<PAGE> 1
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:
<TABLE>
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
<S> <C>
Common Stock, par value $.01 per share ..................................... NYSE
5 3/4% Convertible Subordinated Debentures due 2002 ........................ NYSE
</TABLE>
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.
<PAGE> 2
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.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --------- ---------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
Resident Capacity(1) Commencement
-------------------- of
Community Location IL AL SN Total Operations(2)
- --------- -------- -- -- -- ----- -------------
<S> <C> <C> <C> <C> <C> <C>
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
===== ===== ===== =====
</TABLE>
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<TABLE>
<CAPTION>
Commencement
Home Health Care Agencies Location of Operations
- ------------------------- -------- -------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
12
<PAGE> 13
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.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 High Low
---------------------------------------------------------------------
<S> <C> <C>
Second Quarter (beginning May 30, 1997) $17.875 $14.250
Third Quarter 21.875 17.750
Fourth Quarter 21.250 19.000
</TABLE>
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.
13
<PAGE> 14
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.
<TABLE>
<CAPTION>
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
-------- -------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ======== ========
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
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
-------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
15
<PAGE> 16
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.
16
<PAGE> 17
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.
17
<PAGE> 18
The following table sets forth, for the periods indicated, certain
resident capacity and occupancy data:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
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%
===== ===== =====
</TABLE>
- ---------------
(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.
18
<PAGE> 19
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1997 1996 % CHG 1996 1995 % CHG
------- ------- ---- ------- ------- ----
(dollars in thousands, except other data)
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
- ---------------------
(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.
19
<PAGE> 20
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.
20
<PAGE> 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.
21
<PAGE> 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
22
<PAGE> 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
23
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index to Financial Statements
<S> <C>
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
</TABLE>
28
<PAGE> 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
<PAGE> 30
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
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
============ ===========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
30
<PAGE> 31
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Consolidated Combined
---------------------------------------------- ---------------
Predecessor
Predecessor Entities
------------------------------- ---------------
Nine Months Three Months
Years ended December 31, Ended Ended
----------------------------- December 31 March 31,
1997 1996 1995 1995
---------------------------------------------- ---------------
<S> <C> <C> <C> <C>
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
==============================
</TABLE>
See accompanying notes to consolidated and combined financial statements.
31
<PAGE> 32
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS, CONTINUED
(in thousands, except per share data)
<TABLE>
<CAPTION>
Consolidated
-------------------------------
Predecessor
----------------
Years ended December 31,
-------------------------------
1997 1996
-------------------------------
<S> <C> <C>
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
===========================
</TABLE>
See accompanying notes to consolidated and combined financial statements.
32
<PAGE> 33
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF PARTNERS'/SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Special
General Redeemable
and Preferred
Limited Limited Common Stock Additional
Partners' Partnership ----------------- Paid-In
Interests Interests Shares Amount Capital
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
=========================================================
<CAPTION>
Accumulated
Deficit Total
-----------------------
<S> <C> <C>
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
=======================
</TABLE>
See accompanying notes to consolidated and combined financial statements.
33
<PAGE> 34
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Consolidated Combined
------------------------------------------- -------------
Predecessor
Predecessor Entities
----------------------------- -------------
Nine Months Three Months
Years ended December 31, Ended Ended
----------------------------- December 31, March 31,
1997 1996 1995 1995
------------------------------------------- ------------
<S> <C> <C> <C> <C>
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)
</TABLE>
See accompanying notes to consolidated and combined financial statements.
34
<PAGE> 35
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)
<TABLE>
<CAPTION>
Consolidated Combined
---------------------------------------------- ------------
Predecessor
Predecessor Entities
---------------------------------- ------------
Nine Months Three Months
Years ended December 31, Ended Ended
----------------------------- December 31, March 31,
1997 1996 1995 1995
--------------------------------------------- ------------
<S> <C> <C> <C> <C>
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 ---
========================================== ===========
</TABLE>
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:
<TABLE>
<S> <C> <C> <C> <C>
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)
</TABLE>
See accompanying notes to consolidated and combined financial statements.
35
<PAGE> 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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<PAGE> 37
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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<PAGE> 38
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
38
<PAGE> 39
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
39
<PAGE> 40
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):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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
======== ========
</TABLE>
The Company capitalized $554,000 of interest costs during 1997. No interest was
capitalized in 1996 or 1995.
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<PAGE> 41
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):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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
=========== =========
</TABLE>
(6) LONG-TERM DEBT
A summary of long-term debt is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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
</TABLE>
41
<PAGE> 42
<TABLE>
<S> <C> <C>
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 ---
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
<S> <C> <C>
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
=========== ============
</TABLE>
The aggregate scheduled maturities of long-term debt at December 31, 1997 were
as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 316
1999 355
2000 331
2001 14,160
2002 203,685
Thereafter 18,507
--------
$237,354
========
</TABLE>
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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<PAGE> 44
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.
44
<PAGE> 45
(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):
<TABLE>
<CAPTION>
Average
Exercise
Options Shares Price
-------------------------------------------------------------------------
<S> <C> <C>
Granted 801 $15.51
Forfeited (21) 14.00
-------------------------------------------------------------------------
Outstanding - end of year 780 $15.55
-------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Exercise
Exercise Prices Outstanding Life (Years) Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$14.00 - $21.25 780 9.50 $15.55
</TABLE>
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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<PAGE> 46
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:
<TABLE>
<CAPTION>
SFAS 123
As Reported Pro Forma
----------- -----------
Year ended December 31, 1997
----------------------------
<S> <C> <C>
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
</TABLE>
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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<PAGE> 47
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.
47
<PAGE> 48
Future minimum lease payments under operating leases as of December 31, 1997
were as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 7,696
1999 7,700
2000 7,703
2001 7,707
2002 7,378
Thereafter 108,585
--------
$146,769
========
</TABLE>
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
48
<PAGE> 49
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):
<TABLE>
<CAPTION>
Consolidated Combined
----------------------------------------------------- --------------------
Predecessor Predecessor Entities
---------------------------------- --------------------
Years Ended December 31, Nine Months Ended Three Months Ended
------------------------------ December 31, March 31,
1997 1996 1995 1995
-------------- ------------ ----------------- --------------------
<S> <C> <C> <C> <C>
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
====== ===== ==== ====
</TABLE>
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):
<TABLE>
<CAPTION>
Year ended
December 31,
1997
------------
<S> <C>
U.S. Federal:
Current $ -
Deferred (3,474)
-------
Total Federal (3,474)
-------
State:
Current --
Deferred (409)
-------
Total state (409)
-------
Total $(3,883)
=======
</TABLE>
49
<PAGE> 50
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):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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
======= ======
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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%
=== ==== ===
</TABLE>
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
50
<PAGE> 51
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.
51
<PAGE> 52
(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.
<TABLE>
<CAPTION>
1997 Quarter Ended
------------------
Dec 31 Sept 30 June 30 Mar 31
-------- ------- ------- -------
(dollar amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
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
<CAPTION>
1996 Quarter Ended
---------------------
Dec 31 Sept 30 June 30 Mar 31
-------- ------- -------- --------
(dollar amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
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
</TABLE>
(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.
52
<PAGE> 53
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.
53
<PAGE> 54
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:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
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*
</TABLE>
54
<PAGE> 55
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
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
</TABLE>
55
<PAGE> 56
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------------- -----------
<S> <C>
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)
</TABLE>
- --------------------
* 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.
56
<PAGE> 57
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
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/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.
</TABLE>
57
<PAGE> 58
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/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
</TABLE>
58
<PAGE> 1
Exhibit 10.2
FIRST AMENDMENT TO 1997 STOCK INCENTIVE PLAN
The following paragraph shall be inserted as the penultimate paragraph
of Section 2 of the Plan:
The Committee shall have the power to delegate authority to the
Corporation's Chief Executive Officer, or to a committee composed of executive
officers of the Corporation, to grant, on behalf of the Committee, Stock Options
exercisable at an exercise price per share equal to the Fair Market Value on the
date of grant, subject to such guidelines as the Committee may determine from
time to time; provided, however that (i) options may only be granted pursuant to
such delegated authority for the purposes specified by the Committee, which may
include attracting new employees, awarding outstanding performance, or retaining
employees; (ii) the Committee shall specify the maximum number of shares that
may be granted for purposes of attracting any single new employee at any
specified level and the maximum number that may be granted to any other employee
for any other purpose; (iii) options may not be granted pursuant to such
delegated authority to any officer of the Company who is, or upon consummation
of his or her employment with the Company will be, subject to Section 16 under
the Securities Exchange Act of 1934, as amended; (iv) options to purchase no
more than 50,000 shares in the aggregate and 10,000 shares per individual may be
granted pursuant to such delegated authority in any fiscal year; and (v) a
report of each grant of an option pursuant to such delegated authority shall be
presented to the Committee at the first meeting of the Committee following such
grant. Options granted pursuant to such delegated authority in accordance
herewith shall be deemed, to the extent permitted under applicable law, to have
been granted by the Committee for all purposes under the Plan.
<PAGE> 1
Exhibit 10.4
FIRST AMENDMENT TO EMPLOYEE STOCK PURCHASE PLAN
The first sentence of Section 4.1 of the Plan is hereby deleted and
restated in its entirety as follows:
"Each Employee shall become eligible to become a Participant for each Option
Period on its Commencement Date if such Employee has been employed by the
Employer for a continuous period of at least ninety (90) days prior to the
Commencement Date."
<PAGE> 1
Exhibit 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
LEASE OF THE ASSETS
RICHMOND, VIRGINIA
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I DEFINITIONS............................................................1
ARTICLE II LEASE; LEASE TERM.....................................................1
Section 2.1. Lease..........................................................1
Section 2.2. Lease Term.....................................................1
Section 2.3. Memorandum of Lease............................................2
ARTICLE III RENT; SECURITY DEPOSIT...............................................2
Section 3.1. Base Rent and Additional Obligations...........................2
Section 3.2. Supplemental Rent..............................................3
Section 3.3. Method of Payment..............................................3
Section 3.4. Sufficiency of Base Rent.......................................3
Section 3.5. Security Deposit...............................................3
Section 3.6. Escrows........................................................4
Section 3.7. Late Payment...................................................4
ARTICLE IV NET LEASE.............................................................4
Section 4.1. Net Lease......................................................4
Section 4.2. Limited Right of Set Off.......................................6
ARTICLE V RETURN.................................................................6
ARTICLE VI WARRANTY OF THE LESSOR................................................7
Section 6.1. Quiet Enjoyment................................................7
Section 6.2. Disclaimer of Other Warranties.................................7
ARTICLE VII LIENS................................................................8
Section 7.1. Lessee's Liens.................................................8
Section 7.2. Lessor's Liens.................................................9
Section 7.3. Mechanic's Liens...............................................9
ARTICLE VIII OPERATION, MAINTENANCE, MODIFICATIONS AND
INSPECTION, ETC.............................................................9
Section 8.1. Operation and Maintenance......................................9
Section 8.2. Inspection....................................................11
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 8.3. Optional Modifications........................................12
Section 8.4. Title to Modifications........................................12
Section 8.5. Removal of Property...........................................12
Section 8.6. Contest of Requirements of Law................................14
ARTICLE IX DAMAGE, CASUALTY, CONDEMNATION, ETC..................................14
Section 9.1. Notice of Events..............................................14
Section 9.2. Repair........................................................14
Section 9.3. Event of Loss.................................................15
Section 9.4. [Reserved]....................................................16
Section 9.5. [Reserved]....................................................16
Section 9.6. Application of Payments.......................................16
ARTICLE X INSURANCE.............................................................17
Section 10.1. Required Insurance of the Lessee.............................17
Section 10.2. Other Insurance..............................................19
Section 10.3. Required Insurance of the Lessor.............................19
ARTICLE XI RIGHTS TO ASSIGN; ASSIGNMENT AS SECURITY; ATTORNMENT.................19
Section 11.1. Sublease by the Lessee.......................................19
Section 11.2. Assignment by the Lessee.....................................19
Section 11.3. Consent by the Lessee to HUD Loan............................19
Section 11.4. Assignments by the Lessor....................................20
ARTICLE XII SITE GROUND LEASE...................................................20
ARTICLE XIII PURCHASE OPTION....................................................20
Section 13.1. Purchase Options.............................................20
Section 13.2. Notice.......................................................21
Section 13.3. Purchase Option Consideration................................21
Section 13.4. Exercise of Purchase Option..................................21
Section 13.5. IPC Purchase Price...........................................21
Section 13.6. Memorandum of Option.........................................22
ARTICLE XIV RENEWAL.............................................................23
Section 14.1. Lease Renewal................................................23
</TABLE>
iii
<PAGE> 4
<TABLE>
PAGE
----
<S> <C>
ARTICLE XV LEASE EVENTS OF DEFAULT..............................................23
Section 15.1. Lessee Defaults..............................................23
Section 15.2. Lessor Defaults..............................................25
ARTICLE XVI REMEDIES............................................................26
Section 16.1. Remedies.....................................................26
Section 16.2. No Release...................................................28
Section 16.3. Remedies Cumulative..........................................28
Section 16.4. Remedies for the Lessor Defaults.............................28
ARTICLE XVII NOTICES............................................................28
ARTICLE XVIII SUCCESSORS AND ASSIGNS............................................29
ARTICLE XIX RIGHT TO PERFORM....................................................29
ARTICLE XX ADDITIONAL COVENANTS.................................................29
Section 20.1. Cross-Easement Obligations...................................29
Section 20.2. HUD Loan.....................................................29
ARTICLE XXI AMENDMENTS AND MISCELLANEOUS........................................30
Section 21.1. Amendments in Writing........................................30
Section 21.2. Survival.....................................................30
Section 21.3. Severability of Provisions...................................30
Section 21.4. True Lease...................................................30
Section 21.5. Confidentiality..............................................30
Section 21.6. Governing Law................................................31
Section 21.7. Headings.....................................................31
Section 21.8. Counterpart Execution........................................31
Section 21.9. No Merger....................................................32
Section 21.10. No Accord and Satisfaction..................................32
Section 21.11. Rule Against Perpetuities...................................32
Section 21.12. Recordation.................................................32
</TABLE>
iv
<PAGE> 5
Exhibit A - Memorandum of Lease
SCHEDULE 1 - IPC Land - Legal Description
Exhibit B - Memorandum of Option
SCHEDULE 1 - IPC Land and Site - Legal Description
EXHIBIT C - HUD Required Repairs
EXHIBIT D - Base Rent and Additional Obligations
EXHIBIT E - IRS Section 467 Allocations
EXHIBIT F - Formulas
<PAGE> 6
LEASE AGREEMENT
THIS LEASE AGREEMENT (the "Lease") dated as of October 23,
1997, is between Daniel U.S. Properties Limited Partnership, a Virginia limited
partnership, as Lessor and ARC Imperial Plaza, Inc., a Tennessee corporation, as
Lessee.
W I T N E S S E T H :
WHEREAS, the Lessor owns the Assets;
WHEREAS, the Lessee desires to lease the Assets from the
Lessor upon the terms and subject to the conditions set forth herein; and
WHEREAS, the Lessor is willing to lease the Assets to the
Lessee upon the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements herein contained and other good and valuable consideration,
the receipt and sufficiency of which are hereby mutually acknowledged, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Lease, capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to them in Exhibit A
to the Participation Agreement, effective as of August 29, 1997, by and among
the Guarantor, the Lessee, the Assignee and the Lessor. The rules of usage set
forth in such Exhibit A shall apply hereto. As used in this Agreement, the term
"Parties" means the Lessor and the Lessee and the term "Party" means the Lessor
or the Lessee as the context requires.
ARTICLE II
LEASE; LEASE TERM
SECTION 2.1 LEASE AND ASSIGNMENT. Upon the terms and subject to the
conditions of this Lease and subject to the Permitted Exceptions, the Lessor
hereby leases and demises to the Lessee, and the Lessee hereby leases from the
Lessor, the Assets and all appurtenances thereunto.
SECTION 2.2. LEASE TERM. The term of this Lease (the "Term") shall
include the Initial Term (defined in Section 2.2(a)) and, if applicable, the
Renewal Term (defined in Section 2.2(b)).
(a) Initial Term. The initial term shall commence on the Closing
Date (the "Commencement Date"), and shall terminate at 11:59 p.m. (Richmond,
Virginia time) on the day
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before the 20th anniversary of the Commencement Date, unless this Lease is
earlier terminated in accordance with its terms (the "Initial Term").
(b) Renewal Term. The Initial Term of the Lease may be renewed
under Article XIV. If the Lessee renews under such Article, the Renewal Term
shall commence immediately upon expiration of the Initial Term, and shall
terminate at 11:59 p.m. (Richmond, Virginia time) on the day before the 7th
anniversary of the first day of the Renewal Term, unless this Lease is earlier
terminated in accordance with its terms (the "Renewal Term").
SECTION 2.3. MEMORANDUM OF LEASE. On the Closing Date, the Lessor and
the Lessee shall enter into the Memorandum of Lease attached hereto as Exhibit
A.
ARTICLE III
RENT; SECURITY DEPOSIT
The Lessee shall pay to the Lessor (or to others as expressly provided
herein) as rent the Base Rent, the Supplemental Rent, the Additional Rent and,
pursuant to the terms of the Ground Lease Agreement, the Ground Lease Lump Sum
Rent (the Base Rent, the Supplemental Rent, the Additional Rent and, if
applicable, the Ground Lease Lump Sum Rent are hereinafter sometimes
collectively referred to as the "Rent"). (The attached Exhibit E establishes the
allocations of Rent under Section 467 of the Code.) In addition to Rent, the
Lessee shall pay to the Lessor the Additional Obligations.
SECTION 3.1. BASE RENT AND ADDITIONAL OBLIGATIONS. The Lessee shall pay
monthly to the Lessor an amount equal to Base Rent, as defined on the attached
Exhibit D, and Additional Obligations, as defined in Section 4.1, in the
following manner:
(a) On the Closing Date, (i) the product of (1) the Base Rent and
(2) the ratio of the number of days remaining in that month (including the
Closing Date) divided by 30 and (ii) the product of (1) the Additional
Obligations and (2) the ratio of the number of days remaining in that month
(including the Closing Date) divided by 30;
(b) On the first day of the first month immediately following the
Closing Date and on the first day of each full month thereafter occurring during
the Term, the Base Rent and the Additional Obligations due for that month, in
advance; and
(c) On the first day of the last month of the Lease, (i) the
product of (1) the monthly payment of Base Rent and (2) the ratio of the number
of days from the first of the month to and including the last day of the Lease
in that month divided by 30 and (ii) the product of (1) the monthly payment of
Additional Obligations and (2) the ratio of the number of days from the first of
the month to and including the last day of the Lease in that month divided by
30.
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SECTION 3.2. SUPPLEMENTAL RENT. On the specified dates, the Lessee
shall pay to the Lessor, as supplemental rent, the following amounts (the
"Supplemental Rent"):
(a) On the first anniversary of the Closing Date, $400,000;
(b) On the second anniversary of the Closing Date, $1,400,000;
and
(c) On the third anniversary of the Closing Date, $250,000.
SECTION 3.3. METHOD OF PAYMENT. Each payment of Rent and Additional
Obligations shall be made in immediately available funds no later than 12:00
noon, Birmingham, Alabama time, on the date such payment shall be due and
payable hereunder, and shall be paid (i) in the case of payments of Base Rent
and Additional Obligations under Section 3.1(b), to the Lockbox Account
(provided, however, if payments made by the Lessee to the Lockbox Account are
not subsequently made or would not be able to be made to the HUD Loan noteholder
for any reason other than the act or omission of the Lessee, the Lessee shall be
entitled to pay the Base Rent and the Additional Obligations directly to the HUD
Loan noteholder until such time as payments made by the Lessee to the Lockbox
Account are able to be made to the HUD Loan noteholder), (ii) in the case of
payments of Base Rent and Additional Obligations under Sections 3.1(a) and (c)
and all payments of Supplemental Rent, to the Lessor or such Person as the
Lessor may designate by notice to the Lessee or (iii) in the case of payments of
Additional Rent, to such Person as shall be entitled to receive such payment
(including the Lessor, if the Lessor has paid any item of Additional Rent) at
such address as such Person may specify by notice to the Lessee. If the date on
which any payment of Rent or Additional Obligations is due hereunder is not a
Business Day, such payment shall be made as aforesaid on the next succeeding
Business Day, with the same force and effect as if made on the nominal due date
provided for in this Lease.
SECTION 3.4. SUFFICIENCY OF BASE RENT AND ADDITIONAL OBLIGATIONS.
Notwithstanding any other provision of this Lease or of any other Transaction
Document, the amount of the installment of Base Rent and Additional Obligations
scheduled to be payable on each payment date any installment of Base Rent or
Additional Obligations may be due and payable shall be equal to the aggregate
amount of principal, accrued interest, mortgage insurance premium and all other
amounts due and payable on the outstanding HUD Loan on such payment date;
excluding, however, any payments (including, without limitation, late charges
and interest) solely due to a default of the Lessor under the HUD Loan Documents
that was not caused by an act or omission of the Lessee, the Guarantor or the
Assignee.
SECTION 3.5. SECURITY DEPOSIT. On the Closing Date, the Lessee shall
deposit with the Lessor $5,400,000 (the "Security Deposit"). The Security
Deposit shall be refunded or retained as follows:
(a) (i) If the Lease is not terminated prior to the expiration of
the Initial Term and the Initial Term is not renewed under Article XIV, (ii) if
the Lease is renewed under Article
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XIV and the Lease is not terminated prior to the expiration of the Renewal Term,
(iii) if the Lessee exercises the Purchase Option in connection with an Event of
Loss or (iv) if the Lease is terminated as a result of an Event of Default, the
Lessee shall receive upon surrender of the Assets and the Assigned Rights in
accordance with this Lease, or upon the purchase of the Assets and the Assigned
Rights in accordance with this Lease, the Security Deposit plus interest in an
amount equal to the result obtained from the applicable equation set forth on
the attached Exhibit F.
(b) Moreover, if a Default or an Event of Default is continuing
as of the expiration or termination of the Lease or as of the settlement under
the Purchase Option, and the Lessee has not paid to the Lessor all damages and
other amounts that have accrued as a result of such continuing Default or Event
of Default (including, without limitation, all amounts of Rent and Additional
Obligations), the Lessor may set off against the Security Deposit (and any
applicable interest) an amount equal to such accrued damages and other amounts.
SECTION 3.6. ESCROWS. At Closing the Lessee shall pay to the Lessor an
amount equal to the sum of all amounts that are held in escrow at such time by
the holder of the HUD Loan with respect to real estate taxes, prepaid insurance
premiums and prepaid mortgage insurance premiums. Upon such payment to the
Lessor by the Lessee all such escrows held by such holder shall be deemed to
have been paid by the Lessee to satisfy future charges.
SECTION 3.7. LATE PAYMENT. Any Rent or Additional Obligations not
timely paid shall accrue interest on all amounts outstanding at the Overdue
Interest Rate plus all costs (including reasonable attorney's fees and costs)
incurred by the Lessor in the collection of such Rent or Additional Obligations.
ARTICLE IV
NET LEASE
SECTION 4.1 NET LEASE.
(a) This Lease is a net lease and the Lessee hereby acknowledges
and agrees that the Lessor shall have no obligations with respect to the cost
and expenses associated with the use, occupancy, operation and maintenance of
the Assets or the Assigned Rights or with respect to the obligations of the
"Parcel A Owner," as defined in the Declaration, or the "owner of Parcel A," as
defined in the Parcel B Easements, in the operation and maintenance of the Site
or Parcel B (all of which shall be borne by the Lessee) (including, without
limitation, all real estate and personal property taxes and other governmental
assessments, common area maintenance assessments and obligations and sales and
use taxes (including any obligation to collect and remit such sales and use
taxes to the proper Governmental Authority) but excluding income, franchise or
excise taxes of the Lessor) (collectively, the "Additional Rent").
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(b) In addition to Rent due hereunder, the Lessee shall pay
monthly to the Lessor an amount equal to Additional Obligations, as defined on
the attached Exhibit D, in the manner set forth in Section 3.1.
(c) The Lessee's obligation to pay all Rent and Additional
Obligations as provided hereunder, and the rights of the Lessor in and to such
Rent and Additional Obligations, shall be absolute, unconditional and
irrevocable and shall not be affected by any circumstance of any character
(except as may be expressly provided in this Lease), including: (i) any set-off,
abatement, counterclaim, suspension, recoupment, reduction, rescission, defense
or other right or claim that the Lessee may have against the Lessor, any
noteholder, any vendor or manufacturer of or contractor or subcontractor working
on all or any part of the Assets or the Assigned Rights, or any other Person for
any reason whatsoever; (ii) any defect in or failure of the title,
merchantability, condition, design, operation or fitness for use of all or any
part of the Assets or the Assigned Rights, (iii) any damage to, or removal,
abandonment, dismantling, requisition, taking, condemnation, loss, theft or
destruction of all or any part of the Assets, the Assigned Rights or the Site or
any interference, interruption or cessation in the use, occupancy, possession or
enjoyment of the Assets, the Assigned Rights or the Site by the Lessee or by any
other Person for any reason whatsoever or of whatever duration; (iv) any
restriction, prevention or curtailment of or interference with any use,
occupancy or enjoyment of all or any part of the Assets or the Assigned Rights;
(v) any insolvency, bankruptcy, reorganization or similar proceeding by or
against the Lessee, the Lessor, or any other Person and any action with respect
to this Lease which may be taken by any trustee or receiver of such Person or
its successor in interest or by any Governmental Authority in any such
proceeding; (vi) the invalidity, illegality or unenforceability of any
Transaction Document (other than this Lease) or any other instrument referred to
herein or therein or any other infirmity herein or therein or any lack of right,
power or authority of the Lessee or the Guarantor to enter into this Lease, any
other Transaction Document or to perform the obligations hereunder or thereunder
or consummate the transactions contemplated hereby or thereby or any doctrine of
force majeure, impossibility, frustration or failure of consideration; (vii) any
default under any Transaction Document by the Lessee, the Lessor, or any other
Person; (viii) any action by any Governmental Authority; (ix) any merger,
consolidation or sale of all or substantially all of the assets of the Lessee,
or (x) any other circumstance or happening whatsoever, whether or not similar to
any of the foregoing. The Lessee hereby waives, to the extent permitted by
Applicable Law, any and all rights that it may now have or that at any time
hereafter may be conferred upon it, by statute or otherwise, to modify,
terminate, cancel, quit or surrender this Lease or to effect or claim any
diminution or reduction of Rent or Additional Obligations payable by the Lessee,
except in accordance with the express terms hereof and of the Transaction
Documents. The Lessee agrees that, if for any reason whatsoever this Lease shall
be terminated in whole or in part by operation of law or otherwise (other than
pursuant to a specific right of termination expressly provided for herein),
then, until the Lessor is in possession of the Assets, the Lessee shall pay, to
the maximum extent permitted by Applicable Law, to the Lessor or any other
Person entitled thereto, an amount equal to each installment of Base Rent and
Additional Obligations, all Supplemental Rent and all
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Additional Rent at the time such payment would have become due and payable in
accordance with the terms hereof had this Lease not been terminated in whole or
in part. Absent manifest error, each payment of Rent and Additional Obligations
made by the Lessee shall be final and the Lessee shall not seek or have any
right to recover all or any part of such payment from the Lessor or any Person
for any reason whatsoever. All covenants, agreements and undertakings of the
Lessee herein shall be performed at the Lessee's cost, expense and risk unless
expressly stated otherwise. The Lessee's absolute and irrevocable covenant to
pay Rent and Additional Obligations, as provided in this Section 4, shall not
affect the Lessee's rights, at law or in equity, otherwise to enforce the
Lessor's obligations under this Lease or any other Transaction Documents.
SECTION 4.2. LIMITED RIGHT OF SET-OFF. The provisions of Section 4.1 to
the contrary notwithstanding, the Lessee shall have the right to set-off against
Supplemental Rent and the Purchase Option Consideration an amount equal to any
judgment for a liquidated sum of money entered against the Lessor in favor of
the Lessee by a court of competent jurisdiction sitting in the Commonwealth of
Virginia under a final, non-appealable order.
ARTICLE V
RETURN
Unless the Lessee has acquired the Assets as provided herein, on the
Lease Termination Date the Lessee shall surrender possession of the Assets
(together with all books and records relating to the maintenance of the Assets)
to the Lessor or to a Person specified by the Lessor to the Lessee in writing
not less than 30 days prior to the Lease Termination Date (unless such Lease
Termination Date results from a termination as a remedy for the Lessee's default
pursuant to Section XV, in which event no prior notice shall be required). At
the time of such surrender, any reconstruction, repair and rebuilding of the
Assets by the Lessee pursuant to Article IX shall have been completed in
compliance therewith and the Assets shall be free and clear of all Liens (other
than Liens described in clauses (a) (other than the Lessee's rights hereunder),
(b) (to the extent such Taxes are allocable to periods occurring after the Lease
Termination Date) and (f) of the definition of "Permitted Liens") and in the
condition and state of repair required by Section 8.1(a). If the Lessee fails to
comply with the requirements of the previous sentence at the time of surrender,
the Lessee agrees to pay on demand all reasonable out-of-pocket costs and
expenses incurred by the Lessor in connection with repairing and restoring the
Assets to such condition, and if the Lessee is contesting any Applicable Law or
Governmental Action pursuant to Section 8.6 at the time of surrender, then upon
final resolution or settlement of such contest (or contests), the Lessee agrees
to pay all reasonable costs and expenses of complying with the Applicable Law or
Governmental Action in question as may be required by such resolution and/or
settlement.
Unless the Lessee has acquired the Assets as provided herein, on the
Lease Termination Date the Lessor shall pay to the Lessee an amount equal to the
sum of all amounts that are held in escrow at such time by the holder of the HUD
Loan with respect to real estate taxes, prepaid
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insurance premiums and prepaid mortgage insurance premiums. Upon such payment to
the Lessee by the Lessor all such escrows held by holder of the HUD Loan shall
be deemed to have been paid by the Lessor to satisfy future charges.
Unless the Lessee has acquired the Assets as provided herein, on the
Lease Termination Date the Lessee shall transfer to the Lessor (a) all
refundable security deposits actually paid by the tenants with respect to the
IPC Leases and all interest required by law or by such leases to be accrued or
paid thereon and (b) all of the Lessee's right, title and interest in and to
such deposits and fees owed by the tenants, but not paid by the applicable
tenants to the Lessee (and the Lessee shall cause ARC Imperial Services, Inc. to
transfer all applicable IPALC Sublease security deposits to the Lessor's
designee).
ARTICLE VI
WARRANTY OF THE LESSOR
SECTION 6.1 QUIET ENJOYMENT. So long as the Lessee pays timely the Rent
and Additional Obligations and so long as a Default shall not have occurred and
be continuing, the Lessee's peaceful possession, use and enjoyment of the Assets
in accordance with this Lease shall not be interrupted or disturbed by the
Lessor or anyone claiming through or under the Lessor, provided, however, it
shall not be a breach of this warranty if the Lessee's possession, use or
enjoyment is interrupted or disturbed if any such interruption or disturbance
results from any failure on the part of the Lessee, the Assignee or the
Guarantor to perform or observe (or have performed or observed) any covenant,
condition, obligation, representation or warranty under this Lease or any other
Transaction Document, to be performed or observed by any of such Parties, or
results from any Default by the Lessee, the Assignee or the Guarantor under any
Transaction Document. The right of quiet enjoyment under this Lease described
above is independent of, and shall not affect, the Lessor's rights otherwise to
initiate legal actions seeking to enforce the obligations of the Lessee under
this Lease.
SECTION 6.2. DISCLAIMER OF OTHER WARRANTIES.
(a) Except as expressly set forth in Section 4.2 and in Sections
5.2 of the Participation Agreement, the warranty set forth in Section 6.1 above
is in lieu of all other warranties of the Lessor, whether written, oral or
implied, with respect to this Lease or the Assets.
(b) EXCEPT AS PROVIDED IN SECTION 6.1 OR AS EXPRESSLY PROVIDED IN
THE TRANSACTION DOCUMENTS, THE LESSOR MAKES NO WARRANTY OR REPRESENTATION,
EXPRESS OR IMPLIED OR OTHERWISE, WITH RESPECT TO THE ASSETS OR THE ASSIGNED
RIGHTS OR THE LOCATION, USE, DESCRIPTION, DESIGN, MERCHANTABILITY, FITNESS FOR
USE FOR ANY PARTICULAR PURPOSE, CONDITION, OR DURABILITY THEREOF, OR AS TO THE
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TITLE THERETO OR OWNERSHIP THEREOF OR OTHERWISE; EXCEPT AS EXPRESSLY PROVIDED IN
THE TRANSACTION DOCUMENTS ALL RISKS INCIDENT THERETO ARE TO BE BORNE BY THE
LESSEE. EXCEPT AS EXPRESSLY PROVIDED IN THE TRANSACTION DOCUMENTS, IN THE EVENT
OF ANY DEFECT OR DEFICIENCY OF ANY NATURE IN THE ASSETS (OR ANY FIXTURE OR OTHER
ITEM CONSTITUTING A PORTION THEREOF) OR THE ASSIGNED RIGHTS, WHETHER PATENT OR
LATENT, THE LESSOR SHALL HAVE NO RESPONSIBILITY OR LIABILITY WITH RESPECT TO
SUCH DEFECT OR DEFICIENCY. EXCEPT AS EXPRESSLY PROVIDED IN THE TRANSACTION
DOCUMENTS, IT IS HEREBY AGREED THAT ALL SUCH RISKS, LIABILITIES AND OBLIGATIONS,
ARE TO BE BORNE SOLELY BY THE LESSEE. THE PROVISIONS OF THIS SECTION 6.2 HAVE
BEEN NEGOTIATED AND ARE INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION BY THE
LESSOR OF, AND THE LESSOR DOES HEREBY DISCLAIM, AND THE LESSEE ACKNOWLEDGES SUCH
DISCLAIMER AND WAIVES ANY RIGHTS TO, ANY AND ALL WARRANTIES (EXCEPT AS EXPRESSLY
PROVIDED IN THE TRANSACTION DOCUMENTS), BY THE LESSOR, EXPRESS OR IMPLIED,
INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR
OF HABITABILITY WITH RESPECT TO THE ASSETS (OR ANY FIXTURE OR OTHER ITEM
CONSTITUTING A PORTION THEREOF) OR THE ASSIGNED RIGHTS, WHETHER ARISING PURSUANT
TO THE UNIFORM COMMERCIAL CODE OR ANOTHER LAW NOW OR HEREAFTER IN EFFECT OR
OTHERWISE, EXCEPT AS EXPRESSLY SET FORTH IN SECTION 6.1 OR IN THE OTHER
TRANSACTION DOCUMENTS AND EXCEPT THAT THE LESSOR HEREBY REPRESENTS AND WARRANTS
THAT THE ASSETS ARE AND SHALL BE FREE OF THE LESSOR'S LIENS.
(c) Unless an Event of Default shall have occurred and is
continuing, the Lessor authorizes the Lessee (directly or through agents), at
the Lessee's expense, to assert for the Lessor's account, during the Term, all
of the Lessor's rights (if any) under any applicable warranty and any other
claim (under this Lease or the Assignment) that the Lessee or the Lessor may
have against any vendor, manufacturer, contractor or subcontractor with respect
to any Asset (or any Modification to which the Lessor has title), or any of the
Assigned Rights, and the Lessor agrees to cooperate, at the Lessee's expense,
with the Lessee and its agents in asserting such rights. Any amount recovered by
the Lessee under any such warranty or other claim against any vendor,
manufacturer, contractor or subcontractor shall be applied in accordance with
Section 9.6.
ARTICLE VII
LIENS
SECTION 7.1 LESSEE'S LIENS. The Lessee shall not directly or indirectly
create, incur or suffer to exist any Lien on or with respect to the Assets, the
Assigned Rights, the Lessor's title thereto or the Lessor's or the Lessee's
interest therein, as the case may be, except Permitted
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Liens. The Lessee, at its own expense, shall take such action as may be
necessary duly to discharge any Lien (other than Permitted Liens) that may
arise. The Lessee, however, shall have the right to grant Permitted Liens of the
type described in clause (a) of the definition thereof.
SECTION 7.2. LESSOR'S LIENS. The Lessor shall not directly or
indirectly create any Lien on or with respect to the Lessee's right, title or
interest in the Assets or the Lessor's title to the IPC Land, as the case may
be, EXCEPT Permitted Liens. The Lessor, at its own expense, shall take such
action as may be necessary duly to discharge any Lien (other than Permitted
Liens) that the Lessor may create in violation of the immediately preceding
sentence. Anything to the contrary notwithstanding in any Transaction Documents,
the Lessor shall have the right to pledge, factor, hypothecate or otherwise
similarly assign as collateral any of its right as to any Supplemental Rent or
any other economic benefits under this Lease (other than Base Rent and
Additional Obligations) or any other Transaction Document.
SECTION 7.3. MECHANIC'S LIENS. WITHOUT LIMITING THE OBLIGATIONS OF THE
LESSOR TO DISCHARGE ALL THE LESSOR'S LIENS, NOTICE IS HEREBY GIVEN THAT THE
LESSOR SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO
BE FURNISHED TO THE LESSEE, OR TO ANYONE HOLDING THE ASSETS, THE ASSIGNED
RIGHTS, OR ANY PART THEREOF THROUGH OR UNDER THE LESSEE AFTER THE COMMENCEMENT
DATE, AND THAT NO MECHANICS' OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR
MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF THE LESSOR IN AND TO THE
ASSETS, THE ASSIGNED RIGHTS OR ANY PART THEREOF.
ARTICLE VIII
OPERATION, MAINTENANCE, MODIFICATIONS AND INSPECTION, ETC.
SECTION 8.1 OPERATION AND MAINTENANCE.
(a) Standard.
(i) The Lessee may use the Assets and the Assigned Rights
for apartment, assisted care, senior living, Alzheimer's and skilled
nursing care residences and accessory or complimentary uses,
consistent with operation of the Assets and the Assigned Rights as a
retirement community, provided such use shall not increase the
environmental or other risks associated with the Assets or the
Assigned Rights in any material respect above those associated with
the use of the Assets, the Assigned Rights and the Site by the Lessor
as of the Closing Date and shall not violate any provision of the HUD
Loan Documents.
(ii) The Lessee shall: (1) maintain the Assets in
substantially the same condition and repair as they are on the
Commencement Date (ordinary wear and tear excepted), but in no event
shall the standard of maintenance, repair and condition of any
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or all of the Assets and the Assigned Rights be less than that required
under the HUD Loan Documents; and (2) take all actions and make all
Modifications (if any), structural or nonstructural changes,
replacements and repairs which may be required to keep all parts of
each Asset and Assigned Right and all repair thereto in good repair
and operating condition and in good physical condition (ordinary wear
and tear excepted) and to maintain in full force and effect all
warranties, in each case, at least consistent with the Lessee's
practices (as of the date hereof) for similar facilities owned and
operated by the Lessee.
(iii) Subject to Section 8.5, the Lessee shall use, possess,
occupy and maintain the Assets and the Assigned Rights in compliance
(in all material respects) with, and make all Modifications (if any)
required by, all Applicable Laws (including Environmental Laws),
Governmental Actions and in compliance with all requirements of the
Required Insurance and the HUD Loan Documents.
(iv) Subject to Section 8.6, the Lessee shall make or
obtain, in compliance with the HUD Loan Documents and in material
compliance with all Applicable Laws and all Transaction Documents, all
Governmental Actions from time to time required for the use or
operation of the Assets and the Assigned Rights.
(b) Payment of Taxes and Other Impositions. From time to time as
available, the Lessee shall, unless it is otherwise contesting such matters in
compliance with Section 8.6, provide the Lessor with evidence of the payment of
any Taxes, utility charges or other impositions, the failure of which to be paid
would cause the imposition of a Lien (other than a Permitted Lien identified in
clause (c) of the definition thereof) upon any Asset.
(c) Encroachments. The Lessee shall undertake no Modification
that would encroach onto property not a part of the Assets unless it shall have
obtained an encroachment agreement in form and substance reasonably satisfactory
to the Lessor from the Person owning the property into which the addition or
improvement will encroach.
(d) Identification. Except as provided in a Transaction Document
or as otherwise permitted by the Lessor, the Lessee shall not allow the name of
any Person to be placed on any part of the Assets subject to this Lease as a
designation that might reasonably be interpreted as a claim of ownership or as a
designation that might reasonably be interpreted as a claim of a right to
possession or use thereof (other than the name and trademark of the Lessee, the
Guarantor or the rights of any sublessees permitted hereunder).
(e) Location. Subject to compliance with Section 8.5, the Lessee
agrees that the IPC Personal Property shall at all times be and remain on the
IPC Land, provided that the Lessee (or any permitted sublessee) may deliver
temporary possession of any part or portion of the IPC Personal Property to any
manufacturer, contractor or supplier designated by the Lessee
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for purposes of realizing the benefits of any warranty or to comply with the
obligations and rights of the Lessee under this Section 8, but the rights of any
such party in possession of such part or portion of the IPC Personal Property
shall be subject and subordinate to the terms of this Lease.
(f) Required Repairs. Notwithstanding any provisions of this
Lease to the contrary, the Lessor shall be responsible for the completion of the
Required Repairs and shall maintain title to and control over the Repair Escrow
to fund such Required Repairs. The Lessee shall give reasonable access to the
Assets and shall allocate such personnel and resources as are reasonable,
necessary and practicable to accomplish the Required Repairs with the existing
operations staff. Upon completion of the Required Repairs (and HUD's consent to
release of the Repair Escrow) and to the extent not already applied to the
Required Repairs, the Lessor shall be entitled to the Contingency Holdback, as
described in the attached Exhibit C. The remaining balance of the Repair Escrow,
if any, shall be contributed to the Replacement Reserve Account upon completion
(and HUD consent thereto) of the Required Repairs.
(g) Replacement Reserve Account. The Lessor shall at all times
during the Term retain ownership and title to the Replacement Reserve Account.
Nonetheless, the Lessee shall make all required deposits to the Replacement
Reserve Account required under the HUD Loan Documents and shall be entitled to
draw upon the Replacement Reserve Account for additional leasehold improvements
(subject to maintenance in the Replacement Reserve Account of HUD-required
minimum balances) with the consent of HUD and the Lessor, such consent of the
Lessor to be not unreasonably withheld or delayed. All expenditures in excess of
the balance of the Replacement Reserve Account at the Commencement Date shall be
considered Severable Modifications made by the Lessee under Section 8.4(b) to
the extent they are not Nonseverable Modifications pursuant to Section 8.4(a) or
Severable Modifications pursuant to Section 8.4(c).
(h) Commercial and Residential Leases. Contemporaneously with
execution and delivery of this Lease, the Lessor has conditionally assigned to
the Lessee all of the Lessor's rights under all IPC Leases and the IPALC
Landlord Interest. The Lessee shall have full authority to negotiate, renew,
terminate or amend the existing IPC Leases, subject to the provisions of this
Lease and the HUD Loan Documents.
SECTION 8.2. INSPECTION. Upon not less than five Business Days' notice
(or, in the event of extenuating circumstances in which such five Business Days'
prior notice is not practicable, such maximum prior notice as is practicable) to
the Lessee, the Lessor and its authorized representatives shall have the right
to inspect (a) the Assets and (b) the Lessee's books and records that pertain to
the Assets, the Assigned Rights and any operations in respect to either, subject
to Applicable Law, the Lessee's customary confidentiality undertakings, standard
safety procedures and any contractual restrictions imposed on the Lessee by any
Governmental Authority. Such inspections shall be at the sole expense (unless an
Event of Default has occurred and is continuing) and risk (other than such risks
arising out of the Lessee's negligence or willful misconduct) of the Persons
making such inspections and, in any event, any such inspection shall
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be conducted so as not to interfere materially with the Lessee's or any
permitted sublessee's possession and business (as applicable) or the operation
and maintenance of the Assets. The Lessor shall not have any duty whatsoever to
make any inspection referred to in this Section 8.2 nor shall the Lessor incur
any liability or obligation by reason of not making any such inspection.
SECTION 8.3. OPTIONAL MODIFICATIONS. In addition to the Lessee's
obligations under Section 8.1, the Lessee (at its expense and with the prior
written approval of the Lessor, such consent not to be unreasonably withheld or
delayed, and with such consents as may be required under the HUD Loan Documents)
may make any Modification that the Lessee may deem desirable in the conduct of
its business; provided, however, that such Modifications (i) do not diminish
(except to an insignificant extent) the value, utility or remaining useful life
of the Assets and (ii) are made in compliance with the HUD Loan Documents and
any HUD consent and in material compliance with all Applicable Laws, (iii) are
completed in a workmanlike manner and (iv) are free and clear of all Liens
(other than Permitted Liens).
SECTION 8.4. TITLE TO MODIFICATIONS. Title to each Modification shall
vest as follows:
(a) in the case of each Nonseverable Modification, the Lessor
shall, without further act, effective on the date such Modification, be vested
with title to such Nonseverable Modification;
(b) in the case of each Severable Modification that is not
required by any Applicable Law or the noteholder under the HUD Loan to be titled
in the Lessor, the Lessee shall retain title to such Severable Modification
(including those improvements that otherwise qualify hereunder and are made by
the Lessee with expenditures from the Replacement Reserve Account that are in
excess of the Replacement Reserve Account balance on the Commencement Date shall
be considered Severable Modifications under this paragraph (b)); or
(c) in the case of Severable Modifications required by Applicable
Law or such noteholder, title to such Severable Modifications shall immediately
vest in the Lessor at no cost to the Lessor without further act.
Immediately upon title to a Modification vesting in the Lessor pursuant
to subparagraphs (a) or (c) of this Section 8.4, such Modification shall,
without further act, become subject to this Lease and be deemed part of the
Assets for all purposes hereof. The Lessee shall take such actions as may be
reasonably required by the Lessor to evidence the vesting of such title in the
Lessor. Severable Modifications as to which title remains in the Lessee pursuant
to paragraph (b) of this Section 8.4 shall be deemed a part of the Assets, but
the Lessee shall have the right to remove such Severable Modifications under
Section 8.5.
SECTION 8.5. REMOVAL OF PROPERTY.
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(a) Subject to compliance with the HUD Loan Documents and, in all
material respects, with Applicable Law, so long as no Default or Event of
Default shall have occurred and be continuing, the Lessee may remove any
Severable Modification and any other property to which the Lessee shall have
title as provided in Section 8.4 or otherwise, provided that the Lessee, at its
expense and prior to the Lease Termination Date, shall repair any damage to the
Assets (or any part thereof) caused by such removal and (in the case of any
removal of property not constituting a Severable Modification) shall restore (in
all material respects) any diminishment in the value, utility or remaining
useful life of the Assets caused by such removal.
(b) In addition, if at any time during the Term the Lessee shall
conclude that any IPC Tangible Personal Property or any fixture or appurtenance
thereto (or any part thereof, other than consumables) in respect of which the
Lessor shall have title is obsolete or redundant and can be removed without
causing any material diminishment of the value, utility or remaining useful life
of the remaining Assets as a whole (below that of all of the Assets prior to
such removal, assuming the Lessee's compliance with the terms of this Lease, and
when aggregated with any diminishment in such value, utility or remaining useful
life caused by any prior removal of IPC Tangible Personal Property or fixtures)
and provided (i) no Default or Event of Default shall have occurred and be
continuing, (ii) all applicable consents have been obtained (including those
required under the HUD Loan Documents) and (iii) in the Lessee's reasonable
opinion the value of such property is $100,000 or less, the Lessee may remove
such property and title to such property shall pass to the Lessee without any
obligation to replace same; provided, however, that if in the Lessee's
reasonable opinion, the value of the property so removed at any time exceeds
$100,000, the Lessee shall give notice to the Lessor 30 days prior to such
removal and shall comply with any reasonable directive received from the Lessor
within 30 days after receiving such notice regarding the disposition of such
property. At the Lessor's request (contained in such directive), the Lessee
agrees, at its cost, to crate and deliver such property to a place to be
designated by the Lessor in the greater Richmond metropolitan area or to attempt
to sell such property on the Lessor's behalf and remit to the Lessor the net
proceeds of such sale.
(c) Provided no Default or Event of Default shall have occurred
and be continuing and all applicable consents have been obtained (including
those required under the HUD Loan Documents), the Lessee may remove and replace
IPC Tangible Personal Property or fixtures and appurtenances thereto. If any
such property is removed from the IPC Improvements (or any part thereof) for the
purpose of replacement thereof with other property of equal or greater value and
utility, title to such removed property shall remain in the Lessor, no matter
where such removed property is located, until such time as a replacement
property of equal or greater value shall have been incorporated into the IPC
Improvements, at which time, without further act, title to such removed property
shall vest in the Lessee or in such Person as shall be designated by the Lessee,
and such removed property shall not thereafter be part of the Assets. Each such
replacement property shall be free and clear of all Liens (except Permitted
Liens), shall upon installation become a part of the Assets (with title thereto
vesting in the Lessor), and shall be in as good physical and operating condition
as, and shall have a value, utility and
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remaining useful life at least equal to, that of the removed property, it being
assumed for purposes of this sentence that such removed property was in the
condition and state of repair required by Section 8.1.
SECTION 8.6. CONTEST OF REQUIREMENTS OF LAW. If, with respect to any
requirement of Applicable Law or any Governmental Action as to a Modification or
replacement property (i) the Lessee is contesting diligently and in good faith
by appropriate proceedings such requirement of Applicable Law or Governmental
Action, and has established any reserves as may be required under GAAP in
connection with such contest, (ii) compliance with such requirement or
Governmental Action shall have been excused or exempted by a valid nonconforming
use permit, waiver, extension or forbearance exempting the Lessee from such
requirement or Governmental Action or (iii) the Lessee shall be making a good
faith effort and shall be diligently taking appropriate steps to comply with
such requirement or Governmental Action, then the failure by the Lessee to
comply with such requirement or Governmental Action shall not constitute a
Default or Event of Default hereunder; provided that such contest or
noncompliance does not involve (A) any risk of criminal liability being imposed
on the Lessor or default under the HUD Loan or (B) any material risk of (1) the
loss or sale of, or the creation of any Lien (other than a Permitted Lien) on,
the Assets, or (2) material civil liability being imposed on the Lessor. The
Lessee shall provide the Lessor with notice of any contest of the type described
in this Section 8.6 in detail sufficient to enable the Lessor to ascertain
whether such contest may have any material adverse effect described above.
ARTICLE IX
DAMAGE, CASUALTY, CONDEMNATION, ETC.
SECTION 9.1 NOTICE OF EVENTS. If any material portion of the IPC
Improvements shall suffer any casualty as to which the Lessee would be entitled
to file an insurance claim under its insurance policies maintained under Section
10.1 for an amount in excess of $10,000, or if a material portion of the IPC
Real Property shall be subject to any Condemnation, the Lessee shall immediately
notify the Lessor of such events.
SECTION 9.2. REPAIR. At anytime the Lessee is required to repair, this
Lease shall continue in full force and effect and the Lessee shall (i) promptly
take all actions as may be necessary to prepare for the replacement,
restoration, rebuilding and/or reconstruction of the Assets (such replacement,
restoration, rebuilding and/or reconstruction to be subject to any conditions or
standards under the HUD Loan Documents and the approval of the Lessor and the
Lessee, such approval not to be unreasonably withheld) and within the lesser of
such period as is allowed under the HUD Loan or 120 days after such occurrence,
commence such replacement, restoration, rebuilding and/or reconstruction of the
Assets and (ii) thereafter diligently pursue the completion thereof such that
the resulting Assets shall be restored, to the extent reasonably practicable, to
either (x) in the event of a casualty, the value, utility and remaining useful
life the Assets had immediately prior to such event (assuming the Assets were in
the condition required
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hereunder) or (y) in the event of a condemnation, the optimal value, utility and
remaining useful life of the remaining Assets taking into consideration the loss
of area or use due to such condemnation (as reasonably agreed to by the Parties
hereto, HUD and the HUD Loan noteholder).
SECTION 9.3. EVENT OF LOSS. Upon the occurrence of an Event of Loss,
either:
(a) In the event HUD or the HUD Loan noteholder (or any other
mortgagee of the IPC Real Property) does not require the application of the
insurance or Condemnation proceeds to payment of the HUD Loan (or such other
mortgage), the Lessee is required to repair pursuant to Section 9.2; or
(b) In the event HUD or the HUD Loan noteholder (or any other
mortgagee of the IPC Real Property) requires the application of the insurance
proceeds or Condemnation proceeds to payment of the HUD Loan, then:
(i) The Lessee shall have the option (but not the
obligation) to repair or restore the Assets. The Lessee must provide
written notice (such notice to be given within 30 days of Lessee's
being given notice that an Event of Loss has occurred) to the Lessor
of the Lessee's election to repair the Assets, which election once
given shall be irrevocable. If the Lessee elects to repair the Assets,
the Lessee, at Lessee's expense, shall fulfill the obligations of
Section 9.2. In such event, the Base Rent and Additional Obligations
due hereunder shall be adjusted to equal the amounts then due under
the HUD Loan. The IPC Purchase Price shall not be adjusted;
(ii) If the Lessee elects (by written notice of election or
by failure to exercise such election within the period set forth in
Section 9.3(b)(i)) not to repair the Assets, the Lessor shall have the
option (but not the obligation) to repair or restore the Assets. The
Lessor must provide written notice (within 30 days of receipt of the
Lessee's election or the expiration of the period within which the
Lessee may elect) to the Lessee of the Lessor's election to repair the
Assets, such election shall be subject only to the Lessor being able,
within 90 days using its best efforts, to refinance the Assets with a
loan under which the monthly payment of principal, interest and
mortgage insurance premium will be no greater than the Base Rent and
Additional Obligations payable under the HUD Loan prior to such Event
of Loss. In the event that such refinancing does not include
refinancing of the HUD Loan, the principal amount of such refinancing
is not required to be more than an amount equal to the amount of
insurance proceeds or condemnation proceeds actually applied to
payment of the HUD Loan. If the Lessor is successful in refinancing
the Assets, the Lessor will direct the Lessee, at Lessor's expense,
such expense not to exceed an amount equal to the insurance or
condemnation proceeds actually applied to principal balance of the HUD
Loan Documents, to fulfill the obligations of Section 9.2. In such
event, the Base Rent and Additional Obligations due hereunder shall be
adjusted to equal the amounts then due under the HUD Loan plus the
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monthly amounts due under such new financing, provided, however, in no
event shall the such monthly payments be in excess of the Base Rent and
Additional Obligations payable under the HUD Loan prior to such Event
of Loss. The IPC Purchase Price shall not be adjusted;
(iii) If neither the Lessee nor the Lessor elect to repair
the Assets or the Lessor was unable to obtain financing pursuant to
Section 9.3(b)(ii), the Lessee may exercise within 30 days the Purchase
Option as set forth in Article XII and the IPC Purchase Price set forth
in Section 13.5(c) or (d), as applicable, shall be reduced by an amount
equal to (1) the unamortized portion of the Supplemental Rent paid
hereunder (using straight line amortization for the remaining portion
of the Initial Term) and (2) the net reduction in the principal balance
under the HUD Loan due to the application of the insurance proceeds or
Condemnation proceeds; provided, however, that in no event shall the
IPC Purchase Price be less than the all amounts due under the HUD Loan;
or
(iv) If the Lessee does not provide written notice to the
Lessor that the Lessee is exercising the Lessee's Purchase Option under
Section 9.3(b)(iii), then this Lease shall continue in full force and
effect, including the obligations of Sections 8.1 and 9.2, modified
only to account for the change in condition of the Assets. The Base
Rent and Additional Obligations due hereunder shall be adjusted to
equal the amounts then due under the HUD Loan. The IPC Purchase Price
shall not be adjusted.
SECTION 9.4. [RESERVED].
SECTION 9.5. [RESERVED]
SECTION 9.6. APPLICATION OF PAYMENTS. Payments, other than those
required to be remitted to HUD or the HUD Loan noteholder (or any other
mortgagee of the IPC Real Property) under the HUD Loan Documents (or such other
mortgage), received by the Lessor or the Lessee (other than (i) proceeds of
insurance carried by the Lessor pursuant to Section 10.2 or 10.3 and (ii)
proceeds of business interruption and rent insurance carried by the Lessee) from
any Governmental Authority, insurer or other Person, with respect to any
casualty, condemnation or Event of Loss, shall be applied as follows:
(a) unless a Default or an Event of Default shall have occurred
and be continuing, all such payments from (i) insurers of less than $100,000
which are payable to the Lessee pursuant to the Section 10.1 and (ii)
Governmental Authorities on account of any temporary taking, seizure or
requisition of use that does not constitute an Event of Loss shall be paid over
to, or retained by, the Lessee;
(b) all such other payments shall be promptly paid to, or held
by, the Lessor as security for the obligations of the Lessee under this Lease,
and shall be paid pursuant to the provisions of this Section 9.6, except that
the Lessee may retain any amounts that would be
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payable to the Lessee under the provisions of Section 9.6(c). Any amounts so
held shall, unless a Default or Event of Default shall have occurred and be
continuing, be released and paid over to the Lessee from time to time, in each
case upon presentation to the Lessor of a written request (certified by a
Responsible Officer) specifying the amount so to be released, and annexing
invoices (not previously used as a basis for any release of funds pursuant to
this Section 9.6) demonstrating expenditures made or to be made by the Lessee
upon receipt of such funds, in either case, as required by Sections 8.1 and 9.2
for repair of the affected Assets; and
(c) the balance, if any, of such payments, after completion of
all repairs required by Sections 8.1 and 9.2, shall, (i) in the case of payments
from Governmental Authorities on account of any condemnation, be paid over to,
or retained by, the Lessee and the Lessor as their interests may appear
(provided, however, portions of such condemnation proceeds that are based upon
the Lessee's moving or relocation expenses, the Lessee's allocation of any
business interruption losses or for the taking of the Lessee's trade fixtures or
Severable Improvements shall belong to the Lessee); and (ii) all such other
payments shall be paid over to, or retained by, the Lessee.
ARTICLE X
INSURANCE
SECTION 10.1 REQUIRED INSURANCE OF THE LESSEE.
(a) The Lessee shall carry and maintain, or cause to be carried
and maintained with respect to the Assets, at least the following insurance
coverage, in each case with insurers with an A.M. Best's rating of A(X) or
greater (or such other insurers of similar financial standing not rated by A.M.
Best and reasonably acceptable to the Independent Insurance Broker); provided
that an insurer with an A. M. Best's credit rating of A- shall be satisfactory
if such insurer's size classification is XII or higher (an "Acceptable
Insurer"):
(i) commercial general liability insurance, with contractual
liability, in accordance with the Lessee's general insurance practices
for other similar facilities owned by the Lessee (but in any event the
Lessee shall maintain such insurance, on an occurrence form coverage
basis, in an amount not less than $2,000,000 "single-limit" coverage
(on a per occurrence basis except for products liability coverage
which will be on an aggregate basis) and $10,000,000 excess liability
coverage (on a per occurrence basis except for products liability
coverage which will be on an aggregate basis) with a maximum
deductible not to exceed $100,000 (or such higher maximum deductible
as the Lessor may at any time permit based on the financial condition
of the Lessee and the Guarantor)) and endorsed to provide that (1) the
Lessor and, so long as the HUD Loan is outstanding, the applicable
noteholder (collectively, the "Additional Insureds") are included as
additional insureds, as their interests may appear, but shall not be
liable for the payment of premiums, (2) the insurer thereunder waives
all rights to subrogation against the Additional Insureds with respect
to their respective interests in the Assets, and
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(3) such insurance shall be primary without right of contribution of
any other insurance carried by or on behalf of any Additional Insured
with respect to its interest in the Assets; and
(ii) all risk property insurance covering claims arising out
of the ownership, operation, maintenance, condition or use of the
Assets (and including broad-form boiler and machinery coverage) in at
least such amounts and with such other terms as are consistent with
the all risk property insurance which is carried by the Lessee with
respect to other similar facilities owned by it and in an amount equal
to the replacement cost of the Assets with an "agreed-value"
endorsement and a maximum deductible not to exceed $100,000) and
endorsed: (1) as provided in clauses (a) through (d) of this Section
10.1, and (2) to provide that any payment thereunder shall be made to
the Lessor for application pursuant to Article IX hereof, except that
payments of less than $100,000 made in respect of any single casualty
or other occurrence shall be paid solely to the Lessee;
(iii) appropriate workers' compensation and automobile
liability insurance with respect to the Assets in compliance with all
Applicable Laws; and
(iv) appropriate the Lessee business interruption insurance
and rental income insurance to protect the Lessor, as the Lessor shall
reasonably require.
(b) On the Closing Date and on or prior to each anniversary of
the Commencement Date, the Lessee shall furnish the Lessor either a certificate
or certificates of insurance or a report from the Independent Insurance Broker
describing in detail the insurance then maintained pursuant to this Section 10
and stating that (i) no premiums are then delinquent and (ii) such coverage and
polices comply in all respects with this Section 10.
(c) All property losses shall be adjusted with the insurance
companies and all property insurance proceeds shall be collected, including by
the filing of appropriate proceedings, by or on behalf of the Lessee (with the
prior written consent of the Lessor should a Default or an Event of Default have
occurred and be continuing), and all insurance proceeds paid in respect of
insurance maintained pursuant to Section 10 shall be paid as provided in Section
10 and be applied as provided in Section 9.5 or 9.6, as the case may be.
(d) the Lessee shall obtain endorsements to the insurance
policies carried pursuant to Section 10.1 providing that (i) the insurers waive
any right of set-off or counterclaim or any other deduction, whether by
attachment or otherwise, in respect of any liability of the Lessee or any
Additional Insured, (ii) the respective interests of the Additional Insureds
shall not be invalidated by any act or neglect by the Lessee, including breach
of any warranty contained in such policies or by occupancy or use of the Assets
or the Site for any purpose more hazardous than permitted by such policy, and
(iii) no lapse, cancellation or material change with respect to such policies
(or, in the alternative, no lapse, cancellation or material adverse change that
would
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affect the interests of the Additional Insureds with respect to the Assets)
shall be effective as to an Additional Insured until at least 30 days after
receipt by such Additional Insured of written notice thereof.
SECTION 10.2. OTHER INSURANCE. Nothing in this Section 10 shall
prohibit the Lessor from maintaining at its expense other insurance on or with
respect to the Assets or the operation, use, occupancy and maintenance of the
Assets and the Site, naming the Lessor as insured and/or loss payee, unless such
insurance would conflict with or otherwise limit the insurance required to be
maintained under Section 10.1.
SECTION 10.3. REQUIRED INSURANCE OF THE LESSOR. The Lessor shall carry
and maintain, or cause to be carried and maintained with respect to the Assets,
with an Acceptable Insurer continuing liability insurance covering claims made
for occurrences prior to the Commencement Date for a period not in excess of all
applicable statutes of limitation after the Commencement Date.
ARTICLE XI
RIGHTS TO ASSIGN; ASSIGNMENT AS SECURITY; ATTORNMENT
SECTION 11.1 SUBLEASE BY THE LESSEE. The Lessee may, with the consent
of the Lessor such consent of the Lessor not to be unreasonably withheld and
subject to any required consent under the HUD Loan Documents, sublease all or a
material part of the Assets to any Person; provided, that (i) such sublease
shall be expressly subject and subordinate to this Lease and the HUD Loan
Documents and any such sublease shall not release the Lessee from or impair the
primary liability of the Lessee under any of its obligations as the Lessee or in
respect of any of its obligations under any of the other Transaction Documents;
(ii) such Person is not a tax-exempt entity; (iii) such sublease shall not
extend beyond the expiration or termination of the Lease; (iv) with respect to
any sublease that is not in substantially the same form as the form of a
corresponding IPC Lease or IPALC Sublease, the Lessee shall give the Lessor
written notice of each such sublease within 30 days after the execution thereof,
together with a copy of each such sublease; and (v) each such sublease and
sublessee, if required under the HUD Loan Documents, shall have been approved in
accordance with the HUD Loan Document.
SECTION 11.2. ASSIGNMENT BY THE LESSEE. Upon prior written consent of
the Lessor, such consent of the Lessor not to be unreasonably withheld or
delayed and any prior consent required under the HUD Loan Documents, the Lessee
may assign any of its right, title and interest in and to this Lease and the
Assets (or any portion thereof) to any Person; provided, that unless the
assignee (or a surety or the guarantor for such the assignee) meets the
standards of a Surviving Company set out in Section 5.1(d) of the Participation
Agreement.
SECTION 11.3. CONSENT BY THE LESSEE TO HUD LOAN. The Lessee hereby (a)
consents to the terms of the HUD Loan Documents and agrees to each and every
provision thereof, (b) agrees to pay directly to the Lockbox Account all amounts
of Base Rent and Additional
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Obligations due or to become due to the Lessor under Section 3.1(b), and (c)
agrees that, to the extent provided in the HUD Loan Documents, the noteholder
under the HUD Loan and the Secretary under the Regulatory Agreement shall have
or shall share with the Lessor, such rights of the Lessor hereunder as are
specified in or required by the HUD Loan Documents. Refinancing of the HUD Loan
or further encumbering of the Assets (except as allowed under the HUD Loan
Documents and in this Lease) or IPC Real Property shall not occur without the
consent of both the Lessor and the Lessee.
SECTION 11.4. ASSIGNMENTS BY THE LESSOR. Subject to the provisions of
the HUD Loan Documents, the Lessor may transfer, encumber, sell or convey the
Assets to an Affiliate of the Lessor at any time. The Lessor may not transfer,
encumber, sell or convey the Assets to any Person not an Affiliate of the Lessor
without the consent of the Lessee, which consent shall not be unreasonably
withheld or delayed. Notwithstanding the aforestated restriction, the exercise
by the Lessor of its rights under Section 7.2 of the Lease or the transfer of
(a) ownership or control of any limited partnership interest of the Lessor or
(b) ownership or control of less than 50% of the general partner interests of
the Lessor to any Person shall not require the consent of the Lessee.
Furthermore, general partnership interests of the Lessor may be transferred,
sold or conveyed to an Affiliate of the Lessor at any time.
ARTICLE XII
GROUND LEASE OF SITE
In the event that the Site Closing has not occurred and HUD and the HUD
Loan noteholder subordinate the HUD Loan and the liens securing the HUD Loan to
the Ground Lease Agreement in a manner reasonably satisfactory to the Lessee,
the Lessor agrees to lease and demise to the Lessee, and the Lessee agrees to
lease from the Lessor, the Site and all appurtenances thereunto, all upon the
terms and subject to the conditions of the Ground Lease Agreement. The Parties
will negotiate in good faith the Ground Lease Agreement consistent with the
terms set forth in Schedule 14 of the Participation Agreement and any necessary
amendments to the Lease required by the Ground Lease Transaction that are
reasonably satisfactory to both Parties.
ARTICLE XIII
PURCHASE OPTION
SECTION 13.1 PURCHASE OPTION. Provided that (a) the applicable notice
requirement set forth in Section 13.2 has been met, (b) timely payment of the
Purchase Option Consideration has been made and (c) there is no continuing
Default or Event of Default (or, the Lessee has paid all accrued damages and
other amounts to satisfy such continuing Default or Event of Default), the
Lessee shall have the option to purchase (the "Purchase Option") all the
Lessor's right, title and interest in and to all (but not less than all) of the
Assets, the Assigned Rights and, if the Site Closing has not occurred, the Site
on the date of the expiration of the Initial Term or the Renewal Term or the
Event of Loss Closing Date (collectively the "Option Dates") for a cash purchase
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price equal to the IPC Purchase Price, which shall be determined under the
provisions of Section 13.5. Subject to the provisions of this Article XIII, the
Lessor hereby grants to the Lessee the Purchase Option. The Purchase Option is
to be exercised, if at all, in the manner set forth in Section 13.4.
SECTION 13.2. NOTICE. If the Lessee wishes to exercise the Purchase
Option on the date of the expiration of the Initial Term or the Renewal Term,
the Lessee shall give the Lessor written notice (which shall be irrevocable) of
such election at least six months, but no more than one year, prior to the
applicable expiration date, as the case may be. If the Lessee wishes to exercise
the Purchase Option pursuant to Section 9.3(b)(iii), the Lessee shall give the
Lessor written notice (which shall be irrevocable) of such election within the
time period set forth in Section 9.3(b)(iii); such notice shall specify a
closing date at least three months, but no more than one year, after the date
such notice is received by the Lessor upon which specified date the Lessor and
the Lessee shall close the Purchase Option (the "Event of Loss Closing Date").
SECTION 13.3. PURCHASE OPTION CONSIDERATION. As consideration for the
Lessor's grant of the Purchase Option, the Lessee shall pay to the Lessor the
following amounts (collectively the "Purchase Option Consideration"):
(a) on the Closing Date, the Purchase Option Closing Payment;
(b) on the first anniversary of the Closing Date, $2,600,000; and
(c) on the second anniversary of the Closing Date, $1,100,000.
Failure to timely pay any portion of the Purchase Option Consideration shall
terminate the Purchase Option and shall be a Default under this Lease. Except as
provided in Section 4.2 of this Lease, upon payment, all payments of the
Purchase Option Consideration shall belong to the Lessor without restriction.
All of the Purchase Option Consideration shall be earned upon the grant of the
Purchase Option.
SECTION 13.4 EXERCISE OF PURCHASE OPTION. If the Lessee exercises the
Purchase Option, the Lessee is required to purchase the Assets, the Assigned
Rights and, if applicable, the Site on the applicable expiration date or the
Event of Loss Closing Date, as applicable, upon payment in cash to the Lessor of
an amount equal to the IPC Purchase Price plus any and all unpaid Rent and
Additional Obligations that has accrued (provided, that, with respect to the
portion of Base Rent and Additional Obligations payable in advance, only to the
extent such is allocable to the period through and including such purchase date
including a credit for any prepaid escrow items or mortgage insurance premiums
held by the noteholder through and including the date of such payment. The costs
and expenses of such purchase shall be itemized and pro rated in accordance with
the local custom for commercial real estate transfers in the Richmond, Virginia
area. The Lessor shall effect a transfer to the Lessee or its designee of the
Assets, the Assigned Rights and,
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if applicable, the Site by special warranty instruments subject only to all
easements conditions, restrictions and agreements that lawfully apply to the
Assets or any part thereof and, if applicable, the Site or any part thereof, the
Permitted Liens, the Lessee's interest in this Lease and the IPALC Lease, but
not subject to the HUD Loan (or other mortgage). Upon the transfer by the Lessor
to the Lessee (or its designee) pursuant to this Section 13.4 and the payment of
all Rent and Additional Obligations to the Persons entitled thereto, the Term
shall end without further act on the part of the Lessor or the Lessee and all of
the Lessee's obligations hereunder (other than any obligation expressed herein
as surviving termination of this Lease) shall cease.
SECTION 13.5. IPC PURCHASE PRICE. The consideration to be paid to the
Lessor by the Lessee for the Assets, the Assigned Rights and, if applicable, the
Site (the "IPC Purchase Price") shall be computed as follows:
(a) If purchase is at the end of the Initial Term and no
qualifying Event of Loss has occurred, an amount equal to (i) $59,520,000 (ii)
plus a CPI adjustment in an amount equal to the result of the equation for CPI
adjustment during or at the end of the Initial Term as set forth in the attached
Exhibit F (iii) minus the Purchase Option Consideration actually paid to the
Lessor;
(b) If purchase is at the end of the Renewal Term and no
qualifying Event of Loss has occurred, an amount equal to (i) $59,520,000 (ii)
plus a CPI adjustment in an amount equal to the result of the equation for CPI
adjustment during or at the end of the Renewal Term as set forth in the attached
Exhibit F (iii) minus the Purchase Option Consideration actually paid to the
Lessor;
(c) If purchase is at the Event of Loss Closing Date that is
prior to the expiration of the Initial Term, the IPC Purchase Price set forth in
Section 13.5(a) shall be adjusted as provided in Section 9.3(b)(iii);
(d) If purchase is at the Event of Loss Closing Date that is
after the commencement of the Renewal Term but prior to the expiration of the
Renewal Term, the IPC Purchase Price set forth in Section 13.5(b) shall be
adjusted as provided in Section 9.3(b)(iii);
(e) If the Site Closing has not occurred, the Ground Lease Lump
Sum Rent has not been paid, add $3,000,000; and
(f) If the Site Closing has not occurred but the Ground Lease
Closing Date has occurred, add that portion, if any, of the Ground Lease Lump
Sum Rent that has not been paid.
SECTION 13.6. MEMORANDUM OF OPTION. The Lessor and the Lessee agree
that, if required or requested by either of them, a Memorandum of Option, in the
form set forth in the
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attached Exhibit B, shall be recorded in the applicable governmental offices
listed in Schedule 1 to Participation Agreement at the Lessee's expense.
ARTICLE XIV
RENEWAL
SECTION 14.1 LEASE RENEWAL.
(a) Renewal. Subject to the notice requirements set forth in
Section 14(b) and the provisions of Section 14(c), the Lessee shall have the
option to (i) terminate the Lease or (ii) renew the Initial Term of the Lease
for a Renewal Term, which is an additional term of seven years.
(b) Notice. Not later than 360 days prior to the expiration date
of the Initial Term, the Lessee shall notify the Lessor as to whether the Lessee
will exercise its renewal option. If the Lessee fails to give timely such notice
regarding renewal, the Term of the Lease shall automatically terminate at the
expiration of the Initial Term.
(c) Elections Irrevocable. The election made by the Lessee or
deemed to have been made under Section 14(b) shall be irrevocable, and such
election (or deemed election) shall be binding on the Lessor and the Lessee.
(d) Termination. If the Lessee does not elect to renew, the Lease
shall terminate and the Term shall expire at the end of the Initial Term and the
Lessee shall surrender the Assets and the Assigned Rights in compliance with
Article V.
ARTICLE XV
LEASE EVENTS OF DEFAULT
SECTION 15.1 LESSEE DEFAULTS. The term "Event of Default", wherever
used herein, shall mean any of the following events and any such event shall
continue to be an Event of Default if and for so long as it shall not have been
remedied:
(a) (i) the Lessee shall fail to make, or cause to be made, any
payment of Base Rent or Additional Obligations as specified
in Section 3.1;
(ii) the Lessee shall fail to make, or cause to be made, any
payment of Supplemental Rent, Additional Rent or the
Purchase Option Consideration within 3 Business Days after
the same shall become due; or
(iii) the Guarantor shall fail to make any payment when due
under the Guaranty Agreement and such failure shall continue
for 3 Business Days;
(b) the Lessee shall fail to carry or maintain any of the
Required Insurance;
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(c) the Lessee, the Guarantor or the Assignee shall fail to
perform or observe any of their covenants or obligations (other than those
covenants and obligations that are addressed under Sections 15.1(a) or (b))
under this Lease, the Guaranty Agreement, the Participation Agreement or any
other Transaction Document to which the Lessee, the Assignee or the Guarantor is
a party and such failure shall not have been cured within three Business Days,
(if the applicable default can be cured by payment of money) or otherwise within
15 days; provided, that, if the failure cannot be cured solely by the payment of
money and the Lessee, the Assignee or the Guarantor, as the case may be, has
during the 15 day period, promptly commenced efforts to cure and is diligently
proceeding to cure such incorrectness, such period shall be extended for an
additional period necessary to cure, not to exceed 120 days; provided, however,
that is the applicable Default could become a default under the HUD Loan
Documents, the cure period expires two Business Days prior to the expiration of
the applicable cure period under the HUD Loan Documents.;
(d) any representation or warranty made by the Lessee, the
Assignee or by the Guarantor in any Transaction Document shall be discovered to
have been incorrect in any material respect when such representation or warranty
was made and shall remain materially incorrect at the time of discovery, and
shall not have been cured within 30 days after notice thereof shall have been
given by the Lessor to the Lessee; provided, that if such inaccuracy cannot be
cured solely by the payment of money and the Lessee, the Assignee or the
Guarantor has, as the case may be, during such 30-day period, promptly commenced
efforts to cure and is diligently proceeding to cure such incorrectness, such
period shall be extended for an additional period necessary to cure, not to
exceed 120 days;
(e) (i) an order shall have been made or entered by a competent
court or an effective resolution shall have been passed by
the Lessee, the Guarantor or the Assignee for winding up or
dissolution of the Lessee, the Guarantor or the Assignee
(other than for the purpose of any merger, consolidation,
sale of all or substantially all assets or other similar
arrangement which is permitted by the provisions of the
Transaction Documents);
(ii) the Lessee, the Guarantor or the Assignee shall have
ceased or threatened to cease to carry on all or
substantially all of their business (other than for the
purposes of any merger, consolidation, sale of all or
substantially all assets or similar arrangement which is
permitted by the provisions of the Transaction Documents) or
is unable to pay its debts generally as they fall due;
(iii) an order shall have been made or entered by a
competent court, or an effective resolution shall have been
passed by the Lessee, the Guarantor or the Assignee, for
judicial composition proceedings with its creditors; or a
trustee, liquidator, receiver, administrator, administrative
receiver, or other similar official shall have been
appointed in relation to the Lessee,
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the Guarantor or the Assignee; or a substantial part of the
assets of the Lessee, the Guarantor or the Assignee; or a
distress or execution or other process shall have been
levied or enforced upon or sued out against or an
encumbrancer taking possession of any substantial part of
the assets of the Lessee, the Guarantor or the Assignee and
in any such case not being discharged within 30 days;
(iv) the Lessee, the Guarantor or the Assignee shall have
become insolvent (under applicable bankruptcy law or under
laws of the United States, the Commonwealth of Virginia or
other applicable jurisdiction) or bankrupt, shall generally
not be paying its debts as they become due or shall have
made an assignment for the benefit of creditors, or the
Lessee, the Guarantor or the Assignee shall have applied for
or consented to the appointment of a custodian, liquidator,
trustee or receiver for the Lessee, the Guarantor or the
Assignee or for the major part of the property of such
Person;
(v) bankruptcy, reorganization, arrangement or insolvency
proceedings, or other proceedings for relief under any
bankruptcy or similar law or laws for the relief of debtors,
shall have been instituted by or against the Guarantor, the
Lessee or the Assignee and, if instituted against the
Guarantor, the Lessee or the Assignee , shall have been
consented to or shall not have been dismissed within 30 days
after such institution;
(f) the Guaranty Agreement shall be or become invalid,
unenforceable or ineffective in any material respect or (ii) the Guarantor shall
disaffirm or repudiate its obligations under the Guaranty Agreement; or
(g) final judgment or final judgments for the payment of money
in an amount that creates a material adverse economic impact on the relevant
Party listed herein is or are outstanding against the Lessee, the Guarantor, or
the Assignee and any such judgment has remained unpaid, unvacated, unbonded or
unstayed by appeal or otherwise for a period of 30 days from the date of its
entry.
SECTION 15.2. LESSOR DEFAULTS. The term "Lessor Default," whenever used
herein, shall mean any of the following events and any such event shall continue
to be a the Lessor Default if and for so long as it shall not have been
remedied:
(a) The Lessor shall fail to maintain a valid legal existence
under the laws of the Commonwealth of Virginia;
(b) The Lessor shall fail to carry, or maintain any of the
insurance required under Section 10.3;
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(c) The Lessor shall fail to carry out the HUD Required Repairs;
or
(d) The Lessor shall have caused a default under the HUD Loan
Documents and such default is not caused directly or indirectly by an act or
omission of the Lessee, the Assignee or the Guarantor.
ARTICLE XVI
REMEDIES
SECTION 16.1 REMEDIES. Upon the occurrence of any Event of Default and
at any time thereafter so long as the same shall be continuing the Lessor at its
option may, by notice to the Lessee, declare this Lease to be in default; and at
any time thereafter, the Lessor may, to the extent permitted by Applicable Law,
exercise one or more of the following remedies, except as hereinbelow expressly
otherwise set forth, as the Lessor in its sole discretion shall elect:
(a) The Lessor may (i) demand that the Lessee, and thereupon the
Lessee shall, at the Lessee's expense, promptly return to the Lessor possession
of and vacate the Assets in the manner and condition required by, and otherwise
in accordance with the provisions of, Article V hereof, and (ii) without
prejudice to any other remedy which the Lessor may have for possession of the
Assets or arrearages in Rent or Additional Obligations and interest thereupon
take all action required to enable the Lessor to, and thereafter, enter upon the
IPC Real Property and take possession (to the exclusion of the Lessee) of the
Assets and expel or remove the Lessee and any other Person who may be occupying
the Assets or any part thereof, all without liability (other than for willful or
malicious misconduct) to the Lessee or any other Person for or by reason of such
entry or taking of possession, whether for the restoration of damage to property
caused by such taking or otherwise;
(b) The Lessor may re-let the Assets or any part thereof,
together with any interest of the Lessor under the Transaction Documents in
accordance with Applicable Law, as the Lessor may determine, free and clear of
any rights of the Lessee therein and without any duty to account to the Lessee
with respect to such re-letting or for the proceeds thereof (except to the
extent required by clause (d) or (e) below if the Lessor shall elect to exercise
its rights thereunder), in which event the Lessee's obligation to pay future
Rent and Additional Obligations, for periods commencing after the date of such
re-letting, shall terminate (except to the extent that Rent and Additional
Obligations are to be included in computations under paragraph (d) or (e) below
if the Lessor shall elect to exercise its rights thereunder). The Lessor's
reletting of the Assets hereunder shall not reduce the Lessee's obligation to
pay any overdue Rent or Additional Obligations together with interest on such
amount at the Overdue Interest Rate from the date such Rent or Additional
Obligations were originally due to the date of actual payment;
(c) The Lessor may elect to retake possession of the Assets and
relet the same (or any part thereof) for the benefit of the Lessee without
terminating this Lease, in which case
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the Lessee will be liable for and will pay to the Lessor all amounts required to
be paid by the Lessee during the remainder of the Term as said amounts accrue
hereunder until the expiration of the then applicable Term, diminished by any
net sums received by the Lessor through reletting the Assets during said period
(after deducting expenses incurred by the Lessor in connection with such
reletting); and in no event shall the Lessee be entitled to any excess of rent
or other amounts obtained by reletting (it being understood and agreed that
actions to collect amounts due by the Lessee as provided in this paragraph (c)
may be brought from time to time on one or more occasions, without the necessity
of the Lessor waiting until expiration of the then applicable Term). In the
event that this Lease is terminated or in the event that the Lessor elects to
exercise its remedies pursuant to this paragraph (c), the Lessor shall use
reasonable efforts to relet or attempt to relet the Assets or any portion
thereof, and to collect rent after reletting; and in the event of reletting the
Lessor may relet the whole or any portion of the Assets for any period, to any
Person, and for any use and purpose;
(d) The Lessor may, whether or not the Lessor shall have
exercised or shall thereafter at any time exercise its rights under paragraph
(a), (b) or (c) above (unless this paragraph (d) provides otherwise), by notice
to the Lessee specifying a payment date, demand that the Lessee pay to the
Lessor, and the Lessee shall pay to the Lessor, on the date specified in such
notice, the net present value (using the Discount Rate) of all amounts of Rent
and Additional Obligations that are or would become due prior to the then
applicable Term reduced by (x) the net Rent and Additional Obligations actually
received by the Lessor during such period and (y), if the Lessor takes back
possession of the Assets, the net present value of the net Fair Market Rental
Value (using the Discount Rate) of the Assets the Lessor can reasonably expected
to receive for the applicable period together with interest on such amount at
the Overdue Interest Rate from the date specified in such notice to the date of
actual payment. The Lessor and the Lessee have studied the applicable market as
to potential future rental values and the likelihood of reletting the Assets
and, taking such studies into consideration, have fashioned the remedies
contained in this Lease not as penalties but as appropriate measures of future
damages;
(e) The Lessor may terminate this Lease; however, (i) no reentry
or taking of possession of the Assets by the Lessor will be construed as an
election on the Lessor's part to terminate this Lease unless a written notice of
such intention is given to the Lessee, (ii) notwithstanding any reletting,
reentry or taking of possession, the Lessor may at any time thereafter elect to
terminate this Lease for a continuing Event of Default and (iii) no act or thing
done by the Lessor or any of its agents, representatives or employees shall be
deemed an acceptance of a surrender of the Assets, and no agreement accepting a
surrender of the Assets shall be valid unless the same be made in writing and
executed by the Lessor; and
(f) The Lessor may exercise any other right or remedy that may be
available to it under Applicable Law or proceed by appropriate court action to
enforce the terms hereof or to recover damages for the breach hereof.
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SECTION 16.2. NO RELEASE. Except as otherwise provided in Section 16.1,
no expiration or termination of this Lease, in whole or in part, or repossession
of the Assets or exercise of any remedy under Section 16.1 shall relieve the
Lessee of any of its obligations under this Lease to the extent such obligations
accrued prior to expiration or termination of the Lease. In addition, except as
aforesaid, the Lessee shall be liable for any and all unpaid Rent and Additional
Obligations due hereunder before, after or during the exercise of any of the
foregoing remedies to the extent required under Section 16.1(d) above, including
all reasonable legal fees and other reasonable costs and expenses incurred by
the Lessor by reason of the occurrence of any Event of Default or the exercise
of the Lessor's remedies with respect thereto.
SECTION 16.3. REMEDIES CUMULATIVE. Except as expressly set forth
therein, no remedy under Section 16.1 is intended to be exclusive, but each
shall be cumulative and in addition to any other remedy provided thereunder or
otherwise available to the Lessor at law or in equity. No express or implied
waiver by the Lessor of any Event of Default hereunder shall in any way be, or
be construed to be, a waiver of any future or subsequent Event of Default. The
failure or delay of the Lessor in exercising any right granted it hereunder upon
any occurrence of any of the contingencies set forth herein shall not constitute
a waiver of any such right upon the continuation or recurrence of any such
contingency or similar contingencies and any single or partial exercise of any
particular right by the Lessor shall not exhaust the same or constitute a waiver
of any other right provided herein. To the extent permitted by Applicable Law,
the Lessee hereby waives any rights now or hereafter conferred by statute or
otherwise that may require the Lessor to sell, lease or otherwise use the Assets
in mitigation of the Lessor's damages as set forth in Section 16.1 (except to
the extent provided in Section 16.1(d)) or that may otherwise limit or modify
any of the Lessor's rights and remedies provided in this Article XVI.
SECTION 16.4. REMEDIES FOR THE LESSOR DEFAULTS. Upon the occurrence of
a the Lessor Default, written notice to the Lessor specifying the default and
the failure by the Lessor to cure such default within 30 days of receipt of such
notice, the Lessee may, except in the event more immediate action is reasonably
deemed essential by the Lessee to avoid possible irreparable harm to its
interests, upon five Business Day's notice, make any payment or take such act as
is reasonably necessary to perform or comply with the HUD Loan Documents,
including obligations of the Lessor thereunder, and the Lessee may bill the
Lessor for those costs, actually paid by the Lessee, that the Lessor was legally
responsible for under this Lease.
ARTICLE XVII
NOTICES
All communications, declarations, demands and notices provided for in
this Lease shall be in writing and shall be given and effective in compliance
with Section 10.1 of the Participation Agreement.
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ARTICLE XVIII
SUCCESSORS AND ASSIGNS
This Lease, including all agreements, covenants, indemnities,
representations and warranties contained herein, shall be binding upon and inure
to the benefit of the Lessor and the Lessee and their respective permitted
successors and assigns.
ARTICLE XIX
RIGHT TO PERFORM
If a Default shall have occurred and be continuing, the Lessor may, but
shall not be obligated to, to the extent not prohibited by Applicable Law, make
any such payment or perform or comply with any such agreement as the Lessee
shall be obligated to pay, perform or comply with under this Lease, and the
amount of such payment and the amount of the reasonable expenses of the Lessor
incurred in connection with such payment or the performance or compliance with
such agreement, as the case may be, together with interest thereon at the
Overdue Interest Rate, shall be deemed Supplemental Rent, payable by the Lessee
upon demand. Except in the event more immediate action is deemed essential by
the Lessor to avoid possible irreparable harm to its interests, the Lessor shall
give the Lessee at least five Business Days' notice before taking any action in
accordance with the preceding sentence, provided that the failure to give such
notice shall have no effect upon any of the rights of the Lessor thereunder.
ARTICLE XX
ADDITIONAL COVENANTS
SECTION 20.1 CROSS-EASEMENT OBLIGATIONS. During the Term, the Lessee
shall have all rights, to the extent allowed under Applicable Law, and shall
perform all covenants and obligations of the "owner of Parcel A" (including
without limitation, payment obligations) imposed by the Parcel B Easements and
all covenants and obligations of the "Parcel A Owner" imposed by the Declaration
affecting the IPC Land and the Site. During the Term, the Lessor shall exercise
the right of first refusal granted to the Lessor under the Parcel B Easements as
directed by the Lessee and if such right of first refusal is exercised by the
Lessor pursuant to the Lessee's direction, the Lessor shall assign the Lessor's
purchase right to the Lessee; provided that the Lessee indemnify and hold the
Lessor harmless with regard to any and all actions taken by the Lessor at the
direction of the Lessee.
SECTION 20.2. HUD LOAN. During the Term, the Lessee shall comply with
the provisions of the HUD Loan Documents as to management, distribution of
revenues, operation, use, services, repair, insurance, maintenance, subletting
and renting, rental and service charge rates, reports, safety, environment and
health, required services, operating agreements, financial reporting,
maintenance of the IPALC Lease and maintenance of the Guarantor and Affiliate
entities sufficient to qualify at all times as a manager and lessee under the
HUD Loan Documents and shall cause the Assets and the Assigned Rights to be in
compliance with the applicable
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provisions of the HUD Loan Documents. Without limiting any of the foregoing, the
Lessee and the Assignee agree not to distribute cashflow in violation of the HUD
Loan Documents. Similarly, the Lessee's operations and use as to the Assets and
the Assigned Rights shall be such that the collateral encumbered to secure the
HUD Loan qualifies to secure a loan under ss. 223(f) of the National Housing
Act, as amended.
ARTICLE XXI
AMENDMENTS AND MISCELLANEOUS
SECTION 21.1 AMENDMENTS IN WRITING. The provisions of this Lease may
not be waived, altered, modified, amended, supplemented or terminated in any
manner whatsoever except by written instrument signed by the Lessor and the
Lessee. Any waiver, alteration, modification, amendment, supplement or
termination of this Lease that requires the consent of the Trustee and
noteholder under the HUD Loan shall not be effective unless and until such
consent shall have been obtained as provided in accordance with the provisions
of the Transaction Documents and the HUD Loan.
SECTION 21.2. SURVIVAL. All indemnities, representations and warranties
contained or incorporated by reference in this Lease shall survive, and shall
continue in effect following, the execution and delivery of this Lease and the
expiration or termination of this Lease.
SECTION 21.3. SEVERABILITY OF PROVISIONS. Any provision of this Lease
that may be determined by competent authority to be prohibited or unenforceable
in any jurisdiction shall as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability shall not
invalidate or render unenforceable such provision in any other jurisdiction. To
the extent permitted by Applicable Law, the Lessee hereby waives any provision
of law that renders any provision hereof prohibited or unenforceable in any
respect. The covenants of the Lessor and the Lessee are independent covenants.
SECTION 21.4. TRUE LEASE. This Lease is intended as, and shall
constitute, an agreement of lease, and nothing herein shall be construed as
conveying to the Lessee any right, title or interest in or to the Assets except
as a lessee. The Lessor and the Lessee shall treat this lease as a true lease
for federal income tax purposes and for GAAP reporting purposes.
SECTION 21.5. CONFIDENTIALITY.
(a) No Party will itself use or intentionally disclose or permit
its agents to disclose, directly or indirectly, any information obtained from
the other Party or its representatives or Affiliates in connection herewith or
any portion of any Transaction Document not otherwise available for public
inspection, without the prior written consent of the other Party, and each Party
will keep all such information confidential; provided, that (i) each Party may
use and retain such information and disclose any such information to (1) its
counsel, its investment
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bankers and analysts, its public accountants and any Indemnitee or Indemnified
Party if such information shall have been provided to the recipient in question
after such recipient shall have agreed in writing to keep such information
confidential to the extent provided herein and (2) any Governmental Authorities
where the party is obligated under Applicable Laws to disclose to such
authority, provided the Lessor is given prior notice of the substance of the
disclosure as it pertains to the Lessor, the Assets, the Lease or matters
related thereto such disclosure, (ii) each Party may use, retain and disclose
any such information which has been publicly disclosed (other than by such Party
or any of its Affiliates in breach of this Section) or has been disclosed to
such Party or any of its Affiliates (other than from another Party) by a
third-party not in breach of any confidentiality obligation under this Section
and (iii) to the extent that such Party or any of its Affiliates may have
received a subpoena or other written demand under color of legal right for such
information, such Party or Affiliate may disclose such information, but such
Party shall first, as soon as practicable upon receipt of such demand, furnish a
copy thereof to the Party such information relates to, as the case may be.
(b) Each of the Parties, for itself and for its respective
Affiliates, undertakes and agrees that, except to the extent required by
Applicable Law, it will not issue or release for publication any article,
advertising or other information relating to the identity of any Party to the
Transaction Documents without the prior written approval of such Party such
approval not to be unreasonably withheld; provided, however, that after Closing,
the Lessee, the Guarantor and the Assignee may release information as to the
Lessee's or the Assignee's operations without prior written approval but only to
the extent such release does not contain any information about the transaction
conducted pursuant to the Transaction Documents or the Lessor or any of the
Lessor's Affiliates.
(c) Each of the Parties obligations under this Section 21.5 shall
survive settlement, delivery of any Transaction Documents or the expiration or
termination of the Lease and each and every other Transaction Document.
SECTION 21.6. GOVERNING LAW. THIS LEASE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF VIRGINIA EXCLUDING
ALL CHOICE OF LAW RULES OF SUCH COMMONWEALTH.
SECTION 21.7. HEADINGS. The division of this Lease into sections, the
provision of a table of contents and the insertion of headings are for
convenience of reference only and shall not affect the construction or
interpretation of this Lease.
SECTION 21.8. COUNTERPART EXECUTION. This Lease may be executed in any
number of counterparts and by each of the parties hereto in separate
counterparts, all such counterparts together constituting but one and the same
instrument. Although this Lease is dated as of the date first above written for
convenience, the actual date of execution hereof by the parties hereto
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is the Closing Date, and this Lease shall be effective on, and shall not be
binding on any party hereto until, the Closing Date.
SECTION 21.9. NO MERGER. There shall be no merger of this Lease or the
leasehold estate hereby created with any other estate in the Site or any Asset
by reason of the fact that the same Person acquires, holds, directly or
indirectly, this Lease or the leasehold estate hereby created or any fee simple
interest or any other estate in the Site or any Asset or any interest in either
thereof.
SECTION 21.10. NO ACCORD AND SATISFACTION. The acceptance by the Lessor
of any sums from the Lessee (whether as Rent, Additional Obligations or
otherwise) in amounts which are less than the amounts due and payable by the
Lessee hereunder is not intended, nor shall be construed, to constitute an
accord and satisfaction of any dispute between the Lessor and the Lessee
regarding sums due and payable by the Lessee hereunder, unless the Lessor
specifically deems or acknowledges it as such in writing.
SECTION 21.11. RULE AGAINST PERPETUITIES. If any right or option
provided in this Lease would, in the absence of the limitation imposed by this
Section 21.11, be invalid or unenforceable as being in violation of the rule
against perpetuities or any other rule of law relating to the vesting of an
interest in or the suspension of the power of alienation of property, then such
right or option shall be exercisable only during the period which shall end 21
years after the death of the last survivor of the descendants of the late King
George V of the United Kingdom of Great Britain who were living on the date
hereof.
SECTION 21.12. RECORDATION. The Lessor and the Lessee agree that, if
required or requested by either of them, the Memorandum of Lease, but not the
Lease, shall be recorded in the applicable governmental offices listed in
Schedule 7 to Participation Agreement at the Lessee's expense.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Lease to
be duly executed by an officer thereunto duly authorized as of the date and year
first above written.
DANIEL U.S. PROPERTIES LIMITED
PARTNERSHIP, as Lessor
By: Daniel Realty Investment Corporation,
a Virginia Corporation,
General Partner
-------------------------------------
Name: /s/ Jack R. Peterson
------------------------------------
Title: Vice President
-----------------------------------
ARC IMPERIAL PLAZA,INC., as Lessee
By: /s/ Todd Kaestner
--------------------------------------
Name: Todd Kaestner
------------------------------------
Title: EVP, Corporate Development
-----------------------------------
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EXHIBIT C TO
THE LEASE
HUD Required Repairs
"Repair Escrow" means $828,903 on September 8, 1997.
"Required Repairs" means items reflected on Attachment A to the Escrow Agreement
Unpaid Construction Costs, Repairs or Needs Assessment Repairs, a copy of which
is attached hereto.
"Contingency Holdback" means $527,100.
"Replacement Reserve Account" means the account set up by the HUD Loan
noteholder pursuant to Paragraph 8 of the Request for Endorsement. Such account
is the property of the Lessor, is held by the HUD Loan noteholder and contains
(i) the amount of $2,541,558.59 on September 8, 1997, (ii) plus those additional
amounts contributed by the Lessor after September 8, 1997 and (iii) minus such
withdrawals as are approved and made by the Lessor for expenditure approved by
HUD before the Closing Date.
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EXHIBIT D TO
THE LEASE
"Base Rent" means the sum of: $363,369.89 (such amount shall automatically
adjust, up or down, from time to time as required to pay in full all amounts due
for principal, interest and mortgage insurance premium under the HUD Loan
Documents); excluding, however, any payments (including without limitation, late
charges and interest) solely due to a default of the Lessor under the HUD Loan
Documents that was not caused by an act or omission of the Lessee, the Assignee
or the Guarantor.
"Additional Obligations" means the sum of (a) $28,066 (for HUD required
Replacement Reserves, such amount shall automatically adjust, up or down, from
time to time as required to pay in full applicable amounts due under the HUD
Loan), (b) an amount equal to the monthly payment amounts required under the HUD
Loan for all other required escrows (including without limitation real estate
taxes, and insurance premiums) and (d) any other payments required under the HUD
Loan Documents; excluding, however, any payments (including without limitation,
late charges and interest) solely due to a default of the Lessor under the HUD
Loan Documents that was not caused by an act or omission of the Lessee, the
Assignee or the Guarantor.
35
<PAGE> 41
EXHIBIT F TO
THE LEASE
Formulas
I. Computation of Interest payable on Security Deposit under Section 3.5 (a):
CPI Factor: 80%
Annual Percentage Change in CPI: the difference between the CPI for the first
month of the current lease year minus the CPI for the first month of the prior
lease year, divided by the CPI for the first month of the prior lease year
(CPI current year - CPI prior year)
CPI prior year
Interest on the Security Deposit shall be equal to (I) the final year's
determination of: 1, plus the product of the CPI Factor multiplied by the Annual
Change in the CPI, such sum multiplied after the first lease year by the
Security Deposit, and multiplied each subsequent year by the resulting product
from that computation in the prior year, less (ii) the Security Deposit
Example: CPI 1997 = 480.70 (actual CPI for July 1997)
CPI 1998 = 497.52 (assumed CPI 12 months later)
CPI 1999 = 514.94 (assumed CPI 12 months later)
CPI 2000 = 532.96 (assumed CPI 12 months later)
Security Deposit: $5,400,000
Annual Percentage Change in CPI 1998 = (497.52 480.70)/480.70 = 3.5%
Annual Percentage Change in CPI 1999 = (514.94-497.52)/497.52 = 3.5%
Annual Percentage Change in CPI 2000 = (532.96 - 514.94)/514.94 = 3.5%
Security Deposit Interest accrued at end of 2000
<TABLE>
<CAPTION>
Security Deposit Interest
-------------------------
<S> <C>
at the end of 1998 = (1+(.8 x .035)) x 5,400,000 = 5,551,200 151,200
at the end of 1999 = (1+(.8 x .035)) x 5,551,200 = 5,706,633 306,633
at the end of 2000 = (1+(.8 x .035)) x 5,706,633 = 5,866,419 466,419
... and so on until the year of determination
</TABLE>
36
<PAGE> 42
II. Computation of IPC Purchase Price under Section 13.5:
CPI Factor: 67% if determined during or at the end of the Initial Term
52% if determined during or at the end of the Renewed Term
Annual Percentage Change in CPI: The difference between the CPI for the first
month of the current lease year minus the CPI for the first month of the prior
lease year, divided by the CPI for the first month of the prior lease year
(CPI current year - CPI prior year)
CPI prior year
The Purchase Price shall be equal to the final year's determination of: 1, plus
the product of the CPI Factor multiplied by the Annual Change in the CPI, such
sum multiplied after the first lease year by the $59,620,000, and multiplied
each subsequent year by the resulting product from that computation in the prior
year.
(the CPI Factor used in every year of this determination shall be either 67% if
the determination is made during or at the end of the Initial Term, or 52% if
the determination is made during or at the end of the Renewal Term.)
Example: CPI 1997 = 480.70 (actual CPI for July 1997)
CPI 1998 = 497.52 (assumed CPI 12 months later)
CPI 1999 = 514.94 (assumed CPI 12 months later)
CPI 2000 = 532.96 (assumed CPI 12 months later)
Annual Percentage Change in CPI 1998 = (497.52 - 480.70)/480.70 = 3.5%
Annual Percentage Change in CPI 1999 = (514.94 - 497.52)/497.52 = 3.5%
Annual Percentage Change in CPI 2000 = (532.96 - 514.94)/514.94 = 3.5%
IPC Purchase Price at end of 2000 (assuming determination on or prior to
expiration of Initial Term):
at the end of 1998 = (1+(.67 x .035)) x 59,520,000 = 60,915,744
at the end of 1999 = (1+(.67 x .035)) x 60,915,744 = 62,344,218
at the end of 2000 = (1+(.67 x .035)) x 62,344,218 = 63,806,190...and so on
until the year of determination
37
<PAGE> 1
Exhibit 10.22
================================================================================
LOAN AGREEMENT
between
FORT AUSTIN LIMITED PARTNERSHIP,
as Borrower
and
GENERAL ELECTRIC CAPITAL CORPORATION,
as Lender
December 31, 1997
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE 1
CERTAIN DEFINITIONS
Page No.
--------
<S> <C> <C>
Section 1.1 Certain Definitions.............................................1
ARTICLE 2
LOAN TERMS
Section 2.1 The Loan.........................................................8
Section 2.2 Interest Rate; Late Charge.......................................8
Section 2.3 Terms of Payment.................................................9
Section 2.4 Security........................................................11
ARTICLE 3
INSURANCE, CONDEMNATION, AND IMPOUNDS
Section 3.1 Insurance.......................................................11
Section 3.2 Use and Application of Insurance Proceeds.......................12
Section 3.3 Condemnation Awards.............................................12
Section 3.4 Impounds........................................................13
ARTICLE 4
ENVIRONMENTAL MATTERS
Section 4.1 Certain Definitions.............................................14
Section 4.2 Representations and Warranties on Environmental Matters.........14
Section 4.3 Covenants on Environmental Matters..............................14
Section 4.4 Allocation of Risks and Indemnity...............................15
Section 4.5 Collateral Assignment of Indemnities............................15
Section 4.6 No Waiver.......................................................15
ARTICLE 5
LEASING MATTERS
Section 5.1 Representations and Warranties on Residency Agreements..........16
Section 5.2 Standard Residency Agreement Form...............................16
Section 5.3 Covenants.......................................................16
ARTICLE 6
REPRESENTATIONS AND WARRANTIES
Section 6.1 Organization and Power..........................................16
Section 6.2 Validity of Loan Documents......................................17
Section 6.3 Liabilities; Litigation.........................................17
Section 6.4 Taxes and Assessments...........................................17
Section 6.5 Other Agreements; Defaults......................................17
Section 6.6 Compliance with Law.............................................17
Section 6.7 Location of Borrower............................................18
Section 6.8 ERISA...........................................................18
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Section 6.9 Margin Stock.....................................................18
Section 6.10 Tax Filings......................................................18
Section 6.11 Solvency.........................................................18
Section 6.12 Full and Accurate Disclosure.....................................18
Section 6.13 Single Purpose Entity............................................19
Section 6.14 Licenses and Compliance..........................................19
ARTICLE 7
FINANCIAL REPORTING
Section 7.1 Financial Statements.............................................19
Section 7.2 Accounting Principles............................................19
Section 7.3 Other Information................................................20
Section 7.4 Annual Budget and Cash Flow Summary..............................20
Section 7.5 Audits...........................................................20
ARTICLE 8
COVENANTS
Section 8.1 Due on Sale and Encumbrance; Transfers of Interests..............20
Section 8.2 Taxes; Charges...................................................21
Section 8.3 Control; Management..............................................21
Section 8.4 Noncompliance....................................................22
Section 8.5 Consultant.......................................................22
Section 8.6 Permits and Licenses; Operation; Maintenance; Inspection.........22
Section 8.7 Taxes on Security................................................23
Section 8.8 Reserves, Deposits, Escrows......................................23
Section 8.9 Legal Existence; Name, Etc.......................................23
Section 8.10 Affiliate Transactions...........................................23
Section 8.11 Limitation on Other Debt.........................................23
Section 8.12 Limitation on Affiliate Debt.....................................24
Section 8.13 Further Assurances...............................................24
Section 8.14 Estoppel Certificates............................................24
Section 8.15 Notice of Certain Events.........................................24
Section 8.16 Indemnification..................................................24
Section 8.17 ERISA............................................................24
Section 8.18 Cash Operating Reserve Fund......................................25
Section 8.19 Security Deposits................................................25
Section 8.20 Net Worth........................................................25
Section 8.21 Operation........................................................25
Section 8.22 Services.........................................................25
Section 8.23 Non-Competition..................................................26
Section 8.24 Releases and Substitutions.......................................26
ARTICLE 9
EVENTS OF DEFAULT
Section 9.1 Payments.........................................................27
Section 9.2 Insurance........................................................27
Section 9.3 Sale, Encumbrance, Etc...........................................27
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Section 9.4 Covenants.......................................................27
Section 9.5 Representations and Warranties..................................27
Section 9.6 Other Encumbrances..............................................27
Section 9.7 Involuntary Bankruptcy or Other Proceeding......................27
Section 9.8 Voluntary Petitions, etc........................................28
Section 9.9 Other Loans.....................................................28
Section 9.10 Limiting Mortgage Amounts.......................................28
ARTICLE 10
REMEDIES
Section 10.1 Remedies - Insolvency Events....................................28
Section 10.2 Remedies - Other Events.........................................28
Section 10.3 Lender's Right to Perform the Obligations.......................29
ARTICLE 11
MISCELLANEOUS
Section 11.1 Notices.........................................................29
Section 11.2 Amendments and Waivers..........................................30
Section 11.3 Limitation on Interest..........................................30
Section 11.4 Invalid Provisions..............................................31
Section 11.5 Reimbursement of Expenses.......................................31
Section 11.6 Approvals; Third Parties; Conditions............................31
Section 11.7 Lender Not in Control; No Partnership...........................32
Section 11.8 Time of the Essence.............................................32
Section 11.9 Successors and Assigns..........................................32
Section 11.10 Renewal, Extension or Rearrangement.............................32
Section 11.11 Waivers.........................................................32
Section 11.12 Cumulative Rights...............................................32
Section 11.13 Singular and Plural.............................................32
Section 11.14 Phrases.........................................................33
Section 11.15 Exhibits and Schedules..........................................33
Section 11.16 Titles of Articles, Sections and Subsections....................33
Section 11.17 Promotional Material............................................33
Section 11.18 Survival........................................................33
Section 11.19 Waiver of Jury Trial............................................33
Section 11.20 Waiver of Punitive or Consequential Damages.....................33
Section 11.21 Governing Law...................................................33
Section 11.22 Entire Agreement................................................34
Section 11.23 Counterparts....................................................34
ARTICLE 12
LIMITATIONS ON LIABILITY
Section 12.1 Limitation on Liability.........................................34
Section 12.2 Limitation on Liability of Lender's Officers, Employees, etc....35
</TABLE>
iii
<PAGE> 5
LIST OF DEFINED TERMS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Adjusted Operating Expenses....................................................1
Adjusted Operating Revenues....................................................1
Advance Fee....................................................................8
Advance Fee....................................................................1
Affiliate......................................................................1
Agreement......................................................................1
ARC ......................................................................1
Assignment of Rents and Leases.................................................1
Average Line Balance...........................................................2
Average Line Balance...........................................................9
Bankruptcy Party..............................................................27
Borrower ......................................................................1
Borrower Party.................................................................2
Broadway ......................................................................2
Business Day...................................................................2
Capital Expenditures...........................................................2
Capital Expenditures Budget....................................................2
Capital Improvements Reserve...................................................2
Carriage Club..................................................................3
Cash on Cash Return............................................................2
Convertible Subordinated Debentures.............................SCHEDULE 2.1 - 5
Debt ......................................................................3
Debt Service...................................................................3
Debt Service Coverage..........................................................3
Default Rate...................................................................3
EBIDTA .......................................................SCHEDULE 2.1 - 5
Environmental Laws............................................................14
ERISA .....................................................................24
Eurodollar Business Day........................................................9
Event of Default...............................................................3
Facility Capacity..............................................................3
Fixed Rate.....................................................................3
Floating Rate..................................................................3
Hampton ......................................................................4
Hazardous Materials...........................................................14
Joinder .....................................................................37
Joinder Party..................................................................4
Lender ......................................................................4
LIBOR Rate.....................................................................8
Lien ......................................................................4
Loan Documents.................................................................4
Loan Year......................................................................4
Maturity Date..................................................................4
</TABLE>
iv
<PAGE> 6
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Maximum Line Amount............................................................4
Mortgage ......................................................................4
Net Cash Flow..................................................................5
Net Operating Income...........................................................5
Net Worth......................................................................5
Obligations....................................................................9
Operating Expenses.............................................................5
Operating Reserve.............................................................25
Operating Revenues.............................................................6
Parkplace......................................................................6
Person ......................................................................6
Potential Default..............................................................6
Projects ......................................................................7
Ratio of EBIDTA to Total Interest Expense.......................SCHEDULE 2.1 - 5
Ratio of Total Assets to Total Debt.............................SCHEDULE 2.1 - 5
Residency Agreement............................................................7
Resident ......................................................................7
Santa Catalina.................................................................7
Security Deposit Accounts.....................................................25
Single Purpose Entity..........................................................7
Site Assessment................................................................7
State ......................................................................7
State Agencies.................................................................7
Summit ......................................................................8
Total Interest Expense..........................................SCHEDULE 2.1 - 5
Unused Line Fee................................................................8
Unused Line Fee................................................................9
Westlake Village...............................................................8
</TABLE>
v
<PAGE> 7
LOAN AGREEMENT
This Loan Agreement (this "AGREEMENT") is entered into as of December
31, 1997 between GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation
("LENDER"), and FORT AUSTIN LIMITED PARTNERSHIP, a Texas limited partnership
("BORROWER"). In consideration of the mutual promises contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Lender and Borrower agree as follows:
ARTICLE 1
CERTAIN DEFINITIONS
Section 1.1 CERTAIN DEFINITIONS. As used herein, the following terms
have the meanings indicated:
"ADJUSTED OPERATING EXPENSES" means Operating Expenses as
determined and adjusted by Lender in accordance with its current audit
policies and procedures.
"ADJUSTED OPERATING REVENUES" means Operating Revenues as
determined and adjusted by Lender in accordance with its current audit
policies and procedures.
"ADVANCE FEE" has the meaning set forth in Section 2.1.
"AFFILIATE" means (1) any corporation in which Borrower or any
partner, shareholder, director, officer, member, or manager of Borrower
directly or indirectly owns or controls more than ten percent (10%) of
the beneficial interest, (2) any partnership, joint venture or limited
liability company in which Borrower or any partner, shareholder,
director, officer, member, or manager of Borrower is a partner, joint
venturer or member, (3) any trust in which Borrower or any partner,
shareholder, director, officer, member or manager of Borrower is a
trustee or beneficiary, (4) any entity of any type which is directly or
indirectly owned or controlled by Borrower or any partner, shareholder,
director, officer, member or manager of Borrower, (5) any partner,
shareholder, director, officer, member, manager or employee of
Borrower, (6) any Person related by birth, adoption or marriage to any
partner, shareholder, director, officer, member, manager, or employee
of Borrower, or (7) any Borrower Party.
"AGREEMENT" means this Loan Agreement, as amended from time to
time.
"ARC" means American Retirement Corporation, a Tennessee
corporation.
"ASSIGNMENT OF RENTS AND LEASES" means, collectively, and as
amended, the following Assignments of Rents and Leases:
(a) Assignment of Rents and Leases of even date
herewith, executed by Borrower, in the Real Property Records of Pima
County, Arizona, assigning to Lender all of the rents, leases, and
income of Santa Catalina;
1
<PAGE> 8
(b) Assignment of Rents and Leases of even date
herewith, executed by Borrower and filed for recording in the Real
Property Records of Tarrant County, Texas, and in the Real Property
Records of Travis County, Texas, and in the Real Property Records of
Harris County, Texas, assigning to Lender all of the rents, leases and
income of Broadway and Summit and Hampton;
(c) the Assignment of Rents and Leases dated of even
date herewith, executed by Borrower, filed in the Real Property Records
of Cuyahoga County, Ohio, for Westlake Village, assigning to Lender all
of the rents, leases and income of Westlake Village;
(d) the Assignment of Rents and Leases dated of even
date herewith, filed in the Real Property Records of Denver County,
Colorado for Parkplace, assigning to Lender all of the rents, leases
and income of Parkplace;
(e) Assignment of Rents and Leases dated of even date
herewith, executed by Borrower, filed in the Real Property Records of
Duval County, Florida, assigning to Lender all of the rents, leases and
income of Carriage Club; and
(f) any other assignment of rents and leases in favor
of Lender and pertaining to the rents, and leases, and income of the
Projects.
"AVERAGE LINE BALANCE" has the meaning assigned to such term
in Section 2.3(C).
"BORROWER PARTY" means any Joinder Party, any general partner
in Borrower, and any general partner in any partnership that is a
general partner in Borrower, at any level.
"BROADWAY" means Broadway Plaza at Cityview Retirement Center,
consisting of approximately 126 independent residential living units,
88 villas, 40 assisted living units, and a 122-bed skilled/
intermediate care health center on 20.013 acres located at 5301 Bryant
Irvin Road, Fort Worth, Texas, including parking for 355 automobiles,
and more particularly described on Exhibit A.
"BUSINESS DAY" means any day that is not a Saturday, Sunday,
or day on which banks are required or permitted to be closed in the
State of New York.
"CAPITAL EXPENDITURES" has the meaning assigned to such term
in Schedule 2.4 of this Agreement.
"CAPITAL EXPENDITURES BUDGET" has the meaning assigned to such
term in Schedule 2.4 of this Agreement.
"CAPITAL IMPROVEMENTS RESERVE" has the meaning assigned to
such term in Schedule 2.4 of this Agreement.
"CASH ON CASH RETURN" means the ratio, expressed as a
percentage, of (a) annualized Net Operating Income to (b) the sum of
the outstanding principal balance of the Loan.
2
<PAGE> 9
"CARRIAGE CLUB" means the senior living facility located in
Jacksonville, Florida and known as "Carriage Club of Jacksonville,"
consisting of 298 units (238 independent living units and 60 assisted
living units), and more particularly described on Exhibit A.
"DEBT" means, for any Person, without duplication: (1) all
indebtedness of such Person for borrowed money (whether personal or
non-recourse, secured or unsecured), for amounts drawn under a letter
of credit, or for the deferred purchase price of property for which
such Person or its assets is liable, (2) all unfunded amounts under a
loan agreement, letter of credit, or other credit facility for which
such Person would be liable, if such amounts were advanced under the
credit facility, (3) all amounts required to be paid by such Person as
a guaranteed payment to partners or a preferred or special dividend,
including any mandatory redemption of shares or interests, (4) all
indebtedness guaranteed by such Person, directly or indirectly, (5) all
obligations under leases that constitute capital leases for which such
Person is liable, and (6) all obligations of such Person under interest
rate swaps, caps, floors, collars and other interest hedge agreements,
in each case whether such Person is liable contingently or otherwise,
as obligor, guarantor or otherwise, or in respect of which obligations
such Person otherwise assures a creditor against loss.
"DEBT SERVICE" means the aggregate principal payments,
interest payments and other payments by Borrower on the Loan, other
than required additions to the Capital Expenditures Reserve and any
other reserves deemed necessary by Lender, and on all other outstanding
Debt of Borrower for the period of time for which calculated.
"DEBT SERVICE COVERAGE" means, for the period of time for
which the calculation is being made, the ratio of Net Operating Income
to Debt Service.
"DEFAULT RATE" means the lesser of (i) the maximum rate of
interest allowed by applicable law, or (ii) five percent (5%) per annum
in excess of the Floating Rate.
"EVENT OF DEFAULT" has the meaning assigned to such term in
Article 9.
"FACILITY CAPACITY" means the total number of independent
living units and the total number of assisted living units and skilled
nursing beds, if applicable, in the Projects.
"FIXED RATE" has the meaning assigned to such term in Section
2.2.
"FIXED RATE LOAN" means the loan in the amount of $62,330,000
to be advanced by Lender to Borrower under the Fixed Rate Note.
"FIXED RATE NOTE" means the Promissory Note of even date
herewith in the principal amount of $62,330,000, executed by Borrower,
payable to the order of Lender and evidencing the Fixed Rate Loan.
"FLOATING RATE" has the meaning assigned to such term in
Section 2.2.
"FLOATING RATE NOTE" means the Promissory Note of even date
herewith in the principal amount of up to $50,000,000, executed by
Borrower, payable to the order of Lender and evidencing the Line of
Credit.
3
<PAGE> 10
"HAMPTON" shall mean The Hampton at Post Oak Road Retirement
Community, consisting of approximately 149 independent residential
living units, 21 assisted living units on 1.357 acres located at 2929
Post Oak Boulevard in Houston, Texas, including adequate parking for
automobiles, and more particularly described on Exhibit A.
"JOINDER PARTY" means the Persons, if any, executing the
Joinder hereto.
"LENDER" means General Electric Capital Corporation, and its
successors and assigns.
"LIEN" means any interest, or claim thereof, in the Projects
securing an obligation owed to, or a claim by, any Person other than
the owner of the Projects, whether such interest is based on common
law, statute or contract, including the lien or security interest
arising from a deed of trust, mortgage, assignment, encumbrance,
pledge, security agreement, conditional sale or trust receipt or a
lease, consignment or bailment for security purposes. The term "Lien"
shall include reservations, exceptions, encroachments, easements,
rights of way, covenants, conditions, restrictions, leases and other
title exceptions and encumbrances affecting the Projects.
"LINE OF CREDIT" means the revolving line of credit in the
amount of up to $50,000,000.
"LOAN" means the loan to be made by Lender to Borrower under
this Agreement, and shall include the Fixed Rate Loan and the Line of
Credit and all other amounts owing from time to time and secured by the
Loan Documents.
"LOAN DOCUMENTS" means: (a) this Agreement, (b) the Notes, (c)
the Mortgage, (d) the Assignment of Rents and Leases, (e) financing
statements, (f) any and all other documents evidencing, securing,
governing or otherwise pertaining to the Loan, and (g) all amendments,
modifications, renewals, substitutions and replacements of any of the
foregoing.
"LOAN YEAR" shall mean the period between the date hereof and
December 31, 1998 for the first Loan Year and the period between each
succeeding January 1 and December 31 until the Maturity Date.
"MATURITY DATE" means the earlier of (a) December 31, 2002, or
(b) any earlier on which the entire Loan is required to be paid in
full, by acceleration or otherwise, under this Agreement or any of the
other Loan Documents.
"MAXIMUM LINE AMOUNT" has the meaning assigned to such term in
Section 2.3(3).
"MORTGAGE" means, collectively, the following deeds of trust
and mortgages:
(a) Deed of Trust, Security Agreement and Fixture
Filing, dated of even date herewith, executed by Borrower for
the benefit of Lender, recorded in the Real Property Records
of Tarrant County, Texas, and in the Real Property Records of
Travis County, Texas, and in the Real Property Records of
Harris County, Texas, encumbering Broadway, Summit, and
Hamptons;
4
<PAGE> 11
(b) Deed of Trust, Assignment of Rents, Security
Agreement and Fixture Filing, dated of even date herewith,
executed by Borrower for the benefit of Lender, recorded in
the Real Property Records of Pima County, Arizona, encumbering
Santa Catalina;
(c) Deed of Trust, Security Agreement and Fixture
Filing, dated of even date herewith, executed by Borrower for
the benefit of Lender and encumbering Parkplace, and filed for
recording in the Real Property Records of Denver County,
Colorado;
(d) Open-End Mortgage, Security Agreement and Fixture
Filing, dated of even date herewith, executed by Borrower for
the benefit of Lender, encumbering Westlake Village and filed
in the Real Property Records of Cuyahoga County, Ohio;
(e) Mortgage, Security Agreement and Fixture Filing,
dated of even date herewith, executed by Borrower for the
benefit of Lender, encumbering Carriage Club and filed in the
Real Property Records of Duval County, Florida; and
(f) any other deed of trust, mortgage or similar
instrument encumbering the Projects as security for the Loan.
"NET CASH FLOW" means, for any period, the amount by which
Operating Revenues exceed the sum of (1) Operating Expenses, (2) Debt
Service, and (3) any actual payment into impounds, escrows, or reserves
required by Lender, except to the extent included within the definition
of Operating Expenses.
"NET OPERATING INCOME" means the amount by which Adjusted
Operating Revenues exceed Adjusted Operating Expenses, calculated on
the basis of occupancy of not more than 95% of the Projects and taking
into account a management fee equal to three percent (3%) of Operating
Revenues and a reserve for replacement equal to one percent (1%) of
Operating Revenues.
"NET WORTH" means, as to any period of time, total assets
(after adding back accumulated depreciation, amortization, and other
reasonable non-cash charges determined in accordance with generally
accepted accounting principles), less total liabilities (contingent or
otherwise) determined on a book basis in accordance with generally
accepted accounting principles, including declared and unpaid
distributions or dividends; however, excluded from the determination of
total assets shall be all assets that are classified as intangible,
including good will, licenses, patents, trademarks, trade names,
copyrights and franchises.
"NOTES" means, collectively, the Fixed Rate Note and the
Floating Rate Note.
"OPERATING EXPENSES" means all customary expenses of operating
the Projects in the ordinary course of business which are paid in cash
by Borrower and which are directly associated with and fairly allocable
to the Projects for the applicable period, including ad valorem real
estate taxes and assessments, insurance premiums, regularly scheduled
tax impounds paid to Lender, maintenance costs, management fees and
costs of three percent (3%) of Operating Revenues (which amount
Borrower may retain for Borrower's self-management of the Projects),
accounting, legal, and other professional fees, fees relating to
environmental and Net Cash Flow and Net Operating Income audits, and
other expenses incurred by Lender and reimbursed by Borrower under this
Agreement and the
5
<PAGE> 12
other Loan Documents, Capital Expenditures specifically identified in a
Capital Expenditures Budget (as defined in Schedule 2.4), deposits to
the Capital Improvements Reserve required by Lender, wages, salaries,
and personnel expenses, but excluding Debt Service, Capital
Expenditures unless specifically included in a Capital Expenditures
Budget, any of the foregoing expenses which are paid from deposits to
cash reserves previously included as Operating Expenses, any payment or
expense for which Borrower was or is to be reimbursed from proceeds of
the Loan or insurance or by any third party, and any non-cash charges
such as depreciation and amortization. Any management fee or other
expense payable to Borrower or to an Affiliate of Borrower, other than
the management fee of three percent (3%) of Operating Revenues to be
retained by Borrower, shall be included as an Operating Expense only
with Lender's prior approval. Operating Expenses shall not include
federal, state or local income taxes or legal and other professional
fees unrelated to the operation of the Projects.
"OPERATING REVENUES" means all cash receipts of Borrower from
operation of the Projects or otherwise arising in respect of the
Projects after the date hereof which are properly allocable to the
Projects for the applicable period, including (1) gross resident
service revenues less contractual allowances and provisions for
uncollectible accounts, free care and discounted care, if any, (2)
non-operating revenues, (3) entrance fees actually paid, if any, net of
refunds, (4) revenues from parking agreements, concession fees and
charges and other miscellaneous operating revenues, (5) proceeds from
rental or business interruption insurance, (6) proceeds of any loans
(other than the Loan and any refinancing of the Loan) obtained by
Borrower after the date hereof which are secured by a Project (less
only reasonable and customary expenses incurred in procuring and
closing such loan and actually paid in cash to individuals or entities
other than Borrower or any Affiliate of Borrower and without implying
any consent of Lender to the granting of any security for any such
loans), (7) withdrawals from cash reserves (except to the extent any
operating expenses paid therewith are excluded from Operating
Expenses). Operating Revenues shall not include (A) security deposits
and earnest money deposits until they are forfeited by the depositor,
(B) advance rentals until they are earned, (C) proceeds from a sale or
other disposition, (D) any gain or loss resulting from the early
extinguishment of indebtedness or the sale, exchange or other
disposition of properties not in the ordinary course of business, (E)
gifts, grants, bequests or donations restricted as to use by the donor
or grantor for a purpose inconsistent with the payment of Debt Service,
or (F) insurance proceeds (other than rental or business interruption
proceeds) and condemnation proceeds. For purposes of any calculation
that is made with reference to both Adjusted Operating Revenues and
Adjusted Operating Expenses, any deduction from gross resident service
revenues otherwise required by the preceding provisions of this
definition shall not be made if and to the extent that the amount of
such deduction is included in Adjusted Operating Expenses.
"PERSON" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, trustee, estate,
limited liability company, unincorporated organization, real estate
investment trust, government or any agency or political subdivision
thereof, or any other form of entity.
"POTENTIAL DEFAULT" means the occurrence of any event or
condition which, with the giving of notice, the passage of time, or
both, would constitute an Event of Default.
"PARKPLACE" means Parkplace Retirement Community, consisting
of approximately 173 independent residential living units, and 53
assisted living units on 1.623 acres located at
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111 Emerson Street in Denver, Colorado, including adequate parking for
automobiles, and more particularly described on Exhibit A.
"PROJECTS" means, collectively, Broadway, Summit, Santa
Catalina, Parkplace, Hampton, Westlake Village and Carriage Club, and
any other retirement communities acquired, constructed or developed by
Borrower and made subject to the Mortgage and the other Loan Documents,
and the term "PROJECT" shall mean and refer to any of the Projects and
all related facilities other amenities, fixtures, and personal property
owned by Borrower and any improvements now or hereafter located on the
real property related thereto.
"RESIDENCY AGREEMENT" means (a) any lease, residency or other
rental agreement for the occupancy of residential living units of any
Project, (b) any admission and financial agreement for the use and
occupancy of an assisted living unit of any Project, (c) any health
center admission and financial agreement (private payment) or health
center admission agreement (Medicare payment) and (d) any other express
or implied agreement for the occupancy of nursing beds in a Project or
for space in or use of the Project.
"RESIDENT" means any resident of a Project under a Residency
Agreement.
"SANTA CATALINA" means Santa Catalina Villas Retirement
Community, consisting of approximately 148 independent residential
living units, and 15 assisted living units, on 11 acres located at 7500
North Calle Sin Envidia, Tucson, Arizona 85718, including adequate
parking for automobiles, and more particularly described on Exhibit A.
"SINGLE PURPOSE ENTITY" shall mean a Person (other than an
individual, a government, or any agency or political subdivision
thereof), which exists solely for the purpose of owning the Projects,
conducts business only in its own name, does not engage in any business
or have any assets unrelated to the Projects (other than facilities
which previously were Projects and were released under Section 8.24 of
this Agreement), does not have any indebtedness other than as permitted
by this Agreement, has its own separate books, records, and accounts
(with no commingling of assets), holds itself out as being a Person
separate and apart from any other Person, and observes corporate and
partnership formalities independent of any other entity, and which
otherwise constitutes a single purpose, bankruptcy remote entity as
determined by Lender.
"SITE ASSESSMENT" means an environmental engineering report
for a Project prepared by an engineer engaged by Lender at Borrower's
expense, and in a manner satisfactory to Lender, based upon an
investigation relating to and making appropriate inquiries concerning
the existence of Hazardous Materials on or about a Project, and the
past or present discharge, disposal, release or escape of any such
substances, all consistent with good customary and commercial practice.
"STATE" means the State of Texas.
"STATE AGENCIES" means any governmental authority having
jurisdiction over Borrower, any Joinder Party or any Project,
including, with respect to Broadway, Summit and Hamptons, the Texas
Department of Health and the Texas Department of Human Services, with
respect to Santa Catalina, the Arizona Department of Health Services,
with respect to Parkplace, the Colorado Department of Public Health and
Environment and the Colorado Department of Health Care Policy and
Financing,
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with respect to Westlake Village, the Ohio Department of Health, the
Ohio Department on Aging, and the State of Ohio Fire Marshall/local
fire department, and with respect to Carriage Club, the State of
Florida Agency for Health Care Administration, and any other
governmental authorities having enforcement authority over the
statutes, rulings, rules, regulations, permits, certificates and
ordinances promulgated with respect to Borrower and Joinder Party, or
any Project.
"SUMMIT" means Summit at Westlake Hills Retirement Community
consisting of approximately 149 independent residential living units,
30 assisted living units, and a 90-bed skilled/intermediate care health
center on 14.003 acres located at 1034 Capital Parkway, Austin, Texas,
including parking for 212 automobiles, and more particularly described
on Exhibit A.
"UNUSED LINE FEE" means the fee payable by Borrower to Lender
under Section 2.3(3) hereof.
"WESTLAKE VILLAGE" means Westlake Village Retirement
Community, consisting of approximately 212 independent residential
living units, and 56 assisted living units on 19.6906 acres located at
28550 Westlake Village Drive, Westlake, Ohio, including parking for 201
automobiles, and more particularly described on Exhibit A.
ARTICLE 2
LOAN TERMS
Section 2.1 THE LOAN. The Loan shall be funded in one or more advances
and repaid in accordance with this Agreement. The Fixed Rate Loan, in the amount
of $62,330,000, shall be made as the initial advance upon Borrower's
satisfaction of the conditions to initial advance described in Schedule 2.1. All
other advances of the Loan shall be made under the Line of Credit and the
Floating Rate Note. Repayments of principal of the Fixed Rate Loan may not be
readvanced. Subject to the terms hereof, advances of the Line of Credit made
under the Floating Rate Note may be repaid, without premium or penalty, and
reborrowed as a revolving line of credit. Subsequent advances under the Line of
Credit shall be made upon Borrower's satisfaction of the conditions for such
advances described in Schedule 2.1, Parts B and C. Each advance under the Line
of Credit shall be subject to an advance fee ("ADVANCE FEE") equal to one-half
percent (0.50%) of such advance until Lender has received a total of $375,000 in
Advance Fees over the term of the Loan.
Section 2.2 INTEREST RATE; LATE CHARGE. The outstanding principal
balance of the Loan (including any amounts added to principal under the Loan
Documents) shall bear interest as follows:
(a) the Fixed Rate Note shall bear interest at eight and
twenty one-hundredths percent (8.20%) per annum (the "FIXED RATE"); and
(b) the Floating Rate Note shall bear interest at the rate of
interest equal to one and seventy-five one hundredths percent (1.75%) per annum
in excess of the LIBOR Rate (the "FLOATING RATE"). "LIBOR RATE" shall mean the
U.S. Dollar rate (rounded upward to the nearest one-sixteenth of one percent)
listed on page 3750 (i.e., the Libor page) of the Telerate News Services titled
"British Banker Association Interest Settlement Rates" for a designated maturity
of one (1) month determined as of 11:00 a.m. London Time on the second (2nd)
full Eurodollar Business Day next preceding the first day of each month with
respect
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to which interest is payable under the Loan (unless such date is not a Business
Day in which event the next succeeding Eurodollar Business Day which is also a
Business Day will be used). If the Telerate News Services (i) publishes more
than one (1) such Libor Rate, the average of such rates shall apply, or (ii)
ceases to publish the Libor Rate, then the Libor Rate shall be determined from
such substitute financial reporting service as Lender in its discretion shall
determine. The term "EURODOLLAR BUSINESS DAY" shall mean any day on which banks
in the City of London are generally open for interbank or foreign exchange
transactions.
Interest shall be computed on the basis of a fraction, the denominator of which
is three hundred sixty (360) and the numerator of which is the actual number of
days elapsed from the date of the initial advance or the date on which the
immediately preceding payment was due. If Borrower fails to pay any installment
of interest or principal within five (5) days after the date on which the same
is due, Borrower shall pay to Lender a late charge on such past-due amount, as
liquidated damages and not as a penalty, equal to the greater of (A) interest at
the Default Rate on such amount from the date when due until paid, or (B) five
percent (5%) of such amount, but not in excess of the maximum amount of interest
allowed by applicable law. While any Event of Default exists, the Loan shall
bear interest at the Default Rate.
Section 2.3 TERMS OF PAYMENT. The Loan and the interest thereon shall
be evidenced by, and be payable as hereinafter provided (the Loan and the
interest thereon, together with any other sums payable by Borrower under the
Loan Documents, are herein collectively called the "OBLIGATIONS");
(a) INTEREST. Commencing on February 1, 1998, Borrower shall
pay interest in arrears at the rate or rates set forth in Section 2.2
on the first day of each month until all amounts due under the Loan
Documents are paid in full.
(b) PRINCIPAL AMORTIZATION. In addition to monthly payments of
interest hereunder, if for any calendar quarter either (i) the Cash on
Cash Return is less than fourteen and twenty-five one hundredths
percent (14.25%), or (ii) the Debt Service Coverage is less than
1.75:1, then, in addition to regular monthly installments of interest,
Borrower shall pay to Lender, in reduction of the principal balance of
the Line of Credit, or if the principal balance of the Line of Credit
has been reduced to zero, in reduction of the principal balance of the
Fixed Rate Loan (which shall not be subject to being re-advanced), on
the first (1st) day of each month commencing with the first day of the
second calendar month following such calendar quarter and continuing
until Borrower has demonstrated a Cash on Cash Return of at least
14.25% and a Debt Service Coverage of at least 1.75:1 for a full
calendar quarter, a principal installment based on a 25-year monthly
amortization of the principal balance of the Loan at the Fixed Rate.
(c) UNUSED LINE FEE. If the average outstanding principal
balance of the Line of Credit during any Loan Year, calculated as of
the end of that Loan Year, or for the final Loan Year as of June 30,
2002 (the "AVERAGE LINE BALANCE") is less than $50,000,000 (the
"MAXIMUM LINE AMOUNT"), then within ten (10) days after receipt of
notice from Lender, Borrower shall pay to Lender, in immediately
available funds, a fee (the "UNUSED LINE FEE") equal to one-quarter of
one percent (.25%) of the difference between the Maximum Line Amount
and the Average Line Balance. If payment of the principal amount of the
Line of Credit is accelerated by Lender, or the Line of Credit is
otherwise terminated under Section 2.3(h), Borrower, promptly upon such
acceleration or termination, shall pay to Lender the amount of the
Unused Line Fee that would have otherwise come due had the Line of
Credit not been accelerated or had this Agreement not been otherwise
terminated, calculated using the average outstanding principal balance
of the Line of Credit through the month
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immediately preceding the month in which such acceleration or
termination occurs, prorated for any partial year. The Unused Line Fee
for the final Loan Year shall be prorated as of June 30, 2002.
(d) MATURITY. On the Maturity Date, Borrower shall pay to
Lender all outstanding principal, accrued and unpaid interest, and any
other amounts due under the Loan Documents.
(e) PREPAYMENT. Borrower may not prepay the Fixed Rate Loan in
whole or in part at any time before the expiration of the second Loan
Year. From and after January 1, 2000, the commencement of the third
Loan Year, Borrower may prepay the Fixed Rate Loan in whole or in part,
upon ten (10) days prior written notice to Lender, and on any regularly
scheduled interest payment due date, by paying Lender all or a portion
of the principal balance of the Fixed Rate Loan, without premium or
penalty except that upon repayment prior to the Maturity Date of any
portion of the principal balance of the Fixed Rate Loan, Borrower shall
also pay to Lender the Yield Maintenance Amount, calculated as provided
in Schedule 2.3(5), for the portion prepaid. Borrower may prepay the
Line of Credit in whole or in part at any time without premium or
penalty.
(f) MANDATORY REPAYMENT. After any prepayment of the Loan
which reduces the unpaid principal balance of the Loan to less than
$35,000,000 (excluding payments of principal under Section 2.3(b) and
involuntary payments under Section 3.2 or Section 3.3), Lender may upon
three (3) months prior notice to Borrower declare the unpaid principal
balance of the Loan, together with all accrued and unpaid interest and
other charges and the Yield Maintenance Amount for payment of any
portion of the Fixed Rate Loan, due and payable, and the Loan then
shall be due and payable at the expiration of the three (3) month
period after Lender's notice to Borrower.
(g) APPLICATION OF PAYMENTS. All payments received by Lender
under the Loan Documents shall be applied: first, to any fees and
expenses due to Lender under the Loan Documents; second, to any Default
Rate interest or late charges; third, to accrued and unpaid interest;
fourth, to the principal sum under the Line of Credit, and fifth, to
the principal sum of the Fixed Rate Loan. Lender reserves the right to
require any payment on the Loan, whether such payment is of a regular
installment or represents a prepayment or final payment, to be by wired
federal funds or other immediately available funds.
(h) TERMINATION OF LINE OF CREDIT. Effective on January 1,
2000 or on January 1 of any year thereafter,
(i) upon notice to Lender on or before the
immediately preceding October 1 and payment in full of the
Line of Credit, including any Unused Line Fee, Borrower shall
have a one-time right to terminate the Line of Credit, and
(ii) upon notice to Borrower on or before the
immediately preceding October 1, Lender shall have a one-time
right to terminate any further right of Borrower to advances
of the Line of Credit.
After termination of the Line of Credit by Borrower, Lender shall have
no further obligation with respect to the Line of Credit, Borrower
shall have no right to reinstate the Line of Credit, and any obligation
to pay the Unused Line Fee shall cease. After termination of any
further right to advances
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of the Line of Credit by Lender, the Line of Credit shall be converted
to a term loan with no obligation of Lender to re-advance any principal
which is repaid.
Section 2.4 SECURITY. The Loan shall be secured by the Mortgage, the
Assignments of Rents and Leases, and the other Loan Documents. As further
security for the Loan, Borrower shall fund the Capital Improvements Reserve in
accordance with Schedule 2.4.
ARTICLE 3
INSURANCE, CONDEMNATION, AND IMPOUNDS
Section 3.1 INSURANCE. Borrower shall maintain insurance as follows:
CASUALTY; BUSINESS INTERRUPTION. Borrower shall keep the
Projects insured against damage by fire and the other hazards covered by a
standard extended coverage and all-risk insurance policy for the full insurable
value thereof (without reduction for depreciation or co-insurance), and shall
maintain such other casualty insurance as reasonably required by Lender.
Borrower shall keep the Projects insured against loss by flood if a Project is
located in an area identified by the Federal Emergency Management Agency as an
area having special flood hazards and in which flood insurance has been made
available under the National Flood Insurance Act of 1968 (and any successor act
thereto) in an amount at least equal to the lesser of (1) the maximum amount of
the Loan or (2) the maximum limit of coverage available under said act. Borrower
shall maintain use and occupancy insurance covering, as applicable, rental
income or business interruption, with coverage in an amount not less than twelve
(12)-months anticipated gross rental income or gross business earnings, as
applicable in each case, attributable to the Projects. Borrower shall not
maintain any separate or additional insurance which is contributing in the event
of loss unless it is properly endorsed and otherwise satisfactory to Lender in
all respects. The proceeds of insurance paid on account of any damage or
destruction to a Project shall be paid to Lender to be applied as provided in
Section 3.2.
(a) LIABILITY. Borrower shall maintain (1) commercial general
liability insurance with respect to each Project providing for limits of
liability of not less than $11,000,000 for both injury to or death of a person
and for property damage per occurrence, and (2) other liability insurance as
reasonably required by Lender.
(b) FORM AND QUALITY. All insurance policies shall be endorsed
in form and substance acceptable to Lender to name Lender as an additional
insured, loss payee or mortgagee thereunder, as its interest may appear, with
loss payable to Lender, without contribution, under a standard New York (or
local equivalent) mortgagee clause. All such insurance policies and endorsements
shall be fully paid for and contain such provisions and expiration dates and be
in such form and issued by such insurance companies licensed to do business in
the State, with a rating of "A-IX" or better as established by Best's Rating
Guide (or an equivalent rating approved in writing by Lender). Each policy shall
provide that such policy may not be canceled or materially changed except upon
thirty (30) days' prior written notice of intention of non-renewal, cancellation
or material change to Lender and that no act or thing done by Borrower shall
invalidate any policy as against Lender. If Borrower fails to maintain insurance
in compliance with this Section 3.1, Lender may obtain such insurance and pay
the premium therefor and Borrower shall, on demand, reimburse Lender for all
expenses incurred in connection therewith. Borrower shall assign the policies or
proofs of insurance to Lender, in such manner and form that Lender and its
successors and assigns shall at all times have and hold the same as security for
the payment of the Loan. Borrower shall deliver copies of all original policies
certified to
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Lender by the insurance company or authorized agent as being true copies,
together with the endorsements required hereunder. The proceeds of insurance
policies coming into the possession of Lender shall not be deemed trust funds,
and Lender shall be entitled to apply such proceeds as herein provided.
(c) ADJUSTMENTS. Borrower shall give immediate written notice
of any loss to the insurance carrier and to Lender. Borrower hereby irrevocably
authorizes and empowers Lender, as attorney-in-fact for Borrower coupled with an
interest, to make proof of loss, to appear in and prosecute any action arising
from such insurance policies, to collect and receive insurance proceeds, and to
deduct therefrom Lender's expenses incurred in the collection of such proceeds,
and if an Event of Default or Potential Default exists, to adjust and compromise
any claim under insurance policies. Nothing contained in this Section 3.1(C),
however, shall require Lender to incur any expense or take any action hereunder.
Section 3.2 USE AND APPLICATION OF INSURANCE PROCEEDS. Lender shall
apply insurance proceeds (other than proceeds of rental income or business
interruption insurance which shall constitute Operating Revenues) to costs of
restoring a damaged Project or the Loan as follows:
(a) if the loss is less than or equal to $300,000, Lender
shall apply the insurance proceeds to restoration provided (1) no Event of
Default or Potential Default exists, and (2) Borrower promptly commences and is
diligently pursuing restoration of the Project;
(b) if the loss exceeds $300,000 but is not more than 10% of
the replacement value of the improvements (for projects containing multiple
phases or stand alone structures, such calculation to be based on the damaged
phase or structure, not the project as a whole), Lender shall apply the
insurance proceeds to restoration provided that at all times during such
restoration (1) no Event of Default or Potential Default exists; (2) Lender
determines that there are sufficient funds available to restore and repair the
Project to a condition approved by Lender; (3) Lender determines that the Net
Operating Income of the Projects during restoration will be sufficient to pay
Debt Service; (4) Lender determines that after restoration the Debt Service
Coverage will be at least 1.75:1 and the Cash or Cash Return will be at least
14.25%; (5) Lender determines that restoration and repair of the Project to a
condition approved by Lender will be completed within six months after the date
of loss or casualty and in any event ninety (90) days prior to the Maturity
Date; and (6) Borrower promptly commences and is diligently pursuing restoration
of the Project;
(c) if the conditions set forth above are not satisfied or the
loss exceeds the maximum amount specified in Subsection 3.2(B) above, in
Lender's sole discretion, Lender may apply any insurance proceeds it may receive
to the payment of the Loan or allow all or a portion of such proceeds to be used
for the restoration of the Project; and
(d) insurance proceeds applied to restoration will be
disbursed on receipt of satisfactory plans and specifications, contracts and
subcontracts, schedules, budgets, lien waivers and architects' certificates, and
otherwise in accordance with prudent commercial construction lending practices
for construction loan advances, including, as applicable, the advance conditions
under Schedule 2.1.
Section 3.3 CONDEMNATION AWARDS. Borrower shall immediately notify
Lender of the institution of any proceeding for the condemnation or other taking
of a Project or any portion thereof. Lender may participate in any such
proceeding and Borrower will deliver to Lender all instruments necessary or
required by Lender to permit such participation. Without Lender's prior consent,
Borrower (a) shall not agree to any compensation or award, and (b) shall not
take any action or fail to take any action which would cause the
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compensation to be determined. All awards and compensation for the taking or
purchase in lieu of condemnation of a Project or any part thereof are hereby
assigned to and shall be paid to Lender. Borrower authorizes Lender to collect
and receive such awards and compensation, to give proper receipts and
acquittances therefor, and in Lender's sole discretion to apply the same toward
the payment of the Loan, notwithstanding that the Loan may not then be due and
payable, or to the restoration of the Project; however, if the award is less
than or equal to $300,000 and Borrower requests that such proceeds be used for
non-structural site improvements (such as landscape, driveway, walkway and
parking area repairs) required to be made as a result of such condemnation,
Lender will apply the award to such restoration in accordance with disbursement
procedures applicable to insurance proceeds provided there exists no Potential
Default or Event of Default. Borrower, upon request by Lender, shall execute all
instruments requested to confirm the assignment of the awards and compensation
to Lender, free and clear of all liens, charges or encumbrances.
Section 3.4 IMPOUNDS. Borrower shall deposit with Lender, monthly,
one-twelfth (1/12th) of the annual charges for real estate taxes, assessments
and similar charges relating to the Projects. At or before the initial advance
of the Loan, Borrower shall deposit with Lender a sum of money which together
with the monthly installments will be sufficient to make each of such payments
thirty (30) days prior to the date any delinquency or penalty becomes due with
respect to such payments. Deposits shall be made on the basis of Lender's
estimate from time to time of the charges for the current year (after giving
effect to any reassessment or, at Lender's election, on the basis of the charges
for the prior year, with adjustments when the charges are fixed for the then
current year). Unless Borrower and Lender hereafter enter into a "blocked
account" or similar deposit agreement, all funds so deposited shall be held by
Lender, without interest, and may be commingled with Lender's general funds.
Borrower hereby grants to Lender a security interest in all funds so deposited
with Lender for the purpose of securing the Loan. While an Event of Default
exists, the funds deposited may be applied in payment of the charges for which
such funds have been deposited, or to the payment of the Loan or any other
charges affecting the security of Lender, as Lender may elect, but no such
application shall be deemed to have been made by operation of law or otherwise
until actually made by Lender. Borrower shall furnish Lender with bills for the
charges for which such deposits are required at least thirty (30) days prior to
the date on which the charges first become payable. If at any time the amount on
deposit with Lender, together with amounts to be deposited by Borrower before
such charges are payable, is insufficient to pay such charges, Borrower shall
deposit any deficiency with Lender immediately upon demand. Lender shall pay
such charges when the amount on deposit with Lender is sufficient to pay such
charges and Lender has received a bill for such charges. Pursuant to Section
8.2, Borrower unconditionally and irrevocably covenants and agrees to pay all
real estate taxes, assessments, and similar charges on the Projects, prior to
the delinquency thereof. Notwithstanding the foregoing, Borrower shall not be
obligated to make deposits with Lender under this Section 3.4 if (a) the
Projects are producing a Net Operating Income which is generating a Cash on Cash
Return of at least 14.25% and a Debt Service Coverage of at least 1.75:1, (b)
Borrower shall have provided Lender with evidence that all real estate taxes,
assessments and similar charges relating to the Projects previously have been
paid prior to the delinquency thereof, (c) there exists no Event of Default or
Potential Default, and (d) both Borrower and ARC continue to be personally and
corporately liable for payment of such taxes, assessments and charges.
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ARTICLE 4
ENVIRONMENTAL MATTERS
Section 4.1 CERTAIN DEFINITIONS. As used herein, the following terms
have the meanings indicated:
(a) "ENVIRONMENTAL LAWS" means any federal, state or local law
(whether imposed by statute, or administrative or judicial order, or common
law), now or hereafter enacted, governing health, safety, industrial hygiene,
the environment or natural resources, or Hazardous Materials, including, such
laws governing or regulating the use, generation, storage, removal, recovery,
treatment, handling, transport, disposal, control, discharge of, or exposure to,
Hazardous Materials.
(b) "HAZARDOUS MATERIALS" means (1) petroleum or chemical
products, whether in liquid, solid, or gaseous form, or any fraction or
by-product thereof, (2) asbestos or asbestos-containing materials, (3)
polychlorinated biphenyls (pcbs), (4) radon gas, (5) underground storage tanks,
(6) any explosive or radioactive substances, (7) lead or lead-based paint, or
(8) any other substance, material, waste or mixture which is or shall be listed,
defined, or otherwise determined by any governmental authority to be hazardous,
toxic, dangerous or otherwise regulated, controlled or giving rise to liability
under any Environmental Laws.
Section 4.2 REPRESENTATIONS AND WARRANTIES ON ENVIRONMENTAL MATTERS. To
Borrower's knowledge, except as set forth in the Site Assessment, (a) no
Hazardous Material is now or was formerly used, stored, generated, manufactured,
installed, disposed of or otherwise present at or about any Project or any
property adjacent to a Project (except for cleaning and other products currently
used in connection with the routine maintenance or repair of the Project in full
compliance with Environmental Laws), (b) all permits, licenses, approvals and
filings required by Environmental Laws have been obtained, and the use,
operation and condition of the Projects do not, and did not previously, violate
any Environmental Laws, and (c) no civil, criminal or administrative action,
suit, claim, hearing, investigation or proceeding has been brought or been
threatened, nor have any settlements been reached by or with any parties or any
liens imposed in connection with any Project concerning Hazardous Materials or
Environmental Laws.
Section 4.3 COVENANTS ON ENVIRONMENTAL MATTERS.
(a) Borrower shall (1) comply strictly and in all respects
with applicable Environmental Laws; (2) notify Lender immediately upon
Borrower's discovery of any spill, discharge, release or presence of any
Hazardous Material at, upon, under, within, contiguous to or otherwise affecting
a Project; (3) promptly remove such Hazardous Materials and remediate a Project
in full compliance with Environmental Laws and in accordance with the
recommendations and specifications of an independent environmental consultant
approved by Lender; and (4) promptly forward to Lender copies of all orders,
notices, permits, applications or other communications and reports in connection
with any spill, discharge, release or the presence of any Hazardous Material or
any other matters relating to the Environmental Laws or any similar laws or
regulations, as they may affect a Project or Borrower.
(b) Borrower shall not cause, shall prohibit any other Person
within the control of Borrower from causing, and shall use prudent, commercially
reasonable efforts to prohibit other Persons (including tenants) from (1)
causing any spill, discharge or release, or the use, storage, generation,
manufacture, installation, or disposal, of any Hazardous Materials at, upon,
under, within or about a Project or the transportation of any Hazardous
Materials to or from a Project (except for cleaning and other products
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used in connection with routine maintenance or repair of the Project in full
compliance with Environmental Laws), (2) installing any underground storage
tanks at a Project, or (3) conducting any activity that requires a permit or
other authorization under Environmental Laws.
(c) Borrower shall provide to Lender, at Borrower's expense
promptly upon the written request of Lender from time to time, a Site Assessment
or, if required by Lender, an update to any existing Site Assessment, to assess
the presence or absence of any Hazardous Materials and the potential costs in
connection with abatement, cleanup or removal of any Hazardous Materials found
on, under, at or within a Project. Borrower shall pay the cost of no more than
one such Site Assessment or update in any twelve (12)-month period, unless
Lender's request for a Site Assessment is based on information provided under
Section 4.3(A), a reasonable suspicion of Hazardous Materials at or near a
Project (exclusive of the matters established in the Site Assessment), a breach
of representations under Section 4.2, or an Event of Default, in which case any
such Site Assessment or update shall be at Borrower's expense.
Section 4.4 ALLOCATION OF RISKS AND INDEMNITY. As between Borrower and
Lender, all risk of loss associated with non-compliance with Environmental Laws,
or with the presence of any Hazardous Material at, upon, within, contiguous to
or otherwise affecting a Project, shall lie solely with Borrower. Accordingly,
Borrower shall bear all risks and costs associated with any loss (including any
loss in value attributable to Hazardous Materials), damage or liability
therefrom, including all costs of removal of Hazardous Materials or other
remediation required by Lender or by law. Borrower shall indemnify, defend and
hold Lender harmless from and against all loss, liabilities, damages, claims,
costs and expenses (including reasonable costs of defense) arising out of or
associated, in any way, with the non-compliance with Environmental Laws, or the
existence of Hazardous Materials in, on, or about a Project, or a breach of any
representation, warranty or covenant contained in this Article 4, whether based
in contract, tort, implied or express warranty, strict liability, criminal or
civil statute or common law, INCLUDING THOSE ARISING FROM THE JOINT, CONCURRENT,
OR COMPARATIVE NEGLIGENCE OF LENDER; HOWEVER, BORROWER SHALL NOT BE LIABLE UNDER
SUCH INDEMNIFICATION TO THE EXTENT SUCH LOSS, LIABILITY, DAMAGE, CLAIM, COST OR
EXPENSE RESULTS SOLELY FROM LENDER'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT
OCCURRING AFTER FORECLOSURE. Borrower's obligations under this Section 4.4 shall
arise upon the discovery of the presence of any Hazardous Material, whether or
not any governmental authority has taken or threatened any action in connection
with the presence of any Hazardous Material, and whether or not the existence of
any such Hazardous Material or potential liability on account thereof is
disclosed in the Site Assessment and shall continue notwithstanding the
repayment of the Loan or any transfer or sale of any right, title and interest
in a Project (by foreclosure, deed in lieu of foreclosure or otherwise).
Section 4.5 COLLATERAL ASSIGNMENT OF INDEMNITIES. Borrower hereby
collaterally assigns all of the rights and benefits (but none of the obligations
or liabilities) under any indemnity agreement or provision with respect to one
or more of the Projects, including any indemnification agreement for the benefit
of Borrower executed by any previous owner of the Projects.
Section 4.6 NO WAIVER. Notwithstanding any provision in this Article 4
or elsewhere in the Loan Documents, or any rights or remedies granted by the
Loan Documents, Lender does not waive and expressly reserves all rights and
benefits now or hereafter accruing to Lender under the "security interest" or
"secured creditor" exception under applicable Environmental Laws, as the same
may be amended. No action taken by Lender pursuant to the Loan Documents shall
be deemed or construed to be a waiver or relinquishment of any such rights or
benefits under the "security interest exception."
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ARTICLE 5
LEASING MATTERS
Section 5.1 REPRESENTATIONS AND WARRANTIES ON RESIDENCY AGREEMENTS.
Borrower represents and warrants to Lender with respect to Residency Agreements
of the Projects that: (a) to Borrower's knowledge, the rent roll last delivered
to Lender is true and correct, and the Residency Agreements are valid and in and
full force and effect; (b) the Residency Agreements (including amendments) are
in writing, and, to Borrower's knowledge, there are no material oral agreements
with respect thereto; (c) the copies of the Residency Agreements available to be
furnished to Lender at Lender's request are true and complete; (d) to Borrower's
knowledge, neither the landlord nor any resident is in default under any of the
Residency Agreements; (e) Borrower has no knowledge of any notice of termination
or default with respect to any Residency Agreement; (f) Borrower has not
assigned or pledged any of the Residency Agreements, the rents or any interests
therein except to Lender; (g) except as set forth in the rent roll last
delivered to Lender, no resident or other party has an option to purchase all or
any portion of a Project; and (h) no resident has prepaid more than one month's
rent in advance (except for bona fide security deposits not in excess of an
amount equal to two month's rent).
Section 5.2 STANDARD RESIDENCY AGREEMENT FORM. All Residency Agreements
and other rental arrangements shall in all respects be approved by Lender and
shall be on a standard form approved by Lender with no material unfavorable
modifications (except as approved by Lender). Within ten (10) days after
Lender's request, Borrower shall furnish to Lender a statement of all resident
security deposits, and copies of all Residency Agreements not previously
delivered to Lender, certified by Borrower as being true and correct.
Section 5.3 COVENANTS. Borrower (a) shall perform in all material
respects the obligations which Borrower is required to perform under the
Residency Agreements; (b) shall enforce the obligations to be performed by the
residents in accordance with the normal prudent operation of the Projects; (c)
shall not collect any rents for more than thirty (30) days in advance of the
time when the same shall become due, except for bona fide security deposits not
in excess of an amount equal to two months rent; (d) shall not enter into any
ground lease or master lease of any part of a Project; (e) shall not further
assign or encumber any Residency Agreement; (f) shall not, except in the
ordinary course of business and the normal prudent operation of the Projects,
cancel or accept surrender or termination of any Residency Agreement; and (g)
shall not, except in the ordinary course of business and the normal prudent
operation of the Projects, modify or amend any Residency Agreement and any
action in violation of clauses (5), (6), and (7) of this Section 5.3, shall be
void at the election of Lender.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Lender that:
Section 6.1 ORGANIZATION AND POWER. Borrower and each Borrower Party is
duly organized, validly existing and in good standing under the laws of the
state of its formation or existence, and is in compliance with legal
requirements applicable to doing business in the State. Borrower is not a
"foreign person" within the meaning of ss. 1445(f)(3) of the Internal Revenue
Code.
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Section 6.2 VALIDITY OF LOAN DOCUMENTS. The execution, delivery and
performance by Borrower and each Borrower Party of the Loan Documents: (a) are
duly authorized and do not require the consent or approval of any other party or
governmental authority which has not been obtained; and (b) will not violate any
law or result in the imposition of any lien, charge or encumbrance upon the
assets of any such party, except as contemplated by the Loan Documents. The Loan
Documents constitute the legal, valid and binding obligations of Borrower and
each Borrower Party, enforceable in accordance with their respective terms,
subject to applicable bankruptcy, insolvency, or similar laws generally
affecting the enforcement of creditors' rights.
Section 6.3 LIABILITIES; LITIGATION.
(a) The financial statements last delivered by Borrower and
each Borrower Party are true and correct with no significant change since the
date of preparation. Except as disclosed in such financial statements, there are
no liabilities (fixed or contingent) affecting the Projects, Borrower or any
Borrower Party. Except as disclosed in such financial statements, there is no
litigation, administrative proceeding, investigation or other legal action
(including any proceeding under any state or federal bankruptcy or insolvency
law) pending or, to the knowledge of Borrower, threatened, against the Projects,
Borrower or any Borrower Party which if adversely determined could have a
material adverse effect on such party, a Project or the Loan.
(b) Neither Borrower nor any Borrower Party is contemplating
either the filing of a petition by it under state or federal bankruptcy or
insolvency laws or the liquidation of all or a major portion of its assets or
property, and neither Borrower nor any Borrower Party has knowledge of any
Person contemplating the filing of any such petition against it.
Section 6.4 TAXES AND ASSESSMENTS. The Projects are comprised of one or
more parcels, each of which constitutes a separate tax lot and none of which
constitutes a portion of any other tax lot. There are no pending or, to
Borrower's best knowledge, proposed, special or other assessments for public
improvements or otherwise affecting a Project, nor are there any contemplated
improvements to any Project that may result in such special or other
assessments.
Section 6.5 OTHER AGREEMENTS; DEFAULTS. Neither Borrower nor any
Borrower Party is a party to any agreement or instrument or subject to any court
order, injunction, permit, or restriction which might adversely affect a Project
or the business, operations, or condition (financial or otherwise) of Borrower
or any Borrower Party. Neither Borrower nor any Borrower Party is in violation
of any agreement which violation would have an adverse effect on a Project,
Borrower, or any Borrower Party or Borrower's or any Borrower Party's business,
properties, or assets, operations or condition, financial or otherwise.
Section 6.6 COMPLIANCE WITH LAW.
(a) Borrower has made applications and filed all required
notices for the transfer, renewal, recertification, and/or reissuance of all
such currently existing licenses, permits, approvals and provider agreements
necessary to own, lease, operate and carry on its business in the Projects, and
has no knowledge of any basis for the denial of such applications, subject to
completion of the application process including compliance with any applicable
on-site health facility survey and certification review requirements that can be
completed only after Borrower legally assumes responsibility for operation of
each Project. Each Project is in compliance with all applicable legal
requirements and, to Borrower's knowledge, is free of structural defects, and
all building systems contained therein are in good working order, subject to
ordinary wear and
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tear. No Project constitutes, in whole or in part, a legally non-conforming use
under applicable legal requirements;
(b) No condemnation has been commenced or, to Borrower's
knowledge, is contemplated with respect to all or any portion of a Project or
for the relocation of roadways providing access to a Project; and
(c) Each Project has adequate rights of access to public ways
and is served by adequate water, sewer, sanitary sewer and storm drain
facilities. All public utilities necessary or convenient to the full use and
enjoyment of each Project are located in the public right-of-way abutting the
Project, and all such utilities are connected so as to serve the Project without
passing over other property, except to the extent such other property is subject
to a perpetual easement for such utility benefitting the Project. All roads
necessary for the full utilization of each Project for its current purpose have
been completed and dedicated to public use and accepted by all governmental
authorities.
Section 6.7 LOCATION OF BORROWER. Borrower's principal place of
business and chief executive offices are located at the address stated in
Section 11.1.
Section 6.8 ERISA. Borrower has not established any pension plan for
employees which would cause Borrower to be subject to the Employee Retirement
Income Security Act of 1974, as amended.
Section 6.9 MARGIN STOCK. No part of proceeds of the Loan will be used
for purchasing or acquiring any "margin stock" within the meaning of Regulations
G, T, U or X of the Board of Governors of the Federal Reserve System.
Section 6.10 TAX FILINGS. Borrower and each Borrower Party have filed
(or have obtained effective extensions for filing) all federal, state and local
tax returns required to be filed and have paid or made adequate provision for
the payment of all federal, state and local taxes, charges and assessments
payable by Borrower and each Borrower Party, respectively.
Section 6.11 SOLVENCY. Giving effect to the Loan, the fair saleable
value of Borrower's assets exceeds and will, immediately following the making of
the Loan, exceed Borrower's total liabilities, including, without limitation,
subordinated, unliquidated, disputed and contingent liabilities. The fair
saleable value of Borrower's assets is and will, immediately following the
making of the Loan, be greater than Borrower's probable liabilities, including
the maximum amount of its contingent liabilities on its Debts as such Debts
become absolute and matured, Borrower's assets do not and, immediately following
the making of the Loan will not, constitute unreasonably small capital to carry
out its business as conducted or as proposed to be conducted. Borrower does not
intend to, and does not believe that it will, incur Debts and liabilities
(including contingent liabilities and other commitments) beyond its ability to
pay such Debts as they mature (taking into account the timing and amounts of
cash to be received by Borrower and the amounts to be payable on or in respect
of obligations of Borrower).
Section 6.12 FULL AND ACCURATE DISCLOSURE. No statement of fact made by
or on behalf of Borrower or any Borrower Party in this Agreement or in any of
the other Loan Documents contains any untrue statement of a material fact or
omits to state any material fact necessary to make statements contained herein
or therein not misleading. There is no fact presently known to Borrower which
has not been disclosed to
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Lender which adversely affects, nor as far as Borrower can foresee, might
adversely affect, the Projects or the business, operations or condition
(financial or otherwise) of Borrower or any Borrower Party.
Section 6.13 SINGLE PURPOSE ENTITY. Borrower is and has at all times
since its formation been a Single Purpose Entity.
Section 6.14 LICENSES AND COMPLIANCE. All licenses, permits and
approvals required under current ownership for the operation of the Projects as
nursing homes and personal care facilities under applicable law have been issued
and are in good standing, including, without limitation,(A) Nursing Home
Licenses issued by State Agencies; and (B) Personal Care Facilities Licenses
issued by State Agencies, which are currently in full force and effect.
ARTICLE 7
FINANCIAL REPORTING
Section 7.1 FINANCIAL STATEMENTS.
(a) MONTHLY REPORTS. Within thirty (30) days after the end of
each calendar month, Borrower shall furnish to Lender a current (as of the
calendar month just ended) balance sheet, a detailed operating statement
(showing monthly activity and year-to-date) stating Operating Revenues,
Operating Expenses, operating income and Net Cash Flow for the calendar month
just ended, and, as requested by Lender, an updated rent roll, a written
statement setting forth any variance from the annual budget, copies of bank
statements and bank reconciliations, and other documentation supporting the
information disclosed in the most recent financial statements.
(b) ARC INFORMATION. When and as available, Borrower shall
furnish to Lender all quarterly and annual reports filed by ARC with the
Securities Exchange Commission, together with any additional or further
information as reasonably may be required by Lender to determine and confirm
compliance with the requirements of Schedule 2.1., Part C.3.
(c) ANNUAL REPORTS. Within ninety (90) days after the end of
each fiscal year of Borrower's operation of the Projects, Borrower shall furnish
to Lender a current (as of the end of such fiscal year) balance sheet, a
detailed operating statement stating Operating Revenues, Operating Expenses,
operating income and Net Cash Flow for each of Borrower and the Projects, a
detailed statement of all expenditures for capital improvements and replacements
to the Projects during the preceding calendar year and a reconciliation to
disbursements from the Capital Improvements Reserve (as defined in Schedule
2.4), and, if required by Lender, prepared on a review basis and certified by an
independent public accountant satisfactory to Lender.
(d) CERTIFICATION; SUPPORTING DOCUMENTATION. Each such
financial statement shall be in scope and detail satisfactory to Lender and
certified by the chief financial representative of Borrower.
Section 7.2 ACCOUNTING PRINCIPLES. All financial statements shall be
prepared in accordance with sound accounting principles applicable to commercial
real estate, consistently applied from year to year.
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Section 7.3 OTHER INFORMATION. Borrower shall deliver to Lender such
additional information regarding Borrower, its subsidiaries, its business, any
Borrower Party, and the Projects within 30 days after Lender's request therefor.
Section 7.4 ANNUAL BUDGET AND CASH FLOW SUMMARY. At least thirty (30)
days after the commencement of each fiscal year, Borrower will provide to Lender
its proposed annual operating and capital improvements budget for such fiscal
year for review and approval by Lender. Furthermore, within ninety (90) days
after the end of each fiscal year, Borrower shall provide Lender a certified
cash flow summary which includes certifications that Borrower has and will
continue to (A) preserve its partnership or other separate legal existence, (B)
preserve all its rights and licenses to the extent necessary or desirable in the
operation of its business and affairs and (C) be and remain qualified to do
business and conduct its affairs in each jurisdiction where its ownership of
projects or the conduct of its business affairs requires such qualification.
Section 7.5 AUDITS. Before the initial advance on the Line of Credit,
and if either (a) an audit has not been completed within the immediately
preceding six-month period, or (b) a requested advance would cause the
outstanding principal balance of the Line of Credit to exceed $20,000,000 or to
exceed $40,000,000, then before any other advance on the Line of Credit, and
otherwise as required by Lender to confirm whether conditions for any requested
release of collateral under Section 8.24 have been satisfied, Lender shall
conduct a complete audit of the Operating Revenues and Operating Expenses of the
Projects, at Borrower's expense, to determine compliance with applicable Cash on
Cash Return and Debt Service Coverage requirements. If Lender shall fail to
complete its initial audit of the Projects before February 15, 1998, no Unused
Line Fee shall be payable with respect to the period following February 15, 1998
and prior to the date on which such audit is completed. Lender shall have the
right to choose and appoint a certified public accountant to perform such audits
as it deems necessary, at Borrower's expense. Borrower shall permit Lender to
examine such records, books and papers of Borrower which reflect upon its
financial condition and the income and expense relative to the Projects. Any
waiver of the requirement for an audit under this Section 7.5 shall be at
Lender's sole discretion, shall be effective only if in writing and signed by
Lender, and unless specifically set forth therein, shall not limit or otherwise
affect any requirement for a future audit of the Operating Revenues and
Operating Expenses of the Projects.
ARTICLE 8
COVENANTS
Borrower covenants and agrees with Lender as follows:
Section 8.1 DUE ON SALE AND ENCUMBRANCE; TRANSFERS OF INTERESTS. Except
for the Residency Agreements, without the prior written consent of Lender,
(a) neither Borrower nor any other Person having an ownership
or beneficial interest in Borrower shall (1) directly or indirectly sell,
transfer, convey, mortgage, pledge, or assign any interest in a Project or any
part thereof (including any partnership or any other ownership interest in
Borrower); (2) further encumber, alienate, grant a Lien (other than as described
in Section 8.1(A)(3)) or grant any other interest in a Project or any part
thereof (including any partnership or other ownership interest in Borrower
whether voluntarily or involuntarily; or (3) enter into any easement or other
agreement granting rights in or restricting the use or development of a Project
that materially affects the use or operation of the subject Project;
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(b) no new general partner, member, or limited partner having
the ability to control the affairs of Borrower shall be admitted to or created
in Borrower (nor shall any existing general partner or member or controlling
limited partner withdraw from Borrower), and no change in Borrower's
organizational documents relating to control over Borrower and/or a Project
shall be effected and
(3) no transfer shall be permitted which would cause ARC to
own, directly or indirectly, less than one hundred percent (100%) of Borrower.
As used in this Section 8.1, "transfer" shall include the sale, transfer,
conveyance, mortgage, pledge, or assignment of the legal or beneficial ownership
of (1) a Project, (2) any partnership interest in any partner in Borrower that
is a partnership, and (3) any voting stock in any general partner in Borrower
that is a corporation; "transfer" shall not include the leasing of individual
units within a Project so long as Borrower complies with the provisions of the
Loan Documents relating to such leasing activity.
Section 8.2 TAXES; CHARGES. Borrower shall pay before any fine,
penalty, interest or cost may be added thereto, and shall not enter into any
agreement to defer, any real estate taxes and assessments, franchise taxes and
charges, and other governmental charges that may become a Lien upon a Project or
become payable during the term of the Loan, and will promptly furnish Lender
with evidence of such payment; however, if applicable, Borrower's compliance
with Section 3.4 of this Agreement relating to impounds for taxes and
assessments shall, with respect to payment of such taxes and assessments, be
deemed compliance with this Section 8.2. Borrower shall not suffer or permit the
joint assessment of a Project with any other real property constituting a
separate tax lot or with any other real or personal property. Borrower shall pay
when due all claims and demands of mechanics, materialmen, laborers and others
which, if unpaid, might result in a Lien on a Project. Notwithstanding the
foregoing, Borrower may contest such taxes and charges and such claims and
demands so long as (1) Borrower notifies Lender that it intends to contest such
claim or demand, (2) Borrower provides Lender with an indemnity, bond or other
security satisfactory to Lender (including an endorsement to Lender's title
insurance policy insuring against such claim or demand) assuring the discharge
of Borrower's obligations for such claims and demands, including interest and
penalties, and (3) Borrower is diligently contesting the same by appropriate
legal proceedings in good faith and at its own expense and concludes such
contest prior to the tenth (10th) day preceding the earlier to occur of the
Maturity Date or the date on which a Project is scheduled to be sold for
non-payment.
Section 8.3 CONTROL; MANAGEMENT. Borrower shall remain under the
control of ARC at all times while this Agreement is in effect. Borrower shall
not terminate, replace or appoint any manager or terminate or amend the
management agreement for a Project without Lender's prior written approval.
Borrower shall fully perform all of its covenants, agreements and obligations
under the management agreement. Borrower, or an Affiliate, shall serve as
manager of the Projects. If the manager is an Affiliate of Borrower, such
manager shall be entitled to receive a management fee of up to three percent
(3%) of Operating Revenues pursuant to a management agreement approved by
Lender, in Lender's sole and absolute discretion. No management fee shall be
payable if Borrower manages the Projects. If Borrower seeks to replace the
manager, Lender retains full and absolute approval right over such substitute
manager, management fee and management agreement. Lender shall approve all
managers and management contracts, both presently existing and prior to entering
into such contracts in the future; in addition, all management fees payable
under any management contract shall be subordinate to and be paid following full
payment of all Debt Service payments on the Loan in each fiscal year. Any change
in ownership or control of the manager shall be cause for Lender to re-approve
such manager and management contract. Each manager shall hold and maintain all
necessary licenses, certifications and permits required by law, and, if not an
Affiliate of Borrower, shall enter a non-competition
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agreement to the effect that such manager will not acquire, construct, operate
or manage any facility similar to the Projects (i.e., an independent living
units facility or an assisted living facility) within a 5-mile radius of any
Project at any time while any portion of the Loan is outstanding. Borrower shall
strictly comply with the Management Standards set forth in Exhibit B attached
hereto, and shall not enter into, modify, amend, or terminate any existing
management agreement, except in accordance with the Management Standards and
this Section 8.3.
Section 8.4 NONCOMPLIANCE. Borrower shall promptly deliver to Lender
copies of all reports and other documents with respect to any inspections,
surveys, investigations, or on-site visits of, or certification actions
regarding, the Projects by any federal, state, or local licensing and regulatory
authority having jurisdiction over the Projects, including any inspections by
State Agencies. Subject to Section 8.5, Lender may retain a consultant, at
Borrower's expense, to evaluate and review such reports and documents. Borrower
shall promptly correct any deficiency and comply with all remedial actions and
recommendations set forth in such reports or specified by the consultant
retained by Lender. Borrower will promptly notify Lender of (i) any
noncompliance, or (ii) any event which, with notice or lapse of time or both,
would result in noncompliance, with any statute, law, ordinance, order,
judgment, decree, regulation, direction or requirement concerning Borrower, its
operations, or any of the Projects, or in connection with which Borrower has
received any notice, correspondence other communication to or from any federal,
state or local governmental official, body, board, department or regulatory
authority. If any such notice or communication of a material nature is received
by Borrower, Borrower shall engage an independent consultant as described in
Section 8.5 below and shall provide Lender with a statement of Borrower setting
forth its proposed action or response to the noncompliance situation. Borrower
shall promptly notify Lender of any proposed local, state or federal law that,
if enacted, would materially and adversely affect Borrower's current operation
of either of the Projects.
Section 8.5 CONSULTANT. If (a) Borrower fails to maintain at all times
a Debt Service Coverage of at least 1.20:1, or (b) the occupancy level of the
Projects (on a consolidated basis) is less than 87% for three consecutive
months, or (c) Borrower receives any notice, correspondence or other
communication of a material nature from any federal, state or local governmental
official, body, board, department or regulatory authority citing violations of
or lack of compliance with any statue, ordinance and/or regulation concerning
Borrower, its operations, or any of the Projects, then Borrower shall, at its
expense, retain an independent consultant selected from a list of independent
consultants designated by Lender from time to time, which independent consultant
is to make recommendations to increase the Debt Service Coverage to at least
1.30:1, increase the occupancy level to at least 90%, or make recommendations to
address the violation and/or noncompliance situation, as the case may be. With
regard to a notice of violation or noncompliance received by Borrower as
described in Section 8.4 above, if such violation or noncompliance can be cured
by Borrower within thirty (30) days from the date of receipt of the notice or
other communication relating thereto, then the independent consultant's
engagement may be limited to a review of Borrower's proposed plan to cure such
noncompliance. Such independent consultant will provide a copy of its report to
Borrower and to Lender. Borrower further agrees that its compliance with this
covenant and/or the independent consultant's recommendation will not limit any
of Lender's rights and remedies upon Borrower's default or excuse Borrower from
any default whether by reason of its failure to maintain the above-specified
Debt Service Coverage or occupancy level, or the receipt of a notice of
noncompliance or for any other reason.
Section 8.6 PERMITS AND LICENSES; OPERATION; MAINTENANCE; INSPECTION.
Borrower shall promptly complete the application process for the transfer,
renewal, recertification, and/or reissuance of all currently existing licenses,
permits, approvals and agreements necessary to own, lease, operate and carry on
its business in the Projects and, on request by Lender, shall furnish to Lender
true and correct copies of such
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licenses, permits, approvals and agreements. Borrower shall observe and comply
with all legal requirements applicable to the ownership, use and operation of
the Projects, including the requirements of State Agencies, and any applicable
requirements under the Medicare (or other reimbursement) program. Borrower shall
maintain the Projects in good condition (ordinary wear and tear excepted) and
promptly repair any damage or casualty. Borrower shall permit Lender and its
agents, representatives and employees, upon reasonable prior notice to Borrower,
to inspect the Projects and conduct such environmental and engineering studies
as Lender may require, provided such inspections and studies do not materially
interfere with the use and operation of the Projects.
Section 8.7 TAXES ON SECURITY. Borrower shall pay all taxes, charges,
filing, registration and recording fees, excises and levies payable with respect
to the Notes or the Liens created or secured by the Loan Documents, other than
income, franchise and doing business taxes imposed on Lender. If there shall be
enacted any law (1) deducting the Loan from the value of a Project for the
purpose of taxation, (2) affecting any Lien on a Project, or (3) changing
existing laws of taxation of mortgages, deeds of trust, security deeds, or debts
secured by real property, or changing the manner of collecting any such taxes,
Borrower shall promptly pay to Lender, on demand, all taxes, costs and charges
for which Lender is liable as a result thereof; however, if such payment would
be prohibited by law or would render the Loan usurious, then instead of
collecting such payment, Lender may declare all amounts owing under the Loan
Documents to be immediately due and payable.
Section 8.8 RESERVES, DEPOSITS, ESCROWS. Borrower shall at all times
maintain all reserves, deposits and/or escrows required by Lender or State
Agencies applicable from time to time to Borrower by virtue of the nature of
Borrower's business.
Section 8.9 LEGAL EXISTENCE; NAME, ETC. Borrower and each general
partner in Borrower, if any, shall preserve and keep in full force and effect
its entity status, franchises, rights and privileges under the laws of the state
of its formation, and all qualifications, licenses and permits applicable to the
ownership, use and operation of the Projects. Neither Borrower nor any general
partner of Borrower, if any, shall wind up, liquidate, dissolve, reorganize,
merge, or consolidate with or into, or convey, sell, assign, transfer, lease, or
otherwise dispose of all or substantially all of its assets. Borrower and each
general partner in Borrower, if any, shall conduct business only in its own name
and shall not change its name, identity, or organizational structure, or the
location of its chief executive office or principal place of business unless
Borrower (1) shall have obtained the prior written consent of Lender to such
change, and (2) shall have taken all actions necessary or requested by Lender to
file or amend any financing statement or continuation statement to assure
perfection and continuation of perfection of security interests under the Loan
Documents. Borrower (and each general partner in Borrower, if any) shall
maintain its separateness as an entity, including maintaining separate books,
records, and accounts and observing corporate and partnership formalities
independent of any other entity, shall pay its obligations with its own funds
and shall not commingle funds or assets with those of any other entity.
Section 8.10 AFFILIATE TRANSACTIONS. Without the prior written consent
of Lender, except for management agreements complying with the provisions hereof
and loans from Borrower to Affiliates of Borrower, Borrower shall not engage in
any transaction affecting a Project with an Affiliate of Borrower, unless the
terms thereof are the same as terms otherwise available in the marketplace
generally.
Section 8.11 LIMITATION ON OTHER DEBT. Borrower (and each general
partner in Borrower, if any) shall not, without the prior written consent of
Lender, incur any Debt other than (1) the Loan, and (2)
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customary trade payables which are payable, and shall be paid, within sixty (60)
days of when incurred (or such longer period as may be allowed by trade
creditors) and equipment or automobile lease obligations of not more than
$40,000 for any single lease obligation and of not more than $120,000 for all
such lease obligations in the aggregate for a particular Project, and (c)
subordinated unsecured Debt.
Section 8.12 LIMITATION ON AFFILIATE DEBT. Borrower shall not borrow
funds from any Affiliate of Borrower unless such parties have acknowledged that
all such debt is unsecured and subordinate to the Loan.
Section 8.13 FURTHER ASSURANCES. Borrower shall promptly (a) cure any
defects in the execution and delivery of the Loan Documents, and (b) execute and
deliver, or cause to be executed and delivered, all such other documents,
agreements and instruments as Lender may reasonably request to further evidence
and more fully describe the collateral for the Loan, to correct any omissions in
the Loan Documents, to perfect, protect or preserve any liens created under any
of the Loan Documents, or to make any recordings, file any notices, or obtain
any consents, as may be necessary or appropriate in connection therewith.
Section 8.14 ESTOPPEL CERTIFICATES. Borrower, within ten (10) days
after Lender's reasonable request, shall furnish to Lender a written statement,
duly acknowledged, setting forth the amount due on the Loan, the terms of
payment of the Loan, the date to which interest has been paid, whether any
offsets or defenses exist against the Loan and, if any are alleged to exist, the
nature thereof in detail, and such other matters as Lender reasonably may
request.
Section 8.15 NOTICE OF CERTAIN EVENTS. Borrower shall promptly notify
Lender of (a) any Potential Default or Event of Default, together with a
detailed statement of the steps being taken to cure such Potential Default or
Event of Default; (b) any notice of default received by Borrower under other
obligations relating to a Project or otherwise material to Borrower's business;
and (c) any threatened or pending material legal, judicial or regulatory
proceedings, including any dispute between Borrower and any governmental
authority, affecting Borrower or a Project.
Section 8.16 INDEMNIFICATION. Borrower shall indemnify, defend and hold
Lender harmless from and against any and all losses (other than losses resulting
solely from nonpayment of the Loan), liabilities, claims, damages, expenses,
obligations, penalties, actions, judgments, suits, costs or disbursements of any
kind or nature whatsoever, including the reasonable fees and actual expenses of
Lender's counsel incurred by Lender, in connection with (a) any inspection,
review or testing of or with respect to the Projects pursuant to this Agreement,
(b) any investigative, administrative, mediation, arbitration, or judicial
proceeding, whether or not Lender is designated a party thereto, commenced or
threatened at any time (including after the repayment of the Loan) in any way
related to the execution, delivery or performance of any Loan Document or to any
Project, (c) any proceeding instituted by any Person claiming a Lien, (d) any
brokerage commissions or finder's fees claimed by any broker or other party in
connection with the Loan, any Project, or any of the transactions contemplated
in the Loan Documents, except commissions and fees arising solely from Lender's
actions, (e) the breach of any of the representations, warranties or covenants
contained in any Loan Document, and (f) any professional malpractice or
negligence relating to the operation of the Projects, INCLUDING THOSE ARISING
FROM THE JOINT, CONCURRENT, OR COMPARATIVE NEGLIGENCE OF LENDER, EXCEPT TO THE
EXTENT ANY OF THE FOREGOING IS CAUSED BY LENDER'S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT.
Section 8.17 ERISA. Borrower shall comply with the Employee Retirement
Income Security Act of 1974, as amended, and the rules and regulations
promulgated thereunder from time to time ("ERISA"), in
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all material respects. Without limiting the generality of the foregoing,
Borrower shall cause all or any defined benefit pension plan, including both
single employer and multi-employer plans, subject to Title IV of ERISA (a
"PLAN"), to be funded in accordance with the minimum funding standards of ERISA,
if applicable, and shall make in a timely manner all contributions due to any
Plan.
Section 8.18 CASH OPERATING RESERVE FUND. At any time during the term
of the Loan in which ARC (on a consolidated basis) is not maintaining cash and
cash equivalents of at least $3,500,000, Borrower shall maintain a cash
operating reserve fund (the "OPERATING RESERVE") in an amount representing 21
days' of estimated, routine Operating Expenses. If funds from the Operating
Reserve are withdrawn and used by Borrower to pay ordinary Operating Expenses,
Borrower shall replenish the Operating Reserve within sixty (60) days of such
withdrawal, by depositing an amount sufficient to restore the Operating Reserve
to its full amount. Borrower grants to Lender a security interest in the
Operating Reserve. While an Event of Default exists, Lender shall be entitled,
without notice to Borrower, to withdraw funds from the Operating Reserve to
satisfy Borrower's obligations under the Loan Documents.
Section 8.19 SECURITY DEPOSITS. Borrower shall maintain a separate
account for each of the Projects ("SECURITY DEPOSIT ACCOUNTS") into which it
will deposit all security deposits and other deposits received by Borrower under
the Residency Agreements for such Projects. Borrower shall make all
disbursements from the appropriate Security Deposit Account in accordance with
the terms of the Residency Agreements, the Loan Documents and all applicable
state and local statutes, ordinances and regulations, if any, and Borrower shall
continue to comply with Lender's requirements, the terms of the Residency
Agreements, and all applicable state and local statutes, ordinances and
regulations regarding maintenance of such Security Deposit Accounts. To the
maximum extent allowed by applicable law, Borrower grants to Lender a security
interest in the Security Deposit Accounts and all funds therein to Lender as
security for the Loan. To the extent allowed by law while any Event of Default
exists, Lender may withdraw funds from the Security Deposit Accounts and apply
such funds to satisfy Borrower's obligations under the Loan Documents.
Notwithstanding the foregoing, Borrower shall not be obligated to maintain the
Security Deposit Accounts with Lender under this Section 8.19 if (a) the
Projects are producing a Net Operating Income which is generating a Cash on Cash
Return of at least 14.25% and a Debt Service Coverage of at least 1.75:1, (b)
there exists no Event of Default or Potential Default, and (c) Borrower
continues to be in compliance with all applicable laws and regulations relating
to security deposits under Residency Agreements.
Section 8.20 NET WORTH. ARC shall at all times maintain a Net Worth of
at least $10,000,000.
Section 8.21 OPERATION. The Projects shall be operated as retirement
communities, independent living units, assisted living units, memory impaired or
Alzheimer units, or skilled nursing beds. The Projects shall be operated using
prudent business judgment and, consistent with such business judgment, in such a
manner so as to maximize the number of Residency Agreements and other occupancy
agreements in effect and to maintain a favorable reputation for the Projects.
Borrower shall fully and faithfully perform, in all material respects, all of
its covenants, agreements and obligations under the Residency Agreements and
under any management agreement (and under any replacement instruments to the
foregoing which are permitted pursuant to the terms of this Agreement.)
Section 8.22 SERVICES. Borrower shall maintain and continue to provide
throughout the term of the Loan materially the same services to residents as are
currently being provided at the Projects by Borrower or otherwise on the date a
facility becomes a Project. Borrower shall not materially change such services
or reduce the Facility Capacity without the prior written consent and approval
of Lender.
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Section 8.23 NON-COMPETITION. At any time while any portion of the Loan
is outstanding, neither Borrower nor any Affiliate of Borrower shall construct,
develop or expand any congregate care, assisted living, or skilled or
intermediate nursing facility or any combination of such types of facility (a)
which is or is to be located within a five-mile radius of any Project, and (b)
which, as determined by Lender in Lender's sole and absolute discretion (without
taking into account the financing source for such facility), would have a
material adverse effect on the financial condition or operations of such
Project. Nothing in this Section 8.23 shall prohibit Borrower or any Affiliate
of Borrower from acquiring or managing any existing facility, but neither
Borrower nor any Affiliate of Borrower shall, in its marketing efforts, target
Residents of any Project for transfers to any other facility. Borrower shall
submit proposals for development of any facility which is to be located within a
five-mile radius of any Project for Lender's determination prior to incurring
substantial costs (excluding costs of demographic or market studies) for or
commencing construction of any such facility, and Lender shall use good faith
efforts to respond to such proposals within a reasonable period of time.
Section 8.24 RELEASES AND SUBSTITUTIONS. Lender agrees that from time
to time at Borrower's request, Lender will release from time to time one or more
Projects from the covenants of this Agreement and the other Loan Documents, and
the liens, assignments and security interests of the Mortgage and the other Loan
Documents if:
(a) There exists no Event of Default or Potential Default;
(b) Borrower shall have delivered notice to Lender of any
requested release of a Project(s) at least thirty (30) days prior to
the scheduled date of such release;
(c) Borrower shall pay all costs and expenses of Lender
arising in connection with the release of the Mortgage and the other
Loan Documents, including, but not limited to, reasonable legal fees of
Lender's counsel, and all other costs arising in connection with the
execution and delivery of the release;
(d) Borrower shall deliver to Lender evidence satisfactory to
Lender that all amounts owing to any parties as a result of the release
of such Project(s) have been paid in full, or are simultaneously being
paid in full at closing;
(e) After such release there shall remain at least three (3)
Projects encumbered by the Mortgage and the other Loan Documents;
(f) The Projects which have not been released must be
generating a Cash on Cash Return of at least 14.25% and a Debt Service
Coverage of at least 1.75:1 from Residency Agreements of not more than
95% occupancy of the Projects, as determined by Lender's audit of the
Projects at Borrower's sole cost and expense;
(g) Any Project which has been released shall from the date of
such release no longer be considered a "Project;"and
(h) Any prepayment associated with a release under this
Section 8.24 shall be subject to the provisions of Section 2.3(E) and
Section 2.3(F).
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From time to time Borrower may elect to encumber additional Projects by the
Mortgage and the other Loan Documents (either as new Projects or in substitution
for existing Projects) provided that after the addition of any Project, the Net
Operating Income of the Projects is generating a Cash on Cash Return of at least
14.25% and a Debt Service Coverage of at least 1.75:1, and provided any
additional Project is satisfactory to Lender in its sole and absolute
discretion.
ARTICLE 9
EVENTS OF DEFAULT
Each of the following shall constitute an Event of Default under the
Loan:
Section 9.1 PAYMENTS. Borrower's failure to pay any regularly scheduled
installment of principal, interest or other amount due under the Loan Documents
within five (5) days after the date when due, or Borrower's failure to pay the
Loan at the Maturity Date, whether by acceleration or otherwise.
Section 9.2 INSURANCE. Borrower's failure to maintain insurance as
required under Section 3.1 of this Agreement.
Section 9.3 SALE, ENCUMBRANCE, ETC. The sale, transfer, conveyance,
pledge, mortgage or assignment of any part or all of a Project (other than
disposition of obsolete items of equipment or replacement of worn items of
equipment with new items in the ordinary course of business), or any interest
therein, or of any interest in Borrower, in violation of Section 8.1 of this
Agreement.
Section 9.4 COVENANTS. Borrower's failure to perform or observe any of
the agreements and covenants contained in this Agreement or in any of the other
Loan Documents (other than payments under Section 9.1, insurance requirements
under Section 9.2, and transfers and encumbrances under Section 9.3), and the
continuance of such failure for ten (10) days after notice by Lender to
Borrower; however, subject to any shorter period for curing any failure by
Borrower as specified in any of the other Loan Documents, Borrower shall have an
additional thirty (30) days to cure such failure if (a) such failure does not
involve the failure to make payments on a monetary obligation; (b) such failure
cannot reasonably be cured within ten (10) days; (c) Borrower is diligently
undertaking to cure such default, and (d) Borrower has provided Lender with
security reasonably satisfactory to Lender against any interruption of payment
or impairment of collateral as a result of such continuing failure. The notice
and cure provisions of this Section 9.4 do not apply to any Event of Default
arising under Section 8.9 or Section 8.20, or to the Events of Default described
in Section 9.5, Section 9.6, Section 9.7, Section 9.8, Section 9.9 and Section
9.10.
Section 9.5 REPRESENTATIONS AND WARRANTIES. Any representation or
warranty made in any Loan Document proves to be untrue in any material respect
when made or deemed made.
Section 9.6 OTHER ENCUMBRANCES. Any default under any document or
instrument, other than the Loan Documents, evidencing or creating a Lien on a
Project or any part thereof.
Section 9.7 INVOLUNTARY BANKRUPTCY OR OTHER PROCEEDING. Commencement of
an involuntary case or other proceeding against Borrower, any Borrower Party or
any other Person having an ownership or security interest in a Project
(excluding limited partners in Borrower or any Borrower Party) (each, a
"BANKRUPTCY PARTY") which seeks liquidation, reorganization or other relief with
respect to it or its debts or
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other liabilities under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeks the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any of its property, and such
involuntary case or other proceeding shall remain undismissed or unstayed for a
period of 60 days; or an order for relief against a Bankruptcy Party shall be
entered in any such case under the Federal Bankruptcy Code.
Section 9.8 VOLUNTARY PETITIONS, ETC. Commencement by a Bankruptcy
Party of a voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its Debts or other
liabilities under any bankruptcy, insolvency or other similar law or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official for it or any of its property, or consent by a Bankruptcy Party to any
such relief or to the appointment of or taking possession by any such official
in an involuntary case or other proceeding commenced against it, or the making
by a Bankruptcy Party of a general assignment for the benefit of creditors, or
the failure by a Bankruptcy Party, or the admission by a Bankruptcy Party in
writing of its inability, to pay its debts generally as they become due, or any
action by a Bankruptcy Party to authorize or effect any of the foregoing.
Section 9.9 OTHER LOANS. The existence of any Event of Default under
any other loan by Lender to either Borrower or any Affiliate thereof, which by
its terms is intended to be secured by a Project.
Section 9.10 LIMITING MORTGAGE AMOUNTS. Any filing for record of a
notice pursuant to Florida Statutes Section 697.04 (or any successor replacement
Section) limiting the maximum amount that may be secured by the Mortgage.
ARTICLE 10
REMEDIES
Section 10.1 REMEDIES - INSOLVENCY EVENTS. Upon the occurrence of any
Event of Default described in Section 9.7 or 9.8, the obligations of Lender to
advance amounts hereunder shall immediately terminate, and all amounts due under
the Loan Documents immediately shall become due and payable, all without written
notice and without presentment, demand, protest, notice of protest or dishonor,
notice of intent to accelerate the maturity thereof, notice of acceleration of
the maturity thereof, or any other notice of default of any kind, all of which
are hereby expressly waived by Borrower; however, if the Bankruptcy Party under
Section 9.7 or 9.8 is other than Borrower, then all amounts due under the Loan
Documents shall become immediately due and payable at Lender's election, in
Lender's sole discretion.
Section 10.2 REMEDIES - OTHER EVENTS. Except as set forth in Section
10.1 above, while any Event of Default exists, Lender may (a) by written notice
to Borrower, declare the entire Loan to be immediately due and payable without
presentment, demand, protest, notice of protest or dishonor, notice of intent to
accelerate the maturity thereof, notice of acceleration of the maturity thereof,
or other notice of default of any kind, all of which are hereby expressly waived
by Borrower, (b) terminate the obligation, if any, of Lender to advance amounts
hereunder, and (c) exercise all rights and remedies therefor under the Loan
Documents and at law or in equity.
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Section 10.3 LENDER'S RIGHT TO PERFORM THE OBLIGATIONS. If Borrower
shall fail, refuse or neglect to make any payment or perform any act required by
the Loan Documents, then while any Event of Default exists, and without notice
to or demand upon Borrower and without waiving or releasing any other right,
remedy or recourse Lender may have because of such Event of Default, Lender may
(but shall not be obligated to) make such payment or perform such act for the
account of and at the expense of Borrower, and shall have the right to enter
upon the Projects for such purpose and to take all such action thereon and with
respect to the Projects as it may deem necessary or appropriate. If Lender shall
elect to pay any sum due with reference to a Project, Lender may do so in
reliance on any bill, statement or assessment procured from the appropriate
governmental authority or other issuer thereof without inquiring into the
accuracy or validity thereof. Similarly, in making any payments to protect the
security intended to be created by the Loan Documents, Lender shall not be bound
to inquire into the validity of any apparent or threatened adverse title, lien,
encumbrance, claim or charge before making an advance for the purpose of
preventing or removing the same. Additionally, if any Hazardous Materials affect
or threaten to affect a Project, Lender may (but shall not be obligated to) give
such notices and take such actions as it deems necessary or advisable in order
to abate the discharge of any Hazardous Materials or remove the Hazardous
Materials. Borrower shall indemnify, defend and hold Lender harmless from and
against any and all losses, liabilities, claims, damages, expenses, obligations,
penalties, actions, judgments, suits, costs, or disbursements of any kind or
nature whatsoever, including reasonable attorneys' fees, incurred or accruing by
reason of any acts performed by Lender pursuant to the provisions of this
Section 10.3, INCLUDING THOSE ARISING FROM THE JOINT, CONCURRENT, OR COMPARATIVE
NEGLIGENCE OF LENDER, EXCEPT AS A RESULT OF LENDER'S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT. All sums paid by Lender pursuant to this Section 10.3, and all other
sums expended by Lender to which it shall be entitled to be indemnified,
together with interest thereon at the Default Rate from the date of such payment
or expenditure until paid, shall constitute additions to the Loan, shall be
secured by the Loan Documents and shall be paid by Borrower to Lender upon
demand.
ARTICLE 11
MISCELLANEOUS
Section 11.1 NOTICES. Any notice required or permitted to be given
under this Agreement shall be in writing and either shall be mailed by certified
mail, postage prepaid, return receipt requested, or sent by overnight air
courier service, or personally delivered to a representative of the receiving
party, or sent by telecopy (provided an identical notice is also sent
simultaneously by mail, overnight courier, or personal delivery as otherwise
provided in this Section 11.1). All such communications shall be mailed, sent or
delivered, addressed to the party for whom it is intended at its address set
forth below.
If to Borrower: Fort Austin Limited Partnership
c/o American Retirement Corporation
111 Westwood Place, Suite 402
Brentwood, Tennessee 37027
Attention: George Hicks, Executive Vice
President
Telecopy: (615) 221-2288
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with a copy to: Bass, Berry & Sims
First American Center
Nashville, Tennessee 32238
Attention: T. Andrew Smith
Telecopy: (615) 742-6298
If to Lender: General Electric Capital Corporation
c/o GE Capital Realty Group, Inc.
16479 Dallas Parkway
Two Bent Tree Tower, Suite 400
Dallas, Texas 75248
Attention: Asset Manager
Telecopy: (972) 447-2599
with a copy to: Vinson & Elkins L.L.P.
2001 Ross Avenue, Suite 3700
Dallas, Texas 75201-2875
Attention: Michael R. Boulden
Telecopy: (214) 220-7716
Any communication so addressed and mailed shall be deemed to be given on the
earliest of (a) when actually delivered, (b) on the first Business Day after
deposit with an overnight air courier service, or (c) on the third Business Day
after deposit in the United States mail, postage prepaid, in each case to the
address of the intended addressee (except as otherwise provided in the
Mortgage), and any communication so delivered in person shall be deemed to be
given when receipted for by, or actually received by Lender or Borrower, as the
case may be. If given by telecopy, a notice shall be deemed given and received
when the telecopy is transmitted to the party's telecopy number specified above,
and confirmation of complete receipt is received by the transmitting party
during normal business hours or on the next Business Day if not confirmed during
normal business hours, and an identical notice is also sent simultaneously by
mail, overnight courier, or personal delivery as otherwise provided in this
Section 11.1. Either party may designate a change of address by written notice
to the other by giving at least ten (10) days prior written notice of such
change of address.
Section 11.2 AMENDMENTS AND WAIVERS. No amendment or waiver of any
provision of the Loan Documents shall be effective unless in writing and signed
by the party against whom enforcement is sought.
Section 11.3 LIMITATION ON INTEREST. It is the intention of the parties
hereto to conform strictly to applicable usury laws. Accordingly, all agreements
between Borrower and Lender with respect to the Loan are hereby expressly
limited so that in no event, whether by reason of acceleration of maturity or
otherwise, shall the amount paid or agreed to be paid to Lender or charged by
Lender for the use, forbearance or detention of the money to be lent hereunder
or otherwise, exceed the maximum amount allowed by law. If the Loan would be
usurious under applicable law (including the laws of the State and the laws of
the United States of America), then, notwithstanding anything to the contrary in
the Loan Documents: (a) the aggregate of all consideration which constitutes
interest under applicable law that is contracted for, taken, reserved, charged
or received under the Loan Documents shall under no circumstances exceed the
maximum amount of interest allowed by applicable law, and any excess shall be
credited on the Notes by the holder thereof (or, if the Notes have been paid in
full, refunded to Borrower); and (b) if maturity is accelerated by reason of an
election by Lender, or in the event of any prepayment, then any consideration
which constitutes interest may never include
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more than the maximum amount allowed by applicable law. In such case, excess
interest, if any, provided for in the Loan Documents or otherwise, to the extent
permitted by applicable law, shall be amortized, prorated, allocated and spread
from the date of advance until payment in full so that the actual rate of
interest is uniform through the term hereof. If such amortization, proration,
allocation and spreading is not permitted under applicable law, then such excess
interest shall be canceled automatically as of the date of such acceleration or
prepayment and, if theretofore paid, shall be credited on the Notes (or, if the
Notes have been paid in full, refunded to Borrower). The terms and provisions of
this Section 11.3 shall control and supersede every other provision of the Loan
Documents. The Loan Documents are contracts made under and shall be construed in
accordance with and governed by the laws of the State, except that if at any
time the laws of the United States of America permit Lender to contract for,
take, reserve, charge or receive a higher rate of interest than is allowed by
the laws of the State (whether such federal laws directly so provide or refer to
the law of any state), then such federal laws shall to such extent govern as to
the rate of interest which Lender may contract for, take, reserve, charge or
receive under the Loan Documents.
Section 11.4 INVALID PROVISIONS. If any provision of any Loan Document
is held to be illegal, invalid or unenforceable, such provision shall be fully
severable; the Loan Documents shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part thereof;
the remaining provisions thereof shall remain in full effect and shall not be
affected by the illegal, invalid, or unenforceable provision or by its severance
therefrom; and in lieu of such illegal, invalid or unenforceable provision there
shall be added automatically as a part of such Loan Document a provision as
similar in terms to such illegal, invalid or unenforceable provision as may be
possible to be legal, valid and enforceable.
Section 11.5 REIMBURSEMENT OF EXPENSES. Borrower shall pay all expenses
incurred by Lender in connection with the Loan, including fees and expenses of
Lender's attorneys, environmental, engineering and other consultants, and fees,
charges or taxes for the recording or filing of Loan Documents. Borrower shall
pay all expenses of Lender in connection with the administration of the Loan,
including audit costs, inspection fees, settlement of condemnation and casualty
awards, and premiums for title insurance and endorsements thereto. Borrower
shall, upon request, promptly reimburse Lender for all amounts expended,
advanced or incurred by Lender to collect the Notes, or to enforce the rights of
Lender under this Agreement or any other Loan Document, or to defend or assert
the rights and claims of Lender under the Loan Documents or with respect to the
Projects (by litigation or other proceedings), which amounts will include all
court costs, attorneys' fees and expenses, fees of auditors and accountants, and
investigation expenses as may be incurred by Lender in connection with any such
matters (whether or not litigation is instituted), together with interest at the
Default Rate on each such amount from the date of disbursement until the date of
reimbursement to Lender, all of which shall constitute part of the Loan and
shall be secured by the Loan Documents.
Section 11.6 APPROVALS; THIRD PARTIES; CONDITIONS. All approval rights
retained or exercised by Lender with respect to leases, contracts, plans,
studies and other matters are solely to facilitate Lender's credit underwriting,
and shall not be deemed or construed as a determination that Lender has passed
on the adequacy thereof for any other purpose and may not be relied upon by
Borrower or any other Person. This Agreement is for the sole and exclusive use
of Lender and Borrower and may not be enforced, nor relied upon, by any Person
other than Lender and Borrower. All conditions of the obligations of Lender
hereunder, including the obligation to make advances, are imposed solely and
exclusively for the benefit of Lender, its successors and assigns, and no other
Person shall have standing to require satisfaction of such conditions or be
entitled to assume that Lender will refuse to make advances in the absence of
strict compliance with any or all of such conditions, and no other Person shall,
under any circumstances, be deemed to be a beneficiary
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of such conditions, any and all of which may be freely waived in whole or in
part by Lender at any time in Lender's sole discretion.
Section 11.7 LENDER NOT IN CONTROL; NO PARTNERSHIP. None of the
covenants or other provisions contained in this Agreement shall, or shall be
deemed to, give Lender the right or power to exercise control over the affairs
or management of Borrower, the power of Lender being limited to the rights to
exercise the remedies referred to in the Loan Documents. The relationship
between Borrower and Lender is, and at all times shall remain, solely that of
debtor and creditor. No covenant or provision of the Loan Documents is intended,
nor shall it be deemed or construed, to create a partnership, joint venture,
agency or common interest in profits or income between Lender and Borrower or to
create an equity in the Projects in Lender. Lender neither undertakes nor
assumes any responsibility or duty to Borrower or to any other person with
respect to the Projects or the Loan, except as expressly provided in the Loan
Documents; and notwithstanding any other provision of the Loan Documents: (a)
Lender is not, and shall not be construed as, a partner, joint venturer, alter
ego, manager, controlling person or other business associate or participant of
any kind of Borrower or its stockholders, members, or partners and Lender does
not intend to ever assume such status; (b) Lender shall in no event be liable
for any Debts, expenses or losses incurred or sustained by Borrower; and (c)
Lender shall not be deemed responsible for or a participant in any acts,
omissions or decisions of Borrower or its stockholders, members, or partners.
Lender and Borrower disclaim any intention to create any partnership, joint
venture, agency or common interest in profits or income between Lender and
Borrower, or to create an equity in the Projects in Lender, or any sharing of
liabilities, losses, costs or expenses.
Section 11.8 TIME OF THE ESSENCE. Time is of the essence with respect
to this Agreement.
Section 11.9 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of Lender and Borrower and the successors and
assigns of Lender, including any assignee or transferee of either Note,
individually, and the successors and assigns of Borrower, provided that neither
Borrower nor any other Borrower Party shall, without the prior written consent
of Lender, assign any rights, duties or obligations hereunder.
Section 11.10 RENEWAL, EXTENSION OR REARRANGEMENT. All provisions of
the Loan Documents shall apply with equal effect to each and all promissory
notes and amendments thereof hereinafter executed which in whole or in part
represent a renewal, extension, increase or rearrangement of the Loan. Borrower
agrees to cooperate with Lender and to execute such documents as Lender
reasonably may request to effect any divisions of the Loan required by Lender.
Section 11.11 WAIVERS. No course of dealing on the part of Lender, its
officers, employees, consultants or agents, nor any failure or delay by Lender
with respect to exercising any right, power or privilege of Lender under any of
the Loan Documents, shall operate as a waiver thereof.
Section 11.12 CUMULATIVE RIGHTS. Rights and remedies of Lender under
the Loan Documents shall be cumulative, and the exercise or partial exercise of
any such right or remedy shall not preclude the exercise of any other right or
remedy.
Section 11.13 SINGULAR AND PLURAL. Words used in this Agreement and the
other Loan Documents in the singular, where the context so permits, shall be
deemed to include the plural and vice versa. The definitions of words in the
singular in this Agreement and the other Loan Documents shall apply to such
words when used in the plural where the context so permits and vice versa.
32
<PAGE> 39
Section 11.14 PHRASES. When used in this Agreement and the other Loan
Documents, the phrase "including" shall mean "including, but not limited to,"
the phrase "satisfactory to Lender" shall mean "in form and substance
satisfactory to Lender in all respects," the phrase "with Lender's consent" or
"with Lender's approval" shall mean such consent or approval at Lender's
discretion, and the phrase "acceptable to Lender" shall mean "acceptable to
Lender at Lender's sole discretion."
Section 11.15 EXHIBITS AND SCHEDULES. The exhibits and schedules
attached to this Agreement are incorporated herein and shall be considered a
part of this Agreement for the purposes stated herein.
Section 11.16 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS. All titles
or headings to articles, sections, subsections or other divisions of this
Agreement and the other Loan Documents or the exhibits hereto and thereto are
only for the convenience of the parties and shall not be construed to have any
effect or meaning with respect to the other content of such articles, sections,
subsections or other divisions, such other content being controlling as to the
agreement between the parties hereto.
Section 11.17 PROMOTIONAL MATERIAL. Borrower authorizes Lender to issue
press releases, advertisements and other promotional materials in connection
with Lender's own promotional and marketing activities, and describing the Loan,
in a manner consistent with descriptions of other financings, and Lender's
participation in the Loan. All references to Lender contained in any press
release, advertisement or promotional material issued by Borrower shall be
approved in writing by Lender in advance of issuance.
Section 11.18 SURVIVAL. All of the representations, warranties,
covenants, and indemnities hereunder (including environmental matters under
Article 4), and under the indemnification provisions of the other Loan Documents
shall survive the repayment in full of the Loan and the release of the liens
evidencing or securing the Loan, and shall survive the transfer (by sale,
foreclosure, conveyance in lieu of foreclosure or otherwise) of any or all
right, title and interest in and to the Projects to any party, whether or not an
Affiliate of Borrower.
Section 11.19 WAIVER OF JURY TRIAL. To the maximum extent permitted by
law, Borrower and Lender hereby knowingly, voluntarily and intentionally waive
the right to a trial by jury in respect of any litigation based hereon, arising
out of, under or in connection with this Agreement or any other Loan Document,
or any course of conduct, course of dealing, statement (whether verbal or
written) or action of either party or any exercise by any party of their
respective rights under the Loan Documents or in any way relating to the Loan or
the Projects (including, without limitation, any action to rescind or cancel
this Agreement, and any claim or defense asserting that this Agreement was
fraudulently induced or is otherwise void or voidable). This waiver is a
material inducement for Lender to enter this Agreement.
Section 11.20 WAIVER OF PUNITIVE OR CONSEQUENTIAL DAMAGES. Neither
Lender nor Borrower shall be responsible or liable to the other or to any other
Person for any punitive, exemplary or consequential damages which may be alleged
as a result of the Loan or the transaction contemplated hereby, including any
breach or other default by any party hereto.
Section 11.21 GOVERNING LAW. The Loan Documents are being executed and
delivered, and are intended to be performed, in the State and the laws of the
State and of the United States of America shall govern the rights and duties of
the parties hereto and the validity, construction, enforcement and
interpretation of the Loan Documents, except to the extent otherwise specified
in any of the Loan Documents.
33
<PAGE> 40
Section 11.22 ENTIRE AGREEMENT. This Agreement and the other Loan
Documents embody the entire agreement and understanding between Lender and
Borrower and supersede all prior agreements and understandings between such
parties relating to the subject matter hereof and thereof. Accordingly, the Loan
Documents may not be contradicted by evidence of prior, contemporaneous, or
subsequent oral agreements of the parties. There are no unwritten oral
agreements between the parties.
Section 11.23 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall constitute an original, but all of which shall
constitute one document.
ARTICLE 12
LIMITATIONS ON LIABILITY
Section 12.1 LIMITATION ON LIABILITY. Except as provided below,
Borrower shall not be personally liable for amounts due under the Loan
Documents. Borrower shall be personally liable to Lender for any deficiency,
loss or damage suffered by Lender because of: (a) Borrower's commission of a
criminal act, (b) the failure to comply with provisions of the Loan Documents
prohibiting the sale, transfer or encumbrance of the Projects, any other
collateral, or any direct or indirect ownership interest in Borrower; (c) the
misapplication by Borrower or any Borrower Party of any funds derived from the
Projects, including security deposits, insurance proceeds and condemnation
awards; (d) the fraud or misrepresentation by Borrower or any Borrower Party
made in or in connection with the Loan Documents or the Loan; (e) Borrower's
collection of rents more than one month in advance or entering into or modifying
Residency Agreements, or receipt of monies by Borrower or any Borrower Party in
connection with the modification of any Residency Agreements, in violation of
this Agreement or any of the other Loan Documents; (f) Borrower's failure to
apply proceeds of rents or any other payments in respect of the Residency
Agreements and other income of the Projects or any other collateral to the costs
of maintenance and operation of the Projects and to the payment of taxes, lien
claims, insurance premiums, Debt Service and other amounts due under the Loan
Documents; (g) subject to the provisions of Section 8.2, Borrower's failure to
pay any real estate taxes, assessments or similar charges affecting the Projects
prior to the delinquency thereof, (h) Borrower's interference with Lender's
exercise of rights under the Assignments of Rents and Leases; (i) if applicable,
Borrower's failure to timely renew any letter of credit issued in connection
with the Loan; (j) Borrower's failure to maintain insurance as required by this
Agreement or to pay any taxes or assessments affecting a Project; (k) damage or
destruction to a Project directly caused by the acts or omissions of Borrower,
its agents, employees, or contractors; (l) Borrower's obligations with respect
to environmental matters under Article 4; (m) Borrower's failure to pay for any
loss, liability or expense (including attorneys' fees) incurred by Lender
arising out of any claim or allegation made by Borrower, its successors or
assigns, or any creditor of Borrower, that this Agreement or the transactions
contemplated by the Loan Documents establish a joint venture, partnership or
other similar arrangement between Borrower and Lender; (n) any failure on the
part of Borrower to comply with any local, state or federal laws or regulations
governing the operation of the Projects as nursing homes and personal care
facilities, including the requirements of State Agencies, and any requirements
under Medicare or other reimbursement program; (o) any liability for
professional malpractice or negligence relating to the operation of the
Projects; (p) the failure of Borrower to maintain separate accounts for security
deposits if and as required in Section 8.19; or (q) any brokerage commission or
finder's fees claimed in connection with the transactions contemplated by the
Loan Documents other than commissions or fees incurred solely as a result of
Lender's actions. None of the foregoing limitations on the personal liability of
Borrower shall modify, diminish or discharge the personal liability of any
Joinder Party. Nothing herein shall be deemed to be a waiver of any right which
Lender may have under Sections 506(a), 506(b), 1111(b) or any other provision of
the United
34
<PAGE> 41
States Bankruptcy Code, as such sections may be amended, or corresponding or
superseding sections of the Bankruptcy Amendments and Federal Judgeship Act of
1984, to file a claim for the full amount due to Lender under the Loan Documents
or to require that all collateral shall continue to secure the amounts due under
the Loan Documents.
Section 12.2 LIMITATION ON LIABILITY OF LENDER'S OFFICERS, EMPLOYEES,
ETC. Any obligation or liability whatsoever of Lender which may arise at any
time under this Agreement or any other Loan Document shall be satisfied, if at
all, out of the Lender's assets only. No such obligation or liability shall be
personally binding upon, nor shall resort for the enforcement thereof be had to,
the property of any of Lender's shareholders, directors, officers, employees or
agents, regardless of whether such obligation or liability is in the nature of
contract, tort or otherwise.
35
<PAGE> 42
EXECUTED as of the date first written above.
LENDER: GENERAL ELECTRIC CAPITAL CORPORATION,
a New York corporation
By: /s/ Mark A. Schmidt
--------------------------------------------
Mark A. Schmidt,
Attorney-In-Fact
BORROWER: FORT AUSTIN LIMITED PARTNERSHIP,
a Texas limited partnership
By: ARC FORT AUSTIN PROPERTIES, INC.,
a Tennessee corporation, General Partner
By: /s/ Todd Kaestner
--------------------------------------------
Vice President
36
<PAGE> 43
JOINDER
By executing this Joinder (the "JOINDER"), the undersigned ("JOINDER
PARTIES") jointly and severally guaranty the performance by Borrower of
Borrower's unconditional obligation to pay real estate taxes, assessments and
similar charges relating to the Projects under Section 8.2 of this Agreement;
Borrower's obligations with respect to environmental matters under Article 4 of
this Agreement, Borrower's indemnification obligations under Section 8.16 of
this Agreement, and all obligations and liabilities for which Borrower is
personally liable under Section 12.1 of this Agreement. This Joinder is a
guaranty of full and complete payment and performance and not of collectability.
1. WAIVERS. To the fullest extent permitted by applicable law, each
Joinder Party waives all rights and defenses of sureties, guarantors,
accommodation parties and/or co-makers and agrees that its obligations under
this Joinder shall be primary, absolute and unconditional, and that its
obligations under this Joinder shall be unaffected by any of such rights or
defenses, including:
(a) the unenforceability of any Loan Document against Borrower
and/or any Joinder Party;
(b) any release or other action or inaction taken by Lender
with respect to the collateral, the Loan, Borrower and/or any Joinder Party,
whether or not the same may impair or destroy any subrogation rights of any
Joinder Party, or constitute a legal or equitable discharge of any surety or
indemnitor;
(c) the existence of any collateral or other security for the
Loan, and any requirement that Lender pursue any of such collateral or other
security, or pursue any remedies it may have against Borrower and/or any Joinder
Party;
(d) any requirement that Lender provide notice to or obtain a
Joinder Party's consent to any modification, increase, extension or other
amendment of the Loan, including the guaranteed obligations;
(e) any right of subrogation (until payment in full of the
Loan, including the guaranteed obligations, and the expiration of any applicable
preference period and statute of limitations for fraudulent conveyance claims);
(f) any defense based on any statute of limitations;
(g) any payment by Borrower to Lender if such payment is held
to be a preference or fraudulent conveyance under bankruptcy laws or Lender is
otherwise required to refund such payment to Borrower or any other party; and
(h) any voluntary or involuntary bankruptcy, receivership,
insolvency, reorganization or similar proceeding affecting Borrower or any of
its assets.
37
<PAGE> 44
2. AGREEMENTS. Each Joinder Party further represents, warrants and
agrees that:
(a) The obligations under this Joinder are enforceable against
each such party and are not subject to any defenses, offsets or counterclaims;
(b) The provisions of this Joinder are for the benefit of
Lender and its successors and assigns;
(c) Lender shall have the right to (A) renew, modify, extend
or accelerate the Loan, (B) pursue some or all of its remedies against Borrower
or any Joinder Party, (C) add, release or substitute any collateral for the Loan
or party obligated thereunder, and (D) release Borrower or any Joinder Party
from liability, all without notice to or consent of any Joinder Party (or other
Joinder Party) and without affecting the obligations of any Joinder Party (or
other Joinder Party) hereunder;
(d) Each Joinder Party covenants and agrees to furnish to
Lender, within one hundred twenty (120) days after the end of each fiscal year
of such Joinder Party, a current (as of the end of such fiscal year) balance
sheet of such Joinder Party, in scope and detail satisfactory to Lender,
certified by the chief financial representative of such Joinder Party and, if
required by Lender, prepared on an accounting review basis and certified by an
independent public accountant satisfactory to Lender; and
(e) To the maximum extent permitted by law, each Joinder Party
hereby knowingly, voluntarily and intentionally waives the right to a trial by
jury in respect of any litigation based hereon. This waiver is a material
inducement to Lender to enter into this Agreement.
This Joinder shall be governed by the laws of the State of Texas.
38
<PAGE> 45
Executed as of December 31, 1997.
JOINDER PARTIES: ARC FORT AUSTIN PROPERTIES, INC.,
a Tennessee corporation
By: /s/ Todd Kaestner
--------------------------------------------
Vice President
AMERICAN RETIREMENT CORPORATION,
a Tennessee corporation
By: /s/ Todd Kaestner
--------------------------------------------
Executive Vice President
39
<PAGE> 46
EXHIBIT B
MANAGEMENT STANDARDS
1. If Borrower desires to enter into, modify, amend or terminate any
management agreement, leasing agreement or any other agreement relating to
management, leasing or operation of the Projects, Borrower shall submit such
proposed modification or change to Lender in writing for Lender's prior
approval, which approval shall be given or withheld in Lender's sole discretion.
Lender shall respond to such requests for approval within a reasonable period of
time.
2. Upon Lender's request, Borrower shall, and shall cause its on-site
administrator to (i) meet with Lender at least quarterly to discuss the
financial and physical condition of the Projects and the management of the
Projects, including personnel, resident satisfaction, marketing and other issues
pertinent to the success of the Projects, and (ii) at Lender's request, provide
Lender with reports relating to such information.
3. Borrower's agreements with its management and leasing agents, if
any, shall be written so that if Lender acquires ownership of the Projects,
Lender may, without cost or liability to Lender, within sixty (60) days' of
Lender's notice, terminate the management and leasing agreement, and the on-site
administrator and director of leasing.
B-1
<PAGE> 47
SCHEDULE 2.1
ADVANCE CONDITIONS
Part A - Initial Advance
Part B - General Conditions
Part C - Advances on the Line of Credit
PART A. CONDITIONS TO INITIAL ADVANCE.
The initial advance of the Loan shall be subject to Lender's receipt,
review, approval and/or confirmation of the following, at Borrower's cost and
expense, each in form and content satisfactory to Lender in its sole discretion:
1. The Loan Documents, executed by Borrower and, as applicable, each
Borrower Party.
2. The Advance Fee for any amount advanced under the Floating Rate
Note.
3. ALTA (or equivalent) mortgagee policies of title insurance, in the
aggregate maximum amount of the Loan, with reinsurance and endorsements as
Lender may require, containing no exceptions to title (printed or otherwise)
which are unacceptable to Lender, and insuring that the Mortgage is a
first-priority Lien on the Projects and related collateral.
4. All documents evidencing the formation, organization, valid
existence, good standing, and due authorization of and for Borrower and each
Borrower Party for the execution, delivery, and performance of the Loan
Documents by Borrower and each Borrower Party.
5. Legal opinions issued by counsel for Borrower and each Borrower
Party, opining as to the due organization, valid existence and good standing of
Borrower and each Borrower Party, and the due authorization, execution,
delivery, enforceability and validity of the Loan Documents with respect to,
Borrower and each Borrower Party; that the Loan, as reflected in the Loan
Documents, is not usurious; to the extent that Lender is not otherwise
satisfied, that the Projects and their use is in full compliance with all legal
requirements; that the Loan Documents do not create or constitute a partnership,
a joint venture or a trust or fiduciary relationship between Borrower and
Lender; and as to such other matters as Lender and Lender's counsel reasonably
may specify.
6. Current Uniform Commercial Code searches for Borrower and the
immediately preceding owner of the Projects.
7. Evidence of insurance as required by this Agreement, and conforming
in all respects to the requirements of Lender.
8. An "as-built" survey of each Project, dated or updated to a date not
earlier than thirty (30) days prior to the date hereof, certified to Lender and
such title insurer, prepared by a licensed surveyor acceptable to Lender and the
issuer of the title insurance, and conforming to Lender's current standard
survey requirements.
Schedule 2.1 - 1
<PAGE> 48
9. An engineering report or architect's certificate with respect to
each Project, covering, among other matters, inspection of heating and cooling
systems, roof and structural details and showing no failure of compliance with
building plans and specifications, applicable legal requirements (including
requirements of the Americans with Disabilities Act) and fire, safety and health
standards. As requested by Lender, such report shall also include an assessment
of the Project's tolerance for earthquake and seismic activity.
10. A Site Assessment for each Project.
11. A current rent roll of each Project, and copies of all Residency
Agreements, certified by Borrower or the current owner of such Project. Such
rent roll shall include the following information: (a) resident names; (b)
unit/suite numbers; (c) area of each demised premises and total area of the
Project (stated in net rentable square feet); (d) rental rate (including
escalations, if any); (e) cancellation/termination provisions; (f) term (if
any); and (g) security deposit. In addition, a copy of each standard lease form,
admission agreement, occupancy or other residency agreement form to be used by
Borrower in leasing space in the Projects, or conducting a retirement home
business in the Projects, in form satisfactory to and approved by Lender.
12. Evidence satisfactory to Lender that Borrower is and has at all
relevant times been in all respects in compliance with all requirements of the
Social Security Act of 1965, the regulations promulgated thereunder, and, as
applicable, all conditions of participation in the Medicare program thereunder,
including, without limitation, those imposed by the State Agencies and the
United States Department of Health and Human Services.
13. Certified copies of (a) Medicare provider agreements, as
applicable, issued under Title XVIII and Title XIX of the Social Security Act of
1965, with current provider numbers, (b) as applicable, nursing home licenses
(or "long-term-care licenses") issued by the State Agencies, (c) a personal care
facilities license issued by the State Agencies, and (d) all licenses, permits
and approvals required or convenient for the operation of the Projects as
retirement communities under applicable laws and regulations, such
certifications to state that such agreements, licenses, permits and approvals
are in full force and effect.
14. Borrower's deposit with Lender of the amount required by Lender to
impound for taxes and assessments under Article 3 and to fund any other required
escrows or reserves.
15. Evidence that the Projects and the operation thereof comply with
all legal requirements, including that all requisite certificates of occupancy,
building permits, and other licenses, certificates, approvals or consents
required of any governmental authority have been issued without variance or
condition and that there is no litigation, action, citation, injunctive
proceedings, or like matter pending or threatened with respect to the validity
of such matters.
16. No change shall have occurred in the financial condition of
Borrower or any Borrower Party or in the Net Operating Income of any Project,
which would have, in Lender's judgment, a material adverse effect on a Project
or on Borrower's or any Borrower Party's ability to repay the Loan or otherwise
perform its obligations under the Loan Documents.
17. No condemnation or adverse zoning or usage change proceeding shall
have occurred or shall have been threatened against a Project; no Project shall
have suffered any significant damage by fire or other casualty which has not
been repaired; no law, regulation, ordinance, moratorium, injunctive proceeding,
Schedule 2.1 - 2
<PAGE> 49
restriction, litigation, action, citation or similar proceeding or matter shall
have been enacted, adopted, or threatened by any governmental authority, which
would have, in Lender's judgment, a material adverse effect on Borrower, any
Borrower Party or a Project.
18. All fees and commissions payable to real estate brokers, mortgage
brokers, or any other brokers or agents in connection with the Loan or the
acquisition of the Projects have been paid, such evidence to be accompanied by
any waivers or indemnifications deemed necessary by Lender.
19. Payment of Lender's costs and expenses in underwriting,
documenting, and closing the transaction, including fees and expenses of
Lender's inspecting engineers, consultants, and outside counsel.
20. Such other documents or items as Lender or its counsel reasonably
may require.
21. The representations and warranties contained in this Loan Agreement
and in all other Loan Documents are true and correct.
22. No Potential Default or Event of Default shall have occurred or
exist.
23. Reference is made to that Loan by Lender to Borrower in the amount
of up to $97,500,000 under Loan Agreement dated January 6, 1996 between Lender
and Borrower (the "EXISTING FACILITY") and to that loan by Lender to American
Retirement Communities, L.P. and ARCLP-Charlotte, L.L.C. in the amount of
$51,750,000 under that Loan Agreement dated April 30, 1996 among Lender,
American Retirement Communities, L.P. and ARCLP-Charlotte, L.L.C. (the "ONYX
FACILITY") for the following conditions to the initial advance of the Loan.
(a) Prepayment of that portion of the Existing Facility which
bears interest at a floating rate of interest (reserving the right to
adjust the amount of such prepayment based on a reconciliation of
payments previously made, including applications of reserves), plus all
prepayment premiums therefor as required under the Existing Facility,
in lieu of prepayment and it being understood and agreed that the
initial advance of the Loan is a refinancing in renewal and extension
of the remaining unpaid principal balance of the Existing Facility;
(b) Prepayment in full of the Onyx Facility, plus all
prepayment premiums therefor as required under the Onyx Facility;
(c) Payment to Lender of $3,000,000 in cash in consideration
for Lender's participation interest in cash flow and appreciated value
with respect to the properties securing the Onyx Facility;
(d) Any reserves, letters of credit, or impounds with respect
to the Existing Facility or the Onyx Facility shall be returned to
Borrower upon the closing of the Loan; and
(e) Borrower shall have paid in full the construction
financing for the expansion of Santa Catalina and shall have obtained a
release of Lender from any obligation to satisfy said construction
financing through a funding under the tri-party agreement for the Santa
Catalina Expansion and the Existing Facility.
Schedule 2.1 - 3
<PAGE> 50
PART B. GENERAL CONDITIONS
Each advance of the Line of Credit shall be subject to Lender's
receipt, review, approval and/or confirmation of the following, each in form and
content satisfactory to Lender in its sole discretion:
1. There shall exist no Potential Default or Event of Default
(currently and after giving effect to the requested advance).
2. The representations and warranties contained in this Loan Agreement
and in all other Loan Documents are true and correct (after giving effect to the
Borrower's reports under Article 7 and the notices from Borrower to Lender under
the terms of this Agreement and the other Loan Documents).
3. Such advance shall be secured by the Loan Documents, subject only to
those exceptions to title approved by Lender at the time of Loan closing, or the
time that a Project was first encumbered by a Mortgage, as evidenced by title
insurance endorsements satisfactory to Lender, if necessary.
4. Borrower shall have paid to Lender any Advance Fee applicable to
such advance.
5. Borrower shall have paid Lender's costs and expenses in connection
with such advance (including title charges, and costs and expenses of Lender's
inspecting engineer and attorneys).
6. No change shall have occurred in the financial condition of Borrower
or any Borrower Party, or in the Net Operating Income of the Projects, or in the
financial condition of Borrower or ARC, which would have, in Lender's judgment,
a material adverse effect on the Loan, the Projects, or Borrower's or any
Borrower Party's ability to perform its obligations under the Loan Documents.
7. No condemnation or adverse, as determined by Lender, zoning or usage
change proceeding shall have occurred or shall have been threatened against a
Project; no Project shall have suffered any damage by fire or other casualty
which has not been repaired or is not being restored in accordance with this
Agreement; no law, regulation, ordinance, moratorium, injunctive proceeding,
restriction, litigation, action, citation or similar proceeding or matter shall
have been enacted, adopted, or threatened by any governmental authority, which
would have, in Lender's judgment, a material adverse effect on a Project or
Borrower's or any Borrower Party's ability to perform its obligations under the
Loan Documents.
8. Lender shall have no obligation to make any additional advance for
less than $5,000,000, or to make advances more often than once in any one-month
period, or to make any advance after June 30, 2002, there then being no Unused
Line Fee for the period after June 30, 2002 and before the Maturity Date.
9. At the option of Lender (a) each advance request shall be submitted
to Lender at least ten (10) Business Days prior to the date of the requested
advance; and (b) all advances shall be made at the Dallas, Texas office of
Lender or at such other place as Lender may designate unless Lender exercises
its option to make an advance directly to the Person to whom payment is due.
Schedule 2.1 - 4
<PAGE> 51
PART C. ADVANCES ON THE LINE OF CREDIT.
Advances on the Line of Credit shall be subject to Lender's receipt,
review and approval and/or confirmation of the following, at Borrower's cost and
expense, each in form and substance satisfactory to Lender in its sole
discretion:
1. Confirmation by Lender's review and analysis of Borrower's operating
statements that the Operating Expenses and Operating Revenues of the Projects,
that the Net Operating Income of the Projects, will generate a Cash on Cash
Return of not less than 14.25% and a Debt Service Coverage of not less than
1.75:1, calculated taking into account a principal balance which includes the
requested advance.
2. Lender's audit of the Operating Revenues and Operating Expenses of
the Projects, as reflected in Borrower's monthly and annual reports and as
required by Lender from time to time in accordance with Section 7.5.
3. Verification by Lender that ARC has maintained in the previous
fiscal quarter, and is maintaining, on a consolidated basis, (a) a Ratio of
Total Assets to Total Debt of at least 1.33:1, and (b) a Ratio of EBIDTA to
Total Interest Expense of at least 1.50:1, and certification by ARC that ARC is
not in monetary default under any financial obligation in excess of $1,000,000.
As used herein, "RATIO OF TOTAL ASSETS TO TOTAL DEBT" means the ratio
(1) of the fair market value of all of the assets of ARC, after the restatement
of the current fair market value of the Projects as determined by Lender, to (2)
the total Debt of ARC.
As used herein, "RATIO OF EBIDTA TO TOTAL INTEREST EXPENSE" means, for
any fiscal quarter, the ratio of the EBIDTA of ARC to the Total Interest Expense
of ARC.
As used herein, "EBIDTA" means, for any fiscal quarter, without
duplication, consolidated earnings of ARC before adjustments for interest
income/expense, income taxes, depreciation and amortization, and excluding from
the calculation thereof non-recurring revenues and charges, and extraordinary
gains and losses.
As used herein, "TOTAL INTEREST EXPENSE" means, for any fiscal quarter,
without duplication, the total interest expense of ARC, on a consolidated basis,
whether paid or accrued as liabilities (including the interest component of
capital lease obligations) with respect to all Debt of ARC, including, without
limitation, all commissions, discounts and other fees and charges owed with
respect to any financing or letters of credit and net costs under any interest
rate swap agreement, to the extent that such costs are included within interest
expense under generally accepted accounting principles. For purposes of this
definition, interest expense related to the Convertible Subordinated Debentures
shall be offset by the consolidated interest income of ARC.
As used herein, "CONVERTIBLE SUBORDINATED DEBENTURES" means those
convertible subordinated debentures in the principal amount of $138,000,000,
issued by ARC in September 1997.
4. Receipt by Lender of the accrued but unpaid Unused Line Fee, if any,
which is then owing.
Schedule 2.1 - 5
<PAGE> 52
SCHEDULE 2.3(5)
DISCOUNTED YIELD MAINTENANCE
A. YIELD MAINTENANCE AMOUNT
As used in this Schedule 2.3(5), "CONTRACT RATE" means the
Fixed Rate.
As used herein, "YIELD MAINTENANCE AMOUNT" means the sum of
the Present Value (as defined below) on the date of prepayment
of each Monthly Interest Shortfall (as defined below) for the
remaining term of the Loan discounted at the monthly
Replacement Treasury Yield (as defined below).
The Monthly Interest Shortfall is calculated for each monthly
payment date as follows:
i) The positive difference, if any, of the Contract Rate
less the Replacement Treasury Yield, plus the Break
Contract Fee (as defined below) of 20 basis points;
ii) Divided by 12;
iii) Multiplied by the outstanding principal balance of
the Loan on the date of prepayment
The Present Value is then determined by discounting each
Monthly Interest Shortfall at the Replacement Treasury Yield
divided by 12.
FOR EXAMPLE: If a loan with a Contract Rate of 9% were prepaid
with 24 months remaining in the term, at a time when the two
year Replacement Treasury Yield was 5%, and the outstanding
loan balance was $10,000,000.00 then:
Contract Rate .0900
Less the Replacement Treasury Yield - .0500
--------------
= .0400
Plus the Break Contract Fee + .0020
--------------
Equals the rate difference = .0420
Divided by 12 divided by 12
==============
Equals the monthly rate difference = .0035
Times the principal balance x $10,000,000
--------------
Equals the Monthly Interest Shortfall = $ 35,000.00
Schedule 2.3(5) - 1
<PAGE> 53
The Present Value of each Monthly Interest Shortfall ($35,000)
discounted at the monthly Replacement Treasury Yield (5% divided by 12 or
.4167%) equals $797,786.
The Break Contract Fee shall be 20 basis points at
all times.
As used herein the term "REPLACEMENT TREASURY YIELD" shall mean the
rate of interest equal to the yield to maturity of the most recently
issued U.S. Treasury Security as quoted in The Wall Street Journal on
the prepayment date. If the remaining term is less than one year, the
Replacement Treasury Yield will equal the yield for 1-Year Treasury's.
If the remaining term is 1-Year, 2-Year, etc., then the Replacement
Treasury Yield will equal the yield for the Treasury's with a maturity
equaling the remaining term. If the remaining term is longer than one
year but does not equal one of the maturities being quoted, then the
Replacement Treasury Yield will equal the yield for Treasury's with a
maturity closest to but not exceeding the remaining term. If The Wall
Street Journal (i) quotes more than one such rate, the highest of such
quotes shall apply, or (ii) ceases to publish such quotes, the U.S.
Treasury security shall be determined from such financial reporting
service or source as Lender shall determine.
Schedule 2.3(5) - 2
<PAGE> 54
SCHEDULE 2.4
CAPITAL IMPROVEMENTS RESERVE
CAPITAL IMPROVEMENTS RESERVE. On January 15, 1998 and by the fifteenth
(15th) day of each January thereafter, Borrower shall deposit into a reserve
with Lender (the "CAPITAL IMPROVEMENTS RESERVE") an amount equal to the amount,
if any, by which (a) one percent (1%) of Operating Revenues for the immediately
preceding calendar year exceeded (b) the sum of all expenditures by Borrower for
replacing or correcting damages or defects (as opposed to normal repairs and
recurring expenses) to any Project, including but not limited to, roofing,
foundation work, exterior painting, parking lot and structures, kitchen
appliances, carpeting, furnishings, fixtures, equipment, vehicles, office
equipment, landscaping, heating, ventilating and air-conditioning systems,
plumbing, electrical and mechanical systems ("CAPITAL EXPENDITURES") during the
preceding calendar year which were specified in a Capital Expenditures Budget
(as hereinafter defined) or otherwise approved in advance by Lender and not paid
with disbursements from the Capital Improvements Reserve; however, if the amount
of approved Capital Expenditures in any calendar year exceeded one percent (1%)
of Operating Revenues in such calendar year, the amount of any excess shall be
credited to Borrower's obligation to make deposits to the Capital Improvements
Reserve in any succeeding calendar year(s). The Capital Improvements Reserve
will be held by Lender without interest and may be commingled with Lender's own
funds. The Capital Improvements Reserve shall be advanced by Lender to Borrower
for Capital Expenditures. Borrower grants to Lender a security interest in the
Capital Improvements Reserve. While an Event of Default or a Potential Default
exists, Lender shall not be obligated to advance to Borrower any portion of the
Capital Improvements Reserve, and while an Event of Default exists, Lender shall
be entitled, without notice to Borrower, to apply any funds in the Capital
Improvements Reserve to satisfy Borrower's obligations under the Loan Documents.
Within thirty (30) days after the beginning of any calendar year Borrower shall
submit to Lender a budget for Capital Expenditures for that calendar year (the
"CAPITAL EXPENDITURES BUDGET"). The Capital Expenditures Budget shall be based
on the previous year's experience and an assessment of anticipated future needs,
and shall be subject to Lender's approval. The Capital Improvements Reserve
shall be advanced in accordance with the conditions for advances under Schedule
2.1, Part B, and Lender's customary procedures for improvements advances.
Schedule 2.4 - 1
<PAGE> 1
Exhibit 10.23
PROMISSORY NOTE
$62,330,000 December 31, 1997
For value received, FORT AUSTIN LIMITED PARTNERSHIP, a Texas limited
partnership ("BORROWER"), promises and agrees to pay to the order of GENERAL
ELECTRIC CAPITAL CORPORATION, a New York corporation ("LENDER"), in lawful money
of the United States of America, the principal sum of $62,330,000 or so much
thereof as may be outstanding under the Loan Agreement of even date herewith
between Borrower and Lender (the "LOAN AGREEMENT"), with interest on the unpaid
principal sum owing thereunder at the rate or rates or in the amounts computed
in accordance with the Loan Agreement, together with all other amounts due
Lender under the Loan Agreement, all payable in the manner and at the time or
times provided in the Loan Agreement. Capitalized terms used herein, but not
defined, shall have the meanings assigned to them in the Loan Agreement.
If not sooner due and payable in accordance with the Loan Agreement,
Borrower shall pay to Lender all amounts due and unpaid under the Loan Agreement
on December 31, 2002, or on any earlier Maturity Date as set forth in the Loan
Agreement. Unless otherwise specified in writing by Lender, all payments
hereunder shall be paid to Lender at c/o Texas Commerce Bank, 717 Harwood, 6th
Floor, LB 9103611, Dallas, Texas 75201-6507. Lender reserves the right to
require any payment on this Note, whether such payment is a regular installment,
prepayment or final payment, to be by wired federal funds or other immediately
available funds.
Borrower, co-makers, sureties, endorsers and guarantors, and each of
them, expressly waive demand and presentment for payment, notice of nonpayment,
protest, notice of protest, notice of dishonor, notice of intent to accelerate
the maturity hereof, notice of the acceleration of the maturity hereof, bringing
of suit and diligence in taking any action to collect amounts called for
hereunder and in the handling of securities at any time existing in connection
herewith; such parties are and shall be jointly, severally, directly and
primarily liable for the payment of all sums owing and to be owing hereon,
regardless of and without any notice, diligence, act or omission as or with
respect to the collection of any amount called for hereunder or in connection
with any right, lien, interest or property at any and all times had or existing
as security for any amount called for hereunder.
This Note is the Fixed Rate Note as identified and defined in the Loan
Agreement. This Note evidences the initial advance made, interest due at the
Fixed Rate, and amounts otherwise owed to Lender under the Fixed Rate Note and
the Loan Agreement. This Note is executed in conjunction with the Loan Agreement
and is secured by the liens and security interests created under the Loan
Documents (including those arising under the Mortgage). Reference is made to the
Loan Agreement for provisions relating to repayment of the indebtedness
evidenced by this Note, including mandatory repayment, acceleration following
default, late charges, default rate of interest, limitations on interest,
restrictions on prepayment, and participation interest (if any).
Borrower's liability hereunder is subject to the limitation on
liability provisions of Article 12 of the Loan Agreement. This Note has been
executed and delivered in and shall be construed in accordance with and governed
by the laws of the State of Texas and of the United States of America.
1
<PAGE> 2
Executed as of the date first written above.
FORT AUSTIN LIMITED PARTNERSHIP,
a Texas limited partnership
By: ARC FORT AUSTIN PROPERTIES, INC.,
a Tennessee corporation, General Partner
By: /s/ Todd Kaestner
------------------------------------
EVP, Fort Austin Properties
------------------------------------
<PAGE> 1
Exhibit 10.24
PROMISSORY NOTE
$50,000,000 December 31, 1997
For value received, FORT AUSTIN LIMITED PARTNERSHIP, a Texas limited
partnership ("BORROWER"), promises and agrees to pay to the order of GENERAL
ELECTRIC CAPITAL CORPORATION, a New York corporation ("LENDER"), in lawful money
of the United States of America, the principal sum of $50,000,000 or so much
thereof as may be outstanding from time to time under the Line of Credit
extended by Lender to Borrower in the Loan Agreement of even date herewith
between Borrower and Lender (the "LOAN AGREEMENT"), with interest on the unpaid
principal sum owing thereunder at the rate or rates or in the amounts computed
in accordance with the Loan Agreement, together with all other amounts due
Lender under the Loan Agreement, all payable in the manner and at the time or
times provided in the Loan Agreement. Capitalized terms used herein, but not
defined, shall have the meanings assigned to them in the Loan Agreement.
If not sooner due and payable in accordance with the Loan Agreement,
Borrower shall pay to Lender all amounts due and unpaid under the Loan Agreement
on December 31, 2002, or on any earlier Maturity Date as set forth in the Loan
Agreement. Unless otherwise specified in writing by Lender, all payments
hereunder shall be paid to Lender at c/o Texas Commerce Bank, 717 Harwood, 6th
Floor, LB 9103611, Dallas, Texas 75201-6507. Lender reserves the right to
require any payment on this Note, whether such payment is a regular installment,
prepayment or final payment, to be by wired federal funds or other immediately
available funds.
Borrower, co-makers, sureties, endorsers and guarantors, and each of
them, expressly waive demand and presentment for payment, notice of nonpayment,
protest, notice of protest, notice of dishonor, notice of intent to accelerate
the maturity hereof, notice of the acceleration of the maturity hereof, bringing
of suit and diligence in taking any action to collect amounts called for
hereunder and in the handling of securities at any time existing in connection
herewith; such parties are and shall be jointly, severally, directly and
primarily liable for the payment of all sums owing and to be owing hereon,
regardless of and without any notice, diligence, act or omission as or with
respect to the collection of any amount called for hereunder or in connection
with any right, lien, interest or property at any and all times had or existing
as security for any amount called for hereunder.
This Note is the Floating Rate Note as identified and defined in the
Loan Agreement. This Note evidences advances made, other than the initial
advance, interest due at the Floating Rate, and amounts otherwise owed to Lender
under the Floating Rate Note and the Loan Agreement. This Note evidences a
revolving line of credit which provides that the principal balance hereof may be
advanced, repaid and readvanced (or reborrowed) from time to time as provided in
the Loan Agreement. This Note is executed in conjunction with the Loan Agreement
and is secured by the liens and security interests created under the Loan
Documents (including those arising under the Mortgage). Reference is made to the
Loan Agreement for provisions relating to repayment of the indebtedness
evidenced by this Note, including mandatory repayment, acceleration following
default, late charges, default rate of interest, limitations on interest,
restrictions on prepayment, and participation interest (if any).
Borrower's liability hereunder is subject to the limitation on
liability provisions of Article 12 of the Loan Agreement. This Note has been
executed and delivered in and shall be construed in accordance with and governed
by the laws of the State of Texas and of the United States of America.
1
<PAGE> 2
Executed as of the date first written above.
FORT AUSTIN LIMITED PARTNERSHIP,
a Texas limited partnership
By: ARC FORT AUSTIN PROPERTIES, INC.,
a Tennessee corporation, General Partner
By: /s/ Todd Kaestner
----------------------------------
EVP, Fort Austin Properties
----------------------------------
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant
1. ARC Greenwood Village, Inc., a Tennessee corporation.
2. ARC Rossmoor, Inc., a Tennessee corporation.
3. Plaza Professional Pharmacy, Inc., a Virginia corporation.
4. Assisted Care of the Villages, a Florida general partnership.
5. Maryarc LLC, a Tennessee limited liability company.
6. ARC Bahia Oaks, Inc., a Tennessee corporation.
7. ARC Wilora Lake, Inc., a Tennessee corporation.
8. ARC Tarpon Springs, Inc., a Tennessee corporation.
9. ARC Imperial Plaza, Inc., a Tennessee corporation.
10. ARC Imperial Services, Inc., a Tennessee corporation.
11. ARC Sun City Center Inc., a Tennessee corporation.
12. Lebarc, L.P., a Tennessee limited partnership.
13. Fort Austin Limited Partnership, a Texas limited partnership.
14. ARC Fort Austin Properties, Inc., a Tennessee corporation.
15. ARCLP - Charlotte, LLC, a Tennessee limited liability company.
16. ARC Management Corporation, a Tennessee corporation.
17. ARC Corpus Christi, Inc., a Tennessee corporation.
18. Trinity Towers Limited Partnership, a Tennessee limited partnership.
<PAGE> 1
Exhibit 23
ACCOUNTANTS' CONSENT
The Board of Directors
American Retirement Corporation:
We consent to incorporation by reference in the Registration Statement No.
333-28657 on Form S-8 of American Retirement Corporation of our report dated
February 11, 1998, relating to the 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 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, and the
related combined statements of operations, changes in partners'/shareholders'
equity, and cash flows of American Retirement Corporation and combined entities
for the period from January 1, 1995 through March 31, 1995, which report
appears in the December 31, 1997 annual report on Form 10-K of American
Retirement Corporation.
Our report refers to a change in the presentation of the cost basis of
financial information for periods subsequent to a purchase business combination
effected on April 1, 1995.
KPMG PEAT MARWICK LLP
Nashville, Tennessee
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 44,583
<SECURITIES> 52
<RECEIVABLES> 6,178
<ALLOWANCES> 0
<INVENTORY> 483
<CURRENT-ASSETS> 60,285
<PP&E> 248,546
<DEPRECIATION> 18,648
<TOTAL-ASSETS> 317,154
<CURRENT-LIABILITIES> 12,541
<BONDS> 237,354
0
0
<COMMON> 114
<OTHER-SE> 53,804
<TOTAL-LIABILITY-AND-EQUITY> 317,154
<SALES> 0
<TOTAL-REVENUES> 94,212
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 76,149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,863
<INCOME-PRETAX> 5,874
<INCOME-TAX> 4,340
<INCOME-CONTINUING> 1,534
<DISCONTINUED> 0
<EXTRAORDINARY> 6,334
<CHANGES> 0
<NET-INCOME> (4,800)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
The Company completed its initial public offering in May 1997 thus actual EPS
data is not applicable. Proforma EPS data is presented in Form 10-K.
</FN>
</TABLE>
