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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the fiscal year ended December 31, 1997
Commission file number 01-13031
American Retirement Corporation
(Exact Name of Registrant as Specified in its Charter)
Tennessee 62-1674303
- ------------------------------- ------------------------
(State or Other Jurisdiction of (I.R.S. Employer ID No.)
Incorporation or Organization)
111 Westwood Place, Suite 402, Brentwood, TN 37027
- -------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (615) 221-2250
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
Common Stock, par value $.01 per share ..................................... NYSE
5 3/4% Convertible Subordinated Debentures due 2002 ........................ NYSE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
------
As of March 20, 1998, 11,420,860 shares of the registrant's common
stock were outstanding and the aggregate market value of such common stock held
by non-affiliates was $130,584,599, based on the closing sale price of the
common stock of $22.625 on the New York Stock Exchange on that date. For
purposes of this calculation, shares held by non-affiliates excludes only those
shares beneficially owned by officers, directors, and shareholders owning 10% or
more of the outstanding common stock (and, in each case, their immediate family
members and affiliates).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for use in connection
with the Annual Meeting of Shareholders to be held on May 5, 1998 are
incorporated by reference into Part III of this report.
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PART I
ITEM 1. BUSINESS
THE COMPANY
American Retirement Corporation (the "Company") is a national senior
living and health care services company providing a broad range of care and
services to seniors, including independent living, assisted living, skilled
nursing, and home health care services. Established in 1978, the Company
currently operates 23 senior living communities in 12 states, consisting of 13
owned communities, four leased communities, and six managed communities, with an
aggregate capacity for approximately 7,000 residents. The Company also owns 11
home health care agencies based in or near its retirement communities and
manages four home health care agencies for third parties.
The Company has experienced significant growth since the early 1990s,
primarily through the acquisition of senior living communities. The Company
intends to continue its growth by developing senior living networks through a
combination of (i) selective acquisitions of senior living communities,
including assisted living residences; (ii) development of free-standing assisted
living residences, including special living units and programs for residents
with Alzheimer's and other forms of dementia; (iii) expansion of existing
communities; and (iv) development and acquisition of home health care agencies.
Pursuant to its growth strategy, the Company is currently developing 36
free-standing assisted living residences, with an estimated aggregate capacity
for approximately 3,200 residents, and is expanding six of its existing
communities to add capacity to accommodate approximately 500 additional
residents.
On January 29, 1998, the Company entered into a letter of intent to
acquire privately-held Freedom Group, Inc. ("FGI") and certain entities
affiliated with FGI and/or its Chairman. The acquisition would result in the
ownership of three continuing care retirement communities ("CCRCs") and
management of four additional CCRCs with an aggregate capacity for approximately
3,800 residents. Additionally, ARC would enter into development and management
contracts for, and acquire options to purchase, two other CCRCs currently under
development, which will add resident capacity of approximately 800. The
consideration to be paid is $28.8 million of cash and 1,385,000 shares of the
Company's common stock, par value $.01 per share (the "Common Stock"). The
letter of intent is non-binding and the transaction is subject to the completion
of definitive agreements and the satisfaction of customary closing conditions.
The transaction is expected to be completed in the second quarter of 1998 and to
be accounted for as a purchase.
Business History and Past Operations
The Company's operating philosophy was inspired by the vision of its
founders, Dr. Thomas F. Frist, Sr. and Jack C. Massey, to enhance the lives of
seniors by providing the highest quality of care and services in well-operated
communities designed to improve and protect the quality of life, independence,
personal freedom, privacy, spirit, and dignity of its residents.
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The 1995 Roll-Up
The Company's predecessor, American Retirement Communities, L.P. (the
"Predecessor" or "ARCLP"), was formed in February 1995 in connection with the
reorganization (the "1995 Roll-Up") of certain entities (the "Predecessor
Entities") that owned, operated, or managed various senior living communities.
Each of the Predecessor Entities was organized at the direction of the members
of the Company's management and controlling shareholders. As a result of the
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, whose members included W.E. Sheriff, the Company's
Chairman and Chief Executive Officer, and other Company executive officers.
Reorganization and Initial Public Offering
The Company was incorporated in February 1997 as a wholly-owned
subsidiary of ARCLP in anticipation of the Reorganization (defined below) and
the Company's initial public offering in May 1997 (the "IPO"). ARCLP was
reorganized (the "Reorganization") concurrent with the IPO such that all of its
assets and liabilities were contributed to the Company in exchange for 7,812,500
shares of the Company's Common Stock and a promissory note in the original
principal amount of approximately $21.9 million (the "Reorganization Note"). The
Company issued 3,593,750 shares of Common Stock in the IPO, resulting in net
proceeds $45.0 million. The Company used a portion of the net proceeds from the
IPO to repay the Reorganization Note.
CARE AND SERVICES PROGRAMS
The Company provides a wide array of senior living and health care
services to seniors at its communities, including independent living, assisted
living (with special programs and living units for residents with Alzheimer's
and other forms of dementia), skilled nursing, and home health care services. By
offering a variety of services and involving the active participation of the
resident and the resident's family and medical consultants, the Company is able
to customize its service plan to meet the specific needs and desires of each
resident. As a result, the Company believes that it is able to maximize customer
satisfaction and avoid the high cost of delivering all services to each 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 12
communities, leases four communities, and manages an additional five communities
that provide independent living services, with an aggregate capacity for 2,514
residents, 1,284 residents, and 1,491 residents, respectively.
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Independent living services provided by the Company include daily
meals, transportation, social and recreational activities, laundry,
housekeeping, security, and health care monitoring. The Company also fosters the
wellness of its residents by offering health screenings such as blood pressure
checks, periodic special services such as influenza inoculations, chronic
disease management (such as diabetes with its attendant blood glucose
monitoring), and dietary and similar programs, as well as ongoing exercise and
fitness classes. Classes are given by health care professionals to keep
residents informed about health and disease management. Subject to applicable
government regulation, personal care and medical services are available to
independent living residents through either community staff or through the
Company's or independent home health care agencies. The Company's contracts with
its independent living residents are generally for a term of one year and are
terminable by the resident upon 60 days' notice.
Assisted Living and Memory Impaired Services
The Company offers a wide range of assisted living care and services 24
hours per day, including personal care services, support services, and
supplemental services, at 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 when possible. Each resident's care plan
is reviewed periodically to determine when a change in care is needed.
The Company has adopted a philosophy of assisted living care that
allows a resident to maintain a dignified independent lifestyle. Residents and
their families are encouraged to be partners in their care and to take as much
responsibility for their well being as possible. The basic type of assisted
living services offered by the Company include the following:
Personal Care Services. These services include assistance with
ADLs such as ambulation, bathing, dressing, eating, grooming, personal
hygiene, monitoring or assistance with medications, and confusion
management.
Support Services. These services include meals, assistance
with social and recreational activities, laundry services, general
housekeeping, maintenance services, and transportation services.
Supplemental Services. These services include extra
transportation services, 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.
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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
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 four
communities owned by the Company, one community leased by the Company, and five
communities managed by the Company, with an aggregate capacity for 303 residents
at the Company's owned communities, 60 residents at the Company's leased
community, and 393 residents at the Company's managed communities. In addition,
the Company has communities under development or expansion that will add
estimated additional capacity of 218 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
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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
owns 11 home health care agencies and manages four agencies for third parties.
GOVERNMENT REGULATION
The health care industry is subject to extensive regulation and
frequent regulatory change. At this time, no federal laws or regulations
specifically regulate assisted or independent living residences. While a number
of states have not yet enacted specific assisted living regulations, the
Company's communities are subject to regulation, licensing, and certificate of
need (CON) and permitting by state and local health and social service agencies
and other regulatory authorities. While such requirements vary from state to
state, they typically relate to staffing, physical design, required services,
and resident characteristics. The Company believes that such regulation will
increase in the future. In addition, health care providers are receiving
increased scrutiny under anti-trust laws as integration and consolidation of
health care delivery increases and affects competition. The Company's
communities are also subject to various zoning restrictions, local building
codes, and other ordinances, such as fire safety codes.
The Balanced Budget Act ("BBA") of 1997, Public Law 105-33, included
sweeping changes to Medicare and Medicaid, significantly reducing rates of
increase for payments to home health agencies and skilled nursing facilities.
Under the BBA, beginning in the year 2001, skilled nursing facilities will no
longer be reimbursed under a cost based system. A prospective payment system
under which facilities are reimbursed on a per diem basis will be phased in
over the next three years. The BBA also requires the Secretary of Health and
Human Services to establish and implement a prospective payment system for home
health services for cost reporting periods beginning on and after October 1,
1999. The Company believes that the phase-in period will allow it to make
timely operating adjustments appropriate under the new system, but does not
know what effect these changes will have on its skilled nursing and home health
operations. Approximately 10.6%, 7.9% and 7.8% of the Company's total revenues
for the years ended December 31, 1997, 1996 and 1995, respectively, were
attributable to Medicare, including Medicare-related private co-insurance.
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 that also may require modifications to existing and planned
properties to permit access to the properties by disabled persons. While the
Company believes that its
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communities are substantially in compliance with present requirements or are
exempt therefrom, if required changes involve a greater expenditure than
anticipated or are required to be made on a more accelerated basis than
anticipated, additional costs would be incurred by the Company. Further
legislation may impose additional burdens or restrictions with respect to access
by disabled persons, the costs of compliance with which could be substantial.
In addition, the Company is subject to various Federal, state, and
local environmental laws and regulations. Such laws and regulations often impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of hazardous or toxic substances. The costs of any required
remediation or removal of these substances could be substantial and the
liability of an owner or operator as to any property is generally not limited
under such laws and regulations and could exceed the property's value and the
aggregate assets of the owner or operator. The presence of these substances or
failure to remediate such contamination properly may also adversely affect the
owner's ability to sell or rent the property, or to borrow using the property as
collateral. Under these laws and regulations, an owner, operator, or an entity
that arranges for the disposal of hazardous or toxic substances, such as
asbestos-containing materials, at a disposal site may also be liable for the
costs of any required remediation or removal of the hazardous or toxic
substances at the disposal site. In connection with the ownership or operation
of its properties, the Company could be liable for these costs, as well as
certain other costs, including governmental fines and injuries to persons or
properties.
The Company believes that the structure and composition of government,
and specifically health care, regulations will continue to change and, as a
result, regularly monitors developments in the law. The Company expects to
modify its agreements and operations from time to time as the business and
regulatory environment changes. While the Company believes it will be able to
structure all its agreements and operations in accordance with applicable law,
there can be no assurance that its arrangements will not be successfully
challenged.
COMPETITION
The senior living and health care services industry is highly
competitive and the Company expects that all segments of the industry will
become increasingly competitive in the future. Although there are a number of
substantial companies active in the senior living and health care industry, the
industry continues to be very fragmented and characterized by numerous small
operators. The Company believes that the primary competitive factors in the
senior living and health care services industry are (i) reputation for and
commitment to a high quality of care; (ii) quality of support services offered
(such as home health care and food services); (iii) price of services; (iv)
physical appearance and amenities associated with the communities; and (v)
location. The Company competes with other companies providing independent
living, assisted living, skilled nursing, home health care, and other similar
service and care alternatives, some of whom may have greater financial resources
than the Company. Because seniors tend to choose senior living communities near
their homes, the Company's principal competitors are other senior living and
long-term care communities in the same geographic areas as the Company's
communities. The Company also competes with other health care businesses with
respect to attracting and retaining nurses, technicians, aides, and other high
quality professional and non-professional employees and managers.
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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 that the Company believes are within normal industry standards
based upon the nature and risks of the Company's business. The Company also has
an umbrella excess liability protection policy in the amount of at least $20.0
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.
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.
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EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
executive officers of the Company.
NAME AGE POSITION
- ------------------------ --------- ---------------------------------------------------------------
W.E. Sheriff 55 Chief Executive Officer
Christopher J. Coates 47 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
W.E. SHERIFF has served as Chairman and Chief Executive Officer of the
Company and its predecessors since April 1984. From 1973 to 1984, Mr. Sheriff
served in various capacities for Ryder System, Inc., including as president and
chief executive officer of its Truckstops of America division. Mr. Sheriff also
serves on the boards of various educational and charitable organizations and in
varying capacities with several trade organizations, including as a member of
the board of the National Association for Senior Living Industries.
CHRISTOPHER J. COATES has served as President and Chief Operating
Officer of the Company and its predecessors since January 1993 and as a director
of the Company since January 1998. From 1988 to 1993, Mr. Coates served as
chairman of National Retirement Company, a senior living management company
acquired by a subsidiary of the Company in 1992. From 1985 to 1988, Mr. Coates
was senior director of the Retirement Housing Division of Radice Corporation,
following that company's purchase in 1985 of National Retirement Consultants, a
company formed by Mr. Coates. Mr. Coates is a former chairman of the board of
directors of the American Senior Housing Association.
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.
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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.
TOM G. DOWNS has served as Senior Vice President - Operations since
1989. Mr. Downs has served in various capacities for the Company's predecessors
since 1979.
LEE A. MCKNIGHT has served as Senior Vice President - Marketing since
September 1991. Mr. McKnight has served in various capacities for the Company's
predecessors since 1979.
EMPLOYEES
The Company employs approximately 2,620 persons, of which approximately
1,590 were full-time employees (approximately 80 of whom are located at the
Company's corporate offices) and 1,030 were part-time employees. In addition,
there were approximately 500 full-time employees and 400 part-time employees
employed by the owners of communities managed by the Company and who are under
the direction and supervision of the Company. None of the Company's employees
are 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.
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ITEM 2. PROPERTIES
The table below sets forth certain information with respect to the
senior living communities and home health care agencies currently operated by
the Company.
Resident Capacity(1) Commencement
-------------------- of
Community Location IL AL SN Total Operations(2)
- --------- -------- -- -- -- ----- -------------
Owned(3):
Broadway Plaza Ft. Worth, TX 252 40 122 414 Apr-92
Carriage Club of Charlotte Charlotte, NC 355 54 50 459 May-96
Carriage Club of Jacksonville Jacksonville, FL 292 60 -- 352 May-96
The Hampton at Post Oak Houston, TX 162 21 -- 183 Oct-94
Heritage Club Denver, CO 220 35 -- 255 Feb-95
Parkplace Denver, CO 195 48 -- 243 Oct-94
Homewood Residence at
Corpus Christi Corpus Christi, TX 60 30 -- 90 May-97
Richmond Place Lexington, KY 206 4 -- 210 Apr-95
Santa Catalina Villas Tucson, AZ 217 85 42 344 Jun-94
The Summit at Westlake Hills Austin, TX 167 30 89 286 Apr-92
Homewood Residence at
Tarpon Springs Tarpon Springs, FL -- 64 -- 64 Aug-97
Westlake Village Cleveland, OH 246 54 -- 300 Oct-94
Wilora Lake Lodge Charlotte, NC 142 -- -- 142 Dec-97
----- ----- ----- -----
Subtotal 2,514 525 303 3,342
----- ----- ----- -----
Leased:
Holley Court Terrace(4) Oak Park, IL 179 17 -- 196 Jul-93
Homewood Residence at Victoria(5) Victoria, TX 60 30 -- 90 May-97
Imperial Plaza(6) Richmond, VA 850 140 -- 990 Oct-97
Trinity Towers(4) Corpus Christi, TX 195 32 60 287 Jan-90
----- ----- ----- -----
Subtotal/Average 1,284 219 60 1,563
----- ----- ----- -----
Managed(7):
Burcham Hills East Lansing, MI 138 71 133 342 Nov-78
Meadowood Worcester, PA 355 51 59 465 Oct-89
Parklane West San Antonio, TX -- 17 124 141 Oct-94
Reeds Landing Springfield, MA 148 54 40 242 Aug-95
USAA Towers San Antonio, TX 505 -- -- 505 Oct-94
Williamsburg Landing Williamsburg, VA 345 7 37 389 Sep-85
----- ----- ----- -----
Subtotal 1,491 200 393 2,084
----- ----- ----- -----
Grand Total 5,289 944 756 6,989
===== ===== ===== =====
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Commencement
Home Health Care Agencies Location of Operations
- ------------------------- -------- -------------
Owned:
Broadway Plaza Fort Worth, TX Jun-94
Carriage Club of Charlotte Charlotte, NC Oct-96
Carriage Club of Jacksonville Jacksonville, FL Pending
Guiding Light New Braunfels, TX Nov-97
The Hampton at Post Oak Houston, TX Feb-97
Heritage Club Denver, CO Oct-96
Holley Court Terrace Oak Park, IL May-94
Parkplace Denver, CO Feb-97
Richmond Place Lexington, KY Jun-90
Trinity Towers Corpus Christi, TX Jan-98
Westlake Village Westlake, OH Jan-97
Managed(8):
Bibb County Centreville, AL Mar-97
Burcham Hills East Lansing, MI Aug-97
Hale County Greensboro, AL May-97
Meadowood Worcestor, PA Jul-97
- ---------------------------------------------------------------------------------------------------------------------------
(1) Independent living residences (IL), assisted living residences (including
areas dedicated to residents with Alzheimer's and other forms of dementia)
(AL), and skilled nursing beds (SN).
(2) Indicates the date on which the Company acquired each of its owned and
leased communities, or commenced operating its managed communities. The
Company operated certain of its communities pursuant to management
agreements prior to acquiring the communities.
(3) With the exception of the Company's Carriage Club of Charlotte community,
all of the Company's owned communities are subject to mortgage liens. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
(4) 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.
(5) Leased pursuant to an operating lease expiring in July 2011, with renewal
options for up to two additional ten year terms.
(6) Leased pursuant to an operating lease expiring October 2017, with a seven
year renewal option.
(7) 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 services, and other services for these
communities at the owner's expense and receives a monthly fee for its
services based on either a contractually fixed amount 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 through June 2002.
(8) 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.
Additionally, the Company is currently developing 36 free-standing assisted
living residences, with an estimated aggregate capacity for approximately 3,200
residents, and is expanding six of its existing communities to add capacity to
accommodate approximately 500 additional residents.
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ITEM 3. LEGAL PROCEEDINGS
The Company currently is not a party to any legal proceeding that it
believes would have a material adverse effect on its business, financial
condition, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since the IPO, the Common Stock has traded on the New York Stock
Exchange under the symbol "ACR." The following table sets forth, for the periods
indicated, the high and low sales prices for the Common Stock.
Year Ended December 31, 1997 High Low
---------------------------------------------------------------------
Second Quarter (beginning May 30, 1997) $17.875 $14.250
Third Quarter 21.875 17.750
Fourth Quarter 21.250 19.000
As of March 25, 1998, there were 621 shareholders of record and
approximately 1,517 persons or entities holding Common Stock in nominee name.
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.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated and combined financial data presented below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated and Combined Financial
Statements and notes thereto included in this report.
Consolidated Combined
---------------------------------------- ------------------------------------------
Predecessor Predecessor Entities
------------------------ ------------------------------------------
Nine Months Three Months
Years Ended December 31, Ended Ended Years Ended December 31,
------------------------ December 31, March 31, ------------------------
1997 1996 1995 1995 1994 1993
-------- -------- --------- --------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues:
Resident and health care revenue $ 92,217 $ 73,878 $ 47,239 $ 11,761 $ 30,979 $ 23,162
Management services revenue 1,995 1,739 1,524 595 2,362 2,752
-------- -------- -------- -------- -------- --------
Total revenues 94,212 75,617 48,763 12,356 33,341 25,914
Operating expenses:
Community operating expense 57,838 46,960 30,750 8,035 21,780 16,401
Lease expense 3,405 -- -- -- -- --
General and administrative 8,051 6,200 3,446 1,108 3,455 3,290
Depreciation and amortization 6,855 6,906 4,534 1,127 2,891 2,251
-------- -------- -------- -------- -------- --------
Total operating expenses 76,149 60,066 38,730 10,270 28,126 21,942
-------- -------- -------- -------- -------- --------
Income from operations 18,063 15,551 10,033 2,086 5,215 3,972
-------- -------- -------- -------- -------- --------
Other income (expense):
Interest expense (14,863) (12,160) (7,930) (2,370) (5,354) (3,569)
Interest income 2,675 434 329 49 203 122
Other (1) 788 919 (1,013) 98 189
-------- -------- -------- -------- -------- --------
Other income (expense), net (12,189) (10,938) (6,682) (3,334) (5,053) (3,258)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item 5,874 4,613 3,351 (1,248) 162 714
Income tax expense (benefit) 4,340 (920) 55 20 -- --
-------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
item 1,534 5,533 3,296 (1,268) 162 714
Extraordinary item 6,334 (2,335) -- -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss) (4,800) 3,198 3,296 (1,268) 162 714
Preferred return on special redeemable
preferred limited partnership
interests -- (1,104) (1,125) -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss) available for
distribution to partners and
shareholders $ (4,800) $ 2,094 $ 2,171 $ (1,268) $ 162 $ 714
======== ======== ======== ======== ======== ========
Distribution to partners, excluding
preferred distributions $ 2,500 $ 6,035 $ 4,064 $ 1,400 $ 2,580 $ 5,708
======== ======== ======== ======== ======== ========
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Consolidated Combined
-------------------------------------- --------------------------------------
Predecessor Predecessor Entities
------------------------- --------------------------------------
Nine Months Three Months
Years Ended December 31, Ended Ended
------------------------ December 31, March 31, Years Ended December 31,
1997 1996 1995 1995 1994 1993
-------- ----------- ------------ ------------ ------------ -----------
STATEMENT OF OPERATIONS DATA:
Pro forma earnings data:
Income before income taxes
and extraordinary item $ 5,874 $ 4,613
Pro forma income tax expense 2,115 1,661
-------- ---------
Pro forma income
before 3,759 2,952
extraordinary item
Preferred return on
special
redeemable preferred $ -- $ 1,104
limited partnership -------- ---------
interests
Pro forma income
before
extraordinary item available
for distribution to $ 3,759 $ 1,848
partners and ======== =========
shareholders
EARNINGS PER SHARE:
Pro forma basic earnings per share
before extraordinary item available
for distribution to partners and
Shareholders $ 0.36 $ 0.20
-------- ---------
Weighted average shares outstanding 10,577 9,375
-------- ---------
Pro forma diluted earnings per share
before extraordinary item
available
for distribution to partners and
Shareholders $ 0.35 $ 0.20
-------- ---------
Weighted average shares outstanding 10,675 9,375
-------- ---------
BALANCE SHEET DATA:
Cash and cash equivalents $ 44,583 $ 3,222 $ 3,825 $ 2,894 $ 3,205
Working capital (deficit) 47,744 (14,289) (1,048) 3,168 2,529
Total assets 317,154 228,162 165,579 111,425 63,393
Long-term debt, including current
portion 237,354 170,689 102,245 89,414 43,335
Partners' and shareholders' equity 53,918 37,882 51,823 12,823 15,042
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a national senior living and health care services
company providing a broad range of care and services to seniors within a
residential setting. The Company currently operates 23 senior living communities
in 12 states with an aggregate capacity for approximately 7,000 residents. The
Company currently owns 13 communities, leases four communities pursuant to
long-term leases, and manages six communities pursuant to management agreements.
At December 31, 1997, the Company's owned communities had a stabilized occupancy
rate of 97%; its leased communities had a stabilized occupancy rate of 96%; and
its managed communities had a stabilized occupancy rate of 96%.
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 ARCLP and the Predecessor Entities for the period from January 1, 1995
through March 31, 1995 and the consolidated results of operations of ARCLP for
the period from April 1, 1995 through December 31, 1995. Amounts for the year
ended December 31, 1996 represent the consolidated results of ARCLP, and amounts
for the year ended December 31, 1997 represent the sum of the results of
operations of ARCLP for the period from January 1, 1997 through May 28, 1997 and
the results of operations of the Company for the period from May 29, 1997
through December 31, 1997.
During the year ended December 31, 1997, the Company recorded a
one-time tax charge of $3.0 million related to the conversion from a non-taxable
limited partnership to a taxable corporation in May 1997 in connection with the
Reorganization and a $6.3 million, net of tax, extraordinary loss from
extinguishment of debt. Adjusting for the effects of the one-time tax charge and
extraordinary loss, pro forma earnings before extraordinary item for 1997 was
$3.8 million, or $0.35 diluted earnings per share.
The Company is currently developing or constructing 36 free-standing
assisted living residences with an aggregate capacity for approximately 3,200
residents with an estimated cost to complete and lease-up of approximately
$300.0 million to $325.0 million. The Company is constructing a $14.0 million
expansion at one of its leased communities on behalf of the lessor. In addition,
the Company plans to commence expansions at four of its owned communities, which
are expected to cost approximately $31.0 million to complete and lease-up. The
Company is also managing the expansion of one of its managed communities on
behalf of its owner. The six current expansion projects will add capacity to
accommodate approximately 500 additional residents.
In addition to the development of new free-standing assisted living
residences and expansions of existing retirement communities, the Company's
growth strategy also includes the acquisition of free-standing assisted living
residences and other senior living communities, home health care agencies, and
other properties or businesses that are complementary to the Company's
operations and growth strategy.
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RESULTS OF OPERATIONS
The Company's total revenues are comprised of (i) resident and health
care revenues, which include all resident revenues and home health care agency
fees, and (ii) management services revenues, which include fees, net of
reimbursements, for the development, marketing, and management of communities
owned by third parties. The Company's resident and health care revenues are
derived from three principal sources: (i) monthly service fees from independent
and assisted living residents, representing 74.2%, 75.3%, and 71.6% of total
revenues for the years ended December 31, 1997, 1996, and 1995, respectively;
(ii) per diem charges from nursing patients, representing 13.7%, 13.9%, and
17.2% of total revenues for the years ended December 31, 1997, 1996, and 1995,
respectively; and (iii) per visit billings from home health care patients and
companion services clients, representing 10.0%, 8.5%, and 7.7% of total revenues
for the years ended December 31, 1997, 1996, and 1995, respectively. Management
services revenues represented 2.1%, 2.3%, and 3.5% of total revenues for the
years ended December 31, 1997, 1996, and 1995, respectively. Approximately
89.4%, 92.1%, and 91.2% of the Company's total revenues for the years ended
December 31, 1997, 1996, and 1995, respectively, were attributable to private
pay sources, with the balance attributable to Medicare, including
Medicare-related private co-insurance.
The Company's management agreements are generally for terms of
three to 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, and other services for these communities at the owners'
expense and receives a monthly fee for its services based either on a
contractually fixed amount or a percentage of revenues or income. 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 through June 2002.
The Company's operating expenses are comprised, in general, of (i)
community operating expense, which includes all operating expenses of the
Company's owned or leased communities, 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.
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The following table sets forth, for the periods indicated, certain
resident capacity and occupancy data:
Years Ended December 31,
------------------------
1997 1996 1995
----- ----- -----
OPERATING DATA:
End of period resident capacity:
Owned 3,210 3,369 2,594
Leased 1,531 -- --
Managed 2,159 2,159 3,008
----- ----- -----
Total 6,900 5,528 5,602
===== ===== =====
Average occupancy rate:
Owned 93% 94% 93%
Leased 90 -- --
Managed 94 91 91
----- ----- -----
Total 93% 92% 92%
===== ===== =====
End of period occupancy rate:
Owned 94% 96% 94%
Leased 93 -- --
Managed 96 92 91
----- ----- -----
Total 94% 94% 92%
===== ===== =====
Stabilized average occupancy rate:(1)
Owned 97% 94% 93%
Leased 96 -- --
Managed 96 95 95
----- ----- -----
Total 96% 95% 94%
===== ===== =====
- ---------------
(1) Includes communities or expansions thereof that have either (i) achieved
95% occupancy or (ii) been open at least 12 months. In the table above, the
stabilized average occupancy rate for the year ended December 31, 1996
excludes a large managed community with a capacity for over 240 residents
which opened in August 1995 and continued to stabilize throughout 1996.
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SAME COMMUNITY RESULTS
The following table sets forth certain selected financial and operating
data on a Same Community basis. For purposes of the following discussion, "Same
Community basis" refers to communities that were owned and/or leased by the
Company throughout each of the periods being compared. Revenues on a Same
Community basis do not include any management services revenues.
STATEMENT OF OPERATIONS DATA:
YEARS ENDED DECEMBER 31
-----------------------
1997 1996 % CHG 1996 1995 % CHG
------- ------- ---- ------- ------- ----
(dollars in thousands, except other data)
Monthly/per diem service fees $62,679 $58,405 7.3% $48,888 $46,398 5.4%
Home health/companion services revenue 9,006 6,437 39.9% 3,789 2,699 40.4%
------- ------- ---- ------- ------- ----
Resident and health care revenue 71,685 64,842 10.6% 52,677 49,097 7.3%
Community operating expenses 45,770 41,695 9.8% 34,314 32,854 4.4%
------- ------- ---- ------- ------- ----
Resident income from operations $25,915 $23,147 12.0% $18,363 $16,243 13.1%
======= ======= ==== ======= ======= ====
Resident income from operations margin(1) 36.2% 35.7% 34.9% 33.1%
Lease expense 2,209 -- -- -- -- --
Depreciation and amortization 4,220 5,329 (20.8%) 4,332 4,648 (6.8%)
------- ------- ---- ------- ------- ----
Income from operations $19,486 $17,818 9.4% $14,031 $11,595 21.0%
======= ======= ==== ======= ======= ====
Other data:
Number of communities 10 10 8 8
Resident capacity 2,586 2,586 2,121 2,121
Average occupied units 2,209 2,183 1,775 1,744
Average occupancy rate2 96% 95% 94% 92%
Average monthly revenue per occupied unit(3) $ 2,365 $ 2,230 6.1% $ 2,295 $2,217 3.5%
Average monthly expense per occupied unit(4) $ 1,468 $ 1,399 4.9% $ 1,475 $1,465 0.7%
- ---------------------
(1) "Resident income from operations margin" represents
"Resident income from operations" as a percentage of "Resident and health
care revenue."
(2) "Average occupancy rate" is based on the ratio of occupied
apartments to available apartments expressed on a monthly basis for
independent and assisted living residences, and occupied beds to available
beds on a per diem basis for nursing beds.
(3) "Average monthly revenue per occupied unit" is total resident and health
care revenues, excluding home health care agency and companion services
fees, divided by total occupied apartments and nursing beds expressed on
a monthly basis.
(4) "Average monthly expense per occupied unit" is total 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.
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YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996
Revenues Total revenues were $94.2 million in 1997, compared to $75.6
million in 1996, representing an increase of $18.6 million, or 24.6%. Resident
and health care revenues increased by $18.3 million, and management services
revenues increased by $256,000 during the period. Of the increase in resident
and health care revenues, $11.5 million, or 62.7%, was attributable to revenues
derived from two senior living communities acquired in May 1996, and three
assisted living residences and two senior living communities acquired or leased
in 1997. The remaining $6.8 million, or 37.3%, of such increase was attributable
to Same Community growth.
Resident and health care revenues attributable to Same Communities
were $71.7 million in 1997, as compared to $64.8 million in 1996, representing
an increase of $6.8 million, or 10.6%. Of such increase, $4.3 million, or 62.5%,
was attributable to monthly/per diem service fee revenues which increased by
7.3% during the period. Approximately $2.5 million, or 37.5%, of the increase
was attributable to home health care agency and companion service fees which
increased by 39.9% during the period. Of the 7.3% increase in monthly/per diem
service fee revenue, approximately 6.1% was attributable to increases in average
rates and 1.2% was attributable to increases in occupancy. Same Community
average occupancy rates increased to 96% for 1997 from 95% in 1996.
Community Operating Expense Community operating expense increased to
$57.8 million in 1997, as compared to $47.0 million in 1996, representing an
increase of $10.8 million, or 23.2%. Of the increase in community operating
expense, $6.7 million, or 62.5%, was attributable to expenses from acquired or
leased senior living communities and assisted living residences, and $4.1
million, or 37.5%, of the increase was attributable to Same Community operating
expenses, which increased by 9.8% during the period. The increase in Same
Community operating expenses of $1.8 million was attributable to increases in
home health care agency and companion services expenses. Same Community
operating expenses, exclusive of home health care agency and companion services
expenses, increased 6.1% for 1997, as compared to 1996. Community operating
expense as a percentage of resident and health care revenues decreased to 62.7%
for 1997 from 63.6% for 1996. Same Community operating expenses as a percentage
of Same Community resident and health care revenues declined to 63.8% in 1997
from 64.3% in 1996. Excluding home health care agency and companion services
expenses, Same Community operating expenses decreased, as a percentage of Same
Community revenues, to 62.1% in 1997 from 62.8% in 1996, primarily as a result
of higher occupancy.
General and Administrative General and administrative expense
increased to $8.1 million for the year ended December 31, 1997, as compared to
$6.2 million for 1996, representing an increase of $1.9 million, or 29.9%. Of
this increase, $821,000 was attributable to the growth of the Company's home
health care agencies and approximately $755,000 of the increase was related to
increases in salaries and benefits. The remaining increase of approximately
$324,000 resulted from continued investments in infrastructure necessary to
support the Company's growth. General and administrative expense as a percentage
of total revenues increased to 8.5% for 1997 from 8.2% for 1996.
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21
Lease Expense The Company incurred lease expense of $3.4 million for
the year ended December 31, 1997, primarily as a result of the sale-leaseback by
the Company of two of its communities in January 1997 (the "Sale-Leaseback
Transaction"), as well as new leases entered into for an assisted living
residence in May 1997 and a senior living community in October 1997. The Company
did not incur lease expense in 1996.
Depreciation and Amortization Depreciation and amortization expense
remained largely unchanged at $6.9 million in 1997 in 1997. Reductions in
depreciation and amortization resulting from the Sale-Leaseback Transaction were
largely offset by increases relating to acquisitions. Same Community
depreciation and amortization expense decreased to $4.2 million for the year
ended December 31, 1997, from $5.3 million for 1996, as a result of the
Sale-Leaseback Transaction.
Other Income (Expense) Interest expense increased to $14.9 million in
1997 from $12.2 million in 1996, representing an increase of $2.7 million, or
22.2%. The increase in interest expense was primarily attributable to the
issuance in 1997 of $138.0 million of the Company's 5 3/4% Convertible
Subordinated Debentures Due 2002 (the "Convertible Debentures") and additional
indebtedness incurred in connection with the acquisition of two senior living
communities in May 1996 and the acquisition of two assisted living residences in
May 1997, partially offset by the repayment of certain indebtedness in
connection with the Sale-Leaseback Transaction. Interest expense, as a
percentage of total revenues, decreased to 15.8% for 1997 from 16.1% in 1996.
Interest income increased to $2.7 million for 1997 from $434,000 for 1996,
primarily as a result of income generated during 1997 from the investment of net
proceeds of the Company's IPO and the issuance of the Convertible Debentures.
Income Tax Expense Income tax expense in 1997 was $4.3 million
(including a $3.0 million one-time charge) as compared to income tax benefit of
$920,000 in 1996. In May 1997, in connection with its IPO, the Company incurred
a one-time non-cash tax charge of $3.0 million relating to the conversion from a
non-taxable limited partnership to a taxable corporation and the corresponding
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. Excluding the effect of the one-time tax charge, on a pro forma
basis assuming the Company was a taxable entity for all of 1997, income taxes
would have been $2.1 million assuming the Company's effective tax rate of 36%. A
pro forma adjustment has been reflected to provide for comparative income taxes
as though the Company had been subject to corporate income taxes in 1996.
Extraordinary Loss In December 1997, the Company recorded an
extraordinary loss of $6.3 million, net of taxes, related to costs associated
with the prepayment of $65.1 million of indebtedness. The 1997 amount expensed
included yield maintenance fees, the buy-out of the lender's participation
interest in two of the Company's communities, and the write-off of unamortized
financing costs. Primarily as a result of the extraordinary loss, the Company
has a net operating loss carryforward of approximately $10.9 million as of
December 31, 1997. In 1996, the Company wrote off $2.3 million of unamortized
financing costs in connection with the refinancing of $62.1 million of mortgage
financing.
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22
Net Income As a result of the foregoing factors, the Company reported a
net loss of $4.8 million for 1997 as compared to net income of $3.2 million for
1996. Adjusting for the effect of the one-time income tax charge referenced
above and the extraordinary loss from debt prepayment in both periods, the
Company reported pro forma income before extraordinary item for the year ended
December 31, 1997 of $3.8 million, or $0.35 diluted earnings per share, compared
to $3.0 million, or $0.31 diluted earnings per share, in 1996.
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 Community 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 Communities 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 Community basis increased by $1.1
million, or 40.4%, over 1995. Monthly/per diem service fee revenue on a Same
Community basis increased $2.5 million, or 5.4%, over 1995. Of this increase,
3.3% was attributable to rate increases and 2.1% was attributable to higher
occupancy. Same Community average occupancy rates increased from 92% in 1995 to
94% in 1996. Same Community 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
Community 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 Community operating expense,
exclusive of home health care agency and companion services expenses, increased
2.5% in 1996 as compared to 1995. Community operating expense as a percentage of
resident and health care revenues declined to 63.6% in 1996 from 65.7% in 1995.
Same Community operating expenses as a percentage of Same Community resident and
health care revenues declined to 65.1% in 1996 from 66.9% in 1995, primarily as
a result of 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
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23
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 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.
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.
Income Tax Expense (Benefit) At December 31, 1996, the Company had a
net operating loss carryforward 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 Transaction. The provision for income taxes
reflects income tax expense of only one of the Predecessor Entities, because
ARCLP 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its activities with the net
proceeds from its IPO, its public offering of Convertible Debentures in
September 1997, private placements of equity interests, long-term mortgage
borrowing, and cash flows from operations. At December 31, 1997, the Company had
$237.4 million of indebtedness outstanding, including $138.0 million of
Convertible Debentures and $77.1 million of indebtedness to a capital
corporation, with fixed maturities ranging from December 2001 to April 2028. As
of December 31, 1997, approximately 95.2% of the Company's indebtedness bore
interest at fixed rates, with a weighted average interest rate of 6.7%. The
Company's variable rate
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24
indebtedness carried an average rate of 6.0% as of December 31, 1997. As of
December 31, 1997, the Company had working capital of $47.7 million.
Net cash provided by operating activities was $11.1 million for the
year ended December 31, 1997, as compared with $11.7 million and $9.0 million
for the years ended December 31, 1996 and 1995, respectively. The Company's
unrestricted cash balance was $44.6 million as of December 31, 1997, as compared
to $3.2 million and $3.8 million as of December 31, 1996 and 1995, respectively,
primarily as a result of the remaining proceeds from the Convertible Debenture
offering.
Net cash used by investing activities was $22.6 million for the year
ended December 31, 1997, as compared with $67.6 million and $11.0 million,
respectively, for the years ended December 31, 1996 and 1995. During the year
ended December 31, 1997, the Company acquired an aggregate of $17.5 million of
senior living assets, made capital expenditures, including construction
activity, in an aggregate amount of $29.3 million, and sold an aggregate of
$30.4 million of assets, primarily in connection with the Sale-Leaseback
Transaction.
Net cash provided by financing activities was $52.8 million for the
year ended December 31, 1997, as compared with $55.3 million and $2.9 million,
respectively, for the years ended December 31, 1996 and 1995. The Convertible
Debenture offering resulted in net proceeds of approximately $134.2 million
during the year ended December 31, 1997. Net proceeds from the IPO, after
repayment of the Reorganization Note, were approximately $23.1 million. In
December 1997, the Company prepaid $65.1 million of fixed rate indebtedness and
incurred costs of $9.5 million related to the prepayment and the repurchase of
the lender's participating interest in two of the Company's communities.
Additionally, during the year ended December 31, 1997, the Company repaid term
loans and made principal payments on its long-term debt of $34.7 million. During
1997, the Company incurred $14.3 million of new long-term debt in connection
with the acquisition of senior living communities during the year and
construction related activity. In 1997, the Company redeemed the remaining $5.2
million of preferred partnership interests in ARCLP, and made final cash
distributions to the limited and general partnership owners of ARCLP.
The Company received net proceeds of approximately $45.0 million, after
deducting underwriting discounts and other offering costs, from the IPO. The
Company used approximately $21.9 million of the net proceeds from the IPO to
repay the Reorganization Note. The balance of the net proceeds were used to fund
the Company's growth strategy and for general working capital purposes.
During 1997, the Company sold $138.0 million of its Convertible
Debentures in a public offering. The Convertible Debentures, which are
non-callable for three years, are convertible into shares of Common Stock at a
conversion price of $24.00 per share. The offering resulted in net proceeds to
the Company of approximately $134.2 million. Approximately $74.6 million of the
net proceeds from the sale of the Convertible Debentures was used to prepay
indebtedness in December 1997. The remaining net proceeds are being used to fund
the Company's growth.
In December 1997, the Company entered into a $112.3 million credit
facility with a capital
24
25
corporation replacing a $149.3 million credit facility with the lender. The new
facility is comprised of an existing $62.3 million term loan maturing December
2002 and a $50.0 million revolving credit facility maturing on the same date. In
connection with the closing of the new credit facility, the Company prepaid
approximately $65.1 million of existing indebtedness to the lender (including
approximately $36.5 million at a fixed interest rate of 9.28%), and repurchased
a participating interest in two of the Company's communities.
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, approximately $2.2 million of which had been used at December 31,
1997 to obtain letters of credit. The Company also maintains a $5.0 million
secured line of credit with a bank that is available for land acquisitions. Any
borrowings under the $5.0 million line of credit will be secured by the property
acquired. No borrowings were outstanding under the $5.0 million line of credit
at December 31, 1997.
The $50.0 million revolving credit facility and the $2.5 million line
of credit contain financial covenants that require the Company to maintain
certain prescribed debt service coverage, liquidity, net worth, and capital
expenditure reserve levels. The $2.5 million line of credit 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 management of the Company. The Company
does not believe that such covenants materially limit its operations.
Each of the Company's debt agreements, other than the Company's $2.5
million line of credit, contains restrictive covenants that generally relate to
the use, operation, and disposition of the communities that serve as collateral
for the subject indebtedness, and prohibit the further encumbrance of such
community or communities without the consent of the applicable lender.
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. With the exception of the Company's
Carriage Club of Charlotte community, all of the Company's owned communities are
subject to mortgages. Seven of the Company's thirteen owned communities serve as
blanket collateral for the indebtedness payable to the capital corporation
described above.
The Company has entered into non-binding letters of intent (the "REIT
Facilities") pursuant to which two real estate investment trusts, 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. Currently,
the Company has been allocated $41.6 million and $4.7 million, respectively, in
commitments under the REIT Facilities.
In May 1997, the Company acquired assisted living residences in Tarpon
Springs, Florida, and Corpus Christi, Texas. In December 1997, the Company
acquired a 136 unit retirement community and certain adjoining land and zoning
rights to construct approximately 40 assisted living units in Charlotte,
25
26
North Carolina. The aggregate consideration for the transactions was
approximately $19.9 million, of which approximately $14.3 million was financed
through mortgage loans issued or assumed and the remaining $5.6 million was paid
in cash. In May 1997, the Company entered into an operating lease for an
assisted living residence in Victoria, Texas. The lease terms included a payment
of $1.1 million for the leasehold interest.
In October 1997, the Company entered into an operating lease for
Imperial Plaza, a 917 unit senior living community located in Richmond,
Virginia, with an initial term of 20 years and an option by the Company to
extend the lease for an additional seven-year term. The Company has the option
to acquire the community at its fair market value at the expiration of the
lease. In addition, the terms of the lease arrangement include a commitment by
the lessor to fund a $3.5 million capital expenditure program. Expenditures by
the Company for the lease, security deposit, the adjoining property, and the
purchase option aggregate approximately $18.6 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.
The aggregate estimated cost to complete and lease-up the 36
free-standing assisted living residences currently under development is
approximately $300.0 million to $325.0 million. In addition, the Company plans
to commence expansions at four of its owned communities, which are expected to
cost approximately $31.0 million to complete and lease-up.
The Company expects that its current cash, together with cash flow
from operations, the REIT Facilities, and borrowings available to it under other
existing credit arrangements, will be sufficient to meet its operating
requirements and to fund its anticipated growth for at least the next 12 months.
The Company expects to use a wide variety of financing sources to fund its
future growth, including public and private debt and equity, conventional
mortgage financing, and unsecured bank financing, among other sources. There can
be no assurance that financing from such sources will be available in the future
or, if available, that such financing will be available on terms acceptable to
the Company.
Year 2000
The Company does not anticipate being adversely impacted by Year 2000
compliance. The Company is currently converting its computer systems that are
not already compliant to be compliant by the end of 1999. The total cost of
compliance measures is not estimated to be material and is being funded through
operating cash flows and expensed as incurred.
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company.
Inflation could, however, affect the Company's future revenues and results of
operations because of, among other things, the Company's dependence on senior
residents, many of whom rely primarily on fixed incomes to pay for the Company's
services. As a result, during inflationary periods, the Company may not be able
to
26
27
increase resident service fees to account fully for increased operating
expenses. In structuring its fees, the Company attempts to anticipate inflation
levels, but there can be no assurance that the Company will be able to
anticipate fully or otherwise respond to any future inflationary pressures.
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the
meaning of the federal securities laws, 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. Investors are cautioned that all forward-looking
statements involve risks and uncertainties. These risks include, but are not
limited to, the Company's obligations for substantial debt and operating lease
payments; the need for additional financing to fund the Company's growth
strategy; exposure to rising interest rates; uncertainty as to the Company's
ability manage its growth, particularly the development of additional assisted
living residences, and to integrate the operations of acquired businesses and
communities; competitive pressures in the senior living industry; potential
changes in governmental regulation of senior living communities; and potential
exposure to professional liability claims. Although the Company believes that
the assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could prove to be inaccurate, and therefore,
there can be no assurance that the forward-looking statements included in this
report will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
The Company undertakes no obligation to publicly release any revisions to any
forward-looking statements contained herein to reflect events and circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
27
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Report of Independent Auditors 29
Consolidated Balance Sheets --- December 31, 1997 and 1996 30
Consolidated Statements of Operations --- Years ended December 31,
1997 and 1996, Nine Months ended December 31, 1995 and Combined
Statement of Operations --- Three Months ended March 31, 1995 31
Consolidated Statements of Partners'/Shareholders' Equity --- Years
ended December 31, 1997 and 1996, Nine Months ended December 31, 1995
and Combined Statement of Partners'/Shareholders' Equity ---
Three Months ended March 31, 1995 33
Consolidated Statements of Cash Flows --- Years ended December 31,
1997 and 1996, Nine Months ended December 31, 1995 and Combined
Statement of Cash Flows --- Three Months ended March 31, 1995 34
Notes to Combined and Consolidated Financial Statements 36
28
29
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American Retirement Corporation:
We have audited the accompanying consolidated balance sheet of American
Retirement Corporation and subsidiaries as of December 31, 1997 and the
consolidated balance sheet of American Retirement Communities, L.P. and its
consolidated entities (the Predecessor) as of December 31, 1996, and the related
consolidated statements of operations, changes in partners'/shareholders'
equity, and cash flows for the year ended December 31, 1997, for the year ended
December 31, 1996 and for the period April 1, 1995 through December 31, 1995
(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 period from
January 1, 1995 through March 31, 1995 (Predecessor Entities period). These
consolidated and combined financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
consolidated and combined 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 consolidated financial statements present
fairly, in all material respects, the financial position of American Retirement
Corporation and subsidiaries as of December 31, 1997 and American Retirement
Communities, L.P. and consolidated entities as of December 31, 1996, and the
results of their operations and their cash flows for the year ended December 31,
1997 and 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 period, in conformity with
generally accepted accounting principles.
As discussed in note 1 to the consolidated and combined 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 the period 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
February 11, 1998
29
30
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
December 31
-----------------------------
1997 1996
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 44,583 $ 3,222
Assets limited as to use (Note 6) 2,654 1,022
Resident and health care receivables, net 4,979 2,782
Management services receivables 1,199 565
Inventory 483 420
Prepaid expenses 1,052 340
Deferred income taxes (Note 11) 4,332 920
Other current assets 1,003 ---
------------ -----------
Total current assets 60,285 9,271
Assets limited as to use, excluding amounts classified as current 7,332 3,607
Land, buildings and equipment, net (Notes 4 and 6) 229,898 213,124
Marketable securities 52 52
Other assets (Note 5) 19,587 2,108
------------ -----------
Total assets $ 317,154 $ 228,162
============ ===========
LIABILITIES AND PARTNERS' AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 6) $ 316 $ 8,053
Accounts payable 2,429 2,441
Accrued expenses 9,796 6,239
Redemption payable --- 5,195
Accrued partner distributions --- 1,632
------------ -----------
Total current liabilities 12,541 23,560
Tenant deposits 5,290 3,850
Long-term debt, excluding current portion (Note 6) 237,038 162,636
Deferred gain on sale-leaseback transactions (Note 4) 4,073 ---
Deferred income taxes (Note 11) 3,689 ---
Other long-term liabilities 605 234
------------ -----------
Total liabilities 263,236 190,280
Commitments and contingencies (Notes 4, 6, 9, 10, 12 and 14)
Partners' and shareholders' equity (Notes 7 and 8):
General and limited partners' interests --- 37,882
Common stock, $.01 par value; 50,000,000 shares authorized,
11,420,860 shares issued and outstanding at December 31, 1997 114 ---
Additional paid-in capital 60,203 ---
Accumulated deficit (6,399 ---
------------ -----------
Total partners' and shareholders' equity 53,918 37,882
------------ -----------
Total liabilities and partners' and shareholders' equity $ 317,154 $ 228,162
============ ===========
See accompanying notes to consolidated and combined financial statements.
30
31
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Consolidated Combined
---------------------------------------------- ---------------
Predecessor
Predecessor Entities
------------------------------- ---------------
Nine Months Three Months
Years ended December 31, Ended Ended
----------------------------- December 31 March 31,
1997 1996 1995 1995
---------------------------------------------- ---------------
Revenues:
Resident and health care revenue $92,217 $73,878 $47,239 $11,761
Management services revenue (Note 12) 1,995 1,739 1,524 595
---------------------------------------------- ---------------
Total revenues 94,212 75,617 48,763 12,356
Expenses:
Community operating expense 57,838 46,960 30,750 8,035
Lease expense (Note 4) 3,405 --- --- ---
General and administrative 8,051 6,200 3,446 1,108
Depreciation and amortization 6,855 6,906 4,534 1,127
---------------------------------------------- ---------------
Total operating expenses 76,149 60,066 38,730 10,270
---------------------------------------------- ---------------
Income from operations 18,063 15,551 10,033 2,086
Other income (expense):
Interest expense (14,863) (12,160) (7,930 (2,370)
Interest income 2,675 434 329 49
Other (1) 788 919 (1,013)
---------------------------------------------- ---------------
Other income (expense), net (12,189) (10,938) (6,682 (3,334)
Income (loss) before income taxes and extraordinary item 5,874 4,613 3,351 (1,248)
Income tax expense (benefit) (Note 11) 4,340 (920) 55 20
---------------------------------------------- ---------------
Income (loss) before extraordinary item 1,534 5,533 3,296 (1,268)
Extraordinary loss on extinguishment of debt, net of tax (Note 6) 6,334 2,335 --- ---
---------------------------------------------- ---------------
Net income (loss) $(4,800) $ 3,198 $ 3,296 $(1,268)
============================================== ===============
Preferred return on special redeemable preferred limited
partnership interests --- 1,104 1,125 ---
---------------------------------------------- ---------------
Net income (loss) available for distribution to partners
and shareholders $(4,800) $ 2,094 $ 2,171 $(1,268)
============================================== ===============
Pro forma earnings data (Note 1):
Income before income taxes and extraordinary item $ 5,874 $ 4,613
Pro forma income tax expense 2,115 1,661
------------------------------
Pro forma income before extraordinary item 3,759 2,952
Preferred return on special redeemable preferred limited
partnership interests --- 1,104
------------------------------
Pro forma income before extraordinary item available
for distribution to partners and shareholders $ 3,759 $ 1,848
==============================
See accompanying notes to consolidated and combined financial statements.
31
32
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS, CONTINUED
(in thousands, except per share data)
Consolidated
-------------------------------
Predecessor
----------------
Years ended December 31,
-------------------------------
1997 1996
-------------------------------
Pro forma basic earnings per share:
Pro forma income before extraordinary item $ 0.36 $ 0.31
Preferred return on special redeemable preferred limited
partnership interests -- (0.12)
---------------------------
Pro forma income before extraordinary item available for
distribution to partners and shareholders $ 0.36 $ 0.20
===========================
Pro forma diluted earnings per share:
Pro forma income before extraordinary item $ 0.35 $ 0.31
Preferred return on special redeemable preferred limited
partnership interests -- (0.12)
---------------------------
Pro forma income before extraordinary item available for
distribution to partners and shareholders $ 0.35 $ 0.20
===========================
Weighted average shares used for basic earnings per share data 10,577 9,375
Effect of dilutive common stock options 98 --
---------------------------
Weighted average shares used for diluted earnings per share data 10,675 9,375
===========================
See accompanying notes to consolidated and combined financial statements.
32
33
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF PARTNERS'/SHAREHOLDERS' EQUITY
(in thousands, except share data)
Special
General Redeemable
and Preferred
Limited Limited Common Stock Additional
Partners' Partnership ----------------- Paid-In
Interests Interests Shares Amount Capital
-------------------------------------------------------------
Combined balance at December 31, 1994 $ 12,823
Combined loss for the three months ended
March 31, 1995 (1,268)
Exercise of stock options (ARC) 257
Acquisition of treasury stock by ARC (1,619)
Contribution by ARCLP partners 11,000
Distribution to partners (1,400)
---------------------------------------------------------
Combined balance at March 31, 1995 19,793
Adjustment to equity as a result of business
combination (Note 1) 23,923
Conversion of debt to special redeemable
preferred partnership interests (Note 1) $10,000
Net income for the nine months ended
December 31, 1995 2,171 1,125
Distribution to partners for the nine months
ended December 31, 1995 (4,064) (1,125)
---------------------------------------------------------
Consolidated balance at December 31, 1995 41,823 10,000 -- -- --
Net income for 1996 2,094 1,104
Redemption of preferred partnership interests (10,000)
Distribution to partners (6,035) (1,104)
---------------------------------------------------------
Consolidated balance at December 31, 1996 37,882 -- -- -- --
Net income (loss) for 1997 1,599
Distribution to partners (2,500)
Reorganization Note (Note 1) (21,875)
Transfer of partnership equity for shares of
common stock (Note 7) (15,106) 7,812,500 $ 78 $15,028
Net proceeds from initial public offering (Note 7) 3,593,750 36 44,954
Issuance of common stock pursuant to
employee stock purchase plan (Note 9) 14,610 221
---------------------------------------------------------
Balance at December 31, 1997 -- -- 11,420,860 $114 $60,203
=========================================================
Accumulated
Deficit Total
-----------------------
Combined balance at December 31, 1994 $ 12,823
Combined loss for the three months ended
March 31, 1995 (1,268)
Exercise of stock options (ARC) 257
Acquisition of treasury stock by ARC (1,619)
Contribution by ARCLP partners 11,000
Distribution to partners (1,400)
-----------------------
Combined balance at March 31, 1995 19,793
Adjustment to equity as a result of business
combination (Note 1) 23,923
Conversion of debt to special redeemable
preferred partnership interests (Note 1) 10,000
Net income for the nine months ended
December 31, 1995 3,296
Distribution to partners for the nine months
ended December 31, 1995 (5,189)
-----------------------
Consolidated balance at December 31, 1995 -- 51,823
Net income for 1996 3,198
Redemption of preferred partnership interests (10,000)
Distribution to partners (7,139)
-----------------------
Consolidated balance at December 31, 1996 -- 37,882
Net income (loss) for 1997 $ (6,399) (4,800)
Distribution to partners (2,500)
Reorganization Note (Note 1) (21,875)
Transfer of partnership equity for shares of
common stock (Note 7) --
Net proceeds from initial public offering (Note 7) 44,990
Issuance of common stock pursuant to
employee stock purchase plan (Note 9) 221
-----------------------
Balance at December 31, 1997 $ (6,399) $ 53,918
=======================
See accompanying notes to consolidated and combined financial statements.
33
34
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
Consolidated Combined
------------------------------------------- -------------
Predecessor
Predecessor Entities
----------------------------- -------------
Nine Months Three Months
Years ended December 31, Ended Ended
----------------------------- December 31, March 31,
1997 1996 1995 1995
------------------------------------------- ------------
Cash flows from operating activities:
Net income (loss) $(4,800) $ 3,198 $3,296 $(1,268)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 6,855 6,906 4,534 1,127
Deferred income taxes 4,162 (920) --- ---
Extraordinary loss on extinguishment of debt, net of tax 6,334 2,335 --- ---
Amortization of deferred gain on sale-leaseback
transactions (341) --- --- ---
Write-down of value of insurance policies --- 66 --- ---
Gain on sale of assets (35) (874) (1,143) ---
Changes in assets and liabilities, net of effects from
acquisitions:
(Increase) decrease in receivables (2,831) (431) 701 (903)
Increase in inventory (63) (56) (21) (6)
(Increase) decrease in prepaid expenses (584) (105) 1,894 (1,496)
(Increase) decrease in other assets (1,956) 521 --- 382
Increase (decrease) in accounts payable (12) (249) 948 381
Increase (decrease) in accrued expenses 3,322 1,130 487 (157)
Increase in tenant deposits 673 202 279 60
Increase (decrease) in other long-term liabilities 371 (27) (87) ---
--------------------------------------- --------
Net cash provided by (used in) operating activities 11,095 11,696 10,888 (1,880)
Cash flows from investing activities:
Additions to land, buildings and equipment (29,307) (8,361) (6,032) (3,237)
Costs to acquire or lease retirement communities (17,489) (63,184) --- ---
Investments in joint ventures (1,411) --- --- ---
Proceeds from (purchases of) assets whose use is limited (3,916) 2,578 (2,915) 17
Purchases of other investments (859) --- --- ---
Purchases of marketable securities --- --- (50) ---
Proceeds from the sale of assets 30,412 1,346 1,214 6
--------------------------------------- --------
Net cash used in investing activities (22,570) (67,621) (7,783) (3,214)
See accompanying notes to consolidated and combined financial statements.
34
35
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)
Consolidated Combined
---------------------------------------------- ------------
Predecessor
Predecessor Entities
---------------------------------- ------------
Nine Months Three Months
Years ended December 31, Ended Ended
----------------------------- December 31, March 31,
1997 1996 1995 1995
--------------------------------------------- ------------
Cash flows from financing activities:
Net proceeds from initial public offering 44,990 --- --- ---
Net proceeds from convertible debenture offering 134,220 --- --- ---
Proceeds from issuance of stock through employee stock
purchase plan 221 --- --- ---
Proceeds from exercise of stock options (ARC) --- --- --- 257
Acquisition of treasury stock --- --- --- (1,619)
Repayment of reorganization note (21,875) --- --- ---
Contributions by partners --- --- --- 11,000
Payment of redeemable preferred interests (5,195) (4,805) --- ---
Distribution to partners (4,132) (6,952) (4,659) (485)
Expenditures for financing costs (333) (1,364) (346) (130)
Costs paid in connection with extinguishment of debt (9,534) --- --- ---
Proceeds from the issuance of long-term debt 14,275 73,922 1,614 1,636
Principal payments on long-term debt (99,801) (5,479) (3,720) (628)
------------------------------------------ -----------
Net cash provided by (used in) financing activities 52,836 55,322 (7,111) 10,031
Net increase (decrease) in cash and cash equivalents 41,361 (603) (4,006) 4,937
------------------------------------------ -----------
Cash and cash equivalents at beginning of period 3,222 3,825 7,831 2,894
------------------------------------------ -----------
Cash and cash equivalents at end of period $ 44,583 $ 3,222 $ 3,825 $ 7,831
========================================== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 13,130 $ 11,907 $ 7,772 $ 2,381
========================================== ===========
Income taxes paid $ 86 $ 55 $ 20 ---
========================================== ===========
Supplemental disclosure of non-cash transactions:
During the respective periods, the Company (and predecessor entities) acquired
certain communities and entered into certain lease transactions. In conjunction
with the transactions, net assets and liabilities were assumed as follows:
Current assets $ 128 $497 $ 892 $ 486
Other assets 12,869 674 --- ---
Debt (14,191) --- (8,010) (15,480)
Current liabilities (235) (502) (384) ---
Other liabilities (767) --- --- (77)
See accompanying notes to consolidated and combined financial statements.
35
36
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(1) ORGANIZATION AND PRESENTATION
The accompanying financial statements as of and for the year ended December 31,
1997, include the consolidated financial statements of American Retirement
Corporation (the Corporation) and its wholly owned subsidiaries (collectively
referred to as the Company). The accompanying financial statements as of and for
the year ended December 31, 1996, and for the period April 1, 1995 through
December 31, 1995, include the consolidated financial statements of American
Retirement Communities, L.P. (ARCLP) and its wholly owned subsidiaries
(collectively referred to as the Predecessor). All material intercompany
transactions and balances have been eliminated in consolidation.
The accompanying financial statements for the period January 1, 1994 through
March 31, 1995 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)
ARCLP (collectively referred to as the Predecessor Entities). All material
intercompany transactions and balances have been eliminated in combination.
Prior to March 31, 1995, ARCLP 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 ARCLP and was the managing general partner of
and had contracts to provide management services to each of the other three
limited partnerships.
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 ARCLP (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 ARCLP 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 ARCLP was American Retirement
Communities, LLC, whose members were the senior management of ARC. 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 ARCLP (see Note 7).
In February 1997, the Corporation was incorporated for purposes of effecting a
reorganization of ARCLP and to complete an initial public offering (IPO). In the
reorganization, all of ARCLP's assets and liabilities were contributed to the
Corporation in exchange for 7,812,500 shares of common stock and a promissory
note to ARCLP in the original principal amount of $21.9 million. ARCLP's
historical
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carrying value for assets and liabilities were carried over to the Corporation
upon consummation of the reorganization. Immediately prior to the IPO, which was
completed on May 30, 1997, ARCLP distributed its common stock of the Corporation
to its partners. The Corporation sold an additional 3,593,750 shares of its
common stock in the IPO. Total proceeds to the Corporation from the IPO were
$45.0 million, after underwriting and issuance costs. A portion of the proceeds
was utilized on June 4, 1997 to repay the $21.9 million promissory note to ARCLP
and ARCLP distributed such amount to its limited partners.
(a) Pro Forma Statement of Operations Information (Unaudited)
The income taxes on earnings of ARCLP, other than for ARC, are the
responsibility of the partners. The pro forma adjustments reflected on the
statement of operations provide for income taxes assuming ARCLP was subject to
income taxes. Pro forma income tax expense has been calculated using the
Company's effective tax rate of 36% for 1997 and 1996.
(b) Pro Forma Earnings Per Share (Unaudited)
Pro forma earnings per share is 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 of the Corporation's common stock which the partners
received when the reorganization became effective, plus 1,562,500 shares
representing the value of the $21.9 million promissory note at the IPO price of
$14.00 per share.
(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 Corporation recorded, as a one-time
charge to income, a deferred income tax liability of approximately $3.0 million
resulting from the difference between the accounting and tax bases of the
Corporation's assets and liabilities. Such amount is included in the Company's
income tax expense.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Use of Estimates and Assumptions: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
Recognition of Revenue: 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 10.5%, 7.8%, and 9.0% of resident and health care revenues in 1997, 1996,
and 1995, respectively.
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Management services revenue is recorded as earned and relates to providing
certain management and administrative support services under management
agreements. Revenues are shown net of reimbursed expenses. Such fees are based
either on a percentage of revenues of the managed community or a negotiated fee
per the managed community.
Cash and Cash Equivalents: The Company considers highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
Marketable Securities: Marketable securities consist of U.S. Treasury securities
classified as held-to-maturity securities which are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or discounts.
Assets Limited as to Use: Assets limited as to use include assets held by
lenders under loan agreements in escrow for property taxes and property
improvements, certificates of deposit held as collateral for letters of credit,
and resident deposits.
Inventory: Inventory consists of supplies and is stated at the lower of cost
(first-in, first-out) or market.
Land, Buildings, and Equipment: Land, buildings, and equipment are recorded at
cost and include interest capitalized on long-term construction projects during
the construction period, as well as other costs directly related to the
development and construction of the communities. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the related assets. Buildings and improvements are depreciated over 15 to 40
years, and furniture, fixtures and equipment are depreciated over five to seven
years. Leasehold improvements are amortized over the shorter of their useful
life or remaining lease term. Construction in progress includes costs incurred
related to the development and construction of assisted living residences. If a
project is abandoned, any costs previously capitalized are expensed.
Other Assets: Other assets consists primarily of security deposits, purchase
options, deferred financing costs (including convertible debenture offering
costs), and investments in joint ventures. Deferred financing costs are being
amortized using the straight-line method over the terms of the related debt
agreements.
Investments in joint ventures includes the Company's investments in joint
ventures organized to develop assisted living residences. The Company is
providing full development services related to, and has entered into management
agreements to manage, the related assisted living residences. As of December 31,
1997, the residences were under construction and had not commenced operations;
no development or management fees were recorded in 1997. The Company accounts
for its investments in 20-50% owned joint ventures under the equity method.
Income Taxes: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the
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financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are recorded using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Earnings (Loss) per Share: The Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" on December 31, 1997. The Statement
establishes standards for computing and presenting earnings per share ("EPS")
and applies to companies with publicly held common stock and requires dual
presentation of basic and diluted EPS on the face of the income statement. Basic
EPS is computed by dividing income available to common shareholders (numerator)
by the weighted average number of common shares outstanding (denominator). The
denominator used in computing diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. The effect from assumed
conversion of the Company's convertible debentures would have been anti-dilutive
in 1997 and was therefore not included in the computation of diluted EPS. Prior
period pro forma EPS data has been restated to reflect implementation of SFAS
128.
Stock-Based Compensation: The Company accounts for stock-based employee
compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related interpretations as permitted by Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Accordingly, no compensation expense has been
recognized for its stock option awards and its stock purchase plan because the
option grants are generally for a fixed number of shares with an exercise price
generally equal to the fair value of the shares at the date of grant.
Fair Value of Financial Instruments: The carrying amount of cash and cash
equivalents approximates fair value because of the short-term nature of these
accounts and because amounts are invested in accounts earning market rates of
interest. The carrying value of assets limited as to use, receivables,
marketable securities, accounts and redemption payable, and tenant deposits
approximate their fair values because of the short-term nature of these
accounts. The carrying value of debt approximates fair value as the interest
rates approximate the current rates available to the Company.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of: The
Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1,
1996. This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
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costs to sell. Adoption of this statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
Recent Accounting Pronouncements: 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 during a
period from transactions and other events and circumstances from non-owner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. SFAS No. 130
will be effective for the Company's fiscal year ending December 31, 1998.
Adoption of SFAS No. 130 will not impact the Company's financial position or
results of operations.
It will require comparative presentation for prior periods.
Reclassification: Certain 1996 and 1995 amounts have been reclassified to
conform with the 1997 presentation.
(3) ACQUISITIONS
In May 1997, the Company acquired assisted living residences in Tarpon Springs,
Florida, and Corpus Christi, Texas. In December 1997, the Company acquired a 136
unit retirement community with adjoining land and zoning rights to construct
approximately 40 assisted living units in Charlotte, North Carolina. The
aggregate consideration for the transactions was approximately $19.9 million, of
which approximately $14.3 million was financed through mortgage loans and the
remaining $5.6 million was paid in cash. The transactions were accounted for as
purchases and the purchase price was allocated to land, buildings, and
equipment. Pro forma results of operations for 1997 and 1996, as if the Company
had completed the acquisitions on January 1, 1996, are not presented because the
effect was not material.
(4) LAND, BUILDINGS, AND EQUIPMENT
A summary of land, buildings, and equipment is as follows (in thousands):
1997 1996
---- ----
Land $ 37,584 $ 26,519
Buildings and improvements 183,920 187,239
Furniture, fixtures, and equipment 12,320 11,512
Leasehold improvements 240 --
-------- --------
234,064 225,270
Less accumulated depreciation 18,648 17,423
-------- --------
215,416 207,847
Construction in progress 14,482 5,277
-------- --------
Total $229,898 $213,124
======== ========
The Company capitalized $554,000 of interest costs during 1997. No interest was
capitalized in 1996 or 1995.
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In January 1997, ARCLP entered into a sale-leaseback transaction with a third
party for the property, plant, and equipment of the Holley Court Terrace and
Trinity Towers retirement communities owned by ARCLP. The net cash proceeds to
ARCLP were $27.5 million. The leases are operating leases with the gain from the
transaction of $4.6 million to be recognized over the life of the leases, which
is ten years. Lease payments consist of a base rent which totals $2.5 million
per year in the aggregate 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
leases contain three separate ten-year renewal options. The proceeds from the
sale were used to retire debt of $14.6 million and to fund the redemption of the
special redeemable preferred limited partnership interests of $5.2 million.
(5) OTHER ASSETS
Other assets at December 31, 1997 and 1996 consist of the following (in
thousands):
1997 1996
---- ----
Security deposit $ 6,093 $ ---
Purchase option 4,600 ---
Deferred financing costs, net of accumulated amortization 4,395 1,129
Investments in joint ventures 1,411 ---
Other 3,088 979
----------- ---------
Total $ 19,587 $ 2,108
=========== =========
(6) LONG-TERM DEBT
A summary of long-term debt is as follows (in thousands):
1997 1996
---- ----
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
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.
This debt was restructured on December 31, 1997. 62,330 62,332
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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). The note was repaid in 1997. --- 16,767
Mortgage note payable bearing interest at a fixed rate of 9.28%.
The note was repaid in 1997. --- 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). The note was repaid in 1997. --- 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). The note was repaid
in 1997. --- 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. 14,780 15,020
Note payable to a bank bearing interest at 7.6%. The note was repaid
in 1997. --- 5,000
Term loan note to a bank with a fixed interest rate of 10.07%.
The note was repaid in 1997. --- 9,585
Term loan note payable to a bank at a variable rate of interest
(8.04% at December 31, 1996). The note was repaid in 1997. --- 2,630
Mortgage note payable bearing interest at a fixed rate of 9.25%. Principal and
interest of $49,467 due monthly through April 1, 2028. The loan is secured by
land, buildings, equipment, and
assignment of rents and leases. 6,025 ---
Mortgage note payable bearing interest at a floating rate equal to two hundred
seventy-five basis points in excess of the ninety day LIBOR rate recalculated on
the third monthly payment date (8.69% at December 31, 1997). Principal and
interest of $28,597 is due monthly with remaining principal and unpaid interest
due on May 9, 2002. The note is secured by land, buildings, equipment,
and assignment of rents and leases. 3,477 ---
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Mortgage note payable bearing interest at a fixed rate of 9.95%. Interest is due
monthly with principal due at maturity on May 31, 2007. The loan is secured by
land, buildings, equipment, and
assignment of rents and leases. 4,700 ---
Convertible debentures bearing interest at a fixed rate of 5.75%.
Interest is due semi-annually on April 1 and October 1 through
October 1, 2002. 138,000 ---
Other long-term debt, generally payable monthly 32 410
----------- ------------
Total long-term debt 237,354 170,689
Less current portion of long-term debt 316 8,053
----------- ------------
Long-term debt, excluding current portion $ 237,038 $ 162,636
=========== ============
The aggregate scheduled maturities of long-term debt at December 31, 1997 were
as follows (in thousands):
1998 $ 316
1999 355
2000 331
2001 14,160
2002 203,685
Thereafter 18,507
--------
$237,354
========
During 1997, the Company issued $138.0 million of 5 3/4% fixed rate convertible
subordinated debentures, due October 2002, in a public offering. The debentures
are non-callable for three years and are convertible into shares of the
Company's common stock at a conversion price of $24.00 per share. The Company
received proceeds of $134.2 million, net of offering costs, from the issuance of
the debentures. The offering costs were capitalized as deferred financing costs
and are being amortized using the straight-line method over the term of the
debentures.
During the fourth quarter of 1997, the Company refinanced its mortgage notes
with a capital corporation by prepaying a $65.1 million note and refinancing a
$62.3 million term loan. The notes were restructured with a $112.3 million
credit facility from the capital corporation, of which $62.3 million is a new
term loan bearing interest at a fixed rate of 8.2%, and $50.0 million is a new
revolving line of credit bearing interest at a variable rate of 1.75% over the
lenders' composite commercial paper rate, both maturing on December 31, 2002. In
conjunction with the prepayment, the Company was required to pay $9.5 million
for the buyout of the capital corporation's participation rights to future
earnings of two of the Company's communities and a prepayment penalty. The
Company recognized an extraordinary after-tax charge of $6.3 million, or $.60
per share, for the prepayment penalty, participating rights buyout, and the
write-off of unamortized deferred financing costs related to the previous notes.
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At December 31, 1997, the entire $50.0 million revolving line of credit was
available to provide working capital and for the construction or acquisition of
additional retirement communities.
In 1996, ARCLP refinanced two of its notes held with a capital corporation. The
debt was in the form of two notes, one for $38.5 million and one for $23.5
million, both of which had a variable interest rate of 4.5% above the lender's
composite commercial paper rate. The maturity date of both notes was October 31,
2001. The refinancing combined the two notes into a single loan with a $62.5
million initial advance and a $35.0 million commitment for additional borrowing.
In 1996, ARCLP 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, ARCLP wrote off unamortized deferred financing
costs related to the previous notes of $2.3 million. This write-off was recorded
as an extraordinary loss in 1996.
The Company is required to comply with certain restrictive financial and other
covenants. At December 31, 1997, the Company was in compliance with such
covenants. Under the terms of various long-term debt accounts, the Company is
required to maintain certain deposits with trustees. Such deposits are included
in "assets limited as to use" in the financial statements.
(7) PARTNERS'/SHAREHOLDERS' 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 ARCLP. 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 ARCLP. During 1996, ARCLP redeemed $4.8 million of the preferred
limited interests, and on December 4, 1996, ARCLP approved the redemption of the
remaining $5.2 million. Accordingly, the $5.2 million was removed from equity
and shown as redemption payable at December 31, 1996, and redeemed in January
1997. ARCLP (and the Predecessor Entities for the period from January 1, 1995 to
March 31, 1995) distributed $2.5 million, $7.1 million, and $6.6 million in
1997, 1996, and 1995, respectively, including $1.1 million of preferred
distributions during 1996 and 1995.
ARCLP 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. On May 30, 1997, the Company issued 3,593,750 shares of common
stock pursuant to the IPO.
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(8) STOCK-BASED COMPENSATION
Stock Option Plan
The Company has adopted a stock incentive plan (the "1997 Plan") providing for
the grant of stock options, stock appreciation rights, restricted stock, and/or
other stock-based awards. Pursuant to the 1997 Plan, 1,140,625 shares of common
stock have been reserved and will be available for issuance. The option exercise
price and vesting provisions of such options are fixed when the option is
granted. The options generally expire ten years from the date of grant and vest
over a three-year period. The option exercise price is generally not less than
the fair market value of a share of common stock on the date the option is
granted.
A summary of the Company's stock option activity, and related information for
the year ended December 31, 1997, is presented below (in thousands):
Average
Exercise
Options Shares Price
-------------------------------------------------------------------------
Granted 801 $15.51
Forfeited (21) 14.00
-------------------------------------------------------------------------
Outstanding - end of year 780 $15.55
-------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 1997 (in thousands):
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Exercise
Exercise Prices Outstanding Life (Years) Price
- --------------------------------------------------------------------------------
$14.00 - $21.25 780 9.50 $15.55
There were no options exercisable as of December 31, 1997.
As discussed in Note 2, the Company accounts for stock-based employee
compensation in accordance with APB 25 and related interpretations as permitted
by SFAS 123. Accordingly, no compensation expense has been recognized for its
stock option awards because the option grants are generally for a fixed number
of shares with an exercise price generally equal to the fair value of the shares
at the date of grant. In accordance with SFAS 123, pro forma information
regarding net income (loss) and earnings (loss) per share has been determined by
the Company using the "Black-Scholes" option pricing model with the following
weighted average assumptions: 6.35% risk-free interest rate, 0% dividend yield,
26.7% volatility rate, and an expected life of the options equal to the
remaining vesting period.
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The weighted average fair value of options granted during 1997 was $7.25. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information follows:
SFAS 123
As Reported Pro Forma
----------- -----------
Year ended December 31, 1997
----------------------------
Net loss $ (4,800) $ (5,450)
Pro forma income before extraordinary item $ 3,759 $ 3,109
Basic earnings per share - pro forma before
extraordinary item $ 0.36 $ 0.29
Diluted earnings per share - pro forma before
extraordinary item $ 0.35 $ 0.29
Stock Purchase Plan
The Company has adopted an employee stock purchase plan ("ESPP") pursuant to
which an aggregate of 235,390 shares remain authorized and available for
issuance to employees at December 31, 1997. Under the ESPP, employees, including
executive officers, who have been employed by the Company continuously for at
least 90 days are eligible, as of the first day of any option period (January 1
through June 30, or July 1 through December 31) (an "Option Period") to
contribute on an after-tax basis up to 15% of their base pay per pay period
through payroll deductions and/or a single lump sum contribution per Option
Period to be used to purchase shares of Common Stock. On the last trading day of
each Option Period (the "Exercise Date"), the amount contributed by each
participant over the course of the Option Period will be used to purchase shares
of common stock at a purchase price per share equal to the lesser of (a) 85% of
the closing market price of the common stock on the Exercise Date; or (b) 85% of
the closing market price of the common stock on the first trading date of such
Option Period. The ESPP is intended to qualify for favorable tax treatment under
Section 423 of the Code. During 1997, 14,610 shares were issued pursuant to the
ESPP at $15.30 per share.
(9) RETIREMENT PLANS
401 (k) Plan
Employees of the Company participate in a savings plan (the "401(k) Plan") which
is qualified under Sections 401 (a) and 401(k) of the Code. To be eligible, an
employee must have been employed by the Company for at least three months. The
401(k) Plan permits employees to make voluntary contributions up to specified
limits. Additional contributions may be made by the Company at its discretion,
which contributions vest ratably over a five-year period. The Company
contributed $269,000, $277,000, and $54,000 for 1997, 1996, and 1995,
respectively.
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Section 162 Plan
The Company maintains a non-qualified deferred compensation plan (the "162
Plan") which allows employees who are "highly compensated" under IRS guidelines
to make after-tax contributions to an investment account established in such
employees' name. Additional contributions may be made by the Company at its
discretion. All contributions to the 162 Plan are subject to the claims of the
Company's creditors. Approximately 45 employees are eligible to participate in
the 162 Plan, which is administered by the Compensation Committee. The Company
contributed approximately $96,000, $274,000, and $99,000 to the 162 Plan in
1997, 1996, and 1995, respectively.
(10) COMMITMENTS AND CONTINGENCIES
The Company maintains commercial insurance on a claims-made basis for medical
malpractice liabilities. Management is unaware of any incidents which could
ultimately result in a loss in excess of the Company's insurance coverage.
In the normal course of business, the Company is a defendant in certain
litigation. However, management is unaware of any action which would have a
material adverse impact on the financial position or results of operation of the
Company.
The Company is self-insured for workers' compensation claims with excess loss
coverage of $250,000 per individual claim and $1.2 million for aggregate claims.
The Company utilizes a third party administrator to process and pay filed
claims. The Company has accrued $420,000 to cover open claims not yet settled
and incurred but not reported claims as of December 31, 1997. Management is of
the opinion that such amounts are adequate to cover any such claims.
In December 1997, the Company entered into an operating lease for a 917 unit
senior living community in Richmond, Virginia with an initial term of 20 years
and a seven-year renewal option. The Company has the option to acquire the
community at its fair market value at the expiration of the lease. The cost of
the purchase option is $8.3 million; $4.6 million of which was paid in 1997,
with the remaining amount payable over the next two 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.
The Company has entered into operating leases for four of its retirement
communities (including the Richmond, Virginia community) and its corporate
office. The remaining lease terms vary from four to 20 years . Certain of the
leases provide for renewal options. Lease expense was $3.4 million for 1997. The
Company had no lease expense in 1996 and 1995.
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Future minimum lease payments under operating leases as of December 31, 1997
were as follows (in thousands):
1998 $ 7,696
1999 7,700
2000 7,703
2001 7,707
2002 7,378
Thereafter 108,585
--------
$146,769
========
The Company 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, 1997, $2.2 million of this line of credit had been used to obtain
letters of credit. The Company also has a $5.0 million line of credit with a
bank which is available for land acquisitions. No borrowings were outstanding
under this line of credit at December 31, 1997.
At December 31, 1997, the Company was developing or constructing 36 new assisted
living residences with an aggregated estimated cost to complete and lease-up of
approximately $300.0 million to $325.0 million. At December 31, 1997, the
Company had expansion projects planned at four of its owned retirement
communities with an aggregated estimated cost to complete and lease-up of
approximately $31.0 million.
During 1997, the Company entered into non-binding letters of intent with two
third-party REITs pursuant to which, at the Company's request and upon
satisfaction of certain conditions, the REITs 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. At December 31, 1997, the
Company has been allocated $41.6 million and $4.7 million, respectively, in
commitments under the REIT facilities.
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 services, and
other services for these communities at the owner's expense and receives a
monthly fee for its services based on either a contractually fixed amount 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 through June 2002.
(11) INCOME TAXES
Prior to the IPO, taxes on the Predecessor's income were the responsibility of
the individual partners. Pursuant to the reorganization, all assets of ARCLP
were transferred to the Company. Therefore, all
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income generated subsequent to the IPO is subject to Federal and state income
taxes. Income taxes for periods prior to the IPO relate only to the income of
the Company.
The income tax expense (benefit), attributable to income (loss) before income
taxes and extraordinary item consists of the following (in thousands):
Consolidated Combined
----------------------------------------------------- --------------------
Predecessor Predecessor Entities
---------------------------------- --------------------
Years Ended December 31, Nine Months Ended Three Months Ended
------------------------------ December 31, March 31,
1997 1996 1995 1995
-------------- ------------ ----------------- --------------------
U.S. Federal:
Current $ -- $ -- $ 55 $ 20
Deferred 3,724 (823) -- --
------ ----- ---- ----
Total Federal 3,724 (823) 55 20
------ ----- ---- ----
State:
Current 178 -- -- --
Deferred 438 (97) -- --
------ ----- ---- ----
Total state 616 (97) -- --
------ ----- ---- ----
Total $4,340 $(920) $ 55 $ 20
====== ===== ==== ====
In 1996, ARC recorded an income tax benefit and a deferred tax asset of $920,000
because of the anticipated utilization of net operating loss carryforwards that
would offset taxable gains from the Sale-Leaseback Transaction (See Note 4).
The income tax expense (benefit), attributable to the 1997 extraordinary item
consists of the following (in thousands):
Year ended
December 31,
1997
------------
U.S. Federal:
Current $ -
Deferred (3,474)
-------
Total Federal (3,474)
-------
State:
Current --
Deferred (409)
-------
Total state (409)
-------
Total $(3,883)
=======
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The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1997 and 1996 are
presented below (in thousands):
1997 1996
---- ----
Deferred tax assets:
Federal and state operating loss carryforwards $ 4,141 $2,052
Deferred gains on sale/leaseback transactions 1,536 -
Other 282 78
------- ------
Total gross deferred tax assets 5,959 2,130
Less valuation allowance - (339)
------- ------
5,959 1,791
------- ------
Deferred tax liabilities:
Partnership income - 847
Buildings and equipment 5,316 24
------- ------
Total gross deferred tax liabilities 5,316 871
------- ------
Net deferred tax asset $ 643 $ 920
======= ======
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes on income before extraordinary item:
1997 1996 1995
---- ---- ----
Statutory tax rate 34 % 34 % 34 %
Income attributable to non-taxable entities (9)% (34)% (30)%
Federal tax charge for conversion to taxable entities 47 % - -
Tax goodwill amortization in excess of book amortization (4)% - -
State income taxes, net of Federal benefit 7 % (1)% -
Change in beginning of the year valuation allowance (6)% (19)% -
Other 5 % _ -
--- --- ---
Total 74% (20)% 4%
=== ==== ===
At December 31, 1997, ARC had unused net operating loss carryforwards of
approximately $10.9 million for regular tax purposes and $10.0 million for
alternative minimum tax purposes, which expire in varying amounts from 2003 to
2012.
The valuation allowance for deferred tax assets as of January 1, 1997, and 1996
was $339,000 and $1.1 million, respectively. The net change in the total
valuation allowance for the years ended December 31, 1997, and 1996 was a
decrease of $339,000 and $825,000, respectively. In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. In order to fully realize
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the deferred tax asset, the Company will need to generate future taxable income
of approximately $1.7 million prior to the expiration of the net operating loss
carryforward in 2012. Based upon the level of projected future taxable income
over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences, and no valuation allowance is necessary at
December 31, 1997. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
(12) RELATED PARTY TRANSACTIONS
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 389 residents owned by affiliates of the son of 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 residences' gross revenues and require the Company
to guarantee operating deficits above a specified amount. The management
agreements also provide the Company with the option to purchase the residences.
The Company expects to enter into additional management agreements with this
related party. No management fees or development fees were recorded in 1997.
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(13) QUARTERLY DATA (UNAUDITED)
The following table presents unaudited quarterly operating results for each of
the Company's last eight fiscal quarters. The Company believes that all
necessary adjustments have been included in the amounts stated below to present
fairly the quarterly results when read in conjunction with the consolidated
financial statements. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year or predictive of
future periods.
1997 Quarter Ended
------------------
Dec 31 Sept 30 June 30 Mar 31
-------- ------- ------- -------
(dollar amounts in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Total revenues $ 26,180 $23,643 $22,879 $21,510
Income (loss) before extraordinary item 1,360 1,037 (1,839) 976
Net income (loss) (4,974) 1,037 (1,839) 976
Pro forma income before extraordinary item 1,360 1,037 768 594
Pro forma income before extraordinary item
available for distribution to partners and
shareholders 1,360 1,037 768 594
EARNINGS PER SHARE:
Basic - actual ($ 0.44) $ 0.09 -- --
Basic - pro forma income before extraordinary
item available for distribution to partners
and shareholders $ 0.12 $ 0.09 $ 0.08 $ 0.06
Basic - weighted average shares outstanding 11,406 11,406 10,089 9,375
Diluted - actual ($ 0.44) $ 0.09 --
Diluted - pro forma income before
extraordinary item available for
distribution to partners and shareholders $ 0.12 $ 0.09 $ 0.08 $ 0.06
Diluted - weighted average shares outstanding 11,579 11,584 10,124 9,375
1996 Quarter Ended
---------------------
Dec 31 Sept 30 June 30 Mar 31
-------- ------- -------- --------
(dollar amounts in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Total revenues $ 20,783 $20,028 $ 18,490 $ 16,316
Income (loss) before extraordinary item 2,227 422 1,232 1,652
Net income (loss) 2,227 422 1,232 (683)
Pro forma income before extraordinary item 901 262 764 1,025
Pro forma income before extraordinary item
available for distribution to partners and
shareholders 706 67 425 650
EARNINGS PER SHARE:
Basic - actual -- -- -- --
Basic - pro forma income before extraordinary
item available for distribution to partners
and shareholders $ 0.08 $ 0.01 $ 0.05 $ 0.07
Basic - weighted average shares outstanding 9,375 9,375 9,375 9,375
Diluted - actual -- -- -- --
Diluted - pro forma income before
extraordinary item available for
distribution to partners and shareholders $ 0.08 $ 0.01 $ 0.05 $ 0.07
Diluted - weighted average shares outstanding 9,375 9,375 9,375 9,375
(14) SUBSEQUENT EVENTS (UNAUDITED)
On January 29, 1998, the Company entered into a letter of intent to acquire
privately-held Freedom Group, Inc. ("FGI") and certain entities affiliated with
FGI and/or its Chairman. The acquisition would result in the ownership of three
continuing care retirement communities ("CCRCs") and long-term management of
four additional CCRCs. Additionally, ARC would enter into development and
management contracts for two other communities currently under development, and
would acquire options to purchase the same. The aggregate resident capacity for
the owned and managed communities to be included in the transaction is
approximately 3,800. The development projects will add resident capacity of
approximately 800. The consideration to be paid is approximately $52.1 million
including $28.8 million of cash and $23.3 million of the Company's common stock.
The letter of intent is non-binding and the transaction is subject to the
completion of definitive agreements and satisfaction of customary closing
conditions. The transaction is expected to be completed in the second quarter of
1998 and to be accounted for as a purchase.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the directors
of the Company is incorporated herein by reference to the Company's definitive
proxy statement for its Annual Meeting of Shareholders to be held May 5, 1998 to
be filed with the Securities and Exchange Commission (the "SEC"). Pursuant to
General Instruction G(3), certain information concerning the executive officers
of the Company is included in Part I of this report under the caption "Executive
Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the section entitled "Executive Compensation" in the Company's
definitive proxy statement for its Annual Meeting of Shareholders to be held May
5, 1998 to be filed with the SEC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the section entitled "Security Ownership of Management and Certain
Beneficial Owners" in the Company's definitive proxy statement for its Annual
Meeting of Shareholders to be held May 5, 1998 to be filed with the SEC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the section entitled "Certain Transactions" in the Company's
definitive proxy statement for its Annual Meeting of Shareholders to be held May
5, 1998 to be filed with the SEC.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Item 14.(a)(1) Financial Statements: See Item 8
(2) Financial Statement Schedules: Not applicable
(3) Exhibits required by item 601 of Regulation S-K are as follows:
Exhibit
Number Description
- ------- -----------
2.1 Limited Partnership Agreement of American Retirement Communities,
L.P., dated February 7, 1995, as amended April 1, 1995*
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**
10.1 American Retirement Corporation 1997 Stock Incentive Plan*
10.2 First Amendment to Stock Incentive Plan
10.3 American Retirement Corporation Employee Stock Purchase Plan*
10.4 First Amendment to Employee Stock Purchase Plan
10.5 American Retirement Corporation 401(k) Retirement Plan*
10.6 Officers' Incentive Compensation Plan*
10.7 Registration Rights Policy*
10.8 Lease and Security Agreement, dated January 2, 1997, by and
between Nationwide Health Properties, Inc. and American
Retirement Communities, L.P.*
10.9 Lease and Security Agreement, dated January 2, 1997, by and
between N.H. Texas Properties Limited Partnership and Trinity
Towers Limited Partnership*
10.10 Amended and Restated Loan Agreement, dated December 21, 1994,
between Carriage Club of Denver, L.P. and General Electric
Capital Corporation*
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Exhibit
Number Description
- ------- -----------
10.11 Amended and Restated Promissory Note, dated December 21, 1994,
between Carriage Club of Denver, L.P. and General Electric
Capital Corporation*
10.12 Assumption, Consent and Loan Modification Agreement, dated
February 9, 1995, by and among Carriage Club of Denver, L.P.,
American Retirement Communities, L.P., and General Electric
Capital Corporation*
10.13 Loan Agreement, dated October 31, 1995, by and between American
Retirement Communities, L.P. and First Union National Bank of
Tennessee, as amended*
10.14 Amended and Restated Promissory Note, dated October 31, 1995, by
American Retirement Communities, L.P. to First Union National
Bank of Tennessee, as amended*
10.15 Revolving Credit Promissory Note, dated October 31, 1995, by
American Retirement Communities, L.P. to First Union National
Bank of Tennessee, as amended*
10.16 Standby Note, dated October 31, 1995, by American Retirement
Communities, L.P. to First Union National Bank of North Carolina*
10.17 Reimbursement Agreement, dated October 31, 1995, between American
Retirement Communities, L.P. and First Union National Bank of
North Carolina, as amended*
10.18 Letter of Intent, dated April 3, 1997, by National Health
Investors, Inc. to American Retirement Corporation*
10.19 Master Loan Agreement, dated December 23, 1996, between First
American National Bank and American Retirement Communities, L.P.*
10.20 Letter of Intent, dated February 24, 1997, by Nationwide Health
Properties, Inc. to American Retirement Corporation*
10.21 Deed of Lease, dated as of October 23, 1997, between Daniel U.S.
Properties Limited Partnership, as Lessor, and ARC Imperial
Plaza, Inc., as Lessee
10.22 Loan Agreement, dated as of December 31, 1997, between General
Electric Capital Corporation and Fort Austin Limited Partnership
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Exhibit
Number Description
- -------------- -----------
10.23 Promissory Note, dated December 31, 1997, by Fort Austin Limited
Partnership to General Electric Capital Corporation in the
original principal amount of $62,330,000
10.24 Promissory Note, dated December 31, 1997, by Fort Austin Limited
Partnership to General Electric Capital Corporation in the
original principal amount of $50,000,000
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule (for SEC use only)
- --------------------
* Incorporated by reference to the Registrant's Registration Statement of
Form S-1 (Registration No. 333-23197)
** Incorporated by reference to the Registrant's Registration Statement of
Form S-1 (Registration No. 333-34339)
(b) During the quarter ended December 31, 1997, the Company filed no
reports on Form 8-K.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this registration to be
signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN RETIREMENT CORPORATION
By: /s/ W.E. Sheriff
----------------------------------------
W.E. Sheriff
Chief Executive Officer and Chairman
SIGNATURE TITLE DATE
--------- ----- ----
/s/ W.E. SHERIFF Chairman and March 30, 1998
- ---------------------------------- Chief Executive Officer
W.E. Sheriff (Principal Executive Officer)
/s/ GEORGE T. HICKS
- ---------------------------------- Executive Vice President - March 30, 1998
George T. Hicks Finance, Chief Financial
Officer (Principal Financial
And Accounting Officer)
/s/ H. LEE BARFIELD II Director March 30, 1998
- ----------------------------------
H. Lee Barfield II
/s/ JACK O. BOVENDER Director March 30, 1998
- ----------------------------------
Jack O. Bovender
/s/FRANK M. BUMSTEAD Director March 30, 1998
- ----------------------------------
Frank M. Bumstead
/s/ CHRISTOPHER J. COATES Director March 30, 1998
- ----------------------------------
Christopher J. Coates
/s/ ROBIN G. COSTA Director March 30, 1998
- ----------------------------------
Robin G. Costa
/s/ CLARENCE EDMONDS Director March 30, 1998
- ----------------------------------
Clarence Edmonds
/s/ JOHN A. MORRIS, JR., M.D. Director March 30, 1998
- ----------------------------------
John A. Morris, Jr., M.D.
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SIGNATURE TITLE DATE
--------- ----- ----
/s/ DANIEL K. O'CONNELL Director March 30, 1998
- ----------------------------------
Daniel K. O'Connell
/s/ NADINE C. SMITH Director March 30, 1998
- ----------------------------------
Nadine C. Smith
/s/ LAWRENCE J. STUESSER Director March 30, 1998
- ----------------------------------
Lawrence J. Stuesser
58