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Exhibit 2.5
SUPPLEMENTAL AGREEMENT
This is a Supplemental Agreement, dated July 14, 1998, among American
Retirement Corporation, a Tennessee corporation ("ARC"), Freedom Group, Inc., a
Florida corporation ("FGI"), and Xxxxxx X. Xxxxxxx, PHC, L.L.C., a Michigan
limited liability company, and The Xxxxx and Xxxx Xxxxxx Foundation, a Michigan
not-for-profit corporation (collectively, the "FGI Shareholders"). This
Supplemental Agreement amends and supplements the Agreement and Plan of Merger,
dated as of May 29, 1998, among ARC, FGI, and the FGI Shareholders (the "Merger
Agreement"). Certain capitalized terms defined in the Merger Agreement are used
herein as defined in the Merger Agreement.
FGI has historically prepared interim financial statements at the end
of the each calendar month. The parties acknowledge that a closing of FGI's
accounting books on other than on a month-end basis and a determination of Net
Working Capital for purposes of Section 8.7 of the Merger Agreement would impose
severe administrative burdens upon FGI, would result in a significant delay in
determining Net Working Capital, and could lead to disagreement among the
parties concerning appropriate revenue and expense allocations. Therefore,
notwithstanding that the Closing of the Merger is occurring on the date hereof,
the parties desire to provide for certain accounting and price adjustments as of
July 1, 1998, in order to avoid these problems.
In addition, the parties desire to make certain other amendments to the
Merger Agreement as hereinafter set forth.
Therefore, in accordance with Section 11.4 of the Merger Agreement, and
in consideration of their mutual agreements, the parties agree as follows:
1. Closing Date. ARC, FGI, and the FGI Shareholders agree that
the Closing Date, for all purposes of the Merger Agreement, is July 14, 1998,
and that the parties will take all actions (including the filing of Articles of
Merger in Tennessee and Florida) necessary to cause the Effective Time to occur
simultaneously with the Closing. This Supplemental Agreement does not in any way
change or otherwise affect the Closing Date or the Effective Time, and except as
expressly and specifically provided herein, this Supplemental Agreement has no
effect on the rights or obligations of the parties on the Closing Date or with
respect to the periods preceding or following the Closing Date.
2. Amendment of Section 8.7 of the Merger Agreement. Section
8.7 of the Merger Agreement, entitled "Net Working Capital Adjustments," is
hereby amended in its entirety to read as follows:
(a) ARC and the FGI Shareholders shall adjust (up or down)
the cash portion of the Merger Consideration based upon
the extent to which the Net Working Capital on July 1, 1998
(the "Adjustment Date") is less than or greater than zero. The
cash portion of the Merger Consideration shall be reduced
(dollar
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for dollar) by the amount by which the Net Working Capital on
the Adjustment Date (the "Adjustment Date Net Working
Capital") is less than zero. The cash portion of the Merger
Consideration shall be increased (dollar for dollar) by the
amount by which the Adjustment Date Net Working Capital is
greater than zero.
(b) On the Closing Date, ARC and the FGI Shareholders
shall estimate the amount of the Net Working Capital on the
Adjustment Date (the "Estimated Net Working Capital"). The
Estimated Net Working Capital shall be determined in
accordance with GAAP and shall be based upon the entries in
the balance sheets for FGI and the FGI Subsidiaries (other
than the Excluded FGI Entities) included in the latest
available monthly financial statements delivered pursuant to
Section 6.2(h). ARC and the FGI Shareholders shall tentatively
adjust (up or down) the cash portion of the Merger
Consideration payable to the FGI Shareholders on the Closing
Date (the "Initial Net Working Capital Adjustment"), based on
the extent to which the Estimated Net Working Capital is less
than or greater than zero. The cash portion of the Merger
Consideration payable to the FGI Shareholders on the Closing
Date shall be reduced (dollar for dollar) by the amount by
which the Estimated Net Working Capital is less than zero. The
cash portion of the Merger Consideration payable to the FGI
Shareholders on the Closing Date shall be increased (dollar
for dollar) by the amount by which the Estimated Net Working
Capital is greater than zero. For purposes of illustration,
Exhibit I sets forth a hypothetical Initial Net Working
Capital Adjustment using the balance sheets included in the
Most Recent Financial Statements. The methodology for
calculating the Initial Net Working Capital Adjustment and for
finally determining the Adjustment Date Net Working Capital
shall be consistent with that shown on Exhibit I. Attached
hereto as Exhibit A is the Initial Net Working Capital
Adjustment that the parties have agreed upon, which results in
an Estimated Net Working Capital deficit (and accordingly a
downward adjustment to the cash portion of the Merger
Consideration) of $9,365,000.
(c) Within ninety (90) days after the Closing Date,
ARC and the FGI Shareholders shall re-compute, and determine
the definitive amount of, the Adjustment Date Net Working
Capital in accordance with the procedures and methodologies
set forth above. Within thirty (30) days following receipt by
the FGI Shareholders of such calculation, the parties shall
settle any amounts owing as a result of such calculation. If
the amount of the Adjustment Date Net Working Capital,
as finally determined, is greater than the Estimated Net
Working Capital on which the Initial Net Working Capital
Adjustment was based, then ARC shall pay to the FGI
Shareholders the amount by which Adjustment Date Net Working
Capital, as finally determined, exceeds the Estimated Net
Working Capital on which the Initial Net Working Capital
Adjustment was based. If the amount of the Estimated Net
Working Capital on which the Initial Net Working Capital
Adjustment was based is greater than the Adjustment Date Net
Working Capital,
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as finally determined, then the FGI Shareholders, jointly and
severally, shall pay to ARC the amount by which the Estimated
Net Working Capital on which the Initial Net Working Capital
Adjustment was based exceeds the Adjustment Date Net Working
Capital, as finally determined. Any amounts to be paid to the
FGI Shareholders pursuant to this Section 8.7(c) shall be paid
to the FGI Shareholders in accordance with their proportional
interest in the cash portion of the Merger Agreement paid on
the Closing Date. Any such refund or payment shall be by wire
transfer of immediately available funds to a bank account
designated by the payee to the payor or by such other method
as to which ARC and the FGI Shareholders shall agree.
(d) If, within ninety (90) days after the Closing
Date, ARC and the FGI Shareholders are unable to agree on the
definitive amount of the Adjustment Date Net Working Capital,
ARC and the FGI Shareholders shall each have the right to
require that such disputed determinations be submitted to such
independent certified public accounting firm as ARC and the
FGI Shareholders may then mutually agree upon in writing, for
computation or verification in accordance with the provisions
of this Agreement and otherwise, where applicable, in
accordance with GAAP. The foregoing provisions for certified
public accounting firm review shall be specifically
enforceable by the parties; the decision of such accounting
firm shall be final and binding upon the parties; there shall
be no right of appeal from such decision; and such accounting
firm's fees and expenses for each disputed determination shall
be borne by the party whose determination has been modified by
such accounting firm's report or by both parties in proportion
to the relative amount each party's determination has been
modified. Any additional payments due under this Agreement
shall bear interest until paid in full at the Applicable Rate.
3. FGI Final Tax Return. For federal and state income tax purposes, the
final fiscal year of FGI and the FGI Subsidiaries (other than the Excluded FGI
Entities) shall terminate at the Effective Time on the Closing Date. ARC, on
behalf of FGI, shall prepare and file the final federal and state income tax
returns for FGI and such FGI Subsidiaries covering their final fiscal year
(collectively the "Final Return"), and shall pay all Taxes due thereunder.
Notwithstanding the foregoing, nothing in this Section 3 shall affect, nor
impair or limit the FGI Shareholders' indemnification obligations under the
Merger Agreement.
4. Allocation of Revenues and Expenses. Notwithstanding the Merger
Agreement, all items of revenue, income, gain, expense, cost, and loss of FGI
and the FGI Subsidiaries (other than the Excluded FGI Entities) received,
realized, paid, or incurred on or after July 1, 1998, shall be allocated to, and
be retained by, ARC. ARC shall pay all operating costs and expenses (including
without limitation all interest on indebtedness and all Taxes), and shall be
entitled to retain all income and revenues, of FGI and the FGI Subsidiaries
(other than the Excluded FGI Entities) received, realized, paid, or incurred
from and after July 1, 1998; provided, however, that
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ARC shall not be obligated to pay any costs or expenses for which the FGI
Shareholders are required to indemnify the ARC Indemnified Parties under Section
9.2 of the Merger Agreement (as amended hereby), and the provisions of this
Section 4 shall not limit, affect or impair the provisions of Section 9.2 of the
Merger Agreement (as amended hereby).
5. Amendment of Section 9.2(b) of the Merger Agreement. The
following provision is hereby inserted at the end of Section 9.2(b) of the
Merger Agreement:
; provided, further, that the indemnification by the FGI
Shareholders under this Section 9.2(b) for Taxes for the short
period covered by the Final Return (but for no other period)
shall not include the amount of any income Tax liability that
would be reported on hypothetical federal and state tax
returns for FGI and the FGI Subsidiaries (other than the
Excluded FGI Entities) covering the period beginning on July
1, 1998 and ending on the Closing Date (collectively the
"Hypothetical July Return"). The income Tax liability on the
Hypothetical July Return shall be determined using the
following assumptions: (i) that current FGI tax accounting
methods and practices are continued; (ii) that the rate of tax
applicable to taxable income is the highest marginal rate of
tax applicable to taxable income reported on the Final Return;
(iii) that the Merger is a tax-free reorganization under
Section 368(a)(1)(A) of the Code; and (iv) that income
arising, directly or indirectly, from the distribution or
transfer of the Excluded Assets is disregarded (as is any
charitable contribution deduction arising from such
distribution or transfer). Nothing in the foregoing sentence
shall diminish, alter, impair or affect the parties'
indemnification obligations relating to the tax-free nature of
the Merger, any such charitable contribution deduction or any
other indemnification provision hereof.
6. Adjustment of Merger Consideration. In order to compensate the
FGI Shareholders for any earnings of FGI and the FGI Subsidiaries that they will
forego as a result of the allocations under Section 4 of this Supplemental
Agreement, ARC shall pay to the FGI Shareholders additional cash consideration
as provided in this Section 5 (the "Additional Consideration"). The Additional
Consideration shall be added to, and shall constitute a part of, the Merger
Consideration. The amount of the Additional Consideration shall be determined by
(a) dividing 6.87% by 365, in order to determine a daily rate of interest (the
"Daily Rate"), (b) multiplying the Daily Rate by the cash portion of the Merger
Consideration (other than the Additional Consideration and as adjusted by the
Initial Net Working Capital Adjustment) that is payable to the FGI Shareholders
on the Closing Date pursuant to Section 3.1 of the Merger Agreement, in order to
determine a daily price adjustment, and (c) multiplying the amount of the daily
price adjustment by the number of days within the period running from July 1,
1998, through the date
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on which such cash portion of the Merger Consideration (as adjusted by the
Initial Net Working Capital Adjustment) is paid to the FGI Shareholders. The
Additional Consideration shall be allocated among and distributed to the FGI
Shareholders in accordance with Schedule 3.1 of the Merger Agreement and shall
be due and payable, by wire transfer of immediately available funds, on the
Closing Date.
7. Adjustment of Cash Portion of the Consideration Under
Companion Securities Purchase Agreements.
(a) Section 3.1 of the Merger Agreement is hereby amended by
deleting the numeral $20,647,951 appearing therein, and inserting in
its place $20,179,669. As such, the cash portion of the Merger
Consideration is $20,179,669 before adjustment pursuant to Section 8.7
of the Merger Agreement as amended hereby, or Section 7(b) below.
(b) In order to compensate the partners of the Target
Entities, other than FGI and the FGI Shareholders (the "Target Entity
Partners"), for any earnings of the Target Entities that they will
forego as a result of the allocations under Section 4 of this
Supplemental Agreement and for the income tax effects of such
allocations, ARC shall pay to the Target Entity Partners additional
cash consideration as provided in this Section 7 (the "Additional
Partner Consideration"). The Additional Partner Consideration shall be
added to, and shall constitute a part of, the consideration paid to the
Target Entity Partners under the Companion Securities Purchase
Agreements. The amount of the Additional Partner Consideration shall be
determined by (a) multiplying the Daily Rate by the amount of the
consideration (other than the Additional Partner Consideration) that is
payable to the Target Entity Partners on the Closing Date pursuant to
the Companion Securities Purchase Agreements, in order to determine a
daily price adjustment, and (b) multiplying the amount of the daily
price adjustment by the number of days within the period running from
July 1, 1998, through the date on which the consideration is paid to
the Target Entity Partners under the Companion Securities Purchase
Agreements. The Additional Partner Consideration shall be due and
payable, by wire transfers of immediately available funds, on the
Closing Date.
8. Amendment to Section 9.9(a) of the Merger Agreement. Section
9.9(a) and Exhibit J of the Merger Agreement are hereby deleted in their
entirety. In lieu of said Section 9.9(a) and Exhibit J, the parties have entered
into an Escrow Agreement dated the Closing Date, pursuant to which the FGI
Shareholders have deposited shares of ARC Common Stock with the escrow agent
thereunder for the purposes specified therein.
9. Effect of Supplemental Agreement. Except as expressly and
specifically provided in this Supplemental Agreement, the Merger Agreement
continues in full force and effect, without modification.
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10. Counterparts. This Supplemental Agreement may be executed by
the parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a number
of copies hereof each signed by less than all, but together signed by all, of
the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Supplemental
Agreement and caused the same to be duly delivered on their behalf on the day
and year first written above.
AMERICAN RETIREMENT CORPORATION
By: /s/ Xxxxx X. Money
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Name: Xxxxx X. Money
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Title: EVP Dev. Services
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FREEDOM GROUP, INC.
By: /s/ Xxxxxx X. Xxxxxxx
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Name: Xxxxxx X. Xxxxxxx
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Title: CEO
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THE FGI SHAREHOLDERS:
/s/ Xxxxxx X. Xxxxxxx
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XXXXXX X. XXXXXXX, individually
PHC, L.L.C., a Michigan limited liability
company
By: /s/ Xxxxxx Xxxxxxx
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Name: Xxxxxx Xxxxxxx
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Title: President/Manager
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XXXXX AND XXXX XXXXXX FOUNDATION, a
Michigan corporation
By: /s/ Xxxxxx Xxxxxxx
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Name: Xxxxxx Xxxxxxx
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Title: Secretary/Treasurer
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