-----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, SoiiTBXO1WmJpYnXmTRtoOV6xGntnhyFbsQ4DUua3prwW43IHoM5nGZ8SxO5Q6cV Gp5QzxXT2D1mYHaxzFuVqg== 0000950144-97-010279.txt : 19970924 0000950144-97-010279.hdr.sgml : 19970924 ACCESSION NUMBER: 0000950144-97-010279 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19970923 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN RETIREMENT CORP CENTRAL INDEX KEY: 0000787784 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 621674303 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-34339 FILM NUMBER: 97684169 BUSINESS ADDRESS: STREET 1: 111 WESTWOOD PLACE CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 6152212250 S-1/A 1 AMERICAN RETIREMENT FORM S-1/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1997 REGISTRATION NO. 333-34339 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 1 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 SEPTEMBER 23, 1997 PROSPECTUS $100,000,000 [AMERICAN RETIREMENT CORPORATION LOGO] % CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002 ------------------ The Debentures will be convertible into shares of common stock of the Company, par value $0.01 per share (the "Common Stock"), at any time on or after December 31, 1997 and prior to maturity, unless previously redeemed, at a conversion price of $ per share (the "Conversion Price"), subject to adjustment in certain events. The Common Stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "ACR." On September 22, 1997, the last reported sale price of the Common Stock on the NYSE was $19.81 per share. See "Price Range of Common Stock." The Debentures have been approved for listing on the NYSE. At the request of the Company, up to $10,000,000 principal amount of the Debentures 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." Interest on the Debentures will be payable semi-annually on and of each year, commencing , 1998. The Debentures will be redeemable at any time on or after , 2000 at the option of the Company, from time to time, in whole or in part, at a redemption price equal to 100% of the principal amount thereof, together with accrued interest thereon to the redemption date. Upon a Change in Control (as defined), each holder of the Debentures will have the right, subject to certain conditions and restrictions, to require the Company to repurchase any or all outstanding Debentures owned by such holder at 101% of the principal amount thereof, plus accrued and unpaid interest. The Debentures will be unsecured and subordinated in right of payment to all present and future Senior Indebtedness (as defined) of the Company. In addition, the Debentures will be effectively subordinated to liabilities (including trade payables, but excluding intercompany liabilities) of the Company's subsidiaries. As of June 30, 1997, Senior Indebtedness of the Company and other liabilities to which the Debentures are effectively subordinated totaled $176.8 million. See "Description of Debentures." SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE DEBENTURES 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(1) COMMISSIONS(2) COMPANY(1)(3) - ------------------------------------------------------------------------------------------------------------- Per Debenture..................... % % % - ------------------------------------------------------------------------------------------------------------- Total(4).......................... $ $ $ =============================================================================================================
(1) Plus accrued interest, if any, from , 1997. (2) See "Underwriting" for indemnification arrangements. (3) Before deducting expenses payable by the Company estimated to be $400,000. (4) The Company has granted the Underwriter a 30-day option to purchase up to an additional $15,000,000 principal amount of Debentures solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Company will be $ , $ , and $ , respectively. See "Underwriting." The Debentures are offered by the Underwriter when, as, and if delivered to and accepted by the Underwriter, 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 Debentures will be made in New York, New York on or about , 1997. SCHRODER & CO. INC. September , 1997 3 Omitted Graphic and Image Material The following graphic and image material is omitted from the form of the prospectus filed electronically: A map of the United States depicting the location of the Company's operating home health care agencies and a home health care agency under development, and the location and resident capacity of the Company's operating communities, communities under development, and a community to be acquired by the Company in the future. The following caption accompanies the map: "The above map shows the locations of the Company's existing owned, leased, and managed senior living communities and home health care agencies, including those under development, and a pending acquisition." ------------------------------------ CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE DEBENTURES OFFERED HEREBY OR THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS, AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 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." Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriter's over-allotment option. Unless the context otherwise requires, references to the Company include the Company, its subsidiary partnerships and corporations, and the Company's predecessor, American Retirement Communities, L.P. ("ARCLP" or the "Predecessor"). Immediately prior to the Company's initial public offering in May 1997 (the "IPO"), the Predecessor was reorganized (the "Reorganization") and all of its assets and liabilities were contributed to the Company. See "The Company -- Reorganization." 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. Established in 1978, the Company believes it ranks among the leading operators in the senior living and health care services industry. Currently, the Company operates 22 senior living communities in 12 states, consisting of 12 owned communities, three leased communities, and seven managed communities, with an aggregate capacity for approximately 5,800 residents. In the fourth quarter of 1997, the Company expects to acquire a long-term leasehold in an additional community located in Richmond, Virginia with capacity for 917 residents. The Company operates 15 home health care agencies, ten of which are owned and five of which are managed. At June 30, 1997, the Company's owned communities had a stabilized occupancy rate of 95%, its leased communities had a stabilized occupancy rate of 94%, and its managed communities had a stabilized occupancy rate of 94% (stabilized communities are generally defined as communities or expansions thereof that have (i) achieved 95% occupancy; or (ii) been open at least 12 months). For the year ended December 31, 1996, and the six months ended June 30, 1997, revenues attributable to the Company's senior living communities accounted for 91.5% and 89.8%, respectively, of the Company's total revenues, and revenues attributable to the Company's home health care agencies accounted for 6.2% and 8.0%, respectively, of the Company's total revenues. Approximately 92.4% of the Company's total revenues for the year ended December 31, 1996 and approximately 89.2% of the Company's total revenues for the six months ended June 30, 1997 were derived from private pay sources. Since 1992, the Company has experienced significant growth, primarily through the acquisition of 14 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 by developing senior living networks 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 27 free-standing assisted living residences, with an estimated aggregate capacity for approximately 2,400 residents, and is expanding nine of its existing communities to add capacity to accommodate approximately 800 additional residents. The Company was founded by Dr. Thomas F. Frist, Sr. and Jack C. Massey, the principal founders of Hospital Corporation of America. 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 3 5 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 ten 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 Debentures Offered............ $100,000,000 aggregate principal amount of the Company's % Convertible Subordinated Debentures Due 2002 ($115,000,000 if the Underwriter's over-allotment option is exercised in full). Interest Payment Dates........ and , commencing , 1998. Maturity...................... Due on , 2002. Conversion of Debentures...... The Debentures will be convertible at any time on or after December 31, 1997 and prior to maturity, unless previously redeemed, into shares of Common Stock at a price of $ per share, subject to adjustment in certain events. Optional Redemption........... The Debentures will be redeemable at any time and from time to time on or after , 2000 at the option of the Company, in whole or in part, at a redemption price equal to 100% of the principal amount thereof, together with accrued interest thereon to the redemption date. Ranking....................... The Debentures will be subordinated to all present and future Senior Indebtedness of the Company. In addition, the Debentures will be effectively subordinated to all liabilities of the Company's subsidiaries. The Indenture will not limit the amount of Senior Indebtedness or other liabilities the Company or its subsidiaries may incur from time to time. At June 30, 1997, the Company's outstanding Senior Indebtedness totaled approximately $90.9 million and liabilities of the Company's subsidiaries totaled approximately $85.9 million. Change in Control............. Upon a Change in Control, each holder of the Debentures will have the right, subject to certain conditions and restric- 4 6 tions, to require the Company to repurchase any or all outstanding Debentures owned by such holder at 101% of the principal amount thereof, plus accrued and unpaid interest. Use of Proceeds............... For general corporate purposes, including the development and construction of free-standing assisted living residences, possible acquisitions of businesses engaged in activities similar or complementary to the Company's business, and the possible prepayment of indebtedness. NYSE symbol................... "ACR02" 5 7 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 six months ended June 30, 1996, and the year ended December 31, 1996 is derived from the consolidated financial statements of the Predecessor. The summary financial data for the six months ended June 30, 1997 is derived from the unaudited consolidated financial statements of the Company and includes the operations of the Predecessor for the period January 1, 1997 through May 28, 1997 and the Company for the period May 29, 1997 through June 30, 1997. See "The Company -- Reorganization" and Note 1 to the Combined and Consolidated Financial Statements.
PREDECESSOR ENTITIES (COMBINED) PREDECESSOR --------------------------- --------------------------------------------------------------- THREE MONTHS NINE MONTHS YEAR ENDED SIX MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, 1996 ENDED JUNE 30, 1996 DECEMBER 31, MARCH 31, DECEMBER 31, ----------------------- ---------------------- 1994 1995 1995 ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1) ------------ ------------ ------------ -------- ------------ ------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Total revenues................ $33,341 $12,356 $48,763 $ 75,617 $ 79,543 $34,806 $38,732 Operating expenses............ 28,126 10,270 38,730 60,066 63,861 27,313 30,685 ------- ------- ------- -------- -------- ------- ------- Income from operations....... 5,215 2,086 10,033 15,551 15,682 7,493 8,047 Other income (expense), net... (5,053) (3,334) (6,682) (10,938) (11,353) (4,609) (5,718) ------- ------- ------- -------- -------- ------- ------- Income (loss) before income taxes and extraordinary item......................... 162 (1,248) 3,351 4,613 4,329 2,884 2,329 Income tax expense (benefit) -- current(2)...... -- 20 55 (920) (920) -- -- Income tax expense -- deferred(3).................. -- -- -- -- -- -- -- ------- ------- ------- -------- -------- ------- ------- Income (loss) before extraordinary item........... 162 (1,268) 3,296 5,533 5,249 2,884 2,329 Extraordinary item(4)......... -- -- -- (2,335) (2,335) (2,335) (2,335) ------- ------- ------- -------- -------- ------- ------- Net income (loss)............. $ 162 $(1,268) $ 3,296 $ 3,198 $ 2,914 $ 549 $ (6) ======= ======= ======= ======== ======== ======= ======= Net income (loss) available for distribution to partners and shareholders............. $ 162 $(1,268) $ 2,171 $ 2,094 $ 2,590 $ (165) $ (330) ======= ======= ======= ======== ======== ======= ======= UNAUDITED PRO FORMA TAX DATA(5): Income before income taxes and extraordinary item........... $ 4,613 $ 4,329 $ 2,884 $ 2,329 Pro forma income tax expense.. 820 712 1,096 886 -------- -------- ------- ------- Pro forma income before extraordinary item........... $ 3,793 $ 3,617 $ 1,788 $ 1,443 ======== ======== ======= ======= Pro forma income before extraordinary item available for distribution to partners and shareholders............. $ 2,689 $ 3,293 $ 1,074 $ 1,119 ======== ======== ======= ======= Pro forma per share data: Income before extraordinary item available for distribution to partners and shareholders........... $ 0.29 $ 0.35 $ 0.11 $ 0.12 ======== ======== ======= ======= Shares used in computing pro forma per share data(7).... 9,375 9,375 9,375 9,375 ======== ======== ======= ======= Pro forma as adjusted per share data(8): Income before extraordinary item available for distribution to partners and shareholders........... $ 0.29 $ 0.10 ======== ======= Shares used in computing pro forma as adjusted per share data(9).................... 11,406 11,406 ======== ======= SIX MONTHS ENDED JUNE 30, 1997 -------- STATEMENT OF OPERATIONS DATA: Total revenues................ $44,389 Operating expenses............ 35,867 ------- Income from operations....... 8,522 Other income (expense), net... (6,308) ------- Income (loss) before income taxes and extraordinary item......................... 2,214 Income tax expense (benefit) -- current(2)...... 92 Income tax expense -- deferred(3).................. 10,728 ------- Income (loss) before extraordinary item........... (8,606) Extraordinary item(4)......... -- ------- Net income (loss)............. $(8,606) ======= Net income (loss) available for distribution to partners and shareholders............. $(8,606) ======= UNAUDITED PRO FORMA TAX DATA(5): Income before income taxes and extraordinary item........... $ 2,214 Pro forma income tax expense.. 841(6) ------- Pro forma income before extraordinary item........... $ 1,373 ======= Pro forma income before extraordinary item available for distribution to partners and shareholders............. $ 1,373 ======= Pro forma per share data: Income before extraordinary item available for distribution to partners and shareholders........... $ 0.14 ======= Shares used in computing pro forma per share data(7).... 9,752 ======= Pro forma as adjusted per shar Income before extraordinary item available for distribution to partners and shareholders........... $ 0.12 ======= Shares used in computing pro forma as adjusted per share data(9).................... 11,406 =======
6 8
AT JUNE 30, 1997 -------------------------- AS ACTUAL ADJUSTED(10) -------- ------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................... $ 21,863 $118,963 Working capital............................................. 15,472 112,572 Total assets................................................ 246,072 346,072 Long-term debt, including current portion................... 167,259 267,259 Shareholders' equity........................................ 50,122 50,122
PREDECESSOR ENTITIES (COMBINED) PREDECESSOR --------------------------- ---------------------------------------------------- THREE MONTHS NINE MONTHS YEAR ENDED SIX MONTHS SIX MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, 1996 ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, ---------------------- JUNE 30, JUNE 30, 1994 1995 1995 ACTUAL PRO FORMA(1) 1996 1997 ------------ ------------ ------------ ------- ------------ ---------- ---------- (DOLLARS IN THOUSANDS) OTHER FINANCIAL DATA: Adjusted EBITDA(11)............. $8,407 $3,262 $15,815 $23,679 $23,198 $10,782 $12,031 Ratio of Adjusted EBITDA to interest expense(12)........... 1.6x 1.4x 2.1x 2.0x 1.9x 2.3x 1.9x Ratio of earnings to fixed charges(13).................... 1.0x 0.5x 1.4x 1.4x 1.3x 1.6x 1.3x Distribution to partners, including preferred distributions.................. $2,580 $1,400 $ 5,189 $ 7,139 $ 6,359(14) $ 3,546 $ 2,500(15) OPERATING DATA: Revenue mix: Private pay.................... 93.0% 92.2% 91.2% 92.4% 92.5% 91.3% 89.2% Medicare and other(16)......... 7.0 7.8 8.8 7.6 7.5 8.7 10.8 ------ ------ ------- ------- ------- ------- ------- Total.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Resident capacity (at period end): Owned.......................... 2,141 2,386 2,594 3,369 2,886 3,369 3,002 Leased......................... -- -- -- -- 483 -- 573 Managed........................ 3,315 3,079 3,008 2,159 2,159 2,159 2,159 ------ ------ ------- ------- ------- ------- ------- Total.................... 5,456 5,465 5,602 5,528 5,528 5,528 5,734 Average occupancy rate: Owned.......................... 89% 91% 93% 94% 94% 93% 94% Leased......................... -- -- -- -- 89 -- 93 Managed........................ 93 95 91 91 90 90 93 ------ ------ ------- ------- ------- ------- ------- Total.................... 90% 93% 92% 92% 92% 92% 93%
- --------------- (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 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) Periods prior to 1997 reflect income tax expense of only one of the Predecessor Entities because the Predecessor and the other Predecessor Entities were partnerships. No income tax expense is reflected for periods prior to 1995 because of losses or the availability of 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. Income tax expense for the six months ended June 30, 1997 reflects income taxes incurred by the Company during the period May 29, 1997 (the day following the Reorganization) through June 30, 1997. During the period January 1, 1997 through the date of the Reorganization (May 28, 1997), the Predecessor did not incur income tax expense because it was a partnership. See Note 12 to the Combined and Consolidated Financial Statements. (3) At the time of the Reorganization and as a result of the conversion from a non-taxable to a taxable entity, the Company recorded as a one-time charge to income a net deferred income tax expense of approximately $10.7 million resulting from 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. (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 unaudited pro forma tax 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 (2) above. (6) The unaudited pro forma tax data for the six months ended June 30, 1997, does not give effect to a non-recurring $10.7 million ($1.10 per share) charge to income incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities. See footnote (3) above and Note 16 to the Combined and Consolidated Financial Statements. 7 9 (7) Reflects 7,812,500 shares issued in the Reorganization, plus 1,562,500 shares, representing the value of the $21.9 million principal amount of a promissory note issued to the Predecessor in connection with the Reorganization ("the Reorganization Note") (based upon the IPO price of $14.00 per share). For the six months ended June 30, 1997, also includes the weighted average effect of (a) the 3,593,750 shares sold by the Company in the IPO; and (b) Common Stock equivalents. (8) Gives effect to the following transactions as if they had occurred on January 1, 1996: (a) the Reorganization; (b) the sale of the 3,593,750 shares sold by the Company in the IPO, and the application of a portion of the net proceeds to retire the Reorganization Note; and (c) for the year ended December 31, 1996 data, the transactions described in footnote (1) above. (9) Reflects 7,812,500 shares issued in the Reorganization, plus the 3,593,750 shares sold by the Company in the IPO. (10) Adjusted to reflect the sale of the Debentures offered hereby. (11) Adjusted EBITDA represents earnings before deductions for interest expense, income taxes, depreciation and amortization and excludes the non-recurring charge related to the 1995 Roll-Up and extraordinary loss from early extinguishment of debt. The Company believes that Adjusted EBITDA provides additional information for determining its ability to meet its future debt service, capital expenditure and working capital requirements. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered as an alternative to net income (loss) or income from operations as an indicator of the Company's operating performance, or to cash flows as a measure of the Company's liquidity. (12) For purposes of this computation, interest expense includes interest capitalized and net interest expense. (13) For purposes of this computation, earnings are defined as income (loss) before income taxes and extraordinary item and fixed charges (excluding capitalized interest). Fixed charges are defined as interest expensed and capitalized, amortization of capitalized financing costs, and the portion of operating lease rental expense that is representative of the interest factor. Earnings were inadequate to cover fixed charges for the three months ended March 31, 1995 by $1.2 million. (14) Reflects the elimination, on a pro forma basis, of the preferred distributions paid with respect to $5.2 million of the Predecessor'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 and distributions of $324,000 paid from January 1996 through June 1996 with respect to such Preferred Partnership Interests were not eliminated. (15) Reflects the payment by ARCLP of an aggregate of $2.5 million to its partners (the "Tax Distribution"), which amount represented the approximate amount of income taxes associated with the Predecessor's earnings in 1997 through the date of the Reorganization. (16) Includes Medicare (including Medicare-related private co-insurance) and Medicaid. 8 10 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 June 30, 1997, the Company had long-term debt (including current portion) of $167.3 million, of which $144.3 million was payable to one lender, and was obligated to pay annual rental obligations of approximately $3.0 million under long-term operating leases. In addition, the Company has signed a definitive agreement to acquire a long-term leasehold interest in a community located in Richmond, Virginia that will require annual rental payments of approximately $4.3 million. 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"). Currently, the Company has been allocated $41.6 million and $4.7 million, respectively, in commitments under 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, the remaining proceeds from the IPO, the proceeds from the sale of the Debentures offered hereby, 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. As of June 30, 1997, the Company's existing debt and lease agreements required aggregate annual payments for the years ending December 31, 1997, 1998, 1999, 2000, and 2001, assuming no change in the Company's average interest cost (8.4% at June 30, 1997), ranging from approximately $20.7 million to $22.9 million. In addition, the Company intends to incur significant additional indebtedness and lease obligations and therefore expects its annual debt service and lease obligations over the next five fiscal years will be significantly greater than the amounts set forth in the preceding sentence. For the fiscal year ended December 31, 1996, the Company's net cash provided by operating activities, before giving effect to the payment of interest expense on the Company's outstanding indebtedness, was approximately $23.6 million. There can be no assurance that the Company will generate sufficient cash flows from operations to cover required interest, principal, and operating lease payments. Any payment or other default could cause the lender to foreclose upon the communities securing such indebtedness, or, in the case of an operating lease, could terminate the lease, with a consequent loss of income and asset value to the Company. Furthermore, because most of the Company's mortgages and sale-leaseback agreements contain cross-default provisions, a default by the Company on one of its payment obligations could adversely affect a significant number of the Company's other properties and, consequently the Company's business, results of operations, and financial condition. NEED FOR ADDITIONAL FINANCING; EXPOSURE TO RISING INTEREST RATES The Company's ability to sustain any operating losses and to otherwise meet its growth objectives will depend, in part, on its ability to obtain additional financing on acceptable terms from available financing sources. The Company maintains a $2.5 million line of credit that restricts the Company's ability to incur additional indebtedness. There can be no assurance that future debt instruments will not also include covenants restricting the Company's ability to incur additional debt. Moreover, raising additional funds through the issuance of equity securities could cause existing shareholders to experience dilution and could adversely affect the market price of the Common Stock. There can be no assurance that the Company will be successful in securing additional financing or that adequate financing will be available and, if available, will be on terms that are acceptable to the Company. The Company's inability to obtain additional financing on acceptable terms could delay or eliminate some or all of the Company's growth plans. 9 11 At June 30, 1997, $48.3 million in principal amount, or approximately 28.9%, of the Company's indebtedness, bore interest at floating rates, with a weighted average annual rate of 7.9%. 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. SUBORDINATION The Debentures will be expressly subordinated in right of payment to all existing and future Senior Indebtedness of the Company. At June 30, 1997, the Company's Senior Indebtedness aggregated approximately $90.9 million. In addition, the Debentures will be effectively subordinated to the liabilities (including trade payables but excluding intercompany liabilities) of the Company's subsidiaries, which were approximately $85.9 million at June 30, 1997. Neither the Indenture nor the Debentures will limit the ability of the Company or any of its subsidiaries to incur additional Senior Indebtedness or other liabilities. The Indenture and the Debentures will not contain any financial covenants or similar restrictions with respect to the Company and, therefore, the holders of the Debentures will have no protection (other than rights upon Events of Default as described under "Description of Debentures") from adverse changes in the Company's financial condition. By reason of the subordination of the Debentures, in the event of insolvency, bankruptcy, liquidation, reorganization, dissolution, or winding up of the business of the Company or upon a default in payment with respect to any indebtedness of the Company or an event of default with respect to such indebtedness resulting in the acceleration thereof, the assets of the Company will be available to pay the amounts due on the Debentures only after all Senior Indebtedness and all liabilities of the Company's subsidiaries have been paid in full. DISCRETIONARY USE OF PROCEEDS The Company intends to use the net proceeds of the offering for general corporate purposes, including the development and construction of free-standing assisted living residences, possible acquisitions of businesses engaged in activities similar or complementary to the Company's business, and the possible prepayment of indebtedness. Accordingly, the Company will have broad discretion as to the application of such proceeds. See "Use of Proceeds." DEPENDENCE ON PRIVATE PAY RESIDENTS Approximately 92.4% of the Company's total revenues for the year ended December 31, 1996 and approximately 89.2% of the Company's total revenues for the six months ended June 30, 1997 were attributable to private pay sources. For the same periods, 7.6% and 10.8%, respectively, of the Company's revenues were attributable to reimbursement from third-party payors, including Medicare. The Company expects to continue to rely primarily on the ability of residents to pay for the Company's services from their own or familial financial resources. Inflation or other circumstances that adversely affect the ability of 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. 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 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. 10 12 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 27 free-standing assisted living residences, with an estimated aggregate capacity for approximately 2,400 residents, and is expanding nine of its existing senior living communities to add capacity to accommodate approximately 800 additional 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 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." RISKS IN ACQUISITIONS OF COMMUNITIES AND COMPLEMENTARY BUSINESSES; DIFFICULTIES OF INTEGRATION 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. 11 13 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. RISKS OF DEVELOPMENT IN CONCENTRATED GEOGRAPHIC AREAS 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." INCREASING COMPETITION The senior living and health care services industry is highly competitive, and the Company expects that all segments of the industry will become increasingly competitive in the future. The Company competes with other companies providing independent living, assisted living, skilled nursing, home health care, and other similar service and care alternatives. Although the Company believes there is a need for 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 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 12 14 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 The Company's officers and directors and entities controlled by them, collectively, beneficially own approximately 40.0% of the outstanding shares of Common Stock. Accordingly, such persons 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 Debentures and the Common Stock. See "Principal Shareholders." GOVERNMENT REGULATION AND THE BURDENS OF COMPLIANCE Federal and state governments regulate various aspects of the Company's business. The development and operation of health care facilities and the provision of health care services are subject to federal, state, and local licensure, certification, and inspection laws that regulate, among other matters, the number of licensed beds, the provision of services, the distribution of pharmaceuticals, billing practices and policies, equipment, staffing (including professional licensing), operating policies and procedures, fire prevention measures, environmental matters, and compliance with building and safety codes. Failure to comply with these laws and regulations could result in the denial of reimbursement, the imposition of fines, temporary suspension of admission of new patients, suspension or decertification from the Medicare programs, restrictions on the ability to acquire new facilities or expand existing facilities, and, in extreme cases, the revocation of a community's license or closure of a community. There can be no assurance that federal, state, or local governments will not impose additional restrictions on the Company's activities that could materially adversely affect the Company. 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, 13 15 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 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. 14 16 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. In the event of any Change in Control of the Company, each holder of the Debentures will have the right, at such holder's option and subject to certain conditions and restrictions, to require the Company to repurchase all or any part of such holder's Debentures. The right to require the Company to repurchase Debentures may delay, deter, or prevent a change in control of the Company. See "Description of Debentures" and "Description of Capital Stock -- Certain Provisions of the Charter, Bylaws, and Tennessee Law." ABSENCE OF PUBLIC MARKET FOR THE DEBENTURES The Debentures are a new class of securities for which there is currently no public market. Although the Debentures have been approved for listing on the NYSE, there can be no assurance as to the liquidity of the market for the Debentures that may develop, the ability of the holders to sell their Debentures, or the prices at which holders of the Debentures would be able to sell their Debentures. If a market for the Debentures does develop, the Debentures may trade at a discount from their initial public offering price, depending on prevailing interest rates, the market for similar securities, performance of the Company, performance of the senior living industry, and other factors. See "Underwriting." 15 17 FORWARD-LOOKING STATEMENTS This Prospectus contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, the discussions of the Company's operating and growth strategy, including its development plans and possible acquisitions. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, the factors set forth under the caption "Risk Factors" in this Prospectus. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Prospectus 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. 16 18 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. Established in 1978, the Company believes it ranks among the leading operators in the senior living and health care industry. Currently, the Company operates 22 senior living communities in 12 states, consisting of 12 owned communities, three leased communities, and seven managed communities, with an aggregate capacity for approximately 5,800 residents. In the fourth quarter of 1997, the Company expects to acquire a long-term leasehold in an additional community located in Richmond, Virginia with capacity for 917 residents. The Company also operates 15 home health care agencies, ten of which are owned and five of which are managed. At June 30, 1997, the Company's owned communities had a stabilized occupancy rate of 95%, its leased communities had a stabilized occupancy rate of 94%, and its managed communities had a stabilized occupancy rate of 94%. For the year ended December 31, 1996 and the six months ended June 30, 1997, revenues attributable to the Company's senior living communities accounted for 91.5% and 89.8%, respectively, of the Company's total revenues, and revenues attributable to the Company's home health care agencies accounted for 6.2% and 8.0%, respectively, of the Company's total revenues. Approximately 92.4% of the Company's total revenues for the year ended December 31, 1996 and approximately 89.2% of the Company's total revenues for the six months ended June 30, 1997 were derived from private pay sources. Since 1992, the Company has experienced significant growth, primarily through the acquisition of 14 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 by developing senior living networks 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 27 free-standing assisted living residences, with an estimated aggregate capacity for approximately 2,400 residents, and is expanding nine of its existing communities to add capacity to accommodate approximately 800 additional residents. The Company was incorporated under the laws of the State of Tennessee in February 1997 as a wholly-owned subsidiary of ARCLP in anticipation of the Reorganization and the IPO. The Company's principal executive offices are located at 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027, and its telephone number at that address is (615) 221-2250. THE 1995 ROLL-UP ARCLP was formed in February 1995 in connection with the reorganization (the "1995 Roll-Up") of certain Predecessor Entities that owned, operated, or managed various senior living communities. Each of the Predecessor Entities was organized at the direction of the members of the Company's management and controlling shareholders. As a result of the 1995 Roll-Up, ARCLP issued partnership interests to the partners and shareholders of the Predecessor Entities in exchange for their limited partnership interests and stock, respectively, and thereby became the owner, directly or indirectly, of all of the assets of the Predecessor Entities. The general partner of ARCLP was American Retirement Communities, LLC, a Tennessee limited liability company (the "LLC"), whose members included W.E. Sheriff, the Company's Chairman and Chief Executive Officer, and other Company executive officers. See "Certain Transactions -- The 1995 Roll-Up." 17 19 REORGANIZATION Prior to the IPO, ARCLP completed a series of transactions resulting in the Reorganization. Pursuant to the Reorganization, ARCLP contributed all of its assets, subject to all of its liabilities, to the Company in exchange for 7,812,500 shares of Common Stock and the Reorganization Note in the principal amount of $21.9 million. The number of shares issued to ARCLP and the principal amount of the Reorganization Note were established by ARCLP and the Company in connection with the Reorganization based on a number of factors, including the value of the assets contributed to the Company. In connection with the Reorganization, ARCLP made certain representations and warranties to the Company. Such representations and warranties are limited in scope, however, and do not cover undisclosed liabilities of ARCLP or other matters related to ARCLP's business. Following the Reorganization, ARCLP distributed 1,350,000 shares of Common Stock to the LLC, as general partner of ARCLP, and an aggregate of 6,462,500 shares of Common Stock to the limited partners of ARCLP, generally in accordance with the limited partners' ARCLP contribution accounts. See "Principal Shareholders" and "Certain Transactions -- Reorganization." Immediately after completion of the IPO, the Reorganization Note was repaid by the Company out of the net proceeds from the IPO and such amount was distributed to the limited partners of ARCLP in liquidation in accordance with the limited partners' ARCLP contribution accounts. See "Certain Transactions -- Reorganization." USE OF PROCEEDS The net proceeds to the Company from the sale of the Debentures offered hereby are estimated to be approximately $97.1 million (approximately $111.7 million if the Underwriters' over-allotment option is exercised in full), after deduction of the underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company intends to use the net proceeds for general corporate purposes, including the development and construction of additional free-standing assisted living residences, possible acquisitions of businesses engaged in activities similar or complementary to the Company's business, and the possible prepayment of indebtedness at such time as management deems to be in the best interest of the Company. Any such debt prepayment may be subject to substantial prepayment penalties and no assurance can be given that the Company will prepay any indebtedness. The Company currently has eight owned communities undergoing expansions and 27 free-standing assisted living residences under development. The estimated cost to complete and lease-up the Company's existing expansion and development projects ranges from $250.0 million to $300.0 million. In addition, the Company has reached an agreement in principle to acquire a long-term leasehold interest in a community located in Richmond, Virginia. See "Business -- Recent and Pending Acquisitions." The Company believes the remaining net proceeds from the IPO, the net proceeds from this offering, funding available under the REIT Facilities, future bank indebtedness, construction and mortgage financings, and funds from other sources will be sufficient to fund the Company's current development and acquisition plans. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business -- Development Activities." Pending the use of the net proceeds as described above, the net proceeds will be invested in short-term, investment-grade securities. 18 20 PRICE RANGE OF COMMON STOCK The Company sold shares of Common Stock in the IPO at a price per share of $14.00. Since the date of the IPO (May 30, 1997), the Common Stock has traded on the NYSE under the symbol "ACR." The following table sets forth the range of high and low sales prices for the Common Stock for the periods indicated on the NYSE.
1997 HIGH LOW - ---- ------ ------ Second Quarter (beginning May 30, 1997)..................... $17.88 $14.25 Third Quarter (through September 22, 1997).................. 21.88 17.88
On September 22, 1997, the last reported sale price for the Common Stock on the NYSE was $19.81 per share. The Company estimates that as of August 22, 1997, there were approximately 135 holders of record of the Common Stock. DIVIDEND POLICY AND PRIOR DISTRIBUTIONS It is the policy of the Company's Board of Directors to retain all future earnings to finance the operation and expansion of the Company's business. Accordingly, the Company does not anticipate declaring or paying cash dividends on the Common Stock in the foreseeable future. The payment of cash dividends in the future will be at the sole discretion of the Company's Board of Directors and will depend on, among other things, the Company's earnings, operations, capital requirements, financial condition, restrictions in then existing financing agreements, and other factors deemed relevant by the Board of Directors. Prior to the Reorganization, the Predecessor and the Predecessor Entities made periodic distributions to their respective partners or shareholders in accordance with their ownership interests therein. During 1995 and 1996, ARCLP made or accrued for distributions of approximately $6.6 million and $7.1 million, respectively, to its partners, including approximately $30,000 and $59,000, respectively, to the LLC. In addition, in 1996 ARCLP redeemed its Preferred Partnership Interests for $10.0 million. See "Certain Transactions -- Redemption of Preferred Partnership Interests." In the second quarter of 1997, ARCLP paid the Tax Distribution, which approximated the income taxes associated with the Predecessor's earnings in 1997 through the date of the Reorganization. In addition, immediately following the consummation of the IPO, and in connection with ARCLP's liquidation, the proceeds from the repayment of the Reorganization Note were distributed by ARCLP to its limited partners, generally in accordance with their respective contribution accounts. See "The Company -- Reorganization" and "Certain Transactions -- Reorganization." 19 21 CAPITALIZATION The following table sets forth the capitalization of the Company (i) at June 30, 1997, (ii) as adjusted to reflect the issuance and sale of the Debentures offered hereby, and (iii) as further adjusted to give effect to the assumed conversion of all of the Debentures at the initial Conversion Price. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus.
AS OF JUNE 30, 1997 -------------------------------------- ASSUMING 100% ACTUAL AS ADJUSTED CONVERSION ----------- ----------- ---------- (IN THOUSANDS) Short-term debt, including current portion of long-term debt...................................................... $ 5,935 $ 5,935 $ 5,935 ======== ======== ======== Long-term debt: Long-term unsubordinated debt, less current portion....... $161,324 $161,324 $161,324 % Convertible Subordinated Debentures due 2002........ -- 100,000 -- -------- -------- -------- Total long-term debt, less current portion.......... $161,324 $261,324 $161,324 Shareholders' equity: Preferred Stock, no par value; 5,000,000 shares authorized, no shares issued and outstanding............ -- -- -- Common Stock, par value $.01 per share; 50,000,000 shares authorized; 11,406,250 shares issued and outstanding, actual and as adjusted; shares issued and outstanding assuming 100% conversion of the Debentures(1)........................................... 114 114 Additional paid-in capital................................ 60,213 60,213 Accumulated deficit....................................... (10,205) (10,205) (10,205) -------- -------- -------- Total shareholders' equity.............................. 50,122 50,122 147,222 -------- -------- -------- Total capitalization.................................... $211,446 $311,446 $308,546 ======== ======== ========
- --------------- (1) Does not include 627,500 shares of Common Stock reserved for issuance pursuant to outstanding stock options under the Company's Stock Incentive Plan. See "Management -- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan" and "Description of Capital Stock." 20 22 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The accompanying Unaudited Pro Forma Consolidated Statements of Operations for the six months ended June 30, 1996 and for the year ended December 31, 1996 reflect 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 Statements of Operations for the six months ended June 30, 1996 and for the year ended December 31, 1996 are 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 June 30, 1997 or for the six months then ended because there were no transactions for which pro forma financial information is required for that period. 21 23 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
CARRIAGE CLUB SALE-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 Preferred return on special redeemable preferred limited partnership interests(F)............... (1,104) -- -- 780 -------- ------ -------- ------- Pro forma income (loss) before extraordinary item available for distribution to partners and shareholders................................... $ 2,689 $ 193 $ (679) $ 1,090 ======== ====== ======== ======= Pro forma per share data: Income before extraordinary item available for distribution to partners and shareholders(G).............................. $ 0.29 ======== Shares used in computing pro forma per share data(H)...................................... 9,375 ======== Pro forma as adjusted per share data(I): Income before extraordinary item available for distribution to partners and shareholders(J).............................. Shares used in computing pro forma as adjusted per share data(K)............................ 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 Preferred return on special redeemable preferred limited partnership interests(F)............... (324) -------- Pro forma income (loss) before extraordinary item available for distribution to partners and shareholders................................... $ 3,293 ======== Pro forma per share data: Income before extraordinary item available for distribution to partners and shareholders(G).............................. $ 0.35 ======== Shares used in computing pro forma per share data(H)...................................... 9,375 ======== Pro forma as adjusted per share data(I): Income before extraordinary item available for distribution to partners and shareholders(J).............................. $ 0.29 ======== Shares used in computing pro forma as adjusted per share data(K)............................ 11,406 ========
- --------------- (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 ($4.4 million over ten years); and 22 24 (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) A total of $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 Unaudited Pro Forma Consolidated Statement of Operations data. (G) Income per share before extraordinary item available for distribution to partners and shareholders is calculated after subtracting the return on the Preferred Partnership Interests. (H) Reflects 7,812,500 shares issued in the Reorganization, plus 1,562,500 shares, representing the value of the $21.9 million principal amount of the Reorganization Note (based upon the IPO price of $14.00 per share). (I) Gives effect to the following transactions as if they had occurred on January 1, 1996: (a) the Reorganization; (b) the sale of the 3,593,750 shares sold by the Company in the IPO, and the application of a portion of the net proceeds to retire the Reorganization Note; (c) the Carriage Club Acquisitions; and (d) the Sale-Leaseback Transactions and the application of a portion of the net proceeds therefrom to retire debt. (J) Does not reflect a $10.7 million ($1.10 per share) one-time charge to income incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities. (K) Reflects 7,812,500 shares issued in the Reorganization, plus the 3,593,750 shares sold by the Company in the IPO. 23 25 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996
CARRIAGE CLUB SALE-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............ $33,888 $4,086 $ -- $ -- Management services revenue................. 918 -- (160) -- ------- ------ -------- ----- Total revenues............................ 34,806 4,086 (160) -- Operating expenses: Community operating expense................. 21,727 2,498 (160) -- General and administrative.................. 2,421 -- -- -- Lease expense............................... -- -- -- 1,046 Depreciation and amortization............... 3,165 464 104 (580) ------- ------ -------- ----- Total operating expenses.................. 27,313 2,962 (56) 466 ------- ------ -------- ----- Income (loss) from operations............. 7,493 1,124 (104) (466) ------- ------ -------- ----- Other income (expense): Interest expense............................ (4,733) (833) (991) 694 Interest income............................. 132 21 -- -- Other....................................... (8) -- -- -- ------- ------ -------- ----- Other income (expense), net............... (4,609) (812) (991) 694 ------- ------ -------- ----- Income (loss) before income taxes and extraordinary item...................... 2,884 312 (1,095) 228 Income tax expense (benefit).............. -- -- -- -- ------- ------ -------- ----- Income (loss) before extraordinary item... $ 2,884 $ 312 $ (1,095) $ 228 ======= ====== ======== ===== PRO FORMA TAX DATA: Income (loss) before income taxes and extraordinary item.......................... $ 2,884 $ 312 $ (1,095) $ 228 Pro forma income tax expense (benefit)(E)..... 1,096 119 (416) 87 ------- ------ -------- ----- Pro forma income (loss) before extraordinary item........................................ 1,788 193 (679) 141 Preferred return on special redeemable preferred limited partnership interests(F)................................ (714) -- -- 390 ------- ------ -------- ----- Pro forma income before extraordinary item available for distribution to partners and shareholders................................ $ 1,074 $ 193 $ (679) $ 531 ======= ====== ======== ===== Pro forma per share data: Income before extraordinary item available for distribution to partners and shareholders(G)........................... $ 0.11 ======= Shares used in computing pro forma per share data(H)................................... 9,375 ======= Pro forma as adjusted per share data(I): Income before extraordinary item available for distribution to partners and shareholders(J)........................... Shares used in computing pro forma as adjusted per share data(K)................ PRO FORMA --------- Revenues: Resident and health care revenue............ $37,974 Management services revenue................. 758 ------- Total revenues............................ 38,732 Operating expenses: Community operating expense................. 24,065 General and administrative.................. 2,421 Lease expense............................... 1,046 Depreciation and amortization............... 3,153 ------- Total operating expenses.................. 30,685 ------- Income (loss) from operations............. 8,047 ------- Other income (expense): Interest expense............................ (5,863) Interest income............................. 153 Other....................................... (8) ------- Other income (expense), net............... (5,718) ------- Income (loss) before income taxes and extraordinary item...................... 2,329 Income tax expense (benefit).............. -- ------- Income (loss) before extraordinary item... $ 2,329 ======= PRO FORMA TAX DATA: Income (loss) before income taxes and extraordinary item.......................... $ 2,329 Pro forma income tax expense (benefit)(E)..... 886 ------- Pro forma income (loss) before extraordinary item........................................ 1,443 Preferred return on special redeemable preferred limited partnership interests(F)................................ (324) ------- Pro forma income before extraordinary item available for distribution to partners and shareholders................................ $ 1,119 ======= Pro forma per share data: Income before extraordinary item available for distribution to partners and shareholders(G)........................... $ 0.12 ======= Shares used in computing pro forma per share data(H)................................... 9,375 ======= Pro forma as adjusted per share data(I): Income before extraordinary item available for distribution to partners and shareholders(J)........................... $ 0.10 ======= Shares used in computing pro forma as adjusted per share data(K)................ 11,406 =======
- --------------- (A) Reflects the historical consolidated statement of operations of the Predecessor for the six months ended June 30, 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 24 26 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 $580,000 of depreciation and amortization expense on assets sold in the Sale-Leaseback Transactions; (ii) lease expense of approximately $1.3 million, less $228,000 representing amortization of the deferred gain on the Sale-Leaseback Transactions ($4.4 million over ten years); and (iii) elimination of $694,000 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) A total of $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 Unaudited Pro Forma Consolidated Statement of Operations data. (G) Income per share before extraordinary item available for distribution to partners and shareholders is calculated after subtracting the return on the Preferred Partnership Interests. (H) Reflects 7,812,500 shares issued in the Reorganization, plus 1,562,500 shares, representing the value of the $21.9 million principal amount of the Reorganization Note (based upon the IPO price of $14.00 per share). (I) Gives effect to the following transactions as if they had occurred on January 1, 1996: (a) the Reorganization; (b) the sale of the 3,593,750 shares sold by the Company in the IPO, and the application of a portion of the net proceeds to retire the Reorganization Note; (c) the Carriage Club Acquisitions; and (d) the Sale-Leaseback Transactions and the application of a portion of the net proceeds therefrom to retire debt. (J) Does not reflect a $10.7 million ($1.10 per share) one-time charge to income incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities. (K) Reflects 7,812,500 shares issued in the Reorganization, plus the 3,593,750 shares sold by the Company in the IPO. 25 27 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 six months ended June 30, 1996 are derived from the unaudited consolidated financial statements of the Predecessor. The selected statements of operations and balance sheet data as of and for the six months ended June 30, 1997 are derived from the unaudited consolidated financial statements of the Company and includes the operations of the Predecessor for the period January 1, 1997 through May 28, 1997 and the Company for the period May 29, 1997 through June 30, 1997. 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 six months ended June 30, 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 ------------------------------------------- ------------------------------------- NINE MONTHS YEARS ENDED THREE MONTHS ENDED YEAR ENDED DECEMBER 31, ENDED DECEMBER DECEMBER 31, 1996 --------------------------- MARCH 31, 31, ---------------------- 1992 1993 1994 1995 1995 ACTUAL PRO FORMA(1) ------- ------- ------- ------------- ------------ ------- ------------ (IN THOUSANDS) 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)(2) 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) -- current(3)............................ -- -- -- 20 55 (920) (920) Income tax expense -- deferred(4)...... -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- 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 ---------------------- SIX SIX MONTHS MONTHS ENDED JUNE 30, 1996 ENDED ---------------------- JUNE 30, ACTUAL PRO FORMA(1) 1997 ------- ------------ -------- STATEMENT OF OPERATIONS DATA: Revenues: Resident and health care revenue...... $33,888 $37,974 $43,424 Management services revenue........... 918 758 965 ------- ------- ------- Total revenues.................. 34,806 38,732 44,389 Operating expenses: Community operating expense........... 21,727 24,065 27,519 Lease expense......................... -- 1,046 1,072 General and administrative............ 2,421 2,421 4,070 Depreciation and amortization......... 3,165 3,153 3,206 ------- ------- ------- Total operating expenses............ 27,313 30,685 35,867 ------- ------- ------- Income from operations.............. 7,493 8,047 8,522 ------- ------- ------- Other income (expense): Interest expense...................... (4,733) (5,863) (6,611) Interest income....................... 132 153 364 Other................................. (8) (8) (61) ------- ------- ------- Other income (expense), net......... (4,609) (5,718) (6,308) ------- ------- ------- Income (loss) before income taxes and extraordinary item............ 2,884 2,329 2,214 Income tax expense (benefit) -- current(3)............................ -- -- 92 Income tax expense -- deferred(4)...... -- -- 10,728 ------- ------- ------- Income (loss) before extraordinary item.................................. 2,884 2,329 (8,606) Extraordinary item(5).................. (2,335) (2,335) -- ------- ------- ------- Net income (loss)...................... 549 (6) (8,606) Preferred return on special redeemable preferred limited partnership interests(6).......................... (714) (324) -- ------- ------- ------- Net income (loss) available for distribution to partners and shareholders.......................... $ (165) $ (330) $(8,606) ======= ======= ======= Distribution to partners, excluding preferred distributions............... $ 2,832 $ 2,832 $ 2,500(7) ======= ======= =======
26 28
PREDECESSOR --------------------------------------------- YEAR ENDED SIX MONTHS SIX MONTHS DECEMBER 31, 1996 ENDED JUNE 30, 1996 ENDED --------------------- --------------------- JUNE 30, ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1) 1997 ------ ------------ ------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) UNAUDITED PRO FORMA TAX DATA(8): Income before income taxes and extraordinary item........... $4,613 $4,329 $2,884 $2,329 $2,214 Pro forma income tax expense................................ 820 712 1,096 886 841(9) ------ ------ ------ ------ ------ Pro forma income before extraordinary item.................. 3,793 3,617 1,788 1,443 1,373 Preferred return on special redeemable preferred limited partnership interests(6)................................... (1,104) (324) (714) (324) -- ------ ------ ------ ------ ------ Pro forma income before extraordinary item available for distribution to partners and shareholders.................. $2,689 $3,293 $1,074 $1,119 $1,373 ====== ====== ====== ====== ====== Pro forma per share data: Income before extraordinary item........................... $ 0.40 $ 0.39 $ 0.19 $ 0.15 $ 0.14 Preferred return on special redeemable preferred limited partnership interests.................................... (0.12) (0.03) (0.08) (0.03) -- ------ ------ ------ ------ ------ Income before extraordinary item available for distribution to partners and shareholders............................. $ 0.29 $ 0.35 $ 0.11 $ 0.12 $ 0.14 ====== ====== ====== ====== ====== Shares used in computing pro forma per share data(10)...... 9,375 9,375 9,375 9,375 9,752 ====== ====== ====== ====== ====== Pro forma as adjusted per share data(11): Income before extraordinary item........................... $ 0.32 $ 0.13 $ 0.12 Preferred return on special redeemable preferred limited partnership interests.................................... (0.03) (0.03) -- ------ ------ ------ Income before extraordinary item available for distribution to partners and shareholders............................. $ 0.29 $ 0.10 $ 0.12 ====== ====== ====== Shares used in computing pro forma as adjusted per share data(12)................................................. 11,406 11,406 11,406 ====== ====== ======
AT DECEMBER 31, AT JUNE 30, 1997 -------------------------------------------------- ------------------------- PREDECESSOR ENTITIES (COMBINED) PREDECESSOR ---------------------------- ------------------- AS 1992 1993 1994 1995 1996 ACTUAL ADJUSTED(13) ------- ------- -------- -------- -------- ---------- ------------ (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents........................ $ 2,186 $ 3,205 $ 2,894 $ 3,825 $ 3,222 $ 21,863 $118,963 Working capital (deficit)........................ 1,545 2,529 3,168 (1,048) (14,289) 15,472 112,572 Total assets..................................... 54,419 63,393 111,425 165,579 228,162 246,072 346,072 Long-term debt, including current portion........ 38,469 43,335 89,414 102,245 170,689 167,259 267,259 Partners' and shareholders' equity............... 11,937 15,042 12,823 51,823 37,882 50,122 50,122
PREDECESSOR ENTITIES (COMBINED) PREDECESSOR ---------------------------------------- ------------------------------------- NINE MONTHS YEARS ENDED THREE MONTHS ENDED YEAR ENDED DECEMBER 31, ENDED DECEMBER DECEMBER 31, 1996 ------------------------ MARCH 31, 31, ---------------------- 1992 1993 1994 1995 1995 ACTUAL PRO FORMA(1) ------ ------ ------ ------------- ------------ ------- ------------ (IN THOUSANDS) OTHER FINANCIAL DATA: Adjusted EBITDA(14).......... $4,018 $6,534 $8,407 $3,262 $15,815 $23,679 $23,198 Ratio of adjusted EBITDA to interest expense(15)........ 1.5x 1.9x 1.6x 1.4x 2.1x 2.0x 1.9x Ratio of earnings to fixed charges(16)................. 0.9x 1.2x 1.0x 0.5x 1.4x 1.4x 1.3x PREDECESSOR ---------------------- SIX SIX MONTHS MONTHS ENDED JUNE 30, 1996 ENDED ---------------------- JUNE 30, ACTUAL PRO FORMA(1) 1997 ------- ------------ -------- OTHER FINANCIAL DATA: Adjusted EBITDA(14).......... $10,782 $11,345 $12,031 Ratio of adjusted EBITDA to interest expense(15)........ 2.3x 2.0x 1.9x Ratio of earnings to fixed charges(16)................. 1.6x 1.3x 1.3x
- --------------- (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) 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. (3) Periods prior to 1997 reflect income tax expense of only one of the Predecessor Entities because the Predecessor and the other Predecessor Entities were partnerships. No income tax expense is reflected for periods prior to 1995 because of losses or the availability of NOLs. Both periods in 1995 reflect a provision for alternative minimum taxes. In 1996, the Company recorded an income tax benefit and a deferred tax asset of $920,000 because of the anticipated utilization of NOLs that will offset taxable gains recognized from the Sale-Leaseback Transactions. Income tax expense for the six months ended June 30,1997 reflects income taxes incurred by the Company during the period May 29, 1997 (the day following the Reorganization) through June 30, 1997. During the period January 1, 1997 through the date of the Reorganization (May 28, 1997), the Predecessor did not incur income tax expense because it was a partnership. See Note 12 to the Combined and Consolidated Financial Statements. (4) At the time of the Reorganization and as a result of the conversion from a non-taxable to a taxable entity, the Company recorded as a one-time charge to income a net deferred income tax expense of approximately $10.7 million resulting from 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. 27 29 (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 distributions with respect to $4.8 million of the Preferred Partnership Interests which were redeemed in June 1996 and were not eliminated. The remaining $5.2 million of the Preferred Partnership Interests were redeemed with a portion of the net proceeds from the Sale-Leaseback 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 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 unaudited pro forma tax 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 (3) above. (9) The unaudited pro forma tax data for the six months ended June 30, 1997 does not give effect to a non-recurring $10.7 million ($1.10 per share) charge to income incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities. See footnote (4) above and Note 16 to the Combined and Consolidated Financial Statements. (10) Reflects 7,812,500 shares issued in the Reorganization, plus 1,562,500 shares, representing the value of the $21.9 million principal amount of the Reorganization Note (based upon the IPO price of $14.00 per share). For the six months ended June 30, 1997, also includes the weighted average effect of (a) the 3,593,750 shares sold by the Company in the IPO; and (b) Common Stock equivalents. (11) Gives effect to the following transactions as if they had occurred on January 1, 1996: (a) the Reorganization; (b) the sale of the 3,593,750 shares sold by the Company in the IPO; and (c) for the year ended December 31, 1996 data, the transactions described in footnote (1) above. See Note 16 to the Combined and Consolidated Financial Statements. (12) Reflects 7,812,500 shares issued in the Reorganization, plus the 3,593,750 shares sold by the Company in the IPO. (13) Adjusted to reflect the sale of the Debentures offered hereby. (14) Adjusted EBITDA represents earnings before deductions for interest expense, income taxes, depreciation and amortization and excludes the non-recurring charge related to the 1995 Roll-Up and extraordinary loss from early extinguishment of debt. The Company believes that adjusted EBITDA provides additional information for determining its ability to meet its future debt service, capital expenditure and working capital requirements. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principals and should not be considered as an alternative to net income (loss) or income from operations as an indicator of the Company's operating performance, or to cash flows as a measure of the Company's liquidity. (15) For purposes of this computation, interest expense includes capitalized and net interest expense. (16) For purposes of this computation, earnings are defined as income (loss) before income taxes and extraordinary item and fixed charges (excluding capitalized interest). Fixed charges are defined as interest expensed and capitalized, amortization of capitalized financing costs, and the portion of operating lease rental expense that is representative of the interest factor. Earnings were inadequate to cover fixed charges for the year ended December 31, 1992 and the three months ended March 31, 1995 by $453,000 and $1.2 million, respectively. 28 30 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 22 senior living communities in 12 states with an aggregate capacity for approximately 5,800 residents. The Company currently owns 12 communities, leases three 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 completed the IPO and the Reorganization in the second quarter of 1997. The Company and its predecessors have owned, operated, or managed senior living communities since 1978. The Predecessor, ARCLP, was formed in February 1995 in connection with the 1995 Roll-Up. The 1995 Roll-Up, effective April 1, 1995, was accounted for as a purchase business combination by the Predecessor. The Company was incorporated in February 1997 for purposes of effecting the Reorganization and the IPO. See "The Company -- Reorganization." For the purposes of the following discussion, amounts for the year ended December 31, 1995 represent the sum of the combined results of operations of the Predecessor and 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 and amounts for the six months ended June 30, 1997 represent the sum of the results of operations of the Predecessor for the period January 1, 1997 through May 28, 1997 and the results of operations of the Company for the period May 29, 1997 through June 30, 1997. 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 12 of the communities it now owns or leases. From 1994 through 1996, the Company acquired eight of these senior living communities, with an aggregate capacity for 2,212 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 six of its owned communities, which are expected to cost approximately $60.0 million to $70.0 million to complete and lease-up. These eight expansion projects will add capacity to accommodate approximately 700 additional 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. 29 31 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 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 73.5% and 73.7% of total revenues for the six months ended June 30, 1997 and 1996, respectively, and 75.5%, 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 14.0% and 15.1% of total revenues for the six months ended June 30, 1997 and 1996, respectively, and 13.7%, 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 10.3% and 8.6% of total revenues for the six months ended June 30, 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 2.2% and 2.6% of total revenues for the six months ended June 30, 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 89.2% and 91.3% of the Company's total revenues for the six months ended June 30, 1997 and 1996, respectively, and 92.4%, 91.2%, 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 (10.7% for the six months ended June 30, 1997 and 7.5% for the year ended December 31, 1996), including Medicare-related private co-insurance, and Medicaid (0.1% for the six months ended June 30, 1997 and 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) lease expense; (iii) general and administrative expense, which includes all corporate office overhead; and (iv) depreciation and amortization expense. 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 12 senior living communities and ten home health care agencies; leases three communities; and operates seven communities and five home health care agencies 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. 30 32 The Company's community management agreements are generally for terms of three to five years, but may be canceled by the owner of the community, without cause, on three to six months notice. Pursuant to the management agreements, the Company is generally responsible for providing management personnel, marketing, nursing, resident care and dietary services, accounting and data processing services, risk management, 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 April 1998 and July 2000. The Company's home health care agency management agreements are generally for terms of three years; however, certain of the agreements may be canceled by the owner of the agency on short notice. Pursuant to the management agreements, the Company is generally responsible for providing operational oversight, utilization review, billing, accounting, data processing services, and other services. The Company receives a monthly fee for its services based on a contractual fee per visit. The Company's current home health care agency management agreements expire between February 2000 and July 2000. The following tables set forth, for the periods indicated, selected Statement of Operations data in thousands of dollars and expressed as a percentage of total revenues, and certain resident capacity and occupancy data.
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 income (expense)...................................... 98 0.3 (94) (0.1) 788 1.0 ------- ----- ------- ----- ------- ----- Other 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% ======= ===== ======= ===== ======= =====
31 33
SIX MONTHS ENDED JUNE 30, ---------------------------------- 1996 1997 ---------------- --------------- $ % $ % -------- ----- ------- ----- STATEMENT OF OPERATIONS DATA: Resident and health care revenue............................ $ 33,888 97.4% $43,424 97.8% Management services revenue................................. 918 2.6 965 2.2 -------- ----- ------- ----- Total revenues............................................ 34,806 100.0 44,389 100.0 Community operating expense................................. 21,727 62.4 27,519 62.0 Lease expense............................................... -- -- 1,072 2.4 General and administrative.................................. 2,421 7.0 4,070 9.2 Depreciation and amortization............................... 3,165 9.1 3,206 7.2 -------- ----- ------- ----- Total operating expenses.................................. 27,313 78.5 35,867 80.8 -------- ----- ------- ----- Income from operations.................................... 7,493 21.5 8,522 19.2 Interest expense............................................ (4,733) (13.6) (6,611) (14.9) Interest income............................................. 132 0.4 364 0.8 Other income (expense)...................................... (8) -- (61) (0.1) -------- ----- ------- ----- Other expense, net........................................ (4,609) (13.2) (6,308) (14.2) -------- ----- ------- ----- Income before income taxes and extraordinary item......... 2,884 8.3 2,214 5.0 Income tax expense -- current............................... -- -- 92 (0.2) Income tax expense -- deferred.............................. -- -- 10,728 (24.2) -------- ----- ------- ----- Income before extraordinary item............................ 2,884 8.3 (8,606) (19.4) Extraordinary item.......................................... (2,335) (6.7) -- -- -------- ----- ------- ----- Net income (loss)........................................... $ 549 1.6% $(8,606) (19.4)% ======== ===== ======= =====
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, ----------------------- -------------- 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- OPERATING DATA: End of period capacity: Owned..................................................... 2,141 2,594 3,369 3,369 3,002 Leased.................................................... -- -- -- -- 573 Managed................................................... 3,315 3,008 2,159 2,159 2,159 ----- ----- ----- ----- ----- Total............................................... 5,456 5,602 5,528 5,528 5,734 ===== ===== ===== ===== ===== Average occupancy rate: Owned..................................................... 89% 93% 94% 93% 94% Leased.................................................... -- -- -- -- 93 Managed................................................... 93 91 91 90 93 ----- ----- ----- ----- ----- Total............................................... 90% 92% 92% 92% 93% ===== ===== ===== ===== ===== End of period occupancy rate: Owned..................................................... 91% 94% 96% 93% 93% Leased.................................................... -- -- -- -- 84 Managed................................................... 96 91 92 88 93 ----- ----- ----- ----- ----- Total............................................... 94% 92% 94% 91% 92% ===== ===== ===== ===== ===== Stabilized average occupancy rate(1): Owned..................................................... 89% 93% 94% 94% 95% Leased.................................................... -- -- -- -- 94 Managed................................................... 93 95 95 95 94 ----- ----- ----- ----- ----- Total............................................... 91% 94% 95% 94% 95% ===== ===== ===== ===== =====
- --------------- (1) Includes communities or expansions thereof that have (i) achieved 95% occupancy or (ii) been open at least 12 months. The 12-month stabilization period may be extended for certain large retirement communities. In the table above, the stabilized results for the year ended December 31, 1996 do not include a large managed community with a capacity for over 240 residents which opened in August 1995. 32 34 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.
SIX MONTHS YEAR ENDED YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, JUNE 30, ----------------- ----------------- ----------------- 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% $28,803 $30,962 7.5% Home health and companion services revenue............... 627 2,699 330.5% 2,699 3,789 40.4% 3,010 4,424 47.0% ------- ------- ------- ------- ------- ------- Resident and health care revenue........ 27,011 31,739 17.5% 49,097 52,677 7.3% 31,813 35,386 11.2% Community operating expense............... 19,212 21,795 13.4% 32,854 34,314 4.4% 20,570 22,866 11.2% ------- ------- ------- ------- ------- ------- Resident income from operations(1)....... $ 7,799 $ 9,944 27.5% $16,243 $18,363 13.1% $11,243 $12,520 11.4% ======= ======= ======= ======= ======= ======= Resident income from operations margin(1)(2)........ 28.9% 31.3% 33.1% 34.9% 35.3% 35.4% OTHER DATA: Average occupancy rate(3)............... 88% 91% 92% 94% 94% 96% Average monthly revenue per occupied unit(4)............... $ 2,322 $ 2,467 6.2% $ 2,217 $ 2,295 3.5% $ 2,200 $ 2,337 5.3% Average monthly expense per occupied unit(5)............... $ 1,639 $ 1,665 1.6% $ 1,465 $ 1,475 0.7% $ 1,398 $ 1,471 5.2%
- --------------- (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 trends in operating cash flow and community performance 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 and lease expense. These excluded items are significant components in understanding and assessing the operating performance of the Company as a whole. The following table reconciles resident income from operations and income from operations as determined in accordance with generally accepted accounting principles on a Same Facility basis:
SIX MONTHS YEAR ENDED YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, JUNE 30, ---------------- ------------------ ------------------ 1994 1995 1995 1996 1996 1997 ------ ------ ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Resident income from operations........ $7,799 $9,944 $16,243 $18,363 $11,243 $12,520 Lease expense........................ -- -- -- -- -- 1,027 Depreciation and amortization........ 2,533 3,090 4,648 4,332 2,642 2,260 ------ ------ ------- ------- ------- ------- Income from operations................. $5,266 $6,854 $11,595 $14,031 $ 8,601 $ 9,233 ====== ====== ======= ======= ======= ======= Income from operations margin.......... 19.5% 21.6% 23.6% 26.6% 27.0% 26.1%
This information should be considered in conjunction with the historical and pro forma financial statements of the Company included elsewhere in this Prospectus. (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. 33 35 SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1996 Revenues. Total revenues were $44.4 million for the six months ended June 30, 1997 compared to $34.8 million for the comparable period in 1996, representing an increase of $9.6 million, or 27.5%. Resident and health care revenues increased by $9.5 million, and management services revenues increased by $47,000. Of the increase in resident and health care revenues, $6.0 million, or 62.7%, was attributable to revenues derived from two senior living communities acquired in May 1996, one assisted living residence acquired in May 1997, and one assisted living residence leasehold acquired in May 1997. The remaining $3.6 million, or 37.3%, of such increase was attributable to Same Facility growth. Revenues attributable to Same Facilities were $35.4 million for the six months ended June 30, 1997, representing an increase of $3.6 million, or 11.2%, over 1996. Home health care agency and companion services fees on a Same Facility basis increased by $1.4 million, or 47%, over the comparable 1996 period. Monthly/per diem service fee revenue on a Same Facility basis increased $2.2 million, or 7.5%, over the comparable 1996 period. Of this increase, 5.5% was due primarily to increases in average rates (including Medicare rate adjustments) and 2.0% was due to higher occupancy. Same Facility average occupancy rates increased to 95.6% for the six months ended June 30, 1997 from 93.6% for the comparable period in 1996. Community Operating Expense. Community operating expense increased to $27.5 million for the six months ended June 30, 1997, as compared to $21.7 million for the comparable period in 1996, representing an increase of $5.8 million, or 26.7%. Of the increase in community operating expenses, $3.5 million, or 60.3%, was attributable to expenses from acquired living communities and acquired and newly leased assisted living residences, and 39.6% of the increase was attributable to Same Facility operating expenses, which increased by $2.3 million, or 11.2%, over the comparable 1996 period. Of such increase, $948,000 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 7.4% for the six months ended June 30, 1997 as compared to the comparable period in 1996. Community operating expense as a percentage of resident and health care revenues declined to 63.4% for the six months ended June 30, 1997 from 64.1% for the comparable period in 1996. Same Facility community operating expense as a percentage of Same Facility resident and health care revenues declined to 64.6% for the six months ended June 30, 1997 from 64.7% for the comparable period in 1996. Same Facility operating expenses exclusive of home health agency and companion services expenses as a percentage of Same Facility revenues, exclusively of home health and companion services revenue decreased to 62.9% for the six months ended June 30, 1997 from 63.0% for the comparable period in 1996. General and Administrative. General and administrative expense increased to $4.1 million for the six months ended June 30, 1997, as compared to $2.4 million for the comparable period in 1996, representing an increase of $1.6 million, or 68.1%. Of this increase, $580,000 was directly related to the growth of the Company's home health care agencies and $427,000 of the increase related to salary and wage expenses of new employees. The remaining increase of approximately $642,000 resulted from continued investments in infrastructure necessary to support the Company's growth. General and administrative costs as a percentage of total revenues increased to 9.2% for the six months ended June 30, 1997 from 7.0% for the comparable period in 1996. Lease Expense. The Company incurred lease expense of $1.1 million for the six months ended June 30, 1997, primarily as a result of the Sale-Leaseback Transaction, as well as the acquisition of a leasehold interest in an assisted living residence in May 1997. The Company did not incur lease expense prior to the Sale-Leaseback Transaction. Depreciation and Amortization. Depreciation and amortization expense increased to $3.2 million for the six months ended June 30, 1997, representing an increase of $41,000, or 1.3% over the comparable period of the previous year. This outcome was primarily the result of decreases related to the Sale-Leaseback Transaction partially offset by increases related to the acquisitions of two retirement communities in May 1996 and one assisted living residence in May 1997. Same 34 36 Facility depreciation and amortization expense decreased to $2.3 million for the six months ended June 30, 1997 from $2.6 million for the six months ended June 30, 1996, as result of the Sale-Leaseback Transaction. Other Income (Expense). Interest expense increased to $6.6 million for the six months ended June 30, 1997 from $4.7 million for the comparable period in 1996, representing an increase of $1.9 million, or 39.7%. The increase in interest expense was related to indebtedness incurred in connection with the acquisition of two senior living communities in May 1996. Interest expense, as a percentage of total revenues, increased to 14.9% for the six months ended June 30, 1997 from 13.6% in 1996. Interest income increased to $364,000 for the six months ended June 30, 1997 from $132,000 for the comparable period in 1996, primarily as a result of interest income earned from the investment of the remaining net proceeds from the IPO. Income Tax Expense. The conversion from a non-taxable limited partnership to a taxable corporation in May 1997 resulted in a one-time $10.7 million charge of income related to the recognition of a net deferred income tax liability for the amount of the difference between the accounting and tax bases of the Company's assets and liabilities. Extraordinary Loss. In the six months ended June 30, 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 (Loss). As a result of the foregoing factors, the Company reported a net loss of $8.6 million for the six months ended June 30, 1997. Adjusting for the effect of the income tax charge referenced above, the Company reported pro forma net income of $1.4 million for the six months ended June 30, 1997. For the six months ended June 30, 1996, the Company reported pro forma net income before extraordinary item of $1.8 million, pro forma net income before extraordinary item available for distribution to partners and shareholders of $1.1 million, and net income of $549,000. 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, 3.3% was due primarily to rate increases and 2.1% 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, $695,000 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 35 37 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) $981,000 of nonrecurring expense related to the 1995 Roll-Up; (ii) a gain on the sale of assets of $1.1 million; and (iii) other non-operating expenses of $256,000. 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 36 38 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, 7.1% was due primarily to rate increases and 3.0% was due to higher occupancy. Same Facility average occupancy rates increased from 88% 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. 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 $313,000 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 RESOURCES The Company sold 3,593,750 shares of Common Stock in the IPO in the second quarter of 1997 and received net proceeds (after deducting the underwriting discount and expenses) of approximately $45.2 million. The Company used approximately $21.9 million of the net proceeds from the IPO to repay the Reorganization Note to the limited partners of the Predecessor. The Company has been using and will continue to use the remaining $23.3 million of the net proceeds from the IPO to fund the Company's growth strategy. See "Business -- Growth Strategy." 37 39 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 June 30, 1997, the Company had $167.3 million of indebtedness outstanding, including $144.3 million payable to GECC, with fixed maturities ranging from December 31, 2001 to April 30, 2003. The Company has the capacity to borrow up to an additional $17.0 million from GECC to finance future acquisitions or expansions. The Company also maintains a $2.5 million secured line of credit with a bank that is available for working capital and to secure various debt instruments. At June 30, 1997, approximately $2.3 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 June 30, 1997, $2.9 million was outstanding under this line of credit. Except for the Company's $2.5 million line of credit, each of the Company's debt agreements contain restrictive covenants that generally relate to the use, operation, and disposition of the community or communities that serve as collateral for the indebtedness thereunder, and prohibit the further encumbrance of such community or communities without the consent of the applicable lender. Additionally, substantially all of such indebtedness is cross-defaulted. The Company does not believe such restrictions are material to its business because the Company does not intend to further encumber its owned properties and does not believe the covenants relating to the use, operation, and disposition of its communities materially limit its operations. The Company's $2.5 million line of credit, under which $2.3 million was outstanding as of June 30, 1997, contains covenants prohibiting, among other things, the incurrence of additional debt or liens on the Company's assets, the acquisition or disposition of properties or businesses owned by the Company, and a change in the management of the Company. Such credit agreement also contains financial covenants that require the Company to maintain certain prescribed debt service coverage, liquidity, and capital expenditure reserve levels. The Company does not believe that such covenants materially limit its operations because the Company believes that, if necessary, it will have sufficient resources to repay such indebtedness to obtain relief from such covenants. All of the Company's owned communities are subject to mortgages. Except for the Company's Homewood Residence at Corpus Christi, Richmond Place, and Homewood Residence at Tarpon Springs communities, each of the Company's owned communities serves as blanket collateral for the indebtedness payable to GECC described above. The Homewood Residence at Corpus Christi community is subject to a $4.7 million mortgage in favor of NHI. See "Business -- Recent and Pending Acquisitions." The Richmond Place community is the subject of an approximately $8.0 million revenue bond financing, which is supported by an approximately $8.0 million letter of credit that is secured by a mortgage on the community. The Homewood Residence at Tarpon Springs community is subject to a $3.5 million mortgage in favor of a bank. As of June 30, 1997, approximately 71.1% of the Company's indebtedness bore interest at fixed rates, with a weighted average interest rate of 8.6%. The Company's variable rate indebtedness carried an average rate of 7.9% as of June 30, 1997. Less than 15% of the Company's currently outstanding indebtedness matures before December 31, 2002. Currently, the Company's minimum annual lease obligations are approximately $3.0 million. The Company expects to service current outstanding indebtedness and lease obligations with internally generated funds. At June 30, 1997, the Company was obligated to pay annual rental obligations under long-term leases of approximately $3.0 million. As of June 30, 1997, the Company's existing debt and lease agreements required aggregate annual payments for the years ended December 31, 1997, 1998, 1999, 2000, and 2001, assuming no change in the Company's average interest cost (8.4% at June 30, 1997), ranging from $20.7 million to $22.9 million. In addition, the Company intends to incur significant additional indebtedness and lease obligations and therefore expects its annual debt service and lease payment obligations for such periods to be significantly greater than the amounts set forth in the preceding sentence. 38 40 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 $4.7 million and $8.2 million for the six months ended June 30, 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 June 30, 1997, unrestricted cash balances were $21.8 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 in an aggregate amount of $10.9 million. During the same period, the Company sold an aggregate of $2.8 million of assets. Net cash provided by investing activities was $3.4 million for the six months ended June 30, 1997, as compared to net cash used of $64.5 million for the six months ended June 30, 1996. During the six months ended June 30, 1997, the Company acquired an aggregate of $11.5 million of assisted living residence assets, sold $28.8 million of assets, and made $10.9 million of capital expenditures at certain of its owned communities. 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 or accrued cash distributions to its partners of $7.1 million, $6.6 million, and $2.6 million in 1996, 1995, and 1994, respectively; and redeemed $4.8 million of the $10.0 million of Preferred Partnership Interests in 1996. Net cash provided by financing activities was $10.6 million and $59.4 million for the six months ended June 30, 1997 and 1996, respectively. During the six months ended June 30, 1997, the Company repaid $14.6 million of indebtedness with a portion of the proceeds from the Sale-Leaseback Transactions, repaid a $2.3 million term loan, made $3.6 million of principal payments on its long-term debt, and redeemed the remaining $5.2 million of the Preferred Partnership Interests, which was accrued as of December 31, 1996. The Company paid the $2.5 million Tax Distribution to its partners in the second quarter of 1997. 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 $4.4 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 residence was $4.6 million and was financed primarily through a $3.5 million mortgage loan provided by a bank. The residence was licensed and opened in August 1997. In May 1997, the Company acquired the Homewood Residence at Corpus Christi community and acquired a long-term leasehold in the Homewood Residence at Victoria community. The purchase price for the Corpus Christi community was approximately $5.8 million, and the Company financed the acquisition primarily through a $4.7 million mortgage loan provided by NHI. The 39 41 purchase price for the Victoria community leasehold was approximately $1.1 million. The lease provides for annual lease obligations of approximately $468,000. The Company has also entered into five joint venture arrangements with third parties pursuant to which it will develop six assisted living residences with an aggregate capacity for approximately 500 residents. 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 reached an agreement in principle to lease and operate Imperial Plaza, a senior living community located in Richmond, Virginia with capacity for 917 residents, and to acquire title to certain related assets. The Company will have the option to acquire the community at its fair market value at the expiration of the lease. Expenditures by the Company for the acquisition of the leasehold, the related property, and the purchase option will aggregate approximately $13.1 million, which will be payable in varying amounts over the next three years. The Company will be obligated to make annual rental payments of approximately $4.3 million under the lease. In addition, the Company will be required to maintain a capital reserve account with payments of approximately $300,000 annually, and to make a refundable deposit of $5.4 million to secure the performance of its obligations under the lease. Capital expenditures planned for 1997 total approximately $60.0 million. Of this amount, the Company anticipates that approximately $30.0 million will be used toward the development of approximately 27 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. The Company expects that its current cash and the net proceeds from this 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 incurred a one-time $10.7 million ($1.10 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. 40 42 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. Established in 1978, the Company believes it ranks among the leading operators in the senior living and health care services industry. Currently, the Company operates 22 senior living communities in 12 states, consisting of 12 owned communities, three leased communities, and seven managed communities, with an aggregate capacity for approximately 5,800 residents. In the fourth quarter of 1997, the Company expects to acquire a long-term leasehold in an additional community located in Richmond, Virginia with capacity for 917 residents. The Company also operates 15 home health care agencies, ten of which are owned and five of which are managed. At June 30, 1997, the Company's owned communities had a stabilized occupancy rate of 95%, its leased communities had a stabilized occupancy rate of 94%, and its managed communities had a stabilized occupancy rate of 94%. For the year ended December 31, 1996 and the six months ended June 30, 1997, revenues attributable to the Company's senior living communities accounted for 91.5% and 89.8%, respectively, of the Company's total revenues, and revenues attributable to the Company's home health care agencies accounted for 6.2% and 8.0%, respectively, of the Company's total revenues. Approximately 92.4% of the Company's total revenues for the year ended December 31, 1996 and approximately 89.2% of the Company's total revenues for the six months ended June 30, 1997 were derived from private pay sources. Since 1992, the Company has experienced significant growth, primarily through the acquisition of 14 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 by developing senior living networks 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 27 free-standing assisted living residences, with an estimated aggregate capacity for approximately 2,400 residents, and is expanding nine of its existing communities to add capacity to accommodate approximately 800 additional residents. The Company was founded by Dr. Thomas F. Frist, Sr. and Jack C. Massey, the principal founders of Hospital Corporation of America. 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 ten 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 41 43 living networks in targeted geographic markets. The development of a senior living network involves the clustering of assisted living residences and other senior living communities within a particular geographic service area, complemented by one or more of the Company's home health care agencies, thereby providing residents with a broad range of high quality care in a cost-efficient manner. The following are the principal elements of the Company's growth strategy: 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 27 free-standing assisted living residences, with an estimated aggregate capacity for approximately 2,400 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 42 44 other forms of dementia), and skilled nursing beds. The Company currently has three expansion projects under construction (including one managed community) and six expansion projects under development, representing an aggregate increase in capacity to accommodate approximately 800 additional residents. The expansion of existing senior living communities allows the Company to create operating efficiencies and capitalize on its local presence, community familiarity, and reputation in markets in which the Company currently operates. 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 or near 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 15 home health care agencies, 12 of which are in their initial year of operation. The Company owns ten home health care agencies and manages five agencies for third parties. 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. 43 45 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 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. 44 46 CARE AND SERVICES PROGRAMS The Company provides a wide array of senior living and health care services to the elderly at its communities, including independent living, assisted living (with special programs and living units for residents with Alzheimer's and other forms of dementia), skilled nursing, and home health care services. By offering a variety of services and involving the active participation of the resident and the resident's family and medical consultants, the Company is able to customize its service plan to meet the specific needs and desires of each resident. As a result, the Company believes that it is able to maximize customer satisfaction and avoid the high cost of delivering all services to every resident without regard to need, preference, or choice. Independent Living Services The Company provides independent living services to seniors who do not yet need assistance or support with the activities of daily life ("ADLs"), but who prefer the physical and psychological comfort of a residential community that offers health care and other services. The Company currently owns eleven communities, leases three communities, and manages an additional five communities which provide independent living services, with an aggregate capacity for 2,358 residents, 434 residents, and 1,491 residents, respectively. Independent living services provided by the Company include daily meals, transportation, social and recreational activities, laundry, housekeeping, security, and health care monitoring. The Company also fosters the wellness of its residents by offering health screenings such as blood pressure checks, periodic special services such as influenza inoculations, chronic disease management (such as diabetes with its attendant blood glucose monitoring), dietary and similar programs, as well as ongoing exercise and fitness classes. Classes are given by health care professionals to keep residents informed about health and disease management. Subject to applicable government regulation, personal care and medical services are available to independent living residents through either community staff or through the Company's or independent home health care agencies. The Company's independent living residents pay a fee ranging from $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. 45 47 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. - 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 253 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 46 48 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 or near certain of its existing senior living communities and manages home health care agencies owned by third parties. The services and products that the Company provides through its home health care agencies include (i) general and specialty nursing services to individuals with acute illnesses, long-term chronic health conditions, permanent disabilities, terminal illnesses or post-procedural needs; (ii) therapy services consisting of, among other things, physical, occupational, speech, and medical social services; (iii) personal care services and assistance with ADLs; (iv) hospice care for persons in the final phases of incurable disease; (v) respiratory, monitoring, medical equipment services, and medical supplies to patients; and (vi) a comprehensive range of home infusion and enteral therapies. 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 15 home health care agencies, 12 of which are in their initial year of operation. The Company owns ten home health care agencies and manages five agencies for third parties. 47 49 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 or to be acquired by the Company.
AVERAGE OCCUPANCY RESIDENT CAPACITY(1) COMMENCEMENT 1996 RATE AT ------------------------- OF OCCUPANCY JUNE 30, COMMUNITY LOCATION IL AL SN TOTAL OPERATIONS(2) RATE 1997 - --------- -------- ----- --- --- ----- ------------- --------- --------- OWNED(3): Broadway Plaza...................... Ft. Worth, TX 252 40 122 414 Apr-92 94% 91%(4) Carriage Club of Charlotte(5)....... Charlotte, NC 363 54 42 459 May-96 91(6) 92(6) Carriage Club of Jacksonville(5).... Jacksonville, FL 292 60 -- 352 May-96 89(6) 89(6) The Hampton at Post Oak............. Houston, TX 162 21 -- 183 Oct-94 94 94 Heritage Club....................... Denver, CO 220 35 -- 255 Feb-95 100 99 Parkplace........................... Denver, CO 195 48 -- 243 Oct-94 99 98 Homewood Residence at Corpus Christi(7)........................ Corpus Christi, TX 60 30 -- 90 May-97 N/A 29 Richmond Place...................... Lexington, KY 204 4 -- 208 Apr-95 98 98 Santa Catalina Villas............... Tucson, AZ 197 15 -- 212 Jun-94 90 98 The Summit at Westlake Hills........ Austin, TX 167 30 89 286 Apr-92 98 100 Homewood Residence at Tarpon Springs(8)........................ Tarpon Springs, FL -- 64 -- 64 Aug-97 N/A N/A Westlake Village.................... Cleveland, OH 246 54 -- 300 Oct-94 94 96 ----- --- --- ----- --- --- Subtotal/Average................ 2,358 455 253 3,066 94% 93% LEASED: Holley Court Terrace(9)............. Oak Park, IL 179 17 -- 196 Jul-93 81% 91% Homewood Residence at Victoria(10).. Victoria, TX 60 30 -- 90 May-97 N/A 43 Imperial Plaza(11).................. Richmond, VA 778 139 -- 917 -- N/A N/A Trinity Towers(9)................... Corpus Christi, TX 195 32 60 287 Jan-90 94 94 ----- --- --- ----- --- --- Subtotal/Average................ 1,212 218 60 1,490 89% 84% MANAGED(12): Burcham Hills....................... East Lansing, MI 138 71 133 342 Nov- 78 92% 89% Meadowood........................... Worcester, PA 355 51 59 465 Oct- 89 94 96 Parklane West....................... San Antonio, TX -- 17 124 141 Oct- 94 86 90 Reeds Landing....................... Springfield, MA 148 54 40 242 Aug- 95 65(13) 91(13) USAA Towers......................... San Antonio, TX 505 -- -- 505 Oct- 94 100 100 Weinberg Village.................... Tampa, FL -- 75 -- 75 May- 96 25 67 Williamsburg Landing................ Williamsburg, VA 345 7 37 389 Sept-85 98 98 ----- --- --- ----- --- --- Subtotal/Average................ 1,491 275 393 2,159 89% 93% ----- --- --- ----- --- --- Grand Total/Average............. 5,061 948 706 6,715 92% 92% ===== === === ===== === ===
COMMENCEMENT OF HOME HEALTH CARE AGENCIES: LOCATION OPERATIONS - -------------------------- -------- ------------- OWNED(14): 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 Santa Catalina Villas................ Tucson, AZ August 1997 The Summit at Westlake Hills......... Austin, TX June 1997 Westlake Village..................... Westlake, OH January 1997 MANAGED(15): Air Force Village.................... San Antonio, TX August 1997 Bibb County.......................... Centreville, AL March 1997 Burcham Hills........................ East Lansing, MI August 1997 Hale County.......................... Greensboro, AL May 1997 Meadowood............................ Worcestor, PA July 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). 48 50 (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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." (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 June 30, 1997, was 98%. (5) GECC has certain rights with respect to the Carriage Club communities, including the right to receive 30% of the net cash flows generated by the Carriage Club communities and 30% of any proceeds from the sale or refinancing of the Carriage Club communities in excess of certain defined amounts. In addition, GECC has a right of first offer with respect to any proposed sale of the Carriage Club communities by the Company. (6) 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 June 30, 1997 would have been 97% and 96%, respectively, at Carriage Club of Charlotte and 91% and 93%, respectively, at Carriage Club of Jacksonville. (7) The Company acquired the Homewood Residence at Corpus Christi community in May 1997. See " -- Recent and Pending Acquisitions." (8) The Company acquired the Homewood Residence at Tarpon Springs community in May 1997 and commenced operations at the community in August 1997. See "-- Recent and Pending Acquisitions." (9) Leased pursuant to an operating lease with an initial term of ten years expiring December 31, 2006, with renewal options for up to three additional ten year terms, provided that both leases are extended concurrently. The Company pays contractually fixed rent, plus additional rent, subject to certain limits, based upon the gross revenues of the community. Without the lessor's consent, the Company may not operate any other type of senior care facility within three miles of either of the premises during the term of the leases and for one year thereafter. (10) The Company acquired a long-term leasehold in the Homewood Residence at Victoria facility in May 1997. See " -- Recent and Pending Acquisitions." The Company leases the community pursuant to an operating lease expiring in July 2011, with renewal options for up to two additional ten year terms. The Company pays contractually fixed rent, plus additional rent, subject to certain limits, based upon the gross revenues of the community. Without the lessor's consent, the Company may not operate any other type of senior care facility within the county in which the community is located during the term of the lease and for two years thereafter. (11) In the fourth quarter of 1997, the Company expects to acquire the Imperial Plaza community. See " -- Recent and Pending Acquisitions." (12) 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. (13) 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. (14) Each of the home health care agencies owned by the Company is based at or near one of the Company's senior living communities. (15) Managed pursuant to management agreements with an initial term of three years. The Company receives a contractual fee per visit. None of the home health care agencies managed by the Company are owned by affiliates of the Company. 49 51 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 64 residents. The purchase price for the facility was $4.6 million and was financed primarily through a $3.5 million mortgage loan provided by a bank. The Homewood Residence at Tarpon Springs community commenced operations in August 1997. In May 1997, the Company completed the acquisition of the Homewood Residence at Corpus Christi community, which is located in Corpus Christi, Texas and has capacity for 90 residents, and acquired a long-term leasehold in the Homewood Residence at Victoria community, which is located in Victoria, Texas and has capacity for 90 residents. The purchase price for the Corpus Christi community was approximately $5.8 million, and the Company financed the acquisition primarily through a $4.7 million mortgage loan provided by NHI. The purchase price for the Victoria, Texas leasehold was approximately $1.1 million. The landlord under the Homewood Residence at Victoria lease is Healthcare Properties Investors, Inc., a health care real estate investment trust, and the lease provides for annual rental obligations of approximately $468,000. The Company has reached an agreement in principle to lease and operate Imperial Plaza, a senior living community located in Richmond, Virginia with capacity for 917 residents, and to acquire title to certain related assets. Imperial Plaza has capacity for 778 independent living residents and 139 assisted living residents (including 32 assisted living units that are nearing completion). The community is currently 99.2% occupied. The Company will acquire a long-term operating lease, which has an initial term of 20 years with a seven year renewal option. The Company will have the option to acquire the community at its fair market value at the expiration of the lease. In addition, the lessor is required to fund a $3.5 million capital expenditure program for the community. In connection with the lease, the Company will also purchase 12 acres of undeveloped land located on the Imperial Plaza campus, which is zoned to allow for additional senior living capacity. Expenditures by the Company for the acquisition of the leasehold, the related property and the purchase option will aggregate approximately $13.1 million, which will be payable in varying amounts over the next three years. The Company will be obligated to make annual rental payments of approximately $4.3 million under the lease. In addition, the Company will be required to maintain a capital reserve account with payments of approximately $300,000 annually, and to make a refundable deposit of $5.4 million to secure the performance of its obligations under the lease. Although the transaction is subject to a number of conditions and approvals, the Company anticipates completing the acquisition in the fourth quarter of 1997. In the event that the transaction is consummated, the Company anticipates that Imperial Plaza will be profitable immediately. 50 52 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 Carriage Club of Charlotte, Charlotte, NC.................. 7/98 -- 30 -- 30 Development Richmond Place, Lexington, KY.............................. 10/98 -- 73 -- 73 Development The Hampton at Post Oak, Houston, TX....................... 11/98 -- 15 76 91 Development The Summit at Westlake Hills, Austin, TX................... 5/99 -- 95 -- 95 Development Westlake Village, Cleveland, OH............................ 6/99 -- 15 88 103 Development Carriage Club of Jacksonville, Jacksonville, FL............ 10/99 -- 15 60 75 Development -- ----- --- ----- Subtotal........................................... 57 439 303 799 -- ----- --- ----- DEVELOPMENT PROJECTS: Lady Lake, FL(3)........................................... 12/97 -- 55 -- 55 Construction Halls, TN(4)............................................... 3/98 -- 55 -- 55 Construction Pearland, TX(5)............................................ 3/98 -- 82 -- 82 Construction Marietta, GA............................................... 4/98 -- 60 -- 60 Construction Houston, TX (Northwest)(5)................................. 5/98 -- 95 -- 95 Construction Knoxville, TN (Deane Hill)(4).............................. 5/98 -- 108 -- 108 Construction Houston, TX (Willowchase)(5)............................... 6/98 -- 67 -- 67 Construction Spring Shadow, TX(5)....................................... 6/98 -- 67 -- 67 Construction Houston, TX (West)(5)...................................... 7/98 -- 95 -- 95 Development Lakeway, TX................................................ 7/98 -- 81 -- 81 Construction Nashville, TN (West)(3).................................... 8/98 -- 90 -- 90 Development Tampa, FL(3)............................................... 8/98 -- 90 -- 90 Development Aurora, CO................................................. 10/98 -- 95 -- 95 Development Lakewood, CO............................................... 10/98 -- 93 -- 93 Development St. Petersburg, FL(6)...................................... 10/98 -- 100 -- 100 Development Greenwood Village, CO...................................... 11/98 -- 90 90 180 Development San Antonio, TX............................................ 11/98 -- 75 -- 75 Development Boynton Beach, FL.......................................... 12/98 -- 95 -- 95 Development Del Ray Beach, FL.......................................... 12/98 -- 81 -- 81 Development Austin, TX................................................. 1/99 -- 95 -- 95 Development Cleveland (Brooklyn Heights), OH........................... 4/99 -- 80 -- 80 Development Flint, MI(3)............................................... 4/99 -- 95 -- 95 Development Nashville, TN (Central).................................... 4/99 -- 115 -- 115 Development Boca Raton, FL............................................. 5/99 -- 75 -- 75 Development Clearwater, FL............................................. 5/99 -- 95 -- 95 Development Cleveland (Heights), OH.................................... 6/99 -- 120 -- 120 Development Houston, TX (West University).............................. 7/99 -- 85 -- 85 Development -- ----- --- ----- Subtotal........................................... -- 2,334 90 2,424 -- ----- --- ----- Grand Total........................................ 57 2,773 393 3,223 == ===== === =====
ANTICIPATED COMMENCEMENT HOME HEALTH CARE AGENCIES LOCATION OF OPERATIONS - ------------------------- -------- ------------------------ Trinity Towers.......................................... Corpus Christi, TX April 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. (2) Williamsburg Landing is a managed community. The Company is providing full development services related to the expansion for the owner. (3) Being developed by a joint venture in which the Company owns a 50% interest. 51 53 (4) Being developed by a joint venture in which the Company owns a 40% interest. (5) Indicates a community at which the Company is providing full development services for the owner, who is an affiliate of the Company. The Company will manage the community after completion of construction. In each case, the Company has an option to purchase the community. See "Certain Transactions -- Management Agreements." (6) Being developed by a joint venture in which the Company owns a 60% interest. 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. See "Certain Transactions -- Management Agreements." 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 52 54 other things, resident care and operations; (ii) performing accounting functions; (iii) developing employee training programs and materials; (iv) coordinating human resources, food service and marketing functions; and (v) providing strategic direction. In addition, financing, development, construction and acquisition activities, including feasibility and market studies, residence design, development, and construction management, are conducted by the Company's corporate office. The Company seeks to control operational expenses for each of its communities through standardized management reporting and centralized controls of capital expenditures, asset replacement tracking, and purchasing for larger and more frequently used supplies. Community expenditures are monitored by regional operations teams headed by the Company's Regional Vice Presidents who are accountable for the resident satisfaction and financial performance of the communities in their region. 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. 53 55 The Company's centralized approach allows its home health care agencies to achieve a more efficient delivery of care. Each community-based agency is operated under the auspices of the community's executive director and under the direct control of an agency director. This director and his or her team of nurses, personal care aides, physical therapists, speech therapists, occupational therapists, and social workers focus on assessing the health care needs of residents in the Company's senior living or assisted living communities, as well as clients in the surrounding market. Quality Assurance The Company's quality assurance program is designed to achieve and maintain a high degree of resident and family satisfaction with the care and services the Company provides. The Company coordinates the implementation of its quality assurance program at each of its communities through its corporate office. The Company encourages resident and family participation and seeks feedback from families and residents through surveys conducted on a regular basis. In addition, inspections of each community are conducted regularly by corporate staff. These inspections, performed periodically, review all aspects of operations, care, and services provided, and the overall appearance and cleanliness of the community. Marketing The Company's marketing efforts are implemented on a regional and local level, all under the supervision of the corporate marketing staff, and are intended to create awareness of the Company and its services among prospective residents, their families, professional referral sources, and other key decision makers. The corporate marketing staff conducts regional and state-wide surveys of age- and income-qualified seniors to ensure that the Company understands the needs and demands of that marketplace. To further both market awareness of the Company by prospective residents and to more accurately assess the needs and demands of seniors in that market, the Company periodically conducts regional focus groups. Corporate office personnel develop the overall marketing strategies for each community, produce all marketing materials, maintain marketing databases, oversee direct mailings, place all media advertising, and assist community personnel in the initial development and continuing refinement of marketing plans for each community. Before opening a new assisted living residence, the Company makes referral source contacts and conducts marketing programs such as lead-generating media consisting of direct mail, telemarketing follow-up, and print media advertising. These public awareness campaigns usually begin with the start of construction and intensify several months before the opening of the 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 54 56 assisted living residence is often preferable and more cost-effective than home-based care or nursing home care. Assisted living residents usually enter a residence when other living accommodations no longer provide the level of care required by the individual. Typically, assisted living represents a combination of housing and 24-hour a day personal support services designed to aid elderly residents with ADLs. Certain assisted living residences may also provide assistance to residents with low acuity medical needs, or may offer higher levels of personal assistance for incontinent residents or residents with Alzheimer's disease or other forms of dementia. Generally, assisted living residents require higher levels of care than residents of independent living residences and retirement living centers, but require lower levels of care than patients in skilled nursing facilities. For seniors who need the constant attention of a skilled nurse or medical practitioner, a skilled nursing facility may be required. Estimates of annual expenditures in the assisted living sector of the senior living and health care services industry for 1996 range from $12.0 billion to $14.0 billion and include facilities ranging from "board and care" (generally 12 or fewer residents with little or no services) to full-service assisted living residences such as those operated by the Company. The assisted living sector is highly fragmented and characterized by numerous small operators. Moreover, the scope of assisted living services varies substantially from one operator to another. Many smaller assisted living providers do not operate in purpose-built residences, do not have professional training for staff, and provide only limited assistance with low-level care activities. The Company believes that few assisted living operators provide the required comprehensive range of assisted living services, such as dementia care and other services designed to permit residents to "age in place" within the community as they develop further physical or cognitive frailties. The Company believes there will continue to be significant growth opportunities in the senior living market for providing health care and other services to the elderly, particularly in the assisted living segment of the market. The Company believes that a number of demographic, regulatory, and other trends will contribute to the continued growth in the assisted living market, the Company's targeted market for future development and expansion, including the following: Consumer Preference The Company believes that assisted living is increasingly becoming the setting preferred by prospective residents and their families for the care of the frail elderly. Assisted living offers residents greater independence and allows them to age in place in a residential setting, which the 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. 55 57 Restricted Supply of Nursing Beds The majority of states in the United States have adopted CON or similar statutes generally requiring that, prior to the addition of new beds, the addition of new services, or the making of certain capital expenditures, a state agency must determine that a need exists for the new beds or the proposed activities. The Company believes that this CON process tends to restrict the supply and availability of licensed nursing facility beds. High construction costs, limitations on government reimbursement for the full costs of construction, and start-up expenses also act to constrain growth in the supply of such facilities. At the same time, nursing facility operators are continuing to focus on improving occupancy and expanding services to sub-acute patients requiring significantly higher levels of nursing care. As a result, the Company believes that there has been a decrease in the number of skilled nursing beds available to patients with lower acuity levels and that this trend should increase the demand for the Company's senior living communities, including particularly the Company's assisted living residences and skilled nursing facilities. Cost-Containment Pressures In response to rapidly rising health care costs, governmental and private pay sources have adopted cost-containment measures that have reduced admissions and encouraged reduced lengths of stays in hospitals and other acute care settings. The federal government had previously acted to curtail increases in health care costs under Medicare by limiting acute care hospital reimbursement for specific services to pre-established fixed amounts. Private insurers have begun to limit reimbursement for medical services in general to predetermined reasonable charges, and managed care organizations (such as health maintenance organizations) are attempting to limit the hospitalization costs by negotiating for discounted rates for hospital and acute care services and by monitoring and reducing hospital use. In response, hospitals are discharging patients earlier and referring elderly patients, who may be too sick or frail to manage their lives without assistance, to nursing homes and assisted living residences where the cost of providing care is typically lower than hospital care. In addition, third-party payors are increasingly becoming involved in determining the appropriate health care settings for their insureds or clients based primarily on cost and quality of care. Based on industry data, the annual cost per patient for skilled nursing care averages approximately $40,000, in contrast to the annual per patient cost for assisted living care of approximately $26,000. 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 56 58 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 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 57 59 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 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 58 60 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 2,275 persons, of which approximately 1,390 are full-time employees (approximately 60 of whom are located at the Company's corporate offices) and 885 are part-time employees. In addition, there are approximately 500 full-time employees and 400 part-time employees who are employed by the owners of communities managed by the Company 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. 59 61 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........................... 40 Executive Vice President -- Finance, Chief Financial Officer, Treasurer, and Secretary H. Todd Kaestner.......................... 42 Executive Vice President -- Corporate Development James T. Money............................ 50 Executive Vice President -- Development Services Tom G. Downs.............................. 52 Senior Vice President -- Operations Lee A. McKnight........................... 52 Senior Vice President -- Marketing H. Lee Barfield II........................ 51 Director Jack O. Bovender, Jr...................... 52 Director Frank M. Bumstead......................... 55 Director Robin G. Costa............................ 30 Director Clarence Edmonds.......................... 64 Director John A. Morris, Jr., M.D.................. 50 Director Daniel K. O'Connell....................... 68 Director Nadine C. Smith........................... 40 Director Lawrence J. Stuesser...................... 55 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. 60 62 Tom G. Downs has served as Senior Vice President -- Operations since 1989. Mr. Downs has served in various capacities for the Company's predecessors since 1979. Lee A. McKnight has served as Senior Vice President -- Marketing since September 1991. Mr. McKnight has served in various capacities for the Company's predecessors since 1979. H. Lee Barfield II has served as a director of the Company since its inception and as director of various of the Company's predecessors since 1978. Mr. Barfield is a member in the law firm of Bass, Berry & Sims PLC, the Company's outside general counsel, and has served in various capacities for that firm since 1974. Jack O. Bovender, Jr. has served as a director of the Company since its inception. Mr. Bovender has been President and Chief Operating Officer of Columbia/HCA Healthcare Corporation ("Columbia/HCA") since August 1997. From March 1994 to August 1997, Mr. Bovender was retired. Prior to March 1994, Mr. Bovender worked for Hospital Corporation of America, a predecessor to Columbia/HCA, for over 18 years in various capacities, including Executive Vice President and Chief Operating Officer. Mr. Bovender is a director of America Service Group, Inc., a provider of managed health care services to correctional facilities. Frank M. Bumstead has served as a director of the Company since its inception. Since 1989, Mr. Bumstead has been president and a principal shareholder of Flood, Bumstead, McCready & McCarthy, Inc., a business management firm that represents, among others, artists, songwriters, and producers in the music industry. Since 1993, Mr. Bumstead has also served as the chairman and chief executive officer of FBMS Financial, Inc., an investment advisor registered under the Investment Company Act of 1940. Mr. Bumstead is vice chairman and a director of Response Oncology, Inc., a physician practice management company specializing in oncology, and a director of 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. Since 1994, Ms. Costa has served as chief operating officer of Maddox Companies, a group of over 40 entities involved in oil and gas exploration, real estate development and investment, and other investments. Ms. Costa has served in various capacities for the Maddox Companies since 1985, including as Secretary and Treasurer from 1992 to 1994. Clarence Edmonds has served as a director of the Company since its inception and as a director of various of the Company's predecessors since 1987. Mr. Edmonds has served in various capacities, including vice president and treasurer, of Massey Company, an investment services firm, since 1969. John A. Morris, Jr., M.D. has served as a director of the Company since its inception. Dr. Morris has served in varying capacities of the medical profession since 1977, and is currently a Professor of Surgery and the Director of the Division of Trauma and Surgical Critical Care at the Vanderbilt University School of Medicine, the Medical Director of the Life Flight Air Ambulance Program at Vanderbilt University Hospital, and an Associate in the Department of Health Policy and Management at the Johns Hopkins University. Dr. Morris is also chairman of the board of Sirrom Capital Corporation, a small business investment company. Daniel K. O'Connell has served as a director of the Company since its inception and as a director of various of the Company's predecessors since 1985. Until his retirement in 1990, Mr. O'Connell worked for Ryder System, Inc. for over 25 years in various capacities, including legal counsel and chief financial officer. Nadine C. Smith has served as a director of the Company since its inception. Ms. Smith is President and Chief Executive Officer of Enidan Capital Partners, L.P., an investment company that makes equity investments in public and privately held companies ("Enidan"). Prior to co-founding Enidan, Ms. Smith was managing general partner of NC Smith & Co., a financial and management 61 63 consulting firm, from 1990 to 1997. Ms. Smith also is President and Chief Executive Officer of Sirrom Resource Funding L.P., which provides financing to environmental companies. Lawrence J. Stuesser has served as a director of the Company since its inception and as a member of ARCLP's limited partners committee since June 1995. Since June 1996, Mr. Stuesser has been the president and chief executive officer and a director of Computer People, Inc., an information technology professional services and staffing company. 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. 62 64 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"), which was approved by the Board of Directors and shareholder of the Company in February 1997 and became effective on the date of the IPO. 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, 1,140,625 shares of Common Stock have been reserved and will be available for issuance, which 63 65 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 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, options to purchase 627,500 shares of Common Stock have been awarded to 115 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 were automatically granted to each person serving as an Outside Director as of the date of the IPO. Any person who was not previously a member of the Board of Directors and who is elected or appointed an Outside Director following the consummation of the IPO 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 64 66 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 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") pursuant to which an aggregate of 250,000 shares of Common Stock have been reserved for issuance. 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 65 67 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 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 1995 and 1996, the Company contributed approximately $99,000 and $274,000, respectively, 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 66 68 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 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 IPO, 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. 67 69 PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Common Stock as of the date hereof 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. 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.
NUMBER OF SHARES PERCENT OF NAME BENEFICIALLY OWNED COMMON STOCK ---- --------------------- ------------ NAMED EXECUTIVE OFFICERS: W.E. Sheriff................................................ 1,670,353(1)(2) 14.6% Christopher J. Coates....................................... 242,603(3) 2.1 George T. Hicks............................................. 170,259(4) 1.5 H. Todd Kaestner............................................ 180,244(5) 1.6 James T. Money.............................................. 175,252(6) 1.5 DIRECTORS: H. Lee Barfield II.......................................... 617,661(7)(8) 5.4 Jack O. Bovender, Jr........................................ -- -- Frank M. Bumstead........................................... 5,000 -- Robin G. Costa.............................................. 1,390,037(9)(10) 12.0 Clarence Edmonds............................................ 360,907(11) 3.2 John A. Morris, Jr., M.D.................................... 358,490(12) 3.1 Daniel K. O'Connell......................................... 13,285 * Nadine C. Smith............................................. 29,956 * Lawrence J. Stuesser........................................ 67,547(13) * OTHER 5% SHAREHOLDERS: American Retirement Communities, LLC........................ 1,350,000(14) 11.8 Dan Maddox.................................................. 1,438,259(9)(15) 12.5 DMAR Limited Partnership.................................... 1,372,037(16) 12.0 Mary Louise Frist Barfield.................................. 617,661(17)(18) 5.4 Robert A. Frist, M.D........................................ 573,872(19)(20) 5.0 All directors and executive officers as a group (16 persons).................................................. 4,565,497 40.0
- --------------- * Less than 1%. (1) Address: 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027. (2) 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 14. 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. (3) 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. (4) 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. (5) 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. (6) 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. (7) Address: 2700 First American Center, Nashville, Tennessee 37238. (8) Includes 472,857 shares beneficially owned by Mr. Barfield's wife, Mary Louise Frist Barfield. See Note 18. Mr. Barfield is the brother-in-law of Robert A. Frist. (9) Address: 3833 Cleghorn Avenue, Suite 400, Nashville, Tennessee 37215. 68 70 (10) Includes 1,372,037 shares beneficially owned by DMAR Limited Partnership ("DMAR"). Ms. Costa is a Vice President of Margaret Energy, Inc., the general partner of DMAR. Also includes an aggregate of 18,000 shares beneficially owned by trusts for the benefit of certain members of Dan Maddox's family, as to which Mr. Maddox and Ms. Costa exercise voting and dispositive power. See Note 15. (11) 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. (12) All shares are beneficially owned by partnerships owned and controlled by Dr. Morris, his brother Alfred Morris, and members of Dr. Morris' family. (13) All shares are beneficially owned by B&W Development Centers ("B&W"), of which Mr. Stuesser is a director and 50% shareholder. (14) 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 2, 3, 4, 5, and 6. (15) Includes 1,372,037 shares beneficially owned by DMAR and an aggregate of 18,000 shares beneficially owned by trusts for the benefit of certain members of Mr. Maddox's family, as to which Mr. Maddox and Ms. Costa exercise voting and dispositive power. See Notes 10 and 16. (16) The partners in DMAR include corporations and trusts owned by, or for the benefit of, Mr. Maddox and his wife. (17) Address: c/o H. Lee Barfield II, 2700 First American Center, Nashville, Tennessee 37238. (18) Includes 144,804 shares beneficially owned by Mrs. Barfield's husband, H. Lee Barfield II, and an aggregate of 184,084 shares beneficially owned by trusts for the benefit of Mrs. Barfield's children, of which Mrs. Barfield serves as trustee. See Note 8. Mrs. Barfield is the sister of Robert A. Frist. (19) Address: 1326 Page Road, Nashville, Tennessee 37205. (20) 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 TRANSACTIONS IN 1994 AND 1995 PRIOR TO THE 1995 ROLL-UP Partnership Distributions Prior to the 1995 Roll-Up, certain of the Predecessor Entities made distributions in the ordinary course of business to their respective equity owners, generally in accordance with such persons' relative equity interests, including certain of the Company's directors and Named Executive Officers (all of whom may be deemed to be the "founders" of the Company). During 1994, the following directors and Named Executive Officers of the Company received aggregate distributions, directly or indirectly, from various of the Predecessor Entities in the following amounts: W.E. Sheriff -- $33,000; H. Lee Barfield and Mary Louise Frist Barfield -- $310,000; and Lawrence J. Stuesser -- $15,000. In 1995 through the effective date of the 1995 Roll-Up, the following directors and Named Executive Officers of the Company received aggregate distributions, directly or indirectly, from various of the Predecessor Entities in the following amounts: W.E. Sheriff -- $32,000; H. Lee Barfield and Mary Louise Frist Barfield -- $100,000; Clarence Edmonds -- $7,000; John A. Morris, Jr. -- $66,000; and Lawrence J. Stuesser -- $4,000. Management Fees Prior to the 1995 Roll-Up, ARC Management Corporation ("ARCM"), a wholly-owned subsidiary of American Retirement Corporation II ("ARCII") (one of the Predecessor Entities), provided community management services to certain of the other Predecessor Entities (Fort Austin Limited Partnership, Trinity Towers Limited Partnership, and Holley Court Terrace, L.P.) and was paid a management fee pursuant to the terms of management agreements between ARCM and such Predecessor Entities. During 1994 and the first three months of 1995, Fort Austin Limited Partnership paid ARCM aggregate management fees of approximately $1.1 million and $423,000, respectively; Trinity Towers Limited Partnership paid ARCM aggregate management fees of approximately $266,000 and $71,000, respectively; and Holley Court Terrace, L.P. paid ARCM aggregate management fees of approximately $95,000 and $31,000, respectively. Certain of the Company's directors 69 71 and Named Executive Officers were equity owners in ARCII and the other Predecessor Entities and, consequently, had an indirect interest in such payments. Such directors' and Named Executive Officers' respective ownership interests in the Predecessor Entities were as follows:
OWNERSHIP PERCENTAGE --------------------------------------------------------- FORT AUSTIN TRINITY TOWERS HOLLEY COURT LIMITED NAME ARCII LIMITED PARTNERSHIP TERRACE, L.P. PARTNERSHIP - ---- ----- ------------------- ------------- ----------- W.E. Sheriff....................................... 7.7 6.7 2.8 -- Christopher J. Coates.............................. -- -- 0.3 -- George T. Hicks.................................... -- -- 0.3 -- H. Todd Kaestner................................... -- -- 0.3 -- James T. Money..................................... -- -- 0.3 -- H. Lee Barfield and Mary Louise Frist Barfield..... 5.3 5.4 9.4 8.4 Clarence Edmonds................................... -- 1.7 -- -- John A. Morris, Jr., M.D........................... -- 16.7 0.6 -- Lawrence J. Stuesser............................... -- -- -- 0.1
Additionally, ARCII owned 50.0% of Trinity Towers Limited Partnership, 20.1% of Holley Court Terrace, L.P., and 32.0% of Fort Austin Limited Partnership. Fees Paid to Directors In February 1995, ARCII paid a fee of $15,000 to Messrs. Edmonds and O'Connell and a fee of $30,000 to Ms. Smith, in each case as compensation for services rendered as members of a special committee of ARCII's Board of Directors. In February 1995, ARCII paid Ms. Smith a fee of $165,000 for consulting and other services rendered to ARCII during the period from April 1993 through February 1995 in connection with certain transactions involving ARCII, which fee had previously been deferred by agreement between Ms. Smith and ARCII. FORMATION OF ARCLP; THE 1995 ROLL-UP ARCLP was formed in February 1995 in anticipation of the 1995 Roll-Up of the Predecessor Entities. In connection with the formation of ARCLP, certain directors and Named Executive Officers of the Company contributed cash to ARCLP in the following amounts in return for corresponding limited partnership interests in ARCLP: W. E. Sheriff -- $800,000; Christopher J. Coates -- $100,000; H. Lee Barfield and Mary Louise Frist Barfield -- $1.0 million; John A. Morris, Jr. -- $2.0 million; and Lawrence J. Stuesser -- $250,000. In addition, 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, who received their respective LLC interests in exchange for services rendered to ARCII. 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. 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 equity interests in the Predecessor Entities and thereby became the owner, directly or indirectly, of all of the assets of the Predecessor Entities. As a result of the 1995 Roll-Up and the equity exchanges related thereto, certain of the Company's directors and Named Executive Officers received the following limited partnership percentages in ARCLP: W. E. Sheriff -- 3.7%; Christopher J. Coates -- 0.3%; George T. Hicks -- 0.03%; H. Todd Kaestner -- 0.4%; James T. Money -- 0.1%; H. Lee Barfield and Mary Louise Frist Barfield -- 7.3%; Clarence Edmonds -- 0.4%; John A. Morris, Jr., M.D. -- 2.4%; Daniel J. O'Connell -- 0.2%; and Lawrence J. Stuesser -- 0.5%. 70 72 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 -- $2.34 million (includes $2.16 million distributed to DMAR and $180,000 distributed to a partnership in which Mr. Maddox was a principal; does not include $240,000 distributed to a partnership controlled by Mr. Maddox's son). REORGANIZATION In connection with the Reorganization, the Company issued an aggregate of 7,812,500 shares of Common Stock and the Reorganization Note to ARCLP. Following the Reorganization, ARCLP distributed 1,350,000 shares of Common Stock to the LLC, as general partner of ARCLP, and an aggregate of 6,462,500 shares of Common Stock to the limited partners of ARCLP, generally in accordance with the limited partners' ARCLP contribution accounts. In addition, ARCLP distributed, in liquidation, proceeds from the repayment of the Reorganization Note to the limited partners of ARCLP, generally in accordance with the limited partners' contribution accounts. In connection with the Reorganization, certain executive officers, directors, and other limited partners of ARCLP who beneficially own more than 5% of the Common Stock (and, in each case, their immediate family members and affiliates), received shares of Common Stock and received proceeds from the Reorganization Note as set forth in the table below.
NUMBER OF SHARES PROCEEDS FROM THE NAME OF COMMON STOCK(1) REORGANIZATION NOTE($) ---- ------------------ ---------------------- W.E. Sheriff................................................ 1,670,353 1,084,371.49(2) Christopher J. Coates....................................... 242,603(3) 108,666.34(4) George T. Hicks............................................. 170,259(3) 6,293.82(4) H. Todd Kaestner............................................ 180,244(3) 40,093.44(4) James T. Money.............................................. 175,252(3) 23,193.63(4) H. Lee Barfield II.......................................... 602,661(5) 2,039,949.38(6) Robin G. Costa.............................................. 1,372,037 4,644,227.96(7) Clarence Edmonds............................................ 360,907 1,221,640.38(8) John A. Morris, Jr., M.D.................................... 358,490 1,213,458.23(9) Daniel K. O'Connell......................................... 10,285 34,813.61 Nadine C. Smith............................................. 29,956 101,398.86 Lawrence J. Stuesser........................................ 67,547 228,639.84(10) American Retirement Communities, LLC........................ 1,350,000 -- Dan Maddox.................................................. 1,420,259(11) 4,807,455.82(12) DMAR Limited Partnership.................................... 1,372,037 4,644,227.96 The Jack C. Massey Foundation............................... 335,888 1,136,953.90 Mary Louise Frist Barfield.................................. 602,661(13) 2,039,949.38(14) Robert A. Frist, M.D........................................ 573,872(15) 1,942,507.25(16)
- --------------- (1) See Notes to "Principal Shareholders" for certain beneficial ownership information. (2) Amounts distributed to a family limited partnership in which Mr. Sheriff is a general partner. (3) Does not include shares distributed to other members of the LLC or other partners in Sylvester I. (4) Includes $6,293.82 which represents such person's pro rata portion of amounts distributed to Sylvester I. 71 73 (5) Does not include shares distributed to Robert A. Frist or an aggregate of 841,555 shares 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 $977,470.45 distributed to Mr. Barfield's wife, Mary Louise Frist Barfield, and an aggregate of $572,330.52 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 distributed to Robert A. Frist and his wife, and children; Mr. Barfield's brother-in-law; or an aggregate of $2,848,592.12 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) All amounts distributed to DMAR. Ms. Costa is a Vice President of Margaret Energy, Inc., the general partner of DMAR. (8) Includes $1,136,953.90 distributed to The Massey Foundation and $84,686.48 distributed to Mr. Edmonds' wife. (9) All amounts distributed to partnerships owned and controlled by Dr. Morris, his brother Alfred Morris, and members of Dr. Morris' family. (10) Amounts received by B&W, of which Mr. Stuesser is a director and 50% shareholder. (11) Does not include an aggregate of 15,39 shares distributed to Mr. Maddox's son. (12) Includes $4,644,227.96 distributed to DMAR. Does not include an aggregate of $443,495.52 distributed to Mr. Maddox's son. (13) Does not include shares distributed to Robert A. Frist or an aggregate of 841,555 shares distributed to Ms. Barfield's father, sister, and trusts for the benefit of Ms. Barfield's brother and nephews. (14) Includes $490,148.41 distributed to Mrs. Barfield's husband, H. Lee Barfield II, and an aggregate of $572,330.52 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 distributed to Robert A. Frist and his wife, and children; Mrs. Barfield's brother; or an aggregate of $2,848,592.12 distributed to Ms. Barfield's father, sister, and trusts for the benefit of Ms. Barfield's brother and nephews. (15) Does not include shares distributed to H. Lee Barfield II or Mary Louise Frist Barfield, or an aggregate of 841,555 shares distributed to Dr. Frist's father, sister, or trusts for the benefit of Dr. Frist's brother and nephews. (16) Includes $76,393.06 distributed to Dr. Frist's wife. Does not include an aggregate of $648,394.62 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 distributed to H. Lee Barfield II or Mary Louise Frist Barfield and trusts for the benefit of their children, or an aggregate of $2,848,592.12 distributed to Dr. Frist's father, sister, and trusts for the benefit of Dr. Frist's brother and nephews. MANAGEMENT AGREEMENTS The Company is providing full development services related to and has entered into management agreements to manage five assisted living residences with an aggregate capacity for 399 residents, four of which are located in Houston, Texas and one of which is located in Spring Shadow, Texas, owned by affiliates of Jim Maddox, the son of Dan Maddox, a significant shareholder of the Company. Three of the residences are currently under construction and two of the residences are under development. Such management agreements provide for the payment of management fees to the Company based on a percentage of each facility's gross revenues and require the Company to pay operating deficits above a specified amount. The management agreements also provide the Company with the option to purchase the subject facilities. The Company expects to enter into additional management agreements with Jim Maddox or his affiliates. 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 prior and proposed transactions have complied with this policy. 72 74 DESCRIPTION OF DEBENTURES The Debentures will be issued under an Indenture, to be dated as of , 1997 (the "Indenture"), to be executed by the Company and IBJ Schroder Bank and Trust Company, as the trustee under the Indenture (the "Trustee"). The terms of the Debentures include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939, as amended. A copy of the Indenture has been filed as an exhibit to the Registration Statement and is incorporated herein by reference. The following is a summary of certain provisions of the Indenture, and does not purport to be complete and is qualified in its entirety by reference to the detailed provisions of the Indenture, including the definitions of certain terms therein to which reference is hereby made. Wherever particular provisions or sections of the Indenture or terms defined therein are referred to herein, such provisions or definitions are incorporated herein by reference. GENERAL The Debentures are unsecured general obligations of the Company, subject to the rights of holders of Senior Indebtedness of the Company, and will mature on , 2002. The Debentures will be limited to $100.0 million aggregate principal amount, and will bear interest payable semiannually on and of each year, commencing , 1998, at the per annum rate of %. The first payment will be for the period from the date of delivery to , 1998. The Company will pay interest on the Debentures to the persons who are registered holders of Debentures at the close of business on the or preceding the interest payment date. Principal and interest will be payable, the Debentures will be convertible and exchangeable, and transfers thereof will be registerable, at the office or agency of the Company maintained for such purposes, initially at the offices of the Trustee. The Company may pay principal and interest by check and may mail an interest check to a holder's registered address. Holders must surrender Debentures to a Paying Agent to collect principal payments. Initially, the Trustee will act as Paying Agent, Registrar, and Conversion Agent. The Company may change any Paying Agent, Registrar, Conversion Agent, or co-registrar upon prior written notice to the Trustee and may act in any such capacity itself. The Debentures will be in fully registered form without coupons in denominations of $1,000 or integral multiples thereof. A holder may transfer or exchange Debentures in accordance with the Indenture. No service charge will be made for any registration or transfer, exchange, or conversion of Debentures, except for any tax or other governmental charges that may be imposed in connection therewith. The Registrar need not transfer or exchange any Debentures selected for redemption. Also, in the event of a partial redemption, it need not transfer or exchange any Debentures for a period of 15 days before selecting Debentures to be redeemed. The Indenture does not contain any provision requiring the Company to repurchase the Debentures at the option of the holders thereof in the event of a leveraged buyout, recapitalization, or similar restructuring of the Company, even though the Company's credit-worthiness and the market value of the Debentures may decline significantly as a result of such transaction. The Indenture does not protect holders of the Debentures against any decline in credit quality, whether resulting from any such transaction or from any other cause. The registered holder of a Debenture may be treated as its owner for all purposes. CONVERSION RIGHTS The holders of the Debentures will be entitled at any time on or after December 31, 1997 and prior to maturity, subject to prior redemption, to convert the Debentures (or portions thereof that are $1,000 principal amount or integral multiples thereof) into shares of Common Stock at the conversion price set forth on the cover page of this Prospectus (subject to adjustments as described below). No payment or adjustment will be made for accrued interest on a converted Debenture. If any Debenture not called for redemption is converted between a record date for the payment of interest and the next succeeding interest payment date, such Debenture must be 73 75 accompanied by funds equal to the interest payable to the registered holder on such interest payment date on the principal amount so converted. The Company will not issue fractional interests in shares of Common Stock upon conversion of the Debentures and instead will deliver a check for the fractional share based upon the current market price per share of the Common Stock (as determined in accordance with the provisions described in the Indenture) on the conversion date. If the Debentures are called for redemption, conversion rights will expire at the close of business on the redemption date, unless the Company defaults in payment due upon such redemption. The conversion price is subject to adjustments in certain events, as set forth in the Indenture, including the payment of dividends or distributions on the Common Stock in shares of capital stock; subdivisions or combinations of the Common Stock into a greater or smaller number of shares of Common Stock; reclassification of the shares of Common Stock resulting in an issuance of any shares of the Company's capital stock; distribution of rights or warrants to all holders of Common Stock entitling them to purchase Common Stock at less than the then-current market price at that time; and the distribution to all holders of Common Stock of assets, excluding certain cash dividends and distributions, or debt securities, or any rights or warrants to purchase securities of the Company; provided, however, that no adjustment will be required if holders of the Debentures receive notice of and are allowed to participate in such transactions. No adjustment will be required for rights to purchase Common Stock pursuant to a Company plan for reinvestment of dividends or interest or the Company's Employee Stock Purchase Plan, or for a change in the par value of the Common Stock. To the extent that Debentures become convertible into cash, no adjustment will be required thereafter as to cash. No adjustment in the conversion price need be made unless such adjustment would require a change of at least 1.0% in the conversion price; any adjustment that would otherwise be required to be made, however, shall be carried forward and taken into account in any subsequent adjustment. The Company may voluntarily reduce the conversion price for a period of time. If the Company pays dividends on the Common Stock in shares of capital stock or subdivides or combines the Common Stock or issues by reclassification of its Common Stock any shares of its capital stock or merges with, or transfers or leases substantially all of its assets to, another corporation or trust, the holders of the Debentures then outstanding will be entitled thereafter to convert such Debentures into the kind and amount of shares of capital stock, other securities, cash, or other assets that they would have owned immediately after such event had such Debentures been converted before the effective date of the transaction. Any Debentures called for redemption, unless surrendered for conversion on or before the close of business on the redemption date, are subject to being purchased from the holder of such Debentures at the redemption price by one or more investment banks or other purchasers who may agree with the Company to purchase such Debentures and convert them into Common Stock of the Company. SUBORDINATION OF DEBENTURES The indebtedness evidenced by the Debentures will be subordinated and junior in right of payment to the extent set forth in the Indenture to the prior payment in full of amounts then due on all Senior Indebtedness. No payment shall be made by the Company on account of principal of or interest on the Debentures or on account of the purchase or other acquisition of Debentures, if there shall have occurred and be continuing a default with respect to any Senior Indebtedness permitting the holders to accelerate the maturity thereof, or with respect to any Senior Indebtedness and such default shall be the subject of a judicial proceeding, or the Company shall have received notice of such default from certain persons, unless and until such default or event of default shall have been cured or waived or shall have ceased to exist. In the event of default on any Senior Indebtedness, whether now outstanding or hereafter issued, payments of principal of and interest on the Debentures may not be permitted to be made until such Senior Indebtedness is paid in full, or the event of default on such Senior Indebtedness is cured or waived. 74 76 Upon any acceleration of the principal of the Debentures or any distribution of assets of the Company upon any receivership, dissolution, winding-up, liquidation, reorganization, or similar proceedings of the Company, whether voluntary or involuntary, or in bankruptcy or insolvency, all amounts due or to become due upon all Senior Indebtedness must be paid in full before the holders of the Debentures or the Trustee are entitled to receive or retain any assets so distributed in respect of the Debentures. By reason of this provision, in the event of insolvency, holders of the Debentures may recover less, ratably, than holders of Senior Indebtedness. "Senior Indebtedness" is defined to mean the principal, premium, if any, and interest on, and all other amounts payable under or in respect of, Indebtedness of the Company (other than Indebtedness owed to a subsidiary of the Company, Indebtedness of the Company that is expressly pari passu with the Debentures, or Indebtedness that is expressly subordinated to the Debentures). There is no limit on the amount of Senior Indebtedness that the Company may incur. As of June 30, 1997, the Company's Senior Indebtedness totalled approximately $90.9 million. "Indebtedness" as applied to any person means, without duplication: (i) all indebtedness for borrowed money whether or not evidenced by a promissory note, draft, or similar instrument; (ii) that portion of obligations with respect to any lease that is properly classified as a liability on a balance sheet in accordance with generally accepted accounting principles; (iii) notes payable and drafts accepted representing extensions of credit; (iv) any balance owed for all or any part of the deferred purchase price of property or services, which purchase price is due more than six months from the date of incurrence of the obligation in respect thereof (except any such balance that constitutes (a) a trade payable or an accrued liability arising in the ordinary course of business or (b) a trade draft or note payable issued in the ordinary course of business in connection with the purchase of goods or services), if and to the extent such debt would appear as a liability upon a balance sheet of such person prepared in accordance with generally accepted accounting principles; (v) tenant deposits; (vi) any debt of others described in the preceding clauses (i) through (v) that such person has guaranteed or for which it is otherwise liable; and (vii) any deferral, amendment, renewal, extension, supplement, or refunding of any of the foregoing indebtedness; provided, however, that, in computing the "Indebtedness" of any person, there shall be excluded any particular indebtedness if, upon or prior to the maturity thereof and at the time of determination of such indebtedness, there shall have been deposited with a depository in trust money (or evidences of indebtedness if permitted by the instrument creating such indebtedness) in the necessary amount to pay, redeem, or satisfy such indebtedness as it becomes due, and the amount so deposited shall not be included in any computation of the assets of such person. OPTIONAL REDEMPTION The Debentures will be subject to redemption at the option of the Company, in whole or in part, at any time or from time to time commencing on or after , 2000 on at least 30 days' and not more than 60 days' prior notice by mail, at a redemption price equal to 100% of the principal amount thereof, plus interest accrued to the date of redemption. MODIFICATION OF THE INDENTURE Under the Indenture, the rights and obligations of the Company with respect to the Debentures and the rights of holders of the Debentures may, with certain exceptions, be modified by the Company and the Trustee with the written consent of the holders of not less than 66 2/3% in principal amount of the outstanding Debentures. Without the consent of each Holder of any Debenture affected, however, an amendment, waiver, or supplement may not (a) reduce the principal amount of outstanding Debentures whose holders may consent to an amendment; (b) reduce the rate or extend the time of payment of interest on any Debenture; (c) reduce the principal of or extend the fixed maturity of any Debenture; (d) make any Debenture payable in money other than that stated in the Debenture; (e) change the provisions of the Indenture regarding the right of the holders of a majority in principal amount of the Debentures to waive defaults under the Indenture or impair the 75 77 right of any holder of Debentures to institute suit for the enforcement of any payment of principal and interest on the Debentures on and after their respective due dates; (f) make any Debenture payable in currency other than that stated in the Debenture; (g) make any change that adversely affects the right to convert any Debenture; or (h) make any change in the subordination provisions of the Indenture that adversely affects the rights of any holder. No consent of the holders of the Debentures is required for any amendment of the Indenture or the Debentures by the Company or the Trustee to cure any ambiguity, defect, or inconsistency, or to provide for uncertificated Debentures in addition to or in place of certificated Debentures, or to make any change that does not adversely affect the interests of the holders of the Debentures in any material respect. EVENTS OF DEFAULT, NOTICE, AND WAIVER The following are Events of Default under the Indenture: (i) default in the payment of interest on the Debentures when due and payable that continues for 30 days; (ii) default in the payment of principal of (and premium, if any) on the Debentures when due and payable, at maturity, upon redemption, or otherwise, that continues for five business days; (iii) failure to perform any other covenant of the Company contained in the Indenture or the Debentures that continues for 60 days after written notice to the Company as provided in the Indenture; (iv) default under any bond, debenture, note, or other Indebtedness of the Company or under any mortgage, indenture, or other instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness of the Company, whether any such Indebtedness exists as of the date of the Indenture or is thereafter created, if (a) either (x) such event of default results from the failure to pay any such Indebtedness at its maturity or (y) as a result of such event of default, the maturity of such Indebtedness has been accelerated prior to its expressed maturity and such acceleration shall not be rescinded or annulled or the accelerated amount paid within ten days after notice to the Company of such acceleration or such Indebtedness having been discharged, and (b) the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal or interest thereon, or the maturity of which has been so accelerated, aggregates $10,000,000 or more; and (v) certain events of bankruptcy, insolvency, or reorganization relating to the Company. If an Event of Default occurs and is continuing with respect to the Debentures, either the holders of at least a majority in principal amount of the outstanding Debentures or the Trustee at such holders' direction may declare all of the Debentures to be due and payable immediately. The Indenture provides that the Company will not (i) declare or pay any dividends or make any distribution to holders of its capital stock (other than dividends or distributions payable in shares of Common Stock) or (ii) purchase, redeem, or otherwise acquire or retire for value any of its Common Stock, or any warrants, rights, or options to purchase or acquire any shares of its Common Stock (other than the Debentures or any other convertible indebtedness of the Company that is neither secured nor subordinated to the Debentures), if at the time any Event of Default has occurred and is continuing or would exist immediately after giving effect to such action. The Trustee may require indemnity reasonably satisfactory to it before it enforces the Indenture or the Debentures. Subject to certain limitations, holders of a majority in principal amount of the outstanding Debentures may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from holders of the Debentures notice of any default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Company is required to file with the Trustee annually a statement of certain officers as to the absence of defaults in fulfilling any of the Company's obligations under the Indenture. CERTAIN RIGHTS TO REQUIRE REPURCHASE OF DEBENTURES BY THE COMPANY In the event of any Change in Control of the Company occurring after the date of issuance of the Debentures and on or prior to maturity, each holder of Debentures will have the right, at such 76 78 holder's option, to require the Company to repurchase all or any part of such holder's Debentures on the date (the "Repurchase Date") that is 75 days after the date the Company gives notice of the Change in Control (as described below) at a price (the "Repurchase Price") equal to 101% of the principal amount thereof, together with accrued and unpaid interest to the Repurchase Date. On or prior to the Repurchase Date, the Company is required to deposit with the Trustee or a Paying Agent an amount of money sufficient to pay the Repurchase Price of the Debentures that are to be repaid on the Repurchase Date. Neither the Board of Directors of the Company nor the Trustee, acting alone or together, can modify or waive this required repurchase of the Debentures. Failure by the Company to repurchase the Debentures when required under the preceding paragraph will result in an event of default under the Indenture, whether or not such repurchase is permitted by the subordination provisions of the Indenture. On or before the 15th day after the occurrence of a Change in Control, the Company is obligated to mail to all holders a notice of the event constituting and the date of such Change in Control, the Repurchase Date, the date by which the repurchase right must be exercised, the Repurchase Price for Debentures, and the procedures that a holder must follow to exercise a repurchase right. To exercise the repurchase right, a holder of a Debenture must deliver, on or before the 10th day prior to the Repurchase Date, written notice to the Company (or an agent designated by the Company for such purpose) and to the Trustee of the holder's exercise of such right, together with the certificates evidencing the Debentures with respect to which the right is being duly exercised, duly endorsed for transfer. A "Change in Control" will occur when: (i) all or substantially all of the Company's assets are sold as an entirety to any person or related group of persons; (ii) there shall be consummated any consolidation or merger of the Company (A) in which the Company is not the continuing or surviving corporation (other than a consolidation or merger with a wholly-owned subsidiary of the Company in which all Common Shares outstanding immediately prior to the effectiveness thereof are changed into or exchanged for the same consideration) or (B) pursuant to which the Common Stock is converted into cash, securities, or other property, in each case other than a consolidation or merger of the Company in which the holders of the Common Stock immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger; or (iii) any person, or any persons acting together that would constitute a "group" for purposes of Section 13(d) of the Exchange Act, together with any affiliates thereof, acquires beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of at least 50% of the total voting power of all classes of capital shares of the Company entitled to vote generally in the election of directors of the Company. Notwithstanding clause (iii) of the foregoing definition, a Change in Control will not be deemed to have occurred solely by virtue of the Company; any Subsidiary; any employee share purchase plan, share option plan, or other share incentive plan or program; retirement plan or automatic dividend reinvestment plan; or any substantially similar plan of the Company or any Subsidiary or any person holding securities of the Company for or pursuant to the terms of any such employee benefit plan, filing or becoming obligated to file a report under or in response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form, or report) under the Exchange Act disclosing beneficial ownership by it of shares or securities of the Company, whether at least 50% of the total voting power referred to in clause (iii) of the foregoing definition or otherwise. (Section 14.5) A recapitalization or a leveraged buyout or similar transaction involving members of management or their affiliates will constitute a Change in Control if it meets the foregoing definition. Notwithstanding the foregoing, a Change in Control as described above will not be deemed to have occurred if (i) the Current Market Price (as defined in the Indenture) of the Common Stock on the date of a Change in Control is at least equal to 105% of the conversion price of the Debentures in effect immediately preceding the time of such Change in Control or (ii) all of the consideration (excluding cash payments for fractional shares) in the transaction giving rise to such Change in Control to the holders of Common Stock consists of shares of common stock that are, or 77 79 immediately upon issuance will be, listed on a national securities exchange or quoted on the Nasdaq National Market, and as a result of such transaction the Debentures will become convertible solely into such shares of common stock; or (iii) the consideration in the transaction giving rise to such Change in Control to the holders of Common Stock consists of cash or securities that are, or immediately upon issuance will be, listed on a national securities exchange or quoted on the Nasdaq National Market, or a combination of cash and such securities, and the aggregate fair market value of such consideration (which, in the case of such securities, will be equal to the average of the daily closing prices of such securities during the 10 consecutive trading days commencing with the sixth trading day following consummation of such transaction) is at least 105% of the conversion price of the Debentures in effect on the date immediately preceding the closing date of such transaction. There is no definition of the phrase "all or substantially all" as applied to the Company's assets and used in the definition of Change in Control in the Indenture, and there is no clear definition of the phrase under applicable law. As a result of the uncertainty of the meaning of this phrase, in the event the Company were to sell a significant amount of its assets, the holders and the Company may disagree over whether the sale gives rise to the right of holders to require the Company to repurchase the Debentures. In such event, the holders would likely not be able to require the Company to repurchase unless and until the disagreement were resolved in favor of the holders. The right to require the Company to repurchase Debentures as a result of a Change in Control could create an event of default under Senior Indebtedness, as a result of which any repurchase could, absent a waiver, be blocked by the subordination provisions of the Debentures. See "Subordination of Debentures." The Company's ability to pay cash to the holders upon a repurchase may also be limited by certain financial covenants contained in the Company's Senior Indebtedness. In the event a Change in Control occurs and the holders exercise their rights to require the Company to repurchase Debentures, the Company intends to comply with applicable tender offer rules under the Exchange Act, including Rules 13e-4 and 14e-1, as then in effect, with respect to any such purchase. The Change of Control purchase feature of the Debentures may in certain circumstances make more difficult or discourage a takeover of the Company and, thus, the removal of incumbent management. The Change in Control purchase feature, however, is not the result of management's knowledge of any specific effort to accumulate Common Stock or to obtain control of the Company by means of a merger, tender offer, solicitation, or otherwise, or part of a plan by management to adopt a series of anti-takeover provisions. Instead, the Change in Control purchase feature is a standard term contained in other similar debt offerings and the specific terms of this feature resulted from negotiations between the Company and the Underwriter. Management has no present intention to engage in a transaction involving a Change in Control. The foregoing provisions would not necessarily afford holders protection in the event of highly leveraged or other transactions involving the Company that may adversely affect holders. CONSOLIDATION, MERGER, SALE, OR CONVEYANCE The Company may merge or consolidate with, or sell or convey all or substantially all of its assets to, any other corporation or entity, provided that (i) either the Company shall be the continuing entity, or the successor entity (if other than the Company) shall be an entity organized and existing under the laws of the United States or a state thereof or the District of Columbia and such entity shall expressly assume by supplemental indenture all of the obligations of the Company under the Debentures and the Indenture; (ii) immediately after giving effect to such transactions no default or Event of Default shall have occurred and be continuing; and (iii) the Company shall have delivered to the Trustee an Officer's Certificate and opinion of counsel, stating that the transaction and supplemental indenture comply with the Indenture. 78 80 MARKETABILITY The Debentures are a new class of securities for which there is no established trading market. Although the Debentures have been approved for listing on the New York Stock Exchange, there can be no assurance that an active trading market will develop after the Offering. GOVERNING LAW The Indenture and the Debentures will be governed by and construed in accordance with the laws of the State of New York. 79 81 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"). Currently, 11,406,250 shares of Common Stock are issued and outstanding, no shares of Preferred Stock are outstanding, and 627,500 shares of Common Stock are 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 outstanding shares of Common Stock are, and the shares offered hereby will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of holders of shares of any series of Preferred Stock 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 is listed 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 80 82 without the disruption of the threat of a takeover not deemed by the Board of Directors to be in the best interests of the Company and its shareholders. Directors The Bylaws provide that the number of directors shall be no fewer than three nor more than fifteen, with the exact number to be established by the Board of Directors and subject to change from time to time as determined by the Board of Directors. Vacancies on the Board of Directors (including vacancies created by an increase in the number of directors) may be filled by the Board of Directors, acting by a majority of the remaining directors then in office, or by a plurality of the votes cast by the shareholders at a meeting at which a quorum is present. Officers are elected annually by and serve at the pleasure of the Board of Directors. The Charter and Bylaws provide that the Board of Directors is divided into three classes of as nearly equal size as possible, and the term of office of each class expires in consecutive years so that each year only one class is elected. The Charter also provides that directors may be removed only for cause and only by (i) the affirmative vote of the holders of a majority of the voting power of all the shares of the Company's capital stock then entitled to vote in the election of directors, voting together as a single class, unless the vote of a special voting group is otherwise required by law; or (ii) the affirmative vote of a majority of the entire Board of Directors then in office. The overall effect of these provisions in the Company's Charter and Bylaws may be to render more difficult a change in control of the Company or the removal of incumbent management. Advance Notice for Shareholder Proposals or Making Nominations at Meetings The Bylaws establish an advance notice procedure for shareholder proposals to be brought before a meeting of shareholders of the Company and for nominations by shareholders of candidates for election as directors at an annual meeting or a special meeting at which directors are to be elected. Subject to any other applicable requirements, only such business may be conducted at a meeting of shareholders as has been brought before the meeting by, or at the direction of, the Board of Directors, or by a shareholder who has given to the Secretary of the Company timely written notice, in proper form, of the shareholder's intention to bring that business before the meeting. The presiding officer at such meeting has the authority to make such determinations. Only persons who are selected and recommended by the Board of Directors, or the committee of the Board of Directors designated to make nominations, or who are nominated by a shareholder who has given timely written notice, in proper form, to the Secretary prior to a meeting at which directors are to be elected will be eligible for election as directors of the Company. To be timely, notice of nominations or other business to be brought before any meeting must be received by the Secretary of the Company not later than 120 days in advance of the anniversary date of the Company's proxy statement for the previous year's annual meeting or, in the case of special meetings, at the close of business on the tenth day following the date on which notice of such meeting is first given to shareholders. The notice of any shareholder proposal or nomination for election as director must set forth various information required under the Bylaws. The person submitting the notice of nomination and any person acting in concert with such person must provide, among other things, the name and 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 81 83 represented at a regular or special meeting have the power to amend, alter, change, or repeal the Bylaws. Any proposal to amend, alter, change, or repeal provisions of the Charter relating to staggered terms for directors, and limitations on the ability of shareholders to call a shareholders' meeting or to remove directors require approval by the affirmative vote of both a majority of the members of the Board of Directors then in office and the holders of three-fourths of the voting power of all of the shares of the Company's capital stock entitled to vote on the amendments. Other amendments to the Charter require the affirmative vote of both a majority of the members of the Board of Directors then in office and the holders of a majority of the voting power of all of the shares of the Company's capital stock entitled to vote on the amendments, with shareholders entitled to dissenters' rights as a result of the Charter amendment voting together as a single class. Shareholders entitled to dissenters' rights as a result of a Charter amendment are those whose rights would be materially and adversely affected because the amendment (i) alters or abolishes a preferential right of the shares; (ii) creates, alters, or abolishes a right in respect of redemption; (iii) alters or abolishes a preemptive right; (iv) excludes or limits the right of the shares to vote on any matter, or to cumulate votes, other than a limitation by dilution through issuance of shares or other securities with similar voting rights; or (v) reduces the number of shares held by such holder to a fraction if the fractional share is to be acquired for cash. In general, however, under the TBCA no shareholder is entitled to dissenters' rights if the security he or she holds is listed on a national securities exchange, such as the NYSE. ANTI-TAKEOVER LEGISLATION The Tennessee Business Combination Act (the "Combination Act") provides, among other things, that any corporation to which the Combination Act applies, including the Company, shall not engage in any "business combination" with an "interested shareholder" for a period of five years following the date that such shareholder became an interested shareholder unless prior to such date the board of directors of the corporation approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder. The Combination Act defines "business combination," generally, to mean any: (i) merger or consolidation; (ii) share exchange; (iii) sale, lease, exchange, mortgage, pledge, or other transfer (in one transaction or a series of transactions) of assets representing 10% or more of (A) the market value of consolidated assets, (B) the market value of the corporation's outstanding shares or (C) the corporation's consolidated net income; (iv) issuance or transfer of shares from the corporation to the interested shareholder; (v) plan of liquidation; (vi) transaction in which the interested shareholder's proportionate share of the outstanding shares of any class of securities is increased; or (vii) financing arrangements pursuant to which the interested shareholder, directly or indirectly, receives a benefit except proportionately as a shareholder. The Combination Act defines "interested shareholder," generally, to mean any person who is the beneficial owner, either directly or indirectly, of 10% or more of any class or series of the outstanding voting stock, or any affiliate or associate of the corporation who has been the beneficial owner, either directly or indirectly, of 10% or more of the voting power of any class or series of the corporation's stock at any time within the five year period preceding the date in question. Consummation of a business combination that is subject to the five-year moratorium is permitted after such period if the transaction (i) complies with all applicable charter and bylaw requirements and applicable Tennessee law and (ii) is approved by at least two- 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 82 84 series is entitled to receive on liquidation; or (iii) the market value of the shares on either the date the business combination is announced or the date when the interested shareholder reaches the 10% threshold, whichever is higher, plus interest thereon less dividends as noted above. The Tennessee Control Share Acquisition Act (the "Acquisition Act") prohibits certain shareholders from exercising in excess of 20% of the voting power in a corporation acquired in a "control share acquisition," as defined in the Acquisition Act, unless such voting rights have been previously approved by the disinterested shareholders of the corporation. The Company has elected not to make the Acquisition Act applicable to the Company. No assurance can be given that such election, which must be expressed in a charter or bylaw amendment, will not be made in the future. The Tennessee Greenmail Act (the "Greenmail Act") prohibits the Company from purchasing or agreeing to purchase any of its securities, at a price in excess of fair market value, from a holder of 3% or more of any class of such securities who has beneficially owned such securities for less than two years, unless such purchase has been approved by the affirmative vote of a majority of the outstanding shares of each class of voting stock issued by the Company or the Company makes an offer of at least equal value per share to all holders of shares of such class. The effect of the Combination Act, the Acquisition Act, and the Greenmail Act may be to render more difficult a change of control of the Company. REGISTRATION RIGHTS Beneficial holders of an aggregate of 7,812,500 shares of Common Stock have contractual rights with respect to the registration of the sale of such shares ("Registrable Shares"). Beginning May 30, 1998, 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 May 30, 1999, 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 to issue Common Stock for cash, provided, among other conditions, that the managing underwriter (if any) of such offering has the right, subject to certain conditions, to limit the number of Registrable Shares included in such registration statement. Holders of Registrable Shares are not entitled to request registration thereof in connection with this offering. 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 is the transfer agent and registrar for the Common Stock. 83 85 UNDERWRITING Schroder & Co. Inc. (the "Underwriter") has agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase, and the Company has agreed to sell to the Underwriter, $100,000,000 aggregate principal amount of the Debentures. The Underwriting Agreement provides that the Underwriter is obligated to purchase all the Debentures offered hereby, if any such Debentures are purchased. The Underwriter has advised the Company that it proposes to offer the Debentures directly to the public, initially at the public offering price set forth on the cover page of this Prospectus; that the Underwriter proposes initially to allow a concession not in excess of % of the principal amount of the Debentures to certain dealers; and that the Underwriter and such dealers may initially allow a concession not in excess of % of the principal amount of the Debentures to other dealers. After the initial offering of the Debentures, the public offering price and such concessions may be changed by the Underwriter. The Company has granted an option to the Underwriter, exercisable for 30 days from the date of this Prospectus, to purchase up to $15,000,000 additional principal amount of the Debentures at the public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriter may exercise such option only to cover over-allotments in the sale of the Debentures offered hereby. The Underwriting Agreement provides that the Company will indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act. The Company and its executive officers and directors will agree with the Underwriter that, for a period of 90 days following the offering, they will not offer, sell, contract to sell, grant an option to purchase, or otherwise dispose (or announce any offer, sale, grant of any option, or other distribution) of any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock without the prior written consent of the Underwriter (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 Debentures are a new issue of securities with no existing market. The Debentures have been approved for listing on the NYSE, but there can be no assurance an active trading market in the Debentures will develop or be sustained following the offering or that the purchasers of the Debentures in the offering will be able to liquidate their investments or to resell such Debentures at or above the initial offering price. The Underwriter 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 Underwriter 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 $10,000,000 principal amount of Debentures have been reserved for sale in the Offering to certain individuals, including directors and employees of the 84 86 Company, members of their families, and other persons having business relationships with the Company. The price of such Debentures to such persons will be the initial public offering price set forth on the cover of this Prospectus. The principal amount of Debentures available for sale to the general public will be reduced to the extent these persons purchase such reserved Debentures. Any reserved Debentures not purchased will be offered by the Underwriters to the general public on the same basis as the other Debentures offered hereby. LEGAL MATTERS The validity of the Debentures 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 617,661 shares of Common Stock. See "Principal Shareholders." Certain legal matters will be passed upon for the Underwriter 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. AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Debentures offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto. Certain items are omitted in accordance with the rules and regulations of the Commissions. Statements contained in this Prospectus concerning the provisions or contents of any contract or other document referred to herein are not necessarily complete. With respect to each such contract, agreement, or document, reference is made to such document for a more complete description, and each statement is deemed to be qualified in all respects by such reference. The Company is subject to the informational requirements of the Exchange Act and, in accordance therewith, files proxy statements, reports, and other information with the Commission. The Registration Statement (with exhibits), as well as such proxy statements, reports, and other information, may be inspected and copied at prescribed rates at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048, and Northwestern Atrium Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants, including the Company, at http://www.sec.gov. The Company's Common Stock is listed on the NYSE and proxy statements, reports, and other information concerning the Company may be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005. 85 87 AMERICAN RETIREMENT CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- AMERICAN RETIREMENT COMMUNITIES, L.P. Independent Auditors' Report................................ F-2 Consolidated Balance Sheets -- December 31, 1995 and 1996... 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 and Year Ended December 31, 1996........ 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 and Year Ended December 31, 1996.......................... 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 and Year Ended December 31, 1996........ F-7 Notes to Combined and Consolidated Financial Statements..... F-9 AMERICAN RETIREMENT CORPORATION Condensed Consolidated Balance Sheet -- June 30, 1997 (unaudited)............................................... F-22 Condensed Consolidated Statements of Operations -- Six Months Ended June 30, 1996 and June 30, 1997 (unaudited)............................................... F-23 Condensed Consolidated Statements of Cash Flows -- Six Months Ended June 30, 1996 and June 30, 1997 (unaudited)............................................... F-24 Notes to Condensed Consolidated Financial Statements........ F-25 CARRIAGE CLUB OF CHARLOTTE, LIMITED PARTNERSHIP AND CARRIAGE CLUB OF JACKSONVILLE, LIMITED PARTNERSHIP Independent Auditors' Report................................ F-28 Combined Statement of Operations -- Four Months Ended April 30, 1996.................................................. F-29 Combined Statement of Partners' Equity -- Four Months Ended April 30, 1996............................................ F-29 Combined Statement of Cash Flows -- Four Months Ended April 30, 1996.................................................. F-30 Notes to Combined Financial Statements...................... F-31
F-1 88 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, except for Note 16, which is as of June 4, 1997. F-2 89 AMERICAN RETIREMENT COMMUNITIES, L.P. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, DECEMBER 31, 1995 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 3,825 $ 3,222 Assets limited as to use (note 5)......................... 2,411 1,022 Resident and health care receivables, less allowance for doubtful accounts of $78 in 1995 and $108 in 1996...... 1,585 2,782 Management services receivables........................... 876 565 Inventory................................................. 324 420 Prepaid expenses.......................................... 233 340 Deferred income taxes (note 12)........................... -- 920 -------- -------- Total current assets................................... 9,254 9,271 Assets limited as to use, excluding amounts classified as current (note 5).......................................... 3,532 3,607 Land, buildings and equipment, net (notes 6, 9, and 15)..... 149,082 213,124 Marketable securities (note 4).............................. 102 52 Other assets (note 7)....................................... 3,609 2,108 -------- -------- Total assets...................................... $165,579 $228,162 ======== ======== LIABILITIES AND PARTNERS' EQUITY Current liabilities: Current portion of long-term debt (note 9)................ $ 1,800 $ 8,053 Accounts payable.......................................... 2,615 2,441 Redemption payable (note 10).............................. -- 5,195 Accrued expenses (note 8)................................. 4,442 6,239 Accrued partner distributions............................. 1,445 1,632 -------- -------- Total current liabilities.............................. 10,302 23,560 Tenant deposits............................................. 2,748 3,850 Long-term debt, excluding current portion (note 9).......... 100,445 162,636 Other long-term liabilities................................. 261 234 -------- -------- Total liabilities...................................... 113,756 190,280 Partners' equity: Special redeemable preferred partnership interests (note 10).................................................... 10,000 -- Other general and limited partners' interests............. 41,823 37,882 -------- -------- Total partners' equity................................. 51,823 37,882 -------- -------- Commitments and contingencies (notes 13 and 14) Total liabilities and partners' equity............ $165,579 $228,162 ======== ========
See accompanying notes to combined and consolidated financial statements. F-3 90 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 ENDED ENDED ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, 1994 1995 1995 1996 ------------ ------------ ------------ ------------ Revenues: Resident and health care revenue.................... $30,979 $11,761 $47,239 $ 73,878 Management services revenue......................... 2,362 595 1,524 1,739 ------- ------- ------- -------- Total revenues.................................... 33,341 12,356 48,763 75,617 Expenses: Community operating expenses........................ 21,780 8,035 30,750 46,960 General and administrative.......................... 3,455 1,108 3,446 6,200 Depreciation and amortization....................... 2,891 1,127 4,534 6,906 ------- ------- ------- -------- Total operating expenses.......................... 28,126 10,270 38,730 60,066 ------- ------- ------- -------- Income from operations............................ 5,215 2,086 10,033 15,551 ------- ------- ------- -------- Other income (expense): Interest expense.................................... (5,354) (2,370) (7,930) (12,160) Interest income..................................... 203 49 329 434 Other (note 11)..................................... 98 (1,013) 919 788 ------- ------- ------- -------- Other income (expense), net....................... (5,053) (3,334) (6,682) (10,938) ------- ------- ------- -------- Income (loss) before income taxes and extraordinary item.............................. 162 (1,248) 3,351 4,613 Income tax expense (benefit) (note 12)................ -- 20 55 (920) ------- ------- ------- -------- Income (loss) before extraordinary item........... 162 (1,268) 3,296 5,533 Extraordinary loss on extinguishment of debt (note 9).................................................. -- -- -- (2,335) ------- ------- ------- -------- Net income (loss)................................. 162 (1,268) 3,296 3,198 Preferred return on special redeemable preferred limited partnership interests (note 10)............. -- -- 1,125 1,104 ------- ------- ------- -------- Net income (loss) available for distribution to partners and shareholders....................... $ 162 $(1,268) $ 2,171 $ 2,094 ======= ======= ======= ========
(Continued) F-4 91 AMERICAN RETIREMENT COMMUNITIES, L.P. COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS CONTINUED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, 1996 ------------ Pro forma earnings data (unaudited) (note 16): Income before income taxes and extraordinary items, as reported.................................................. $4,613 Pro forma income taxes...................................... 820 ------ Pro forma income before extraordinary item................ 3,793 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 ====== Pro forma earnings per common share (note 16): Pro forma income before extraordinary item................ $ 0.40 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 ====== Shares used in computing pro forma income per common share.................................................. 9,375 ======
See accompanying notes to combined and consolidated financial statements. F-5 92 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 AND YEAR ENDED DECEMBER 31, 1996 (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 ======== ======= =======
See accompanying notes to combined and consolidated financial statements. F-6 93 AMERICAN RETIREMENT COMMUNITIES, L.P. COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
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 ------------ ------------ ------------ ------------ Cash flows from operating activities: Net income (loss).................................... $ 162 $(1,268) $ 3,296 $ 3,198 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 Deferred taxes..................................... -- -- -- (920) Extraordinary loss on extinguishment of debt....... -- -- -- 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) Inventory........................................ (67) (6) (21) (56) Prepaid expenses................................. 27 (1,496) 1,894 (105) Other assets..................................... (97) 382 -- 521 Accounts payable................................. 586 381 948 (249) Accrued expenses................................. 1,004 (157) 487 1,130 Tenant deposits.................................. 344 60 279 202 Other long-term liabilities...................... (588) -- (87) (27) -------- ------- ------- -------- Net cash provided (used) by operating activities................................... 3,454 (1,880) 10,888 11,696 -------- ------- ------- -------- Cash flows from (used by) investing activities: Additions to land, building and equipment............ (45,606) (3,237) (6,032) (71,545) Proceeds from (purchases of) assets limited as to use................................................ (904) 17 (2,915) 2,578 Proceeds from the sale of assets..................... 205 6 1,214 1,346 Proceeds from (purchases of) marketable securities... (52) -- (50) -- -------- ------- ------- -------- Net cash provided (used) by investing activities................................... (46,357) (3,214) (7,783) (67,621) -------- ------- ------- --------
(Continued) F-7 94 AMERICAN RETIREMENT COMMUNITIES, L.P. COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (IN THOUSANDS)
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 ------------ ------------ ------------ ------------ Cash flows from financing activities: Contributions from partners.......................... -- 11,000 -- -- Distributions to partners............................ (2,580) (485) (4,659) (6,952) Payment of redeemable preferred interests............ -- -- -- (4,805) Proceeds from issuance of long-term debt............. 48,979 1,636 1,614 73,922 Principal payments on long-term debt................. (2,471) (628) (3,720) (5,479) Expenditures for financing costs..................... (1,535) (130) (346) (1,364) 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 -------- ------- ------- -------- Net increase (decrease) in cash and cash equivalents.................................. (311) 4,937 (4,006) (603) Cash and cash equivalents at beginning of period....... 3,205 2,894 7,831 3,825 -------- ------- ------- -------- Cash and cash equivalents at end of period............. $ 2,894 $ 7,831 $ 3,825 $ 3,222 ======== ======= ======= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest............. $ 4,946 $ 2,381 $ 7,772 $ 11,907 ======== ======= ======= ======== 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 95 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 (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 occurred in 1997. (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. F-9 96 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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. (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 F-10 97 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. F-11 98 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 lender has certain rights, including the right to receive 30% of the net cash flows generated by the two communities, 30% of any proceeds from the sale or refinancing of the two communities in excess of certain defined amounts and the right of first offer with respect to any proposed sale of the two communities. 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, 1995 1996 ------------ ------------ (IN THOUSANDS) Held-to-maturity: U.S. Treasury securities....................... $ 52 $52 Exxon Capital Corporation marketable corporate debt securities............................. 50 -- ---- --- $102 $52 ==== ===
Maturities of marketable securities classified as held-to-maturity was due between one and five years. F-12 99 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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 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, 1995 1996 ------------ ------------ (IN THOUSANDS) Operating expense reserve........................ $ 349 $ 349 Tax escrow account............................... 1,904 285 Capital improvement escrow....................... 890 218 Bond principal and interest escrow............... 617 862 Tenant deposits.................................. 1,292 2,114 Collateral for letter of credit with bank........ 891 801 ------ ------ 5,943 4,629 Less amounts classified as current assets........ 2,411 1,022 ------ ------ Assets limited as to use, excluding amounts classified as current assets................... $3,532 $3,607 ====== ======
(6) LAND, BUILDINGS, AND EQUIPMENT A summary of land, buildings and equipment is as follows:
DECEMBER 31, DECEMBER 31, 1995 1996 ------------ ------------ (IN THOUSANDS) Land............................................. $ 18,326 $ 26,519 Buildings and improvements....................... 132,775 187,239 Furniture, fixtures and equipment................ 8,960 11,512 -------- -------- 160,061 225,270 Less accumulated depreciation.................... 11,141 17,423 -------- -------- 148,920 207,847 Construction in progress......................... 162 5,277 -------- -------- Land, buildings and equipment, net............... $149,082 $213,124 ======== ========
F-13 100 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) OTHER ASSETS Other assets consists of the following:
DECEMBER 31, DECEMBER 31, 1995 1996 ------------ ------------ (IN THOUSANDS) Deferred financing costs, net of accumulated amortization.................................... $2,649 $1,129 Long term investments............................. 435 -- Other............................................. 525 979 ------ ------ $3,609 $2,108 ====== ======
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. 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, 1995 1996 ------------ ------------ (IN THOUSANDS) Property taxes payable............................ $2,454 $2,550 Accrued payroll................................... 628 1,439 Other............................................. 1,360 2,250 ------ ------ $4,442 $6,239 ====== ======
(9) LONG-TERM DEBT A summary of long-term debt is as follows:
DECEMBER 31, DECEMBER 31, 1995 1996 ------------ ------------ (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
F-14 101 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, DECEMBER 31, 1995 1996 ------------ ------------ (IN THOUSANDS) 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 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 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 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 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 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 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
F-15 102 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, DECEMBER 31, 1995 1996 ------------ ------------ (IN THOUSANDS) 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 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 Other long-term debt, generally payable monthly............. 98 410 -------- -------- Total long-term debt...................................... 102,245 170,689 Less current portion...................................... 1,800 8,053 -------- -------- Long-term debt, excluding current portion......... $100,445 $162,636 ======== ========
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. F-16 103 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. (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 -- (964) (17) -- 1)...................................... 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-17 104 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-18 105 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. 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. F-19 106 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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 $27.6 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) In connection with the initial public offering by American Retirement Corporation (New ARC), the Partnership implemented a reorganization with New ARC, such that all of the Partnership's assets and liabilities were contributed to New ARC, a newly formed corporation, in exchange for common stock totaling 7,812,500 shares and a promissory note to the Partnership in the original principal amount approximating $21.9 million. Immediately prior to the initial public offering, which was completed on June 4, 1997, the Partnership distributed its common stock of New ARC to its partners. New ARC sold an additional 3,593,750 shares of its common stock in the initial public offering. Total proceeds to New ARC from the initial public offering were $45.2 million, after underwriting costs. A portion of the proceeds were utilized on June 4, 1997 to repay the approximately $21.9 million promissory note to the Partnership and the Partnership distributed such amount to its limited partners. The Partnership's historical carrying value for assets and liabilities were carried 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 received when the reorganization became effective plus 1,562,500 shares for the approximately $21.9 million promissory note at an offering price of $14.00 per share. F-20 107 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 recorded, as a one-time charge to income, a deferred income tax liability of approximately $10.7 million resulting from the difference between the accounting and tax bases of New ARC's assets and liabilities. F-21 108 AMERICAN RETIREMENT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, 1997 ------------- ASSETS Current assets: Cash and cash equivalents................................. $ 21,863 Assets limited as to use.................................. 3,462 Resident and health care receivables...................... 3,912 Management services receivables........................... 719 Inventory................................................. 419 Prepaid expenses.......................................... 1,011 -------- Total current assets.............................. 31,386 Assets limited as to use, excluding amounts classified as current................................................ 3,183 Land, buildings and equipment, net........................ 207,020 Marketable securities..................................... 52 Other assets.............................................. 4,431 -------- Total assets...................................... $246,072 ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt......................... $ 5,935 Accounts payable.......................................... 3,042 Accrued expenses.......................................... 6,937 -------- Total current liabilities......................... 15,914 Tenant deposits............................................. 4,365 Long-term debt, excluding current portion................... 161,324 Deferred gain on sale-leaseback transactions................ 4,311 Deferred income taxes....................................... 9,807 Other long-term liabilities................................. 229 -------- Total liabilities................................. 195,950 Shareholders' equity: Preferred stock, no par value; 5,000,000 shares authorized, no shares issued and outstanding....................... -- Common stock, $.01 par value; 50,000,000 shares authorized, 11,406,250 shares issued and outstanding... 114 Additional paid-in capital................................ 60,213 Accumulated deficit....................................... (10,205) -------- Total shareholders' equity........................ 50,122 -------- Total liabilities and shareholders' equity........ $246,072 ========
See accompanying notes to condensed consolidated financial statements. F-22 109 AMERICAN RETIREMENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED ------------------------------ JUNE 30, 1996 JUNE 30, 1997 ------------- ------------- Revenues: Resident and health care revenue.......................... $33,888 $43,424 Management services revenue............................... 918 965 ------- ------- Total revenues..................................... 34,806 44,389 Expenses: Community operating expenses.............................. 21,727 27,519 Lease expense (net)....................................... -- 1,072 General and administrative................................ 2,421 4,070 Depreciation and amortization............................. 3,165 3,206 ------- ------- Total operating expenses........................... 27,313 35,867 ------- ------- Income from operations...................................... 7,493 8,522 Other income (expense): Interest expense.......................................... (4,733) (6,611) Interest income........................................... 132 364 Other..................................................... (8) (61) ------- ------- Other income (expense), net............................. (4,609) (6,308) ------- ------- Income before income taxes and extraordinary item....... 2,884 2,214 Income tax expense -- current............................... 92 Income tax expense -- deferred.............................. -- 10,728 ------- ------- Income (loss) before extraordinary item................. 2,884 (8,606) Extraordinary loss on extinguishment of debt................ 2,335 -- ------- ------- Net income (loss)....................................... $ 549 $(8,606) ======= ======= Preferred return on special redeemable preferred limited partnership interests..................................... 714 -- ------- ------- Net income (loss) available for distribution to partners and shareholders..................................... $ (165) $(8,606) ======= ======= Pro forma earnings data: Income before income taxes and extraordinary item, as reported................................................ $ 2,884 $ 2,214 Pro forma income tax expense.............................. 1,096 841 ------- ------- Pro forma income before extraordinary item................ 1,788 1,373 Preferred return on special redeemable preferred partnership interests................................... 714 -- ------- ------- Pro forma income before extraordinary item available for distribution to partners and shareholders............... $ 1,074 $ 1,373 ======= ======= Pro forma earnings per common share: Pro forma income before extraordinary item................ $ 0.19 $ 0.14 Preferred return on special redeemable preferred limited partnership interests................................... 0.08 -- ------- ------- Pro forma income before extraordinary item available for distribution to partners and shareholders............... $ 0.11 $ 0.14 ======= ======= Shares used in computing pro forma earnings per share data.................................................... 9,375 9,752 ======= =======
See accompanying notes to condensed consolidated financial statements. F-23 110 AMERICAN RETIREMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED ------------------------------ JUNE 30, 1996 JUNE 30, 1997 ------------- ------------- Cash flows from operating activities: Net income (loss)......................................... $ 549 $ (8,606) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 3,165 3,206 Deferred income taxes.................................. -- 10,728 Extinguishment of debt................................. 2,335 -- Amortization of deferred gain.......................... -- (102) Increase (decrease), net of acquisitions, in cash due to changes in: Receivables............................................ 190 (1,284) Inventory.............................................. (17) 1 Prepaid expenses....................................... 39 (643) Other assets........................................... (59) (333) Accounts payable....................................... 248 601 Accrued expenses....................................... 1,812 620 Tenant deposits........................................ (17) 502 Other long-term liabilities............................ (74) (28) -------- -------- Net cash provided by operating activities................... 8,171 4,662 Cash flows from investing activities: Additions to land, building and equipment................. (2,125) (10,851) Acquisition of retirement communities..................... (63,184) -- Acquisition of assisted living residences................. -- (11,524) Investments in joint ventures............................. -- (1,030) Proceeds from (purchases of) assets whose use is limit.... 289 (1,987) Proceeds from the maturity of marketable securities....... 50 -- Proceeds from the sale of assets.......................... 437 28,789 -------- -------- Net cash provided (used) by investing activities............ (64,533) 3,397 Cash flows from financing activities: Proceeds from initial public offering, net of expenses.... -- 45,221 Repayment of reorganization note.......................... -- (21,875) Payment of redeemable preferred interests................. (4,805) (5,195) Distributions to partners................................. (3,576) (4,132) Expenditures for financing costs.......................... (341) (32) Proceeds from the issuance of long-term debt.............. 68,948 17,132 Principal payments on long-term debt...................... (826) (20,537) -------- -------- Net cash provided by financing activities................... 59,400 10,582 Net increase in cash and cash equivalents................. 3,038 18,641 -------- -------- Cash and cash equivalents at beginning of period............ 3,825 3,222 -------- -------- Cash and cash equivalents at end of period.................. $ 6,863 $ 21,863 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest.................. $ 3,356 $ 6,268 ======== ========
See accompanying notes to condensed consolidated financial statements. F-24 111 AMERICAN RETIREMENT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 1997 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of American Retirement Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain 1996 amounts have been reclassified to conform with the 1997 presentation. Operating results for the six month period ended June 30, 1997 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1997. Prior to the IPO, the Company's facilities were owned, managed and/or operated by one or more limited partnerships of the Company's predecessor, American Retirement Communities, LP (the "Partnership" or "Predecessor"). As the Company is newly formed, all references to the Company in connection with historical financial data or otherwise include the Predecessor. 2. INITIAL PUBLIC OFFERING On June 4, 1997, the Company completed an IPO of 3,593,750 shares of common stock, the proceeds of which (after underwriting discounts and expenses) amounted to approximately $45.2 million. The Company used approximately $21.9 million of the net proceeds from the IPO to repay the promissory note resulting from the reorganization discussed below. The balance of the net proceeds are being used for working capital purposes, including the development and construction of free-standing assisted living residences and possible acquisitions. 3. FORMATION OF AMERICAN RETIREMENT CORPORATION AND PRO FORMA ADJUSTMENTS The Partnership was reorganized concurrent with the IPO such that all of its assets and liabilities were contributed to the Company in exchange for 7,812,500 shares of common stock and a promissory note for approximately $21.9 million (the "Reorganization"). (a) Pro Forma Earnings Data: The pro forma adjustment reflected on the statements of operations provides for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, assuming the Partnership was subject to taxes. (b) Pro Forma Earnings per Share: Pro forma 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 shares received as a result of the Reorganization plus 1,562,500 shares for the approximate $21.9 million promissory note. (c) Tax Expense Charge to Income: At the time of the Reorganization and as a result of the conversion from a limited partnership to a corporation, the Company recorded as a one-time charge to income a net deferred income tax expense of approximately $10.7 million resulting from the difference between the accounting and tax bases of the new corporation's assets and liabilities. F-25 112 AMERICAN RETIREMENT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. EQUITY The following table summarizes the Company's equity transactions for the six months ended June 30, 1997:
ADDITIONAL PARTNERS' COMMON PAID-IN RETAINED EQUITY STOCK CAPITAL EARNINGS TOTAL --------- ------ ---------- --------- ------- Balance at December 31, 1996....... $ 37,882 $37,882 Net income (loss).................. 1,599 (10,205) (8,606) Partner distributions.............. (2,500) (2,500) Reorganization Note................ (21,875) (21,875) Transfer of partnership equity for 7,812,500 shares of common stock............................ (15,106) 78 15,028 0 Net proceeds from issuance of 3,593,750 shares of common stock............................ 36 45,185 45,221 -------- ---- ------- -------- ------- Balance at June 30, 1997........... $ -- $114 $60,213 $(10,205) $50,122 ======== ==== ======= ======== =======
5. INCOME TAXES The total provision for income taxes for the quarter ended June 30, 1997 was $10.8 million consisting of current income tax expense of $.1 million and deferred tax expense of $10.7 million. The deferred tax expense includes an increase in deferred income tax liabilities of $12.2 million primarily related to the Reorganization. The increase in deferred income tax liabilities is partially offset by an increase in deferred income tax assets of $2.3 million, also related primarily to the Reorganization. The Company believes that it is more likely than not that the benefits of the deferred income tax assets will be realized. Accordingly, the Company has not established a valuation allowance against the deferred tax assets. The net deferred income tax liability as of June 30, 1997 was $9.8 million. 6. ACQUISITIONS In May 1997, the Company acquired assisted living residences in Tarpon Springs, Florida and Corpus Christi, Texas and a leasehold interest in an assisted living residence in Victoria, Texas. The total consideration was approximately $11.5 million, of which approximately $8.2 million was financed through mortgage loans and the remaining $3.3 million was paid in cash. 7. RECENTLY ISSUED ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128 , "Earnings Per Share". This statement establishes and simplifies standards for computing and presenting earnings per share. SFAS No. 128 will be effective beginning with the Company's quarter ended December 31, 1997 and requires the restatement of all previously reported earnings per share data that are presented. Early adoption of SFAS No. 128 is not permitted. SFAS No. 128 replaces primary and fully diluted earnings per share. There will be no impact on the calculation of basic earnings per share for the quarters ended June 30, 1997 and 1996. Diluted earnings per share is not expected to differ materially from basic earnings per share. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". The statement establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise F-26 113 AMERICAN RETIREMENT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distribution to owners. SFAS No. 130 will be effective for the Company's fiscal year ending December 31, 1998. Adoption of SFAS No. 130 is not expected to significantly impact the Company's financial position or results of operations, including the required comparative presentation for prior periods. In June 1997, the FASB also issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" which supersedes SFAS No. 14. This statement changes the way that public business enterprises report segment information, including financial and descriptive information about their operating segments, in annual financial statements and would require that those enterprises report selected segment information in interim financial reports to shareholders. Operating segments are defined as revenue-producing components of the enterprise which are generally used internally for evaluating segment performance. SFAS No. 131 will be effective for the Company beginning with the Company's first quarter of 1998. Adoption of SFAS No. 131 will not impact the Company's financial position or results of operations. F-27 114 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-28 115 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-29 116 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-30 117 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-31 118 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-32 119 ====================================================== 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 THE 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......................... 9 The Company.......................... 17 Use of Proceeds...................... 18 Price Range of Common Stock.......... 19 Dividend Policy and Prior Distributions...................... 19 Capitalization....................... 20 Unaudited Pro Forma Condensed Combined Financial Information..... 21 Selected Combined and Consolidated Financial Data..................... 26 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 29 Business............................. 41 Management........................... 60 Principal Shareholders............... 68 Certain Transactions................. 69 Description of Debentures............ 73 Description of Capital Stock......... 80 Underwriting......................... 84 Legal Matters........................ 85 Experts.............................. 85 Available Information................ 85 Index to Consolidated Financial Statements......................... F-1
====================================================== ====================================================== $100,000,000 [AMERICAN RETIREMENT CORPORATION LOGO] % CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002 ------------------------ PROSPECTUS ------------------------ SCHRODER & CO. INC. , 1997 ====================================================== 120 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........................................ $ 34,849 NASD fee.................................................... 12,000 Accounting fees and expenses................................ 30,000 Legal fees and expenses..................................... 85,000 Printing and engraving expenses............................. 85,000 Blue sky fees and expenses.................................. 2,500 Trustee fees and expenses................................... 9,500 Miscellaneous fees and expenses............................. 141,151 -------- Total............................................. $400,000 ========
- --------------- * To be completed by amendment. 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. II-1 121 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. 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 other than the 3,593,750 shares sold by the Company in its initial public offering in May 1997 (the "IPO") were distributed to the Registrant's shareholders immediately prior to the effectiveness of the IPO 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 were 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 the Company's registration statement in connection with the IPO to organize the Registrant and liquidate the limited partnership, subject only to the effectiveness of the IPO. The Registrant believes that the distribution of shares of Common Stock by the affiliated limited partnership was 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) 4.3 -- Form of Indenture between the Company and IBJ Schroder Bank and Trust Company, as Trustee 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*
II-2 122
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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.* 10.27 -- Letter of Intent, dated February 24, 1997, by Nationwide Health Properties, Inc. to American Retirement Corporation* 12 -- Statements re Computation of Ratios** 21 -- Subsidiaries of the Registrant* 23.1 -- Consent of KPMG Peat Marwick LLP 23.2 -- Consent of Bass, Berry & Sims PLC (included in Exhibit 5) 24 -- Power of Attorney** 25 -- Statement of Eligibility of Trustee**
- --------------- * Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 333-23197). ** Previously filed. II-3 123 (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. 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 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-4 124 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 September 22, 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 September 22, 1997 - ----------------------------------------------------- Executive Officer W.E. Sheriff (Principal Executive Officer) /s/ GEORGE T. HICKS Executive Vice September 22, 1997 - ----------------------------------------------------- President -- Finance, George T. Hicks Chief Financial Officer (Principal Financial and Accounting Officer) * Director September 22, 1997 - ----------------------------------------------------- H. Lee Barfield II * Director September 22, 1997 - ----------------------------------------------------- Jack O. Bovender, Jr. * Director September 22, 1997 - ----------------------------------------------------- Frank M. Bumstead * Director September 22, 1997 - ----------------------------------------------------- Robin G. Costa * Director September 22, 1997 - ----------------------------------------------------- Clarence Edmonds * Director September 22, 1997 - ----------------------------------------------------- John A. Morris, Jr., M.D. * Director September 22, 1997 - ----------------------------------------------------- Daniel K. O'Connell * Director September 22, 1997 - ----------------------------------------------------- Nadine C. Smith * Director September 22, 1997 - ----------------------------------------------------- Lawrence J. Stuesser * /s/ GEORGE T. HICKS - ----------------------------------------------------- George T. Hicks, Attorney-in-Fact
II-5 125 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-1 126 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) 4.3 -- Form of Indenture between the Company and IBJ Schroder Bank and Trust Company, as Trustee 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*
127
EXHIBIT NUMBER DESCRIPTION - ------- ----------- -- Senior Promissory Note, dated May 7, 1996, by 10.21 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* 12 -- Statements re Computation of Ratios** 21 -- Subsidiaries of the Registrant* 23.1 -- Consent of KPMG Peat Marwick LLP 23.2 -- Consent of Bass, Berry & Sims PLC (included in Exhibit 5) 24 -- Power of Attorney** 25 -- Statement of Eligibility of Trustee**
- --------------- * Previously filed. ** Previously filed. EX-1 2 UNDERWRITERS AGREEMENT 1 ___% Convertible Subordinated Debentures Due 2002 UNDERWRITING AGREEMENT New York, New York September __, 1997 SCHRODER & CO. INC. As Underwriter Equitable Center 787 Seventh Avenue New York, New York 10019-6016 Ladies and Gentlemen: AMERICAN RETIREMENT CORPORATION, a Tennessee corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to you, as underwriter (the "Underwriter"), $100,000,000 aggregate principal amount of its ___% Convertible Subordinated Debentures Due 2002 (the "Firm Securities"). In addition, the Company proposes to grant to you an option to purchase up to an additional $15,000,000 principal amount of such debentures (the "Option Securities"), on the terms and for the purposes set forth in Section 2 hereof. The Firm Securities and the Option Securities are herein collectively referred to as the "Securities." 1. The Company represents and warrants to, and agrees with, you that: (a) A registration statement on Form S-1 (Registration No. 333-34339) relating to the Securities, including a preliminary prospectus relating to the Securities 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 Securities, 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 Underwriter. If such registration statement has not become effective, a further amendment to such registration statement, including a form of 2 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 Securities 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 Securities 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 Securities included in the Registration Statement at the Effective Date. (b) On the date that any Preliminary Prospectus was filed with the Commission, the date the Prospectus is first filed with the Commission pursuant to Rule 424(b) (if required), on the Closing Date and any 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 in all material respects with all applicable provisions of the Act, the Rules and Regulations, and the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and the rules and regulations of the Commission thereunder, including containing 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 the Underwriter furnished in writing to the Company by the Underwriter specifically for inclusion in the Registration Statement or Prospectus or any amendment or supplement thereto, it being understood that such information includes the 2 3 last paragraph on the cover page, the paragraph at the bottom of the inside cover page, and the information in the third and eighth paragraphs under the caption "Underwriting" in the Prospectus. 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 Securities, will not distribute, any offering material in connection with the offering or sale of the Securities other than the Registration Statement, the Preliminary Prospectus, the Prospectus or any other materials, if any, permitted by the Act. (c) The indenture, including any amendments and supplements thereto, pursuant to which the Securities will be issued (the "Indenture"), will conform in all material respects with the requirements of the Trust Indenture Act and the rules and regulations of the Commission thereunder. (d) Set forth on Exhibit A attached hereto is a list of each entity that is directly or indirectly wholly-owned by the Company (collectively, the "Subsidiaries"). Each of the Company 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 its state of organization. Each of the Company 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). Each of the Company 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 except for jurisdictions in which the failure to be so licensed or qualified would not have a material adverse effect on the business, properties, condition (financial or otherwise), net worth, or results of operations of the Company and the Subsidiaries, taken as a whole. The Company, directly or indirectly, beneficially owns all of the outstanding equity interests in each of the Subsidiaries, free and clear of all liens, security interests, restriction, pledges, encumbrances, charges, equities, claims, easements, assessments and tenancies (collectively, "Encumbrances"), except as set forth in the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus). Except with respect to the Subsidiaries 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 charter and the bylaws or partnership agreement or operating agreement of the 3 4 Company and each Subsidiary and all amendments thereto have been delivered to the Underwriter, 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. (e) 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 Company has, and, upon completion of the sale of the Securities, 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 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 material 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. (f) The combined and consolidated financial statements and the related notes and schedules of the Company, the Predecessor (as defined in the Registration Statement) and the Predecessor Entities (as defined in the Registration Statement) 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, in all material respects, the financial condition of the Company, the Predecessor and the Predecessor Entities as of the dates indicated and the combined and consolidated results of operations, changes in partners' and shareholders' equity and cash flows of the Company, the Predecessor and the Predecessor Entities 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 Charlotte 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, in all material respects, 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, except as otherwise disclosed therein. The selected financial data of the Company, the Predecessor and the Predecessor Entities set forth under the captions "Prospectus Summary--Summary Combined and Consolidated Financial and Other Data" and "Selected 4 5 Combined and Consolidated 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 the Company, the Predecessor 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, the Predecessor, the Predecessor Entities, 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, the Predecessor, the Predecessor Entities, the Subsidiaries and the Carriage Clubs as required by the Act and the Rules and Regulations. (g) Each of the Company and the Subsidiaries maintains a system of internal accounting control sufficient to provide reasonable assurance that (i) 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. (h) 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 any change in the capitalization of the Company or any material adverse change in the business, properties, condition (financial or otherwise), net worth or results of operations of the Company and the Subsidiaries, taken as a whole, arising for any reason whatsoever, (ii) none of the Company or any Subsidiary has incurred, nor will any of them have incurred any material liabilities or obligations, direct or contingent, (iii) none of the Company or any Subsidiary has entered into, nor will any of them have entered into any material transactions, other than pursuant to this Agreement, and (iv) none of the Company or any of the Subsidiaries has paid or declared any dividends or other distributions of any kind on any class of its capital stock, partnership interests or other equity securities. (i) Each of the Company and the Subsidiaries has good, marketable 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 5 6 Prospectus) as owned by them or by the Company (collectively, the "Owned 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), and except such Encumbrances that do not materially interfere with the use made of such properties. Each of the Company and 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). 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 knowledge of the Company, threatened condemnation, zoning change, environmental or other proceeding or action that will in any material respect adversely affect the business, properties, condition (financial or otherwise), net worth or results of operations of the Company and the Subsidiaries, taken as a whole. (j) 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. (k) 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"). (l) 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, any Subsidiary, 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 could be reasonably expected to adversely affect the business, properties, condition (financial or otherwise), net worth or results of operations of the Company and the Subsidiaries, taken as a whole. (m) 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 and the Subsidiaries has, and at the Closing Date and the Option Closing Date (if any) 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, condition (financial or otherwise), net worth or 6 7 results of operations of the Company and the Subsidiaries, taken as a whole. Each of the Company and the Subsidiaries has complied, and at the Closing Date and the Option Closing Date (if any) 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 or any Subsidiary is, and, at the Closing Date and the Option Closing Date (if any), 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 a party or by which any of their respective properties is bound or affected, which default would individually or in the aggregate have a material adverse effect on the business, properties, 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 or the Option Closing Date (if any), will be, in default in any material respect thereunder. There are no governmental proceedings or actions pending or threatened for the purpose of suspending, modifying or revoking any License held by the Company 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 or any Subsidiary is in violation of any provision of its charter or bylaws or partnership agreement or other governing instrument. (n) 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 in connection with the issuance and sale of the Securities 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 Underwriter of the Securities to be sold by the Company. (o) The Company has full corporate power and authority to enter into this Agreement and to carry out all the terms and provisions hereof 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. 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 consummation of the transactions contemplated hereby 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 or any Subsidiary pursuant to the 7 8 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 charter or bylaws or the partnership agreement or other organizational document of the Company or any Subsidiary, or (ii) any material contract or other material 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 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 or any Subsidiary. The Company has full corporate power and authority to authorize, issue, offer and sell the Securities, as contemplated by this Agreement, free of any preemptive rights. The offer, issuance and sale by the Company of all shares of its common stock, par value $0.01 per share (the "Common Stock"), prior to the date hereof complied with or was exempt from the registration requirements of the Act and applicable state securities laws. (p) 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 a party that are material to the operation of the business of the Company, 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. (q) 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 Securities or otherwise. (r) 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. (s) The Securities have been approved for listing on the New York Stock Exchange (the "NYSE"), subject only to notice of issuance. (t) No material labor dispute with the employees of the Company or with the employees of any Subsidiary exists or is threatened or imminent. (u) 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 8 9 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. (v) None of the Company or any Subsidiary, nor, to the Company's best knowledge, any employee or agent of the Company or any Subsidiary, has made any payment of funds of the Company or any Subsidiary or received or retained any funds of the Company or any Subsidiary 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). (w) The Company is 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 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 as and when such coverage expires. (x) The business, operations and facilities of the Company and each Subsidiary have been and are being conducted in compliance in all material respects 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, 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 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, 9 10 properties, condition (financial or otherwise), net worth or results of operations of the Company and the Subsidiaries, taken as a whole. (y) Each of the Company and the Subsidiaries 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. (z) The Company and each of its executive officers and directors has delivered to the Underwriter an agreement in the form set forth as Exhibit B hereto to the effect that it, he or she will not, for a period of 90 days after the date hereof, without the prior written consent of the Underwriter, 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. (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 any acquisitions). (aa) Each certificate signed by any officer of the Company and delivered to the Underwriter or counsel for the Underwriter shall be deemed to be a representation and warranty by the Company to the Underwriter as to the matters covered thereby. (bb) The Securities have been duly and validly authorized and the Securities, when the Indenture has been duly executed and delivered by the Company and the Trustee (assuming the due authorization, execution and delivery of the Indenture by the Trustee) and when the Securities have been authenticated by the Trustee and issued, executed, delivered and sold by the Company in accordance with this Agreement and the Indenture, will have been duly and validly executed, authenticated, issued and delivered and will (i) constitute valid and legally binding obligations of the Company enforceable against the Company in accordance with their terms and entitled to the benefits provided in the Indenture, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general principles of equity, and (ii) be convertible into shares of Common Stock (the "Conversion Shares") in accordance with the terms of the Indenture. The Conversion Shares have been duly and validly authorized and reserved for issuance upon conversion of the Securities and, when issued and delivered upon such conversion, will be duly and validly issued and outstanding, fully paid and nonassessable and will not have been issued in violation of or subject to any preemptive or other similar rights. The Securities and the Conversion Shares, when issued, will conform to the respective descriptions thereof set forth in the Prospectus. 10 11 (cc) The Indenture has been duly and validly authorized by the Company and, when duly executed and delivered by the Company and the Trustee (assuming the due authorization, execution and delivery of the Indenture by the Trustee), will constitute a valid and legally binding instrument of the Company, enforceable against the Company in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general principles of equity. The Indenture will conform to the description thereof set forth in the Prospectus. 2. Subject to the terms and conditions herein set forth, the Company agrees to sell to you, and you agree to purchase, $100,000,000 aggregate principal amount of Firm Securities at a purchase price equal to 97.5% of the principal amount thereof, plus accrued interest, if any, from September __, 1997 to the Firm Securities Delivery Date (as defined herein). In addition, subject to the terms and conditions herein set forth, the Company agrees to sell to you, as required (for the sole purpose of covering over-allotments in the sale of the Firm Securities), up to $15,000,000 principal amount of Option Securities at a purchase price equal to 97.5% of the principal amount thereof, plus accrued interest, if any, from September __, 1997 to the Option Securities Delivery Date (as defined herein). The right to purchase the Option Securities may be exercised by your giving 48 hours' prior written or telephonic notice (subsequently confirmed in writing) to the Company of your determination to purchase all or a portion of the Option Securities. Such notice may be given at any time within a period of 30 days following the date of this Agreement. No Option Securities shall be delivered to or for the accounts of the Underwriter unless the Firm Securities shall be simultaneously delivered or shall theretofore have been delivered as herein provided. 3. The Underwriter proposes to offer the Securities for sale to the public at the "Price to Public" set forth on the cover page of the Prospectus and upon the other terms and conditions set forth in the Prospectus. 4. The Firm Securities, in definitive form, to be purchased by the Underwriter hereunder shall be delivered by or on behalf of the Company to you for your account, against payment by you of the purchase price therefor by wire transfer of immediately available funds to an account designated by the Company, at the office of Stroock & Stroock & Lavan LLP, New York, New York, at 9:30 A.M., New York City time, on September __, 1997, or at such other time, date and place as you and the Company may agree upon in writing, such time and date being herein called the "Firm Securities Delivery Date." The Option Securities, in definitive form, to be purchased by the Underwriter hereunder shall be delivered by or on behalf of the Company to you for your account against payment by you of the purchase price thereof by wire transfer of immediately available funds to an account designated by the Company, in New York, New York, at such time and on such date (not earlier than the Firm Securities Delivery Date nor later than ten business days after giving of 11 12 the notice delivered by you to the Company with reference thereto) and in such denominations and registered in such names as shall be specified in the notice delivered by you to the Company with respect to the purchase of such Option Securities. The date and time of such delivery and payment are herein sometimes referred to as the "Option Securities Delivery Date" (and either of the Option Securities Delivery Date or the Firm Securities Delivery Date may be referred to herein as a "Delivery Date"). The Firm Securities and the Option Securities so to be delivered will be in good delivery form, and in such denominations and registered in such names as you may request not less than 48 hours prior to the applicable Delivery Date, respectively. Such Securities will be made available for checking and packaging in New York, New York, at least 24 hours prior to the applicable Delivery Date. 5. The Company covenants and agrees with the Underwriter: (a) 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 Debentures 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 Underwriter within a reasonable period of time prior to the filing thereof and the Underwriter shall not have objected thereto in good faith. (b) 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 Underwriter 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 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(b) 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 Underwriter and will file such Prospectus pursuant to Rule 424(b) under the Act not later than the 12 13 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 Underwriter promptly of all such filings. (c) If, at any time when a Prospectus relating to the Debentures 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 Underwriter 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. (d) To make generally available to its shareholders as soon as practicable, but in any event not later than 90 days after the close of the period covered thereby, an earnings statement in form complying with the provisions of Section 11(a) of the Act covering a period of 12 consecutive months beginning not later than the first day of the Company's fiscal quarter next following the Effective Date. (e) To file on a timely basis all documents required to be filed with the Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act subsequent to the Effective Date and during any period when the Prospectus is required to be delivered. (f) The Company will comply with all the provisions of all undertakings contained in the Registration Statement. (g) During the period of three years commencing on the Effective Date, the Company will furnish to the Underwriter, upon request, a copy 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 the Underwriter, upon request, a copy of each annual or other report it shall be required to file with the Commission or the NYSE; and (ii) such additional information concerning, the business and financial condition of the Company as you may from time to time reasonably request in connection with your obligations hereunder. 13 14 (h) To apply the net proceeds from the sale of the Securities in the manner set forth in the Prospectus under the caption "Use of Proceeds." (i) That it will not take, directly or indirectly, any action designed to cause or result in, or that might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (j) The Company will not for a period of 90 days after the date hereof, without your prior written consent, 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 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 any acquisitions). (k) That it has caused the Securities and the Conversion Shares to be authorized for quotation on the NYSE upon notice of issuance. 6. The Company covenants and agrees with you that the Company will pay or cause to be paid: (i) the fees, disbursements and expenses of counsel and accountants for the Company, and all other expenses, in connection with the preparation, printing and filing of the Registration Statement and the Prospectus and any amendments and supplements thereto and the furnishing of copies thereof, including charges for mailing, air freight and delivery and counting and packaging thereof and of any Preliminary Prospectus and related offering documents to the Underwriter and dealers; (ii) the cost of printing this Agreement, communications with the Underwriter and selling group and the Preliminary and Supplemental Blue Sky Memoranda and any other documents in connection with the offering, purchase, sale and delivery of the Securities; (iii) all expenses in connection with the exemption of the Securities for offering and sale under securities laws as provided in Section 5(b) hereof, including the fees, disbursements and expenses for counsel for the Underwriter in connection with such exemption and in connection with Blue Sky surveys or similar advice with respect to sales; (iv) the filing fees (but not the fees and disbursements of counsel for the Underwriter) in connection with securing any required review by the National Association of Securities 14 15 Dealers, Inc. of the terms of the sale of the Securities; (v) all fees and expenses in connection with the quotation of the Securities and the Conversion Shares on the NYSE; and (vi) all other costs and expenses incident to the performance of the Company's obligations hereunder that are not otherwise specifically provided for in this Section 6, including the fees of the Company's Transfer Agent and Registrar, the Trustee under the Indenture, the cost of the Company's personnel and other internal costs, the cost of printing and engraving the certificates representing the Securities and all expenses and taxes incident to the sale and delivery of the Securities to be sold by the Company to the Underwriter hereunder. It is understood, however, that, except as provided in this Section, Section 8 and Section 11 hereof, the Underwriter will pay all of it own costs and expenses, including the fees of its counsel, stock transfer taxes on the resale of any of the Securities by it, and any advertising expenses connected with any offers that it may make. 7. The obligations of the Underwriter hereunder shall be subject, in its discretion, to (i) the condition that all representations and warranties and other statements of the Company herein are true and correct in all material respects, when made and on each Delivery Date, (ii) the condition that the Company shall have performed all its obligations hereunder theretofore to be performed and (iii) the following additional conditions: (a) The Registration Statement shall have become effective, and you shall have received notice thereof not later than 10:00 P.M., New York City time, on the date of execution of this Agreement, or at such other time as you and the Company may agree and the Prospectus shall have been filed with the Commission in the manner and within the time period required by Rule 424(b). (b) (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 exemption of the Securities 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 Underwriter and the Underwriter did not object thereto in good faith, and the Underwriter 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 15 16 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). (c) You shall not have advised the Company that the Registration Statement or Prospectus, or any amendment or supplement thereto, contains an untrue statement of fact or omits to state a fact which in your judgment is in either case material and in the case of an omission is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (d) Bass, Berry & Sims PLC, counsel to the Company, shall have furnished to you their written opinion, dated such Delivery Date, in form and substance satisfactory to you, to the effect that: (i) Each of the Company and the Subsidiaries (A) has been duly incorporated or organized and is a validly existing corporation, partnership or limited liability company, to the extent applicable, in good standing under the laws of its jurisdiction of incorporation or organization 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 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 requires such qualification and (y) in which it owns or leases property; (ii) To the knowledge of such counsel, 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 and except as set forth in the Registration Statement; (iii) The Indenture has been duly authorized, executed and delivered by the Company and duly qualified under the Trust Indenture Act and, assuming due authorization, execution and delivery by the Trustee, is a valid and legally binding instrument of the Company, enforceable against the Company in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and except as rights to indemnity and contribution may be limited by federal and state securities laws or the public policy underlying such laws; (iv) The Securities have been validly authorized, duly executed by authorized officers of the Company, and assuming the due authentication and delivery of the Securities by the Trustee, 16 17 are the validly issued, outstanding and legally binding obligations of the Company, entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization moratorium and other similar laws relating to or affecting creditors' rights generally, and general equitable principles (whether considered in a proceeding in equity or at law); (v) The Company has authorized capital stock as set forth in the Prospectus and all of the authorized Common Stock, including the Conversion Shares, have been duly authorized, all of the Conversion Shares have been duly reserved for issuance upon such conversion, and all of the issued and outstanding shares of Common Stock are, and all the Conversion Shares, when issued pursuant to the Indenture, will be, validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership thereof; all of the outstanding shares of Common Stock were issued and sold in compliance with all applicable Federal and state securities laws; except as described in the Prospectus and except with respect to existing stock incentive or stock purchase plans and the Company's proposed dividend reinvestment plan, to the knowledge of such counsel, there are no outstanding options, warrants or other rights calling for the issuance of, and there are no commitments, plans or arrangements to issue any shares of capital stock of the Company; (vi) To the best of such counsel's knowledge, except as set forth in the Prospectus, there are no legal or governmental proceedings pending or threatened to which the Company or any Subsidiary is a party or of which any property of the Company or any Subsidiary is the subject which, if resolved against the Company or any Subsidiary, individually, or to the extent involving related claims or issues, in the aggregate, is of a character required to be disclosed in the Prospectus; (vii) This Agreement has been duly authorized, executed and delivered by the Company and is a legal, valid and binding agreement of the Company subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization moratorium and other similar laws relating to or affecting creditors' rights generally, and general equitable principles (whether considered in a proceeding in equity or at law); (viii) The Company has full corporate power and authority to execute, deliver and perform this Agreement and the Indenture, and the execution, delivery and performance of this Agreement and the Indenture, the consummation of the transactions herein and therein contemplated and the compliance by the Company with all the provisions of this Agreement, the Indenture and the Securities will not conflict with, or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge, claim or encumbrance upon any of the property or assets of 17 18 the Company or any Subsidiary pursuant to, the terms of any material contract or other agreement known to such counsel to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary is bound or to which any of the respective property or assets of the Company or any Subsidiary is subject, nor will such action result in any violation of the provisions of the charter or bylaws or partnership agreement or operating agreement, in each case as amended, of the Company or any Subsidiary, any statute or any rule or regulation known to such counsel of any Governmental Body having jurisdiction over the Company or any Subsidiary or any of their respective properties or the terms of any judgment, decree or order, known to such counsel, of any arbitrator or Governmental Body having such jurisdiction; (ix) No consent, approval, authorization, order, registration or qualification of or with any court or any regulatory authority or other governmental body is required for the consummation of the transactions contemplated by this Agreement and the Indenture, except such as have been obtained under the Act or may be required by the NASD, and such consents, approvals, authorizations, registrations or qualifications as may be required under state or foreign securities or Blue Sky laws in connection with the purchase and distribution of the Securities by the Underwriter; (x) To the best of such counsel's knowledge, neither the Company nor any Subsidiary is currently in violation of its charter or bylaws, partnership agreement or operating agreement, in each case as amended to the date hereof, or in material default under any indenture, mortgage, deed of trust, lease, bank loan or credit agreement or any other agreement or instrument of which such counsel has knowledge to which the Company or any Subsidiary is a party or by which any of them or any of their respective property may be bound or affected; (xi) There are no preemptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any Securities or Common Stock issuable upon conversion thereof, pursuant to the Company's Charter or Bylaws, in each case as amended to the date hereof, or any agreement or other instrument known to such counsel; and no holders of securities of the Company have rights to the registration thereof under the Registration Statement; (xii) To the extent summarized therein, all contracts and agreements summarized in the Registration Statement and the Prospectus are fairly summarized therein, conform in all material respects to the descriptions thereof contained therein, and, to the extent such contracts or agreements or any other material agreements are required under the Act or the rules and regulations thereunder to be filed or incorporated by reference therein as exhibits to the Registration Statement, they are so filed or incorporated by reference; and such 18 19 counsel does not know of any contracts or other documents required to be summarized or disclosed in the Prospectus or to be so filed or incorporated by reference as an exhibit to the Registration Statement, which have not been so summarized or disclosed, or so filed or incorporated by reference; (xiii) All descriptions in the Prospectus of legal or governmental proceedings are fair summaries thereof and fairly present the information required to be shown with respect to such matters; (xiv) The Registration Statement has become effective under the Act, the Prospectus has been filed in accordance with Rule 424(b) of the rules and regulations of the Commission under the Act, including the applicable time periods set forth therein, or such filing is not required and, to the best knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act, and the Registration Statement, the Prospectus and each amendment or supplement thereto, as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the Act, the Trust Indenture Act and the rules and regulations thereunder, it being understood that such counsel need express no opinion as to the financial statements and schedules or other financial data contained in the Registration Statement or the Prospectus; (xv) The Securities, the Indenture and the Common Stock conform as to legal matters, in all material respects, to the statements concerning them in the Registration Statement and the Prospectus; (xvi) 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; and (xvii) The Securities have been duly authorized for listing on the NYSE, subject only to official notice of issuance. 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 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 (xiv) above) and, except as stated in the foregoing opinion, without assuming 19 20 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, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need not express any opinion with respect to the financial statements, schedules and other financial and statistical 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 the laws of any State other than Tennessee (to the extent satisfactory in form and scope to counsel for the Underwriter) such counsel may rely upon the opinion of local counsel to the Company. The foregoing opinion shall also state that the Underwriter is justified in relying upon such opinion of local counsel, and copies of such opinion shall be delivered to the Underwriter and counsel for the Underwriter. (f) Stroock & Stroock & Lavan LLP, counsel to the Underwriter, shall have furnished to you their written opinion or opinions, dated such Delivery Date, in form and substance satisfactory to you, with respect to the incorporation of the Company, the validity of the Securities, the Registration Statement, the Prospectus and other related matters as you may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters. 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. (g) With respect to the letter of KPMG Peat Marwick LLP delivered to you concurrently with the execution of this Agreement (the "initial letter"), the Company shall have furnished to the Underwriter a letter (as used in this paragraph, the "bring-down letter") of such accountants, addressed to the Underwriter and dated such Delivery Date (i) confirming that they are independent public accountants within the meaning of the Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date of the bring-down letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date of the bring-down letter), the conclusions and findings of such firm with respect to the financial information and other matters covered by the initial letter and (iii) confirming in all material respects the conclusions and findings set forth in the initial letter. 20 21 (h) Neither the Company nor any Subsidiary shall have sustained since the date as of which information is given in the Prospectus, any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree; and since the respective dates as of which information is given in the Prospectus, there shall not have been any change in the capital stock (other than shares issued pursuant to the exercise of stock options or pursuant to the terms of the Securities) or short-term debt or long-term debt of the Company or any Subsidiary nor any change or any development involving a prospective change, in or affecting the general affairs, management, financial position, shareholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case, is in your judgment so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Securities on the terms and in the manner contemplated in the Prospectus. (i) Between the date hereof and such Delivery Date there shall have been no declaration of war by the Government of the United States; on such Delivery Date there shall not have occurred any material adverse change in the financial or securities markets in the United States or in political, financial or economic conditions in the United States or any outbreak or material escalation of hostilities or other calamity or crisis, the effect of which is such as to make it, in the judgment of the Underwriter, impracticable to market the Securities or to enforce contracts for the resale of Securities and no event shall have occurred resulting in (i) trading in securities generally on the NYSE or in the Common Stock on the NYSE being suspended or limited or minimum or maximum prices being generally established on the NYSE, or (ii) additional material governmental restrictions, not in force on the date of this Agreement, being imposed upon trading in securities generally by the NYSE or in the Common Stock on the NYSE or by order of the Commission or any court or other governmental authority, or (iii) a general banking moratorium being declared by either Federal or New York authorities. (j) At the Closing Date and, as to the Option Securities, the Option Closing Date, there shall be furnished to the Underwriter 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 reasonably satisfactory to the Underwriter, to the effect that: (i) 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 21 22 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; (ii) 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 (iii) 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 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. (k) The Company shall have delivered to you evidence that the Securities and the Conversion Shares have been authorized for quotation on the NYSE upon notice of issuance. 8. (a) The Company will indemnify and hold you harmless for any losses, claims, damages or liabilities to which you may become subject, under the Act 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 any amendment or supplement thereto, or filed with the Commission or any securities association or securities exchange (each, an "Application"), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements made therein not misleading, (ii) any untrue statement or alleged untrue statement made by the Company in Section 1 of this Agreement, or (iii) the employment by the Company of any device, scheme or artifice to defraud, or the engaging by the Company in any act, practice or course of business which operates or would operate as a fraud or deceit, or any conspiracy with respect thereto, in which the Company shall participate, in connection with the issuance and sale of any of the Securities, and will reimburse you for any legal or other expenses reasonably incurred by you in connection with investigating, preparing to defend, defending or appearing as a third-party witness in connection with any such action or claim; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission relating to you made in any Preliminary Prospectus, the Registration Statement, or the Prospectus or such amendment or supplement or any Application in reliance upon and in conformity with written information furnished to the Company by you expressly for use therein; and provided, further, that, the indemnity agreement contained in this Section 8(a) with respect to any 22 23 Preliminary Prospectus shall not inure to your benefit (or any persons controlling you) on account of any losses, claims, damages, liabilities or litigation arising from the sale of Securities to any person, if you fail to send or give a copy of the Prospectus, as the same may be then supplemented or amended, to such person, within the time required by the Act and the untrue statement or alleged untrue statement or omission or alleged omission to state a material fact contained in such Preliminary Prospectus was corrected in the Prospectus, unless such failure is the result of noncompliance by the Company with Section 5(b) hereof. (b) The Underwriter will indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or any Application, or arise out of or are based upon the omission or alleged omission to state therein 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 any Preliminary Prospectus, the Registration Statement, the Prospectus or such amendment or supplement or any Application in reliance upon and in conformity with written information furnished to the Company by you relating to you expressly for use therein, and will reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim. The indemnity agreement in this Section 8(b) shall be in addition to any liability which you may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and to each person, if any, who controls the Company within the meaning of the Act or the Exchange Act. (c) Promptly after receipt by an indemnified party under Section 8(a) or 8(b) of notice of the commencement of any action (including any governmental investigation), such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party under Section 8(a) or 8(b) except to the extent it was unaware of such action and has been prejudiced in any material respect by such failure or from any liability which it may have to any indemnified party otherwise than under such Section 8(a) or 8(b). In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party 23 24 similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. If, however, (i) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party or (ii) an indemnified party shall have reasonably concluded that representation of such indemnified party and the indemnifying party by the same counsel would be inappropriate under applicable standards of professional conduct due to actual or potential differing interests between them and the indemnified party so notifies the indemnifying party, then the indemnified party shall be entitled to employ counsel different from counsel for the indemnifying party at the expense of the indemnifying party and the indemnifying party shall not have the right to assume the defense of such indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to local counsel) for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same set of allegations or circumstances. The counsel with respect to which fees and expenses shall be so reimbursed shall be designated in writing by Schroder & Co. Inc. in the case of parties indemnified pursuant to Section 8(a) and by the Company in the case of parties indemnified pursuant to Section 8(b). If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel to which such indemnified party is entitled under Section 8(a) or 8(b), the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (d) In order to provide for you just and equitable contribution under the Act in any case in which (i) the Underwriter (or any person who controls any Underwriter within the meaning of the Act or the Exchange Act) makes a claim for indemnification pursuant to Section 8(a) hereof, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be 24 25 enforced in such case notwithstanding the fact that Section 8(a) provides for indemnification in such case or (ii) contribution under the Act may be required on the part of the Underwriter or any such controlling person in circumstances for which indemnification is provided under Section 8(b), then, and in each such case, each indemnifying party shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject as an indemnifying party hereunder (after contribution from others) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriter on the other from the offering of the Securities. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under Section 8(c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriter on the other in connection with the statements or omissions which 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 Underwriter on the other shall be deemed to be in the same proportion as the total net proceeds from the offering of the Securities purchased under this Agreement (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriter with respect to the Securities purchased under this Agreement, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, 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 on the one hand or the Underwriter on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriter agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or 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), the Underwriter shall not be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which the Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 25 26 (e) Promptly after receipt by any party to this Agreement of notice of the commencement of any action, suit or proceeding, such party will, if a claim for contribution in respect thereof is to be made against another party (the "contributing party"), notify the contributing party of the commencement thereof, but the omission so to notify the contributing party will not relieve it from any liability which it may have to any other party for contribution under the Act except to the extent it was unaware of such action and has been prejudiced in any material respect by such failure or from any liability which it may have to any other party other than for contribution under the Act. In case any such action, suit or proceeding is brought against any party, and such party notifies a contributing party of the commencement thereof, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. 9. The respective indemnities, agreements, representations, warranties and other statements of the Company and the Underwriter, as 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 any investigation (or any statement as to the results thereof) made by or on behalf of the Underwriter or any controlling person of the Underwriter, or the Company, or an officer or director or controlling person of the Company, and shall survive delivery of and payment for the Securities. 10. This Agreement shall become effective (a) if the Registration Statement has not heretofore become effective, at the earlier of 12:00 Noon, New York City time, on the first full business day after the Registration Statement becomes effective, or at such time after the Registration Statement becomes effective as you may authorize the sale of the Securities to the public by the Underwriter or other securities dealers, or (b) if the Registration Statement has heretofore become effective, at the earlier of 24 hours after the filing of the Prospectus with the Commission or at such time as you may authorize the sale of the Securities to the public by yourself or securities dealers, unless, prior to any such time you shall have received notice from the Company that it elects that this Agreement shall not become effective, or you shall have given notice to the Company that you elect that this Agreement shall not become effective; provided, however, that the provisions of this Section and Section 6 and Section 8 hereof shall at all times be effective. If this Agreement shall be terminated pursuant to Section 9 hereof, or if this Agreement, by election of you, shall not become effective pursuant to the provisions of this Section, the Company shall not then be under any liability to you except as provided in Section 6 and Section 8 hereof, but if this Agreement becomes effective and is not so terminated but the Securities are not delivered by or on behalf of the Company as provided herein because the Company has been unable for any reason beyond its control and not due to any default by it to comply with the terms and conditions hereof, the Company will reimburse you for all out-of-pocket expenses, including fees and disbursements of counsel, actually and reasonably incurred by you in making preparations for the purchase, sale and delivery of the Securities, but the 26 27 Company shall then be under no further liability to you except as provided in Section 6 and Section 8 hereof and in no event will the Company be liable to the Underwriter for any loss of anticipated profits from transactions contemplated by this Agreement. 11. The statements set forth in the last paragraph on the front cover page of the Prospectus, the paragraph on the inside front cover of the Prospectus containing stabilization language and the third and eighth paragraphs under the caption "Underwriting" in the Prospectus constitute the only information furnished by the Underwriter to the Company for purposes of Sections 1(b), 1(c) and 8 hereof. 12. All statements, requests, notices and agreements hereunder, unless otherwise specified in this Agreement, shall be in writing and, if to the Underwriter, shall be delivered or sent by mail, telex or facsimile transmission (subsequently confirmed by delivery or by letter sent by mail) to Schroder & Co. Inc. at Equitable Center, 787 Seventh Avenue, New York, New York 10019, Attention: Syndicate Department; and if to the Company, shall be delivered or sent by mail, telex or facsimile transmission (subsequently confirmed by delivery or by letter sent by mail) to the address of the Company set forth in the Registration Statement, Attention: Chief Financial Officer. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. 13. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriter, the Company and, to the extent provided in Section 8 and Section 10 hereof, the officers and directors of the Company and each person who controls the Company or the Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Securities from the Underwriter shall be deemed a successor or assign by reason merely of such purchase. 14. Time shall be of the essence of this Agreement. As used herein, the term "business day" shall mean any day when the Commission's office in Washington, D.C. is open for business. 15. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. 27 28 16. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. If the foregoing is in accordance with your understanding, please sign and return to us two counterparts hereof. Upon the acceptance hereof by you, this letter and such acceptance hereof shall constitute a binding agreement among you and the Company. Very truly yours, AMERICAN RETIREMENT CORPORATION By:____________________________________ Name: Title: Accepted as of the date hereof: SCHRODER & CO. INC., as Underwriter By:________________________________ Name: Title: 28 29 EXHIBIT A SUBSIDIARIES American Retirement Corporation II ARCLP - Charlotte, LLC A.R.C. Management Corporation ARC Corpus Christi, Inc. ARC Oak Park, Inc. ARC Equities - Lexington, Inc. ARC Fort Austin Properties, Inc. Fort Austin Limited Partnership Trinity Towers Limited Partnership Holley Court Terrace, L.P. A.R.C. Chattanooga, Inc. ARC Tarpon Springs, Inc. ARC Sun City Center, Inc. A-1 30 EXHIBIT B September __, 1997 SCHRODER & CO. INC. As Underwriter Equitable Center 787 Seventh Avenue New York, New York 10019 Ladies and Gentlemen: In order to induce Shroder & Co. Inc. ("Schroders") to underwrite a proposed public offering (the "Offering") of ___% Convertible Subordinated Debentures due 2002 (the "Debentures") 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. 333-34339), the undersigned hereby agrees that the undersigned will not, directly or indirectly, for a period of 90 days after the commencement of the Offering, without Schroders' prior written consent, 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 the Company's common stock, par value $0.01 per share (the "Common Stock") or any securities convertible into or exchangeable 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 Option Plan and issue privately placed shares in connection with any acquisitions). This letter shall have no further force or effect if the Company and the Underwriter shall not have executed and delivered an underwriting agreement related to the Offering by [_______ __, 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 Debentures or 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: B-1 EX-4.3 3 INDENTURE 1 EXHIBIT-4.3 - ------------------------------------------------------------------------------- AMERICAN RETIREMENT CORPORATION $100,000,000 ___% Convertible Subordinated Debentures Due 2002 INDENTURE Dated as of _________, 1997 IBJ SCHRODER BANK & TRUST COMPANY, AS TRUSTEE - ------------------------------------------------------------------------------- 2 TABLE OF CONTENTS ARTICLE I. DEFINITIONS AND INCORPORATION BY REFERENCE....................................................1 SECTION 1.1. Definitions.........................................................................1 SECTION 1.2. Other Definitions...................................................................4 SECTION 1.3. Incorporation by Reference to Trust Indenture Act...................................5 SECTION 1.4. Rules of Construction...............................................................5 ARTICLE II. THE SECURITIES................................................................................6 SECTION 2.1. Form; Dating; Incorporation of Form in Indenture....................................6 SECTION 2.2. Execution and Authentication........................................................6 SECTION 2.3. Registrar and Agents................................................................7 SECTION 2.4. Paying Agent to Hold Money in Trust.................................................8 SECTION 2.5. Transfer and Exchange...............................................................8 SECTION 2.6. Replacement Securities..............................................................9 SECTION 2.7. Outstanding Securities.............................................................10 SECTION 2.8. Temporary Securities...............................................................10 SECTION 2.9. Cancellation.......................................................................11 SECTION 2.10. Defaulted Interest.................................................................11 SECTION 2.11. Securityholder Lists...............................................................11 SECTION 2.12. Persons Deemed Owners..............................................................11 SECTION 2.13. CUSIP Number.......................................................................12 SECTION 2.14. Book-Entry Provisions for Global Securities........................................12 SECTION 2.15. Certificated Securities............................................................12 ARTICLE III. REDEMPTION...................................................................................12 SECTION 3.1. Notices to Trustee.................................................................12 SECTION 3.2. Selection of Securities to be Redeemed.............................................12 SECTION 3.3. Notice of Redemption by the Company................................................13 SECTION 3.4. Effect of Notice of Redemption.....................................................13 SECTION 3.5. Deposit of Redemption Price........................................................14 SECTION 3.6. Securities Redeemed in Part........................................................14 ARTICLE IV. COVENANTS SECTION 4.1. Payment of the Securities..........................................................14 SECTION 4.2. Commission Reports.................................................................14 SECTION 4.3. Waiver of Stay, Extension or Usury Laws............................................15 SECTION 4.4. Notice of Default..................................................................15 SECTION 4.5. Compliance Certificates............................................................15 SECTION 4.6. Limitation on Dividends and Other Distributions....................................16 ARTICLE V. SUCCESSOR CORPORATION........................................................................16 SECTION 5.1. When Company May Merge, etc........................................................16 SECTION 5.2. Successor Corporation or Trust Substituted.........................................16 ARTICLE VI. DEFAULTS AND REMEDIES........................................................................17 SECTION 6.1. Events of Default..................................................................17
-i- 3 SECTION 6.2. Acceleration.......................................................................19 SECTION 6.3. Other Remedies.....................................................................19 SECTION 6.4. Waiver of Defaults and Events of Default...........................................19 SECTION 6.5. Control by Majority................................................................20 SECTION 6.6. Rights of Holders to Receive Payment...............................................20 SECTION 6.7. Collection Suit by Trustee.........................................................20 SECTION 6.8. Trustee May File Proofs of Claim...................................................20 SECTION 6.9. Priorities.........................................................................21 SECTION 6.10. Undertaking for Costs..............................................................21 SECTION 6.11. Limitation on Suits................................................................22 ARTICLE VII. TRUSTEE ...................................................................................22 SECTION 7.1. Duties of Trustee..................................................................22 SECTION 7.2. Rights of Trustee..................................................................23 SECTION 7.3. Individual Rights of Trustee.......................................................24 SECTION 7.4. Trustee's Disclaimer...............................................................24 SECTION 7.5. Notice of Defaults.................................................................25 SECTION 7.6. Reports by Trustee to Holders......................................................25 SECTION 7.7. Compensation and Indemnity.........................................................25 SECTION 7.8. Replacement of Trustee.............................................................26 SECTION 7.9. Successor Trustee by Merger, etc...................................................27 SECTION 7.10. Eligibility; Disqualification......................................................27 SECTION 7.11. Preferential Collection of Claims Against Company..................................27 ARTICLE VIII. SATISFACTION AND DISCHARGE OF INDENTURE......................................................28 SECTION 8.1. Satisfaction, Discharge and Defeasance of the Securities...........................28 SECTION 8.2. Satisfaction and Discharge of Indenture............................................28 SECTION 8.3. Survival of Certain Obligations....................................................29 SECTION 8.4. Application of Trust Money.........................................................29 SECTION 8.5. Paying Agent to Repay Monies Held..................................................30 SECTION 8.6. Return of Unclaimed Monies.........................................................30 SECTION 8.7. Reinstatement......................................................................30 SECTION 8.8. Indemnity for Government Obligations...............................................30 ARTICLE IX. AMENDMENTS AND WAIVERS.......................................................................31 SECTION 9.1. Amendments and Waivers Without Consent of Holders..................................31 SECTION 9.2. Amendments and Waivers with Consent of Holders.....................................31 SECTION 9.3. Compliance with Trust Indenture Act................................................32 SECTION 9.4. Revocation and Effect of Consents..................................................32 SECTION 9.5. Notation on or Exchange of Securities..............................................33 SECTION 9.6. Trustee to Sign Amendments, etc....................................................33 ARTICLE X. CONVERSION OF SECURITIES.....................................................................33 SECTION 10.1. Right of Conversion; Conversion Price..............................................33 SECTION 10.2. Issuance of Shares on Conversion...................................................34 SECTION 10.3. No Adjustment for Interest or Dividends............................................35 SECTION 10.4. Adjustment of Conversion Price.....................................................35 SECTION 10.5. Notice of Adjustment of Conversion Price...........................................37 SECTION 10.6. Notice of Certain Corporate Action.................................................38
-ii- 4 SECTION 10.7. Taxes on Conversions...............................................................39 SECTION 10.8. Fractional Shares..................................................................39 SECTION 10.9. Cancellation of Converted Securities...............................................39 SECTION 10.10. Provisions in Case of Consolidation, Merger or Sale of Assets......................39 SECTION 10.11. Disclaimer by Trustee of Responsibility for Certain Matters........................40 SECTION 10.12. Covenant to Reserve Shares.........................................................40 ARTICLE XI. SUBORDINATION; SENIORITY.....................................................................41 SECTION 11.1. Securities Subordinated to Senior Indebtedness.....................................41 SECTION 11.2. Company Not to Make Payments with Respect to Securities in Certain Circumstances..............................................................41 SECTION 11.3. Subrogation of Securities..........................................................43 SECTION 11.4. Authorization by Holders of Securities.............................................44 SECTION 11.5. Notices to Trustee.................................................................45 SECTION 11.6. Trustee's Relation to Senior Indebtedness..........................................45 SECTION 11.7. No Impairment of Subordination.....................................................46 SECTION 11.8. Article XI Not To Prevent Events of Default........................................46 SECTION 11.9. Paying Agents other than the Trustee...............................................46 SECTION 11.10. Securities Senior to Subordinated Indebtedness.....................................46 ARTICLE XII. CHANGE IN CONTROL............................................................................46 SECTION 12.1. Right to Require Repurchase........................................................46 SECTION 12.2. Notice; Method of Exercising Repurchase Right......................................47 SECTION 12.3. Deposit Of Repurchase Price........................................................48 SECTION 12.4. Notes Not Repurchased On Repurchase Date...........................................48 SECTION 12.5. Change In Control Defined..........................................................48 ARTICLE XIII. MISCELLANEOUS................................................................................50 SECTION 13.1. Trust Indenture Act Controls.......................................................50 SECTION 13.2. Notices............................................................................50 SECTION 13.3. Communications by Holders with Other Holders.......................................51 SECTION 13.4. Certificate and Opinion as to Conditions Precedent.................................51 SECTION 13.5. Statements Required in Certificate and Opinion.....................................52 SECTION 13.6. Rules by Trustee and Agents........................................................52 SECTION 13.7. Record Date........................................................................52 SECTION 13.8. Legal Holidays.....................................................................53 SECTION 13.9. Governing Law......................................................................53 SECTION 13.10. No Adverse Interpretation of Other Agreements......................................53 SECTION 13.11. No Recourse Against Others.........................................................53 SECTION 13.12. Successors.........................................................................53 SECTION 13.13. Multiple Counterparts..............................................................53 SECTION 13.14. Table of Contents, Headings, etc...................................................53 SECTION 13.15. Severability.......................................................................54
-iii- EXHIBIT A - FORM OF SECURITY 5 CROSS-REFERENCE TABLE AMERICAN RETIREMENT CORPORATION Trust Indenture Act Section Indenture - ---------------- --------- 310(a)(1) 7.10; 13.1 (a)(2) 13.1 (a)(3) 13.1 (a)(4) 13.1 (a)(5) 13.1 (b) 7.10; 13.1 (c) 13.1 311(a) 7.11; 13.1 (b) 7.11; 13.1 (c) 13.1 312(a) 13.1 (b) 13.1; 13.3 (c) 13.1; 13.3 313(a) 7.6; 13.1 (b) 7.6; 13.1 (c) 7.6; 13.1 (d) 7.6; 13.1 314(a) 4.2; 13.1 (b) 13.1 (c) 13.1 (d) 13.1 (e) 13.1 (f) 13.1 315(a) 7.1; 13.1 (b) 7.1; 13.1 (c) 7.1; 13.1 (d) 7.1; 13.1 (e) 7.1; 13.1 316(a) 7.1; 13.1 (b) 7.1; 13.1 (c) 7.1; 13.1 317(a) 13.1 (b) 13.1 318(a) Not Applicable - ------------------- Note: This Cross-Reference Table shall not, for any purpose, be deemed to be a part of the Indenture. 6 INDENTURE dated as of __________, 1997 by and between AMERICAN RETIREMENT CORPORATION, a Tennessee corporation (the "Company"), and IBJ SCHRODER BANK & TRUST COMPANY, a New York banking corporation, as trustee ("Trustee"). RECITALS The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance of the Company's __% Convertible Subordinated Debentures due 2002 (the "Securities"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders (as defined herein) of the Company's Securities: ARTICLE I. DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.1. Definitions. "Affiliate" means any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities or by agreement or otherwise. "Agent" means any Registrar, Paying Agent, Conversion Agent, co-registrar or agent for service of notices and demands. "Bankruptcy Law" means Title 11 of the U.S. Code or any similar Federal or State law for the relief of debtors. "Board of Directors of the Company" means the Board of Directors of the Company or any committee of the Board of Directors of the Company. "Board Resolution" means a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors of the Company and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means a day that is not a Legal Holiday. "Capital Stock" means any and all shares or other equivalents (however designated) of capital stock, including all common stock and all preferred stock, in the case of a corporation, or partnership interests or other equivalents (however designated) in the case of a partnership or common shares of beneficial interest or other equivalents (however designated) in the case of a trust. 7 "Closing Price" means with respect to the shares of Capital Stock of the Company on any day, (i) the reported last sale price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case, on the New York Stock Exchange (the "NYSE"), or (ii) if the shares of Capital Stock are not listed or admitted to trading on the NYSE, the reported last sale price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case, on the principal national securities exchange on which the shares of Capital Stock are listed or admitted to trading, or (iii) if the shares of Capital Stock are not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices as furnished by any New York Stock Exchange member firm selected from time to time by the Company for that purpose. "Company" means the party named as such in this Indenture until a successor replaces it pursuant to this Indenture and thereafter means the successor. "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office at the date of execution of this Indenture is located at One State Street, New York, New York 10004. "Custodian" means any receiver, trustee, liquidator or similar official under any Bankruptcy Law. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Dollar" or "$" means the lawful money of the United States of America. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Global Security" or "Global Securities" means any Security or Securities issued in global form. "Holder" or "Securityholder" means the Person in whose name a Security is registered on the Security Register. "Indebtedness" as applied to any Person, means, without duplication: (i) all indebtedness for borrowed money whether or not evidenced by a promissory note, draft or similar instrument; (ii) that portion of obligations with respect to any lease that is properly classified as a liability on a balance sheet in accordance with generally accepted accounting principles; (iii) notes payable and drafts accepted representing extensions of credit; (iv) any balance owed for all or any part of the deferred purchase price of property or services, which purchase price is due more than six months from the date of incurrence of the obligation in respect thereof (except any such balance that constitutes (a) a trade payable or an accrued liability arising in the ordinary course of business or (b) a trade draft or note payable issued in the ordinary course of business in connection with the purchase of goods or services), if and to the extent such debt would appear as a liability upon a balance sheet of such Person prepared in accordance with generally accepted accounting principles; (v) tenant deposits; (vi) any debt of -2- 8 others described in the preceding clauses (i) through (v) that such Person has guaranteed or for which it is otherwise liable; and (vii) any deferral, amendment, renewal, extension, supplement or refunding of any of the foregoing indebtedness; provided, however, that, in computing the "Indebtedness" of any Person, there shall be excluded any particular indebtedness if, upon or prior to the maturity thereof and at the time of determination of such indebtedness, there shall have been deposited with a depository in trust money (or evidences of indebtedness if permitted by the instrument creating such indebtedness) in the necessary amount to pay, redeem or satisfy such indebtedness as it becomes due, and the amount so deposited shall not be included in any computation of the assets of such Person. "Indenture" means this Indenture as amended or supplemented from time to time. "Officer" means the Chairman of the Board, Chief Executive Officer, the President, any Vice President, the Treasurer, the Secretary or the Controller of the Company. "Officers' Certificate" means a certificate signed by two Officers or by an Officer and an Assistant Treasurer, Assistant Secretary or Assistant Controller of the Company. See Sections 13.4 and 13.5. "Opinion of Counsel" means a written opinion from Bass, Berry & Sims PLC or any other legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. See Sections 13.4 and 13.5. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government (or any agency, instrumentality or political subdivision thereof). "Redemption Date" when used with respect to any Security to be redeemed, means the date fixed for such redemption pursuant to this Indenture. "Redemption Price" when used with respect to any Security to be redeemed, means the price fixed for such redemption pursuant to this Indenture. "Regular Record Date" means, with respect to any Interest Payment Date, the ________ or ___________ (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Security" or "Securities" means the security or securities in the form of Exhibit A hereto that are issued under this Indenture as amended or supplemented from time to time. "Securities Act" means the Securities Act of 1933, as amended from time to time. "Securities Custodian" means the Trustee, as custodian with respect to any Global Security, or any successor entity thereto. -3- 9 "Senior Indebtedness" means the principal, premium, if any, and interest on, and all other amounts payable under or in respect of, Indebtedness of the Company (other than (i) Indebtedness owed to a Subsidiary, (ii) Indebtedness of the Company which is expressly pari passu to the Securities or (iii) Subordinated Indebtedness). "Subordinated Indebtedness" means the principal, premium, if any, and interest on any Indebtedness of the Company which by its terms is expressly subordinated in right of payment to the Securities. "Subsidiary" means a Person the majority of whose voting stock is owned by the Company or a subsidiary of the Company. Voting stock is Capital Stock having voting power under ordinary circumstances to elect directors or similar positions. "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code ss.ss. 77aaa - 77bbbb) as amended by the Trust Indenture Reform Act of 1990 and as in effect on the date of this Indenture. "Trustee" means the party named as such in this Indenture until a successor replaces it pursuant to this Indenture and thereafter means the successor. "Trust Officer", when used with respect to the Trustee, means an officer of the Trustee assigned by the Trustee to administer its corporate trust matters or any other officer of the Trustee to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "United States" means the United States of America. SECTION 1.2. Other Definitions. Term Defined in Section ---- ------------------ "Change in Control" 12.5 "Common Stock" 10.1 "Company Order" 2.2 "Conversion Agent" 2.3 "conversion price" 10.1 "current market price" 10.4 "Depositary" 2.3 "Event of Default" 6.1 "Group" 12.5 "Interest Payment Date" 2.1 "Legal Holiday" 13.8 "Paying Agent" 2.3 "Payment or Distribution" 11.1 -4- 10 "Registrar" 2.3 "Repurchase Date" 12.1 "Rule 13e-3 Transaction" 10.6 "Security Register" 2.3 "Trading Day" 12.5 "U.S. Government Obligations" 8.1 SECTION 1.3. Incorporation by Reference to Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "Commission" means the Securities and Exchange Commission. "indenture securities" means the Securities. "indenture security holder" means a Securityholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company or any other obligor on the indenture securities. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by Commission rules have the meanings assigned to them therein. SECTION 1.4. Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with United States generally accepted accounting principles in effect as of the time as to which such accounting principles are to be applied; (3) "or" is not exclusive; and (4) words in the singular include the plural, and in the plural include the singular. -5- 11 ARTICLE II. THE SECURITIES SECTION 2.1. Form; Dating; Incorporation of Form in Indenture. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to $100,000,000, except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Sections 2.3, 2.5, 2.6, 2.8, 3.6, 9.5 or 10.1. The Securities shall be known and designated as the ___% Convertible Subordinated Debentures Due 2002 of the Company. Their fixed maturity shall be ________, 2002, and they shall bear interest at the rate per annum of ___%, from and including the date of issuance thereof until maturity or earlier redemption, payable semiannually on _______ and __________ commencing __________, 1998 (each an "Interest Payment Date"), until the principal thereof is paid or made available for payment. Subject to Section 2.10, such interest shall be paid to the Holder in whose name each Security was registered at the close of business on the Regular Record Date next preceding each Interest Payment Date. The Securities shall be redeemable as provided in Article III. The Securities shall be convertible as provided in Article X. The Securities shall be subordinated in right of payment to Senior Indebtedness, to the extent provided in Article XI. The Securities shall become subject to a Holder's right of repurchase in the event of a Change in Control as provided in Article XII. The Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A which is incorporated in and made part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rules, agreements to which the Company is subject, or usage. The Company shall approve the form of the Securities and any notation, legend or endorsement on them. Each Security shall be dated the date of its authentication. The terms and provisions contained in the Securities shall constitute, and are hereby expressly made, a part of this Indenture and to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. SECTION 2.2. Execution and Authentication. Two Officers shall sign the Securities for the Company by manual or facsimile signature. -6- 12 If an Officer whose signature is on a Security no longer holds that office at the time the Trustee authenticates the Security, the Security shall nevertheless be valid. A Security shall not be valid until the Trustee manually signs the certificate of authentication on the Security. Such signature shall be conclusive evidence that the Security has been authenticated under this Indenture. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 2.9, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture. The Trustee shall authenticate Securities for original issue in the aggregate principal amount of up to $100,000,000 upon the execution of this Indenture and a written order or orders of the Company signed by two Officers or by an Officer and an Assistant Treasurer of the Company (a "Company Order"). The aggregate principal amount of the Securities outstanding at any time may not exceed that amount. The Trustee may appoint an authenticating agent to authenticate Securities. An authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate. The Securities shall be issuable only in registered form without coupons. The Securities shall be issuable only in denominations of $1,000 principal amount and any whole multiples thereof. SECTION 2.3. Registrar and Agents. The Company shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange ("Registrar"), an office or agency where Securities may be presented for payment ("Paying Agent"), an office or agency where Securities may be presented for conversion ("Conversion Agent") and an office or agency where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Registrar shall keep a register of the Securities (the "Security Register") and of their transfer and exchange. The Company may have one or more co-registrars, one or more additional Paying Agents and one or more additional Conversion Agents. The Company or any Subsidiary may act as Paying Agent and/or Conversion Agent. The term "Paying Agent" includes any additional paying agent and the term "Conversion Agent" includes any additional conversion agent. The Company may change any Paying Agent, Registrar, Conversion Agent or add as a co-Paying Agent, co-Registrar, or co-Conversion Agent an entity on sixty (60) days' prior written notice to the Trustee specifying the name and address of any such entity. If the Company -7- 13 fails to maintain a Registrar, Paying Agent, Conversion Agent or agent for service of notices and demands, or fails to give the foregoing notice, the Trustee shall act as such. The Company initially appoints the Trustee as Registrar, Paying Agent, Conversion Agent, Securities Custodian, and agent for service of notices and demands. The Company initially appoints The Depository Trust Company to act as depositary (the "Depositary") with respect to any Global Security. SECTION 2.4. Paying Agent to Hold Money in Trust. At least one Business Day prior to each due date of the principal of, premium if any, and interest on any Securities, the Company shall deposit with each Paying Agent a sum sufficient to pay such principal, premium, if any, and interest so becoming due. The Company shall require each Paying Agent other than the Trustee to agree in writing that it will hold in trust for the benefit of Holders of Securities or the Trustee all money held by the Paying Agent for the payment of principal of, premium if any, or interest on the Securities and to notify the Trustee of any default by the Company (or any other obligor on the Securities) in making any such payment. If the Company or a Subsidiary acts as Paying Agent, it shall on or before each due date of the principal of, premium, if any, or interest on any Securities segregate the money and hold it as a separate trust fund. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and the Trustee may at any time during the continuance of any payment default, upon written request to a Paying Agent, require such Paying Agent to forthwith pay to the Trustee all sums so held in trust by such Paying Agent. Upon doing so, the Paying Agent (if other than the Company or a Subsidiary thereof) shall have no further liability for the money. The final installment of principal of and premium, if any, on each Security shall be payable only upon surrender of such Security at the office or agency of the Company maintained for such purpose. Payments of principal and premium, if any, and interest on the Securities shall be made at the office or agency of the Company maintained for such purpose, or, in the case of any such payments other than the final payment of principal and premium, if any, at the Company's option, by check mailed to the Person entitled thereto at such Person's address last appearing on the Security Register maintained by the Registrar. SECTION 2.5. Transfer and Exchange. (1) When a Security is presented to the Registrar or a co-registrar with a request to register the transfer thereof, the Registrar or co-registrar shall register the transfer as requested, and when Securities are presented to the Registrar or a co-registrar with a request to exchange them for an equal principal amount of Securities of other authorized denominations, the Registrar shall make the exchange as requested provided that every Security represented or surrendered for registration of transfer or exchange shall be duly endorsed and accompanied by a written instrument of transfer satisfactory to the Company and the Registrar duly executed by the Holder or such Holder's attorney-in-fact duly authorized in writing. -8- 14 (2) To permit registrations of transfers and exchanges, the Company shall issue and the Trustee or any authenticating agent shall authenticate Securities upon a Company Order. No service charge shall be made for any registration of transfer or exchange of Securities but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto, but this provision shall not apply to any exchange pursuant to Section 2.8, 3.6, 9.5 or 10.2 not involving any transfer. (3) The Registrar shall not be required (i) to issue, register the transfer of or exchange Securities during a period beginning at the opening of business 15 days before the day of any selection of Securities for redemption under Section 3.2 and ending at the close of business on the day of selection, or (ii) to register the transfer or exchange of any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. (4) Any Holder of a Global Security shall, by acceptance of such Global Security, agree that transfers of beneficial interests in such Global Security may be effected only through a book-entry system maintained by the Depositary (or its agent), and that ownership of a beneficial interest in the Global Security shall be required to be reflected in a book entry. The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. SECTION 2.6. Replacement Securities. If a mutilated Security is surrendered to the Trustee or if the Holder of a Security presents evidence to the satisfaction of the Company and the Trustee that the Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a new Security in replacement of and substitution for such Security if the requirements of the Trustee and the Company are met. An indemnity bond may be required by the Company or the Trustee that is sufficient in the judgment of the Company to protect the Company and is sufficient in the judgment of the Trustee to protect the Trustee or any Agent from any loss which it may suffer if a Security is replaced pursuant to this Section 2.6. The Company and the Trustee may charge for its expense in replacing a Security. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its sole discretion may, instead of issuing a new Security, pay or authorize the payment or convert or authorize the conversion of such Security. Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. -9- 15 SECTION 2.7. Outstanding Securities. Securities outstanding at any time are all Securities theretofore authenticated and delivered under this Indenture except: (a) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; and (b) Securities in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Issuer; provided, that in determining whether the Securityholders of the requisite principal amount of outstanding Securities are present at a meeting of Securityholders for quorum purposes or have voted or taken or concurred in any action under this Indenture, including the making of any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor shall be disregarded and deemed not outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such determination as to the presence of a quorum or upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which a Trust Officer of the Trustee actually knows to be so owned shall be disregarded. If a Security is replaced pursuant to Section 2.6, it ceases to be outstanding until the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. If the Paying Agent (other than the Company or a Subsidiary) holds on a Redemption Date or maturity date money deposited with it by or on behalf of the Company sufficient to pay the principal of, premium, if any, and accrued interest on Securities payable on that date, then on and after that date such Securities cease to be outstanding and interest on them ceases to accrue. A Security does not cease to be outstanding because the Company or an Affiliate holds the Security. SECTION 2.8. Temporary Securities. Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have non-material variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Securities in exchange for temporary Securities upon a Company Order. Until so exchanged, temporary Securities represent the same rights as definitive Securities. Upon request of the Trustee, the Company shall provide a certificate to the effect that the temporary Securities meet the requirements of the second sentence of this Section 2.8. -10- 16 SECTION 2.9. Cancellation. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar, the Paying Agent and the Conversion Agent shall forward to the Trustee any Securities surrendered to them for transfer, exchange, payment or conversion. The Trustee shall cancel all Securities surrendered for transfer, exchange, payment or conversion and destroy canceled Securities and deliver a certificate of such destruction to the Company unless the Company directs the Trustee in writing prior to such destruction to deliver canceled Securities to the Company. Subject to Sections 2.6, 3.6 and the second paragraph of Section 10.2, the Company may not issue Securities to replace Securities that it has previously paid or delivered to the Trustee for cancellation or that a Securityholder has converted pursuant to Article X hereof. SECTION 2.10. Defaulted Interest. If the Company defaults in a payment of interest on Securities when the same becomes due and payable and such default continues for a period of 30 days, it shall pay the defaulted interest to the Persons who are Holders of the Securities on a subsequent special record date. After the deposit by the Company with the Trustee of money sufficient to pay such defaulted interest, the Trustee shall fix the special record date and payment date. Each such special record date shall be not less than 10 days prior to such payment date. Each such payment date shall be not more than 60 days after the deposit by the Company of money to pay the defaulted interest. At least 15 days before the special record date, the Company shall mail to each Holder of a Security, with a copy to the Trustee, a notice that states the special record date, the payment date, and the amount of defaulted interest to be paid. SECTION 2.11. Securityholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders, a copy of which list shall be provided to the Company upon its written request. If the Trustee is not the Registrar, the Registrar shall furnish to the Trustee at least seven Business Days prior to each semiannual interest payment date and at such other times as the Trustee may reasonably request in writing a list in such form and as of such date as the Trustee may require of the names and addresses of Securityholders upon which the Trustee may conclusively rely. The Trustee may destroy any such list upon receipt of a replacement list. The Paying Agent will solicit from each Securityholder a certification of social security number or taxpayer identification number in accordance with its customary practice and as required by law, unless the Paying Agent is in possession of such certification. Each Paying Agent is authorized to impose back-up withholding with respect to payments to be made to Securityholders to the extent required by law. SECTION 2.12. Persons Deemed Owners. Prior to registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the -11- 17 owner of such Security and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 2.13. CUSIP Number. The Company shall use a "CUSIP" number when issuing the Securities. The Trustee may use the CUSIP number in notices of redemption or exchange as a convenience to Securityholders; provided that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Securities and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption or exchange shall not be affected by any defect in or omission of such numbers. SECTION 2.14. Book-Entry Provisions for Global Securities. (a) The Global Securities initially shall (i) be registered in the name of the Depositary or the nominee of the Depositary and (ii) be delivered to the Trustee as Securities Custodian for the Depositary. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depositary, or the Trustee as Securities Custodian, or under any Global Security, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute legal owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a beneficial owner of any Security. (b) Transfers of a Global Security shall be limited to transfers of such Global Security in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of beneficial owners in a Global Security may be transferred in accordance with the applicable rules and procedures of the Depositary and the provisions of Section 2.5. (c) The registered holder of a Global Security may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Securities. SECTION 2.15. Certificated Securities. If the Depositary is at any time unwilling or unable to continue as a depositary for the Global Securities and a successor depositary is not appointed by the Company within 90 days, the Company will issue certificated Securities in exchange for the Global Securities. In connection with the execution and delivery of such certificated Securities, the Trustee shall reflect on its books and records a decrease in the principal amount of the relevant Global Security equal to the aggregate principal amount of such certificated Securities and the Company shall execute and the Trustee shall, upon receipt of a written order of the Company signed by two officers, authenticate and deliver one or more certificated Securities in an equal aggregate principal amount. ARTICLE III. REDEMPTION SECTION 3.1. Notices to Trustee. If the Company wants to redeem the Securities pursuant to the optional redemption provisions of Paragraph 5 of the Securities, it shall notify the Trustee of the Redemption Date and the principal amount of Securities to be redeemed. The notice shall be given to the Trustee in writing at least 60 days prior to the Redemption Date (unless a shorter notice period shall be satisfactory to the Trustee in its discretion) and accompanied by an Officers' Certificate stating that the redemption complies with the provisions of this Indenture. Redemptions provided for in Paragraph 5 of the Securities shall be effected as provided in said Paragraph 5 or as otherwise agreed upon by the Company and the Trustee. SECTION 3.2. Selection of Securities to be Redeemed. If less than all the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed pro rata or by lot or by any other method that the Trustee considers fair and appropriate under the circumstances. The Trustee shall promptly notify the Company of the Securities to be so called for redemption. The Trustee shall make the selection from Securities outstanding and not previously called for redemption. The Trustee may select for redemption portions of the principal of Securities that have denominations larger than $1,000 principal amount. Securities and portions of them it selects shall be in principal amounts of $1,000 or multiples thereof. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee's selection of Securities for redemption by any method authorized by this Section 3.2 shall be conclusively deemed reasonable. Upon any redemption of less than all the Securities, the Company and the Trustee, for the purpose of selecting Securities to be redeemed, may treat as outstanding any Securities surrendered for conversion during the period of 15 days next preceding the selection of the Securities and need not treat as outstanding any Security authenticated and delivered during such -12- 18 period in exchange for the unconverted portion of any Security converted in part during such period. SECTION 3.3. Notice of Redemption by the Company. At least 30 days but not more than 60 days before a Redemption Date, the Company shall mail a notice of redemption by first-class mail to each Holder of Securities to be redeemed, with a copy to the Trustee. The notice shall identify the Securities to be redeemed and shall state: (1) the Redemption Date; (2) the Redemption Price; (3) the conversion price (as defined in Article X of this Indenture); (4) the name and address and telephone number of the Paying Agent and the Conversion Agent; (5) that Securities called for redemption may be converted at any time before the close of business on the Redemption Date and, if not converted prior to the close of business on the Redemption Date, the right of conversion will be lost; (6) that Holders who want to convert Securities must satisfy the requirements of Paragraph 7 thereof; (7) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; (8) that interest on Securities called for redemption ceases to accrue on and after the Redemption Date; and (9) if any Security is being redeemed in part, the portion of the principal amount of such Security to be redeemed and that, after the Redemption Date, upon surrender of such Security, a new Security or Securities in principal amount equal to the unredeemed portion thereof will be issued. At the Company's written request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. If a CUSIP number is listed in such notice or printed on the Security, the notice shall state that no representation is made as to the correctness or accuracy of such CUSIP number. SECTION 3.4. Effect of Notice of Redemption. Once notice of redemption is mailed, Securities called for redemption become due and payable on the applicable Redemption Date and at the applicable Redemption Price. Upon -13- 19 surrender to the Paying Agent, such Securities shall be paid at the Redemption Price, plus accrued interest to the Redemption Date. SECTION 3.5. Deposit of Redemption Price. At least one Business Day before the Redemption Date, the Company shall deposit with the Paying Agent (or if the Company or a Subsidiary is the Paying Agent, shall segregate and hold in trust or cause such Subsidiary to segregate and hold in trust) in immediately available funds money sufficient to pay the Redemption Price of and accrued interest on all Securities to be redeemed on that date. The Trustee or the Paying Agent shall return to the Company any money so deposited not required for that purpose. SECTION 3.6. Securities Redeemed in Part. Upon surrender of a Security that is redeemed in part, the Trustee shall authenticate for the Holder, at the expense of the Company, a new Security equal in principal amount to the unredeemed portion of the Security surrendered. There shall be no service charge to the Holder. ARTICLE IV. COVENANTS SECTION 4.1. Payment of the Securities. The Company shall pay the principal of, premium, if any, and interest on the Securities on the dates and in the manner provided in the Securities and this Indenture. An installment of principal, premium, if any, or interest shall be considered paid on the date it is due if the Trustee or Paying Agent (if other than the Company or a Subsidiary) holds on that date money designated for and sufficient to pay the installment. The Company shall pay interest on overdue principal and premium, if any, at the rate borne by the Security; it shall pay interest, including post-petition interest in the event of a proceeding under any Bankruptcy Law, on overdue installments of interest at the same rate to the extent lawful. SECTION 4.2. Commission Reports. The Company shall file with the Trustee, promptly after filing with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may by rules and regulations prescribe) which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The Company shall also comply with the other provisions of TIA ss. 314(a). So long as the Securities remain outstanding, the Company shall cause its annual reports to shareholders (containing audited financial statements) and any other financial reports -14- 20 furnished by it to shareholders to be mailed to the Holders at their addresses appearing in the Security Register maintained by the Registrar. SECTION 4.3. Waiver of Stay, Extension or Usury Laws. The Company expressly waives (to the extent that it may lawfully do so) any stay or extension law or any usury law or other law that would prohibit or forgive the Company from paying all or any portion of the principal of, premium, if any, or interest on Securities as contemplated herein, wherever enacted, now or at any time hereafter in force, or that may affect the covenants or the performance of this Indenture, and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 4.4. Notice of Default. The Company will, so long as any Securities are outstanding, deliver to the Trustee, within three business days of becoming aware of any Default or Event of Default in the performance of any covenant, agreement or condition in this Indenture, an Officers' Certificate specifying such Default or Event of Default, the period of existence thereof and what action the Company is taking or proposes to take with respect thereto. SECTION 4.5. Compliance Certificates. The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company (which as of the date hereof is December 31), a written statement, which complies with Section 314(a)(4) of the TIA, signed by the principal executive officer, principal financial officer or principal accounting officer of the Company, stating, as to each signer thereof: (1) that a review of the activities of the Company during such year and of performance under this Indenture has been made under his or her supervision; (2) that to the best of his or her knowledge, based on such review, the Company has kept, observed, performed and fulfilled in all material respects each and every condition and covenant contained in this Indenture throughout such year, or, if there has been a default in the fulfillment of any such condition or covenant, specifying each such default known to him or her and the nature and status thereof; and (3) the conversion price (as defined in Article X of this Indenture) then in effect. The Company will give the Trustee written notice of a change in the fiscal year of the Company, within a reasonable time after such change is effected. -15- 21 SECTION 4.6. Limitation on Dividends and Other Distributions. The Company will not declare or pay any dividends or make any distribution to holders of its Capital Stock (other than dividends or distributions payable in Capital Stock of the Company), or purchase, redeem or otherwise acquire or retire for value any of its Capital Stock or any warrants, rights or options to purchase or acquire Capital Stock (other than the Securities or any other convertible indebtedness of the Company that is neither secured nor subordinated to the Securities) or permit any Subsidiary to purchase, redeem or otherwise acquire or retire for value any of the Company's Capital Stock or any such warrants, rights or options if at the time of any of the aforementioned actions an Event of Default has occurred and is continuing or would exist immediately after giving effect to such action. Notwithstanding the foregoing, the provisions of this Section 4.6 will not prevent (i) the payment of any dividend within 60 days after the date of declaration when the payment would have complied with the foregoing provisions on the date of declaration; or (ii) the retirement of any shares of the Company's Capital Stock by exchange for, or out of the proceeds of the substantially concurrent sale (other than to a Subsidiary) of, other shares of its Capital Stock. ARTICLE V. SUCCESSOR CORPORATION SECTION 5.1. When Company May Merge, etc. The Company shall not consolidate with or merge into, or transfer all or substantially all of its assets to, another Person in any transaction in which the Company is not the continuing or surviving entity unless (i) the resulting, surviving or transferee Person (or the parent corporation of such Person in the case of a triangular merger) is a corporation which assumes by supplemental indenture, in form satisfactory to the Trustee, all the obligations of the Company under the Securities and this Indenture; (ii) such corporation is organized and existing under the laws of the United States, a State thereof or the District of Columbia although it in turn may be owned by a foreign entity; (iii) immediately after giving effect to such transaction no Default or Event of Default shall have happened and be continuing and the Officers' Certificate referred to in the following clause reflects that such Officers after due inquiry are not aware of any such Default or Event of Default that shall have happened and be continuing, and (iv) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture comply with this Indenture, and thereafter all obligations of the Company shall terminate. SECTION 5.2. Successor Corporation or Trust Substituted. Upon any consolidation or merger, or any transfer of all or substantially all of the assets of the Company in accordance with Section 5.1, the successor corporation formed by such consolidation or into which the Company is merged (or the parent company of such successor or surviving corporation in the case of a triangular merger in which the Company is a constituent corporation) or to which such transfer is made shall succeed to, and be substituted for, and may -16- 22 exercise every right and power of, the Company under this Indenture with the same effect as if such successor corporation has been named as the Company herein; the Company shall thereupon be relieved of any further obligation or liability hereunder or upon the Securities; and the Company as the predecessor corporation may thereupon or at any time thereafter be dissolved, wound up or liquidated. Such successor corporation thereupon may cause to be signed, and may issue either in its own name or in the name of American Retirement Corporation, any or all of the Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee; and, upon the order of such successor corporation, instead of the Company, and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any Securities which previously shall have been signed and delivered by the Officers to the Trustee for authentication, and any Securities which such successor corporation thereafter shall cause to be signed and delivered to the Trustee for that purpose. All the Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all such Securities had been issued at the date of the execution hereof. ARTICLE VI. DEFAULTS AND REMEDIES SECTION 6.1. Events of Default. An "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article XI or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order or any court or any order, rule or regulation of any administrative or governmental body): (1) the Company defaults in the payment of interest on any Security when the same becomes due and payable and such default continues for a period of 30 days; (2) the Company defaults in the payment of the principal of or premium, if any, on any Security when the same becomes due and payable at maturity, upon redemption or otherwise, and such default continues for five Business Days; (3) default in the payment of the Repurchase Price in respect of any Security on the Repurchase Date; (4) the Company fails to comply with any of its other covenants, agreements or conditions in the Securities or this Indenture and such default continues for the period and after the notice specified in the last paragraph of this Section 6.1; (5) there shall be a default under any bond, debenture, note or other evidence of Indebtedness or under any mortgage, indenture or other instrument under which there may be issued or by which there may be secured or evidenced -17- 23 any Indebtedness of the Company or any Subsidiary, whether any such Indebtedness now exists or shall hereafter be created, if (a) either (i) such event of default results from the failure to pay any such Indebtedness at maturity or (ii) as a result of such event of default, the maturity of such Indebtedness has been accelerated prior to its stated maturity and such acceleration shall not be rescinded or annulled or the accelerated amount paid within ten days after notice to the Company of such acceleration, or such Indebtedness having been discharged and (b) the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal or interest thereon, or the maturity of which has been so accelerated, aggregates $10,000,000 or more; (6) the Company pursuant to or within the meaning of any Bankruptcy Law: (a) commences a voluntary case or proceeding, (b) consents to the entry of an order for relief against it in an involuntary case or proceeding, (c) consents to the appointment of a Custodian of it or for all or substantially all of its property, or (d) makes a general assignment for the benefit of its creditors; or (7) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law: (a) for relief against the Company in an involuntary case or proceeding, (b) appointing a Custodian of the Company or for all or substantially all of its property, or (c) ordering the liquidation of the Company, and the order or decree remains unstayed and in effect for 90 days. A default under clause (3) is not an Event of Default until the Trustee notifies the Company, or the Holders of a majority in principal amount of the Securities then outstanding notify the Company and the Trustee in writing, of the default and the Company does not cure the default within 60 days after receipt of such notice. The notice must specify the default, demand that it be remedied and state that the notice is a "Notice of Default." The Trustee shall give such notice to the Company only if directed to do so in writing by the Holders of a majority in -18- 24 principal amount of the Securities then outstanding. Such notice by the Trustee shall not be deemed to be a certification by the Trustee as to whether an Event of Default has occurred. SECTION 6.2. Acceleration. If an Event of Default (other than an Event of Default specified in Section 6.1(5) or 6.1(6)) occurs and is continuing, the Trustee by notice to the Company, or the Holders of a majority in principal amount of the Securities then outstanding by notice to the Company and the Trustee, may declare to be due and payable immediately the principal amount of the Securities plus accrued interest to the date of acceleration. Upon any such declaration, such amount shall be due and payable immediately, and upon payment of such amount all of the Company's obligations with respect to the Securities, other than obligations under Section 7.7, shall terminate. If an Event of Default specified in Section 6.1(5) or 6.1(6) occurs, all unpaid principal and accrued interest on the Securities then outstanding shall become and be immediately due and payable without any declaration or the act on the part of the Trustee or any Holder. The Holders of a majority in principal amount of the outstanding Securities by written notice to the Trustee may rescind an acceleration and its consequences if (x) all existing Events of Default, other than the non-payment of the principal of the Securities, which have become due solely by such declaration of acceleration, have been cured or waived, (y) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal and premium, if any, which has become due otherwise than by such declaration of acceleration, has been paid, and (z) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. The Trustee may rely upon such notice of rescission without any independent investigation as to the satisfaction of conditions (x), (y) and (z). SECTION 6.3. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of and premium, if any, or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. SECTION 6.4. Waiver of Defaults and Events of Default. Subject to Section 9.2, the Holders of a majority in principal amount of the Securities then outstanding, on behalf of all the Securityholders, by written notice to the Trustee may waive a Default or Event of Default with respect to the Securities and its consequences. When a Default or Event of Default is waived, it is considered to be cured and ceases to exist; -19- 25 but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 6.5. Control by Majority. The Holders of a majority in principal amount of the Securities then outstanding may direct in writing the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on it. The Trustee, however, may refuse to follow any direction that conflicts with law or this Indenture, that the Trustee determines may be unduly prejudicial to the rights of other Securityholders, it being understood that (subject to Section 7.1) the Trustee shall have no duty to ascertain whether or not such actions or forbearances are unduly prejudicial to such Securityholders, or that may involve the Trustee in personal liability or for which the Trustee does not have indemnification reasonably satisfactory to the Trustee pursuant to Sections 7.1(5) and 7.2(6); provided that, the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 6.6. Rights of Holders to Receive Payment. Subject to Article XI, notwithstanding any other provision of this Indenture, the right of any Securityholder to receive payment of principal of, premium, if any, and interest on the Security, on or after the respective due dates expressed in the Security, or to bring suit for the enforcement of any such payment on or after such respective dates, is absolute and unconditional and shall not be impaired or affected without the consent of the Holder. Notwithstanding any other provision of this Indenture, the right of any Holder of any Security to convert such Security or to bring suit for the enforcement of such right shall not be impaired or affected without the written consent of the Holder. SECTION 6.7. Collection Suit by Trustee. If an Event of Default in payment of interest or principal, and premium, if any, specified in Section 6.1(1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company or any other obligor on the Securities for the whole amount of unpaid principal, and premium, if any, and accrued interest remaining unpaid on the Securities, together with interest on overdue principal, and premium, if any, and to the extent that payment of such interest is lawful, interest on overdue installments of interest, in each case at the rate borne by the Securities and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 6.8. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders of Securities allowed in any judicial proceedings relative to the -20- 26 Company (or any other obligor upon the Securities), its creditors or its property and shall be entitled and empowered to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same. Any Custodian in any such judicial proceeding is hereby authorized by each Securityholder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders of Securities, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.7. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceedings. SECTION 6.9. Priorities. If the Trustee collects any money pursuant to this Article VI, it shall pay out the money in the following order: FIRST: to the Trustee amounts due under Section 7.7; SECOND: to holders of any Senior Indebtedness as required by Article XI; THIRD: to the Holders of the Securities for amounts due and unpaid on the Securities for principal, premium, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal, premium, if any, and interest, respectively; and FOURTH: to the Company. The Trustee may fix a record date and payment date for any payment to Holders of Securities pursuant to this Section 6.9. SECTION 6.10. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorney's fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.10 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.6 or a suit by Holders of more than 10% in principal amount of the Securities then outstanding or a suit by any holder of Senior Indebtedness. -21- 27 SECTION 6.11. Limitation on Suits. A Securityholder may not pursue any remedy with respect to this Indenture or the Securities unless: (1) the Holder gives to the Trustee written notice stating that an Event of Default is continuing; (2) the Holders of at least 25% in aggregate principal amount of the Securities at the time outstanding make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee reasonable security or indemnity against any loss, liability or expense satisfactory to the Trustee; (4) the Trustee does not comply with the request within 60 days after receipt of notice, the request and the offer of security or indemnity; and (5) the Holders of a majority in aggregate principal amount of the Securities at the time outstanding do not give the Trustee a direction inconsistent with the request during such 60-day period. A Securityholder may not use this Indenture to prejudice the rights of any other Securityholder or to obtain a preference or priority over any other Securityholder. ARTICLE VII. TRUSTEE SECTION 7.1. Duties of Trustee. (1) The duties and responsibilities of the Trustee shall be as provided by the TIA. If an Event of Default has occurred and is continuing, the Trustee shall exercise its rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent Person would exercise or use under the circumstances in the conduct of his own affairs. (2) Except during the continuance of an Event of Default: (a) The Trustee need perform only those duties that are specifically set forth in this Indenture, and the Trustee shall not be liable except for the performance of such duties as are specifically set forth in this Indenture, and no others, and no implied covenants or obligation shall be read into this Indenture against the Trustee. -22- 28 (b) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any statements, certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. The Trustee, however, shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (3) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (a) This paragraph does not limit the effect of paragraph (2) of this Section 7.1. (b) The Trustee shall not be liable for any error in judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (c) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.5. (d) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (4) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (1), (2) and (3) of this Section 7.1 and subject to Sections 315 and 316 of the TIA. (5) Subject to subsection (3), the Trustee may refuse to perform any duty or exercise any right or power unless, subject to the provisions of the TIA, it receives indemnity satisfactory to it against any loss, liability, expense or fee. (6) The Trustee shall not be liable for interest on any money received by it. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 7.2. Rights of Trustee. (1) The Trustee may rely on and shall be protected in acting or refraining from acting upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. -23- 29 (2) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel, or both, which shall conform to Section 13.5. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. (3) The Trustee may act through agents or attorneys and shall not be responsible for the misconduct or negligence of such agents or attorneys appointed with due care and shall not be responsible for their supervision. (4) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. (5) The Trustee may consult with counsel of its choice and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by the Trustee hereunder in good faith and reliance thereon. (6) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders of Securities pursuant to this Indenture, unless such Holders shall have offered to the Trustee security or indemnity reasonably satisfactory to the Trustee against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction. (7) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an officer of the Company. SECTION 7.3. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. The Trustee, however, is subject to Sections 7.10 and 7.11. SECTION 7.4. Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee and it shall not be responsible for any statement of the Company in the Indenture or any statement in the Securities other than its certificate of authentication or in any document used in the sale of the Securities other than any statement in writing provided by the Trustee expressly for use in such document. -24- 30 SECTION 7.5. Notice of Defaults. If a Default or Event of Default occurs and is continuing and if it is actually known to the Trustee, the Trustee shall mail to each Holder of Securities notice of the Default or Event of Default within 90 days after it becomes known to the Trustee. Except in the case of a default in payment of principal of, premium, if any, or interest on any Security, the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of Holders of Securities. Notwithstanding anything to the contrary expressed in this Indenture, the Trustee shall not be deemed to have knowledge of any Event of Default hereunder unless and until a Trust Officer shall have actual knowledge thereof, or shall have received written notice thereof from the Company at its principal Corporate Trust Office as specified in Section 13.2. The Trustee shall not be deemed to have actual knowledge of an Event of Default hereunder, except in the case of an Event of Default under Sections 6.1(1) or 6.1(2) (provided that the Trustee is the Paying Agent), until a Trust Officer receives written notice thereof from the Company or any Securityholder that such a Default or an Event of Default has occurred. SECTION 7.6. Reports by Trustee to Holders. Within 60 days after each May 15 beginning with May 15 of the first year in which Securities are outstanding hereunder, the Trustee, if required by the provisions of TIA ss. 313(a), shall mail to each Securityholder a brief report dated as of May 15 of such year that complies with TIA ss. 313(a). The Trustee also shall comply with TIA ss. 313(b), ss. 313(c) and ss. 313(d). A copy of each report at the time of its mailing to Securityholders shall be filed with the Securities and Exchange Commission and each securities exchange, if any, on which the Securities are listed. The Company agrees to notify the Trustee in writing whenever the Securities become listed or delisted on or from any securities exchange. SECTION 7.7. Compensation and Indemnity The Company shall pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation for its services (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust). The Company shall reimburse the Trustee upon request for all reasonable disbursements, expenses and advances incurred or made by it. Such expenses may include, but shall not be limited to, the reasonable compensation, disbursements and expenses of the Trustee's agents, consultants and counsel. The Company shall indemnify the Trustee and its officers, directors, shareholders, agents and employees for, and hold them harmless against, any loss or liability incurred by any of them in connection with the acceptance or administration of the Trustee's duties and the exercise of its rights and powers under this Indenture or any Security, including (whether asserted by any Securityholder, the Company or any other Person) the costs and expenses of defending themselves against any claim or liability in connection with the Securities or the exercise or performance of any of -25- 31 the Trustee's rights, powers or duties hereunder. The Trustee and its officers, directors, shareholders, agents and employees in their capacity as Paying Agent, Registrar, Conversion Agent, Securities Custodian and agent for service of notices and demands shall have the full benefit of the foregoing indemnity as well as all other benefits, rights, and privileges accorded to the Trustee in this Indenture when acting in such other capacity. The Trustee shall notify the Company promptly of any claim asserted against the Trustee for which it may seek indemnity; provided, however, that any failure to so notify the Company shall not relieve the Company of its indemnity obligations hereunder except to the extent the Company's ability to defend such claim shall be prejudiced thereby. The Company may elect by written notice to the Trustee to assume the defense of any such claim at the Company's expense with counsel reasonably satisfactory to the Trustee; provided, however, that if the Trustee is advised by counsel that the interests of the Company and the Trustee conflict, the Trustee shall have the right to retain separate counsel at the expense of the Company. The Company need not reimburse the Trustee for any expense or indemnify it against any loss or liability incurred by it through the Trustee's negligence or willful misconduct. The Company shall not be liable for any settlement of any claim or action effected without the Company's consent, which consent shall not be unreasonably withheld. To secure the Company's payment obligations to the Trustee pursuant to this Article VII and all other obligations of the Company to the Trustee pursuant to this Indenture, including all fees, expenses, and rights to indemnification, the Trustee shall have a first priority lien on all money or property held or collected by the Trustee. Such lien shall survive the satisfaction and discharge of the Indenture and the resignation or removal of the Trustee. The Trustee's right to receive payment of any amounts due under this Indenture shall not be subordinate to any other indebtedness of the Company and the Securities shall be subordinate to the Trustee's rights to receive such payments. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.1 occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any applicable bankruptcy or comparable law. The provisions of this Section shall survive termination of this Indenture. SECTION 7.8. Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.8. The Trustee may resign by so notifying the Company. The Holders of a majority in principal amount of the Securities then outstanding may remove the Trustee by so notifying the Trustee and may appoint a successor Trustee with the Company's written consent. The Company may remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged a bankrupt or an insolvent; (3) a receiver or other public officer takes charge of the Trustee or its property; or -26- 32 (4) the Trustee otherwise becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. If a successor Trustee does not take office within 45 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of a majority in principal amount of the Securities then outstanding may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Immediately after that, the retiring Trustee shall, upon payment of its fees and expenses, transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.7, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. Notwithstanding the replacement of the Trustee pursuant to this Section 7.8, the Company's obligations under Section 7.7 shall continue for the benefit of the retiring Trustee with respect to expenses and liabilities incurred by it and compensation earned by it prior to such replacement or otherwise or the Indenture. A successor Trustee shall mail notice of its succession to each Holder of Securities. SECTION 7.9. Successor Trustee by Merger, etc. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust assets to, another corporation, the successor corporation without any further act shall be the successor Trustee. SECTION 7.10. Eligibility; Disqualification. This Indenture shall always have a Trustee who satisfies the requirements of TIA ss. 310(a)(1). The Trustee shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA ss. 310(b), including the optional provision permitted by the second sentence of TIA ss. 310(b)(9). SECTION 7.11. Preferential Collection of Claims Against Company. The Trustee is subject to TIA ss. 311(a), excluding any creditor relationship listed in TIA ss. 311(b). A Trustee who has resigned or been removed shall be subject to TIA ss. 311(a) to the extent indicated therein. -27- 33 ARTICLE VIII. SATISFACTION AND DISCHARGE OF INDENTURE SECTION 8.1. Satisfaction, Discharge and Defeasance of the Securities. The Company shall be deemed to have paid and discharged the entire indebtedness on the Securities after the date of the deposit referred to in paragraph (1) below, the provisions of this Indenture shall no longer be in effect in respect of the Securities, and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of such indebtedness; provided that the following conditions shall have been satisfied: (1) the Company has deposited or caused to be deposited with the Trustee irrevocably as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities, with reference to this Section 8.1, (a) money or (b) U.S. Government Obligations or (c) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge the entire indebtedness on all the Securities for principal, premium, if any, and interest, if any, to the maturity date of the Securities as such principal, premium, if any, or interest becomes due and payable in accordance with the terms of this Indenture and the Securities; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company in connection with all of the Securities, including all fees and expenses of the Trustee; and (3) the Company has delivered to the Trustee an Opinion of Counsel and an Officers' Certificate, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of the entire Indebtedness on the Securities and the discharge of this Indenture and the termination of the Company's obligations hereunder have been complied with. "U.S. Government Obligations" means direct, non-callable obligations of, or non-callable obligations guaranteed by, the United States of America for the timely payment of which obligation or guarantee the full faith and credit of the United States of America is pledged. SECTION 8.2. Satisfaction and Discharge of Indenture. In addition to its rights under Section 8.1, the Company may terminate all of its obligations under this Indenture when: (1) all of the Securities theretofore authenticated and delivered (other than (a) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.6 hereof and (b) Securities for whose payment money has theretofore been deposited with the Trustee or the Paying -28- 34 Agent in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 2.4 and Section 8.6 hereof) have been delivered to the Trustee for cancellation (including any cancellation resulting from the conversion of such Securities pursuant to Paragraph 7 of the Securities); and (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company in connection with the outstanding Securities, including all fees and expenses of the Trustee. SECTION 8.3. Survival of Certain Obligations. Notwithstanding the satisfaction and discharge of this Indenture pursuant to Section 8.1, the respective obligations of the Company specified in Sections 2.3, 2.4, 2.5, 2.6, 2.11, 4.1, 7.7, 8.5, 8.6, 8.7 and in Article X shall survive until the Securities are no longer outstanding, and after the Securities are no longer outstanding, or upon compliance with Section 8.2, only the obligations of the Company in such Sections 7.7 and 8.6 shall survive. Nothing contained in this Article VIII shall abrogate any of the obligations or duties of the Trustee under this Indenture. SECTION 8.4. Application of Trust Money. (1) Subject to the provisions of Section 8.6, all money and U.S. Government Obligations deposited with the Trustee for the Securities pursuant to Section 8.1 or Section 8.2, and all money received by the Trustee in respect of U.S. Government Obligations deposited with the Trustee for the Securities pursuant to Section 8.1 or Section 8.2 shall be held in trust and reinvested by the Trustee in (a) U.S. Government Obligations or (b) beneficial interests in one or more mutual funds which invest solely in U.S. Government Obligations and which are rated in the highest applicable rating category by a nationally-recognized statistical rating organization in accordance with the Company's written instructions and applied by the Trustee in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company or any Subsidiary acting as Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal, premium, if any, and interest, if any, on the Securities; but such money need not be segregated from other funds except to the extent required by law. Money and U.S. Government Obligations so held in trust are not subject to the subordination provisions of Article XI. (2) The Trustee shall deliver or pay to the Company from time to time upon the Company's written request any U.S. Government Obligations or money held by it as provided in Section 8.1 or Section 8.2 which, in the written opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are then in excess of the amount thereof which then would have been required to be deposited for the purpose for which such U.S. Government Obligations, or money, were deposited or received. -29- 35 SECTION 8.5. Paying Agent to Repay Monies Held. Upon the satisfaction and discharge of this Indenture, all monies then held by any Paying Agent under the provisions of this Indenture shall, upon written demand of the Company, be repaid to it or paid to the Trustee, and thereupon such Paying Agent shall be released from all further liability with respect to such monies. SECTION 8.6. Return of Unclaimed Monies. Any monies deposited with or paid to the Trustee or any Paying Agent for the Securities, or then held by the Company in trust, for the payment of any principal, premium, if any, and interest, if any, on the Securities and not applied but remaining unclaimed by the Holders of the Securities for two years after the date upon which the principal of, premium, if any, and interest, if any, on the Securities, as the case may be, shall have become due and payable, shall, unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property law, be repaid to the Company by such Trustee or any Paying Agent on written demand by the Company or (if then held by the Company or any Affiliate) shall be discharged from such trust; and the Holders of the Securities entitled to receive such payment shall thereafter look only to the Company for the payment thereof; provided, however, that, before being required to make any such repayment, the Trustee may, or shall at the written request of the Company, at the expense of the Company, cause to be published once in an authorized newspaper in the same city in which the place of payment with respect to the Securities shall be located and in an authorized newspaper in the City of New York, or mail to each such Holder, a notice (in such form as may be deemed appropriate by the Trustee) that said monies remain unclaimed and that, after a date named therein, any unclaimed balance of said monies then remaining will be returned to the Company. SECTION 8.7. Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 8.1 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.1 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 8.4; provided, however, that if the Company has made any payment of principal of, premium, if any, or interest on the Securities because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. SECTION 8.8. Indemnity for Government Obligations. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against U.S. Government Obligations deposited with the Trustee pursuant hereto or the principal and interest received on such U.S. Government Obligations. -30- 36 ARTICLE IX. AMENDMENTS AND WAIVERS SECTION 9.1. Amendments and Waivers Without Consent of Holders. The Company, when authorized by Board Resolution, and the Trustee at any time and from time to time, may amend or supplement this Indenture or the Securities (any such amendment or supplement to be in a form satisfactory to the Trustee) without notice to or consent of any Securityholder for any of the following purposes: (1) to comply with Section 5.1; or (2) to provide for uncertificated Securities in addition to or in place of certificated Securities; or (3) to cure any ambiguity, defect or inconsistency, or to make any other change that does not adversely affect the interests of the Holders of Securities in any material respect; or (4) to add to the covenants of the Company, for the benefit of the Holders or to surrender any right or power herein conferred upon the Company; or (5) to add any Event of Default. The Trustee shall be entitled to receive upon request an Opinion of Counsel to its satisfaction with respect to any supplement to this Indenture without consent of the Holders that all conditions precedent have been satisfied. SECTION 9.2. Amendments and Waivers with Consent of Holders. With the written consent of the Holders of not less than 66-2/3% in aggregate principal amount of the Securities at the time outstanding, the Company, when authorized by Board Resolution, and the Trustee may amend or supplement this Indenture (any such amendment or supplement to be in a form satisfactory to the Trustee) or the Securities for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the Holders of the Securities. The Holders of a majority in principal amount of the Securities then outstanding may waive compliance in a particular instance by the Company with any provision of this Indenture or the Securities without notice to any Securityholder. Subject to Section 9.4, without the consent of each Holder of Securities affected, however, an amendment, supplement or waiver, including a waiver pursuant to Section 6.4, may not: (1) reduce the amount of Securities whose Holders must consent to an amendment or waiver; -31- 37 (2) reduce the rate of or extend the time for payment of interest on any Security; (3) reduce the principal of or extend the fixed maturity of any Security; (4) waive (except unless theretofore cured) a default in the payment of the principal of (and premium, if any on), interest on or redemption amounts with respect to any Security; (5) make any Security payable in currency other than that stated in the Security; (6) make any change in Sections 6.4, 6.6 or 9.2; (7) make any change that adversely affects the right to convert any Security; or (8) make any change in Article XI that adversely affects the rights of any Securityholder. To secure a consent of the Holders under this Section, it shall not be necessary for the Holders to approve the particular form of any proposed amendment or waiver; rather, it shall be sufficient if such consent approves the substance thereof. After an amendment under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing such amendment. SECTION 9.3. Compliance with Trust Indenture Act. Every amendment or supplement to this Indenture or the Securities shall comply with the TIA as then in effect. SECTION 9.4. Revocation and Effect of Consents. Subject to this Indenture, each amendment, supplement or waiver evidencing other action shall become effective in accordance with its terms. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Security is a continuing consent by the Holder even if notation of the consent is not made on any Security. Any such Holder or subsequent Holder, however, may revoke the consent as to his Security or portion of a Security, if the Trustee receives the notice of revocation before the date the amendment, waiver or other action becomes effective. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver. If a record date is fixed, then notwithstanding the provisions of the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies) and only -32- 38 those Persons, shall be entitled to consent to such amendment, supplement or waiver or to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. No consent shall be valid or effective for more than 90 days after such record date unless consent from Holders of the principal amount of Securities then outstanding required hereunder for such amendment, supplement or waiver to be effective shall have also been given and not revoked within such 90-day period. After an amendment, waiver or other action becomes effective, pursuant to Section 9.1 or Section 9.2, as the case may be, it shall bind every Holder of a Security. SECTION 9.5. Notation on or Exchange of Securities. If an amendment, supplement or waiver changes the terms of a Security, the Trustee may request the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security about the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determine, the Company in exchange for the Security shall issue and upon Company Order the Trustee shall authenticate a new Security that reflects the changed terms, the cost and expense of which will be borne by the Company. Any failure to make the appropriate notation or to issue a new Security shall not affect the validity of such amendment, supplement or waiver. SECTION 9.6. Trustee to Sign Amendments, etc. The Trustee need not sign any amendment that adversely affects its rights or interests, as determined by the Trustee in its sole discretion. In signing or refusing to sign any amendment the Trustee shall be entitled to receive and shall be fully protected in relying upon, an Opinion of Counsel stating that such amendment is authorized or permitted by this Indenture. The Company may not sign an amendment until its Board of Directors approves it. ARTICLE X. CONVERSION OF SECURITIES SECTION 10.1. Right of Conversion; Conversion Price. Subject to the provisions of Section 7 of the Securities, the Holder of any Security or Securities shall have the right, at such Holder's option, at any time on or after December 31, 1997 until the close of business on ________, 2002 (except that, with respect to any Security or portion of a Security which shall be called for redemption, such right shall terminate at the close of business on the Redemption Date fixed for redemption of such Security or portion of a Security unless the Company shall default in payment due upon redemption thereof), to convert, subject to the terms and provisions of this Article X, the principal of any such Security or Securities or any portion thereof which is $1,000 principal amount or an integral multiple thereof into shares of common stock of the Company, $0.01 par value per share ("Common Stock"), initially at the conversion price per share of $____or, in case an adjustment of such price has taken place pursuant to the provisions of Section 10.4, then at the price as last adjusted (such -33- 39 price or adjusted price being referred to herein as the "conversion price"), upon surrender of the Security or Securities, the principal of which is so to be converted, accompanied by written notice of conversion duly executed, to the Conversion Agent, at any time during usual business hours at the office or agency maintained by it for such purpose, and, if so required by the Conversion Agent or Registrar, accompanied by a written instrument or instruments of transfer in form satisfactory to the Conversion Agent or Registrar duly executed by the Holder or his duly authorized representative in writing. For convenience, the conversion of any portion of the principal of any Security or Securities into shares of Common Stock is hereinafter sometimes referred to as the conversion of such Security or Securities. SECTION 10.2. Issuance of Shares on Conversion. As promptly as practicable after the surrender, as herein provided, of any Security or Securities for conversion, the Conversion Agent shall notify the Company in writing of the surrender and the Company shall deliver or cause to be delivered at the office or agency of the Conversion Agent, certificates representing the number of fully paid and nonassessable shares of Common Stock into which such Security or Securities may be converted in accordance with the provisions of this Article X to, or upon the written order of, the Holder of the Security or Securities so surrendered. Such conversion shall be deemed to have been made as of the close of business on the date that such Security or Securities shall have been surrendered for conversion by delivery thereof with a written notice of conversion duly executed, so that the rights of the Holder of such Security or Securities as a Securityholder shall cease at such time and, subject to the following provisions of this paragraph, the Person or Persons entitled to receive the shares of Common Stock upon conversion of such Security or Securities shall be treated for all purposes as having become the record holder or holders of such shares of Common Stock at such time and such conversion shall be at the conversion price in effect at such time; provided, however, that no such surrender on any date when the stock transfer books of the Company shall be closed shall be effective to constitute the Person or Persons entitled to receive the shares of Common Stock upon such conversion as the record holder or holders of such shares of Common Stock on such date, but such surrender shall be effective to constitute the Person or Persons entitled to receive such shares of Common Stock as the record holder or holders thereof for all purposes at the close of business on the next succeeding day on which such stock transfer books are open; and provided, further, that in such event such conversion shall be at the conversion price in effect on the date that such Security or Securities shall have been surrendered for conversion by delivery thereof, as if the stock transfer books of the Company had not been closed. The Company shall give or cause to be given to the Trustee written notice whenever the stock transfer books of the Company shall be closed. Upon Conversion of any Security which is converted in part only, the Company shall execute and the Trustee after receipt of written notice from the Conversion Agent shall authenticate and deliver to or on the order of the Holder thereof, at the expense of the Company, a new Security or Securities of authorized denominations in principal amount equal to the unconverted portion of such Security. -34- 40 SECTION 10.3. No Adjustment for Interest or Dividends. No payment or adjustment in respect of interest on the Securities or dividends on the shares of Common Stock shall be made upon the conversion of any Security or Securities; provided, however, that if a Security or any portion thereof shall be converted subsequent to any Regular Record Date and on or prior to the next succeeding Interest Payment Date, the interest falling due on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion, and such interest (whether or not punctually paid or duly provided for) shall be paid to the Person in whose name such Security is registered at the close of business on such Regular Record Date and such Securities surrendered during this period (i.e., subsequent to any Regular Record Date and on or prior to the next succeeding Interest Payment Date) must be accompanied by payment of an amount equal to the interest payable on such Interest Payment Date. SECTION 10.4. Adjustment of Conversion Price. (1) In case the Company shall pay or make a dividend or other distribution on any class of Capital Stock of the Company in shares of Common Stock, the conversion price in effect at the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such dividend or other distribution shall be reduced by multiplying such conversion price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. (2) In case the Company shall issue rights or warrants to all or substantially all holders of its shares of Common Stock entitling them to subscribe for or purchase shares of Common Stock (or securities convertible into or exchangeable for Common Stock) at a price per share (or having a conversion or exchange price per share) less than the current market price per share (determined as provided in paragraph (6) of this Section 10.4) of the shares of Common Stock on the date fixed for the determination of shareholders entitled to receive such rights or warrants, the conversion price in effect at the opening of business on the day following the date fixed for such determination shall be reduced by multiplying such conversion price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the subscription price of the total number of shares of Common Stock so offered for subscription or purchase (or the aggregate conversion or exchange price of the convertible or exchangeable securities so offered) would purchase at such current market price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. In the event that all of the shares of Common Stock subject to such rights or warrants have not been issued when such rights or warrants expire, then the conversion price shall promptly be readjusted to the conversion price which would then be in effect had the adjustment upon the issuance of such rights or warrants been made on the basis of the actual number of shares of Common Stock issued upon the exercise of such -35- 41 rights or warrants. For the purposes of this paragraph (2), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not issue any rights or warrants in respect of shares of Common Stock held in the treasury of the Company. (3) In case the outstanding shares of Common Stock shall be subdivided into a greater number of shares, the conversion price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares, the conversion price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (4) In case the Company shall, by dividend or otherwise, distribute to all or substantially all holders of shares of Common Stock evidences of indebtedness or assets (including securities, but excluding any (a) rights or warrants referred to in paragraph (2) of this Section 10.4, (b) any dividend or distribution not prohibited by Section 4.6 hereof and (c) any dividend or distribution referred to in paragraph (1) of this Section 10.4), the conversion price shall be adjusted so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to the close of business on the day fixed for the determination of shareholders entitled to receive such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (6) of this Section) of the shares of Common Stock on the date fixed for such determination less the then fair market value as determined by the Board of Directors of the Company (whose determination shall be conclusive and described in a resolution of the Board of Directors of the Company filed with the Trustee) of the portion of the assets or evidences of indebtedness so distributed allocable to one share of Common Stock and the denominator shall be such current market price per share of the shares of Common Stock, such adjustment to become effective immediately prior to the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such distribution. (5) In case the shares of Common Stock shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification, or otherwise (other than a subdivision or combination of shares or a stock dividend described in paragraph (1) or (3) of this Section 10.4, or a consolidation, merger or sale of assets described in Section 10.10), then and in each such event the Holders of Securities shall have the right thereafter to convert such Securities into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change, by holders of the number of shares of Common Stock into which such Securities might have been converted immediately prior to such reorganization, reclassification or change. -36- 42 (6) For the purpose of any computation under paragraphs (2) and (4) of this Section, the current market price per share of Common Stock on any date shall be deemed to be the average of the Closing Prices for the 15 consecutive Business Days selected by the Company commencing not more than 30 and not less than 20 Business Days before the date in question. (7) No adjustment in the conversion price shall be required (a) pursuant to paragraphs (1) through (5) if Holders of the Securities receive notice of and are allowed to participate in such transaction, (b) pursuant to paragraph (2) if the rights or warrants to purchase common stock of the Company were issued pursuant to a company plan for reinvestment of dividends or interest or the Company's employee stock purchase plan, or (c) as a result of a change in the par value of the common stock of the Company. (8) No adjustment in the conversion price shall be required unless such adjustment (plus any adjustments not previously made by reason of this paragraph (8)) would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this paragraph (8) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this paragraph (8) shall be made to the nearest cent. (9) The Company may, but shall not be required to, make such reductions in the conversion price, in addition to those required by paragraph (1), (2), (3), (4) and (5) of this Section 10.4 as the Company's Board of Directors considers to be advisable in order to avoid or diminish any income tax to any holders of shares of Common Stock resulting from any dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes or for any other reason. The Company's Board of Directors shall have the power to resolve any ambiguity or correct any error in the adjustments made pursuant to this Section 10.4 and its actions in so doing shall be final and conclusive. (10) The adjustments provided for in this Section 10.4 shall be made successively whenever any event listed above shall occur. SECTION 10.5. Notice of Adjustment of Conversion Price. Whenever the conversion price for the Securities is adjusted as herein provided: (1) the Company shall compute the adjusted conversion price in accordance with Section 10.4 and shall prepare an Officers' Certificate setting forth the adjusted conversion price and showing in reasonable detail the facts upon which such adjustment is based and the computation thereof, and such certificate shall forthwith be filed at each office or agency maintained for the purpose of conversion of the Securities pursuant to Section 2.3 and with the Trustee; and (2) a notice stating that the conversion price has been adjusted and setting forth the adjusted conversion price shall as soon as practicable be mailed by the Company to all Holders of the Securities at their last addresses as they shall appear in the Security Register. -37- 43 (3) If the conversion price is adjusted and the Company fails to file an Officers' Certificate with the Trustee as provided by Section 10.5(1) and the Trustee is acting as the Conversion Agent, the Trustee shall be entitled to rely conclusively on the conversion price set forth in the Officer's Certificate most recently received by the Trustee (or as set forth in the Securities and this Indenture if the conversion price shall not have been adjusted). SECTION 10.6. Notice of Certain Corporate Action. (1) In case: (a) the Company shall authorize the granting to holders of its shares of Common Stock of rights or warrants entitling them to subscribe for or purchase any shares of Capital Stock of any class or of any other rights; or (b) of any reclassification of the shares of Common Stock of the Company, or of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (c) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of the Securities pursuant to Section 2.3 and shall cause to be mailed to the Trustee and all Holders of the Securities at their last addresses as they shall appear in the Security Register, at least 20 days (or 10 days in any case specified in clause (a) or (b) above) prior to the applicable record date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the Holders of shares of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of shares of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. Such notice shall also state whether such transaction will result in any adjustment in the conversion price applicable to the Securities and, if so, shall state what the adjusted conversion price will be and when it will become effective. Neither the failure to give the notice required by this Section, nor any defect therein, to any particular Holder shall affect the sufficiency of the notice or the legality or validity of any such dividend, distribution, right, warrant, reclassification, consolidation, merger, sale, transfer, liquidation, dissolution or winding-up, or the vote on any action authorizing such with respect to the other holders. (2) In case the Company or any Affiliate of the Company shall propose to engage in a "Rule 13e-3 Transaction" as defined in the Commission's Rule 13e-3 under the -38- 44 Exchange Act, the Company shall, no later than the date on which any information with respect to such Rule 13e-3 Transaction is first required to be given to the Commission or any other Person pursuant to such Rule 13e-3, cause to be mailed to all Holders at their last addresses as they shall appear in the Security Register, a copy of all information required to be given to the holders of the Company's Capital Stock pursuant to such Rule 13e-3. The information required to be given under this paragraph shall be in addition to and not in lieu of any other information required to be given by the Company pursuant to this Section 10.6 or any other provision of the Securities or this Indenture. SECTION 10.7. Taxes on Conversions. The Company will pay any and all stamp or similar taxes that may be payable in respect of the issuance or delivery of shares of Common Stock on conversion of the Securities pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that of the Holder of the Security or Securities to be converted, and no such issuance or delivery shall be made unless and until the Person requesting such issuance has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid. SECTION 10.8. Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon any conversion of the Securities. If any such conversion would otherwise require the issuance of a fractional share an amount equal to such fraction multiplied by the current market price per share of Common Stock (determined as provided in paragraph (6) of Section 10.4) on the day of conversion shall be paid to the Holder in cash by the Company. SECTION 10.9. Cancellation of Converted Securities. All Securities delivered for conversion shall be delivered to the Trustee and upon Company Order certifying that certificates representing the number of fully paid and nonassessable shares of Common Stock required to be delivered by the Company pursuant to Section 10.2 have been delivered, the Trustee shall cancel and dispose of the same as provided in Section 2.9. SECTION 10.10. Provisions in Case of Consolidation, Merger or Sale of Assets. (1) In case of any consolidation of the Company with, or merger of the Company into, any Person, or in case of any merger of another Person into the Company (other than a consolidation or merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock), or in case of any sale or transfer of all or substantially all of the assets of the Company, the Person formed by such consolidation or resulting from such merger or which acquires such assets, as the case may be, shall execute and deliver to the Trustee a supplemental indenture providing that the Holder of each Security then outstanding shall have the right thereafter, during the period such Security -39- 45 shall be convertible as specified in Section 10.1 to convert such Security only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock into which such Security might have been converted immediately prior to such consolidation, merger, sale or transfer. Such supplemental indenture shall provide for adjustments which, for events subsequent to the effective date of such supplemental indenture, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article X. The above provisions of this Section 10.10 shall similarly apply to successive consolidations, mergers, sales or transfers. (2) The Trustee shall not be under any responsibility to determine the correctness of any provisions contained in any such supplemental indenture relating either to the kind or amount of shares of stock or securities or property receivable by Holders upon the conversion of their Securities after any such reclassification, change, consolidation, merger, sale or conveyance or to any adjustment to be made with respect thereto. SECTION 10.11. Disclaimer by Trustee of Responsibility for Certain Matters. The Trustee and each Conversion Agent (other than the Company or any Subsidiary) shall not at any time be under any duty or responsibility to any Holder of the Securities to determine whether any facts exist which may require any adjustment of the conversion price, how it should be calculated or what it should be, or with respect to the nature or extent or accuracy of computation of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. The Trustee and each Conversion Agent (other than the Company or any Subsidiary) shall not be accountable with respect to the validity, value, kind or amount of any shares of Common Stock, or of any securities or property, which may at any time be issued or delivered upon the conversion of any Security; and it makes no representation with respect thereto. The Trustee and each Conversion Agent (other than the Company or any Subsidiary) shall not be responsible for any failure of the Company to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property upon the surrender of any Security for the purpose of conversion or, subject to Section 7.1, to comply with any of the covenants of the Company contained in this Article X. SECTION 10.12. Covenant to Reserve Shares. The Company covenants that it will at all times reserve and keep available, free from preemptive rights, out of its authorized shares of Common Stock, solely for the purpose of issuance upon conversion of the Securities as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of all outstanding Securities. The Company covenants that all shares of Common Stock which shall be so issuable shall be, when issued, duly and validly issued and fully paid and non-assessable. For purposes of this Section 10.12, the number of shares of Common Stock which shall be deliverable upon the conversion of all outstanding Securities shall be computed as if at the time of computation all outstanding Securities were held by a single holder. -40- 46 ARTICLE XI. SUBORDINATION; SENIORITY SECTION 11.1. Securities Subordinated to Senior Indebtedness. (1) The Company agrees, and each Holder of the Securities by his acceptance thereof likewise agrees, that the payment of the principal of, premium, if any, and interest on the Securities (all of the foregoing, a "Payment or Distribution") is subordinated and junior in right of payment, except as provided in Section 8.1, to the extent and in the manner provided in this Article XI, to the prior payment in full in cash of all Senior Indebtedness whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed. A Payment or Distribution shall include any asset of any kind or character, and may consist of cash, securities or other property, by set-off or otherwise, and shall include, without limitation, any purchase, redemption or other acquisition of Securities or the making of any deposit of funds or securities pursuant to this Indenture (including, without limitation, any deposit pursuant to Article VIII hereof). (2) The Senior Indebtedness of the Company shall continue to be Senior Indebtedness and entitled to the benefit of these subordination provisions irrespective of any amendment, modification or waiver of any term of any instrument relating to refinancing of the Senior Indebtedness. There shall be no limit on the amount of Senior Indebtedness that the Company may incur. (3) All the provisions of this Indenture and the Securities shall be subject to the provisions of this Article XI so far as they may be applicable thereto, except that nothing in this Article XI shall apply to claims for, or payments to, the Trustee under or pursuant to Article VII of this Indenture. (4) No right of any holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time or in any way be affected or impaired by any failure to act on the part of the Company, any Paying Agent, the Holders of the Securities, the Trustee or the holders of the Senior Indebtedness, or by any noncompliance by the Company, any Paying Agent, the Holders of the Securities or the Trustee with any of the terms, provisions and covenants of the Securities or this Indenture, regardless of any knowledge thereof that any such holder of Senior Indebtedness may have or be otherwise charged with. SECTION 11.2. Company Not to Make Payments with Respect to Securities in Certain Circumstances. No Payment or Distribution shall be made by the Company, the Trustee or any Paying Agent on account of principal of, premium, if any, or interest on the Securities, whether upon stated maturity, upon redemption or acceleration, or otherwise, or on account of the purchase or other acquisition of Securities, whether upon stated maturity, upon redemption or acceleration, or otherwise, if there shall have occurred and be continuing a default with respect to -41- 47 any Senior Indebtedness permitting the acceleration thereof or with respect to the payment of any Senior Indebtedness and (a) such default is the subject of a judicial proceeding or (b) written notice of such default has been given to the Company by any holder or holders of any Senior Indebtedness, unless and until such default or event of default shall have been cured or waived or shall have ceased to exist. Upon any acceleration of the principal of the Securities or any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding up or liquidation or reorganization of the Company, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or other proceedings, all amounts due or to become due upon all Senior Indebtedness shall first be paid in full in cash, or payment thereof provided for to the satisfaction of the holders thereof, before any Payment or Distribution is made on account of the redemption price or principal of (and premium, if any) or interest on the Securities; and (subject to the power of a court of competent jurisdiction to make other equitable provision, which shall have been determined by such court to give effect to the rights conferred in this Article upon the Senior Indebtedness and the holders thereof with respect to the Securities or the Holders thereof or the Trustee, by a lawful plan of reorganization or readjustment under applicable law) upon any such dissolution or winding up or liquidation or reorganization, any Payment or Distribution by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than securities of the Company as reorganized or readjusted or securities of the Company or any other company, trust or corporation provided for by a plan of reorganization or readjustment, the payment of which is junior or otherwise subordinate, at least to the extent provided in this Article XI with respect to the Securities to the payment of all Senior Indebtedness at the time outstanding and to the payment of all securities issued in exchange therefor to the holders of the Senior Indebtedness at the time outstanding, and the rights of the holders of Senior Indebtedness of the Company are not altered by such plan of reorganization or readjustment), to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article XI, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such Payment or Distribution directly to the holders of Senior Indebtedness of the Company or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay all Senior Indebtedness in full in cash, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any Payment or Distribution is made to the Holders of the Securities or to the Trustee, except that the Trustee will have a first priority lien for the payment of its fees, expenses and any right to indemnity provided for herein. In the event that, notwithstanding the foregoing, any Payment or Distribution by the Company of any kind or character, (whether such payment shall be in cash, property or securities) which is prohibited by the foregoing, shall have been made to the Trustee or the Holders of the Securities before all Senior Indebtedness is paid in full in cash, or provision is made for such payment to the satisfaction of the holders thereof, and if such fact shall then have been or thereafter be made known to a Trust Officer of the Trustee or, as the case may be, such -42- 48 Holder, then and in such event such Payment or Distribution shall be paid over by the Trustee (if the Notice required by Section 11.5 has been timely received by the Trustee) or such Holder or delivered to the holders of Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in cash, after giving effect to any concurrent Payment or Distribution to or for the holders of such Senior Indebtedness, and, until so delivered, the same shall be held in trust by any Holder of a Security as the property of the holders of Senior Indebtedness.. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided in Article V shall not be deemed a dissolution, winding up, liquidation or reorganization for the purposes of this Section 11.2 if such other Person shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article V. Nothing in this Section shall apply to claims of, or payments to, the Trustee under or pursuant to Section 7.7. The holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Holders of the Securities, without incurring responsibility to the Holders of the Securities and without impairing or releasing the obligations of the Holders of the Securities hereunder to the holders of Senior Indebtedness: (i) change the manner, place or terms of payment or change or extend the time of payment of, or renew or alter, Senior Indebtedness, or otherwise amend in any manner Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Senior Indebtedness; (iv) apply any amounts received to any liability of the Company owing to holders of Senior Indebtedness; and/or (v) exercise or refrain from exercising any rights against the Company and any other Person. SECTION 11.3. Subrogation of Securities. Subject to the payment in full in cash of all amounts then due (whether by acceleration of the maturity thereof or otherwise) on account of all Senior Indebtedness at the time outstanding, the Holders of the Securities shall be subrogated to the rights of the holders of Senior Indebtedness to receive Payments or Distributions of cash, property or securities of the Company applicable to the Senior Indebtedness until the principal of, premium, if any, and interest on the Securities shall be paid in full; and, for the purposes of such subrogation, no Payments or Distributions to the holders of Senior Indebtedness to which the Holders of the Securities would be entitled except for the provisions of this Article XI, and no payments over pursuant to the provisions of this Article XI to the holders of Senior Indebtedness by Holders of the Securities, shall, as between the Company, the Company's creditors other than holders of Senior Indebtedness, and the Holders of the Securities, be deemed to be a payment by the -43- 49 Company to or on account of the Senior Indebtedness. It is understood that the provisions of this Article XI are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities, on the one hand, and the holders of Senior Indebtedness, on the other hand. Nothing contained in this Article XI or elsewhere in this Indenture or in the Securities is intended to or shall impair, as among the Company, its creditors other than the holders of Senior Indebtedness, and the Holders of the Securities, the obligation of the Company, which is absolute and unconditional, to pay to the Holders of the Securities the principal of, premium, if any, and interest on the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders of the Securities and creditors of the Company other than the holders of Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article XI of the holders of Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy. Nothing in this Article XI shall prevent conversions of Securities pursuant to Article X. Upon any payment or distribution of assets of the Company referred to in this Article XI, the Trustee, subject to the provisions of Section 7.1, and the Holders of the Securities shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which any dissolution, winding up, liquidation or reorganization proceedings are pending, or certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of the Securities, for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XI. SECTION 11.4. Authorization by Holders of Securities. Each holder of a Security by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as it believes is necessary or appropriate to effectuate, as between the Holder of the Security and the holders of Senior Indebtedness, the subordination provided in this Article XI and appoints the Trustee his attorney-in-fact for any and all such purposes including, without limitation, to execute, verify, deliver and file any proofs of claim which any holder of Senior Indebtedness may at any time require in order to prove and realize upon any rights or claims pertaining to the Securities and to effectuate the full benefit of the subordination contained herein. If the Trustee shall fail to do so prior to 30 days prior to the expiration of the period for filing such claims, any such holder of Senior Indebtedness shall be deemed to be irrevocably appointed the agent and attorney-in-fact of the Holder to execute, verify, deliver and file any such proofs of claim; provided that no holder of Senior Indebtedness shall incur any liability for any failure to exercise its right to file any such proofs of claim. -44- 50 SECTION 11.5. Notices to Trustee. The Company shall give prompt written notice to the Trustee of any fact known to it which would prohibit the making of any payment of moneys to or by the Trustee in respect of the Securities pursuant to the provisions of this Article XI. Notwithstanding the provisions of this Article XI or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment of moneys to or by the Trustee in respect of the Securities pursuant to the provisions of this Article XI unless and until a Trust Officer of the Trustee shall have received at its Corporate Trust Office written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee or agent therefor; and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of Section 7.1, shall be entitled in all respects to assume that no such facts exist; provided, however, that if a Trust Officer of the Trustee shall not have received at least three Business Days prior to the date upon which by the terms hereof any such moneys may become payable for any purpose (including, without limitation, the payment of the principal of, premium, if any, or interest on any Security) with respect to such moneys the notice provided for in this Section 11.5, then, anything herein contained to the contrary notwithstanding, the Trustee shall have the full power and authority to receive such moneys and to apply the same to the purpose for which they were received and shall not be affected by any notice to the contrary which may be received by it within three Business Days prior to such date or at any time thereafter. The Trustee shall be entitled to rely conclusively on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee on behalf of such holder) to establish that such notice has been given by a holder of Senior Indebtedness or a trustee or agent on behalf of any such holder. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article XI, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XI, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 11.6. Trustee's Relation to Senior Indebtedness. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XI in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in Section 7.11 or elsewhere in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XI, and no implied covenants or obligations with respect to the holders of Senior -45- 51 Indebtedness shall be read into this Indenture against the Trustee. The Trustee and Paying Agent shall not owe any duty to the holders of Senior Indebtedness and shall not be liable to any such holder or representative if any sums are paid over or distributed to Holders of the Securities or the Company or any other Person money or assets to which any holder of Senior Indebtedness shall be entitled by virtue of this Article XI or otherwise. SECTION 11.7. No Impairment of Subordination. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, the Trustee or the Holder of any of the Securities or by any act, or failure to act, in good faith, by any such holder of Senior Indebtedness, or by any noncompliance by the Company, the Trustee or the Holder of any of the Securities with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof which any such holder may have or otherwise be charged with. SECTION 11.8. Article XI Not To Prevent Events of Default. The failure to make a payment on account of principal of, premium, if any, or interest on the Securities by reason of any provision in this Article XI shall not be construed as preventing the occurrence of an Event of Default with respect to such Securities under Section 6.1. SECTION 11.9. Paying Agents other than the Trustee. In any case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article XI shall in such case (unless the context shall otherwise require) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article XI in addition to or in place of the Trustee. SECTION 11.10. Securities Senior to Subordinated Indebtedness. The indebtedness represented by the Securities will be senior and prior in right of payment to all Subordinated Indebtedness, to the extent and in the manner provided in such Subordinated Indebtedness. ARTICLE XII. CHANGE IN CONTROL SECTION 12.1. Right to Require Repurchase. In the event that there shall occur a Change in Control (as defined in Section 12.5), each Holder shall have the right, at such Holder's option, to require the Company to purchase, and upon the exercise of such right, the Company shall, subject to the provisions of -46- 52 Article XI, purchase, all or any part of such Holder's Securities on the date (the "Repurchase Date") that is 75 days after the date the Company gives notice of the Change in Control as contemplated in Section 12.2(1) at a price (the "Repurchase Price") equal to 101% of the principal amount thereof, together with accrued and unpaid interest to the Repurchase Date. In connection with the exercise of the repurchase right by a Holder prior to a Redemption Date, a Holder's right to exercise his repurchase right shall terminate at the close of business on the Business Day prior to the Redemption Date. SECTION 12.2. Notice; Method of Exercising Repurchase Right. (1) On or before the 15th day after the occurrence of a Change in Control, the Company or, at the written request of the Company, the Trustee (in the name and at the expense of the Company), shall give notice of the occurrence of the Change in Control and of the repurchase right set forth herein arising as a result thereof by first-class mail, postage prepaid, to each Holder at such Holder's address appearing in the Security Register. The Company shall also deliver a copy of such notice of a repurchase right to the Trustee. Each notice of a repurchase right shall state: (a) the event constituting the Change in Control and the date thereof; (b) the Repurchase Date; (c) the date by which the repurchase right must be exercised; (d) the Repurchase Price; and (e) the procedures a Holder must follow to exercise a repurchase right. No failure of the Company to give the foregoing notice shall limit any Holder's right to exercise a repurchase right. The Trustee shall have no affirmative obligation to determine if there shall have occurred a Change in Control. (2) To exercise a repurchase right, a Holder shall deliver to the Company (or an agent designated by the Company for such purpose in the notice referred to in (1) above) and to the Trustee on or before the tenth day prior to the Repurchase Date (a) written notice of the Holder's exercise of such right, which notice shall set forth the name of the Holder, the principal amount of the Security or Securities (or portion of a Security) to be repurchased and a statement that an election to exercise the repurchase right is being made thereby and (b) the Security or Securities with respect to which the repurchase right is being exercised, duly endorsed for transfer to the Company. Such written notice shall be irrevocable. If the Repurchase Date falls between any Regular Record Date and the next succeeding Interest Payment Date, Securities to be repurchased must be accompanied by payment from the Holder of an amount equal to the interest thereon which the registered Holder thereof is to receive on such Interest Payment Date. A Holder that fails to exercise a repurchase right in accordance with the terms hereof shall waive -47- 53 such repurchase right but the rights of such Holder to receive principal of and interest on the Securities and all other rights of such Holder under this Indenture shall not be affected thereby. (3) In the event a repurchase right shall be exercised in accordance with the terms hereof, the Company shall on the Repurchase Date pay or cause to be paid in cash to the Holder thereof the Repurchase Price of the Security or Securities as to which the repurchase right has been exercised. In the event that a repurchase right is exercised with respect to less than the entire principal amount of a surrendered Security, the Company shall execute and deliver to the Trustee and the Trustee shall authenticate for issuance in the name of the Holder a new Security or new Securities in the aggregate principal amount of the unrepurchased portion of such surrendered Security. SECTION 12.3. Deposit Of Repurchase Price . On or prior to the Repurchase Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 2.4) an amount of money sufficient to pay the Repurchase Price of the Notes which are to be repaid on the Repurchase Date. SECTION 12.4. Securities Not Repurchased On Repurchase Date. If any Security surrendered for repurchase shall not be so paid on the Repurchase Date, the principal shall, until paid, bear interest to the extent permitted by applicable law from the Repurchase Date at the rate per annum borne by such Security. SECTION 12.5 "Change In Control" Defined For purposes of this Article, "Change In Control" means any of the following events that occur after the date of this Indenture and on or prior to such date as no Securities remain outstanding: (1) all or substantially all of the Company's assets are sold as an entirety to any person or related group of persons; (2) there shall be consummated any consolidation or merger of the Company (a) in which the Company is not the continuing or surviving corporation (other than a consolidation or merger with a wholly-owned subsidiary of the Company in which all Common Stock outstanding immediately prior to the effectiveness thereof are changed into or exchanged for the same consideration) or (b) pursuant to which the Common Stock are converted into cash, securities or other property, in each case other than a consolidation or merger of the Company in which the holders of the Common Stock immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger; or (3) any person, or any persons acting together which would constitute a "group" for purposes of Section 13(d) of the Securities Exchange Act of 1934 (a "Group"), together with -48- 54 any Affiliates thereof, shall acquire beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of at least 50% of the total voting power of all classes of Capital Stock of the Company entitled to vote generally in the election of directors of the Company. Notwithstanding anything to the contrary set forth in this definition, a Change in Control shall not be deemed to have occurred: (A) under paragraph (3) above, solely by virtue of the Company, any Subsidiary, any employee share purchase plan, share option plan or other share incentive plan or program, retirement plan or automatic dividend reinvestment plan or any substantially similar plan of the Company or any Subsidiary or any Person holding securities of the Company for or pursuant to the terms of any such employee benefit plan, filing or becoming obligated to file a report under or in response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report) under the Securities Exchange Act of 1934 disclosing beneficial ownership by it of Capital Stock of the Company, whether at least 50% of the total voting power referred to in paragraph (3) above, or otherwise; or (B) under paragraphs (1), (2) or (3) above if: (i) the Current Market Price of the Common Stock on the date the Change in Control shall have occurred is at least equal to 105% of the conversion price in effect immediately preceding the time of such Change in Control; or (ii) all of the consideration (excluding cash payments for fractional shares) in the transaction giving rise to such Change in Control to the holders of Common Stock consists of common stock that is, or immediately upon issuance will be, listed on a national securities exchange or quoted on the Nasdaq National Market, and as a result of such transaction the Securities become convertible solely into such common stock; or (iii) the consideration in the transaction giving rise to such Change in Control to the holders of Common Stock consists of cash, securities that are, or immediately upon issuance will be, listed on a national securities exchange or quoted on the Nasdaq National Market, or a combination of cash and such securities, and the aggregate fair market value of such consideration (which, in the case of such securities, shall be equal to the average of the daily Closing Prices of such securities during the ten consecutive Trading Days commencing with the sixth Trading Day following consummation of such transaction) is at least 105% of the conversion price in effect on the date immediately preceding the closing date of such transaction. If a Change in Control shall have occurred under paragraph (2) above, the Company shall deliver the Officers' Certificate and Opinion of Counsel called for under Section 13.4 as well as the notices called for under Section 10.5. -49- 55 For purposes of this definition of Change of Control, "Current Market Price" on any date means the average daily Closing Prices for the five consecutive Trading Days selected by the Company commencing not more than ten Trading Days before, and ending not later than, the date in question; and "Trading Day", with respect to any stock exchange or securities market, means any Monday, Tuesday, Wednesday, Thursday or Friday on which such stock exchange or securities market is open for business. ARTICLE XIII. MISCELLANEOUS SECTION 13.1. Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provisions shall control. The provisions of TIA Sections 310 through 317 that impose duties on any Person (including the provisions automatically deemed included herein unless expressly excluded by this Indenture) are a part of and govern this Indenture, whether or not physically contained herein. SECTION 13.2. Notices. Any notices or other communications required or permitted hereunder shall be in writing, and shall be sufficiently given if made by hand delivery, or first class mail, postage prepaid (except that any notice by the Trustee to the Company of a default or an Event of Default under this Indenture shall be by registered or certified mail, postage prepaid, return receipt requested), or by a nationally-recognized overnight express courier service (which notices or communications shall be deemed received, in the case of the Company, the business day after the receipt thereof by such service and, in the case of the Trustee, upon receipt), addressed as follows: if to the Company: American Retirement Corporation 111 Westwood Place Suite 402 Brentwood, Tennessee 37027 Attention: Chief Financial Officer -50- 56 Telephone: 615-221-2250 Telecopier: 615-221-2269 if to the Trustee: IBJ Schroder Bank & Trust Company Corporate Trust Office One State Street New York, New York 10004 Telephone: 212-858-2815 Telecopier: 212-858-2952 The Company or the Trustee by notice to the other may designate additional or different addresses as shall be furnished in writing by either party. Any notice or communication to the Company or the Trustee shall be deemed to have been given or made as of the date so delivered if personally delivered, and five (5) calendar days after mailing if sent by registered or certified mail (except that a notice of change of address shall not be deemed to have been given until actually received by the addressee). Any notice or communication mailed to a Securityholder shall be mailed to the address of such Securityholder as it appears on the registration books of the Registrar and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. In case by reason of the suspension of regular mail service, or by reason of any other cause, it shall be impossible to mail any notice, as required by this Indenture, then such method of notification as shall be made with the approval of the Trustee shall constitute a sufficient mailing of such notice. If the Company mails any notice or communication to Securityholders, it shall mail a copy to the Trustee and all Agents at the same time. SECTION 13.3. Communications by Holders with Other Holders. Securityholders may communicate pursuant to TIA ss. 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA ss. 312(c). SECTION 13.4. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, or upon the request of the Trustee with respect to any matter relating to the -51- 57 performance of its rights, duties or obligations hereunder, the Company shall furnish to the Trustee: (1) an Officers' Certificate (which shall include the statements set forth in Section 13.5) stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel (which shall include the statements set forth in Section 13.5) stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 13.5. Statements Required in Certificate and Opinion. Each Certificate and Opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that the Person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such Person, such covenant or condition has been complied with. SECTION 13.6. Rules by Trustee and Agents. The Trustee may make reasonable rules for action by or at a meeting of Securityholders. The Registrar, Paying Agent or Conversion Agent may make reasonable rules for its functions. SECTION 13.7. Record Date. Whenever the Company or the Trustee solicits an act of Securityholders, the Company or the Trustee may fix in advance of the solicitation of such act a date as the record date for determining Securityholders entitled to perform said act. The record date shall be not more than 15 days prior to the date fixed for the solicitation of said act. -52- 58 SECTION 13.8. Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday or a day on which banks or trust companies in the city in which either the Trustee or the Company is located are not required to be open. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. SECTION 13.9. Governing Law. The laws of the State of New York shall govern this Indenture and the Securities without regard to principles of conflicts of law. Each of the parties hereto agrees to submit to the jurisdiction of the Courts of the State of New York and the U.S. Federal Courts, in each case sitting in the Borough of Manhattan, and waives any objection as to venue or forum non conveniens. SECTION 13.10. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or a Subsidiary. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 13.11. No Recourse Against Others. No shareholder, director or officer, as such, past, present or future, of the Company or of any successor corporation or trust shall have any liability for any obligation of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder of a Security by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. SECTION 13.12. Successors. All agreements of the Company in this Indenture and the Securities shall bind its successor. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 13.13. Multiple Counterparts. The parties may sign multiple counterparts of this Indenture. Each signed counterpart shall be deemed an original, but all of them together represent the same agreement. SECTION 13.14. Table of Contents, Headings, etc. The table of contents, cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. -53- 59 SECTION 13.15. Severability. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, and a Holder shall have no claim therefor against any party hereto. (Signature page follows.) -54- 60 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the date first written above. AMERICAN RETIREMENT CORPORATION, a Tennessee corporation By: ------------------------------------ Name: Title: By: ------------------------------------ Name: Title: IBJ SCHRODER BANK & TRUST COMPANY, ----------------------------, as Trustee -55- 61 EXHIBIT A FORM OF SECURITY [Attached] 62 FORM OF SECURITY [FORM OF FACE OF SECURITY] AMERICAN RETIREMENT CORPORATION ___% Convertible Subordinated Debenture Due 2002 AMERICAN RETIREMENT CORPORATION, a Tennessee corporation, promises to pay to ________________________________ or registered assigns, the principal sum of _____________ Dollars, on _______, 2002. Interest Payment Dates: _________ and ___________ Record Dates: __________ and ___________ Additional provisions of this Security are set forth on other side of this Security. Dated: CERTIFICATE OF AUTHENTICATION AMERICAN RETIREMENT CORPORATION IBJ SCHRODER BANK & TRUST COMPANY as Trustee, certifies that this is one of the Securities referred By: to in the within mentioned ----------------------------- Indenture. By: By: ------------------------------ ----------------------------- Authorized Signatory 63 [FORM OF REVERSE OF SECURITY] AMERICAN RETIREMENT CORPORATION ___% Convertible Subordinated Debenture Due 2002 1. Interest. American Retirement Corporation, a Tennessee corporation (the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semiannually on _________ and _________ of each year beginning __________, 1998. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from ___________, 1997; provided that, if there is no existing Default in the payment of interest, and if this Security is authenticated between a record date referred to on the face hereof and the next succeeding interest payment date, interest shall accrue from such interest payment date. Interest will be computed on the basis of a 360 day year of twelve 30-day months. 2. Method of Payment. The Company will pay interest on the Securities (except defaulted interest) to the persons who are the registered Holders of the Securities at the close of business on the ________ or __________ immediately preceding the interest payment date. Holders must surrender Securities to a Paying Agent to collect final principal and premium payments. The Company will pay principal, premium and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Company, however, may pay principal, premium and interest by its check payable in such money. It may mail an interest check to a Holder's registered address. The payment of principal of and premium, if any, on this Security shall be payable only upon surrender of this Security at the office or agency of the Paying Agent in the Borough of Manhattan, City and State of New York. Payments of principal of, premium, if any, and interest on this Security shall be made at the office or agency of the Trustee maintained in the Borough of Manhattan, City and State of New York, or, in the case of any such payments other than the payment of principal and premium, if any, at the Company's option, by check mailed to the Person entitled thereto at such Person's address last appearing on the Company's register. 3. Registrar and Agents. Initially, IBJ Schroder Bank & Trust Company ("IBJ") will act as Registrar, Paying Agent, Conversion Agent and agent for service of notices and demands. The Company may change any Registrar, co-registrar, Paying Agent, Conversion Agent and agent for service of notices and demands without notice. The Company or any of its Subsidiaries may act as Paying Agent or Conversion Agent. The address of IBJ is One State Street, New York, New York 10004. 4. Indenture; Limitations. The Company issued the Securities under an Indenture, dated as of ___________, 1997 (the "Indenture"), between the Company and IBJ (the "Trustee"). Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code ss.ss. 77aaa- 64 77bbbb) as in effect on the date of the Indenture. The Securities are subject to all such terms, and the Holders of the Securities are referred to the Indenture and said Act for a statement of them. The Securities are general unsecured obligations of the Company limited to $_____________ principal amount. The Indenture imposes certain limitations on the ability of the Company to, among other things, make payments in respect of its Capital Stock, merge or consolidate with any other Person or transfer substantially all of its assets. 5. Optional Redemption by the Company. The Company may, at its option, redeem the Securities at any time or from time to time, in whole or in part, together with accrued and unpaid interest to the Redemption Date, on or after _________, 2000 at a redemption price equal to 100% of the principal amount thereof. 6. Notice of Redemption. Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Securities to be redeemed at his registered address. Securities in denominations larger than $1,000 principal amount may be redeemed in part, but only in whole multiples thereof. On and after the Redemption Date interest ceases to accrue on Securities or portions of them called for redemption. 7. Conversion. A Holder of a Security may convert such Security into shares of common stock of the Company at any time on or after December 31, 1997 until the close of business on _________, 2002. If the Security is called for redemption, the Holder may convert it at any time before the close of business on the date fixed for such redemption. The initial conversion price is $_____ per share, subject to adjustment in certain events. To determine the number of shares issuable upon conversion of a Security, divide the principal amount to be converted by the conversion price in effect on the conversion date. The Company will deliver a check for any fractional share. To convert a Security, a Holder must (1) complete and sign the conversion notice on the back of the Security, (2) surrender the Security to the Conversion Agent, (3) furnish appropriate endorsements and transfer documents if required by the Registrar or Conversion Agent, and (4) pay any transfer or similar tax if required. No payment or adjustment is to be made on conversion for interest accrued hereon or for dividends on shares of common stock issued on conversion; provided, however, that if a Security is surrendered for conversion after the record date for a payment of interest and on or before the interest payment date, then, notwithstanding such conversion, the interest falling due to such interest payment date will be paid to the Person in whose name the Security is registered at the close of business on such record date and any Security surrendered for conversion during the period from the close of business on any regular record date to the opening of business on the corresponding interest payment date must be accompanied by payment of an amount equal to the interest payable on such interest payment date. A Holder may convert a portion of a Security if the portion is $1,000 principal amount or an integral multiple thereof. -2- 65 If the Company is a party to a consolidation or merger or a transfer or lease of all or substantially all of its assets, the right to convert a Security into shares of common stock may be changed into a right to convert it into securities, cash or other assets of the Company or another Person. 8. Subordination. This Security is subordinated to all Senior Indebtedness of the Company. To the extent and in the manner provided in the Indenture, Senior Indebtedness must be paid before any payment may be made to any Holders of Securities. Any Securityholder by accepting this Security agrees to such subordination and authorizes the Trustee to give it effect. In addition to all other rights of Senior Indebtedness described in the Indenture, the Senior Indebtedness shall continue to be Senior Indebtedness and entitled to the benefits of the subordination provisions irrespective of any amendment, modification or waiver of any term of any instrument relating to the Senior Indebtedness or extension or renewal of the Senior Indebtedness. 9. Right to Require Repurchase. In certain circumstances involving the occurrence of a Change in Control (as defined in the Indenture), the Holder hereof shall have the right to require the Company to repurchase this Security at 101% of the principal amount hereof, together with accrued interest to the Repurchase Date, or as provided in the Indenture. In connection with the exercise of the repurchase right by a Holder prior to a Redemption Date, a Holder's right to exercise such repurchase right shall terminate at the close of business on the Business Day prior to the Redemption Date. 10. Denominations, Transfer, Exchange. The Securities issued under the Indenture are in the aggregate principal amount of up to $100,000,000. The Securities are in registered form without coupons in denominations of $1,000 principal amount and integral multiples thereof. A Holder may register the transfer of or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange any Securities selected for redemption or register the transfer of or exchange any Securities for a period of 15 days before a selection of Securities to be redeemed. 11. Persons Deemed Owners. The registered Holder of a Security may be treated as its owner for all purposes. 12. Unclaimed Money. If money for the payment of principal or interest on any Securities remains unclaimed for two years, the Trustee and the Paying Agent will pay the money back to the Company at its written request. After that, Holders may look only to the Company for payment. 13. Discharge Prior to Redemption or Maturity. The Indenture will be discharged and canceled except for certain sections thereof upon payment of all the Securities, or upon the irrevocable deposit with the Trustee of funds or U.S. Government Obligations maturing -3- 66 on or before such payment date or Redemption Date, sufficient to pay principal, premium, if any, and interest on such payment or redemption. 14. Amendment and Waiver. Subject to certain exceptions, without notice to the Holders of the Securities, the Indenture or the Securities may be amended with the consent of the Holders of at least 66-2/3% in principal amount of the Securities then outstanding and any existing default or compliance with any provision may be waived with the consent of the Holders of a majority in principal amount of the Securities then outstanding. Without the consent of or notice to any Securityholder, the Company may amend or supplement the Indenture or the Securities to, among other things, provide for uncertificated Securities, to cure any ambiguity, defect or inconsistency or make any other change that does not adversely affect the rights of any Securityholder. 15. Successors. When a successor assumes all the obligations of its predecessor under the Securities and the Indenture, the predecessor will be released from those obligations. 16. Defaults and Remedies. If an Event of Default, as defined in the Indenture (other than a Event of Default relating to bankruptcy of the Company), occurs and is continuing, the Trustee or the Holders of a majority in principal amount of Securities may declare all the Securities to be due and payable immediately in the manner and with the effect provided in the Indenture. If an Event of Default relating to bankruptcy of the Company occurs, then all Securities shall become immediately due and payable without any declaration or act on the part of the Trustee or any Holder. Holders of Securities may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it, subject to the provisions of the TIA, before it enforces the Indenture or the Securities. Subject to certain limitations, Holders of a majority in principal amount of the Securities then outstanding may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of Securities notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Company is required to file periodic reports with the Trustee as to the absence of any Default or Event of Default. 17. Trustee Dealings with the Company. IBJ Schroder Bank & Trust Company, the Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not Trustee. 18. No Recourse Against Others. No shareholder, director, officer or incorporator, as such, past, present or future, of the Company or any successor corporation shall have any liability for any obligation of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder of a Security by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. -4- 67 19. Authentication. This Security shall not be valid until the Trustee signs the certificate of authentication on the other side of this Security. 20. Abbreviations. Customary abbreviations may be used in the name of a Securityholder or an assignee, such as: TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=Custodian), and U/G/M/A (=Uniform Gifts to Minors Act). The Company will furnish to any Securityholder upon written request and without charge a copy of the Indenture. It also will furnish the text of this Security in larger type. Requests may be made to: American Retirement Corporation, 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027. Attention: Chief Financial Officer. -5- 68 TRANSFER NOTICE If you, the Holder, want to assign this Security, fill in the form below and have your signature guaranteed: - -------------------------------------------------------------------------------- For value received, I or we assign and transfer this Security to (INSERT ASSIGNEE'S SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) agent - -------------------------------------------------------------------------- to transfer this Security on the books of the Company. The agent may substitute another to act for him. Date: -------------------------------------------------------------------------- Your signature: ---------------------------------------------------------------- (Sign exactly as your name appears on the other side of this Security) Signature Guaranteed by*: ------------------------------------------------------ * Signature must be guaranteed by an eligible guarantor institution within the meaning of Securities and Exchange Commission Rule 17Ad-15 (including banks, stock brokers, savings and loan associations, national securities exchanges, registered securities associations, clearing agencies and credit unions) with membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Registrar in addition to, or substitution for, STAMP, if this Security is to be delivered other than to and in the name of the registered holder. 69 CONVERSION NOTICE To convert this Security into shares of common stock of the Company, check the box: [ ] To convert only part of this Security, state the principal amount to be converted (which must be a minimum of $1,000 or any multiple thereof): [$ ] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- If you want the Security certificate, if any, made out in another person's name, fill in the form below: (INSERT OTHER PERSON'S SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER) [ ] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) Date: --------------------------------------------------------------------------- Your signature: ----------------------------------------------------------------- (Sign exactly as your name appears on the other side of this Security) Signature Guaranteed By*:_______________________________________________________ *Signature must be guaranteed by an eligible guarantor institution within the meaning of Securities and Exchange Commission Rule 17Ad-15 (including banks, stock brokers, savings and loan associations, national securities exchanges, registered securities associations, clearing agencies and credit unions) with membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Registrar in addition to, or substitution for, STAMP, if this Security is to be delivered other than to and in the name of the registered holder. EX-5 4 OPINION OF BASS, BERRY & SIMS PLC 1 B A S S, B E R R Y & S I M S P L C A PROFESSIONAL LIMITED LIABILITY COMPANY ATTORNEYS AT LAW 2700 FIRST AMERICAN CENTER 1700 RIVERVIEW TOWER NASHVILLE, TENNESSEE 37238-2700 POST OFFICE BOX 1509 TELEPHONE (615) 742-6200 KNOXVILLE, TENNESSEE 37901-1509 TELECOPIER (615) 742-6293 TELEPHONE (423) 521-6200 TELECOPIER (423) 521-6234 September 22, 1997 American Retirement Corporation 111 Westwood Place, Suite 402 Brentwood, Tennessee 37027 Re: Registration Statement on Form S-1 (File No. 333-34339) Ladies and Gentlemen: We have acted as your counsel in connection with your preparation of a Registration Statement on Form S-1 (the "Registration Statement") filed by you with the Securities and Exchange Commission on August 26, 1997, covering $115,000,000 principal amount of Convertible Subordinated Debentures (the "Debentures") of American Retirement Corporation (the "Company") to be sold by the Company to Schroder & Co. Inc. (the "Underwriter") for public distribution pursuant to the Underwriting Agreement between the Company and the Underwriter filed as an exhibit to the Registration Statement. Such $115,000,000 principal amount of Debentures includes $15,000,000 principal amount of Debentures that may be purchased by the Underwriter pursuant to the exercise of an option to cover over-allotments. In connection with this opinion, we have examined and relied upon such records, documents, certificates, and other instruments as in our judgment are necessary or appropriate in order to express the opinions hereinafter set forth and have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to original documents of all documents submitted to us as certified or photostatic copies. Based on the foregoing and such other matters as we have deemed relevant, we are of the opinion that the Debentures to be sold by the Company, when issued and delivered in the manner and on the terms described in the Registration Statement, will be validly issued, fully paid, and nonassessable. We hereby consent to the reference to our law firm in the Registration Statement under the caption "Legal Matters" and to the use of this opinion as an exhibit to the Registration Statement. Very truly yours, /s/ Bass, Berry & Sims PLC EX-23.1 5 CONSENT OF KPMG 1 EXHIBIT 23.1 The Board Of Directors of American Retirement Corporation: The audits of American Retirement Communities, L.P. referred to in our report dated January 22, 1997, except for Note 16, which is as of June 4, 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, except for Note 16, which is as of June 4, 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. /s/ KPMG PEAT MARWICK LLP ------------------------ KPMG Peat Marwick LLP Nashville, Tennessee September 22, 1997 -----END PRIVACY-ENHANCED MESSAGE-----