%, and its managed communities had an occupancy rate of 93%. For the year ended December 31, 1996, and the three months ended March 31, 1997, revenues attributable to the Company's senior living communities accounted for 91.5% and 90.5%, respectively, of the Company's total revenues, and revenues attributable to the Company's home health care agencies accounted for 6.2% and 7.0%, respectively, of the Company's total revenues. Approximately 92.1% of the Company's total revenues for the year ended December 31, 1996 and approximately 91.1% of the Company's total revenues for the three months ended March 31, 1997 were derived from private pay sources. Since 1992, the Company has experienced significant growth, primarily through the acquisition of 11 senior living communities. The Company's revenues have grown from $17.8 million in 1992 to $75.6 million in 1996, an average annual growth rate of 43.5%. During the same period, the Company's income from operations has grown from $2.3 million to $15.6 million, an average annual growth rate of 61.7%. The Company intends to continue its growth through a combination of (i) development of free-standing assisted living residences, including special living units and programs for residents with Alzheimer's and other forms of dementia; (ii) selective acquisitions of senior living communities, including assisted living residences; (iii) expansion of existing communities; and (iv) development and acquisition of home health care agencies. As part of its growth strategy, the Company is currently developing 21 free-standing assisted living residences, with an estimated aggregate capacity for 1,826 residents, and is expanding eight of its existing communities to add capacity to accommodate an additional 704 residents. The Company has also entered into a letter of intent to acquire one additional home health care agency and intends to commence operations at five additional home health care agencies during 1997. The Company was founded by Dr. Thomas F. Frist, Sr. and Jack C. Massey, the principal founders of Hospital Corporation of America (now a subsidiary of Columbia/HCA Healthcare Corporation). The Company's operating philosophy was inspired by Dr. Frist's and Mr. Massey's vision to enhance the lives of the elderly by providing the highest quality of care and services in well-operated communities designed to improve and protect the quality of life, independence, personal freedom, privacy, spirit, and dignity of its residents. The Company believes that its senior management, led by W.E. Sheriff, its Chairman and Chief 3 5 Executive Officer, and Christopher J. Coates, its President and Chief Operating Officer, is one of the most experienced management teams in the senior living industry. The Company's 12 senior officers have been employed by the Company for an average of nine years and have an average of 14 years of industry experience. The executive directors of the Company's communities have been employed by the Company for an average of four years and have an average of 11 years of experience in the senior living industry. The Company's target market, which consists of seniors age 75 and older, is one of the fastest growing segments of the United States population. According to the United States Census Bureau, this age group is expected to grow from 13.2 million in 1990 to over 16.6 million by 2000, an increase of 26%. The Company believes that the market for senior living and health care services, including Alzheimer's and dementia care services, will continue to grow as a result of (i) the aging of the U.S. population, (ii) rising public and private cost-containment pressures, (iii) declining availability of traditional nursing home beds as a result of nursing home operators focusing on higher acuity patients, (iv) the quality of life advantages of assisted living residences over traditional skilled nursing facilities, and (v) the decreasing availability of family care as an option for elderly family members. The Company believes that its experience, reputation, and market presence favorably position it to take advantage of opportunities in the rapidly growing senior living and health care industry. THE OFFERING Common Stock offered by the Company........................ 3,125,000 shares Common Stock to be outstanding after the Offering.......... 10,937,500 shares(1) Use of proceeds............................................ To repay the Reorganization Note; to fund development activities and possible future acquisitions; and for general corporate purposes, including working capital. See "The Company -- Pending Reorganization" and "Use of Proceeds." NYSE symbol................................................ ACR
- --------------- (1) Includes 7,812,500 shares of Common Stock to be issued in the Reorganization. Does not include 635,000 shares of Common Stock reserved for issuance pursuant to outstanding stock options under the Company's 1997 Stock Incentive Plan, which options are exercisable at the initial public offering price. See "Management -- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan" and "Description of Capital Stock." 4 6 SUMMARY COMBINED AND CONSOLIDATED FINANCIAL AND OTHER DATA The following summary combined and consolidated financial and other data is qualified in its entirety by the more detailed information in the financial statements and pro forma financial information appearing elsewhere in this Prospectus. The summary financial data for the year ended December 31, 1994 and for the three months ended March 31, 1995 is derived from the combined financial statements of certain affiliated partnerships and corporations (collectively, the "Predecessor Entities"). The summary financial data for the nine months ended December 31, 1995, the three months ended March 31, 1996, the year ended December 31, 1996, and the three months ended March 31, 1997 is derived from the consolidated financial statements of the Predecessor. See Note 1 to the Combined and Consolidated Financial Statements.
PREDECESSOR ENTITIES (COMBINED) PREDECESSOR --------------------------- -------------------------------------------------------------- THREE MONTHS NINE MONTHS YEAR ENDED THREE MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, 1996 ENDED MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, ------------------------ ----------------- 1994 1995 1995 ACTUAL PRO FORMA(1) 1996(2) 1997 ------------ ------------ ------------ -------- ------------ ------- ------- (in thousands, except per share, community, and resident data) STATEMENT OF OPERATIONS DATA: Total revenues................... $33,341 $12,356 $48,763 $ 75,617 $ 79,543 $16,316 $21,510 Operating expenses............... 28,126 10,270 38,730 60,066 63,861 12,843 17,398 ------- ------- ------- -------- -------- ------- ------- Income from operations......... 5,215 2,086 10,033 15,551 15,682 3,473 4,112 Other income (expense), net...... (5,053) (3,334) (6,682) (10,938) (11,353) (1,821) (3,137) ------- ------- ------- -------- -------- ------- ------- Income (loss) before income taxes and extraordinary item......... 162 (1,248) 3,351 4,613 4,329 1,652 975 Income tax expense (benefit)(3)................... -- 20 55 (920) (920) -- -- ------- ------- ------- -------- -------- ------- ------- Income (loss) before extraordinary item............. 162 (1,268) 3,296 5,533 5,249 1,652 975 Extraordinary item(4)............ -- -- -- (2,335) (2,335) (2,335) -- ------- ------- ------- -------- -------- ------- ------- Net income (loss)................ $ 162 $(1,268) $ 3,296 $ 3,198 $ 2,914 $ (683) $ 975 ======= ======= ======= ======== ======== ======= ======= Net income (loss) available for distribution to partners and shareholders................... $ 162 $(1,268) $ 2,171 $ 2,094 $ 2,590 $(1,058) $ 975 ======= ======= ======= ======== ======== ======= ======= UNAUDITED PRO FORMA TAX DATA(5): Income before income taxes and extraordinary item............. $ 4,613 $ 4,329 $ 1,652 $ 975 Pro forma income tax expense..... 820 712 628 370 -------- -------- ------- ------- Pro forma income before extraordinary item............. $ 3,793 $ 3,617 $ 1,024 $ 605 ======== ======== ======= ======= Pro forma income before extraordinary item available for distribution to partners and shareholders............... $ 2,689 $ 3,293 $ 649 $ 605 ======== ======== ======= ======= Pro forma per share data: Income per share before extraordinary item........... $ 0.40 $ 0.39 $ 0.06 ======== ======== ======= Shares used in computing pro forma per share data(6)...... 9,375 9,375 9,375 ======== ======== ======= Pro forma as adjusted per share data(7): Income per share before extraordinary item........... $ 0.33 $ .06 ======== ======= Shares used in computing pro forma as adjusted per share data........................... 10,938 10,938 ======== =======
AT MARCH 31, 1997 ------------------------------- COMPANY --------------- PREDECESSOR PRO FORMA ----------- AS ACTUAL(8) ADJUSTED(9) ----------- --------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................... $ 8,854 $ 26,954 Working capital............................................. 1,651 22,251 Total assets................................................ 214,156 234,756 Long-term debt, including current portion................... 157,568 157,568 Partners' and shareholders' equity.......................... 36,357 43,441
5 7
PREDECESSOR ENTITIES (COMBINED) PREDECESSOR --------------------------- ------------------------------------------------------------- THREE MONTHS NINE MONTHS YEAR ENDED THREE MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, 1996 ENDED MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, ---------------------- ------------------ 1994 1995 1995 ACTUAL PRO FORMA(1) 1996 1997 ------------ ------------ ------------ ------ ------------ ------ ------ (IN THOUSANDS, EXCEPT PER SHARE, COMMUNITY, AND RESIDENT DATA) OTHER DATA: Distribution to partners, including preferred distributions................. $2,580 $1,400 $5,189 $7,139 $6,359(10) $1,415 $2,500(11) Revenue mix: Private pay................... 93.0% 92.2% 91.2% 92.1% 92.5% 90.1% 91.1% Medicare and other(12)........ 7.0 7.8 8.8 7.9 7.5 9.9 8.9 ------ ------ ------ ------ ------ ------ ------ Total................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Communities (at period end): Owned......................... 8 9 10 12 10 10 10 Leased........................ -- -- -- -- 2 -- 2 Managed....................... 11 10 10 7 7 10 7 ------ ------ ------ ------ ------ ------ ------ Total................... 19 19 20 19 19 20 19 Resident capacity (at period end): Owned......................... 2,141 2,386 2,594 3,369 2,886 2,584 2,912 Leased........................ -- -- -- -- 483 -- 483 Managed....................... 3,315 3,079 3,008 2,159 2,159 3,005 2,159 ------ ------ ------ ------ ------ ------ ------ Total................... 5,456 5,456 5,602 5,528 5,528 5,589 5,554 Average occupancy rate: Owned......................... 89% 91% 93% 94% 94% 93% 94% Leased........................ -- -- -- -- 89 -- 95 Managed....................... 93 95 90 91 90 91 92 ------ ------ ------ ------ ------ ------ ------ Total................... 91% 93% 92% 92% 92% 92% 94%
- --------------- (1) Gives effect to the following transactions as if they had occurred on January 1, 1996: (a) the May 1996 acquisition (the "Carriage Club Acquisitions") of Carriage Club of Charlotte, L.P. and Carriage Club of Jacksonville, L.P. (collectively, "Carriage Club"), and (b) the January 1997 sale-leaseback by the Company of two senior living communities (the "Sale-Leaseback Transactions") and the application of a portion of the net proceeds therefrom to retire debt. See "Unaudited Pro Forma Condensed Combined Financial Information." (2) Giving pro forma effect to the transactions described in footnote (1) above as if they had occurred on January 1, 1996, certain selected financial data of the Predecessor for the three months ended March 31, 1996 would have been as follows: Total revenues.............................................. $19,281 Income from operations...................................... 4,070 Income before income taxes and extraordinary item........... 1,134 Pro forma income tax expense................................ 431 Pro forma income before extraordinary item.................. 703 Pro forma income before extraordinary item available for distribution to partners and shareholders................. $ 523
(3) Provision for income taxes reflects income tax expense of only one of the Predecessor Entities because the Predecessor and the other Predecessor Entities were partnerships. No income tax expense is reflected for periods prior to 1995 because of losses or the availability of net operating loss carryforwards ("NOLs"). Both periods in 1995 reflect a provision for alternative minimum taxes. In 1996, the Company recorded an income tax benefit and a deferred tax asset of $920,000 because of the anticipated utilization of NOLs that will offset taxable gains recognized from the Sale-Leaseback Transactions. See Note 12 to the Combined and Consolidated Financial Statements. (4) Amount represents loss on early extinguishment of debt. See Note 9 to the Combined and Consolidated Financial Statements. (5) Except for one of the Predecessor Entities, the Predecessor and the Predecessor Entities, as partnerships, were exempt from U.S. Federal and state income taxes. The pro forma financial data reflects the effect on certain income statement data of income tax expense that would have been recorded had the Predecessor and the other Predecessor Entities not been exempt from paying such income taxes. Pro forma income tax expense has been calculated using the statutory U.S. Federal and state tax rates and gives effect to the recognition in 1996 of the $920,000 deferred tax asset described in footnote (3) above. (6) Reflects 7,812,500 shares issuable in the Reorganization, plus 1,562,500 shares, representing the value of the $25.0 million principal amount of the Reorganization Note (based upon the assumed initial public offering price of $16.00 per share). (7) Gives effect to the following transactions as if they had occurred on January 1, 1996: (a) the Reorganization; and (b) the sale of the 3,125,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $16.00 per share, and the application of a portion of the estimated net proceeds to retire the Reorganization Note, and (c) for the year ended December 31, 1996 data, the transactions described in footnote (1) above. The pro forma as adjusted per share data does not give effect to a non-recurring $13.5 million ($1.23 per share) charge to income that will be incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities. See Note 16 to the Combined and Consolidated Financial Statements. (8) Reflects a $2.5 million reduction in partners' and shareholders' equity to give effect to the accrual as of March 31, 1997 of the $2.5 million distribution by the Predecessor to its partners (the "Tax Distribution"), which was paid in April 1997. The Tax Distribution approximates the income taxes associated with the Predecessor's anticipated earnings in 1997 through the date of the Reorganization. See "Dividend Policy and Prior Distributions." (9) Gives effect to the following transactions as if they had occurred at March 31, 1997: (a) the payment of the Tax Distribution, which had been accrued as of March 31, 1997; (b) the Reorganization, including a $13.5 million charge to income resulting in a reduction of shareholders' equity that will be incurred at the time of the Reorganization in connection with the conversion from a non-taxable 6 8 to a taxable entity and the resulting recognition of a deferred tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities; and (c) the sale of the 3,125,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $16.00 per share, and the application of a portion of the estimated net proceeds to retire the Reorganization Note. (10) Reflects the elimination, on a pro forma basis, of the preferred distributions paid with respect to $5.2 million of ARCLP's special redeemable preferred limited partnership interests (the "Preferred Partnership Interests"), which interests were redeemed with a portion of the net proceeds from the Sale-Leaseback Transactions. The Company redeemed $4.8 million of the Preferred Partnership Interests in June 1996 out of operating cash flow and distributions of $324,000 paid from January 1996 through June 1996 with respect to such Preferred Partnership Interests were not eliminated. (11) Reflects the accrual of the Tax Distribution described in footnote (8) above. (12) Includes Medicare (including Medicare-related private co-insurance) and Medicaid. 7 9 RISK FACTORS Potential investors should consider carefully the following factors, as well as the more detailed information contained elsewhere in this Prospectus, before making a decision to invest in the Common Stock offered hereby. SUBSTANTIAL DEBT AND OPERATING LEASE PAYMENTS At March 31, 1997, the Company had long-term debt (including current portion) of $157.6 million, of which $145.8 million was payable to one lender, and was obligated to pay annual rental obligations of approximately $2.5 million under long-term operating leases. The Company has entered into non-binding letters of intent to establish operating lease facilities with Nationwide Health Properties, Inc. ("NHP") and National Health Investors, Inc. ("NHI"), both health care real estate investment trusts, pursuant to which NHP and NHI, at the Company's request and upon satisfaction of certain conditions, would develop, construct, or acquire up to $110.0 million and $100.0 million, respectively, of senior living communities and lease the communities to the Company (collectively, the "REIT Facilities"). The Company currently intends to finance its growth through a combination of bank indebtedness, construction and mortgage financing, transactions with NHP and NHI or other real estate investment trusts, proceeds from the Offering, and joint venture arrangements. As a result, a substantial portion of the Company's cash flow will be devoted to debt service and lease payments and the Company will be subject to risks normally associated with a high degree of financial leverage. There can be no assurance that the Company will generate sufficient cash flows from operations to cover required interest, principal, and operating lease payments. Any payment or other default could cause the lender to foreclose upon the communities securing such indebtedness, or, in the case of an operating lease, could terminate the lease, with a consequent loss of income and asset value to the Company. Furthermore, because most of the Company's mortgages and sale-leaseback agreements contain cross-default provisions, a default by the Company on one of its payment obligations could adversely affect a significant number of the Company's other properties and, consequently the Company's business, results of operations, and financial condition. 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. Raising additional funds through the issuance of equity securities could cause existing shareholders to experience further dilution and could adversely affect the market price of the Common Stock. There can be no assurance that the Company will be successful in securing additional financing or that adequate financing will be available and, if available, will be on terms that are acceptable to the Company. The Company's inability to obtain additional financing on acceptable terms could delay or eliminate some or all of the Company's growth plans. At March 31, 1997, $42.9 million in principal amount, or approximately 27.3%, of the Company's indebtedness, bore interest at floating rates, with a weighted average annual rate of 7.7%. In addition, it is anticipated that the REIT Facilities will require operating lease payments that will be based on prevailing interest rates. Future indebtedness, from commercial banks or otherwise, and lease obligations 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. DEPENDENCE ON PRIVATE PAY RESIDENTS Approximately 92.1% of the Company's total revenues for the year ended December 31, 1996 and approximately 91.1% of the Company's total revenues for the three months ended March 31, 1997 were attributable to private pay sources. For the same periods, 7.9% and 8.9%, respectively, of the Company's revenues were attributable to reimbursement from third-party payors, including Medicare. The Company 8 10 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 the elderly to pay for the Company's services could have a material adverse effect on the Company's business, financial condition, and results of operations. SUBSTANTIAL PORTION OF THE PROCEEDS OF THE OFFERING TO BENEFIT EXISTING SHAREHOLDERS The Company will use $25.0 million of the estimated net proceeds of the Offering to repay the Reorganization Note, regardless of the price per share at which the Common Stock is sold or the net proceeds received by the Company from the Offering. The principal amount of the Reorganization Note was established by the general partner of ARCLP in consultation with representatives of the limited partners of ARCLP, and was not the result of arms length negotiation. See "The Company -- Pending Reorganization" and "Use of Proceeds." ARCLP will distribute in liquidation all amounts received from the repayment of the Reorganization Note to its limited partners, who are the existing shareholders of the Company, including approximately $17.4 million to the Company's non-employee directors and their immediate family members and affiliates, and $1.5 million to the Company's executive officers and their immediate family members and affiliates. See "Certain Transactions -- Pending Reorganization." NO ASSURANCE AS TO ABILITY TO MANAGE GROWTH The Company intends to expand its operations through the development, construction, and acquisition of free-standing assisted living residences and, to a lesser extent, through the acquisition of other types of senior living communities, as well as through the expansion of the Company's home health care services. See "Business -- Growth Strategy." The success of the Company's growth strategy will depend, in large part, on its ability to effectively operate any newly acquired or developed residences, communities, or home health care agencies, as to which there can be no assurance. The Company has limited experience developing and operating assisted living residences on a free-standing basis. The Company's growth plans will also place significant demands on the Company's management and operating personnel. The Company's ability to manage its future growth effectively will require it to improve its operational, financial, and management information systems and to continue to attract, retain, train, motivate, and manage key employees. If the Company is unable to manage its growth effectively, its business, results of operations, and financial condition will be adversely affected. See "Business -- Growth Strategy" and "Management -- Directors and Executive Officers." LOSSES FROM NEWLY DEVELOPED RESIDENCES AND ACQUISITIONS Although the Company was profitable in 1994, 1995, and 1996, in view of its growth plan for development and acquisitions, there can be no assurance that the Company will continue to be profitable in any future period. Newly developed assisted living residences are expected to incur operating losses during a substantial portion of their first twelve months of operations, on average, until the residences achieve targeted occupancy levels. Newly acquired residences and communities may also incur losses pending their integration into the Company's operations. The Company may also incur operating losses as a result of the expansion of its existing home health care agencies and the establishment of additional home health care agencies in new markets. See "Business -- Growth Strategy" and "Business -- Development Activities." NO ASSURANCE AS TO ABILITY TO DEVELOP ADDITIONAL ASSISTED LIVING RESIDENCES An integral component of the Company's growth strategy is to develop and operate free-standing assisted living residences. As part of its growth strategy, the Company is currently developing 21 free-standing assisted living residences, with an estimated aggregate capacity for 1,826 residents, and is expanding eight of its existing senior living communities to add capacity to accommodate an additional 704 residents. The Company's ability to develop successfully assisted living residences will depend on a number of factors, including, but not limited to, the Company's ability to acquire suitable development sites at reasonable prices; the Company's success in obtaining necessary zoning, licensing, and other required governmental permits and authorizations; and the Company's ability to control construction costs and project completion schedules. In 9 11 addition, the Company's development plans are subject to numerous factors over which it has little or no control, including competition for developable properties; shortages of labor or materials; changes in applicable laws or regulations or their enforcement; the failure of general contractors or subcontractors to perform under their contracts; strikes; and adverse weather conditions. As a result of these factors, there can be no assurance that the Company will not experience construction delays, that it will be successful in developing and constructing currently planned or additional assisted living residences, or that any developed assisted living residences 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 assisted living residences will involve a substantial commitment of capital with little or no revenue associated with residences under development, the consequence of which could be an adverse impact on the Company's liquidity. See "Business -- Development Activities." ACQUISITION OF COMMUNITIES AND COMPLEMENTARY BUSINESSES The Company plans to make strategic acquisitions of senior living communities (which may include a variety of independent living, assisted living, and skilled nursing facilities), free-standing assisted living residences, home health care agencies, and other properties or businesses that are complementary to the Company's operations and growth strategy. The acquisition of existing communities or other businesses involves a number of risks. Existing communities available for acquisition frequently serve or target different markets than those presently served by the Company. The Company may also determine that renovations of acquired communities and changes in staff and operating management personnel are necessary to successfully integrate such communities or businesses into the Company's existing operations. The costs incurred to reposition or renovate newly acquired communities may not be recovered by the Company. In undertaking acquisitions, the Company also may be adversely impacted by unforeseen liabilities attributable to the prior operators of such communities or businesses, against whom the Company may have little or no recourse. The success of the Company's acquisition strategy will be determined by numerous factors, including the Company's ability to identify suitable acquisition candidates, the competition for such acquisitions, the purchase price, the requirement to make operational or structural changes and improvements, the financial performance of the communities or businesses after acquisition, the Company's ability to finance the acquisitions, and the Company's ability to integrate effectively any acquired communities or businesses into the Company's management, information, and operating systems. There can be no assurance that the Company's acquisition of senior living communities and complementary properties and businesses will be completed at the rate currently expected, if at all, or, if completed, that any acquired communities or businesses will be successfully integrated into the Company's operations. GEOGRAPHIC CONCENTRATION The Company's growth strategy involves the development of assisted living residences and the acquisition of senior living communities in concentrated geographic service areas. See "Business -- Growth Strategy." Accordingly, the Company's occupancy rates in existing, developed, or acquired communities may be adversely affected by a number of factors, including regional and local economic conditions, general real estate market conditions including the supply and proximity of senior living communities, competitive conditions, and applicable local laws and regulations. See "Business -- Operating Residences," "Business -- Development Activities," and "Business -- Government Regulation." COMPETITION The senior living and health care services industry is highly competitive, and the Company expects that all segments of the industry will become increasingly competitive in the future. The Company competes with other companies providing independent living, assisted living, skilled nursing, home health care, and other similar service and care alternatives. Although the Company believes there is a need for assisted living residences in the markets where the Company is operating and developing residences, the Company expects that competition will increase from existing competitors and new market entrants, some of whom may have substantially greater financial resources than the Company. In addition, some of the Company's competitors 10 12 operate on a not-for-profit basis or as charitable organizations and have the ability to finance capital expenditures on a tax-exempt basis or through the receipt of charitable contributions, neither of which are readily available to the Company. Furthermore, if the development of new senior living communities (particularly given the rapid pace of development of new assisted living residences) outpaces the demand for such communities in the markets in which the Company has or is developing senior living communities, such markets may become saturated. An oversupply of such communities in the Company's markets could cause the Company to experience decreased occupancy, reduced operating margins, and lower profitability. Consequently, there can be no assurance that the Company will not encounter increased competition that adversely affects its occupancy rates, pricing for services, and growth prospects. See "Business -- Competition." DEPENDENCE ON KEY PERSONNEL The Company is dependent on the services of its executive officers, particularly the Company's Chairman and Chief Executive Officer, W.E. Sheriff, and the Company's President and Chief Operating Officer, Christopher J. Coates, for the management of the Company. Neither Mr. Sheriff, Mr. Coates, nor any of the Company's other executive officers has an employment agreement with the Company. The Company has a key employee life insurance policy in the amount of $2.0 million covering Mr. Sheriff. The loss by the Company of certain of its executive officers and the inability to attract and retain qualified management personnel could adversely affect the Company's business, financial condition, and results of operations. See "Management -- Directors and Executive Officers." RESIDENCE MANAGEMENT, STAFFING, AND LABOR COSTS The Company competes with other providers of senior living and health care services with respect to attracting and retaining qualified management personnel responsible for the day-to-day operations of each of the Company's communities and skilled technical personnel responsible for providing resident care. A shortage of nurses or trained personnel may require the Company to enhance its wage and benefits package in order to compete in the hiring and retention of such personnel or to hire more expensive temporary personnel. The Company will also be dependent on the available labor pool of semi-skilled and unskilled employees in each of the markets in which it operates. No assurance can be given that the Company's labor costs will not increase, or that, if they do increase, they can be matched by corresponding increases in rates charged to residents. Any significant failure by the Company to attract and retain qualified management and staff personnel, to control its labor costs, or to pass on any increased labor costs to residents through rate increases could have a material adverse effect on the Company's business, financial condition, and results of operations. CONTROL BY MANAGEMENT AND CERTAIN SHAREHOLDERS Upon completion of the Offering, the Company's officers and directors and entities controlled by them will, collectively, beneficially own approximately 42.4% of the outstanding shares of Common Stock (40.7% if the Underwriters' over-allotment option is exercised in full). Accordingly, such persons will have the ability, by voting their shares in concert, to influence the election of the Company's Board of Directors and the outcome of all other matters submitted to the Company's shareholders. Furthermore, such influence could preclude any unsolicited acquisition of the Company and, consequently, adversely affect the market price of the Common Stock. See "Principal Shareholders." GOVERNMENT REGULATION 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 11 13 admission of new patients, suspension or decertification from the Medicare programs, restrictions on the ability to acquire new facilities or expand existing facilities, and, in extreme cases, the revocation of a community's license or closure of a community. There can be no assurance that federal, state, or local governments will not impose additional restrictions on the Company's activities that could materially adversely affect the Company. Many states, including several of the states in which the Company currently operates, control the supply of licensed skilled nursing beds and home health care agencies through certificate of need ("CON") programs. Presently, state approval is required for the construction of new health care communities, the addition of licensed beds, and certain capital expenditures at such communities, as well as the opening of a home health care agency. To the extent that a CON or other similar approval is required for the acquisition or construction of new facilities, the expansion of the number of licensed beds, services, or existing communities, or the opening of a home health care agency, the Company could be adversely affected by the failure or inability to obtain such approval, changes in the standards applicable for such approval, and possible delays and expenses associated with obtaining such approval. In addition, in most states the reduction of the number of licensed beds or the closure of a community requires the approval of the appropriate state regulatory agency and, if the Company were to seek to reduce the number of licensed beds at, or to close, a community, the Company could be adversely affected by a failure to obtain or a delay in obtaining such approval. Federal and state anti-remuneration laws, such as "anti-kickback" laws, govern certain financial arrangements among health care providers and others who may be in a position to refer or recommend patients to such providers. These laws prohibit, among other things, certain direct and indirect payments that are intended to induce the referral of patients to, the arranging for services by, or the recommending of, a particular provider of health care items or services. Federal anti-kickback laws have been broadly interpreted to apply to certain contractual relationships between health care providers and sources of patient referral. Similar state laws vary, are sometimes vague, and seldom have been interpreted by courts or regulatory agencies. Violation of these laws can result in loss of licensure, civil and criminal penalties, and exclusion of health care providers or suppliers from participation in the Medicare and Medicaid programs. There can be no assurance that such laws will be interpreted in a manner consistent with the practices of the Company. Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state, and local laws exist that also may require modifications to existing and planned communities to create access to the properties by disabled persons. Although the Company believes that its communities are substantially in compliance with present requirements or are exempt therefrom, if required changes involve a greater expenditure than anticipated or must be made on a more accelerated basis than anticipated, additional costs would be incurred by the Company. Further legislation may impose additional burdens or restrictions with respect to access by disabled persons, the costs of compliance with which could be substantial. See "Business -- Government Regulation." POTENTIAL FOR ENVIRONMENTAL LIABILITY Under various federal, state, and local environmental laws, ordinances, and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean up costs incurred by such parties in connection with the contamination. Such laws typically impose clean-up responsibility and liability without regard to whether the owner knew of or caused the presence of the contaminants, and liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The costs of investigation, remediation, or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such property, may adversely affect the owner's ability to sell or lease such property or to borrow using such property as collateral. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or remediation of such 12 14 substances at the disposal or treatment facility, whether or not such facility is owned or operated by such person. Finally, the owner of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. LIABILITY AND INSURANCE The provision of personal and health care services entails an inherent risk of liability. In recent years, participants in the health care services industry have become subject to an increasing number of lawsuits alleging negligence or related legal theories, many of which involve large claims and result in the incurrence of significant defense costs. Moreover, assisted living residences offer residents a greater degree of independence in their daily living. This increased level of independence may subject the resident and the Company to certain risks that would be reduced in more institutionalized settings. The Company currently maintains liability insurance in amounts it believes are sufficient to cover such claims based on the nature of the risks, its historical experience, and industry standards. There can be no assurance, however, that claims in excess of the Company's insurance or claims not covered by the Company's insurance, such as claims for punitive damages, will not arise. A claim against the Company not covered by, or in excess of, the Company's insurance could have a material adverse effect upon the Company. In addition, the Company's insurance policies must be renewed annually. There can be no assurance that the Company will be able to obtain liability insurance in the future or that, if such insurance is available, it will be available on acceptable economic terms. See "Business -- Insurance and Legal Proceedings." EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS The Company's Board of Directors has the authority, without action by the shareholders, to issue up to 5,000,000 shares of preferred stock and to fix the rights and preferences of such shares. This authority, together with certain provisions of the Company's Charter (including provisions that implement staggered terms for directors, limit shareholder ability to call a shareholders' meeting or to remove directors, and require a supermajority vote to amend certain provisions of the Charter), may delay, deter, or prevent a change in control of the Company. In addition, as a Tennessee corporation, the Company is subject to the provisions of the Tennessee Business Combination Act and the Tennessee Greenmail Act, each of which may be deemed to have anti-takeover effects and may delay, deter, or prevent a takeover attempt that might be considered by the shareholders to be in their best interests. See "Description of Capital Stock -- Certain Provisions of the Charter, Bylaws, and Tennessee Law." SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS Sales of substantial amounts of Common Stock in the public market following the Offering, or the perception that such sales could occur, could adversely affect the prevailing market price of the Common Stock. Upon completion of the Offering, the Company will have 10,937,500 shares of Common Stock outstanding. Of these shares, the 3,125,000 shares sold in the Offering will be freely tradeable without restriction or limitation under the Securities Act of 1933, as amended (the "Securities Act"), except for shares purchased by "affiliates" of the Company, as such term is defined in Rule 144 promulgated under the Securities Act. The remaining 7,812,500 shares will be issued in the Reorganization and will be "restricted securities" within the meaning of Rule 144 and may not be resold in the public markets unless registered under the Securities Act or pursuant to an exemption, such as the safe harbor provided by Rule 144. Holders of the restricted shares will have certain contractual registration rights with respect thereto. The Company and all directors and executive officers of the Company (who in the aggregate will beneficially own 4,637,986 shares of Common Stock) will agree prior to the Offering, and certain holders of 5% or more of the Company's Common Stock outstanding after the Offering will be asked to agree, subject to certain exceptions, not to offer, sell, or otherwise dispose of any Common Stock for a period of 180 days after the date hereof. See "Principal Shareholders," "Description of Capital Stock -- Registration Rights," and "Shares Eligible for Future Sale." As soon as practicable following the consummation of the Offering, the Company intends to file a registration statement under the Securities Act to register the issuance of an aggregate of 1,343,750 shares 13 15 under the Company's 1997 Stock Incentive Plan and Employee Stock Purchase Plan. As of the date hereof, options to purchase 635,000 shares of Common Stock have been granted under the 1997 Stock Incentive Plan, which options are exercisable at the initial public offering price. Following the effective date of such registration statement, shares of Common Stock issued pursuant to either plan will be freely tradeable in the open market, subject to lock-up agreements, if applicable. See "Management -- Compensation Pursuant to Plans" and "Shares Eligible For Future Sale." ABSENCE OF PRIOR PUBLIC TRADING MARKET; POSSIBLE VOLATILITY OF MARKET PRICE Prior to the Offering, there has been no public trading market for the Common Stock. The public offering price for the Common Stock will be determined by negotiations among the Company and the Underwriters based upon several factors and will not necessarily bear any relationship to the Company's assets, book value, results of operations, net worth, or any other generally accepted criteria of value, and should not be considered as indicative of the actual value of the Company. See "Underwriting." Although the Common Stock has been approved for listing on the NYSE, there can be no assurance that an active trading market will develop or be sustained after the Offering. To the extent that an active trading market does develop, factors such as quarterly variations in the Company's financial results, announcements by the Company or others, general market conditions, or certain regulatory pronouncements may cause the market price of the Common Stock to fluctuate substantially. There can be no assurance that the Common Stock can be resold at or above the initial public offering price. DILUTION Purchasers of the Common Stock offered hereby will experience immediate and substantial dilution in the amount of $12.03 per share in the pro forma net tangible book value of their shares of Common Stock, based upon the assumed initial public offering price of $16.00 per share. See "Dilution." ------------------ SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Those statements include, but may not be limited to, the discussions of the Company's expectations concerning its future profitability and the discussion of the Company's operating and growth strategy, including possible acquisitions. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, the factors set forth under the caption "Risk Factors" in this Prospectus. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate and there can be no assurance that the forward-looking statements included in this Prospectus 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 or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. 14 16 THE COMPANY GENERAL The Company is a national senior living and health care services company providing a broad range of care and services to the elderly, including independent living, assisted living, skilled nursing, and home health care services. The Company has pioneered numerous developments in the provision of care and services for the elderly since its inception in 1978, and believes it ranks among the leading operators in the senior living and health care industry. Currently, the Company operates 19 senior living communities in 12 states, consisting of ten owned communities, two leased communities, and seven managed communities, with an aggregate capacity for approximately 5,500 residents. In May 1997, the Company expects to acquire an additional community with capacity for 90 residents and to commence operating an additional leased community with capacity for 90 residents. The Company also owns and operates eight home health care agencies. At March 31, 1997, the Company's owned communities had an occupancy rate of 94%, its leased communities had an occupancy rate of 95%, and its managed communities had an occupancy rate of 93%. For the year ended December 31, 1996 and the three months ended March 31, 1997, revenues attributable to the Company's senior living communities accounted for 91.5% and 90.5%, respectively, of the Company's total revenues, and revenues attributable to the Company's home health care agencies accounted for 6.2% and 7.0%, respectively, of the Company's total revenues. Approximately 92.1% of the Company's total revenues for the year ended December 31, 1996 and approximately 91.1% of the Company's total revenues for the three months ended March 31, 1997 were derived from private pay sources. Since 1992, the Company has experienced significant growth, primarily through the acquisition of 11 senior living communities. The Company's revenues have grown from $17.8 million in 1992 to $75.6 million in 1996, an average annual growth rate of 43.5%. During the same period, the Company's income from operations has grown from $2.3 million to $15.6 million, an average annual growth rate of 61.7%. The Company intends to continue its growth through a combination of (i) development of free-standing assisted living residences, including special living units and programs for residents with Alzheimer's and other forms of dementia; (ii) selective acquisitions of senior living communities, including assisted living residences; (iii) expansion of existing communities; and (iv) development and acquisition of home health care agencies. As part of its growth strategy, the Company is currently developing 21 free-standing assisted living residences, with an estimated aggregate capacity for 1,826 residents, and is expanding eight of its existing communities to add capacity to accommodate an additional 704 residents. The Company has also entered into a letter of intent to acquire one additional home health care agency and intends to commence operations at five additional home health care agencies during 1997. The Company was incorporated under the laws of the State of Tennessee in February 1997 as a wholly-owned subsidiary of ARCLP in anticipation of the Reorganization and the Offering. The Company's principal executive offices are located at 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027, and its telephone number at that address is (615) 221-2250. THE 1995 ROLL-UP The Company's predecessor, ARCLP, was formed in February 1995 in connection with the reorganization (the "1995 Roll-Up") of certain Predecessor Entities that owned, operated, or managed various senior living communities. Each of the Predecessor Entities was organized at the direction of the members of the Company's management and controlling shareholders. As a result of the 1995 Roll-Up, ARCLP issued partnership interests to the partners and shareholders of the Predecessor Entities in exchange for their limited partnership interests and stock, respectively, and thereby became the owner, directly or indirectly, of all of the assets of the Predecessor Entities. The general partner of ARCLP is American Retirement Communities, LLC, a Tennessee limited liability company (the "LLC"), whose members include W.E. Sheriff, the Company's Chairman and Chief Executive Officer, and other Company executive officers. See "Certain Transactions -- The 1995 Roll-Up." 15 17 PENDING REORGANIZATION Prior to the consummation of the Offering, ARCLP will undergo a series of transactions that will result in the Reorganization. Pursuant to the Reorganization, ARCLP will contribute all of its assets, subject to all of its liabilities, to the Company in exchange for 7,812,500 shares of Common Stock and the Reorganization Note in the principal amount of $25.0 million. The number of shares to be issued to ARCLP and the principal amount of the Reorganization Note were established by ARCLP and the Company in connection with the Reorganization based on a number of factors, including the value of the assets to be contributed to the Company. Immediately after consummation of the Reorganization, ARCLP will distribute approximately 1,350,000 shares of Common Stock to the LLC, as general partner of ARCLP, and an aggregate of approximately 6,412,500 shares of Common Stock to the limited partners of ARCLP, generally in accordance with the limited partners' ARCLP contribution accounts. The actual number of shares of Common Stock to be allocated to the LLC will be determined at the time of the consummation of the Offering and will have a value, based on the initial public offering price, equal to the sum of $15.0 million plus a percentage of the value of the Company (including the principal amount of the Reorganization Note) immediately prior to the Offering (the "Pre-IPO Valuation") over $84.0 million. The Pre-IPO Valuation will be determined by the Company by reference to the initial public offering price. See "Principal Shareholders" and "Certain Transactions -- Pending Reorganization." Upon consummation of the Offering, the Reorganization Note will be repaid by the Company out of the net proceeds from the Offering and such amounts received by ARCLP will be distributed to the limited partners of ARCLP in liquidation in accordance with the limited partners' ARCLP contribution accounts. See "Risk Factors -- Substantial Portion of the Proceeds of the Offering to Benefit Existing Shareholders," "Use of Proceeds," and "Certain Transactions -- Pending Reorganization." USE OF PROCEEDS The net proceeds from the sale of the Common Stock offered hereby are estimated to be approximately $45.6 million (approximately $52.6 million if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $16.00 per share (the midpoint of the range shown on the cover page of this Prospectus) and after deduction of the underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company will use $25.0 million of the net proceeds to repay the Reorganization Note. See "The Company -- Pending Reorganization" and "Certain Transactions -- Pending Reorganization." The principal amount of the Reorganization Note was established by ARCLP and the Company in connection with the Reorganization based on a number of factors, including the value of the assets to be contributed to the Company. The Company intends to use the balance of the net proceeds, together with funding available under the REIT Facilities, any future bank indebtedness, any construction and mortgage financings, and funds from other sources for working capital purposes, including the development and construction of free-standing assisted living residences and possible acquisitions of businesses engaged in activities similar or complementary to the Company's business, including the anticipated acquisition of a home health care agency located in Corpus Christi, Texas. See "Business -- Recent and Pending Acquisitions." The Company currently has 21 assisted living residences under development with an aggregate capacity for 1,826 residents. See "Business -- Development Activities." The Company anticipates that the cost to develop its assisted living residences will range from $65,000 to $90,000 per unit. Pending the use of the net proceeds as described above, the net proceeds will be invested in short-term, investment-grade securities. 16 18 DIVIDEND POLICY AND PRIOR DISTRIBUTIONS Following the Offering, it will be the policy of the Company's Board of Directors to retain all future earnings to finance the operation and expansion of the Company's business. Accordingly, the Company does not anticipate declaring or paying cash dividends on the Common Stock in the foreseeable future. The payment of cash dividends in the future will be at the sole discretion of the Company's Board of Directors and will depend on, among other things, the Company's earnings, operations, capital requirements, financial condition, restrictions in then existing financing agreements, and other factors deemed relevant by the Board of Directors. Prior to the Offering, the Predecessor and the Predecessor Entities have made periodic distributions to their respective partners or shareholders in accordance with their ownership interests therein. During 1995 and 1996, ARCLP made or accrued for distributions of approximately $6.6 million and $7.1 million, respectively, to its partners, including approximately $30,000 and $59,000, respectively, to the LLC. In addition, in 1996 ARCLP redeemed its Preferred Partnership Interests for $10.0 million. See "Certain Transactions -- Redemption of Preferred Partnership Interests." In April 1997, ARCLP made the Tax Distribution of $2.5 million to its partners, which amount approximates the income taxes associated with ARCLP's anticipated earnings in 1997 through the date of the Reorganization. In addition, immediately following the consummation of the Offering, and in connection with ARCLP's liquidation, the proceeds from the repayment of the Reorganization Note will be distributed by ARCLP to its limited partners, generally in accordance with their respective contribution accounts. See "The Company -- Pending Reorganization" and "Certain Transactions -- Pending Reorganization." 17 19 CAPITALIZATION The following table sets forth (i) the actual capitalization of the Predecessor at March 31, 1997, and (ii) the capitalization of the Company at March 31, 1997 on a pro forma as adjusted basis to reflect (a) the Reorganization (including a $13.5 million one-time charge to income resulting in a reduction of shareholders' equity which will be incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities), and (b) the issuance and sale of the 3,125,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $16.00 per share, and the application of a portion of the estimated net proceeds to retire the Reorganization Note, as if all such events had occurred on March 31, 1997. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Combined and Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus.
AS OF MARCH 31, 1997 ------------------------- COMPANY PREDECESSOR ----------- ----------- PRO FORMA ACTUAL AS ADJUSTED ----------- ----------- (IN THOUSANDS) Short-term debt, including current portion of long-term debt...................................................... $ 3,189 $ 3,189 ======== ======== Long-term debt, less current portion........................ $154,379 $154,379 Partners'/shareholders' equity: Partners' equity.......................................... 36,357 -- Preferred Stock, no par value; 5,000,000 shares authorized, no shares issued and outstanding........... -- -- Common Stock, par value $.01 per share; 50,000,000 shares authorized; 10,937,500 shares issued and outstanding, as adjusted(1)......................................... -- 109 Additional paid-in capital................................ -- 43,332 -------- -------- Total partners'/shareholders' equity................... 36,357 43,441 -------- -------- Total capitalization................................... $190,736 $197,820 ======== ========
- --------------- (1) Includes 7,812,500 shares of Common Stock to be issued in the Reorganization. Does not include 635,000 shares of Common Stock reserved for issuance pursuant to outstanding stock options under the Company's Stock Incentive Plan, which options are exercisable at the initial public offering price. See "Management -- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan" and "Description of Capital Stock." 18 20 DILUTION The net tangible book value of the Company at March 31, 1997 was approximately $36.4 million, or $3.88 per share of Common Stock. Net tangible book value per share represents the amount of the Company's total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding, which, for purposes of these calculations, is presumed to be 9,375,000 shares (which reflects 7,812,500 shares issuable in the Reorganization, plus 1,562,500 shares, representing the value of the $25.0 million principal amount of the Reorganization Note, based upon an assumed initial public offering price of $16.00 per share). After giving effect to (i) the Reorganization (including a $13.5 million one-time charge to income resulting in a reduction of shareholders' equity which will be incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities); (ii) the sale of the 3,125,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $16.00 per share, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company; and (iii) the application of a portion of the estimated net proceeds to retire the Reorganization Note, the net tangible book value of the Company as of March 31, 1997 would have been approximately $43.4 million, or $3.97 per share of Common Stock. This represents an immediate increase in pro forma net tangible book value per share of $0.09 to existing shareholders and an immediate dilution of $12.03 per share to investors purchasing Common Stock in the Offering. The following table illustrates this per share dilution: Assumed initial public offering price....................... $16.00 Net tangible book value prior to the Offering............. $3.88 Increase in net tangible book value attributable to new investors.............................................. 0.09 ----- Pro forma net tangible book value after the Offering........ 3.97 ------ Dilution to new investors................................... $12.03 ======
The following table summarizes the number of shares of Common Stock issued by the Company, the total consideration paid to the Company, and the average price per share paid by the existing shareholders and to be paid by the new investors. For purposes of the total consideration and average price per share paid by the existing shareholders, the Company has based such valuation on the aggregate amount of the partners' cash contributions to the Predecessor and the Predecessor Entities, without deducting distributions paid to such partners.
SHARES PURCHASED TOTAL CONSIDERATION -------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing shareholders.................... 7,812,500 71.4% $34,838,000 41.1% $ 4.46 New investors............................ 3,125,000 28.6% $50,000,000 58.9% $16.00 ---------- ----- ----------- ------ Total.......................... 10,937,500 100.0% $84,838,000 100.0% ========== ===== =========== ======
19 21 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The accompanying Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 1996 reflects the pro forma effects of the Carriage Club Acquisitions and the Sale-Leaseback Transactions and the application of a portion of the net proceeds therefrom to retire debt, as if these transactions had occurred on January 1, 1996. The Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 1996 is presented for illustrative purposes only and may not be indicative of the actual results that would have been obtained if the transactions had occurred on the dates indicated or that may be realized in the future. The pro forma information should be read in conjunction with the historical financial statements of the Predecessor and the historical combined financial statements of Carriage Club and the notes thereto included elsewhere in this Prospectus. No unaudited pro forma condensed combined financial information is presented as of March 31, 1997 or for the three months then ended because there were no transactions for which pro forma financial information is required for that period. 20 22 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
SALE- CARRIAGE CLUB LEASEBACK CARRIAGE CLUB ACQUISITIONS TRANSACTIONS PREDECESSOR(A) ACQUISITIONS(B) ADJUSTMENTS(C) ADJUSTMENTS(D) -------------- --------------- -------------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Resident and health care revenue............... $ 73,878 $4,086 $ -- $ -- Management services revenue.................... 1,739 -- (160) -- -------- ------ -------- ------- Total revenues............................... 75,617 4,086 (160) -- Operating expenses: Community operating expense.................... 46,960 2,498 (160) -- General and administrative..................... 6,200 -- -- -- Lease expense.................................. -- -- -- 2,090 Depreciation and amortization.................. 6,906 464 104 (1,201) -------- ------ -------- ------- Total operating expenses..................... 60,066 2,962 (56) 889 -------- ------ -------- ------- Income (loss) from operations................ 15,551 1,124 (104) 889 Other income (expense): Interest expense............................... (12,160) (833) (991) 1,388 Interest income................................ 434 21 -- -- Other.......................................... 788 -- -- -- -------- ------ -------- ------- Other income (expense), net.................. (10,938) (812) (991) 1,388 -------- ------ -------- ------- Income (loss) before income taxes and extraordinary item......................... 4,613 312 (1,095) 499 Income tax expense (benefit)................. (920) -- -- -- -------- ------ -------- ------- Income (loss) before extraordinary item...... $ 5,533 $ 312 $ (1,095) $ 499 ======== ====== ======== ======= PRO FORMA TAX DATA: Income (loss) before income taxes and extraordinary item............................. $ 4,613 $ 312 $ (1,095) $ 499 Pro forma income tax expense (benefit)(E)........ 820 119 (416) 189 -------- ------ -------- ------- Pro forma income (loss) before extraordinary item........................................... $ 3,793 $ 193 $ (679) $ 310 ======== ====== ======== ======= Pro forma per share data: Income per share before extraordinary item(F)...................................... $ 0.40 ======== Shares used in computing pro forma per share data(G)...................................... 9,375 ======== Pro forma as adjusted per share data: Income per share before extraordinary item(H)...................................... Shares used in computing pro forma as adjusted per share data(I)............................ PRO FORMA --------- Revenues: Resident and health care revenue............... $ 77,964 Management services revenue.................... 1,579 -------- Total revenues............................... 79,543 Operating expenses: Community operating expense.................... 49,298 General and administrative..................... 6,200 Lease expense.................................. 2,090 Depreciation and amortization.................. 6,273 -------- Total operating expenses..................... 63,861 -------- Income (loss) from operations................ 15,682 Other income (expense): Interest expense............................... (12,596) Interest income................................ 455 Other.......................................... 788 -------- Other income (expense), net.................. (11,353) -------- Income (loss) before income taxes and extraordinary item......................... 4,329 Income tax expense (benefit)................. (920) -------- Income (loss) before extraordinary item...... $ 5,249 ======== PRO FORMA TAX DATA: Income (loss) before income taxes and extraordinary item............................. $ 4,329 Pro forma income tax expense (benefit)(E)........ 712 -------- Pro forma income (loss) before extraordinary item........................................... $ 3,617 ======== Pro forma per share data: Income per share before extraordinary item(F)...................................... $ 0.39 ======== Shares used in computing pro forma per share data(G)...................................... 9,375 ======== Pro forma as adjusted per share data: Income per share before extraordinary item(H)...................................... $ 0.33 ======== Shares used in computing pro forma as adjusted per share data(I)............................ 10,938 ========
- --------------- (A) Reflects the historical consolidated statement of operations of the Predecessor for the year ended December 31, 1996, including the operations of Carriage Club for the period May 1, 1996 (the effective date of the Carriage Club Acquisitions) through December 31, 1996. (B) Reflects the historical combined statement of operations for Carriage Club for the period January 1, 1996 through April 30, 1996. (C) Includes the following adjustments relating to the Carriage Club Acquisitions for the period January 1, 1996 through April 30, 1996: (i) elimination of $160,000 in management fees paid to the Predecessor by Carriage Club; (ii) additional depreciation expense of $104,000 attributable to the increase in the carrying value of the acquired assets; and (iii) additional interest costs of $991,000 associated with the financing of the Carriage Club Acquisitions. Additional interest costs represent the difference between the interest that would have been incurred by the Company if the Company had acquired the Carriage Club properties on January 1, 1996, and the actual interest cost incurred by the seller of these properties for the period from January 1, 1996 through April 30, 1996. (D) Includes the following adjustments relating to the Sale-Leaseback Transactions: (i) elimination of $1.2 million of depreciation and amortization expense on assets sold in the Sale-Leaseback Transactions; (ii) lease expense of approximately $2.5 million, less $455,000 representing amortization of the deferred gain on the Sale-Leaseback Transactions ($4.6 million over ten years); and (iii) elimination of $1.4 million of interest expense on debt retired with a portion of the net proceeds from the Sale-Leaseback Transactions. (E) Reflects income tax expense that would have been recognized if the Predecessor, the Predecessor Entities, and Carriage Club had been corporations since January 1, 1996, filing a consolidated tax return. (F) Income per share before extraordinary item is calculated before subtracting the return on the Preferred Partnership Interests. (G) Reflects 7,812,500 shares issuable in the Reorganization, plus 1,562,500 shares, representing the value of the $25.0 million principal amount of the Reorganization Note (based upon an assumed initial public offering price of $16.00 per share). (H) Does not reflect a $13.5 million ($1.23 per share) one-time charge to income which will be incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities. (I) Reflects 7,812,500 shares issuable in the Reorganization, plus the 3,125,000 shares offered hereby. 21 23 SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA The following table sets forth selected financial data and pro forma data of the Company, the Predecessor, and the Predecessor Entities. The selected financial data as of and for the years ended December 31, 1992, 1993, and 1994 and the three months ended March 31, 1995 are derived from the combined financial statements of the Predecessor Entities. The selected financial data as of and for the nine months ended December 31, 1995 and as of and for the year ended December 31, 1996 are derived from the consolidated financial statements of the Predecessor. The selected data as of and for the periods ended December 31, 1994, March 31, 1995, December 31, 1995, and December 31, 1996 are derived from the combined and consolidated financial statements of the Predecessor, which financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The combined and consolidated financial statements as of December 31, 1995 and 1996, and for the year ended December 31, 1994, the three months ended March 31, 1995, the nine months ended December 31, 1995, and the year ended December 31, 1996, and the report thereon, are included elsewhere in this Prospectus. The selected statement of operations and balance sheet data as of and for the three months ended March 31, 1996 and as of and for the three months ended March 31, 1997 are derived from the unaudited consolidated financial statements of the Predecessor. In the opinion of the Company's management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1997 are not necessarily indicative of the results that may be expected for fiscal 1997. The information below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the combined and consolidated financial statements of the Predecessor, the related notes, and the independent auditors' report, which refers to a change in cost basis as a result of a purchase business combination in connection with the 1995 Roll-Up.
PREDECESSOR ENTITIES (COMBINED) PREDECESSOR ------------------------------------------- ------------------------------------- THREE MONTHS NINE MONTHS YEAR ENDED YEARS ENDED DECEMBER 31, ENDED ENDED DECEMBER 31, 1996 --------------------------- MARCH 31, DECEMBER 31, ---------------------- 1992 1993 1994 1995 1995 ACTUAL PRO FORMA(1) ------- ------- ------- ------------- ------------ ------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Resident and health care revenue................... $16,045 $23,162 $30,979 $11,761 $47,239 $73,878 $77,964 Management services revenue................... 1,774 2,752 2,362 595 1,524 1,739 1,579 ------- ------- ------- ------- ------- ------- ------- Total revenues........ 17,819 25,914 33,341 12,356 48,763 75,617 79,543 Operating expenses: Community operating expense................... 11,329 16,401 21,780 8,035 30,750 46,960 49,298 Lease expense............... -- -- -- -- -- -- 2,090 General and administrative............ 2,656 3,290 3,455 1,108 3,446 6,200 6,200 Depreciation and amortization.............. 1,557 2,251 2,891 1,127 4,534 6,906 6,273 ------- ------- ------- ------- ------- ------- ------- Total operating expenses................ 15,542 21,942 28,126 10,270 38,730 60,066 63,861 ------- ------- ------- ------- ------- ------- ------- Income from operations.... 2,277 3,972 5,215 2,086 10,033 15,551 15,682 ------- ------- ------- ------- ------- ------- ------- Other income (expense): Interest expense............ (2,914) (3,569) (5,354) (2,370) (7,930) (12,160) (12,596) Interest income............. 145 122 203 49 329 434 455 Other....................... 39 189 98 (1,013)(3) 919 788 788 ------- ------- ------- ------- ------- ------- ------- Other income (expense), net..................... (2,730) (3,258) (5,053) (3,334) (6,682) (10,938) (11,353) ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes and extraordinary item...... (453) 714 162 (1,248) 3,351 4,613 4,329 Income tax expense (benefit)(4)................ -- -- -- 20 55 (920) (920) ------- ------- ------- ------- ------- ------- ------- Income (loss) before extraordinary item.......... (453) 714 162 (1,268) 3,296 5,533 5,249 Extraordinary item(5)......... -- -- -- -- -- (2,335) (2,335) ------- ------- ------- ------- ------- ------- ------- Net income (loss)............. (453) 714 162 (1,268) 3,296 3,198 2,914 Preferred return on special redeemable preferred limited partnership interests(6).... -- -- -- -- (1,125) (1,104) (324) ------- ------- ------- ------- ------- ------- ------- Net income (loss) available for distribution to partners and shareholders............ $ (453) $ 714 $ 162 $(1,268) $ 2,171 $ 2,094 $ 2,590 ======= ======= ======= ======= ======= ======= ======= Distribution to partners, excluding preferred distributions............... $ 404 $ 5,708 $ 2,580 $ 1,400 $ 4,064 $ 6,035 $ 6,035 ======= ======= ======= ======= ======= ======= ======= PREDECESSOR ----------------- THREE MONTHS ENDED MARCH 31, ----------------- 1996(2) 1997 ------- ------- STATEMENT OF OPERATIONS DATA: Revenues: Resident and health care revenue................... $15,803 $20,982 Management services revenue................... 513 528 ------- ------- Total revenues........ 16,316 21,510 Operating expenses: Community operating expense................... 10,270 13,399 Lease expense............... -- 528 General and administrative............ 1,183 1,886 Depreciation and amortization.............. 1,390 1,585 ------- ------- Total operating expenses................ 12,843 17,398 ------- ------- Income from operations.... 3,473 4,112 ------- ------- Other income (expense): Interest expense............ (1,894) (3,257) Interest income............. 79 150 Other....................... (6) (30) ------- ------- Other income (expense), net..................... (1,821) (3,137) ------- ------- Income (loss) before income taxes and extraordinary item...... 1,652 975 Income tax expense (benefit)(4)................ -- -- ------- ------- Income (loss) before extraordinary item.......... 1,652 975 Extraordinary item(5)......... (2,335) -- ------- ------- Net income (loss)............. (683) 975 Preferred return on special redeemable preferred limited partnership interests(6).... (375) -- ------- ------- Net income (loss) available for distribution to partners and shareholders............ $(1,058) $ 975 ======= ======= Distribution to partners, excluding preferred distributions............... $ 1,415 $ 2,500(7) ======= =======
22 24
PREDECESSOR ------------------------------------------- YEAR ENDED THREE MONTHS DECEMBER 31, 1996 ENDED MARCH 31, ---------------------- ----------------- ACTUAL PRO FORMA(1) 1996(2) 1997 ------ ------------ ------- ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) UNAUDITED PRO FORMA TAX DATA(8): Income before income taxes and extraordinary item........... $4,613 $4,329 $1,652 $ 975 Pro forma income tax expense................................ 820 712 628 370 ------ ------ ------ ------ Pro forma income before extraordinary item.................. 3,793 3,617 1,024 605 Preferred return on special redeemable preferred limited partnership interests(6).................................. (1,104) (324) (375) -- ------ ------ ------ ------ Pro forma income before extraordinary item available for distribution to partners and shareholders................. $2,689 $3,293 $ 649 $ 605 ====== ====== ====== ====== Pro forma per share data: Income before extraordinary item.......................... $ 0.40 $ 0.39 $ 0.06 Preferred return on special redeemable preferred limited partnership interests................................... 0.12 0.03 -- ------ ------ ------ Income before extraordinary item available for distribution to partners and shareholders............... $ 0.29 $ 0.35 $ 0.06 ====== ====== ====== Shares used in computing pro forma per share data(9)...... 9,375 9,375 9,375 ====== ====== ====== Pro forma as adjusted per share data(10): Income before extraordinary item.......................... $ 0.33 $ 0.06 Preferred return on special redeemable preferred limited partnership interests................................... 0.03 -- ------ ------ Income before extraordinary item available for distribution to partners and shareholders............... $ 0.30 $ 0.06 ====== ====== Shares used in computing pro forma as adjusted per share data.................................................... 10,938 10,938 ====== ======
AT DECEMBER 31, AT MARCH 31, 1997 -------------------------------------------------- ---------------------------- PREDECESSOR ENTITIES (COMBINED) PREDECESSOR COMPANY ---------------------------- -------------------------------- --------------- PRO FORMA, 1992 1993 1994 1995 1996 ACTUAL(11) AS ADJUSTED(12) ------- ------- -------- -------- -------- ---------- --------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.................. $ 2,186 $ 3,205 $ 2,894 $ 3,825 $ 3,222 $ 8,854 $ 26,954 Working capital (deficit).................. 1,545 2,529 3,168 (1,048) (14,289) 1,651 22,251 Total assets............................... 54,419 63,393 111,425 165,579 228,162 214,156 234,756 Long-term debt, including current portion.................................. 38,469 43,335 89,414 102,245 170,689 157,568 157,568 Partners' and shareholders' equity......... 11,937 15,042 12,823 51,823 37,882 36,357 43,441
- --------------- (1) Gives effect to the following transactions as if they had occurred on January 1, 1996: (a) the Carriage Club Acquisitions, and (b) the Sale-Leaseback Transactions and the application of a portion of the net proceeds therefrom to retire debt. (2) Giving pro forma effect to the transactions described in footnote (1) above as if they had occurred on January 1, 1996, certain selected financial data of the Predecessor for the three months ended March 31, 1996 would have been as follows: Total revenues.............................................. $19,281 Income from operations...................................... 4,070 Income before income taxes and extraordinary item........... 1,134 Pro forma income tax expense................................ 431 Pro forma income before extraordinary item.................. 703 Pro forma income before extraordinary item available for distribution to partners and shareholders................. $ 523
(3) Includes a one-time expense of $964,000 incurred in connection with the 1995 Roll-Up. See Note 11 to the Combined and Consolidated Financial Statements. (4) Provision for income taxes reflects income tax expense of only one of the Predecessor Entities because the Predecessor and the other Predecessor Entities were partnerships. No income tax expense is reflected for periods prior to 1995 because of losses or the availability of NOLs. Both periods in 1995 reflect a provision for alternative minimum taxes. In 1996, the Company recorded an income tax benefit and a deferred tax asset of $920,000 because of the anticipated utilization of NOLs that will offset taxable gains recognized from the Sale-Leaseback Transactions. See Note 12 to the Combined and Consolidated Financial Statements. (5) Amount represents loss on early extinguishment of debt. See Note 9 to the Combined and Consolidated Financial Statements. (6) In connection with the 1995 Roll-Up, $10.0 million of promissory notes were exchanged for $10.0 million of Preferred Partnership Interests bearing a 15% cumulative distribution right. From October 1994 (when such notes were created) through the 1995 Roll-Up, interest expense at 15% was recorded and paid. Following the 1995 Roll-Up, the Company has paid preferred 15% distributions to the holders of the Preferred Partnership Interests. From January 1996 to June 1996, the Company paid $324,000 of distribution 23 25 with respect to $4.8 million of the Preferred Partnership Interests which were redeemed in June 1996 out of operating cash flow and were not eliminated. The remaining $5.2 million of the Preferred Partnership Interests were redeemed with a portion of the net proceeds from the Sale-Leaseback Transactions, and therefore distributions with respect to this $5.2 million portion of the Preferred Partnership Interests have been eliminated in the Pro Forma Statement of Operations data. (7) Reflects the accrual of the Tax Distribution. (8) Except for one of the Predecessor Entities, the Predecessor and the Predecessor Entities, as partnerships, were exempt from U.S. Federal and state income taxes. The pro forma financial data reflects the effect on certain income statement data of income tax expense that would have been recorded had the Predecessor and the other Predecessor Entities not been exempt from paying such income taxes. Pro forma income tax expense has been calculated using statutory U.S. Federal and state tax rates and gives effect to the recognition in 1996 of the $920,000 deferred tax asset described in footnote (4) above. (9) Reflects 7,812,500 shares issuable in the Reorganization, plus 1,562,500 shares, representing the value of the $25.0 million principal amount of the Reorganization Note (based upon an assumed initial public offering price of $16.00 per share). (10) Gives effect to the following transactions as if they had occurred on January 1, 1996: (a) the Reorganization, and (b) the sale of the 3,125,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $16.00 per share, and the application of a portion of the estimated net proceeds to retire the Reorganization Note, and, (c) for the year ended December 31, 1996 data, the transactions described in footnote (1) above. The pro forma as adjusted per share data does not give effect to a non-recurring $13.5 million ($1.23 per share) charge to income that will be incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities. See Note 16 to the Combined and Consolidated Financial Statements. (11) Gives effect to the accrual as of March 31, 1997 of the Tax Distribution, which was paid in April 1997. (12) Gives effect to the following transactions as if they had occurred on March 31, 1997: (a) the payment of the Tax Distribution which had been accrued as of March 31, 1997; (b) the Reorganization, including a $13.5 million charge to income resulting in a reduction of shareholders' equity which will be incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities; and (c) the sale of the 3,125,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $16.00 per share, and the application of a portion of the estimated net proceeds to retire the Reorganization Note. 24 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a national senior living and health care services company providing a broad range of care and services to the elderly within a residential setting. The Company currently operates 19 senior living communities in 12 states with an aggregate capacity for approximately 5,500 residents. In May 1997, the Company expects to acquire an additional community with capacity for 90 residents and to commence operating an additional leased community with capacity for 90 residents. The Company currently owns ten communities, leases two communities pursuant to long-term leases, and manages seven communities pursuant to management agreements. The Company's total revenues have grown from $17.8 million in 1992 to $75.6 million in 1996, an average annual growth rate of 43.5%. During the same period, the Company's income from operations has grown from $2.3 million to $15.6 million, an average annual growth rate of 61.7%. The Company and its predecessors have owned, operated, or managed senior living communities since 1978. The Predecessor, ARCLP, was formed in February 1995 in connection with the 1995 Roll-Up. The 1995 Roll-Up, effective April 1, 1995, was accounted for as a purchase business combination by the Predecessor. The Company was incorporated in February 1997 for purposes of effecting the Reorganization and the Offering. See "The Company -- Pending Reorganization." For the purposes of the following discussion, amounts for the year ended December 31, 1995 represent the sum of the combined results of operations of the Predecessor and Predecessor Entities for the period from January 1, 1995 through March 31, 1995 and the consolidated results of operations of the Predecessor for the period from April 1, 1995 (the effective date of the 1995 Roll-Up) through December 31, 1995. See Note 1 to the Combined and Consolidated Financial Statements. In its early history, the Company focused its efforts on providing contract management, marketing, and development services primarily to third parties. Beginning in 1990 and continuing through 1996, the Company embarked on a strategy of acquiring senior living communities through the Predecessor Entities and the Predecessor. During that period, the Company acquired the 12 communities it now owns or leases. Over the last three years, the Company acquired eight of these senior living communities, with an aggregate capacity for 2,186 residents, at a total cost of approximately $139.0 million. See Note 3 to the Combined and Consolidated Financial Statements. During the next three years, the Company intends to develop approximately 35 free-standing assisted living residences with an aggregate capacity for approximately 2,900 residents at an aggregate estimated cost to complete and lease-up such residences of approximately $250.0 million to $300.0 million. The Company is currently constructing an $11.6 million expansion at one of its owned communities and is constructing, on behalf of the lessor, a $14.0 million expansion at one of its leased communities. In addition, the Company plans to commence additional expansions at five of its owned communities, which are expected to cost approximately $50.0 million to $60.0 million to complete and lease-up. These seven expansion projects will add capacity to accommodate an additional 615 residents. The development of assisted living residences typically involves a substantial commitment of capital over a twelve month construction period, during which no revenues are generated, followed by a twelve month lease-up period. The Company anticipates that newly opened or expanded communities will operate at a loss during a substantial portion of the lease-up period. See " -- Liquidity and Capital Resources" and "Risk Factors -- Losses from Newly Developed Residences and Acquisitions" and "Risk Factors -- No Assurance as to Ability to Develop Additional Assisted Living Residences." In addition to the expansion of its owned and leased communities, the Company is currently managing the expansion of one of its managed communities. The Company's growth strategy also includes the acquisition of free-standing assisted living residences and, to a lesser extent, other senior living communities; home health care agencies; and other properties or businesses that are complementary to the Company's operations and growth strategy. The Company's total revenues are comprised of (i) resident and health care revenues, which include all resident and home health care agency fees, and (ii) management services revenues, which include fees, net of 25 27 reimbursements, for the development, marketing, and management of facilities owned by third parties. The Company's resident and health care revenues are derived primarily from three principal sources: (i) monthly service fees from independent and assisted living residents, representing 75.0% and 71.4% of total revenues for the three months ended March 31, 1997 and 1996, respectively, and 75.2%, 71.6%, and 61.9% of total revenues for the years ended December 31, 1996, 1995, and 1994, respectively; (ii) per diem charges from nursing patients, representing 13.1% and 16.2% of total revenues for the three months ended March 31, 1997 and 1996, respectively, and 14.0%, 17.2%, and 29.1% of total revenues for the years ended December 31, 1996, 1995, and 1994, respectively; and (iii) per visit billings from home health care patients and companion services clients, representing 9.4% and 9.3% of total revenues for the three months ended March 31, 1997 and 1996, respectively, and 8.5%, 7.7%, and 1.9% of total revenues for the years ended December 31, 1996, 1995, and 1994, respectively. Management services revenues represented 2.5% and 3.1% of total revenues for the three months ended March 31, 1997 and 1996, respectively, and 2.3%, 3.5%, and 7.1% of total revenues for the years ended December 31, 1996, 1995, and 1994, respectively. Approximately 91.1% and 90.1% of the Company's total revenues for the three months ended March 31, 1997 and 1996, respectively, and 92.1%, 91.3%, and 93.0% of the Company's total revenues for the years ended December 31, 1996, 1995, and 1994, respectively, were attributable to private pay sources, with the balance attributable to Medicare (8.8% for the three months ended March 31, 1997 and 7.8% for the year ended December 31, 1996), including Medicare-related private co-insurance, and Medicaid (0.1% for the three months ended March 31, 1997 and 0.1% for the year ended December 31, 1996). 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 facilities, including the expenses of its home health care agencies; (ii) general and administrative expense, which includes all corporate office overhead; and (iii) depreciation and amortization expense. As a result of the Sale-Leaseback Transactions in January 1997, the Company is incurring lease expense for periods after such date. RESULTS OF OPERATIONS The Company operates senior living communities and home health care agencies under three general types of arrangements: fee ownership, leases, and management agreements. Currently, the Company owns ten senior living communities and eight home health care agencies; leases two communities; and operates seven communities pursuant to management agreements. Ownership of senior living communities and home health care agencies typically requires a larger capital investment than managed or leased operations, but provides maximum control over operations and all growth in owned community and agency revenues flows directly to the Company. The Company's lease arrangements are typically for terms of ten to 15 years, include renewal options, and provide for a contractually fixed rent, plus additional rent, subject to certain limits, based upon the gross revenues of the community. The Company's lease agreements also typically limit the Company's right to operate other senior living communities within a limited geographic area adjacent to the leased community during the term of the lease and for one year thereafter. Leased communities require a longer commitment and a larger capital investment by the Company than managed communities, but provide a more stable source of revenue because of their longer terms and provide a greater opportunity for long-term revenue growth. 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. The Company receives a monthly fee for its services based on either a contractually fixed amount or a percentage of revenues or income. Certain management agreements also provide the Company with an incentive fee based on various performance goals. The Company's current management agreements expire on various dates between June 1997 and July 2000. 26 28 The following tables set forth, for the periods indicated, selected Statements of Operations data in thousands of dollars and expressed as a percentage of total revenues, and certain resident capacity and occupancy data.
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1994 1995 1996 --------------- --------------- --------------- $ % $ % $ % ------- ----- ------- ----- ------- ----- STATEMENT OF OPERATIONS DATA: Resident and health care revenue....................... $30,979 92.9% $59,000 96.5% $73,878 97.7% Management services revenue............................ 2,362 7.1 2,119 3.5 1,739 2.3 ------- ----- ------- ----- ------- ----- Total revenues................................ 33,341 100.0 61,119 100.0 75,617 100.0 Community operating expense............................ 21,780 65.3 38,785 63.5 46,960 62.1 Lease expense.......................................... -- -- -- -- -- -- General and administrative............................. 3,455 10.4 4,554 7.5 6,200 8.2 Depreciation and amortization.......................... 2,891 8.7 5,661 9.3 6,906 9.1 ------- ----- ------- ----- ------- ----- Total operating expenses...................... 28,126 84.4 49,000 80.2 60,066 79.4 ------- ----- ------- ----- ------- ----- Income from operations........................ 5,215 15.6 12,119 19.8 15,551 20.6 Interest expense....................................... (5,354) (16.0) (10,300) (16.9) (12,160) (16.1) Interest income........................................ 203 0.6 378 0.6 434 0.6 Other.................................................. 98 0.3 (94) (0.1) 788 1.0 ------- ----- ------- ----- ------- ----- Other income (expense), net.......................... (5,053) (15.1) (10,016) (16.4) (10,938) (14.5) ------- ----- ------- ----- ------- ----- Income before income taxes and extraordinary item.... 162 0.5% 2,103 3.4% 4,613 6.1% Income tax expense (benefit)........................... -- -- 75 (0.1) (920) 1.2 ------- ----- ------- ----- ------- ----- Income before extraordinary item....................... 162 0.5% 2,028 3.3% 5,533 7.3% Extraordinary item..................................... -- -- -- -- 2,335 3.1 ------- ----- ------- ----- ------- ----- Net income............................................. $ 162 0.5% $ 2,028 3.3% $ 3,198 4.2% ======= ===== ======= ===== ======= =====
THREE MONTHS ENDED MARCH 31, --------------------------------- 1996 1997 --------------- --------------- $ % $ % ------- ----- ------- ----- STATEMENT OF OPERATIONS DATA: Resident and health care revenue............................ $15,803 96.9% $20,982 97.5% Management services revenue................................. 513 3.1 528 2.5 ------- ----- ------- ----- Total revenues..................................... 16,316 100.0 21,510 100.0 Community operating expense................................. 10,270 62.9 13,399 62.3 Lease expense............................................... -- -- 528 2.5 General and administrative.................................. 1,183 7.3 1,886 8.8 Depreciation and amortization............................... 1,390 8.5 1,585 7.4 ------- ----- ------- ----- Total operating expenses........................... 12,843 78.7 17,398 80.9 ------- ----- ------- ----- Income from operations............................. 3,473 21.3 4,112 19.1 Interest expense............................................ (1,894) (11.6) (3,257) (15.1) Interest income............................................. 79 0.5 150 0.7 Other....................................................... (6) -- (30) (0.1) ------- ----- ------- ----- Other income (expense), net............................... (1,821) (11.2) 3,137 14.6 Income before income taxes and extraordinary item......... 1,652 10.1 975 4.5 Income tax expense (benefit)................................ -- -- -- -- ------- ----- ------- ----- Income before extraordinary item............................ 1,652 10.1 975 4.5 Extraordinary item.......................................... (2,335) (14.3) -- -- ------- ----- ------- ----- Net income (loss)........................................... $ (683) (4.2)% $ 975 4.5% ======= ===== ======= =====
27 29
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ---------------------------------------------------- ---------------------------------- 1994 1995 1996 1996 1997 --------------- ---------------- --------------- --------------- ---------------- OPERATING DATA: End of period capacity: Owned.......................... 2,141 2,594 2,886 2,584 2,912 Leased......................... -- -- 483 -- 483 Managed........................ 3,315 3,008 2,159 3,005 2,159 ----- ----- ---- ---- ---- Total.................... 5,456 5,602 5,528 5,589 5,554 ===== ===== ===== ==== ==== Average occupancy rate: Owned.......................... 89% 93% 94% 93% 94% Leased......................... -- -- -- -- 95 Managed........................ 93 91 90 91 92 ---- ----- ---- ---- ---- Total.................... 91% 92% 92% 92% 94% ==== ===== ==== ==== ==== End period occupancy rate: Owned.......................... 91% 94% 96% 93% 94% Leased......................... -- -- -- -- 96 Managed........................ 96 91 92 91 93 ---- --- ---- ---- --- Total.................... 94% 92% 94% 92% 94% ==== === ==== ==== ==== Stabilized average occupancy rate(1):) Owned.......................... 89% 93% 95% 93% 96% Leased......................... -- -- -- -- 95 Managed........................ 93 95 95 91 95 ---- --- ---- ---- --- Total.................... 91% 94% 95% 92% 96% ==== === ==== ==== ====
- --------------- (1) Excludes the effect of new communities or expansions of the Company's existing communities, including: (i) the opening of a managed community in 1995 with a capacity for 242 residents; (ii) the opening of two expansions of owned communities in mid-1996 with an aggregate additional capacity for 114 residents; and (iii) the opening of a managed community in mid-1996 with a capacity for 76 residents. These openings resulted in decreased average occupancy rates for the periods noted. 28 30 The following table sets forth certain selected financial and operating data on a Same Facility basis. For purposes of the following discussion, "Same Facility basis" refers to communities that were owned and leased by the Company throughout each of the periods being compared. Revenues on a Same Facility basis do not include any management services revenues.
THREE MONTHS YEAR ENDED YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, MARCH 31, ----------------- ----------------- ----------------- 1994 1995 % CHANGE 1995 1996 % CHANGE 1996 1997 % CHANGE ------- ------- -------- ------- ------- -------- ------- ------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) STATEMENT OF OPERATIONS DATA: Monthly/per diem service fees........ $26,384 $29,040 10.1% $46,398 $48,888 5.4% $14,280 $15,222 6.6% Home health and companion services revenue............. 627 2,699 330.5% 2,699 3,789 40.4% 1,524 1,960 28.6% ------- ------- ------- ------- ------- ------- Resident and health care revenue...... 27,011 31,739 17.5% 49,097 52,677 7.3% 15,804 17,182 8.7% Community operating expense............. 19,212 21,795 13.4% 32,854 34,314 4.4% 10,324 11,191 8.4% ------- ------- ------- ------- ------- ------- Resident income from operations(1)..... $ 7,799 $ 9,944 27.5% $16,243 $18,363 13.1% 5,480 5,991 9.3% ======= ======= ======= ======= ======= ======= Resident income from operations margin(1)(2)...... 28.9% 31.3% 33.1% 34.9% 34.7% 34.9% OTHER DATA: Average occupancy rate(3)............. 88% 91% 92% 94% 93% 96% Average monthly revenue per occupied unit(4)............. $ 2,322 $ 2,467 6.2% $ 2,217 $ 2,295 3.5% 2,215 2,289 3.3% Average monthly expense per occupied unit(5)............. 1,639 1,665 1.6% 1,465 1,475 0.7% 1,412 1,446 2.4%
- --------------- (1) "Resident income from operations" and "Resident income from operations margin" are not measures of performance determined in accordance with generally accepted accounting principles. This information is included because the Company believes it is useful for investors in measuring operating trends on a Same Facility basis. "Resident income from operations" reflects resident and health care income from operations on a Same Facility basis before depreciation and amortization, interest, general and administrative expense, and other non-operating expenses. This information should be considered in conjunction with the historical and pro forma financial statements of the Company included elsewhere in this Prospectus, which include certain significant items excluded from the foregoing calculations for the Company as a whole. (2) "Resident income from operations margin" represents "Resident income from operations" as a percentage of "Resident and health care revenue." (3) 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. (4) Average monthly revenue per occupied unit is total annual resident and health care revenues, excluding home health care agency and companion services fees, divided by total occupied apartments and nursing beds, expressed on a monthly basis. (5) Average monthly expense per unit is total annual community operating expenses, excluding home health care agency and companion services expenses, divided by total occupied apartments and nursing beds, expressed on a monthly basis. THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1996 Revenues. Total revenues were $21.5 million for the three months ended March 31, 1997 compared to $16.3 million for the three months ended March 31, 1996, representing an increase of $5.2 million, or 31.8%. Resident and health care revenues increased by $5.2 million and management services revenues increased by $15,000. Of the increase in resident and health care revenues, $4.2 million, or 81.9%, was attributable to revenues derived from two senior living communities acquired in May 1996, with the remaining $942,000, or 18.1%, of such increase attributable to Same Facility growth. Revenues attributable to Same Facilities were $17.2 million for the three months ended March 31, 1997, representing an increase of $1.4 million, or 8.7%, over the same period in 1996. Home health care agency and companion services fees on a Same Facility basis increased by $436,000, or 28.6%, over the prior period. Monthly/per diem service fee revenue on a Same Facility basis increased $942,000, or 6.6%, over the three 29 31 months ended March 31, 1996. Of this increase, 3.1% was due primarily to rate increases and 3.5% was due to higher occupancy. Same Facility average occupancy rates increased from 93% for the three months ended March 31, 1996 to 96% for the three months ended March 31, 1997. Same Facility end of period occupancy rates increased from 93% at March 31, 1996 to 95% at March 31, 1997. Community Operating Expense. Community operating expense increased to $13.4 million for the three months ended March 31, 1997, as compared to $10.3 million for the three months ended March 31, 1996, representing an increase of $3.1 million, or 30.5%. Of the increase in community operating expense, $2.3 million, or 72.3%, was attributable to expenses from acquired senior living communities, and 27.7% of this increase was attributable to Same Facility operating expenses, which increased by $867,000, or 8.4%, over the prior period. Of such increase, $353,000 was attributable to increases in home health care agency and companion services expenses. Same Facility operating expenses, exclusive of home health care agency and companion services expenses, increased 5.6% for the three months ended March 31, 1997 as compared to the comparable period in the prior year. Community operating expense as a percentage of resident and health care revenues declined to 63.9% for the three months ended March 31, 1997, from 65.0% for the three months ended March 31, 1996. Same Facility community operating expense as a percentage of Same Facility resident and health care revenues declined to 65.1% for the three months ended March 31, 1997 from 65.3% in the comparable period in the prior year, primarily due to improved economies of scale resulting from higher occupancy. General and Administrative. General and administrative expense increased to $1.9 million for the three months ended March 31, 1997, as compared to $1.2 million for the three months ended March 31, 1996, representing an increase of $703,000, or 59.4%. Of this increase, $448,000 was due to payroll cost increases related to salary increases and the hiring of additional staff in the corporate office, including staff to manage the Company's home health agencies. The remaining increase of approximately $256,000 resulted primarily from development activity related to the Company's growth plans. General and administrative expense as a percentage of total revenues increased to 8.8% for the three months ended March 31, 1997, from 7.3% for the comparable period in the prior year. Lease Expense. The Company incurred lease expense of $528,000 for the three months ended March 31, 1997, as a result of the Sale-Leaseback Transactions in January 1997. The Company did not incur lease expense prior to the Sale-Leaseback Transactions. Depreciation and Amortization. Depreciation and amortization expense increased to $1.6 million for the three months ended March 31, 1997, from $1.4 million for the three months ended March 31, 1996, representing an increase of $195,000, or 14.0%. This increase was primarily the result of depreciation associated with acquisitions and amortization of related financing costs. Same Facility depreciation and amortization expense decreased to $1.1 million for the three months ended March 31, 1997 from $1.3 million for the three months ended March 31, 1996, as a result of the Sale-Leaseback Transactions effected in January 1997. This decrease was offset in part by the increased lease expense described in the preceding paragraph. Other Income (Expense). Interest expense increased to $3.3 million in the three months ended March 31, 1997, from $1.9 million for the three months ended March 31, 1996, representing an increase of $1.4 million, or 72.0%. The increase in interest expense was a result of indebtedness incurred in connection with the acquisition of two senior living communities in May 1996 offset in part by a reduction in indebtedness of $14.6 million in connection with the Sale-Leaseback Transactions. Interest expense, as a percentage of total revenues, increased to 15.1% for the three months ended March 31, 1997 from 11.6% for the comparable period in the prior year. Extraordinary Loss. During the three months ended March 31, 1996, the Company wrote off $2.3 million of financing costs in connection with the refinancing of $62.1 million of mortgage financing. Net Income. As a result of the foregoing factors, net income increased to $975,000 for the three months ended March 31, 1997 from a loss of $683,000 for the comparable period in the prior year. Before the extraordinary item described above, net income for the three months ended March 31, 1996 was $1.7 million. 30 32 YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995 Revenues. Total revenues were $75.6 million in 1996 compared to $61.1 million in 1995, representing an increase of $14.5 million, or 23.7%. Resident and health care revenues increased by $14.9 million, which was offset, in part, by a decrease in management services revenues of $380,000. Of the increase in resident and health care revenues, $11.3 million, or 75.9%, was attributable to revenues derived from acquired senior living communities, with the remaining $3.6 million, or 24.1%, of such increase attributable to Same Facility growth. During 1995 and 1996, the Company acquired four senior living communities that the Company had previously managed, resulting in a decrease in management services revenues in 1996 to $1.7 million, as compared to $2.1 million in 1995. Revenues attributable to Same Facilities were $52.7 million in 1996, representing an increase of $3.6 million, or 7.3%, over 1995. Home health care agency and companion services fees on a Same Facility basis increased by $1.1 million, or 40.4%, over 1995. Monthly/per diem service fee revenue on a Same Facility basis increased $2.5 million, or 5.4%, over 1995. Of this increase, 3.6% was due primarily to rate increases and 1.8% was due to higher occupancy. Same Facility average occupancy rates increased from 92% in 1995 to 94% in 1996. Same Facility end of year occupancy rates increased from 93% in 1995 to 96% in 1996. Community Operating Expense. Community operating expense increased to $47.0 million in 1996, as compared to $38.8 million in 1995, representing an increase of $8.2 million, or 21.1%. Of the increase in community operating expense, $6.7 million, or 82.0%, was attributable to expenses from acquired senior living communities, and 18.0% of this increase was attributable to Same Facility operating expenses, which increased by $1.5 million, or 4.4%, over 1995. Of such increase, $694,000 was attributable to increases in home health care agency and companion services expenses. Same Facility operating expenses, exclusive of home health care agency and companion services expenses, increased 2.5% in 1996 as compared to 1995. Community operating expense as a percentage of resident and health care revenues declined to 63.6% in 1996 from 65.7% in 1995. Same Facility community operating expense as a percentage of Same Facility resident and health care revenues declined to 65.1% in 1996 from 66.9% in 1995, primarily due to improved economies of scale resulting from higher occupancy. General and Administrative. General and administrative expense increased to $6.2 million in 1996, as compared to $4.6 million in 1995, representing an increase of $1.6 million, or 36.1%. General and administrative expense as a percentage of total revenues increased to 8.2% in 1996 from 7.5% in 1995. Of this increase in general and administrative expense, $546,000 was directly related to the creation of a new operating department by the Company in 1996 to manage the Company's home health care agencies, which had previously been managed by a third party. The remaining increase of approximately $1.1 million resulted from continued investments in infrastructure necessary to support the Company's growth, including the incurrence of costs related to personnel training, the expansion of the development services department, the upgrade of management information systems, and the centralization of the Company's accounting staff and functions. Depreciation and Amortization. Depreciation and amortization expense increased to $6.9 million in 1996 from $5.7 million in 1995, representing an increase of $1.2 million, or 22.0%. This increase was primarily the result of depreciation associated with acquisitions and amortization of related financing costs, offset in part by a decrease in amortization resulting from the write-off of certain financing costs. As a result of the Sale-Leaseback Transactions effected in January 1997, the Company expects Same Facility depreciation and amortization expense to decrease in the future, which decrease will be offset, in part, by increased lease expense. Other Income (Expense). Interest expense increased to $12.2 million in 1996 from $10.3 million in 1995, representing an increase of $1.9 million, or 18.1%. The increase in interest expense was related to indebtedness incurred in connection with the acquisition of senior living communities. Interest expense, as a percentage of total revenues, declined to 16.1% in 1996 from 16.9% in 1995. Interest income increased to $434,000 in 1996 from $378,000 in 1995. The Company had other income of $788,000 in 1996, including a gain on the sale of assets of $874,000, compared to other expense of $94,000 in 1995. The 1995 other expense included: (i) $982,000 of nonrecurring expense related to the 1995 Roll-Up; (ii) a gain on the sale of assets of 31 33 $1.1 million; and (iii) other non-operating expenses of $256,000. As a result of the Sale-Leaseback Transactions, the Company expects Same Facility interest expense will decrease in the future, which decrease will be offset, in part, by increased lease expense. Income Tax Expense (Benefit). At December 31, 1996, the Company had NOLs of approximately $5.4 million. In 1996, the Company recognized an income tax benefit of $920,000 because of the anticipated utilization of such net operating loss carryforwards to offset taxable gains related to the Sale-Leaseback Transactions. The provision for income taxes reflects income tax expense of only one of the Predecessor Entities, because the Predecessor and the other Predecessor Entities were partnerships. Extraordinary Loss. In 1996, the Company wrote off $2.3 million of financing costs in connection with the refinancing of $62.1 million of mortgage financing. Net Income. As a result of the foregoing factors, net income increased to $3.2 million ($5.5 million before extraordinary item) in 1996 from $2.0 million in 1995. YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994 Revenues. Total revenues were $61.1 million in 1995 compared to $33.3 million in 1994, representing an increase of $27.8 million, or 83.3%. Resident and health care revenues increased by $28.0 million, which was offset, in part, by a decrease in management services revenues of $243,000. Of the increase in resident and health care revenues, $23.3 million, or 83.1%, was attributable to revenues derived from acquired senior living communities, with the remaining $4.7 million, or 16.9%, of such increase attributable to Same Facility growth. During 1994 and 1995, the Company acquired six senior living communities, three of which had been previously managed by the Company, resulting in a decrease in management services revenues in 1995 to $2.1 million, as compared to $2.4 million in 1994. Revenues attributable to Same Facilities were $31.7 million in 1995, representing an increase of $4.7 million, or 17.5%, over 1994. Home health care agency and companion services fees on a Same Facility basis increased by $2.1 million, or 330.5%, over 1994. Monthly/per diem service fee revenue on a Same Facility basis increased $2.6 million, or 10.1%, over 1994. Of this increase, 6.5% was due primarily to rate increases and 3.6% was due to higher occupancy. Same Facility average occupancy rates increased from 89% in 1994 to 91% in 1995. Same Facility end of year occupancy rates increased from 90% in 1994 to 92% in 1995. Community Operating Expense. Community operating expense increased to $38.8 million in 1995, as compared to $21.8 million in 1994, representing an increase of $17.0 million, or 78%. Of the increase in community operating expense, $14.4 million, or 84.8%, was attributable to operating expenses from acquired senior living communities, and 15.2% of this increase was attributable to Same Facility operating expenses, which increased by $2.6 million, or 13.4%, over 1994. Of such increase, $1.6 million was attributable to increases in home health care agency and companion services expenses. Same Facility operating expenses, exclusive of home health care agency and companion services expenses, increased 5.2% in 1995 as compared to 1994. Community operating expense as a percentage of resident and health care revenues declined to 65.7% in 1995 from 70.3% in 1994. Same Facility community operating expense as a percentage of Same Facility resident and health care revenues increased to 71% in 1995 from 69% in 1994. General and Administrative. General and administrative expense increased to $4.6 million in 1995, as compared to $3.5 million in 1994, representing an increase of $1.1 million, or 31.8%. General and administrative expense as a percentage of total revenues decreased to 7.5% in 1995 from 10.4% in 1994. The majority of the increase resulted from costs incurred in connection with increased personnel costs incurred to support the Company's growth, including costs associated with the upgrade of management information systems and the centralization of the Company's accounting staff and functions. Depreciation and Amortization. Depreciation and amortization expense increased to $5.7 million in 1995 from $2.9 million in 1994, representing an increase of $2.8 million, or 95.8%. This increase was primarily the result of depreciation associated with acquisitions and amortization of related financing costs. 32 34 Other Income (Expense). Interest expense increased to $10.3 million in 1995 from $5.4 million in 1994, representing an increase of $4.9 million, or 92.4%. The increase in interest expense was related to indebtedness incurred in connection with the acquisition of senior living communities. Interest expense, as a percentage of total revenues, increased to 16.9% in 1995 from 16.1% in 1994. Interest income increased to $378,000 in 1995 from $203,000 in 1994. The Company had other expense of $94,000 in 1995 compared to other income of $98,000 in 1994, primarily as a result of $981,000 of nonrecurring expenses related to the 1995 Roll-Up, and $268,000 of other expenses associated with a 1995 acquisition, which was offset, in part, by a $1.1 million gain on sale of assets. Net Income. As a result of the foregoing factors, net income increased to $2.0 million in 1995 from $162,000 in 1994. LIQUIDITY AND CAPITAL RESOURCES The Company has traditionally financed its activities from net proceeds from private placements of equity interests, long-term mortgage borrowing, and cash flows from operations. At March 31, 1997, the Company had $157.6 million of indebtedness outstanding, including $145.8 million payable to General Electric Capital Corporation ("GECC"), with fixed maturities ranging from December 31, 2001 to April 30, 2003. The Company has the capacity to borrow up to an additional $15.9 million from GECC to finance future acquisitions or expansions. The Company also maintains a $2.5 million line of credit with a bank that is available for working capital and to secure various debt instruments. At March 31, 1997, approximately $1.6 million of this line of credit had been used to obtain letters of credit. The Company also maintains a $5.0 million line of credit with a bank that is available for land acquisitions. At March 31, 1997, $825,000 was outstanding under this line of credit. Substantially all of the Company's indebtedness is secured, is cross-defaulted with other indebtedness and contains customary restrictive covenants. The Company does not believe that these restrictive covenants materially limit its operations. As of March 31, 1997, approximately 72.6% of the Company's indebtedness bore interest at fixed rates, with a weighted average interest rate of 8.5%. The Company's variable rate indebtedness carried an average rate of 7.7% as of March 31, 1997. Less than 12% of the Company's currently outstanding indebtedness matures before December 31, 2002. The Sale-Leaseback Transactions resulted in minimum annual lease obligations of $2.5 million, beginning in 1997. The Company expects to service current outstanding indebtedness and lease obligations with internally generated funds. The Company has entered into non-binding letters of intent with respect to the REIT Facilities pursuant to which NHP and NHI, at the Company's request and upon satisfaction of certain conditions, would develop, construct, or acquire up to $110.0 million and $100.0 million, respectively, of senior living communities and lease the communities to the Company. Net cash provided by operating activities was $11.7 million, $9.0 million, and $3.5 million for the fiscal years ended December 31, 1996, 1995, and 1994, respectively, and $1.6 million and $3.3 million for the three months ended March 31, 1997 and 1996, respectively. Unrestricted cash balances were $3.2 million, $3.8 million, and $2.9 million at December 31, 1996, 1995, and 1994, respectively. As of March 31, 1997, unrestricted cash balances were $8.9 million. Net cash used by investing activities totaled $67.6 million, $11.0 million, and $46.3 million for the fiscal years ended December 31, 1996, 1995, and 1994, respectively. Over this period, the Company acquired an aggregate of $139.0 million of senior living community assets, and made capital expenditures at its owned properties in an aggregate amount of $8.9 million, including expansion activity in the amount of $3.5 million. During the same period, the Company sold an aggregate of $2.8 million of assets. Net cash provided by investing activities was $24.0 million for the three months ended March 31, 1997, as compared to net cash used of $746,000 for the three months ended March 31, 1996. During the three months ended March 31, 1997, the Company sold $27.0 million of assets in the Sale-Leaseback Transactions and made $3.3 million of capital expenditures at certain of its owned communities. 33 35 Net cash provided by financing activities was $55.3 million, $2.9 million, and $42.6 million for the fiscal years ended December 31, 1996, 1995, and 1994, respectively. Proceeds from the issuance of long-term debt was $73.9 million, $26.7 million, and $49.0 million in 1996, 1995, and 1994, respectively, including $23.5 million of debt assumed by the Company pursuant to acquisitions in 1995. The Company also raised $11.0 million in a private placement of equity in 1995. The Company retired debt in the amount of $5.5 million, $4.3 million, and $2.5 million in 1996, 1995, and 1994, respectively; made cash distributions to its partners of $7.1 million, $6.6 million, and $2.6 million in 1996, 1995, and 1994, respectively; and redeemed all of the outstanding Preferred Partnership Interests for $10.0 million in 1996. Net cash used by financing activities was $20.0 million and $973,000 for the three months ended March 31, 1997 and 1996, respectively. During the three months ended March 31, 1997, the Company repaid $14.6 million of indebtedness with a portion of the proceeds from the Sale-Leaseback Transactions and made $959,000 of principal payments on its long-term debt. The Company made the $2.5 million Tax Distribution to its partners in April 1997 (which was accrued as of March 31, 1997), which amount approximates the income taxes associated with the Predecessor's anticipated earnings in 1997 through the date of the Reorganization. Following the Reorganization and conversion from partnership to corporate form, the Company does not anticipate declaring or paying cash dividends on the Common Stock in the foreseeable future. The Company intends to retain future earnings to finance the operation and expansion of the Company's business. See "Dividend Policy and Prior Distributions." In January 1997, the Company effected the Sale-Leaseback Transactions with respect to its Holley Court Terrace and Trinity Towers senior living communities and realized net cash proceeds therefrom of $27.6 million. Of such proceeds, $14.6 million were used to retire indebtedness and $5.2 million were used to redeem the Predecessor's outstanding Preferred Partnership Interests (which redemption had been accrued as of December 31, 1996). The Sale-Leaseback Transactions resulted in a gain of approximately $4.6 million, which will be recognized over the ten-year initial term of the lease. In May 1997, the Company acquired an assisted living residence in Tarpon Springs, Florida. The purchase price for the facility was $4.4 million and was financed primarily through a $3.5 million mortgage loan provided by a bank. The Company has entered into an acquisition agreement pursuant to which it expects in May 1997 to acquire the Remington at Corpus Christi community and to acquire a long-term leasehold in the Remington at Victoria community. The purchase price for the Corpus Christi community will be approximately $5.7 million, and the Company intends to finance the acquisition primarily through a $4.7 million mortgage loan provided by NHI. The purchase price for the Victoria community leasehold will be approximately $900,000. The lease is expected to provide for annual lease obligations of approximately $468,000. The Company is currently constructing an $11.6 million expansion at one of its owned communities. The Company has a construction loan commitment from a bank, as well as a permanent loan commitment from a mortgage lender to fund the costs of construction. The Company also plans to expand certain of its other owned communities; to open home health care agencies at certain of its owned and/or leased communities that do not currently operate home health care agencies; to develop new assisted living residences; and to acquire assisted living residences and selected senior living and health care services assets. The Company has entered into a non-binding letter of intent to acquire a home health care agency located in Corpus Christi, Texas for a purchase price of approximately $1.0 million. Subject to completion of additional due diligence, the Company expects to complete the acquisition in the second quarter of 1997. Capital expenditures planned for 1997 total approximately $55.0 million. Of this amount, the Company anticipates that approximately $25.0 million will be used for the development of approximately 21 free-standing assisted living residences; approximately $27.0 million will be used for the expansion of existing communities; and approximately $3.0 million will be used for renovation and replacement of equipment at existing communities. The Company estimates that capital expenditures for the development of additional free-standing assisted living residences in 1998 will range from approximately $25.0 million to $30.0 million. 34 36 The Company expects that its current cash and the net proceeds from the Offering, together with cash flow from operations, the REIT Facilities, and the proceeds of borrowings available to it under existing credit arrangements, will be sufficient to meet its operating requirements and to fund its anticipated growth for at least the next 12 to 18 months. The Company expects to use a wide variety of financing sources to fund its future growth, including public and private debt and equity, conventional mortgage financing, and unsecured bank financing, among other sources. There can be no assurance that financing from such sources will be available in the future or, if available, that such financing will be available on terms acceptable to the Company. DEFERRED TAX LIABILITY The Company will incur a one-time $13.5 million ($1.23 per share) charge to income resulting in a reduction of shareholders' equity at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities. 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. 35 37 BUSINESS OVERVIEW AND HISTORY The Company is a national senior living and health care services company providing a broad range of care and services to the elderly, including independent living, assisted living, skilled nursing, and home health care services. The Company has pioneered numerous developments in the provision of care and services for the elderly since its inception in 1978, and believes it ranks among the leading operators in the senior living and health care services industry. Currently, the Company operates 19 senior living communities in 12 states, consisting of ten owned communities, two leased communities, and seven managed communities, with an aggregate capacity for approximately 5,500 residents. In May 1997, the Company expects to acquire an additional community with capacity for 90 residents and to commence operating an additional leased community with capacity for 90 residents. The Company also owns and operates eight home health care agencies. At March 31, 1997, the Company's owned communities had an occupancy rate of 94%, its leased communities had an occupancy rate of 95%, and its managed communities had an occupancy rate of 93%. For the year ended December 31, 1996 and the three months ended March 31, 1997, revenues attributable to the Company's senior living communities accounted for 91.5% and 90.5%, respectively, of the Company's total revenues, and revenues attributable to the Company's home health care agencies accounted for 6.2% and 7.0%, respectively, of the Company's total revenues. Approximately 92.1% of the Company's total revenues for the year ended December 31, 1996 and approximately 91.1% of the Company's total revenues for the three months ended March 31, 1997 were derived from private pay sources. Since 1992, the Company has experienced significant growth, primarily through the acquisition of 11 senior living communities. The Company's revenues have grown from $17.8 million in 1992 to $75.6 million in 1996, an average annual growth rate of 43.5%. During the same period, the Company's income from operations has grown from $2.3 million to $15.6 million, an average annual growth rate of 61.7%. The Company intends to continue its growth through a combination of (i) development of free-standing assisted living residences, including special living units and programs for residents with Alzheimer's and other forms of dementia; (ii) selective acquisitions of senior living communities, including assisted living residences; (iii) expansion of existing communities; and (iv) development and acquisition of home health care agencies. As part of its growth strategy, the Company is currently developing 21 free-standing assisted living residences, with an estimated aggregate capacity for 1,826 residents, and is expanding eight of its existing communities to add capacity to accommodate an additional 704 residents. The Company has also entered into a letter of intent to acquire one additional home health care agency and intends to commence operations at five additional home health care agencies during 1997. The Company was founded by Dr. Thomas F. Frist, Sr. and Jack C. Massey, the principal founders of Hospital Corporation of America (now a subsidiary of Columbia/HCA Healthcare Corporation). The Company's operating philosophy was inspired by Dr. Frist's and Mr. Massey's vision to enhance the lives of the elderly by providing the highest quality of care and services in well-operated communities designed to improve and protect the quality of life, independence, personal freedom, privacy, spirit, and dignity of its residents. The Company believes that its senior management, led by W.E. Sheriff, its Chairman and Chief Executive Officer, and Christopher J. Coates, its President and Chief Operating Officer, is one of the most experienced management teams in the senior living industry. The Company's 12 senior officers have been employed by the Company for an average of nine years and have an average of 14 years of industry experience. The executive directors of the Company's communities have been employed by the Company for an average of four years and have an average of 11 years of experience in the senior living industry. GROWTH STRATEGY The Company believes that the fragmented nature of the senior living industry and the limited capital resources available to many small, private operators provide a unique opportunity for the Company to expand its existing base of senior living operations. The Company believes that its existing senior living communities serve as the foundation on which the Company can build senior living networks in targeted geographic markets 36 38 and thereby provide a broad range of high quality care in a cost-efficient manner. The following are the principal elements of the Company's growth strategy: Develop New Assisted Living Residences The Company has implemented an aggressive growth plan to expand primarily through the development and construction of new assisted living residences, including special living units and programs for residents with Alzheimer's and other forms of dementia. The Company intends to develop and market a significant number of its newly developed assisted living residences under the tradename "Homewood Residence." See "-- Trademarks." The Company's primary strategy is to develop a cluster of residences within a particular geographic service area and thereby achieve regional density. In this regard, the Company believes that its existing senior living communities and its extensive knowledge of the local markets in which the Company operates provide the Company with a strong platform from which to expand its operations. In addition, the Company believes that through clustering its residences it can maximize operational, marketing, and management efficiencies while achieving economies of scale. The Company believes that regional density also provides strengthened local presence, community familiarity, and reputation, and will enhance the Company's opportunities in the evolving managed care environment. The Company currently is developing 21 free- standing assisted living residences, with an estimated aggregate capacity for 1,826 residents. See "Business -- Development Activities." The Company follows a disciplined development strategy that includes the following sequential components: (i) a market demographic analysis is conducted by the Company to assess and confirm the relative strength of a potential market; (ii) cohesive neighborhoods and submarkets are identified within the market; (iii) within each neighborhood and submarket, competitive projects are identified and assessed as to their market niche, program of services and pricing, physical condition, and likely financial condition; (iv) based on the prior three steps, a determination is then made as to whether to participate in the market by acquisition or development; (v) if the Company elects to develop within the market, the Company then determines which submarkets to serve, selects a specific design type for each submarket and determines the number of assisted living units and dementia care units to develop; and (vi) specific sites are analyzed, whereby the Company considers a number of factors including site visibility, location within a submarket, the specific neighborhoods which can be served from the site, probability of achieving zoning approvals and the proximity of the site to the Company's other assisted living residences and senior living communities. Architectural design and hands-on construction functions are usually performed by outside architects and contractors with whom the Company has an historical relationship. The Company expects that the average construction time for a typical assisted living residence will be approximately 10 to 12 months. Once construction is completed, the Company estimates that it will take approximately 12 months on average for the assisted living residence to achieve a stabilized level of occupancy. The Company's senior management and development staff have extensive experience in the development of senior living communities, including assisted living residences, real estate acquisition, engineering, general construction, and project management. The Company's development team has the demonstrated ability to target potential markets, perform appropriate market and demographic studies, identify zoning and development issues, and determine the appropriate size and configuration of residences to be developed. Expand Existing Facilities The Company plans to expand certain of its existing communities to include additional assisted living residences (including special programs and living units for residents with Alzheimer's and other forms of dementia), and skilled nursing beds. The Company currently has three expansion projects under construction (including one managed community) and five expansion projects under development, representing an aggregate increase in capacity to accommodate an additional 704 residents. The expansion of existing senior living communities allows the Company to create operating efficiencies and capitalize on its local presence, community familiarity, and reputation in markets in which the Company currently operates. 37 39 Pursue Strategic Acquisitions The Company intends to continue to pursue single or portfolio acquisitions of assisted living residences and, to a lesser extent, other senior living and long-term care communities. Through strategic acquisitions, the Company plans to enter new markets or acquire communities in existing markets as a means to increase market share, augment existing clusters, strengthen its ability to provide a broad range of care, and create operating efficiencies. The Company believes that the current fragmentation of the industry, combined with the Company's financial resources and extensive contacts within the industry, should provide it with the opportunity to consider a number of potential acquisition opportunities. In reviewing acquisition opportunities, the Company will consider, among other things, geographic location, competitive climate, reputation and quality of management and residences, and the need for renovation or improvement of the residences. Develop and Acquire Additional Home Health Care Agencies The Company intends to expand its home health care services by developing, acquiring, and managing new home health care agencies and expanding its range of existing home health care services. The Company currently anticipates that its home health care agencies will be based at the Company's communities, and will serve both the Company's communities and the surrounding area. The Company believes that the expansion of its home health care services will enhance its ability to provide a broad range of health care services, increase its market visibility, and augment the creation of senior living networks in targeted areas. The Company currently operates eight home health care agencies, four of which are in their initial year of operation, and has entered into a letter of intent to acquire an additional home health care agency in Corpus Christi, Texas. The Company expects to complete such acquisition in the second quarter of 1997. Expand Referral Networks and Strategic Alliances The Company intends to continue to develop relationships (which, in certain instances, may involve strategic alliances or joint ventures) with local and regional hospital systems, managed care organizations, and other referral sources to attract new residents to the Company's communities. The Company believes that such arrangements or alliances, which could range from joint marketing arrangements to priority transfer agreements, will enable it to be strategically positioned within the Company's markets if, as the Company believes, senior living programs become an integral part of the evolving health care delivery system. Pursue Additional Third-Party Management Opportunities Although the Company intends to focus its efforts primarily on development and acquisition activities, it may in certain instances pursue third-party management opportunities as a means to enter new markets or expand its presence, market knowledge, and influence in a targeted market. The Company currently manages seven communities with an aggregate capacity for 2,159 residents pursuant to management contracts. Furthermore, the Company intends to continue its consulting and contract activities on a selective basis. OPERATING STRATEGY The Company's operating strategy is to provide high quality health care services to its residents while achieving and sustaining a strong competitive position within its chosen markets, as well as to continue to enhance the performance of its operations. Continue to Provide A Broad Range of High-Quality Personalized Care Central to the Company's operating strategy is its focus on providing high-quality care and services that are personalized and tailored to meet the individual needs of each community resident. The Company's residences and services are designed to provide a broad range of care that permits residents to "age in place" as their needs change and as they develop further physical or cognitive frailties. By creating an environment that maximizes resident autonomy and provides individualized service programs, the Company seeks to attract seniors at an earlier stage, before they need the higher level of care provided in a skilled nursing facility. The 38 40 Company also maintains a comprehensive quality assurance program designed to ensure the satisfaction of its residents and their family members. Offer Services Across a Range of Pricing Options The Company is continually expanding its range of personal, health care, and support services to meet the evolving needs of its residents. The Company has developed several different care plans and residence designs which may, in each instance, be customized to serve the upper income and moderate income markets of a particular targeted geographic area. By offering a range of pricing options that are customized for each target market, the Company believes it can develop synergies, economies of scale, and operating efficiencies in its efforts to serve a larger percentage of the elderly population within a particular geographic market. Maintain and Improve Occupancy Rates The Company also seeks to maintain and improve occupancy rates by (i) retaining residents as they "age in place" by emphasizing quality and breadth of care and service; (ii) attracting new residents through marketing programs directed towards family decision makers, namely adult children, and prospective residents; and (iii) actively seeking referrals from hospitals, rehabilitation hospitals, physicians' clinics, home health care agencies, and other acute and sub-acute health care providers in the markets served by the Company. Improve Operating Efficiencies The Company will seek to improve operating efficiencies at its communities by continuing to actively monitor and manage operating costs. By concentrating residences within selected geographic regions, the Company believes it will be able to achieve operating efficiencies through economies of scale and reduced corporate overhead, and provide more effective management supervision and financial controls. Emphasize Employee Training The Company devotes special attention to the hiring, screening, training, and supervising of its employees and caregivers to ensure that quality standards are achieved. During 1997, the Company expects to spend in excess of $700,000 on personnel training and development of on-site field personnel. In 1995, the Company, together with Dr. Frist, founded The Frist Center at Belmont University in Nashville, Tennessee. The Frist Center is a non-profit foundation providing training, education, and career services for management and front line personnel involved in the senior living and health care services industry. The Company works closely with The Frist Center and the Company's employees actively participate in the training programs, seminars, and classes sponsored by The Frist Center. In addition, professional training programs designed to be delivered on-site by The Frist Center staff have been and are being developed by the Company and The Frist Center. The Company believes its commitment to and emphasis on employee training differentiates the Company from many of its competitors. CARE AND SERVICES PROGRAMS The Company provides a wide array of senior living and health care services to the elderly at its communities, including independent living, assisted living (with special programs and living units for residents with Alzheimer's and other forms of dementia), skilled nursing, and home health care services. By offering a variety of services and involving the active participation of the resident and the resident's family and medical consultants, the Company is able to customize its service plan to meet the specific needs and desires of each resident. As a result, the Company believes that it is able to maximize customer satisfaction and avoid the high cost of delivering all services to every resident without regard to need, preference, or choice. Independent Living Services The Company provides independent living services to seniors who do not yet need assistance or support with the activities of daily life ("ADLs"), but who prefer the physical and psychological comfort of a 39 41 residential community that offers health care and other services. The Company currently owns 10 communities, leases two communities, and manages an additional five communities which provide independent living services, with an aggregate capacity for 2,290 residents, 374 residents, and 1,491 residents, respectively, and intends in May 1997 to commence operating an additional leased community with capacity for 60 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), dietary and similar programs, as well as ongoing exercise and fitness classes. Classes are given by health care professionals to keep residents informed about health and disease management. Subject to applicable government regulation, personal care and medical services are available to independent living residents through either community staff or through the Company's or independent home health care agencies. The Company's independent living residents pay a fee ranging from $1,150 to $4,105 per month, in general depending on the specific community, program of services, size of the units, and amenities offered. The Company's contracts with its independent living residents are generally for a term of one year and are terminable by the resident upon 60 days' notice. Assisted Living and Memory Impaired Services The Company offers a wide range of assisted living care and services 24 hours per day, including personal care services, support services, and supplemental services, at all of its owned and leased communities and at six managed communities. The residents of the Company's assisted living residences generally need help with some or all ADLs, but do not require the more acute medical care traditionally given in nursing homes. Upon admission to the Company's assisted living residences, and in consultation with the resident and the resident's family and medical consultants, each resident is assessed to determine his or her health status, including functional abilities, and need for personal care services, and completes a lifestyles assessment to determine the resident's preferences. From these assessments, a care plan is developed for each resident to ensure that all staff members who render care meet the specific needs and preferences of each resident where possible. Each resident's care plan is reviewed periodically to determine when a change in care is needed. The Company has adopted a philosophy of assisted living care that allows a resident to maintain a dignified independent lifestyle. Residents and their families are encouraged to be partners in their care and to take as much responsibility for their well being as possible. The basic type of assisted living services offered by the Company include the following: Personal Care Services. These services include assistance with ADLs such as ambulation, bathing, dressing, eating, grooming, personal hygiene, monitoring or assistance with medications, and confusion management. Support Services. These services include meals, assistance with social and recreational activities, laundry services, general housekeeping, maintenance services, and transportation services. Supplemental Services. These services include extra transportation services, personal maintenance, extra laundry services, non-routine care services, and special care services, such as services for residents with Alzheimer's and other forms of dementia. Certain of these services require an extra charge in addition to the pricing levels described below. In pricing its services, the Company has developed the following three levels or tiers of assisted living care: - Level I typically provides for minimum levels of care and service, for which the Company generally charges a monthly fee per resident ranging from $1,500 to $2,100, depending upon apartment size and the project design type. Typically, Level I residents need minimal assistance with ADLs. 40 42 - Level II provides for relatively higher levels and increased frequency of care, for which the Company generally charges a monthly fee per resident ranging from $1,800 to $2,700, depending upon the apartment size and the project design type. Typically, Level II residents require moderate assistance with ADLs and may need additional personal care, support, and supplemental services. - Level III provides for the highest level of care and service, for which the Company generally charges a monthly fee per resident ranging from $2,400 to $3,100, depending upon the apartment size and the project design type. Typically, Level III residents are either very frail or impaired and utilize many of the Company's services on a regular basis. The Company maintains programs and special units at its assisted living residences for residents with Alzheimer's and other forms of dementia, which provide the attention, care, and services needed to help those residents maintain a higher quality of life. Specialized services include assistance with ADLs, behavior management, and a lifeskills based activities program, the goal of which is to provide a normalized environment that supports residents' remaining functional abilities. Whenever possible, residents assist with meals, laundry, and housekeeping. Special units for residents with Alzheimer's and other forms of dementia are located in a separate area of the community and have their own dining facilities, resident lounge areas, and specially trained staff. The special care areas are designed to allow residents the freedom to ambulate as they wish while keeping them safely contained within a secure area with a minimum of disruption to other residents. Special nutritional programs are used to help ensure caloric intake is maintained in residents whose constant movement increases their caloric expenditure. Resident fees for these special units are dependent on the size of the unit, the design type, and the level of services provided. Skilled Nursing and Sub-Acute Services The Company provides traditional skilled nursing services in three communities owned by the Company, one community leased by the Company, and five communities managed by the Company, with an aggregate capacity for 261 residents at the Company's owned communities, 60 residents at the Company's leased community, and 393 residents at the Company's managed communities. In addition, the Company has communities under development or expansion which will add estimated additional capacity of 393 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. Home Health Care The Company provides home health care services to residents at certain of its senior living communities and the surrounding areas through home health care agencies based at certain of its existing senior living communities. The services and products that the Company provides through its home health care agencies include (i) general and specialty nursing services to individuals with acute illnesses, long-term chronic health conditions, permanent disabilities, terminal illnesses or post-procedural needs; (ii) therapy services consisting of, among other things, physical, occupational, speech, and medical social services; (iii) personal care services and assistance with ADLs; (iv) hospice care for persons in the final phases of incurable disease; (v) respiratory, monitoring, medical equipment services, and medical supplies to patients; and (vi) a comprehensive range of home infusion and enteral therapies. The Company intends to expand its home health care services to additional senior living communities and to develop, acquire, or manage home health care service businesses at other communities. In addition, the Company will make available to residents certain physician, dentistry, podiatry, and other health related services that will be offered by third-party providers. The Company may elect to provide these services directly or through participation in managed care networks or in joint ventures with other providers. The Company currently operates eight home health care agencies, five of which are in their initial year of operation. 41 43 OPERATING COMMUNITIES AND HOME HEALTH CARE AGENCIES The table below sets forth certain information with respect to the senior living communities and home health care agencies currently operated by the Company.
AVERAGE OCCUPANCY RESIDENT CAPACITY(1) COMMENCEMENT 1996 RATE AT ------------------------- OF OCCUPANCY MARCH 31, COMMUNITY LOCATION IL AL SN TOTAL OPERATIONS(2) RATE 1997 - --------- -------- ----- --- --- ----- ------------- --------- --------- OWNED(3): Broadway Plaza....................... Ft. Worth, TX 252 40 122 414 Apr-92 94% 90%(4) Carriage Club of Charlotte........... Charlotte, NC 355 54 50 459 May-96 91(5) 91(5) Carriage Club of Jacksonville........ Jacksonville, FL 292 60 -- 352 May-96 89(5) 88(5) The Hampton at Post Oak.............. Houston, TX 162 21 -- 183 Oct-94 94 95 Heritage Club........................ Denver, CO 220 35 -- 255 Feb-95 100 99 Parkplace............................ Denver, CO 195 48 -- 243 Oct-94 99 96 Remington at Corpus Christi(6)....... Corpus Christi, TX -- 90 -- 90 May-97 N/A N/A Richmond Place....................... Lexington, KY 204 4 -- 208 Apr-95 98 98 Santa Catalina Villas................ Tucson, AZ 197 15 -- 212 Jun-94 90 94 The Summit at Westlake Hills......... Austin, TX 167 30 89 286 Apr-92 98 99 Westlake Village..................... Cleveland, OH 246 54 -- 300 Oct-94 94 94 ----- --- --- ----- --- --- Subtotal/Average................. 2,290 451 261 3,002 94% 94% LEASED(7): Holley Court Terrace................. Oak Park, IL 179 17 -- 196 Jul-93 81 94 Remington at Victoria(6)............. Victoria, TX 60 30 -- 90 May-97 N/A N/A Trinity Towers....................... Corpus Christi, TX 195 32 60 287 Jan-90 94 96 ----- --- --- ----- --- --- Subtotal/Average................. 434 79 60 573 89% 95% MANAGED(8):) Burcham Hills........................ East Lansing, MI 138 71 133 342 Nov-78 92% 89% Meadowood............................ Worcester, PA 355 51 59 465 Oct-89 94 95 Parklane West........................ San Antonio, TX -- 17 124 141 Oct-94 86 90 Reeds Landing........................ Springfield, MA 148 54 40 242 Aug-95 65(9) 91(9) USAA Towers.......................... San Antonio, TX 505 -- -- 505 Oct-94 100 100 Weinberg Village..................... Tampa, FL -- 75 -- 75 May-96 25 59 Williamsburg Landing................. Williamsburg, VA 345 7 37 389 Sept-85 98 97 ----- --- --- ----- --- --- Subtotal/Average................. 1,491 275 393 2,159 89% 93% ----- --- --- ----- --- --- Grand Total/Average.............. 4,215 805 714 5,734 92% 94% ===== === === ===== === ===
COMMENCEMENT OF HOME HEALTH CARE AGENCIES(10):) LOCATION OPERATIONS - ------------------------------- -------- ------------- Broadway Plaza..................... Fort Worth, TX June 1994 Carriage Club of Charlotte......... Charlotte, NC October 1996 The Hampton at Post Oak............ Houston, TX February 1997 Heritage Club...................... Denver, CO October 1996 Holley Court Terrace............... Oak Park, IL May 1994 Parkplace.......................... Denver, CO February 1997 Richmond Place..................... Lexington, KY June 1990 Westlake Village................... Westlake, OH January 1997
- --------------- (1) Independent living residences (IL), assisted living residences (including areas dedicated to residents with Alzheimer's and other forms of dementia) (AL), and skilled nursing beds (SN). (2) Indicates the date on which the Company acquired each of its owned and leased communities, or commenced operating its managed communities. The Company operated certain of its communities pursuant to management agreements prior to acquiring the communities. The Company operated the following communities pursuant to management agreements for the period indicated prior to the acquisition of such communities by the Company: Carriage Club of Charlotte - July 1988 to May 1996; Carriage Club of Jacksonville - January 1990 to May 1996; Heritage Club - April 1988 to February 1995; Holley Court Terrace -- April 1992 to July 1993; Richmond Place - October 1983 to April 1995; Santa Catalina Villas - November 1991 to June 1994; and Trinity Towers -- November 1986 to November 1990. (3) Each of the Company's owned communities is subject to a mortgage lien. (4) Broadway Plaza's skilled nursing facility contains a sub-acute unit. Sub-acute units generally experience shorter lengths of stay and corresponding higher fluctuations in occupancy rates. Excluding the skilled nursing facility, Broadway Plaza's occupancy rate at March 31, 1997, was 99%. 42 44 (5) Communities at which expansions opened in 1996, which resulted in decreased occupancy rates for the period. Excluding the effect of the expansions, the average 1996 occupancy rate and the occupancy rate at March 31, 1997 would have been 97% and 97%, respectively, at Carriage Club of Charlotte and 91% and 93%, respectively, at Carriage Club of Jacksonville. (6) In May 1997, the Company expects to acquire the Remington at Corpus Christi community and to acquire a long-term leasehold in the Remington at Victoria community. See " -- Recent and Pending Acquisitions." (7) Leased pursuant to operating leases with initial terms of ten to 15 years expiring December 31, 2006 and renewal options for up to three additional ten year terms, provided that both leases are extended concurrently. The Company pays contractually fixed rent, plus additional rent, subject to certain limits, based upon the gross revenues of the community. Without the lessor's consent, the Company may not operate any other type of senior care facility within three miles of either of the premises during the term of the leases and for one year thereafter. (8) The Company's management agreements are generally for terms of three to five years, but may be canceled by the owner of the community, without cause, on three to six months' notice. Pursuant to the management agreements, the Company is generally responsible for providing management personnel, marketing, nursing, resident care and dietary services, accounting and data processing reports, and other services for these communities at the owner's expense and receives a monthly fee for its services based either on a contractually fixed amount or a percentage of revenues or income. Certain management agreements also provide the Company with an incentive fee based on various performance goals. The Company's existing management agreements expire at various times between June 1997 and July 2000. None of the communities managed by the Company is owned by an affiliate of the Company. (9) Reeds Landing is a life care community. Its fill-up rate has been consistent with the feasibility projection for its bond financing, and the fill-up rate of life care communities generally. (10) Each of the home health care agencies is owned by the Company and is based at one of the Company's senior living communities. RECENT AND PENDING ACQUISITIONS In May 1997, the Company completed the acquisition of an assisted living facility located in Tarpon Springs, Florida with capacity for 60 residents. The purchase price for the facility was $4.4 million and was financed primarily through a $3.5 million mortgage loan provided by a bank. The Tarpon Springs facility is completed and will commence operations upon receipt of required licenses. The Company expects to obtain such required licenses in July 1997. The Company has entered into an acquisition agreement pursuant to which it expects to acquire the Remington at Corpus Christi community, which is located in Corpus Christi, Texas and has capacity for 90 residents, and to acquire a long-term leasehold in the Remington at Victoria community, which is located in Victoria, Texas and has capacity for 90 residents. The purchase price for the Corpus Christi community will be approximately $5.7 million, and the Company intends to finance the acquisition primarily through a $4.7 million mortgage loan provided by NHI. The purchase price for the Victoria, Texas leasehold will be approximately $900,000. The landlord under the Remington at Victoria lease will be Healthcare Properties Investors, Inc., a health care real estate investment trust, and the lease is expected to provide for annual rental obligations of approximately $468,000. Although the closing of the transactions is subject to a number of conditions, the Company anticipates completing such transactions in May 1997. The Company has entered into a non-binding letter of intent to acquire a home health care agency located in Corpus Christi, Texas for a purchase price of approximately $1.0 million. Subject to the completion of additional due diligence, the Company expects to complete the acquisition in the second quarter of 1997. In the event that the Company consummates such acquisition, the Company currently intends to pay the purchase price from the net proceeds from the Offering. 43 45 DEVELOPMENT ACTIVITIES The table below summarizes information regarding the expansion of certain of the Company's existing senior living communities and the residences and home health care agencies currently under development.
ADDITIONAL RESIDENT CAPACITY SCHEDULED ----------------------------- COMMUNITIES COMPLETION IL AL SN TOTAL STATUS(1) - ----------- ---------- ---- ------ ---- ------ ----------- EXPANSION PROJECTS: Santa Catalina Village, Tucson, AZ.................. 12/97 20 70 42 132 Construction Williamsburg Landing, Williamsburg, VA(2)........... 12/97 10 58 21 89 Construction Trinity Towers, Corpus Christi, TX.................. 3/98 27 68 16 111 Construction Richmond Place, Lexington, KY....................... 4/98 -- 73 -- 73 Development Carriage Club of Charlotte, Charlotte, NC........... 7/98 -- 30 -- 30 Development Carriage Club of Jacksonville, Jacksonville, FL..... 10/98 -- 15 60 75 Development The Hampton at Post Oak, Houston, TX................ 11/98 -- 15 76 91 Development Westlake Village, Cleveland, Ohio................... 6/99 -- 15 88 103 Development -- ----- --- ----- Subtotal................................... 57 344 303 704 -- ----- --- ----- DEVELOPMENT PROJECTS: Tarpon Springs, FL(3)............................... 7/97 -- 64 -- 64 Licensure Lady Lake, FL(4).................................... 11/97 -- 55 -- 55 Construction Halls, TN(4)........................................ 1/98 -- 55 -- 55 Construction Pearland, TX........................................ 2/98 -- 82 -- 82 Development Spring Shadow, TX................................... 4/98 -- 67 -- 67 Development Houston, TX (Willowchase)........................... 4/98 -- 67 -- 67 Development Houston, TX (Northwest)............................. 4/98 -- 95 -- 95 Development Knoxville, TN (Deane Hill)(4)....................... 4/98 -- 108 -- 108 Development Marietta, GA........................................ 4/98 -- 60 -- 60 Development Lakeway, TX......................................... 5/98 -- 70 -- 70 Development Houston, TX (West).................................. 7/98 -- 85 -- 85 Development Nashville, TN (West)................................ 8/98 -- 90 -- 90 Development Tampa, FL(4)........................................ 8/98 -- 90 -- 90 Development St. Petersburg, FL.................................. 9/98 -- 100 -- 100 Development Aurora, CO.......................................... 10/98 -- 95 -- 95 Development Lakewood, CO........................................ 10/98 -- 93 -- 93 Development Del Ray Beach, FL................................... 10/98 -- 80 -- 80 Development Greenwood Village, CO............................... 11/98 -- 85 90 175 Development Austin, TX.......................................... 1/99 -- 95 -- 95 Development Nashville, TN (Central)............................. 3/99 -- 115 -- 115 Development Houston, TX (West University)....................... 7/99 -- 85 -- 85 Development -- ----- --- ----- Subtotal................................... -- 1,736 90 1,826 -- ----- --- ----- Grand Total................................ 57 2,080 393 2,530 == ===== === =====
ANTICIPATED COMMENCEMENT HOME HEALTH CARE AGENCIES LOCATION OF OPERATIONS - ------------------------- -------- ------------------------ Carriage Club Jacksonville(5)........................... Jacksonville, FL(6) May 1997 Hale County(7).......................................... Greensboro, AL May 1997 The Summit at Westlake Hills(5)......................... Austin, TX(6) June 1997 Meadowood(7)............................................ Worcester, PA(6) July 1997 Air Force Village(7).................................... San Antonio, TX August 1997 Santa Catalina Villas(5)................................ Tucson, AZ(6) January 1998
- --------------- (1) "Development" means that development activities, such as site surveys, preparation of architectural plans, or initiation of zoning processes, have commenced (but construction has not commenced). "Construction" means that construction activities, such as ground-breaking activities, exterior construction, or interior build-out, have commenced. "Licensure" means that the facility is completed and will open upon receipt of required licenses. (2) Williamsburg Landing is a managed community. The Company is providing full development services related to the expansion for the owner. (3) The Company acquired the Tarpon Springs facility in May 1997. See " -- Recent and Pending Acquisitions." (4) Being developed by joint ventures in which the Company owns a 50% interest. (5) Owned by the Company. (6) Based at one of the Company's senior living communities. (7) Managed by the Company for an unaffiliated third party. 44 46 The Company has developed a portfolio of flexible designs for its assisted living residences, each of which may be configured in a number of different ways thereby providing the Company with flexibility in adapting to a particular geographic market, neighborhood, or site. In addition, each design has been developed to facilitate the prompt, efficient, cost-effective delivery of health care and personal services. Site requirements for the various designs range from 2.5 to 6.0 acres. Each of the Company's designs also provide for specially designed residential units, common areas, and dining rooms for residents with Alzheimer's and other forms of dementia. The Company believes that its designs meet the desire of many of its residents to move into a new residence that approximates, as nearly as possible, the comfort of their prior home. The Company also believes that its designs achieve several other objectives, including (i) lessening the trauma of change for residents and their families, (ii) facilitating resident mobility and caregiver access, (iii) enhancing operating efficiencies, (iv) enhancing the Company's ability to match its products to targeted markets, and (v) differentiating the Company from its competitors. The Company intends to develop and market a significant number of its newly developed assisted living residences under the trade name "Homewood Residence." See " -- Trademarks." The Company intends to develop new assisted living residences by using a combination of in-house development personnel and experienced third-party project managers and by acquiring newly constructed residences from developers under "turnkey" purchase and sale agreements. To the extent the Company acquires newly developed residences from a developer on a "turnkey" basis, it intends to enter into a purchase and sale agreement whereby the Company, subject to construction of the residence to the Company's designs and specifications and satisfaction of typical purchase and sale contingencies for the Company's benefit, will commit to purchase the residence upon completion at an agreed upon price. The Company has also entered into contractual arrangements with established, regional real estate development contractors pursuant to which such developers will provide assistance in the development process. These arrangements are intended to enable the Company to develop and construct additional assisted living residences while reducing the investment of, and associated risk to, the Company. The Company's development contractors provide construction management experience, knowledge of local state and building codes and zoning laws, and assistance with site locations. As a result, the Company's development staff is able to evaluate and direct overall development activity more efficiently. The Company intends to enter into development and management agreements with one or more developers which provide that the Company will manage nine assisted living residences to be developed using the Company's residence designs and grant the Company an option to purchase the residences. In addition, the Company has entered into joint venture arrangements with development partners to develop assisted living residences and may enter into additional joint ventures in the future. OPERATIONS Centralized Management The Company centralizes its corporate and other administrative functions so that the community-based management and staff can focus their efforts on resident care. The Company maintains centralized accounting, finance, human resources, training, and other operational functions at its national corporate office in Brentwood (Nashville), Tennessee. The Company's corporate office is generally responsible for (i) establishing Company-wide policies and procedures relating to, among other things, resident care and operations, (ii) performing accounting functions, (iii) developing employee training programs and materials, (iv) coordinating human resources and food service functions, (v) coordinating marketing functions, and (vi) providing strategic direction. In addition, financing, development, construction and acquisition activities, including feasibility and market studies, residence design, development, and construction management, are conducted by the Company's corporate office. The Company seeks to control operational expenses for each of its communities through standardized management reporting and centralized controls of capital expenditures, asset replacement tracking, and purchasing for larger and more frequently used supplies. Community expenditures are monitored by regional operations teams headed by the Company's Regional Vice Presidents who are accountable for the resident 45 47 satisfaction and financial performance of the communities in their region. The Company's assisted living residences operational activities are directed by the Senior Director for Assisted Living Operations who is responsible, together with the appropriate Regional Vice President, for the opening and operation of the Company's assisted living residences. Community-Based Management An executive director manages the day-to-day operations at each senior living community, including oversight of the quality of care, delivery of resident services, and monitoring of financial performance, and is responsible for all personnel, including food service, maintenance, activities, security, assisted living, housekeeping, and, where applicable, nursing. Executive directors are compensated based on certain quality of service goals and on the financial performance of the community. In most cases, each senior living community also has department managers that direct the environmental services, nursing or care services, business management functions, dining services, activities, transportation, housekeeping, and marketing functions. A residence manager manages the day-to-day operations at each assisted living residence. While the residence managers have many of the same operational responsibilities as the Company's executive directors, their primary responsibility is to oversee resident care. For its assisted living residences, the Company has adopted the concept of universal workers whereby each employee's responsibilities span a number of traditional job descriptions. For example, an assisted living residence employee may, during the course of a day, provide housekeeping, food service, activities, and assistance with ADLs services to residents. As a result, and because the Company's senior living communities located near assisted living residences provide certain support personnel and services on an on-going basis, each assisted living residence employs fewer associates. On-site care managers and residents' assistants provide most of the actual resident care in conjunction with a small support team consisting of a housekeeper, a maintenance helper, an administrative coordinator, and a small dining service team. In most assisted living residences, the residence manager is also a licensed nurse. The Company actively recruits personnel to maintain adequate staffing levels at its existing communities as well as new staff for new or acquired communities prior to opening. The Company has adopted comprehensive recruiting and screening programs for management positions that utilize personnel profiling, corporate office interviews, and drug screening company-wide. The Company offers system-wide training and orientation for its front line employees, department level managers, and executive staff at the community level through a combination of Company-sponsored seminars and conferences and through its contract for training services with The Frist Center. Home Health Management The Company centralizes all home health financial and clinical data through an electronic data collection system. This data warehouse allows corporate regional directors to identify emerging trends, establish critical pathways, and develop and monitor cost and utilization controls. All accounting functions including claims submission and processing are performed at the corporate office. The Company's centralized approach allows its home health care agencies to achieve a more efficient delivery of care. Each community-based agency is operated under the auspices of the community's executive director and under the direct control of an agency director. This director and his or her team of nurses, personal care aides, physical therapists, speech therapists, occupational therapists, and social workers focus on assessing the health care needs of residents in the Company's senior living or assisted living communities, as well as clients in the surrounding market. Quality Assurance The Company's quality assurance program is designed to achieve and maintain a high degree of resident and family satisfaction with the care and services the Company provides. The Company coordinates the implementation of its quality assurance program at each of its communities through its corporate office. The Company encourages resident and family participation and seeks feedback from families and residents through surveys conducted on a regular basis. In addition, inspections of each community are conducted 46 48 regularly by corporate staff. These inspections, performed periodically, review all aspects of operations, care, and services provided, and the overall appearance and cleanliness of the community. Marketing The Company's marketing efforts are implemented on a regional and local level, all under the supervision of the corporate marketing staff, and are intended to create awareness of the Company and its services among prospective residents, their families, professional referral sources, and other key decision makers. The corporate marketing staff conducts regional and state-wide surveys of age- and income-qualified seniors to ensure that the Company understands the needs and demands of that marketplace. To further both market awareness of the Company by prospective residents and to more accurately assess the needs and demands of seniors in that market, the Company periodically conducts regional focus groups. Corporate office personnel develop the overall marketing strategies for each community, produce all marketing materials, maintain marketing databases, oversee direct mailings, place all media advertising, and assist community personnel in the initial development and continuing refinement of marketing plans for each community. Before opening a new assisted living residence, the Company makes referral source contacts and conducts marketing programs such as lead-generating media consisting of direct mail, telemarketing follow-up, and print media advertising. These public awareness campaigns usually begin with the start of construction and intensify several months before the opening of the residence. An on-site marketing person is at the residence approximately six months prior to the opening of the residence and is supported by the Company's corporate marketing department. Once the residence opens, the Company believes that satisfied residents and their families are the most important referral sources. Accordingly, the Company believes that its emphasis on high-quality services and resident satisfaction will result in a strong referral base for its existing communities. In addition, the Company focuses on enhancing the reputation of the communities and the services provided among potential referral sources, such as hospitals, home health care agencies, physicians, therapy companies, and other health care professionals. INDUSTRY BACKGROUND The senior living and health care services industry encompasses a broad and diverse range of living accommodations and health care services that are provided primarily to persons 75 years of age or older. For the elderly who require limited services, care in their own or family members' homes or in independent living residences or retirement centers, supplemented at times by home health care, offers a viable option. For the elderly who are interested in a community housing option, most independent living residences and retirement centers typically offer a basic services package limited to meals, housekeeping, and laundry. As a senior's need for assistance increases, care in an assisted living residence is often preferable and more cost-effective than home-based care or nursing home care. Assisted living residents usually enter a residence when other living accommodations no longer provide the level of care required by the individual. Typically, assisted living represents a combination of housing and 24-hour a day personal support services designed to aid elderly residents with ADLs. Certain assisted living residences may also provide assistance to residents with low acuity medical needs, or may offer higher levels of personal assistance for incontinent residents or residents with Alzheimer's disease or other forms of dementia. Generally, assisted living residents require higher levels of care than residents of independent living residences and retirement living centers, but require lower levels of care than patients in skilled nursing facilities. For seniors who need the constant attention of a skilled nurse or medical practitioner, a skilled nursing facility may be required. Estimates of annual expenditures in the assisted living sector of the senior living and health care services industry range from $12.0 billion to $14.0 billion and include facilities ranging from "board and care" (generally 12 or fewer residents with little or no services) to full-service assisted living residences such as those operated by the Company. The assisted living sector is highly fragmented and characterized by numerous small operators. Moreover, the scope of assisted living services varies substantially from one operator to another. Many smaller assisted living providers do not operate in purpose-built residences, do not 47 49 have professional training for staff, and provide only limited assistance with low-level care activities. The Company believes that few assisted living operators provide the required comprehensive range of assisted living services, such as dementia care and other services designed to permit residents to "age in place" within the community as they develop further physical or cognitive frailties. The Company believes there will continue to be significant growth opportunities in the senior living market for providing health care and other services to the elderly, particularly in the assisted living segment of the market. The Company believes that a number of demographic, regulatory, and other trends will contribute to the continued growth in the assisted living market, the Company's targeted market for future development and expansion, including the following: Consumer Preference The Company believes that assisted living is increasingly becoming the setting preferred by prospective residents and their families for the care of the frail elderly. Assisted living offers residents greater independence and allows them to age in place in a residential setting, which the Company believes results in a higher quality of life than that experienced in more institutional or clinical settings. Demographics The primary market for the Company's senior living and health care services is comprised of persons age 75 and older. This age group is one of the fastest growing segments of the United States population. According to United States Census Bureau information, this population segment will increase from approximately 13.2 million in 1990 to over 16.6 million by 2000, an increase of 26%. The population of seniors aged 85 and over is expected to increase from approximately 3.1 million in 1990 to over 4.3 million by 2000, an increase of 39%. As the number of persons aged 75 and over continues to grow, the Company believes that there will be corresponding increases in the number of persons who need assistance with ADLs. According to the United States General Accounting Office, there are approximately 6.5 million people age 65 and older in the United States who needed assistance with ADLs, and the number of people needing such assistance is expected to double by the year 2020. According to the Alzheimer's Association the number of persons afflicted with Alzheimer's disease is expected to grow from the current 4.0 million to 14.0 million by the year 2050. Restricted Supply of Nursing Beds The majority of states in the United States have adopted CON or similar statutes generally requiring that, prior to the addition of new beds, the addition of new services, or the making of certain capital expenditures, a state agency must determine that a need exists for the new beds or the proposed activities. The Company believes that this CON process tends to restrict the supply and availability of licensed nursing facility beds. High construction costs, limitations on government reimbursement for the full costs of construction, and start-up expenses also act to constrain growth in the supply of such facilities. At the same time, nursing facility operators are continuing to focus on improving occupancy and expanding services to sub-acute patients requiring significantly higher levels of nursing care. As a result, the Company believes that there has been a decrease in the number of skilled nursing beds available to patients with lower acuity levels and that this trend should increase the demand for the Company's senior living communities, including particularly the Company's assisted living residences and skilled nursing facilities. Cost-Containment Pressures In response to rapidly rising health care costs, governmental and private pay sources have adopted cost-containment measures that have reduced admissions and encouraged reduced lengths of stays in hospitals and other acute care settings. The federal government had previously acted to curtail increases in health care costs under Medicare by limiting acute care hospital reimbursement for specific services to pre-established fixed amounts. Private insurers have begun to limit reimbursement for medical services in general to predetermined reasonable charges, and managed care organizations (such as health maintenance organizations) are 48 50 attempting to limit the hospitalization costs by negotiating for discounted rates for hospital and acute care services and by monitoring and reducing hospital use. In response, hospitals are discharging patients earlier and referring elderly patients, who may be too sick or frail to manage their lives without assistance, to nursing homes and assisted living residences where the cost of providing care is typically lower than hospital care. In addition, third-party payors are increasingly becoming involved in determining the appropriate health care settings for their insureds or clients based primarily on cost and quality of care. Based on industry data, the annual cost per patient for skilled nursing care averages approximately $40,000, in contrast to the annual per patient cost for assisted living care of approximately $26,000. Senior Affluence The average net worth of senior citizens is higher than non-senior citizens, primarily as a result of accumulated equity through home ownership. The Company believes that a substantial portion of the senior population thus has significant resources available for their retirement and long-term care needs. The Company's target population is comprised of middle- to upper-income seniors who have, either directly or indirectly through familial support, the financial resources to pay for senior living communities, including an assisted living alternative to traditional long-term care. Reduced Reliance on Family Care Historically, the family has been the primary provider of care for seniors. The Company believes that the increase in the percentage of women in the work force, the reduction of average family size, and the increased mobility in society will reduce the role of the family as the traditional care-giver for aging parents. The Company believes that this trend will make it necessary for many seniors to look outside the family for assistance as they age. GOVERNMENT REGULATION Changes in existing laws and regulations, adoption of new laws and regulations and new interpretations of existing laws and regulations could have a material effect on the Company's operations. Failure by the Company to comply with applicable regulatory requirements could have a material adverse effect on the Company's business, financial condition, and results of operations. Accordingly, the Company devotes significant resources to monitoring legal and regulatory developments on local and national levels. The health care industry is subject to extensive regulation and frequent regulatory change. At this time, no federal laws or regulations specifically regulate assisted or independent living residences. While a number of states have not yet enacted specific assisted living regulations, the Company's communities are subject to regulation, licensing, CON and permitting by state and local health and social service agencies and other regulatory authorities. While such requirements vary from state to state, they typically relate to staffing, physical design, required services, and resident characteristics. The Company believes that such regulation will increase in the future. In addition, health care providers are receiving increased scrutiny under anti-trust laws as integration and consolidation of health care delivery increases and affects competition. The Company's communities are also subject to various zoning restrictions, local building codes, and other ordinances, such as fire safety codes. Failure by the Company to comply with applicable regulatory requirements could have a material adverse effect on the Company's business, financial condition, and results of operations. Regulation of the assisted living industry is evolving. The Company is unable to predict the content of new regulations and their effect on its business. There can be no assurance that the Company's operations will not be adversely affected by regulatory developments. Federal and state anti-remuneration laws, such as the Medicare/Medicaid anti-kickback law, govern certain financial arrangements among health care providers and others who may be in a position to refer or recommend patients to such providers. These laws prohibit, among other things, certain direct and indirect payments that are intended to induce the referral of patients to, the arranging for services by, or the recommending of, a particular provider of health care items or services. The Medicare/Medicaid anti-kickback law has been broadly interpreted to apply to certain contractual relationships between health care 49 51 providers and sources of patient referral. Similar state laws, which vary from state to state, are sometimes vague and seldom have been interpreted by courts or regulatory agencies. Violation of these laws can result in loss of licensure, civil and criminal penalties, and exclusion of health care providers or suppliers from participation in the Medicare and Medicaid program. There can be no assurance that such laws will be interpreted in a manner consistent with the practices of the Company. The Company believes that its communities are in substantial compliance with applicable regulatory requirements. However, in the ordinary course of business, one or more of the Company's communities could be cited for deficiencies. In such cases, the appropriate corrective action would be taken. To the Company's knowledge, no material regulatory actions are currently pending with respect to any of the Company's communities. Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state, and local laws exist which also may require modifications to existing and planned properties to permit access to the properties by disabled persons. While the Company believes that its communities are substantially in compliance with present requirements or are exempt therefrom, if required changes involve a greater expenditure than anticipated or must be made on a more accelerated basis than anticipated, additional costs would be incurred by the Company. Further legislation may impose additional burdens or restrictions with respect to access by disabled persons, the costs of compliance with which could be substantial. In addition, the Company is subject to various Federal, state and local environmental laws and regulations. Such laws and regulations often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances. The costs of any required remediation or removal of these substances could be substantial and the liability of an owner or operator as to any property is generally not limited under such laws and regulations and could exceed the property's value and the aggregate assets of the owner or operator. The presence of these substances or failure to remediate such contamination properly may also adversely affect the owner's ability to sell or rent the property, or to borrow using the property as collateral. Under these laws and regulations, an owner, operator or an entity that arranges for the disposal of hazardous or toxic substances, such as asbestos-containing materials, at a disposal site may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at the disposal site. In connection with the ownership or operation of its properties, the Company could be liable for these costs, as well as certain other costs, including governmental fines and injuries to persons or properties. The Company believes that the structure and composition of government, and specifically health care, regulations will continue to change and, as a result, regularly monitors developments in the law. The Company expects to modify its agreements and operations from time to time as the business and regulatory environment changes. While the Company believes it will be able to structure all its agreements and operations in accordance with applicable law, there can be no assurance that its arrangements will not be successfully challenged. COMPETITION The senior living and health care services industry is highly competitive, and the Company expects that all segments of the industry will become increasingly competitive in the future. Although there are a number of substantial companies active in the senior living and health care industry, the industry continues to be very fragmented and characterized by numerous small operators. The Company believes that the primary competitive factors in the senior living and health care services industry are (i) reputation for and commitment to a high quality of care; (ii) quality of support services offered (such as home health care and food services); (iii) price of services; (iv) physical appearance and amenities associated with the communities; and (v) location. The Company competes with other companies providing independent living, assisted living, skilled nursing, home health care, and other similar service and care alternatives, some of whom may have greater financial resources than the Company. Because seniors tend to choose senior living communities near their homes, the Company's principal competitors are other senior living and long-term care communities in the same geographic areas as the Company's communities. The Company also competes with other health 50 52 care businesses with respect to attracting and retaining nurses, technicians, aides, and other high quality professional and non-professional employees and managers. TRADEMARKS The Company has registered its corporate logo with the United States Patent and Trademark Office. The Company intends to develop and market a significant number of new free-standing assisted living residences under the tradename "Homewood Residence." The Company has filed an application with the United States Patent and Trademark Office 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. INSURANCE AND LEGAL PROCEEDINGS The provision of personal and health care services entails an inherent risk of liability. In recent years, participants in the senior living and health care services industry have become subject to an increasing number of lawsuits alleging negligence or related legal theories, many of which involve large claims and result in the incurrence of significant defense costs. The Company currently maintains property, liability, and professional medical malpractice insurance policies for the Company's owned and certain of its managed communities under a master insurance program in amounts and with such coverages and deductibles which the Company believes are within normal industry standards based upon the nature and risks of the Company's business. The Company also has an umbrella excess liability protection policy in the amount of $15.0 million per location. There can be no assurance that a claim in excess of the Company's insurance will not arise. A claim against the Company not covered by, or in excess of, the Company's insurance could have a material adverse effect upon the Company. In addition, the Company's insurance policies must be renewed annually. There can be no assurance that the Company will be able to obtain liability insurance in the future or that, if such insurance is available, it will be available on acceptable terms. Under various federal, state, and local environmental laws, ordinances, and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean up costs. The Company is not aware of any environmental liability with respect to any of its owned, leased, or managed communities that it believes would have a material adverse effect on the Company's business, financial condition, or results of operations. The Company believes that its communities are in compliance in all material respects with all federal, state, and local laws, ordinances, and regulations regarding hazardous or toxic substances or petroleum products. The Company has not been notified by any governmental authority, and is not otherwise aware of any material non-compliance, liability, or claim relating to hazardous or toxic substances or petroleum products in connection with any of the communities it currently operates. The Company currently is not party to any legal proceeding that it believes would have a material adverse effect on its business, financial condition, or results of operations. EMPLOYEES The Company employs approximately 2,160 persons, of which approximately 1,350 are full-time employees (approximately 50 of whom are located at the Company's corporate offices) and 810 are part-time employees. In addition, there are approximately 535 full-time employees and 455 part-time employees who are employed by the owners of communities managed by the Company who are under the direction and supervision of the Company. None of the Company's employees is currently represented by a labor union and the Company is not aware of any union organizing activity among its employees. The Company believes that its relationship with its employees is good. 51 53 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information concerning the directors and executive officers of the Company.
NAME AGE POSITION ---- --- -------- W.E. Sheriff.............................. 54 Chairman and Chief Executive Officer Christopher J. Coates..................... 46 President and Chief Operating Officer George T. Hicks........................... 39 Executive Vice President -- Finance, Chief Financial Officer, Treasurer, and Secretary H. Todd Kaestner.......................... 41 Executive Vice President -- Corporate Development James T. Money............................ 49 Executive Vice President -- Development Services Tom G. Downs.............................. 51 Senior Vice President -- Operations Lee A. McKnight........................... 51 Senior Vice President -- Marketing H. Lee Barfield II........................ 50 Director Jack O. Bovender, Jr...................... 51 Director Frank M. Bumstead......................... 54 Director Robin G. Costa............................ 30 Director Clarence Edmonds.......................... 63 Director John A. Morris, Jr., M.D.................. 50 Director Daniel K. O'Connell....................... 68 Director Nadine C. Smith........................... 39 Director Lawrence J. Stuesser...................... 54 Director
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, and as a member of the American Association of Homes and Services for the Aging and the American Senior Housing Association. Christopher J. Coates has served as President and Chief Operating Officer of the Company and its predecessors since January 1993. From 1988 to 1993, Mr. Coates served as chairman of National Retirement Company ("NRC"), a senior living management company acquired by a subsidiary of the Company in 1992. From 1985 to 1988, Mr. Coates was senior director of the Retirement Housing Division of Radice Corporation, following that company's purchase in 1985 of National Retirement Consultants, a company formed by Mr. Coates. Mr. Coates is chairman of the board of directors of the American Senior Housing Association. 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. 52 54 Tom G. Downs has served as Senior Vice President -- Operations since 1989. Mr. Downs has served in various capacities for the Company's predecessors since 1979. Lee A. McKnight has served as Senior Vice President -- Marketing since September 1991. Mr. McKnight has served in various capacities for the Company's predecessors since 1979. H. Lee Barfield II has served as a director of the Company since its inception, as a member of ARCLP's limited partners committee since its formation in 1995, and as director of various of the Company's predecessors since 1978. Mr. Barfield is a member in the law firm of Bass, Berry & Sims PLC, the Company's outside general counsel, and has served in various capacities for that firm since 1974. Jack O. Bovender, Jr. has served as a director of the Company since its inception and as a member of ARCLP's limited partners committee since September 1996. Until his retirement in March 1994, Mr. Bovender worked for Hospital Corporation of America for over 18 years in various capacities, including Executive Vice President and Chief Operating Officer. Mr. Bovender is a director of Response Oncology, Inc., a physician practice management company specializing in oncology, and a director of Quorum Health Group, Inc., a hospital management company. Frank M. Bumstead has served as a director of the Company since its inception and as a member of ARCLP's limited partners committee since June 1995. Since 1989, Mr. Bumstead has been president and a principal shareholder of Flood, Bumstead, McCready & McCarthy, Inc., a business management firm that represents, among others, artists, songwriters, and producers in the music industry. Since 1993, Mr. Bumstead has also served as the chairman and chief executive officer of FBMS Financial, Inc., an investment advisor registered under the Investment Company Act of 1940. Mr. Bumstead is vice chairman and a director of Response Oncology, Inc., a physician practice management company specializing in oncology, and a director of Nashville Country Club, Inc., an owner and operator of restaurants and hotels. Mr. Bumstead also serves as a director, secretary, and treasurer of Imprint Records, Inc., a music recording company. Robin G. Costa has served as a director of the Company since its inception and as a member of ARCLP's limited partners committee since October 1996. Since 1994, Ms. Costa has served as chief operating officer of Maddox Companies, a group of over 40 entities involved in oil and gas exploration, real estate development and investment, and other investments. Ms. Costa has served in various capacities for the Maddox Companies since 1985, including as Secretary and Treasurer from 1992 to 1994. Clarence Edmonds has served as a director of the Company since its inception, as a member of ARCLP's limited partners committee since June 1995, and as a director of various of the Company's predecessors since 1987. Mr. Edmonds has served in various capacities, including vice president and treasurer, of Massey Company, an investment services firm, since 1969. John A. Morris, Jr., M.D. has served as a director of the Company since its inception and as a member of ARCLP's limited partners committee since June 1995. Dr. Morris has served in varying capacities of the medical profession since 1977, and is currently a Professor of Surgery and the Director of the Division of Trauma and Surgical Critical Care at the Vanderbilt University School of Medicine, the Medical Director of the Life Flight Air Ambulance Program at Vanderbilt University Hospital, and an Associate in the Department of Health Policy and Management at the Johns Hopkins University. Dr. Morris is also chairman of the board of Sirrom Capital Corporation, a small business investment company. Daniel K. O'Connell has served as a director of the Company since its inception, as a member of ARCLP's limited partners committee since June 1995, and as a director of various of the Company's predecessors since 1985. Until his retirement in 1990, Mr. O'Connell worked for Ryder System, Inc. for over 25 years in various capacities, including legal counsel and chief financial officer. Nadine C. Smith has served as a director of the Company since its inception and as a member of ARCLP's limited partners committee since June 1995. Since 1990, Ms. Smith has been managing general partner of NC Smith & Co., a financial and management consulting firm. Ms. Smith is also a director of UTI Energy Corp., an oil services company. 53 55 Lawrence J. Stuesser has served as a director of the Company since its inception and as a member of ARCLP's limited partners committee since June 1995. Since June 1996, Mr. Stuesser has been the president and chief executive officer and a director of Computer People, Inc., an information technology professional services and staffing company. From August 1993 to May 1996, Mr. Stuesser was a private investor and independent business consultant. From January 1991 to July 1993, Mr. Stuesser was chairman and chief executive officer of Kimberly Quality Care, Inc., a home health care services company. Mr. Stuesser is chairman of the board of Curative Health Services Inc., a disease management company in the chronic wound care market, and a director of IntegraMed America, Inc., an owner and operator of clinical ambulatory care facilities. The Company's Board of Directors, currently consisting of ten members, is divided into three classes of as nearly equal size as possible. At each annual meeting of shareholders, directors constituting one class are elected for a three-year term. The terms of Messrs. Bovender, O'Connell, and Stuesser will expire at the 1998 Annual Meeting of Shareholders, the terms of Messrs. Bumstead and Edmonds and Ms. Smith will expire at the 1999 Annual Meeting of Shareholders, and the terms of Messrs. Sheriff, Barfield, and Morris and Ms. Costa will expire at the 2000 Annual Meeting of Shareholders. See "Description of Capital Stock -- Certain Provisions of the Charter, Bylaws, and Tennessee Law." Executive officers serve at the discretion of the Board of Directors. The Board of Directors has established a policy of holding meetings on a regular quarterly basis and on other occasions when required by special circumstances. Certain directors also devote their time and attention to the Board's principal standing committees. The committees and their primary functions are as follows. Executive Committee. The Executive Committee is authorized generally to act on behalf of the Board of Directors between scheduled meetings, subject to certain limitations established by the Board of Directors and applicable corporate law. The Executive Committee currently consists of Messrs. Bovender, Bumstead, Morris, and Sheriff. Audit Committee. The Audit Committee makes recommendations to the Board of Directors with respect to the Company's financial statements and the appointment of independent accountants, reviews significant audit and accounting policies and practices, meets with the Company's independent accountants concerning, among other things, the scope of audits and reports, and reviews the performance of the overall accounting and financial controls of the Company. The Audit Committee currently consists of Messrs. Barfield and Edmonds and Ms. Costa. Compensation Committee. The Compensation Committee has the responsibility for reviewing and approving salaries, bonuses, and other compensation and benefits of executive officers, advising management regarding benefits and other terms and conditions of compensation, and administering the Company's stock incentive, employee stock purchase, 401(k), and other executive compensation plans. See "-- Compensation Pursuant to Plans." The Compensation Committee currently consists of Messrs. O'Connell and Stuesser and Ms. Smith. 54 56 EXECUTIVE COMPENSATION The following table sets forth the total compensation paid or accrued by ARCLP on behalf of the Chief Executive Officer and the four other most highly paid executive officers (collectively, the "Named Executive Officers") for the year ended December 31, 1996. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1) ----------------------- ALL OTHER NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($) --------------------------- ---------- --------- ---------------- W.E. Sheriff.......................................... 212,400 30,515 84,000(2) Chairman and Chief Executive Officer Christopher J. Coates................................. 153,400 22,038 11,033(3) President and Chief Operating Officer George T. Hicks....................................... 100,300 14,410 7,214(3) Executive Vice President -- Finance, Chief Financial Officer, Treasurer and Secretary H. Todd Kaestner...................................... 106,200 15,257 7,637(3) Executive Vice President -- Corporate Development James T. Money........................................ 100,300 14,410 7,214(3) Executive Vice President -- Development Services
- --------------- (1) Does not include amounts distributed by the LLC to its members, including Named Executive Officers. In 1996, ARCLP distributed to the LLC an aggregate of approximately $59,000 and the LLC distributed approximately $13,561 to Mr. Sheriff, $9,686 to Mr. Coates, and $7,749 to each of Messrs. Hicks, Kaestner, and Money in accordance with their ownership interests in the LLC. (2) Reflects insurance premiums paid by the Company for insurance policies benefiting Mr. Sheriff. (3) Reflects contributions by the Company under the Company's Section 162 Plan. See "-- Compensation Pursuant to Plans -- Section 162 Plan." DIRECTOR COMPENSATION Directors who are employees of the Company do not receive additional compensation for serving as directors of the Company. Non-employee directors are entitled to an annual retainer of $12,000 payable, in arrears, on the date of each annual meeting of shareholders, commencing with the 1998 Annual Meeting of Shareholders. Non-employee directors are also entitled to a fee of $500 for each board meeting attended by such director, and $250 for each committee meeting attended by such director that is not on the same day as a meeting of the Board of Directors. All directors are entitled to reimbursement for their actual out-of-pocket expenses incurred in connection with attending meetings. In addition, non-employee directors receive options to purchase shares of Common Stock in accordance with the provisions of the 1997 Stock Incentive Plan. See "-- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan." COMPENSATION PURSUANT TO PLANS 1997 Stock Incentive Plan The Company has adopted a stock incentive plan (the "Stock Incentive Plan") that will become effective upon the consummation of the Offering. The Stock Incentive Plan was approved by the Board of Directors and shareholder of the Company in February 1997. Under the Stock Incentive Plan, the Compensation Committee has the authority to grant to key employees and consultants of the Company, and the Board of Directors has the authority to grant to directors who are not employed by the Company ("Outside Directors"), the following types of awards: (1) stock options; (2) stock appreciation rights; (3) restricted stock; and/or (4) other stock-based awards. Pursuant to the Stock Incentive Plan, 1,093,750 shares of Common Stock have been reserved and will be available for issuance, which may include authorized and unissued shares or treasury shares. The number of shares reserved and available for issuance pursuant to the Stock Incentive Plan will, upon the consummation of any Equity Issuance (as defined in the Plan), increase 55 57 automatically by 10% of the number of shares of Common Stock issued in such Equity Issuance; provided, however, that Incentive Stock Options ("ISOs") may not be issued after 1,093,750 shares of Common Stock have been issued under the Stock Incentive Plan. The maximum number of shares of Common Stock for which awards may be made under the Stock Incentive Plan to any officer of the Company or other person whose compensation may be subject to the limitations on deductibility under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), is 200,000 during any single year. As of the date hereof, and subject to the consummation of the Offering, options to purchase 635,000 shares of Common Stock, exercisable at the initial public offering price, have been awarded to 105 key employees, directors, and consultants of the Company. Any shares as to which an option or other award expires, lapses unexpired, or is forfeited, terminated, or canceled may become subject to a new option or other award. The Stock Incentive Plan will terminate on, and no award may be granted later than, the tenth anniversary of the date of adoption of the Stock Incentive Plan, but the exercise date of awards granted prior to such tenth anniversary may extend beyond that date. The Stock Incentive Plan provides for automatic grants of non-qualified stock options to purchase shares of Common Stock to Outside Directors. Options to purchase 9,000 shares of Common Stock have been automatically granted to each person serving as an Outside Director as of the consummation of the Offering at an exercise price equal to the initial public offering price. If any person who was not previously a member of the Board of Directors is elected or appointed an Outside Director following the consummation of the Offering but prior to the date of the Annual Meeting of Shareholders of the Company in the year 2000, such Outside Director will automatically be granted an option to purchase 7,000 shares of Common Stock if such Outside Director's service begins prior to the second anniversary of the Offering and 5,000 shares of Common Stock if such Outside Director's service begins after the second anniversary of the Offering. The Board of Directors may, in its discretion, increase or decrease the number of shares subject to such option to reflect the extent to which such Outside Director's expected service may exceed two years or may be less than one year. Such options shall vest with respect to 5,000 shares on the date of the first annual meeting of shareholders following the date of grant, 2,000 shares on the date of the second annual meeting of shareholders following the date of grant, and any remaining shares on the date of the third annual meeting of shareholders following the date of grant. On the date of each annual meeting of the shareholders of the Company beginning with the annual meeting of shareholders held in the year 2000, unless the Stock Incentive Plan has been terminated, each Outside Director who will continue as a director following such meeting will receive an option to purchase 3,000 shares of Common Stock. Such options will vest with respect to all 3,000 shares on the date of the next annual meeting of shareholders. All options automatically granted to an Outside Director will enable the optionee to purchase shares of Common Stock at the fair market value of the Common Stock on the date of grant. Outside Director optionees will not be able to transfer or assign their options without the prior written consent of the Board of Directors other than (i) transfers by the optionee to a member of his or her immediate family or a trust for the benefit of the optionee or a member of his or her immediate family, or (ii) transfers by will or by the laws of descent and distribution. Options automatically granted to Outside Directors will have a term of ten years from the date of grant. The exercise price may be paid in cash, shares of Common Stock, or a combination thereof. The Board of Directors has the discretion to reduce, but not increase, the number of shares awardable to Outside Directors. ISOs and non-qualified stock options may be granted for such number of shares as the Board or Compensation Committee may determine and may be granted alone, in conjunction with, or in tandem with other awards under the Stock Incentive Plan or cash awards outside the Stock Incentive Plan. A stock option will be exercisable at such times and subject to such terms and conditions as the Compensation Committee will determine. In the case of an ISO, however, the term will be no more than ten years after the date of grant (five years in the case of ISOs for certain 10% shareholders). The option price for an ISO will not be less than 100% (110% in the case of certain 10% shareholders) of the fair market value of the Common Stock as of the date of grant and for any non-qualified stock option will not be less than 50% of the fair market value as of the date of grant. ISOs granted under the Stock Incentive Plan may not be transferred or assigned other than by will or by the laws of descent and distribution. Non-qualified stock options and stock appreciation rights may 56 58 not be transferred or assigned without the prior written consent of the Compensation Committee, other than (i) transfers by the optionee to a member of his or her immediate family or a trust for the benefit of the optionee or a member of his or her immediate family, or (ii) transfers by will or by the laws of descent and distribution. Stock appreciation rights may be granted under the Stock Incentive Plan in conjunction with all or part of a stock option and will be exercisable only when the underlying stock option is exercisable. Once a stock appreciation right has been exercised, the related portion of the stock option underlying the stock appreciation right will terminate. Upon the exercise of a stock appreciation right, the Company will pay to the employee or consultant in cash, Common Stock, or a combination thereof (the method of payment to be at the discretion of the Committee), an amount equal to the excess of the fair market value of the Common Stock on the exercise date over the option price, multiplied by the number of stock appreciation rights being exercised. Restricted stock awards may be granted alone, in addition to, or in tandem with, other awards under the Stock Incentive Plan or cash awards made outside the Plan. The provisions attendant to a grant of restricted stock may vary from participant to participant. In making an award of restricted stock, the Compensation Committee will determine the periods during which the restricted stock is subject to forfeiture and may provide such other awards designed to guarantee a minimum value for such stock. During the restriction period, the employee or consultant may not sell, transfer, pledge, or assign the restricted stock but will be entitled to vote the restricted stock and to receive, at the election of the Compensation Committee, cash or deferred dividends. The Compensation Committee also may grant other types of awards such as performance shares, convertible preferred stock, convertible debentures, or other exchangeable securities that are valued, as a whole or in part, by reference to or otherwise based on the Common Stock. These awards may be granted alone, in addition to, or in tandem with, stock options, stock appreciation rights, restricted stock, or cash awards outside of the Stock Incentive Plan. Awards will be made upon such terms and conditions as the Compensation Committee may determine. If there is a change in control or a potential change in control of the Company (as defined in the Stock Incentive Plan), stock appreciation rights and limited stock appreciation rights, and any stock options which are not then exercisable, will become fully exercisable and vested and the restrictions and deferral limitations applicable to restricted stock and other stock-based awards may lapse and such shares and awards will be deemed fully vested. Stock options, stock appreciation rights, limited stock appreciation rights, restricted stock and other stock-based awards, will, unless otherwise determined by the Compensation Committee in its sole discretion, be cashed out on the basis of the change in control price (as defined in the Stock Incentive Plan and as described below). The change in control price will be the highest price per share paid in any transaction reported on the NYSE or paid or offered to be paid in any bona fide transaction relating to a change in control or potential change in control at any time during the immediately preceding 60-day period, as determined by the Compensation Committee. Employee Stock Purchase Plan The Company has adopted an employee stock purchase plan (the "Stock Purchase Plan") that will become effective on the later of July 1, 1997 or the consummation of the Offering. The Stock Purchase Plan was approved by the Board of Directors and shareholder of the Company in February 1997. An aggregate of 250,000 shares of Common Stock has been reserved for issuance pursuant to the Stock Purchase Plan. Under the Stock Purchase Plan, employees, including executive officers, who have been employed by the Company continuously for at least one year are eligible, 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. Notwithstanding the foregoing, no employee who is a 5% or greater shareholder of the Company's voting stock is eligible to participate in the Stock Purchase Plan. 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 57 59 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 Stock Purchase Plan is intended to qualify for favorable tax treatment under Section 423 of the Code. 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. Section 162 Plan The Company maintains a non-qualified deferred compensation plan which allows employees who are "highly compensated" under IRS guidelines to make after-tax contributions to an investment account established in such employee's name. Additional contributions may be made by the Company at its discretion. All contributions to the Section 162 Plan are subject to the claims of the Company's creditors. Approximately 45 employees are eligible to participate in the Section 162 Plan, which is administered by the Compensation Committee. In each of 1995 and 1996, the Company contributed approximately $271,000 to the Section 162 Plan. Officers' Incentive Compensation Plan The officers of the Company participate in an Officers' Incentive Compensation Plan which provides contingent incentive compensation. The plan provides for a single annual incentive compensation payment in the amount of up to 60% of an officer's base salary dependent upon the degree to which the Company achieves its operational and financial objectives, or up to a maximum total of 100%, contingent upon the degree to which the Company exceeds its objectives. LIMITATION OF LIABILITY AND INDEMNIFICATION The Tennessee Business Corporation Act ("TBCA") provides that a corporation may indemnify any of its directors and officers against liability incurred in connection with a proceeding if (i) such person acted in good faith, (ii) the director or officer reasonably believed, in the case of conduct in an official capacity, that such conduct was in the corporation's best interests, or, in all other cases, that such conduct was not opposed to the best interests of the corporation, and (iii) in connection with any criminal proceeding, the director or officer had no reasonable cause to believe his or her conduct was unlawful. In actions brought by or in the right of the corporation, however, the TBCA provides that no indemnification may be made if the director or officer was adjudged liable to the corporation. The TBCA also provides that in connection with any proceeding charging improper personal benefit to a director or officer, no indemnification may be made if such director or officer is adjudged liable on the basis that such personal benefit was improperly received. In cases where the director or officer is wholly successful, on the merits or otherwise, in the defense of any proceeding instigated because of his or her status as a director or officer of a corporation, the TBCA mandates that the corporation indemnify the director or officer against reasonable expenses incurred in the proceeding. Notwithstanding the foregoing, the TBCA provides that a court of competent jurisdiction, upon application, may order that a director or officer be indemnified for reasonable expenses if, in consideration of all relevant circumstances, the court determines that such individual is fairly and reasonably entitled to indemnification, even if such director or officer (i) was adjudged liable to the corporation in a proceeding by or in right of the corporation, (ii) was adjudged liable on the basis that personal benefit was improperly received, or (iii) breached his or her duty of care to the corporation. The Company's Charter provides that to the fullest extent permitted by Tennessee law no director shall be personally liable to the Company or its shareholders for monetary damages for breach of any fiduciary duty 58 60 as a director. Under the TBCA, this charter provision relieves the Company's directors of personal liability to the Company or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability arising from a judgment or other final adjudication establishing (i) any breach of the director's duty of loyalty, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or (iii) any unlawful distributions. In addition, the Company's Charter and Bylaws provide that each director and officer of the Company shall be indemnified by the Company to the fullest extent allowed by Tennessee law. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee, consisting of Messrs. O'Connell and Stuesser and Ms. Smith, each an Outside Director, was established in February 1997. Prior to the Offering, the Company's executive officers were compensated as employees of ARCLP and compensation decisions were made by ARCLP's compensation committee, which was comprised in 1996 of the persons who now constitute the Company's Compensation Committee. No executive officer of the Company served during 1996 as a member of a compensation committee or as a director of any entity of which any of the Company's directors or members of ARCLP's limited partners committee serves as an executive officer. 59 61 PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Common Stock after giving effect to the Reorganization with respect to (i) each of the Named Executive Officers, (ii) each of the Company's directors, (iii) each person known by the Company to own beneficially more than 5% of the Common Stock, and (iv) all directors and executive officers of the Company as a group, both before and after giving effect to the Offering. Under the rules of the Securities and Exchange Commission (the "Commission"), a person is deemed to be a "beneficial owner" of a security if he or she has or shares the power to vote or direct the voting of such security or the power to dispose of or direct the disposition of such security. Accordingly, more than one person may be deemed to be a beneficial owner of the same security. Shares of Common Stock subject to options held by the directors and executive officers that are not exercisable within 60 days of the date hereof are not, in accordance with beneficial ownership rules promulgated by the Commission, deemed outstanding for the purpose of computing such director's or executive officer's beneficial ownership.
PERCENT OF COMMON STOCK -------------------- NUMBER OF SHARES BEFORE AFTER NAME BENEFICIALLY OWNED(1) OFFERING OFFERING ---- --------------------- -------- -------- NAMED EXECUTIVE OFFICERS: W.E. Sheriff........................................... 1,670,353(2)(3) 21.4% 15.3% Christopher J. Coates.................................. 242,603(4) 3.1 2.2 George T. Hicks........................................ 170,259(5) 2.2 1.6 H. Todd Kaestner....................................... 180,244(6) 2.3 1.6 James T. Money......................................... 175,252(7) 2.2 1.6 DIRECTORS: H. Lee Barfield II..................................... 602,661(8)(9) 7.7 5.5 Jack O. Bovender, Jr................................... -- -- -- Frank M. Bumstead...................................... -- -- -- Robin G. Costa......................................... 1,467,526(10)(11) 18.8 13.4 Clarence Edmonds....................................... 360,907(12) 4.6 3.3 John A. Morris, Jr., M.D............................... 358,490(13) 4.6 3.3 Daniel K. O'Connell.................................... 10,285 * * Nadine C. Smith........................................ 29,956 * * Lawrence J. Stuesser................................... 67,547(14) * * OTHER 5% SHAREHOLDERS: American Retirement Communities, LLC................... 1,350,000(15) 17.3 12.3 Dan Maddox............................................. 1,419,782(10)(16) 18.2 13.0 DMAR Limited Partnership............................... 1,372,037(17) 17.6 12.5 Mary Louise Frist Barfield............................. 602,661(18)(19) 7.7 5.5 Robert A. Frist, M.D................................... 573,872(20)(21) 7.3 5.2 All directors and executive officers as a group (16 persons)............................................. 4,637,986 59.4% 42.4%
- --------------- * Less than 1%. (1) The information listed below with respect to the beneficial ownership of the Common Stock is based upon the estimated allocation of the Common Stock in the Reorganization. See "Certain Transactions -- Pending Reorganization." (2) Address: 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027. (3) Includes 320,353 shares beneficially owned by a family limited partnership in which Mr. Sheriff is a general partner and 1,350,000 shares beneficially owned by the LLC. See Note 15. Mr. Sheriff is Chief Manager and a member of the LLC. Mr. Sheriff disclaims beneficial ownership of the shares owned by the LLC except to the extent of the 294,698 shares as to which he holds a pecuniary interest. (4) Includes 210,499 shares beneficially owned by the LLC and 1,860 shares beneficially owned by Sylvester I, L.P. ("Sylvester I") as to which Mr. Coates holds a pecuniary interest. (5) Includes 168,399 shares beneficially owned by the LLC and 1,860 shares beneficially owned by Sylvester I as to which Mr. Hicks holds a pecuniary interest. (6) Includes 168,399 shares beneficially owned by the LLC and 1,860 shares beneficially owned by Sylvester I as to which Mr. Kaestner holds a pecuniary interest. 60 62 (7) Includes 168,399 shares beneficially owned by the LLC and 1,860 shares beneficially owned by Sylvester I as to which Mr. Money holds a pecuniary interest. (8) Address: 2700 First American Center, Nashville, Tennessee 37238. (9) Includes 457,857 shares beneficially owned by Mr. Barfield's wife, Mary Louise Frist Barfield. See Note 19. Mr. Barfield is the brother-in-law of Robert A. Frist. (10) Address: 3833 Cleghorn Avenue, Suite 400, Nashville, Tennessee 37215. (11) Includes 1,372,037 shares beneficially owned by DMAR Limited Partnership ("DMAR") and 95,489 shares beneficially owned by Little Buck Limited Partnership ("Little Buck"). Ms. Costa is a Vice President of Margaret Energy, Inc., the general partner of DMAR and Little Buck. See Note 16. (12) Includes 335,888 shares beneficially owned by The Jack C. Massey Foundation ("The Massey Foundation"), of which Mr. Edmonds serves as a co-trustee, and 25,019 shares beneficially owned by Mr. Edmonds' wife. Mr. Edmonds disclaims beneficial ownership of his wife's shares. (13) All shares are beneficially owned by partnerships owned and controlled by Dr. Morris, his brother Alfred Morris, and members of Dr. Morris' family. (14) All shares are beneficially owned by B&W Development Centers ("B&W"), of which Mr. Stuesser is a director and 50% shareholder. (15) Address: 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027. The members of the LLC include the Named Executive Officers and other members of management of the Company. See Notes 3, 4, 5, 6, and 7. (16) Includes 1,372,037 shares beneficially owned by DMAR and 47,745 shares beneficially owned by Little Buck as to which Mr. Maddox holds a pecuniary interest. See Notes 11 and 17. (17) The partners in DMAR include corporations and trusts owned by, or for the benefit of, Mr. Maddox and his wife. (18) Address: c/o H. Lee Barfield II, 2700 First American Center, Nashville, Tennessee 37238. (19) Includes 144,804 shares beneficially owned by Mrs. Barfield's husband, H. Lee Barfield II, and an aggregate of 169,084 shares beneficially owned by trusts for the benefit of Mrs. Barfield's children, of which Mrs. Barfield serves as trustee. See Note 9. Mrs. Barfield is the sister of Robert A. Frist. (20) Address: 1326 Page Road, Nashville, Tennessee 37205. (21) Includes 22,569 shares beneficially owned by Dr. Frist's wife. Does not include an aggregate of 191,554 shares beneficially owned by Dr. Frist's children who are 18 years of age or older. Dr. Frist is the brother of Mary Louise Barfield Frist and the brother-in-law of H. Lee Barfield II. CERTAIN TRANSACTIONS THE 1995 ROLL-UP ARCLP was formed in February 1995 in anticipation of the 1995 Roll-Up of the Predecessor Entities. As a result of the 1995 Roll-Up, ARCLP issued partnership interests to the partners and shareholders of the Predecessor Entities, many of whom are directors, executive officers, and greater than 5% shareholders of the Company, in exchange for their limited partnership interests and stock in the Predecessor Entities and thereby became the owner, directly or indirectly, of all of the assets of the Predecessor Entities. The LLC was organized in connection with the formation of ARCLP and serves as its general partner. The members of the LLC include each of the Named Executive Officers and certain other members of management of the Company. Messrs. Sheriff and Coates have LLC membership interests of approximately 21.8% and 15.6%, respectively, and Messrs. Kaestner, Money, and Hicks have LLC membership interests of approximately 14.5% each. REDEMPTION OF PREFERRED PARTNERSHIP INTERESTS In connection with the 1995 Roll-Up, partners in certain of the Predecessor Entities exchanged promissory notes for the Preferred Partnership Interests. In 1996, the Company redeemed the Preferred Partnership Interests for an aggregate amount of $10.0 million. In connection with the redemption of the Preferred Partnership Interests, certain executive officers, directors, and certain other limited partners who will be greater than five percent (5%) beneficial owners of the Common Stock (including, unless otherwise noted, their immediate family members and affiliates) received the following amounts in payment for the redemption of their Preferred Partnership Interests: H. Lee Barfield II and Mary Louise Frist Barfield -- $1.12 million (does not include amounts distributed to Robert A. Frist or an aggregate of $780,000 distributed to Mrs. Barfield's sister and trusts for the benefit of Mr. and Mrs. Barfield's nephews); Lawrence J. Stuesser -- $150,000 (distributed to B&W); DMAR -- $2.16 million; Robert A. Frist -- $1.57 million (does not include an aggregate of $1.24 million distributed to Dr. Frist's children who are 18 years of age or older; amounts distributed to H. Lee Barfield II and Mary Louise Frist Barfield, or an aggregate of $780,000 distributed to Dr. Frist's sister and trusts for the benefit of Dr. Frist's nephews); and Dan Maddox -- $2.52 million (includes 61 63 $2.16 million distributed to DMAR and $360,000 distributed to Little Buck; does not include $240,000 distributed to a partnership controlled by Mr. Maddox's son). PENDING REORGANIZATION In connection with the Reorganization, the Company will issue an aggregate of 7,812,500 shares of Common Stock and the Reorganization Note to ARCLP. ARCLP will distribute approximately 1,350,000 shares of Common Stock to the LLC, as general partner of ARCLP, and an aggregate of approximately 6,462,500 shares of Common Stock to the limited partners of ARCLP, generally in accordance with the limited partners' ARCLP contribution accounts. The number of shares of Common Stock allocated to the LLC will be determined at the time of the consummation of the Offering and will have a value, based upon the initial public offering price, equal to the sum of (i) $15.0 million, plus (ii) 10% of the value of the Company (including the value of the Reorganization Note) immediately prior to the Offering (the "Pre-IPO Valuation") between $84.0 million and $160.0 million, plus (iii) 20% of the Pre-IPO Valuation over $160.0 million. The information below assumes an initial public offering price of $16.00. In addition, ARCLP will distribute, in liquidation, proceeds from the repayment of the Reorganization Note to the limited partners of ARCLP, generally in accordance with the limited partners' contribution accounts. In connection with the Reorganization, certain executive officers, directors, and other limited partners of ARCLP who will beneficially own more than 5% of the Common Stock (and, in each case, their immediate family members and affiliates), will receive shares of Common Stock and proceeds from the Reorganization Note as set forth in the table below.
NUMBER OF SHARES PROCEEDS FROM THE NAME OF COMMON STOCK(1) REORGANIZATION NOTE($) ---- ------------------ ---------------------- W.E. Sheriff......................................... 1,670,353 $1,239,281.70(2) Christopher J. Coates................................ 242,603(3) 124,191.71(4) George T. Hicks...................................... 170,259(3) 7,194.55(4) H. Todd Kaestner..................................... 180,244(3) 45,822.69(4) James T. Money....................................... 175,252(3) 26,508.62(4) H. Lee Barfield II................................... 602,661(5) 2,331,370.74(6) Robin G. Costa....................................... 1,467,526 5,677,087.37(7) Clarence Edmonds..................................... 360,907 1,396,160.43(8) John A. Morris, Jr., M.D............................. 358,490 1,386,809.40(9) Daniel K. O'Connell.................................. 10,285 39,786.98 Nadine C. Smith...................................... 29,956 115,884.42 Lawrence J. Stuesser................................. 67,547 261,302.67(10) American Retirement Communities, LLC................. 1,350,000 -- Dan Maddox........................................... 1,419,782(11) 5,492,388.24(12) DMAR Limited Partnership............................. 1,372,037 5,307,689.10 The Jack C. Massey Foundation........................ 335,888 1,299,375.88 Mary Louise Frist Barfield........................... 602,661(13) 2,331,370.74(14) Robert A. Frist, M.D................................. 573,872(15) 2,220,008.29(16)
- --------------- (1) See Notes to "Principal Shareholders" for certain beneficial ownership information. (2) Amounts to be distributed to a family limited partnership in which Mr. Sheriff is a general partner. (3) Does not include shares to be distributed to other members of the LLC or other partners in Sylvester I. (4) Includes $7,194.55 which represents such person's pro rata portion of amounts to be distributed to Sylvester I. (5) Does not include shares to be distributed to Robert A. Frist or an aggregate of 841,555 shares to be distributed to Mr. Barfield's father-in-law, sister-in-law, and trusts for the benefit of Mr. Barfield's brother-in-law and nephews. (6) Includes $1,117,109.09 to be distributed to Mr. Barfield's wife, Mary Louise Frist Barfield, and an aggregate of $654,092.04 to be distributed to trusts for the benefit of Mr. Barfield's children, of which Mrs. Barfield serves as trustee. See Note 12. Does not include amounts to be distributed to Robert A. Frist, Mr. Barfield's brother-in-law, or an aggregate of $3,255,533.84 to be distributed to Mr. Barfield's father-in-law, sister-in-law, and trusts for the benefit of Mr. Barfield's brother-in-law and nephews. (7) Includes $5,307,689.10 to be distributed to DMAR and $369,398.27 to be distributed to Little Buck. Ms. Costa is a Vice President of Margaret Energy, Inc., the general partner of DMAR and Little Buck. (8) Includes $1,299,375.88 to be distributed to The Massey Foundation and $96,784.55 to be distributed to Mr. Edmonds' wife. 62 64 (9) All amounts to be distributed to partnerships owned and controlled by Dr. Morris, his brother Alfred Morris, and members of Dr. Morris' family. (10) Amounts to be received by B&W, of which Mr. Stuesser is a director and 50% shareholder. (11) Does not include 111,672 shares to be distributed to a partnership controlled by Mr. Maddox's son or 47,745 shares to be distributed to Little Buck as to which Mr. Maddox's son holds a pecuniary interest. (12) Includes $5,307,689.10 to be distributed to DMAR and $184,699.14 which represents Mr. Maddox's pro rata portion of amounts to be distributed to Little Buck. Does not include $431,999.70 to be distributed to a partnership controlled by Mr. Maddox's son and $184,699.14 which represents Mr. Maddox's son's pro rata portion of amounts to be distributed to Little Buck. (13) Does not include shares to be distributed to Robert A. Frist or an aggregate of 841,555 shares to be distributed to Ms. Barfield's father, sister, and trusts for the benefit of Ms. Barfield's brother and nephews. (14) Includes $560,169.61 to be distributed to Mrs. Barfield's husband, H. Lee Barfield II, and an aggregate of $654,092.04 to be distributed to trusts for the benefit of Mrs. Barfield's children, of which Mrs. Barfield serves as trustee. See Note 5. Does not include amounts to be distributed to Robert A. Frist, Mrs. Barfield's brother, or an aggregate of $3,255,533.84 to be distributed to Ms. Barfield's father, sister, and trusts for the benefit of Ms. Barfield's brother and nephews. (15) Does not include shares to be distributed to H. Lee Barfield II or Mary Louise Frist Barfield, or an aggregate of 841,555 shares to be distributed to Dr. Frist's father, sister, or trusts for the benefit of Dr. Frist's brother and nephews. (16) Includes $87,306.35 to be distributed to Dr. Frist's wife. Does not include an aggregate of $741,022.43 to be distributed to Dr. Frist's children who are 18 years of age or older. Dr. Frist is the brother of Mary Louise Frist Barfield and the brother-in-law of H. Lee Barfield II. Does not include amounts to be distributed to H. Lee Barfield II or Mary Louise Frist Barfield, or an aggregate of $3,255,533.84 to be distributed to Dr. Frist's father, sister, and trusts for the benefit of Dr. Frist's brother and nephews. POLICY OF THE BOARD OF DIRECTORS The Board of Directors has adopted a policy providing that any transaction between the Company and any of its directors, officers, or principal shareholders or affiliates thereof must be on terms no less favorable to the Company than can be obtained from unaffiliated parties. Management believes that past transactions have complied with this policy. 63 65 DESCRIPTION OF CAPITAL STOCK The Company is authorized to issue 50,000,000 shares of Common Stock, par value $.01 per share, and 5,000,000 shares of preferred stock, no par value per share (the "Preferred Stock"). Upon consummation of the Offering, 10,937,500 shares of Common Stock will be issued and outstanding, no shares of Preferred Stock will be outstanding, and 635,000 shares of Common Stock will be reserved for issuance pursuant to outstanding stock options under the Stock Incentive Plan. COMMON STOCK The holders of Common Stock are entitled to one vote per share on all matters to be voted on by shareholders and are not entitled to cumulative voting in the election of directors, which means that the holders of a majority of the shares voting for the election of directors can elect all of the directors then standing for election by the holders of Common Stock. The holders of Common Stock are entitled to share ratably in such dividends, if any, as may be declared from time to time by the Board of Directors in its discretion out of funds legally available therefor. See "Dividend Policy and Prior Distributions." The holders of Common Stock are entitled to share ratably in any assets remaining after satisfaction of all prior claims upon liquidation of the Company. The Company's Charter gives holders of Common Stock no preemptive or other subscription or conversion rights, and there are no redemption provisions with respect to such shares. All shares of Common Stock to be outstanding upon consummation of the Offering, including the shares offered hereby, will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. PREFERRED STOCK The authorized Preferred Stock may be issued from time to time in one or more designated series or classes. The Board of Directors may issue shares of Preferred Stock without approval of the shareholders, except as may be required by applicable law or by the rules of the NYSE. The Board of Directors is also authorized to establish the voting, dividend, redemption, conversion, liquidation, and other relative provisions as may be provided in a particular series or class. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of Common Stock and, under certain circumstances, make it more difficult for a third party to acquire, or discourage a third party from acquiring, a majority of the outstanding voting stock of the Company. The Company has no present intention to issue any series or class of Preferred Stock. The Common Stock has been approved for listing on the NYSE. The current rules of the NYSE effectively preclude the listing on the NYSE of any securities of an issuer which has issued securities or taken other corporate action that would have the effect of nullifying, restricting, or disparately reducing the per share voting rights of holders of an outstanding class or classes of securities registered under Section 12 of the Exchange Act. The Company does not intend to issue any additional shares of stock that would make the Common Stock ineligible for continued listing or cause the Common Stock to be delisted from the NYSE. CERTAIN PROVISIONS OF THE CHARTER, BYLAWS, AND TENNESSEE LAW General The provisions of the Charter, the Bylaws, and Tennessee statutory law described in this section may delay or make more difficult acquisitions or changes of control of the Company that are not approved by the Board of Directors. Such provisions have been implemented to enable the Company, particularly (but not exclusively) in the initial years of its existence as an independent, publicly-owned company, to develop its business in a manner that will foster its long-term growth without the disruption of the threat of a takeover not deemed by the Board of Directors to be in the best interests of the Company and its shareholders. 64 66 Directors The Bylaws provide that the number of directors shall be no fewer than three nor more than fifteen, with the exact number to be established by the Board of Directors and subject to change from time to time as determined by the Board of Directors. Vacancies on the Board of Directors (including vacancies created by an increase in the number of directors) may be filled by the Board of Directors, acting by a majority of the remaining directors then in office, or by a plurality of the votes cast by the shareholders at a meeting at which a quorum is present. Officers are elected annually by and serve at the pleasure of the Board of Directors. The Charter and Bylaws provide that the Board of Directors is divided into three classes of as nearly equal size as possible, and the term of office of each class expires in consecutive years so that each year only one class is elected. The Charter also provides that directors may be removed only for cause and only by (i) the affirmative vote of the holders of a majority of the voting power of all the shares of the Company's capital stock then entitled to vote in the election of directors, voting together as a single class, unless the vote of a special voting group is otherwise required by law, or (ii) the affirmative vote of a majority of the entire Board of Directors then in office. The overall effect of these provisions in the Company's Charter and Bylaws may be to render more difficult a change in control of the Company or the removal of incumbent management. Advance Notice for Shareholder Proposals or Making Nominations at Meetings The Bylaws establish an advance notice procedure for shareholder proposals to be brought before a meeting of shareholders of the Company and for nominations by shareholders of candidates for election as directors at an annual meeting or a special meeting at which directors are to be elected. Subject to any other applicable requirements, only such business may be conducted at a meeting of shareholders as has been brought before the meeting by, or at the direction of, the Board of Directors, or by a shareholder who has given to the Secretary of the Company timely written notice, in proper form, of the shareholder's intention to bring that business before the meeting. The presiding officer at such meeting has the authority to make such determinations. Only persons who are selected and recommended by the Board of Directors, or the committee of the Board of Directors designated to make nominations, or who are nominated by a shareholder who has given timely written notice, in proper form, to the Secretary prior to a meeting at which directors are to be elected will be eligible for election as directors of the Company. To be timely, notice of nominations or other business to be brought before any meeting must be received by the Secretary of the Company not later than 120 days in advance of the anniversary date of the Company's proxy statement for the previous year's annual meeting or, in the case of special meetings, at the close of business on the tenth day following the date on which notice of such meeting is first given to shareholders. The notice of any shareholder proposal or nomination for election as director must set forth various information required under the Bylaws. The person submitting the notice of nomination and any person acting in concert with such person must provide, among other things, the name and address under which they appear on the Company's books (if they so appear) and the class and number of shares of the Company's capital stock that are beneficially owned by them. Amendment of the Bylaws and Charter The Bylaws provide that a majority of the members of the Board of Directors who are present at any regular or special meeting or, subject to greater voting requirements imposed by the Charter, the holders of a majority of the voting power of all shares of the Company's capital stock represented at regular or special meeting have the power to amend, alter, change, or repeal the Bylaws. Any proposal to amend, alter, change, or repeal provisions of the Charter relating to staggered terms for directors, and limitations on the ability of shareholders to call a shareholders' meeting or to remove directors require approval by the affirmative vote of both a majority of the members of the Board of Directors then in office and the holders of three-fourths of the voting power of all of the shares of the Company's capital stock entitled to vote on the amendments. Other amendments to the Charter require the affirmative vote of both a 65 67 majority of the members of the Board of Directors then in office and the holders of a majority of the voting power of all of the shares of the Company's capital stock entitled to vote on the amendments, with shareholders entitled to dissenters' rights as a result of the Charter amendment voting together as a single class. Shareholders entitled to dissenters' rights as a result of a Charter amendment are those whose rights would be materially and adversely affected because the amendment (i) alters or abolishes a preferential right of the shares; (ii) creates, alters, or abolishes a right in respect of redemption; (iii) alters or abolishes a preemptive right; (iv) excludes or limits the right of the shares to vote on any matter, or to cumulate votes, other than a limitation by dilution through issuance of shares or other securities with similar voting rights; or (v) reduces the number of shares held by such holder to a fraction if the fractional share is to be acquired for cash. In general, however, under the TBCA no shareholder is entitled to dissenters' rights if the security he or she holds is listed on a national securities exchange, such as the NYSE. ANTI-TAKEOVER LEGISLATION The Tennessee Business Combination Act (the "Combination Act") provides, among other things, that any corporation to which the Combination Act applies, including the Company, shall not engage in any "business combination" with an "interested shareholder" for a period of five years following the date that such shareholder became an interested shareholder unless prior to such date the board of directors of the corporation approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder. The Combination Act defines "business combination," generally, to mean any: (i) merger or consolidation; (ii) share exchange; (iii) sale, lease, exchange, mortgage, pledge, or other transfer (in one transaction or a series of transactions) of assets representing 10% or more of (A) the market value of consolidated assets, (B) the market value of the corporation's outstanding shares or (C) the corporation's consolidated net income; (iv) issuance or transfer of shares from the corporation to the interested shareholder; (v) plan of liquidation; (vi) transaction in which the interested shareholder's proportionate share of the outstanding shares of any class of securities is increased; or (vii) financing arrangements pursuant to which the interested shareholder, directly or indirectly, receives a benefit except proportionately as a shareholder. The Combination Act defines "interested shareholder," generally, to mean any person who is the beneficial owner, either directly or indirectly, of 10% or more of any class or series of the outstanding voting stock, or any affiliate or associate of the corporation who has been the beneficial owner, either directly or indirectly, of 10% or more of the voting power of any class or series of the corporation's stock at any time within the five year period preceding the date in question. Consummation of a business combination that is subject to the five-year moratorium is permitted after such period if the transaction (i) complies with all applicable charter and bylaw requirements and applicable Tennessee law and (ii) is approved by at least two-thirds of the outstanding voting stock not beneficially owned by the interested shareholder, or when the transaction meets certain fair price criteria. The fair price criteria include, among others, the requirement that the per share consideration received in any such business combination by each of the shareholders is equal to the highest of (i) the highest per share price paid by the interested shareholder during the preceding five-year period for shares of the same class or series plus interest thereon from such date at a treasury bill rate less the aggregate amount of any cash dividends paid and the market value of any dividends paid other than in cash since such earliest date, up to the amount of such interest, (ii) the highest preferential amount, if any, such class or series is entitled to receive on liquidation, or (iii) the market value of the shares on either the date the business combination is announced or the date when the interested shareholder reaches the 10% threshold, whichever is higher, plus interest thereon less dividends as noted above. The Tennessee Control Share Acquisition Act (the "Acquisition Act") prohibits certain shareholders from exercising in excess of 20% of the voting power in a corporation acquired in a "control share acquisition," as defined in the Acquisition Act, unless such voting rights have been previously approved by the disinterested shareholders of the corporation. The Company has elected not to make the Acquisition Act applicable to the Company. No assurance can be given that such election, which must be expressed in a charter or bylaw amendment, will not be made in the future. 66 68 The Tennessee Greenmail Act (the "Greenmail Act") prohibits the Company from purchasing or agreeing to purchase any of its securities, at a price in excess of fair market value, from a holder of 3% or more of any class of such securities who has beneficially owned such securities for less than two years, unless such purchase has been approved by the affirmative vote of a majority of the outstanding shares of each class of voting stock issued by the Company or the Company makes an offer of at least equal value per share to all holders of shares of such class. The effect of the Combination Act, the Acquisition Act, and the Greenmail Act may be to render more difficult a change of control of the Company. REGISTRATION RIGHTS Following the consummation of the Offering, beneficial holders of an aggregate of 7,812,500 shares of Common Stock will have contractual rights with respect to the registration of the sale of such shares ("Registrable Shares"). Beginning one year after the date hereof (the "IPO Date"), holders of Registrable Shares that may not otherwise be sold pursuant to Rule 144 of the Securities Act will be entitled to two demand registrations upon the written demand to the Company to register the sale of 25% or more of the Registrable Shares; provided, however, that in no event will any holder of Registrable Shares participating in such demand registrations be permitted to sell in excess of 20% of such holder's Registrable Shares. In addition, until the second anniversary of the IPO Date, holders of Registrable Shares that may not otherwise be sold pursuant to Rule 144 of the Securities Act may require the Company to include all or a portion of such holder's Registrable Shares in a registration statement filed by the Company for its own account for cash, provided, among other conditions, that the managing underwriter (if any) of such offering has the right, subject to certain conditions, to limit the number of Registrable Shares included in such registration statement. In general, all fees, costs, and expenses of such registrations (other than the underwriting commissions, dealers' fees, brokers' fees and concessions applicable to Common Stock) will be borne by the Company. TRANSFER AGENT AND REGISTRAR American Stock Transfer and Trust Company, New York, New York will be the transfer agent and registrar for the Common Stock. 67 69 SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offering, there has not been any public market for securities of the Company. No prediction can be made as to the effect, if any, that market sales of shares of Common Stock or the availability of shares of Common Stock for sale will have on the market price prevailing from time to time. Sales of substantial amounts of Common Stock of the Company in the public market after the restrictions described below lapse could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of the Offering, the Company will have outstanding 10,937,500 shares of Common Stock (11,406,250 shares if the underwriters' over-allotment option is exercised in full). Of these shares, the 3,125,000 shares of Common Stock sold in the Offering will be freely tradeable without restriction or limitation under the Securities Act, except to the extent such shares are subject to the Agreement with the representatives of the Underwriters described below, and except for any shares purchased by "affiliates," as that term is defined under the Securities Act, of the Company. The remaining 7,812,500 shares will be "restricted securities" within the meaning of Rule 144 adopted under the Securities Act (the "Restricted Shares"). The Restricted Shares were issued by the Company in the Reorganization in reliance upon an exemption from registration under the Securities Act and none of such shares may be sold in the public market, except in compliance with the registration requirements of the Securities Act or pursuant to an exemption from registration, such as the exemption provided by Rule 144 under the Securities Act. Upon consummation of the Offering, the beneficial holders of all of the Restricted Shares will have demand and piggyback registration rights with respect to the sale of such shares. See "Description of Capital Stock -- Registration Rights." In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated), including an affiliate, who has beneficially owned shares for at least a one-year period (as computed under Rule 144) is entitled to sell within any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (109,375 shares after giving effect to the Offering), and (ii) the average weekly trading volume in the Common Stock during the four calendar weeks immediately preceding the date on which the notice of sale is filed with the Commission. Sales under Rule 144 are also subject to certain provisions relating to the manner and notice of sale and the availability of current public information about the Company. A shareholder who is not an affiliate of the Company at any time during the 90 days immediately preceding a sale, and who has beneficially owned his or her shares for at least two years (as computed under Rule 144), is entitled to sell such shares under Rule 144(k) without regard to the volume, manner and notice of sale, and availability of public information limitations described above. Shares properly sold in reliance upon Rule 144 to persons who are not affiliates are thereafter freely tradeable without restrictions or registration under the Securities Act. The Company and all directors and executive officers of the Company (who in the aggregate will beneficially own 4,637,986 shares of Common Stock) will agree prior to the Offering, and certain holders of 5% or more of the shares of Common Stock outstanding after the Offering will be asked to agree, with the Underwriters that, for a period of 180 days following the Offering (the "Lock-up Period"), they will not offer to sell, sell, contract to sell, grant an option to purchase or otherwise dispose (or announce any offer, sale, grant of any option or other distribution) of any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock without the prior written consent of NatWest Securities Limited (except that the Company may grant options to purchase or award shares of Common Stock under the Stock Incentive Plan and the Stock Purchase Plan and issue privately placed shares in connection with acquisitions). See "Principal Shareholders" and "Management -- Compensation Pursuant to Plans." As soon as practicable following the consummation of the Offering, the Company intends to file a registration statement under the Securities Act to register shares of Common Stock issuable pursuant to the Stock Incentive Plan and the Stock Purchase Plan. See "Management -- Compensation Pursuant to Plans." Shares of Common Stock issued pursuant to the Stock Incentive Plan and the Stock Purchase Plan after the effective date of such registration statement will be available for sale in the open market, subject to the Lock-up Period, if applicable. 68 70 UNDERWRITING The Underwriters named below (the "Underwriters") have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock set forth opposite their names below.
UNDERWRITER NUMBER OF SHARES - ----------- ---------------- NatWest Securities Limited.................................. Equitable Securities Corporation............................ McDonald & Company Securities, Inc.......................... Total.............................................
The Underwriters are obligated to purchase all the shares of Common Stock offered hereby, if any such shares are purchased. The Underwriters propose to offer the shares directly to the public initially at the public offering price set forth on the cover page of this Prospectus, and to certain securities dealers at such price less a concession not in excess of $ per share of Common Stock. Such dealers may re-allow a concession not in excess of $ per share of Common Stock to certain other brokers and dealers. After the public offering, the per share price and such concessions may be changed by the Underwriters. The Underwriters have informed the Company that they do not intend to confirm sales of shares of Common Stock to any accounts over which they exercise discretionary authority. The Underwriting Agreement provides that the Company will indemnify the several Underwriters against certain liabilities, including liabilities under the federal securities laws, or will contribute to payments that the Underwriters may be required to make in respect thereof. The Company has granted an option to the Underwriters, exercisable for 30 days from the date of this Prospectus, to purchase up to 468,750 additional shares of Common Stock at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriters may exercise such option only to cover over-allotments in the sale of the shares of Common Stock offered hereby. NatWest Securities Limited, a United Kingdom broker-dealer and a member of the Securities and Futures Authority Limited, has agreed that, as part of the distribution of the Common Stock offered hereby and subject to certain exceptions, it will not offer or sell any Common Stock within the United States, its territories or possessions or to persons who are citizens thereof or residents therein. The Underwriting Agreement does not limit the sale of the Common Stock offered hereby outside of the United States. NatWest Securities Limited has further represented and agreed that (a) it has not offered or sold and will not offer or sell any shares of Common Stock to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing, or disposing of investments (whether as principal or agent) for the purposes of their businesses or otherwise in circumstances that have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995 or the Financial Services Act 1986 (the "Act"); (b) it has complied and will comply with all applicable provisions of the Act with respect to anything done by it in relation to the shares of Common Stock in, from, or otherwise involving the United Kingdom; and (c) it has only issued or passed on and will only issue or pass on, in the United Kingdom, any document that consists of or any part of listing 69 71 particulars, supplementary listing particulars, or any other document required or permitted to be published by listing rules under Part IV of the Act, to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom the document may otherwise be lawfully issued or passed on. Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price of the Common Stock will be determined by negotiation between the Company and the Underwriters. Among the factors to be considered in determining the initial public offering price, in addition to prevailing market and general economic conditions, are the history of, and prospects for, the industry in which the Company operates, the ability of the Company's management, the Company's past and present operations, the Company's historical results of operations, the Company's earnings prospects, the prices of similar securities of comparable companies, and other relative factors. There can be no assurance, however, that the price at which the Common Stock will sell in the public market after the Offering will not be lower than the price at which it is sold by the Underwriters. The Representatives, on behalf of the Underwriters, have agreed to undertake to sell the Common Stock in such a manner as to ensure that the distribution standards of the NYSE will be met. See "Risk Factors -- Absence of Prior Public Trading Market." The Company, directors and officers of the Company, and certain holders of 5% or more of the shares of Common Stock and options to purchase Common Stock outstanding after the Offering will agree with the Underwriters that, for a period of 180 days following the Offering, they will not offer to sell, sell, contract to sell, grant an option to purchase or otherwise dispose (or announce any offer, sale, grant of any option or other distribution) of any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock without the prior written consent of NatWest Securities Limited (except that the Company may grant options to purchase or award shares of Common Stock under the Stock Incentive Plan and the Stock Purchase Plan and issue privately placed shares in connection with acquisitions). See "Principal Shareholders" and "Management -- Compensation Pursuant to Plans." The Representatives, on behalf of the Underwriters, may engage in over-allotment, stabilizing transactions, syndicate covering transactions, and penalty bids in accordance with Regulation M under the Exchange Act. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specific maximum. Syndicate covering transactions involve purchases of the securities in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the Representatives to reclaim a selling concession from a syndicate member when the securities originally sold by such syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions. Such stabilizing transactions, syndicate covering transactions, and penalty bids may cause the price of the securities to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on the NYSE or otherwise and, if commenced, may be discontinued at any time. At the request of the Company, up to 300,000 shares of Common Stock have been reserved for sale in the Offering to certain individuals, including directors and employees of the Company, members of their families, and other persons having business relationships with the Company. The price of such shares to such persons will be the initial public offering price set forth on the cover of this prospectus. The number of shares available for sale to the general public will be reduced to the extent these persons purchase such reserved shares. Any reserved shares not purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby. 70 72 LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Bass, Berry & Sims PLC, Nashville, Tennessee. H. Lee Barfield II, a member of Bass, Berry & Sims PLC, is a director of the Company. Mr. Barfield and his wife and children beneficially own 602,661 shares of Common Stock, and will receive approximately $2.3 million pursuant to ARCLP's liquidation and distribution of the repayment of the Reorganization Note. See "The Company -- Pending Reorganization," "Principal Shareholders," and "Certain Transactions -- Pending Reorganization." Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Stroock & Stroock & Lavan LLP, New York, New York. EXPERTS The Predecessor Entities' and the Predecessor's Combined and Consolidated Financial Statements and schedule as of December 31, 1995 and 1996, and for the year ended December 31, 1994, the three months ended March 31, 1995, the nine months ended December 31, 1995, and the year ended December 31, 1996, and the combined financial statements of Carriage Club for the four months ended April 30, 1996 have been included herein in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering the Predecessor Entities' and the Predecessor's Combined and Consolidated Financial Statements refers to a change in cost basis as a result of a purchase business combination. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 (herein, together with all amendments thereto, called the "Registration Statement"), of which this Prospectus constitutes a part, under the Securities Act and the rules and regulations promulgated thereunder, with respect to the Common Stock offered hereby. This Prospectus omits certain information contained in the Registration Statement, and reference is made to the Registration Statement, including the exhibits thereto, for further information with respect to the Company and the securities offered hereby. Statements contained herein concerning the provisions of documents are necessarily summaries of such documents; when any such document is an exhibit to the Registration Statement, each such statement is qualified in its entirety by reference to the copy of such document filed with the Commission. The Registration Statement and the exhibits and schedules thereto may be reviewed without charge at the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the New York Regional Office located at Seven World Trade Center, 13th Floor, New York, New York 10048, and at the Chicago Regional Office located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained, upon payment of the fee prescribed by the Commission, at the Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a web site that contains reports, proxy statements, and other information regarding registrants, including the Company. The address of the Commission's web site is http://www.sec.gov. --------------------- The Company intends to furnish its shareholders with annual reports containing financial statements audited by the Company's independent public accountants. 71 73 AMERICAN RETIREMENT COMMUNITIES, L.P. INDEX TO FINANCIAL STATEMENTS
PAGE ---- American Retirement Communities, L.P. Independent Auditors' Report................................ F-2 Consolidated Balance Sheets -- December 31, 1995, and 1996, and March 31, 1997 (unaudited)............................ F-3 Combined Statements of Operations -- Year Ended December 31, 1994 and Three Months Ended March 31, 1995 and Consolidated Statements of Operations -- Nine Months Ended December 31, 1995, Year Ended December 31, 1996, Three Months Ended March 31, 1996 (unaudited), and Three Months Ended March 31, 1997 (unaudited).......................... F-4 Combined Statements of Partners'/Shareholders' Equity -- Year Ended December 31, 1994 and Three Months Ended March 31, 1995 and Consolidated Statements of Partners' Equity -- Nine Months Ended December 31, 1995, Year Ended December 31, 1996, and Three Months Ended March 31, 1997 (unaudited)...................................... F-6 Combined Statements of Cash Flows -- Year Ended December 31, 1994 and Three Months Ended March 31, 1995 and Consolidated Statements of Cash Flows -- Nine Months Ended December 31, 1995, Year Ended December 31, 1996, Three Months Ended March 31, 1996 (unaudited), and Three Months Ended March 31, 1997 (unaudited).......................... F-7 Notes to Combined and Consolidated Financial Statements..... F-9 Carriage Club of Charlotte, Limited Partnership and Carriage Club of Jacksonville, Limited Partnership Independent Auditors' Report................................ F-22 Combined Statement of Operations -- Four Months Ended April 30, 1996.................................................. F-23 Combined Statement of Partners' Equity -- Four Months Ended April 30, 1996............................................ F-23 Combined Statement of Cash Flows -- Four Months Ended April 30, 1996.................................................. F-24 Notes to Combined Financial Statements...................... F-25
F-1 74 INDEPENDENT AUDITORS' REPORT The Partners American Retirement Communities, L.P.: We have audited the accompanying consolidated balance sheets of American Retirement Communities, L.P. and consolidated subsidiaries (the Predecessor) as of December 31, 1995 and 1996, and the related consolidated statements of operations, changes in partners' equity, and cash flows for the period April 1, 1995 through December 31, 1995 and for the year ended December 31, 1996 (Predecessor periods), and the related combined statements of operations, changes in partners'/shareholders' equity, and cash flows of American Retirement Corporation and combined entities (Predecessor Entities) for the year ended December 31, 1994 and for the period from January 1, 1995 through March 31, 1995 (Predecessor Entities periods). These combined and consolidated financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these combined and 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned Predecessor consolidated financial statements present fairly, in all material respects, the financial position of American Retirement Communities, L.P. and consolidated entities as of December 31, 1995 and 1996, and the results of their operations and their cash flows for the Predecessor periods, in conformity with generally accepted accounting principles. Further, in our opinion, the aforementioned Predecessor Entities combined financial statements present fairly, in all material respects, the results of operations and cash flows of American Retirement Corporation and combined entities for the Predecessor Entities periods, in conformity with generally accepted accounting principles. As discussed in note 1 to the combined and consolidated financial statements, effective April 1, 1995, an exchange of common stock or partnership interests for limited partnership interests in American Retirement Communities, L.P. was accounted for as a purchase business combination (the Roll-up). As a result of the Roll-up, net assets not previously owned by the acquirer were recorded at fair value. Accordingly, consolidated financial information for periods after the Roll-up is presented on a different cost basis than that for periods before the Roll-up and, therefore, is not comparable. KPMG PEAT MARWICK LLP Nashville, Tennessee January 22, 1997 F-2 75 AMERICAN RETIREMENT COMMUNITIES, L.P. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, DECEMBER 31, MARCH 31, 1995 1996 1997 ------------ ------------ ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.............................. $ 3,825 $ 3,222 $ 8,854 Assets limited as to use (note 5)...................... 2,411 1,022 975 Resident and health care receivables, less allowance for doubtful accounts of $78 in 1995 and $108 in 1996................................................ 1,585 2,782 3,301 Management services receivables........................ 876 565 804 Inventory.............................................. 324 420 405 Prepaid expenses....................................... 233 340 1,002 Deferred income taxes (note 12)........................ -- 920 920 -------- -------- -------- Total current assets................................ 9,254 9,271 16,261 Assets limited as to use, excluding amounts classified as current (note 5)....................................... 3,532 3,607 3,514 Land, buildings and equipment, net (notes 6, 9, and 15).................................................... 149,082 213,124 192,302 Marketable securities (note 4)........................... 102 52 52 Other assets (note 7).................................... 3,609 2,108 2,027 -------- -------- -------- Total assets................................... $165,579 $228,162 $214,156 ======== ======== ======== LIABILITIES AND PARTNERS' EQUITY Current liabilities: Current portion of long-term debt (note 9)............. $ 1,800 $ 8,053 $ 3,189 Accounts payable....................................... 2,615 2,441 3,553 Redemption payable (note 10)........................... -- 5,195 -- Accrued expenses (note 8).............................. 4,442 6,239 5,368 Accrued partner distributions.......................... 1,445 1,632 2,500 -------- -------- -------- Total current liabilities........................... 10,302 23,560 14,610 Tenant deposits.......................................... 2,748 3,850 4,278 Long-term debt, excluding current portion (note 9)....... 100,445 162,636 154,379 Deferred gain on sale-leaseback transactions (note 15)... -- -- 4,302 Other long-term liabilities.............................. 261 234 230 -------- -------- -------- Total liabilities................................... 113,756 190,280 177,799 Partners' equity: Special redeemable preferred partnership interests (note 10)........................................... 10,000 -- -- Other general and limited partners' interests.......... 41,823 37,882 36,357 -------- -------- -------- Total partners' equity.............................. 51,823 37,882 36,357 -------- -------- -------- Commitments and contingencies (notes 13 and 14) Total liabilities and partners' equity......... $165,579 $228,162 $214,156 ======== ======== ========
See accompanying notes to combined and consolidated financial statements. F-3 76 AMERICAN RETIREMENT COMMUNITIES, L.P. COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PREDECESSOR ENTITIES PREDECESSOR --------------------------- --------------------------------------------------------- YEAR THREE MONTHS NINE MONTHS YEAR THREE MONTHS THREE MONTHS ENDED ENDED ENDED ENDED ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, 1994 1995 1995 1996 1996 1997 ------------ ------------ ------------ ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) Revenues: Resident and health care revenue.................... $30,979 $11,761 $47,239 $ 73,878 $15,803 $20,982 Management services revenue.................... 2,362 595 1,524 1,739 513 528 ------- ------- ------- -------- ------- ------- Total revenues............. 33,341 12,356 48,763 75,617 16,316 21,510 Expenses: Community operating expenses................... 21,780 8,035 30,750 46,960 10,270 13,399 Lease expense................ -- -- -- -- -- 528 General and administrative... 3,455 1,108 3,446 6,200 1,183 1,886 Depreciation and amortization............... 2,891 1,127 4,534 6,906 1,390 1,585 ------- ------- ------- -------- ------- ------- Total operating expenses... 28,126 10,270 38,730 60,066 12,843 17,398 ------- ------- ------- -------- ------- ------- Income from operations..... 5,215 2,086 10,033 15,551 3,473 4,112 ------- ------- ------- -------- ------- ------- Other income (expense): Interest expense............. (5,354) (2,370) (7,930) (12,160) (1,894) (3,257) Interest income.............. 203 49 329 434 79 150 Other (note 11).............. 98 (1,013) 919 788 (6) (30) ------- ------- ------- -------- ------- ------- Other income (expense), net...................... (5,053) (3,334) (6,682) (10,938) (1,821) (3,137) ------- ------- ------- -------- ------- ------- Income (loss) before income taxes and extraordinary item..................... 162 (1,248) 3,351 4,613 1,652 975 Income tax expense (benefit) (note 12).................... -- 20 55 (920) -- -- ------- ------- ------- -------- ------- ------- Income (loss) before extraordinary item....... 162 (1,268) 3,296 5,533 1,652 975 Extraordinary loss on extinguishment of debt (note 9)........................... -- -- -- (2,335) (2,335) -- ------- ------- ------- -------- ------- ------- Net income (loss).......... 162 (1,268) 3,296 3,198 (683) 975 Preferred return on special redeemable preferred limited partnership interests (note 10).......................... -- -- 1,125 1,104 375 -- ------- ------- ------- -------- ------- ------- Net income (loss) available for distribution to partners and shareholders............. $ 162 $(1,268) $ 2,171 $ 2,094 $(1,058) $ 975 ======= ======= ======= ======== ======= =======
(Continued) F-4 77 AMERICAN RETIREMENT COMMUNITIES, L.P. COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS CONTINUED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, 1996 1997 ------------ ------------ (UNAUDITED) Pro forma earnings data (unaudited) (note 16): Income before income taxes and extraordinary items, as reported.................................................. $4,613 $ 975 Pro forma income taxes...................................... 820 370 ------ ------ Pro forma income before extraordinary item................ 3,793 605 Preferred return on special redeemable preferred limited partnership interests..................................... 1,104 -- ------ ------ Pro forma income before extraordinary item available for distribution to partners and shareholders......... $2,689 $ 605 ====== ====== Pro forma earnings per common share (note 16): Pro forma income before extraordinary item................ $ 0.40 $ 0.06 Preferred return on special redeemable preferred limited partnership interests.................................. 0.12 -- ------ ------ Pro forma income before extraordinary item available for distribution to partners and shareholders.............. $ 0.29 $ 0.06 ====== ====== Shares used in computing pro forma income per common share.................................................. 9,375 9,375 ====== ======
See accompanying notes to combined and consolidated financial statements. F-5 78 AMERICAN RETIREMENT COMMUNITIES, L.P. COMBINED AND CONSOLIDATED STATEMENTS OF PARTNERS'/SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1994; THREE MONTHS ENDED MARCH 31, 1995; NINE MONTHS ENDED DECEMBER 31, 1995; YEAR ENDED DECEMBER 31, 1996; AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) (IN THOUSANDS)
PARTNERS'/ SHAREHOLDERS' EQUITY ------------- Combined balance, January 1, 1994........................... $15,042 Combined income for 1994.................................. 162 Exercise of stock options (ARC)........................... 199 Distributions to partners during 1994..................... (2,580) ------- Combined balance, December 31, 1994......................... 12,823 Combined loss for the period January 1, 1995 through March 31, 1995............................................... (1,268) Exercise of stock options (ARC)........................... 257 Acquisition of treasury stock by ARC...................... (1,619) Contribution by ARC-LP partners........................... 11,000 Distributions to partners................................. (1,400) ------- Combined balance, March 31, 1995............................ $19,793 =======
SPECIAL REDEEMABLE OTHER GENERAL PREFERRED LIMITED AND LIMITED PARTNERSHIP INTERESTS PARTNERSHIP INTERESTS TOTAL --------------------- --------------------- -------- Combined balance, March 31, 1995................. $ -- $19,793 $ 19,793 Adjustment to equity as a result of business combination (note 1)........................ -- 23,923 23,923 Conversion of debt to special redeemable preferred limited partnership interests..... 10,000 -- 10,000 Earnings for the period April 1, 1995 through December 31, 1995........................... 1,125 2,171 3,296 Distribution to partners for the period April 1, 1995 through December 31, 1995........... (1,125) (4,064) (5,189) -------- ------- -------- Consolidated balance, December 31, 1995.......... 10,000 41,823 51,823 Earnings for 1996.............................. 1,104 2,094 3,198 Redemption of preferred limited partnership interests................................... (10,000) -- (10,000) Distribution to partners....................... (1,104) (6,035) (7,139) -------- ------- -------- Consolidated balance, December 31, 1996.......... -- 37,882 37,882 Earnings for the period January 1, 1997 through March 31, 1997 (unaudited)..................... -- 975 975 Distribution to partners (unaudited)............. -- (2,500) (2,500) -------- ------- -------- Consolidated balance, March 31, 1997 (unaudited).................................... $ -- $36,357 $ 36,357 ======== ======= ========
See accompanying notes to combined and consolidated financial statements. F-6 79 AMERICAN RETIREMENT COMMUNITIES, L.P. COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PREDECESSOR ENTITIES PREDECESSOR --------------------------- --------------------------------------------------------- YEAR THREE MONTHS NINE MONTHS YEAR THREE MONTHS THREE MONTHS ENDED ENDED ENDED ENDED ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, 1994 1995 1995 1996 1996 1997 ------------ ------------ ------------ ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income (loss)................ $ 162 $(1,268) $ 3,296 $ 3,198 (683) 975 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization................. 2,891 1,127 4,534 6,906 1,390 1,585 Amortization of deferred gain......................... -- -- -- -- -- (111) Deferred taxes................. -- -- -- (920) -- -- Extraordinary loss on extinguishment of debt....... -- -- -- 2,335 2,335 -- Write-down of value of insurance policies........... -- -- -- 66 -- -- Gain on sale of assets......... (155) -- (1,143) (874) -- -- Increase (decrease), net of retirement communities acquired, in cash, due to changes in: Receivables.................. (653) (903) 701 (431) 523 (757) Inventory.................... (67) (6) (21) (56) 11 15 Prepaid expenses............. 27 (1,496) 1,894 (105) (256) (661) Other assets................. (97) 382 -- 521 -- (115) Accounts payable............. 586 381 948 (249) (649) 1,111 Accrued expenses............. 1,004 (157) 487 1,130 697 (819) Tenant deposits.............. 344 60 279 202 40 426 Other long-term liabilities................ (588) -- (87) (27) (63) (3) -------- ------- ------- -------- ------- ------- Net cash provided (used) by operating activities..... 3,454 (1,880) 10,888 11,696 3,345 1,646 -------- ------- ------- -------- ------- ------- Cash flows from (used by) investing activities: Additions to land, building and equipment...................... (45,606) (3,237) (6,032) (71,545) (1,667) (3,317) Proceeds from (purchases of) assets limited as to use....... (904) 17 (2,915) 2,578 819 139 Proceeds from the sale of assets......................... 205 6 1,214 1,346 -- 27,144 Proceeds from (purchases of) marketable securities.......... (52) -- (50) -- 102 -- -------- ------- ------- -------- ------- ------- Net cash provided (used) by investing activities..... (46,357) (3,214) (7,783) (67,621) (746) 23,966 -------- ------- ------- -------- ------- -------
(Continued) F-7 80 AMERICAN RETIREMENT COMMUNITIES, L.P. COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (IN THOUSANDS)
PREDECESSOR ENTITIES PREDECESSOR --------------------------- --------------------------------------------------------- YEAR THREE MONTHS NINE MONTHS YEAR THREE MONTHS THREE MONTHS ENDED ENDED ENDED ENDED ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, 1994 1995 1995 1996 1996 1997 ------------ ------------ ------------ ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) Cash flows from financing activities: Contributions from partners...... -- 11,000 -- -- -- -- Distributions to partners........ (2,580) (485) (4,659) (6,952) (1,820) (1,632) Payment of redeemable preferred interests...................... -- -- -- (4,805) -- (5,195) Proceeds from issuance of long-term debt................. 48,979 1,636 1,614 73,922 1,610 2,423 Principal payments on long-term debt........................... (2,471) (628) (3,720) (5,479) (422) (15,544) Expenditures for financing costs.......................... (1,535) (130) (346) (1,364) (341) (32) Proceeds from the issuance of common stock................... 199 257 -- -- -- -- Acquisition of treasury stock.... -- (1,619) -- -- -- -- -------- ------- ------- -------- ------- ------- Net cash provided (used) by financing activities..... 42,592 10,031 (7,111) 55,322 (973) (19,980) -------- ------- ------- -------- ------- ------- Net increase (decrease) in cash and cash equivalents.............. (311) 4,937 (4,006) (603) 1,626 5,632 Cash and cash equivalents at beginning of period.............. 3,205 2,894 7,831 3,825 3,825 3,222 -------- ------- ------- -------- ------- ------- Cash and cash equivalents at end of period........................... $ 2,894 $ 7,831 $ 3,825 $ 3,222 5,451 8,854 ======== ======= ======= ======== ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest....................... $ 4,946 $ 2,381 $ 7,772 $ 11,907 $ 1,277 $ 2,037 ======== ======= ======= ======== ======= ======= Income taxes paid................ $ -- $ -- $ 20 $ 55 $ -- $ -- ======== ======= ======= ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION During 1994, 1995, and 1996, as discussed in note 3, the Partnership acquired certain communities. In conjunction with the acquisitions, net assets and liabilities were assumed as follows:
PREDECESSOR ENTITIES PREDECESSOR ---------------------------- ---------------------------- YEAR THREE MONTHS NINE MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, 1994 1995 1995 1996 ------------ ------------ ------------ ------------ Current assets........................ $ -- $ 486 $ 892 $ 497 Other assets.......................... 481 -- -- 674 Debt.................................. -- (15,480) (8,010) -- Current liabilities................... (597) -- (384) (502) Other liabilities..................... (580) (77) -- --
As discussed in note 1, the Partnership engaged in a roll-up transaction in 1995. See accompanying notes to combined and consolidated financial statements. F-8 81 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 AND MARCH 31, 1997 UNAUDITED INTERIM FINANCIAL INFORMATION The consolidated balance sheet as of March 31, 1997, the consolidated statements of operations and cash flows for the three months ended March 31, 1996 and 1997, and the consolidated statement of partners' equity for the three months ended March 31, 1997 (1996 and 1997 interim financial information) have been prepared by American Retirement Communities, L.P. (ARC-LP) and are unaudited. In the opinion of the management of ARC-LP, the 1996 and 1997 interim financial information includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results of the 1996 and 1997 interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from the 1996 and 1997 interim financial information. The 1996 and 1997 interim financial information should be read in conjunction with ARC-LP's audited financial statements appearing herein. The results for the three months ended March 31, 1996 and March 31, 1997 may not be indicative of operating results for the full year. (1) BASIS OF PRESENTATION The accompanying financial statements include the combined financial statements of (1) American Retirement Corporation II, formerly known as American Retirement Corporation (ARC) and its wholly owned subsidiaries; (2) Trinity Towers Limited Partnership; (3) Fort Austin Limited Partnership; (4) Holley Court Terrace L.P.; and (5) ARC-LP for the period January 1, 1994 through March 31, 1995 and, as a result of a purchase business combination, the consolidated financial statements of these entities for the periods since April 1, 1995. In these financial statements, activities or transactions occurring on or after April 1, 1995 relate to those of the consolidated entity and are referred to as those of the Partnership. Prior to March 31, 1995, ARC-LP, and three limited partnerships (Trinity Towers Limited Partnership, Fort Austin Limited Partnership and Holley Court Terrace L.P.) were entities that were each managed and/or partially owned by ARC. ARC provided management services to ARC-LP and was the managing general partner of and had contracts to provide management services to each of the other three limited partnerships. The accompanying financial statements for the periods prior to March 31, 1995 are presented on a combined basis. All material intercompany transactions and balances have been eliminated. Effective March 31, 1995, substantially all of the shareholders of ARC and the non-ARC partners of the three limited partnerships exchanged their common stock or partnership interests for limited partnership interests in ARC-LP (the Roll-up). Certain minority shareholders of ARC tendered their common stock for approximately $1.6 million of cash. The Roll-up was accounted for as a purchase business combination in which ARC was determined to be the accounting acquirer. Accordingly, the ownership interests in ARC-LP and the three operating partnerships not previously owned by ARC were recorded at fair value as of the date of the Roll-up. The net assets acquired were allocated as follows: land -- $2.6 million; buildings and improvements -- $20.4 million; and furniture and fixtures -- $1.0 million. The general partner of ARC-LP is American Retirement Communities, LLC, whose members are the senior management of ARC. The accompanying financial statements for the periods beginning after March 31, 1995 are presented on a consolidated basis. All material intercompany transactions and balances have been eliminated. Concurrent with the Roll-up, holders of $10.0 million of notes receivable from Fort Austin Limited Partnership exchanged their notes for an equivalent amount of preferred limited partnership interests in the Partnership (see note 10). As further discussed in note 16, a reorganization of the Partnership is planned for 1997. F-9 82 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) 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. (b) Recognition of Revenue Resident and health care revenues are reported at the estimated net realizable amounts from residents, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Resident and health care revenues, primarily Medicare, subject to retroactive adjustments, were 7.5%, 9.0%, and 7.8% of resident and health care revenues in 1994, 1995 and 1996, respectively. Management services revenue is recorded as earned and relates to providing certain management and administrative support services under management agreements. Such management agreements generally are for terms of three to five years, but may be canceled by the owner, without cause, on three to six months notice. The management services revenues are based either on a contractually fixed fee or a percentage of revenues. Certain management agreements also provide the Partnership with an incentive fee based on various performance goals. Revenues are shown, in these financial statements, net of reimbursed expenses. The reimbursed expenses were $2.5 million, $0.6 million, $1.7 million, and $2.3 million for the year ended December 31, 1994, the three months ended March 31, 1995, the nine months ended December 31, 1995, and the year ended December 31, 1996, respectively. (c) Cash Equivalents All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. (d) Marketable Securities Marketable securities consist of U.S. Treasury securities and marketable corporate debt securities. All of the Partnership's marketable securities are classified as held-to-maturity securities which are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. A decline in the market value of any held-to-maturity security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. Discounts are accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold. (e) Assets Limited as to Use Assets limited as to use include assets held by lenders under loan agreements in escrow for property taxes and property improvements, certificates of deposit held as collateral for letters of credit, and resident deposits. (f) Inventory Inventory consists of supplies and is stated at the lower of cost (first-in, first-out) or market. F-10 83 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (g) Land, Buildings and Equipment Land, buildings, and equipment are stated at cost. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed on the straight-line basis. Buildings and improvements are depreciated over 15 to 40 years, and furniture, fixtures and equipment are depreciated over 5 to 7 years. The Partnership adopted the provisions of Statement of Financial Accounting Standard (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. SFAS No. 121 requires that long-lived assets 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 exceed 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 Partnership's financial position, results of operations, or liquidity. (h) Other Assets Other assets consist primarily of deferred financing charges being amortized on the straight-line basis over the terms of the debt agreement and management contract rights being amortized over the initial terms of the management contracts. (i) Income Taxes Except for ARC, the entities included in these financial statements are partnerships, and the income and losses of the partnerships and distributions are allocated to the partners in accordance with the various partnership agreements. Accordingly, no provision has been made in the accompanying financial statements for federal and state income taxes related to the partnerships since such taxes are the liabilities of the partners. ARC follows the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. See note 16 for a discussion of pro forma taxes. (j) Disclosure of Fair Value of Financial Instruments The fair values of the financial instruments are estimates based upon current market conditions and quoted market prices for the same or similar instruments as of December 31, 1996. Book value approximates fair value for substantially all of the Partnership's assets and liabilities meeting the definition of a financial instrument. (3) ACQUISITIONS During 1994, Fort Austin Limited Partnership acquired the assets of four retirement communities. Santa Catalina Villas was acquired on June 15, 1994 for a purchase price of $10.9 million. Hampton at Post Oak, Park Place Retirement Community, and Westlake Village were acquired on October 31, 1994 for a purchase price of $34.7 million. The purchases were financed primarily through various borrowings. On February 1, 1995, ARC-LP acquired certain assets and assumed certain liabilities of a retirement community in Denver, Colorado known as Heritage Club. The purchase price was $22.0 million and was a combination of cash of approximately $6.5 million and assumption of debt of $15.5 million. F-11 84 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Effective April 1, 1995, ARC-LP acquired all of the assets and all contractual liabilities of a retirement community and related home health agency in Lexington, Kentucky known as Richmond Place. The purchase price approximated $10.3 million and included the payment of cash of $2.3 million and the assumption of debt of $8.0 million. Effective May 1, 1996, ARC-LP acquired all assets and all contractual liabilities of a retirement community in Charlotte, North Carolina known as Carriage Club of Charlotte and a retirement community in Jacksonville, Florida known as Carriage Club of Jacksonville. The purchase price totaled $61.1 million and was financed primarily through various borrowings. The purchase prices have been allocated to the assets acquired and liabilities assumed based on fair market value at the date of acquisition. The above acquisitions were accounted for as purchases, and the accompanying financial statements include the results of operations from the date of the acquisitions. The following unaudited pro forma financial information presents the results of operations as if the acquisitions noted above occurring subsequent to January 1, 1995 had occurred on January 1, 1995, after giving effect to certain adjustments primarily additional depreciation expense and increased interest expense on debt related to the acquisitions. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the acquisitions occurred at the beginning of the year:
1995 1996 ------- ------- (IN THOUSANDS) Total revenues................................... $74,308 $79,543 ======= ======= Income (loss) before extraordinary item.......... $ (93) $ 4,750 ======= ======= Net income (loss)................................ $ (93) $ 2,415 ======= =======
(4) MARKETABLE SECURITIES Marketable securities consist of securities which are classified as held-to-maturity and are reported at amortized cost of $102,000 and $52,000 at December 31, 1995 and 1996, respectively. The amortized cost, which approximates market, for marketable securities was as follows:
DECEMBER 31, DECEMBER 31, MARCH 31, 1995 1996 1997 ------------ ------------ ----------- (UNAUDITED) (IN THOUSANDS) Held-to-maturity: U.S. Treasury securities............. $ 52 $52 $52 Exxon Capital Corporation marketable corporate debt securities......... 50 -- -- ---- --- --- $102 $52 $52 ==== === ===
Maturities of marketable securities classified as held-to-maturity was due between one and five years. (5) ASSETS LIMITED AS TO USE Assets limited as to use that are required for obligations classified as current liabilities are reported as current assets. Assets limited as to use, other than tenant deposits, are on deposit with the lender of the mortgage note payable. The residency agreements which govern the terms under which some of the communities lease apartments to residents require each resident to place a tenant deposit with the Partnership in an amount equal to one month's rent. The deposit functions as a security deposit. These deposits are carried F-12 85 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) as a liability on the balance sheet. In compliance with state laws when applicable, cash reserve accounts are maintained for the tenant deposits. Assets limited as to use consist of the following:
DECEMBER 31, DECEMBER 31, MARCH 31, 1995 1996 1997 ------------ ------------ ------------ (UNAUDITED) (IN THOUSANDS) Operating expense reserve................. $ 349 $ 349 $ 180 Tax escrow account........................ 1,904 285 206 Capital improvement escrow................ 890 218 88 Bond principal and interest escrow........ 617 862 589 Tenant deposits........................... 1,292 2,114 2,110 Collateral for letter of credit with bank.................................... 891 801 1,316 ------ ------ ------ 5,943 4,629 4,489 Less amounts classified as current assets.................................. 2,411 1,022 975 ------ ------ ------ Assets limited as to use, excluding amounts classified as current assets.... $3,532 $3,607 $3,514 ====== ====== ======
(6) LAND, BUILDINGS, AND EQUIPMENT A summary of land, buildings and equipment is as follows:
DECEMBER 31, DECEMBER 31, MARCH 31, 1995 1996 1997 ------------ ------------ --------- (UNAUDITED) (IN THOUSANDS) Land...................................... $ 18,326 $ 26,519 $ 25,282 Buildings and improvements................ 132,775 187,239 167,428 Furniture, fixtures and equipment......... 8,960 11,512 10,054 -------- -------- -------- 160,061 225,270 202,764 Less accumulated depreciation............. 11,141 17,423 14,050 -------- -------- -------- 148,920 207,847 188,714 Construction in progress.................. 162 5,277 3,588 -------- -------- -------- Land, buildings and equipment, net........ $149,082 $213,124 $192,302 ======== ======== ========
(7) OTHER ASSETS Other assets consists of the following:
DECEMBER 31, DECEMBER 31, MARCH 31, 1995 1996 1997 ------------ ------------ ----------- (UNAUDITED) (IN THOUSANDS) Deferred financing costs, net of accumulated amortization............... $2,649 $1,129 $1,053 Long term investments.................... 435 -- -- Other.................................... 525 979 974 ------ ------ ------ $3,609 $2,108 $2,027 ====== ====== ======
Long-term investments at December 31, 1995 consisted of an investment in property held by ARC for resale or development. During September 1996, Williamsburg Landing, Inc. (WLI), a third party, exercised its $1.3 million option to purchase an unimproved parcel of land adjacent to Williamsburg Landing, a facility managed by the Partnership. The basis of the land to ARC was approximately $435,000 resulting in a net gain of approximately $865,000. F-13 86 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 1996, the Partnership entered into a development management agreement with WLI whereby the Partnership oversees the land development and administers any relevant payments; however, WLI provides full funding of the development and the Partnership has no financial obligation with respect to the project. The development management agreement provides for a fixed fee to be paid by WLI to the Partnership on a predetermined schedule throughout the term of the planned development. The Partnership has a contractual right to participate in the appreciation value upon any subsequent sale of the real property to the extent of 20% of the net realized profit. (8) ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, DECEMBER 31, MARCH 31, 1995 1996 1997 ------------ ------------ ----------- (UNAUDITED) (IN THOUSANDS) Property taxes payable................... $2,454 $2,550 $1,630 Accrued payroll.......................... 628 1,439 1,761 Other.................................... 1,360 2,250 1,977 ------ ------ ------ $4,442 $6,239 $5,368 ====== ====== ======
(9) LONG-TERM DEBT A summary of long-term debt is as follows:
DECEMBER 31, DECEMBER 31, MARCH 31, 1995 1996 1997 ------------ ------------ ----------- (UNAUDITED) (IN THOUSANDS) Lexington-Fayette Urban County Government Residential Facilities Revenue Bonds refinanced May 1, 1987, collateralized by mortgage liens on property and equipment. The refinancing bond issue is remarketed to set the coupon rate on April 1 of each year (3.65% for the year ended March 31, 1997) until the bonds mature on April 1, 2015. Interest is due semi- annually on April 1 and October 1. .......................................... $ 8,010 $ 8,010 $ 8,010 Mortgage note payable bearing interest at a fixed rate of 8.2%. Interest is due monthly with principal payments due monthly in varying amounts with remaining principal and unpaid interest due at maturity on December 31, 2002. The loan is secured by land, buildings, equipment and assignment of rents and leases. See note (a) below. ..... 62,109 62,332 62,332 Mortgage note payable bearing interest at 2.65% above the lender's composite commercial paper rate, as defined in the promissory note (8.16% at December 31, 1996). Interest is due monthly with principal payments due monthly in varying amounts. The remaining principal and unpaid interest is due at maturity on December 31, 2002. The loan is secured by land, buildings, equipment and assignment of rents and leases. See note (a) below. ..... -- 16,767 17,474
F-14 87 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, DECEMBER 31, MARCH 31, 1995 1996 1997 ------------ ------------ ----------- Mortgage note payable bearing interest at a fixed rate of 9.28%. Interest is due monthly with principal payments of $61,000 per month beginning May 1, 1997 and continuing until and including April 30, 2003, the maturity date of the note. The loan is secured by land, buildings, equipment, assignment of leases and rents, and escrow accounts. ............................................... -- 37,000 37,000 Mortgage note payable bearing interest at 3.25% above the lender's composite commercial paper rate, as defined in the promissory note (8.76% at December 31, 1996). Interest is due monthly with principal payments of $19,000 due monthly continuing until and including April 30, 2003, the maturity date of the note. The loan is secured by land, buildings, equipment, assignment of rents and leases, and escrow accounts. .................. -- 13,110 14,036 Note payable to a bank bearing interest at a floating rate equal to the bank's index rate (8.25% at December 31, 1996). Interest is due monthly with quarterly principal payments of an amount equal to 20% of the excess of total project value over the amount of the note beginning September 30, 1997, and continuing until December 31, 1998, the maturity date of the note. The note is secured by a land deed. ......................................... -- 825 825 Mortgage note payable bearing interest at a fixed rate of 8.2%. Interest is due monthly with principal payments of $20,000 per month with remaining principal and unpaid interest due at maturity on December 31, 2001. The loan is secured by land, buildings, equipment and assignment of rents and leases. .................................... 15,260 15,020 14,960 Note payable to a bank bearing interest at 7.6%. Interest due quarterly with principal due at maturity on June 30, 1997. The loan is secured by land, buildings and equipment and assignment of rents and leases, and is guaranteed by certain limited partners. This debt instrument was repaid during January 1997 (note 15). See note (b) below. ......................................... 5,000 5,000 -- Term loan note to a bank with a fixed interest rate of 10.07%. Principal and interest of $288,822 due quarterly through March 31, 1998. This debt instrument was repaid during January 1997 (note 15). See note (b) below. ...... 9,768 9,585 --
F-15 88 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, DECEMBER 31, MARCH 31, 1995 1996 1997 ------------ ------------ ----------- Term loan note payable to a bank. Principal of $160,000 and interest at a variable rate (8.04% at December 31, 1996) tied to the LIBOR rate are due quarterly on the 10th day of each January, April, July, and October until October 31, 1998, when all remaining principal and interest become due. The note was amended during 1996 increasing the face amount by $1,150,000. .......................... 2,000 2,630 2,470 Other long-term debt, generally payable monthly............ 98 410 461 -------- -------- -------- Total long-term debt..................................... 102,245 170,689 157,568 Less current portion..................................... 1,800 8,053 3,189 -------- -------- -------- Long-term debt, excluding current portion........ $100,445 $162,636 $154,379 ======== ======== ========
The aggregate scheduled maturities of long-term debt at December 31, 1996 are as follows:
(IN THOUSANDS) 1997................................... $ 8,053(b) 1998................................... 14,402(b) 1999................................... 2,303 2000................................... 2,287 2001................................... 2,272 Thereafter............................. 141,372 -------- $170,689 ========
- --------------- (a) In 1996, the Partnership refinanced two of its notes held with a capital corporation. In 1995, the debt was in the form of two notes, one for $38.5 million and one for $23.5 million, both of which had a variable interest rate of 4.5% above the lender's composite commercial paper rate. The maturity date of both notes was October 31, 2001. The refinancing combined the two notes into a single loan with a $62.0 million initial advance and a $35.0 million commitment for additional borrowing. In 1996, the Partnership borrowed $17.7 million against the remaining commitment. The initial $62.0 million advance bears interest at a fixed rate of 8.2%. Borrowings against the remaining commitment bear interest at a variable rate of 2.65% over the lenders' composite commercial paper rate. All principal reductions under the advances are first applied to any balance outstanding under the variable rate portion of the advances. The maturity of the loan is December 31, 2002. In conjunction with the refinancing, the Partnership wrote off net financing costs related to the previous notes of $2,335,000. This loss was recorded as an extraordinary loss in 1996. (b) Of the $14,585,000 of debt repaid in January 1997, $5,207,000 and $9,378,000 matured in 1997 and 1998, respectively (see note 15). The Partnership is also required to comply with certain restrictive financial and other covenants. At December 31, 1996, the Partnership was in compliance with its debt covenants. Under the terms of various long-term debt accounts, the Partnership is required to maintain certain deposits with trustees. Such deposits are included with assets limited as to use in these financial statements. F-16 89 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (10) EQUITY As discussed in note 1, in connection with the Roll-up, the shareholders of ARC and the partners in various partnerships exchanged their common stock or partnership interests for limited partnership interests in the Partnership. Additionally, holders of $10.0 million of notes payable by the Fort Austin Limited Partnership exchanged these notes for special redeemable preferred limited partnership interests. Such preferred interests were entitled to a cumulative 15% preferred distribution. Such preferred interests were redeemable, in whole or in part, at the option of the Partnership. During 1996, the Partnership redeemed $4.8 million of the preferred interests and on December 4, 1996, the Partnership approved the redemption of the remaining $5.2 million. Accordingly, the $5.2 million was removed from equity and shown as redemption payable at December 31, 1996 (see note 15). During both 1995 and 1996, the Partnership distributed $1.1 million of preferred distributions. There were no cumulative unpaid preferred distributions at December 31, 1995 or 1996. Distributions of all or any portion of the net cash flow from operations or from the proceeds of capital transactions are at the discretion of the general partner. Such distributions are made pursuant to formulas set forth in the limited partnership agreement. (11) OTHER INCOME (EXPENSE) Other income (expense) consists of the following:
PREDECESSOR ENTITIES PREDECESSOR --------------------------- --------------------------- YEAR THREE MONTHS NINE MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, 1994 1995 1995 1996 ------------ ------------ ------------ ------------ (IN THOUSANDS) Gain on sale of assets........................ $155 $ -- $1,143 $874 Costs incurred for the roll-up (see note 1)... -- (964) (17) -- Other, net.................................... (57) (49) (207) (86) ---- ------- ------ ---- $ 98 $(1,013) $ 919 $788 ==== ======= ====== ====
The 1995 gain resulted primarily from the sale of certain assets and liabilities of a retirement center by a general partnership in which ARC had an investment, and the 1996 gain included a gain of approximately $865,000 from the sale of land owned by ARC (see note 7). F-17 90 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (12) INCOME TAXES As discussed in note 2, income taxes, other than those for ARC, are the responsibility of the individual partners. Accordingly, the information shown below relates solely to ARC. The income tax expense (benefit), all of which was allocated to income, consists of the following:
PREDECESSOR ENTITIES PREDECESSOR --------------------------- --------------------------- YEAR THREE MONTHS NINE MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, 1994 1995 1995 1996 ------------ ------------ ------------ ------------ (IN THOUSANDS) U.S. federal: Current..................................... $ -- $ 20 $ 55 $ -- Deferred.................................... -- -- -- (823) ------ ------ ------ ------ -- 20 55 (823) ------ ------ ------ ------ State: Current..................................... -- -- -- -- Deferred.................................... -- -- -- (97) ------ ------ ------ ------ Total......................................... $ -- $ 20 $ 55 $ (920) ====== ====== ====== ======
For 1994 and 1995, ARC had no income tax expense other than an alternative minimum tax expense of $75,000 in 1995. ARC has net operating loss carryforwards available to offset further taxable income. Such carryforwards represent a deferred tax asset. However, a valuation allowance was applied to produce a net tax asset of zero for 1994 and 1995, since it was not likely the net operating loss carryforwards could be realized. In 1996, ARC has recorded an income tax benefit and a deferred tax asset of $920,000 because of the anticipated utilization of net operating loss carryforwards that will offset taxable gains recognized from a January 1997 sale/leaseback transaction (see note 15). The components of deferred tax assets and liabilities at December 31, 1995 and 1996 are presented below:
1995 1996 ------ ------ (IN THOUSANDS) Deferred tax assets: Federal and state operating loss carryforward............. $1,900 $2,052 Deferred compensation..................................... 28 46 Other..................................................... -- 32 ------ ------ Total gross deferred tax assets........................ 1,928 2,130 Less valuation allowance............................... 1,164 339 ------ ------ 764 1,791 ------ ------ Deferred tax liabilities: Partnership income or loss................................ 740 847 Accumulated depreciation.................................. 24 24 ------ ------ Total gross deferred tax liabilities................... 764 871 ------ ------ Net deferred tax asset................................. $ -- $ 920 ====== ======
F-18 91 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1996, ARC had unused net operating loss carryforwards of approximately $5.4 million for regular tax purposes, and $5.0 million for alternative minimum tax purposes, which expire in varying amounts from 2004 to 2009. Additionally, the Corporation had alternative minimum tax credit carryovers in the amount of approximately $143,000 at December 31, 1996, to be used to offset regular tax in the future in the event the regular tax expense exceeds the alternative minimum tax expense. See note 16 for a discussion of pro forma income taxes. (13) RETIREMENT PLAN The Partnership has established the American Retirement Communities, L.P. 401(k) Plan (the "Plan") for eligible employees who have completed ninety days of service and are at least 21 years old. This Plan is administered by the Partnership with a bank serving as trustee. A Plan participant may elect to contribute up to 20% of his or her annual compensation, subject to certain Internal Revenue Service limitations. The Partnership can elect to make voluntary contributions to the Plan. Such contributions will be allocated to each participant's account. Participants vest in Partnership contributions at 20% per year beginning the first year of employment becoming fully vested after five years of service. The Partnership contributed $54,000 and $277,000 to the Plan during the periods ended December 31, 1995 and 1996, respectively. At retirement, the participant receives the balance in his or her individual account. Upon termination of employment prior to retirement, the participant receives 100% of his or her individual contributions plus related earnings and the vested portion of the Partnership's contributions and related earnings. The nonvested portion of a terminated employee's account is reallocated among the remaining Plan participants. The Partnership has also established a post tax deferral plan (the 162 plan) for highly compensated employees. The Partnership and the individual participant can both make contributions to the 162 plan and the individual has freedom of investment elections. The Partnership contributed $99,000 and $274,000 to the 162 plan during 1995 and 1996, respectively. (14) COMMITMENTS AND CONTINGENCIES The Partnership is subject to claims for medical malpractice liabilities; however, management is unaware of any incidents which would have a material impact on the Partnership's financial position or results of operations. Commercial insurance on a claims-made basis is maintained to cover any such incidents. In the normal course of business, the Partnership is a defendant in certain litigation. However, management is unaware of any action which would have a material adverse impact on the financial position or results of operation of the Partnership. The Partnership is self-insured for workers' compensation claims with excess loss coverage of $250,000 per individual claim and $1.3 million for aggregate claims. The Partnership utilizes a third party administrator to process and pay filed claims. The Partnership has accrued $300,000 to cover open claims not yet settled and incurred but not reported claims as of December 31, 1996. Management is of the opinion that such amounts are adequate to cover any such claims. The Partnership leases its corporate facilities. The current lease expires December 31, 2001 and requires annual rentals of $252,000. The Partnership maintains a $2.5 million line of credit with a bank which is available to provide working capital and to secure various debt instruments. At December 31, 1996, $925,000 of this line of credit had been used to obtain letters of credit. At December 31, 1996, the Partnership has construction in process at the two retirement communities acquired during the year. The costs to complete the construction approximates $600,000. The Partnership has F-19 92 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) an outstanding commitment from a mortgage lender of $1.1 million to complete the construction. In December 1996, The Partnership began an expansion of another retirement community. The total cost of construction is expected to be approximately $11.6 million. The partnership has a construction loan commitment from a bank, as well as a permanent loan commitment from a mortgage lender to cover the construction. (15) SUBSEQUENT EVENTS In January 1997, the Partnership entered into a sale-leaseback transaction with a third party for the property, plant, and equipment of Holley Court Terrace and Trinity Towers retirement communities owned by the Partnership. The net cash proceeds to the Partnership were approximately $27.5 million. The lease is an operating lease with the gain from the transaction of approximately $4.4 million to be recognized over the life of the lease, which is ten years. Lease payments will consist of a base rent which totals approximately $2.5 million per year and additional rent, not to exceed 2.5% over the prior year's rent, based on an increase in revenues at the leased facilities. The agreement contains three separate ten-year renewal options. The proceeds from the sale were used to retire debt of approximately $14.6 million and to fund the redemption of the special redeemable preferred limited partnership interests of $5.2 million. (16) FORMATION OF NEW AMERICAN RETIREMENT CORPORATION AND PRO FORMA ADJUSTMENTS (UNAUDITED) The Partnership intends to proceed with a reorganization and a concurrent initial public offering of the common stock of the reorganized entity. Immediately following the effective date of the registration statement covering the planned public offering of newly issued shares of common stock, the Partnership will be reorganized such that all of its assets and liabilities will be contributed to a newly formed corporation known as American Retirement Corporation (New ARC) in exchange for common stock totaling 7,812,500 shares and a promissory note to the Partnership in the original principal amount approximating $25.0 million. The Partnership will distribute its common stock of New ARC to its partners. New ARC plans to sell up to an additional 3,593,750 shares of its common stock in the initial public offering, including the overallotment option; the proceeds of which will be utilized to, among other things, repay the approximately $25.0 million promissory note to the Partnership. The Partnership will distribute to its limited partners all amounts received upon repayment of the Reorganization Note. New ARC will only commence operations and issue shares of common stock upon completion of the reorganization and initial public offering. New ARC currently has no assets or liabilities. The Partnership's historical carrying value for assets and liabilities will carry over to New ARC upon consummation of the reorganization. (a) Pro Forma Statement of Earnings Information (Unaudited) The income taxes on earnings of the Partnership, other than for ARC, are the responsibility of the partners. The pro forma adjustments reflected on the statement of earnings provide for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, assuming the Partnership was subject to income taxes. Pro forma income tax expense has been calculated using statutory U.S. federal and state tax rates and gives effect to the recognition in 1996 of the $920,000 deferred tax asset as described in Note 12. (b) Pro Forma Net Earnings Per Share (unaudited) Pro forma net earnings per share are based on the number of shares which would have been outstanding assuming the partners had been shareholders and is based on the 7,812,500 the partners will receive when the reorganization is effective plus 1,562,500 shares for the $25.0 million promissory note assuming an offering price of $16.00 per share. F-20 93 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (c) Tax Expense Charge to Income At the time of the reorganization and as a result of the conversion from a limited partnership to a corporation, New ARC will record, as a one-time charge to income, a deferred income tax liability of approximately $13.5 million resulting from the difference between the accounting and tax bases of New ARC's assets and liabilities. F-21 94 INDEPENDENT AUDITORS' REPORT The Partners American Retirement Communities, L.P.: We have audited the accompanying combined statements of operations, partners' equity and cash flows of the Carriage Club of Charlotte Limited Partnership and Carriage Club of Jacksonville Limited Partnership for the four months ended April 30, 1996. These combined financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the operations and cash flows of Carriage Club of Charlotte Limited Partnership and Carriage Club of Jacksonville Limited Partnership for the four month period ending April 30, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Nashville, Tennessee January 22, 1997 F-22 95 CARRIAGE CLUB OF CHARLOTTE LIMITED PARTNERSHIP AND CARRIAGE CLUB OF JACKSONVILLE LIMITED PARTNERSHIP COMBINED STATEMENT OF OPERATIONS FOUR MONTHS ENDED APRIL 30, 1996 (IN THOUSANDS) Resident and health care revenue............................ $4,086 Expenses: Community operating expenses.............................. 2,498 Depreciation and amortization............................. 464 ------ Total operating expenses............................... 2,962 ------ Income from operations................................. 1,124 ------ Other income (expense): Interest expense.......................................... (833) Interest income........................................... 21 ------ Other income (expense), net............................ (812) ------ Net income........................................ $ 312 ====== Pro forma earnings data (unaudited) (note 6): Income as reported........................................ $ 312 Pro forma income taxes.................................... 119 ------ Pro forma net income...................................... $ 193 ======
COMBINED STATEMENT OF PARTNERS' EQUITY FOUR MONTHS ENDED APRIL 30, 1996 (IN THOUSANDS)
PARTNERS' EQUITY --------- Combined balance, December 31, 1995......................... $1,090 Combined net income for the four months ended April 30, 1996................................................... 312 Contributions from partners............................... 646 ------ Combined balance, April 30, 1996............................ $2,048 ======
See accompanying notes to combined financial statements. F-23 96 CARRIAGE CLUB OF CHARLOTTE LIMITED PARTNERSHIP AND CARRIAGE CLUB OF JACKSONVILLE LIMITED PARTNERSHIP COMBINED STATEMENT OF CASH FLOWS FOUR MONTHS ENDED APRIL 30, 1996 (IN THOUSANDS) Cash flows from operating activities: Net income................................................ $ 312 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 464 Increase (decrease) in cash, due to changes in: Resident, patient, and personal care receivables..... 4 Inventory............................................ 2 Prepaid expenses..................................... 8 Other assets......................................... (4) Accounts payable..................................... (65) Property taxes payable............................... (42) Accrued expenses and other current liabilities....... 24 Tenant deposits...................................... (34) ------- Net cash provided by operating activities......... 669 ------- Cash flows used by investing activities: Expenditures for purchases of furniture, fixtures and equipment............................................. (2,664) Purchases of assets limited as to use.................. (81) ------- Net cash used by investing activities............. (2,745) ------- Cash flows from financing activities: Contributions from partners............................ 646 Proceeds from the issuance of long-term debt........... 727 Expenditures for financing costs....................... (27) ------- Net cash provided by financing activities................... 1,346 ------- Net decrease in cash and cash equivalents................... (730) Cash and cash equivalents at beginning of period............ 1,963 ------- Cash and cash equivalents at end of period.................. $ 1,233 ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest.................... $ 833 =======
See accompanying notes to combined financial statements F-24 97 CARRIAGE CLUB OF CHARLOTTE LIMITED PARTNERSHIP AND CARRIAGE CLUB OF JACKSONVILLE LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS APRIL 30, 1996 (1) BASIS OF PRESENTATION The accompanying financial statements include the combined financial statements of Carriage Club of Charlotte Limited Partnership and Carriage Club of Jacksonville Limited Partnership (the Partnerships) for the four months ended April 30, 1996. Carriage Club of Charlotte is a retirement living community located in Charlotte, North Carolina with 306 units. Carriage Club of Jacksonville is a retirement community located in Jacksonville, Florida with 260 units. The limited partners in the Partnerships are shareholders of the corporate general partners. Allocations of profits, losses and cash distributions of the Partnership are made pursuant to the terms of the partnership agreement. Generally, such allocations and cash distributions are made to the partners in proportion to their respective ownership interests. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) 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. (b) Cash Equivalents For the purposes of the statement of cash flows, the Partnerships consider highly liquid debt investments with a maturity of three months or less when purchased to be cash equivalents. (c) Income Taxes The entities included in these financial statements are partnerships, and the income and losses of the partnerships and distributions are allocated to the partners in accordance with the various partnership agreements. Accordingly, no provision has been made in the accompanying financial statements for federal and state income taxes related to the partnerships since such taxes are the liabilities of the partners. (d) Recognition of Revenue Resident and health care revenues are reported at the estimated net realizable amounts from residents, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. (e) Depreciation Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed on the straight-line basis. F-25 98 CARRIAGE CLUB OF CHARLOTTE LIMITED PARTNERSHIP AND CARRIAGE CLUB OF JACKSONVILLE LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (3) RENTS The partnerships lease the majority of their units to their tenants under leases that have lease terms of one year with rents due monthly. The leases are noncancelable except for instances of tenant death or tenant health reasons. (4) MANAGEMENT AGREEMENT Carriage Club of Charlotte and Carriage Club of Jacksonville each have a management agreement with a wholly-owned subsidiary of American Retirement Corporation II (ARC) which provides for management of daily operations of the retirement communities. Each entity pays ARC $20,000 per month for these services. (5) SUBSEQUENT EVENTS Effective May 1, 1996, American Retirement Communities, L.P. acquired all assets and all contractual liabilities of Carriage Club of Charlotte Limited Partnership and Carriage Club of Jacksonville Limited Partnership. (6) PRO FORMA INCOME TAXES The income taxes of the Partnerships are the responsibility of the partners. The pro forma adjustment reflected in the statement of operations provides for income taxes as if the Partnership were subject to the taxes. F-26 99 ====================================================== NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES, OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 8 The Company........................... 15 Use of Proceeds....................... 16 Dividend Policy and Prior Distributions....................... 17 Capitalization........................ 18 Dilution.............................. 19 Unaudited Pro Forma Condensed Combined Financial Information............... 20 Selected Combined and Consolidated Financial Data...................... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 25 Business.............................. 36 Management............................ 52 Principal Shareholders................ 60 Certain Transactions.................. 61 Description of Capital Stock.......... 64 Shares Eligible for Future Sale....... 68 Underwriting.......................... 69 Legal Matters......................... 71 Experts............................... 71 Additional Information................ 71 Index to Consolidated Financial Statements.......................... F-1
------------------ UNTIL , 1997 (FOR 25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ====================================================== ====================================================== 3,125,000 SHARES AMERICAN RETIREMENT CORPORATION (LOGO) COMMON STOCK ---------------------------- PROSPECTUS ---------------------------- NATWEST SECURITIES LIMITED EQUITABLE SECURITIES CORPORATION MCDONALD & COMPANY SECURITIES, INC. , 1997 ====================================================== 100 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the estimated costs and expenses of the Registrant in connection with the Offering described in the Registration Statement. SEC registration fee........................................ $ 18,514 NASD fee.................................................... 6,610 New York Stock Exchange listing fee......................... 112,600 Accounting fees and expenses................................ 150,000* Legal fees and expenses..................................... 375,000* Printing and engraving expenses............................. 150,000* Blue sky fees and expenses.................................. 2,500* Transfer agent and registrar fees........................... 10,000* Miscellaneous fees and expenses............................. 74,776* -------- Total............................................. $900,000 ========
- --------------- * Estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Tennessee Business Corporation Act ("TBCA") provides that a corporation may indemnify any director or officer against liability incurred in connection with a proceeding if (i) the director or officer acted in good faith, (ii) the director or officer reasonably believed, in the case of conduct in his or her official capacity with the corporation, that such conduct was in the corporation's best interest, or, in all other cases, that his or her conduct was not opposed to the best interests of the corporation, and (iii) in connection with any criminal proceeding, the director or officer had no reasonable cause to believe that his or her conduct was unlawful. In actions brought by or in the right of the corporation, however, the TBCA provides that no indemnification may be made if the director or officer is adjudged to be liable to the corporation. Similarly, the TBCA prohibits indemnification in connection with any proceeding charging improper personal benefit to a director or officer, if such director or officer is adjudged liable on the basis that a personal benefit was improperly received. In cases where the director or officer is wholly successful, on the merits or otherwise, in the defense of any proceeding instigated because of his or her status as a director or officer of a corporation, the TBCA mandates that the corporation indemnify the director or officer against reasonable expenses incurred in the proceeding. Notwithstanding the foregoing, the TBCA provides that a court of competent jurisdiction, upon application, may order that a director or officer be indemnified for reasonable expense if, in consideration of all relevant circumstances, the court determines that such individual is fairly and reasonably entitled to indemnification, whether or not the standard of conduct set forth above was met. The Charter and Bylaws of the Company provide that the Company will indemnify from liability, and advance expenses to, any present or former director or officer of the Company to the fullest extent allowed by the TBCA, as amended from time to time, or any subsequent law, rule, or regulation adopted in lieu thereof. Additionally, the Charter provides that no director of the Company will be personally liable to the Company or any of its shareholders for monetary damages for breach of any fiduciary duty except for liability arising from (i) any breach of a director's duty of loyalty to the Company or its shareholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) any unlawful distributions, or (iv) receiving any improper personal benefit. The Company has purchased a directors and officers insurance policy providing for $10.0 million in coverage for certain liabilities of the Company's directors and officers. The policy expires in May 2000. II-1 101 The proposed form of the Underwriting Agreement to be filed as Exhibit 1 to this Registration Statement contains certain provisions relating to the indemnification of the Company and its controlling persons by the Underwriters and relating to the indemnification of the Underwriters by the Company and its controlling persons. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. All of the shares of Common Stock outstanding on the date hereof will be distributed to the Registrant's shareholders immediately prior to the effectiveness of the Offering in connection with the transfer of assets to the Registrant by an affiliated limited partnership and the simultaneous liquidation of the affiliated limited partnership. Prior to such distribution, the Registrant's shareholders have been partners of the affiliated limited partnership. In accordance with the provisions of the limited partnership's Partnership Agreement, the partners voted prior to the filing of this Registration Statement to organize the Registrant and liquidate the limited partnership, subject only to the effectiveness of the Offering. The Registrant believes that the distribution of shares of Common Stock by the affiliated limited partnership will be an exempt transaction in accordance with Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following exhibits are filed as part of the Registration Statement:
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1 -- Form of Underwriting Agreement 2.1 -- Limited Partnership Agreement of American Retirement Communities, L.P., dated February 7, 1995, as amended April 1, 1995** 2.2 -- Articles of Share Exchange between American Retirement Communities, L.P., and American Retirement Corporation, dated March 31, 1995 (including attached Plan and Agreement of Share Exchange)** 2.3 -- Reorganization Agreement, dated February 28, 1997* 3.1 -- Charter of the Registrant** 3.2 -- Bylaws of the Registrant** 4.1 -- Specimen Common Stock certificate* 4.2 -- Article 8 of the Registrant's Charter (included in Exhibit 3.1) 5 -- Opinion of Bass, Berry & Sims PLC* 10.1 -- American Retirement Corporation 1997 Stock Incentive Plan** 10.2 -- American Retirement Corporation Employee Stock Purchase Plan** 10.3 -- American Retirement Corporation 401(k) Retirement Plan** 10.4 -- Officers' Incentive Compensation Plan** 10.5 -- Registration Rights Policy** 10.6 -- Lease and Security Agreement, dated January 2, 1997, by and between Nationwide Health Properties, Inc. and American Retirement Communities, L.P.** 10.7 -- Lease and Security Agreement, dated January 2, 1997, by and between N.H. Texas Properties Limited Partnership and Trinity Towers Limited Partnership** 10.8 -- Amended and Restated Loan Agreement, dated December 21, 1994, between Carriage Club of Denver, L.P. and General Electric Capital Corporation** 10.9 -- Amended and Restated Promissory Note, dated December 21, 1994 between Carriage Club of Denver, L.P. and General Electric Capital Corporation** 10.10 -- Assumption, Consent and Loan Modification Agreement, dated February 8, 1995, by and among Carriage Club of Denver, L.P., American Retirement Communities, and General Electric Capital Corporation** 10.11 -- Loan Agreement, dated October 31, 1995, by and between American Retirement Communities, L.P. and First Union National Bank of Tennessee, as amended** 10.12 -- Amended and Restated Promissory Note, dated October 31, 1995, by American Retirement Communities, L.P. to First Union National Bank of Tennessee, as amended** 10.13 -- Revolving Credit Promissory Note, dated October 31, 1995, by American Retirement Communities, L.P. to First Union National Bank of Tennessee, as amended**
II-2 102 10.14 -- Standby Note, dated October 31, 1995, by American Retirement Communities, L.P. to First Union National Bank of North Carolina** 10.15 -- Reimbursement Agreement, dated October 31, 1995, between American Retirement Communities, L.P. and First Union National Bank of North Carolina, as amended** 10.16 -- Loan Agreement, dated January 4, 1996, between General Electric Capital Corporation and Fort Austin Limited Partnership** 10.17 -- Promissory Note, dated January 4, 1996, by Fort Austin Limited Partnership to General Electric Capital Corporation** 10.18 -- Promissory Note, dated April 1, 1992, by Fort Austin Limited Partnership to General Electric Capital Corporation, as amended** 10.19 -- Loan Agreement, dated May 7, 1996, between ARCLP-Charlotte, LLC, American Retirement Communities, L.P. and General Electric Capital Corporation** 10.20 -- Junior Promissory Note, dated May 7, 1996, by ARCLP-Charlotte, LLC and American Retirement Communities, L.P. to General Electric Capital Corporation** 10.21 -- Senior Promissory Note, dated May 7, 1996, by ARCLP-Charlotte, LLC and American Retirement Communities, L.P. to General Electric Capital Corporation** 10.22 -- Construction Loan Agreement, dated March 14, 1997, between Fort Austin Limited Partnership and First Union National Bank of Tennessee 10.23 -- Construction Loan Addendum, dated March 28, 1997, between First Union National Bank of Tennessee and Fort Austin Limited Partnership 10.24 -- Promissory Note, dated March 28, 1997, by Fort Austin Limited Partnership to First Union National Bank of Tennessee 10.25 -- Letter of Intent, dated April 3, 1997, by National Health Investors, Inc. to American Retirement Corporation 10.26 -- Master Loan Agreement, dated December 23, 1996, between First American National Bank and American Retirement Communities, L.P. 10.27 -- Letter of Intent, dated February 24, 1997, by Nationwide Health Properties, Inc. to American Retirement Corporation 11 -- Statement re Computation of Per Share Earnings** 21 -- Subsidiaries of the Registrant** 23.1 -- Consent of KPMG Peat Marwick LLP 23.2 -- Consent of Bass, Berry & Sims PLC (to be included in Exhibit 5) 24 -- Power of Attorney** 27 -- Financial Data Schedule (for SEC use only)**
- --------------- * To be filed by amendment ** Previously filed (b) Financial Statement Schedules Schedule II -- Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters, at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the provisions described under Item 14 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person II-3 103 in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 104 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Nashville, Tennessee on May 12, 1997. AMERICAN RETIREMENT CORPORATION By: /s/ W.E. SHERIFF ------------------------------------ W.E. Sheriff Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ W.E. SHERIFF Chairman and Chief Executive May 12, 1997 - ----------------------------------------------------- Officer (Principal Executive W.E. Sheriff Officer) /s/ GEORGE T. HICKS Executive Vice May 12, 1997 - ----------------------------------------------------- President -- Finance, Chief George T. Hicks Financial Officer (Principal Financial and Accounting Officer) * Director May 12, 1997 - ----------------------------------------------------- H. Lee Barfield II * Director May 12, 1997 - ----------------------------------------------------- Jack O. Bovender, Jr. * Director May 12, 1997 - ----------------------------------------------------- Frank M. Bumstead * Director May 12, 1997 - ----------------------------------------------------- Robin G. Costa * Director May 12, 1997 - ----------------------------------------------------- Clarence Edmonds * Director May 12, 1997 - ----------------------------------------------------- John A. Morris, Jr., M.D. * Director May 12, 1997 - ----------------------------------------------------- Daniel K. O'Connell * Director May 12, 1997 - ----------------------------------------------------- Nadine C. Smith * Director May 12, 1997 - ----------------------------------------------------- Lawrence J. Stuesser * /s/ W. E. SHERIFF - ----------------------------------------------------- W.E. Sheriff, Attorney-in-fact
II-5 105 AMERICAN RETIREMENT COMMUNITIES, L.P. SCHEDULE II -- ALLOWANCE FOR DOUBTFUL ACCOUNTS YEAR ENDED DECEMBER 31, 1994, THREE MONTHS ENDED MARCH 31, 1995, NINE MONTHS ENDED DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS) Balance January 1, 1994..................................... $ 19 1994 charge to expense.................................... 5 Write-offs against allowance.............................. (5) ---- Balance December 31, 1994................................... 19 Charge to expense for three months ended March 31, 1995... -- Write-offs against allowance for three months ended March 31, 1995............................................... -- ---- Balance March 31, 1995...................................... 19 Charge to expense for nine months ended December 31, 1995................................................... 122 Write-offs against allowance for nine months ended December 31, 1995...................................... (63) ---- Balance December 31, 1995................................... 78 1996 charge to expense.................................... 123 Write-offs against allowance.............................. (93) ---- Balance December 31, 1996................................... $108 ====
S-1 106 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1 -- Form of Underwriting Agreement 2.1 -- Limited Partnership Agreement of American Retirement Communities, L.P., dated February 7, 1995, as amended April 1, 1995** 2.2 -- Articles of Share Exchange between American Retirement Communities, L.P., and American Retirement Corporation, dated March 31, 1995 (including attached Plan and Agreement of Share Exchange)** 2.3 -- Reorganization Agreement, dated February 28, 1997* 3.1 -- Charter of the Registrant** 3.2 -- Bylaws of the Registrant** 4.1 -- Specimen Common Stock certificate* 4.2 -- Article 8 of the Registrant's Charter (included in Exhibit 3.1) 5 -- Opinion of Bass, Berry & Sims PLC* 10.1 -- American Retirement Corporation 1997 Stock Incentive Plan** 10.2 -- American Retirement Corporation Employee Stock Purchase Plan** 10.3 -- American Retirement Corporation 401(k) Retirement Plan** 10.4 -- Officers' Incentive Compensation Plan** 10.5 -- Registration Rights Policy** 10.6 -- Lease and Security Agreement, dated January 2, 1997, by and between Nationwide Health Properties, Inc. and American Retirement Communities, L.P.** 10.7 -- Lease and Security Agreement, dated January 2, 1997, by and between N.H. Texas Properties Limited Partnership and Trinity Towers Limited Partnership** 10.8 -- Amended and Restated Loan Agreement, dated December 21, 1994, between Carriage Club of Denver, L.P. and General Electric Capital Corporation** 10.9 -- Amended and Restated Promissory Note, dated December 21, 1994 between Carriage Club of Denver, L.P. and General Electric Capital Corporation** 10.10 -- Assumption, Consent and Loan Modification Agreement, dated February 8, 1995, by and among Carriage Club of Denver, L.P., American Retirement Communities, and General Electric Capital Corporation** 10.11 -- Loan Agreement, dated October 31, 1995, by and between American Retirement Communities, L.P. and First Union National Bank of Tennessee, as amended** 10.12 -- Amended and Restated Promissory Note, dated October 31, 1995, by American Retirement Communities, L.P. to First Union National Bank of Tennessee, as amended** 10.13 -- Revolving Credit Promissory Note, dated October 31, 1995, by American Retirement Communities, L.P. to First Union National Bank of Tennessee, as amended** 10.14 -- Standby Note, dated October 31, 1995, by American Retirement Communities, L.P. to First Union National Bank of North Carolina** 10.15 -- Reimbursement Agreement, dated October 31, 1995, between American Retirement Communities, L.P. and First Union National Bank of North Carolina, as amended** 10.16 -- Loan Agreement, dated January 4, 1996, between General Electric Capital Corporation and Fort Austin Limited Partnership** 10.17 -- Promissory Note, dated January 4, 1996, by Fort Austin Limited Partnership to General Electric Capital Corporation** 10.18 -- Promissory Note, dated April 1, 1992, by Fort Austin Limited Partnership to General Electric Capital Corporation, as amended** 10.19 -- Loan Agreement, dated May 7, 1996, between ARCLP-Charlotte, LLC, American Retirement Communities, L.P. and General Electric Capital Corporation** 10.20 -- Junior Promissory Note, dated May 7, 1996, by ARCLP-Charlotte, LLC and American Retirement Communities, L.P. to General Electric Capital Corporation** 10.21 -- Senior Promissory Note, dated May 7, 1996, by ARCLP-Charlotte, LLC and American Retirement Communities, L.P. to General Electric Capital Corporation** 10.22 -- Construction Loan Agreement, dated March 14, 1997, between Fort Austin Limited Partnership and First Union National Bank of Tennessee 10.23 -- Construction Loan Addendum, dated March 28, 1997, between First Union National Bank of Tennessee and Fort Austin Limited Partnership 10.24 -- Promissory Note, dated March 28, 1997, by Fort Austin Limited Partnership to First Union National Bank of Tennessee 10.25 -- Letter of Intent, dated April 3, 1997, by National Health Investors, Inc. to American Retirement Corporation 10.26 -- Master Loan Agreement, dated December 23, 1996, between First American National Bank and American Retirement Communities, L.P.
107 10.27 -- Letter of Intent, dated February 24, 1997, by Nationwide Health Properties, Inc. to American Retirement Corporation 11 -- Statement re Computation of Per Share Earnings** 21 -- Subsidiaries of the Registrant** 23.1 -- Consent of KPMG Peat Marwick LLP 23.2 -- Consent of Bass, Berry & Sims PLC (to be included in Exhibit 5) 24 -- Power of Attorney** 27 -- Financial Data Schedule (for SEC use only)**
- --------------- * To be filed by amendment ** Previously filed EX-1 2 UNDERWRITING AGREEMENT 1 Page 1 EXHIBIT 1 3,125,000 Shares AMERICAN RETIREMENT CORPORATION Common Stock UNDERWRITING AGREEMENT May __, 1997 NATWEST SECURITIES LIMITED EQUITABLE SECURITIES CORPORATION McDONALD & COMPANY SECURITIES, INC. As Representatives of the several Underwriters c/o NatWest Securities Limited 135 Bishopsgate London EC2M 3XT England Ladies and Gentlemen: AMERICAN RETIREMENT CORPORATION, a Tennessee corporation (the "Company"), proposes to issue and sell an aggregate of 3,125,000 shares (the "Firm Shares") of the Company's common stock, par value $.01 per share (the "Common Stock"), to you and the other underwriters named in Schedule I hereto (collectively, the "Underwriters"), for whom you are acting as representatives (the "Representatives"). The Company has also agreed to grant to you and the other Underwriters an option (the "Option") to purchase up to an additional 468,750 shares of Common Stock (the "Option Shares") on the terms and for the purposes set forth in Section 1(b) hereto. The Firm Shares and the Option Shares are hereinafter collectively referred to as the "Shares." The Company hereby confirms as follows its agreements with the Representatives and the several other Underwriters. Agreement to Sell and Purchase On the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions of this Agreement, (i) the Company agrees to sell to the several Underwriters and (ii) each of the Underwriters, severally and nost jointly, agrees to purchase from the Company, at a purchase price of 2 Page 2 $_____ per share, the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto, plus such additional number of Firm Shares which such Underwriter may become obligated to purchase pursuant to Section 10 hereof. Subject to all the terms and conditions of this Agreement, the Company grants the Option to the several Underwriters to purchase, severally and not jointly, the Option Shares at the same price per share as the Underwriters shall pay for the Firm Shares. The Option may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time and from time to time on or before the 30th day after the date of this Agreement (or on the next business day if the 30th day is not a business day), upon notice (the "Option Shares Notice") in writing or by telephone (confirmed in writing) by the Representatives to the Company not later than 5:00 p.m., New York City time, at least two and not more than five business days before the date specified for closing in the Option Shares Notice (the "Option Closing Date") setting forth the aggregate number of Option Shares to be purchased and the time and date for such purchase. On the Option Closing Date, the Company will issue and sell to the Underwriters the number of Option Shares set forth in the Option Shares Notice and each Underwriter will purchase such percentage of the Option Shares as is equal to the percentage of Firm Shares that such Underwriter is purchasing, as adjusted by the Representatives in such manner as they deem advisable to avoid fractional shares. Delivery and Payment. Delivery of the Firm Shares shall be made to the Representatives for the accounts of the Underwriters against payment of the purchase price by certified or official bank checks payable in New York Clearing House (next-day) funds to the order of the Company (the "Closing") at the office of Stroock & Stroock & Lavan LLP, counsel to the Underwriters, 180 Maiden Lane, New York, New York 10038. Such payment shall be made at 10:00 a.m., New York City time, on the third full business day following the date of this Agreement, or at such other time on such other date, not later than seven business days after the date of this Agreement, as may be agreed upon by the Company and the Representatives (such date is hereinafter referred to as the "Closing Date"). To the extent the Option is exercised, delivery of the Option Shares against payment by the Underwriters (in the manner specified above) will take place at the offices specified above for the Closing Date at the time and date (which may be the Closing Date) specified in the Option Shares Notice. Certificates evidencing the Shares shall be in definitive form and shall be registered in such names and in such denominations as the Representatives shall request at least two business days prior to the Closing Date or the Option Closing Date, as the case may be, by written notice to the Company. For the purpose of expediting the checking and packaging of certificates for the Shares, the Company agrees to make such certificates available for inspection at least 24 hours prior to the Closing Date or the Option Closing Date, as the case may be. The cost of original issue tax stamps, if any, in connection with the issuance, 3 Page 3 sale and delivery of the Firm Shares and Option Shares by the Company to the respective Underwriters shall be borne by the Company. The Company will pay and save each Underwriter and any subsequent holder of the Shares harmless from any and all liabilities, interest and penalties with respect to or resulting from any failure or delay in paying Federal or state stamp and other transfer taxes, if any, which may be payable or determined to be payable in connection with the original issuance, sale or delivery to such Underwriter of the Firm Shares and Option Shares. Representations and Warranties of the Company. The Company represents, warrants and covenants to each Underwriter that: A registration statement on Form S-1 (Registration No. 333-23197) relating to the Shares, including a preliminary prospectus relating to the Shares and such amendments to such registration statement as may have been required to the date of this Agreement, has been prepared by the Company under the provisions of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (collectively referred to as the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, and has been filed with the Commission. The Commission has not issued any order preventing or suspending the use of the Prospectus (as defined below) or any Preliminary Prospectus (as defined below). The term "Preliminary Prospectus" as used herein means a preliminary prospectus relating to the Shares, as contemplated by Rule 430 or Rule 430A ("Rule 430A") of the Rules and Regulations, included at any time as part of the foregoing registration statement or any amendment thereto before it became effective under the Act and any prospectus filed with the Commission by the Company pursuant to Rule 424(a) of the Rules and Regulations. Copies of such registration statement and amendments and of each related Preliminary Prospectus have been delivered to the Representatives. If such registration statement has not become effective, a further amendment to such registration statement, including a form of final prospectus, necessary to permit such registration statement to become effective will be filed promptly by the Company with the Commission. If such registration statement has become effective, a final prospectus relating to the Shares containing information permitted to be omitted at the time of effectiveness by Rule 430A will be filed by the Company with the Commission in accordance with Rule 424(b) of the Rules and Regulations promptly after execution and delivery of this Agreement. The term "Registration Statement" means the registration statement as amended at the time it becomes or became effective (the "Effective Date"), including all financial statements and schedules and all exhibits, and all information contained in any final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or in a term sheet described in Rule 434 of the Rules and Regulations in accordance with Section 5 hereof and deemed to be included therein as of the Effective Date by Rule 430A of the Rules and Regulations. The term "Prospectus" means the prospectus relating to the Shares as first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is required, the form of final prospectus relating to the Shares included in the Registration Statement at the Effective Date. On the date that any Preliminary Prospectus was filed with the Commission, the 4 Page 4 date the Prospectus is first filed with the Commission pursuant to Rule 424(b) (if required), at all times subsequent to and including the Closing Date and, if later, the Option Closing Date and when any post-effective amendment to the Registration Statement becomes effective or any amendment or supplement to the Prospectus is filed with the Commission, the Registration Statement, each Preliminary Prospectus and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement thereto), including the financial statements included in the Prospectus, did or will comply with all applicable provisions of the Act and the Rules and Regulations and did or will contain all statements required to be stated therein in accordance with the Act and the Rules and Regulations. On the Effective Date and when any post-effective amendment to the Registration Statement becomes effective, no part of the Registration Statement or any such amendment did or will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. At the Effective Date, the date the Prospectus or any amendment or supplement to the Prospectus is filed with the Commission and at the Closing Date and, if later, the Option Closing Date, the Prospectus did not or will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing representations and warranties in this Section 3(b) do not apply to any statements or omissions made in reliance on and in conformity with information relating to any Underwriter furnished in writing to the Company by the Representatives specifically for inclusion in the Registration Statement or Prospectus or any amendment or supplement thereto. The Company has not distributed, and, prior to the later to occur of (i) the Closing Date or, if later, the Option Closing Date and (ii) completion of the distribution of the Shares, will not distribute, any offering material in connection with the offering or sale of the Shares other than the Registration Statement, the Preliminary Prospectus, the Prospectus or any other materials, if any, permitted by the Act. The Company currently is a wholly-owned subsidiary of American Retirement Communities, L.P. ("ARCLP"). Prior to the consummation of the offering of the shares of Common Stock (the "Offering"), ARCLP will be reorganized (the "Reorganization") as contemplated by that certain Reorganization Agreement dated as of [February 28, 1997] (the "Reorganization Agreement"), a copy of which has been filed as Exhibit 2.3 to the Registration Statement, pursuant to which ARCLP will contribute its assets, subject to all of its liabilities, to the Company in exchange for a total of 7,812,500 shares of Common Stock and a promissory note in the principal amount of $25.0 million (the "Reorganization Note"). Immediately after consummation of the Reorganization, ARCLP will distribute all such 7,812,500 shares of Common Stock to its limited partners and to its general partner, American Retirement Communities, LLC (the "LLC"). Concurrently with the consummation of the Offering, the Reorganization Note will be repaid by the Company out of the net proceeds from the Offering and such amounts received by ARCLP will be distributed to the limited partners of ARCLP in liquidation. The Reorganization will be consummated prior to the Closing and in accordance with the Reorganization Agreement. 5 Page 5 Set forth on Exhibit A attached hereto is a list of (A) each corporation that is wholly owned by ARCLP and (B) each limited partnership in which ARCLP has a general or limited partnership interest (collectively, the "Subsidiaries"). Upon completion of the Reorganization on the Closing Date, each of the Subsidiaries will become a [direct] wholly-owned subsidiary of the Company. Each Subsidiary is listed in Exhibit 21 to the Registration Statement. Each of the Company, ARCLP and the Subsidiaries is, and at the Closing Date and any Option Closing Date will be, duly organized, validly existing and in good standing under the laws of the Tennessee. Each of the Company, ARCLP and the Subsidiaries has, and at the Closing Date and the Option Closing Date will have, full corporate, partnership or other power and authority to conduct all the activities conducted by it, to own or lease all the assets owned or leased by it and to conduct its business as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus), assuming and giving effect to, in each case, the consummation of the Reorganization. Each of the Company, ARCLP and the Subsidiaries is, and at the Closing Date and the Option Closing Date will be, duly licensed or qualified to do business and in good standing as a foreign organization in all jurisdictions in which the nature of the activities conducted by it or the character of the assets owned or leased by it makes such licensing or qualification necessary (assuming, in each case, the consummation of the Reorganization). Upon completion of the Reorganization and prior to the Closing Date, the Company will beneficially own all of the outstanding equity interests in each of the Subsidiaries, free and clear of all liens, security interests, restriction, pledgees, encumbrances, charges, equities, claims, easements, assessments and tenancies (collectively, "Encumbrances")[, except for _____________]. Except with respect to the Subsidiaries upon completion of the Reorganization on the Closing Date and except as described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus), the Company does not own, and at the Closing Date and any Option Closing Date will not own, directly or indirectly, any shares of stock or any other equity or long-term debt securities of any corporation or have any equity interest in any firm, partnership, limited liability company, joint venture, association or other entity. Complete and correct copies of the articles of incorporation and the bylaws or partnership agreements or other governing documents of the Company, ARCLP, each Subsidiary and the LLC and all amendments thereto have been delivered to the Representatives, and no changes therein will be made subsequent to the date hereof and prior to the Closing Date or, if later, the Option Closing Date, except as contemplated by the Reorganization Agreement.] The outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable and are not subject to any preemptive or similar rights. The Shares to be issued and sold by the Company will be, upon such issuance and payment therefor, duly authorized, validly issued, fully paid and nonassessable and will not be subject to any preemptive or similar rights. The Company has, and, upon completion of the sale of the Shares and the Reorganization, will have, an authorized, issued and outstanding capitalization as set forth in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus). The description of the securities of the 6 Page 6 Company in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus) is, and at the Closing Date and, if later, the Option Closing Date will be, complete and accurate in all respects. Except as set forth in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus), the Company does not have outstanding, and at the Closing Date and, if later, the Option Closing Date will not have outstanding, any options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell, any shares of its capital stock or any such warrants, convertible securities or obligations. The combined and consolidated financial statements and the related notes and schedules of ARCLP set forth in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus) present fairly the financial condition of ARCLP as of the dates indicated and the combined and consolidated results of operations, changes in partners' and shareholders' equity and cash flows of ARCLP for the periods covered thereby, all in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the entire period involved, except as otherwise disclosed therein. The combined financial statements and the related notes and schedules of Carriage Club of Charlottesville Limited Partnership and Carriage Club of Jacksonville Limited Partnership (the "Carriage Clubs") set forth in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) present fairly the financial condition of the Carriage Clubs as of the dates indicated and the combined results of operations, partners' equity and cash flows of the Carriage Clubs for the periods covered thereby, all in conformity with GAAP applied on a consistent basis throughout the entire period involved. The selected financial data for the Company, ARCLP and certain affiliated partnerships and corporations (collectively, the "Predecessor Entities") set forth under the captions "Prospectus Summary--Summary Combined and Consolidated Financial and Other Data" and "Selected Financial Data" in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus) have been prepared on a basis consistent with the financial statements of ARCLP and the Predecessor Entities. The pro forma financial statements included in the Registration Statement and the Prospectus comply in all material respects with the applicable requirements of Rule 11-02 of Regulation S-X of the Commission and the pro forma adjustments have been properly applied to the historical amounts in the compilation of such statements. No other financial statements or schedules of the Company, ARCLP, any Subsidiary, the Carriage Clubs or any other entity are required by the Act or the Rules and Regulations to be included in the Registration Statement or the Prospectus. KMPG Peat Marwick, LLP (the "Accountants"), who have reported on those of such financial statements and schedules which are audited, are independent accountants with respect to the Company, ARCLP, the Subsidiaries and the Carriage Clubs as required by the Act and the Rules and Regulations. Each of the Company, ARCLP and the Subsidiaries maintains a system of internal accounting control sufficient to provide reasonable assurance that (i) 7 Page 7 transactions are executed in accordance with management's general or specific authorization, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as set forth in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and prior to the Closing Date and, if later, the Option Closing Date, (i) there has not been, and will not have been (after giving effect to the consummation of the Reorganization), any change in the capitalization of the Company or any material adverse change in the business, properties, prospects, condition (financial or otherwise), net worth or results of operations of the Company, ARCLP or any Subsidiary arising for any reason whatsoever, (ii) none the Company, ARCLP or any Subsidiary has incurred, nor will any of them have incurred (after giving effect to the consummation of the Reorganization), any material liabilities or obligations, direct or contingent, (iii) none of the Company, ARCLP or any Subsidiary has entered into, nor will any of them have entered into (after giving effect to the consummation of the Reorganization), any material transactions, other than pursuant to this Agreement or the Reorganization Agreement, and (iv) none of the Company, ARCLP or any of the Subsidiaries has, nor will any of them have (after giving effect to the consummation of the Reorganization), paid or declared any dividends or other distributions of any kind on any class of its capital stock, partnership interests or other equity securities. Each of ARCLP or the Subsidiaries has good and indefeasible title to the respective properties described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) as owned by them or by the Company (collectively, the "Owned Properties"), in each case free and clear of all Encumbrances or leases and without title company exceptions, disclaimers of liability or objections, except as set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). Each of ARCLP or the Subsidiaries has valid, subsisting and enforceable leases for the respective properties described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) as leased by them or by the Company (collectively, the "Leased Properties"), in each case free and clear of all Encumbrances, except as set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). The mortgages and deeds of trust encumbering the Owned Properties are not convertible into equity interests in the Owned Properties. Such mortgages and deeds of trust are not cross-defaulted or cross-collateralized to any property not to be owned directly or indirectly by the Company or a Subsidiary. Upon consummation of the Reorganization, either the Company or a Subsidiary 8 Page 8 will have good and marketable title to all properties and assets described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) as to be owned by it, including, but not limited to each Initial Property, free and clear of all Encumbrances, except such as are described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). The Company, ARCLP or the Subsidiaries each has valid, subsisting and enforceable leases for the properties described in the Prospectus as to be leased by it, free and clear of all Encumbrances, except such as are described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). Upon consummation of the Reorganization, title insurance in favor of the Company will be in full force and effect with respect to each Initial Property in amounts prudent and customary in the business in which the Company and the Subsidiaries are engaged. The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"). Except as set forth in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus), there are no actions, suits or proceedings pending or threatened against or affecting the Company, ARCLP, any Subsidiary, the LLC or any directors, officers, partners or shareholders of any of the foregoing in their capacity as such, or any of the Owned Properties or Leased Properties, before or by any Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign (collectively, a "Governmental Body"), wherein an unfavorable ruling, decision or finding might, upon consummation of the Reorganization, adversely affect the business, properties, prospects, condition (financial or otherwise), net worth or results of operations of the Company or the Subsidiaries, taken as a whole. Except as set forth in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus), each of the Company, ARCLP and the Subsidiaries has, and at the Closing Date, the Option Closing Date (if any) and upon consummation of the Reorganization will have, all governmental licenses, permits, consents, orders, approvals, franchises, certificates and other authorizations (collectively, "Licenses") necessary to carry on its business and to own or lease and operate its properties as contemplated in the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus), except where the failure to have any such License would not have a material adverse effect on the business, properties, prospects, condition (financial or otherwise), net worth or results of operations of the Company and the Subsidiaries, taken as a whole. Each of the Company, ARCLP and the Subsidiaries has complied, and at the Closing Date and the Option Closing Date (if any) and upon consummation of the Reorganization will have complied, in all material respects with all laws, regulations, Licenses and orders applicable to it or its business and properties. None of the Company, ARCLP or any Subsidiary is, and, at the Closing Date, the Option Closing Date (if any) and upon 9 Page 9 consummation of the Reorganization, none of them will be, in default (nor has any event occurred which, with notice or lapse of time or both, would constitute a default) in the due performance and observation of any term, covenant or condition of any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, lease, contract or other agreement or instrument (collectively, a "contract or other agreement") to which any of them is, or, upon consummation of the Reorganization, will be, a party or by which any of their respective properties is, or, upon consummation of the Reorganization, will be, bound or affected, violation of which would individually or in the aggregate have a material adverse effect on the business, properties, prospects, condition (financial or otherwise), net worth or results of operations of the Company and the Subsidiaries, taken as a whole. To the best knowledge of the Company, no other party under any such contract or other agreement is, or, at the Closing Date, the Option Closing Date (if any) or upon consummation of the Reorganization, will be, in default in any material respect thereunder. Without limiting the generality of the foregoing, each of the senior living communities to be operated by the Company upon consummation of the Reorganization is, and, upon consummation of the Reorganization, will be, certified to participate in those Medicaid and Medicare programs, if any, in which such residences have historically participated, and, upon consummation of the Reorganization, such certification currently in effect will remain in full force and effect, without interruption whatsoever. There are no governmental proceedings or actions pending or threatened for the purpose of suspending, modifying or revoking any License held, or, upon consummation of the Reorganization, to be held, by the Company, ARCLP or any Subsidiary (including, without limitation, any proceeding or action to decertify any of the Owned Properties or Leased Properties from participation in any Medicaid or Medicare program). None of the Company, ARCLP or any Subsidiary is in violation of any provision of its articles of incorporation or bylaws or partnership agreement or other governing instrument. No consent, approval, authorization or order of, or any filing or declaration with, any Governmental Body is required for the consummation of the transactions contemplated by this Agreement or the Reorganization or in connection with the issuance and sale of shares of Common Stock by the Company in the Reorganization or the issuance of the Shares by the Company in the Offering, except such as have been obtained under the Act or the Rules and Regulations and such as may be required under state securities or Blue Sky laws or the bylaws and rules of the National Association of Securities Dealers, Inc. (the "NASD") in connection with the purchase and distribution by the Underwriters of the Shares to be sold by the Company. All consents of the partners or shareholders of ARCLP, each Subsidiary and the LLC required for the consummation of the Reorganization were duly and validly obtained prior to the date the registration statement described in Section 3(a) hereof was first filed with the Commission, have not been revoked and remain in full force and effect; such consents were solicited on the basis of information supplied by such entities and no such information included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading. 10 Page 10 The Company has full corporate power and authority to enter into this Agreement and the Reorganization Agreement and to carry out all the terms and provisions hereof and thereof to be carried out by it. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company and is enforceable against the Company in accordance with the terms hereof. The Reorganization Agreement and any other documents required to be executed thereunder have been duly authorized, executed and delivered and constitute valid and binding agreements of the parties thereto and are enforceable against the parties thereto in accordance with the terms thereof. Except as disclosed in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), the execution, delivery and the performance of this Agreement and the Reorganization Agreement and the consummation of the transactions contemplated hereby and thereby will not result in the creation or imposition of any Encumbrance upon any of the Owned Properties or Leased Properties or any of the other assets of the Company, ARCLP or any Subsidiary pursuant to the terms or provisions of, or result in a breach or violation of or conflict with any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, (i) the articles of incorporation or bylaws or the partnership agreement or other organizational document of the Company, ARCLP, any Subsidiary or the LLC, or (ii) any contract or other agreement to which any of them is a party or by which they, any of the Owned Properties or Leased Properties, or any of their assets or properties are, or, upon consummation of the Reorganization, will be, bound or affected, or (iii) any judgment, ruling, decree, order, law, statute, rule or regulation of any Governmental Body applicable to the Owned Properties or Leased Properties or the business or other assets of the Company, ARCLP or any Subsidiary. The Company has full corporate power and authority to authorize, issue, offer and sell the Shares, as contemplated by this Agreement, free of any preemptive rights. The offer, issuance and sale by the Company of shares of Common Stock in the Reorganization will be exempt from the registration requirements of the Act and applicable state securities, real estate syndication and Blue Sky laws. There is no document or contract of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required. All contracts to which the Company is, or, upon consummation of the Reorganization, will be, a party have been duly authorized, executed and delivered by the Company, constitute valid and binding agreements of the Company and are enforceable against the Company in accordance with the terms thereof. Neither the Company nor any of its directors, officers or affiliates (within the meaning of the Rules and Regulations) has taken, nor will he, she or it take, directly or indirectly, any action designed, or which might reasonably be expected in the future, to cause or result in, under the Act or otherwise, or which has constituted, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares or otherwise. 11 Page 11 No holder of securities of the Company has rights to the registration of any securities of the Company as a result of the filing of the Registration Statement. The Shares have been approved for listing on the New York Stock Exchange (the "NYSE"), subject only to notice of issuance. No labor dispute with the employees of the Company or with the employees of any Subsidiary exists or is threatened or imminent. Except as set forth in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), the Company or a Subsidiary owns, or is licensed or otherwise has the full exclusive right to use, or, upon consummation of the Reorganization, will own, be licensed or otherwise have the full exclusive right to use, all material trademarks and trade names which are used in or necessary for the conduct of its business as described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus). To the Company's best knowledge, no claims have been asserted by any person to the use of any such trademarks or trade names or challenging or questioning the validity or effectiveness of any such trademark or trade name. The use, in connection with the business and operations of the Company, of such trademarks and trade names does not, to the Company's knowledge, infringe on the rights of any person. None of the Company, ARCLP or any Subsidiary, nor, to the Company's best knowledge, any employee or agent of the Company, ARCLP or any Subsidiary, has made any payment of funds of the Company, ARCLP, any Subsidiary or the LLC or received or retained any funds of the Company, ARCLP, any Subsidiary or the LLC in violation of any law, rule or regulation or of a character required to be disclosed in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus). The Company is, or, upon consummation of the Reorganization, will be, insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the business in which the Company is engaged; none of the Company, ARCLP or any Subsidiary has been refused any insurance coverage sought or applied for; and the Company has no reason to believe that it will not be able to renew its existing insurance coverage (or such coverage as will be in effect upon consummation of the Reorganization) as and when such coverage expires. The business, operations and facilities of the Company, ARCLP and each Subsidiary have been, are being and, upon consummation of the Reorganization, will be conducted in compliance with all applicable laws, ordinances, rules, regulations, Licenses, permits, approvals, plans, authorizations or requirements relating to occupational safety and health, or pollution, or protection of health or the environment (including, without limitation, those relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or hazardous or toxic substances, 12 Page 12 materials or wastes into ambient air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of chemical substances, pollutants, contaminants or hazardous or toxic substances, materials or wastes, whether solid, gaseous or liquid in nature) of any governmental department, commission, board, bureau, agency or instrumentality of the United States, any state or political subdivision thereof, or any foreign jurisdiction, and all applicable judicial or administrative agency or regulatory decrees, awards, judgments and orders relating thereto; and none of the Company, ARCLP or any Subsidiary has received any notice from governmental instrumentality or any third party alleging any violation thereof or liability thereunder (including, without limitation, liability for costs of investigating or remediating sites containing hazardous substances and/or damages to natural resources), except for such noncompliances, violations or liabilities that would not have a material adverse effect upon the business, properties, prospects, condition (financial or otherwise), net worth or results of operations of the Company and the Subsidiaries, taken as a whole. Upon consummation of the Reorganization the Company will receive or the Subsidiaries will retain good and marketable title in fee simple to the Owned Properties, in each case, free and clear of all Encumbrances, other than those described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and those that will not materially affect the value of such properties and will not interfere with the use made and proposed to be made of such properties by the Company. Upon the consummation of the Reorganization, the Leased Properties will be held by the Company or a Subsidiary under valid, subsisting and enforceable leases, free and clear of all Encumbrances, other than those described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) or which are not material and will not interfere with the use made and proposed to be made of such property and buildings by the Company. All Encumbrances on or affecting the Owned Properties which are required to be disclosed in the Registration Statement and Prospectus are disclosed therein. The use and occupancy of each of the Owned Properties and Leased Properties complies with all applicable codes and zoning laws and regulations and there is no pending or, to the best knowledge of the Company, threatened condemnation, zoning change, environmental or other proceeding or action that will in any material respect adversely affect the size of, use of, improvements on, construction on, or access to the Owned Propertiesv or Leased Properties. Each of the Company, ARCLP, the Subsidiaries and the LLC has filed all foreign, federal, state and local tax returns that are required to be filed or has requested extensions thereof and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable. Each officer and director of the Company, and each person who will, upon consummation of the Reorganization and the liquidation of ARCLP, become a beneficial holder of 5% or more of the shares of Common Stock, have delivered to NatWest Securities Limited an agreement in the form set forth as Exhibit B hereto to 13 Page 13 the effect that he or she will not, for a period of 180 days after the date hereof, without the prior written consent of NatWest Securities Limited, offer to sell, sell, contract to sell, grant any option to purchase or otherwise dispose (or announce any offer, sale, grant of any option to purchase or other disposition) of any shares of Common Stock or securities convertible into, or exchangeable or exercisable for, shares of Common Stock. Each certificate signed by any officer of the Company and delivered to the Representatives or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters covered thereby. Representations and Warranties of the Underwriters. Upon your authorization of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale to the public upon the terms set forth in the Prospectus. NatWest Securities Limited represents and agrees that (i) it has not offered or sold and will not offer or sell any Shares to persons in the United Kingdom, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (whether as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995 or the Financial Services Act 1986 (the "UK Act"); (ii) it has complied and will comply with all applicable provisions of the UK Act with respect to anything done by it in relation to the Shares in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on, and will only issue or pass on, in the United Kingdom any document which consists of or any part of listing particulars or any other document required or permitted to be published by listing rules under Part IV of the UK Act, to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a person to whom the document may otherwise lawfully be issued or passed on. Agreements of the Company. The Company covenants and agrees with each of the several Underwriters as follows: The Company will not, either prior to the Effective Date or thereafter during such period as the Prospectus is required by law to be delivered in connection with sales of the Shares by an Underwriter or dealer, file any amendment or supplement to the Registration Statement or the Prospectus, unless a copy thereof shall first have been submitted to the Representatives within a reasonable period of time prior to the filing thereof and the Representatives shall not have objected thereto in good faith. If the Registration Statement is not yet effective, the Company will use its best efforts to cause the Registration Statement to become effective not later than the time indicated in Section 7(a) hereof. The Company will notify the Representatives promptly, and will confirm such advice in writing, (i) when the Registration Statement has become effective and when any post-effective amendment thereto becomes effective, (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (iii) of the issuance by the 14 Page 14 Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose or the threat thereof, (iv) of the happening of any event during the period mentioned in the second sentence of Section 5(f) that in the judgment of the Company makes any statement made in the Registration Statement or the Prospectus untrue or that requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein, in light of the circumstances in which they are made, not misleading and (v) of receipt by the Company or any representative or attorney of the Company of any other communication from the Commission relating to the Company, the Registration Statement, any Preliminary Prospectus or the Prospectus. If at any time the Commission shall issue any order suspending the effectiveness of the Registration Statement, the Company will use its best efforts to obtain the withdrawal of such order at the earliest possible moment. The Company will prepare the Prospectus in a form approved by the Representatives and will file such Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Securities Act. If the Company has omitted any information from the Registration Statement pursuant to Rule 430A, the Company will use its best efforts to comply with the provisions of, and to make all requisite filings with the Commission pursuant to, said Rule 430A and to notify the Representatives promptly of all such filings. If, at any time when a Prospectus relating to the Shares is required to be delivered under the Act, any event occurs as a result of which the Prospectus, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or the Registration Statement, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, or if for any other reason it is necessary at any time to amend or supplement the Prospectus or the Registration Statement to comply with the Act or the Rules and Regulations, the Company will promptly notify the Representatives thereof and, subject to Section 5(b) hereof, will prepare and file with the Commission, at the Company's expense, an amendment to the Registration Statement or an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance. The Company will furnish to the Representatives, without charge, two signed copies of the Registration Statement and of any post-effective amendment thereto, including financial statements and schedules, and all exhibits thereto and will furnish to the Representatives, without charge, for transmittal to each of the other Underwriters, copies of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules but without exhibits. The Company will comply with all the provisions of all undertakings contained in the Registration Statement. 15 Page 15 On the Effective Date, and thereafter from time to time for such period as the Prospectus is required by the Act to be delivered, the Company will deliver to each of the Underwriters, without charge, as many copies of the Prospectus or any amendment or supplement thereto as the Representatives may reasonably request. The Company consents to the use of the Prospectus or any amendment or supplement thereto by the several Underwriters and by all dealers to whom the Shares may be sold, both in connection with the offering or sale of the Shares and for any period of time thereafter during which the Prospectus is required by law to be delivered in connection therewith. If during such period of time any event shall occur which in the judgment of the Company or counsel to the Underwriters should be set forth in the Prospectus in order to make any statement therein, in the light of the circumstances under which it was made, not misleading, or in the Registration Statement in order to make any statement therein not misleading, or if it is necessary to supplement or amend the Prospectus or the Registration Statement to comply with law, the Company will forthwith prepare and duly file with the Commission an appropriate supplement or amendment thereto, and will deliver to each of the Underwriters, without charge, such number of copies thereof as the Representatives may reasonably request. Prior to any public offering of the Shares by the Underwriters, the Company will cooperate with the Representatives and counsel to the Underwriters in connection with the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Representatives may request; provided, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to general service of process in any jurisdiction where it is not now so subject. During the period of five years commencing on the Effective Date, the Company will furnish to each of the Representatives and each other Underwriter who may so request copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its capital stock, and will furnish to each of the Representatives and each other Underwriter who may so request a copy of each annual or other report it shall be required to file with the Commission. The Company will make generally available to holders of its securities, as soon as may be practicable, but in no event later than the last day of the fifteenth full calendar month following the calendar quarter in which the Effective Date falls, a consolidated earnings statement (which need not be audited but shall be in reasonable detail) for a period of 12 months commencing after the Effective Date, and satisfying the provisions of Section 11(a) of the Act (including Rule 158 of the Rules and Regulations). The Company will not at any time, directly or indirectly, take any action intended, or which might reasonably be expected, to cause or result in, or which will constitute, stabilization of the price of the shares of Common Stock to facilitate the sale or resale of any of the Shares. 16 Page 16 The Company will apply the net proceeds from the offering and sale of the Shares to be sold by the Company in the manner set forth in the Prospectus under "Use of Proceeds" and shall file such reports with the Commission with respect to the sale of the Shares and the application of the proceeds therefrom as may be required in accordance with Rule 463 of the Rules and Regulations under the Act. The Company will not for a period of 180 days after the date hereof, without the prior written consent of NatWest Securities Limited, offer to sell, sell, contract to sell, grant any option to purchase or otherwise dispose (or announce any offer to sell, sale, contract to sell, grant of any option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock (except that the Company may grant options to purchase or award shares of Common Stock under the Stock Incentive Plan and the Stock Purchase Plan and may issue privately placed shares in connection with acquisitions). The Company will cause ARCLP to be dissolved and liquidated as promptly as practicable following the Closing; and the Company will cause ARCLP to distribute the shares of Common Stock to be issued by the Company as set forth in the Reorganization Agreement, as promptly as practicable following the Closing. Expenses. Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Company will pay, or reimburse if paid by the Representatives, all costs and expenses incident to the performance of the obligations of the Company under this Agreement, including but not limited to costs and expenses of or relating to (1) the preparation, printing and filing of the Registration Statement and exhibits thereto, each Preliminary Prospectus, the Prospectus and any amendment or supplement to the Registration Statement or the Prospectus, (2) the preparation and delivery of certificates representing the Shares and the shares of Common Stock to be issued in the Reorganization, (3) the printing of this Agreement, the Agreement among Underwriters, any Dealer Agreements and any Underwriters' Questionnaire, (4) furnishing (including costs of shipping and mailing) such copies of the Registration Statement, the Prospectus and any Preliminary Prospectus, and all amendments and supplements thereto, as may be requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold, (5) the listing of the Shares on the NYSE, (6) any filings required to be made by the Underwriters with the National Association of Securities Dealers, Inc., (7) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions designated pursuant to Section 5(g), including the reasonable fees, disbursements and other charges of counsel to the Underwriters in connection therewith, and the preparation and printing of preliminary, supplemental and final Blue Sky memoranda, (8) counsel and accountants to the Company and (9) the transfer agent for the Shares. If this Agreement shall be terminated by the Company pursuant to any of the provisions hereof (otherwise than pursuant to Section 10) or if for any reason the 17 Page 17 Company shall be unable to perform its obligations hereunder, the Company will reimburse the several Underwriters for all out-of-pocket expenses (including the fees, disbursements and other charges of counsel to the Underwriters) incurred by them in connection herewith. Conditions of the Obligations of the Underwriters. The obligations of each Underwriter hereunder are subject to the following conditions: Notification that the Registration Statement has become effective shall be received by the Representatives not later than 12:00 p.m., New York City time, on the date of this Agreement or at such later date and time as shall be consented to in writing by the Representatives and all filings required by Rule 424 of the Rules and Regulations and Rule 430A shall have been made. (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall be pending or threatened by the Commission, (ii) no order suspending the effectiveness of the Registration Statement or the qualification or registration of the Shares under the securities or Blue Sky laws of any jurisdiction shall be in effect and no proceeding for such purpose shall be pending before or threatened or contemplated by the Commission or the authorities of any such jurisdiction, (iii) any request for additional information on the part of the staff of the Commission or any such authorities shall have been complied with to the satisfaction of the staff of the Commission or such authorities and (iv) after the date hereof no amendment or supplement to the Registration Statement or the Prospectus shall have been filed unless a copy thereof was first submitted to the Representatives and the Representatives did not object thereto in good faith, and the Representatives shall have received certificates, dated the Closing Date and the Option Closing Date and signed by the Chief Executive Officer of the Company and the Chief Financial Officer of the Company (who may, as to proceedings threatened, rely upon the best of their information and belief), to the effect of the foregoing clauses (i), (ii) and (iii). Since the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) there shall not have been a material adverse change in the general affairs, business, business prospects, properties, management, condition (financial or otherwise) or results of operations of the Company, ARCLP or any Subsidiary, whether or not arising from transactions in the ordinary course of business, and (ii) none of the Company, ARCLP or any Subsidiary shall have sustained any material loss or interference with its business or properties from fire, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree, which is not set forth in the Registration Statement and the Prospectus, if in the judgment of the Representatives any such development makes it impracticable or inadvisable to consummate the sale and delivery of the Shares by the Underwriters at the initial public offering price. Since the respective dates as of which information is given in the Registration 18 Page 18 Statement and the Prospectus, there shall have been no litigation or other proceeding instituted against the Company, ARCLP or any Subsidiary or any of their respective officers, directors, partners or shareholders in their capacities as such, before or by any Governmental Body in which litigation or proceeding an unfavorable ruling, decision or finding would materially and adversely affect the business, properties, business prospects, condition (financial or otherwise), net worth or results of operations of the Company, ARCLP or any Subsidiary. Each of the representations and warranties of the Company contained herein shall be true and correct at the Closing Date and, with respect to the Option Shares, at the Option Closing Date, as if made on such date, and all covenants and agreements herein contained to be performed on the part of the Company and all conditions herein contained to be fulfilled or complied with by the Company at or prior to the Closing Date and, with respect to the Option Shares, at or prior to the Option Closing Date, shall have been fully performed, fulfilled or complied with. The Representatives shall have received an opinion, dated the Closing Date and the Option Closing Date, from Bass, Berry & Sims PLC, counsel for the Company, to the following effect: Each of the Company, ARCLP and the Subsidiaries (A) has been duly incorporated or organized and is a validly existing corporation, partnership or limited liability company in good standing under the laws of its jurisdiction of incorporation or organized with full power and authority (corporate, partnership or other) to own or lease and to operate its properties and to conduct its business as described in the Registration Statement and Prospectus (in the case of the Company, as to be owned, leased, operated or conducted upon consummation of the Reorganization), and (B) is duly qualified to do business as a foreign corporation or partnership and is in good standing in each jurisdiction (x) in which the conduct of its business (in the case of the Company, as to be conducted upon consummation of the Reorganization) requires such qualification and (y) in which it owns or leases property; The Company owns no capital stock or other beneficial interest in any corporation, partnership, joint venture or other business entity except for equity interests in the Subsidiaries as set forth on Exhibit A hereto; The Company has authorized capital stock as set forth in the Prospectus; the securities of the Company conform in all material respects to the description thereof contained in the Registration Statement and Prospectus; the outstanding shares of Common Stock have been duly authorized and validly issued by the Company, are fully paid and nonassessable and are free of any preemptive or other rights to subscribe for any of the Shares; the Company has duly authorized the issuance and sale of the Shares to be sold by it hereunder; such Shares, when issued by the Company and paid for in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and will conform in all material respects to the description thereof contained in the Registration 19 Page 19 Statement and Prospectus and will not be subject to any preemptive, subscription or other similar rights; and the Shares have been duly authorized for listing, subject to official notice of issuance, on the NYSE; The Registration Statement is effective under the Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and no proceedings for that purpose have been instituted or are pending or, to the best knowledge of such counsel, are threatened or contemplated under the Act; the registration statement originally filed with respect to the Shares and each amendment thereto and the Prospectus and, if any, each amendment and supplement thereto (except for the financial statements, schedules and other financial data included therein, as to which such counsel need not express any opinion), complied as to form in all material respects with the requirements of the Act and the Rules and Regulations; the descriptions contained and summarized in the Registration Statement and the Prospectus of contracts and other documents are accurate and fairly present in all material respects the information required to be shown by the Act and the Rules and Regulations; to the best knowledge of such counsel, there are no contracts or documents which are required by the Act to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement which are not described or filed as required by the Act and the Rules and Regulations; to the best knowledge of such counsel, there is not pending or threatened against the Company any action, suit, proceeding or investigation before or by any Governmental Body of a character required to be disclosed in the Registration Statement or the Prospectus which is not so disclosed therein; and the statements set forth under the headings "The Company--The 1995 Roll-Up", "--Pending Reorganization," "Business--Government Regulation," "Business-Insurance and Legal Proceedings," "Management--Limitation of Liability and Indemnification," "Certain Transactions" and "Description of Capital Stock" in the Registration Statement and Prospectus, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, provide an accurate summary of such legal matters, documents and proceedings; The Company has full legal right, power, and authority to enter into this Agreement and to consummate the transactions provided for herein; this Agreement has been duly authorized, executed and delivered by the Company; this Agreement, assuming due authorization, execution and delivery by each other party hereto, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws now or hereafter in effect relating to or affecting creditors' rights generally or by general principles of equity relating to the availability of remedies and except as rights to indemnity and contribution may be limited by federal or state securities laws or the public policy underlying such laws; none of the Company's execution or 20 Page 20 delivery of this Agreement, its performance hereof, its consummation of the transactions contemplated herein or its application of the net proceeds of the offering in the manner set forth in the Prospectus under the caption "Use of Proceeds", conflicts or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon, any property or assets of the Company or any Subsidiary pursuant to (A) the terms of the articles of incorporation or bylaws of the Company or any Subsidiary; (B) the terms of any contract or other agreement known to such counsel after reasonable investigation to which the Company or any Subsidiary is (or, upon consummation of the Reorganization, will be) a party or by which any of them is or may be (or, upon consummation of the Reorganization, will or may be) bound or to which any of their respective properties is or may be (or, upon consummation of the Reorganization, will or may be) subject; (C) any statute, rule or regulation of any Governmental Body having (or that, upon consummation of the Reorganization, will have) jurisdiction over the Company or any Subsidiary or any of their respective activities or properties; or (D) the terms of any judgment, decree or order, known to such counsel after reasonable investigation, of any arbitrator or Governmental Body having (or that, upon consummation of the Reorganization, will have) such jurisdiction; and no consent, approval, authorization or order of any Governmental Body has been or is required for the Company's performance of this Agreement or the consummation of the transactions contemplated hereby, except such as have been obtained under the Act or may be required under state securities or blue sky laws in connection with the purchase and distribution by the Underwriters of the Shares; To the best of such counsel's knowledge, the conduct of the business of each of the Company and the Subsidiaries is not, and, upon consummation of the Reorganization, will not be, in violation of any federal, state or local statute, administrative regulation or other law, where such violation is likely to have a material adverse effect on the Company; and each of the Company and the Subsidiaries has obtained all Licenses as are necessary or required for the ownership, leasing and operation of its properties and the conduct of its business as presently conducted and, in the case of the Company, as contemplated by the Registration Statement and Prospectus upon consummation of the Reorganization; The Company is not (after giving effect to the Reorganization and the sale of the Shares) an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act; Each of the Company, ARCLP, the Subsidiaries and the LLC has full legal right, power, and authority to enter into the Reorganization Agreement and each other agreement relating thereto to which it is a party and to consummate the transactions provided for in each thereof; the Reorganization Agreement has been duly authorized, executed and delivered by the Company, ARCLP, the 21 Page 21 Subsidiaries and the LLC is a valid and binding agreement of the Company, ARCLP, the Subsidiaries and the LLC, enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws now or hereafter in effect relating to or affecting creditors' rights generally or by general principles of equity relating to the availability of remedies; none of the execution or delivery of the Reorganization Agreement by the Company, ARCLP, the Subsidiaries or the LLC, the performance by any thereof of its obligations thereunder, or the consummation by any thereof of the transactions contemplated therein or of any other Reorganization transactions, conflicts or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitutes or will constitute a default under, or results or will result in the creation or imposition of any lien, charge or encumbrance upon, any property or assets of any of them pursuant to (A) the terms of the articles of incorporation or bylaws or partnership agreement or other governing instruments or documents of any of them; (B) the terms of any contract or other agreement known to such counsel after reasonable investigation to which any of them is (or, upon consummation of the Reorganization, will be) a party or by which any of them is or may be (or, upon consummation of the Reorganization, will or may be) bound or to which any of their respective properties is or may be (or, upon consummation of the Reorganization, will or may be) subject; (C) any statute, rule or regulation of any Governmental Body having (or that, upon consummation of the Reorganization, will have) jurisdiction over any of them or any of their respective activities or properties; or (D) the terms of any judgment, decree or order, known to such counsel after reasonable investigation, of any arbitrator or Governmental Body having (or that, upon consummation of the Reorganization, will have) such jurisdiction; and no consent, approval, authorization or order of any Governmental Body has been or is required for the performance of the Reorganization Agreement or the consummation of the transactions contemplated thereby or the consummation of any other Reorganization transaction, in each case by any of the Company, ARCLP, the Subsidiaries or the LLC, except such as have been obtained under the Act or may be required under state securities or Blue Sky laws in connection with the purchase and distribution by the Underwriters of the Shares; The Shares have been duly authorized for listing on the NYSE, subject only to official notice of issuance; The offer, issuance and sale by the Company of shares of Common Stock (other than the Shares) in the Reorganization is exempt from the registration requirements of the Act and applicable state securities, real estate syndication and Blue Sky laws; and None of the Company, ARCLP, any Subsidiary or the LLC is in any breach or violation of any of the terms or provisions of, or in default under (nor has an event occurred which with notice or lapse of time or both would constitute a default or acceleration under), (A) the terms of its articles of incorporation or 22 Page 22 bylaws, partnership agreement or other governing documents; (B) the terms of any contract or other agreement known to such counsel after reasonable investigation to which any of them is a party or by which any of them is or may be bound or to which any of their respective properties or assets is or may be subject; (C) any statute, rule or regulation of any Governmental Body having jurisdiction over any of them or any of their respective activities or properties; or (D) the terms of any judgment, decree or order, known to such counsel after reasonable investigation, of any arbitrator or Governmental Body having such jurisdiction. In addition, such counsel shall state that in the course of the preparation of the Registration Statement and the Prospectus, such counsel has participated in conferences with officers and representatives of the Company and with the Company's independent public accountants, at which conferences such counsel made inquiries of such officers, representatives and accountants and discussed the contents of the Registration Statement and the Prospectus and (without taking any further action to verify independently the statements made in the Registration Statement and the Prospectus (other than the sections identified in paragraph (iv) above) and, except as stated in the foregoing opinion, without assuming responsibility for the accuracy, completeness or fairness of such statements) nothing has come to such counsel's attention that causes such counsel to believe that the Registration Statement as of the date it was declared effective or as of the Closing Date or the Prospectus as of the date thereof or as of the Closing Date contained or contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading (it being understood that such counsel need not express any opinion with respect to the financial statements, schedules and other financial data included in the Registration Statement or the Prospectus). In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and public officials and, as to matters involving the application of laws of any State other than Tennessee (to the extent satisfactory in form and scope to counsel for the Underwriters) such counsel may rely upon the opinion of local counsel to the Company. The foregoing opinion shall also state that the Underwriters are justified in relying upon such opinion of local counsel, and copies of such opinion shall be delivered to the Representatives and counsel for the Underwriters. References to the Registration Statement and the Prospectus in this paragraph (f) shall include any amendment or supplement thereto at the date of such opinion. The Representatives shall have received an opinion, dated the Closing Date and the Option Closing Date, from Stroock & Stroock & Lavan LLP, counsel to the Underwriters, which opinion shall be satisfactory in all respects to the Representatives. In rendering such opinion, such counsel may rely as to all matters of Tennessee law upon the opinion of Bass, Berry & Sims, PLC, Nashville, Tennessee. 23 Page 23 Concurrently with the execution and delivery of this Agreement, or, if the Company elects to rely on Rule 430A, on the date of the Prospectus, the Accountants shall have furnished to the Representatives a letter, dated the date of its delivery (the "Original Letter"), addressed to the Representatives and in form and substance satisfactory to the Representatives, confirming that (i) they are independent public accountants with respect to the Company, ARCLP and its consolidated subsidiaries and the Carriage Clubs within the meaning of the Act and the Rules and Regulations; (ii) in their opinion, the financial statements and any supplementary financial information and schedules (and pro forma financial information) included in the Registration Statement and examined by them comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations; (iii) on the basis of procedures, not constituting an examination in accordance with generally accepted auditing standards, set forth in detail in the Original Letter, including a "SAS 71" review, a reading of the unaudited financial statements and other information referred to below, a reading of the latest available interim financial statements of ARCLP and its consolidated subsidiaries, inspections of the minute books and partnership records of ARCLP and its consolidated subsidiaries since the latest audited financial statements included in the Registration Statement and Prospectus, inquiries of officials of ARCLP and its consolidated subsidiaries and the Carriage Clubs responsible for financial and accounting matters and such other inquiries and procedures as may be specified in the Original Letter to a date not more than five days prior to the date of the Original Letter, nothing came to their attention that caused them to believe that: (A) the unaudited consolidated financial statements and schedules of ARCLP and its consolidated subsidiaries included in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations, or are not fairly presented in conformity with GAAP applied on a basis substantially consistent with the basis for the audited financial statements included in the Registration Statement and Prospectus; (B) any other unaudited income statement data and balance sheet items included in the Registration Statement and Prospectus do not agree with the corresponding items in the unaudited financial statements from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited financial statements included in the Registration Statement and Prospectus; (C) the unaudited financial statements which were not included in the Registration Statement and Prospectus but from which were derived any unaudited financial statements referred to in Clause (A) and any unaudited income statement data and balance sheet items included in the Registration Statement and Prospectus and referred to in Clause (B) were not determined on a basis substantially consistent with the basis for the audited financial statements included in the Registration Statement and Prospectus; (D) the unaudited consolidated pro forma financial statements included in the Registration Statement and Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations or the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; (E) as of a specified date not more than five days prior to the date of the Original Letter, there have been any changes in 24 Page 24 the capital stock or partnership interests of the Company, ARCLP, the Subsidiaries or the LLC or any increase in the long-term debt of the Company, ARCLP or the Subsidiaries, or any decreases in net current assets or net assets or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with amounts shown in the latest balance sheet included in the Registration Statement and Prospectus, except in each case for changes, increases or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur or which are described in the Original Letter; and (F) for the period from the date of the latest financial statements included in the Registration Statement and Prospectus to the specified date referred to in Clause (E), there were any decreases in revenues, income from operations, income before extraordinary items or the total or per share amounts of net income or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with the comparable period of the preceding year and with any other period of corresponding length specified by the Representatives, except in each case for decreases or increases which the Prospectus discloses have occurred or may occur or which are described in the Original Letter; and (iv) in addition to the examination referred to in their reports included in the Registration Statements and Prospectus and the procedures referred to in clause (iii) above, they have carried out certain specified procedures, not constituting an examination in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Representatives, which are derived from the general accounting, financial or other records of ARCLP or the Subsidiaries, as the case may be, which appear in the Prospectus or in Part II of, or in exhibits or schedules to, the Registration Statement, and have compared such amounts, percentages and financial information with such accounting, financial and other records and have found them to be in agreement. At the Closing Date and, as to the Option Shares, the Option Closing Date, the Accountants shall have furnished to the Representatives a letter, dated the date of its delivery, which shall confirm, on the basis of a review in accordance with the procedures set forth in the Original Letter, that nothing has come to their attention during the period from the date of the Original Letter referred to in the prior sentence to a date (specified in the letter) not more than five days prior to the Closing Date or the Option Closing Date, as the case may be, which would require any change in the Original Letter if it were required to be dated and delivered at the Closing Date or the Option Closing Date, as the case may be. At the Closing Date and, as to the Option Shares, the Option Closing Date, there shall be furnished to the Representatives an accurate certificate, dated the date of its delivery, signed by each of the Chief Executive Officer and the President of the Company, in form and substance satisfactory to the Representatives, to the effect that: Each signer of such certificate has carefully examined the Registration Statement and the Prospectus and (A) as of the date of such certificate, (x) the Registration Statement does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading and (y) the Prospectus does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and (B) since the Effective Date no event has occurred as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein not untrue or misleading in any material respect; Each of the representations and warranties of the Company contained in this Agreement were, when originally made, and are, at the time such certificate is delivered, true and correct in all material respects; and Each of the covenants required herein to be performed by the Company on or prior to the date of such certificate has been duly, timely and fully 25 Page 25 performed and each condition herein required to be complied with by the Company on or prior to the delivery of such certificate has been duly, timely and fully complied with. The Shares shall be qualified for sale in such states as the Representatives may reasonably request, each such qualification shall be in effect and not subject to any stop order or other proceeding on the Closing Date and the Option Closing Date. Prior to the Closing Date, the Shares shall have been approved for listing on the NYSE, subject only to notice of issuance. The Reorganization shall have been consummated or shall be consummated in accordance with the Reorganization Agreement prior to the closing of the purchase and sale of the Shares hereunder. On or before the date hereof, the Company shall have delivered to you executed copies of all of the documents relating to the closing of the Reorganization. On or before the date hereof, the Company shall have delivered to you the lock-up agreements described in Section 3(cc) hereof. The Company shall have furnished to the Representatives such certificates, letters and other documents, in addition to those specifically mentioned herein, as the Representatives may have reasonably requested as to the accuracy and completeness at the Closing Date and the Option Closing Date of any statement in the Registration Statement or the Prospectus as to the accuracy at the Closing Date and the Option Closing Date of the representations and warranties of the Company, as to the performance by the Company of its obligations hereunder, or as to the fulfillment of the conditions concurrent and precedent to the obligations hereunder of the Underwriters. All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to you and your counsel. The Company will furnish you with such conformed copies of such opinions, certificates, letters and other documents as you shall reasonably request. Indemnification and Contribution. The Company agrees to indemnify and hold harmless each Underwriter, the directors, officers, employees and agents of each Underwriter and each person, if any, who controls each Underwriter within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all losses, claims, damages or liabilities, joint or several (and actions in respect thereof), to which they, or any of them, may become subject under the Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement made by the Company in Section 3 of this Agreement, (ii) any untrue statement or alleged untrue statement of any material fact contained in (A) any Preliminary Prospectus, the 26 Page 26 Registration Statement or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus or (B) any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Shares under the securities or blue sky laws thereof or filed with the Commission or any securities association or securities exchange (each, an "Application"), or (iii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus or any Application a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse, as incurred, each Underwriter and each such other person for any legal or other expenses reasonably incurred by such Underwriter or such other person in connection with investigating, defending or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability is based solely upon an untrue statement or omission or alleged untrue statement or omission in any of such documents made in reliance upon and in conformity with information relating to any Underwriter furnished in writing to the Company by the Representatives on behalf of any Underwriter expressly for inclusion therein; provided, further, that such indemnity with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter (or any such other person) from whom the person asserting any such loss, claim, damage, liability or action purchased Shares which are the subject thereof to the extent that any such loss, claim, damage or liability (i) results from the fact that such Underwriter failed to send or give a copy of the Prospectus (as amended or supplemented) to such person at or prior to the confirmation of the sale of such Shares to such person in any case where such delivery is required by the Act and (ii) arises out of or is based upon an untrue statement or omission of a material fact contained in such Preliminary Prospectus that was corrected in the Prospectus (or any amendment or supplement thereto), unless such failure to deliver the Prospectus (as amended or supplemented) was the result of noncompliance by the Company with Section 5(f). This indemnity agreement will be in addition to any liability that the Company might otherwise have. The Company will not, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to each claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of each Underwriter and each such other person from all liability arising out of such claim, action, suit or proceeding. Each Underwriter will indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each director of the Company and each officer of the Company who signed the Registration Statement against any losses, claims, damages or liabilities (or actions in respect thereof) to which the Company and any such director, officer or controlling person may become subject under the Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus or 27 Page 27 any amendment or supplement to the Registration Statement or the Prospectus or any Application, or material fact required to be stated therein or (ii) the omission or the alleged omission to state in the Registration Statement, any Preliminary Prospectus or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus, or any Application, a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives expressly for use therein; and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any legal or other expenses reasonably incurred by the Company and any such director, officer or controlling person in connection with investigating or defending any such loss, claim, damage, liability or any action in respect thereof. The Company acknowledges that, for all purposes under this Agreement, the statements set forth in [the third, sixth and seventh paragraphs] under the heading "Underwriting" and the information in [the two paragraphs on the inside front cover] of any Preliminary Prospectus and the Prospectus constitute the only information relating to any Underwriter furnished in writing to the Company by the Representatives on behalf of the Underwriters expressly for inclusion in the Registration Statement, any Preliminary Prospectus or the Prospectus. This indemnity agreement will be in addition to any liability that each Underwriter might otherwise have. Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party or parties under this Section 8, notify such indemnifying party or parties of the commencement thereof; but the omission so to notify the indemnifying party or parties will not relieve it or them from any liability which it or they may have to any indemnified party under the foregoing provisions of this Section 8 or otherwise unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party. If any such action is brought against an indemnified party and it notifies an indemnifying party or parties of its commencement, the indemnifying party or parties against which a claim is made will be entitled to participate therein and, to the extent that it or they may wish, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnifying party shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses other than reasonable costs of investigation subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated by the 28 Page 28 Representatives in the case of paragraph (a) of this Section 8, representing the indemnified parties under such paragraph (a) who are parties to such action or actions), or (ii) the indemnifying party has authorized in writing the employment of counsel for the indemnified party at the expense of the indemnifying party. After such notice from the indemnifying party to such indemnified party, the indemnifying party will not be liable for the costs and expenses of any settlement of such action effected by such indemnified party without the consent of the indemnifying party, unless such indemnified party waived its rights under this Section 8 in which case the indemnified party may effect such a settlement without such consent. If the indemnification provided for in the foregoing paragraphs of this Section 8 is unavailable or insufficient to hold harmless an indemnified party under paragraph (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties, on the one hand, and the indemnified party, on the other, from the offering of the Shares or (ii) if, but only if, the allocation provided by the foregoing clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying party or parties, on the one hand, and the indemnified party, on the other, in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other, shall be deemed to be in the same proportion as the total proceeds from the offering of the Shares (before deducting expenses) bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. Relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Representatives on behalf of the Underwriters, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities (or actions in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8(d), no Underwriter shall be required to contribute any amount in excess of the total underwriting discounts received by it with respect to the Shares purchased by such Underwriter under this Agreement, less the aggregate amount of any damages that such Underwriter has otherwise been required to pay in respect of the same or any substantially similar claim. 29 Page 29 No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute as provided in this Section 8(d) are several in proportion to their respective underwriting obligations and not joint. For purposes of this Section 8(d), each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act will have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, will have the same rights to contribution as the Company, subject in each case to the provisions of this paragraph (d). Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made under this Section 8(d), will notify any such party or parties from whom contribution may be sought, but the omission so to notify will not relieve the party or parties from whom contribution may be sought from any other obligation(s) it or they may have hereunder or otherwise than under this paragraph (d) or (y) to the extent that such party or parties were not adversely affected by such omission. The contribution agreement set forth above shall be in addition to any liabilities which any indemnifying party may otherwise have. No party will be liable for contribution with respect to any action or claim settled without its written consent (which consent will not be unreasonably withheld). The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company contained in this Agreement shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of the Underwriters, (ii) acceptance of any of the Shares and payment therefor or (iii) any termination of this Agreement. Termination. The obligations of the several Underwriters under this Agreement may be terminated at any time prior to the Closing Date (or, with respect to the Option Shares, on or prior to the Option Closing Date), by notice to the Company from the Representatives, without liability on the part of any Underwriter to the Company if, prior to delivery and payment for the Firm Shares (or the Option Shares, as the case may be), in the sole judgment of the Representatives, (i) trading in any of the equity securities of the Company shall have been suspended by the Commission or by an exchange that lists the Shares, (ii) trading in securities generally on the NYSE, the American Stock Exchange or the International Stock Exchange of the United Kingdom and the Republic of Ireland, Limited shall have been suspended or limited or minimum or maximum prices shall have been generally established on any of such exchanges, or additional material governmental restrictions, not in force on the date of this Agreement, shall have been imposed upon trading in securities generally by any of such exchanges or by order of the Commission or any court or other governmental authority, (iii) a general banking moratorium shall have been declared by Federal, New York State or United Kingdom authorities or (iv) any material adverse change in the financial or securities markets in the United States or United Kingdom or any outbreak or material escalation of hostilities or declaration by the United States or the United Kingdom of a national emergency or war or other calamity or crisis shall have occurred, the effect of any of which is such as to make it, in the sole judgment of the Representatives, impracticable or inadvisable to market the Shares on the terms and in the manner contemplated by the Prospectus. Any termination pursuant to Section 9 shall be without liability of any party to any other party except as provided in Sections 6(a) and 8. Default of Underwriters. If one or more Underwriters default in their obligations to purchase Firm Shares or Option Shares hereunder and the aggregate number of such Shares that such defaulting Underwriter or Underwriters agreed but failed to purchase is ten percent or less of the aggregate number of Firm Shares or Option Shares to be purchased by all of the Underwriters at such time hereunder, the other Underwriters may make arrangements satisfactory to the Representatives for the purchase of such Shares by other persons (who may include one or more of the 30 Page 30 non-defaulting Underwriters, including the Representatives), but if no such arrangements are made by the Firm Closing Date or the related Option Closing Date, as the case may be, the other Underwriters shall be obligated severally in proportion to their respective commitments hereunder to purchase the Firm Shares or Option Shares that such defaulting Underwriter or Underwriters agreed but failed to purchase. If one or more Underwriters so default with respect to an aggregate number of Shares that is more than ten percent of the aggregate number of Firm Shares or Option Shares, as the case may be, to be purchased by all of the Underwriters at such time hereunder, and if arrangements satisfactory to the Representatives are not made within 36 hours after such default for the purchase by other persons (who may include one or more of the non-defaulting Underwriters, including one or more of the Representatives) of the Shares with respect to which such default occurs, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company other than as provided in Section 11 hereof. In the event of any default by one or more Underwriters as described in this Section 10, the Representatives shall have the right to postpone the Firm Closing Date or the Option Closing Date, as the case may be, established as provided in Section 2 hereof for not more than seven business days in order that any necessary changes may be made in the arrangements or documents for the purchase and delivery of the Firm Shares or Option Shares, as the case may be. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section 10. Nothing herein shall relieve any defaulting Underwriter from liability for its default. Survival. The respective representations, warranties, agreements, covenants, indemnities and other statements of the Company, its officers and the several Underwriters set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Company, any of its officers or directors, any Underwriter or any controlling person referred to in Section 8 hereof and (ii) delivery of and payment for the Shares. The respective agreements, covenants, indemnities and other statements set forth in Sections 6 and 8 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. Notices. Notice given pursuant to any of the provisions of this Agreement shall be in writing and, unless otherwise specified, shall be mailed or delivered (a) if to the Company, at the office of the Company, 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027, Attention: Chief Executive Officer, or (b) if to the Underwriters, to the Representatives at the offices of NatWest Securities Limited, 135 Bishopsgate, London EC2M 3XT England, Attention: Melvin Rowe. Any such notice shall be effective only upon receipt. Any notice under Section 8 or 9 may be made by telex or telephone, but if so made shall be subsequently confirmed in writing. Successors. This Agreement shall inure to the benefit of and shall be binding upon the several Underwriters, the Company and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this 31 Page 31 Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that (i) the indemnities of the Company contained in Section 8 of this Agreement shall also be for the benefit of any person or persons who control any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters contained in Section 8 of this Agreement shall also be for the benefit of the directors of the Company, the officers of the Company who have signed the Registration Statement and any person or persons who control the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of Shares from any Underwriter shall be deemed a successor because of such purchase. This Agreement shall not be assignable by either party hereto without the prior written consent of the other party. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (Signature page follows) 32 Page 32 Please confirm that the foregoing correctly sets forth the agreement among the Company and the several Underwriters. Very truly yours, AMERICAN RETIREMENT CORPORATION By: ------------------------------ Name: Title: Confirmed as of the date first above mentioned: By: NATWEST SECURITIES LIMITED EQUITABLE SECURITIES CORPORATION MCDONALD & COMPANY SECURITIES, INC. By: NATWEST SECURITIES LIMITED By: -------------------------------- Name: Title: Acting on behalf of themselves and as the Representatives of the other several Underwriters named in Schedule I hereto. 33 Page 33 SCHEDULE I UNDERWRITERS
Number of Firm Shares to be Purchased ------------ NatWest Securities Limited Equitable Securities Corporation McDonald & Company Securities, Inc Total 3,125,000 =========
34 Page 34 EXHIBIT A SUBSIDIARIES 35 EXHIBIT B May __, 1997 NATWEST SECURITIES LIMITED EQUITABLE SECURITIES CORPORATION MCDONALD & COMPANY SECURITIES, INC. As Representatives of the several Underwriters c/o NatWest Securities Limited 135 Bishopsgate London EC2M 3XT England Ladies and Gentlemen: In order to induce the several underwriters, for which NatWest Securities Limited, Equitable Securities Corporation and McDonald & Company Securities, Inc. (the "Representatives") intend to act as Representatives, to underwrite a proposed initial public offering (the "Offering") of shares of common stock, $.01 par value per share (the "Common Stock"), of American Retirement Corporation, a Tennessee corporation (the "Company"), as contemplated by a registration statement filed with the Securities and Exchange Commission on Form S-1 (Registration No. 33-23197), the undersigned hereby agrees that the undersigned will not, directly or indirectly, for a period of 180 days after the commencement of the Offering, without the prior written consent of NatWest Securities Limited, offer to sell, sell, contract to sell, grant any option to purchase or otherwise dispose (or announce any offer, sale, grant of any option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, shares of Common Stock. This letter shall have no further force or effect if the Company and the several Underwriters shall not have executed and delivered an underwriting agreement related to the Offering by [June 30, 1997] or if any underwriting agreement entered into by such parties shall be terminated prior to the initial closing date provided for therein. This letter agreement shall not prohibit the undersigned from transferring any shares of Common Stock to members of his or her immediate family or to a trust for their benefit, provided that such persons or trust agree to be bound by the terms hereof. Very truly yours, By: Name: EX-10.22 3 CONSTRUCTION LOAN AGREEMENT 1 EXHIBIT 10.22 CONSTRUCTION LOAN AGREEMENT This Construction Loan Agreement is entered into as of the 14th day of March, 1997, by and between FORT AUSTIN LIMITED PARTNERSHIP ("Borrower"), a Texas limited partnership; and FIRST UNION NATIONAL BANK OF TENNESSEE ("Lender"), a national banking association. RECITALS WHEREAS, Lender has agreed to extend credit to Borrower, on certain terms and conditions, as set forth in detail in this Agreement; NOW, THEREFORE, as an inducement to cause Lender to extend credit to Borrower, and for other valuable consideration, the receipt and sufficiency of which are acknowledged, it is agreed as follows: I. DEFINITIONS As used in this Agreement, the following capitalized terms shall have the following meanings, unless the context expressly requires otherwise: "AFFILIATE" means, with respect to any Person, another Person that, directly or indirectly, (i) has an equity interest in that Person, in any degree, (ii) has common ownership with that Person, in any degree, (iii) Controls that Person, or (iv) shares common Control with that Person. "AGREEMENT" means this Loan Agreement (including all schedules and exhibits hereto), as the same may be amended from time to time. "ARC ENTITIES" means Borrower; American Retirement Communities, L.P., a Tennessee limited partnership ("ARC, LP"), American Retirement Communities, LLC ("ARC, LLC"), a Tennessee limited liability company; American Retirement Corporation II, formerly known as "American Retirement Corporation ("ARC"), a Tennessee corporation; A.R.C. Management Corporation ("ARCM"), a Tennessee corporation; ARC Chattanooga, Inc., a Tennessee corporation; ARC Fort Austin Properties, Inc., a Tennessee corporation; ARC Corpus Christi, Inc., a Tennessee corporation; ARC Oak Park, Inc., a Tennessee corporation; Trinity Towers Limited Partnership, a Tennessee limited partnership; Holley Court Terrace Limited Partnership, a _____________ limited partnership; ARCLP-Charlotte, L.L.C., a ________________ limited liability company; and all other Subsidiaries of Borrower from time to time. 2 "BANKRUPTCY CODE" means Title I of the Bankruptcy Reform Act of 1978, as it may be amended from time to time. "BORROWER" means Fort Austin Limited Partnership, a Texas limited partnership, its successors and assigns. This definition does not abrogate the requirement set forth below restricting Borrower's ability to assign its rights under this Agreement. "CAPITAL LEASE" means a lease that would be characterized as a financed sale under GAAP. "CHANGE OF CONTROL" means the occurrence, after the date of this Agreement, of the acquisition of Control of any ARC Entity by any Person which does not presently Control such entity. "CLOSING DATE" means the date of this Agreement. "COLLATERAL" means all Property now or hereafter securing the Obligations. "CONSTRUCTION LOAN" has the meaning assigned in Article II hereof. "CONSTRUCTION LOAN ADDENDUM" means the Construction Loan Addendum between Borrower and Lender of even date herewith, which Addendum is an integral part of this Agreement and is incorporated herein by this reference. "CONSTRUCTION LOAN NOTE" means the Construction Loan Note made by Borrower dated the date of this Agreement in the principal amount of Eleven Million Six Hundred Thousand and 00/100 Dollars ($11,600,000.00), and all modifications, amendments, extensions, renewals and restatements thereof. "CONTROL" or "CONTROLLED" means that a Person has the power to conduct or govern the policies of another Person. "DEBT" means, with respect to any Person, all obligations, contingent or otherwise, that would be classified under GAAP as a liability of that Person including, but not limited to, any nonrecourse obligations secured by Property of that Person. "DEFAULT RATE" means the lesser of four per cent (4%) above the Prime Rate or the highest lawful rate. "EVENT OF DEFAULT" means the occurrence of any of the events specified in Section 8.1 hereof, as to which any requirement for notice or lapse of time has been satisfied. 2 3 "ENCUMBRANCE" means any interest in Property in favor of one not the owner thereof, whether voluntary or involuntary, including, but not limited to, (i) the lien or security interest arising from a deed of trust, mortgage, pledge, security agreement, conditional sale, Capital Lease, consignment, or bailment for security purposes, and (ii) reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions. "ENVIRONMENTAL LAWS" means the Environmental Protection Act, the Resource Conservation and Recovery Act of 1976, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Hazardous Materials Transportation Act and any other federal, state or municipal law, rule or regulation relating to air emissions, water discharge, noise emissions, solid or liquid waste disposal, hazardous or toxic waste or materials, or other environmental or health matters. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, including (unless the context otherwise requires) any rules or regulations promulgated thereunder. "ERISA AFFILIATE" means any Person who for purposes of Title IV of ERISA is a member of Borrower's controlled group, or under common control with Borrower, within the meaning of Section 414 of the IRC, and the regulations promulgated pursuant thereto and the rulings issued thereunder. "ERISA EVENT" means (i) the occurrence of a reportable event, within the meaning of Section 4043 of ERISA, unless the 30-day notice requirement with respect thereto has been waived by the PBGC; (ii) the provision by the administrator of any Plan of a notice of intent to terminate such Plan, pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA); (iii) the cessation of operations at a facility in the circumstances described in Section 4068(f) of ERISA; (iv) the withdrawal by Borrower or an ERISA Affiliate from a Multiple Employer Plan during a plan year for which it was a substantial employer, as defined in 4001(a)(2) of ERISA; (v) the failure by Borrower or any ERISA Affiliate to make a material payment to a Plan required under Section 302(f)(1) of ERISA; (vi) the adoption of an amendment to a Plan requiring the provision of initial or additional security to such Plan, pursuant to Section 307 of ERISA; or (vii) the institution by the PBGC of proceedings to terminate a Plan, pursuant to Section 4042 of ERISA, or the occurrence of any event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, a Plan. "FACILITY" means the Santa Catalina Villas Retirement Community in Tucson, Arizona. "FINANCIAL STATEMENTS" means the consolidated balance sheet and income statement for ARC, L.P. and the consolidating balance sheet and income statement for ARC, LP represented as Richmond Place, Heritage Club, Carriage Club Charlotte, Carriage Club 3 4 Jacksonville, ARCLP-Charlotte L.L.C. representing Carriage Club Charlotte, Trinity Towers Limited Partnership, Borrower, Holley Court Terrace, L.P. and ARC, dated December 31, 1996, delivered by Borrower to Lender, and all subsequent financial statements delivered to Lender pursuant to this Agreement as of the date hereof, including all notes thereto. "FUNB-NC" means First Union National Bank of North Carolina, a national banking association and the issuer of the Richmond Place Letter of Credit. "GAAP" means generally accepted accounting principles pronounced by the Financial Accounting Standards Board or any successor thereto, as in effect from time to time. "GOVERNMENTAL AUTHORITY OR AUTHORITIES" shall mean any governmental or quasi-governmental entity, court or tribunal including, without limitation, any department, commission, board, bureau, agency, administration, service or other instrumentality of any foreign or domestic governmental entity. "HAZARDOUS SUBSTANCES" means those substances included from time to time within the definition of hazardous substances, hazardous materials, toxic substances, or solid waste under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended, 42 U.S.C. ss. 9601 et seq.; the Resource Conservation and Recovery Act of 1976, 42 U.S.C. ss. 6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. ss. 1801 et seq.; the Clean Water Act, 33 U.S.C. Section 1251 et. seq.; the Toxic Substances Control Act, 15 U.S.C. Section 2601 et. seq., and in the regulations promulgated pursuant to such acts and laws; and such other substances that are or become regulated under any applicable local, state, or federal law or regulation addressing environmental hazards. "INTEREST EXPENSE" means expenses for interest (including current charges on Capital Leases) and expenses for any interest rate swaps or similar derivative contracts used for the management of interest expense, letter of credit fees, remarketing and guaranty fees. "IRC" means the Internal Revenue Code of 1986, as amended from time to time. "LAW" or "LAWS" means all applicable constitutional provisions, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, and requirements of all Governmental Authorities. "LENDER" means First Union National Bank of Tennessee, its successors and assigns. "LOAN" means an extension of credit under the Construction Loan. "LOAN DOCUMENTS" means, collectively, each written agreement executed and delivered by any ARC Entity to Lender in connection with the Construction Loan. 4 5 "MATERIAL ADVERSE CHANGE" means any material and adverse change in the business, Properties, or operations of Borrower or ARC, LP individually or of the ARC Entities on a consolidated basis. "MATERIAL ADVERSE EFFECT" means any event or condition which, singly or in the aggregate with other events or conditions, materially and adversely affects the business, Properties, or operations of Borrower or ARC, LP individually or of the ARC Entities on a consolidated basis. "OBLIGATIONS" means all present and future debts and other obligations of Borrower to Lender, whether arising by contract, tort, guaranty, overdraft, or otherwise; whether or not the advances or events creating such debts or other obligations are presently foreseen; and regardless of the class of the debts or other obligations, be they otherwise secured or unsecured. Without limiting the foregoing, the "Obligations" specifically includes the obliga tions of Borrower under this Agreement and the other Loan Documents. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "PERMITTED ENCUMBRANCES" means all of the following: (a) Encumbrances securing the payment of any of the Obligations. (b) Encumbrances securing taxes, assessments, or other governmental charges not yet due or which are being contested in good faith by appropriate action promptly initiated and diligently conducted, if Borrower has made reserve therefor as required by GAAP. (c) Mechanics', repairmen's, materialmen's, warehousemen's and other like liens arising by operation of law securing accounts that are not delinquent. (d) Encumbrances on real property used by Borrower not securing monetary obligations, provided that the Encumbrances are of a type customarily placed on real property and do not materially impair the value of the affected property. (e) Pledges or deposits in the ordinary course of business to secure nondelinquent obligations under workman's compensation or unemployment laws or similar legislation or 5 6 to secure the performance of leases or contracts entered into in the ordinary course of business. (f) Encumbrances described on the attached Schedule 1. "PERSON" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government, governmental agency or political subdivision thereof, or any other form of entity. "PLAN" means any employee benefit or other plan established or maintained, or to which contributions have been made, by Borrower or any Subsidiary and covered by Title IV of ERISA or to which Section 412 of the IRC applies. "PRIME RATE" shall be that rate announced by Lender from time to time as its Prime Rate and is one of several interest rate bases used by Lender. Lender lends at rates both above and below Lender's Prime Rate and Borrower acknowledges that Lender's Prime Rate is not represented or intended to be the lowest or most favorable rate of interest offered by Lender. "PROPERTY" or "PROPERTIES" means any interest in any kind of property, whether real, personal, or mixed, or tangible or intangible. "REIMBURSEMENT AGREEMENT" means the Reimbursement Agreement dated as of October 31, 1995 by ARC, LP in favor of Lender and FUNB-NC, pursuant to which the Richmond Place Letter of Credit has been issued. "RICHMOND PLACE LETTER OF CREDIT" means the Irrevocable Direct Pay Letter of Credit issued by FUNB-NC for the account of ARC, LP to Third National Bank in Nashville as Trustee under the Trust Indenture dated as of April 1, 1987, as amended and restated as of November 1, 1994, governing the issuance of the Lexington-Fayette Urban County Government Residential Facilities Refunding Revenue Bonds (Richmond Place Associates, L.P. Project) Series 1987. "SOLVENT" shall mean, as to any Person, that as of any date of determination, (i) the then fair value of the assets of such Person is (a) greater than the then total amount of liabilities (including subordinated liabilities) of such Person and (b) greater than the amount that will be required to pay such Person's probable liability on such Person's then existing debts as they become absolute and matured, (ii) such Person's capital is not unreasonably small in relation to its business, and (iii) such Person does not intend to incur, or believe or reasonably should believe that it will incur, debts beyond its ability to pay such debts as they become due. "SUBSIDIARY" means any present or future corporation, partnership or other entity at least a majority of whose outstanding voting stock shall at the time be owned directly or indirectly by Borrower, by one or more Subsidiaries of Borrower or a combination thereof, or any partnership in which Borrower or a Subsidiary of Borrower is a general partner. 6 7 "TAXES" means all taxes and assessments whether general or special, ordinary or extraordinary, or foreseen or unforeseen, which at any time may be assessed, levied, confirmed or imposed on Borrower or on any of its properties or assets or any part thereof or in respect of any of its franchises, businesses, income or profits. "UCC" means the Uniform Commercial Code as adopted in Tennessee, as it may be amended from time to time. "UNMATURED DEFAULT" means any event or condition that, but for the giving of any required notice by Lender and/or the passing of time, would be an Event of Default hereunder. II. LOAN 2.1 Construction Loan. Concurrently with the execution of this Agreement, Lender shall make a Construction Loan (the "Construction Loan") available to Borrower under the following terms: 2.1.1 Amount of Construction Loan. The original principal indebtedness of Borrower to Lender under the Construction Loan shall be Eleven Million Six Hundred Thousand and 00/100 Dollars. 2.1.2 Use of Proceeds of Construction Loan. The proceeds of the Construction Loan shall be used by Borrower to finance the expansion of the Santa Catalina Retirement Community in Tucson, Arizona. Such proceeds shall be advanced in accordance with the terms of the Construction Loan Addendum. 2.1.3 Construction Loan Note. Borrower's obligations under the Construction Loan shall be evidenced by the Construction Loan Note. 2.1.4 Interest Rate Applicable to Construction Loan. The principal amount of the Construction Loan outstanding shall bear interest at Lender's Prime Rate, as it may change from time to time. 2.1.5 Calculation of Interest. Interest for Prime Rate Loans shall be computed on the basis of a 360-day year counting the actual number of days elapsed. 2.1.6 Default Rate. Notwithstanding the foregoing, upon the occurrence of an Event of Default and during the continuation of such Event of Default until it is cured or waived, interest shall be charged at the Default Rate, regardless of whether Lender has elected to exercise any other remedies available to Lender, including, without limitation, acceleration of the maturity of the 7 8 outstanding principal of the Construction Loan. All such interest shall be paid at the time of and as a condition precedent to the curing of any such Event of Default to the extent any right to cure is given in this Agreement. 2.1.7 Usury Savings Provision. It is the intention of the parties that all charges under or in connection with this Agreement and the Obligations, however denominated, and including (without limitation) all interest, commitment fees, late charges and loan charges, shall be limited to the maximum lawful amount that may be assessed under Tennessee law or, if higher, applicable federal law. Such charges shall be characterized and all provisions of the Loan Documents shall be construed as to uphold the validity of charges provided for therein and, all such charges shall be spread over the entire term of the Loans to the extent permitted by law. If for any reason whatsoever, however, any charges paid or contracted to be paid in respect of the Construction Loan shall exceed the maximum amounts collectible under applicable laws in effect from time to time, then, ipso facto, the obligation to pay such interest and/or other charges shall be reduced to the maximum lawful amount in effect from time to time, and any amounts collected by Lender that exceed the maximum lawful amount shall be applied to the reduction of the principal balance of the Construction Loan and/or refunded to Borrower so that at no time shall the interest or loan charges paid or payable in respect of the Construction Loan exceed the maximum lawful amount. This provision shall control every other provision herein and in any and all other agreements and instruments now existing or hereafter arising between Borrower and Lender with respect to the Construction Loan. 2.2 Repayment. Monthly payments of interest only shall be due during the term of this Agreement. 2.2.1 Initial Repayment Schedule. Payments of interest only shall be made monthly in arrears, with the entire principal balance due at the earlier of completion of construction of the Facility or April 30, 1998. 2.2.2 All Amounts Due. All remaining principal, interest and expenses under the Construction Loan will be due at the earlier of the date that is thirty (30) days subsequent to the completion of construction of the Facility (as evidenced by the issuance of a certificate of occupancy for the new portion of the Facility) or June 30, 1998. 8 9 2.3 Fees. 2.3.1 Construction Loan Commitment Fee. Concurrently with the execution hereof, Borrower shall pay Lender the sum of $58,000.00 as a commitment fee for the Construction Loan. 2.4 Release. So long as Borrower and the ARC Entities are not in default with respect to any obligation to Lender, Lender shall release its Deed of Trust upon payment in full of Borrower's obligations under the Construction Loan and Borrower shall have no further obligation under this Agreement or the Loan Documents except as expressly provided herein or therein. III. CONDITIONS PRECEDENT 3.1 Conditions to Closing. Lender shall not be obligated to make its initial Loan pursuant to this Agreement unless and until Borrower provides Lender with the documents and other items required by the Construction Addendum. IV. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to Lender that, as of the Closing Date: 4.1 Capacity. Each ARC Entity is a limited partnership, limited liability company ("LLC") or corporation, as applicable, duly organized, validly existing and in good standing under the laws of the state of its formation or organization, as applicable. Each ARC Entity is qualified or authorized to do business in all jurisdictions in which its ownership of property or conduct of business requires such qualification or authorization. Each ARC Entity has the power and authority to own its Properties and to carry on its business as now being conducted and as proposed to be conducted after the execution hereof, to execute and deliver this Agreement and/or such of the other Loan Documents as they are required to execute, and to perform its obligations hereunder and under such other Loan Documents. References in this Article IV to the execution, delivery and performance by the ARC Entities shall be limited in each instance to the ARC Entities which are parties to such documents. 4.2 Authorization. Each ARC Entity's execution, delivery and performance of this Agreement and the other Loan Documents, as applicable, have been duly authorized by all requisite partnership, LLC and corporate action. 4.3 Binding Obligations. This Agreement is and the other Loan Documents, when executed and delivered to Lender, will be, legal, valid and binding upon each ARC Entity, enforceable in accordance with their respective terms, subject only to principles of equity and laws applicable to creditors generally, including bankruptcy laws. 9 10 4.4 No Conflicting Law or Agreement. Each ARC Entity's execution, delivery and performance of the Loan Documents do not constitute a breach of or default under, and will not violate or conflict with, any provisions of the corporate charter of any ARC Entity; any contract, financing agreement, lease, or other agreement to which any ARC Entity is a party or by which its Properties may be affected; or any Law to which any ARC Entity is subject or by which its Properties may be affected; nor will the same result in the creation or imposition of any Encumbrance upon any Properties of any ARC Entity, other than those contemplated by the Loan Documents. 4.5 No Consent Required. Each ARC Entity's execution, delivery, and performance of this Agreement and the other Loan Documents do not require the consent or approval of or the giving of notice to any Person except for those consents which have been duly obtained and are in full force and effect on the date hereof. 4.6 Financial Statements. The Financial Statements are complete and correct, have been prepared in accordance with GAAP, and present fairly the financial condition and results of operations of the ARC Entities as of the date and for the period stated therein, subject to year-end adjustments. No Material Adverse Change has occurred since the date of the Financial Statements. Borrower acknowledges that Lender has advanced (or shall advance) the Loans in reliance upon the Financial Statements. 4.7 Fiscal Year. Each ARC Entity's fiscal year ends on December 31 of each year. 4.8 Litigation. Except as disclosed on Schedule 4.8 hereto, there is no litigation, arbitration, legal or administrative proceeding, tax audit, investigation, or other action or proceeding of any nature pending or, to the knowledge of Borrower, threatened against, likely to be instituted against or affecting any ARC Entity or any of its Properties, except any such proceeding involving only a claim for money damages less than $100,000. No ARC Entity is subject to any outstanding court, arbitral or administrative order, writ or injunction. To the best of Borrower's knowledge, information and belief, no facts exist under which third parties have unasserted claims against any ARC Entity that would involve a claim for injunctive relief or payment of money damages in excess of $100,000. 4.9 Taxes; Governmental Charges. Each ARC Entity has filed or caused to be filed all tax returns and reports required to be filed. Each ARC Entity has paid, or made adequate provision for the payment of, all Taxes that have or may have become due pursuant to such returns or otherwise, or pursuant to any assessment received by Borrower, except such Taxes, if any, as are being contested in good faith by appropriate proceedings and for which adequate reserves have been provided. Borrower knows of no proposed material tax assessment against any ARC Entity. No extension of time for the assessment of federal, state or local taxes of borrower is in effect or has been requested, except as disclosed in the Financial Statements. Each ARC Entity has timely made all required remittances of withholding deposits and other assessments against payroll expenditures. 10 11 4.10 Title to Properties. Each ARC Entity has good and marketable title to, or a valid leasehold interest in, its Properties, free and clear of all Encumbrances except for Permitted Encumbrances. 4.11 No Default. No ARC Entity is in default (beyond applicable grace and/or periods of notice and cure) in any material respect that affects its business, Properties, operations, or condition, financial or otherwise, under any document evidencing an obligation for the repayment of borrowed money. No ARC Entity is in default in any respect under any other instrument to which any ARC Entity is a party or by which its Properties are bound, except to the extent that such default could not reasonably be expected to have a Material Adverse Effect. To the best of Borrower's knowledge, information and belief, no other party to any contract with any ARC Entity is in default or breach thereof and no circumstances exist which, with the giving of notice and/or the passing of time would constitute such default or breach which would have a Material Adverse Effect. No Event of Default or Unmatured Default exists under this Agreement. 4.12 Casualties; Taking of Properties. Neither the business nor the Property of any ARC Entity is presently impaired as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of property, cancellation of contracts, permits, concessions by any domestic or foreign government or any agency thereof, riot, activities of armed forces or acts of God or of any public enemy. 4.13 Compliance with Laws. No ARC Entity is in violation of any Law to which any ARC Entity, its business or any of its Properties are subject, the violation of which would likely have a Material Adverse Effect, and there are no outstanding citations, notices or orders of noncompliance issued to any ARC Entity under any such Law, the violation of which would likely have a Material Adverse Effect. Each ARC Entity has obtained all licenses, permits, franchises, or other governmental authorizations necessary to the ownership of its Properties or to the conduct of any ARC Entity's business. 4.14 ERISA. No ERISA Event has occurred with respect to any Plan or is reasonably expected to occur with respect to any Plan. 4.15 Full Disclosure of Material Facts. Borrower has fully advised Lender of all matters involving Borrower's, ARC, LP's and the consolidated ARC Entities' financial condition, business, operations, Properties or industry that would be reasonably expected to have a Material Adverse Effect. No information, exhibit, or report furnished or to be furnished by Borrower to Lender in connection with this Agreement contains, as of the date thereof, any misrepresentation of fact or failed or will fail to state any material fact, the omission of which would render the statements therein materially false or misleading. 4.16 Accuracy of Projections. With respect to all business plans and other forecasts and projections furnished by or on behalf of Borrower and made available to Lender relating to the financial condition, business, operations, Properties or prospects of the ARC 11 12 Entities, to the best of Borrower's knowledge, information and belief, all facts stated as such therein are true and complete in all material respects and all estimates and assumptions were made in good faith and believed to be reasonable at the time made. 4.17 Investment Company Act. No ARC Entity is an "investment company" under the Investment Company Act of 1940, as amended. 4.18 Personal Holding Company. No ARC Entity is a "personal holding company" as defined in Section 542 of the IRC. 4.19 Solvency. Each ARC Entity is Solvent as of the Closing Date and will remain Solvent upon the consummation of the transactions contemplated hereby. 4.20 Chief Executive Office. The address designated herein to which notices are to be sent under this Agreement is the chief executive office for each ARC Entity within the meaning of Tennessee Code Annotated Section 47-9-103(3)(d). 4.21 Subsidiaries. Borrower has no Subsidiaries. 4.22 Ownership of Patents, Licenses, Etc. Each ARC Entity owns all licenses, permits, franchises, registrations, patents, copyrights, trademarks, trade names or service marks, or the rights to use the foregoing, that are necessary for the continued operation of its business. 4.23 Environmental Compliance. Each ARC Entity has duly complied with, and its Properties are owned and operated in compliance with, all Environmental Laws, the violation of which would have a Material Adverse Effect. There have been no citations, notices or orders of non-compliance issued to any ARC Entity or, to Borrower's knowledge, relating to any ARC Entity's business or Properties pursuant to any Environmental Law. Each ARC Entity has obtained all required federal, state and local licenses, certificates or permits relating to it and its Properties as required by applicable Environmental Laws. 4.24 Labor Matters. No ARC Entity is subject to any collective bargaining agreements or any agreements, contracts, decrees or orders requiring it to recognize, deal with or employ any Person. No demand for collective bargaining has been asserted against any ARC Entity by any union or organization. No ARC Entity has experienced any strike, labor dispute, slowdown or work stoppage due to labor dispute and, to the best knowledge of Borrower, there is no such strike, dispute, slowdown or work stoppage threatened against any ARC Entity. Each ARC Entity is in compliance in all material respects with the Fair Labor Standards Act of 1938, as amended. 4.25 OSHA Compliance. Each ARC Entity is in compliance in all material respects with the Federal Occupational Safety and Health Act, as amended, and all regulations under the foregoing. 12 13 4.26 Regulation U. No ARC Entity is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System). No proceeds of any Revolving Loan will be used to purchase or carry any margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System) in violation of applicable law, including, without limitation, Regulation U issued by the Board of Governors of the Federal Reserve System. V. AFFIRMATIVE COVENANTS Borrower covenants that, during the term of this Agreement (and thereafter where such covenants expressly require), it will observe and cause the other ARC Entities to observe the affirmative covenants set forth in Article V of the Loan Agreement dated October 31, 1995, between Lender and ARC, LP, as the same may be amended from time to time. This obligation shall survive the repayment of the obligations evidenced by the October 31, 1995, Loan Agreement. VI. NEGATIVE COVENANTS Borrower covenants and agrees that, without Lender's prior written consent, neither it nor any of the other ARC Entities will violate any of the negative covenants contained in Article VI of the Loan Agreement dated October 31, 1995, between Lender and ARC, LP, as the same may be amended from time to time. This obligation shall survive the repayment of the obligations evidenced by the October 31, 1995, Loan Agreement. 13 14 VII. FINANCIAL COVENANTS Borrower acknowledges that certain of the ARC Entities are subject to financial covenants in other agreements that they have entered into with Lender, and covenants with Lender that it will cause such entities to comply with those financial covenants; this obligation shall survive the repayment of the obligations evidenced by those other agreements so long as the Construction Loan is outstanding. Borrower further covenants with Lender as follows: 7.1 Debt Service Coverage Ratio. On a rolling 4 quarter basis, tested quarterly, Borrower shall maintain a debt service coverage ratio of no less than 1.35:1. This ratio shall be determined as follows: NIBT + D/A + INT. EXP. + LEASE EXP. ----------------------------------- INT. EXP. (incl. Letter of Credit, Remarketing & Guaranty fees, as appl.) + CURRENT MATURITIES OF LTD (including required escrow payments) + LEASE EXP. As used in the formula above, NIBT means net income plus tax expense; D/A means expenses for depreciation and amortization, and other non-cash items; INT.EXP means Interest Expense; LEASE EXP. means expenses under leases other than Capital Leases; LTD means long-term Debt and CURRENT MATURITIES OF LTD means principal and escrow payments actually due and payable within the applicable test period. 7.2 Security Deposit Escrows. Borrower shall maintain tenant security deposits in full compliance with its contractual agreements and all applicable laws. VIII. EVENTS OF DEFAULT 8.1 Events of Default. Any of the following events shall be considered an Event of Default under this Agreement: 8.1.1 Payments. Borrower's failure to make payment of any installment of principal, interest or expenses to Lender within 10 days of the date when due. 8.1.2 Representations and Warranties. Lender's determination that any material representation or warranty made by any Borrower or any other ARC Entity in any Loan Document was incorrect in any material respect as of the date thereof. 8.1.3 Negative Covenants. The failure of Borrower or any other ARC Entity to comply in any material respect with any of the material requirements of Article VI hereof. 14 15 8.1.4 Reporting Requirements. The failure of Borrower or any other party to timely perform all covenants in the Loan Documents requiring the furnishing of notices, financial reports or other information to Lender. 8.1.5 Other Covenants. The failure of Borrower or any other ARC Entity to observe or perform any covenant contained in any Loan Document, which covenant is not subject to any specific provision in this Article VIII; provided, however, as to any such breach that is reasonably susceptible to being cured (a "Curable Default"), the occurrence of such Curable Default shall not constitute an Event of Default hereunder if such Curable Default is fully cured and/or corrected within thirty days (five (5) days, if such Curable Default may be cured by the payment of a sum of money) after the earlier of Borrower's knowledge of the facts giving rise thereto or Lender's written notice thereof to Borrower given in accordance with the provisions hereof. 8.1.6 Involuntary Bankruptcy or Receivership Proceedings. The appointment of a receiver, custodian, liquidator, or trustee for Borrower or any other ARC Entity, or for any of its Property, by the order or decree of any court or agency or supervisory authority having jurisdiction; or Borrower's or any other ARC Entity's adjudication as being bankrupt or insolvent; or the sequestering of any of the Property of Borrower or any other ARC Entity by court order or the filing of a petition against Borrower or any other ARC Entity under any state or federal bankruptcy, reorganization, debt arrangement, insolvency, readjustment of debt, dissolution, liquidation, or receivership law of any jurisdiction, whether now or hereafter in effect, if such involuntary proceedings are not dismissed within 60 days. 8.1.7 Voluntary Petitions. Borrower's or any other ARC Entity's filing of a petition in voluntary bankruptcy or to seek relief under any provision of any bankruptcy, reorganization, debt arrangement, insolvency, receivership, readjustment of debt, dissolution, or liquidation law of any jurisdiction, whether now or hereafter in effect, or its consent to the filing of any petition against it under any such law. 8.1.8 Discontinuance of Business. Borrower's or any other ARC Entity's discontinuance of its usual business or its dissolution. 8.1.9 Default on Other Debt. Borrower or any other ARC Entity shall fail to make any payment due from it on any indebtedness or other security for borrowed money in excess of $100,000.00 beyond any applicable cure period (whether its liability therefor is direct or contingent), or if any other event (other than the mere passage of time) or any other condition in respect of any indebtedness or other security for borrowed money of Borrower or any other ARC Entity in a principal amount in excess of $100,000 (whether its liability therefor 15 16 is direct or contingent) or under any agreement securing or relating to such indebtedness or other security for borrowed money shall occur the effect of which, after the giving of any required notice and the expiration of any applicable cure period, is to cause (or permit any holder of such indebtedness or other security or a trustee to cause) such indebtedness or other security, or a portion thereof, to become due prior to its stated maturity or prior to its regularly scheduled dates of payment, or if any such indebtedness or other security for borrowed money otherwise is accelerated and becomes due prior to its stated maturity or prior to its regularly scheduled dates of payment. 8.1.10 Undischarged Judgments. Any judgment against Borrower or any other ARC Entity or any attachment or levy against the property of Borrower any other ARC Entity with respect to a claim for an amount in excess of $25,000 not adequately insured or indemnified against, remains unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of twenty (20) days. 8.1.11 Insolvency. Borrower's or any ARC Entity's no longer being Solvent. For purposes of making the determination of solvency hereunder, Borrower or any ARC Entity may include funds available from Borrower or any other ARC Entity to the extent permitted under the terms of this Agreement. 8.1.12 Attachment. The issuance of an attachment or other process against any Property of Borrower or any other ARC Entity, unless removed (by bond or otherwise) within twenty (20) days. 8.1.13 Insurance. Borrower's or any other ARC Entity's failure to maintain any insurance required in the Construction Loan Addendum or in any other Loan Document. 8.1.14 Other Event. The occurrence of any event or condition which, in Lender's reasonable discretion, materially and adversely affects the ability of Borrower to perform the Obligations. 8.1.15 Cross-Default. The occurrence of an Event of Default under (i) the Reimbursement Agreement or (ii) any document evidencing or securing obligations of any of the ARC Entities to Lender or its affiliates. 8.2 Remedies. Upon the happening of any Event of Default: 8.2.1 Default Rate. Lender may declare the Obligations to thereafter bear interest at the Default Rate. 8.2.2 Acceleration. Lender may declare the entire principal amount of all Obligations then outstanding, including interest accrued thereon, to be 16 17 immediately due and payable without presentment, demand, protest, notice of protest, or dishonor or other notice of default of any kind, all of which are hereby expressly waived. 8.2.3 Exercise of Setoff. Lender may exercise its right of setoff against Borrower. 8.2.4 Other Remedies. Lender may exercise its remedies under any or all of the Loan Documents and all other rights afforded a creditor under applicable law. IX. GENERAL PROVISIONS 9.1 Notices. All communications relating to this Agreement or any of the other Loan Documents shall be in writing and shall effective when be delivered by mail, overnight courier, special courier or otherwise to the following addresses: if to Borrower: Fort Austin Limited Partnership Attn: Mr. W.E. Sheriff 111 Westwood Place, Suite 400 Brentwood, Tennessee 37027 With a Copy To: Bass, Berry & Sims Attn: T. Andrew Smith, Esq. First American Center Nashville, Tennessee 37238 17 18 if to Lender: First Union National Bank of Tennessee Attn: Andrew C. Tompkins 150 Fourth Avenue North Nashville, Tennessee 37219 With a Copy To: Boult, Cummings, Conners & Berry Attn: Richard F. Warren 414 Union Street, Suite 1600 Nashville, Tennessee 37219 Any party may change its address for receipt of notice by written direction to the other parties hereto. 9.2 Renewal, Extension, or Rearrangement. All provisions of this Agreement relating to Obligations shall apply with equal force and effect to each and all promissory notes executed hereafter which in whole or in part represent a renewal, extension for any period, increase, or rearrangement of any part of the Obligations originally represented by any part of such other Obligations. 9.3 Application of Payments. Amounts received with respect to the Obligations shall be applied (i) first, to any expenses due Lender, (ii) second, to accrued interest under any of the Obligations, and (iii) third, to reduce principal of the Obligations, in such manner as determined by Lender. 9.4 Computations; Accounting Principles. Where the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, such determination or calculation, to the extent applicable and except as otherwise specified in this Agreement, shall be made in accordance with GAAP. 9.5 Counterparts. This Agreement may be executed in counterparts with all signatures or by counterpart signature pages, and it shall not be necessary that the signatures of all parties be contained on any one counterpart. Each counterpart shall be deemed an original, but all of them together shall constitute one and the same instrument. 9.6 Negotiated Document. This Agreement and the other Loan Documents have been negotiated by the parties with full benefit of counsel and should not be construed against any party as author. 18 19 9.7 Consent to Jurisdiction; Exclusive Venue. Borrower hereby irrevocably consents to the jurisdiction of the United States District Court for the Middle District of Tennessee and of all Tennessee state courts sitting in Davidson County, Tennessee, for the purpose of any litigation to which Lender may be a party and which concerns this Agreement or the Obligations. It is further agreed, subject to the provisions of Section 9.26, that venue for any such action shall lie exclusively with courts sitting in Davidson County, Tennessee, except for matters relating to the Property, which may be heard in a court sitting in the State of Arizona, unless Lender agrees to the contrary in writing. 9.8 Not Partners; No Third Party Beneficiaries. The relationship of Lender and Borrower and the other ARC Entities is that of lender and borrower only, and neither is a fiduciary, partner or joint venturer of the other for any purpose. Except as described in the immediately succeeding sentence, this Agreement has been executed for the sole benefit of Lender, and no third party is authorized to rely upon Lender's rights or duties hereunder. 9.9 No Reliance on Lender's Analysis. Borrower acknowledges and represents that, in connection with the Obligations, Borrower has not relied upon any financial projection, budget, assessment or other analysis by Lender or upon any representation by Lender as to the risks, benefits or prospects of Borrower's business activities or present or future capital needs incidental thereto, all such considerations having been examined fully and independently by Borrower. 9.10 No Marshalling of Assets. Lender may proceed against collateral securing the Obligations and against parties liable therefor in such order as it may elect, and neither Borrower nor any surety or guarantor for Borrower nor any creditor of Borrower shall be entitled to require Lender to marshal assets. The benefit of any rule of law or equity to the contrary is hereby expressly waived. 9.11 Impairment of Collateral. Lender may, in its sole discretion, release any collateral securing the Obligations or release any party liable therefor. The defenses of impairment of collateral and impairment of recourse and any requirement of diligence on Lender's part in collecting the Obligations are hereby waived. 9.12 Business Days. If any payment date under the Obligations falls on a day that is not a Business Day, or if the last day of any notice period falls on such a day, the payment shall be due and the notice period shall end on the next following Business Day. 9.13 Participations. Lender may, from time to time, in its sole discretion, and without notice to Borrower or any other Person, sell participations in any credit subject hereto to such other investors or financial institutions as it may elect. Lender may from time to time disclose to any participant or prospective participant such information as Lender may have regarding the financial condition, operations, and prospects of Borrower. 19 20 9.14 Standard of Care; Limitation of Damages. Lender shall be liable to the Borrower only for matters arising from this Agreement or otherwise related to the Obligations resulting from Lender's gross negligence or willful misconduct, and liability for all other matters is hereby waived. Lender shall not in any event be liable to Borrower for special or consequential damages arising from this Agreement or otherwise related to the Obligations. 9.15 Incorporation of Schedules. All Schedules and Exhibits referred to in this Agreement are incorporated herein by this reference. 9.16 Indulgence Not Waiver. Lender's indulgence in the existence of a default hereunder or any other departure from the terms of this Agreement shall not prejudice Lender's rights to declare a default or otherwise demand strict compliance with this Agreement. 9.17 Cumulative Remedies. The remedies provided Lender in this Agreement are not exclusive of any other remedies that may be available to Lender under any other document or at law or equity. 9.18 Amendment and Waiver in Writing. No provision of this Agreement can be amended or waived, except by a statement in writing signed by the party against whom enforcement of the amendment or waiver is sought. 9.19 Assignment. This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of Borrower and Lender, except that Borrower shall not assign any rights or delegate any obligations arising hereunder without the prior written consent of Lender. Any attempted assignment or delegation by Borrower without the required prior consent shall be void. 9.20 Entire Agreement. This Agreement and the other written agreements between the Borrower and Lender represent the entire agreement between the parties concerning the subject matter hereof, and all oral discussions and prior agreements are merged herein. Provided, if there is a conflict between this Agreement and any other document executed contemporaneously herewith with respect to the Obligations, the provision in this Agreement shall control. 9.21 Severability. Should any provision of this Agreement be declared invalid or unenforceable for any reason, the remaining provisions hereof shall remain in full effect. 9.22 Time of Essence. Time is of the essence of this Agreement, and all dates and time periods specified herein shall be strictly observed. 9.23 Applicable Law. The validity, construction and enforcement of this Agreement and all other documents executed with respect to the Obligations shall be determined according to the laws of Tennessee applicable to contracts executed and performed entirely within 20 21 that state, except for the Deed of Trust, which the parties have agreed shall be governed by the laws of the State of Arizona. 9.24 Gender and Number. Words used herein indicating gender or number shall be read as context may require. 9.25 Captions Not Controlling. Captions and headings have been included in this Agreement for the convenience of the parties, and shall not be construed as affecting the content of the respective Sections. 9.26 Arbitration. Upon demand of any party hereto, whether made before or after institution of any judicial proceeding, any dispute, claim or controversy arising out of, connected with or relating to this Loan Agreement and other Loan Documents ("Disputes") between or among parties to this Loan Agreement shall be resolved by binding arbitration as provided herein. Institution of a judicial proceeding by a party does not waive the right of that party to demand arbitration hereunder. Disputes may include, without limitation, tort claims, counterclaims, disputes as to whether a matter is subject to arbitration, claims brought as class actions, claims arising from Loan Documents executed in the future, or claims arising out of or connected with the transaction reflected by this Loan Agreement. Arbitration shall be conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association (the "AAA") and Title 9 of the U.S. Code. All arbitration hearings shall be conducted in the city in which the office of Bank first stated above is located. The expedited procedures set forth in Rule 51 et seq. of the Arbitration Rules shall be applicable to claims of less than $1,000,000. All applicable statutes of limitation shall apply to any Dispute. A judgment upon the award may be entered in any court having jurisdiction. The panel from which all arbitrators are selected shall be comprised of licensed attorneys. The single arbitrator selected for expedited procedure shall be a retired judge from the highest court of general jurisdiction, state or federal, of the state where the hearing will be conducted or if such person is not available to serve, the single arbitrator may be a licensed attorney. Notwithstanding the foregoing, this arbitration provision does not apply to disputes under or related to swap agreements. 9.27 Preservation and Limitation of Remedies. Notwithstanding the preceding binding arbitration provisions, Bank and Grantor agree to preserve, without diminution, certain remedies that any party hereto may employ or exercise freely, independently or in connection with an arbitration proceeding or after an arbitration action is brought. Bank and Grantor shall have the right to proceed in any court of proper jurisdiction or by self-help to exercise or prosecute the following remedies, as applicable: (i) all rights to foreclose against any real or personal property or other security by exercising a power of sale granted under Loan Documents or under applicable law or by judicial foreclosure and sale, including a proceeding to confirm the sale; (ii) all rights of self-help including peaceful occupation of real property and collection of rents, set-off, and peaceful possession of personal property; (iii) obtaining provisional or ancillary remedies including injunctive relief, sequestration, garnishment, attachment, appointment of receiver and 21 22 filing an involuntary bankruptcy proceeding; and (iv) when applicable, a judgment by confession of judgment. Preservation of these remedies does not limit the power of an arbitrator to grant similar remedies that may be requested by a party in a Dispute. Grantor and Bank agree that they shall not have a remedy of punitive or exemplary damages against the other in any Dispute and hereby waive any right or claim to punitive or exemplary damages they have now or which may arise in the future in connection with any Dispute whether the Dispute is resolved by arbitration or judicially. 9.28 Federal Reserve. Nothing in this or other documents with respect to this transaction shall prohibit Lender from pledging or assigning the obligations evidencing this transaction including the collateral securing those obligations to any Federal reserve Bank in accordance with applicable law. Executed as of the date first written above. FORT AUSTIN LIMITED PARTNERSHIP By: ARC Fort Austin Properties, Inc. General Partner By:____________________________________ Title:_________________________________ FIRST UNION NATIONAL BANK OF TENNESSEE, Lender By:____________________________________ Title:_________________________________ 22 EX-10.23 4 CONSTRUCTION LOAN ADDENDUM 1 EXHIBIT 10.23 CONSTRUCTION LOAN ADDENDUM This Construction Loan Addendum is hereby incorporated into that certain Construction Loan Agreement dated March 28, 1997, between FIRST UNION NATIONAL BANK OF TENNESSEE ("Lender"), and FORT AUSTIN LIMITED PARTNERSHIP ("Borrower"). W I T N E S S E T H WHEREAS, Lender has agreed to extend a construction loan to Borrower, on certain terms and conditions; and WHEREAS, one condition to Lender's agreement to extend credit to Borrower is that Lender and Borrower must enter into a comprehensive agreement setting forth the terms and conditions of Borrower's construction loan; NOW, THEREFORE, as an inducement to cause Lender to extend credit to Borrower, and for other valuable consideration, the receipt and sufficiency of which are acknowledged, it is agreed as follows: ARTICLE I. DEFINITIONS As used in this Agreement, in addition to the definitions contained in the Agreement, the following words have the definitions indicated below unless context clearly requires otherwise: 1.1. Appraisal means that Appraisal dated December 3, 1996, whereby Alan C. Plush, MAI, of Gulf/Atlantic Valuation Services, Inc. appraises the value of the Project, "as completed," as $11,100,000.00 and "future stabilized" as $13,200,000.00. 1.2. Architect means Earl Swensson Associates, Inc. 1.3. Architect Contract means that contract for architectural services relative to the construction of the Improvements dated February 20, 1997, between Borrower and the Architect. 1.4. Budget means a written schedule of the Construction Costs and the Non-construction costs as estimated by Borrower for completion of the Project. 2 1.5. Building Permit means all permits necessary for the completion of the Improvements according to the Plans and Specifications. 1.6. Business Day means any day on which Lender is open for business. 1.7. Completion Date means April 30, 1998. 1.8. Construction Contract means that contract for the construction of the Improvements on a "fixed price" basis (or "cost plus" basis with guaranteed maximum) dated _________________, 199_, between Borrower and the Contractor. 1.9. Construction Costs means all costs set forth in the Budget for construction labor, materials, fixtures and furnishings incurred and to be incurred in the development of the Project. 1.10. Construction Inspector means EMJ Construction Consultants, Inc. 1.11. Contractor means The Weitz Company, Inc. 1.12. Dual Obligee Performance Bond means that dual obligee bond issued by American Home Assurance Company in favor of Borrower and Lender insuring construction of the Improvements according to the Plans and Specifications. 1.13. Encumbrances means the liens of all real estate taxes, personal property taxes, and other taxes and assessments; deeds of trust; mortgages; judgment liens; restrictive covenants; easements; and other presently existing or hereafter created restrictions or other encumbrances. 1.14. GECC means General Electric Capital Corporation. 1.15. Improvements means a building of approximately 97,500 square feet to be constructed upon the Land according to the Plans and Specifications and all other improvements to the Land incident thereto. 1.16. Land means the real property described in Exhibit A hereto. 1.17. Non-Construction Costs means all costs set forth in the Budget for interest, architects fees, surveyors fees, attorneys fees, loan fees, costs for land acquisition or the release of prior encumbrances and other costs, other than Construction Costs, to be incurred in the development of the Project. 1.18. Plans means those plans dated November 20, 1996, with revisions dated January 14, 1997, prepared by the Architect. - 2 - 3 1.19. Project means the Land and the Improvements. 1.20. Project Manager means Knestrick Management, Inc. (KMI). 1.21. Specifications means those specifications dated November 20, 1996, prepared by the Architect. 1.22. Survey means that survey of the Land dated December 20, 1995, prepared by Ashby Survey & Drafting, Inc. 1.23. Title Company means First American Title Insurance Company. 1.24. Tri-Party Agreement means that agreement among Borrower, Lender, and GECC relating to the Project. ARTICLE II. LOAN DOCUMENTS 2.1. Security Documents. Concurrently with the execution of this Agreement, Borrower shall provide Lender with the following documents to evidence and secure the Construction Loan, in form and substance satisfactory to Lender: (a) Promissory Note made by Borrower in the original principal amount of Eleven Million Six Hundred Thousand Dollars ($11,600,000.00), payable to the order of Lender. (b) Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing encumbering the Project in favor of Lender, subject only to the Permitted Encumbrances. (c) Collateral Assignment of Construction Contract granting Lender a first priority security interest in the Construction Contract. (d) Collateral Assignment of Architect Contract granting Lender a first priority security interest in the Architect Contract. (e) Collateral Assignment of Project Management Contract granting lender a first priority security interest in the Project Management Contract. (f) U.C.C. Financing Statements for filing with the Arizona Secretary of State and the Office of the County Recorder for Pima County, Arizona. - 3 - 4 (g) Other Documents as Lender may require to evidence and secure the Construction Loan. 2.2. Other Closing Documents. Concurrently with the execution of this Agreement, Borrower shall provide Lender with the following additional documents, in form and substance satisfactory to Lender: (a) Certificate of Borrower's Good Standing under applicable law issued by the Secretary of State within thirty (30) days of the date hereof. (b) Certified Copy of Resolution of Borrower's Board of Directors executed by Borrower's Secretary authorizing a named officer or officers of Borrower to enter into this Agreement and to execute all related documents on Borrower's behalf, and including the Secretary's certification of the incumbency of such officer or officers. (c) Closing Statement listing disbursements for all closing expenses and for the initial draw under the Construction Loan. (d) Legal Opinion executed by Borrower's counsel addressing such matters as Lender shall require. (e) Evidence of Insurance as required by Article _____ hereof. (f) Commitment of the Title Company to issue a mortgagee title insurance policy naming Lender as the holder of a first lien on the Project, subject only to the Permitted Encumbrances. (g) Owner's Affidavit sufficient to induce the title company to delete all standard exceptions from Lender's mortgagee title insurance policy. (h) Construction Inspector's Contract among Borrower, Lender, GECC, and the Construction Inspector providing for inspections of the Project by the Construction Inspector. (i) Program Management Consultant Agreement between Borrower and Project Manager providing for certain construction management services. (j) Contractor's Acknowledgment of assignment of the Construction Contract. - 4 - 5 (k) Architect's Acknowledgment of assignment of the Architect Contract. (l) The Plans. (m) The Specifications. (n) The Budget. (o) The Construction Contract. (p) The Architect Contract. (q) The Appraisal. (r) The Survey and Surveyor's Report sufficient to induce the Title Insurance Company to delete any exception for matters determinable by survey from Lender's mortgagee title insurance policy. (s) The Dual Obligee Performance Bond. (t) Copies of all Building Permits. (t) Unlimited Guaranties by each of the ARC Entities other than Borrower and ARCLP-Charlotte, L.L.C. Such guaranties shall be secured by all collateral currently securing obligations of such entities to Lender. (u) Tri-Party Agreement among Borrower, Lender and GECC. (u) Other Documents as Lender may require in connection with the closing of the Construction Loan. 2.3. Delivery of Closing Documents as Conditions Precedent to Advances. If any of the Loan Documents are not delivered to Lender concurrently with the execution hereof, the delivery of the remainder of the Loan Documents in form and substance acceptable to Lender shall be an express condition precedent to Lender's making of any advances under the Construction Loan. Lender may waive this condition as to an advance for closing costs or for any other advance by allowing the funding thereof; provided, however, Lender's making of any such advance(s) shall not be considered a waiver of this condition as to future advance requests, unless Lender specifically so agrees in writing. - 5 - 6 ARTICLE III. INSURANCE 3.1. Insurance During Construction. During construction of the Project, the following insurance policies shall be maintained in force: (a) The Improvements and all related construction equipment, supplies and materials shall be insured against "all risks of physical loss," including collapse and transit coverage, under a builder's risk insurance policy in "replacement cost" or "completed value" form. The deductible under said policy shall not exceed $1,000.00. The provisional value stated in said policy, if in "completed value" form, shall not be less than the maximum insurable value of the Project "as completed." Said policy shall also contain the "permission to occupy upon completion of work" endorsement. (b) The employees of the contractor and all subcontractors employed with respect to the Project shall be covered by worker's compensation insurance in such amounts as the law requires. (c) Public liability insurance shall be maintained covering the acts of Borrower, the general contractor, subcontractors, and their employees. Such policy shall insure against all claims for personal injury and death on an occurrence basis in an amount not less than $1,000,000 per occurrence. 3.2. Insurance After Construction. Borrower covenants to keep the following insurance policies in force upon the substantial completion of the Improvements: (a) The Improvements shall be insured against fire and other hazards included in coverage against "all risks of physical loss," under a policy with a deductible of not more than $10,000.00 and with the "replacement cost" endorsement. (b) All employees of Borrower whose employment pertains to the Project shall be covered by worker's compensation insurance in such amounts as are required by law. (c) Borrower shall be covered by a comprehensive public liability insurance policy including coverage for elevators and escalators and providing completed operations coverage. Such policy shall insure against all claims for personal injury and death on an occurrence basis in an amount not less than $1,000,000.00 per occurrence. - 6 - 7 (d) Borrower shall maintain business interruption insurance and/or "loss of rental value" insurance providing coverage for at least a six (6) month period. (e) Borrower shall insure all personalty on the Project against, fire, theft, and other hazards as Lender may require. (f) Borrower shall maintain such other insurance as Lender may reasonably require. 3.3. Insured Mortgagee. All required policies of property insurance shall name Lender as insured first mortgagee under a noncontributing mortgagee clause acceptable to Lender. All liability policies shall name Lender as an additional insured. Said policies shall also provide that they will not be canceled or the coverage thereunder reduced or restricted in any way without Lender being given at least thirty (30) days prior written notice. 3.4. Delivery of Policies, Payment of Premiums. All required policies of insurance shall be issued by companies and in amounts, form and substance satisfactory to Lender. Borrower shall furnish Lender with the originals of all required insurance policies. At least thirty (30) days prior to the expiration of each such policy, Borrower shall furnish Lender with evidence satisfactory to Lender of the insurer's agreement to reissue said policy and of the payment of the premium for reissuance. If Borrower fails to maintain and furnish to Lender the policies of insurance required by this Article, Lender may obtain such insurance or single-interest insurance for such risks covering Lender's interest. All expenses incurred by Lender in obtaining such insurance shall be deemed additional advances for the benefit of Borrower under the Construction Loan. 3.5. Insurance Proceeds. Borrower agrees to give Lender prompt written notice of any casualty to the Project. The proceeds of any insurance policy pertaining to the Project shall be paid directly to Lender, but may be used by Borrower to restore the Project so long as no Event of Default has occurred and is continuing. If an Event of Default has occurred and is continuing, then Lender may apply said proceeds, in its sole discretion, (i) to the reduction of the Obligations, (ii) to the restoration of the Improvements, or (iii) to Borrower with or without restriction. Borrower hereby directs all issuers of insurance policies relating to the Project to pay all amounts due thereunder directly to Lender and Borrower hereby appoints Lender as Borrower's attorney-in-fact to receive any sums due under insurance policies concerning the Project, to endorse any drafts or instruments received under such policies, and to make proof of loss for, settle, and give binding acquittances for claims under such policies. 3.6. Assignment of Policies Upon Foreclosure. If all or part of Project is sold at foreclosure, all policies of insurance pertaining to the Project and then in force shall pass to the purchaser at such sale. - 7 - 8 ARTICLE IV. DISBURSEMENTS 4.1. Disbursement Requests. The administration of disbursements under the Construction Loan shall be conducted according to the following: (a) Form and Delivery of Requests. Disbursement requests shall be submitted in writing on AIA Form G702 (with schedules attached) to the following address or such other address as Lender may direct: First Union Corporation Construction Loan Administration Attention: Lisa Brown P.O. Box 740074 Atlanta, GA 30374 or 200 East Ponce de Leon First Floor Decatur, GA 30030 If Lisa Brown is not available, disbursement requests may be submitted to any other officer at that office of Lender. Each disbursement request must be signed by Borrower, the Contractor, the Project Manager, and the Architect, and must be accompanied by a certificate signed by the Construction Inspector in form and substance satisfactory to Lender. If Borrower satisfies the conditions stated in herein, disbursements shall be funded within five (5) Business Days of request. Invoices shall be submitted for disbursements of $5,000.00 or more. (b) Frequency and Amount of Disbursements. Lender shall not be obligated to make disbursements more frequently than monthly. Borrower shall request no disbursement (except the final disbursement) for an amount less than $500,000.00. (c) Application of Disbursements; Retainage. Borrower's draw requests shall be made only for Non-Construction Costs actually incurred and for Construction Costs actually incurred and arising from labor performed and materials incorporated into the Project, with advances for Construction Costs to be subject to a ten percent (10%) retainage (other than the contractor's fee and general conditions) to be administered in accordance with applicable law until such time as the Project is fifty percent (50%) complete, after which subsequent draws shall not be subject any further retainage. - 8 - 9 No disbursements shall be made for materials stored off the Project site. Borrower shall apply each disbursement to the expenses itemized in the disbursement request. (d) Additional Documents. Lender may require that affidavits, certificates, receipts or other written evidence satisfactory to Lender of any or all of the following be submitted with disbursement requests: (i) The percentage of completion of the Improvements and the value of the Improvements already completed; (ii) That Borrower is not in default under any document pertaining to the Obligations; (iii) That all construction has been performed in accordance with the Plans and Specifications; (iv) That the Dual Obligee Performance Bond is in full effect; (v) That all funds previously disbursed by Lender have been applied directly to the costs of construction of the Improvements or to the payment of other costs permitted under this Agreement, allocated as represented in the disbursement requests submitted to Lender; (vi) That the amount of undisbursed Construction Loan proceeds is sufficient to pay the costs of completing the Improvements in accordance with the Plans and Specifications; and (vii) That the time remaining before the Completion Date is sufficient to allow the timely completion of construction of the Project. (viii) Such other matters as Lender may reasonably require. 4.2. Conditions Precedent to Disbursements. Lender's obligation to disburse proceeds of the Construction Loan is subject to the following conditions: (a) Truth of Warranties. All warranties made herein and in the other Loan Documents must be true as of the date of the submission of the disbursement request. - 9 - 10 (b) Compliance with Covenants. All covenants made herein and in the other Loan Documents must be fully complied with as of the date of submission of the disbursement request. (c) No Default. Borrower must not be in default under this Agreement or under any other of the Loan Documents and no condition shall exist that with the giving of notice, the passing of time, or both, would constitute a default under this Agreement or under any other of the Loan Documents. (d) Disbursement Documentation. Lender must be satisfied that the requirements stated herein above have been satisfied. (e) Compliance with Budget. The requested disbursement must not cause any expense itemized in the Budget to exceed its budgeted amount or violate the terms of the Tri-Party Agreement. (f) Warranties Implied in Request. The submission of a request for advance hereunder shall constitute a warranty by Borrower that conditions stated in (a), (b) and (c) above are satisfied as of the date of the request. 4.3. Additional Conditions to Final Disbursement. In addition to the other conditions set forth above, the delivery of the following documents to Lender shall be a condition precedent to the final disbursement of retainage amounts: (a) Architect's Certificate. A certificate of the Architect addressed to Lender stating that the construction of the Project has been completed in a good and workmanlike manner and in material compliance with the Plans and Specifications. (b) Construction Inspector's Certificate. A certificate of the Construction Inspector addressed to Lender stating that the construction of the Project has been completed in a good and workmanlike manner and in material compliance with the Plans and Specifications. (c) Certificate of Occupancy. The original permanent Certificate of Occupancy for the Project. (d) Contractor's Affidavit. An affidavit of the Contractor addressed to Lender stating that all suppliers of labor and/or materials for the Project have been paid without any continuing dispute over the charges or value of their materials or services, or that the final - 10 - 11 disbursement will be sufficient to pay all such charges in full, with no such dispute. Lender may also require the filing of a notice of completion to determine the remaining claims against the Project for labor and materials. (e) Final Survey. A final updated survey of the Project, showing all Improvements. 4.4. Disposition of Advances. All disbursements under the Construction Loan shall be made by crediting a special account of Borrower at Lender, which account shall only be used by Borrower for depositing and disbursing Construction Loan proceeds. Lender, in its sole discretion, may choose to make any or all disbursements under the Construction Loan directly to the appropriate general contractor, subcontractor, laborer or materials furnisher, whether or not a disbursement has been requested by Borrower. Any amounts advanced by Lender directly to any of such persons or entities shall be deemed additional advances under the Construction Loan. 4.5. Advance Not Waiver. No advance of Construction Loan proceeds hereunder shall constitute a continuing waiver of any of the conditions to Lender's right to declare a default or otherwise demand strict compliance with this Agreement, unless Lender agrees to the contrary in a writing specifically referring to this Paragraph. 4.6. Draws by Debit Memorandum. Lender may, without prior notice to Borrower, draw any amount available under the Construction Loan to pay any interest or expenses that are not timely paid by Borrower. ARTICLE V. ADDITIONAL WARRANTIES AND COVENANTS 5.1. Leases. Borrower covenants to deliver to Lender, prior to their execution, copies of all leases of the Project which shall be in form and content satisfactory to Lender. 5.2. Lien Waivers and Contractor Affidavits. Upon Lender's request, Borrower shall cause the Contractor to furnish to Lender copies of all subcontracts and purchase orders relating to construction of the Project. Borrower shall also cause the Contractor to furnish to Lender, upon request, statements from the Contractor and from each subcontractor and supplier (i) stating the amount of its contract and the amount paid to date; and (ii) stating the amount currently due for work done and materials supplied. 5.3. Plans and Specifications. The construction of the Improvements shall be performed according to the Plans and Specifications. No changes shall be made in the Plans and Specifications without the prior written approval of Lender, except for changes which meet the requirements set forth in the Tri-Party Agreement for changes not requiring prior approval. All change orders shall be submitted on standard AIA forms. - 11 - 12 5.4. Access to Project. Borrower agrees to give the Construction Inspector and Lender's agents and independent contractors access to the Project at all times for the purpose of inspecting the progress of construction of the Improvements. Any inspection conducted on behalf of Lender shall be for Lender's benefit alone, and Lender's continued funding of construction after any inspection does not imply that Lender has determined or assured that the Improvements are being constructed in a safe manner or in accordance with the Plans and Specifications. 5.5. Indemnification. Borrower acknowledges that it has already begun site preparation work on the Project and agrees to provide an Indemnification Agrement to the Title Insurance Company and to take such other actions as the Title Insurance Company may require to affirmatively insure Lender against mechanic's liens. 5.6. Zoning. Borrower warrants that the Project is suitably zoned to permit construction on the Project pursuant to the Plans and Specification, and to permit the operation of the Project for its intended use as a retirement living facility. 5.7. Utilities. Borrower warrants that all adequate utility services for water, sewerage, electricity, gas, and telephone services are available at the Project and can be accessed upon payment of only the ordinary tap or hook-up fees charged by the respective utility companies. 5.8. Subsurface Conditions. Borrower warrants that it has tested subsurface conditions on the Project and that no condition exists that may reasonably be expected to interfere with or delay the construction of the Improvements or the operation thereof after completion. Without limiting the foregoing, Borrower warrants that excavation for the Improvements is not expected to require the blasting and/or removal of rock in excess of the amount, if any, itemized in the Budget. 5.9. No Flood Risk. Borrower warrants that except as shown on the survey provided to Lender, none of the Project is within the 100-year flood plain or flood way as determined by the Department of Housing and Urban Development or by the Army Corps of Engineers, and that the Project is not otherwise known or believed to be a flood risk. 5.10. No Off-Site Construction. Borrower warrants that the construction of the Improvements and the operation thereof when completed does not require the construction of any sewer lines, water detention ponds, sewage treatment plants, roads, or other improvements that will not be located on the Project. 5.11. Adequacy of Budget. Borrower warrants that the Budget provides sufficient funds to complete construction of the Improvements according to the Plans and Specifications, which provide for all of the improvements that Borrower intends to make on the Project. - 12 - 13 5.12. Commencement and Completion of Construction. Borrower agrees to commence construction of the Improvements within ten (10) days after the date of this Agreement, and to diligently pursue such construction to completion on or before the Completion Date in one continuous operation. 5.13. Construction Sign. Borrower agrees to promptly erect and maintain on the Project a conspicuous project identification sign, which shall be at least four feet by eight feet in size and which shall name Lender as construction lender, in a format to be approved by Lender. 5.14. Books and Records. Borrower covenants to maintain complete and accurate books and records reflecting all items of income and expense in connection with the acquisition and construction of the Project. Borrower agrees to make its books and records available to Lender for inspection upon request. 5.15. Notification of Claims by Subcontractors and Materialmen. Borrower agrees to give Lender prompt written notice if Borrower receives any notice, whether written or oral, from any laborer, subcontractor or materialman to the effect that such party has not been paid when due for any labor or materials furnished in connection with the construction of the Improvements. 5.16. No Violation of Laws; Permits. Borrower warrants that the construction and operation of the Improvements will not violate in any material respect any applicable law or regulation including, but not limited to, any law or regulation pertaining to sewage disposal or any other environmental impact of the Project. Borrower further warrants that all permits from necessary health departments and other regulatory agencies that will be required to allow the construction or operation of the Project have been obtained or, if not, the appropriate aspect of the Plans and Specifications have been approved in writing by such departments or agencies. 5.17. Update of Survey. After completion of the foundation stage of construction, Lender shall be provided with an updated survey of the Project showing the location of all improvements. Upon completion of the Project, Lender shall be provided with a final survey of the Project so as to show the Improvements and all appurtenances as constructed. 5.18. Capacity. Borrower warrants that it is and shall remain a duly organized Texas limited partnership. Borrower further warrants that the execution of all necessary consents, partnership resolutions, or other documents has been duly performed so that the partner signing this Agreement and all related documents on behalf of Borrower is duly authorized to bind Borrower by his signature. 5.19. Changes in Financial Condition. Borrower covenants to give Lender prompt written notice of the creation or discovery of any additional contingent liability or the occurrence of any other material adverse change in the financial condition of Borrower or of any guarantor or other person or entity presently or hereafter liable for payment of all or part of the Obligations. - 13 - 14 5.20. Default Certificates. Within two (2) business days after written request by Lender, Borrower shall provide Lender with the written certificate of Borrower's president, general partner or other appropriate representative stating whether, to the best of the representative's knowledge, information, and belief, a default exists hereunder, or whether any condition or event exists which, with the giving of notice, the passage of time, or both, would constitute such a default. Any such defaults, events or conditions shall be described with particularity. The certificate shall further address any specific matters inquired of by Lender regarding possible defaults under this Agreement. 5.21. No Unpaid Taxes. Borrower warrants that Borrower is not presently delinquent in the payment of any taxes imposed by any governmental authority or in the filing of any tax return and that Borrower is not involved in a dispute with any taxing authority over tax amounts due. Borrower covenants that all future taxes assessed against Borrower shall be timely paid and that all tax returns required of Borrower shall be timely filed. 5.22. Compliance with Law. Borrower warrants that Borrower's business activities are conducted in accordance in all material respects with all applicable laws and regulations, the violation of which would have a Material Adverse Effect, and Borrower covenants that such activities shall continue to be so conducted. 5.23. Assistance in Litigation. Borrower covenants to, upon request, cooperatively participate in any proceeding in which Borrower is not an adverse party to Lender and which concerns Lender's rights regarding the Obligations or any collateral securing its payment. 5.24. Name. Borrower warrants that Borrower has not been known under or done business (except that project referred to as ______________) under any name other than the name used by Borrower in executing this Agreement. Borrower agrees to give Lender at least fifteen (15) days prior written notice before Borrower begins using any name other than that used in executing this Agreement. 5.25. Security Interest; Setoff. In order to further secure the payment of the Obligations, Borrower hereby grants to Lender a security interest and right of setoff against all of Borrower's presently owned or hereafter acquired monies, items, credits, deposits and instruments (including certificates of deposit) presently or hereafter in the possession of Lender. By maintaining any such accounts or other property at Lender, Borrower acknowledges that Borrower voluntarily subjects the property to Lender's rights hereunder. 5.26. Expenses. Upon demand, Borrower will advance to Lender or, at Lender's option, reimburse Lender for, the following expenses: (a) Taxes. All taxes that Lender may be required to pay because of the Obligations (other than income taxes) or because of Lender's interest in any property securing the payment of the Obligations; - 14 - 15 (b) Administration. All expenses that Lender may incur in connection with the preparation, execution, or enforcement of this Agreement or of any other document pertaining to the Obligations; (c) Protection of Collateral. All costs of preserving, insuring, preparing for sale (whether by improvement, repair or otherwise) or selling any collateral securing the Obligations; (d) Costs of Collection. All court costs and other costs of collecting any debt, overdraft or other obligation included in the Obligations, including compensation for time spent by employees of Lender; (e) Litigation. All costs arising from any litigation, investigation, or administrative proceeding (whether or not Lender is a party thereto) that Lender may incur as a result of the Obligations or as a result of Lender's association with Borrower, including, but not limited to, expenses incurred by Lender in connection with a case or proceeding involving Borrower under any chapter of the Bankruptcy Code or any successor statute thereto; (f) Attorneys Fees. Reasonable attorneys' fees incurred in connection with any of the foregoing. If Lender pays any of the foregoing expenses, they shall become a part of the Obligations and shall bear interest at the lower rate of Prime plus 4% per annum or the highest lawful rate. This Paragraph shall remain in full effect regardless of the full payment of the Obligations, the purported termination of this Agreement, the delivery of the executed original of this Agreement to Borrower, or the content or accuracy of any representation made by Borrower to Lender. Provided, Lender may terminate this Paragraph by executing and delivering to Borrower a written instrument of termination specifically referring to this Paragraph. 5.27. Further Assurances. Borrower covenants to execute such other assignments, security agreements, financing statements, and other documents that Lender may deem necessary to further evidence the obligations provided for herein or to perfect, extend, or clarify Lender's rights in any property securing or intended to secure the Obligations. Lender is hereby appointed as Borrower's attorney-in-fact for the signing of such documents. Borrower acknowledges that this power of attorney is coupled with an interest and is irrevocable. 5.28. Recitals. Borrower warrants and agrees that the recitals set forth at the beginning of this Agreement are true. 5.29. No Burdensome Agreements. Borrower warrants that Borrower is not a party to any contract or agreement and is not subject to any contingent liability that does or may impair Borrower's ability to perform under the terms of this Agreement. Borrower further - 15 - 16 warrants that the execution and performance of this Agreement will not cause a default under any other contract or agreement to which Borrower or any property securing the Obligations or any other property of Borrower is subject. 5.30. Legal and Binding Agreement. Borrower warrants that the execution and performance of this Agreement will not violate any judicial or administrative order or governmental law or regulation, and that this Agreement is valid and binding in every respect according to its terms. 5.31. No Consent Required. Borrower warrants that Borrower's execution and performance of this Agreement do not require the consent of or the giving of notice to any third party including, but not limited to, any other lender, governmental body or regulatory authority. ARTICLE VI. DEFAULT 6.1. Remedies Upon Default. Upon the occurrence of a default under this Agreement that continues for more than thirty (30) days after the earlier of (i) Borrower's actual knowledge of such default, or (ii) written notice thereof from Lender, Lender may pursue any or all of the following remedies, without notice to Borrower: (a) Possession of Project. Lender may take exclusive possession of the Project without the appointment of a receiver and without prior notice to Borrower. Borrower hereby waives the benefit of any rule of law or equity requiring notice or delay in Lender's taking possession of the Project upon default. Lender shall not be liable to Borrower or to any third party for any damages, including damages for breach of any contract, that might result from Lender's exercise of its remedies hereunder and its ejectment, by detainer action or otherwise, of Borrower or of any general contractor, subcontractor, or other party from the Project. Lender may, but shall not be obligated to, retain security guards or take other measures to protect the Project. (b) Additional Construction. Lender may continue or resume construction on the Project pursuant to the Plans and Specifications or pursuant to such variations thereof or other plans or specifications as Lender may deem appropriate. Any construction so caused by Lender may be terminated by Lender at any time, in its discretion. In furtherance of construction, Lender may take any of the following action: - 16 - 17 (i) Lender may retain such contractors, subcontractors, architects, engineers, laborers, and other persons and firms as it may elect. Lender shall not be required to use any particular person or firm because the person or firm had a prior contract with Borrower. (ii) Lender may purchase construction materials and supplies from such sources as it may elect. Lender shall not be required to use any particular supplier, because the supplier had a prior contract with Borrower. (iii) Lender may pay, litigate or compromise any claim for labor, professional services or materials that may result in a lien upon the Project. (iv) Lender may make any applications or give any certificates with respect to the Project including, but not limited to, applications pertaining to zoning variances and other applications to regulatory agencies. (v) Lender may take any other action it may deem necessary to protect the Project, to promote construction thereon, or to enhance the value or marketability of the Project. (c) Marketing of Project. Lender may retain a broker or real estate agent to attempt to seek a buyer for all or part of the Project on commission terms deemed reasonable by Lender, including a retainer that may be paid whether or not the Project is sold as a result of the broker or agent's efforts. (d) Preservation of Financing. Lender may take any action necessary to cure or prevent a default under any other lender's commitment to provide financing with respect to any or all of the Project. (e) Attorney-in-Fact. Any action taken by Lender pursuant to its remedies hereunder may be taken by Lender in its own name or in the name of Borrower. Borrower hereby appoints Lender as Borrower's attorney-in-fact, with full power of substitution, to take any action authorized by this Agreement on Borrower's behalf. The parties acknowledge that this power of attorney is coupled with an interest and is irrevocable. Without limiting the foregoing, Lender is specifically authorized to initiate, pursue, settle or dismiss judicial or administrative proceedings pertaining to the Project. - 17 - 18 (f) Expenses. All expenses incurred by Lender in the pursuit of remedies hereunder, including, but not limited to, the expenses of construction and reasonable attorneys' fees, shall be deemed additional advances for the benefit of Borrower under the Construction Loan. (g) Setoff. Lender may exercise its lien upon and right of setoff against any monies, items, credits, deposits or instruments that Lender may have in its possession and which belong to Borrower or any other person or entity liable for the payments of any or all of the Secured Indebtedness. (h) Other Remedies. Lender may pursue any other remedies available under any other document evidencing or securing the Obligations or otherwise available to Lender at law or equity. 6.2. Application of Proceeds. All amounts received by Lender for Borrower's account shall be applied as follows: First, to the payment of all expenses incurred by Lender in exercising its rights hereunder, including attorney's fees, and any other expenses due Lender from Borrower; Second, to the payment of all interest due Lender; Third, to the payment of all principal due Lender, in such order as Lender may elect; and Fourth, surplus to Borrower. FORT AUSTIN LIMITED PARTNERSHIP By: ARC Fort Austin Properties, Inc. General Partner By:___________________________________________ Title:________________________________________ FIRST UNION NATIONAL BANK OF TENNESSEE, Lender By:___________________________________________ Title:________________________________________ - 18 - EX-10.24 5 PROMISSORY NOTE 1 EXHIBIT 10.24 CONSTRUCTION LOAN PROMISSORY NOTE $11,600,000.00 Nashville, Tennessee March 28, 1997 FOR VALUE RECEIVED, FORT AUSTIN LIMITED PARTNERSHIP ("Maker"), a Texas limited partnership, promises to pay to the order of First Union National Bank of Tennessee ("Payee"), a national banking association, the sum of Eleven Million Six Hundred Thousand Dollars ($11,600,000.00) together with interest thereon as provided in that certain Construction Loan Agreement of even date herewith between Maker and Payee (the "Construction Loan Agreement"). Payments of principal and interest on the outstanding principal balance hereunder shall be made as provided in the Construction Loan Agreement. All remaining principal and interest shall be due and payable on June 30, 1998. Interest hereunder shall be calculated based upon a 360-day year and actual days elapsed. The interest rate required hereby shall not exceed the maximum rate permissible under applicable law, and any amounts paid in excess of such rate shall be applied to reduce the principal amount hereof or shall be refunded to Maker, at the option of the holder of this Note. All amounts due under this Note are payable at par in lawful money of the United States of America, at the principal place of business of Payee in Nashville, Tennessee, or at such other address as the Payee or other holder hereof (herein "Holder") may direct. To the maximum extent permitted under applicable law, any payment not made within fifteen (15) days of its due date will be subject to assessment of a late charge equal to five percent (5%) of such payment. Holder's right to impose a late charge does not evidence a grace period for the making of payments hereunder. The occurrence of any Event of Default under the Construction Loan Agreement shall constitute an Event of Default hereunder. Upon the occurrence of an Event of Default, as so defined, Holder may, at its option and without notice, declare all principal and interest provided for under this Note, and any other obligations of Maker to Holder, to be presently due and payable, and Holder may enforce any remedies available to Holder under any documents securing or evidencing debts of Maker to Holder. Holder may waive any Event of Default before or after it occurs and may restore this Note in full effect without impairing the right to declare it due for a subsequent Event of Default, this right being a continuing one. Following the occurrence of an Event of Default, the remaining unpaid principal balance of the indebtedness evidenced hereby and all expenses due Holder shall bear interest at the default rate set forth in the Construction Loan Agreement. All amounts received for payment of this Note shall be first applied to any expenses due Holder under this Note or under any other documents evidencing or securing obligations of Maker to Holder, then to accrued interest, and finally to the reduction of principal. Prepayment of principal or accrued interest may be made, in whole or in part, at any time, without premium or penalty. Any Page 1 of 3 2 partial prepayment(s) shall reduce the final payment(s) and shall not reduce or defer installments next due. This Note may be freely transferred by Holder. Maker and all sureties, guarantors, endorsers and other parties to this instrument hereby consent to any and all renewals, waivers, modifications, or extensions of time (of any duration) that may be granted by Holder with respect to this Note and severally waive demand, presentment, protest, notice of dishonor, and all other notices that might otherwise be required by law. All parties hereto waive the defense of impairment of collateral and all other defenses of suretyship. Maker and all sureties, guarantors, endorsers and other parties hereto agree to pay reasonable attorneys' fees and all court and other costs that Holder may incur in the course of efforts to collect the debt evidenced hereby or to protect Holder's interest in any collateral securing the same. The validity and construction of this Note shall be determined according to the laws of Tennessee applicable to contracts executed and performed within that state. If any provision of this Note should for any reason be invalid or unenforceable, the remaining provisions hereof shall remain in full effect. The provisions of this Note may be amended or waived only by instrument in writing signed by the Holder and Maker and attached to this Note. Words used herein indicating gender or number shall be read as context may require. Arbitration. Upon demand of any party hereto, whether made before or after institution of any judicial proceeding, any dispute, claim or controversy arising out of, connected with or relating to this Note and other Loan Documents ("Disputes") between or among parties to this Note shall be resolved by binding arbitration as provided herein. Institution of a judicial proceeding by a party does not waive the right of that party to demand arbitration hereunder. Disputes may include, without limitation, tort claims, counterclaims, disputes as to whether a matter is subject to arbitration, claims brought as class actions, claims arising from Loan Documents executed in the future, or claims arising out of or connected with the transaction reflected by this Note. Arbitration shall be conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association (the "AAA") and Title 9 of the U.S. Code. All arbitration hearings shall be conducted in Nashville, Tennessee. The expedited procedures set forth in Rule 51 et seq. of the Arbitration Rules shall be applicable to claims of less than $1,000,000. All applicable statutes of limitation shall apply to any Dispute. A judgment upon the award may be entered in any court having jurisdiction. The panel from which all arbitrators are selected shall be comprised of licensed attorneys. The single arbitrator selected for expedited procedure shall be a retired judge from the highest court of general jurisdiction, state or federal, of the state where the hearing will be conducted or if such person is not available to serve, Page 2 of 3 3 the single arbitrator may be a licensed attorney. Notwithstanding the foregoing, this arbitration provision does not apply to disputes under or related to swap agreements. Preservation and Limitation of Remedies. Notwithstanding the preceding binding arbitration provisions, Payee and Maker agree to preserve, without diminution, certain remedies that any party hereto may employ or exercise freely, independently or in connection with an arbitration proceeding or after an arbitration action is brought. Payee and Maker shall have the right to proceed in any court of proper jurisdiction or by self-help to exercise or prosecute the following remedies, as applicable: (i) all rights to foreclose against any real or personal property or other security by exercising a power of sale granted under Loan Documents or under applicable law or by judicial foreclosure and sale, including a proceeding to confirm the sale; (ii) all rights of self-help including peaceful occupation of real property and collection of rents, set-off, and peaceful possession of personal property; (iii) obtaining provisional or ancillary remedies including injunctive relief, sequestration, garnishment, attachment, appointment of receiver and filing an involuntary bankruptcy proceeding; and (iv) when applicable, a judgment by confession of judgment. Preservation of these remedies does not limit the power of an arbitrator to grant similar remedies that may be requested by a party in a Dispute. Maker and Payee agree that they shall not have a remedy of punitive or exemplary damages against the other in any Dispute and hereby waive any right or claim to punitive or exemplary damages they have now or which may arise in the future in connection with any Dispute whether the Dispute is resolved by arbitration or judicially. Federal Reserve. Nothing in this or other documents with respect to this transaction shall prohibit Lender from pledging or assigning the obligations evidencing this transaction including the collateral securing those obligations to any Federal Reserve Bank in accordance with applicable law. FORT AUSTIN LIMITED PARTNERSHIP By: ARC Fort Austin Properties, Inc. General Partner By:______________________________ Title:___________________________ Page 3 of 3 EX-10.25 6 NATIONAL HEALTH INVESTORS LETTER OF INTENT 1 EXHIBIT 10.25 [NATIONAL HEALTH INVESTORS, INC. LETTERHEAD] April 3, 1997 Mr. Bill Sheriff, President American Retirement Corporation 111 Westwood Place, Suite 402 Brentwood, TN 37027 Via Facsimile: 221-2269 Re: Construction and Leaseback Financing for Independent Living, Assisted Living and Licensed Nursing Home Projects Dear Bill: National Health Investors, Inc. (NHI) is pleased to offer this Letter of Intent to provide both construction and leaseback financing for the above, subject to the following terms and conditions: AMOUNT OF COMMITMENT: Up to $100,000,000 to be applied toward the construction and financing of the Projects with related closing costs to include $100,000 Owner's Development Fee per project. No proposed projects will be financed unless i) ARC is not in default on any financial obligation, and ii) proforma on proposed project indicates obtaining a 1.25 debt coverage ratio within 24 months of completion. Usage: This development line will be i) valid for 36 months from date of definitive agreement, ii) must be drawn at least $30 million dollars per year with short fall reducing undrawn commitment, and iii) must be a 50/50 mix of new projects and acquisitions measured annually on a cumulative basis. RATE DURING CONSTRUCTION: Prime POINTS AND DISCOUNT: Zero if ARC has at least $35,000,000 in shareholders' equity and 50 Basis Points if not. INITIAL LEASE TERM & RATE: Ten to fifteen year initial term at Lessee's option, with rate to be set based upon Lessor's original cost times the Ten(10) to Fifteen(15) Year Treasury rate at time of Certificate of Occupancy plus 325 Basis Points if ARC has at least $35,000,000 in shareholders' equity, but if not, then applicable Treasury plus 350 Basis Points. The equity requirement will increase $1,000,000 per year, with rate adjustments (if any) to be made effective January 1 based upon the prior year audit. RENEWAL LEASE TERM & RATE: Each renewal term shall be for ten to fifteen years and the rate shall be set at the Ten to Fifteen Year Treasury plus 300 Basis Points (or 325 Basis points if, at that time, ARC does not have at least $45,000,000 in shareholders' equity) times the Fair Market Value, but not to exceed 125% of the prior term's ending rate. Fair Market Value is the lesser of the Project value established by a MAI appraisal or Lessor's original cost inflated by 50% of the CPI cumulative over the prior term, but in no event less than Lessor's original cost. 2 ANNUAL LEASE ESCALATOR: Greater of C.P.I. or 5% of revenue increase over first complete year of occupancy, with a maximum increase of 2.5% per year. Home care revenues are excluded from calculation. LEASE TERM: 10 TO 15 years from Certificate of Occupancy with three (3) 10 to 15-year renewal options at ARC's discretion. LESSEE: ARC GUARANTOR: ARC LESSOR: National Health Investors, Inc. GENERAL TERMS: a. Lease is net, net to Lessor. First six months lease payments are accrued and included in cost of Project then amortized over the remaining term of the initial lease term. b. There will be a 3-mile non-compete around each Project. c. At Closing a six(6) months lease service reserve will be provided in a Letter of Credit. The lease service reserve will be reduced to three months once $25,000,000 has been funded and then no incremental requirement once $50,000,000 has been funded. d. Lease shall commit on an ongoing basis to a capital improvement expenditure equal to $200 per unit per year, excluding i) the cost of capital improvements to HVAC, roof, and other structural items, and ii) expenditures on licensed healthcare beds. e. Borrower is responsible for all costs incurred in closing each project transaction, excluding counsel fees of NHI. f. ARC has right of first refusal upon sale by Lessor. g. NHI agrees to accept only a $100,000 prepayment fee for its existing $4,700,000 first mortgage loan to Remington Retirement Corporation if it is acquired by ARC using capital provided by NHI in accordance with the terms of this Agreement. For any future transactions between ARC and a health care provider financed by NHI, the parties will negotiate for similar discounts on prepayment fees. h. Subject to satisfactory review (at the sole discretion of NHI) of all due diligence items, including site visits, physical plant approval to include any plans or specifications, proformaed financial performance with verification of all rates and occupancy, and all supportive documentation. There will be a separate due diligence for each project. This Letter of Intent is valid through Friday, April 4, 1997. Upon acceptance the parties will then have sixty (60) days to enter into a definitive agreement and prototype documents. We look forward to working with you and should you have any questions, please do not hesitate to contact David H. Jones at (615) 890-9100. 3 Sincerely yours, NATIONAL HEALTH INVESTORS, INC. /s/ Richard F. LaRoche, Jr. - ------------------------------ Richard F. LaRoche, Jr. Vice President Accepted this 7th day of April, 1997 By: /s/ --------------------------------- - ------------------------------------ EX-10.26 7 MASTER LOAN AGREEMENT 1 EXHIBIT 10.26 MASTER LOAN AGREEMENT THIS MASTER LOAN AGREEMENT, is made and entered into as of the 23rd day of December, 1996, between First American National Bank, a national banking association with its principal place of business at First American Center, Nashville, Tennessee, 37237 (the "Bank") and American Retirement Communities, L.P., a Tennessee limited partnership (the "Borrower"). RECITALS The Bank has agreed to make available to Borrower a non-revolving line of credit of up to $5,000,000, the proceeds of which are to be used to finance real estate acquisitions, subject to the terms and conditions set forth in this Agreement (the "Credit Facility"). NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained in this Agreement, the Bank and the Borrower agree as follows: 1. DEFINITIONS As used in this Agreement, the term: 1.1 "Applicable Environmental Laws" means any and all applicable local, state, and federal environmental laws, regulations, ordinances, and administrative and judicial orders relating to the generation, recycling, reuse, sale, storage, handling, transport, or disposal of any Hazardous Substances. 1.2 "Borrowing Base" means, with respect to each Project to be financed with proceeds of the Credit Facility, seventy-five percent (75%) of the lesser of (i) the appraised value of the Project, as determined by Bank or (ii) the actual costs incurred in connection with the acquisition of such Project. 1.3 "Compliance Certificate" means the Compliance Certificate required by Section 3.2(e) of this Agreement. 1.4 "Default" means any of the events specified in Section 8 which, with the passage of time, or giving of notice, or both, would constitute an Event of Default. 1.5 "Event of Default" means any of the events specified in Section 8, provided that any requirement for notice or lapse of time or any other condition has been satisfied. 1.6 "Hazardous Substances" means any substance or material defined or designated as hazardous or toxic waste, hazardous or toxic material, a hazardous or toxic substance, or other similar term, by any federal, state or local environmental statute, regulation, or ordinance presently in effect or that may be promulgated in the future, as such statutes, regulations, and ordinances may be amended from time to time, including, without limitation, asbestos in any form, urea formaldehyde foam insulation, petroleum products, and polychlorinated biphenyls (PCBs). 1.7 "Indebtedness" means all loans or advances, now or in the future under this Loan Agreement, and all other indebtedness and obligations of Borrower to Bank created hereunder or otherwise, now existing or hereafter incurred, matured or unmatured, and direct contingent, including all 2 modifications, extensions and renewals thereof, and specifically including, without limitation, the indebtedness evidenced by each Project Note. 1.8 "Index Rate" is that rate announced by Bank from time to time as the Bank's Index Rate and is not necessarily the lowest rate charged by Bank. 1.9 "Project" means a tract or parcel of real estate purchased by Borrower with the proceeds of the Credit Facility. 1.10 "Project Loan" means each advance made under the Credit Facility to finance the acquisition of a Project. 1.11 "Project Note" means each note (substantially in the form of Exhibit A attached hereto) executed by the Borrower in favor of the Bank and evidencing a Project Loan, together with all renewals, extensions and modifications thereof. 1.12 "Security Instruments" means all mortgages, deeds of trust, deeds to secure debt, financing statements and other documents and instruments deemed necessary by Bank to evidence the Bank's liens and security interests in the Projects, as described in Section 2.6 of this Agreement. 2. CREDIT FACILITY 2.1 Purposes. Bank shall make available to Borrower, on a non-revolving basis, up to $5,000,000 to finance the acquisition of Projects. So long as no Default exists, and subject to the terms and conditions set forth in this Agreement, Borrower may borrow funds under the Credit Facility to finance the acquisition of a Project, provided the amount advanced for the acquisition of a Project shall not exceed the Borrowing Base for such Project, as reasonably determined by Bank. 2.2 Interest. Interest shall accrue on the outstanding principal balance of each Project Loan at a floating rate per annum equal to the Index Rate, such interest rate to adjust automatically to reflect adjustments in the Index Rate. Notwithstanding the foregoing, to the extent the Borrower has not received new equity investments in Borrower in a minimum amount of $10,000,000 on or before September 30, 1997, then effective October 1, 1997, interest shall accrue on the outstanding principal balance of each Project Loan at a floating rate per annum equal to the Index Rate plus one-half of one percent (.50%), such interest rate to adjust automatically to reflect adjustments in the Index Rate. In no event shall the interest payable under the Credit Facility exceed the maximum amount permitted by applicable law. 2.3 Note: Repayment Terms. Each advance under the Credit Facility for a Project shall be evidenced by a separate Project Note. Each Project Note shall have a maturity date of December 31, 1998. Interest accruing under each Project Note shall be due and payable quarterly in arrears on the last day of each calendar quarter, beginning with the calendar quarter and immediately following funding under the specific Project Note. In addition, with respect to each Project Note, beginning September 30, 1997, and on each calendar quarter end thereafter, a quarterly principal payment equal to twenty percent (20%) of the difference between the amount which represents a seventy-five percent (75%) loan to value ratio for the Project, and the amount which represents a fifty percent (50%) loan to value ratio for the Project shall -2- 3 be due and payable. By way of example, if a Project has a recognized value of $1,000,000, as determined by Bank, and the outstanding principal balance of the Project Loan for such Project is $750,000, the quarterly principal payment due with respect to such Project Loan shall be $50,000 per quarter (20% X 750,000 - 500,000 = 50,000). 2.4 Maturity Date. All Project Loans shall mature and shall be due and payable in full on December 31, 1998. 2.5 Commitment Fee. In consideration for the Bank reserving the funds necessary to fund the Credit Facility over the period of the permitted disbursements, Borrower shall pay to Bank a commitment fee equal to one quarter of one percent (.25%) of each Project Loan, such fee to be due and payable at the funding of the Project Loan, provided, however, the commitment fee for the first Project Loan shall be due on the later of (i) the funding of the Project Loan, or (ii) January 2, 1997. 2.6 Security. All advances under the Credit Facility shall be secured by (i) a first priority lien on the Projects acquired by Borrower with proceeds of the Credit Facility, including the real property, fixtures, rents, leases and profits arising from each Project. The liens in favor of Bank shall be evidenced by the Security Instruments which shall be in form and substance acceptable to Bank. The Security Instruments shall consist of: a. Mortgage. A mortgage, deed of trust or other appropriate mortgage instrument executed by Borrower (hereinafter the "Mortgage") granting Bank (1) a first priority lien on each Project, together with all appurtenances thereto, (2) a first priority security interest in all of Borrower's right, title, and interest in and to all machinery, equipment, furniture, fixtures and furnishings owned by Borrower and located at the Project, if any, and all of the proceeds therefrom (the "Collateral"). The priority of the lien of the Mortgage as a good and valid first lien on each Project shall be evidenced by a mortgage title insurance policy (ALTA-B) issued by a title company acceptable to Bank. The policy shall be subject to no exception other than the current year's taxes and such other exceptions as Bank shall agree to in writing, and specifically containing no exception for unfiled mechanics', materialmen's, or laborers' liens, matters which would be disclosed by an accurate survey, exception for parties in possession, or other exceptions not acceptable to counsel for the Bank. Such policy shall include such endorsements as bank deems necessary and customary for the Project. The title policy shall be in the face amount of the Project Loan. The above-mentioned security interest in the Collateral shall be perfected by the signing of all financing statements deemed reasonably necessary by Bank. b. Assignment of Rentals and Leases. A first priority collateral, conditional assignment of the landlord's interest in all present and future leases with respect to each Project, together with the rental income to be derived therefrom from Borrower to Bank (hereinafter referred to as the "Assignment of Rents"). c. UCC Financing Statements. Statements giving notice of and perfecting, when appropriately filed, the security interest of Bank in all fixtures and personal property described in the Loan Documents, executed by the Borrower as necessary to perfect Bank's interest in such fixtures and personal property (hereinafter referred to as "Financing Statements"). -3- 4 d. Other Documents. Such other documents or instruments as Bank deems necessary to evidence or secure the Credit Facility. 2.7 Prepayment. The Borrower may prepay all or any of the indebtedness created pursuant to this Agreement at any time without penalty. 3. CONDITIONS TO ADVANCES UNDER THE CREDIT FACILITY. 3.1 Draw Request. As a condition to Bank's obligation to fund any monies under the Credit Facility to the Borrower with respect to a Project Loan, the Borrower shall provide to the Bank, with respect to each requested Project Loan, the following (all of which shall be in form and substance acceptable to Bank): a. A Draw Request completed by the Borrower in the form of Exhibit B attached hereto; b. A copy of the Real Estate Purchase Contract for the Project which Borrower proposes to finance with proceeds from the Credit Facility; and c. A current appraisal of the Project, completed by an appraiser acceptable to the Bank. Based upon Bank's review of the Draw Request, the purchase contract and the appraisal submitted by the Borrower, the Bank shall determine the Borrowing Base for the proposed Project Loan. In no event shall the Borrowing Base for a Project Loan exceed seventy-five percent (75%) of the lesser of (i) the actual costs (including all acquisition and closing costs) incurred by Borrower in connection with the acquisition of the Project, or (ii) the appraised value for the Project, as determined by Bank, based upon the appraisal submitted by the Borrower. 3.2 Conditions to Funding Advances. Upon receipt of a Draw Request acceptable to the Bank, together with the other information required by Section 3.1 of this Agreement, the obligations of the Bank to fund the Project Loan shall be subject to Borrower complying with the following conditions precedent, all to be satisfied in a manner acceptable to Bank, in Bank's discretion: a. Survey. Delivery to Bank of a current boundary survey (as- built if Project includes improvements) of the Project, in form and substance acceptable to Bank, prepared and certified by a duly registered land surveyor, in form acceptable to Bank. b. Title Insurance. Delivery to Bank of the binding commitment of a title insurance company acceptable to Bank to issue a mortgage title insurance policy in the form described in Section 2.6(a) hereof, conditioned only upon payment of the premium and recordation of the appropriate Security Instruments. c. Insurance. Delivery to Bank of original policies of insurance (or certified copies), evidencing general liability, hazard loss, rent loss, and such other insurance on the Project, in such amounts as may be required by Bank, including, without limitation, flood insurance, if necessary. All -4- 5 policies shall contain appropriate mortgagee endorsements, and shall otherwise be in amount, form and substance acceptable to Bank. d. Environmental Compliance. Delivery to Bank of proof, reasonable satisfactory to Bank in all respects, that the Project has not been used for the storage or disposal of any toxic or hazardous substances and that the Improvements will be in compliance with all federal, state and local laws, ordinances, regulations and statutes imposing environmental or ecological protection restrictions on the Improvements, including without limitation, delivery to Bank of a Phase I environmental report in form and substance reasonably acceptable to Bank. e. No Material Adverse Changes. Delivery to Bank, prior to Closing, of a Compliance Certificate from Borrower, in form and substance acceptable to Bank, confirming to the best of the borrower's knowledge and belief, there have been no material, adverse changes in the financial condition of the Borrower, since the date of the cost recent financial statements delivered to Bank, and no Default exists under this Agreement as of the date of this Certificate. f. Loan Documents. Execution and delivery by Borrower of a Project Note and such Security Instruments as Bank shall deem necessary, all of which shall be in form and substance acceptable to Bank. g. Additional Documents. Delivery to Bank of such other documents or information as Bank shall deem necessary in connection with the evidencing, securing, or funding of the Project Loan. 4. BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Bank as follows: 4.1 Borrower's Partnership Status. Borrower is and shall remain a limited partnership duly organized and existing and in good standing under the laws of the State of Tennessee, and is and shall remain duly qualified to do business in each state other than Tennessee in which qualification is necessary. 4.2 No Defaults; Authorization. Neither the execution, the delivery nor the performance of this Agreement and all related documents by Borrower will constitute a default under or conflict with Borrower's partnership agreement, or any other agreement, contract, document, or instrument to which Borrower is now a party. The execution of all necessary resolutions and other prerequisites of partnership actions have been duly performed so that the individual executing this Agreement and related documents on behalf of Borrower is duly authorized to bind Borrower by his signature. 4.3 Place of Business. Borrower's principal place of business and chief executive office is at the address appearing after Borrower's signature hereto. Any notices to Borrower may be sent to that address and shall be deemed received by Borrower one (1) business day following the date of mailing by Bank of such notice in the U.S. mail, postage prepaid, addressed to Borrower at such address. Borrower will notify Bank promptly in writing of any change in the location of its principal place of business or any other place of business or the establishment of any new place of business. -5- 6 4.4 Records. Borrower at all times will keep accurate and complete records of Borrower's accounts. 4.5 No Litigation. There is no litigation or proceeding pending against Borrower or, to the knowledge of Borrower, threatened that, if decidedly adversely to Borrower, would have a material effect upon Borrower's financial condition. Borrower is not subject to any outstanding court or administrative order. 4.6 Financial Disclosures. The statement of condition of Borrower dated ____________, fairly and accurately reflects the financial condition and capital structure of Borrower as of said date. Since said date, no material adverse change in either has occurred or, to the knowledge of Borrower, is threatened. All financial statements delivered to Bank have been prepared in accordance with generally accepted accounting principles, consistently applied, and are true, accurate and complete in every respect. Without limiting the foregoing, Borrower warrants that such financial statements disclose all known contingent liabilities as well as direct liabilities. Borrower acknowledges that Bank has advanced (or committed to advance) the Indebtedness in reliance upon such financial statements, and Borrower warrants that no material adverse change has occurred in the financial condition of any person or entity as set forth in such financial statements. Borrower warrants that Borrower has good and absolute title to the assets disclosed on Borrower's balance sheet disclosed to Bank, subject only to liens, security interests and other encumbrances noted thereon. 4.7 Taxes. Borrower is not presently delinquent in the payment of any taxes imposed by any governmental authority or in the filing of any tax return and that Borrower is not involved in a dispute with any taxing authority over tax amounts due, except for good faith disputes. 4.8 ERISA. Borrower is in compliance with the Employee Retirement Income Security Act of 1974 ("ERISA") and all other applicable laws governing any pension or profit sharing plan or arrangement to which the Borrower is a party. Borrower has not incurred any "accumulated funding deficiency" within the meaning of ERISA. 4.9 Name. Borrower has not been known under or done business under any name other than name used by Borrower in executing this Agreement. 4.10 Consents. Borrower's execution and performance of this Agreement or any of the other Loan Documents do not require the consent of or the giving of notice to any third party including, but not limited to, any account debtor, other lendor, governmental body or regulatory authority. 4.11 Environmental Matters. Borrower has no actual knowledge of (i) the presence of any Hazardous Substances on any property owned, leased or otherwise controlled by the Borrower, including, without limitation, all Projects (collectively, the "Property"); (ii) any spills, releases, discharges, or disposal of Hazardous Substance that have occurred or are presently occurring on or onto the Property; (iii) the presence of transformers or other electrical equipment on the Property which contain or may contain polychlorinated biphenyls (pCBs); (iv) the presence of underground or above-ground storage tanks or pipelines which are required to be licensed by any local, state or federal agency; or (v) any spills or disposal of Hazardous Substances that have occurred or are occurring off the Property as a result of any construction on or operation and use of the Property; (vi) any failure by the Borrower to comply with all -6- 7 Applicable Environmental Laws: (vii) any notices related to the Borrower or the Property, claiming a violation of Applicable Environmental Laws, or the commencement of any action or proceeding against the Borrower or related to the Property, in connection with an alleged violation of Applicable Environmental Laws; (viii) notices related to the Borrower or the Property requiring compliance with Applicable Environmental Laws; (ix) notices related to the Borrower or the Property, demanding payment or contribution for injury to the environment or human health; or (x) any outstanding notices or citations relating to violations by any former owner or operator of the Property. 4.12 Licenses and Permits; Business Conducted in Accordance with Law. Borrower possesses all necessary licenses, permits and other governmental or regulatory approvals necessary to the conduct of its business. Borrower's business activities are conducted in accordance with all applicable laws and regulations. 4.13 No Burdensome Agreements. Borrower is not a party to any contract or agreement and is not subject to any contingent liability that does or may impair Borrower's ability to perform under the terms of this Agreement. This execution and performance of this Agreement will not cause a default under any other contract or agreement to which Borrower or any property of Borrower is subject, and will not result in the imposition of any charge, penalty, lien or other encumbrance against any of Borrower's property except in favor of bank. 4.14 Indebtedness. Borrower is not currently indebted to any party other than trade debt incurred in the ordinary course of business and other than as set forth in Borrower's financial statements provided to Bank. 4.15 Brokerage Commissions. Any brokerage commissions due in connection with the transaction contemplated hereby have been paid in full and any such commissions coming due in the future will be promptly paid by Borrower. Borrower agrees to and shall indemnify Bank from any liability, claims or losses arising by reason of any such brokerage commissions. This provision shall survive the repayment of the Credit Facility, and shall continue in full force and effect so long as the possibility of such liability, claims or losses exists. 4.16 Expenses. Borrower shall pay all reasonable costs of closing the Credit Facility and all expenses of Bank with respect thereto, including but not limited to, legal fees of Bank's counsel (including legal fees incurred by Bank subsequent to the closing of the Credit Facility but incurred in connection with the disbursement, enforcement or collection of the Credit Facility), advances, recording expenses, surveys, intangible taxes, other recording taxes, expenses of foreclosure (including reasonable attorney's fees) and similar items, and to allow all closing papers, Loan Documents and other legal matters to be subject to the approval of Bank's counsel. 4.17 Right of Bank to Inspect Projects. Bank and its representatives and agents shall have the right, but not the duty, to enter upon a Project and to inspect the Project; provided, however, that this provision shall not be deemed to impose upon Bank any obligation to undertake such inspections. Any such inspections and the results therefrom shall be solely for the use and benefit of Bank. 4.18 Restriction on Secondary Financing and Sale of Projects. Borrower shall keep the Projects upon which Bank has a first lien as evidenced by the Security Instruments, free and clear of all -7- 8 other encumbrances, liens, mortgages, security interests and secondary financing, except those approved in writing by Bank, Borrower shall not, without the prior written consent of Bank, voluntarily or by operation of law, sell, transfer or convey all or any part of its interest in the Project, or any portion thereof, except as permitted in the Security Instruments. 4.19 Non-Waiver. Borrower acknowledges that any condition precedent to closing contained herein or in any Loan Document which is not satisfied at the time required hereunder shall not be deemed waived unless done so in writing by Bank, and if the closing occurs, such unfulfilled conditions shall thereafter be and become conditions precedent to Bank's obligation to advance any further funds under the Credit Facility. 5. BORROWER'S COVENANTS 5.1 Affirmative Covenants. Borrower hereby covenants that: a. Financing Statements. At the request of Bank, Borrower will join with Bank in executing one or more financing statements pursuant to the Uniform Commercial Code, in form satisfactory to Bank, and will pay the cost of filing or recording the same or this Agreement in all public offices wherever filing or recording is deemed by Bank to be necessary or desirable. A copy of this Agreement or copies of any financing statements executed herewith may be filed in lieu of originals in any public office. b. Litigation. Borrower covenants to give Bank prompt written notice of any litigation, arbitration, administrative proceeding or investigation that may hereafter be instituted or threatened against Borrower, whether or not Borrower's liability under such proceeding would be covered by insurance. c. Taxes. Borrower covenants that all future taxes assessed against Borrower or any Project shall be paid prior to the delinquency date and that all tax returns required of Borrower shall be timely filed. d. Compliance with Laws. Borrower will comply with all statutes and government regulations applicable to Borrower's operations and pay promptly all taxes, assessments, claims for labor, supplies, rent, and other obligations that, if unpaid, might become a lien against a Project. In the event any such liability or obligation is contested by Borrower in good faith, Borrower, at the request of Bank, shall establish reserves in amounts satisfactory to Bank to meet such obligation. e. Payment of Debts. Borrower will pay when due (or within applicable grace periods) all indebtedness due third parties, except when the amount thereof is being contested in good faith by the appropriate proceedings and with adequate reserves being set aside on the books of Borrower. f. Insurance. Borrower will maintain insurance, in form, amounts, and with companies in all respects satisfactory to Bank, insuring the Projects against loss from fire, theft, and other risks determined by Bank. Bank shall be designated as an additional insured and loss payee under the terms of the policies evidencing such insurance. Upon request by Bank, Borrower will execute such additional instruments as Bank deems necessary to perfect in Bank a lien on Borrower's rights under such policies. -8- 9 g. Borrower Financial Statements. Borrower will furnish Bank with the following financial statements: (i) Within one hundred twenty (120) days of Borrower's fiscal year end, each year, complete certified audited financial statements prepared in accordance with generally accepted accounting principles, consistently applied, prepared by a certified public accountant acceptable to Bank with such accountant giving an unqualified opinion as to all statements. In addition, Borrower will furnish to Bank with such financial statements a copy of the management letter delivered to the Borrower by the certified public accountant. Borrower shall also deliver to Bank with such financial statements a certificate executed by a responsible officer of Borrower certifying to Bank that no Default exists with respect to any of the terms, conditions, and covenants of this Agreement or the other Loan Documents. At Bank's request, Borrower will furnish Bank copies of all of Borrower's federal income tax returns within fifteen (15) days after they are filed by Borrower. (ii) Within thirty (30) days after the end of each month, Borrower shall furnish to Bank monthly interim financial and operating statements for the preceding month, in form and content satisfactory to Bank, which shall be certified by a responsible officer of Borrower and shall reflect accurately the financial condition of Borrower. h. Discovery of Liability. Borrower will give Bank prompt written notice within three (3) days of (i) the creation of, or discovery of, any material additional contingent liability or the occurrence of any other material adverse change in the financial condition of Borrower or of any guarantor or other person or entity presently or hereafter liable for payment of all or part of the Indebtedness, and (ii) the occurrence of any event, or presence of any condition, which constitutes a default hereunder or which within the giving of notice, the passage of time, or both, would constitute a default. i. Payment of Expenses. Upon demand, Borrower will advance to Bank, or, at Bank's option, reimburse Bank, for the following expenses: (i) All taxes that Bank may be required to pay because of the Indebtedness or because of Bank's interest in any collateral securing the payment of the Indebtedness (excluding federal or state income tax); (ii) All expenses that Bank may incur in connection with the preparation, execution, audit, or enforcement of this Agreement or of any other document pertaining to the Indebtedness; (iii)All costs of preserving, insuring, preparing for sale (whether by improvement, repair or otherwise) or selling any Collateral securing the Indebtedness; (iv) All court costs and other costs of collecting any debt, overdraft or other obligation included in the Indebtedness, including compensation for time spent by employees of Bank; (v) All costs arising form any litigation investigation, or administrative proceeding (whether or not Bank is a party thereto) that Bank may incur as a result of the Indebtedness or as a result of Bank's association with Borrower, including, but not limited to, expenses incurred by Bank -9- 10 in connection with a case or proceeding involving Borrower under any chapter of the Bankruptcy Code or any successor statute thereto; (vi) Reasonable attorney's fees incurred in connection with any of the foregoing. If Bank pays any of the foregoing expenses, they shall become part of the Indebtedness and shall bear interest at the highest lawful rate until paid. j. Maintenance of Records. Borrower will maintain current corporate minute books and stock ledgers and agrees to allow Bank to inspect the same at any time. k. ERISA. Borrower shall provide Bank with written notice of any "reportable event" or "prohibited transaction" or the imposition of any "withdrawal liability" within the meaning of ERISA. Borrower further covenants that it will not establish any further such plans without Bank's prior written consent, which will not be unreasonably withheld or delayed. l. Further Assurances. Borrower will execute such other assignments, security agreements, financing statements, and other documents that Bank may deem necessary to further evidence the obligations provided for herein or to perfect, extend, or clarify Bank's rights in any property securing or intended to secure the Indebtedness. Any Vice President of Bank is hereby appointed as Borrower's attorney-in-fact with full power of substitution for the signing of financing statements and other similar filings with government offices for perfecting security interests granted hereby. Borrower acknowledges that this power of attorney is coupled with an interest and is irrevocable. m. Environmental Compliance. Borrower covenants that during the term of this Agreement, the Borrower will not operate a Project in violation of, or otherwise violate any Applicable Environmental Laws, and will promptly notify the Bank of (i) any notices related to the Borrower or a Project, claiming a violation of Applicable Environmental Laws, or the commencement of any action or proceeding against the Borrower or related to a Project, in connection with an alleged violation of applicable Environmental Laws, (ii) notices related to the Borrower or a Project requiring compliance with Applicable Environmental Laws, (iii) notices related to the Borrower or a Project, demanding payment or contribution for injury to the environment or human health. n. Indemnification. Borrower will indemnify the Bank and its officers, directors, employees, agents, advisors and affiliates against any and all liabilities, obligations, losses, damages, penalties, costs and expenses of any kind or nature whatsoever (including, without limitation, the reasonable fees and expenses of counsel) imposed on, incurred by, or asserted against Bank in any manner related to or arising out of the Credit Facility, except for such liabilities, losses or damages resulting from gross negligence or willful misconduct on the part of the Bank. 5.2 Negative Covenants. So long as any Indebtedness secured hereby is outstanding, Borrower covenants and warrants that, without the prior written consent of Bank, it will not: a. Name Change. Change its name without giving Bank at least thirty (30) days' prior written notice. -10- 11 b. Partnership Changes. Amend or modify the Borrower's Partnership Agreement, except for changes necessitated in connection with a public equity offering by the Borrower, provided Borrower shall give Bank notice of such offering. c. Disposition of Assets. Sell, lease, convey, or otherwise dispose of any Project, except in the ordinary course of business. d. Liquidation. Suffer or permit, in whole or in part, dissolution or liquidation of the Borrower. e. ERISA. Establish any plan qualified under ERISA. f. No Further Encumbrances. Suffer or permit a Project to become subject to any security interest, lien, or other encumbrance, except for the following: (i) Any lien created by virtue of this Agreement, the Security Instruments, or any other lien in favor of Bank; (ii) A pledge or deposit in connection with or to secure workman's compensation, unemployment insurance, pensions, or other employee benefits accruing under the provisions of law or under agreements now in force and disclosed to Bank. g. Other Warranties and Covenants. Take any action, or suffer or permit any action to be taken, that would violate any of the warranties and covenants contained in this Agreement or cause any of said warranties and covenants to be or become untrue. h. Misstatements, Omissions. Submit to Bank any certificate or other document that contains any untrue statement of material fact or omits to state a material fact necessary to make it not misleading. i. Borrowing Base. Suffer or permit the Borrowing Base for any Project to be less than the outstanding balance of the Project Loan for such Project. 6. CONDITIONS PRECEDENT 6.1 In addition to other conditions set forth in Section 3 with respect to funding individual Project Loans, as conditions precedent to Bank's obligations under this Agreement, Borrower shall furnish to Bank, in form satisfactory to Bank: a. Appropriate resolutions authorizing Borrower to enter into this Agreement, together with authorizations for the general partner to execute all documents necessary to effectuate the loan transaction described herein. b. Execution and delivery of the Loan Documents. -11- 12 c. Current financial statements for the Borrower, which shall be in form and substance acceptable to Bank. d. A certifled copy of the Borrower's partnership agreement, together with any consents of limited partners to the transactions contemplated by this Agreement, to the extent required by the partnership agreement. e. Such other documents or information as Bank shall deem necessary in connection with the evidencing, securing, or funding of the Credit Facility. 7. PROTECTIVE ACTION 7.1 At its option, to the extent Borrower fails to do so, Bank may discharge taxes, liens, security interests, or other encumbrances at any time levied or placed against any property or assets of Borrower securing the Credit Facility, and may pay for insurance on the Projects. Borrower agrees to reimburse Bank on demand for any payment made, or any expense incurred, by Bank pursuant to the foregoing authorization, together with interest thereon from date of payment at the maximum rate permitted by law. 8. DEFAULT 8.1 Regardless of the terms of any Project Note or notes issued in connection herewith, the occurrence of any of the events specified hereinbelow (sometimes hereinafter referred to as in "Event of Default") shall immediately terminate any obligations on the part of Bank to make or continue to fund, advance or readvance any sums to Borrower and, at the option of Bank, shall make all sums of interest and principal remaining on the Indebtedness immediately due and payable, without notice of Default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind or character, except as hereinafter specified: a. Default in the payment of any portion of the Indebtedness, within ten (10) days of the date when due; b. Default in performance of any of the covenants, warranties, terms, or provisions contained or referred to in this Agreement, the Security Instruments, the Project Notes, or in any other document evidencing, securing or otherwise related to the Indebtedness or any portion thereof, which is not cured within thirty (30) days of receipt by Borrower of written notice from Bank setting forth the nature of such Default; C. Any covenant, warranty, representation, or statement made or furnished to Bank by or on behalf of Borrower in connection with this Agreement or the other Loan Documents proving to have been false in any material respect when made or furnished; d. The occurrence of an Event of Default under the other Loan Documents; -12- 13 e. Dissolution, liquidation, cessation of business, termination of existence. insolvency, failure to pay debts as they mature, business failure, or appointment of a receiver of any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding under any bankruptcy or insolvency law by or against Borrower; or f.. The entry of a final judgment against Borrower in excess of $100,000, which remains unsatisfied for thirty (30) days after execution may first issue. g. The occurrence of an Event of Default under the Borrower's existing credit facility with General Electric Capital Corporation and First Union National Bank of Tennessee, which is not cured within any applicable cure period. 9. REMEDIES 9.1 Upon the occurrence of an Event of Default and at any time thereafter. Bank shall have all the rights and remedies of a secured party under the Uniform Commercial Code, all rights and remedies set forth in the Loan Documents, and any other right Bank may have at law or equity. Bank may exercise its lien upon and right of setoff against any monies, credits, deposits or instruments that Bank may have in its possession and which belong to Borrower or to any other person or entity liable for the payment of any or all of the Indebtedness. The remedies provided Bank in this Agreement are not exclusive of any other remedies that may be available to Bank under any other document or at law or equity. 9.2 No delay or omission on the part of Bank in exercising any right hereunder or in demanding strict compliance with the terms of this Agreement shall operate as a waiver of such right or of any other right under this Agreement or of demanding strict compliance with the terms of this Agreement. No waiver by Bank of any default shall operate as a waiver of any other default or of the same default on a future occasion. 9.3 All amounts received by Bank for Borrower's account by exercise of its remedies hereunder shall be applied as follows first, to the payment of all expenses incurred by Bank in exercising its rights hereunder, including reasonable attorney's fees, and any other expenses due Bank from Borrower; second, to the payment of all interest included in the Indebtedness, in such order as Bank may elect; and the remainder to the Borrower or other party entitled thereto, 10. MISCELLANEOUS 10.1 The captions contained in this Agreement are inserted only as a matter of convenience and shall not be construed as defining, limiting, extending, or describing the scope of this Agreement, any section hereof, or the intent of any provision hereof. 10.2 All rights of Bank hereunder shall inure to the benefit of its successors and assigns, and all obligations of Borrower shall bind Borrower's successors and assigns. 10.3 Time is of the essence with regard to each and every provision of this Agreement. -13- 14 10.4 Nothing in this Agreement shall be deemed a waiver or prohibition of Bank's right of banker's lien or setoff. 10.5 This Agreement, and the documents executed and delivered pursuant hereto, constitute the entire agreement between the parties, and may be amended only by a writing signed by all parties. 10.6 If any provision of this Agreement shall be held invalid under any applicable law, such invalidity shall not affect any other provision of this Agreement that ran be given effect without the invalid provision, and, to this end, the provisions hereof are severable. 10.7 Borrower hereby irrevocably consents to the jurisdiction of the United States District Court for the Middle District of Tennessee and of all Tennessee state courts sitting in Davidson County. Tennessee, for the purpose of any litigation to which Bank may be a party and which concerns this Agreement or the Indebtedness. It is further agreed that venue for any such action shall lie exclusively with courts sitting in Davidson County, Tennessee, unless Bank agrees to the contrary in writing. 10.8 Nothing contained herein or in any related document shall be deemed to render Bank a partner of Borrower for any purpose. This Agreement has been executed for the sole benefit of Bank, and no third party is authorized to rely upon Bank's rights hereunder or to rely upon an assumption that Bank has or will exercise its rights under this Agreement or under any document referred to herein. 10.9 Bank may proceed against collateral securing the Indebtedness and against parties liable therefor in such order as it may elect, and neither Borrower nor any surety or guarantor for Borrower shall be entitled to require Bank to marshall assets. The benefit of any rule of law or equity to the contrary is hereby expressly waived. 10.10 Bank may, in its sole discretion, release any collateral securing the Indebtedness or release any party liable therefor. The defenses of impairment of recourse and any requirement of diligence on Bank's part in collecting the Indebtedness are hereby waived 10.11 If any payment date under the Indebtedness falls on a day that is not a business day of Bank, or if the last day of any notice period falls on such a day, the payment shall be due and the notice period shall end on Bank's next following business day. 10.12 The validity, construction and enforcement of this Agreement and all other documents executed with respect to the Indebtedness shall be determined to the maximum extent permissible according to the laws of Tennessee, in which state this Agreement has been executed and delivered. 10.13 WAIVER OF JURY-TRIAL. THE BANK AND THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE (TO THE EXTENT PERMITTED BY APPLICABLE LAW) ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE ARISING UNDER, RELATING TO, OR CONNECTED WITH THIS AGREEMENT, THE COLLATERAL OR ANY OTHER AGREEMENT, INSTRUMENT OR DOCUMENT CONTEMPLATED HEREBY OR DELIVERED IN CONNECTION HEREWITH AND AGREE THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES TO ENTER INTO THIS AGREEMENT. -14- 15 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered on their behalf by their duly authorized officers on the date first set out above. FIRST AMERICAN NATIONAL BANK AMERICAN RETIREMENT COMMUNITIES, L.P., Tennessee limited partnership By: /s/ Frank O. Keener BY: American Retirement Communities, ------------------------------ LLC, General Partner Frank O. Keener Sr. Vice President BY: /s/ H. Todd Kaestner ------------------------------- TITLE: Executive Vice President ---------------------------- First American Center Nashvile, TN 37237 Chief Executive Office: 111 Westwood Place, Suite 402 Brentwood, TN 37027 "BANK" "BORROWER" -15- 16 EXHIBIT A PROMISSORY NOTE $ Nashville, Tennessee ----------- , 1996 ------- FOR VALUE RECEIVED, the undersigned, American Retirement Communities, L.P., a Tennessee limited partnership (the "Borrower"), promises to pay to the order of First American National Bank, a national banking association (the "Bank"), the sum of _______________ Dollars ($_______) together with interest at a floating rate per annum equal to the Index Rate, such interest rate to be automatically adjusted to reflect changes in the Index Rate. For purposes hereof, the "Index Rate" is that rate announced by Bank from time to time as Bank's Index Rate and is not necessarily the lowest rate charged by Bank. This Project Note is entered into pursuant to the terms of a Master Loan Agreement dated as of December ___ , 1996, between Borrower and Bank (the "Loan Agreement"). Effective October 1, 1997, the interest rate payable hereunder may adjust in accordance with the provisions of Section 2.2 of the Loan Agreement. Interest shall be computed for the actual number of days elapsed on the basis of a year consisting of 360 days. In no event shall the interest rate charged herein (the "Stated Rate") exceed the maximum rate of interest permitted to be charged by Bank under the laws in effect from time to time (the "Maximum Rate"). In the event that the Stated Rate ever exceeds the Maximum Rate, interest shall accrue hereunder at a floating rate equal to the Maximum Rate until such time as the Stated Rate no longer exceeds the Maximum Rate. Interest accruing on the outstanding principal balance hereof shall be due and payable quarterly in arrears on each calendar quarter end, the first payment being due and payable on _____, _____. In addition, beginning ____, quarterly principal payments calculated in accordance with Section of___ the Loan Agreement, shall be due and payable. The unpaid principal balance hereof, together with all accrued but unpaid interest shall be due and payable on December 31, 1998 (the "Maturity Date"). This Note may be prepaid at any time, in whole or in part, without premium or penalty. Both principal and interest due on this Note are payable in Nashville, Tennessee, at par in lawful money of the United States of America, in the Main Office of Bank, or at such other place as Bank may designate in writing from time to time. This Note is secured by [describe Security Instruments] (the "Security Instruments"). Time is of the essence of this Note. It is hereby expressly agreed that in the event that any default be made in the payment of any part of interest or principal in accordance with the terms hereof, or upon failure of the undersigned to keep and perform all the covenants, promises, agreements, conditions and provisions of (i) this Note, (ii) the Loan Agreement, (iii) the Security Instruments, or (iii) any other instrument or document now or hereafter evidencing, securing or otherwise relating to The indebtedness 17 evidenced hereby or the Credit Facility (as defined in the Loan Agreement); then, in any such case, the entire unpaid principal sum evidenced by this Note, together with all accrued interest, shall, at the option of any holder, without notice, become due and payable forthwith, regardless of the stipulated Maturity Date. Upon the occurrence of any default as set forth herein, at the option of holder and without notice to obligor, the entire outstanding principal balance shall bear interest thereafter until paid at an annual rate equal to the Maximum Rate, regardless of whether or not there has been an acceleration of the payment of principal as set forth herein. All such interest shall be paid at the time of and as a condition precedent to the curing of any such default. Failure of the holder to exercise this right of accelerating the maturity of the debt, or indulgence granted from time to time, shall in no event be considered as a waiver of said right of acceleration or stop the holder from exercising said right. If any payment is past due by five (5) days or more, the undersigned shall pay to Bank a late charge of (i) five percent (5%) of any such payment amount or (ii) any lesser maximum amount permitted under applicable law. No late charge, however, shall be imposed on any payment made on time and in full solely by reason of any previously accrued and unpaid late charge. All persons, partnerships or corporations now or at any time liable, whether primarily or secondarily, for the payment of the indebtedness hereby evidenced, for themselves, their heirs, legal representatives and assigns, waive demand, presentment for payment, notice of dishonor, protest, notice of protest, and diligence in collection and all other notices or demands whatsoever with respect to this Note or the enforcement hereof, and consent that the time of said payments or any part thereof may be extended by the holder hereof and assent to any substitution, exchange, or release of collateral permitted by the holder hereof, all without in any wise modifying, altering, releasing, affecting or limiting their respective liability. This Note may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. The term obligor, as used in this Note, shall mean all parties, and each of them, directly or indirectly obligated for the indebtedness that this Note evidences, whether as principal, maker, endorser, surety, guarantor or otherwise. It is expressly understood and agreed by all parties hereto, including obligors, that if it is necessary to enforce payment of this Note through an attorney or by suit, undersigned or any obligors shall pay reasonable attorney's fees, court costs and all costs of collection. This obligation is made and intended as a Tennessee contract and is to be so construed. PAGE 2 OF A 3 PAGE NOTE 18 IN WITNESS WHEREOF, this Note has been duly executed by the undersigned the day and year first above written. AMERICAN RETIREMENT COMMUNITIES, L.P., Tennessee limited partnership BY: American Retirement Communities, LLC, General Partner BY: -------------------------- TITLE: ----------------------- PAGE 3 OF A 3 PAGE NOTE 19 EXHIBIT B DRAW REQUEST Borrower hereby requests an advance of $_________ under the Master Loan Agreement dated as: of December 23, 1996, to finance the acquisition of certain real property located at: - ------------------------------------------------------------------------------- (Street Address) Attached hereto (or delivered separately to Bank) are the following: (1) Copy of current appraisal for the Property; (2) Copy of environmental site assessment for the Property; and (3) Copy of Purchase Contract for the Property. The acquisition is scheduled to close on . ----------------------------- AMERICAN RETIREMENT COMMUNITIES, L.P., a Tennessee limited partnership BY: American Retirement Communities, LLC, General Partner BY: --------------------------------------- TITLE: ------------------------------------- EX-10.27 8 NATIONWIDE HEALTH PROPERTIES LETTER OF INTENT 1 Exhibit 10.27 NHP NATIONWIDE HEALTH PROPERTIES, INC. February 24, 1997 Via Telecopy and Overnight Delivery H. Todd Kaestner American Retirement Communities, L.P. 111 Westwood Place Suite 402 Brentwood, TN 37027 Dear Todd: The purpose of this letter is to outline the terms under which Nationwide Health Properties, Inc. ("Nationwide") would provide to American Retirement Corporation ("ARC") lease financing for the acquisition of existing long-term care facilities ("Acquisition Properties") and the de novo development of long term care facilities ("Development Properties"). Based on the information available to us and subject to the conditions precedent contained in this letter, Nationwide is prepared to provide such financing under the following salient terms. TENANT(S) - American Retirement Corporation, its controlled subsidiaries, or other party acceptable to Nationwide. GUARANTIES AND CROSS-DEFAULTS - Guarantee of ARC, cross-guaranties and cross-defaults between and among ARC leased properties financed by Nationwide. FACILITY AMOUNT - Approximately $110,000,000. DEVELOPMENT FUNDING - Actual direct and indirect costs which are incurred for the Development Properties and which are paid to unrelated parties for: land; easements; entitlements; fees including impact fees; permits; utility hook-ups; site preparation; landscaping; construction; fixtures; equipment; design; architectural and engineering services and inspections; construction period rent; insurance, taxes; and utilities; as-built survey; reasonable legal and accounting fees; reasonable Tenant(s) or Guarantor(s) overhead and out-of-pockets. DEVELOPER - ARC will plan, design, develop, build, obtain licences for, and open the Development Properties 1) for a maximum amount agreed to in advance for each Development Property and 2) complete each Development Property by a date certain agreed to in advance. TERM - Initial lease term to expire 10 years from closing the Transaction; renewals of all, but not fewer than all, the Properties for 4 terms of 10 years each at the option of ARC. 2 Todd Kaestner February 24, 1997 Page 2 TRANSACTION COSTS - Nationwide and ARC will each pay their respective ancillary transaction costs. Nationwide will pay for environmental, survey, title insurance, site inspections, and its own legal costs up to a reasonable level agreed to in advance for each Property. OTHER FEES - None. MINIMUM RENT - 320 basis points for Acquisition Properties, 340 basis points for Development Properties after completion, both over the 20 trading day average 10-year Treasury rate; for Development Properties prior to completion, 30-day Libor plus 150 basis points. ADDITIONAL RENT - Beginning in Year 2, Additional Rent will equal 10% of increases in revenue over revenue in the first year but not less than 0% and not to exceed 2.5% annual increases. RENEWAL RENT - Fair market value as of renewal date (but not more than Nationwide's investment increased by 2.5% per year) times the then 10-year Treasury rate (20 day average) plus 300 basis points; total rent may not decrease from the prior year, nor may total rent increase by more than 25% from the prior year. SECURITY DEPOSIT - Equal to 6 months Minimum Rent for the first $40,000,000 of Facility usage; 3 months for the next $30,000,000, none thereafter, in cash or letter of credit from mutually acceptable bank. Nationwide will pay interest on cash, if any, held as a Security Deposit, at a rate equal to income earned thereon. MAINTENANCE AND UPKEEP EXPENDITURES - Tenant will, by a mutually agreeable mechanism, fund expenditures to insure that the Properties remains in high quality and competitive position. TENANT'S OPTION - ARC will have the option to purchase all, but not fewer than all, the Properties at the end of the initial lease term and all renewal terms for fair market value but not less than Nationwide's investment. CONDITIONS PRECEDENT - Satisfaction and fulfillment of conditions precedent customary and appropriate for transactions of this type, including but not limited to: Inspection and approval of each Acquisition Property and the site for each Development Property by Nationwide; Approval of each Property and each transaction by Nationwide's board of directors. Prior approval by Nationwide of Development Property plans, specifications, material contracts, schedules, and budgets. 3 Todd Kaestner February 24, 1997 Page 3 Receipt and approval by Nationwide of most recent Medicaid, Medicare, and/or regulatory inspection reports, as well as financial statements and operating reports on each Acquisition Property and Guarantor(s). Satisfaction of Nationwide with the material terms and conditions of all necessary documents including, but not limited to, supporting documentation such as guaranties, trust agreement(s), partnership agreement(s), corporate charter(s), bylaws, resolutions, certificates, and security documents in addition to purchase agreement(s), development agreement(s), and lease(s), and the execution, delivery and, where applicable, public recordation, of all necessary documents. No material adverse change from the date of due diligence to closing. Accuracy of representations and warranties and absence of default or other material breach. Satisfaction of Nationwide with the final organization of and structure of each transaction, Developer, Tenant(s), Guarantor(s), and title to respective assets. Receipt and approval by Nationwide of evidence satisfactory to Nationwide as to the due formation, power and authority of Developer, Tenant(s), Guarantor(s), and other parties to each transaction to participate in each transaction; the enforceability of all documents and agreements; and the absence of material actions, suits, judgments, or proceedings. Repayment of outstanding liens, encumbrances and debt on each Property and satisfaction of Nationwide with unencumbered title thereon. Such title to be insured by ALTA 1970 Form B extended coverage in amount equal to Nationwide's investment. Nationwide to receive surveys on each Property. Receipt and approval by Nationwide of satisfactory evidence that each Acquisition Property has passed all inspections and has received all licenses, permits, access approvals, certificates of need, provider agreements, Medicare, Medicaid and third party payor agreements and other authorizations and approvals as are needed for the operation of each Property as a skilled/intermediate nursing facility, assisted/independent living facility, personal care facility, continuing care retirement community, or adult congregate living facility as the case may be. Receipt and approval by Nationwide of satisfactory Phase 1 Environmental Assessment Reports (or appropriate updates) prepared by qualified experts approved by Nationwide showing no presence or potential of hazardous materials in, on, under or around each Property. 4 Todd Kaestner February 24, 1997 Page 4 Receipt by Nationwide of satisfactory certificates of compliance with respect to material obligations of Developer, Tenant(s) and Guarantor(s) as are customary with transactions of this nature. Receipt and approval by Nationwide of certificates of insurance satisfactory to Nationwide naming Nationwide as additionally insured. Receipt by Nationwide of representations and warranties customary and appropriate for transactions of this nature. This letter is not a commitment. Such a commitment can only be granted by Nationnwide's board of directors, which has not considered any Property or any transaction contemplated herein. We look forward to working with you in the future. Sincerely, T. Andrew Stokes - ---------------------- T. Andrew Stokes Senior Vice President TAS:pb f:\users\andy\ARC\acqdevpr\terms2 AGREED AND ACCEPTED: H Todd Kaestner 2/26/97 - --------------------- ---------------- Signature Date Name (printed): H Todd Kaestner -------------------------------- Title: EVP Corporate Development ---------------------------------------- Company: American Retirement Communities, L.P. -------------------------------------- EX-23.1 9 CONSENT OF KPMG LLP 1 Exhibit 23.1 The Partners American Retirement Communities, L.P.: The audits of American Retirement Communities, L.P. referred to in our report dated January 22, 1997, included the related financial statement schedule for the year ended December 31, 1994, the three months ended March 31, 1995, the nine months ended December 31, 1995, and the year ended December 31, 1996, included in the registration statement. The financial statement schedule is the responsibility of the Partnership's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic combined and consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. Our report dated January 22, 1997 contains an explanatory paragraph which refers to a change in cost basis as a result of a purchase business combination. We consent to the use of our reports included herein on (1) American Retirement Communities L.P. and (2) Carriage Club of Charlotte, Limited Partnership and Carriage Club of Jacksonville, Limited Partnership and to the reference to our firm under the headings "Selected Combined and Consolidated Financial Data" and "Experts" in the prospectus. KPMG PEAT MARWICK LLP Nashville, Tennessee May 12, 1997 -----END PRIVACY-ENHANCED MESSAGE-----