-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ej+SOaTUyi7GoT8vatd6nVg3PQMMCiX7XZ30BWQ5tedFmNrF3XiPfmXwyl5xzFeS SurfY9hUiV8RCyvlhunhrA== 0000950144-97-002300.txt : 19970313 0000950144-97-002300.hdr.sgml : 19970313 ACCESSION NUMBER: 0000950144-97-002300 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 29 FILED AS OF DATE: 19970312 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN RETIREMENT CORP CENTRAL INDEX KEY: 0000787784 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-23197 FILM NUMBER: 97555583 BUSINESS ADDRESS: STREET 1: 111 WESTWOOD PLACE CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 6152212250 S-1 1 AMERICAN RETIREMENT CORPORATION 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 12, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- AMERICAN RETIREMENT CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TENNESSEE 8059 62-1674303 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Number)
111 WESTWOOD PLACE, SUITE 402 BRENTWOOD, TENNESSEE 37027 (615) 221-2250 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) --------------------- W.E. SHERIFF CHAIRMAN AND CHIEF EXECUTIVE OFFICER 111 WESTWOOD PLACE, SUITE 402 BRENTWOOD, TENNESSEE 37027 (615) 221-2250 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) --------------------- COPIES OF COMMUNICATIONS TO: T. ANDREW SMITH JEFFREY S. LOWENTHAL BASS, BERRY & SIMS PLC STROOCK & STROOCK & LAVAN LLP FIRST AMERICAN CENTER 180 MAIDEN LANE NASHVILLE, TENNESSEE 37238 NEW YORK, NEW YORK 10038 (615) 742-6200 (212) 806-5400
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____________. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____________. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] --------------------- CALCULATION OF REGISTRATION FEE
======================================================================================================================= PROPOSED PROPOSED MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE - ----------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share................................ 3,593,750 $17.00 $61,093,750 $18,514 =======================================================================================================================
(1) Includes 468,750 shares of Common Stock which the Underwriters have the option to purchase from the Registrant to cover over-allotments, if any. (2) Estimated in accordance with Rule 457(a) solely for the purpose of calculating the registration fee. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MARCH 12, 1997 PROSPECTUS 3,125,000 SHARES AMERICAN RETIREMENT CORPORATION (LOGO) COMMON STOCK ------------------ All of the shares of Common Stock, par value $.01 per share (the "Common Stock"), of American Retirement Corporation (the "Company") offered hereby (the "Offering") are being offered by the Company. Prior to the Offering, there has been no public market for the Common Stock. It is currently anticipated that the initial public offering price will be between $15.00 and $17.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. It is anticipated that approximately 500,000 shares of Common Stock will be offered outside of the United States. SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
============================================================================================================= UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - ------------------------------------------------------------------------------------------------------------- Per Share.................................. $ $ $ - ------------------------------------------------------------------------------------------------------------- Total(3)................................... $ $ $ =============================================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated to be $900,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to an additional 468,750 shares of Common Stock on the same terms and conditions as set forth above solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Company will be $ , $ , and $ , respectively. ------------------ The shares of Common Stock are offered by the Underwriters when, as, and if delivered to and accepted by the Underwriters, and subject to various prior conditions, including the right to withdraw, cancel, or modify the Offering and to reject orders in whole or in part. It is expected that delivery of stock certificates will be made in New York, New York on or about , 1997. ------------------ NATWEST SECURITIES LIMITED EQUITABLE SECURITIES CORPORATION The date of this Prospectus is , 1997 3 [MAP/PICTURES TO FOLLOW] FOR UNITED KINGDOM PURCHASERS: This Prospectus has not been registered in the United Kingdom and, accordingly, the shares of Common Stock offered hereby may not be and are not being offered or sold in the United Kingdom other than to persons whose ordinary activities involve them in acquiring, holding, managing, or disposing of investments, whether as principal or agent (except in circumstances that do not constitute an offer to the public within the meaning of the Public Offers of Securities Regulations 1995 or the Financial Services Act 1986), and this Prospectus may only be issued or passed on to any person in the United Kingdom if that person is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or a person to whom this Prospectus may otherwise lawfully be passed on. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS, AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information set forth under "Risk Factors." Immediately prior to the consummation of the Offering, American Retirement Communities, L.P. ("ARCLP" or the "Predecessor") will be reorganized (the "Reorganization") such that all of ARCLP's assets and liabilities will be contributed to the Company in exchange for a total of 7,812,500 shares of Common Stock, which will be immediately distributed to ARCLP's partners, and a promissory note in the principal amount of $25.0 million (the "Reorganization Note"). See "The Company -- Pending Reorganization." Unless otherwise indicated, all information in this Prospectus (i) gives effect to the Reorganization, and (ii) assumes no exercise of the Underwriters' over-allotment option. Unless the context otherwise requires, references to the Company include the Company, its subsidiary partnerships and corporations, and the Predecessor. THE COMPANY The Company is a national senior living and health care services company providing a broad range of care and services to the elderly, including independent living, assisted living, skilled nursing, and home health care services. The Company has pioneered numerous developments in the provision of care and services for the elderly since its inception in 1978, and believes it ranks among the leading operators in the senior living and health care services industry. Currently, the Company operates 19 senior living communities in 12 states, consisting of ten owned communities, two leased communities, and seven managed communities, with an aggregate capacity for approximately 5,500 residents. The Company also owns and operates seven home health care agencies. At December 31, 1996, the Company's owned and leased communities had an occupancy rate of 96% and its managed communities had an occupancy rate of 92%. Approximately 92.1% of the Company's total revenues for the year ended December 31, 1996 were derived from private pay sources. Over the past several years, the Company has experienced significant growth, primarily through the acquisition of senior living communities. The Company's revenues have grown from $17.8 million in 1992 to $75.6 million in 1996, an average annual growth rate of 43.5%. During the same period, the Company's income from operations has grown from $2.3 million to $15.6 million, an average annual growth rate of 61.7%. The Company intends to continue its growth through a combination of (i) development of free-standing assisted living residences, including special living units and programs for residents with Alzheimer's and other forms of dementia; (ii) selective acquisitions of senior living communities, including assisted living residences; (iii) expansion of existing communities; and (iv) development and acquisition of home health care agencies. As part of its growth strategy, the Company is currently developing 19 free-standing assisted living residences, with an estimated aggregate capacity for 1,684 residents, and is expanding eight of its existing communities to add capacity to accommodate an additional 702 residents. The Company has also entered into letters of intent to acquire one additional senior living community, which is currently managed by the Company, and one additional home health care agency. The Company was founded by Dr. Thomas F. Frist, Sr. and Jack C. Massey, the principal founders of Hospital Corporation of America (now a subsidiary of Columbia/HCA Healthcare Corporation). The Company's operating philosophy was inspired by Dr. Frist's and Mr. Massey's vision to enhance the lives of the elderly by providing the highest quality of care and services in well-operated communities designed to improve and protect the quality of life, independence, personal freedom, privacy, spirit, and dignity of its residents. The Company believes that its senior management, led by W.E. Sheriff, its Chairman and Chief Executive Officer, and Christopher J. Coates, its President and Chief Operating Officer, is one of the most experienced management teams in the senior living industry. The Company's 12 senior officers have been employed by the Company for an average of nine years and have an average of 14 years of industry experience. The executive directors of the Company's communities have been employed by the Company for an average of four years and have an average of 11 years of experience in the senior living industry. The Company's target market, which consists of seniors age 75 and older, is one of the fastest growing segments of the United States population. According to the United States Census Bureau, this age group is 3 5 expected to grow from 13.2 million in 1990 to over 16.6 million by 2000, an increase of 26%. The Company believes that the market for senior living and health care services, including Alzheimer's and dementia care services, will continue to grow as a result of (i) the aging of the U.S. population, (ii) rising public and private cost-containment pressures, (iii) declining availability of traditional nursing home beds as a result of nursing home operators focusing on higher acuity patients, (iv) the quality of life advantages of assisted living residences over traditional skilled nursing facilities, and (v) the decreasing availability of family care as an option for elderly family members. The Company believes that its experience, reputation, and market presence favorably position it to take advantage of opportunities in the rapidly growing senior living and health care industry. THE OFFERING Common Stock offered by the Company........................ 3,125,000 shares Common Stock to be outstanding after the Offering.......... 10,937,500 shares(1) Use of proceeds............................................ To repay the Reorganization Note; to complete two pending acquisitions; to fund development activities and possible future acquisitions; and for general corporate purposes, including working capital. See "The Company -- Pending Reorganization" and "Use of Proceeds."
- --------------- (1) Includes 7,812,500 shares of Common Stock to be issued in the Reorganization. Does not include 635,000 shares of Common Stock reserved for issuance pursuant to outstanding stock options under the Company's 1997 Stock Incentive Plan, which options are exercisable at the initial public offering price. See "Management -- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan" and "Description of Capital Stock." 4 6 SUMMARY COMBINED AND CONSOLIDATED FINANCIAL AND OTHER DATA The following summary combined and consolidated financial and other data is qualified in its entirety by the more detailed information in the financial statements and pro forma financial information appearing elsewhere in this Prospectus. The summary financial data for the year ended December 31, 1994 and for the three months ended March 31, 1995 is derived from the combined financial statements of certain affiliated partnerships and corporations (collectively, the "Predecessor Entities"). The summary financial data for the nine months ended December 31, 1995 and the year ended December 31, 1996 is derived from the consolidated financial statements of the Predecessor. See Note 1 to the Combined and Consolidated Financial Statements.
PREDECESSOR ENTITIES (COMBINED) PREDECESSOR --------------------------- ---------------------------------------- THREE MONTHS NINE MONTHS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, 1996 DECEMBER 31, MARCH 31, DECEMBER 31, ------------------------ 1994 1995 1995 ACTUAL PRO FORMA(1) ------------ ------------ ------------ -------- ------------ (IN THOUSANDS, EXCEPT PER SHARE, COMMUNITY, AND RESIDENT DATA) STATEMENT OF OPERATIONS DATA: Total revenues.................................... $33,341 $12,356 $48,763 $ 75,617 $ 79,543 Operating expenses................................ 28,126 10,270 38,730 60,066 63,861 ------- ------- ------- -------- -------- Income from operations.......................... 5,215 2,086 10,033 15,551 15,682 Other income (expense), net....................... (5,053) (3,334) (6,682) (10,938) (11,353) ------- ------- ------- -------- -------- Income (loss) before income taxes and extraordinary item.............................. 162 (1,248) 3,351 4,613 4,329 Income tax expense (benefit)(2)................... -- 20 55 (920) (920) ------- ------- ------- -------- -------- Income (loss) before extraordinary item........... 162 (1,268) 3,296 5,533 5,249 Extraordinary item(3)............................. -- -- -- (2,335) (2,335) ------- ------- ------- -------- -------- Net income (loss)................................. $ 162 $(1,268) $ 3,296 $ 3,198 $ 2,914 ======= ======= ======= ======== ======== UNAUDITED PRO FORMA TAX DATA(4): Income before income taxes and extraordinary item............................................ $ 4,613 $ 4,329 Pro forma income tax expense...................... 820 712 -------- -------- Pro forma income before extraordinary item........ $ 3,793 $ 3,617 ======== ======== Pro forma per share data: Income per share before extraordinary item...... $ 0.40 $ 0.39 ======== ======== Shares used in computing pro forma per share data(5)....................................... 9,375 9,375 ======== ======== Pro forma as adjusted per share data(6): Income per share before extraordinary item(7)... $ 0.33 ======== Shares used in computing pro forma as adjusted per share data................................ 10,938 ======== OTHER DATA: Operating income before interest, taxes, depreciation, amortization and rental payments ("EBITDAR")(8).................................. $ 8,106 $ 3,213 $14,567 $ 22,457 $ 24,045 Distribution to partners, including preferred distributions................................... 2,580 1,400 5,189 7,139 6,359(9) Revenue mix: Private pay..................................... 93.0% 92.2% 91.2% 92.1% 92.5% Medicare and other(10).......................... 7.0 7.8 8.8 7.9 7.5 ------- ------- ------- -------- -------- Total..................................... 100.0% 100.0% 100.0% 100.0% 100.0% Communities (at period end): Owned........................................... 8 9 10 12 12(11) Managed......................................... 11 10 10 7 7 ------- ------- ------- -------- -------- Total..................................... 19 19 20 19 19 Resident capacity (at period end): Owned........................................... 2,141 2,386 2,594 3,369 3,369(11) Managed......................................... 3,315 3,079 3,008 2,159 2,159 ------- ------- ------- -------- -------- Total..................................... 5,456 5,456 5,602 5,528 5,528 Average occupancy rate: Owned........................................... 89% 91% 93% 94% 94%(11) Managed......................................... 93 95 90 91 90 ------- ------- ------- -------- -------- Total..................................... 91% 93% 92% 92% 92%
5 7
AT DECEMBER 31, 1996 ------------------------------------------- COMPANY PREDECESSOR ---------------- ---------------------- PRO FORMA PRO AS ACTUAL FORMA(12) ADJUSTED(13) -------- --------- ---------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................... $ 3,222 $ 11,514 $ 32,114 Working capital (deficit)................................... (14,289) 3,913 24,513 Total assets................................................ 228,162 212,925 233,525 Long-term debt, including current portion................... 170,689 156,096 156,096 Partners' and shareholders' equity.......................... 37,882 37,882 44,966
- --------------- (1) Gives effect to the following transactions as if they had occurred on January 1, 1996: (a) the May 1996 acquisition (the "Carriage Club Acquisitions") of Carriage Club of Charlotte, L.P. and Carriage Club of Jacksonville, L.P. (collectively, "Carriage Club"), and (b) the January 1997 sale-leaseback by the Company of two senior living communities (the "Sale-Leaseback Transactions") and the application of a portion of the net proceeds therefrom to retire debt. See "Unaudited Pro Forma Condensed Combined Financial Information." (2) Provision for income taxes reflects income tax expense of only one of the Predecessor Entities because the Predecessor and the other Predecessor Entities were partnerships. No income tax expense is reflected for periods prior to 1995 because of losses or the availability of net operating loss carryforwards ("NOLs"). Both periods in 1995 reflect a provision for alternative minimum taxes. In 1996, the Company recorded an income tax benefit and a deferred tax asset of $920,000 because of the anticipated utilization of NOLs that will offset taxable gains recognized from the Sale-Leaseback Transactions. See Note 12 to the Combined and Consolidated Financial Statements. (3) Amount represents loss on early extinguishment of debt. See Note 9 to the Combined and Consolidated Financial Statements. (4) Except for one of the Predecessor Entities, the Predecessor and the Predecessor Entities, as partnerships, were exempt from U.S. Federal and state income taxes. The pro forma financial data reflects the effect on certain income statement data of income tax expense that would have been recorded had the Predecessor and the other Predecessor Entities not been exempt from paying such income taxes. Pro forma income tax expense has been calculated using the statutory U.S. Federal and state tax rates and gives effect to the recognition in 1996 of the $920,000 deferred tax asset described in footnote (2) above. (5) Reflects 7,812,500 shares issuable in the Reorganization, plus 1,562,500 shares, representing the value of the $25.0 million principal amount of the Reorganization Note (based upon the assumed initial public offering price of $16.00 per share). (6) Gives effect to the following transactions as if they had occurred on January 1, 1996: (a) the transactions described in footnote (1) above; (b) the Reorganization; and (c) the sale of the 3,125,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $16.00 per share, and the application of a portion of the estimated net proceeds to retire the Reorganization Note . The pro forma as adjusted per share data does not give effect to a non-recurring $13.5 million ($1.23 per share) charge to income that will be incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities. See Note 16 to the Combined and Consolidated Financial Statements. (7) The Company intends to repay approximately $15.0 million of debt in January 1998, when applicable prepayment restrictions lapse, and is currently in discussions with its lender to prepay such debt during 1997. Giving pro forma effect to the transactions described in footnote (6) above and to such anticipated repayment as if it had occurred on January 1, 1996, including the elimination of interest expense incurred in 1996 with respect to such debt and the related tax effects, (i) income before income taxes and extraordinary item for 1996 would have been $5.1 million ($0.47 per share), and (ii) pro forma income before extraordinary item for 1996 would have been $4.1 million ($0.38 per share). (8) This measurement is not intended to represent net income, cash flow, or any other measure of performance in accordance with generally accepted accounting principles, but is included because the Company believes it is useful for measuring and identifying trends with respect to the Company's operating performance and creditworthiness. (9) Reflects the elimination, on a pro forma basis, of the preferred distributions paid with respect to $5.2 million of ARCLP's special redeemable preferred limited partnership interests (the "Preferred Partnership Interests"), which interests were redeemed with a portion of the net proceeds from the Sale-Leaseback Transactions. The Company redeemed $4.8 million of the Preferred Partnership Interests in June 1996 out of operating cash flow and distributions of $324,000 paid from January 1996 through June 1996 with respect to the Preferred Partnerships Interests were not eliminated. (10) Includes Medicare (including Medicare-related private co-insurance) and Medicaid. (11) Includes the two senior living communities with total aggregate capacity for 483 residents that were the subject of the Sale-Leaseback Transactions effected January 2, 1997. (12) Gives effect to the Sale-Leaseback Transactions and the application of a portion of the net proceeds therefrom to retire debt as if they had occurred on December 31, 1996. (13) Gives effect to the following transactions as if they had occurred at December 31, 1996: (a) the Sale-Leaseback Transactions and the application of a portion of the net proceeds therefrom to retire debt; (b) the Reorganization, including a $13.5 million charge to income resulting in a reduction of shareholders' equity that will be incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities; (c) the sale of the 3,125,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $16.00 per share, and the application of a portion of the estimated net proceeds to retire the Reorganization Note. 6 8 RISK FACTORS Potential investors should consider carefully the following factors, as well as the more detailed information contained elsewhere in this Prospectus, before making a decision to invest in the Common Stock offered hereby. ABILITY TO MANAGE GROWTH The Company intends to expand its operations through the development, construction, and acquisition of free-standing assisted living residences and, to a lesser extent, through the acquisition of other types of senior living communities, as well as through the expansion of the Company's home health care services. See "Business -- Growth Strategy." The success of the Company's growth strategy will depend, in large part, on its ability to effectively operate any newly acquired or developed residences, communities, or home health care agencies, as to which there can be no assurance. The Company has limited experience developing and operating assisted living residences on a free-standing basis. The Company's growth plans will also place significant demands on the Company's management and operating personnel. The Company's ability to manage its future growth effectively will require it to improve its operational, financial, and management information systems and to continue to attract, retain, train, motivate, and manage key employees. If the Company is unable to manage its growth effectively, its business, results of operations, and financial condition will be adversely affected. See "Business -- Growth Strategy" and "Management -- Directors and Executive Officers." LOSSES FROM NEWLY DEVELOPED RESIDENCES AND ACQUISITIONS Although the Company was profitable in 1994, 1995, and 1996, in view of its growth plan for development and acquisitions, there can be no assurance that the Company will continue to be profitable in any future period. Newly developed assisted living residences are expected to incur operating losses during a substantial portion of their first twelve months of operations, on average, until the residences achieve targeted occupancy levels. Newly acquired residences and communities may also incur losses pending their integration into the Company's operations. The Company may also incur operating losses as a result of the expansion of its existing home health care agencies and the establishment of additional home health care agencies in new markets. See "Business -- Growth Strategy" and "Business -- Development Activities." ABILITY TO DEVELOP ADDITIONAL ASSISTED LIVING RESIDENCES An integral component of the Company's growth strategy is to develop and operate free-standing assisted living residences. As part of its growth strategy, the Company is currently developing 19 free-standing assisted living residences, with an estimated aggregate capacity for 1,684 residents, and is expanding eight of its existing senior living communities to add capacity to accommodate an additional 702 residents. The Company's ability to develop successfully assisted living residences will depend on a number of factors, including, but not limited to, the Company's ability to acquire suitable development sites at reasonable prices; the Company's success in obtaining necessary zoning, licensing, and other required governmental permits and authorizations; and the Company's ability to control construction costs and project completion schedules. In addition, the Company's development plans are subject to numerous factors over which it has little or no control, including competition for developable properties; shortages of labor or materials; changes in applicable laws or regulations or their enforcement; the failure of general contractors or subcontractors to perform under their contracts; strikes; and adverse weather conditions. As a result of these factors, there can be no assurance that the Company will not experience construction delays, that it will be successful in developing and constructing currently planned or additional assisted living residences, or that any developed assisted living residences will be economically successful. If the Company's development schedule is delayed, the Company's growth plans could be adversely affected. Additionally, the Company anticipates that the development and construction of additional assisted living residences will involve a substantial commitment of capital with little or no revenue associated with residences under development, the consequence of which could be an adverse impact on the Company's liquidity. See "Business -- Development Activities." 7 9 ACQUISITION OF COMMUNITIES AND COMPLEMENTARY BUSINESSES The Company plans to make strategic acquisitions of senior living communities (which may include a variety of independent living, assisted living, and skilled nursing facilities), free-standing assisted living residences, home health care agencies, and other properties or businesses that are complementary to the Company's operations and growth strategy. The acquisition of existing communities or other businesses involves a number of risks. Existing communities available for acquisition frequently serve or target different markets than those presently served by the Company. The Company may also determine that renovations of acquired communities and changes in staff and operating management personnel are necessary to successfully integrate such communities or businesses into the Company's existing operations. The costs incurred to reposition or renovate newly acquired communities may not be recovered by the Company. In undertaking acquisitions, the Company also may be adversely impacted by unforeseen liabilities attributable to the prior operators of such communities or businesses, against whom the Company may have little or no recourse. The success of the Company's acquisition strategy will be determined by numerous factors, including the Company's ability to identify suitable acquisition candidates, the competition for such acquisitions, the purchase price, the requirement to make operational or structural changes and improvements, the financial performance of the communities or businesses after acquisition, the Company's ability to finance the acquisitions, and the Company's ability to integrate effectively any acquired communities or businesses into the Company's management, information, and operating systems. There can be no assurance that the Company's acquisition of senior living communities and complementary properties and businesses will be completed at the rate currently expected, if at all, or, if completed, that any acquired communities or businesses will be successfully integrated into the Company's operations. SUBSTANTIAL DEBT AND OPERATING LEASE PAYMENTS Following the Sale-Leaseback Transactions on January 2, 1997, the Company had long-term debt (including current portion) of $156.1 million, of which $144.2 million was payable to one lender. In addition, the Company is obligated to pay annual rental obligations of $2.5 million under long-term operating leases. The Company has entered into a non-binding letter of intent to establish an operating lease facility with a health care real estate investment trust (the "REIT") pursuant to which the REIT, at the Company's request and upon certain conditions, would develop, construct, or acquire up to $110.0 million of senior living communities and lease the communities to the Company (the "REIT Facility"). The Company currently intends to finance its growth through a combination of bank indebtedness, construction and mortgage financing, transactions with the REIT or other real estate investment trusts, proceeds from the Offering, and joint venture arrangements. As a result, a substantial portion of the Company's cash flow will be devoted to debt service and lease payments and the Company will be subject to risks normally associated with a high degree of financial leverage. There can be no assurance that the Company will generate sufficient cash flows from operations to cover required interest, principal, and operating lease payments. Any payment or other default could cause the lender to foreclose upon the communities securing such indebtedness, or, in the case of an operating lease, could terminate the lease, with a consequent loss of income and asset value to the Company. Furthermore, because most of the Company's mortgages and sale-leaseback agreements contain cross-default provisions, a default by the Company on one of its payment obligations could adversely affect a significant number of the Company's other properties and, consequently the Company's business, results of operations, and financial condition. NEED FOR ADDITIONAL FINANCING; EXPOSURE TO RISING INTEREST RATES The Company's ability to sustain any operating losses and to otherwise meet its growth objectives will depend, in part, on its ability to obtain additional financing on acceptable terms from available financing sources. Raising additional funds through the issuance of equity securities could cause existing shareholders to experience further dilution and could adversely affect the market price of the Common Stock. There can be no assurance that the Company will be successful in securing additional financing or that adequate financing will be available and, if available, will be on terms that are acceptable to the Company. The Company's inability to 8 10 obtain additional financing on acceptable terms could delay or eliminate some or all of the Company's growth plans. Following the Sale-Leaseback Transactions, $41.8 million in principal amount, or approximately 24.5%, of the Company's indebtedness bore interest at floating rates, with a weighted average annual rate of 7.7%. In addition, it is anticipated that the REIT Facility will require operating lease payments that will be based on prevailing interest rates. Future indebtedness, from commercial banks or otherwise, and lease obligations are also expected to be based on interest rates prevailing at the time such debt and lease arrangements are obtained. Therefore, increases in prevailing interest rates could increase the Company's interest or lease payment obligations and could have a material adverse effect on the Company's business, financial condition, and results of operations. GEOGRAPHIC CONCENTRATION The Company's growth strategy involves the development of assisted living residences and the acquisition of senior living communities in concentrated geographic service areas. See "Business -- Growth Strategy." Accordingly, the Company's occupancy rates in existing, developed, or acquired communities may be adversely affected by a number of factors, including regional and local economic conditions, general real estate market conditions including the supply and proximity of senior living communities, competitive conditions, and applicable local laws and regulations. See "Business -- Operating Residences," "Business -- Development Activities," and "Business -- Government Regulation." COMPETITION The senior living and health care services industry is highly competitive, and the Company expects that all segments of the industry will become increasingly competitive in the future. The Company competes with other companies providing independent living, assisted living, skilled nursing, home health care, and other similar service and care alternatives. Although the Company believes there is a need for assisted living residences in the markets where the Company is operating and developing residences, the Company expects that competition will increase from existing competitors and new market entrants, some of whom may have substantially greater financial resources than the Company. In addition, some of the Company's competitors operate on a not-for-profit basis or as charitable organizations and have the ability to finance capital expenditures on a tax-exempt basis or through the receipt of charitable contributions, neither of which are readily available to the Company. Furthermore, if the development of new senior living communities (particularly given the rapid pace of development of new assisted living residences) outpaces the demand for such communities in the markets in which the Company has or is developing senior living communities, such markets may become saturated. An oversupply of such communities in the Company's markets could cause the Company to experience decreased occupancy, reduced operating margins, and lower profitability. Consequently, there can be no assurance that the Company will not encounter increased competition that adversely affects its occupancy rates, pricing for services, and growth prospects. See "Business -- Competition." DEPENDENCE ON PRIVATE PAY RESIDENTS Approximately 92.1% of the Company's total revenues for the year ended December 31, 1996 were attributable to private pay sources. For the same period, 7.9% of the Company's revenues came from reimbursement from third-party payors, including Medicare. The Company expects to continue to rely primarily on the ability of residents to pay for the Company's services from their own or familial financial resources. Inflation or other circumstances that adversely affect the ability of the elderly to pay for the Company's services could have a material adverse effect on the Company's business, financial condition, and results of operations. 9 11 DEPENDENCE ON KEY PERSONNEL The Company is dependent on the services of its executive officers, particularly the Company's Chairman and Chief Executive Officer, W.E. Sheriff, and the Company's President and Chief Operating Officer, Christopher J. Coates, for the management of the Company. Neither Mr. Sheriff, Mr. Coates, nor any of the Company's other executive officers has an employment agreement with the Company. The Company has a key employee life insurance policy in the amount of $2.0 million covering Mr. Sheriff. The loss by the Company of certain of its executive officers and the inability to attract and retain qualified management personnel could adversely affect the Company's business, financial condition, and results of operations. See "Management -- Directors and Executive Officers." RESIDENCE MANAGEMENT, STAFFING, AND LABOR COSTS The Company competes with other providers of senior living and health care services with respect to attracting and retaining qualified management personnel responsible for the day-to-day operations of each of the Company's communities and skilled technical personnel responsible for providing resident care. A shortage of nurses or trained personnel may require the Company to enhance its wage and benefits package in order to compete in the hiring and retention of such personnel or to hire more expensive temporary personnel. The Company will also be dependent on the available labor pool of semi-skilled and unskilled employees in each of the markets in which it operates. No assurance can be given that the Company's labor costs will not increase, or that, if they do increase, they can be matched by corresponding increases in rates charged to residents. Any significant failure by the Company to attract and retain qualified management and staff personnel, to control its labor costs, or to pass on any increased labor costs to residents through rate increases could have a material adverse effect on the Company's business, financial condition, and results of operations. SUBSTANTIAL PORTION OF THE PROCEEDS OF THE OFFERING TO BENEFIT EXISTING SHAREHOLDERS The Company will use $25.0 million of the estimated net proceeds of the Offering to repay the Reorganization Note, regardless of the price per share at which the Common Stock is sold or the net proceeds received by the Company from the Offering. ARCLP will distribute in liquidation all amounts received from the repayment of the Reorganization Note to its limited partners, who are the existing shareholders of the Company, including approximately $17.4 million to the Company's non-employee directors and their immediate family members and affiliates, and $1.5 million to the Company's executive officers and their immediate family members and affiliates. See "The Company -- Pending Reorganization," "Use of Proceeds," and "Certain Transactions -- Pending Reorganization." CONTROL BY MANAGEMENT AND CERTAIN SHAREHOLDERS Upon completion of the Offering, the Company's officers and directors and entities controlled by them will, collectively, beneficially own approximately 42.4% of the outstanding shares of Common Stock (40.7% if the Underwriters' over-allotment option is exercised in full). Accordingly, such persons will have the ability, by voting their shares in concert, to influence the election of the Company's Board of Directors and the outcome of all other matters submitted to the Company's shareholders. Furthermore, such influence could preclude any unsolicited acquisition of the Company and, consequently, adversely affect the market price of the Common Stock. See "Principal Shareholders." GOVERNMENT REGULATION Federal and state governments regulate various aspects of the Company's business. The development and operation of health care facilities and the provision of health care services are subject to federal, state, and local licensure, certification, and inspection laws that regulate, among other matters, the number of licensed beds, the provision of services, the distribution of pharmaceuticals, billing practices and policies, equipment, staffing (including professional licensing), operating policies and procedures, fire prevention measures, environmental matters, and compliance with building and safety codes. Failure to comply with these laws and regulations could result in the denial of reimbursement, the imposition of fines, temporary suspension of 10 12 admission of new patients, suspension or decertification from the Medicare programs, restrictions on the ability to acquire new facilities or expand existing facilities, and, in extreme cases, the revocation of a community's license or closure of a community. There can be no assurance that federal, state, or local governments will not impose additional restrictions on the Company's activities that could materially adversely affect the Company. Many states, including several of the states in which the Company currently operates, control the supply of licensed skilled nursing beds and home health care agencies through certificate of need ("CON") programs. Presently, state approval is required for the construction of new health care communities, the addition of licensed beds, and certain capital expenditures at such communities, as well as the opening of a home health care agency. To the extent that a CON or other similar approval is required for the acquisition or construction of new facilities, the expansion of the number of licensed beds, services, or existing communities, or the opening of a home health care agency, the Company could be adversely affected by the failure or inability to obtain such approval, changes in the standards applicable for such approval, and possible delays and expenses associated with obtaining such approval. In addition, in most states the reduction of the number of licensed beds or the closure of a community requires the approval of the appropriate state regulatory agency and, if the Company were to seek to reduce the number of licensed beds at, or to close, a community, the Company could be adversely affected by a failure to obtain or a delay in obtaining such approval. Federal and state anti-remuneration laws, such as "anti-kickback" laws, govern certain financial arrangements among health care providers and others who may be in a position to refer or recommend patients to such providers. These laws prohibit, among other things, certain direct and indirect payments that are intended to induce the referral of patients to, the arranging for services by, or the recommending of, a particular provider of health care items or services. Federal anti-kickback laws have been broadly interpreted to apply to certain contractual relationships between health care providers and sources of patient referral. Similar state laws vary, are sometimes vague, and seldom have been interpreted by courts or regulatory agencies. Violation of these laws can result in loss of licensure, civil and criminal penalties, and exclusion of health care providers or suppliers from participation in the Medicare and Medicaid programs. There can be no assurance that such laws will be interpreted in a manner consistent with the practices of the Company. Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state, and local laws exist that also may require modifications to existing and planned communities to create access to the properties by disabled persons. Although the Company believes that its communities are substantially in compliance with present requirements or are exempt therefrom, if required changes involve a greater expenditure than anticipated or must be made on a more accelerated basis than anticipated, additional costs would be incurred by the Company. Further legislation may impose additional burdens or restrictions with respect to access by disabled persons, the costs of compliance with which could be substantial. See "Business -- Government Regulation." POTENTIAL FOR ENVIRONMENTAL LIABILITY Under various federal, state, and local environmental laws, ordinances, and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean up costs incurred by such parties in connection with the contamination. Such laws typically impose clean-up responsibility and liability without regard to whether the owner knew of or caused the presence of the contaminants, and liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The costs of investigation, remediation, or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such property, may adversely affect the owner's ability to sell or lease such property or to borrow using such property as collateral. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or remediation of such 11 13 substances at the disposal or treatment facility, whether or not such facility is owned or operated by such person. Finally, the owner of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. LIABILITY AND INSURANCE The provision of personal and health care services entails an inherent risk of liability. In recent years, participants in the health care services industry have become subject to an increasing number of lawsuits alleging negligence or related legal theories, many of which involve large claims and result in the incurrence of significant defense costs. Moreover, assisted living residences offer residents a greater degree of independence in their daily living. This increased level of independence may subject the resident and the Company to certain risks that would be reduced in more institutionalized settings. The Company currently maintains liability insurance in amounts it believes are sufficient to cover such claims based on the nature of the risks, its historical experience, and industry standards. There can be no assurance, however, that claims in excess of the Company's insurance or claims not covered by the Company's insurance, such as claims for punitive damages, will not arise. A claim against the Company not covered by, or in excess of, the Company's insurance could have a material adverse effect upon the Company. In addition, the Company's insurance policies must be renewed annually. There can be no assurance that the Company will be able to obtain liability insurance in the future or that, if such insurance is available, it will be available on acceptable economic terms. See "Business -- Insurance and Legal Proceedings." EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS The Company's Board of Directors has the authority, without action by the shareholders, to issue up to 5,000,000 shares of preferred stock and to fix the rights and preferences of such shares. This authority, together with certain provisions of the Company's Charter (including provisions that implement staggered terms for directors, limit shareholder ability to call a shareholders' meeting or to remove directors, and require a supermajority vote to amend certain provisions of the Charter), may delay, deter, or prevent a change in control of the Company. In addition, as a Tennessee corporation, the Company is subject to the provisions of the Tennessee Business Combination Act and the Tennessee Greenmail Act, each of which may be deemed to have anti-takeover effects and may delay, deter, or prevent a takeover attempt that might be considered by the shareholders to be in their best interests. See "Description of Capital Stock -- Certain Provisions of the Charter, Bylaws, and Tennessee Law." SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS Sales of substantial amounts of Common Stock in the public market following the Offering, or the perception that such sales could occur, could adversely affect the prevailing market price of the Common Stock. Upon completion of the Offering, the Company will have 10,937,500 shares of Common Stock outstanding. Of these shares, the 3,125,000 shares sold in the Offering will be freely tradeable without restriction or limitation under the Securities Act of 1933, as amended (the "Securities Act"), except for shares purchased by "affiliates" of the Company, as such term is defined in Rule 144 promulgated under the Securities Act. The remaining 7,812,500 shares will be issued in the Reorganization and will be "restricted securities" within the meaning of Rule 144 and may not be resold in the public markets unless registered under the Securities Act or pursuant to an exemption, such as the safe harbor provided by Rule 144. Holders of the restricted shares will have certain contractual registration rights with respect thereto. The Company and all directors and executive officers of the Company (who in the aggregate will beneficially own 4,637,986 shares of Common Stock) have agreed, and certain holders of 5% or more of the Company's Common Stock outstanding after the Offering will be asked to agree, subject to certain exceptions, not to offer, sell, or otherwise dispose of any Common Stock for a period of 180 days after the date hereof. See "Principal Shareholders," "Description of Capital Stock -- Registration Rights," and "Shares Eligible for Future Sale." As soon as practicable following the consummation of the Offering, the Company intends to file a registration statement under the Securities Act to register the issuance of an aggregate of 1,343,750 shares under the Company's 1997 Stock Incentive Plan and Employee Stock Purchase Plan. As of the date hereof, 12 14 options to purchase 635,000 shares of Common Stock have been granted under the 1997 Stock Incentive Plan, which options are exercisable at the initial public offering price. Following the effective date of such registration statement, shares of Common Stock issued pursuant to either plan will be freely tradeable in the open market, subject to lock-up agreements, if applicable. See "Management -- Compensation Pursuant to Plans" and "Shares Eligible For Future Sale." ABSENCE OF PRIOR PUBLIC TRADING MARKET; POSSIBLE VOLATILITY OF MARKET PRICE Prior to the Offering, there has been no public trading market for the Common Stock. The public offering price for the Common Stock will be determined by negotiations among the Company and the Underwriters based upon several factors and will not necessarily bear any relationship to the Company's assets, book value, results of operations, net worth, or any other generally accepted criteria of value, and should not be considered as indicative of the actual value of the Company. See "Underwriting." Although the Company will apply to list the Common Stock on a securities exchange, there can be no assurance that a securities exchange will authorize the Common Stock for listing or that an active trading market will develop or be sustained after the Offering. To the extent that an active trading market does develop, factors such as quarterly variations in the Company's financial results, announcements by the Company or others, general market conditions, or certain regulatory pronouncements may cause the market price of the Common Stock to fluctuate substantially. There can be no assurance that the Common Stock can be resold at or above the initial public offering price. DILUTION Purchasers of the Common Stock offered hereby will experience immediate and substantial dilution in the amount of $11.89 per share in the pro forma net tangible book value of their shares of Common Stock, based upon the assumed initial public offering price of $16.00 per share. See "Dilution." ------------------ SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Those statements include, but may not be limited to, the discussions of the Company's expectations concerning its future profitability and the discussion of the Company's operating and growth strategy, including possible acquisitions. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, the factors set forth under the caption "Risk Factors" in this Prospectus. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate and there can be no assurance that the forward-looking statements included in this Prospectus will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. The Company undertakes no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. 13 15 THE COMPANY GENERAL The Company is a national senior living and health care services company providing a broad range of care and services to the elderly, including independent living, assisted living, skilled nursing, and home health care services. The Company has pioneered numerous developments in the provision of care and services for the elderly since its inception in 1978, and believes it ranks among the leading operators in the senior living and health care industry. Currently, the Company operates 19 senior living communities in 12 states, consisting of ten owned communities, two leased communities, and seven managed communities, with an aggregate capacity for approximately 5,500 residents. The Company also owns and operates seven home health care agencies. At December 31, 1996, the Company's owned and leased communities had an occupancy rate of 96% and its managed communities had an occupancy rate of 92%. Approximately 92.1% of the Company's total revenues for the year ended December 31, 1996 were derived from private pay sources. Over the past several years, the Company has experienced significant growth, primarily through the acquisition of senior living communities. The Company's revenues have grown from $17.8 million in 1992 to $75.6 million in 1996, an average annual growth rate of 43.5%. During the same period, the Company's income from operations has grown from $2.3 million to $15.6 million, an average annual growth rate of 61.7%. The Company intends to continue its growth through a combination of (i) development of free-standing assisted living residences, including special living units and programs for residents with Alzheimer's and other forms of dementia; (ii) selective acquisitions of senior living communities, including assisted living residences; (iii) expansion of existing communities; and (iv) development and acquisition of home health care agencies. As part of its growth strategy, the Company is currently developing 19 free-standing assisted living residences, with an estimated aggregate capacity for 1,684 residents, and is expanding eight of its existing communities to add capacity to accommodate an additional 702 residents. The Company has also entered into letters of intent to acquire one additional senior living community, which is currently managed by the Company, and one additional home health care agency. The Company was incorporated under the laws of the State of Tennessee in February 1997 as a wholly-owned subsidiary of ARCLP in anticipation of the Reorganization and the Offering. The Company's principal executive offices are located at 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027, and its telephone number at that address is (615) 221-2250. THE 1995 ROLL-UP The Company's predecessor, ARCLP, was formed in February 1995 in connection with the reorganization (the "1995 Roll-Up") of certain Predecessor Entities that owned, operated, or managed various senior living communities. Each of the Predecessor Entities was organized at the direction of the members of the Company's management and controlling shareholders. As a result of the 1995 Roll-Up, ARCLP issued partnership interests to the partners and shareholders of the Predecessor Entities in exchange for their limited partnership interests and stock, respectively, and thereby became the owner, directly or indirectly, of all of the assets of the Predecessor Entities. The general partner of ARCLP is American Retirement Communities, LLC, a Tennessee limited liability company (the "LLC"), whose members include W.E. Sheriff, the Company's Chairman and Chief Executive Officer, and other Company executive officers. See "Certain Transactions -- The 1995 Roll-Up." PENDING REORGANIZATION Prior to the consummation of the Offering, ARCLP will undergo another series of transactions that will result in the Reorganization. Pursuant to the Reorganization, ARCLP will contribute all of its assets, subject to all of its liabilities, to the Company in exchange for 7,812,500 shares of Common Stock and the Reorganization Note in the principal amount of $25.0 million. The principal amount of the Reorganization Note was established by ARCLP and the Company in connection with the Reorganization based on a number of factors, including the value of the assets to be contributed to the Company. Immediately after 14 16 consummation of the Reorganization, ARCLP will distribute all 7,812,500 shares of Common Stock to its Limited Partners and the LLC. See "Principal Shareholders" and "Certain Transactions -- Pending Reorganization." Upon consummation of the Offering, the Reorganization Note will be repaid by the Company out of the net proceeds from the Offering and such amounts received by ARCLP will be distributed to the limited partners of ARCLP in liquidation. See "Risk Factors -- Substantial Portion of the Proceeds of the Offering to Benefit Existing Shareholders," "Use of Proceeds," and "Certain Transactions -- Pending Reorganization." USE OF PROCEEDS The net proceeds from the sale of the Common Stock offered hereby are estimated to be approximately $45.6 million (approximately $52.6 million if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $16.00 per share (the midpoint of the range shown on the cover page of this Prospectus) and after deduction of the underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company will use $25.0 million of the net proceeds to repay the Reorganization Note. See "The Company -- Pending Reorganization" and "Certain Transactions -- Pending Reorganization." The principal amount of the Reorganization Note was established by ARCLP and the Company in connection with the Reorganization based on a number of factors, including the value of the assets to be contributed to the Company. The Company has entered into non-binding letters of intent to acquire a home health care agency located in Corpus Christi, Texas, and to acquire Parklane West, a senior living community in San Antonio, Texas currently managed by the Company. The Company intends to use approximately $1.0 million and $1.2 million, respectively, of the net proceeds from the Offering to complete such acquisitions. There can be no assurance, however, that the Company will complete these transactions or, if completed, that the terms of the transactions will not differ materially from those currently contemplated. The Company intends to use the balance of the net proceeds, together with cash on hand, to fund development and construction of free-standing assisted living residences and possible acquisitions of businesses engaged in activities similar or complementary to the Company's business; and for other general corporate purposes, including working capital. Pending such uses, the net proceeds will be invested in short-term, investment-grade securities. DIVIDEND POLICY AND PRIOR DISTRIBUTIONS Following the Offering, it will be the policy of the Company's Board of Directors to retain all future earnings to finance the operation and expansion of the Company's business. Accordingly, the Company does not anticipate declaring or paying cash dividends on the Common Stock in the foreseeable future. The payment of cash dividends in the future will be at the sole discretion of the Company's Board of Directors and will depend on, among other things, the Company's earnings, operations, capital requirements, financial condition, restrictions in then existing financing agreements, and other factors deemed relevant by the Board of Directors. Prior to the Offering, the Predecessor and the Predecessor Entities have made periodic distributions to their respective partners or shareholders in accordance with their ownership interests therein. During 1995 and 1996, ARCLP made or accrued for distributions of approximately $6.6 million and $7.1 million, respectively, to its partners, including approximately $30,000 and $59,000, respectively, to the LLC. In addition, in 1996 ARCLP redeemed its Preferred Partnership Interests for $10.0 million. See "Certain Transactions -- Redemption of Preferred Partnership Interests." Prior to the consummation of the Reorganization, ARCLP will distribute approximately $2.5 million to its partners, which amount substantially approximates the income taxes associated with ARCLP's anticipated earnings in 1997 through the date of the Reorganization. In addition, immediately following the consummation of the Offering, and in connection with ARCLP's liquidation, the proceeds from the repayment of the Reorganization Note will be distributed by ARCLP to its limited partners, generally in accordance with their respective contribution accounts. See "The Company -- Pending Reorganization" and "Certain Transactions -- Pending Reorganization." 15 17 CAPITALIZATION The following table sets forth (i) the actual capitalization of the Predecessor at December 31, 1996, (ii) the capitalization of the Predecessor at December 31, 1996 on a pro forma basis as if the Sale-Leaseback Transactions had occurred on such date, and (iii) the capitalization of the Company at December 31, 1996 on a pro forma as adjusted basis to reflect (a) the Sale-Leaseback Transactions; (b) the Reorganization (including a $13.5 million one-time charge to income resulting in a reduction of shareholders' equity which will be incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities); and (c) the issuance and sale of the 3,125,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $16.00 per share, and the application of a portion of the estimated net proceeds to retire the Reorganization Note, as if all such events had occurred on December 31, 1996. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Combined and Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus.
AS OF DECEMBER 31, 1996 ---------------------------------- PREDECESSOR COMPANY -------------------- ----------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS) Short-term debt, including current portion of long-term debt...................................................... $ 8,053 $ 2,838 $ 2,838 ======== ======== ======== Long-term debt, less current portion........................ $162,636 $153,258 $153,258 Partners'/shareholders' equity: Partners' equity.......................................... 37,882 37,882 -- Preferred Stock, no par value; 5,000,000 shares authorized, no shares issued and outstanding........... -- -- -- Common Stock, par value $.01 per share; 50,000,000 shares authorized; 10,937,500 shares issued and outstanding, pro forma as adjusted (1).............................. -- -- 109 Additional paid-in capital................................ -- -- 44,857 -------- -------- -------- Total partners'/shareholders' equity................... 37,882 37,882 44,966 -------- -------- -------- Total capitalization................................... $200,518 $191,140 $198,224 ======== ======== ========
- --------------- (1) Includes 7,812,500 shares of Common Stock to be issued in the Reorganization. Does not include 635,000 shares of Common Stock reserved for issuance pursuant to outstanding stock options under the Company's Stock Incentive Plan, which options are exercisable at the initial public offering price. See "Management -- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan" and "Description of Capital Stock." 16 18 DILUTION The actual and pro forma net tangible book value of the Company at December 31, 1996 was approximately $37.9 million, or $4.04 per share of Common Stock. Net tangible book value per share represents the amount of the Company's total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding, which, for purposes of these calculations, is presumed to be 9,375,000 shares (which reflects 7,812,500 shares issuable in the Reorganization, plus 1,562,500 shares, representing the value of the $25.0 million principal amount of the Reorganization Note, based upon an assumed initial public offering price of $16.00 per share). After giving effect to (i) the Reorganization (including a $13.5 million one-time charge to income resulting in a reduction of shareholders' equity which will be incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities); (ii) the sale of the 3,125,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $16.00 per share, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company; and (iii) the application of a portion of the estimated net proceeds to retire the Reorganization Note, the pro forma net tangible book value of the Company as of December 31, 1996 would have been approximately $45.0 million, or $4.11 per share of Common Stock. This represents an immediate increase in pro forma net tangible book value per share of $0.07 to existing shareholders and an immediate dilution of $11.89 per share to investors purchasing Common Stock in the Offering. The following table illustrates this per share dilution: Assumed initial public offering price....................... $16.00 Pro forma net tangible book value prior to the Offering... $4.04 Increase in pro forma net tangible book value attributable to new investors....................................... 0.07 ----- Pro forma net tangible book value after the Offering........ 4.11 ------ Dilution to new investors................................... $11.89 ======
The following table summarizes the number of shares of Common Stock issued by the Company, the total consideration paid to the Company, and the average price per share paid by the existing shareholders and to be paid by the new investors. For purposes of the total consideration and average price per share paid by the existing shareholders, the Company has based such valuation on the aggregate amount of the partners' cash contributions to the Predecessor and the Predecessor Entities, without deducting distributions paid to such partners.
SHARES PURCHASED TOTAL CONSIDERATION -------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing shareholders.................... 7,812,500 71.4% $34,838,000 41.1% $ 4.46 New investors............................ 3,125,000 28.6% $50,000,000 58.9% $16.00 ---------- ----- ----------- ------ Total.......................... 10,937,500 100.0% $84,838,000 100.0% ========== ===== =========== ======
17 19 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The accompanying Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 1996 reflects the pro forma effects of the Carriage Club Acquisitions and the Sale-Leaseback Transactions and the application of a portion of the net proceeds therefrom to retire debt, as if these transactions had occurred on January 1, 1996. The accompanying Unaudited Pro Forma Consolidated Balance Sheet at December 31, 1996 reflects the pro forma effects of (i) the Sale-Leaseback Transactions and the application of a portion of the net proceeds therefrom to retire debt, (ii) the Reorganization (including the recognition of a non-recurring $13.5 million charge to income resulting in a reduction of shareholders' equity which will be incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities), and (iii) the sale of the 3,125,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $16.00 per share, and the application of a portion of the estimated net proceeds to retire the Reorganization Note, as if all of these transactions had occurred at December 31, 1996. These unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and may not be indicative of the actual results that would have been obtained if the transactions had occurred on the dates indicated or that may be realized in the future. The pro forma information should be read in conjunction with the historical financial statements of the Predecessor and the historical combined financial statements of Carriage Club and the notes thereto included elsewhere in this Prospectus. 18 20 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
SALE- CARRIAGE CLUB LEASEBACK CARRIAGE CLUB ACQUISITIONS TRANSACTIONS PREDECESSOR(A) ACQUISITIONS(B) ADJUSTMENTS(C) ADJUSTMENTS(D) -------------- --------------- -------------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Resident and health care revenue............... $ 73,878 $4,086 $ -- $ -- Management services revenue.................... 1,739 -- (160) -- -------- ------ -------- ------- Total revenues............................... 75,617 4,086 (160) -- Operating expenses: Community operating expense.................... 46,960 2,498 (160) -- General and administrative..................... 6,200 -- -- -- Lease expense.................................. -- -- -- 2,090 Depreciation and amortization.................. 6,906 464 104 (1,201) -------- ------ -------- ------- Total operating expenses..................... 60,066 2,962 (56) 889 -------- ------ -------- ------- Income (loss) from operations................ 15,551 1,124 (104) 889 Other income (expense): Interest expense............................... (12,160) (833) (991) 1,388 Interest income................................ 434 21 -- -- Other.......................................... 788 -- -- -- -------- ------ -------- ------- Other income (expense), net.................. (10,938) (812) (991) 1,388 -------- ------ -------- ------- Income (loss) before income taxes and extraordinary item......................... 4,613 312 (1,095) 499 Income tax expense (benefit)................. (920) -- -- -- -------- ------ -------- ------- Income (loss) before extraordinary item...... $ 5,533 $ 312 $ (1,095) $ 499 ======== ====== ======== ======= PRO FORMA TAX DATA: Income (loss) before income taxes and extraordinary item............................. $ 4,613 $ 312 $ (1,095) $ 499 Pro forma income tax expense (benefit)(E)........ 820 119 (416) 189 -------- ------ -------- ------- Pro forma income (loss) before extraordinary item........................................... $ 3,793 $ 193 $ (679) $ 310 ======== ====== ======== ======= Pro forma per share data: Income per share before extraordinary item(F)...................................... $ 0.40 ======== Shares used in computing pro forma per share data(G)...................................... 9,375 ======== Pro forma as adjusted per share data: Income per share before extraordinary item(H)(I)................................... Shares used in computing pro forma as adjusted per share data(J)............................ PRO FORMA --------- Revenues: Resident and health care revenue............... $ 77,964 Management services revenue.................... 1,579 -------- Total revenues............................... 79,543 Operating expenses: Community operating expense.................... 49,298 General and administrative..................... 6,200 Lease expense.................................. 2,090 Depreciation and amortization.................. 6,273 -------- Total operating expenses..................... 63,861 -------- Income (loss) from operations................ 15,682 Other income (expense): Interest expense............................... (12,596) Interest income................................ 455 Other.......................................... 788 -------- Other income (expense), net.................. (11,353) -------- Income (loss) before income taxes and extraordinary item......................... 4,329 Income tax expense (benefit)................. (920) -------- Income (loss) before extraordinary item...... $ 5,249 ======== PRO FORMA TAX DATA: Income (loss) before income taxes and extraordinary item............................. $ 4,329 Pro forma income tax expense (benefit)(E)........ 712 -------- Pro forma income (loss) before extraordinary item........................................... $ 3,617 ======== Pro forma per share data: Income per share before extraordinary item(F)...................................... $ 0.39 ======== Shares used in computing pro forma per share data(G)...................................... 9,375 ======== Pro forma as adjusted per share data: Income per share before extraordinary item(H)(I)................................... $ 0.33 ======== Shares used in computing pro forma as adjusted per share data(J)............................ 10,938 ========
- --------------- (A) Reflects the historical consolidated statement of operations of the Predecessor for the year ended December 31, 1996, including the operations of Carriage Club for the period May 1, 1996 (the effective date of the Carriage Club Acquisitions) through December 31, 1996. (B) Reflects the historical combined statement of operations for Carriage Club for the period January 1, 1996 through April 30, 1996. (C) Includes the following adjustments relating to the Carriage Club Acquisitions for the period January 1, 1996 through April 30, 1996: (i) elimination of $160,000 in management fees paid to the Predecessor by Carriage Club; (ii) additional depreciation expense of $104,000 attributable to the increase in the carrying value of the acquired assets; and (iii) additional interest costs of $991,000 associated with the financing of the Carriage Club Acquisitions. (D) Includes the following adjustments relating to the Sale-Leaseback Transactions: (i) elimination of $1.2 million of depreciation and amortization expense on assets sold in the Sale-Leaseback Transactions; (ii) lease expense of approximately $2.5 million, less $455,000 representing amortization of the deferred gain on the Sale-Leaseback Transactions ($4.6 million over ten years); and (iii) elimination of $1.4 million of interest expense on debt retired with a portion of the net proceeds from the Sale-Leaseback Transactions. (E) Reflects income tax expense that would have been recognized if the Predecessor, the Predecessor Entities, and Carriage Club had been corporations since January 1, 1996, filing a consolidated tax return. (F) Income per share before extraordinary item is calculated before subtracting the return on the Preferred Partnership Interests. (G) Reflects 7,812,500 shares issuable in the Reorganization, plus 1,562,500 shares, representing the value of the $25.0 million principal amount of the Reorganization Note (based upon an assumed initial public offering price of $16.00 per share). (H) Does not reflect a $13.5 million ($1.23 per share) one-time charge to income which will be incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities. (I) The Company intends to repay approximately $15.0 million of debt in January 1998, when applicable prepayment restrictions lapse, and is currently in discussions with its lender to prepay such debt during 1997. Giving pro forma effect to such anticipated repayment as if it had occurred on January 1, 1996, including the elimination of interest expense incurred in 1996 with respect to such debt and the related tax effects, (i) income before income taxes and extraordinary item for 1996 would have been $5.1 million ($0.47 per share), and (ii) pro forma income before extraordinary item for 1996 would have been $4.1 million ($0.38 per share). (J) Reflects 7,812,500 shares issuable in the Reorganization, plus the 3,125,000 shares offered hereby. 19 21 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 [CAPTION]
SALE-LEASEBACK REORGANIZATION TRANSACTIONS AND OFFERING PRO FORMA PREDECESSOR ADJUSTMENTS(A) PRO FORMA ADJUSTMENTS(B) AS ADJUSTED ----------- --------------- --------- -------------- ------------ (IN THOUSANDS) Cash and cash equivalents..................... $ 3,222 $ 8,292 $ 11,514 $ 20,600 $ 32,114 Assets whose use is limited................... 1,022 (500) 522 -- 522 Resident and health care receivables.......... 2,782 -- 2,782 -- 2,782 Other current assets.......................... 2,245 -- 2,245 -- 2,245 -------- -------- -------- -------- -------- Total current assets.................. 9,271 7,792 17,063 20,600 37,663 Land, buildings and equipment, net............ 213,124 (22,890) 190,234 -- 190,234 Other assets.................................. 5,767 (139) 5,628 -- 5,628 -------- -------- -------- -------- -------- Total assets.......................... $228,162 $(15,237) $212,925 $ 20,600 $233,525 ======== ======== ======== ======== ======== Current portion of long-term debt............. $ 8,053 $ (5,215) $ 2,838 $ -- $ 2,838 Redemption payable............................ 5,195 (5,195) -- -- -- Promissory note............................... -- -- -- 25,000 -- (25,000) Other current liabilities..................... 10,312 -- 10,312 -- 10,312 -------- -------- -------- -------- -------- Total current liabilities............. 23,560 (10,410) 13,150 -- 13,150 Long-term debt................................ 162,636 (9,378) 153,258 -- 153,258 Deferred income taxes......................... -- -- -- 13,516 13,516 Other long-term liabilities................... 4,084 4,551 8,635 -- 8,635 -------- -------- -------- -------- -------- Total liabilities..................... 190,280 (15,237) 175,043 13,516 188,559 Partners' equity.............................. 37,882 -- 37,882 (37,882) -- Shareholders' equity: Common stock................................ -- -- -- 109 109 Additional paid-in capital.................. -- -- -- 44,857 44,857 -------- -------- -------- -------- -------- Total shareholders' equity............ -- -- -- 44,966 44,966 -------- -------- -------- -------- -------- Total liabilities and partners'/shareholders' equity...... $228,162 $(15,237) $212,925 $ 20,600 $233,525 ======== ======== ======== ======== ========
- --------------- (A) Includes the following adjustments relating to the Sale-Leaseback Transactions: (i) the cash proceeds received of $27.6 million; (ii) the application of a portion the net proceeds therefrom to repay $14.6 million of debt, including $5.2 million of short-term debt and $9.4 million of long-term debt, and to redeem the remaining balance of the Preferred Partnership Interests for $5.2 million; (iii) the sale of $22.9 million of land, buildings, and equipment; (iv) the write-off of $139,000 of deferred financing costs on long-term debt which was repaid with the net proceeds; (v) the recognition of a deferred gain of $4.6 million reflecting the excess of the sale price of such assets over the Company's bases in the assets; and (vi) the reclassification of $500,000 which was previously restricted as to use. (B) Includes the following adjustments relating to the Reorganization and the Offering: (i) the reorganization of the Predecessor from a limited partnership to a corporation; (ii) the issuance of the Reorganization Note; (iii) the recognition of a non-recurring $13.5 million ($1.23 per share) charge to income resulting in a reduction of shareholders' equity which will be incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities; (iv) the issuance and sale of the 3,125,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $16.00 per share, and the receipt by the Company of estimated net proceeds of $45.6 million; and (v) the application of a portion of the net proceeds from the Offering to retire the Reorganization Note. 20 22 SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA The following table sets forth selected financial data and pro forma data of the Company, the Predecessor, and the Predecessor Entities. The selected financial data as of and for the years ended December 31, 1992, 1993, and 1994 and the three months ended March 31, 1995 are derived from the combined financial statements of the Predecessor Entities. The selected financial data as of and for the nine months ended December 31, 1995 and as of and for the year ended December 31, 1996 are derived from the consolidated financial statements of the Predecessor. The selected data as of and for the periods ended December 31, 1994, March 31, 1995, December 31, 1995, and December 31, 1996 are derived from the combined and consolidated financial statements of the Predecessor, which financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The combined and consolidated financial statements as of December 31, 1995 and 1996, and for the year ended December 31, 1994, the three months ended March 31, 1995, the nine months ended December 31, 1995, and the year ended December 31, 1996, and the report thereon, are included elsewhere in this Prospectus. The information below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the combined and consolidated financial statements of the Predecessor, the related notes, and the independent auditors' report, which refers to a change in cost basis as a result of a purchase business combination in connection with the 1995 Roll-Up.
PREDECESSOR ENTITIES (COMBINED) PREDECESSOR ------------------------------------------- ------------------------------------- THREE MONTHS NINE MONTHS YEAR ENDED YEARS ENDED DECEMBER 31, ENDED ENDED DECEMBER 31, 1996 --------------------------- MARCH 31, DECEMBER 31, ---------------------- 1992 1993 1994 1995 1995 ACTUAL PRO FORMA(1) ------- ------- ------- ------------- ------------ ------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Resident and health care revenue... $16,045 $23,162 $30,979 $11,761 $47,239 $73,878 $77,964 Management services revenue........ 1,774 2,752 2,362 595 1,524 1,739 1,579 ------- ------- ------- ------- ------- ------- ------- Total revenues............... 17,819 25,914 33,341 12,356 48,763 75,617 79,543 Operating expenses: Community operating expense........ 11,329 16,401 21,780 8,035 30,750 46,960 49,298 General and administrative......... 2,656 3,290 3,455 1,108 3,446 6,200 6,200 Lease expense...................... -- -- -- -- -- -- 2,090 Depreciation and amortization...... 1,557 2,251 2,891 1,127 4,534 6,906 6,273 ------- ------- ------- ------- ------- ------- ------- Total operating expenses......... 15,542 21,942 28,126 10,270 38,730 60,066 63,861 ------- ------- ------- ------- ------- ------- ------- Income from operations........... 2,277 3,972 5,215 2,086 10,033 15,551 15,682 ------- ------- ------- ------- ------- ------- ------- Other income (expense): Interest expense................... (2,914) (3,569) (5,354) (2,370) (7,930) (12,160) (12,596) Interest income.................... 145 122 203 49 329 434 455 Other.............................. 39 189 98 (1,013)(2) 919 788 788 ------- ------- ------- ------- ------- ------- ------- Other income (expense), net...... (2,730) (3,258) (5,053) (3,334) (6,682) (10,938) (11,353) Income (loss) before income taxes and extraordinary item......... (453) 714 162 (1,248) 3,351 4,613 4,329 Income tax expense (benefit) (3)..... -- -- -- 20 55 (920) (920) ------- ------- ------- ------- ------- ------- ------- Income (loss) before extraordinary item............................... (453) 714 162 (1,268) 3,296 5,533 5,249 Extraordinary item(4)................ -- -- -- -- -- (2,335) (2,335) ------- ------- ------- ------- ------- ------- ------- Net income (loss).................... (453) 714 162 (1,268) 3,296 3,198 2,914 Preferred return on special redeemable preferred limited partnership interests(5)........... -- -- -- -- (1,125) (1,104) (324) ------- ------- ------- ------- ------- ------- ------- Net income (loss) available for distribution to partners and shareholders ...................... $ (453) $ 714 $ 162 $(1,268) $ 2,171 $ 2,094 $ 2,590 ======= ======= ======= ======= ======= ======= ======= Distribution to partners, excluding preferred distributions............ $ 404 $ 5,708 $ 2,580 $ 1,400 $ 4,064 $ 6,035 $ 6,035 ======= ======= ======= ======= ======= ======= =======
21 23
PREDECESSOR -------------------- YEAR ENDED DECEMBER 31, 1996 -------------------- PRO ACTUAL FORMA(1) ------ -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) UNAUDITED PRO FORMA TAX DATA(6): Income before income taxes and extraordinary item........... $4,613 $4,329 Pro forma income tax expense................................ 820 712 ------ ------ Pro forma income before extraordinary item.................. 3,793 3,617 Preferred return on special redeemable preferred limited partnership interests(5).................................. (1,104) (324) ------ ------ Pro forma income before extraordinary item available for distribution to partners and shareholders................. $2,689 $3,293 ====== ====== Pro forma per share data: Income before extraordinary item.......................... $ 0.40 $ 0.39 Preferred return on special redeemable preferred limited partnership interests................................... 0.12 0.03 ------ ------ Income before extraordinary item available for distribution to partners and shareholders............... $ 0.29 $ 0.35 ====== ====== Shares used in computing pro forma per share data(7)...... 9,375 9,375 ====== ====== Pro forma as adjusted per share data(8): Income before extraordinary item(9)....................... $ 0.33 Preferred return on special redeemable preferred limited partnership interests................................... 0.03 ------ Income before extraordinary item available for distribution to partners and shareholders(9)............ $ 0.30 ====== Shares used in computing pro forma as adjusted per share data.................................................... 10,938 ======
AT DECEMBER 31, --------------------------------------------------------------------------------------- PREDECESSOR ENTITIES (COMBINED) PREDECESSOR COMPANY ---------------------------- ----------------------------------------- ------------ 1996 PRO FORMA 1996 1996 AS 1992 1993 1994 1995 ACTUAL PRO FORMA(10) ADJUSTED(11) ------- ------- -------- -------------- -------- ------------- ------------ (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.......... $ 2,186 $ 3,205 $ 2,894 $ 3,825 $ 3,222 $ 11,514 $ 32,114 Working capital (deficit).......... 1,545 2,529 3,168 (1,048) (14,289) 3,913 24,513 Total assets....................... 54,419 63,393 111,425 165,579 228,162 212,925 233,525 Long-term debt, including current portion.......................... 38,469 43,335 89,414 102,245 170,689 156,096 156,096 Partners' and shareholders' equity........................... 11,937 15,042 12,823 51,823 37,882 37,882 44,966
- --------------- (1) Gives effect to the following transactions as if they had occurred on January 1, 1996: (a) the Carriage Club Acquisitions, and (b) the Sale-Leaseback Transactions and the application of a portion of the net proceeds therefrom to retire debt. (2) Includes a one-time expense of $964,000 incurred in connection with the 1995 Roll-Up. See Note 11 to the Combined and Consolidated Financial Statements. (3) Provision for income taxes reflects income tax expense of only one of the Predecessor Entities because the Predecessor and the other Predecessor Entities were partnerships. No income tax expense is reflected for periods prior to 1995 because of losses or the availability of NOLs. Both periods in 1995 reflect a provision for alternative minimum taxes. In 1996, the Company recorded an income tax benefit and a deferred tax asset of $920,000 because of the anticipated utilization of NOLs that will offset taxable gains recognized from the Sale-Leaseback Transactions. See Note 12 to the Combined and Consolidated Financial Statements. (4) Amount represents loss on early extinguishment of debt. See Note 9 to the Combined and Consolidated Financial Statements. (5) In connection with the 1995 Roll-Up, $10.0 million of promissory notes were exchanged for $10.0 million of Preferred Partnership Interests bearing a 15% cumulative distribution right. From October 1994 (when such notes were created) through the 1995 Roll-Up, interest expense at 15% was recorded and paid. Following the 1995 Roll-Up, the Company has paid preferred 15% distributions to the holders of the Preferred Partnership Interests. From January 1996 to June 1996, the Company paid $324,000 of distributions with respect to $4.8 million of the Preferred Partnership Interests which were redeemed in June 1996 out of operating cash flow and were not eliminated. The remaining $5.2 million of the Preferred Partnership Interests were redeemed with a portion of the net proceeds from the Sale-Leaseback Transactions, and therefore distributions with respect to this $5.2 million portion of the Preferred Partnership Interests have been eliminated in the Pro Forma Statement of Operations data. (6) Except for one of the Predecessor Entities, the Predecessor and the Predecessor Entities, as partnerships, were exempt from U.S. Federal and state income taxes. The pro forma financial data reflects the effect on certain income statement data of income tax expense that would have been recorded had the Predecessor and the other Predecessor Entities not been exempt from paying such income taxes. Pro forma income tax expense has been calculated using statutory U.S. Federal and state tax rates and gives effect to the recognition in 1996 of the $920,000 deferred tax asset described in footnote (3) above. (7) Reflects 7,812,500 shares issuable in the Reorganization, plus 1,562,500 shares, representing the value of the $25.0 million principal amount of the Reorganization Note (based upon an assumed initial public offering price of $16.00 per share). 22 24 (8) Gives effect to the following transactions as if they had occurred on January 1, 1996: (a) the transactions described in footnote (1) above; (b) the Reorganization; and (c) the sale of the 3,125,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $16.00 per share, and the application of a portion of the estimated net proceeds to retire the Reorganization Note. The pro forma as adjusted per share data does not give effect to a non-recurring $13.5 million ($1.23 per share) charge to income that will be incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities. See Note 16 to the Combined and Consolidated Financial Statements. (9) The Company intends to repay approximately $15.0 million of debt in January 1998, when applicable prepayment restrictions lapse, and is currently in discussions with its lender to prepay such debt during 1997. Giving pro forma effect to the transactions described in footnote (8) above and to such anticipated repayment as if it had occurred on January 1, 1996, including the elimination of interest expense incurred in 1996 with respect to such debt and the related tax effects, (i) income before income taxes and extraordinary item for 1996 would have been $5.1 million ($0.47 per share), and (ii) pro forma income before extraordinary item for 1996 would have been $4.1 million ($0.38 per share). (10) Gives effect to the Sale-Leaseback Transactions and the application of a portion of the net proceeds therefrom to retire debt as if they had occurred on December 31, 1996. (11) Gives effect to the following transactions as if they had occurred at December 31, 1996: (a) the Sale-Leaseback Transactions and the application of a portion of the net proceeds therefrom to retire debt; (b) the Reorganization, including a $13.5 million charge to income resulting in a reduction of shareholders' equity which will be incurred at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities; and (c) the sale of the 3,125,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $16.00 per share, and the application of a portion of the estimated net proceeds to retire the Reorganization Note. 23 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a national senior living and health care services company providing a broad range of care and services to the elderly within a residential setting. The Company currently operates 19 senior living communities in 12 states with an aggregate capacity for approximately 5,500 residents. The Company currently owns ten communities, leases two communities pursuant to long-term leases, and manages seven communities pursuant to management agreements. The Company's total revenues have grown from $17.8 million in 1992 to $75.6 million in 1996, an average annual growth rate of 43.5%. During the same period, the Company's income from operations has grown from $2.3 million to $15.6 million, an average annual growth rate of 61.7%. The Company and its predecessors have owned, operated, or managed senior living communities since 1978. The Predecessor, ARCLP, was formed in February 1995 in connection with the 1995 Roll-Up. The 1995 Roll-Up, effective April 1, 1995, was accounted for as a purchase business combination by the Predecessor. The Company was incorporated in February 1997 for purposes of effecting the Reorganization and the Offering. See "The Company -- Pending Reorganization." For the purposes of the following discussion, amounts for the year ended December 31, 1995 represent the sum of the combined results of operations of the Predecessor and Predecessor Entities for the period from January 1, 1995 through March 31, 1995 and the consolidated results of operations of the Predecessor for the period from April 1, 1995 (the effective date of the 1995 Roll-Up) through December 31, 1995. See Note 1 to the Combined and Consolidated Financial Statements. In its early history, the Company focused its efforts on providing contract management, marketing, and development services primarily to third parties. Beginning in 1990 and continuing through 1996, the Company embarked on a strategy of acquiring senior living communities through the Predecessor Entities and the Predecessor. During that period, the Company acquired the 12 communities it now owns or leases. Over the last three years, the Company acquired eight of these senior living communities, with an aggregate capacity for 2,186 residents, at a total cost of approximately $139.0 million. See Note 3 to the Combined and Consolidated Financial Statements. During the next three years, the Company intends to develop approximately 35 free-standing assisted living residences with an aggregate capacity for approximately 2,900 residents at an aggregate estimated cost to complete and lease-up such residences of approximately $250.0 million to $300.0 million. The Company is currently constructing an $11.6 million expansion at one of its owned communities and is constructing, on behalf of the lessor, a $14.0 million expansion at one of its leased communities. In addition, the Company plans to commence additional expansions at five of its owned communities, which are expected to cost approximately $50.0 million to $60.0 million to complete and lease-up. These seven expansion projects will add capacity to accommodate an additional 613 residents. The development of assisted living residences typically involves a substantial commitment of capital over a twelve month construction period, during which no revenues are generated, followed by a twelve month lease-up period. The Company anticipates that newly opened or expanded communities will operate at a loss during a substantial portion of the lease-up period. See " -- Liquidity and Capital Resources" and "Risk Factors -- Losses from Newly Developed Residences and Acquisitions" and "Risk Factors -- Ability to Develop Additional Assisted Living Residences." In addition to the expansion of its owned and leased communities, the Company is currently managing the expansion of one of its managed communities. The Company's growth strategy also includes the acquisition of free-standing assisted living residences and, to a lesser extent, other senior living communities; home health care agencies; and other properties or businesses that are complementary to the Company's operations and growth strategy. The Company's total revenues are comprised of (i) resident and health care revenues, which include all resident and home health care agency fees, and (ii) management services revenues, which include fees, net of reimbursements, for the development, marketing, and management of facilities owned by third parties. The 24 26 Company's resident and health care revenues are derived primarily from three principal sources: (i) monthly service fees from independent and assisted living residents, representing 75.2%, 71.6%, and 61.9% of total revenues for the years ended December 31, 1996, 1995, and 1994, respectively; (ii) per diem charges from nursing patients, representing 14.0%, 17.2%, and 29.1% of total revenues for the years ended December 31, 1996, 1995, and 1994, respectively; and (iii) per visit billings from home health care patients and companion services clients, representing 8.5%, 7.7%, and 1.9% of total revenues for the years ended December 31, 1996, 1995, and 1994, respectively. Management services revenues represented 2.3%, 3.5%, and 7.1% of total revenues for the years ended December 31, 1996, 1995, and 1994, respectively. Approximately 92.1%, 91.3%, and 93.0% of the Company's total revenues for the years ended December 31, 1996, 1995, and 1994, respectively, were attributable to private pay sources, with the balance attributable to Medicare (7.8% in 1996), including Medicare-related private co-insurance, and Medicaid (0.1% in 1996). The Company's operating expenses are comprised, in general, of (i) community operating expense, which includes all operating expenses of the Company's owned or leased facilities, including the expenses of its home health care agencies; (ii) general and administrative expense, which includes all corporate office overhead; and (iii) depreciation and amortization expense. As a result of the Sale-Leaseback Transactions in January 1997, the Company will incur lease expense for periods after such date. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected Statements of Operations data in thousands of dollars and expressed as a percentage of total revenues, and certain resident capacity and occupancy data.
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1994 1995 1996 --------------- --------------- --------------- $ % $ % $ % ------- ----- ------- ----- ------- ----- STATEMENT OF OPERATIONS DATA: Resident and health care revenue........... $30,979 92.9% $59,000 96.5% $73,878 97.7% Management services revenue................ 2,362 7.1 2,119 3.5 1,739 2.3 ------- ----- ------- ----- ------- ----- Total revenues................... 33,341 100.0 61,119 100.0 75,617 100.0 Community operating expense................ 21,780 65.3 38,785 63.5 46,960 62.1 General and administrative................. 3,455 10.4 4,554 7.5 6,200 8.2 Depreciation and amortization.............. 2,891 8.7 5,661 9.3 6,906 9.1 ------- ----- ------- ----- ------- ----- Total operating expenses......... 28,126 84.4 49,000 80.2 60,066 79.4 ------- ----- ------- ----- ------- ----- Income from operations........... 5,215 15.6 12,119 19.8 15,551 20.6 Interest expense........................... (5,354) (16.0) (10,300) (16.9) (12,160) (16.1) Interest income............................ 203 0.6 378 0.6 434 0.6 Other...................................... 98 0.3 (94) (0.1) 788 1.0 ------- ----- ------- ----- ------- ----- Other income (expense), net.............. (5,053) (15.1) (10,016) (16.4) (10,938) (14.5) Income before income taxes and extraordinary item.................... 162 0.5% 2,103 3.4% 4,613 6.1% Income tax expense (benefit)............... -- -- 75 (0.1) (920) 1.2 ------- ----- ------- ----- ------- ----- Income before extraordinary item........... 162 0.5% 2,028 3.3% 5,533 7.3% Extraordinary item......................... -- -- -- -- 2,335 3.1 ------- ----- ------- ----- ------- ----- Net income................................. $ 162 0.5% $ 2,028 3.3% $ 3,198 4.2% ======= ===== ======= ===== ======= =====
25 27
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1994 1995 1996 --------------- ---------------- --------------- OPERATING DATA: End of year capacity: Owned................................... 2,141 2,594 3,369 Managed................................. 3,315 3,008 2,159 ----- ----- ----- Total........................... 5,456 5,602 5,528 ===== ===== ===== Average occupancy rate: Owned................................... 89% 93% 94% Managed................................. 93 91 91 ----- ----- ----- Total........................... 91% 92% 92% ===== ===== ===== End of year occupancy rate: Owned................................... 91% 94% 96% Managed................................. 96 91 92 ----- ----- ----- Total........................... 94% 92% 94% ===== ===== ===== Stabilized average occupancy rate (1): Owned................................... 89% 93% 94% Managed................................. 93 95 96 ----- ----- ----- Total........................... 91% 94% 95% ===== ===== =====
- --------------- (1) Excludes the effect of new communities or expansions of the Company's existing communities including: (i) the opening of a managed community in 1995 with a capacity for 242 residents; (ii) the opening of two expansions of owned communities in mid-1996 with an aggregate additional capacity for 114 residents; and (iii) the opening of a managed community in mid-1996 with a capacity for 76 residents. These openings resulted in decreased average occupancy rates for the periods noted. The following table sets forth certain selected financial and operating data on a Same Facility basis. For purposes of the following discussion, "Same Facility basis" refers to communities that were owned by the Company throughout each of the periods being compared. Revenues on a Same Facility basis do not include any management services revenues.
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ----------------- ----------------- 1994 1995 % CHANGE 1995 1996 % CHANGE ------- ------- -------- ------- ------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) STATEMENT OF OPERATIONS DATA: Monthly/per diem service fees............ $26,384 $29,040 10.1% $46,398 $48,888 5.4% Home health and companion services revenue................................ 627 2,699 330.5% 2,699 3,789 40.4% ------- ------- ------- ------- Resident and health care revenue....... 27,011 31,739 17.5% 49,097 52,677 7.3% Community operating expense.............. 19,212 21,795 13.4% 32,854 34,314 4.4% ------- ------- ------- ------- Resident income from operations(1)..... $ 7,799 $ 9,944 27.5% $16,243 $18,363 13.1% ======= ======= ======= ======= Resident income from operations margin.............................. 28.9% 31.3% 33.1% 34.9% OTHER DATA: Average occupancy rate(2)................ 88% 91% 92% 94% Average monthly revenue per occupied unit(3)................................ $ 2,322 $ 2,467 6.2% $ 2,217 $ 2,295 3.5% Average monthly expense per occupied unit(4)................................ 1,639 1,665 1.6% 1,465 1,475 0.7%
- --------------- (1) Reflects resident and health care income from operations before depreciation and amortization, interest, general and administrative expense, and other non-operating expenses. (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 annual resident and health care revenues, excluding home health care agency and companion services fees, divided by total occupied apartments and nursing beds, expressed on a monthly basis. (4) Average monthly expense per unit is total annual community operating expenses, excluding home health care agency and companion services expenses, divided by total occupied apartments and nursing beds, expressed on a monthly basis. 26 28 YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995 Revenues. Total revenues were $75.6 million in 1996 compared to $61.1 million in 1995, representing an increase of $14.5 million, or 23.7%. Resident and health care revenues increased by $14.9 million, which was offset, in part, by a decrease in management services revenues of $380,000. Of the increase in resident and health care revenues, $11.3 million, or 75.9%, was attributable to revenues derived from acquired senior living communities, with the remaining $3.6 million, or 24.1%, of such increase attributable to Same Facility growth. During 1995 and 1996, the Company acquired four senior living communities that the Company had previously managed, resulting in a decrease in management services revenues in 1996 to $1.7 million, as compared to $2.1 million in 1995. Revenues attributable to Same Facilities were $52.7 million in 1996, representing an increase of $3.6 million, or 7.3%, over 1995. Home health care agency and companion services fees on a Same Facility basis increased by $1.1 million, or 40.4%, over 1995. Monthly/per diem service fee revenue on a Same Facility basis increased $2.5 million, or 5.4%, over 1995. Of this increase, 3.6% was due primarily to rate increases and 1.8% was due to higher occupancy. Same Facility average occupancy rates increased from 92% in 1995 to 94% in 1996. Same Facility end of year occupancy rates increased from 93% in 1995 to 96% in 1996. Community Operating Expense. Community operating expense increased to $47.0 million in 1996, as compared to $38.8 million in 1995, representing an increase of $8.2 million, or 21.1%. Of the increase in community operating expense, $6.7 million, or 82.0%, was attributable to expenses from acquired senior living communities, and 18.0% of this increase was attributable to Same Facility operating expenses, which increased by $1.5 million, or 4.4%, over 1995. Of such increase, $694,000 was attributable to increases in home health care agency and companion services expenses. Same Facility operating expenses, exclusive of home health care agency and companion services expenses, increased 2.5% in 1996 as compared to 1995. Community operating expense as a percentage of resident and health care revenues declined to 63.6% in 1996 from 65.7% in 1995. Same Facility community operating expense as a percentage of Same Facility resident and health care revenues declined to 65.1% in 1996 from 66.9% in 1995, primarily due to improved economies of scale resulting from higher occupancy. General and Administrative. General and administrative expense increased to $6.2 million in 1996, as compared to $4.6 million in 1995, representing an increase of $1.6 million, or 36.1%. General and administrative expense as a percentage of total revenues increased to 8.2% in 1996 from 7.5% in 1995. Of this increase in general and administrative expense, $546,000 was directly related to the creation of a new operating department by the Company in 1996 to manage the Company's home health care agencies, which had previously been managed by a third party. The remaining increase of approximately $1.1 million resulted from continued investments in infrastructure necessary to support the Company's growth, including the incurrence of costs related to personnel training, the expansion of the development services department, the upgrade of management information systems, and the centralization of the Company's accounting staff and functions. Depreciation and Amortization. Depreciation and amortization expense increased to $6.9 million in 1996 from $5.7 million in 1995, representing an increase of $1.2 million, or 22.0%. This increase was primarily the result of depreciation associated with acquisitions and amortization of related financing costs, offset in part by a decrease in amortization resulting from the write-off of certain financing costs. As a result of the Sale-Leaseback Transactions effected in January 1997, the Company expects Same Facility depreciation and amortization expense to decrease in the future, which decrease will be offset, in part, by increased lease expense. Other Income (Expense). Interest expense increased to $12.2 million in 1996 from $10.3 million in 1995, representing an increase of $1.9 million, or 18.1%. The increase in interest expense was related to indebtedness incurred in connection with the acquisition of senior living communities. Interest expense, as a percentage of total revenues, declined to 16.1% in 1996 from 16.9% in 1995. Interest income increased to $434,000 in 1996 from $378,000 in 1995. The Company had other income of $788,000 in 1996, including a gain on the sale of assets of $874,000, compared to other expense of $94,000 in 1995. The 1995 other expense included: (i) $982,000 of nonrecurring expense related to the 1995 Roll-Up; (ii) a gain on the sale of assets of 27 29 $1.1 million; and (iii) other non-operating expenses of $256,000. As a result of the Sale-Leaseback Transactions, the Company expects Same Facility interest expense will decrease in the future, which decrease will be offset, in part, by increased lease expense. Income Tax Expense (Benefit). At December 31, 1996, the Company had NOLs of approximately $5.4 million. In 1996, the Company recognized an income tax benefit of $920,000 because of the anticipated utilization of such net operating loss carryforwards to offset taxable gains related to the Sale-Leaseback Transactions. The provision for income taxes reflects income tax expense of only one of the Predecessor Entities, because the Predecessor and the other Predecessor Entities were partnerships. Extraordinary Loss. In 1996, the Company wrote off $2.3 million of financing costs in connection with the refinancing of $62.1 million of mortgage financing. Net Income. As a result of the foregoing factors, net income increased to $3.2 million ($5.5 million before extraordinary item) in 1996 from $2.0 million in 1995. YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994 Revenues. Total revenues were $61.1 million in 1995 compared to $33.3 million in 1994, representing an increase of $27.8 million, or 83.3%. Resident and health care revenues increased by $28.0 million, which was offset, in part, by a decrease in management services revenues of $243,000. Of the increase in resident and health care revenues, $23.3 million, or 83.1%, was attributable to revenues derived from acquired senior living communities, with the remaining $4.7 million, or 16.9%, of such increase attributable to Same Facility growth. During 1994 and 1995, the Company acquired six senior living communities, three of which had been previously managed by the Company, resulting in a decrease in management services revenues in 1995 to $2.1 million, as compared to $2.4 million in 1994. Revenues attributable to Same Facilities were $31.7 million in 1995, representing an increase of $4.7 million, or 17.5%, over 1994. Home health care agency and companion services fees on a Same Facility basis increased by $2.1 million, or 330.5%, over 1994. Monthly/per diem service fee revenue on a Same Facility basis increased $2.6 million, or 10.1%, over 1994. Of this increase, 6.5% was due primarily to rate increases and 3.6% was due to higher occupancy. Same Facility average occupancy rates increased from 89% in 1994 to 91% in 1995. Same Facility end of year occupancy rates increased from 90% in 1994 to 92% in 1995. Community Operating Expense. Community operating expense increased to $38.8 million in 1995, as compared to $21.8 million in 1994, representing an increase of $17.0 million, or 78%. Of the increase in community operating expense, $14.4 million, or 84.8%, was attributable to operating expenses from acquired senior living communities, and 15.2% of this increase was attributable to Same Facility operating expenses, which increased by $2.6 million, or 13.4%, over 1994. Of such increase, $1.6 million was attributable to increases in home health care agency and companion services expenses. Same Facility operating expenses, exclusive of home health care agency and companion services expenses, increased 5.2% in 1995 as compared to 1994. Community operating expense as a percentage of resident and health care revenues declined to 65.7% in 1995 from 70.3% in 1994. Same Facility community operating expense as a percentage of Same Facility resident and health care revenues increased to 71% in 1995 from 69% in 1994. General and Administrative. General and administrative expense increased to $4.6 million in 1995, as compared to $3.5 million in 1994, representing an increase of $1.1 million, or 31.8%. General and administrative expense as a percentage of total revenues decreased to 7.5% in 1995 from 10.4% in 1994. The majority of the increase resulted from costs incurred in connection with increased personnel costs incurred to support the Company's growth, including costs associated with the upgrade of management information systems and the centralization of the Company's accounting staff and functions. Depreciation and Amortization. Depreciation and amortization expense increased to $5.7 million in 1995 from $2.9 million in 1994, representing an increase of $2.8 million, or 95.8%. This increase was primarily the result of depreciation associated with acquisitions and amortization of related financing costs. 28 30 Other Income (Expense). Interest expense increased to $10.3 million in 1995 from $5.4 million in 1994, representing an increase of $4.9 million, or 92.4%. The increase in interest expense was related to indebtedness incurred in connection with the acquisition of senior living communities. Interest expense, as a percentage of total revenues, increased to 16.9% in 1995 from 16.1% in 1994. Interest income increased to $378,000 in 1995 from $203,000 in 1994. The Company had other expense of $94,000 in 1995 compared to other income of $98,000 in 1994, primarily as a result of $981,000 of nonrecurring expenses related to the 1995 Roll-Up, and $268,000 of other expenses associated with a 1995 acquisition, which was offset, in part, by a $1.1 million gain on sale of assets. Net Income. As a result of the foregoing factors, net income increased to $2.0 million in 1995 from $162,000 in 1994. LIQUIDITY AND CAPITAL RESOURCES The Company has traditionally financed its activities from net proceeds from private placements of equity interests, long-term mortgage borrowing, and cash flows from operations. At December 31, 1996, excluding mortgage debt in the amount of $14.6 million that was repaid on January 2, 1997 in connection with the Sale-Leaseback Transactions, the Company had $156.1 million of indebtedness outstanding, including $144.2 million payable to one lender, with fixed maturities ranging from December 31, 2001 to April 30, 2003. In addition, the Company has the capacity to borrow up to an additional $15.9 million from such lender to finance future acquisitions or expansions. The Company also maintains a $2.5 million line of credit with a bank that is available for working capital and to secure various debt instruments. At December 31, 1996, $925,000 of this line of credit had been used to obtain letters of credit. The Sale-Leaseback Transactions resulted in minimum annual lease obligations of $2.5 million, beginning in 1997. After giving effect to the Sale-Leaseback Transactions, approximately 73.2% of the Company's indebtedness bears interest at fixed rates, with a weighted average interest rate of 8.6%. The Company's variable rate indebtedness carried an average rate of 7.7% as of December 31, 1996. Net cash provided by operating activities was $11.9 million, $9.0 million, and $3.5 million in 1996, 1995, and 1994, respectively. Unrestricted cash balances were $3.2 million, $3.8 million, and $2.9 million at December 31, 1996, 1995, and 1994, respectively. Adjusted for the Sale-Leaseback Transactions, unrestricted cash balances as of December 31, 1996, would have been $11.5 million. Net cash used by investing activities totaled $67.6 million, $11.0 million, and $46.3 million in 1996, 1995, and 1994, respectively. Over this period, the Company acquired an aggregate of $139.0 million of senior living community assets, and made capital expenditures at its owned properties in an aggregate amount of $8.9 million, including expansion activity in the amount of $3.5 million. During the same period, the Company sold an aggregate of $2.8 million of assets. Net cash provided by financing activities was $55.1 million, $2.9 million, and $42.6 million in 1996, 1995, and 1994, respectively. Proceeds from the issuance of long-term debt was $73.9 million, $26.7 million, and $49.0 million in 1996, 1995, and 1994, respectively, including $23.5 million of debt assumed by the Company pursuant to acquisitions in 1995. The Company also raised $11.0 million in a private placement of equity in 1995. The Company retired debt in the amount of $5.5 million, $4.3 million, and $2.5 million in 1996, 1995, and 1994, respectively; made cash distributions to its partners of $7.1 million, $6.6 million, and $2.6 million in 1996, 1995, and 1994, respectively; and redeemed all of the outstanding Preferred Partnership Interests for $10.0 million in 1996. The Company intends to make a distribution in the first quarter of 1997 prior to the consummation of the Offering in the amount of approximately $2.5 million, which amount substantially approximates the income taxes associated with the Predecessor's anticipated earnings in 1997 through the date of the Reorganization. Following the Reorganization and conversion from partnership to corporate form, the Company does not anticipate declaring or paying cash dividends on the Common Stock in the foreseeable future. The Company intends to retain future earnings to finance the operation and expansion of the Company's business. See "Dividend Policy and Prior Distributions." In January 1997, the Company effected the Sale-Leaseback Transactions with respect to its Holley Court Terrace and Trinity Towers senior living communities and realized net cash proceeds therefrom of $27.6 29 31 million. Of such proceeds, $14.6 million were used to retire indebtedness and $5.2 million were used to redeem the Predecessor's outstanding Preferred Partnership Interests (which redemption had been accrued as of December 31, 1996). The Sale-Leaseback Transactions resulted in a gain of approximately $4.6 million, which will be recognized over the ten-year initial term of the lease. The Company is currently constructing an $11.6 million expansion at one of its owned communities. The Company has a construction loan commitment from a bank, as well as a permanent loan commitment from a mortgage lender to fund the costs of construction. The Company also plans to expand certain of its other owned communities; to open home health care agencies at certain of its owned and/or leased communities that do not currently operate home health care agencies; to develop new assisted living residences; and to acquire assisted living residences and selected senior living and health care services assets. The Company has signed non-binding letters of intent for the acquisition of a home health care agency located in Corpus Christi, Texas for $1.0 million, and Parklane West, a senior living community in San Antonio, Texas currently managed by the Company, for $6.0 million, $4.8 million of which is expected to be financed by the seller at a weighted average interest rate of 7.4%. The Company expects to complete both acquisitions in the second quarter of 1997. The Company intends to repay approximately $15.0 million of debt in January 1998, when applicable prepayment restrictions lapse, and is currently in discussions with its lender to repay such debt during 1997. The Company has entered into a non-binding letter of intent with respect to the REIT Facility pursuant to which the REIT, at the Company's request, will develop, construct, or acquire up to $110.0 million of senior living communities and lease the communities to the Company. The Company expects that its current cash and the net proceeds from the Offering, together with cash flow from operations, the REIT Facility, and the proceeds of borrowings available to it under existing credit arrangements, will be sufficient to meet its operating requirements and to fund its anticipated growth for at least the next 12 months. The Company expects to use a wide variety of financing sources to fund its future growth, including public and private debt and equity, conventional mortgage financing, and unsecured bank financing, among other sources. There can be no assurance that financing from such sources will be available in the future or, if available, that such financing will be available on terms acceptable to the Company. DEFERRED TAX LIABILITY The Company will incur a one-time $13.5 million ($1.23 per share) charge to income resulting in a reduction of shareholders' equity at the time of the Reorganization in connection with the conversion from a non-taxable to a taxable entity and the resulting recognition of a deferred income tax liability for the differences between the accounting and tax bases of the Company's assets and liabilities. IMPACT OF INFLATION To date, inflation has not had a significant impact on the Company. Inflation could, however, affect the Company's future revenues and results of operations because of, among other things, the Company's dependence on senior residents, many of whom rely primarily on fixed incomes to pay for the Company's services. As a result, during inflationary periods, the Company may not be able to increase resident service fees to account fully for increased operating expenses. In structuring its fees, the Company attempts to anticipate inflation levels, but there can be no assurance that the Company will be able to anticipate fully or otherwise respond to any future inflationary pressures. 30 32 BUSINESS OVERVIEW AND HISTORY The Company is a national senior living and health care services company providing a broad range of care and services to the elderly, including independent living, assisted living, skilled nursing, and home health care services. The Company has pioneered numerous developments in the provision of care and services for the elderly since its inception in 1978, and believes it ranks among the leading operators in the senior living and health care services industry. Currently, the Company operates 19 senior living communities in 12 states, consisting of ten owned communities, two leased communities, and seven managed communities, with an aggregate capacity for approximately 5,500 residents. The Company also owns and operates seven home health care agencies. At December 31, 1996, the Company's owned and leased communities had an occupancy rate of 96% and its managed communities had an occupancy rate of 92%. Approximately 92.1% of the Company's total revenues for the year ended December 31, 1996 were derived from private pay sources. Over the past several years, the Company has experienced significant growth, primarily through the acquisition of senior living communities. The Company's revenues have grown from $17.8 million in 1992 to $75.6 million in 1996, an average annual growth rate of 43.5%. During the same period, the Company's income from operations has grown from $2.3 million to $15.6 million, an average annual growth rate of 61.7%. The Company intends to continue its growth through a combination of (i) development of free-standing assisted living residences, including special living units and programs for residents with Alzheimer's and other forms of dementia; (ii) selective acquisitions of senior living communities, including assisted living residences; (iii) expansion of existing communities; and (iv) development and acquisition of home health care agencies. As part of its growth strategy, the Company is currently developing 19 free-standing assisted living residences, with an estimated aggregate capacity for 1,684 residents, and is expanding eight of its existing communities to add capacity to accommodate an additional 702 residents. The Company has also entered into letters of intent to acquire one additional senior living community, which is currently managed by the Company, and one additional home health care agency. The Company was founded by Dr. Thomas F. Frist, Sr. and Jack C. Massey, the principal founders of Hospital Corporation of America (now a subsidiary of Columbia/HCA Healthcare Corporation). The Company's operating philosophy was inspired by Dr. Frist's and Mr. Massey's vision to enhance the lives of the elderly by providing the highest quality of care and services in well-operated communities designed to improve and protect the quality of life, independence, personal freedom, privacy, spirit, and dignity of its residents. The Company believes that its senior management, led by W.E. Sheriff, its Chairman and Chief Executive Officer, and Christopher J. Coates, its President and Chief Operating Officer, is one of the most experienced management teams in the senior living industry. The Company's 12 senior officers have been employed by the Company for an average of nine years and have an average of 14 years of industry experience. The executive directors of the Company's communities have been employed by the Company for an average of four years and have an average of 11 years of experience in the senior living industry. GROWTH STRATEGY The Company believes that the fragmented nature of the senior living industry and the limited capital resources available to many small, private operators provide a unique opportunity for the Company to expand its existing base of senior living operations. The Company believes that its existing senior living communities serve as the foundation on which the Company can build senior living networks in targeted geographic markets and thereby provide a broad range of high quality care in a cost-efficient manner. The following are the principal elements of the Company's growth strategy: Develop New Assisted Living Residences The Company has implemented an aggressive growth plan to expand primarily through the development and construction of new assisted living residences, including special living units and programs for residents with Alzheimer's and other forms of dementia. The Company's primary strategy is to develop a cluster of 31 33 residences within a particular geographic service area and thereby achieve regional density. In this regard, the Company believes that its existing senior living communities and its extensive knowledge of the local markets in which the Company operates provide the Company with a strong platform from which to expand its operations. In addition, the Company believes that through clustering its residences it can maximize operational, marketing, and management efficiencies while achieving economies of scale. The Company believes that regional density also provides strengthened local presence, community familiarity, and reputation, and will enhance the Company's opportunities in the evolving managed care environment. The Company currently is developing 19 free-standing assisted living residences, with an estimated aggregate capacity for 1,684 residents. See "Business -- Development Activities." The Company follows a disciplined development strategy that includes the following sequential components: (i) a market demographic analysis is conducted by the Company to assess and confirm the relative strength of a potential market; (ii) cohesive neighborhoods and submarkets are identified within the market; (iii) within each neighborhood and submarket, competitive projects are identified and assessed as to their market niche, program of services and pricing, physical condition, and likely financial condition; (iv) based on the prior three steps, a determination is then made as to whether to participate in the market by acquisition or development; (v) if the Company elects to develop within the market, the Company then determines which submarkets to serve, selects a specific design type for each submarket and determines the number of assisted living units and dementia care units to develop; and (vi) specific sites are analyzed, whereby the Company considers a number of factors including site visibility, location within a submarket, the specific neighborhoods which can be served from the site, probability of achieving zoning approvals and the proximity of the site to the Company's other assisted living residences and senior living communities. Architectural design and hands-on construction functions are usually performed by outside architects and contractors with whom the Company has an historical relationship. The Company expects that the average construction time for a typical assisted living residence will be approximately 10 to 12 months. Once construction is completed, the Company estimates that it will take approximately 12 months on average for the assisted living residence to achieve a stabilized level of occupancy. The Company's senior management and development staff have extensive experience in the development of senior living communities, including assisted living residences, real estate acquisition, engineering, general construction, and project management. The Company's development team has the demonstrated ability to target potential markets, perform appropriate market and demographic studies, identify zoning and development issues, and determine the appropriate size and configuration of residences to be developed. Expand Existing Facilities The Company plans to expand certain of its existing communities to include additional assisted living residences (including special programs and living units for residents with Alzheimer's and other forms of dementia), and skilled nursing beds. The Company currently has three expansion projects under construction (including one managed community) and five expansion projects under development, representing an aggregate increase in capacity to accommodate an additional 702 residents. The expansion of existing senior living communities allows the Company to create operating efficiencies and capitalize on its local presence, community familiarity, and reputation in markets in which the Company currently operates. Pursue Strategic Acquisitions The Company intends to continue to pursue single or portfolio acquisitions of assisted living residences and, to a lesser extent, other senior living and long-term care communities. Through strategic acquisitions, the Company plans to enter new markets or acquire communities in existing markets as a means to increase market share, augment existing clusters, strengthen its ability to provide a broad range of care, and create operating efficiencies. The Company believes that the current fragmentation of the industry, combined with the Company's financial resources and extensive contacts within the industry, should provide it with the opportunity to consider a number of potential acquisition opportunities. In reviewing acquisition opportunities, the Company will consider, among other things, geographic location, competitive climate, reputation and quality of management and residences, and the need for renovation or improvement of the residences. In 32 34 February 1997, the Company entered into a non-binding letter of intent to purchase Parklane West, a senior living community in San Antonio, Texas currently managed by the Company. The Company expects to complete the acquisition in the second quarter of 1997. Develop and Acquire Additional Home Health Care Agencies The Company intends to expand its home health care services by developing, acquiring, and managing new home health care agencies and expanding its range of existing home health care services. The Company currently anticipates that its home health care agencies will be based at the Company's communities, and will serve both the Company's communities and the surrounding area. The Company believes that the expansion of its home health care services will enhance its ability to provide a broad range of health care services, increase its market visibility, and augment the creation of senior living networks in targeted areas. The Company currently operates seven home health care agencies, four of which are in their initial year of operation, and has entered into a letter of intent to acquire an additional home health care agency in Corpus Christi, Texas. The Company expects to complete such acquisition in the second quarter of 1997. Expand Referral Networks and Strategic Alliances The Company intends to continue to develop relationships (which, in certain instances, may involve strategic alliances or joint ventures) with local and regional hospital systems, managed care organizations, and other referral sources to attract new residents to the Company's communities. The Company believes that such arrangements or alliances, which could range from joint marketing arrangements to priority transfer agreements, will enable it to be strategically positioned within the Company's markets if, as the Company believes, senior living programs become an integral part of the evolving health care delivery system. Pursue Additional Third-Party Management Opportunities Although the Company intends to focus its efforts primarily on development and acquisition activities, it may in certain instances pursue third-party management opportunities as a means to enter new markets or expand its presence, market knowledge, and influence in a targeted market. The Company currently manages seven communities with an aggregate capacity for 2,158 residents pursuant to management contracts. Furthermore, the Company intends to continue its consulting and contract activities on a selective basis. OPERATING STRATEGY The Company's operating strategy is to provide high quality health care services to its residents while achieving and sustaining a strong competitive position within its chosen markets, as well as to continue to enhance the performance of its operations. Continue to Provide A Broad Range of High-Quality Personalized Care Central to the Company's operating strategy is its focus on providing high-quality care and services that are personalized and tailored to meet the individual needs of each community resident. The Company's residences and services are designed to provide a broad range of care that permits residents to "age in place" as their needs change and as they develop further physical or cognitive frailties. By creating an environment that maximizes resident autonomy and provides individualized service programs, the Company seeks to attract seniors at an earlier stage, before they need the higher level of care provided in a skilled nursing facility. The Company also maintains a comprehensive quality assurance program designed to ensure the satisfaction of its residents and their family members. Offer Services Across a Range of Pricing Options The Company is continually expanding its range of personal, health care, and support services to meet the evolving needs of its residents. The Company has developed several different care plans and residence designs which may, in each instance, be customized to serve the upper income and moderate income markets of a particular targeted geographic area. By offering a range of pricing options that are customized for each target 33 35 market, the Company believes it can develop synergies, economies of scale, and operating efficiencies in its efforts to serve a larger percentage of the elderly population within a particular geographic market. Maintain and Improve Occupancy Rates The Company also seeks to maintain and improve occupancy rates by (i) retaining residents as they "age in place" by emphasizing quality and breadth of care and service; (ii) attracting new residents through marketing programs directed towards family decision makers, namely adult children, and prospective residents; and (iii) actively seeking referrals from hospitals, rehabilitation hospitals, physicians' clinics, home health care agencies, and other acute and sub-acute health care providers in the markets served by the Company. Improve Operating Efficiencies The Company will seek to improve operating efficiencies at its communities by continuing to actively monitor and manage operating costs. By concentrating residences within selected geographic regions, the Company believes it will be able to achieve operating efficiencies through economies of scale and reduced corporate overhead, and provide more effective management supervision and financial controls. Emphasize Employee Training The Company devotes special attention to the hiring, screening, training, and supervising of its employees and caregivers to ensure that quality standards are achieved. During 1997, the Company expects to spend in excess of $700,000 on personnel training and development of on-site field personnel. In 1995, the Company, together with Dr. Frist, founded The Frist Center at Belmont University in Nashville, Tennessee. The Frist Center is a non-profit foundation providing training, education, and career services for management and front line personnel involved in the senior living and health care services industry. The Company works closely with The Frist Center and the Company's employees actively participate in the training programs, seminars, and classes sponsored by The Frist Center. In addition, professional training programs designed to be delivered on-site by The Frist Center staff have been and are being developed by the Company and The Frist Center. The Company believes its commitment to and emphasis on employee training differentiates the Company from many of its competitors. CARE AND SERVICES PROGRAMS The Company provides a wide array of senior living and health care services to the elderly at its communities, including independent living, assisted living (with special programs and living units for residents with Alzheimer's and other forms of dementia), skilled nursing, and home health care services. By offering a variety of services and involving the active participation of the resident and the resident's family and medical consultants, the Company is able to customize its service plan to meet the specific needs and desires of each resident. As a result, the Company believes that it is able to maximize customer satisfaction and avoid the high cost of delivering all services to every resident without regard to need, preference, or choice. Independent Living Services The Company provides independent living services to seniors who do not yet need assistance or support with the activities of daily life ("ADLs"), but who prefer the physical and psychological comfort of a residential community that offers health care and other services. The Company currently owns or leases twelve communities and manages an additional five communities which provide independent living services, with an aggregate capacity for 2,646 residents and 1,496 residents, respectively. Independent living services provided by the Company include daily meals, transportation, social and recreational activities, laundry, housekeeping, security, and health care monitoring. The Company also fosters the wellness of its residents by offering health screenings such as blood pressure checks, periodic special services such as influenza inoculations, chronic disease management (such as diabetes with its attendant blood glucose monitoring), dietary and similar programs, as well as ongoing exercise and fitness classes. Classes are 34 36 given by health care professionals to keep residents informed about health and disease management. Subject to applicable government regulation, personal care and medical services are available to independent living residents through either community staff or through the Company's or independent home health care agencies. The Company's independent living residents pay a fee ranging from $1,150 to $4,105 per month, in general depending on the specific community, program of services, size of the units, and amenities offered. The Company's contracts with its independent living residents are generally for a term of one year and are terminable by the resident upon 60 days' notice. Assisted Living and Memory Impaired Services The Company offers a wide range of assisted living care and services 24 hours per day, including personal care services, support services, and supplemental services, at all of its owned and leased communities and at six managed communities. The residents of the Company's assisted living residences generally need help with some or all ADLs, but do not require the more acute medical care traditionally given in nursing homes. Upon admission to the Company's assisted living residences, and in consultation with the resident and the resident's family and medical consultants, each resident is assessed to determine his or her health status, including functional abilities, and need for personal care services, and completes a lifestyles assessment to determine the resident's preferences. From these assessments, a care plan is developed for each resident to ensure that all staff members who render care meet the specific needs and preferences of each resident where possible. Each resident's care plan is reviewed periodically to determine when a change in care is needed. The Company has adopted a philosophy of assisted living care that allows a resident to maintain a dignified independent lifestyle. Residents and their families are encouraged to be partners in their care and to take as much responsibility for their well being as possible. The basic type of assisted living services offered by the Company include the following: Personal Care Services. These services include assistance with ADLs such as ambulation, bathing, dressing, eating, grooming, personal hygiene, monitoring or assistance with medications, and confusion management. Support Services. These services include meals, assistance with social and recreational activities, laundry services, general housekeeping, maintenance services, and transportation services. Supplemental Services. These services include extra transportation services, personal maintenance, extra laundry services, non-routine care services, and special care services, such as services for residents with Alzheimer's and other forms of dementia. Certain of these services require an extra charge in addition to the pricing levels described below. In pricing its services, the Company has developed the following three levels or tiers of assisted living care: - Level I typically provides for minimum levels of care and service, for which the Company generally charges a monthly fee per resident ranging from $1,500 to $2,100, depending upon apartment size and the project design type. Typically, Level I residents need minimal assistance with ADLs. - Level II provides for relatively higher levels and increased frequency of care, for which the Company generally charges a monthly fee per resident ranging from $1,800 to $2,700, depending upon the apartment size and the project design type. Typically, Level II residents require moderate assistance with ADLs and may need additional personal care, support, and supplemental services. - Level III provides for the highest level of care and service, for which the Company generally charges a monthly fee per resident ranging from $2,400 to $3,100, depending upon the apartment size and the project design type. Typically, Level III residents are either very frail or impaired and utilize many of the Company's services on a regular basis. The Company maintains programs and special units at its assisted living residences for residents with Alzheimer's and other forms of dementia, which provide the attention, care, and services needed to help those residents maintain a higher quality of life. Specialized services include assistance with ADLs, behavior 35 37 management, and a lifeskills based activities program, the goal of which is to provide a normalized environment that supports residents' remaining functional abilities. Whenever possible, residents assist with meals, laundry, and housekeeping. Special units for residents with Alzheimer's and other forms of dementia are located in a separate area of the community and have their own dining facilities, resident lounge areas, and specially trained staff. The special care areas are designed to allow residents the freedom to ambulate as they wish while keeping them safely contained within a secure area with a minimum of disruption to other residents. Special nutritional programs are used to help ensure caloric intake is maintained in residents whose constant movement increases their caloric expenditure. Resident fees for these special units are dependent on the size of the unit, the design type, and the level of services provided. Skilled Nursing and Sub-Acute Services The Company provides traditional skilled nursing services in four communities owned or leased by the Company and five communities managed by the Company, with an aggregate capacity for 313 residents at the Company's owned and leased communities and 393 residents at the Company's managed communities. In addition, the Company has communities under development or expansion which will add estimated additional capacity of 393 skilled nursing beds. In its skilled nursing facilities, the Company provides traditional long-term care through 24-hour a day skilled nursing care by registered nurses, licensed practical nurses, and certified nursing aides. The Company also offers a range of sub-acute care services in certain of its communities. Sub-acute care is generally short-term, goal-oriented rehabilitation care intended for individuals who have a specific illness, injury or disease, but who do not require many of the services provided in an acute care hospital. Sub-acute care is typically rendered immediately after, or in lieu of, acute hospitalization in order to treat such specific medical conditions. Home Health Care The Company provides home health care services to residents at certain of its senior living communities and the surrounding areas through home health care agencies based at certain of its existing senior living communities. The services and products that the Company provides through its home health care agencies include (i) general and specialty nursing services to individuals with acute illnesses, long-term chronic health conditions, permanent disabilities, terminal illnesses or post-procedural needs; (ii) therapy services consisting of, among other things, physical, occupational, speech, and medical social services; (iii) personal care services and assistance with ADLs; (iv) hospice care for persons in the final phases of incurable disease; (v) respiratory, monitoring, medical equipment services, and medical supplies to patients; and (vi) a comprehensive range of home infusion and enteral therapies. The Company intends to expand its home health care services to additional senior living communities and to develop, acquire, or manage home health care service businesses at other communities. In addition, the Company will make available to residents certain physician, dentistry, podiatry, and other health related services that will be offered by third-party providers. The Company may elect to provide these services directly or through participation in managed care networks or in joint ventures with other providers. The Company currently operates seven home health care agencies, four of which are in their initial year of operation. 36 38 OPERATING RESIDENCES The table below sets forth certain information with respect to the senior living communities currently operated by the Company.
AVERAGE OCCUPANCY RESIDENT CAPACITY (1) COMMENCEMENT 1996 RATE AT ------------------------- OF OCCUPANCY DECEMBER 31, COMMUNITY LOCATION IL AL SN TOTAL OPERATIONS(2) RATE 1996 - --------- -------- ----- --- --- ----- ------------- --------- ------------ OWNED/LEASED: Broadway Plaza....................... Ft. Worth, TX 252 40 122 414 Apr-92 94% 91%(3) Carriage Club of Charlotte........... Charlotte, NC 355 54 42 451 May-96 92(4) 92(4) Carriage Club of Jacksonville........ Jacksonville, FL 274 60 -- 334 May-96 89(4) 91(4) The Hampton at Post Oak.............. Houston, TX 162 21 -- 183 Oct-94 94 97 Heritage Club........................ Denver, CO 220 35 -- 255 Feb-95 100 100 Holley Court Terrace(5).............. Oak Park, IL 179 17 -- 196 Jul-93 81 95 Parkplace............................ Denver, CO 195 48 -- 243 Oct-94 99 99 Richmond Place....................... Lexington, KY 204 4 -- 208 Apr-95 98 98 Santa Catalina Villas................ Tucson, AZ 197 15 -- 212 Jun-94 90 96 The Summit at Westlake Hills......... Austin, TX 167 30 89 286 Apr-92 98 100 Trinity Towers(5).................... Corpus Christi, TX 195 32 60 287 Jan-90 94 97 Westlake Village..................... Cleveland, OH 246 54 -- 300 Oct-94 94 97 ----- --- --- ----- --- --- Subtotal/Average................. 2,646 410 313 3,369 94% 96% MANAGED(6): Burcham Hills........................ East Lansing, MI 143 66 133 342 Nov-78 92% 91% Meadowood............................ Worcester, PA 355 51 59 465 Oct-89 95 94 Parklane West(7)..................... San Antonio, TX -- 17 124 141 Oct-94 86 91 Reeds Landing........................ Springfield, MA 148 54 40 242 Aug-95 65(8) 84(8) USAA Towers.......................... San Antonio, TX 505 -- -- 505 Oct-94 100 100 Weinberg Village..................... Tampa, FL -- 75 -- 75 May-96 25 39 Williamsburg Landing................. Williamsburg, VA 345 7 37 389 Sept-85 98 99 ----- --- --- ----- --- --- Subtotal/Average................. 1,496 270 393 2,159 91% 92% ----- --- --- ----- --- --- Grand Total/Average.............. 4,142 680 706 5,528 92% 94% ===== === === ===== === ===
- --------------- (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 or commenced management of the community. (3) Broadway Plaza's skilled nursing facility contains a sub-acute unit. Sub-acute units generally experience shorter lengths of stay and corresponding higher fluctuations in occupancy rates. Excluding the skilled nursing facility, Broadway Plaza's occupancy rate at December 31, 1996, was 98%. (4) Communities at which expansions opened in 1996, which resulted in decreased occupancy rates for the period. Excluding the effect of the expansions, the average 1996 occupancy rate and the occupancy rate at December 31, 1996 would have been 97% and 98%, respectively, at Carriage Club of Charlotte and 91% and 95%, respectively, at Carriage Club of Jacksonville. (5) Leased pursuant to operating leases with initial terms of ten years expiring December 31, 2006 and renewal options for up to three additional ten year terms, provided that both leases are extended concurrently. The Company pays contractually fixed rent, plus additional rent, subject to certain limits, based upon the gross revenues of the community. Without the lessor's consent, the Company may not operate any other type of senior care facility within three miles of either of the premises during the term of the leases and for one year thereafter. (6) The Company's management agreements are generally for terms of five to ten years, but may be canceled by the owner of the community, without cause, on three to six months' notice. Pursuant to the management agreements, the Company is generally responsible for providing management personnel, marketing, nursing, resident care and dietary services, accounting and data processing reports, and other services for these communities at the owner's expense and receives a monthly fee for its services based either on a contractually fixed amount or a percentage of revenues or income. Certain management agreements also provide the Company with an incentive fee based on various performance goals. The Company's existing management agreements expire at various times between June 1997 and July 2000. (7) The Company has a letter of intent to acquire Parklane West, which acquisition is expected to close in the second quarter of 1997. (8) Reeds Landing is a life care community. Its fill-up rate has been consistent with the feasibility projection for its bond financing, and the fill-up rate of life care communities generally. 37 39 DEVELOPMENT ACTIVITIES The table below summarizes information regarding the expansion of certain of the Company's existing senior living communities and the residences currently under development.
SCHEDULED LOCATION COMPLETION ADDITIONAL RESIDENT CAPACITY STATUS(1) - -------- ---------- ----------------------------- ----------- IL AL SN TOTAL ---- ------ ---- ------ EXPANSION PROJECTS: Santa Catalina Village, Tucson, AZ.................. 12/97 20 70 42 132 Construction Williamsburg Landing, Williamsburg, VA(2)........... 12/97 10 58 21 89 Construction Trinity Towers, Corpus Christi, TX.................. 3/98 27 68 16 111 Construction Richmond Place, Lexington, KY....................... 4/98 -- 71 -- 71 Development Carriage Club of Charlotte, Charlotte, NC........... 7/98 -- 30 -- 30 Development Carriage Club of Jacksonville, Jacksonville, FL..... 10/98 -- 15 60 75 Development The Hampton at Post Oak, Houston, TX................ 11/98 -- 15 76 91 Development Westlake Village, Cleveland, Ohio................... 6/99 -- 15 88 103 Development -- ----- --- ----- Subtotal................................... 57 342 303 702 -- ----- --- ----- DEVELOPMENT PROJECTS: Lady Lake, FL....................................... 11/97 -- 55 -- 55 Construction Halls, TN........................................... 1/98 -- 55 -- 55 Construction Pearland, TX........................................ 2/98 -- 82 -- 82 Development Spring City, TX..................................... 4/98 -- 67 -- 67 Development Houston, TX (Willowchase)........................... 4/98 -- 67 -- 67 Development Houston, TX (Northwest)............................. 4/98 -- 95 -- 95 Development Knoxville, TN....................................... 4/98 -- 108 -- 108 Development Lakeway, TX......................................... 5/98 -- 70 -- 70 Development Nashville, TN (Franklin)............................ 7/98 -- 67 -- 67 Development Nashville, TN (West)................................ 8/98 -- 90 -- 90 Development Tampa, FL........................................... 8/98 -- 90 -- 90 Development Aurora, CO.......................................... 10/98 -- 95 -- 95 Development Lakewood, CO........................................ 10/98 -- 93 -- 93 Development Greenwood Village , CO.............................. 11/98 -- 85 90 175 Development Houston, TX (West).................................. 11/98 -- 85 -- 85 Development Austin, TX.......................................... 1/99 -- 95 -- 95 Development Denver, CO (East)................................... 1/99 -- 95 -- 95 Development Nashville, TN (Central)............................. 3/99 -- 115 -- 115 Development Houston, TX (West University)....................... 7/99 -- 85 -- 85 Development -- ----- --- ----- Subtotal................................... -- 1,594 90 1,684 -- ----- --- ----- Grand Total................................ 57 1,936 393 2,386 == ===== === =====
- --------------- (1) "Development" means that development activities, such as site surveys, preparation of architectural plans, or initiation of zoning processes, have commenced (but construction has not commenced). "Construction" means that construction activities, such as ground-breaking activities, exterior construction, or interior build-out, have commenced. (2) Williamsburg Landing is a managed community. The Company is providing full development services related to the expansion for the owner. The Company has developed a portfolio of flexible designs for its assisted living residences, each of which may be configured in a number of different ways thereby providing the Company with flexibility in adapting to a particular geographic market, neighborhood, or site. In addition, each design has been developed to facilitate the prompt, efficient, cost-effective delivery of health care and personal services. Site requirements for the various designs range from 2.5 to 6.0 acres. Each of the Company's designs also provide for specially designed residential units, common areas, and dining rooms for residents with Alzheimer's and other forms of dementia. The Company believes that its designs meet the desire of many of its residents to move into a new residence that approximates, as nearly as possible, the comfort of their prior home. The Company also believes that its designs achieve several other objectives, including (i) lessening the trauma of change for residents and their families, (ii) facilitating resident mobility and caregiver access, (iii) enhancing operating efficiencies, (iv) enhancing the Company's ability to match its products to targeted markets, and (v) differentiating the Company from its competitors. 38 40 The Company intends to develop new assisted living residences by using a combination of in-house development personnel and experienced third-party project managers and by acquiring newly constructed residences from developers under "turnkey" purchase and sale agreements. To the extent the Company acquires newly developed residences from a developer on a "turnkey" basis, it intends to enter into a purchase and sale agreement whereby the Company, subject to construction of the residence to the Company's designs and specifications and satisfaction of typical purchase and sale contingencies for the Company's benefit, will commit to purchase the residence upon completion at an agreed upon price. The Company has also entered into contractual arrangements with established, regional real estate development contractors pursuant to which such developers will provide assistance in the development process. These arrangements are intended to enable the Company to develop and construct additional assisted living residences while reducing the investment of, and associated risk to, the Company. The Company's development contractors provide construction management experience, knowledge of local state and building codes and zoning laws, and assistance with site locations. As a result, the Company's development staff is able to evaluate and direct overall development activity more efficiently. The Company has also entered into a development and management agreement with a development contractor which provides that the Company will manage nine assisted living residences to be developed using the Company's residence designs and grants the Company an option to purchase the residences. OPERATIONS Centralized Management The Company centralizes its corporate and other administrative functions so that the community-based management and staff can focus their efforts on resident care. The Company maintains centralized accounting, finance, human resources, training, and other operational functions at its national corporate office in Brentwood (Nashville), Tennessee. The Company's corporate office is generally responsible for (i) establishing Company-wide policies and procedures relating to, among other things, resident care and operations, (ii) performing accounting functions, (iii) developing employee training programs and materials, (iv) coordinating human resources and food service functions, (v) coordinating marketing functions, and (vi) providing strategic direction. In addition, financing, development, construction and acquisition activities, including feasibility and market studies, residence design, development, and construction management, are conducted by the Company's corporate office. The Company seeks to control operational expenses for each of its communities through standardized management reporting and centralized controls of capital expenditures, asset replacement tracking, and purchasing for larger and more frequently used supplies. Community expenditures are monitored by regional operations teams headed by the Company's Regional Vice Presidents who are accountable for the resident satisfaction and financial performance of the communities in their region. The Company's assisted living residences operational activities are directed by the Senior Director for Assisted Living Operations who is responsible, together with the appropriate Regional Vice President, for the opening and operation of the Company's assisted living residences. Community-Based Management An executive director manages the day-to-day operations at each senior living community, including oversight of the quality of care, delivery of resident services, and monitoring of financial performance, and is responsible for all personnel, including food service, maintenance, activities, security, assisted living, housekeeping, and, where applicable, nursing. Executive directors are compensated based on certain quality of service goals and on the financial performance of the community. In most cases, each senior living community also has department managers that direct the environmental services, nursing or care services, business management functions, dining services, activities, transportation, housekeeping, and marketing functions. A residence manager manages the day-to-day operations at each assisted living residence. While the residence managers have many of the same operational responsibilities as the Company's executive directors, their primary responsibility is to oversee resident care. For its assisted living residences, the Company has 39 41 adopted the concept of universal workers whereby each employee's responsibilities span a number of traditional job descriptions. For example, an assisted living residence employee may, during the course of a day, provide housekeeping, food service, activities, and assistance with ADLs services to residents. As a result, and because the Company's senior living communities located near assisted living residences provide certain support personnel and services on an on-going basis, each assisted living residence employs fewer associates. On-site care managers and residents' assistants provide most of the actual resident care in conjunction with a small support team consisting of a housekeeper, a maintenance helper, an administrative coordinator, and a small dining service team. In most assisted living residences, the residence manager is also a licensed nurse. The Company actively recruits personnel to maintain adequate staffing levels at its existing communities as well as new staff for new or acquired communities prior to opening. The Company has adopted comprehensive recruiting and screening programs for management positions that utilize personnel profiling, corporate office interviews, and drug screening company-wide. The Company offers system-wide training and orientation for its front line employees, department level managers, and executive staff at the community level through a combination of Company-sponsored seminars and conferences and through its contract for training services with The Frist Center. Home Health Management The Company centralizes all home health financial and clinical data through an electronic data collection system. This data warehouse allows corporate regional directors to identify emerging trends, establish critical pathways, and develop and monitor cost and utilization controls. All accounting functions including claims submission and processing are performed at the corporate office. The Company's centralized approach allows its home health care agencies to achieve a more efficient delivery of care. Each community-based agency is operated under the auspices of the community's executive director and under the direct control of an agency director. This director and his or her team of nurses, personal care aides, physical therapists, speech therapists, occupational therapists, and social workers focus on assessing the health care needs of residents in the Company's senior living or assisted living communities, as well as clients in the surrounding market. Quality Assurance The Company's quality assurance program is designed to achieve and maintain a high degree of resident and family satisfaction with the care and services the Company provides. The Company coordinates the implementation of its quality assurance program at each of its communities through its corporate office. The Company encourages resident and family participation and seeks feedback from families and residents through surveys conducted on a regular basis. In addition, inspections of each community are conducted regularly by corporate staff. These inspections, performed periodically, review all aspects of operations, care, and services provided, and the overall appearance and cleanliness of the community. Marketing The Company's marketing efforts are implemented on a regional and local level, all under the supervision of the corporate marketing staff, and are intended to create awareness of the Company and its services among prospective residents, their families, professional referral sources, and other key decision makers. The corporate marketing staff conducts regional and state-wide surveys of age- and income-qualified seniors to ensure that the Company understands the needs and demands of that marketplace. To further both market awareness of the Company by prospective residents and to more accurately assess the needs and demands of seniors in that market, the Company periodically conducts regional focus groups. Corporate office personnel develop the overall marketing strategies for each community, produce all marketing materials, maintain marketing databases, oversee direct mailings, place all media advertising, and assist community personnel in the initial development and continuing refinement of marketing plans for each community. Before opening a new assisted living residence, the Company makes referral source contacts and conducts marketing programs such as lead-generating media consisting of direct mail, telemarketing follow-up, and 40 42 print media advertising. These public awareness campaigns usually begin with the start of construction and intensify several months before the opening of the residence. An on-site marketing person is at the residence approximately six months prior to the opening of the residence and is supported by the Company's corporate marketing department. Once the residence opens, the Company believes that satisfied residents and their families are the most important referral sources. Accordingly, the Company believes that its emphasis on high-quality services and resident satisfaction will result in a strong referral base for its existing communities. In addition, the Company focuses on enhancing the reputation of the communities and the services provided among potential referral sources, such as hospitals, home health care agencies, physicians, therapy companies, and other health care professionals. INDUSTRY BACKGROUND The senior living and health care services industry encompasses a broad and diverse range of living accommodations and health care services that are provided primarily to persons 75 years of age or older. For the elderly who require limited services, care in their own or family members' homes or in independent living residences or retirement centers, supplemented at times by home health care, offers a viable option. For the elderly who are interested in a community housing option, most independent living residences and retirement centers typically offer a basic services package limited to meals, housekeeping, and laundry. As a senior's need for assistance increases, care in an assisted living residence is often preferable and more cost-effective than home-based care or nursing home care. Assisted living residents usually enter a residence when other living accommodations no longer provide the level of care required by the individual. Typically, assisted living represents a combination of housing and 24-hour a day personal support services designed to aid elderly residents with ADLs. Certain assisted living residences may also provide assistance to residents with low acuity medical needs, or may offer higher levels of personal assistance for incontinent residents or residents with Alzheimer's disease or other forms of dementia. Generally, assisted living residents require higher levels of care than residents of independent living residences and retirement living centers, but require lower levels of care than patients in skilled nursing facilities. For seniors who need the constant attention of a skilled nurse or medical practitioner, a skilled nursing facility may be required. According to the United States Health Care Financing Administration, annual expenditures in the assisted living sector of the senior living and health care services industry range from $12.0 billion to $14.0 billion and include facilities ranging from "board and care" (generally 12 or fewer residents with little or no services) to full-service assisted living residences such as those operated by the Company. The assisted living sector is highly fragmented and characterized by numerous small operators. Moreover, the scope of assisted living services varies substantially from one operator to another. Many smaller assisted living providers do not operate in purpose-built residences, do not have professional training for staff, and provide only limited assistance with low-level care activities. The Company believes that few assisted living operators provide the required comprehensive range of assisted living services, such as dementia care and other services designed to permit residents to "age in place" within the community as they develop further physical or cognitive frailties. The Company believes there will continue to be significant growth opportunities in the senior living market for providing health care and other services to the elderly, particularly in the assisted living segment of the market. The Company believes that a number of demographic, regulatory, and other trends will contribute to the continued growth in the assisted living market, the Company's targeted market for future development and expansion, including the following: Consumer Preference The Company believes that assisted living is increasingly becoming the setting preferred by prospective residents and their families for the care of the frail elderly. Assisted living offers residents greater independence and allows them to age in place in a residential setting, which the Company believes results in a higher quality of life than that experienced in more institutional or clinical settings. 41 43 Demographics The primary market for the Company's senior living and health care services is comprised of persons age 75 and older. This age group is one of the fastest growing segments of the United States population. According to United States Census Bureau information, this population segment will increase from approximately 13.2 million in 1990 to over 16.6 million by 2000, an increase of 26%. The population of seniors aged 85 and over is expected to increase from approximately 3.1 million in 1990 to over 4.3 million by 2000, an increase of 39%. As the number of persons aged 75 and over continues to grow, the Company believes that there will be corresponding increases in the number of persons who need assistance with ADLs. According to the United States General Accounting Office, in 1991 there were over seven million people in the United States who needed assistance with ADLs, and the number of people needing such assistance was expected to double by the year 2020. Furthermore, the number of persons afflicted with Alzheimer's disease is also expected to grow from the current 3.8 million to 4.5 million, or an increase of 26.3%, by the year 2000, according to data published by the Alzheimer's Association. Restricted Supply of Nursing Beds The majority of states in the United States have adopted CON or similar statutes generally requiring that, prior to the addition of new beds, the addition of new services, or the making of certain capital expenditures, a state agency must determine that a need exists for the new beds or the proposed activities. The Company believes that this CON process tends to restrict the supply and availability of licensed nursing facility beds. High construction costs, limitations on government reimbursement for the full costs of construction, and start-up expenses also act to constrain growth in the supply of such facilities. At the same time, nursing facility operators are continuing to focus on improving occupancy and expanding services to sub-acute patients requiring significantly higher levels of nursing care. As a result, the Company believes that there has been a decrease in the number of skilled nursing beds available to patients with lower acuity levels and that this trend should increase the demand for the Company's senior living communities, including particularly the Company's assisted living residences and skilled nursing facilities. Cost-Containment Pressures In response to rapidly rising health care costs, governmental and private pay sources have adopted cost-containment measures that have reduced admissions and encouraged reduced lengths of stays in hospitals and other acute care settings. The federal government had previously acted to curtail increases in health care costs under Medicare by limiting acute care hospital reimbursement for specific services to pre-established fixed amounts. Private insurers have begun to limit reimbursement for medical services in general to predetermined reasonable charges, and managed care organizations (such as health maintenance organizations) are attempting to limit the hospitalization costs by negotiating for discounted rates for hospital and acute care services and by monitoring and reducing hospital use. In response, hospitals are discharging patients earlier and referring elderly patients, who may be too sick or frail to manage their lives without assistance, to nursing homes and assisted living residences where the cost of providing care is typically lower than hospital care. In addition, third-party payors are increasingly becoming involved in determining the appropriate health care settings for their insureds or clients based primarily on cost and quality of care. Based on industry data, in 1993 the annual cost per patient for skilled nursing care averaged approximately $35,000, in contrast to the annual per patient cost for assisted living care of approximately $24,000. Senior Affluence According to United States Census Bureau information, the average net income per senior citizen household member is 9% higher than for non-senior citizen households. In addition, seniors frequently have accumulated equity, primarily through home ownership. The Company believes that a substantial portion of the senior population thus has significant resources available for their retirement and long-term care needs. The Company's target population is comprised of middle- to upper-income seniors who have, either directly or indirectly through familial support, the financial resources to pay for senior living communities, including an assisted living alternative to traditional long-term care. 42 44 Reduced Reliance on Family Care Historically, the family has been the primary provider of care for seniors. The Company believes that the increase in the percentage of women in the work force, the reduction of average family size, and the increased mobility in society will reduce the role of the family as the traditional care-giver for aging parents. The Company believes that this trend will make it necessary for many seniors to look outside the family for assistance as they age. GOVERNMENT REGULATION Changes in existing laws and regulations, adoption of new laws and regulations and new interpretations of existing laws and regulations could have a material effect on the Company's operations. Failure by the Company to comply with applicable regulatory requirements could have a material adverse effect on the Company's business, financial condition, and results of operations. Accordingly, the Company devotes significant resources to monitoring legal and regulatory developments on local and national levels. The health care industry is subject to extensive regulation and frequent regulatory change. At this time, no federal laws or regulations specifically regulate assisted or independent living residences. While a number of states have not yet enacted specific assisted living regulations, the Company's communities are subject to regulation, licensing, CON and permitting by state and local health and social service agencies and other regulatory authorities. While such requirements vary from state to state, they typically relate to staffing, physical design, required services, and resident characteristics. The Company believes that such regulation will increase in the future. In addition, health care providers are receiving increased scrutiny under anti-trust laws as integration and consolidation of health care delivery increases and affects competition. The Company's communities are also subject to various zoning restrictions, local building codes, and other ordinances, such as fire safety codes. Failure by the Company to comply with applicable regulatory requirements could have a material adverse effect on the Company's business, financial condition, and results of operations. Regulation of the assisted living industry is evolving. The Company is unable to predict the content of new regulations and their effect on its business. There can be no assurance that the Company's operations will not be adversely affected by regulatory developments. Federal and state anti-remuneration laws, such as the Medicare/Medicaid anti-kickback law, govern certain financial arrangements among health care providers and others who may be in a position to refer or recommend patients to such providers. These laws prohibit, among other things, certain direct and indirect payments that are intended to induce the referral of patients to, the arranging for services by, or the recommending of, a particular provider of health care items or services. The Medicare/Medicaid anti-kickback law has been broadly interpreted to apply to certain contractual relationships between health care providers and sources of patient referral. Similar state laws, which vary from state to state, are sometimes vague and seldom have been interpreted by courts or regulatory agencies. Violation of these laws can result in loss of licensure, civil and criminal penalties, and exclusion of health care providers or suppliers from participation in the Medicare and Medicaid program. There can be no assurance that such laws will be interpreted in a manner consistent with the practices of the Company. The Company believes that its communities are in substantial compliance with applicable regulatory requirements. However, in the ordinary course of business, one or more of the Company's communities could be cited for deficiencies. In such cases, the appropriate corrective action would be taken. To the Company's knowledge, no material regulatory actions are currently pending with respect to any of the Company's communities. Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state, and local laws exist which also may require modifications to existing and planned properties to permit access to the properties by disabled persons. While the Company believes that its communities are substantially in compliance with present requirements or are exempt therefrom, if required changes involve a greater expenditure than anticipated or must be made on a more accelerated basis than anticipated, additional 43 45 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. INSURANCE AND LEGAL PROCEEDINGS The provision of personal and health care services entails an inherent risk of liability. In recent years, participants in the senior living and health care services industry have become subject to an increasing number of lawsuits alleging negligence or related legal theories, many of which involve large claims and result in the incurrence of significant defense costs. The Company currently maintains property, liability, and professional medical malpractice insurance policies for the Company's owned and certain of its managed communities under a master insurance program in amounts and with such coverages and deductibles which the Company believes are within normal industry standards based upon the nature and risks of the Company's business. The Company also has an umbrella excess liability protection policy in the amount of $15.0 million per location. There can be no assurance that a claim in excess of the Company's insurance will not arise. A claim against the Company not covered by, or in excess of, the Company's insurance could have a material adverse effect upon the Company. In addition, the Company's insurance policies must be renewed annually. There can be no 44 46 assurance that the Company will be able to obtain liability insurance in the future or that, if such insurance is available, it will be available on acceptable terms. Under various federal, state, and local environmental laws, ordinances, and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean up costs. The Company is not aware of any environmental liability with respect to any of its owned, leased, or managed communities that it believes would have a material adverse effect on the Company's business, financial condition, or results of operations. The Company believes that its communities are in compliance in all material respects with all federal, state, and local laws, ordinances, and regulations regarding hazardous or toxic substances or petroleum products. The Company has not been notified by any governmental authority, and is not otherwise aware of any material non-compliance, liability, or claim relating to hazardous or toxic substances or petroleum products in connection with any of the communities it currently operates. The Company currently is not party to any legal proceeding that it believes would have a material adverse effect on its business, financial condition, or results of operations. EMPLOYEES The Company employs approximately 2,160 persons, of which approximately 1,350 are full-time employees (approximately 50 of whom are located at the Company's corporate offices) and 810 are part-time employees. In addition, there are approximately 535 full-time employees and 455 part-time employees who are employed by the owners of communities managed by the Company who are under the direction and supervision of the Company. None of the Company's employees is currently represented by a labor union and the Company is not aware of any union organizing activity among its employees. The Company believes that its relationship with its employees is good. 45 47 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information concerning the directors and executive officers of the Company.
NAME AGE POSITION ---- --- -------- W.E. Sheriff.............................. 54 Chairman and Chief Executive Officer Christopher J. Coates..................... 46 President and Chief Operating Officer George T. Hicks........................... 39 Executive Vice President -- Finance, Chief Financial Officer, Treasurer, and Secretary H. Todd Kaestner.......................... 41 Executive Vice President -- Corporate Development James T. Money............................ 49 Executive Vice President -- Development Services Tom G. Downs.............................. 51 Senior Vice President -- Operations Lee A. McKnight........................... 51 Senior Vice President -- Marketing H. Lee Barfield II........................ 50 Director Jack O. Bovender, Jr...................... 51 Director Frank M. Bumstead......................... 54 Director Robin G. Costa............................ 30 Director Clarence Edmonds.......................... 63 Director John A. Morris, Jr., M.D.................. 50 Director Daniel K. O'Connell....................... 68 Director Nadine C. Smith........................... 39 Director Lawrence J. Stuesser...................... 54 Director
W.E. Sheriff has served as Chairman and Chief Executive Officer of the Company and its predecessors since April 1984. From 1973 to 1984, Mr. Sheriff served in various capacities for Ryder System, Inc., including as president and chief executive officer of its Truckstops of America division. Mr. Sheriff also serves on the boards of various educational and charitable organizations and in varying capacities with several trade organizations, including as a member of the board of the National Association for Senior Living Industries, and as a member of the American Association of Homes and Services for the Aging and the American Senior Housing Association. Christopher J. Coates has served as President and Chief Operating Officer of the Company and its predecessors since January 1993. From 1988 to 1993, Mr. Coates served as chairman of National Retirement Company ("NRC"), a senior living management company acquired by a subsidiary of the Company in 1992. From 1985 to 1988, Mr. Coates was senior director of the Retirement Housing Division of Radice Corporation, following that company's purchase in 1985 of National Retirement Consultants, a company formed by Mr. Coates. Mr. Coates is chairman of the board of directors of the American Senior Housing Association. George T. Hicks, a certified public accountant, has served as the Executive Vice President -- Finance, Chief Financial Officer, Treasurer, and Secretary since September 1993. Mr. Hicks has served in various capacities for the Company's predecessors since 1985, including Vice President -- Finance and Treasurer from November 1989 to September 1993. H. Todd Kaestner has served as Executive Vice President -- Corporate Development since September 1993. Mr. Kaestner has served in various capacities for the Company's predecessors since 1985, including Vice President - Development from 1988 to 1993 and Chief Financial Officer from 1985 to 1988. James T. Money has served as Executive Vice President -- Development Services since September 1993. Mr. Money has served in various capacities for the Company's predecessors since 1978, including Vice President -- Development from 1985 to 1993. Mr. Money is a member of the board of directors and the executive committee of the National Association for Senior Living Industries. 46 48 Tom G. Downs has served as Senior Vice President -- Operations since 1989. Mr. Downs has served in various capacities for the Company's predecessors since 1979. Lee A. McKnight has served as Senior Vice President -- Marketing since September 1991. Mr. McKnight has served in various capacities for the Company's predecessors since 1979. H. Lee Barfield II has served as a director of the Company since its inception, as a member of ARCLP's limited partners committee since its formation in 1995, and as director of various of the Company's predecessors since 1978. Mr. Barfield is a member in the law firm of Bass, Berry & Sims PLC, the Company's outside general counsel, and has served in various capacities for that firm since 1974. Jack O. Bovender, Jr. has served as a director of the Company since its inception and as a member of ARCLP's limited partners committee since September 1996. Until his retirement in March 1994, Mr. Bovender worked for Hospital Corporation of America for over 18 years in various capacities, including Executive Vice President and Chief Operating Officer. Mr. Bovender is a director of Response Oncology, Inc., a physician practice management company specializing in oncology, and a director of Quorum Health Group, Inc., a hospital management company. Frank M. Bumstead has served as a director of the Company since its inception and as a member of ARCLP's limited partners committee since June 1995. Since 1989, Mr. Bumstead has been president and a principal shareholder of Flood, Bumstead, McCready & McCarthy, Inc., a business management firm that represents, among others, artists, songwriters, and producers in the music industry. Since 1993, Mr. Bumstead has also served as the chairman and chief executive officer of FBMS Financial, Inc., an investment advisor registered under the Investment Company Act of 1940. Mr. Bumstead is vice chairman and a director of Response Oncology, Inc., a physician practice management company specializing in oncology, and a director of Nashville Country Club, Inc., an owner and operator of restaurants and hotels. Mr. Bumstead also serves as a director, secretary, and treasurer of Imprint Records, Inc., a music recording company. Robin G. Costa has served as a director of the Company since its inception and as a member of ARCLP's limited partners committee since October 1996. Since 1994, Ms. Costa has served as chief operating officer of Maddox Companies, a group of over 40 entities involved in oil and gas exploration, real estate development and investment, and other investments. Ms. Costa has served in various capacities for the Maddox Companies since 1985, including as Secretary and Treasurer from 1992 to 1994. Clarence Edmonds has served as a director of the Company since its inception, as a member of ARCLP's limited partners committee since June 1995, and as a director of various of the Company's predecessors since 1987. Mr. Edmonds has served in various capacities, including vice president and treasurer, of Massey Company, an investment services firm, since 1969. John A. Morris, Jr., M.D. has served as a director of the Company since its inception and as a member of ARCLP's limited partners committee since June 1995. Dr. Morris has served in varying capacities of the medical profession since 1977, and is currently a Professor of Surgery and the Director of the Division of Trauma and Surgical Critical Care at the Vanderbilt University School of Medicine, the Medical Director of the Life Flight Air Ambulance Program at Vanderbilt University Hospital, and an Associate in the Department of Health Policy and Management at the Johns Hopkins University. Dr. Morris is also chairman of the board of Sirrom Capital Corporation, a small business investment company. Daniel K. O'Connell has served as a director of the Company since its inception, as a member of ARCLP's limited partners committee since June 1995, and as a director of various of the Company's predecessors since 1985. Until his retirement in 1990, Mr. O'Connell worked for Ryder System, Inc. for over 25 years in various capacities, including legal counsel and chief financial officer. Nadine C. Smith has served as a director of the Company since its inception and as a member of ARCLP's limited partners committee since June 1995. Since 1990, Ms. Smith has been managing general partner of NC Smith & Co., a financial and management consulting firm. Ms. Smith is also a director of UTI Energy Corp., an oil services company. 47 49 Lawrence J. Stuesser has served as a director of the Company since its inception and as a member of ARCLP's limited partners committee since June 1995. Since June 1996, Mr. Stuesser has been the president and chief executive officer and a director of Computer People, Inc., an information technology professional services and staffing company. From August 1993 to May 1996, Mr. Stuesser was a private investor and independent business consultant. From January 1991 to July 1993, Mr. Stuesser was chairman and chief executive officer of Kimberly Quality Care, Inc., a home health care services company. Mr. Stuesser is chairman of the board of Curative Health Services Inc., a disease management company in the chronic wound care market, and a director of IntegraMed America, Inc., an owner and operator of clinical ambulatory care facilities. The Company's Board of Directors, currently consisting of ten members, is divided into three classes of as nearly equal size as possible. At each annual meeting of shareholders, directors constituting one class are elected for a three-year term. The terms of Messrs. Bovender, O'Connell, and Stuesser will expire at the 1998 Annual Meeting of Shareholders, the terms of Messrs. Bumstead and Edmonds and Ms. Smith will expire at the 1999 Annual Meeting of Shareholders, and the terms of Messrs. Sheriff, Barfield, and Morris and Ms. Costa will expire at the 2000 Annual Meeting of Shareholders. See "Description of Capital Stock -- Certain Provisions of the Charter, Bylaws, and Tennessee Law." Executive officers serve at the discretion of the Board of Directors. The Board of Directors has established a policy of holding meetings on a regular quarterly basis and on other occasions when required by special circumstances. Certain directors also devote their time and attention to the Board's principal standing committees. The committees and their primary functions are as follows. Executive Committee. The Executive Committee is authorized generally to act on behalf of the Board of Directors between scheduled meetings, subject to certain limitations established by the Board of Directors and applicable corporate law. The Executive Committee currently consists of Messrs. Bovender, Bumstead, Morris, and Sheriff. Audit Committee. The Audit Committee makes recommendations to the Board of Directors with respect to the Company's financial statements and the appointment of independent accountants, reviews significant audit and accounting policies and practices, meets with the Company's independent accountants concerning, among other things, the scope of audits and reports, and reviews the performance of the overall accounting and financial controls of the Company. The Audit Committee currently consists of Messrs. Barfield and Edmonds and Ms. Costa. Compensation Committee. The Compensation Committee has the responsibility for reviewing and approving salaries, bonuses, and other compensation and benefits of executive officers, advising management regarding benefits and other terms and conditions of compensation, and administering the Company's stock incentive, employee stock purchase, 401(k), and other executive compensation plans. See "-- Compensation Pursuant to Plans." The Compensation Committee currently consists of Messrs. O'Connell and Stuesser and Ms. Smith. 48 50 EXECUTIVE COMPENSATION The following table sets forth the total compensation paid or accrued by ARCLP on behalf of the Chief Executive Officer and the four other most highly paid executive officers (collectively, the "Named Executive Officers") for the year ended December 31, 1996. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1) ----------------------- ALL OTHER NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($) --------------------------- ---------- --------- ---------------- W.E. Sheriff.......................................... 212,400 30,515 84,000(2) Chairman and Chief Executive Officer Christopher J. Coates................................. 153,400 22,038 11,033(3) President and Chief Operating Officer George T. Hicks....................................... 100,300 14,410 7,214(3) Executive Vice President -- Finance, Chief Financial Officer, Treasurer and Secretary H. Todd Kaestner...................................... 106,200 15,257 7,637(3) Executive Vice President -- Corporate Development James T. Money........................................ 100,300 14,410 7,214(3) Executive Vice President -- Development Services
- --------------- (1) Does not include amounts distributed by the LLC to its members, including Named Executive Officers. In 1996, ARCLP distributed to the LLC an aggregate of approximately $59,000 and the LLC distributed approximately $13,561 to Mr. Sheriff, $9,686 to Mr. Coates, and $7,749 to each of Messrs. Hicks, Kaestner, and Money in accordance with their ownership interests in the LLC. (2) Reflects insurance premiums paid by the Company for insurance policies benefiting Mr. Sheriff. (3) Reflects contributions by the Company under the Company's Section 162 Plan. See "-- Compensation Pursuant to Plans -- Section 162 Plan." DIRECTOR COMPENSATION Directors who are employees of the Company do not receive additional compensation for serving as directors of the Company. Non-employee directors are entitled to an annual retainer of $12,000 payable, in arrears, on the date of each annual meeting of shareholders, commencing with the 1998 Annual Meeting of Shareholders. Non-employee directors are also entitled to a fee of $500 for each board meeting attended by such director, and $250 for each committee meeting attended by such director that is not on the same day as a meeting of the Board of Directors. All directors are entitled to reimbursement for their actual out-of-pocket expenses incurred in connection with attending meetings. In addition, non-employee directors receive options to purchase shares of Common Stock in accordance with the provisions of the 1997 Stock Incentive Plan. See "-- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan." COMPENSATION PURSUANT TO PLANS 1997 Stock Incentive Plan The Company has adopted a stock incentive plan (the "Stock Incentive Plan") that will become effective upon the consummation of the Offering. The Stock Incentive Plan was approved by the Board of Directors and shareholder of the Company in February 1997. Under the Stock Incentive Plan, the Compensation Committee has the authority to grant to key employees and consultants of the Company, and the Board of Directors has the authority to grant to directors who are not employed by the Company ("Outside Directors"), the following types of awards: (1) stock options; (2) stock appreciation rights; (3) restricted stock; and/or (4) other stock-based awards. Pursuant to the Stock Incentive Plan, 1,093,750 shares of Common Stock have been reserved and will be available for issuance, which may include authorized and unissued shares or treasury shares. The number of shares reserved and available for issuance pursuant to the Stock Incentive Plan will, upon the consummation of any Equity Issuance (as defined in the Plan), increase 49 51 automatically by 10% of the number of shares of Common Stock issued in such Equity Issuance; provided, however, that Incentive Stock Options ("ISOs") may not be issued after 1,093,750 shares of Common Stock have been issued under the Stock Incentive Plan. The maximum number of shares of Common Stock for which awards may be made under the Stock Incentive Plan to any officer of the Company or other person whose compensation may be subject to the limitations on deductibility under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), is 200,000 during any single year. As of the date hereof, and subject to the consummation of the Offering, options to purchase 635,000 shares of Common Stock, exercisable at the initial public offering price, have been awarded to 105 key employees, directors, and consultants of the Company. Any shares as to which an option or other award expires, lapses unexpired, or is forfeited, terminated, or canceled may become subject to a new option or other award. The Stock Incentive Plan will terminate on, and no award may be granted later than, the tenth anniversary of the date of adoption of the Stock Incentive Plan, but the exercise date of awards granted prior to such tenth anniversary may extend beyond that date. The Stock Incentive Plan provides for automatic grants of non-qualified stock options to purchase shares of Common Stock to Outside Directors. Options to purchase 9,000 shares of Common Stock have been automatically granted to each person serving as an Outside Director as of the consummation of the Offering at an exercise price equal to the initial public offering price. If any person who was not previously a member of the Board of Directors is elected or appointed an Outside Director following the consummation of the Offering but prior to the date of the Annual Meeting of Shareholders of the Company in the year 2000, such Outside Director will automatically be granted an option to purchase 7,000 shares of Common Stock if such Outside Director's service begins prior to the second anniversary of the Offering and 5,000 shares of Common Stock if such Outside Director's service begins after the second anniversary of the Offering. The Board of Directors may, in its discretion, increase or decrease the number of shares subject to such option to reflect the extent to which such Outside Director's expected service may exceed two years or may be less than one year. Such options shall vest with respect to 5,000 shares on the date of the first annual meeting of shareholders following the date of grant, 2,000 shares on the date of the second annual meeting of shareholders following the date of grant, and any remaining shares on the date of the third annual meeting of shareholders following the date of grant. On the date of each annual meeting of the shareholders of the Company beginning with the annual meeting of shareholders held in the year 2000, unless the Stock Incentive Plan has been terminated, each Outside Director who will continue as a director following such meeting will receive an option to purchase 3,000 shares of Common Stock. Such options will vest with respect to all 3,000 shares on the date of the next annual meeting of shareholders. All options automatically granted to an Outside Director will enable the optionee to purchase shares of Common Stock at the fair market value of the Common Stock on the date of grant. Outside Director optionees will not be able to transfer or assign their options without the prior written consent of the Board of Directors other than (i) transfers by the optionee to a member of his or her immediate family or a trust for the benefit of the optionee or a member of his or her immediate family, or (ii) transfers by will or by the laws of descent and distribution. Options automatically granted to Outside Directors will have a term of ten years from the date of grant. The exercise price may be paid in cash, shares of Common Stock, or a combination thereof. The Board of Directors has the discretion to reduce, but not increase, the number of shares awardable to Outside Directors. ISOs and non-qualified stock options may be granted for such number of shares as the Board or Compensation Committee may determine and may be granted alone, in conjunction with, or in tandem with other awards under the Stock Incentive Plan or cash awards outside the Stock Incentive Plan. A stock option will be exercisable at such times and subject to such terms and conditions as the Compensation Committee will determine. In the case of an ISO, however, the term will be no more than ten years after the date of grant (five years in the case of ISOs for certain 10% shareholders). The option price for an ISO will not be less than 100% (110% in the case of certain 10% shareholders) of the fair market value of the Common Stock as of the date of grant and for any non-qualified stock option will not be less than 50% of the fair market value as of the date of grant. ISOs granted under the Stock Incentive Plan may not be transferred or assigned other than by will or by the laws of descent and distribution. Non-qualified stock options and stock appreciation rights may 50 52 not be transferred or assigned without the prior written consent of the Compensation Committee, other than (i) transfers by the optionee to a member of his or her immediate family or a trust for the benefit of the optionee or a member of his or her immediate family, or (ii) transfers by will or by the laws of descent and distribution. Stock appreciation rights may be granted under the Stock Incentive Plan in conjunction with all or part of a stock option and will be exercisable only when the underlying stock option is exercisable. Once a stock appreciation right has been exercised, the related portion of the stock option underlying the stock appreciation right will terminate. Upon the exercise of a stock appreciation right, the Company will pay to the employee or consultant in cash, Common Stock, or a combination thereof (the method of payment to be at the discretion of the Committee), an amount equal to the excess of the fair market value of the Common Stock on the exercise date over the option price, multiplied by the number of stock appreciation rights being exercised. Restricted stock awards may be granted alone, in addition to, or in tandem with, other awards under the Stock Incentive Plan or cash awards made outside the Plan. The provisions attendant to a grant of restricted stock may vary from participant to participant. In making an award of restricted stock, the Compensation Committee will determine the periods during which the restricted stock is subject to forfeiture and may provide such other awards designed to guarantee a minimum value for such stock. During the restriction period, the employee or consultant may not sell, transfer, pledge, or assign the restricted stock but will be entitled to vote the restricted stock and to receive, at the election of the Compensation Committee, cash or deferred dividends. The Compensation Committee also may grant other types of awards such as performance shares, convertible preferred stock, convertible debentures, or other exchangeable securities that are valued, as a whole or in part, by reference to or otherwise based on the Common Stock. These awards may be granted alone, in addition to, or in tandem with, stock options, stock appreciation rights, restricted stock, or cash awards outside of the Stock Incentive Plan. Awards will be made upon such terms and conditions as the Compensation Committee may determine. If there is a change in control or a potential change in control of the Company (as defined in the Stock Incentive Plan), stock appreciation rights and limited stock appreciation rights, and any stock options which are not then exercisable, will become fully exercisable and vested and the restrictions and deferral limitations applicable to restricted stock and other stock-based awards may lapse and such shares and awards will be deemed fully vested. Stock options, stock appreciation rights, limited stock appreciation rights, restricted stock and other stock-based awards, will, unless otherwise determined by the Compensation Committee in its sole discretion, be cashed out on the basis of the change in control price (as defined in the Stock Incentive Plan and as described below). The change in control price will be the highest price per share paid or offered to be paid in any bona fide transaction relating to a change in control or potential change in control at any time during the immediately preceding 60-day period, as determined by the Compensation Committee. Employee Stock Purchase Plan The Company has adopted an employee stock purchase plan (the "Stock Purchase Plan") that will become effective on the later of July 1, 1997 or the consummation of the Offering. The Stock Purchase Plan was approved by the Board of Directors and shareholder of the Company in February 1997. An aggregate of 250,000 shares of Common Stock has been reserved for issuance pursuant to the Stock Purchase Plan. Under the Stock Purchase Plan, employees, including executive officers, who have been employed by the Company continuously for at least one year are eligible, as of the first day of any option period (January 1 through June 30, or July 1 through December 31) (an "Option Period"), to contribute on an after-tax basis up to 15% of their base pay per pay period through payroll deductions and/or a single lump-sum contribution per Option Period to be used to purchase shares of Common Stock. Notwithstanding the foregoing, no employee who is a 5% or greater shareholder of the Company's voting stock is eligible to participate in the Stock Purchase Plan. On the last trading day of each Option Period (the "Exercise Date"), the amount contributed by each participant over the course of the Option Period will be used to purchase shares of Common Stock at a purchase price per share equal to the lesser of (a) 85% of the closing market price of the Common Stock on 51 53 the Exercise Date, or (b) 85% of the closing market price of the Common Stock on the first trading date of such Option Period. The Stock Purchase Plan is intended to qualify for favorable tax treatment under Section 423 of the Code. 401(k) Plan Employees of the Company participate in a savings plan (the "401(k) Plan") which is qualified under Sections 401(a) and 401(k) of the Code. To be eligible, an employee must have been employed by the Company for at least three months. The 401(k) Plan permits employees to make voluntary contributions up to specified limits. Additional contributions may be made by the Company at its discretion, which contributions vest ratably over a five-year period. Section 162 Plan The Company maintains a non-qualified deferred compensation plan which allows employees who are "highly compensated" under IRS guidelines to make after-tax contributions to an investment account established in such employee's name. Additional contributions may be made by the Company at its discretion. All contributions to the Section 162 Plan are subject to the claims of the Company's creditors. Approximately 45 employees are eligible to participate in the Section 162 Plan, which is administered by the Compensation Committee. In each of 1995 and 1996, the Company contributed approximately $271,000 to the Section 162 Plan. Officers' Incentive Compensation Plan The officers of the Company participate in an Officers' Incentive Compensation Plan which provides contingent incentive compensation. The plan provides for a single annual incentive compensation payment in the amount of up to 60% of an officer's base salary dependent upon the degree to which the Company achieves its operational and financial objectives, or up to a maximum total of 100%, contingent upon the degree to which the Company exceeds its objectives. LIMITATION OF LIABILITY AND INDEMNIFICATION The Tennessee Business Corporation Act ("TBCA") provides that a corporation may indemnify any of its directors and officers against liability incurred in connection with a proceeding if (i) such person acted in good faith, (ii) the director or officer reasonably believed, in the case of conduct in an official capacity, that such conduct was in the corporation's best interests, or, in all other cases, that such conduct was not opposed to the best interests of the corporation, and (iii) in connection with any criminal proceeding, the director or officer had no reasonable cause to believe his or her conduct was unlawful. In actions brought by or in the right of the corporation, however, the TBCA provides that no indemnification may be made if the director or officer was adjudged liable to the corporation. The TBCA also provides that in connection with any proceeding charging improper personal benefit to a director or officer, no indemnification may be made if such director or officer is adjudged liable on the basis that such personal benefit was improperly received. In cases where the director or officer is wholly successful, on the merits or otherwise, in the defense of any proceeding instigated because of his or her status as a director or officer of a corporation, the TBCA mandates that the corporation indemnify the director or officer against reasonable expenses incurred in the proceeding. Notwithstanding the foregoing, the TBCA provides that a court of competent jurisdiction, upon application, may order that a director or officer be indemnified for reasonable expenses if, in consideration of all relevant circumstances, the court determines that such individual is fairly and reasonably entitled to indemnification, even if such director or officer (i) was adjudged liable to the corporation in a proceeding by or in right of the corporation, (ii) was adjudged liable on the basis that personal benefit was improperly received, or (iii) breached his or her duty of care to the corporation. The Company's Charter provides that to the fullest extent permitted by Tennessee law no director shall be personally liable to the Company or its shareholders for monetary damages for breach of any fiduciary duty as a director. Under the TBCA, this charter provision relieves the Company's directors of personal liability to 52 54 the Company or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability arising from a judgment or other final adjudication establishing (i) any breach of the director's duty of loyalty, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or (iii) any unlawful distributions. In addition, the Company's Charter and Bylaws provide that each director and officer of the Company shall be indemnified by the Company to the fullest extent allowed by Tennessee law. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee, consisting of Messrs. O'Connell and Stuesser and Ms. Smith, each an Outside Director, was established in February 1997. Prior to the Offering, the Company's executive officers were compensated as employees of ARCLP and compensation decisions were made by ARCLP's compensation committee, which was comprised in 1996 of the persons who now constitute the Company's Compensation Committee. No executive officer of the Company served during 1996 as a member of a compensation committee or as a director of any entity of which any of the Company's directors or members of ARCLP's limited partners committee serves as an executive officer. 53 55 PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Common Stock after giving effect to the Reorganization with respect to (i) each of the Named Executive Officers, (ii) each of the Company's directors, (iii) each person known by the Company to own beneficially more than 5% of the Common Stock, and (iv) all directors and executive officers of the Company as a group, both before and after giving effect to the Offering. Under the rules of the Securities and Exchange Commission (the "Commission"), a person is deemed to be a "beneficial owner" of a security if he or she has or shares the power to vote or direct the voting of such security or the power to dispose of or direct the disposition of such security. Accordingly, more than one person may be deemed to be a beneficial owner of the same security. Shares of Common Stock subject to options held by the directors and executive officers that are not exercisable within 60 days of the date hereof are not, in accordance with beneficial ownership rules promulgated by the Commission, deemed outstanding for the purpose of computing such director's or executive officer's beneficial ownership.
PERCENT OF COMMON STOCK -------------------- NUMBER OF SHARES BEFORE AFTER NAME BENEFICIALLY OWNED(1) OFFERING OFFERING ---- --------------------- -------- -------- NAMED EXECUTIVE OFFICERS: W.E. Sheriff........................................... 1,670,353(2)(3) 21.4% 15.3% Christopher J. Coates.................................. 242,603(4) 3.1 2.2 George T. Hicks........................................ 170,259(5) 2.2 1.6 H. Todd Kaestner....................................... 180,244(6) 2.3 1.6 James T. Money......................................... 175,252(7) 2.2 1.6 DIRECTORS: H. Lee Barfield II..................................... 602,661(8)(9) 7.7 5.5 Jack O. Bovender, Jr................................... -- -- -- Frank M. Bumstead...................................... -- -- -- Robin G. Costa......................................... 1,467,526(10)(11) 18.8 13.4 Clarence Edmonds....................................... 360,907(12) 4.6 3.3 John A. Morris, Jr., M.D............................... 358,490(13) 4.6 3.3 Daniel K. O'Connell.................................... 10,285 * * Nadine C. Smith........................................ 29,956 * * Lawrence J. Stuesser................................... 67,547(14) * * OTHER 5% SHAREHOLDERS: American Retirement Communities, LLC................... 1,350,000(15) 17.3 12.3 Dan Maddox............................................. 1,419,782(10)(16) 18.2 13.0 DMAR Limited Partnership............................... 1,372,037(17) 17.6 12.5 Mary Louise Frist Barfield............................. 602,661(18)(19) 7.7 5.5 Robert A. Frist, M.D................................... 573,872(20)(21) 7.3 5.2 All directors and executive officers as a group (16 persons)............................................. 4,637,986 59.4% 42.4%
- --------------- * Less than 1%. (1) The information listed below with respect to the beneficial ownership of the Common Stock is based upon the estimated allocation of the Common Stock in the Reorganization. See "Certain Transactions -- Pending Reorganization." (2) Address: 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027. (3) Includes 320,353 shares beneficially owned by a family limited partnership in which Mr. Sheriff is a general partner and 1,350,000 shares beneficially owned by the LLC. See Note 15. Mr. Sheriff is Chief Manager and a member of the LLC. Mr. Sheriff disclaims beneficial ownership of the shares owned by the LLC except to the extent of the 294,698 shares as to which he holds a pecuniary interest. (4) Includes 210,499 shares beneficially owned by the LLC and 1,860 shares beneficially owned by Sylvester I, L.P. ("Sylvester I") as to which Mr. Coates holds a pecuniary interest. (5) Includes 168,399 shares beneficially owned by the LLC and 1,860 shares beneficially owned by Sylvester I as to which Mr. Hicks holds a pecuniary interest. (6) Includes 168,399 shares beneficially owned by the LLC and 1,860 shares beneficially owned by Sylvester I as to which Mr. Kaestner holds a pecuniary interest. 54 56 (7) Includes 168,399 shares beneficially owned by the LLC and 1,860 shares beneficially owned by Sylvester I as to which Mr. Money holds a pecuniary interest. (8) Address: 2700 First American Center, Nashville, Tennessee 37238. (9) Includes 457,857 shares beneficially owned by Mr. Barfield's wife, Mary Louise Frist Barfield. See Note 19. Mr. Barfield is the brother-in-law of Robert A. Frist. (10) Address: 3833 Cleghorn Avenue, Suite 400, Nashville, Tennessee 37215. (11) Includes 1,372,037 shares beneficially owned by DMAR Limited Partnership ("DMAR") and 95,489 shares beneficially owned by Little Buck Limited Partnership ("Little Buck"). Ms. Costa is a Vice President of Margaret Energy, Inc., the general partner of DMAR and Little Buck. See Note 16. (12) Includes 335,888 shares beneficially owned by The Jack C. Massey Foundation ("The Massey Foundation"), of which Mr. Edmonds serves as a co-trustee, and 25,019 shares beneficially owned by Mr. Edmonds' wife. Mr. Edmonds disclaims beneficial ownership of his wife's shares. (13) All shares are beneficially owned by partnerships owned and controlled by Dr. Morris, his brother Alfred Morris, and members of Dr. Morris' family. (14) All shares are beneficially owned by B&W Development Centers ("B&W"), of which Mr. Stuesser is a director and 50% shareholder. (15) Address: 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027. The members of the LLC include the Named Executive Officers and other members of management of the Company. See Notes 3, 4, 5, 6, and 7. (16) Includes 1,372,037 shares beneficially owned by DMAR and 47,745 shares beneficially owned by Little Buck as to which Mr. Maddox holds a pecuniary interest. See Notes 11 and 17. (17) The partners in DMAR include corporations and trusts owned by, or for the benefit of, Mr. Maddox and his wife. (18) Address: c/o H. Lee Barfield II, 2700 First American Center, Nashville, Tennessee 37238. (19) Includes 144,804 shares beneficially owned by Mrs. Barfield's husband, H. Lee Barfield II, and an aggregate of 169,084 shares beneficially owned by trusts for the benefit of Mrs. Barfield's children, of which Mrs. Barfield serves as trustee. See Note 9. Mrs. Barfield is the sister of Robert A. Frist. (20) Address: 1326 Page Road, Nashville, Tennessee 37205. (21) Includes 22,569 shares beneficially owned by Dr. Frist's wife. Does not include an aggregate of 191,554 shares beneficially owned by Dr. Frist's children who are 18 years of age or older. Dr. Frist is the brother of Mary Louise Barfield Frist and the brother-in-law of H. Lee Barfield II. CERTAIN TRANSACTIONS THE 1995 ROLL-UP ARCLP was formed in February 1995 in anticipation of the 1995 Roll-Up of the Predecessor Entities. As a result of the 1995 Roll-Up, ARCLP issued partnership interests to the partners and shareholders of the Predecessor Entities, many of whom are directors, executive officers, and greater than 5% shareholders of the Company, in exchange for their limited partnership interests and stock in the Predecessor Entities and thereby became the owner, directly or indirectly, of all of the assets of the Predecessor Entities. The LLC was organized in connection with the formation of ARCLP and serves as its general partner. The members of the LLC include each of the Named Executive Officers and certain other members of management of the Company. Messrs. Sheriff and Coates have LLC membership interests of approximately 21.8% and 15.6%, respectively, and Messrs. Kaestner, Money, and Hicks have LLC membership interests of approximately 14.5% each. REDEMPTION OF PREFERRED PARTNERSHIP INTERESTS In connection with the 1995 Roll-Up, partners in certain of the Predecessor Entities exchanged promissory notes for the Preferred Partnership Interests. In 1996, the Company redeemed the Preferred Partnership Interests for an aggregate amount of $10.0 million. In connection with the redemption of the Preferred Partnership Interests, certain executive officers, directors, and certain other limited partners who will be greater than five percent (5%) beneficial owners of the Common Stock (including, unless otherwise noted, their immediate family members and affiliates) received the following amounts in payment for the redemption of their Preferred Partnership Interests: H. Lee Barfield II and Mary Louise Frist Barfield -- $1.12 million (does not include amounts distributed to Robert A. Frist or an aggregate of $780,000 distributed to Mrs. Barfield's sister and trusts for the benefit of Mr. and Mrs. Barfield's nephews); Lawrence J. Stuesser -- $150,000 (distributed to B&W); DMAR -- $2.16 million; Robert A. Frist -- $1.57 million (does not include an aggregate of $1.24 million distributed to Dr. Frist's children who are 18 years of age or older; amounts distributed to H. Lee Barfield II and Mary Louise Frist Barfield, or an aggregate of $780,000 distributed to Dr. Frist's sister and trusts for the benefit of Dr. Frist's nephews); and Dan Maddox -- $2.52 million (includes 55 57 $2.16 million distributed to DMAR and $360,000 distributed to Little Buck; does not include $240,000 distributed to a partnership controlled by Mr. Maddox's son). PENDING REORGANIZATION In connection with the Reorganization, the Company will issue an aggregate of 7,812,500 shares of Common Stock and the Reorganization Note to ARCLP. ARCLP will distribute approximately 1,350,000 shares of Common Stock to the LLC, as general partner of ARCLP, and an aggregate of approximately 6,462,500 shares of Common Stock to the limited partners of ARCLP, generally in accordance with the limited partners' ARCLP contribution accounts. The number of shares of Common Stock allocated to the LLC will be determined at the time of the consummation of the Offering and will have a value, based upon the initial public offering price, equal to the sum of (i) $15.0 million, plus (ii) 10% of the value of the Company (including the value of the Reorganization Note) immediately prior to the Offering (the "Pre-IPO Valuation") between $84.0 million and $160.0 million, plus (iii) 20% of the Pre-IPO Valuation over $160.0 million. The information below assumes an initial public offering price of $16.00. In addition, ARCLP will distribute, in liquidation, proceeds from the repayment of the Reorganization Note to the limited partners of ARCLP, generally in accordance with the limited partners' contribution accounts. In connection with the Reorganization, certain executive officers, directors, and other limited partners of ARCLP who will beneficially own more than 5% of the Common Stock (and, in each case, their immediate family members and affiliates), will receive shares of Common Stock and proceeds from the Reorganization Note as set forth in the table below.
NUMBER OF SHARES PROCEEDS FROM THE NAME OF COMMON STOCK(1) REORGANIZATION NOTE($) ---- ------------------ ---------------------- W.E. Sheriff......................................... 1,670,353 $1,239,281.70(2) Christopher J. Coates................................ 242,603(3) 124,191.71(4) George T. Hicks...................................... 170,259(3) 7,194.55(4) H. Todd Kaestner..................................... 180,244(3) 45,822.69(4) James T. Money....................................... 175,252(3) 26,508.62(4) H. Lee Barfield II................................... 602,661(5) 2,331,370.74(6) Robin G. Costa....................................... 1,467,526 5,677,087.37(7) Clarence Edmonds..................................... 360,907 1,396,160.43(8) John A. Morris, Jr., M.D............................. 358,490 1,386,809.40(9) Daniel K. O'Connell.................................. 10,285 39,786.98 Nadine C. Smith...................................... 29,956 115,884.42 Lawrence J. Stuesser................................. 67,547 261,302.67(10) American Retirement Communities, LLC................. 1,350,000 -- Dan Maddox........................................... 1,419,782(11) 5,492,388.24(12) DMAR Limited Partnership............................. 1,372,037 5,307,689.10 The Jack C. Massey Foundation........................ 335,888 1,299,375.88 Mary Louise Frist Barfield........................... 602,661(13) 2,331,370.74(14) Robert A. Frist, M.D................................. 573,872(15) 2,220,008.29(16)
- --------------- (1) See Notes to "Principal Shareholders" for certain beneficial ownership information. (2) Amounts to be distributed to a family limited partnership in which Mr. Sheriff is a general partner. (3) Does not include shares to be distributed to other members of the LLC or other partners in Sylvester I. (4) Includes $7,194.55 which represents such person's pro rata portion of amounts to be distributed to Sylvester I. (5) Does not include shares to be distributed to Robert A. Frist or an aggregate of 841,555 shares to be distributed to Mr. Barfield's father-in-law, sister-in-law, and trusts for the benefit of Mr. Barfield's brother-in-law and nephews. (6) Includes $1,117,109.09 to be distributed to Mr. Barfield's wife, Mary Louise Frist Barfield, and an aggregate of $654,092.04 to be distributed to trusts for the benefit of Mr. Barfield's children, of which Mrs. Barfield serves as trustee. See Note 12. Does not include amounts to be distributed to Robert A. Frist, Mr. Barfield's brother-in-law, or an aggregate of $3,255,533.84 to be distributed to Mr. Barfield's father-in-law, sister-in-law, and trusts for the benefit of Mr. Barfield's brother-in-law and nephews. (7) Includes $5,307,689.10 to be distributed to DMAR and $369,398.27 to be distributed to Little Buck. Ms. Costa is a Vice President of Margaret Energy, Inc., the general partner of DMAR and Little Buck. (8) Includes $1,299,375.88 to be distributed to The Massey Foundation and $96,784.55 to be distributed to Mr. Edmonds' wife. 56 58 (9) All amounts to be distributed to partnerships owned and controlled by Dr. Morris, his brother Alfred Morris, and members of Dr. Morris' family. (10) Amounts to be received by B&W, of which Mr. Stuesser is a director and 50% shareholder. (11) Does not include 111,672 shares to be distributed to a partnership controlled by Mr. Maddox's son or 47,745 shares to be distributed to Little Buck as to which Mr. Maddox's son holds a pecuniary interest. (12) Includes $5,307,689.10 to be distributed to DMAR and $184,699.14 which represents Mr. Maddox's pro rata portion of amounts to be distributed to Little Buck. Does not include $431,999.70 to be distributed to a partnership controlled by Mr. Maddox's son and $184,699.14 which represents Mr. Maddox's son's pro rata portion of amounts to be distributed to Little Buck. (13) Does not include shares to be distributed to Robert A. Frist or an aggregate of 841,555 shares to be distributed to Ms. Barfield's father, sister, and trusts for the benefit of Ms. Barfield's brother and nephews. (14) Includes $560,169.61 to be distributed to Mrs. Barfield's husband, H. Lee Barfield II, and an aggregate of $654,092.04 to be distributed to trusts for the benefit of Mrs. Barfield's children, of which Mrs. Barfield serves as trustee. See Note 5. Does not include amounts to be distributed to Robert A. Frist, Mrs. Barfield's brother, or an aggregate of $3,255,533.84 to be distributed to Ms. Barfield's father, sister, and trusts for the benefit of Ms. Barfield's brother and nephews. (15) Does not include shares to be distributed to H. Lee Barfield II or Mary Louise Frist Barfield, or an aggregate of 841,555 shares to be distributed to Dr. Frist's father, sister, or trusts for the benefit of Dr. Frist's brother and nephews. (16) Includes $87,306.35 to be distributed to Dr. Frist's wife. Does not include an aggregate of $741,022.43 to be distributed to Dr. Frist's children who are 18 years of age or older. Dr. Frist is the brother of Mary Louise Frist Barfield and the brother-in-law of H. Lee Barfield II. Does not include amounts to be distributed to H. Lee Barfield II or Mary Louise Frist Barfield, or an aggregate of $3,255,533.84 to be distributed to Dr. Frist's father, sister, and trusts for the benefit of Dr. Frist's brother and nephews. POLICY OF THE BOARD OF DIRECTORS The Board of Directors has adopted a policy providing that any transaction between the Company and any of its directors, officers, or principal shareholders or affiliates thereof must be on terms no less favorable to the Company than can be obtained from unaffiliated parties. Management believes that past transactions have complied with this policy. 57 59 DESCRIPTION OF CAPITAL STOCK The Company is authorized to issue 50,000,000 shares of Common Stock, par value $.01 per share, and 5,000,000 shares of preferred stock, no par value per share (the "Preferred Stock"). Upon consummation of the Offering, 10,937,500 shares of Common Stock will be issued and outstanding, no shares of Preferred Stock will be outstanding, and 635,000 shares of Common Stock will be reserved for issuance pursuant to outstanding stock options under the Stock Incentive Plan. COMMON STOCK The holders of Common Stock are entitled to one vote per share on all matters to be voted on by shareholders and are not entitled to cumulative voting in the election of directors, which means that the holders of a majority of the shares voting for the election of directors can elect all of the directors then standing for election by the holders of Common Stock. The holders of Common Stock are entitled to share ratably in such dividends, if any, as may be declared from time to time by the Board of Directors in its discretion out of funds legally available therefor. See "Dividend Policy and Prior Distributions." The holders of Common Stock are entitled to share ratably in any assets remaining after satisfaction of all prior claims upon liquidation of the Company. The Company's Charter gives holders of Common Stock no preemptive or other subscription or conversion rights, and there are no redemption provisions with respect to such shares. All shares of Common Stock to be outstanding upon consummation of the Offering, including the shares offered hereby, will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. PREFERRED STOCK The authorized Preferred Stock may be issued from time to time in one or more designated series or classes. The Board of Directors may issue shares of Preferred Stock without approval of the shareholders, except as may be required by applicable law or by the rules of any securities exchange on which the Common Stock may be listed. The Board of Directors is also authorized to establish the voting, dividend, redemption, conversion, liquidation, and other relative provisions as may be provided in a particular series or class. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of Common Stock and, under certain circumstances, make it more difficult for a third party to acquire, or discourage a third party from acquiring, a majority of the outstanding voting stock of the Company. The Company has no present intention to issue any series or class of Preferred Stock. CERTAIN PROVISIONS OF THE CHARTER, BYLAWS, AND TENNESSEE LAW General The provisions of the Charter, the Bylaws, and Tennessee statutory law described in this section may delay or make more difficult acquisitions or changes of control of the Company that are not approved by the Board of Directors. Such provisions have been implemented to enable the Company, particularly (but not exclusively) in the initial years of its existence as an independent, publicly-owned company, to develop its business in a manner that will foster its long-term growth without the disruption of the threat of a takeover not deemed by the Board of Directors to be in the best interests of the Company and its shareholders. Directors The Bylaws provide that the number of directors shall be no fewer than three nor more than fifteen, with the exact number to be established by the Board of Directors and subject to change from time to time as determined by the Board of Directors. Vacancies on the Board of Directors (including vacancies created by an increase in the number of directors) may be filled by the Board of Directors, acting by a majority of the remaining directors then in office, or by a plurality of the votes cast by the shareholders at a meeting at which a quorum is present. Officers are elected annually by and serve at the pleasure of the Board of Directors. 58 60 The Charter and Bylaws provide that the Board of Directors is divided into three classes of as nearly equal size as possible, and the term of office of each class expires in consecutive years so that each year only one class is elected. The Charter also provides that directors may be removed only for cause and only by (i) the affirmative vote of the holders of a majority of the voting power of all the shares of the Company's capital stock then entitled to vote in the election of directors, voting together as a single class, unless the vote of a special voting group is otherwise required by law, or (ii) the affirmative vote of a majority of the entire Board of Directors then in office. The overall effect of these provisions in the Company's Charter and Bylaws may be to render more difficult a change in control of the Company or the removal of incumbent management. Advance Notice for Shareholder Proposals or Making Nominations at Meetings The Bylaws establish an advance notice procedure for shareholder proposals to be brought before a meeting of shareholders of the Company and for nominations by shareholders of candidates for election as directors at an annual meeting or a special meeting at which directors are to be elected. Subject to any other applicable requirements, only such business may be conducted at a meeting of shareholders as has been brought before the meeting by, or at the direction of, the Board of Directors, or by a shareholder who has given to the Secretary of the Company timely written notice, in proper form, of the shareholder's intention to bring that business before the meeting. The presiding officer at such meeting has the authority to make such determinations. Only persons who are selected and recommended by the Board of Directors, or the committee of the Board of Directors designated to make nominations, or who are nominated by a shareholder who has given timely written notice, in proper form, to the Secretary prior to a meeting at which directors are to be elected will be eligible for election as directors of the Company. To be timely, notice of nominations or other business to be brought before any meeting must be received by the Secretary of the Company not later than 120 days in advance of the anniversary date of the Company's proxy statement for the previous year's annual meeting or, in the case of special meetings, at the close of business on the tenth day following the date on which notice of such meeting is first given to shareholders. The notice of any shareholder proposal or nomination for election as director must set forth various information required under the Bylaws. The person submitting the notice of nomination and any person acting in concert with such person must provide, among other things, the name and address under which they appear on the Company's books (if they so appear) and the class and number of shares of the Company's capital stock that are beneficially owned by them. Amendment of the Bylaws and Charter The Bylaws provide that a majority of the members of the Board of Directors who are present at any regular or special meeting or, subject to greater voting requirements imposed by the Charter, the holders of a majority of the voting power of all shares of the Company's capital stock represented at regular or special meeting have the power to amend, alter, change, or repeal the Bylaws. Any proposal to amend, alter, change, or repeal provisions of the Charter relating to staggered terms for directors, and limitations on the ability of shareholders to call a shareholders' meeting or to remove directors require approval by the affirmative vote of both a majority of the members of the Board of Directors then in office and the holders of three-fourths of the voting power of all of the shares of the Company's capital stock entitled to vote on the amendments. Other amendments to the Charter require the affirmative vote of both a majority of the members of the Board of Directors then in office and the holders of a majority of the voting power of all of the shares of the Company's capital stock entitled to vote on the amendments, with shareholders entitled to dissenters' rights as a result of the Charter amendment voting together as a single class. Shareholders entitled to dissenters' rights as a result of a Charter amendment are those whose rights would be materially and adversely affected because the amendment (i) alters or abolishes a preferential right of the shares; (ii) creates, alters, or abolishes a right in respect of redemption; (iii) alters or abolishes a preemptive right; (iv) excludes or limits the right of the shares to vote on any matter, or to cumulate votes, other than a limitation by dilution through issuance of shares or other securities with similar voting rights; or 59 61 (v) reduces the number of shares held by such holder to a fraction if the fractional share is to be acquired for cash. In general, however, under the TBCA no shareholder is entitled to dissenters' rights if the security he or she holds is listed on a national securities exchange. ANTI-TAKEOVER LEGISLATION The Tennessee Business Combination Act (the "Combination Act") provides, among other things, that any corporation to which the Combination Act applies, including the Company, shall not engage in any "business combination" with an "interested shareholder" for a period of five years following the date that such shareholder became an interested shareholder unless prior to such date the board of directors of the corporation approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder. The Combination Act defines "business combination," generally, to mean any: (i) merger or consolidation; (ii) share exchange; (iii) sale, lease, exchange, mortgage, pledge, or other transfer (in one transaction or a series of transactions) of assets representing 10% or more of (A) the market value of consolidated assets, (B) the market value of the corporation's outstanding shares or (C) the corporation's consolidated net income; (iv) issuance or transfer of shares from the corporation to the interested shareholder; (v) plan of liquidation; (vi) transaction in which the interested shareholder's proportionate share of the outstanding shares of any class of securities is increased; or (vii) financing arrangements pursuant to which the interested shareholder, directly or indirectly, receives a benefit except proportionately as a shareholder. The Combination Act defines "interested shareholder," generally, to mean any person who is the beneficial owner, either directly or indirectly, of 10% or more of any class or series of the outstanding voting stock, or any affiliate or associate of the corporation who has been the beneficial owner, either directly or indirectly, of 10% or more of the voting power of any class or series of the corporation's stock at any time within the five year period preceding the date in question. Consummation of a business combination that is subject to the five-year moratorium is permitted after such period if the transaction (i) complies with all applicable charter and bylaw requirements and applicable Tennessee law and (ii) is approved by at least two-thirds of the outstanding voting stock not beneficially owned by the interested shareholder, or when the transaction meets certain fair price criteria. The fair price criteria include, among others, the requirement that the per share consideration received in any such business combination by each of the shareholders is equal to the highest of (i) the highest per share price paid by the interested shareholder during the preceding five-year period for shares of the same class or series plus interest thereon from such date at a treasury bill rate less the aggregate amount of any cash dividends paid and the market value of any dividends paid other than in cash since such earliest date, up to the amount of such interest, (ii) the highest preferential amount, if any, such class or series is entitled to receive on liquidation, or (iii) the market value of the shares on either the date the business combination is announced or the date when the interested shareholder reaches the 10% threshold, whichever is higher, plus interest thereon less dividends as noted above. The Tennessee Control Share Acquisition Act (the "Acquisition Act") prohibits certain shareholders from exercising in excess of 20% of the voting power in a corporation acquired in a "control share acquisition," as defined in the Acquisition Act, unless such voting rights have been previously approved by the disinterested shareholders of the corporation. The Company has elected not to make the Acquisition Act applicable to the Company. No assurance can be given that such election, which must be expressed in a charter or bylaw amendment, will not be made in the future. The Tennessee Greenmail Act (the "Greenmail Act") prohibits the Company from purchasing or agreeing to purchase any of its securities, at a price in excess of fair market value, from a holder of 3% or more of any class of such securities who has beneficially owned such securities for less than two years, unless such purchase has been approved by the affirmative vote of a majority of the outstanding shares of each class of voting stock issued by the Company or the Company makes an offer of at least equal value per share to all holders of shares of such class. The effect of the Combination Act, the Acquisition Act, and the Greenmail Act may be to render more difficult a change of control of the Company. 60 62 REGISTRATION RIGHTS Following the consummation of the Offering, beneficial holders of an aggregate of 7,812,500 shares of Common Stock will have contractual rights with respect to the registration of the sale of such shares ("Registrable Shares"). Beginning one year after the date hereof (the "IPO Date"), holders of Registrable Shares that may not otherwise be sold pursuant to Rule 144 of the Securities Act will be entitled to two demand registrations upon the written demand to the Company to register the sale of 25% or more of the Registrable Shares; provided, however, that in no event will any holder of Registrable Shares participating in such demand registrations be permitted to sell in excess of 20% of such holder's Registrable Shares. In addition, until the second anniversary of the IPO Date, holders of Registrable Shares that may not otherwise be sold pursuant to Rule 144 of the Securities Act may require the Company to include all or a portion of such holder's Registrable Shares in a registration statement filed by the Company for its own account for cash, provided, among other conditions, that the managing underwriter (if any) of such offering has the right, subject to certain conditions, to limit the number of Registrable Shares included in such registration statement. In general, all fees, costs, and expenses of such registrations (other than the underwriting commissions, dealers' fees, brokers' fees and concessions applicable to Common Stock) will be borne by the Company. TRANSFER AGENT AND REGISTRAR First Union National Bank, Charlotte, North Carolina will be the transfer agent and registrar for the Common Stock. 61 63 SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offering, there has not been any public market for securities of the Company. No prediction can be made as to the effect, if any, that market sales of shares of Common Stock or the availability of shares of Common Stock for sale will have on the market price prevailing from time to time. Sales of substantial amounts of Common Stock of the Company in the public market after the restrictions described below lapse could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of the Offering, the Company will have outstanding 10,937,500 shares of Common Stock (11,406,250 shares if the underwriters' over-allotment option is exercised in full). Of these shares, the 3,125,000 shares of Common Stock sold in the Offering will be freely tradeable without restriction or limitation under the Securities Act, except to the extent such shares are subject to the Agreement with the representatives of the Underwriters described below, and except for any shares purchased by "affiliates," as that term is defined under the Securities Act, of the Company. The remaining 7,812,500 shares will be "restricted securities" within the meaning of Rule 144 adopted under the Securities Act (the "Restricted Shares"). The Restricted Shares were issued by the Company in the Reorganization in reliance upon an exemption from registration under the Securities Act and none of such shares may be sold in the public market, except in compliance with the registration requirements of the Securities Act or pursuant to an exemption from registration, such as the exemption provided by Rule 144 under the Securities Act. Upon consummation of the Offering, the beneficial holders of all of the Restricted Shares will have demand and piggyback registration rights with respect to the sale of such shares. See "Description of Capital Stock -- Registration Rights." In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated), including an affiliate, who has beneficially owned shares for at least a one-year period (as computed under Rule 144) is entitled to sell within any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (109,375 shares after giving effect to the Offering), and (ii) the average weekly trading volume in the Common Stock during the four calendar weeks immediately preceding the date on which the notice of sale is filed with the Commission. Sales under Rule 144 are also subject to certain provisions relating to the manner and notice of sale and the availability of current public information about the Company. A shareholder who is not an affiliate of the Company at any time during the 90 days immediately preceding a sale, and who has beneficially owned his or her shares for at least two years (as computed under Rule 144), is entitled to sell such shares under Rule 144(k) without regard to the volume, manner and notice of sale, and availability of public information limitations described above. Shares properly sold in reliance upon Rule 144 to persons who are not affiliates are thereafter freely tradeable without restrictions or registration under the Securities Act. The Company and all directors and executive officers of the Company (who in the aggregate will beneficially own 4,637,986 shares of Common Stock) have agreed, and certain holders of 5% or more of the shares of Common Stock outstanding after the Offering will be asked to agree, with the Underwriters that, for a period of 180 days following the Offering (the "Lock-up Period"), they will not offer to sell, sell, contract to sell, grant an option to purchase or otherwise dispose (or announce any offer, sale, grant of any option or other distribution) of any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock without the prior written consent of NatWest Securities Limited (except that the Company may grant options to purchase or award shares of Common Stock under the Stock Incentive Plan and the Stock Purchase Plan and issue privately placed shares in connection with acquisitions). See "Principal Shareholders" and "Management -- Compensation Pursuant to Plans." As soon as practicable following the consummation of the Offering, the Company intends to file a registration statement under the Securities Act to register shares of Common Stock issuable pursuant to the Stock Incentive Plan and the Stock Purchase Plan. See "Management -- Compensation Pursuant to Plans." Shares of Common Stock issued pursuant to the Stock Incentive Plan and the Stock Purchase Plan after the effective date of such registration statement will be available for sale in the open market, subject to the Lock-up Period, if applicable. 62 64 UNDERWRITING The Underwriters named below (the "Underwriters") have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock set forth opposite their names below.
UNDERWRITER NUMBER OF SHARES - ----------- ---------------- NatWest Securities Limited.................................. Equitable Securities Corporation............................ Total.............................................
The Underwriters are obligated to purchase all the shares of Common Stock offered hereby, if any such shares are purchased. The Underwriters propose to offer the shares directly to the public initially at the public offering price set forth on the cover page of this Prospectus, and to certain securities dealers at such price less a concession not in excess of $ per share of Common Stock. Such dealers may re-allow a concession not in excess of $ per share of Common Stock to certain other brokers and dealers. After the public offering, the per share price and such concessions may be changed by the Underwriters. The Underwriters have informed the Company that they do not intend to confirm sales of shares of Common Stock to any accounts over which they exercise discretionary authority. The Underwriting Agreement provides that the Company will indemnify the several Underwriters against certain liabilities, including liabilities under the federal securities laws, or will contribute to payments that the Underwriters may be required to make in respect thereof. The Company has granted an option to the Underwriters, exercisable for 30 days from the date of this Prospectus, to purchase up to 468,750 additional shares of Common Stock at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriters may exercise such option only to cover over-allotments in the sale of the shares of Common Stock offered hereby. NatWest Securities Limited, a United Kingdom broker-dealer and a member of the Securities and Futures Authority Limited, has agreed that, as part of the distribution of the Common Stock offered hereby and subject to certain exceptions, it will not offer or sell any Common Stock within the United States, its territories or possessions or to persons who are citizens thereof or residents therein. The Underwriting Agreement does not limit the sale of the Common Stock offered hereby outside of the United States. NatWest Securities Limited has further represented and agreed that (a) it has not offered or sold and will not offer or sell any shares of Common Stock to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing, or disposing of investments (whether as principal or agent) for the purposes of their businesses or otherwise in circumstances that have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995 or the Financial Services Act 1986 (the "Act"); (b) it has complied and will comply with all applicable provisions of the Act with respect to anything done by it in relation to the shares of Common Stock in, from, or otherwise involving the United Kingdom; and (c) it has only issued or passed on and will only issue or pass on, in the United Kingdom, any document that consists of or any part of listing 63 65 particulars, supplementary listing particulars, or any other document required or permitted to be published by listing rules under Part IV of the Act, to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom the document may otherwise be lawfully issued or passed on. Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price of the Common Stock will be determined by negotiation between the Company and the Underwriters. Among the factors to be considered in determining the initial public offering price, in addition to prevailing market and general economic conditions, are the history of, and prospects for, the industry in which the Company operates, the ability of the Company's management, the Company's past and present operations, the Company's historical results of operations, the Company's earnings prospects, the prices of similar securities of comparable companies, and other relative factors. There can be no assurance, however, that the price at which the Common Stock will sell in the public market after the Offering will not be lower than the price at which it is sold by the Underwriters. See "Risk Factors -- Absence of Prior Public Trading Market." The Company, directors and officers of the Company, and certain holders of 5% or more of the shares of Common Stock and options to purchase Common Stock outstanding after the Offering will agree with the Underwriters that, for a period of 180 days following the Offering, they will not offer to sell, sell, contract to sell, grant an option to purchase or otherwise dispose (or announce any offer, sale, grant of any option or other distribution) of any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock without the prior written consent of NatWest Securities Limited (except that the Company may grant options to purchase or award shares of Common Stock under the Stock Incentive Plan and the Stock Purchase Plan and issue privately placed shares in connection with acquisitions). See "Principal Shareholders" and "Management -- Compensation Pursuant to Plans." The Representatives, on behalf of the Underwriters, may engage in over-allotment, stabilizing transactions, syndicate covering transactions, and penalty bids in accordance with Regulation M under the Exchange Act. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specific maximum. Syndicate covering transactions involve purchases of the securities in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the Representatives to reclaim a selling concession from a syndicate member when the securities originally sold by such syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions. Such stabilizing transactions, syndicate covering transactions, and penalty bids may cause the price of the securities to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on a securities exchange or otherwise and, if commenced, may be discontinued at any time. At the request of the Company, up to 300,000 shares of Common Stock have been reserved for sale in the Offering to certain individuals, including directors and employees of the Company, members of their families, and other persons having business relationships with the Company. The price of such shares to such persons will be the initial public offering price set forth on the cover of this prospectus. The number of shares available for sale to the general public will be reduced to the extent these persons purchase such reserved shares. Any reserved shares not purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Bass, Berry & Sims PLC, Nashville, Tennessee. H. Lee Barfield II, a member of Bass, Berry & Sims PLC, is a director of the Company. Mr. Barfield and his wife and children beneficially own 602,661 shares of Common Stock, and will receive approximately $2.3 million pursuant to ARCLP's liquidation and distribution of the repayment of the Reorganization Note. See "The Company -- Pending Reorganization," "Principal Shareholders," and "Certain Transactions -- Pending Reorganization." Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Stroock & Stroock & Lavan LLP, New York, New York. 64 66 EXPERTS The Predecessor Entities' and the Predecessor's Combined and Consolidated Financial Statements and schedule as of December 31, 1995 and 1996, and for the year ended December 31, 1994, the three months ended March 31, 1995, the nine months ended December 31, 1995, and the year ended December 31, 1996, and the combined financial statements of Carriage Club for the four months ended April 30, 1996 have been included herein in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering the Predecessor Entities' and the Predecessor's Combined and Consolidated Financial Statements refers to a change in cost basis as a result of a purchase business combination. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 (herein, together with all amendments thereto, called the "Registration Statement"), of which this Prospectus constitutes a part, under the Securities Act and the rules and regulations promulgated thereunder, with respect to the Common Stock offered hereby. This Prospectus omits certain information contained in the Registration Statement, and reference is made to the Registration Statement, including the exhibits thereto, for further information with respect to the Company and the securities offered hereby. Statements contained herein concerning the provisions of documents are necessarily summaries of such documents; when any such document is an exhibit to the Registration Statement, each such statement is qualified in its entirety by reference to the copy of such document filed with the Commission. The Registration Statement and the exhibits and schedules thereto may be reviewed without charge at the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the New York Regional Office located at Seven World Trade Center, 13th Floor, New York, New York 10048, and at the Chicago Regional Office located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained, upon payment of the fee prescribed by the Commission, at the Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a web site that contains reports, proxy statements, and other information regarding registrants, including the Company. The address of the Commission's web site is http://www.sec.gov. --------------------- The Company intends to furnish its shareholders with annual reports containing financial statements audited by the Company's independent public accountants. 65 67 AMERICAN RETIREMENT COMMUNITIES, L.P. INDEX TO FINANCIAL STATEMENTS
PAGE ---- American Retirement Communities, L.P. Independent Auditors' Report................................ F-2 Consolidated Balance Sheets -- December 31, 1995, and 1996...................................................... F-3 Combined Statements of Operations -- Year Ended December 31, 1994 and Three Months Ended March 31, 1995 and Consolidated Statements of Operations -- Nine Months Ended December 31, 1995 and Year Ended December 31, 1996........ F-4 Combined Statements of Partners'/Shareholders' Equity -- Year Ended December 31, 1994 and Three Months Ended March 31, 1995 and Consolidated Statements of Partners' Equity -- Nine Months Ended December 31, 1995 and Year Ended December 31, 1996.......................... F-6 Combined Statements of Cash Flows -- Year Ended December 31, 1994 and Three Months Ended March 31, 1995 and Consolidated Statements of Cash Flows -- Nine Months Ended December 31, 1995 and Year Ended December 31, 1996........ F-7 Notes to Combined and Consolidated Financial Statements..... F-9 Carriage Club of Charlotte, Limited Partnership and Carriage Club of Jacksonville, Limited Partnership Independent Auditors' Report................................ F-21 Combined Statement of Operations -- Four Months Ended April 30, 1996.................................................. F-22 Combined Statement of Partners' Equity -- Four Months Ended April 30, 1996............................................ F-22 Combined Statement of Cash Flows -- Four Months Ended April 30, 1996.................................................. F-23 Notes to Combined Financial Statements...................... F-24
F-1 68 INDEPENDENT AUDITORS' REPORT The Partners American Retirement Communities, L.P.: We have audited the accompanying consolidated balance sheets of American Retirement Communities, L.P. and consolidated subsidiaries (the Predecessor) as of December 31, 1995 and 1996, and the related consolidated statements of operations, changes in partners' equity, and cash flows for the period April 1, 1995 through December 31, 1995 and for the year ended December 31, 1996 (Predecessor periods), and the related combined statements of operations, changes in partners'/shareholders' equity, and cash flows of American Retirement Corporation and combined entities (Predecessor Entities) for the year ended December 31, 1994 and for the period from January 1, 1995 through March 31, 1995 (Predecessor Entities periods). These combined and consolidated financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these combined and consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned Predecessor consolidated financial statements present fairly, in all material respects, the financial position of American Retirement Communities, L.P. and consolidated entities as of December 31, 1995 and 1996, and the results of their operations and their cash flows for the Predecessor periods, in conformity with generally accepted accounting principles. Further, in our opinion, the aforementioned Predecessor Entities combined financial statements present fairly, in all material respects, the results of operations and cash flows of American Retirement Corporation and combined entities for the Predecessor Entities periods, in conformity with generally accepted accounting principles. As discussed in note 1 to the combined and consolidated financial statements, effective April 1, 1995, an exchange of common stock or partnership interests for limited partnership interests in American Retirement Communities, L.P. was accounted for as a purchase business combination (the Roll-up). As a result of the Roll-up, net assets not previously owned by the acquirer were recorded at fair value. Accordingly, consolidated financial information for periods after the Roll-up is presented on a different cost basis than that for periods before the Roll-up and, therefore, is not comparable. KPMG PEAT MARWICK LLP Nashville, Tennessee January 22, 1997 F-2 69 AMERICAN RETIREMENT COMMUNITIES, L.P. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, DECEMBER 31, 1995 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 3,825 $ 3,222 Assets limited as to use (note 5)......................... 2,411 1,022 Resident and health care receivables, less allowance for doubtful accounts of $78 in 1995 and $108 in 1996...... 1,585 2,782 Management services receivables........................... 876 565 Inventory................................................. 324 420 Prepaid expenses.......................................... 233 340 Deferred income taxes (note 12)........................... -- 920 -------- -------- Total current assets................................... 9,254 9,271 Assets limited as to use, excluding amounts classified as current (note 5).......................................... 3,532 3,607 Land, buildings and equipment, net (notes 6, 9, and 15)..... 149,082 213,124 Marketable securities (note 4).............................. 102 52 Other assets (note 7)....................................... 3,609 2,108 -------- -------- Total assets...................................... $165,579 $228,162 ======== ======== LIABILITIES AND PARTNERS' EQUITY Current liabilities: Current portion of long-term debt (note 9)................ $ 1,800 $ 8,053 Accounts payable.......................................... 2,615 2,441 Redemption payable (note 10).............................. -- 5,195 Accrued expenses (note 8)................................. 4,442 6,239 Accrued partner distributions............................. 1,445 1,632 -------- -------- Total current liabilities.............................. 10,302 23,560 Tenant deposits............................................. 2,748 3,850 Long-term debt, excluding current portion (note 9).......... 100,445 162,636 Other long-term liabilities................................. 261 234 -------- -------- Total liabilities...................................... 113,756 190,280 Partners' equity: Special redeemable preferred partnership interests (note 10).................................................... 10,000 -- Other general and limited partners' interests............. 41,823 37,882 -------- -------- Total partners' equity................................. 51,823 37,882 -------- -------- Commitments and contingencies (notes 13 and 14) Total liabilities and partners' equity............ $165,579 $228,162 ======== ========
See accompanying notes to combined and consolidated financial statements. F-3 70 AMERICAN RETIREMENT COMMUNITIES, L.P. COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PREDECESSOR ENTITIES PREDECESSOR --------------------------- --------------------------- YEAR THREE MONTHS NINE MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, 1994 1995 1995 1996 ------------ ------------ ------------ ------------ Revenues: Resident and health care revenue............ $30,979 $11,761 $47,239 $ 73,878 Management services revenue................. 2,362 595 1,524 1,739 ------- ------- ------- -------- Total revenues........................... 33,341 12,356 48,763 75,617 Expenses: Community operating expenses................ 21,780 8,035 30,750 46,960 General and administrative.................. 3,455 1,108 3,446 6,200 Depreciation and amortization............... 2,891 1,127 4,534 6,906 ------- ------- ------- -------- Total operating expenses................. 28,126 10,270 38,730 60,066 ------- ------- ------- -------- Income from operations................... 5,215 2,086 10,033 15,551 ------- ------- ------- -------- Other income (expense): Interest expense............................ (5,354) (2,370) (7,930) (12,160) Interest income............................. 203 49 329 434 Other (note 11)............................. 98 (1,013) 919 788 ------- ------- ------- -------- Other income (expense), net.............. (5,053) (3,334) (6,682) (10,938) ------- ------- ------- -------- Income (loss) before income taxes and extraordinary item..................... 162 (1,248) 3,351 4,613 Income tax expense (benefit) (note 12)........ -- 20 55 (920) ------- ------- ------- -------- Income (loss) before extraordinary item................................... 162 (1,268) 3,296 5,533 Extraordinary loss on extinguishment of debt (note 9).................................... -- -- -- 2,335 ------- ------- ------- -------- Net income (loss)........................ 162 (1,268) 3,296 3,198 Preferred return on special redeemable preferred limited partnership interests (note 10)................................... -- -- 1,125 1,104 ------- ------- ------- -------- Net income (loss) available for distribution to partners and shareholders........................... $ 162 $(1,268) $ 2,171 $ 2,094 ======= ======= ======= ========
(Continued) F-4 71 AMERICAN RETIREMENT COMMUNITIES, L.P. COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS CONTINUED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 ------ Pro forma earnings data (unaudited) (note 16): Income before income taxes and extraordinary items, as reported.................................................. $4,613 Pro forma income taxes...................................... 820 ------ Pro forma income before extraordinary item................ 3,793 Preferred return on special redeemable preferred limited partnership interests..................................... 1,104 ------ Pro forma income before extraordinary item available for distribution to partners and shareholders......... $2,689 ====== Pro forma earnings per common share (note 16): Pro forma income before extraordinary item................ $ 0.40 Preferred return on special redeemable preferred limited partnership interests.................................. 0.12 ------ Pro forma income before extraordinary item available for distribution to partners and shareholders.............. $ 0.29 ====== Shares used in computing pro forma income per common share.................................................. 9,375 ======
See accompanying notes to combined and consolidated financial statements. F-5 72 AMERICAN RETIREMENT COMMUNITIES, L.P. COMBINED AND CONSOLIDATED STATEMENTS OF PARTNERS'/SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1994; THREE MONTHS ENDED MARCH 31, 1995; NINE MONTHS ENDED DECEMBER 31, 1995; AND YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
PARTNERS'/ SHAREHOLDERS' EQUITY ------------- Combined balance, January 1, 1994........................... $15,042 Combined income for 1994.................................. 162 Exercise of stock options (ARC)........................... 199 Distributions to partners during 1994..................... (2,580) ------- Combined balance, December 31, 1994......................... 12,823 Combined loss for the period January 1, 1995 through March 31, 1995............................................... (1,268) Exercise of stock options (ARC)........................... 257 Acquisition of treasury stock by ARC...................... (1,619) Contribution by ARC-LP partners........................... 11,000 Distributions to partners................................. (1,400) ------- Combined balance, March 31, 1995............................ $19,793 =======
SPECIAL REDEEMABLE OTHER GENERAL PREFERRED LIMITED AND LIMITED PARTNERSHIP INTERESTS PARTNERSHIP INTERESTS TOTAL --------------------- --------------------- -------- Combined balance, March 31, 1995................. $ -- $19,793 $ 19,793 Adjustment to equity as a result of business combination (note 1)........................ -- 23,923 23,923 Conversion of debt to special redeemable preferred limited partnership interests..... 10,000 -- 10,000 Earnings for the period April 1, 1995 through December 31, 1995........................... 1,125 2,171 3,296 Distribution to partners for the period April 1, 1995 through December 31, 1995........... (1,125) (4,064) (5,189) -------- ------- -------- Consolidated balance, December 31, 1995.......... 10,000 41,823 51,823 Earnings for 1996.............................. 1,104 2,094 3,198 Redemption of preferred limited partnership interests................................... (10,000) -- (10,000) Distribution to partners....................... (1,104) (6,035) (7,139) -------- ------- -------- Consolidated balance, December 31, 1996.......... $ -- $37,882 $ 37,882 ======== ======= ========
See accompanying notes to combined and consolidated financial statements. F-6 73 AMERICAN RETIREMENT COMMUNITIES, L.P. COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PREDECESSOR ENTITIES PREDECESSOR --------------------------- --------------------------- YEAR THREE MONTHS NINE MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, 1994 1995 1995 1996 ------------ ------------ ------------ ------------ Cash flows from operating activities: Net income (loss)........................... $ 162 $(1,268) $ 3,296 $ 3,198 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization............ 2,891 1,127 4,534 6,906 Deferred taxes........................... -- -- -- (920) Extraordinary loss on extinguishment of debt................................... -- -- -- 2,335 Write-down of value of insurance policies............................... -- -- -- 66 Gain on sale of assets................... (155) -- (1,143) (874) Increase (decrease), net of retirement communities acquired, in cash, due to changes in: Receivables............................ (653) (903) 701 (431) Inventory.............................. (67) (6) (21) (56) Prepaid expenses....................... 27 (1,496) 1,894 (105) Other assets........................... (97) 382 -- 748 Accounts payable....................... 586 381 948 (249) Accrued expenses....................... 1,004 (157) 487 1,130 Tenant deposits........................ 344 60 279 202 Other long-term liabilities............ (588) -- (87) (27) -------- ------- ------- -------- Net cash provided (used) by operating activities.............. 3,454 (1,880) 10,888 11,923 -------- ------- ------- -------- Cash flows from (used by) investing activities: Additions to land, building and equipment... (45,606) (3,237) (6,032) (71,545) Proceeds from (purchases of) assets limited as to use................................ (904) 17 (2,915) 2,578 Proceeds from the sale of assets............ 205 6 1,214 1,346 Purchases of marketable securities.......... (52) -- (50) -- -------- ------- ------- -------- Net cash used by investing activities........................ (46,357) (3,214) (7,783) (67,621) -------- ------- ------- --------
(Continued) F-7 74 AMERICAN RETIREMENT COMMUNITIES, L.P. COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (IN THOUSANDS)
PREDECESSOR ENTITIES PREDECESSOR ---------------------------- ---------------------------- YEAR THREE MONTHS NINE MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, 1994 1995 1995 1996 ------------ ------------ ------------ ------------ Cash flows from financing activities: Contributions from partners............ -- 11,000 -- -- Distributions to partners.............. (2,580) (485) (4,659) (6,952) Payment of redeemable preferred interests........................... -- -- -- (4,805) Proceeds from issuance of long-term debt................................ 48,979 1,636 1,614 73,922 Principal payments on long-term debt... (2,471) (628) (3,720) (5,479) Expenditures for financing costs....... (1,535) (130) (346) (1,591) Proceeds from the issuance of common stock............................... 199 257 -- -- Acquisition of treasury stock.......... -- (1,619) -- -- ------- ------- ------- ------- Net cash provided (used) by financing activities......... 42,592 10,031 (7,111) 55,095 ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents......... (311) 4,937 (4,006) (603) Cash and cash equivalents at beginning of period................................. 3,205 2,894 7,831 3,825 ------- ------- ------- ------- Cash and cash equivalents at end of period................................. $ 2,894 $ 7,831 $ 3,825 $ 3,222 ======= ======= ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest............................ $ 4,946 $ 2,381 $ 7,772 $11,907 ======= ======= ======= ======= Income taxes paid...................... $ -- $ -- $ 20 $ 55 ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION During 1994, 1995, and 1996, as discussed in note 3, the Partnership acquired certain communities. In conjunction with the acquisitions, net assets and liabilities were assumed as follows:
PREDECESSOR ENTITIES PREDECESSOR ---------------------------- ---------------------------- YEAR THREE MONTHS NINE MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, 1994 1995 1995 1996 ------------ ------------ ------------ ------------ Current assets......................... $ -- $ 486 $ 892 $ 497 Other assets........................... 481 -- -- 674 Debt................................... -- (15,480) (8,010) -- Current liabilities.................... (597) -- (384) (502) Other liabilities...................... (580) (77) -- --
As discussed in note 1, the Partnership engaged in a roll-up transaction in 1995. See accompanying notes to combined and consolidated financial statements. F-8 75 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 (1) BASIS OF PRESENTATION The accompanying financial statements include the combined financial statements of (1) American Retirement Corporation II, formerly known as American Retirement Corporation (ARC) and its wholly owned subsidiaries; (2) Trinity Towers Limited Partnership; (3) Fort Austin Limited Partnership; (4) Holley Court Terrace L.P.; and (5) American Retirement Communities, L.P. (ARC-LP) for the period January 1, 1994 through March 31, 1995 and, as a result of a purchase business combination, the consolidated financial statements of these entities for the periods since April 1, 1995. In these financial statements, activities or transactions occurring on or after April 1, 1995 relate to those of the consolidated entity and are referred to as those of the Partnership. Prior to March 31, 1995, ARC-LP, and three limited partnerships (Trinity Towers Limited Partnership, Fort Austin Limited Partnership and Holley Court Terrace L.P.) were entities that were each managed and/or partially owned by ARC. ARC provided management services to ARC-LP and was the managing general partner of and had contracts to provide management services to each of the other three limited partnerships. The accompanying financial statements for the periods prior to March 31, 1995 are presented on a combined basis. All material intercompany transactions and balances have been eliminated. Effective March 31, 1995, substantially all of the shareholders of ARC and the non-ARC partners of the three limited partnerships exchanged their common stock or partnership interests for limited partnership interests in ARC-LP (the Roll-up). Certain minority shareholders of ARC tendered their common stock for approximately $1.6 million of cash. The Roll-up was accounted for as a purchase business combination in which ARC was determined to be the accounting acquirer. Accordingly, the ownership interests in ARC-LP and the three operating partnerships not previously owned by ARC were recorded at fair value as of the date of the Roll-up. The net assets acquired were allocated as follows: land -- $2.6 million; buildings and improvements -- $20.4 million; and furniture and fixtures -- $1.0 million. The general partner of ARC-LP is American Retirement Communities, LLC, whose members are the senior management of ARC. The accompanying financial statements for the periods beginning after March 31, 1995 are presented on a consolidated basis. All material intercompany transactions and balances have been eliminated. Concurrent with the Roll-up, holders of $10.0 million of notes receivable from Fort Austin Limited Partnership exchanged their notes for an equivalent amount of preferred limited partnership interests in the Partnership (see note 10). As further discussed in note 16, a reorganization of the Partnership is planned for 1997. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Use of Estimates and Assumptions The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (b) Recognition of Revenue Resident and health care revenues are reported at the estimated net realizable amounts from residents, third-party payors, and others for services rendered, including estimated retroactive adjustments under F-9 76 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Resident and health care revenues, primarily Medicare, subject to retroactive adjustments, were 7.5%, 9.0%, and 7.8% of resident and health care revenues in 1994, 1995 and 1996, respectively. Management services revenue is recorded as earned and relates to providing certain management and administrative support services under management agreements. Revenues are shown net of reimbursed expenses. Such fees are based either on a percentage of revenues of the managed facility or a negotiated fee per the managed facility. (c) Cash Equivalents All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. (d) Marketable Securities Marketable securities consist of U.S. Treasury securities and marketable corporate debt securities. All of the Partnership's marketable securities are classified as held-to-maturity securities which are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. A decline in the market value of any held-to-maturity security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. Discounts are accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold. (e) Assets Limited as to Use Assets limited as to use include assets held by lenders under loan agreements in escrow for property taxes and property improvements, certificates of deposit held as collateral for letters of credit, and resident deposits. (f) Inventory Inventory consists of supplies and is stated at the lower of cost (first-in, first-out) or market. (g) Land, Buildings and Equipment Land, buildings, and equipment are stated at cost. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed on the straight-line basis. Buildings and improvements are depreciated over 15 to 40 years, and furniture, fixtures and equipment are depreciated over 5 to 7 years. The Partnership periodically reviews the carrying value of land, buildings and equipment to assess the recoverability of these assets. Any impairments would be recognized in operating results if a diminution in value considered to be other than temporary were to occur. As part of this assessment, the Partnership reviews the expected future net operating cash flows from its facilities. (h) Other Assets Other assets consist primarily of deferred financing charges being amortized on the straight-line basis over the terms of the debt agreement and management contract rights being amortized over the initial terms of the management contracts. F-10 77 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (i) Income Taxes Except for ARC, the entities included in these financial statements are partnerships, and the income and losses of the partnerships and distributions are allocated to the partners in accordance with the various partnership agreements. Accordingly, no provision has been made in the accompanying financial statements for federal and state income taxes related to the partnerships since such taxes are the liabilities of the partners. ARC follows the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. See note 16 for a discussion of pro forma taxes. (j) Disclosure of Fair Value of Financial Instruments The fair values of the financial instruments are estimates based upon current market conditions and quoted market prices for the same or similar instruments as of December 31, 1996. Book value approximates fair value for substantially all of the Partnership's assets and liabilities meeting the definition of a financial instrument. (3) ACQUISITIONS During 1994, Fort Austin Limited Partnership acquired the assets of four retirement communities. Santa Catalina Villas was acquired on June 15, 1994 for a purchase price of $10.9 million. Hampton at Post Oak, Park Place Retirement Community, and Westlake Village were acquired on October 31, 1994 for a purchase price of $34.7 million. The purchases were financed primarily through various borrowings. On February 1, 1995, ARC-LP acquired certain assets and assumed certain liabilities of a retirement community in Denver, Colorado known as Heritage Club. The purchase price was $22.0 million and was a combination of cash of approximately $6.5 million and assumption of debt of $15.5 million. Effective April 1, 1995, ARC-LP acquired all of the assets and all contractual liabilities of a retirement community and related home health agency in Lexington, Kentucky known as Richmond Place. The purchase price approximated $10.3 million and included the payment of cash of $2.3 million and the assumption of debt of $8.0 million. Effective May 1, 1996, ARC-LP acquired all assets and all contractual liabilities of a retirement community in Charlotte, North Carolina known as Carriage Club of Charlotte and a retirement community in Jacksonville, Florida known as Carriage Club of Jacksonville. The purchase price totaled $61.1 million and was financed primarily through various borrowings. The above acquisitions were accounted for as purchases, and the accompanying financial statements include the results of operations from the date of the acquisitions. The following unaudited pro forma financial information presents the results of operations as if the acquisitions noted above occurring subsequent to January 1, 1995 had occurred on January 1, 1995, after giving effect to certain adjustments primarily additional depreciation expense and increased interest expense on debt related to the acquisitions. The pro F-11 78 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) forma financial information does not necessarily reflect the results of operations that would have occurred had the acquisitions occurred at the beginning of the year:
1995 1996 ------- ------- (IN THOUSANDS) Total revenues................................... $74,308 $79,543 ======= ======= Income (loss) before extraordinary item.......... $ (93) $ 4,750 ======= ======= Net income (loss)................................ $ (93) $ 2,415 ======= =======
(4) MARKETABLE SECURITIES Marketable securities consist of securities which are classified as held-to-maturity and are reported at amortized cost of $102,000 and $52,000 at December 31, 1995 and 1996, respectively. The amortized cost, which approximates market, for marketable securities was as follows:
1995 1996 ----- ----- (IN THOUSANDS) Held-to-maturity: U.S. Treasury securities............................ $ 52 $52 Exxon Capital Corporation marketable corporate debt securities....................................... 50 -- ---- --- $102 $52 ==== ===
Maturities of marketable securities classified as held-to-maturity was due between one and five years. (5) ASSETS LIMITED AS TO USE Assets limited as to use that are required for obligations classified as current liabilities are reported as current assets. Assets limited as to use, other than tenant deposits, are on deposit with the lender of the mortgage note payable. Tenant deposits are comprised of resident deposits and deferred entrance fees. The residency agreements which govern the terms under which some of the communities lease apartments to residents require each resident to place a tenant deposit with the Partnership in an amount equal to one month's rent. The deposit functions as a security deposit. These deposits are carried as a liability on the balance sheet. In compliance with state laws when applicable, cash reserve accounts are maintained for the tenant deposits. At December 31, 1995 and 1996, assets limited as to use consist of the following:
1995 1996 ------ ------ (IN THOUSANDS) Operating expense reserve.......................... $ 349 $ 349 Tax escrow account................................. 1,904 285 Capital improvement escrow......................... 890 218 Bond principal and interest escrow................. 617 862 Tenant deposits.................................... 1,292 2,114 Collateral for letter of credit with bank.......... 891 801 ------ ------ 5,943 4,629 Less amounts classified as current assets.......... 2,411 1,022 ------ ------ Assets limited as to use, excluding amounts classified as current assets..................... $3,532 $3,607 ====== ======
F-12 79 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) LAND, BUILDINGS, AND EQUIPMENT A summary of land, buildings and equipment is as follows:
1995 1996 -------- -------- (IN THOUSANDS) Land........................................... $ 18,326 $ 26,519 Buildings and improvements..................... 132,775 187,239 Furniture, fixtures and equipment.............. 8,960 11,512 -------- -------- 160,061 225,270 Less accumulated depreciation.................. 11,141 17,423 -------- -------- 148,920 207,847 Construction in progress....................... 162 5,277 -------- -------- Land, buildings and equipment, net............. $149,082 $213,124 ======== ========
(7) OTHER ASSETS Other assets at December 31, 1995 and 1996 consists of the following:
1995 1996 ------ ------ (IN THOUSANDS) Deferred financing costs, net of accumulated $2,941 $1,790 amortization..................................... Long term investments.............................. 435 -- Other.............................................. 233 318 ------ ------ $3,609 $2,108 ====== ======
Long-term investments at December 31, 1995 consisted of an investment in property held by ARC for resale or development. During September 1996, Williamsburg Landing, Inc. (WLI), a third party, exercised its $1.3 million option to purchase an unimproved parcel of land adjacent to Williamsburg Landing, a facility managed by the Partnership. The basis of the land to ARC was approximately $435,000 resulting in a net gain of approximately $865,000. In 1996, the Partnership entered into a development management agreement with WLI whereby the Partnership oversees the land development and administers any relevant payments; however, WLI provides full funding of the development and the Partnership has no financial obligation with respect to the project. The Partnership has a contractual right to participate in the appreciation value upon any subsequent sale of the real property to the extent of 20% of the net realized profit. (8) ACCRUED EXPENSES Accrued expenses as of December 31, 1995 and 1996 consist of the following:
1995 1996 ------ ------ (IN THOUSANDS) Property taxes payable............................. $2,454 $2,550 Accrued payroll.................................... 628 1,439 Other.............................................. 1,360 2,250 ------ ------ $4,442 $6,239 ====== ======
F-13 80 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (9) LONG-TERM DEBT A summary of long-term debt is as follows:
1995 1996 -------- -------- (IN THOUSANDS) Lexington-Fayette Urban County Government Residential Facilities Revenue Bonds refinanced May 1, 1987, collateralized by mortgage liens on property and equipment. The refinancing bond issue is remarketed to set the coupon rate on April 1 of each year (3.65% for the year ended March 31, 1997) until the bonds mature on April 1, 2015. Interest is due semi- annually on April 1 and October 1. ............................................... $ 8,010 $ 8,010 Mortgage note payable bearing interest at a fixed rate of 8.2%. Interest is due monthly with principal payments due monthly in varying amounts with remaining principal and unpaid interest due at maturity on December 31, 2002. The loan is secured by land, buildings, equipment and assignment of rents and leases. See note (a) below. ...... 62,109 62,332 Mortgage note payable bearing interest at 2.65% above the lender's composite commercial paper rate, as defined in the promissory note (8.16% at December 31, 1996). Interest is due monthly with principal payments due monthly in varying amounts. The remaining principal and unpaid interest is due at maturity on December 31, 2002. The loan is secured by land, buildings, equipment and assignment of rents and leases. See note (a) below. .................... -- 16,767 Mortgage note payable bearing interest at a fixed rate of 9.28%. Interest is due monthly with principal payments of $61,000 per month continuing until and including April 30, 2003, the maturity date of the note. The loan is secured by land, buildings, equipment, assignment of leases and rents, and escrow accounts. .............................. -- 37,000 Mortgage note payable bearing interest at 3.25% above the lender's composite commercial paper rate, as defined in the promissory note (8.76% at December 31, 1996). Interest is due monthly with principal payments of $19,000 due monthly continuing until and including April 30, 2003, the maturity date of the note. The loan is secured by land, buildings, equipment, assignment of rents and leases, and escrow accounts. ......................................... -- 13,110 Note payable to a bank bearing interest at a floating rate equal to the bank's index rate (8.25% at December 31, 1996). Interest is due monthly with quarterly principal payments of an amount equal to 20% of the excess of total project value over the amount of the note beginning September 30, 1997, and continuing until December 31, 1998, the maturity date of the note. The note is secured by a land deed. .......................................... -- 825 Mortgage note payable bearing interest at a fixed rate of 8.2%. Interest is due monthly with principal payments of $20,000 per month with remaining principal and unpaid interest due at maturity on December 31, 2001. The loan is secured by land, buildings, equipment and assignment of rents and leases. ........................................ 15,260 15,020
F-14 81 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995 1996 -------- -------- (IN THOUSANDS) Note payable to a bank bearing interest at 7.6%. Interest due quarterly with principal due at maturity on June 30, 1997. The loan is secured by land, buildings and equipment and assignment of rents and leases, and is guaranteed by certain limited partners. This debt instrument was repaid during January 1997 (note 15). See note (b) below. ....... 5,000 5,000 Term loan note to a bank with a fixed interest rate of 10.07%. Principal and interest of $288,822 due quarterly through March 31, 1998. This debt instrument was repaid during January 1997 (note 15). See note (b) below. ....... 9,768 9,585 Term loan note payable to a bank. Principal of $160,000 and interest at a variable rate (8.04% at December 31, 1996) tied to the LIBOR rate are due quarterly on the 10th day of each January, April, July, and October until October 31, 1998, when all remaining principal and interest become due. The note was amended during 1996 increasing the face amount by $1,150,000. .................................... 2,000 2,630 Other long-term debt, generally payable monthly............. 98 410 -------- -------- Total long-term debt...................................... 102,245 170,689 Less current portion...................................... 1,800 8,053 -------- -------- Long-term debt, excluding current portion......... $100,445 $162,636 ======== ========
The aggregate scheduled maturities of long-term debt at December 31, 1996 are as follows:
(IN THOUSANDS) 1997................................... $ 8,053(b) 1998................................... 14,402(b) 1999................................... 2,303 2000................................... 2,287 2001................................... 2,272 Thereafter............................. 141,372 -------- $170,689 ========
- --------------- (a) In 1996, the Partnership refinanced two of its notes held with a capital corporation. In 1995, the debt was in the form of two notes, one for $38.5 million and one for $23.5 million, both of which had a variable interest rate of 4.5% above the lender's composite commercial paper rate. The maturity date of both notes was October 31, 2001. The refinancing combined the two notes into a single loan with a $62.0 million initial advance and a $35.0 million commitment for additional borrowing. In 1996, the Partnership borrowed $17.7 million against the remaining commitment. The initial $62.0 million advance bears interest at a fixed rate of 8.2%. Borrowings against the remaining commitment bear interest at a variable rate of 2.65% over the lenders' composite commercial paper rate. All principal reductions under the advances are first applied to any balance outstanding under the variable rate portion of the advances. The maturity of the loan is December 31, 2002. In conjunction with the refinancing, the Partnership wrote off net financing costs related to the previous notes of $2,335,000. This loss was recorded as an extraordinary loss in 1996. (b) Of the $14,585,000 of debt repaid in January 1997, $5,207,000 and $9,378,000 matured in 1997 and 1998, respectively (see note 15). The Partnership is also required to comply with certain restrictive financial and other covenants. F-15 82 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Under the terms of various long-term debt accounts, the Partnership is required to maintain certain deposits with trustees. Such deposits are included with assets limited as to use in these financial statements. (10) EQUITY As discussed in note 1, in connection with the Roll-up, the shareholders of ARC and the partners in various partnerships exchanged their common stock or partnership interests for limited partnership interests in the Partnership. Additionally, holders of $10.0 million of notes payable by the Fort Austin Limited Partnership exchanged these notes for special redeemable preferred limited partnership interests. Such preferred interests were entitled to a cumulative 15% preferred distribution. Such preferred interests were redeemable, in whole or in part, at the option of the Partnership. During 1996, the Partnership redeemed $4.8 million of the preferred interests and on December 4, 1996, the Partnership approved the redemption of the remaining $5.2 million. Accordingly, the $5.2 million was removed from equity and shown as redemption payable at December 31, 1996 (see note 15). During both 1995 and 1996, the Partnership distributed $1.1 million of preferred distributions. There were no cumulative unpaid preferred distributions at December 31, 1995 or 1996. Distributions of all or any portion of the net cash flow from operations or from the proceeds of capital transactions are at the discretion of the general partner. Such distributions are made pursuant to formulas set forth in the limited partnership agreement. (11) OTHER INCOME (EXPENSE) Other income (expense) consists of the following:
PREDECESSOR ENTITIES PREDECESSOR --------------------------- --------------------------- YEAR THREE MONTHS NINE MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, 1994 1995 1995 1996 ------------ ------------ ------------ ------------ (IN THOUSANDS) Gain on sale of assets........................ $155 $ -- $1,143 $874 Costs incurred for the roll-up (see note 1)... -- (964) (17) -- Other, net.................................... (57) (49) (207) (86) ---- ------- ------ ---- $ 98 $(1,013) $ 919 $788 ==== ======= ====== ====
The 1995 gain resulted primarily from the sale of certain assets and liabilities of a retirement center by a general partnership in which ARC had an investment, and the 1996 gain included a gain of approximately $865,000 from the sale of land owned by ARC (see note 7). F-16 83 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (12) INCOME TAXES As discussed in note 2, income taxes, other than those for ARC, are the responsibility of the individual partners. Accordingly, the information shown below relates solely to ARC. The income tax expense (benefit), all of which was allocated to income, consists of the following:
PREDECESSOR ENTITIES PREDECESSOR --------------------------- --------------------------- YEAR THREE MONTHS NINE MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, 1994 1995 1995 1996 ------------ ------------ ------------ ------------ (IN THOUSANDS) U.S. federal: Current..................................... $ -- $ 20 $ 55 $ -- Deferred.................................... -- -- -- (823) ------ ------ ------ ------ -- 20 55 (823) ------ ------ ------ ------ State: Current..................................... -- -- -- -- Deferred.................................... -- -- -- (97) ------ ------ ------ ------ Total......................................... $ -- $ 20 $ 55 $ (920) ====== ====== ====== ======
For 1994 and 1995, ARC had no income tax expense other than an alternative minimum tax expense of $75,000 in 1995. ARC has net operating loss carryforwards available to offset further taxable income. Such carryforwards represent a deferred tax asset. However, a valuation allowance was applied to produce a net tax asset of zero for 1994 and 1995, since it was not likely the net operating loss carryforwards could be realized. In 1996, ARC has recorded an income tax benefit and a deferred tax asset of $920,000 because of the anticipated utilization of net operating loss carryforwards that will offset taxable gains recognized from a January 1997 sale/leaseback transaction (see note 15). The components of deferred tax assets and liabilities at December 31, 1995 and 1996 are presented below:
1995 1996 ------ ------ (IN THOUSANDS) Deferred tax assets: Federal and state operating loss carryforward............. $1,900 $2,052 Deferred compensation..................................... 28 46 Other..................................................... -- 32 ------ ------ Total gross deferred tax assets........................ 1,928 2,130 Less valuation allowance............................... 1,164 339 ------ ------ 764 1,791 ------ ------ Deferred tax liabilities: Partnership income or loss................................ 740 847 Accumulated depreciation.................................. 24 24 ------ ------ Total gross deferred tax liabilities................... 764 871 ------ ------ Net deferred tax asset................................. $ -- $ 920 ====== ======
F-17 84 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1996, ARC had unused net operating loss carryforwards of approximately $5.4 million for regular tax purposes, and $5.0 million for alternative minimum tax purposes, which expire in varying amounts from 2004 to 2009. Additionally, the Corporation had alternative minimum tax credit carryovers in the amount of approximately $143,000 at December 31, 1996, to be used to offset regular tax in the future in the event the regular tax expense exceeds the alternative minimum tax expense. See note 16 for a discussion of pro forma income taxes. (13) RETIREMENT PLAN The Partnership has established the American Retirement Communities, L.P. 401(k) Plan (the "Plan") for eligible employees who have completed ninety days of service and are at least 21 years old. This Plan is administered by the Partnership with a bank serving as trustee. A Plan participant may elect to contribute up to 20% of his or her annual compensation, subject to certain Internal Revenue Service limitations. The Partnership can elect to make voluntary contributions to the Plan. Such contributions will be allocated to each participant's account. Participants vest in Partnership contributions at 20% per year beginning the first year of employment becoming fully vested after five years of service. The Partnership contributed $54,000 and $277,000 to the Plan during the periods ended December 31, 1995 and 1996, respectively. At retirement, the participant receives the balance in his or her individual account. Upon termination of employment prior to retirement, the participant receives 100% of his or her individual contributions plus related earnings and the vested portion of the Partnership's contributions and related earnings. The nonvested portion of a terminated employee's account is reallocated among the remaining Plan participants. The Partnership has also established a post tax deferral plan (the 162 plan) for highly compensated employees. The Partnership and the individual participant can both make contributions to the 162 plan and the individual has freedom of investment elections. The Partnership contributed $99,000 and $274,000 to the 162 plan during 1995 and 1996, respectively. (14) COMMITMENTS AND CONTINGENCIES The Partnership 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 Partnership's insurance coverage. In the normal course of business, the Partnership is a defendant in certain litigation. However, management is unaware of any action which would have a material adverse impact on the financial position or results of operation of the Partnership. The Partnership is self-insured for workers' compensation claims with excess loss coverage of $250,000 per individual claim and $1.3 million for aggregate claims. The Partnership utilizes a third party administrator to process and pay filed claims. The Partnership has accrued $300,000 to cover open claims not yet settled and incurred but not reported claims as of December 31, 1996. Management is of the opinion that such amounts are adequate to cover any such claims. The Partnership leases its corporate facilities. The current lease expires December 31, 2001 and requires annual rentals of $252,000. The Partnership maintains a $2.5 million line of credit with a bank which is available to provide working capital and to secure various debt instruments. At December 31, 1996, $925,000 of this line of credit had been used to obtain letters of credit. At December 31, 1996, the Partnership has construction in process at the two retirement communities acquired during the year. The costs to complete the construction approximates $600,000. The Partnership has F-18 85 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) an outstanding commitment from a mortgage lender of $1.1 million to complete the construction. In December 1996, The Partnership began an expansion of another retirement community. The total cost of construction is expected to be approximately $11.6 million. The partnership has a construction loan commitment from a bank, as well as a permanent loan commitment from a mortgage lender to cover the construction. (15) SUBSEQUENT EVENTS In January 1997, the Partnership entered into a sale-leaseback transaction with a third party for the property, plant, and equipment of Holley Court Terrace and Trinity Towers retirement communities owned by the Partnership. The net cash proceeds to the Partnership were approximately $27.5 million. The lease is an operating lease with the gain from the transaction of approximately $4.6 million to be recognized over the life of the lease, which is ten years. Lease payments will consist of a base rent which totals approximately $2.5 million per year and additional rent, not to exceed 2.5% over the prior year's rent, based on an increase in revenues at the leased facilities. The agreement contains three separate ten-year renewal options. The proceeds from the sale were used to retire debt of approximately $14.6 million and to fund the redemption of the special redeemable preferred limited partnership interests of $5.2 million. (16) FORMATION OF NEW AMERICAN RETIREMENT CORPORATION AND PRO FORMA ADJUSTMENTS (UNAUDITED) The Partnership intends to proceed with a reorganization and a concurrent initial public offering of the common stock of the reorganized entity. Immediately prior to the effective date of the registration statement covering the planned public offering of newly issued shares of common stock, the Partnership will be reorganized such that all of its assets and liabilities will be contributed to a newly formed corporation known as American Retirement Corporation (New ARC) in exchange for common stock totaling 7,812,500 shares and a promissory note in the original principal amount approximating $25.0 million. The Partnership will distribute its common stock of New ARC to its partners. New ARC plans to sell up to an additional 3,593,750 shares of its common stock in the initial public offering, including the overallotment option; the proceeds of which will be utilized to, among other things, repay the approximately $25.0 million promissory note. New ARC will only commence operations and issue shares of common stock upon completion of the reorganization and initial public offering. New ARC currently has no assets or liabilities. The Partnership's historical carrying value for assets and liabilities will carry over to New ARC upon consummation of the reorganization. (a) Pro Forma Statement of Earnings Information (Unaudited) The income taxes on earnings of the Partnership, other than for ARC, are the responsibility of the partners. The pro forma adjustments reflected on the statement of earnings provide for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, assuming the Partnership was subject to income taxes. Pro forma income tax expense has been calculated using statutory U.S. federal and state tax rates and gives effect to the recognition in 1996 of the $920,000 deferred tax asset as described in Note 12. (b) Pro Forma Net Earnings Per Share (unaudited) Pro forma net earnings per share are based on the number of shares which would have been outstanding assuming the partners had been shareholders and is based on the 7,812,500 the partners will receive when the reorganization is effective plus 1,562,500 shares for the $25.0 million promissory note assuming an offering price of $16.00 per share. F-19 86 AMERICAN RETIREMENT COMMUNITIES, L.P. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (c) Tax Expense Charge to Income At the time of the reorganization and as a result of the conversion from a limited partnership to a corporation, New ARC will record, as a one-time charge to income, a deferred income tax liability of approximately $13.5 million resulting from the difference between the accounting and tax bases of New ARC's assets and liabilities. F-20 87 INDEPENDENT AUDITORS' REPORT The Partners American Retirement Communities, L.P.: We have audited the accompanying combined statements of operations, partners' equity and cash flows of the Carriage Club of Charlotte Limited Partnership and Carriage Club of Jacksonville Limited Partnership for the four months ended April 30, 1996. These combined financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the operations and cash flows of Carriage Club of Charlotte Limited Partnership and Carriage Club of Jacksonville Limited Partnership for the four month period ending April 30, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Nashville, Tennessee January 22, 1997 F-21 88 CARRIAGE CLUB OF CHARLOTTE LIMITED PARTNERSHIP AND CARRIAGE CLUB OF JACKSONVILLE LIMITED PARTNERSHIP COMBINED STATEMENT OF OPERATIONS FOUR MONTHS ENDED APRIL 30, 1996 (IN THOUSANDS) Resident and health care revenue............................ $4,086 Expenses: Community operating expenses.............................. 2,498 Depreciation and amortization............................. 464 ------ Total operating expenses............................... 2,962 ------ Income from operations................................. 1,124 ------ Other income (expense): Interest expense.......................................... (833) Interest income........................................... 21 ------ Other income (expense), net............................ (812) ------ Net income........................................ $ 312 ======
COMBINED STATEMENT OF PARTNERS' EQUITY FOUR MONTHS ENDED APRIL 30, 1996 (IN THOUSANDS)
PARTNERS' EQUITY --------- Combined balance, December 31, 1995......................... $1,090 Combined net income for the four months ended April 30, 1996................................................... 312 Contributions from partners............................... 646 ------ Combined balance, April 30, 1996............................ $2,048 ======
See accompanying notes to combined financial statements. F-22 89 CARRIAGE CLUB OF CHARLOTTE LIMITED PARTNERSHIP AND CARRIAGE CLUB OF JACKSONVILLE LIMITED PARTNERSHIP COMBINED STATEMENT OF CASH FLOWS FOUR MONTHS ENDED APRIL 30, 1996 (IN THOUSANDS) Cash flows from operating activities: Net income................................................ $ 312 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 464 Increase (decrease) in cash, due to changes in: Resident, patient, and personal care receivables..... 4 Inventory............................................ 2 Prepaid expenses..................................... 8 Other assets......................................... (4) Accounts payable..................................... (65) Property taxes payable............................... (42) Accrued expenses and other current liabilities....... 24 Tenant deposits...................................... (34) ------- Net cash provided by operating activities......... 669 ------- Cash flows used by investing activities: Expenditures for purchases of furniture, fixtures and equipment............................................. (2,664) Purchases of assets limited as to use.................. (81) ------- Net cash used by investing activities............. (2,745) ------- Cash flows from financing activities: Contributions from partners............................ 646 Proceeds from the issuance of long-term debt........... 727 Expenditures for financing costs....................... (27) ------- Net cash provided by financing activities................... 1,346 ------- Net decrease in cash and cash equivalents................... (730) Cash and cash equivalents at beginning of period............ 1,963 ------- Cash and cash equivalents at end of period.................. $ 1,233 ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest.................... $ 833 =======
See accompanying notes to combined financial statements F-23 90 CARRIAGE CLUB OF CHARLOTTE LIMITED PARTNERSHIP AND CARRIAGE CLUB OF JACKSONVILLE LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS APRIL 30, 1996 (1) BASIS OF PRESENTATION The accompanying financial statements include the combined financial statements of Carriage Club of Charlotte Limited Partnership and Carriage Club of Jacksonville Limited Partnership (the Partnerships) for the four months ended April 30, 1996. Carriage Club of Charlotte is a retirement living community located in Charlotte, North Carolina with 306 units. Carriage Club of Jacksonville is a retirement community located in Jacksonville, Florida with 260 units. The limited partners in the Partnerships are shareholders of the corporate general partners. Allocations of profits, losses and cash distributions of the Partnership are made pursuant to the terms of the partnership agreement. Generally, such allocations and cash distributions are made to the partners in proportion to their respective ownership interests. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Use of Estimates and Assumptions The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (b) Cash Equivalents For the purposes of the statement of cash flows, the Partnerships consider highly liquid debt investments with a maturity of three months or less when purchased to be cash equivalents. (c) Income Taxes The entities included in these financial statements are partnerships, and the income and losses of the partnerships and distributions are allocated to the partners in accordance with the various partnership agreements. Accordingly, no provision has been made in the accompanying financial statements for federal and state income taxes related to the partnerships since such taxes are the liabilities of the partners. (d) Recognition of Revenue Resident and health care revenues are reported at the estimated net realizable amounts from residents, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. (e) Depreciation Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed on the straight-line basis. F-24 91 CARRIAGE CLUB OF CHARLOTTE LIMITED PARTNERSHIP AND CARRIAGE CLUB OF JACKSONVILLE LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (3) RENTS The partnerships lease the majority of their units to their tenants under leases that have lease terms of one year with rents due monthly. The leases are noncancelable except for instances of tenant death or tenant health reasons. (4) MANAGEMENT AGREEMENT Carriage Club of Charlotte and Carriage Club of Jacksonville each have a management agreement with a wholly-owned subsidiary of American Retirement Corporation II (ARC) which provides for management of daily operations of the retirement communities. Each entity pays ARC $20,000 per month for these services. (5) SUBSEQUENT EVENTS Effective May 1, 1996, American Retirement Communities, L.P. acquired all assets and all contractual liabilities of Carriage Club of Charlotte Limited Partnership and Carriage Club of Jacksonville Limited Partnership. F-25 92 ====================================================== NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES, OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 7 The Company........................... 14 Use of Proceeds....................... 15 Dividend Policy and Prior Distributions....................... 15 Capitalization........................ 16 Dilution.............................. 17 Unaudited Pro Forma Condensed Combined Financial Information............... 18 Selected Combined and Consolidated Financial Data...................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 24 Business.............................. 31 Management............................ 46 Principal Shareholders................ 54 Certain Transactions.................. 55 Description of Capital Stock.......... 58 Shares Eligible for Future Sale....... 62 Underwriting.......................... 63 Legal Matters......................... 64 Experts............................... 65 Additional Information................ 65 Index to Consolidated Financial Statements.......................... F-1
------------------ UNTIL , 1997 (FOR 25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ====================================================== ====================================================== 3,125,000 SHARES AMERICAN RETIREMENT CORPORATION (LOGO) COMMON STOCK ---------------------------- PROSPECTUS ---------------------------- NATWEST SECURITIES LIMITED EQUITABLE SECURITIES CORPORATION , 1997 ====================================================== 93 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the estimated costs and expenses of the Registrant in connection with the Offering described in the Registration Statement. SEC registration fee........................................ $ 18,514 NASD fee.................................................... 6,610 Accounting fees and expenses................................ 150,000* Legal fees and expenses..................................... 375,000* Printing and engraving expenses............................. 150,000* Blue sky fees and expenses.................................. 2,500* Transfer agent and registrar fees........................... 10,000* Miscellaneous fees and expenses............................. 187,376 -------- Total............................................. $900,000 ========
- --------------- * Estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Tennessee Business Corporation Act ("TBCA") provides that a corporation may indemnify any director or officer against liability incurred in connection with a proceeding if (i) the director or officer acted in good faith, (ii) the director or officer reasonably believed, in the case of conduct in his or her official capacity with the corporation, that such conduct was in the corporation's best interest, or, in all other cases, that his or her conduct was not opposed to the best interests of the corporation, and (iii) in connection with any criminal proceeding, the director or officer had no reasonable cause to believe that his or her conduct was unlawful. In actions brought by or in the right of the corporation, however, the TBCA provides that no indemnification may be made if the director or officer is adjudged to be liable to the corporation. Similarly, the TBCA prohibits indemnification in connection with any proceeding charging improper personal benefit to a director or officer, if such director or officer is adjudged liable on the basis that a personal benefit was improperly received. In cases where the director or officer is wholly successful, on the merits or otherwise, in the defense of any proceeding instigated because of his or her status as a director or officer of a corporation, the TBCA mandates that the corporation indemnify the director or officer against reasonable expenses incurred in the proceeding. Notwithstanding the foregoing, the TBCA provides that a court of competent jurisdiction, upon application, may order that a director or officer be indemnified for reasonable expense if, in consideration of all relevant circumstances, the court determines that such individual is fairly and reasonably entitled to indemnification, whether or not the standard of conduct set forth above was met. The Charter and Bylaws of the Company provide that the Company will indemnify from liability, and advance expenses to, any present or former director or officer of the Company to the fullest extent allowed by the TBCA, as amended from time to time, or any subsequent law, rule, or regulation adopted in lieu thereof. Additionally, the Charter provides that no director of the Company will be personally liable to the Company or any of its shareholders for monetary damages for breach of any fiduciary duty except for liability arising from (i) any breach of a director's duty of loyalty to the Company or its shareholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) any unlawful distributions, or (iv) receiving any improper personal benefit. The proposed form of the Underwriting Agreement to be filed as Exhibit 1 to this Registration Statement contains certain provisions relating to the indemnification of the Company and its controlling persons by the Underwriters and relating to the indemnification of the Underwriters by the Company and its controlling persons. II-1 94 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. All of the shares of Common Stock outstanding on the date hereof will be distributed to the Registrant's shareholders immediately prior to the effectiveness of the Offering in connection with the transfer of assets to the Registrant by an affiliated limited partnership and the simultaneous liquidation of the affiliated limited partnership. Prior to such distribution, the Registrant's shareholders have been partners of the affiliated limited partnership. In accordance with the provisions of the limited partnership's Partnership Agreement, the partners voted prior to the filing of this Registration Statement to organize the Registrant and liquidate the limited partnership, subject only to the effectiveness of the Offering. The Registrant believes that the distribution of shares of Common Stock by the affiliated limited partnership will be an exempt transaction in accordance with Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following exhibits are filed as part of the Registration Statement:
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1 -- Form of Underwriting Agreement* 2.1 -- Limited Partnership Agreement of American Retirement Communities, L.P., dated February 7, 1995, as amended April 1, 1995 2.2 -- Articles of Share Exchange between American Retirement Communities, L.P., and American Retirement Corporation, dated March 31, 1995 (including attached Plan and Agreement of Share Exchange) 2.3 -- Reorganization Agreement, dated February 28, 1997* 3.1 -- Charter of the Registrant 3.2 -- Bylaws of the Registrant 4.1 -- Specimen Common Stock certificate* 4.2 -- Article 8 of the Registrant's Charter (included in Exhibit 3.1) 5 -- Opinion of Bass, Berry & Sims PLC* 10.1 -- American Retirement Corporation 1997 Stock Incentive Plan 10.2 -- American Retirement Corporation Employee Stock Purchase Plan 10.3 -- American Retirement Corporation 401(k) Retirement Plan 10.4 -- Officers' Incentive Compensation Plan 10.5 -- Registration Rights Policy 10.6 -- Lease and Security Agreement, dated January 2, 1997, by and between Nationwide Health Properties, Inc. and American Retirement Communities, L.P. 10.7 -- Lease and Security Agreement, dated January 2, 1997, by and between N.H. Texas Properties Limited Partnership and Trinity Towers Limited Partnership 10.8 -- Amended and Restated Loan Agreement, dated December 21, 1994, between Carriage Club of Denver, L.P. and General Electric Capital Corporation 10.9 -- Amended and Restated Promissory Note, dated December 21, 1994 between Carriage Club of Denver, L.P. and General Electric Capital Corporation 10.10 -- Assumption, Consent and Loan Modification Agreement, dated February 8, 1995, by and among Carriage Club of Denver, L.P., American Retirement Communities, and General Electric Capital Corporation 10.11 -- Loan Agreement, dated October 31, 1995, by and between American Retirement Communities, L.P. and First Union National Bank of Tennessee, as amended 10.12 -- Amended and Restated Promissory Note, dated October 31, 1995, by American Retirement Communities, L.P. to First Union National Bank of Tennessee, as amended 10.13 -- Revolving Credit Promissory Note, dated October 31, 1995, by American Retirement Communities, L.P. to First Union National Bank of Tennessee, as amended 10.14 -- Standby Note, dated October 31, 1995, by American Retirement Communities, L.P. to First Union National Bank of North Carolina 10.15 -- Reimbursement Agreement, dated October 31, 1995, between American Retirement Communities, L.P. and First Union National Bank of North Carolina, as amended
II-2 95
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.16 -- Loan Agreement, dated January 4, 1996, between General Electric Capital Corporation and Fort Austin Limited Partnership 10.17 -- Promissory Note, dated January 4, 1996, by Fort Austin Limited Partnership to General Electric Capital Corporation 10.18 -- Promissory Note, dated April 1, 1992, by Fort Austin Limited Partnership to General Electric Capital Corporation, as amended 10.19 -- Loan Agreement, dated May 7, 1996, between ARCLP-Charlotte, LLC, American Retirement Communities, L.P. and General Electric Capital Corporation 10.20 -- Junior Promissory Note, dated May 7, 1996, by ARCLP-Charlotte, LLC and American Retirement Communities, L.P. to General Electric Capital Corporation 10.21 -- Senior Promissory Note, dated May 7, 1996, by ARCLP-Charlotte, LLC and American Retirement Communities, L.P. to General Electric Capital Corporation 11 -- Statement re Computation of Per Share Earnings 21 -- Subsidiaries of the Registrant 23.1 -- Consent of KPMG Peat Marwick LLP 23.2 -- Consent of Bass, Berry & Sims PLC (to be included in Exhibit 5) 24 -- Power of Attorney (included on page II-4) 27 -- Financial Data Schedule (for SEC use only)
- --------------- * To be filed by amendment (b) Financial Statement Schedules Schedule II -- Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters, at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the provisions described under Item 14 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 96 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Nashville, Tennessee on March 12, 1997. AMERICAN RETIREMENT CORPORATION By: /s/ W.E. SHERIFF ---------------------------------- W.E. Sheriff Chairman and Chief Executive Officer POWER OF ATTORNEY Each person whose signature to the Registration Statement appears below hereby constitutes and appoints W.E. Sheriff and George T. Hicks, and each of them, with full power to act without the other, as his or her attorney-in-fact, with full power of substitution and resubstitution, for him or her and in his or her name, place, and stead, in any and all capacities (until revoked in writing) to sign any and all amendments to this Registration Statement (including post-effective amendments and amendments thereto), and any registration statement relating to the same offering as this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and each of them full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ W.E. SHERIFF Chairman and Chief Executive March 12, 1997 - ----------------------------------------------------- Officer (Principal Executive W.E. Sheriff Officer) /s/ GEORGE T. HICKS Executive Vice President -- March 12, 1997 - ----------------------------------------------------- Finance, Chief Financial George T. Hicks Officer (Principal Financial and Accounting Officer) /s/ H. LEE BARFIELD II Director March 12, 1997 - ----------------------------------------------------- H. Lee Barfield II /s/ JACK O. BOVENDER, JR. Director March 12, 1997 - ----------------------------------------------------- Jack O. Bovender, Jr. /s/ FRANK M. BUMSTEAD Director March 12, 1997 - ----------------------------------------------------- Frank M. Bumstead /s/ ROBIN G. COSTA Director March 12, 1997 - ----------------------------------------------------- Robin G. Costa /s/ CLARENCE EDMONDS Director March 12, 1997 - ----------------------------------------------------- Clarence Edmonds
II-4 97
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN A. MORRIS, JR., M.D. Director March 12, 1997 - ----------------------------------------------------- John A. Morris, Jr., M.D. /s/ DANIEL K. O'CONNELL Director March 12, 1997 - ----------------------------------------------------- Daniel K. O'Connell /s/ NADINE C. SMITH Director March 12, 1997 - ----------------------------------------------------- Nadine C. Smith /s/ LAWRENCE J. STUESSER Director March 12, 1997 - ----------------------------------------------------- Lawrence J. Stuesser
II-5 98 AMERICAN RETIREMENT COMMUNITIES, L.P. SCHEDULE II -- ALLOWANCE FOR DOUBTFUL ACCOUNTS YEAR ENDED DECEMBER 31, 1994, THREE MONTHS ENDED MARCH 31, 1995, NINE MONTHS ENDED DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS) Balance January 1, 1994..................................... $ 19 1994 charge to expense.................................... 5 Write-offs against allowance.............................. (5) ---- Balance December 31, 1994................................... 19 Charge to expense for three months ended March 31, 1995... -- Write-offs against allowance for three months ended March 31, 1995............................................... -- ---- Balance March 31, 1995...................................... 19 Charge to expense for nine months ended December 31, 1995................................................... 122 Write-offs against allowance for nine months ended December 31, 1995...................................... (63) ---- Balance December 31, 1995................................... 78 1996 charge to expense.................................... 123 Write-offs against allowance.............................. (93) ---- Balance December 31, 1996................................... $108 ====
S-1 99 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1 -- Form of Underwriting Agreement* 2.1 -- Limited Partnership Agreement of American Retirement Communities, L.P., dated February 7, 1995, as amended April 1, 1995 2.2 -- Articles of Share Exchange between American Retirement Communities, L.P., and American Retirement Corporation, dated March 31, 1995 (including attached Plan and Agreement of Share Exchange) 2.3 -- Reorganization Agreement, dated February 28, 1997* 3.1 -- Charter of the Registrant 3.2 -- Bylaws of the Registrant 4.1 -- Specimen Common Stock certificate* 4.2 -- Article 8 of the Registrant's Charter (included in Exhibit 3.1) 5 -- Opinion of Bass, Berry & Sims PLC* 10.1 -- American Retirement Corporation 1997 Stock Incentive Plan 10.2 -- American Retirement Corporation Employee Stock Purchase Plan 10.3 -- American Retirement Corporation 401(k) Retirement Plan 10.4 -- Officers' Incentive Compensation Plan 10.5 -- Registration Rights Policy 10.6 -- Lease and Security Agreement, dated January 2, 1997, by and between Nationwide Health Properties, Inc. and American Retirement Communities, L.P. 10.7 -- Lease and Security Agreement, dated January 2, 1997, by and between N.H. Texas Properties Limited Partnership and Trinity Towers Limited Partnership 10.8 -- Amended and Restated Loan Agreement, dated December 21, 1994, between Carriage Club of Denver, L.P. and General Electric Capital Corporation 10.9 -- Amended and Restated Promissory Note, dated December 21, 1994 between Carriage Club of Denver, L.P. and General Electric Capital Corporation 10.10 -- Assumption, Consent and Loan Modification Agreement, dated February 8, 1995, by and among Carriage Club of Denver, L.P., American Retirement Communities, and General Electric Capital Corporation 10.11 -- Loan Agreement, dated October 31, 1995, by and between American Retirement Communities, L.P. and First Union National Bank of Tennessee, as amended 10.12 -- Amended and Restated Promissory Note, dated October 31, 1995, by American Retirement Communities, L.P. to First Union National Bank of Tennessee, as amended 10.13 -- Revolving Credit Promissory Note, dated October 31, 1995, by American Retirement Communities, L.P. to First Union National Bank of Tennessee, as amended 10.14 -- Standby Note, dated October 31, 1995, by American Retirement Communities, L.P. to First Union National Bank of North Carolina 10.15 -- Reimbursement Agreement, dated October 31, 1995, between American Retirement Communities, L.P. and First Union National Bank of North Carolina, as amended 10.16 -- Loan Agreement, dated January 4, 1996, between General Electric Capital Corporation and Fort Austin Limited Partnership 10.17 -- Promissory Note, dated January 4, 1996, by Fort Austin Limited Partnership to General Electric Capital Corporation 10.18 -- Promissory Note, dated April 1, 1992, by Fort Austin Limited Partnership to General Electric Capital Corporation, as amended 10.19 -- Loan Agreement, dated May 7, 1996, between ARCLP-Charlotte, LLC, American Retirement Communities, L.P. and General Electric Capital Corporation 10.20 -- Junior Promissory Note, dated May 7, 1996, by ARCLP-Charlotte, LLC and American Retirement Communities, L.P. to General Electric Capital Corporation 10.21 -- Senior Promissory Note, dated May 7, 1996, by ARCLP-Charlotte, LLC and American Retirement Communities, L.P. to General Electric Capital Corporation 11 -- Statement re Computation of Per Share Earnings 21 -- Subsidiaries of the Registrant 23.1 -- Consent of KPMG Peat Marwick LLP 23.2 -- Consent of Bass, Berry & Sims PLC (to be included in Exhibit 5) 24 -- Power of Attorney (included on page II-4) 27 -- Financial Data Schedule (for SEC use only)
- --------------- * To be filed by amendment EX-2.1 2 LIMITED PARTNERSHIP AGREEMENT 1 EXHIBIT 2.1 LIMITED PARTNERSHIP AGREEMENT AMERICAN RETIREMENT COMMUNITIES, L.P. THIS LIMITED PARTNERSHIP AGREEMENT is made and entered into as of the 7th day of February, 1995, by and among American Retirement Communities, LLC, a Tennessee limited liability company, as the general partner, and those persons whose names and addresses are listed on Exhibit A hereto as limited partners and the other persons who may become limited partners under the terms of this Agreement, as the limited partners. W I T N E S S E T H: WHEREAS, the Partners (as hereinafter defined) desire to enter into this Agreement for the purpose of establishing a limited partnership (the "Partnership") to invest in, acquire, own, develop, construct, hold, operate, manage and dispose of, directly or indirectly, adult living retirement communities and similar or related facilities or businesses; and WHEREAS, it is contemplated that the Partnership may acquire the outstanding shares of stock of American Retirement Corporation, and certain debt and equity interests in limited partnerships in which American Retirement Corporation has a direct or indirect interest, in exchange for additional limited partnership interests in the Partnership; NOW, THEREFORE, in consideration of the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 2 I. DEFINITIONS As used in this Agreement, the following terms shall have the meanings set forth below (which shall be equally applicable to the singular and plural forms of the terms so defined). 1.1 The term "Act" shall mean the Tennessee Revised Uniform Limited Partnership Act, being Sections 61-2-101, et seq of the Tennessee Code Annotated, as the same may be amended from time to time. 1.2 The term "Affiliate" shall mean (i) any Person directly or indirectly controlling, controlled by, or under common control with the Person in question, (ii) any Person owning or controlling 20% or more of the outstanding voting securities of the Person in question, (iii) any manager, governor, officer or director of the Person in question and (iv) the spouse or child, or the spouse of a child, of any Person described in the foregoing clauses of this Section 1.2. 1.3 The term "Affiliated Partnerships" shall mean (a) Fort Austin Limited Partnership, a Texas limited partnership, (b) Fort Austin Associates Limited Partnership, a Texas limited partnership, (c) Holley Court Terrace, L.P., a Tennessee limited partnership, and (d) Trinity Towers Limited Partnership, a Tennessee limited partnership. 1.4 The term "Agreement" shall mean this Agreement of Limited Partnership, as amended from time to time, which Agreement shall also be the agreement of limited partnership among the Partners. 1.5 The term "Applicable Percent" shall be eight percent (8%) per annum in calendar year 1995, nine percent (9%) per annum in calendar year 1996 and ten percent (10%) per annum in calendar year 1997 and each calendar year thereafter. 2 3 1.6 The term "ARC" shall mean American Retirement Corporation, a Tennessee corporation. 1.7 The term "ARCLLC" shall mean American Retirement Communities, LLC, a Tennessee limited liability company. 1.8 The term "Bankruptcy" with respect to any Person shall mean the adjudication of bankruptcy, declaration of insolvency, or the assignment for the benefit of creditors of or by such person, the subjection of any part or all of the property of such Person to the control and direction of a receiver, which receivership is not dismissed within sixty (60) days of such receiver's appointment, or the filing by such person of a petition for relief under any federal or other bankruptcy or other insolvency law or for an arrangement with creditors. 1.9 The term "Budgets" shall have the meaning provided in Section 7.1(a) hereof. 1.10 The term "Capital Account" shall mean the financial account to be established and maintained by the Partnership for each Partner as computed from time to time in accordance with Section 4.3 of this Agreement. 1.11 The term "Capital Transaction" shall mean (a) a sale, condemnation or other final disposition of any of the properties of the Partnership or any of its Subsidiaries, (b) an initial financing of any property of the Partnership or any of its Subsidiaries, or a refinancing of all or a portion of any indebtedness secured by any of such properties, or (c) the receipt of insurance proceeds or other damage recoveries by the Partnership in respect of any property of the Partnership or any of its Subsidiaries (excluding, in any case, the proceeds of business interruption or similar insurance of the Partnership). 3 4 1.12 The term "Certificate" shall mean the Certificate of Limited Partnership of American Retirement Communities, L.P. as filed with the Secretary of State of Tennessee, as amended from time to time. 1.13 The term "Code" shall mean the United States Internal Revenue Code of 1986, as the same may be amended from time to time, and any successor thereto. 1.14 The term "Contribution Account" shall mean a financial account to be maintained by the Partnership for each Partner, which account shall be credited (increased) by the amount of cash or property actually contributed by such Partner to the Partnership from time to time pursuant to Article IV of this Agreement (excluding the LEAAF Notes). The balance of each Partner's Contribution Account shall be debited (reduced) by the amounts distributed to such Partner from time to time pursuant to Section 6.2(d) of this Agreement. 1.15 The term "Effective Date" means February 7, 1995. 1.16 The term "General Partner" shall mean ARCLLC and any successor(s) as general partner in compliance with Sections 11.2, 11.6 or 11.7 of this Agreement. 1.17 The term "General Partner's Subordinated Interest" shall mean those distributions to the General Partner constituting twenty percent (20%), subject to adjustment as provided in Section 15.4 hereof, of the total distributions specified in Section 6.1(c), Section 6.2(e) and Section 12.2(d) representing distributions unrelated to any capital contributions by the General Partner. 1.18 The term "LEAAF Contribution Account" shall mean a financial account to be maintained by the Partnership for each LEAAF Partner pursuant to Section 4.2 hereof, which account shall initially be in an amount equal to the outstanding principal amount of the LEAAF 4 5 Notes contributed to the Partnership by such LEAAF Partner, and shall be debited (reduced) by amounts distributed to such LEAAF Partner pursuant to Sections 6.2(c), 6.3 and 12.2(b) of this Agreement. 1.19 The term "LEAAF Notes" shall mean, collectively, those certain non-negotiable subordinated promissory notes dated October 31, 1994, due December 31, 2001, in the aggregate original principal amount of $10,000,000, issued by Fort Austin Limited Partnership to various investors. 1.20 The term "LEAAF Partners" shall mean those Limited Partners (if any) that have received LEAAF Partnership Interests in the Partnership pursuant to Section 4.2 hereof in exchange for capital contributions of the LEAAF Notes, but only in such capacity. 1.21 The term "LEAAF Partnership Interests" shall mean the special redeemable preferred limited partnership interests (if any) in the Partnership received by holders of the LEAAF Notes in exchange for their LEAAF Notes which are contributed to the Partnership pursuant to Section 4.2 hereof, but shall not include the Partnership Interest (if any) received by such Partners in exchange for such LEAAF Notes and all other rights and claims related to the LEAAF Notes, which rights and claims will be surrendered in connection with the contribution of their LEAAF Notes pursuant to Section 4.2 hereof. 1.22 The term "LEAAF Return" shall mean a sum equal to fifteen percent (15%) per annum, simple interest, on the outstanding balance of the LEAAF Contribution Account of each LEAAF Partner from time to time during the period to which the LEAAF Return relates, cumulative to the extent not distributed in any given Year. 5 6 1.23 The term "Limited Partners" shall mean the Persons (including substituted Limited Partners and LEAAF Partners) who are, from time to time, admitted to the Partnership as limited partners (pursuant to the provisions of the Act and of this Agreement) and whose names, business or residence addresses, the amount of their original capital contributions and capital commitments and their Percentage Interests appear on Exhibit A to this Agreement, as amended from time to time. 1.24 The term "Limited Partners Committee" shall mean the committee referred to in Section 7.2 hereof. 1.25 The term "Minimum Gain" shall mean the amount determined by (a) computing for each Nonrecourse Liability of the Partnership any gain the Partnership would realize if it disposed of the property subject to that liability for no consideration other than full satisfaction of the liability and (b) aggregating the separately computed gains, increased by any minimum gain assigned to the Partnership from a Subsidiary pursuant to Regulation section 1.704-2(k). If, pursuant to Regulations sections 1.704-1(b)(2)(iv)(d) or 1.704-1(b)(2) (iv)(f), Partnership property is properly reflected on the books of the Partnership at a value different from the adjusted tax basis of such property, the calculation of Minimum Gain pursuant to the preceding sentence shall be made by reference to such book value. 1.26 The term "Net Capital Gain" shall mean, for each Year, the excess of the Partnership's gains realized from sales or exchanges of capital assets over the losses realized during such Year from such sales or exchanges and expenses incurred in connection with the transactions, excluding all capital gains or losses which are specially allocated pursuant to Section 5.5 hereof. For a Year in which "section 1231 gains" exceed "section 1231 losses," as those 6 7 terms are defined in section 1231(a)(3) of the Code, such gains and losses from sales and exchanges of property used in the trade or business shall be treated as gains and losses from sales or exchanges of capital assets and shall be included in the determination of Net Capital Gain. For a Year in which "section 1231 gains" do not exceed "section 1231 losses," such gains and losses from sales and exchanges of property used in the trade or business shall not be treated as gains and losses from sales or exchanges of capital assets and shall not be included in the determination of Net Capital Gain. 1.27 The term "Net Capital Gain Available for General Allocation" shall mean, for each Year, the amount of Net Capital Gain remaining (if any) after allocation of Net Capital Gain pursuant to Section 5.2 hereof. 1.28 The term "Net Capital Loss" shall mean, for each Year, the excess of the Partnership's losses realized from sales or exchanges of capital assets and expenses incurred in connection with the transactions over gains realized during such Year from such sales and exchanges, excluding all capital gains or losses which are specially allocated pursuant to Section 5.5 hereof. For a Year in which "section 1231 gains" exceed "section 1231 losses," as those terms are defined in section 1231(a)(3) of the Code, such gains and losses from sales and exchanges of property used in the trade or business shall be treated as gains and losses from sales or exchanges of capital assets and shall be included in the determination of Net Capital Loss. For a Year in which "section 1231 gains" do not exceed "section 1231 losses," such gains and losses from sales and exchanges of property used in the trade or business shall not be treated as gains and losses from sales or exchanges of capital assets and shall not be included in the determination of Net Capital Loss. 7 8 1.29 The term "Net Cash Flow From Operations" shall mean, with respect to the Year or period since the last distribution of Net Cash Flow From Operations, the excess of (a) the sum of (i) all cash receipts from operations (excluding capital contributions, loan proceeds and proceeds from Capital Transactions), provided that the General Partner, with the consent of the Limited Partners Committee, may include all or any portion of the proceeds of a designated Capital Transaction in the determination of Net Cash Flow From Operations, (ii) proceeds of business interruption insurance, and (iii) reductions in the Partnership's operating reserve, over (b) the sum of (i) cash disbursements for operating and non- operating expenses, (ii) cash payments of capital expenditures, (iii) cash payments representing amortization of principal, or any other payment of principal, on any debt of the Partnership, (iv) additions to the Partnership's operating reserve, and (v) additions to the Partnership's capital reserve (other than additions from capital contributions, from loan proceeds or from proceeds of Capital Transactions); 8 9 provided, however, that none of the items in clause (b) above shall be subtracted to the extent the item in question is paid from capital contributions, from loan proceeds, from the Partnership's capital reserve or from proceeds of Capital Transactions. 1.30 The term "Net Income Available for General Allocation" shall mean, for each Year, the sum of the Net Capital Gain Available for General Allocation (if any) and the Net Operating Income Available for General Allocation (if any). 1.31 The term "Net Operating Income" or "Net Operating Loss" shall mean, for each Year, an amount equal to the Partnership's taxable income or loss (after the adjustments described below) for each Year, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (a) Expenditures described in Section 705(a)(2)(B) of the Code shall be included as an expense in the determination of Net Operating Income and Net Operating Loss; (b) Income exempt from taxation shall be included in the determination of Net Operating Income and Net Operating Loss; (c) Items which are specially allocated pursuant to Section 5.5 hereof shall be added or subtracted in the determination of Net Operating Income and Net Operating Loss; and (d) Net Capital Gain or Net Capital Loss for the Year shall be subtracted or added, respectively. 9 10 1.32 The term "Net Operating Income Available for General Allocation" shall mean, for each Year, the amount of Net Operating Income remaining (if any) after allocation of Net Operating Income pursuant to Section 5.2 hereof. 1.33 The term "Nonrecourse Deductions" shall mean losses, deductions and items described in section 705(a)(2)(B) of the Code attributable to Nonrecourse Liabilities of the Partnership as described in Regulations sections 1.704-2(b)(1) and 1.704- 2(c), including nonrecourse deductions of any subsidiary allocated to the Partnership and treated as described in Regulation section 1.704-2(k)(4). 1.34 The term "Nonrecourse Liability" shall mean a debt or liability of the Partnership or any subsidiary to the extent that no Partner or related person bears the economic risk of loss for that liability within the meaning of Regulations sections 1.752-2 and 1.752-4(a). 1.35 The term "Partner Nonrecourse Debt" shall mean a debt or liability of the Partnership (including a debt or liability of any subsidiary pursuant to Regulation section 1.704-2(k)(5)) which would be a Nonrecourse Liability except that a Partner bears the economic risk of loss because, for example, the Partner is the creditor or guarantor as described in Regulations section 1.704-2(b)(4). 1.36 The term "Partner Nonrecourse Debt Minimum Gain" shall have the meaning ascribed to such term in Regulations section 1.704-2(i)(2). 1.37 The term "Partner Nonrecourse Deductions" shall mean any item of partnership loss, deduction, or expenditure under section 705(a)(2)(B) of the Code that is attributable to a Partner Nonrecourse Debt, as determined pursuant to Regulations section 1.704-2(i)(2). 10 11 1.38 The term "Partners" shall mean and include the General Partner and all Limited Partners. 1.39 The term "Partnership" shall mean this limited partnership, American Retirement Communities, L.P. 1.40 The term "Partnership Capital Loss Account" shall mean the account maintained by the Partnership pursuant to Section 4.5 hereof. 1.41 The term "Partnership Interest" shall mean the interests of the Limited Partners in the Partnership, excluding LEAAF Partnership Interests. 1.42 The term "Partnership Operating Loss Account" shall mean the account maintained by the Partnership pursuant to Section 4.5 hereof. 1.43 The term "Percentage Interest" shall mean (a) for each Partner his interest in certain allocations and distributions as determined pursuant to Section 5.4 hereof and (b) with respect to the voting and consent rights of Limited Partners, the interest of a Limited Partner (other than a LEAAF Partner in respect of his LEAAF Partnership Interest) in the Partnership, based on such Limited Partner's interest in certain allocations and distributions as determined pursuant to Section 5.4 hereof. A Limited Partner's Percentage Interest for purposes of clause (a) of this Section 1.43 shall be the same as such Limited Partner's Percentage Interest for purposes of clause (b) of this Section 1.43. 1.44 The term "Person" shall mean any individual, trust, partnership, limited partnership, corporation, association, limited liability company or other entity. 1.45 The term "Policies" shall have the meaning provided in Section 7.1(a) hereof. 11 12 1.46 The term "Preferred Cash Return" shall mean a sum equal to the Applicable Percent of simple interest on the daily balance of each Partner's Contribution Account from time to time during the period to which the "Preferred Cash Return" relates, cumulative to the extent not distributed in any given Year. 1.47 The term "Regulations" shall mean Treasury Department regulations, temporary regulations and proposed regulations promulgated under the Code from time to time, and any successor provisions thereto. 1.48 The term "Requisite Percentage" shall have the meaning set forth in Section 7.4(b) hereof. 1.49 The term "Roll-Up" shall mean either (a) a transaction or series of transactions by which (i) the Partnership achieves ownership, directly or indirectly, of at least a majority of the partnership interests in the Affiliated Partnerships, and (ii) the Partnership becomes the owner of all of the then outstanding shares of stock of ARC or (b) any other transaction or series of transactions which the Limited Partners Committee deems to be equivalent to the transaction described in Section 1.49(a). 1.50 The term "Share Exchange" shall mean either (a) a transaction or series of transactions by which the Partnership becomes the owner of all of the then outstanding shares of capital stock of ARC or (b) any other transaction or series of transactions which the Limited Partners Committee deems to be equivalent to the transaction described in Section 1.50(a). 12 13 1.51 The term "Subsidiary" shall mean a corporation, partnership, limited partnership or other entity of which the Partnership owns, directly or indirectly, at least 50% of the outstanding common equity interests and which is controlled by the Partnership or the General Partner. 1.52 The term "Termination Event" shall have the meaning set forth in Section 12.1 hereof. 1.53 The term "Year" shall mean the fiscal year of the Partnership, which shall be the calendar year. 1.54 The term "Year of Liquidation" shall mean the Year during which the Partnership is liquidated and the final distributions are made to Partners. II. ORGANIZATION AND RELATED MATTERS 2.1 Formation of Partnership. The parties hereto hereby form a Tennessee limited partnership under the Act. The General Partner will cause a certificate of limited partnership to be filed for record in the Office of the Secretary of State of Tennessee, and in such other places as deemed necessary by the General Partner to protect the status of the Partnership as a limited partnership and as otherwise required by law. No copies of this Agreement, the Certificate or any amendment hereto or thereto need to delivered to the Limited Partners, unless requested by a Limited Partner pursuant to Section 61-2-304 of the Act. 2.2 Name of Partnership. The name of the Partnership is American Retirement Communities, L.P. 13 14 2.3 Purpose. The Partnership is hereby formed primarily for the purpose of establishing a limited partnership that will invest in, acquire, own, develop, construct, hold, operate, finance, manage and dispose of, directly or indirectly, adult living retirement communities and similar or related facilities or businesses. In addition, the Partnership may carry on any business related thereto or arising therefrom or useful in connection therewith. 2.4 Principal Place of Business; Registered Agent. The principal business office of the Partnership shall be located at 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027 or at such other place as the General Partner from time to time shall designate in writing to the Limited Partners. The Partnership may maintain such other offices and places of business as the General Partner may deem beneficial for the Partnership. The initial agent for service of process for the Partnership at such address shall be W. E. Sheriff. 2.5 Names and Addresses of Partners. The names and addresses of the Partners are set forth in Exhibit A attached hereto, which Exhibit A is hereby incorporated herein by reference. Any Partner may change his address by written notice to the Partnership given as provided herein. The General Partner shall supplement and amend Exhibit A to reflect the current names and addresses of the Partners as such names and addresses may change from time to time. 14 15 III. TERM 3.1 Term. The term of the Partnership shall commence on the date of the filing of the Certificate creating the Partnership with the Secretary of State of Tennessee and shall continue until December 31, 2015, unless earlier terminated as provided in Article XIII of this Agreement. 3.2 Termination. Dissolution and termination of the Partnership shall be governed by the provisions of Article XIII of this Agreement. IV. CAPITAL CONTRIBUTIONS, CAPITAL ACCOUNTS 4.1 Capital Contributions of the Partners. The amount of each Limited Partner's original capital contribution as of the Effective Date is set forth on Exhibit A hereto. In addition, Exhibit A hereto lists for each Limited Partner the amount of any additional capital contributions such Limited Partner has agreed to make and whether such amounts are due as of a specified date or on call. Each Limited Partner hereby agrees to contribute the amount of any such additional capital contributions set forth opposite such Limited Partner's name on Exhibit A hereto on the date specified thereon or on call as specified thereon. If any Limited Partner fails to make a capital contribution provided for on Exhibit A hereto with respect to such Limited Partner, the General Partner may, in its discretion, institute suit against such defaulting Limited Partner for the amount of such capital contribution, plus interest, consequential damages and any expenses (including attorney's fees) relating to such suit, to the extent allowable, and in addition may seek contributions on a voluntary basis from other Limited Partners or other Persons for the amount of such capital contribution. 15 16 4.2 Issuance of LEAAF Partnership Interests. The General Partner may, with the approval of the Limited Partners Committee, cause the Partnership to issue LEAAF Partnership Interests in exchange for the outstanding principal amount of the LEAAF Notes, and Partnership Interests in exchange for the surrender of such LEAAF Notes and all other rights and claims related to the LEAAF Notes. The LEAAF Partners shall be credited with a LEAAF Contribution Account in a dollar amount equal to the principal amount of the LEAAF Notes contributed to the Partnership, in exchange for the contribution of such LEAAF Notes, and a Contribution Account in a dollar amount to be determined by the General Partner and the Limited Partners Committee in exchange for the surrender of such LEAAF Notes and all other rights and claims related to the LEAAF Notes. The LEAAF Partnership Interests shall be subject to redemption as provided in Section 6.3 hereof. The LEAAF Partnership Interests shall not be deemed to have a Percentage Interest and shall have no voting or consent rights except as otherwise specifically provided in Section 7.4 of this Agreement or required by law. 4.3 Capital Account. A Capital Account shall be established on the books of the Partnership for each Partner. Each such Capital Account shall be credited with the amount of the respective Partner's contributions to the Partnership as and when made (including the principal amounts of the LEAAF Notes) and with the respective Partner's share, determined as provided herein, of Partnership income, gains, and profits; each Partner's Capital Account shall be debited with the respective Partner's share, determined as provided herein, of Partnership losses and with the amount of all distributions made by the Partnership to such Partner. The Capital Accounts shall be maintained in accordance with the rules of Section 1.704-1(b)(2)(iv) of the Regulations, and the items of income, profit, gain, expenditures, deductions and losses which increase or 16 17 decrease such Capital Accounts shall be those items which, pursuant to such provision, affect the balance of capital accounts. 4.4 Contribution Account. A Contribution Account shall be established on the books of the Partnership for each Partner, other than LEAAF Partners in respect of their LEAAF Partnership Interests. Each such Contribution Account shall be credited (increased) with the amount of the respective Partner's contributions to the Partnership as and when made, with property contributed in kind being valued in accordance with Section 4.6(c) hereof. The balance of each Partner's Contribution Account shall be debited (reduced) by the amounts distributed to such Partner pursuant to Section 6.2(d) or Section 12.2 of this Agreement. 4.5 Partnership Loss Accounts. (a) Partnership Capital Loss Account. The Partnership shall maintain a single Partnership Capital Loss Account which shall be credited each Year with the amount of Net Capital Loss allocated pursuant to Section 5.1(b) hereof and which shall be debited each Year with the amount of Net Capital Gain allocated pursuant to Section 5.2 hereof. (b) Partnership Operating Loss Account. The Partnership shall maintain a single Partnership Operating Loss Account which shall be credited each Year with the amount of Net Operating Loss allocated pursuant to Section 5.1(b) hereof and which shall be debited each Year with the amount of Net Operating Income allocated pursuant to Section 5.2 hereof. 4.6 Additional Contributions and Limited Partnership Interests. (a) Additional Contributions. In order to raise additional capital or to acquire assets or to redeem or retire debt or for any other Partnership purpose, the General Partner, with the approval of the Limited Partners Committee, is authorized to accept additional capital 17 18 contributions in cash or in property other than cash from Partners or from other Persons from time to time and to admit such Persons as additional Limited Partners. The Partnership may assume related liabilities in connection with any such issuance. In addition, the General Partner is authorized to cause the issuance of limited partnership interests having different relative rights, powers, and privileges, including preferences as to distributions and voting, and other types of securities, from time to time, to Partners or other Persons, all on terms and conditions approved by the Limited Partners Committee, with the consent of the Requisite Percentage of the Limited Partners if required pursuant to Section 7.4 hereof. In accepting additional capital contributions or in causing the issuance of limited partnership interests, the General Partner, with approval of the Limited Partners Committee, is hereby expressly authorized and empowered to determine a minimum amount for any such investment by each Partner or other Person, to determine a maximum total for the additional investments, and to fix the relative rights and preferences of the limited partnership interests so issued to the full extent allowable by law, except as such rights and preferences are fixed herein. The General Partner shall do all things deemed by the General Partner to be necessary or advisable in connection with any future issuance, including compliance with any statute, rule, regulation or guideline of any Federal, state or other governmental agency. (b) Options and Rights. The General Partner, with the approval of the Limited Partners Committee, shall have the power and authority to issue on behalf of the Partnership options, warrants and other instruments, contracts or securities which are convertible into Partnership Interests or other interests in the Partnership or which entitle the holder to purchase Partnership Interests or other interests in the Partnership in the future, and to fix the terms and conversion or exercise price thereof, and to the fullest extent permitted by applicable law, to 18 19 finance the purchase of said options, warrants and other instruments, contracts or securities on such terms as may be deemed appropriate by the General Partner, with the approval of the Limited Partners Committee. (c) Valuation of Capital Contributions. The General Partner shall, with the approval of the Limited Partners Committee, determine the value of any contributions to the capital of the Partnership that are not made in cash and the Percentage Interest, if any, to be assigned to the Partner making such contribution. Any such value and Percentage Interest (if any) shall be set forth in an agreement between the General Partner and the contributing Partner on or prior to the date on which the contribution is made. In determining the value of any such contribution, and in assigning a Percentage Interest (if any) to the Partner making such contribution, the General Partner and the Limited Partners Committee shall have the right (but not the obligation) to rely on opinions of investment banking firms or other professional appraisals, as well as financial statements and other information that they, in their sole discretion, deem to be relevant. The value so established shall be credited to the contributing Partner's Capital Account and Contribution Account. (d) Admission of Affiliates of the General Partner. The admission of an additional Limited Partner which is an Affiliate of the General Partner, the valuation of such Limited Partner's capital contribution and the Percentage Interest, if any, assigned to the contributing Partner shall require the approval of the Limited Partners Committee, except for any Limited Partner who is admitted on terms described in Section 8.2(d) hereof. 19 20 (e) Adjustment of Percentage Interests. If additional Partnership Interests are issued in accordance with this Section 4.6, the General Partner and the Limited Partners Committee will adjust the Percentage Interests of the other Partners as appropriate and make appropriate changes to Exhibit A hereto. 4.7 No Additional Required Contributions or Preemptive Rights. Except as otherwise specifically required by the terms of this Agreement, no additional capital contributions shall be required to be made by any of the Partners. No Partner shall have any preemptive right with respect to (a) additional contributions to the capital of the Partnership, (b) issuance of additional Partnership Interests or other interests in the Partnership, (c) issuance of any obligations, evidences of indebtedness or other securities of the Partnership, whether or not convertible into or exchangeable for, or carrying or accompanied by any rights to receive, purchase or subscribe to Partnership Interests or other interests in the Partnership, (d) issuance of any right of subscription for or right to receive, or any warrant or option for the purchase of, any of the foregoing securities or (e) issuance or sale of any other securities that may be issued or sold by the Partnership. 4.8 No Right to Withdrawal of Capital Contributions. (a) No Limited Partner shall have the right to with- draw or reduce his contribution to the capital of the Partnership or to require the Partnership to make any distribution to the Partners or purchase such Limited Partner's Partnership Interest or other interest in the Partnership. (b) No Limited Partner shall have the right to demand, to have distributed, or to receive any specific class or item of property. Except as otherwise provided in this Agreement, 20 21 no Limited Partner shall have any priority over any other Limited Partner, either as to contributions of capital or otherwise. 4.9 Limited Liability. No Limited Partner shall be subject to assessment nor shall any Limited Partner be personally liable for or upon any of the debts or obligations of the Partnership or any of the losses of the Partnership beyond his obligation to contribute to the capital of the Partnership as specified in Section 4.1 hereof. No Limited Partner shall be required to return to the Partnership any amount previously distributed to him by the Partnership, except as and to the extent otherwise required by law. 4.10 Capital Contribution of the General Partner. The General Partner may, but (except as provided in this Section 4.10) is not required to, make capital contributions to the Partnership. If the General Partner does not make capital contributions and fails to maintain a capital account balance equal to the lesser of (a) 1.01% of the capital contributions and Capital Account balances, respectively, of the Limited Partners or (b) $500,000, the General Partner shall be required, upon the occurrence of a Termination Event, to contribute for the benefit of the Limited Partners (but not for creditors of the Partnership) an amount equal to the lesser of (i) the deficit capital account balance of the General Partner after the final distribution pursuant to Section 12.2 hereof (disregarding the contribution required by this Section 4.10), or (ii) the excess of 1.01% of total capital contributions of the Limited Partners over the life of the Partnership over capital contributions by the General Partner. 21 22 V. ALLOCATION OF PROFITS AND LOSSES FOR FEDERAL INCOME TAX PURPOSES As of the end of each Year, the Partnership's Net Operating Income or Net Operating Loss, Net Capital Gain or Net Capital Loss, and each item of income, gain, loss and deduction related thereto, as well as other items of income, gain, loss or deduction which are subject to special allocation provisions, shall be allocated to the Capital Accounts of the Partners and for federal income tax purposes pursuant to the following Sections of this Article V. 5.1 Allocation of Losses. After giving effect to the special allocations set forth in Section 5.5 hereof, if the Partnership has a Net Capital Loss or Net Operating Loss for the Year, or both, any such Net Capital Loss or Net Operating Loss, or both, shall be allocated as follows: (a) First, in an amount not exceeding the excess of cumulative allocations pursuant to Section 5.3(d) hereof (if any) through the current Year over cumulative allocations in prior Years of Net Capital Loss or Net Operating Loss, or both, pursuant to this Section 5.1(a), 20% to the General Partner in respect of the General Partner's Subordinated Interest and 80% to the Partners in proportion to their Percentage Interests; and (b) Second, to the Partners in proportion to their Percentage Interests. 5.2 Allocation of Profits to Extent of Balance of Partnership Loss Accounts. After giving effect to the special allocations set forth in Section 5.5 hereof, if the Partnership has Net Capital Gain or Net Operating Income, or both, for the Year, Net Capital Gain shall be allocated to Partners in an amount not exceeding the balance of the Partnership Capital Loss Account, such amount to be allocated to each Partner in proportion to his Percentage Interest, and Net Operating Income shall be allocated to Partners in an amount not exceeding the balance of the Partnership's Operating Loss Account, such amount to be allocated to each Partner in proportion to his Percentage Interest. Any Net Capital Gain and any Net Operating Income remaining after the 22 23 foregoing allocations (defined as "Net Capital Gain Available for General Allocation" and "Net Operating Income Available for General Allocation," respectively) shall be combined as Net Income Available for Allocation and allocated in accordance with Section 5.3 hereof. 5.3 General Allocation of Profits. After giving effect to the special allocations described in Section 5.5 hereof and the allocations described in Sections 5.1 and 5.2 hereof, any Net Income Available for General Allocation shall be allocated as follows: (a) First, to the LEAAF Partners, in proportion to and to the extent of, for each LEAAF Partner, the excess of (i) the cumulative distributions of the LEAAF Return to such LEAAF Partner, as of the end of the current Year, over (ii) allocations to such LEAAF Partner pursuant to this Section 5.3(a) for all prior Years; (b) Second, to the General Partner, to the extent of the distributions during the current Year of the General Partner's Subordinated Interest pursuant to Sections 6.1(c) and 6.2(e) hereof; (c) Third, to the Partners (other than the LEAAF Partners in respect of their LEAAF Partnership Interests), in proportion to and to the extent of the distributions during the current Year of their Preferred Cash Return; and (d) Fourth, any remaining amount 20% to the General Partner in respect of the General Partner's Subordinated Interest and 80% to the Partners (other than the LEAAF Partners in respect of their LEAAF Partnership Interests) in proportion to their respective Percentage Interests. 23 24 Each allocation of Net Income Available for General Allocation pursuant to this Section 5.3 shall consist of pro rata portions of Net Capital Gain Available for General Allocation and Net Operating Income Available for General Allocation. 5.4 Determination of Percentage Interests. The Percentage Interest shall be determined initially for each Partner as the ratio of the amount of that Partner's initial contribution to the Partnership (excluding the contribution of the LEAAF Notes by the LEAAF Partners), including the value of property contributed in the Roll-Up described in Section 1.49 hereof, to the total of such initial contributions to the Partnership by all Partners (excluding the contribution of the LEAAF Notes by the LEAAF Partners), as more particularly set forth in Exhibit A hereto. Upon the admission of a new Limited Partner or the making of additional capital contributions by Partners other than in proportion to their Percentage Interests, the Percentage Interests shall be adjusted as agreed by the General Partner and the Limited Partners Committee. 5.5 Special Allocations. Prior to the allocations pursuant to Section 5.1 and Section 5.2 of this Agreement, items of income, gain, loss and deduction for the Year shall be allocated in accordance with the following provisions of this Section 5.5 to the extent such provisions are applicable, and any items so allocated shall not be taken into account in determining Net Operating Income, Net Operating Loss, Net Capital Gain or Net Capital Loss: (a) Nonrecourse Deductions. Nonrecourse Deductions of the Partnership for any Year shall be specially allocated to the Partners in accordance with the Percentage Interests of the respective Partners. Partner Nonrecourse Deductions of the Partnership for any Year shall be specially allocated to the Partner who bears the economic risk of loss for the Partner Nonrecourse Debt in question. The provisions of this Section 5.5(a) are intended to satisfy the 24 25 requirements of Regulations sections 1.704-2(e)(2) and 1.704-2(i)(1) and shall be interpreted in accordance therewith for all purposes under this Agreement. (b) Minimum Gain Chargeback. If there is a net decrease in the Minimum Gain of the Partnership during any Year, each Partner shall be specially allocated items of Partnership income and gain for such year equal to that Partner's share of the net decrease in Minimum Gain, within the meaning of Regulations section 1.704-2(g)(2). The provisions of this Section 5.5(b) are intended to comply with the minimum gain chargeback requirement of Regulations section 1.704-2(f) and shall be interpreted in accordance therewith for all purposes under this Agreement. (c) Partner Nonrecourse Debt Minimum Gain Chargeback. If there is a net decrease in Partner Nonrecourse Debt Minimum Gain during any Year, each Partner that has a share of such Partner Nonrecourse Debt Minimum Gain, determined in accordance with Regulations section 1.704-2(i)(5), as of the beginning of such Year shall be specially allocated items of Partnership income and gain for such Year (and, if necessary, for succeeding Years) equal to such Partner's share of the net decrease in Partner Nonrecourse Debt Minimum Gain. The provisions of this Section 5.5(c) are intended to comply with the partner nonrecourse debt minimum gain chargeback requirement of Regulations section 1.704-2(i)(4) and shall be interpreted in accordance therewith for all purposes under this Agreement. (d) Deficit Capital Account. In the event that any Partner, after all allocations pursuant to this Article V disregarding this Section 5.5(d), would have a deficit balance in his Capital Account at the end of any Year which deficit would be in excess of the sum of (i) the amount that such Partner is obligated to restore to the Partnership under Regulations section 1.704-1(b)(2)(ii)(c), and (ii) such Partner's share of Minimum Gain (which is also treated as an 25 26 obligation to restore in accordance with Regulation section 1.704-1(b)(2)(ii)(d)), the Capital Account of such Partner shall be specially credited with items of Partnership income (including gross income) and gain for such Year in a manner to eliminate such excess as quickly as possible. (e) Qualified Income Offset. If any Partner unexpectedly receives any adjustment, allocation or distribution described in clauses (4), (5) and (6) of Regulations section 1.704-1(b)(2)(ii)(d), such Partner shall be allocated items of Partnership income and gain (consisting of a pro rata portion of each item of Partnership income, including gross income, and gain for such Year) in an amount and manner sufficient to eliminate, as quickly as possible, the deficit balance of such Partner's Capital Account, if any, to the extent required by the relevant Regulations. The provisions of this Section 5.5(e) are intended to comply with the "qualified income offset" requirement of Regulations section 1.704-1(b)(2)(ii)(d)(3) and shall be interpreted in accordance therewith for all purposes under this Agreement. (f) Allocations to Reflect Contributed Property. If a Partner contributes property to the Partnership which has a difference between its tax basis and its fair market value on the date of its contribution, then all items of income, gain, loss, and deduction with respect to such contributed property shall be shared among the Partners, pursuant to Section 704(c)(1)(A) of the Code, solely for federal income tax purposes, so as to take account of the variation between the basis of such property and its fair market value at the time of contribution. Such allocations shall be made in accordance with the traditional method with reasonable curative allocations described in Regulations section 1.704-3(c). If two or more Partners contribute in related transactions depreciable property which has a difference between its tax basis and fair market value, the curative allocations between those Partners as to the depreciable property which they 26 27 each contribute shall be limited to depreciation on the property contributed as described in Regulation section 1.704-3(c)(4) Ex.(2). Any elections or other decisions relating to such curative allocations shall be made by the General Partner, after consulting with the accounts for the Partnership, in any manner that reasonably reflect the purpose and intention of this Agreement. Allocations pursuant to this Section 5.5(f) are solely for purposes of federal income taxes and shall not affect, or in any way be taken into account in computing, any Partner's Capital Account or distributions pursuant to any provision of this Agreement. A Limited Partner who contributes property to the Partnership (including the interests in the Affiliated Partnerships) shall provide to the General Partner such information as may be required to establish such Limited Partner's tax basis in the contributed property. 5.6 Limitation on Allocations. (a) General Partner's Minimum Allocation. Notwithstanding any provision of this Article V to the contrary, in no event shall less than one percent (1%) of the Partnership's Net Operating Profit or Net Operating Loss for the Year and Net Capital Gain or Net Capital Loss for the Year be allocated to the General Partner. (b) Section 706(d) Restriction. In the case of a Partner who has contributed capital to the Partnership during the Year or who became (or ceased to be) a Partner during the Year, the allocation of federal income tax items to such Partner shall not exceed the maximum allocation permitted under Section 706(d) of the Code to limit retroactive allocations. 5.7 Allocations for Year of Liquidation. After giving effect to the special allocations set forth in Section 5.5 hereof, the amount of Net Operating Income or Net Operating Loss and Net Capital Gain or Net Capital Loss for the Year of Liquidation, and each item of income, gain, 27 28 loss and deduction related thereto, shall be allocated to all Partners in such manner as to produce, as nearly as possible, a Capital Account balance for each Partner (including the LEAAF Partners) immediately prior to the final distribution of assets to such Partner equal to the amount required to be distributed to that Partner pursuant to Section 12.2 hereof. To the extent that allocations for the Year of Liquidation cannot be made to satisfy the foregoing sentence, these allocations shall be made in accordance with the Partners' respective interests in the Partnership (taking into account all facts and circumstances) pursuant to Regulation section 1.704(b)-1(b)(1)(i), as determined by the accountants for the Partnership. 5.8 Adjustment Upon Transfer of Partnership Interest or Change in Percentage Interest. For any Year during which a Partner (or LEAAF Partner) transfers all or part of his interest in the Partnership (including a transfer of all or part of the General Partner's Subordinated Interest) or during which there is a change in the Percentage Interests, the adjustment for allocation of (i) Net Operating Income or Net Operating Loss, (ii) Net Capital Gain or Net Capital Loss, and (iii) other items of income, gain, loss and deduction between the transferor and transferee Partners (or LEAAF Partners) or regarding a Partner having different Percentage Interests during portions of the Year shall be made in the following manner: (a) Allocations in respect of distributions of the LEAAF Return, the Preferred Cash Return and the General Partner's Subordinated Interest pursuant to Sections 5.3(a), 5.3(b) and 5.3(c) hereof shall be adjusted in proportion to the amount of distributions of such LEAAF Return, Preferred Cash Return or General Partner's Subordinated Interest received by the transferor and transferee Partners (or LEAAF Partners) during the Year, respectively, or to the amount of such distributions received by the same Partner during 28 29 portions of the Year in which his Percentage Interest is different, regardless of the number of days that the Partnership Interest (or LEAAF Partnership Interest) was held, and regardless of the number of days during each period that the Percentage Interest was different; and (b) All allocations other than the allocations described in Section 5.8(a) hereof shall be adjusted between the transferor and transferee Partner or between each Partner having a different Percentage Interest during different portions of the Year according to the "pro-rata method" described in Treasury Regulation Section 1.706- 1(c)(2)(ii); that is, all such items for the entire Year shall be allocated between the disposing and transferee Partners according to the number of days in the Year that the Partnership Interest was held by each, or between each Partner having a different Percentage Interest during different portions of the Year according to the number of days in the Year that each discrete Percentage Interest was applicable to that Partner. VI. DISTRIBUTIONS 6.1 Distribution of Net Cash Flow from Operations. Distributions of all or any portion of Net Cash Flow from Operations shall be made in amounts and at times determined by the General Partner, consistent with the Budgets and Policies. Such distributions of the Partnership's Net Cash Flow from Operations shall be apportioned among the Partners as follows: (a) First, to the LEAAF Partners, in proportion to and to the extent of the excess, if any, of (i) the cumulative LEAAF Return of each LEAAF Partner to the time of the 29 30 distribution, over (ii) the sum of all prior distributions to such LEAAF Partner pursuant to this Section 6.1(a) and Section 6.2(a) hereof; (b) Second, to the Partners (other than the LEAAF Partners in respect of their LEAAF Partnership Interests), in proportion to and to the extent of the excess, if any, of (i) the cumulative Preferred Cash Return of each Partner, over (ii) the sum of all prior distributions to such Partner pursuant to this Section 6.1(b) and Section 6.2(b) hereof; (c) Third, any remaining amount 20% to the General Partner in respect of the General Partner's Subordinated Interest and 80% to the Partners (other than LEAAF Partners in respect of their LEAAF Partnership Interests), apportioned among the Partners in accordance with their respective Percentage Interests at the time of the distribution. 6.2 Distribution of Proceeds of Capital Transactions. Proceeds of Capital Transactions may, in the discretion of the General Partner and consistent with any Budgets and Policies, be applied to capital expenditures, to payment of outstanding debt, to redeem the LEAAF Partnership Interests, to increase the capital reserve, to increase Net Cash Flow From Operations with the approval of Limited Partners Committee, or to provide cash for a distribution to Partners pursuant to this Section 6.2. The General Partner shall identify any distribution which represents part or all of the proceeds of a Capital Transaction and shall designate it as such to the Limited Partners Committee. Any such distribution (except for proceeds of Capital Transactions in the Year of Liquidation distributed in the winding up of the Partnership pursuant to Section 12.2 hereof) shall be apportioned among the Partners as follows: (a) First, to the LEAAF Partners, in proportion to and to the extent of the excess, if any, of (i) the cumulative LEAAF Return of each LEAAF Partner to the time of the 30 31 distribution, over (ii) the sum of all prior distributions to such LEAAF Partner pursuant to Section 6.1(a) hereof and this Section 6.2(a); (b) Second, to the Partners (other than the LEAAF Partners in respect of their LEAAF Partnership Interests), in proportion to and to the extent of the excess, if any, of (i) the cumulative Preferred Cash Return of each Partner, over (ii) the sum of all prior distributions to such Partner pursuant to Section 6.1(b) hereof and this Section 6.2(b); (c) Third, in the discretion of the General Partner, to the LEAAF Partners, in proportion to and to the extent of the outstanding balance of their LEAAF Contribution Accounts; (d) Fourth, to the Partners (other than the LEAAF Partners in respect of their LEAAF Partnership Interests), in proportion to and to the extent of the outstanding balance of their Contribution Accounts; and (e) Fifth, any remaining amount 20% to the General Partner in respect of the General Partner's Subordinated Interest and 80% to the Partners (other than the LEAAF Partners in respect of their LEAAF Partnership Interests), in accordance with their respective Partnership Interests immediately prior to the distribution of proceeds of the Capital Transaction. 6.3 Redemption of LEAAF Partners' Interest. At any time or from time to time, the General Partner shall have the right, with the approval of the Limited Partners Committee or in accordance with any Budgets or Policies, to cause the LEAAF Partnership Interest of each LEAAF Partner to be redeemed, in whole or in part, by repaying all or a portion of the outstanding amount of such LEAAF Partner's LEAAF Contribution Account, together with an amount equal to the LEAAF Return on such LEAAF Contribution Account, less any amounts theretofore paid in respect of such LEAAF Return pursuant to Section 6.1(a) or 6.2(a) hereof or 31 32 this Section 6.3. Following a redemption of all or part of the LEAAF Partnership Interest of any LEAAF Partner, such LEAAF Partner shall have no rights as a Partner with respect to the LEAAF Partnership Interest that has been redeemed and such LEAAF Partnership Interest shall no longer be deemed to be outstanding. 6.4 Consequences of Distributions. Upon its determination to distribute, remit or pay funds in any manner expressly provided in this Article VI, made in good faith, the General Partner and, if applicable, the Limited Partners Committee shall incur no liability on account of such distribution, even if such distribution results in the Partnership retaining insufficient funds for the operation of its business or such insufficiency results in loss to the Partnership or necessitates the borrowing of funds by the Partnership. VII. GOVERNANCE OF THE PARTNERSHIP 7.1 Management by General Partner. Except as otherwise provided in this Agreement, the management of the business and affairs of the Partnership shall be vested in the General Partner. Without limiting the generality of the foregoing, the General Partner shall have the power and authority to: (a) make distributions in accordance with the terms of this Agreement, or refrain from making any distributions, to the extent that such making or refraining from making of distributions is not inconsistent with any annual operating or capital budget approved by the Limited Partners Committee pursuant to Section 7.3(a) hereof ("Budgets") or any other policies, resolutions or determinations of the Limited Partners Committee pursuant to Section 7.3 hereof ("Policies"); 32 33 (b) establish, maintain or reduce any operating or capital reserves, to the extent such establishment, maintenance or reduction is not inconsistent with any Budgets or Policies or any loan agreement to which the Partnership or any of its Subsidiaries is subject; (c) subject to Section 7.3(f) hereof, spend the capital and net income of the Partnership, to the extent not inconsistent with any Budgets or Policies; (d) subject to Section 7.3(f) hereof, purchase or acquire, hold, lease, manage and operate the properties and other assets of the Partnership and its Subsidiaries and enter into agreements containing such terms, provisions and conditions as the General Partner in its discretion shall approve, to the extent not inconsistent with any Budget or Policies; (e) subject to Section 7.3(i) hereof, purchase from or through others contracts of liability, casualty and other insurance which the General Partner deems advisable for the protection of the Partnership or for any purpose convenient or beneficial to the Partnership, to the extent not inconsistent with any Budget or Policies; (f) subject to Section 7.3(c) and 7.3(f) hereof, incur indebtedness on behalf of the Partnership in the ordinary course of business, to the extent not inconsistent with any Budgets or Policies; (g) subject to Section 7.3(g) hereof, sell, exchange or otherwise dispose of properties or assets of the Partnership or any of its Subsidiaries in the ordinary course of business, upon such terms and conditions as the General Partner may deem advisable, appropriate or convenient, to the extent not inconsistent with any Budgets or Policies; (h) invest in short term debt obligations (including those issued or guaranteed by federal and state governments and their agencies and certificates of deposit of commercial 33 34 banks, savings banks or savings and loan association), "money market" accounts of commercial banks, or "money market" mutual funds, such funds as are temporarily not required for the purposes of the Partnerships operations to the extent not inconsistent with any Budgets or Policies; (i) delegate all or any of its duties hereunder and, in furtherance of any such delegation, appoint, employ or contract with any Person for the transaction of the business of the Partnership, which Persons may, under the supervision of the General Partner, act as consultants, accountants, attorneys, brokers, escrow agents, leasing agents or in any other capacity deemed by the General Partner necessary or desirable and pay appropriate fees to any of such Persons, all to the extent not inconsistent with any Budget or Policies; and (j) take any and all action necessary or deemed necessary or desirable by the General Partner to carry out any Budgets or Policies or take any other action consistent with the actions of the Limited Partners Committee or the Limited Partners in accordance with the provisions of this Agreement. 7.2 Limited Partners Committee. (a) Constitution of the Limited Partners Committee; Number and Term of Office. The Partnership shall have a committee (the "Limited Partners Committee"), which shall be composed of not less than three (3) nor more than ten (10) individuals, which Limited Partners Committee shall have the powers and authority granted to it in this Agreement. The exact number of members of the Limited Partners Committee, between the minimum of three (3) and the maximum of ten (10), shall be determined from time to time by the Limited Partners Committee. The initial members of the Limited Partners Committee shall be Clarence Edmonds, Nadine Smith and Daniel O'Connell (the "Initial Members"). As soon as practicable after the consummation 34 35 of the Roll Up, but in no event later than June 1995, the Limited Partners Committee shall call a meeting of the Limited Partners of the Partnership pursuant to Section 7.5 hereof, at which meeting all Limited Partners holding Partnership Interests as of the date of such meeting shall have the right to elect new members of the Limited Partners Committee, to serve a term of one year or until their earlier death, resignation or removal. Thereafter, the members of the Limited Partners Committee (other than the Chief Manager or other chief executive officer of the General Partner, who shall be a member ex officio of the Limited Partners Committee as provided in Section 7.2(b) below) shall be elected on an annual basis pursuant to Sections 7.4 and 7.5 hereof and shall serve for a term of one year or until their earlier death, resignation or removal. Members of the Limited Partners Committee may serve for repeated terms if re-elected. The Limited Partners Committee shall have the right to appoint additional members to fill any vacancy on the Limited Partners Committee until the next annual meeting of Limited Partners. (b) Qualifications for Membership. The members of the Limited Partners Committee shall be: (i) Limited Partners or their designated representatives, (ii) the Chief Manager or other chief executive officer of the General Partner, who shall serve ex officio as a voting member of the Limited Partners Committee and (iii) up to two additional members. On or after June 30, 1995, individuals who (directly or indirectly other than through the Partnership) hold partnership interests in any of the Affiliated Partnerships (except if, as a result of the Roll Up, such Affiliated Partnership owns only partnership interests in the Partnership), or designated or professional representatives of such individuals or their Affiliates, will not have the right to serve as members of the Limited Partners Committee. Until the consummation of the Roll Up, if ARCLLC is the General Partner, no individual who (directly or indirectly) holds an equity 35 36 interest in the General Partner or is employed by ARC may serve as a member of the Limited Partners Committee, except for the Chief Manager or other chief executive officer of the General Partner. (c) Meetings and Notice. The Limited Partners Committee may hold regular and special meetings either within or without the State of Tennessee. The Limited Partners Committee may permit any or all of its members to participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all members participating may simultaneously hear each other during the meeting. A member of the Limited Partners Committee participating in a meeting by this means is deemed to be present in person at the meeting. Unless otherwise determined by the Limited Partners Committee, regular meetings of the Limited Partners may be held without notice of the date, time, place or purpose of the meeting at such dates, times and places as may be determined by the Limited Partners from time to time. Special meetings of the Limited Partners Committee may be called by the General Partner or any two members of the Limited Partners Committee. Special meetings must be preceded by at least 24-hours notice of the date, time and place of the meeting, but need not describe the purpose of such meeting. Notice of an adjourned meeting need not be given if the time and place to which the meeting is adjourned are fixed at the meeting at which the adjournment is taken, and if the period of adjournment does not exceed one month for any one adjournment. A member of the Limited Partners Committee may waive any required notice before or after the date and time stated in the notice. Except as provided in the next sentence, the waiver must be in writing, signed by the member of the Limited Partners Committee and filed with the minutes or Partnership records. A member's attendance at or participation in a meeting 36 37 waives any required notice to him or her of such meeting unless the member at the beginning of the meeting (or promptly upon his or her arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to any action taken at the meeting. (d) Quorum. A quorum of the members of the Limited Partners Committee consists of a majority of the total number of members that has been fixed by the Limited Partners Committee as the total number of members of the Limited Partners Committee. (e) Voting. If a quorum is present when a vote is taken, the affirmative vote of the majority of the members of the Limited Partners Committee present is the act of the Limited Partners Committee. A member of the Limited Partners Committee who is present at a meeting of the Limited Partners Committee when action is taken is deemed to have voted in favor of such action unless: (i) He or she objects at the beginning of the meeting (or promptly upon his or her arrival) to holding the meeting or transacting business at the meeting; (ii) His or her dissent or abstention from the action is entered in the minutes of the meeting; or (iii) He or she delivers written notice of such dissent or abstention to the presiding officer of the meeting before its adjournment or to the Partnership immediately after adjournment. The right of dissent or abstention is not available to a member who votes in favor of the action taken. (f) Action Without Meeting. Any action required or permitted by this Agreement to be taken by the Limited Partners Committee may be taken without a meeting. If 37 38 all members of the Limited Partners Committee consent to taking such action without a meeting, the affirmative vote of the number of members that would be necessary to authorize or take such action at a meeting is the act of the Limited Partners Committee. Such action must be evidenced by one or more written consents describing the action taken, indicating the member's vote or abstention on the action, which consents shall be included in the minutes or filed with the Partnership records reflecting the action taken. Action taken by consent is effective when the last member signs the consent, unless the consent specifies a different effective date. (g) Right to Confer with General Partner and Others. Members of the Limited Partners Committee shall have the right to confer with representatives of the General Partner and employees of the Partnership and its Subsidiaries in connection with any matter regarding the Partnership's business, and may confer with legal counsel, accountants and other advisers to the Partnership. The General Partner must consult with (but need not receive the approval of) the Limited Partners Committee prior to amending its operating agreement, charter or similar constitutive document. (h) Additional Rules and Procedures. The members of the Limited Partners Committee may from time to time establish additional rules and procedures for the conduct of 38 39 the business of the Limited Partners Committee to the extent that such additional rules and procedures are not inconsistent with this Agreement or the Act. (i) Compensation. Members of the Limited Partners Committee shall be entitled to reasonable compensation from the Partnership for their services as members of the Limited Partners Committee, and shall be entitled to reimbursement from the Partnership for any reasonable expenses incurred in attending meetings of the Limited Partners Committee. (j) Resignation. A member of the Limited Partners Committee may resign at any time by delivering written notice to the Limited Partners Committee or to the General Partner. A resignation is effective when the notice is delivered unless the notice specifies a later effective date. (k) Removal of Members of the Limited Partners Committee. Members of the Limited Partners Committee may be removed with or without cause upon a vote of the Limited Partners at a meeting called expressly for such purpose. 7.3 Approval Rights of the Limited Partners Committee. The following matters shall require the approval of the Limited Partners Committee: (a) the adoption of annual operating and capital budgets for the Partnership and its Subsidiaries; (b) the adoption of policies with respect to distributions, including policies with respect to the establishment, maintenance or reduction of operating and capital reserves; (c) the adoption of policies with respect to the incurrence or repayment of indebtedness of the Partnership and its Subsidiaries (except as already approved pursuant to Section 7.3(a) or (h) hereof); 39 40 (d) the adoption of executive and management compensation plans for employees of the Partnership and its Subsidiaries and the entry into any new compensation arrangement with senior executives of the Partnership and its Subsidiaries; (e) the issuance of additional equity interests in the Partnership as provided in Section 4.5 hereof; (f) the acquisition by the Partnership or any of its Subsidiaries of any assets or properties other than in the ordinary course of business (except as already approved pursuant to Section 7.3(a) hereof); (g) the disposition by the Partnership or any of its Subsidiaries of any assets or properties other than in the ordinary course of business (except as already approved pursuant to Section 7.3(a) hereof); (h) the refinancing of any indebtedness of the Partnership or any of its Subsidiaries other than in the ordinary course of business or as already approved pursuant to Section 7.3(a) or (c) hereof; (i) the adoption of policies to be followed by the Partnership with respect to the acquisition and maintenance of insurance coverage for the assets and properties of the Partnership and its Subsidiaries; (j) the adoption of any amendment to this Agreement; provided, however, that any amendment described in Section 7.4(a)(iv) hereof shall also require the approval of the Limited Partners to the extent provided in such Section 7.4(a)(iv); (k) the selection of any independent accounting firm to audit the financial statements of the Partnership; 40 41 (l) transactions with Affiliates of the General Partner to the extent provided in Section 8.1(a) hereof; (m) any other matters requiring the approval of the Limited Partners Committee pursuant to this Agreement or submitted to the Limited Partners Committee by the General Partner; and (n) the approval of any matter (other than the election or removal of any members of the Limited Partners Committee) for which a vote of the Limited Partners is required pursuant to this Agreement. 7.4 Approval Rights of the Limited Partners. (a) Approval Rights. The approval of the Requisite Percentage of the Limited Partners at a meeting at which a quorum is present in accordance with Section 7.5 hereof or acting by written consent shall be required for: (i) the election or removal of members of the Limited Partners Committee, except as otherwise specifically provided in Section 7.2(a) hereof; (ii) the merger of the Partnership with or into another entity, or the sale of all, or substantially all, of the assets of the Partnership to another entity (other than a sale of assets to a wholly-owned Subsidiary); (iii) the dissolution of the Partnership; (iv) the amendment of this Agreement in any manner that would materially and adversely alter the rights of the Limited Partners (or the holders of any particular class of limited partnership interests) with respect to: (i) the rights of Limited Partners under this Article VII or (ii) the rights and preferences with respect to allocations 41 42 and distributions (including the Preferred Cash Return) pursuant to Articles V and VI and Section 12.2 hereof, other than (A) by reason of adjustment of the Percentage Interests of Partners in accordance with Section 4.6 hereof upon the admission of a new Limited Partner or the making of additional capital contributions by Partners other than in proportion to their Percentage Interests, (B) an adjustment to the method set forth in Section 5.8 hereof regarding tax allocations for the Year during which a change in Percentage Interests or a transfer of part or all of a Partnership Interest occurs or (c) alteration of the tax allocations set forth in Article V as necessary to conform to the Code or Regulations (or the interpretation thereof by the Internal Revenue Service) or to conform to the Partners' interests in the Partnership; (v) the removal or withdrawal of the General Partner, or election of a new General Partner, except as provided in Section 11.2 hereof; (vi) the continuation of the Partnership following the resignation, removal or withdrawal of the General Partner (except as provided in Section 11.2 hereof); (vii) the assignment of the partnership interest of the General Partner in the Partnership or the transfer of a majority interest in the equity of the General Partner to Persons other than employees of the General Partner and its Affiliates; (viii) any other matter submitted to a vote of Limited Partners at the discretion of the Limited Partners Committee. (b) Requisite Percentage. The "Requisite Percentage" for the election or removal of any member of the Limited Partners Committee shall be a plurality of the Percentage Interests of Limited Partners present and voting at any meeting at which a quorum is present. The 42 43 "Requisite Percentage" required for the approval of a merger or sale of assets shall be a majority of the outstanding Percentage Interests of Limited Partners. The "Requisite Percentage" for any vote to dissolve the Partnership shall be three-quarters (75%) of the Percentage Interests of Limited Partners. The "Requisite Percentage" for the approval of any amendment of this Agreement requiring a vote of the Limited Partners holding Percentage Interests pursuant to Section 7.4(a)(iv) shall be a majority of the Percentage Interests of Limited Partners and the "Requisite Percentage" for any amendment requiring a vote of the holders of any particular class of limited partnership interest in a majority of the outstanding balances in the contribution accounts with respect to such class. The "Requisite Percentage" for the removal or the election of a General Partner pursuant to Section 7.4(a)(v) shall be two-thirds (66.67%) of the outstanding Percentage Interests of Limited Partners. The "Requisite Percentage" for the continuation of the Partnership pursuant to Section 7.4(a)(vi) shall be all of the outstanding Percentage Interests of Limited Partners and other interests (if any) in the Partnership. The "Requisite Percentage" for the approval of the assignment of the partnership interest of the General Partner or the transfer of a majority interest in the equity of the General Partner pursuant to Section 7.4(a)(vii) is a majority of the outstanding Percentage Interests of the Limited Partners. The "Requisite Percentage" for the approval of any other matter submitted to the vote of the Limited Partners shall be a majority of the Percentage Interests of Limited Partners present and voting at any meeting at which a quorum is present. 43 44 7.5 Meeting of Limited Partners. (a) Annual Meeting. An annual meeting of the Limited Partners shall be held on such date as may be determined by the Limited Partners Committee. The business to be transacted at such meeting shall be the election of members of the Limited Partners Committee and such other business as shall be properly brought before the meeting. (b) Special Meetings. A special meeting of the Limited Partners shall be held on call by the General Partner, the Limited Partners Committee or if the holders of at least ten percent of the Percentage Interests or any other partnership interest entitled to vote on any issue proposed to be considered at the proposed special meeting sign, date and deliver to the General Partner and the members of the Limited Partners Committee one or more written demands for the meeting describing the purpose or purposes for which such special meeting is to be held, including all statements necessary to make a statement of such purpose not incomplete, false or misleading. Only business within the purpose or purposes described in the meeting notice may be conducted at a special Limited Partners' meeting. (c) Place of Meetings. The Limited Partners Committee may designate any place, either within or without the State of Tennessee, as the place of meeting for any annual meeting or for any special meeting. If no place is fixed by the Limited Partners Committee, the meeting shall be held at the principal office of the Partnership. (d) Notice of Meetings; Waiver. Notice of the date, time and place of each annual and special Limited Partners' meeting and, in the case of a special meeting, a description of the purpose or purposes for which the meeting is called, shall be given no fewer than ten days nor more than sixty days before the date of the meeting. A Limited Partner may waive any notice 44 45 required by law or by this Agreement before or after the date and time stated in such notice. Except as provided in the next sentence, the waiver must be in writing, be signed by the Limited Partner entitled to notice and delivered to the Partnership for inclusion in the minutes or filing with Partnership records. A Limited Partner's attendance at a meeting: (i) waives objection to lack of notice or defective notice of the meeting, unless the Limited Partner at the beginning of the meeting (or promptly upon his or her arrival) objects to holding the meeting or transacting business at the meeting; and (ii) waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the Limited Partner objects to considering the matter when it is presented. (e) List of Limited Partners. Each Limited Partner shall have the right to receive, for any proper purpose, the name and address of each Limited Partner and the Percentage Interests or other interests in the Partnership held by each Limited Partner, and the Partnership shall furnish such information to any Limited Partner requesting same in writing. Prior to any meeting of the Limited Partners, the General Partner shall prepare a list of the names of all Limited Partners who are entitled to notice of a Limited Partners meeting and the address of such Limited Partners. The list will be available for inspection by any Limited Partner, beginning two business days after notice of the meeting is given for which the list was prepared and continuing through the meeting, at the Partnership's principal office or at a place identified in the meeting notice in the city where the meeting will be held. A Limited Partner or his or her agent or attorney is entitled on written demand to inspect and to copy the list, during regular business hours and at his or her expense during the period in which it is available for inspection. 45 46 (f) Quorum. A majority of the Percentage Interests or other partnership interests entitled to vote on any matter constitutes a quorum for action on that matter, unless the Requisite Percentage is greater than a majority of such Percentage Interests or other partnership interests. If the Requisite Percentage is greater than a majority of the Percentage Interests or other partnership interests entitled to vote on a matter, a quorum shall consist of the Percentage Interests or the percentage of other partnership interests constituting the Requisite Percentage. (g) Adjournment. Once a Limited Partner is represented for any purpose at a meeting, such Limited Partner is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting, unless a new record date is or must be set for that adjourned meeting. If a quorum shall not be present or represented at any meeting, the Limited Partners entitled to vote thereat shall have power to adjourn the meeting to a different date, time or place without notice other than the announcement at the meeting of the new time, date or place to which the meeting is adjourned. At any adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally called. (h) Proxies. A Limited Partner may vote in person or by proxy. A Limited Partner may appoint a proxy to vote or otherwise act for such Limited Partner by signing an appointment either personally or by his or her attorney-in-fact. An appointment of a proxy is effective when received by the General Partner. An appointment is valid for eleven months unless another period is expressly provided in the appointment form. An appointment of a proxy is revocable by the Limited Partner unless the appointment form conspicuously states that it is irrevocable and that the appointment is coupled with an interest. 46 47 (i) Acceptance of Limited Partner Documents. If the name on a Limited Partner document (a vote, consent, waiver or proxy appointment) corresponds to the name of the Limited Partner, the General Partner, if acting in good faith, is entitled to accept such Limited Partner document and give it effect as the act of the Limited Partner. If the name signed on such Limited Partner document does not correspond to the name of a Limited Partner, the General Partner, if acting in good faith, is nevertheless entitled to accept such Limited Partner document and give it effect as the act of the Limited Partner if (i) the Limited Partner is an entity and the name signed purports to be that of an officer or agent of the entity; (ii) the name signed purports to be that of the fiduciary representing the Limited Partner and, if the General Partner requests, evidence of fiduciary status acceptable to the General Partner has been presented with respect to such Limited Partner document; (iii) the name signed purports to be that of a receiver or trustee in bankruptcy or the Limited Partner and, if the General Partner requests, evidence of this status acceptable to the General Partner has been presented with respect to the General Partner document; (iv) the name signed purports to be that of a pledgee, beneficial owner or attorney-in-fact of the Limited Partner and, if the General Partner requests, evidence acceptable to the General Partner of the signatory's authority to sign for the Limited Partner has been presented with respect to such Limited Partner document; or (v) two or more persons are the Limited Partner as co-owners or fiduciaries and the name signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all of the co-owners or at least one of the co-owners or fiduciaries. The General Partner is entitled to reject a Limited Partner document if the General Partner, acting in good faith, has a reasonable basis for doubt about the validity of 47 48 the signature on such Limited Partner document or about the signatory's authority to sign for the Limited Partner. (j) Ownership of Interests Assigned by a Limited Partner. In the event a vote of the Limited Partners shall be taken pursuant to this Agreement, a Limited Partner shall, solely for the purpose of determining the Percentage Interests held by him in weighing his vote, be deemed the holder of any Percentage Interests assigned by him, so long as the assignee of such Percentage Interests has not become a substituted Limited Partner. Whenever the Limited Partners shall be entitled to vote pursuant to this Agreement, such vote may be cast in person at a meeting duly called for such purpose or by validly executed proxy. (k) Action Without Meeting. Action required or permitted by this Agreement or the Act to be taken at a meeting of the Limited Partners may be taken without a meeting. If all Limited Partners entitled to vote on the action consent to taking such action without a meeting, the affirmative vote of the number of Limited Partners that would be necessary to authorize or take such action at the meeting is the act of the Limited Partners. The action must be evidenced by one or more written consents describing the action taken, at least one of which is signed by each Limited Partner entitled to vote on the action in one or more counterparts, indicating such signing Limited Partner's vote or abstention on the action and deliver to the Partnership for inclusion in the minutes or for filing with the Partnership records. 48 49 7.6 Tax Matters Partner. (a) Designation of Tax Matters Partner. The General Partner shall be the "Tax Matters Partner" (as defined in Section 6231(a)(7) of the Code) for all administrative and judicial proceedings or the assessment and collection of tax deficiencies for the refund of tax overpayments arising out of a Partner's distributive share of Partnership items allocated to the Partners affecting any of the Partners' tax liability. The General Partner shall have all power and authority necessary for it to carry out its duties as a Tax Matters Partner under the Code. Each Partner, by the execution of this Agreement, consents to the appointment of the General Partner as the Tax Matters Partner and agrees to execute, certify, acknowledge, deliver, swear to, file and record at the appropriate public offices such documents as may be necessary or appropriate to evidence such consent. (b) Indemnification and Reimbursement. The Partnership shall indemnify and reimburse the Tax Matters Partner for all expenses, including legal and accounting fees, claims, liabilities, losses and damages incurred in connection with any administrative or judicial proceeding with respect to the tax liability of the Partners and against any and all loss, liability, cost or expense, including judgments, fines, amounts paid in settlement and attorneys fees and expenses, incurred by the Tax Matters Partner in any civil, criminal or investigative proceeding in which the Tax Matters Partner is involved or threatened to be involved solely by virtue of being Tax Matters Partner, so long as the Tax Matters Partner (i) acted in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances and (ii) reasonably believed his actions to be in the best interest of the Partnership (or if such actions were not taken in the Tax Matters Partner's official capacity with the Partnership, the Tax Matters 49 50 Partner reasonably believed such actions to be not opposed to the best interests of the Partnership). Neither the General Partner, nor any Affiliate, nor any other person shall have any obligation to provide funds for such purpose. The taking of any action and the incurring of any expense by the Tax Matters Partner and the provisions on limitations of liability of the General Partner and indemnification set forth in this Agreement shall be fully applicable to the Tax Matters Partner in its capacity as such. VIII. TRANSACTIONS WITH AFFILIATES 8.1 In General. The Partnership may acquire property or services from, and have other transactions with, the General Partner and its Affiliates, subject only to the following limitations: (a) Such transaction shall have been approved by a majority of the members of the Limited Partners Committee or shall be one of the transactions enumerated in Section 8.2 hereof; (b) The funds of the Partnership shall be kept separate and will not be commingled with any other funds; and (c) All such transactions shall be evidenced in writing and provide for compensation at a rate commensurate with that which would be obtained in the case of a similar transaction with independent persons. 8.2 Authorized Transactions. Nothing contained in this Agreement shall prohibit or limit those transactions with Partners and their Affiliates contemplated or referred to in this 50 51 Section 8.2, and each of the Limited Partners hereby expressly approves and consents to the following transactions: (a) The engagement of the services of such bookkeepers, auditors, accountants, attorneys, consultants, and other professionals on behalf and at the reasonable expense of the Partnership, including Affiliates of the General Partner, whether or not any of the same shall have been or then be otherwise engaged by the General Partner or any of its Affiliates, all as the General Partner may deem proper or desirable for the proper operation or protection of the Partnership; (b) The reimbursement of the General Partner or any of its Affiliates by the Partnership for any and all reasonable costs and expenses, including, without limitation, legal, accounting, auditing, and other fees and expenses of other agents or advisors, cost of insurance, and the bookkeeping and clerical work necessary in maintaining the books and records of the Partnership, including the cost of printing and mailing checks, statements, and reports, and all other costs and expenses which are, as determined by the General Partner, properly allocable to the operations of the Partnership incurred by it in connection with its duties to the Partnership; (c) The admission of and service by the General Partner as general partner in partnerships controlled, directly or indirectly, by the Partnership and the receipt of benefits by the General Partner in connection with its ownership interest therein; (d) The acquisition of Partnership Interests or other interests in the Partnership by persons who are Affiliates of the General Partner and who receive their Partnership Interests in exchange for shares of ARC or interests in the Affiliated Partnerships on the same terms as other persons holding like interests; and 51 52 (e) The payment of fees and expenses with respect to such other matters and transactions as are contemplated or set forth elsewhere in this Agreement. IX. INDEMNIFICATION AND EXCULPATION OF GENERAL PARTNER AND THE LIMITED PARTNERS COMMITTEE AND OTHER MATTERS 9.1 Indemnification. The General Partner and its Affiliates and the members of the Limited Partners Committee and their respective members, managers, governors, officers, directors, partners, agents and employees, shall be indemnified and held harmless, to the full extent of Partnership assets, by the Partnership from any loss, liability or damages incurred or suffered by them (including fees and expenses of attorneys and other experts) as a result of any and all acts or omissions in connection with the business of the Partnership, if (i) such actions were in good faith and (except in the case of member of the Limited Partners Committee) taken with the care an ordinarily prudent person in a like position would exercise under similar circumstances and (ii) such Person reasonably believed such actions to be in the best interests of the Partnership (or if such actions were not taken in such Person's official capacity with the Partnership, such Person reasonably believed such actions to be not opposed to the best interests of the Partnership). 9.2 Exculpation. The members of the Limited Partners Committee, the General Partner and its Affiliates and their respective members, managers, governors, officers, directors, partners, agents and employees shall not be liable, in damages or otherwise, to the Partnership or any Limited Partner for any acts in connection with the business of the Partnership, if (a) such actions were in good faith and (except in the case of members of the Limited Partners Committee) taken 52 53 with the care an ordinarily prudent person in a like position would exercise under similar circumstances and (b) such Person reasonably believed such actions to be in the best interests of the Partnership (or if such actions were not taken in such Person's official capacity with the Partnership, such Person reasonably believed such actions to be not opposed to the best interests of the Partnership). 9.3 No Personal Liability of Limited Partners. Any amounts payable to the General Partner or its Affiliates or the members of the Limited Partners Committee or any other Person pursuant to this Article IX are recoverable only out of the assets of the Partnership and not from the Limited Partners. 9.4 Periodic Advancement of Expenses. The Partnership shall from time to time make advances to the General Partner and its Affiliates and the members of the Limited Partners Committee and their respective members, managers, governors, officers, directors, partners, agents and employees for expenses in connection with any claim made against them of the type contemplated in Section 9.1, provided the following conditions are met: (a) the claim relates to the business of the Partnership; and (b) the Person to whom expenses are advanced (i) undertakes to repay the advanced funds to the Partnership in cases in which such Person would not be entitled to indemnification and (ii) furnishes the Partnership with a written affirmation of such party that such Person has met the applicable standard of conduct specified in Section 9.1 hereof for entitlement to indemnification. 9.5 Returns of Capital Contributions. Anything in this Agreement to the contrary notwithstanding, the General Partner shall not be individually liable for the return of the capital contributions of the Limited Partners, or any portion thereof, it being expressly understood that 53 54 any such return shall be made solely from Partnership assets; provided, however, that the General Partner must comply with Section 4.10 hereof. X. TRANSFER OF INTERESTS IN THE PARTNERSHIP 10.1 In General. With the General Partner's consent, which consent may be granted or denied in the sole discretion of the General Partner, a Limited Partner may sell, transfer, assign or subject to a security interest any or all of his limited partnership interest; provided, however, that: (a) Such Limited Partner and his purchaser, transferee or assignee execute, shall acknowledge and deliver to the General Partner such instruments of transfer and assignment with respect to such transaction as are in form and substance satisfactory to the General Partner; (b) Upon request of the General Partner, such Limited Partner shall pay the Partnership a transfer fee which is sufficient to pay all reasonable expenses of the Partnership in connection with such transaction; and (c) Upon the request of the General Partner, the Limited Partner or his purchaser, transferee or assignee shall deliver to the Partnership and the General Partner an opinion of counsel, in form and substance satisfactory to the General Partner, to the effect that such sale, transfer, assignment or subjection to a security interest does not violate the securities laws of the United States or any applicable state securities laws. No such purchaser, transferee, assignee, or holder of such security interest (or any Person who purchases such limited partnership interest upon foreclosure of such security interest) shall become 54 55 a Limited Partner within the meaning of Section 61- 2-301 of the Act unless the General Partner consents in writing to such Person becoming a substituted Limited Partner. Neither the Partnership nor the General Partner shall recognize or be bound by any assignment of a limited partnership interest, unless the General Partner consents to such assignment in writing. Notwithstanding the foregoing to the contrary, the General Partner's prior consent shall not be required for the assignment of the right to share in profits by a Limited Partner to an immediate member of the assignor Limited Partner's immediate family, but such transferee shall not become a substituted Limited Partner except with the consent of the General Partner and the fulfillment of the other conditions set forth in Section 10.2 hereof. 10.2 Substituted Limited Partners. If the General Partner consents to the admission of a person as a substituted Limited Partner within the meaning of Sections 61-2-301 and 61-2-704 of the Act, and such person: (a) Elects to become a substituted Limited Partner by delivering a written notice of such election to the General Partner; (b) Executes and acknowledges such other instruments as the General Partner may deem necessary or advisable to effect the admission of such person as a substituted Limited Partner, including, without limitation, the written acceptance and adoption by such person of the provisions of this Agreement; and (c) Upon request of the General Partner, pays a transfer fee to the Partnership which is sufficient to cover all reasonable expenses connected with the admission of such person as a substituted Limited Partner within the meaning of Section 61-2-301 of the Act, including, without limitation, the cost of preparing, printing and filing for record an amendment to this 55 56 Agreement and, if required by the Act or deemed appropriate by the General Partner, the Certificate, and obtaining any opinions of counsel the Partnership deems necessary or advisable. Upon the satisfaction of the conditions set forth in clauses (a), (b) and (c) above, then the General Partner shall amend this Agreement and, if necessary or desired, the Certificate in accordance with the provisions of the Act and shall take all other steps which, in the opinion of the General Partner, are reasonably necessary to admit such person as a substituted Limited Partner under Section 61-2-301 of the Act. The General Partner shall file an amendment to this Agreement and the Certificate, if required by the Act or if the General Partner considers it appropriate to do so. Such person shall become a substituted Limited Partner on the date of such amendment to this Agreement and his predecessor will cease to be a Limited Partner on such date. 10.3 Purchase of Limited Partner Interests by the General Partner. The General Partner may acquire limited partnership interests in the Partnership, and, if with respect to such interest the General Partner becomes a Limited Partner within the meaning of the Act, the General Partner shall, with respect to such interest, enjoy all rights and be subject to all of the obligations and duties of the Limited Partners. 10.4 Transfer Upon Death of Limited Partner. Upon the death of a Limited Partner, his executor, administrator, or other personal representative shall have all of the rights of the deceased Limited Partner for the purpose of settling his estate; may assign or transfer the limited partnership interest in the Partnership of the deceased Limited Partner to such persons and in such manner as the deceased Limited Partner could have during his lifetime; and may constitute his 56 57 transferee or assignee a substituted Limited Partner to the extent that the deceased Limited Partner could have done so, but only upon compliance with the provisions of this Agreement. XI. TRANSFER OF THE GENERAL PARTNER'S INTEREST 11.1 Resignation and Withdrawal of the General Partner. The General Partner hereby covenants and agrees not to resign or withdraw as General Partner unless removed by a vote of the Limited Partners as provided in Section 7.4(a)(v) hereof or replaced by ARC as provided in Section 11.2 hereof. 11.2 Removal of the General Partner; Substitution of ARC. The General Partner may be removed at any time upon a vote of Limited Partners holding two-thirds (66-2/3%) or more of the outstanding Percentage Interests as provided in Section 7.4(a)(v) hereof. In addition, if ARC is not a Subsidiary of the Partnership by October 31, 1995, ARC shall have the right, exercisable until December 31, 1995, to be admitted as a general partner of the Partnership by executing a copy of this Agreement and agreeing to assume the responsibilities and obligations of the General Partner under this Agreement. Upon such admission, ARC will become the General Partner of the Partnership and ARCLLC will have the right, at its option, to withdraw from the Partnership and have returned to it the amount of any capital contribution made by it or to continue its interest in the Partnership as a special limited partner pursuant to Section 11.5 hereof. The admission of ARC as a general partner in the Partnership, the substitution of ARC for ARCLLC as the General Partner under this Agreement and the withdrawal of ARCLLC from the Partnership will not require the consent or approval of the Limited Partners and will not cause the existence of the Partnership to be terminated. 57 58 11.3 Notice of Transfer. Written notice of the transfer of the General Partner's interest pursuant to Section 11.7 shall be given by the General Partner to the Limited Partners. Such notice shall set forth the day upon which the resignation or transfer is to become effective. 11.4 Liability of the General Partner after Removal. If the General Partner is removed as general partner in the Partnership in accordance with the provisions of this Agreement, its liability as a general partner shall cease as to future obligations of the Partnership, and the Partnership shall promptly take all steps reasonably necessary under the Act to cause such cessation of liability. 11.5 Continuing Interest of the General Partner after Removal. Upon removal, the General Partner that has been removed may transfer its interest to any substituted General Partner or withdraw with the consent of the Limited Partners as provided in Section 7.4(a)(v) hereof. If the General Partner does not withdraw or transfer its interest to a successor General Partner, the interest of the General Partner that has been removed will be converted into a special limited partnership interest having no right to participate in distributions of Net Cash Flow from Operations or proceeds from Capital Transactions pursuant to Sections 6.1 and 6.2 except as Partner with the Percentage Interest, if any, held by such General Partner prior to removal, but having a right to participate in a percentage of the General Partner's Subordinated Interest on liquidation pursuant to Section 12.2 hereof. The percentage participation in the General Partner's Subordinated Interest shall be determined in accordance with a formula to be established by the Limited Partners Committee at the time of removal in a manner designed to reflect the length of time that the General Partner that is being removed has served as a general partner of the 58 59 Partnership and the contribution of such General Partner to the formation of the Partnership and to the Roll Up. 11.6 Election of Successor General Partner. Except as otherwise provided in Section 11.2 hereof, if the General Partner withdraws or resigns, or is removed as general partner of the Partnership, all the Limited Partners may elect a successor General Partner as provided in Section 7.4 hereof; provided, however, if after such resignation the Partnership has no remaining General Partner, the business of the Partnership may be continued, and a dissolution and liquidation of the Partnership pursuant to Article XII hereof may be avoided, only if, within 90 days after the withdrawal, resignation or removal of the General Partner, the Limited Partners elect to continue the business of the Partnership and elect one or more successor general partners pursuant to Section 7.4 hereof. The Person so elected as a successor General Partner shall not become the General Partner until the withdrawal, resignation or removal of the former general partner is effective and the successor has executed a copy of this Agreement. 11.7 Transfer to Successor General Partner. The General Partner shall not have the right to assign the whole or any portion of its partnership interest or transfer a majority interest in its equity to any person or persons other than employees of the General Partner or its Affiliates without the written consent of Limited Partners owning a majority of the Percentage Interests of all Limited Partners; provided, however, that notwithstanding Section 11.6 hereof, the General Partner may at any time transfer its interest in the Partnership or its equity to an entity that is an Affiliate of the General Partner without the consent of the Limited Partners, and such Affiliate receiving the partnership interest shall after the effective date set forth in notice thereof to Limited Partners assume all the rights and duties of the General Partner hereunder. 59 60 XII. DISSOLUTION AND WINDING UP OF THE PARTNERSHIP 12.1 Dissolution of the Partnership. The following events (each, a "Termination Event") shall cause a dissolution of the Partnership: (a) the withdrawal, resignation, removal or Bankruptcy of the General Partner unless, within 90 days after such withdrawal, resignation, removal or Bankruptcy, a successor General Partner shall be elected pursuant to Sections 7.4 and 11.6 of this Agreement to continue the business of the Partnership, in a reconstituted form if necessary, and subject to all the terms of this Agreement; (b) the vote of Limited Partners owning three-quarters (75%) of the Percentage Interests of the Limited Partners, (c) the disposition of all or substantially all of the assets of the Partnership and the receipt of the final cash payment of the sale price of such assets; or (d) the expiration of the term of the Partnership pursuant to Article III hereof. In no event shall the Bankruptcy, death, withdrawal, expulsion, assignment for the benefit of creditors, or legal incapacity of any Limited Partner result in dissolution of the Partnership. In the event of the death of any Limited Partner, the personal representative of the deceased Limited Partner shall succeed to the interest of the deceased Limited Partner in the Partnership, subject to the rights of any assignees of the deceased Limited Partner in and to such interest, and subject to the provisions of this Agreement. 12.2 Winding Up of the Partnership. Upon the dissolution of the Partnership following the occurrence of a Termination Event, the General Partner shall make any contribution required pursuant to Section 4.10 hereof (determined after the final Capital Account balances are determined on a tentative basis following hypothetical distributions in accordance with this Section 12.2 as if this contribution by the General Partner were not made), and the General Partner or other Person or Persons empowered to act on behalf of the Partnership pursuant to Section 61-2- 60 61 803 of the Act shall take full account of the Partnership's assets and liabilities and the assets shall be liquidated as promptly as is consistent with obtaining the fair value thereof. The proceeds from the liquidation of the Partnership's assets and any contribution by the General Partner pursuant to Section 4.10 hereof, to the extent sufficient therefor, shall be applied and distributed as provided in Section 61-2-804 of the Act; provided, however, that after payment of all Partnership debts, obligations and liabilities there shall be distributed to each Partner the remaining assets of the Partnership in the following order of priority: (a) First, to the LEAAF Partners (if any), to the extent of the difference between the cumulative LEAAF Return to the time of the final distribution and the aggregate amounts they have previously received on account thereof, on a cumulative basis, pursuant to Sections 6.1(a) and 6.2(a) hereof; (b) Second, to the LEAAF Partners (if any), to the extent of the then outstanding balance of their LEAAF Contribution Accounts; (c) Third, to each Partner (other than LEAAF Partners in respect of their LEAAF Partnership Interests), an amount sufficient to produce an internal rate of return equal to fourteen percent (14%) per annum, compound interest, computed as a return on all contributions by such Partner to the Partnership and taking into account in the calculation all distributions to such Partner (except for distributions of the General Partner's Subordinated Interest), including the distribution pursuant to this Section 12.2(c); provided, however, if the amount to be distributed pursuant to this Section 12.2(c) is not sufficient to produce an internal rate of return of 14% per annum to all such Partners, the amount distributed to each such Partner shall be computed to produce an internal rate of return after all distributions (including the distribution 61 62 pursuant to this Section 12.2(c) but excluding distributions of the General Partner's Subordinated Interest) that is the same internal rate of return for each Partner receiving such a distribution; and (d) Fourth, any remaining amount 20% to the General Partner (and any former General Partner to the extent provided in Section 11.5 hereof) in respect of the General Partner's Subordinated Interest and 80% to the Partners (other than LEAAF Partners in respect of their LEAAF Partnership Interests, which will no longer be outstanding), in an amount apportioned among the Partners computed to produce an internal rate of return after all distributions (including all distributions pursuant to this Section 12.2, but excluding (i) distributions to LEAAF Partners of their LEAAF Return or amounts credited to their LEAAF Contribution Accounts and (ii) distributions of the General Partner's Subordinated Interest) that is the same internal rate of return for each Partner receiving such a distribution. XIII. BOOKS OF ACCOUNT, ACCOUNTING, REPORTS, FISCAL YEAR, BANKING AND TAX ELECTION 13.1 Books of Account. The Partnership's books and records (including a current list of the names and addresses of and percentage of ownership of all Limited Partners) and an executed copy of this Agreement, as currently in effect, shall be maintained at the principal office of the General Partner in Tennessee, and each Partner shall have access thereto upon notice at a reasonable time for any proper purpose. The books and records shall be kept by the General Partner using an appropriate method of accounting consistently applied and shall reflect all Partnership transactions and be appropriate and adequate for the Partnership's business. The 62 63 General Partner shall also keep adequate federal income tax records using an appropriate method of accounting applied on a consistent basis. 13.2 Financial Reports. As soon as reasonably practicable after the end of each fiscal year, but not later than April 30 of the next succeeding year, each Partner shall be furnished with a copy of a balance sheet of the Partnership as of the last day of such fiscal year and statements of income or loss and cash flow of the Partnership for such year. Such annual financial statements shall be audited by a reputable independent certified public accounting firm. The Partnership shall also furnish to each Partner not later than March 31 of each year an unaudited statement showing the amounts allocated to or allocated against such Partner pursuant to this Agreement during or in respect of such year, and any items of income, deduction, credit or loss allocated to such Partner for purposes of the Code. 13.3 Annual Reports. The annual financial statements provided for in Section 13.2 of this Agreement shall be accompanied by a report in reasonable detail, containing a description of the activities of the Partnership during such year. Such report shall set forth the distributions to the Limited Partners during such year. 13.4 Fiscal Year. The fiscal year of the Partnership shall be the calendar year. 13.5 Banking. All funds of the Partnership shall be initially deposited in one or more separate account or accounts of banks or other insured financial institutions as shall be determined by the General Partner, but such funds may be invested as provided in Section 7.1(h) of this Agreement. 13.6 Tax Election to Adjust Basis of Property. Upon the transfer of an interest in the Partnership or in the event of a distribution of the Partnership's property, the Partnership may, 63 64 but is not required to, elect pursuant to Section 754 of the Code, to adjust the basis of the Partnership's property as allowed by Section 734(b) and 743(b) thereof. 13.7 Other Tax Elections. All elections required or permitted to be made by the Partnership under any applicable tax laws shall be made by the General Partner in such manner as the General Partner may determine. In making such elections, the General Partner may rely upon the advice of the Partnership's regularly retained accountant. 13.8 Tax Returns. The General Partner shall utilize its best efforts, for each fiscal year, to file on behalf of the Partnership with the Internal Revenue Service a Partnership Return within the time prescribed by law (including any extensions) for such filing. The General Partner shall also utilize reasonable efforts to file on behalf of the Partnership such state and/or local income tax returns as may be required by law. XIV. POWER OF ATTORNEY 14.1 Appointment of Attorney-in-Fact. Each Limited Partner hereby makes, constitutes and appoints the General Partner with full power of substitution and resubstitution, his agent and attorney-in-fact (a) to file for record this Agreement if required by the Act, (b) if the General Partner deems it appropriate to do so, to sign, execute, certify, acknowledge, and file for record any other instruments which may be required of the Partnership or of the Limited Partners by law, including, but not limited to, amendments to or cancellations of this Agreement and the Certificate, (c) sign, execute, certify, acknowledge, and file for record any instruments required to effectuate or evidence the transfer of a partnership interest as permitted by this Agreement, and (d) upon compliance with the appropriate provisions of this Agreement, to amend this Agreement 64 65 and the Certificate. Each Limited Partner authorizes each such attorney-in-fact to take any further action which such attorney-in-fact shall consider necessary or advisable in connection with the foregoing, hereby giving such attorney-in-fact full power and authority to act to the same extent as if such Limited Partner were himself personally present, and hereby ratifying and confirming all that such attorney-in-fact shall lawfully do or cause to be done by virtue hereof. 14.2 Effect of Power. The power of attorney granted pursuant to Section 14.1 of this Agreement: (a) Is a special power of attorney coupled with an interest, is irrevocable, and shall survive the death, insanity, or incapacity of the granting Limited Partner; and (b) May be exercised by any such attorney-in-fact for each Limited Partner by listing all of the Limited Partners executing any agreement, certificate, instrument or document with the single signature of such attorney-in-fact as attorney-in-fact for all of them; and (c) Shall survive the effectiveness of an assignment by a Limited Partner of his entire interest in the Partnership, except that where the purchaser, transferee or assignee thereof is admitted as a substituted Limited Partner, the power of attorney shall survive such assignment as to the assignor for the sole purpose of enabling such attorney-in-fact to execute, acknowledge and file any such agreement, certificate, instrument, or document necessary to effect such substitution. 65 66 XV. MISCELLANEOUS 15.1 Notices. Except as otherwise provided in this Agreement, any notice, payment, demand or communication required or permitted to be given by any provision of this Agreement shall be duly given if delivered in writing personally to the person to whom it is authorized to be given, or if sent by mail or overnight delivery service, telecopy, telex or telegraph, as follows: if to the General Partner, at the address set forth in Section 2.4 of this Agreement, or to such other addresses as the General Partner may from time to time specify by written notice to the Limited Partners; and if to a Limited Partner, at such Limited Partner's address set forth in the first paragraph of this Agreement or in Exhibit A hereto, or to such other address as such Limited Partner may from time to time specify, by written notice to the General Partner. Any such notice shall be deemed to be given as of the date so delivered, if delivered personally, by telecopy, telex or telegraph, or as of the date on which the same was deposited in the United States mail or overnight delivery service, charges prepaid, addressed and sent as aforesaid. 15.2 Section Captions. Section and other captions contained in this Agreement are for reference purposes only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provision hereof. 15.3 Severability. Every provision of this Agreement is intended to be severable. If any term or provision of this Agreement is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remainder of this Agreement. 15.4 Amendments. This Agreement may be amended from time to time (a) with the consent of the General Partner and the Limited Partners Committee if the consent of the Limited Partners is not required pursuant to Section 7.4 hereof, and (b) with the consent of the General 66 67 Partner, the Limited Partners Committee and the Requisite Percentage of the Limited Partners is required pursuant to Section 7.4 hereof. In addition, if the Roll Up is not consummated on or before October 31, 1995, the Limited Partners Committee shall have the right, exercisable until December 31, 1995, to cause this Agreement to be amended to reduce the General Partner's Subordinated Interest below 20% of the total distributions specified in Sections 6.1(c), 6.2(e) and 12.2(d) and to increase amounts distributed to Limited Partners in respect of their Partnership Interests under Sections 6.1(c), 6.2(e) and 12.2(d) as a result of such reduction (with a corresponding change in the percentage of allocations to the General Partner and the Limited Partners under Sections 5.1(a) and 5.3(d)). 15.5 Waiver of Action for Partition. Each Partner irrevocably waives during the term of the Partnership and during the period of its liquidation following any dissolution, any right to maintain any action for partition with respect to any of the assets of the Partnership. 15.6 Counterpart Execution. This Agreement may be executed in one or more counterparts all of which together shall constitute one and the same Agreement. 15.7 Parties in Interest. Except as provided in Article X of this Agreement, this Agreement shall be binding upon the parties hereto and their successors, heirs, devisees, assigns, legal representatives, executors and administrators. 15.8 Integrated Agreement. This Agreement constitutes the entire understanding and agreement among the parties hereto with respect to the subject matter hereof, and there are no agreements, understandings, restrictions, representations or warranties among the parties other than those set forth herein or herein provided for. 67 68 15.9 Number and Gender. References herein to the plural shall include the singular, where applicable, and references to the singular shall include the plural, where applicable. References herein to any gender shall include any other gender, where applicable. 15.10 Tennessee Law. Notwithstanding the place where this Agreement or any counterpart hereof may be executed by any of the parties hereto, the parties expressly agree that all the terms and provisions hereof shall be construed under the laws of the State of Tennessee, without regard to the principles of conflicts of law thereof, and that the Act as now adopted or as may be hereafter amended shall govern the partnership aspects of this Agreement. 68 69 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. GENERAL PARTNER: AMERICAN RETIREMENT COMMUNITIES, LLC By: H. Todd Kaestner ------------------------------------ Its: ---------------------------- LIMITED PARTNERS: [ ] By: /s/ ----------------------------------- Title: ------------------------- Each of the other limited partners have executed a separate limited partner signature page which is attached hereto. 69 70 STATE OF TENNESSEE ) ) COUNTY OF WILLIAMSON ) Before me, the undersigned, a Notary Public in and for the State and County aforesaid, personally appeared __________________ with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath acknowledged that he executed the within instrument for the purposes therein contained, and who further acknowledged that he is the ______ of American Retirement Communities, LLC, the within named bargainer, and that he is authorized by such entity to execute this instrument on behalf of such entity. WITNESS my hand and seal, this ____ day of _____________, 1993. ------------------------------------------- Notary Public My Commission Expires: - ---------------------------------- 70 71 FIRST AMENDEMENT TO LIMITED PARTNERSHIP AGREEMENT AMERICAN RETIREMENT COMMUNITIES, L.P. This First Amendment, dated as of April 1, 1995, is made by American Retirement Communities, LLC, a Tennessee limited liability company (the "General Partner"), as the general partner of American Retirement Communities, L.P., a Tennessee limited partnership (the "Partnership"). W I T N E S S E T H: WHEREAS, the Limited Partners Committee of the partnership wishes to cause the amendment of the Limited Partnership Agreement, dated as of February 7, 1995 (the "Agreement"), by and among the General Partner and the limited partners of the Partnership (the "Limited Partners") as provided herein and the General Partner agrees to cause such amendment; WHEREAS, the consent of the Limited Partners is not required under Sections 7.4 and 15.4 of the Agreement; NOW, THEREFORE, the parties hereto agree as follows: 1. General Partner's Subordinated Interest. Section 1.17 of the Agreement is hereby amended to read as follows in its entirety: "1.17 The term "General Partner's Subordinated Interest" shall mean those distributions to the General Partner constituting (i) fifteen and eight-tenths percent (15.8%) of the total distributions specified in Section 6.1(c), and (ii) twenty percent (20%) of the total distributions specified in Section 6.2(e), and Section 12.2(d), which represent, in each case, distributions unrelated to any capital contributions by the General Partner." 72 2. Distribution of Net Cash Flow from Operations. Section 6.1(c) of the Agreement is hereby amended to read as follows in its entirety: "(c) Third, any remaining amount 15.8% to the General Partner in respect of the General Partner's Subordinated Interest and 84.2% to the Partners (other than LEAAF Partners in respect of their LEAAF Partnership Interests), apportioned among the Partners in accordance with their respective Percentage Interests at the time of the distribution." IN WITNESS WHEREOF, the undersigned General Partner of the Partnership has caused this First Amendment to be duly executed as of the date first above written. AMERICAN RETIREMENT COMMUNITIES, LLC By: /s/ W. E. Sheriff -------------------------------- W. E. Sheriff, Chief Manager EX-2.2 3 ARTICLES OF SHARE EXCHANGE 1 EXHIBIT 2.2 ARTICLES OF SHARE EXCHANGE BETWEEN AMERICAN RETIREMENT COMMUNITIES, L.P., A TENNESSEE LIMITED PARTNERSHIP AND AMERICAN RETIREMENT CORPORATION, A TENNESSEE CORPORATION Pursuant to the provisions of Section 48-21-107 of the Tennessee Business Corporation Act, the undersigned domestic corporation and domestic limited partnership adopt the following Articles of Share Exchange for the purpose of exchanging shares of the Common Stock of American Retirement Corporation ("ARC") for limited partnership interests in American Retirement Communities, L.P (the "Partnership"): 1. The Plan and Agreement of Share Exchange is attached hereto as Exhibit A. 2. The Plan and Agreement of Share Exchange and the performance of the terms thereof were duly approved by the Board of Directors of ARC and duly adopted by the affirmative vote of a majority of the shares of ARC Common Stock entitled to vote at a Special Meeting of Shareholders held on March 24, 1995. 3. The Plan and Agreement of Share Exchange and the performance of the terms thereof, were duly authorized by all action of the Partnership required by Tennessee law, by its Certificate of Limited Partnership and by its Limited Partnership Agreement. 4. The Share Exchange is to be effective on the filing of these Articles of Share Exchange. Date: March 31, 1995 AMERICAN RETIREMENT CORPORATION By: /s/ H. Todd Kaestner ------------------------------------- Title: EVP ------------------------------------- AMERICAN RETIREMENT COMMUNITIES, L.P. By: American Retirement Communities, LLC, its General Partner By: /s/ H. Todd Kaestner -------------------------------- Title: EVP -------------------------------- 2 PLAN AND AGREEMENT OF SHARE EXCHANGE THIS PLAN AND AGREEMENT OF SHARE EXCHANGE (the "Plan") is made and entered into as of March ___, 1995, by and between American Retirement Communities, L.P., a Tennessee limited partnership (the "Partnership"), and American Retirement Corporation, a Tennessee corporation ("ARC"). WHEREAS, the Partnership has authorized the issuance of limited partnership interests ("Interests") in the Partnership pursuant to a "share exchange" as defined in Section 48-21-103 of the Tennessee Business Corporation Act (the "Act") whereby outstanding shares of ARC common stock, $1.00 par value per share (the "ARC Common Stock"), will be exchanged for Interests or cash and ARC will become a wholly-owned subsidiary of the Partnership (the "ARC Share Exchange"); WHEREAS, the authorized capital stock of ARC consists of 5,000,000 shares of ARC Common Stock, of which 2,109,736 shares are issued and outstanding (the "Shares"); WHEREAS, the Board of Directors of ARC deems it in the best interests of ARC to effect the ARC Share Exchange and, by action duly taken, has approved this Plan and directed that it be submitted to the shareholders of ARC for their approval at a Special Meeting of Shareholders to be held on March 24, 1995 (the "Special Meeting"); and WHEREAS, the General Partner and the Limited Partners' Committee of the Partnership deems it in the best interests of the Partnership to effect the ARC Share Exchange and have approved this Plan in accordance with the terms of the Limited Partnership Agreement of the Partnership (the "Partnership Agreement") and Tennessee law. NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements herein contained, and for the purposes of stating the method, terms and conditions of the ARC Share Exchange provided for herein, the mode of putting the same into effect, the manner and basis of exchanging the Shares as herein provided, and such other provisions relating to the ARC Share Exchange as the parties deem necessary or desirable, the parties hereto have agreed and do hereby agree, subject to the terms and conditions hereinafter set forth, as follows: PLAN OF SHARE EXCHANGE I. Parties; Effect of ARC Share Exchange The parties to the ARC Share Exchange are ARC and the Partnership. Pursuant to the provisions of Section 48-21-103 of the Act and other applicable provisions of Tennessee law, the Shares shall be exchanged for Interests in the Partnership or cash as set forth in Section II below. Following the ARC Share Exchange, ARC will become a wholly-owned subsidiary of the Partnership. Except as herein specifically set forth to the contrary, the name, identity, existence, certificate of authority, purposes, powers, objects, franchises, privileges, rights and immunities of ARC shall continue unaffected and unimpaired by the ARC Share Exchange. II. Terms, Manner and Basis of Exchanging Shares of ARC Common Stock The manner and basis of exchanging the Shares shall be as follows: A. ARC shareholders who hold 3,000 or more Shares will receive Interests in the Partnership with an initial Contribution Account (as defined in the Partnership Agreement) in the amount of $9.72 per share of ARC Common Stock (the "ARC Share Exchange Rate"). 3 B. ARC shareholders who hold less than 3,000 Shares will not be eligible to exchange ARC Common Stock for Interests, but instead will receive a cash amount equal to $9.72 per share of ARC Common Stock in exchange for their Shares (the "ARC Cash Exchange Rate"). III. Conditions of the ARC Share Exchange The consummation of the ARC Share Exchange is subject to the following conditions: A. The approval by the holders of at least a majority (50.1%) of the issued and outstanding Shares entitled to vote on this Plan. B. The holders of no more than 8% of the outstanding Shares indicate their intent to exercise dissenters' rights with respect to the ARC Share Exchange and demand payment to receive fair value for their Shares pursuant to Section 48-23-101 et seq of the Act. C. The Holders of at least the Requisite Percentage of partnership interests in the Affiliated Partnerships and at least 66-2/3% of the outstanding principal amount of the LEAAF Notes and 66-2/3% of the Profit Participation shall have tendered these interests to the Partnership on or before March 28, 1995 and such tenders shall not have been revoked on or before March 28, 1995. The term "Requisite Percentage" means that percentage of the partnership interests in each Affiliated Partnership which, when added to the partnership interests held by ARC or its subsidiaries, equals 66-2/3 of the partnership in such Affiliated Partnership. The term "Affiliated Partnerships" means Trinity Towers Limited Partnership and Frist-Maddox Investors. The term "LEAAF Notes" means those certain non-negotiable subordinated promissory notes due December 31, 2001 in the aggregate principal amount of $10,000,000, issued by Fort Austin Limited Partnership. The term "Profit Participation" means the rights under that certain Profits Participation Agreement (After Termination of GECC Agreement), dated May 31, 1993, between Fort Austin Limited Partnership and Thomas F. Frist, Sr. D. No action or proceeding shall have been instituted before a court or other governmental body by any governmental agency or public authority to restrain or prohibit the transactions contemplated by this Plan or to obtain an amount of damages or other material relief in connection with the consummation of this Plan, and no governmental agency shall have given notice to the effect that consummation of the transactions contemplated by this Plan would constitute a violation of any law or that it intends to commence proceedings to restrain consummation of this Plan. The General Partner of the Partnership, and the Board of Directors of ARC may, in their sole discretion, waive any of the foregoing conditions other than (A) above; however, neither the Partnership nor ARC shall be under any obligation to effect the ARC Share Exchange unless all of the conditions set forth above have been satisfied. IV. Effective Time of the ARC Share Exchange Subject to the terms hereof and upon satisfaction of all requirements of law and the conditions specified in this Plan, the ARC Share Exchange shall become effective upon the filing of the Articles of Share Exchange with the Secretary of State of Tennessee (the "Effective Time.") V. Exchange of Shares After the Effective Time, each holder of a certificate or certificates theretofore representing Shares shall be required to surrender such certificates to the Partnership, together with a properly completed and signed letter of transmittal, and receive in exchange therefor Interests in the Partnership or cash based on the ARC Cash Exchange Rate, as the case may be, as provided in Section II of this Plan. Certificates so surrendered will be canceled. 2 4 Unless and until surrendered as provided herein, or unless otherwise required by law, after the Effective Time, each certificate theretofore representing Shares shall be entitled only to the right to receive Interests in the Partnership with an initial Contribution Account in the amount of $9.72 per share of ARC Common Stock, or the right to receive cash based on the ARC Cash Exchange Rate, as the case may be, as provided in Section II of this Plan. IN WITNESS WHEREOF, the parties have caused this Plan and Agreement of Share Exchange to be executed by their duly authorized representatives, all as of the day and year first above written. AMERICAN RETIREMENT COMMUNITIES, L.P. By: American Retirement Communities, LLC, its General Partner By: /s/ H. Todd Kaestner ------------------------------------- Title: EVP AMERICAN RETIREMENT CORPORATION By: /s/ H. Todd Kaestner ------------------------------------ Title: EVP 3 EX-3.1 4 CHARTER OF ARC 1 EXHIBIT 3.1 CHARTER OF AMERICAN RETIREMENT CORPORATION The undersigned, acting as the incorporator of a corporation under the Tennessee Business Corporation Act, adopts the following charter for such corporation: 1. The name of the corporation is American Retirement Corporation. 2. The corporation is for profit. 3. The duration of the corporation is perpetual. 4. The street address and zip code of the corporation's principal office in Tennessee will be: 111 Westwood Place, Suite 402 Brentwood, Tennessee 37027 County of Williamson 5. (a) The name of the corporation's registered agent is W. E. Sheriff. (b) The street address, zip code, and county of the corporation's registered office and registered agent in Tennessee shall be: 111 Westwood Place, Suite 402 Brentwood, Tennessee 37027 County of Williamson 6. The name and address of the incorporator is: W. E. Sheriff 111 Westwood Place, Suite 402 Brentwood, Tennessee 37027 7. The corporation is organized to do any and all things and to exercise any and all powers, rights, and privileges that a corporation may now or hereafter be organized to do or to exercise under the Tennessee Business Corporation Act, as amended from time to time. 8. The maximum number of shares of stock the corporation is authorized to issue is: a. Fifty million (50,000,000) shares of common stock, par value $.01 per share, which shall be entitled to one vote per share and, upon dissolution of the corporation, shall be entitled to receive the net assets of the corporation. 2 b. Five million (5,000,000) shares of preferred stock without par value. Shares of preferred stock may be issued from time to time in one or more classes or series, each such class or series to be so designated as to distinguish the shares thereof from the shares of all other classes and series. The Board of Directors is hereby vested with the authority to divide preferred stock into classes or series and to fix and determine the relative rights, preferences, qualifications, and limitations of the shares of any class or series so established. 9. The shareholders of the corporation shall not have preemptive rights. 10. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, a Board of Directors consisting of not less than three nor more than fifteen directors, the exact number of directors to be determined in the manner provided in the Bylaws of the corporation. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. At the 1998 annual meeting of shareholders, Class I directors shall be elected; at the 1999 annual meeting of shareholders, Class II directors shall be elected; and at the 2000 annual meeting of shareholders, Class III directors shall be elected. At each succeeding annual meeting of shareholders beginning with the annual meeting in 1998, successors to the class of directors whose term expires at that annual meeting shall be elected for three-year terms. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting of shareholders for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification, or removal from office. Any vacancy on the Board of Directors, including a vacancy that results from an increase in the number of directors or a vacancy that results from the removal of a director with cause, may be filled only by the Board of Directors. Any director may be removed from office but only for cause and only by (a) the affirmative vote of the holders of a majority of the voting power of the shares entitled to vote for the election of directors, considered for this purpose as one class, unless a vote of a special voting group is otherwise required by law, or (b) the affirmative vote of a majority of the entire Board of Directors then in office. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of shareholders, the election, term of office, filling of vacancies, and other features of such directorships shall be governed by the terms of this Charter applicable thereto. 11. To the fullest extent permitted by the Tennessee Business Corporation Act as in effect on the date hereof, and as hereafter amended from time to time, a director of the corporation shall not be liable to the corporation or its shareholders for monetary damages for 3 breach of fiduciary duty as a director. If the Tennessee Business Corporation Act or any successor statute is amended after adoption of this provision to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Tennessee Business Corporation Act, as so amended from time to time, or such successor statute. Any repeal or modification of this Article 11 by the shareholders of the corporation shall not affect adversely any right or protection of a director of the corporation existing at the time of such repeal or modification or with respect to events occurring prior to such time. 12. The corporation shall indemnify every person who is or was a party or is or was threatened to be made a party to any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, by reason of the fact that he or she is or was a director or officer or is or was serving at the request of the corporation as a director, officer, employee, agent, or trustee of another corporation or of a partnership, joint venture, trust, employee benefit plan, or other enterprise, including service on a committee formed for any purpose (and, in each case, his or her heirs, executors, and administrators), against all expense, liability, and loss (including counsel fees, judgments, fines, ERISA excise taxes, penalties, and amounts paid in settlement) actually and reasonably incurred or suffered in connection with such action, suit, or proceeding, to the fullest extent permitted by applicable law, as in effect on the date hereof and as hereafter amended. Such indemnification may include advancement of expenses in advance of final disposition of such action, suit, or proceeding, subject to the provision of any applicable statute. The indemnification and advancement of expenses provisions of this Article 12 shall not be exclusive of any other right that any person (and his or her heirs, executors, and administrators) may have or hereafter acquire under any statute, this Charter, the corporation's Bylaws, resolution adopted by the shareholders, resolution adopted by the Board of Directors, agreement, or insurance, purchased by the corporation or otherwise, both as to action in his or her official capacity and as to action in another capacity. The corporation is hereby authorized to provide for indemnification and advancement of expenses through its Bylaws, resolution of shareholders, resolution of the Board of Directors, or agreement, in addition to that provided by this Charter. 13. The Bylaws of this corporation may be amended, altered, modified, or repealed by resolution adopted by the Board of Directors, subject to any provisions of law then applicable. 14. The corporation shall hold a special meeting of shareholders only in the event (a) of a call of the Board of Directors of the corporation or the officers authorized to do so by the Bylaws of the corporation, or (b) the holders of at least twenty-five percent of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting sign, date, and deliver to the corporation's secretary one or more written demands for the meeting describing the purpose or purposes for which it is to be held. 4 15. The affirmative vote of the holders of at least three-quarters (3/4) of the voting power of the shares entitled to vote at an election of directors shall be required to amend, alter, modify, or to repeal the provisions of Articles 10 and 14, and this Article 15, of this Charter. Date: January 12, 1997 /s/ W. E. Sheriff W. E. Sheriff, Incorporator EX-3.2 5 BYLAWS OF ARC 1 EXHIBIT 3.2 BYLAWS OF AMERICAN RETIREMENT CORPORATION (THE "CORPORATION") ARTICLE I. OFFICES The Corporation may have such offices, either within or without the State of Tennessee, as the Board of Directors may designate or as the business of the Corporation may require from time to time. ARTICLE II. SHAREHOLDERS 2.1 ANNUAL MEETING. An annual meeting of the shareholders of the Corporation shall be held on such date as may be determined by the Board of Directors; provided, that, the first annual meeting of shareholders shall not be held until 1998. The business to be transacted at such meeting shall be the election of directors and such other business as shall be properly brought before the meeting. 2.2 SPECIAL MEETINGS. Unless otherwise required by law or the Corporation's Charter (the "Charter"), as amended from time to time, a special meeting of shareholders shall be held only on the call of the Board of Directors or if the holders of at least twenty-five percent (25%) of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting sign, date, and deliver to the Corporation's Secretary one or more written demands for the meeting describing the purpose or purposes for which such special meeting is to be held, including all statements necessary to make any statement of such purpose not incomplete, false, or misleading, and include any other information specified in Schedule 14A, Rule 14a-3, Rule 14a-8, or Rule 14a-11 (or such successor schedules or rules) of the Rules and Regulations of the Securities and Exchange Commission. Only business within the purpose or purposes described in the meeting notice may be conducted at a special shareholders' meeting. 2.3 PLACE OF MEETINGS. The Board of Directors may designate any place, either within or without the State of Tennessee, as the place of meeting for any annual meeting or for any special meeting. If no place is fixed by the Board of Directors, the meeting shall be held at the principal office of the Corporation. 2.4 NOTICE OF MEETINGS; WAIVER. 2 (A) NOTICE. Notice of the date, time, and place of each annual and special shareholders' meeting and, in the case of a special meeting, a description of the purpose or purposes for which the meeting is called, shall be given no fewer than ten days nor more than two months before the date of the meeting. Such notice shall comply with the requirements of Article XI of these Bylaws. (B) WAIVER. A shareholder may waive any notice required by law, the Charter, or these Bylaws before or after the date and time stated in such notice. Except as provided in the next sentence, the waiver must be in writing, be signed by the shareholder entitled to the notice and be delivered to the Corporation for inclusion in the minutes or filing with the corporate records. A shareholder's attendance at a meeting: (i) waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting (or promptly upon his arrival) objects to holding the meeting or transacting business at the meeting; and (ii) waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. 2.5 RECORD DATE. The Board of Directors shall fix as the record date for the determination of shareholders entitled to notice of a shareholders' meeting, to demand a special meeting, to vote, or to take any other action, a date not more than seventy days before the meeting or action requiring a determination of shareholders. A record date fixed for a shareholders' meeting is effective for any adjournment of such meeting unless the Board of Directors fixes a new record date, which it must do if the meeting is adjourned to a date more than four months after the date fixed for the original meeting. 2.6 SHAREHOLDERS' LIST. After the record date for a meeting has been fixed, the Corporation shall prepare an alphabetical list of the names of all shareholders who are entitled to notice of a shareholders' meeting. Such list will show the address of and number of shares held by each shareholder. The shareholders' list will be available for inspection by any shareholder, beginning two business days after notice of the meeting is given for which the list was prepared and continuing through the meeting, at the Corporation's principal office or at a place identified in the meeting notice in the city where the meeting will be held. A shareholder or his agent or attorney is entitled on written demand to inspect and, subject to the requirements of the Tennessee Business Corporation Act (the "Act"), to copy the list, during regular business hours and at his expense, during the period it is available for inspection. 2.7 VOTING OF SHARES. 2 3 Unless otherwise provided by the Act or the Charter, each outstanding share is entitled to one vote on each matter voted on at a shareholders' meeting. Only shares are entitled to vote. Unless otherwise provided in the Charter, directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. 2.8 PROXIES. A shareholder may vote his or her shares in person or by proxy. A shareholder may appoint a proxy to vote or otherwise act for him or her by signing an appointment either personally or through an attorney-in-fact. An appointment of a proxy is effective when received by the Secretary or other officer or agent authorized to tabulate votes. An appointment is valid for eleven months unless another period is expressly provided in the appointment form. An appointment of a proxy is revocable by the shareholder unless the appointment form conspicuously states that it is irrevocable and the appointment is coupled with an interest. 2.9 ACCEPTANCE OF SHAREHOLDER DOCUMENTS. If the name signed on a shareholder document (a vote, consent, waiver, or proxy appointment) corresponds to the name of a shareholder, the Corporation, if acting in good faith, is entitled to accept such shareholder document and give it effect as the act of the shareholder. If the name signed on such shareholder document does not correspond to the name of a shareholder, the Corporation, if acting in good faith, is nevertheless entitled to accept such shareholder document and to give it effect as the act of the shareholder if: (A) the shareholder is an entity and the name signed purports to be that of an officer or agent of the entity; (B) the name signed purports to be that of a fiduciary representing the shareholder and, if the Corporation requests, evidence of fiduciary status acceptable to the Corporation has been presented with respect to such shareholder document; (C) the name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the Corporation requests, evidence of this status acceptable to the Corporation has been presented with respect to the shareholder document; (D) the name signed purports to be that of a pledgee, beneficial owner, or attorney-in-fact of the shareholder and, if the Corporation requests, evidence acceptable to the Corporation of the signatory's authority to sign for the shareholder has been presented with respect to such shareholder document; or (E) two or more persons are the shareholder as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all the co-owners. 3 4 The Corporation is entitled to reject a shareholder document if the Secretary or other officer or agent authorized to tabulate votes, acting in good faith, has a reasonable basis for doubt about the validity of the signature on such shareholder document or about the signatory's authority to sign for the shareholder. 2.10 ACTION WITHOUT MEETING. No action required or permitted by the Act to be taken at a shareholders' meeting may be taken without a meeting, unless the total number of shareholders is less than ten. If there are fewer than ten shareholders and all such shareholders consent to taking such action without a meeting, the affirmative vote of the number of shares that would be necessary to authorize or take such action at a meeting is the act of the shareholders. The action must be evidenced by one or more written consents describing the action taken, at least one of which is signed by each shareholder entitled to vote on the action in one or more counterparts, indicating such signing shareholder's vote or abstention on the action and delivered to the Corporation for inclusion in the minutes or for filing with the corporate records. If the Act or the Charter requires that notice of a proposed action be given to nonvoting shareholders and the action is to be taken by consent of the voting shareholders, then the Corporation shall give its nonvoting shareholders written notice of the proposed action at least ten days before such action is taken. Such notice shall contain or be accompanied by the same material that would have been required to be sent to nonvoting shareholders in a notice of a meeting at which the proposed action would have been submitted to the shareholders for action. 2.11 PRESIDING OFFICER AND SECRETARY. Meetings of the shareholders shall be presided over by the Chairman, or if the Chairman is not present or if the Corporation shall not have a Chairman, by the President or Chief Executive Officer, or if neither the Chairman nor the President or Chief Executive Officer is present, by a chairman chosen by a majority of the shareholders entitled to vote at such meeting. The Secretary or, in the Secretary's absence, an Assistant Secretary shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present, a majority of the shareholders entitled to vote at such meeting shall choose any person present to act as secretary of the meeting. 2.12 NOTICE OF NOMINATIONS. Nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors authorized to make such nominations or by any shareholder entitled to vote in the election of directors generally. Any such shareholder nomination may be made, however, only if written notice of such nomination has been given, either by personal delivery or the United States mail, postage prepaid, to the Secretary of the Corporation not later than (a) with respect to an election to be held at an annual meeting of 4 5 shareholders, one hundred twenty days in advance of the anniversary date of the proxy statement for the previous year's annual meeting, and (b) with respect to an election to be held at a special meeting of shareholders for the election of directors called other than by written request of a shareholder, the close of business on the tenth day following the date on which notice of such meeting is first given to shareholders, and (c) in the case of a special meeting of shareholders duly called upon the written request of a shareholder to fill a vacancy or vacancies (then existing or proposed to be created by removal at such meeting), within ten business days of such written request. In the case of any nomination by the Board of Directors or a committee appointed by the Board of Directors authorized to make such nominations, compliance with the proxy rules of the Securities and Exchange Commission shall constitute compliance with the notice provisions of the preceding sentence. In the case of any nomination by a shareholder, each such notice shall set forth: (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address, and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation which are beneficially owned by such person, and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies with respect to nominees for election as directors, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such person's written consent to being named in the proxy statement as a nominee and to serving as a director, if elected); and (b) as to the shareholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such shareholder, and (ii) the class and number of shares of the Corporation which are beneficially owned by such shareholder; and (c) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder. The presiding officer of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. 5 6 2.13 NOTICE OF NEW BUSINESS. At an annual meeting of the shareholders only such new business shall be conducted, and only such proposals shall be acted upon, as have been properly brought before the meeting. To be properly brought before the annual meeting such new business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a shareholder. For a proposal to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation and the proposal and the shareholder must comply with Rule 14a-8 under the Securities Exchange Act of 1934. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation within the time limits specified by Rule 14a-8. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the proposal desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the shareholder, and (d) any financial interest of the shareholder in such proposal. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 2.13. The presiding officer of the meeting shall, if the facts warrant, determine and declare to the meeting that new business or any shareholder proposal was not properly brought before the meeting in accordance with the provisions of this Section 2.13, and if he or she should so determine, he or she shall so declare to the meeting and any such business or proposal not properly brought before the meeting shall not be acted upon at the meeting. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees, but in connection with such reports no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. 2.14 CONDUCT OF MEETINGS. Meetings of the shareholders generally shall follow accepted rules of parliamentary procedure subject to the following: (a) The presiding officer of the meeting shall have absolute authority over the matters of procedure, and there shall be no appeal from the ruling of the presiding officer. If, in his or her absolute discretion, the presiding officer deems it advisable to dispense with the rules of parliamentary procedure as to any meeting of shareholders or part thereof, he or she shall so state and shall state the rules under which the meeting or appropriate part thereof shall be conducted. 6 7 (b) If disorder should arise which prevents the continuation of the legitimate business of the meeting, the presiding officer may quit the chair and announce the adjournment of the meeting, and upon so doing, the meeting will immediately be adjourned. (c) The presiding officer may ask or require that anyone not a bona fide shareholder or proxy leave the meeting. (d) The resolution or motion shall be considered for vote only if proposed by a shareholder or a duly authorized proxy and seconded by a shareholder or duly authorized proxy other than the individual who proposed the resolution or motion. (e) Except as the President, Chief Executive Officer, or chairman may permit, no matter shall be presented to the meeting which has not been submitted for inclusion in the agenda at least thirty (30) days prior to the meeting. ARTICLE III. DIRECTORS 3.1 POWERS AND DUTIES. All corporate powers shall be exercised by or under the authority of and the business and affairs of the Corporation managed under the direction of the Board of Directors. 3.2 NUMBER AND TERM. (A) NUMBER. The Board of Directors shall consist of no fewer than three or more than fifteen members. The exact number of directors, within the minimum and maximum, or the range for the size of the Board, or whether the size of the Board shall be fixed or variable-range, may be fixed, changed, or determined from time to time by the Board of Directors. (B) TERM. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. At the 1998 annual meeting of shareholders, Class I directors shall be elected; at the 1999 annual meeting of shareholders, Class II directors shall be elected; and at the 2000 annual meeting of shareholders, Class III directors shall be elected. At each succeeding annual meeting of shareholders beginning with the annual meeting in 1998, successors to the class of directors whose term expires at that annual meeting shall be elected for three year terms. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting of shareholders for the year in which his or her term expires and until his or her successor shall 7 8 be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification, or removal from office. 3.3 MEETINGS; NOTICE. The Board of Directors may hold regular and special meetings either within or without the State of Tennessee. The Board of Directors may permit any or all directors to participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting. (A) REGULAR MEETINGS. Unless the Charter otherwise provides, regular meetings of the Board of Directors may be held without notice of the date, time, place, or purpose of the meeting. (B) SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman, the President, or a majority of the directors. Unless the Charter otherwise provides, special meetings must be preceded by at least twenty-four (24) hours' notice of the date, time, and place of the meeting but need not describe the purpose of such meeting. Such notice shall comply with the requirements of Article XI of these Bylaws. (C) ADJOURNED MEETINGS. Notice of an adjourned meeting need not be given if the time and place to which the meeting is adjourned are fixed at the meeting at which the adjournment is taken, and if the period of adjournment does not exceed one month in any one adjournment. (D) WAIVER OF NOTICE. A director may waive any required notice before or after the date and time stated in the notice. Except as provided in the next sentence, the waiver must be in writing, signed by the director, and filed with the minutes or corporate records. A director's attendance at or participation in a meeting waives any required notice to him or her of such meeting unless the director at the beginning of the meeting (or promptly upon his arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. 8 9 3.4 QUORUM. Unless the Charter requires a greater number, a quorum of the Board of Directors consists of a majority of the fixed number of directors if the Corporation has a fixed board size or a majority of the number of directors prescribed, or if no number is prescribed, the number in office immediately before the meeting begins, if the Corporation has a variable range board. 3.5 VOTING. If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the Board of Directors, unless the Charter or these Bylaws require the vote of a greater number of directors. A director who is present at a meeting of the Board of Directors when corporate action is taken is deemed to have assented to such action unless: (A) he or she objects at the beginning of the meeting (or promptly upon his or her arrival) to holding the meeting or transacting business at the meeting; (B) his or her dissent or abstention from the action taken is entered in the minutes of the meeting; or (C) he or she delivers written notice of his or her dissent or abstention to the presiding officer of the meeting before its adjournment or to the Corporation immediately after adjournment of the meeting. The right of dissent or abstention is not available to a director who votes in favor of the action taken. 3.6 ACTION WITHOUT MEETING. Unless the Charter otherwise provides, any action required or permitted by the Act to be taken at a Board of Directors meeting may be taken without a meeting. If all directors consent to taking such action without a meeting, the affirmative vote of the number of directors that would be necessary to authorize or take such action at a meeting is the act of the Board of Directors. Such action must be evidenced by one or more written consents describing the action taken, at least one of which is signed by each director, indicating the director's vote or abstention on the action, which consents shall be included in the minutes or filed with the corporate records reflecting the action taken. Action taken by consent is effective when the last director signs the consent, unless the consent specifies a different effective date. 3.7 COMPENSATION. Directors and members of any committee created by the Board of Directors shall be entitled to such reasonable compensation for their services as directors and members of such committee as shall be fixed from time to time by the Board or a committee thereof, and shall also be entitled to reimbursement for any reasonable expenses incurred in attending meetings of the 9 10 Board or of any such committee meetings. Any director receiving such compensation shall not be barred from serving the Corporation in any other capacity and receiving reasonable compensation for such other services. 3.8 RESIGNATION. A director may resign at any time by delivering written notice to the Board of Directors or to the Chairman or President. A resignation is effective when the notice is delivered unless the notice specifies a later effective date. 3.9 VACANCIES. Unless the Charter otherwise provides, if a vacancy occurs on the Board of Directors, including a vacancy resulting from an increase in the number of directors or a vacancy resulting from the removal of a director with or without cause, either the shareholders or the Board of Directors may fill such vacancy. If the vacancy is filled by the shareholders, it shall be filled by a plurality of the votes cast at a meeting at which a quorum is present. If the directors remaining in office constitute fewer than a quorum of the Board of Directors, they may fill such vacancy by the affirmative vote of a majority of all the directors remaining in office. 3.10 REMOVAL OF DIRECTORS. (A) BY SHAREHOLDERS. The shareholders may remove one (1) or more directors with or without cause unless the Charter provides that directors may be removed only for cause. If cumulative voting is authorized, a director may not be removed if the number of votes sufficient to elect him or her under cumulative voting is voted against his or her removal. If cumulative voting is not authorized, a director may be removed only if the number of votes cast to remove him exceeds the number of votes cast not to remove him or her. (B) BY DIRECTORS. If so provided by the Charter, any of the directors may be removed for cause by the affirmative vote of a majority of the entire Board of Directors. (C) GENERAL. A director may be removed by the shareholders or directors only at a meeting called for the purpose of removing him or her, and the meeting notice must state that the purpose, or one of the purposes, of the meeting is removal of directors. 10 11 ARTICLE IV. COMMITTEES Unless the Charter otherwise provides, the Board of Directors may create one or more committees, each consisting of one or more members. All members of committees of the Board of Directors which exercise powers of the Board of Directors must be members of the Board of Directors and serve at the pleasure of the Board of Directors. The creation of a committee and appointment of a member or members to it must be approved by the greater of (i) a majority of all directors in office when the action is taken or (ii) the number of directors required by the Charter or these Bylaws to take action. Unless otherwise provided in the Act, to the extent specified by the Board of Directors or in the Charter, each committee may exercise the authority of the Board of Directors. All such committees and their members shall be governed by the same statutory requirements regarding meetings, action without meetings, notice and waiver of notice, quorum, and voting requirements as are applicable to the Board of Directors and its members. ARTICLE V. OFFICERS 5.1 NUMBER. The officers of the Corporation shall be a Chairman, a President, a Chief Executive Officer, a Chief Financial Officer, a Secretary and such other officers as may be from time to time appointed by the Board of Directors or by the Chairman with the Board of Directors' approval. One person may simultaneously hold more than one office, except the President may not simultaneously hold the office of Secretary. 5.2 APPOINTMENT. The principal officers shall be appointed annually by the Board of Directors at the first meeting of the Board following the annual meeting of the shareholders, or as soon thereafter as is conveniently possible. Each officer shall serve at the pleasure of the Board of Directors and until his or her successor shall have been appointed, or until his or her death, resignation, or removal. 5.3 RESIGNATION AND REMOVAL. An officer may resign at any time by delivering notice to the Corporation. Such resignation is effective when such notice is delivered unless such notice specifies a later effective date. An officer's resignation does not affect the Corporation's contract rights, if any, with the 11 12 officer. The Board of Directors may remove any officer at any time with or without cause, but such removal shall not prejudice the contract rights, if any, of the person so removed. 5.4 VACANCIES. Any vacancy in an office for any reason may be filled for the unexpired portion of the term by the Board of Directors. 5.5 DUTIES. (A) CHAIRMAN. The Chairman shall preside at all meetings of the shareholders and the Board of Directors and shall see that all orders and resolutions of the Board of Directors are carried into effect. (B) CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the Corporation shall have general supervision over the active management of the business of the Corporation. (C) PRESIDENT. The President shall have the general powers and duties of supervision and management usually vested in the office of the President of a corporation and shall perform such other duties as the Board of Directors may from time to time prescribe. (D) VICE PRESIDENT. The Vice President or Vice Presidents (if any) shall assist the Chairman, President, and Chief Executive Officer in the active management of the business, and shall perform such other duties as the Board of Directors may from time to time prescribe. (E) CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall have the custody of the Corporation's funds and securities, shall keep or cause to be kept full and accurate account of receipts and disbursements in books belonging to the Corporation, and shall deposit or cause to be deposited all monies and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Chief Financial Officer shall disburse or cause to be disbursed the funds of the Corporation as required in the ordinary course of business or as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the Chairman, the President, the Chief Executive Officer, and directors at the regular meetings of the Board, or whenever they may require it, an account of all of his or her transactions as Chief Financial Officer and the financial condition of the Corporation. He or she shall perform such other duties as may be incident to the office or as prescribed from time to time by the Board of Directors. (F) SECRETARY AND ASSISTANT SECRETARY . The Secretary or Assistant Secretary shall attend all meetings of the Board of Directors and all meetings of the shareholders and shall prepare and record all votes and all minutes of all such meetings in a book to be kept for that purpose. He or she shall also perform like duties for any committee when required. The Secretary or Assistant Secretary shall give, or cause to be given, notice of all meetings of the 12 13 shareholders and of the Board of Directors when required, and unless directed otherwise by the Board of Directors, shall keep a stock record containing the names of all persons who are shareholders of the Corporation, showing their place of residence and the number of shares held by each of them. The Secretary or Assistant Secretary shall have the responsibility of authenticating records of the Corporation. The Secretary or Assistant Secretary shall perform such other duties as may be prescribed from time to time by the Board of Directors. (G) OTHER OFFICERS. Other officers appointed by the Board of Directors shall exercise such powers and perform such duties as may be delegated to them. (H) DELEGATION OF DUTIES. In case of the absence or disability of any officer of the Corporation or of any person authorized to act in his or her place, the Board of Directors may from time to time delegate the powers and duties of such officer to any officer, or any director, or any other person whom it may select, during such period of absence or disability. 5.6 INDEMNIFICATION, ADVANCEMENT OF EXPENSES, AND INSURANCE. (A) INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. The Corporation shall indemnify and advance expenses to each director and officer of the Corporation, or any person who may have served at the request of the Corporation's Board of Directors or its President or Chief Executive Officer as a director or officer of another corporation (and, in either case, such person's heirs, executors, and administrators), to the full extent allowed by the laws of the State of Tennessee, both as now in effect and as hereafter adopted. The Corporation may indemnify and advance expenses to any employee or agent of the Corporation who is not a director or officer (and such person's heirs, executors, and administrators) to the same extent as to a director or officer, if the Board of Directors determines that doing so is in the best interests of the Corporation. (B) NON-EXCLUSIVITY OF RIGHTS. The indemnification and expense advancement provisions of subsection (a) of this Section 5.6 shall not be exclusive of any other right which any person (and such person's heirs, executors and administrators) may have or hereafter acquire under any statute, provision of the Charter, provision of these Bylaws, resolution adopted by the shareholders, resolution adopted by the Board of Directors, agreement, or insurance (purchased by the Corporation or otherwise), both as to action in such person's official capacity and as to action in another capacity. (C) INSURANCE. The Corporation may maintain insurance, at its expense, to protect itself and any individual who is or was a director, officer, employee, or agent of the Corporation, or who, while a director, officer, employee, or agent of the Corporation, is or was serving at the request of the Corporation's Board of Directors or its Chief Executive Officer as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise against any expense, liability, or loss, 13 14 whether or not the Corporation would have the power to indemnify such person against such expense, liability, or loss under this Article or the Act. ARTICLE VI. SHARES OF STOCK 6.1 SHARES WITH OR WITHOUT CERTIFICATES. The Board of Directors may authorize that some or all of the shares of any or all of the Corporation's classes or series of stock be evidenced by a certificate or certificates of stock. The Board of Directors may also authorize the issue of some or all of the shares of any or all of the Corporation's classes or series of stock without certificates. The rights and obligations of shareholders with the same class and/or series of stock shall be identical whether or not their shares are represented by certificates. (A) SHARES WITH CERTIFICATES. If the Board of Directors chooses to issue shares of stock evidenced by a certificate or certificates, each individual certificate shall include the following on its face: (i) the Corporation's name, (ii) the fact that the Corporation is organized under the laws of the State of Tennessee, (iii) the name of the person to whom the certificate is issued, (iv) the number of shares represented thereby, (v) the class of shares and the designation of the series, if any, which the certificate represents, and (vi) such other information as applicable law may require or as may be lawful. If the Corporation is authorized to issue different classes of shares or different series within a class, the designations, relative rights, preferences, and limitations determined for each series (and the authority of the Board of Directors to determine variations for future series) shall be summarized on the front or back of each certificate. Alternatively, each certificate shall state on its front or back that the Corporation will furnish the shareholder this information in writing, without charge, upon request. Each certificate of stock issued by the Corporation shall be signed (either manually or in facsimile) by any two officers of the Corporation. If the person who signed a certificate no longer holds office when the certificate is issued, the certificate is nonetheless valid. (B) SHARES WITHOUT CERTIFICATES. If the Board of Directors chooses to issue shares of stock without certificates, the Corporation, if required by the Act, shall, within a reasonable time after the issue or transfer of shares without certificates, send the shareholder a written statement of the information required on certificates by Section 6.1(a) of these Bylaws and any other information required by the Act. 6.2 SUBSCRIPTIONS FOR SHARES. 14 15 Subscriptions for shares of the Corporation shall be valid only if they are in writing. Unless the subscription agreement provides otherwise, subscriptions for shares, regardless of the time when they are made, shall be paid in full at such time, or in such installments and at such periods, as shall be determined by the Board of Directors. All calls for payment on subscriptions shall be uniform as to all shares of the same class or of the same series, unless the subscription agreement specifies otherwise. 6.3 TRANSFERS. Transfers of shares of the capital stock of the Corporation shall be made only on the books of the Corporation by (i) the holder of record thereof, (ii) his or her legal representative, who, upon request of the Corporation, shall furnish proper evidence of authority to transfer, or (iii) his or her attorney, authorized by a power of attorney duly executed and filed with the Secretary of the Corporation or a duly appointed transfer agent. Such transfers shall be made only upon surrender, if applicable, of the certificate or certificates for such shares properly endorsed and with all taxes thereon paid. 6.4 LOST, DESTROYED, OR STOLEN CERTIFICATES. No certificate for shares of stock of the Corporation shall be issued in place of any certificate alleged to have been lost, destroyed, or stolen except on production of evidence, satisfactory to the Board of Directors, of such loss, destruction, or theft, and, if the Board of Directors so requires, upon the furnishing of an indemnity bond in such amount and with such terms and such surety as the Board of Directors may in its discretion require. ARTICLE VII. CORPORATE ACTIONS 7.1 CONTRACTS. Unless otherwise required by the Board of Directors, the Chairman, the President, the Chief Executive Officer, or any Vice President shall execute contracts or other instruments on behalf of and in the name of the Corporation. The Board of Directors may from time to time authorize any other officer, assistant officer, or agent to enter into any contract or execute any instrument in the name of and on behalf of the Corporation as it may deem appropriate, and such authority may be general or confined to specific instances. 15 16 7.2 LOANS. No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by the Chairman, the President, the Chief Executive Officer, or the Board of Directors. Such authority may be general or confined to specific instances. 7.3 CHECKS, DRAFTS, ETC. Unless otherwise required by the Board of Directors, all checks, drafts, bills of exchange, and other negotiable instruments of the Corporation shall be signed by either the Chairman, the President, the Chief Executive Officer, a Vice President or such other officer, assistant officer, or agent of the Corporation as may be authorized so to do by the Board of Directors. Such authority may be general or confined to specific business, and, if so directed by the Board, the signatures of two or more such officers may be required. 7.4 DEPOSITS. All funds of the Company not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks or other depositories as the Board of Directors may authorize. 7.5 VOTING SECURITIES HELD BY THE CORPORATION. Unless otherwise required by the Board of Directors, the Chairman, President, or Chief Executive officer shall have full power and authority on behalf of the Corporation to attend any meeting of security holders, or to take action on written consent as a security holder, of other corporations in which the Corporation may hold securities. In connection therewith the Chairman, the President, or the Chief Executive Officer shall possess and may exercise any and all rights and powers incident to the ownership of such securities which the Corporation possesses. The Board of Directors may, from time to time, confer like powers upon any other person or persons. 7.6 DIVIDENDS. The Board of Directors may, from time to time, declare, and the Corporation may pay, dividends on its outstanding shares of capital stock in the manner and upon the terms and conditions provided by applicable law. The record date for the determination of shareholders entitled to receive the payment of any dividend shall be determined by the Board of Directors, which in no event will be less than ten days prior to the date of such payment. 16 17 ARTICLE VIII. FISCAL YEAR The fiscal year of the Corporation shall be determined by the Board of Directors, and in the absence of such determination, shall be the calendar year. ARTICLE IX. CORPORATE SEAL The Corporation shall not have a corporate seal. ARTICLE X. AMENDMENT OF BYLAWS These Bylaws may be altered, amended, repealed, or restated, and new Bylaws may be adopted, at any meeting of the shareholders by the affirmative vote of the holders of a majority of the voting power of the shares entitled to vote for the election of directors, or by the affirmative vote of a majority of the members of the Board of Directors who are present at any regular or special meeting. ARTICLE XI. NOTICE Unless otherwise provided for in these Bylaws, any notice required shall be in writing except that oral notice is effective if it is reasonable under the circumstances and not prohibited by the Charter or these Bylaws. Notice may be communicated in person, by telephone, telegraph, teletype or other form of wire or wireless communication, or by mail or private carrier. If these forms of personal notice are impracticable, notice may be communicated by a newspaper of general circulation in the area where published, or by radio, television, or other form of public broadcast communication. Written notice to a domestic or foreign corporation authorized to transact business in Tennessee may be addressed to its registered agent at its registered office or to the corporation or its secretary at its principal office as shown in its most recent annual report or, in the case of a foreign corporation that has not yet delivered an annual report, in its application for a certificate of authority. Written notice to shareholders, if in a comprehensible form, is effective when mailed, if mailed postpaid and correctly addressed to the shareholder's address shown in the Corporation's current record of shareholders. Except as provided above, written notice, if in a comprehensible form, is effective at the earliest of the following: (a) when received; (b) five days after its deposit in the United States mail, if mailed correctly addressed and with first class postage affixed thereon; (c) on the date shown on the return receipt, if sent by registered or certified mail, return receipt requested, and the receipt is signed by or on behalf of the addressee; or (d) twenty days after its deposit in the United States mail, as evidenced by the postmark if mailed correctly 17 18 addressed, and with other than first class, registered, or certified postage affixed. Oral notice is effective when communicated if communicated in a comprehensible manner. 18 EX-10.1 6 ARC 1997 STOCK INCENTIVE PLAN 1 EXHIBIT 10.1 AMERICAN RETIREMENT CORPORATION 1997 STOCK INCENTIVE PLAN SECTION 1. PURPOSE; DEFINITIONS. The purpose of the American Retirement Corporation 1997 Stock Incentive Plan (the "Plan") is to enable American Retirement Corporation (the "Corporation") to attract, retain and reward key employees of and consultants to the Corporation and its Subsidiaries and Affiliates, and directors who are not also employees of the Corporation, and to strengthen the mutuality of interests between such key employees, consultants, and directors by awarding such key employees, consultants, and directors performance-based stock incentives and/or other equity interests or equity-based incentives in the Corporation, as well as performance-based incentives payable in cash. The creation of the Plan shall not diminish or prejudice other compensation programs approved from time to time by the Board. For purposes of the Plan, the following terms shall be defined as set forth below: A. "Affiliate" means any entity other than the Corporation and its Subsidiaries that is designated by the Board as a participating employer under the Plan, provided that the Corporation directly or indirectly owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity. B. "Board" means the Board of Directors of the Corporation. C. "Cause" has the meaning provided in Section 5(j) of the Plan. D. "Change in Control" has the meaning provided in Section 10(b) of the Plan. E. "Change in Control Price" has the meaning provided in Section 10(d) of the Plan. F. "Common Stock" means the Corporation's Common Stock, par value $.01 per share. G. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. H. "Committee" means the Committee referred to in Section 2 of the Plan. I. "Corporation" means American Retirement Corporation, a corporation organized under the laws of the State of Tennessee or any successor corporation. 2 J. "Disability" means disability as determined under the Corporation's Group Long Term Disability Insurance Plan. K. "Early Retirement" means retirement, for purposes of this Plan with the express consent of the Corporation at or before the time of such retirement, from active employment with the Corporation and any Subsidiary or Affiliate prior to age 65, in accordance with any applicable early retirement policy of the Corporation then in effect or as may be approved by the Committee. L. "Effective Date" has the meaning provided in Section 14 of the Plan. M. "Equity Issuance" means an issuance of Common Stock by the Corporation following the Effective Date of this Plan in connection with a public or private offering, including in connection with an acquisition, merger or similar transaction, but excluding issuances of Common Stock under this Plan or in any other compensatory transaction with an officer or employee of, or consultant to, the Corporation or its Subsidiaries or Affiliates. N. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. O. "Fair Market Value" means with respect to the Common Stock, as of any given date or dates, unless otherwise determined by the Committee in good faith, the reported closing price of a share of Common Stock on the NYSE or such other market or exchange as is the principal trading market for the Common Stock, or, if no such sale of a share of Common Stock is reported on the NYSE or other exchange or principal trading market on such date, the fair market value of a share of Common Stock as determined by the Committee in good faith. P. "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. Q. "Immediate Family" means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and shall include adoptive relationships. R. "Non-Employee Director" means a member of the Board who is a Non-Employee Director within the meaning of Rule 16b-3(b)(3) promulgated under the Exchange Act and an outside director within the meaning of Treasury Regulation Sec. 162-27(e)(3) promulgated under the Code. S. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. 2 3 T. "NYSE" means The New York Stock Exchange. U. "Normal Retirement" means retirement from active employment with the Corporation and any Subsidiary or Affiliate on or after age 65. V. "Other Stock-Based Award" means an award under Section 8 below that is valued in whole or in part by reference to, or is otherwise based on, the Common Stock. W. "Outside Director" means a member of the Board who is not an officer or employee of the Corporation or any Subsidiary or Affiliate of the Corporation. X. "Outside Director Option" means an award to an Outside Director under Section 9 below. Y. "Plan" means this American Retirement Corporation 1997 Stock Incentive Plan, as amended from time to time. Z. "Restricted Stock" means an award of shares of Common Stock that is subject to restrictions under Section 7 of the Plan. AA. "Restriction Period" has the meaning provided in Section 7 of the Plan. BB. "Retirement" means Normal or Early Retirement. CC. "Section 162(m) Maximum" has the meaning provided in Section 3(a) hereof. DD. "Stock Appreciation Right" means the right pursuant to an award granted under Section 6 below to surrender to the Corporation all (or a portion) of a Stock Option in exchange for an amount equal to the difference between (i) the Fair Market Value, as of the date such Stock Option (or such portion thereof) is surrendered, of the shares of Common Stock covered by such Stock Option (or such portion thereof), subject, where applicable, to the pricing provisions in Section 6(b)(ii), and (ii) the aggregate exercise price of such Stock Option (or such portion thereof). EE. "Stock Option" or "Option" means any option to purchase shares of Common Stock (including Restricted Stock, if the Committee so determines) granted pursuant to Section 5 below. FF. "Subsidiary" means any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 3 4 SECTION 2. ADMINISTRATION. The Plan shall be administered by a Committee of not less than two Non-Employee Directors, who shall be appointed by the Board and who shall serve at the pleasure of the Board. The functions of the Committee specified in the Plan may be exercised by an existing Committee of the Board composed exclusively of Non-Employee Directors. The initial Committee shall be the Compensation Committee of the Board. In the event there are not at least two Non- Employee Directors on the Board, the Plan shall be administered by the Board and all references herein to the Committee shall refer to the Board. The Committee shall have authority to grant, pursuant to the terms of the Plan, to officers, other key employees and consultants eligible under Section 4: (i) Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock, and/or (iv) Other Stock-Based Awards. In particular, the Committee, or the Board, as the case may be, shall have the authority, consistent with the terms of the Plan: (a) to select the officers, key employees of and consultants to the Corporation and its Subsidiaries and Affiliates to whom Stock Options, Stock Appreciation Rights, Restricted Stock, and/or Other Stock-Based Awards may from time to time be granted hereunder; (b) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock, and/or Other Stock-Based Awards, or any combination thereof, are to be granted hereunder to one or more eligible persons; (c) to determine the number of shares to be covered by each such award granted hereunder; (d) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Stock Option or other award and/or the shares of Common Stock relating thereto, based in each case on such factors as the Committee shall determine, in its sole discretion); and to amend or waive any such terms and conditions to the extent permitted by Section 11 hereof; (e) to determine whether and under what circumstances a Stock Option may be settled in cash or Restricted Stock under Section 5(m) or (n), as applicable, instead of Common Stock; 4 5 (f) to determine whether, to what extent, and under what circumstances Option grants and/or other awards under the Plan are to be made, and operate, on a tandem basis vis-a-vis other awards under the Plan and/or cash awards made outside of the Plan; (g) to determine whether, to what extent, and under what circumstances shares of Common Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant (including providing for and determining the amount (if any) of any deemed earnings on any deferred amount during any deferral period); (h) to determine whether to require payment of tax withholding requirements in shares of Common Stock subject to the award; and (i) to impose any holding period required to satisfy Section 16 under the Exchange Act. The Committee shall have the authority to adopt, alter, and repeal such rules, guidelines, and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan; provided, however, that, to the extent that this Plan otherwise requires the approval of the Board or the shareholders of the Corporation, all decisions of the Committee shall be subject to such Board or shareholder approval Subject to the foregoing, all decisions made by the Committee pursuant to the provisions of the Plan shall be made in the Committee's sole discretion and shall be final and binding on all persons, including the Corporation and Plan participants. SECTION 3. SHARES OF COMMON STOCK SUBJECT TO PLAN. (a) As of the Effective Date, the aggregate number of shares of Common Stock that may be issued under the Plan shall be 1,093,750 shares. Such number shall, upon the consummation of any Equity Issuance, increase automatically by ten percent (10%) of the number of shares of Common Stock issued in such Equity Issuance; provided, however, that Incentive Stock Options may not be issued after 1,093,750 shares of Common Stock have been issued under the Plan. The shares of Common Stock issuable under the Plan may consist, in whole or in part, of authorized and unissued shares or treasury shares. No officer of the Corporation or other person whose compensation may be subject to the limitations on deductibility under Section 162(m) of the Code shall be eligible to receive awards pursuant to this Plan relating to in excess of 200,000 shares of Common Stock in any fiscal year (the "Section 162(m) Maximum"). (b) If any shares of Common Stock that have been optioned cease to be subject to a Stock Option, or if any shares of Common Stock that are subject to any Restricted Stock or Other 5 6 Stock-Based Award granted hereunder are forfeited prior to the payment of any dividends, if applicable, with respect to such shares of Common Stock, or any such award otherwise terminates without a payment being made to the participant in the form of Common Stock, such shares shall again be available for distribution in connection with future awards under the Plan. (c) In the event of any merger, reorganization, consolidation, recapitalization, extraordinary cash dividend, stock dividend, stock split or other change in corporate structure affecting the Common Stock, an appropriate substitution or adjustment shall be made in the maximum number of shares that may be awarded under the Plan, in the number and option price of shares subject to outstanding Options granted under the Plan, in the number of shares underlying Outside Director Options to be granted under Section 9 hereof, the Section 162(m) Maximum and in the number of shares subject to other outstanding awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. An adjusted option price shall also be used to determine the amount payable by the Corporation upon the exercise of any Stock Appreciation Right associated with any Stock Option. SECTION 4. ELIGIBILITY. Officers, other key employees and Outside Directors of and consultants to the Corporation and its Subsidiaries and Affiliates who are responsible for or contribute to the management, growth and/or profitability of the business of the Corporation and/or its Subsidiaries and Affiliates are eligible to be granted awards under the Plan. Outside Directors are eligible to receive awards pursuant to Section 9 and not pursuant to any other provisions of the Plan. SECTION 5. STOCK OPTIONS. Stock Options may be granted alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. Incentive Stock Options may be granted only to individuals who are employees of the Corporation or any Subsidiary of the Corporation. The Committee shall have the authority to grant to any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights). 6 7 Options granted to officers, key employees, Outside Directors and consultants under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable. (a) Option Price. The option price per share of Common Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant but shall be not less than 100% (or, in the case of any employee who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation or of any of its Subsidiaries, not less than 110%) of the Fair Market Value of the Common Stock at grant, in the case of Incentive Stock Options, and not less than 50% of the Fair Market Value of the Common Stock at grant, in the case of Non-Qualified Stock Options. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years (or, in the case of an employee who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation or any of its Subsidiaries or parent corporations, more than five years) after the date the Option is granted. (c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant; provided, however, that except as provided in Section 5(g) and (h) and Section 10, unless otherwise determined by the Committee at or after grant, no Stock Option shall be exercisable prior to the first anniversary date of the granting of the Option. The Committee may provide that a Stock Option shall vest over a period of future service at a rate specified at the time of grant, or that the Stock Option is exercisable only in installments. If the Committee provides, in its sole discretion, that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time at or after grant, in whole or in part, based on such factors as the Committee shall determine in its sole discretion. (d) Method of Exercise. Subject to whatever installment exercise restrictions apply under Section 5(c),Stock Options may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Corporation specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by check, note, or such other instrument as the Committee may accept. As determined by the Committee, in its sole discretion, at or (except in the case of an Incentive Stock Option) after grant, payment in full or in part may also be made in the form of shares of Common Stock already owned by the optionee or, in the case of a Non-Qualified Stock Option, shares of Restricted Stock or shares subject to such Option or another award hereunder (in each case valued at the Fair Market Value of the Common Stock on the date the Option is exercised). If payment of the exercise price is made in part or in full with Common Stock, the Committee may 7 8 award to the employee a new Stock Option to replace the Common Stock which was surrendered. If payment of the option exercise price of a Non-Qualified Stock Option is made in whole or in part in the form of Restricted Stock, such Restricted Stock (and any replacement shares relating thereto) shall remain (or be) restricted in accordance with the original terms of the Restricted Stock award in question, and any additional Common Stock received upon the exercise shall be subject to the same forfeiture restrictions, unless otherwise determined by the Committee, in its sole discretion, at or after grant. No shares of Common Stock shall be issued until full payment therefor has been made. An optionee shall generally have the rights to dividends or other rights of a shareholder with respect to shares subject to the Option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in Section 13(a). (e) Transferability of Options. No Non-Qualified Stock Option shall be transferable by the optionee without the prior written consent of the Committee other than (i) transfers by the Optionee to a member of his or her Immediate Family or a trust for the benefit of the optionee or a member of his or her Immediate Family, or (ii) transfers by will or by the laws of descent and distribution. No Incentive Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution and all Incentive Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. (f) Bonus for Taxes. In the case of a Non-Qualified Stock Option or an optionee who elects to make a disqualifying disposition (as defined in Section 422(a)(1) of the Code) of Common Stock acquired pursuant to the exercise of an Incentive Stock Option, the Committee in its discretion may award at the time of grant or thereafter the right to receive upon exercise of such Stock Option a cash bonus calculated to pay part or all of the federal and state, if any, income tax incurred by the optionee upon such exercise. (g) Termination by Death. Subject to Section 5(k), if an optionee's employment by the Corporation and any Subsidiary or (except in the case of an Incentive Stock Option) Affiliate terminates by reason of death, any Stock Option held by such optionee may thereafter be exercised, to the extent such option was exercisable at the time of death or (except in the case of an Incentive Stock Option) on such accelerated basis as the Committee may determine at or after grant (or except in the case of an Incentive Stock Option, as may be determined in accordance with procedures established by the Committee) by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of one year (or such other period as the Committee may specify at or after grant) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. 8 9 (h) Termination by Reason of Disability. Subject to Section 5(k), if an optionee's employment by the Corporation and any Subsidiary or (except in the case of an Incentive Stock Option) Affiliate terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination or (except in the case of an Incentive Stock Option) on such accelerated basis as the Committee may determine at or after grant (or, except in the case of an Incentive Stock Option, as may be determined in accordance with procedures established by the Committee), for a period of (i) three years (or such other period as the Committee may specify at or after grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter, in the case of a Non-Qualified Stock Option and (ii) one year from the date of termination of employment or until the expiration of the stated term of such Stock Option, whichever period is shorter, in the case of an Incentive Stock Option; provided however, that, if the optionee dies within the period specified in (i) above (or other such period as the committee shall specify at or after grant), any unexercised Non-Qualified Stock Option held by such optionee shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of twelve months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise period applicable to Incentive Stock Options, but before the expiration of any period that would apply if such Stock Option were a Non-Qualified Stock Option, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (i) Termination by Reason of Retirement. Subject to Section 5(k), if an optionee's employment by the Corporation and any Subsidiary or (except in the case of an Incentive Stock Option) Affiliate terminates by reason of Normal or Early Retirement, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of such Retirement or (except in the case of an Incentive Stock Option) on such accelerated basis as the Committee may determine at or after grant (or, except in the case of an Incentive Stock Option, as may be determined in accordance with procedures established by the Committee), for a period of (i) three years (or such other period as the Committee may specify at or after grant) from the date of such termination of employment or the expiration of the stated term of such Stock Option, whichever period is the shorter, in the case of a Non-Qualified Stock Option and (ii) three months from the date of such termination of employment or the expiration of the stated term of such Stock Option, whichever period is the shorter, in the event of an Incentive Stock Option; provided however, that, if the optionee dies within the period specified in (i) above (or other such period as the Committee shall specify at or after grant), any unexercised Non-Qualified Stock Option held by such optionee shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of twelve months from the date of such death or until the expiration of the stated term of such 9 10 Stock Option, whichever period is shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise period applicable to Incentive Stock Options, but before the expiration of the period that would apply if such Stock Option were a Non-Qualified Stock Option, the option will thereafter be treated as a Non-Qualified Stock Option. (j) Other Termination. Subject to Section 5(k), unless otherwise determined by the Committee (or pursuant to procedures established by the Committee) at or (except in the case of an Incentive Stock Option) after grant, if an optionee's employment by the Corporation and any Subsidiary or (except in the case of an Incentive Stock Option) Affiliate is involuntarily terminated for any reason other than death, Disability or Normal or Early Retirement, the Stock Option shall thereupon terminate, except that such Stock Option may be exercised, to the extent otherwise then exercisable, for the lesser of three months or the balance of such Stock Option's term if the involuntary termination is without Cause. For purposes of this Plan, "Cause" means (i) a felony conviction of a participant or the failure of a participant to contest prosecution for a felony, or (ii) a participant's willful misconduct or dishonesty, which is directly and materially harmful to the business or reputation of the Corporation or any Subsidiary or Affiliate. If an optionee voluntarily terminates employment with the Corporation and any Subsidiary or (except in the case of an Incentive Stock Option) Affiliate (except for Disability, Normal or Early Retirement), the Stock Option shall thereupon terminate; provided, however, that the Committee at grant or (except in the case of an Incentive Stock Option) thereafter may extend the exercise period in this situation for the lesser of three months or the balance of such Stock Option's term. (k) Incentive Stock Options. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended, or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the optionee(s) affected, to disqualify any Incentive Stock Option under such Section 422. No Incentive Stock Option shall be granted to any participant under the Plan if such grant would cause the aggregate Fair Market Value (as of the date the Incentive Stock Option is granted) of the Common Stock with respect to which all Incentive Stock Options are exercisable for the first time by such participant during any calendar year (under all such plans of the Company and any Subsidiary) to exceed $100,000. To the extent permitted under Section 422 of the Code or the applicable regulations thereunder or any applicable Internal Revenue Service pronouncement: (i) if (x) a participant's employment is terminated by reason of death, Disability, or Retirement and (y) the portion of any Incentive Stock Option that is otherwise exercisable during the post-termination period specified under Section 5(g), (h) or (i), applied without regard to the $100,000 limitation contained 10 11 in Section 422(d) of the Code, is greater than the portion of such Option that is immediately exercisable as an "Incentive Stock Option" during such post-termination period under Section 422, such excess shall be treated as a Non-Qualified Stock Option; and (ii) if the exercise of an Incentive Stock Option is accelerated by reason of a Change in Control, any portion of such Option that is not exercisable as an Incentive Stock Option by reason of the $100,000 limitation contained in Section 422(d) of the Code shall be treated as a Non-Qualified Stock Option. (l) Buyout Provisions. The Committee may at any time offer to buy out for a payment in cash, Common Stock, or Restricted Stock an Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the optionee at the time that such offer is made. (m) Settlement Provisions. If the option agreement so provides at grant or (except in the case of an Incentive Stock Option) is amended after grant and prior to exercise to so provide (with the optionee's consent), the Committee may require that all or part of the shares to be issued with respect to the spread value of an exercised Option take the form of Restricted Stock, which shall be valued on the date of exercise on the basis of the Fair Market Value (as determined by the Committee) of such Restricted Stock determined without regards to the forfeiture restrictions involved. (n) Performance and Other Conditions. The Committee may condition the exercise of any Option upon the attainment of specified performance goals or other factors as the Committee may determine, in its sole discretion. Unless specifically provided in the option agreement, any such conditional Option shall vest six months prior to its expiration if the conditions to exercise have not theretofore been satisfied. SECTION 6. STOCK APPRECIATION RIGHTS. (a) Grant and Exercise. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Stock Option. A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, subject to such provisions as the Committee may specify at grant where a Stock Appreciation Right is granted with respect to less than the full number of shares covered by a related Stock Option. A Stock Appreciation Right may be exercised by an optionee, subject to Section 6(b), in accordance with the procedures established by the Committee 11 12 for such purpose. Upon such exercise, the optionee shall be entitled to receive an amount determined in the manner prescribed in Section 6(b). Stock Options relating to exercised Stock Appreciation Rights shall no longer be exercisable to the extent that the related Stock Appreciation Rights have been exercised. (b) Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 5 and this Section 6 of the Plan. (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive an amount in cash and/or shares of Common Stock equal in value to the excess of the Fair Market Value of one share of Common Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. When payment is to be made in shares, the number of shares to be paid shall be calculated on the basis of the Fair Market Value of the shares on the date of exercise. When payment is to be made in cash, such amount shall be calculated on the basis of the Fair Market Value of the Common Stock on the date of exercise. (iii) Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under Section 5(e) of the Plan. (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of shares of Common Stock to be issued under the Plan. (v) The Committee, in its sole discretion, may also provide that, in the event of a Change in Control and/or a Potential Change in Control, the amount to be paid upon the exercise of a Stock Appreciation Right shall be based on the Change in Control Price, subject to such terms and conditions as the Committee may specify at grant. 12 13 (vi) The Committee may condition the exercise of any Stock Appreciation Right upon the attainment of specified performance goals or other factors as the Committee may determine, in its sole discretion. SECTION 7. RESTRICTED STOCK. (a) Administration. Shares of Restricted Stock may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside the Plan. The Committee shall determine the eligible persons to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares of Restricted Stock to be awarded to any person, the price (if any) to be paid by the recipient of Restricted Stock (subject to Section 7(b)), the time or times within which such awards may be subject to forfeiture, and the other terms, restrictions and conditions of the awards in addition to those set forth in Section 7(c). The Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may determine, in its sole discretion. The provisions of Restricted Stock awards need not be the same with respect to each recipient. (b) Awards and Certificates. The prospective recipient of a Restricted Stock award shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award and has delivered a fully executed copy thereof to the Corporation, and has otherwise complied with the applicable terms and conditions of such award. (i) The purchase price for shares of Restricted Stock shall be established by the Committee and may be zero. (ii) Awards of Restricted Stock must be accepted within a period of 60 days (or such shorter period as the Committee may specify at grant) after the award date, by executing a Restricted Stock Award Agreement and paying whatever price (if any) is required under Section 7(b)(i). (iii) Each participant receiving a Restricted Stock award shall be issued a stock certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such participant (or a transferee permitted by Section 13(h) hereof), and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award. 13 14 (iv) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Corporation until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the shares of Common Stock covered by such award. (c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to this Section 7 shall be subject to the following restrictions and conditions: (i) In accordance with the provisions of this Plan and the award agreement, during a period set by the Committee commencing with the date of such award (the "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge, assign, or otherwise encumber shares of Restricted Stock awarded under the Plan. Within these limits, the Committee, in its sole discretion, may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or in part, based on service, performance, such other factors or criteria as the Committee may determine in its sole discretion. (ii) Except as provided in this paragraph (ii) and Section 7(c)(i), the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a shareholder of the Corporation, including the right to vote the shares, and the right to receive any cash dividends. The Committee, in its sole discretion, as determined at the time of award, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested, subject to Section 14(e), in additional Restricted Stock to the extent shares are available under Section 3, or otherwise reinvested. Pursuant to Section 3 above, stock dividends issued with respect to Restricted Stock shall be treated as additional shares of Restricted Stock that are subject to the same restrictions and other terms and conditions that apply to the shares with respect to which such dividends are issued. If the Committee so determines, the award agreement may also impose restrictions on the right to vote and the right to receive dividends. (iii) Subject to the applicable provisions of the award agreement and this Section 7, upon termination of a participant's employment with the Corporation and any Subsidiary or Affiliate for any reason during the Restriction Period, all shares still subject to restriction will vest, or be forfeited, in accordance with the terms and conditions established by the Committee at or after grant. (iv) If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, certificates for an appropriate number of unrestricted shares shall be delivered to the participant (or a transferee permitted by Section 13(h) hereof) promptly. 14 15 (d) Minimum Value Provisions. In order to better ensure that award payments actually reflect the performance of the Corporation and service of the participant, the Committee may provide, in its sole discretion, for a tandem performance-based or other award designed to guarantee a minimum value, payable in cash or Common Stock to the recipient of a restricted stock award, subject to such performance, future service, deferral, and other terms and conditions as may be specified by the Committee. SECTION 8. OTHER STOCK-BASED AWARDS. (a) Administration. Other Stock-Based Awards, including, without limitation, performance shares, convertible preferred stock, convertible debentures, exchangeable securities and Common Stock awards or options valued by reference to earnings per share or Subsidiary performance, may be granted either alone, in addition to, or in tandem with Stock Options, Stock Appreciation Rights, or Restricted Stock granted under the Plan and cash awards made outside of the Plan; provided that no such Other Stock-Based Awards may be granted in tandem with Incentive Stock Options if that would cause such Stock Options not to qualify as Incentive Stock Options pursuant to Section 422 of the Code. Subject to the provisions of the Plan, the Committee shall have authority to determine the persons to whom and the time or times at which such awards shall be made, the number of shares of Common Stock to be awarded pursuant to such awards, and all other conditions of the awards. The Committee may also provide for the grant of Common Stock upon the completion of a specified performance period. The provisions of Other Stock-Based Awards need not be the same with respect to each recipient. (b) Terms and Conditions. Other Stock-Based Awards made pursuant to this Section 8 shall be subject to the following terms and conditions: (i) Shares subject to awards under this Section 8 and the award agreement referred to in Section 8(b)(v) below, may not be sold, assigned, transferred, pledged, or otherwise encumbered prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction, performance, or deferral period lapses. (ii) Subject to the provisions of this Plan and the award agreement and unless otherwise determined by the Committee at grant, the recipient of an award under this Section 8 shall be entitled to receive, currently or on a deferred basis, interest or dividends or interest or dividend equivalents with respect to the number of shares covered by the award, as determined at the time of the award by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional shares of Common Stock or otherwise reinvested. 15 16 (iii) Any award under Section 8 and any shares of Common Stock covered by any such award shall vest or be forfeited to the extent so provided in the award agreement, as determined by the Committee in its sole discretion. (iv) In the event of the participant's Retirement, Disability, or death, or in cases of special circumstances, the Committee may, in its sole discretion, waive in whole or in part any or all of the remaining limitations imposed hereunder (if any) with respect to any or all of an award under this Section 8. (v) Each award under this Section 8 shall be confirmed by, and subject to the terms of, an agreement or other instrument by the Corporation and the participant. (vi) Common Stock (including securities convertible into Common Stock) issued on a bonus basis under this Section 8 may be issued for no cash consideration. Common Stock (including securities convertible into Common Stock) purchased pursuant to a purchase right awarded under this Section 8 shall be priced at least 85% of the Fair Market Value of the Common Stock on the date of grant. SECTION 9. AWARDS TO OUTSIDE DIRECTORS. (a) The provisions of this Section 9 shall apply only to awards to Outside Directors in accordance with this Section 9. The Committee shall have no authority to determine the timing of or the terms or conditions of any award under this Section 9. (b) At the date of the Corporation's initial public offering, each person serving as an Outside Director on such date will receive a non-qualified stock option to purchase 9,000 shares of Common Stock at a per share exercise price equal to the initial public offering price. Such option shall vest and become exercisable with respect to the following numbers of shares on the following Annual Meeting dates, if the grantee has been a member of the Board until such date (whether or not the grantee will remain a director following such meeting): (i) 5,000 shares on the date of the Annual Meeting of Shareholders in 1998, (ii) 2,000 shares on the date of the Annual Meeting of Shareholders in 1999 and (iii) 2,000 shares on the date of the Annual Meeting of Shareholders in 2000. (c) If any person who was not previously a member of the Board is elected or appointed an Outside Director following the initial public offering but prior to the date of the Annual Meeting of Shareholders of the Corporation in the year 2000, such Outside Director will receive a non-qualified stock option to purchase 7,000 shares of Common Stock if such Outside Director's service begins prior to the second anniversary of the 16 17 initial public offering and 5,000 shares of Common Stock if such Outside Director's service begins after the second anniversary of the initial public offering but prior to the date of the Annual Meeting of Shareholders in the year 2000. It is intended that such grant may be increased or decreased to extent deemed appropriate by the Board, in its sole discretion, to reflect the extent to which director's expected service prior to the Annual Meeting of Shareholders in 2000 may exceed two years or may be less than one full year. The exercise price per share of each option granted pursuant to this Section 9(c) shall equal the Fair Market Value per share of Common Stock on the date of grant. Options granted under this Section 9(c) shall vest and become exercisable with respect to the following numbers of shares on the following Annual Meeting dates, if the grantee has been a member of the Board until such date (whether or not such grantee will remain a director following such meeting): (i) 5,000 shares (or any smaller number constituting the entire grant) on the date of the first Annual Meeting of Shareholders following the date of grant, (ii) 2,000 shares (or any smaller remaining number of shares) on the date of the second Annual Meeting of Shareholders following the date of grant and (iii) any remaining shares on the date of the third Annual Meeting of Shareholders following the date of grant. (d) On the date of each Annual Meeting of Shareholders of the Corporation beginning with the Annual Meeting of Shareholders in 2000, unless this Plan has been previously terminated, each Outside Director who will continue as a director following such meeting will receive a non-qualified stock option to purchase 3,000 shares of Common Stock. The exercise price per share of each option granted pursuant to this Section 9(d) shall equal the Fair Market Value per share of Common Stock on the date of grant. Such option shall vest and become exercisable with respect to all 3,000 shares on the date of the next Annual Meeting of Shareholders of the Corporation if the grantee has been a member of the Board until such date (whether or not such grantee will remain a director following such meeting). (e) No Outside Director Option shall be exercisable prior to vesting. Each Outside Director Option shall expire, if unexercised, on the tenth anniversary of the date of grant. The exercise price may be paid in cash or in shares of Common Stock, including shares of Common Stock subject to the Outside Director Option. (f) Outside Director Options shall not be transferable without the prior written consent of the Board other than (i) transfers by the optionee to a member of his or her Immediate Family or a trust for the benefit of optionee or a member of his or her Immediate Family, or (ii) transfers by will or by the laws of descent and distribution. (g) Grantees of Outside Director Options shall enter into a stock option agreement with the Corporation setting forth the exercise price and other terms as provided herein. 17 18 (h) Upon termination of an Outside Director's service as a director of the Corporation, (i) all Outside Director Options theretofore exercisable and held by such Outside Director will remain vested and exercisable through the expiration date and (ii) all remaining Outside Director Options held by such Outside Director will become exercisable and vested and remain so through the expiration date to the extent of any shares that would have become exercisable and vested within a period of less than twelve months following the date of termination of service. Any unvested Outside Director Options held by the Outside Director on the date of termination of service will be forfeited to the extent of any shares that would not have become vested and exercisable until at least twelve months from the date of termination of service. The Board may, in its sole discretion, elect to accelerate the vesting of any Outside Director Options in connection with the termination of service of any individual Outside Director. (i) Outside Director Options shall be subject to Section 10. The number of shares and the exercise price per share of each Outside Director Option theretofore awarded shall be adjusted automatically in the same manner as the number of shares and the exercise price for Stock Options under Section 3(c) hereof at any time that Stock Options are adjusted as provided in Section 3(c). The number of shares underlying Outside Director Options to be awarded in the future shall be adjusted automatically in the same manner as the number of shares underlying outstanding Stock Options are adjusted under Section 3(c) hereof at any time that Stock Options are adjusted under Section 3(c) hereof. (j) The Board, in its sole discretion, may determine to reduce the size of any Outside Director Option prior to grant or to postpone the vesting and exercisability of any Outside Director Option prior to grant. SECTION 10. CHANGE IN CONTROL PROVISIONS. (a) Impact of Event. In the event of: (1) a "Change in Control" as defined in Section 10(b); or (2) a "Potential Change in Control" as defined in Section 10(c), but only if and to the extent so determined by the Committee or the Board at or after grant (subject to any right of approval expressly reserved by the Committee or the Board at the time of such determination), (i) Subject to the limitations set forth below in this Section 10(a), the following acceleration provisions shall apply: 18 19 (a) Any Stock Appreciation Rights, any Stock Option or Outside Director Option awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested. (b) The restrictions applicable to any Restricted Stock and Other Stock-Based Awards, in each case to the extent not already vested under the Plan, shall lapse and such shares and awards shall be deemed fully vested. (ii) Subject to the limitations set forth below in this Section 10(a), the value of all outstanding Stock Options, Stock Appreciation Rights, Restricted Stock, Outside Director Options and Other Stock-Based Awards, in each case to the extent vested, shall, unless otherwise determined Board or by the Committee in its sole discretion prior to any Change in Control, be cashed out on the basis of the "Change in Control Price" as defined in Section 10(d) as of the date such Change in Control or such Potential Change in Control is determined to have occurred or such other date as the Board or Committee may determine prior to the Change in Control. (iii) The Board or the Committee may impose additional conditions on the acceleration or valuation of any award in the award agreement. (b) Definition of Change in Control. For purposes of Section 10(a), a "Change in Control" means the happening of any of the following: (i) any person or entity, including a "group" as defined in Section 13(d)(3) of the Exchange Act, other than the Corporation or a wholly-owned subsidiary thereof or any employee benefit plan of the Corporation or any of its Subsidiaries, becomes the beneficial owner of the Corporation's securities having 35% or more of the combined voting power of the then outstanding securities of the Corporation that may be cast for the election of directors of the Corporation (other than as a result of an issuance of securities initiated by the Corporation in the ordinary course of business); or (ii) as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sales of assets or contested election, or any combination of the foregoing transactions, less than a majority of the combined voting power of the then outstanding securities of the Corporation or any successor corporation or entity entitled to vote generally in the election of the directors of the Corporation or such other corporation or entity after such transaction are held in the aggregate by the holders of the Corporation's securities entitled to vote generally in the election of directors of the Corporation immediately prior to such transaction; or 19 20 (iii) during any period of two consecutive years, individuals who at the beginning of any such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Corporation's shareholders, of each director of the Corporation first elected during such period was approved by a vote of at least two-thirds of the directors of the Corporation then still in office who were directors of the Corporation at the beginning of any such period. (c) Definition of Potential Change in Control. For purposes of Section 10(a), a "Potential Change in Control" means the happening of any one of the following: (i) The approval by shareholders of an agreement by the Corporation, the consummation of which would result in a Change in Control of the Corporation as defined in Section 10(b); or (ii) The acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Corporation or a Subsidiary or any Corporation employee benefit plan (including any trustee of such plan acting as such trustee)) of securities of the Corporation representing 5% or more of the combined voting power of the Corporation's outstanding securities and the adoption by the Committee of a resolution to the effect that a Potential Change in Control of the Corporation has occurred for purposes of this Plan. (d) Change in Control Price. For purposes of this Section 10, "Change in Control Price" means the highest price per share paid in any transaction reported on the NYSE or such other exchange or market as is the principal trading market for the Common Stock, or paid or offered in any bona fide transaction related to a Potential or actual Change in Control of the Corporation at any time during the 60 day period immediately preceding the occurrence of the Change in Control (or, where applicable, the occurrence of the Potential Change in Control event), in each case as determined by the Committee except that, in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the optionee exercises such Stock Appreciation Rights or, where applicable, the date on which a cash out occurs under Section 10(a)(ii). SECTION 11. AMENDMENTS AND TERMINATION. The Board may at any time amend, alter or discontinue the Plan; provided, however, that, without the approval of the Corporation's shareholders, no amendment or alteration may be made which would (a) except as a result of the provisions of Section 3(c) of the Plan, increase the maximum number of shares that may be issued under the Plan or increase the Section 162(m) 20 21 Maximum, (b) change the provisions governing Incentive Stock Options except as required or permitted under the provisions governing incentive stock options under the Code, (c) amend Section 9 hereof so as to increase the size of any award (other than as contemplated by Section 3(c) and Section 9(i) hereof) or otherwise materially increase the benefits to Outside Directors under Section 9 hereof, or (d) make any change for which applicable law or regulatory authority (including the regulatory authority of the NYSE or any other market or exchange on which the Common Stock is traded) would require shareholder approval or for which shareholder approval would be required to secure full deductibility of compensation received under the Plan under Section 162(m) of the Code. No amendment, alteration, or discontinuation shall be made which would impair the rights of an optionee or participant under a Stock Option, Stock Appreciation Right, Restricted Stock, Other Stock-Based Award or Outside Director Option theretofore granted, without the participant's consent. The Committee may amend the terms of any Stock Option or other award theretofore granted, prospectively or retroactively, but, subject to Section 3 above, no such amendment shall impair the rights of any holder without the holder's consent. The Committee may also substitute new Stock Options for previously granted Stock Options (on a one for one or other basis), including previously granted Stock Options having higher option exercise prices. Solely for purposes of computing the Section 162(m) Maximum, if any Stock Options or other awards previously granted to a participant are canceled and new Stock Options or other awards having a lower exercise price or other more favorable terms for the participant are substituted in their place, both the initial Stock Options or other awards and the replacement Stock Options or other awards will be deemed to be outstanding (although the canceled Stock Options or other awards will not be exercisable or deemed outstanding for any other purposes). SECTION 12. UNFUNDED STATUS OF PLAN. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Corporation, nothing contained herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Corporation. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Common Stock or payments in lieu of or with respect to awards hereunder; provided, however, that, unless the Committee otherwise determines with the consent of the affected participant, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. SECTION 13. GENERAL PROVISIONS. (a) The Committee may require each person purchasing shares pursuant to a Stock Option or other award under the Plan to represent to and agree with the Corporation 21 22 in writing that the optionee or participant is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Common Stock or other securities delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Commission, any stock exchange upon which the Common Stock is then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. (c) The adoption of the Plan shall not confer upon any employee of the Corporation or any Subsidiary or Affiliate any right to continued employment with the Corporation or a Subsidiary or Affiliate, as the case may be, nor shall it interfere in any way with the right of the Corporation or a Subsidiary or Affiliate to terminate the employment of any of its employees at any time. (d) No later than the date as of which an amount first becomes includible in the gross income of the participant for Federal income tax purposes with respect to any award under the Plan, the participant shall pay to the Corporation, or make arrangements satisfactory to the Committee regarding the payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to such amount. The Committee may require withholding obligations to be settled with Common Stock, including Common Stock that is part of the award that gives rise to the withholding requirement. The obligations of the Corporation under the Plan shall be conditional on such payment or arrangements and the Corporation and its Subsidiaries or Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. (e) The actual or deemed reinvestment of dividends or dividend equivalents in additional Restricted Stock (or other types of Plan awards) at the time of any dividend payment shall only be permissible if sufficient shares of Common Stock are available under Section 3 for such reinvestment (taking into account then outstanding Stock Options and other Plan awards). (f) The Plan and all awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Tennessee. 22 23 (g) The members of the Committee and the Board shall not be liable to any employee or other person with respect to any determination made hereunder in a manner that is not inconsistent with their legal obligations as members of the Board. In addition to such other rights of indemnification as they may have as directors or as members of the Committee, the members of the Committee shall be indemnified by the Corporation against the reasonable expenses, including attorneys' fees actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any option granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Corporation) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee member is liable for negligence or misconduct in the performance of his duties; provided that within 60 days after institution of any such action, suit or proceeding, the Committee member shall in writing offer the Corporation the opportunity, at its own expense, to handle and defend the same. (h) In addition to any other restrictions on transfer that may be applicable under the terms of this Plan or the applicable award agreement, no Stock Option, Stock Appreciation Right, Restricted Stock award, or Other Stock-Based Award or other right issued under this Plan is transferable by the participant without the prior written consent of the Committee, or, in the case of an Outside Director, the Board, other than (i) transfers by an optionee to a member of his or her Immediate Family or a trust for the benefit of the optionee or a member of his or her Immediate Family or (ii) transfers by will or by the laws of descent and distribution. The designation of a beneficiary will not constitute a transfer. (i) The Committee may, at or after grant, condition the receipt of any payment in respect of any award or the transfer of any shares subject to an award on the satisfaction of a six-month holding period, if such holding period is required for compliance with Section 16 under the Exchange Act. SECTION 14. EFFECTIVE DATE OF PLAN. The Plan shall be effective upon the date of the closing of the Corporation's initial public offering (the "Effective Date"), provided that it has been approved by the Board of the Corporation and by a majority of the votes cast by the holders of the Corporation's Common Stock. SECTION 15. TERM OF PLAN. 23 24 No Stock Option, Stock Appreciation Right, Restricted Stock award, Other Stock-Based Award or Outside Director Option award shall be granted pursuant to the Plan on or after the tenth anniversary of the Effective Date of the Plan, but awards granted prior to such tenth anniversary may be extended beyond that date. 24 EX-10.2 7 ARC ESOP 1 EXHIBIT 10.2 ARC EMPLOYEE STOCK PURCHASE PLAN ARTICLE I INTRODUCTION 1.1 ESTABLISHMENT OF PLAN. American Retirement Corporation, a Tennessee corporation ("ARC") with principal offices located in Nashville, Tennessee, adopts the following employee stock purchase plan for its eligible employees, effective on July 1, 1997. This Plan shall be known as the ARC Employee Stock Purchase Plan. 1.2 PURPOSE. The purpose of this Plan is to provide an opportunity for eligible employees of the Employer to become shareholders in ARC. It is believed that broad-based employee participation in the ownership of the business will help to achieve the unity of purpose conducive to the continued growth of the Employer and to the mutual benefit of its employees and shareholders. 1.3 QUALIFICATION. This Plan is intended to be an employee stock purchase plan which qualifies for favorable Federal income tax treatment under Section 423 of the Code. 1.4 RULE 16B-3 COMPLIANCE. This Plan is intended to comply with Rule 16b-3 under the Securities Exchange Act of 1934, and should be interpreted in accordance therewith. ARTICLE II DEFINITIONS As used herein, the following words and phrases shall have the meanings specified below: 2.1 Board of Directors: The Board of Directors of ARC. 2.2 Closing Market Price: The last sale price of the Stock as reported on the New York Stock Exchange (or any other exchange or quotation system, if applicable) on the date specified; or if no sales occurred on such day, at the last sale price reported for the Stock; but if 2 there should be any material alteration in the present system of reporting sales prices of such Stock, or if such Stock should no longer be listed on the New York Stock Exchange (or other exchange or quotation system), or if the last sale price reported shall be on a date more than 30 days from the date in question, the market value of the Stock as of a particular date shall be determined in such a method as shall be specified by the Plan Administrator. 2.3 Code: The Internal Revenue Code of 1986, as amended from time to time. 2.4 Commencement Date: The first day of each Option Period (January 1 and July 1). The first Commencement Date shall be July 1, 1997. 2.5 Contribution Account: The account established on behalf of a Participant to which shall be credited the amount of the Participant's contribution, pursuant to Article V. 2.6 Effective Date: July 1, 1997. 2.7 Employee: Each employee of an Employer except: (a) any employee whose customary employment is twenty (20) hours per week or less, or (b) any employee whose customary employment is for not more than five months in any calendar year. 2.8 Employer: ARC and any corporation which is a Subsidiary of ARC (except for a Subsidiary which by resolutions of the Board of Directors is expressly not authorized to become a participating Employer). The term "Employer" shall include any corporation into which an Employer may be merged or consolidated or to which all or substantially all of its assets may be transferred, provided such corporation does not affirmatively disavow this Plan. 2.9 Exercise Date: The last trading date of each Option Period on the New York Stock Exchange. 2.10 Exercise Price: The price per share of the Stock to be charged to Participants at the Exercise Date, as determined in Section 6.3. 2.11 Five-Percent Shareholder: An Employee who owns five percent (5%) or more of the total combined voting power or value of all classes of stock of ARC or any Subsidiary thereof. In determining this five percent test, shares of stock which the Employee may purchase under outstanding options, warrants or other convertible securities, as well as stock attributed to the Employee from members of such Employee's family or otherwise under Section 424(d) of the Code, shall be treated as stock owned by the Employee in the numerator, but shares of stock 2 3 which may be issued under options, warrants or other convertible securities shall not be counted in the total of outstanding shares in the denominator. 2.12 Grant Date: The first trading date of each Option Period on the New York Stock Exchange. 2.13 Option Period: Successive periods of six (6) months (i) commencing on July 1 and ending on December 31; and (ii) commencing on January 1 and ending on June 30. 2.14 Participant: Any Employee of an Employer who has met the conditions for eligibility as provided in Article IV and who has elected to participate in the Plan. 2.15 Plan: ARC Employee Stock Purchase Plan. 2.16 Plan Administrator: The committee composed of one or more individuals to whom authority is delegated by the Board of Directors to administer the Plan. The initial committee shall be the Compensation Committee of the Board of Directors. 2.17 Stock: Those shares of common stock of ARC which are reserved pursuant to Section 6.1 for issuance upon the exercise of options granted under this Plan. 2.18 Subsidiary: Any corporation in an unbroken chain of corporations beginning with ARC each of which (other than the last corporation in the chain) owns stock possessing fifty percent (50%) or more of the combined voting power of all classes of stock in one of the other corporations in such chain. ARTICLE III SHAREHOLDER APPROVAL 3.1 SHAREHOLDER APPROVAL REQUIRED. This plan must be approved by the shareholders of ARC within the period beginning twelve (12) months before and ending twelve (12) months after its adoption by the Board of Directors. 3.2 SHAREHOLDER APPROVAL FOR CERTAIN AMENDMENTS. Without the approval of the shareholders of ARC, no amendment to this Plan shall increase the number of shares reserved under the Plan, other than as provided in Section 10.3. Approval by shareholders must comply with applicable provisions of the corporate charter and bylaws of 3 4 ARC and with Tennessee law prescribing the method and degree of shareholder approval required for issuance of corporate stock or options. ARTICLE IV ELIGIBILITY AND PARTICIPATION 4.1 CONDITIONS OF ELIGIBILITY. 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 one (1) year prior to the Commencement Date. No Employee who is a Five-Percent Shareholder shall be eligible to participate in the Plan. Notwithstanding anything to the contrary contained herein, no individual who is not an Employee shall be granted an option to purchase Stock under the Plan. For the purpose of satisfying the service requirement for eligibility, all employees of ARC shall be granted credit for service prior to the initial public offering with American Retirement Corporation or with any partnership or other entity affiliated with American Retirement Corporation. 4.2 APPLICATION FOR PARTICIPATION. Each Employee who becomes eligible to participate shall be furnished a summary of the Plan and an enrollment form. If such Employee elects to participate hereunder, he shall complete such form and file it with his Employer no later than ten (10) days prior to the Commencement Date for the Option Period for which the Employee is enrolling. The completed enrollment form shall indicate the amount of Employee contribution authorized by the Employee. If no new enrollment form is filed by a Participant at least ten (10) days in advance of any subsequent Option Period, that Participant shall be deemed to have elected to continue to participate with the same contribution level previously elected (subject to the limit of 15% of base pay). If any Employee does not elect to participate for any given Option Period, he may elect to participate on any future Commencement Date so long as he continues to meet the eligibility requirements. 4.3 DATE OF PARTICIPATION. All Employees who elect to participate shall be enrolled in the Plan commencing with the first pay date after the Commencement Date following their submission of the enrollment form. Upon becoming a Participant, the Participant shall be bound by the terms of this Plan, including any amendments whenever made. 4 5 4.4 ACQUISITION OR CREATION OF SUBSIDIARY. If the stock of a corporation is acquired by ARC or another Employer so that the acquired corporation becomes a Subsidiary, or if a Subsidiary is created, the Subsidiary in either case shall automatically become an Employer and its Employees shall become eligible to participate in the Plan on the first Commencement Date after the acquisition or creation of the Subsidiary, as the case may be. In the case of an acquisition, credit shall be given to Employees of the acquired Subsidiary for service with such corporation prior to the acquisition for purposes of satisfying the requirement of Section 4.1 of one (1) year continuous employment. Notwithstanding the foregoing, the Board of Directors may by appropriate resolutions (i) provide that the acquired or newly created Subsidiary shall not be a participating Employer, (ii) specify that the acquired or newly created Subsidiary will become a participating Employer on a date other than the first Commencement Date after the acquisition or creation, or (iii) attach any conditions whatsoever (including denial of credit for prior service) to eligibility of the employees of the acquired or newly created Subsidiary. ARTICLE V CONTRIBUTION ACCOUNT 5.1 EMPLOYEE CONTRIBUTIONS. The enrollment form signed by each Participant shall authorize the Employer to deduct from the Participant's compensation an after-tax amount in an exact number of dollars during each payroll period not less than five dollars ($5.00) per bi-weekly payroll period (or $5.00 per semi-monthly payroll period), nor more than an amount which is fifteen (15%) of the Participant's base pay on the Commencement Date. The dollar amount deducted each payday shall be credited to the Participant's Contribution Account. Participant contributions will not be permitted to commence at any time during the Option Period other than on a Commencement Date. No interest will accrue on any contributions or on the balance in a Participant's Contribution Account. 5.2 MODIFICATION OF CONTRIBUTION RATE. No change shall be permitted in a Participant's amount of withholding except upon a Commencement Date, and then only if the Participant files a new enrollment form with the Employer designating the new withholding rate at least ten (10) days in advance of the Commencement Date for each Option Period. Notwithstanding the foregoing, a Participant may notify the Employer at any time at least thirty (30) days prior to the last day of the Option Period that he wishes to discontinue his contributions. This notice shall be in writing and on such forms as provided by the Employer and shall become effective as of a date provided on the form not more than thirty (30) days following its receipt by the Employer. The Participant shall become eligible to recommence contributions on the next Commencement Date. 5 6 5.3 WITHDRAWAL OF CONTRIBUTIONS. A Participant may elect to withdraw the balance of his Contribution Account at any time during the Option Period at least thirty (30) days prior to the last day of the Option Period. The option granted to a Participant shall be canceled upon his withdrawal of the balance in his Contribution Account. This election to withdraw must be in writing on such forms as may be provided by the Employer. If contributions are withdrawn in this manner, further contributions during that Option Period will be discontinued in the same manner as provided in Section 5.2, and the Participant shall become eligible to recommence contributions on the next Commencement Date. 5.4 LUMP SUM CONTRIBUTIONS. Subject to the limitations described in Section 5.5 and Section 6.6, a Participant who has not discontinued his contributions pursuant to Section 5.2 or elected to withdraw his contributions pursuant to Section 5.3 may make no more than one lump sum contribution during each Option Period (except during the last thirty (30) days of the Option Period). A lump sum contribution shall be paid by check by the Participant delivered at least thirty (30) days prior to the last day of the Option Period and shall be credited to Participant's Contribution Account. 5.5 LIMITATIONS ON CONTRIBUTIONS. During each Option Period the total contributions by a Participant to his Contribution Account (including both contributions by payroll deduction pursuant to Section 5.1 and lump sum contributions pursuant to Section 5.5) shall not exceed fifteen percent (15%) of the Participant's base pay on the Commencement Date (expressed as base pay for the applicable payroll period) multiplied by the number of payroll periods during that Option Period. If a Participant's total contributions should exceed this limit, the excess shall be returned to the Participant after the end of the Option Period, without interest. ARTICLE VI ISSUANCE AND EXERCISE OF OPTIONS 6.1 RESERVED SHARES OF STOCK. ARC shall reserve two hundred fifty thousand (250,000) shares of Stock for issuance upon exercise of the options granted under this Plan. 6 7 6.2 ISSUANCE OF OPTIONS. On the Grant Date each Participant shall be deemed to receive an option to purchase Stock with the number of shares and Exercise Price determined as provided in this Article VI, subject to the maximum limit specified in Section 6.6(a). All such options shall be automatically exercised on the following Exercise Date, except for options which are canceled when a Participant withdraws the balance of his Contribution Account or which are otherwise terminated under the provisions of this Plan. 6.3 DETERMINATION OF EXERCISE PRICE. The Exercise Price of the options granted under this Plan for any Option Period shall be the lesser of (a) eighty-five percent (85%) of the Closing Market Price of the Stock on the Exercise Date, or (b) eighty-five percent (85%) of the Closing Market Price of the Stock on the Grant Date. 6.4 PURCHASE OF STOCK. On an Exercise Date, all options shall be automatically exercised, except that the options of a Participant who has terminated employment pursuant to Section 7.1 or who has withdrawn all his contribution shall expire. The Contribution Account of each Participant shall be used to purchase the maximum number of whole shares of Stock determined by dividing the Exercise Price into the balance of the Participant's Contribution Account. Any money remaining in a Participant's Contribution Account representing a fractional share shall remain in his Contribution Account to be used in the next Option Period along with new contributions in the next Option Period; provided, however, that if the Participant does not enroll for the next Option Period, the balance remaining shall be returned to such Participant in cash. 6.5 TERMS OF OPTIONS. Options granted under this Plan shall be subject to such amendment or modification as the Employer shall deem necessary to comply with any applicable law or regulation, including but not limited to Section 423 of the Code, and shall contain such other provisions as the Employer shall from time to time approve and deem necessary. 7 8 6.6 LIMITATIONS ON OPTIONS. The options granted hereunder are subject to the following limitations: (a) The maximum number of shares of Stock which may be purchased by any Participant on an Exercise Date shall be seven hundred (700) shares. This maximum number of shares shall be adjusted upon the occurrence of an event described in Section 10.3. (b) No Participant shall be permitted to purchase during any calendar year Stock under this Plan (and any other plan of the Employer or Subsidiary which is qualified under Section 423 of the Code) having a market value in excess of $25,000 (as determined on the Grant Date for the Option Period during which each such share of Stock is purchased). (c) No option may be granted to a Participant if the Participant immediately after the option is granted would be a Five-Percent Shareholder. (d) No Participant may assign, transfer or otherwise alienate any options granted to him under this Plan, otherwise than by will or the laws of descent and distribution, and such options must be exercised during the Participant's lifetime only by such Participant. 6.7 PRO-RATA REDUCTION OF OPTIONED STOCK. If the total number of shares of Stock to be purchased under option by all Participants on an Exercise Date exceeds the number of shares of Stock remaining authorized for issuance under Section 6.1, a pro-rata allocation of the shares of Stock available for issuance will be made among Participants in proportion to their respective Contribution Account balances on the Exercise Date, and any money remaining in the Contribution Accounts shall be returned to the Participants. 6.8 STATE SECURITIES LAWS. Notwithstanding anything to the contrary contained herein, the Company shall not be obligated to issue shares of Stock to any Participant if to do so would violate any State securities law applicable to the sale of Stock to such Participant. In the event that the Company refrains from issuing shares of Stock to any Participant in reliance on this Section, the Company shall return to such Participant the amount in such Participant's Contribution Account that would otherwise have been applied to the purchase of Stock. 8 9 ARTICLE VII TERMINATION OF PARTICIPATION 7.1 TERMINATION OF EMPLOYMENT. Any Employee whose employment with the Employer is terminated during the Option Period prior to the Exercise Date for any reason except death, disability or retirement at or after age 65 shall cease being a Participant immediately. The balance of that Participant's Contribution Account shall be paid to such Participant as soon as practical after his termination. The option granted to such Participant shall be null and void from and after his termination of employment. 7.2 DEATH. If a Participant should die while employed by the Employer, no further contributions on behalf of the deceased Participant shall be made. The legal representative of the deceased Participant may elect to withdraw the balance in said Participant's Contribution Account by notifying the Employer in writing at least thirty (30) days prior to the last day of the Option Period during which the Participant died. In the event no election to withdraw is made in a timely manner, the balance accumulated in the deceased Participant's Contribution Account shall be used to purchase shares of Stock in accordance with Section 6.4. Any money remaining which is insufficient to purchase a whole share shall be paid to the legal representative. 7.3 RETIREMENT. If a Participant should retire from the employment of the Employer at or after attaining age 65, no further contributions on behalf of the retired Participant shall be made. The Participant may elect to withdraw the balance in his Contribution Account by notifying the Employer in writing at least thirty (30) days prior to the last day of the Option Period during which the Participant retired. In the event no election to withdraw is made in a timely manner, the balance accumulated in the retired Participant's Contribution Account shall be used to purchase shares of Stock in accordance with Section 6.4, and any money remaining which is insufficient to purchase a whole share shall be paid to the retired Participant. 7.4 DISABILITY. If a Participant should terminate employment with the Employer on account of disability, as determined by reference to the definition of "total disability" in the Company's then current long-term disability plan (which as of the Effective Date is insured by Guarantee Mutual Life Company, Group Policy No. 01-001-0646), no further contributions on behalf of the disabled Participant shall be made. The Participant may elect to withdraw the balance in his Contribution Account by notifying the Employer in writing at least thirty (30) days prior to the last day of the Option Period during which the Participant became disabled. In the event no election to withdraw 9 10 is made in a timely manner, the balance accumulated in the disabled Participant's Contribution Account shall be used to purchase shares of Stock in accordance with Section 6.4, and any money remaining which is insufficient to purchase a whole share shall be paid to the disabled Participant. ARTICLE VIII OWNERSHIP OF STOCK 8.1 STOCK CERTIFICATES. Certificates for Stock purchased through exercise of the options granted hereunder shall be issued as soon as practical after the Exercise Date. Certificates may be issued, at the request of the Participant, in the name of the Participant, jointly in the name of the Participant and a member of the Participant's family, or to the Participant as custodian for the Participant's child under the Gift to Minors Act. 8.2 PREMATURE SALE OF STOCK. If a Participant (or former Participant) sells or otherwise disposes of any shares of Stock obtained under this Plan (a) prior to two (2) years after the Grant Date of the option under which such shares were obtained, or (b) prior to one (1) year after the Exercise Date on which such shares were obtained, that Participant (or former Participant) must notify the Employer immediately in writing concerning such disposition. ARTICLE IX ADMINISTRATION AND AMENDMENT 9.1 ADMINISTRATION. The Plan Administrator shall (i) administer the Plan and keep records of the Contribution Account balance of each Participant, (ii) interpret the Plan, and (iii) determine all questions arising as to eligibility to participate, amount of contributions permitted, determination of the Exercise Price, and all other matters of administration. The Plan Administrator shall have such duties, powers and discretionary authority as may be necessary to discharge the foregoing duties, and 10 11 may delegate any or all of the foregoing duties to any individual or individuals (including officers or other Employees who are Participants). The Board of Directors shall have the right at any time and without notice to remove or replace any individual or committee of individuals serving as Plan Administrator. All determinations by the Plan Administrator shall be conclusive and binding on all persons. Any rules, regulations, or procedures that may be necessary for the proper administration or functioning of this Plan that are not covered in this Plan document shall be promulgated and adopted by the Plan Administrator. 9.2 AMENDMENT. The Board of Directors of ARC may at any time amend the Plan in any respect, including termination of the Plan, without notice to Participants. If the Plan is terminated, all options outstanding at the time of termination shall become null and void and the balance in each Participant's Contribution Account shall be paid to that Participant. Notwithstanding the foregoing, no amendment of the Plan as described in Section 3.2 shall become effective until and unless such amendment is approved by the shareholders of ARC. ARTICLE X MISCELLANEOUS 10.1 EXPENSES. The Employer will pay all expenses of administering this Plan that may arise in connection with the Plan. 10.2 NO CONTRACT OF EMPLOYMENT. Nothing in this Plan shall be construed to constitute a contract of employment between an Employer and any Employee or to be an inducement for the employment of any Employee. Nothing contained in this Plan shall be deemed to give any Employee the right to be retained in the service of an Employer or to interfere with the right of an Employer to discharge any Employee at any time, with or without cause, regardless of the effect which such discharge may have upon him as a Participant of the Plan. 10.3 ADJUSTMENT UPON CHANGES IN STOCK. The aggregate number of shares of Stock reserved for purchase under the Plan as provided in Section 6.1, and the calculation of the Exercise Price as provided in Section 6.3, shall be adjusted by the Plan Administrator (subject to direction by the Board of Directors) in an equitable manner to reflect changes in the capitalization of ARC, including, but not limited to, such changes as result from merger, consolidation, reorganization, recapitalization, stock dividend, dividend 11 12 in property other than cash, stock split, combination of shares, exchange of shares and change in corporate structure. If any adjustment under this Section 10.3 would create a fractional share of Stock or a right to acquire a fractional share of Stock, such fractional share shall be disregarded and the number of shares available under the Plan and the number of shares covered under any options granted pursuant to the Plan shall be the next lower number of shares, rounding all fractions downward. 10.4 EMPLOYER'S RIGHTS. The rights and powers of any Employer shall not be affected in any way by its participation in this Plan, including but not limited to the right or power of any Employer to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. 10.5 LIMIT ON LIABILITY. No liability whatever shall attach to or be incurred by any past, present or future shareholders, officers or directors, as such, of ARC or any Employer, under or by reason of any of the terms, conditions or agreements contained in this Plan or implied therefrom, and any and all liabilities of any and all rights and claims against ARC, an Employer, or any shareholder, officer or director as such, whether arising at common law or in equity or created by statute or constitution or otherwise, pertaining to this Plan, are hereby expressly waived and released by every Participant as a part of the consideration for any benefits under this Plan; provided, however, no waiver shall occur, solely by reason of this Section 10.5, of any right which is not susceptible to advance waiver under applicable law. 10.6 GENDER AND NUMBER. For the purposes of the Plan, unless the contrary is clearly indicated, the use of the masculine gender shall include the feminine, and the singular number shall include the plural and vice versa. 10.7 GOVERNING LAW. The validity, construction, interpretation, administration and effect of this Plan, and any rules or regulations promulgated hereunder, including all rights or privileges of any Participants hereunder, shall be governed exclusively by and in accordance with the laws of the State of Tennessee, except that the Plan shall be construed to the maximum extent possible to comply with Section 423 of the Code and the Treasury regulations promulgated thereunder. 12 13 10.8 HEADINGS. Any headings or subheadings in this Plan are inserted for convenience of reference only and are to be ignored in the construction of any provisions hereof. 10.9 SEVERABILITY. If any provision of this Plan is held by a court to be unenforceable or is deemed invalid for any reason, then such provision shall be deemed inapplicable and omitted, but all other provisions of this Plan shall be deemed valid and enforceable to the full extent possible under applicable law. IN WITNESS WHEREOF, the Employer has adopted this Plan effective July 1, 1997, subject to approval by the shareholders of ARC on or before the expiration of the time period specified in Section 3.1. Date: __________, 1997 AMERICAN RETIREMENT CORPORATION By:___________________________ Title:________________________ Attest: ______________________________________________ 13 EX-10.3 8 PROTOTYPE DEFINED CONTRIBUTION PLAN 1 EXHIBIT 10.3 PROTOTYPE DEFINED CONTRIBUTION PLAN AND TRUST/CUSTODIAL ACCOUNT SPONSORED BY THIRD NATIONAL BANK IN NASHVILLE BASIC PLAN DOCUMENT JULY 1994 COPYRIGHT 1994 2 This document is copyrighted under the laws of the United States. Its use, duplication or reproduction, including the use of electronic means, is prohibited by law without the express consent of the author. TABLE OF CONTENTS PARAGRAPH PAGE - --------- ---- ARTICLE I DEFINITIONS 1.1 Actual Deferral Percentage [For The ADP Or 401(k) Test] 1 1.2 Adoption Agreement 1 1.3 Aggregate Limit 2 1.4 Annual Additions 2 1.5 Annuity Starting Date 2 1.6 Applicable Calendar Year 2 1.7 Applicable Life Expectancy 3 1.8 Average Contribution Percentage [The ACP For The 401(m) Test] 3 1.9 Average Deferral Percentage [The ADP For The 401(k) Test] 3 1.10 Break In Service 3 1.11 Code 3 1.12 Compensation 3 1.13 Contribution Percentage [For The ACP Or 401(m) Test] 5 1.14 Custodian 6 1.15 Defined Benefit Plan 6 1.16 Defined Benefit (Plan) Fraction 6 1.17 Defined Contribution Dollar Limitation 6 1.18 Defined Contribution Plan 7 1.19 Defined Contribution (Plan) Fraction 7 1.20 Designated Beneficiary 7 1.21 Direct Rollover 7 1.22 Direct Rollover Of Benefits 7 1.23 Disability 8 1.24 Distribution Calendar Year 8 1.25 Early Retirement Age 8 1.26 Earned Income 8 1.27 Effective Date 8 1.28 Election Period 8 1.29 Elective Deferral 8 1.30 Eligible Participant 9 1.31 Eligible Retirement Plan 9 1.32 Eligible Rollover Distribution 9 1.33 Employee 9 1.34 Employer 9 1.35 Entry Date 10 1.36 Excess Aggregate Contributions [ACP Or 401(m) Test] 10 1.37 Excess Amount (415 Limits) Or Excess Annual Additions 11 1.38 Excess Contribution [ADP Or 401(k) Test] 11
3 1.39 Excess Elective Deferrals ($7,000 as Indexed) 11 1.40 Family Member 11 1.41 First Distribution Calendar Year 11 1.42 Fund 11 1.43 Hardship 11 1.44 Highest Average Compensation 11 1.45 Highly Compensated Employee 11 1.46 Hour Of Service 12 1.47 Key Employee 14 1.48 Leased Employee 14 1.49 Limitation Year 14 1.50 Master Or Prototype Plan 14 1.51 Matching Contribution 14 1.52 Maximum Permissible Amount 14 1.53 Net Profit 15 1.54 Normal Retirement Age 15 1.55 Owner-Employee 15 1.56 Paired Plans 15 1.57 Participant 15 1.58 Participant's Benefit 15 1.59 Permissive Aggregation Group 15 1.60 Plan 15 1.61 Plan Administrator 15 1.62 Plan Year 15 1.63 Present Value 16 1.64 Projected Annual Benefit 16 1.65 Qualified Deferred Compensation Plan 16 1.66 Qualified Domestic Relations Order (QDRO) 16 1.67 Qualified Early Retirement Age 16 1.68 Qualified Joint And Survivor Annuity 16 1.69 Qualified Matching Contribution 16 1.70 Qualified Non-Elective Contributions 17 1.71 Qualified Voluntary Contribution 17 1.72 Required Aggregation Group 17 1.73 Required Beginning Date 17 1.74 Rollover Contribution 17 1.75 Salary Savings Agreement 17 1.76 Self-Employed Individual 17 1.77 Service 17 1.78 Shareholder Employee 17 1.79 Simplified Employee Pension Plan 17 1.80 Sponsor 17 1.81 Spouse (Surviving Spouse) 18 1.82 Super Top-Heavy Plan 18 1.83 Taxable Wage Base 18 1.84 Top-Heavy Determination Date 18 1.85 Top-Heavy Plan 18 1.86 Top-Heavy Ratio 18 1.87 Top-Paid Group 19 1.88 Transfer Contribution 20 1.89 Trustee 20 1.90 Valuation Date 20 1.91 Valuation Period 20 1.92 Vested Account Balance 20 1.93 Voluntary Contribution 20 1.94 Welfare Benefit Fund 21 1.95 Year Of Service 21
4 ARTICLE II ELIGIBILITY REQUIREMENTS 2.1 Participation 22 2.2 Change In Classification Of Employment 22 2.3 Computation Period 22 2.4 Employment Rights 23 2.5 Service With Controlled Groups 23 2.6 Owner-Employees 23 2.7 Leased Employees 23 2.8 Thrift Plans 24
ARTICLE III EMPLOYER CONTRIBUTIONS 3.1 Amount 25 3.2 Expenses And Fees 25 3.3 Responsibility For Contributions 25 3.4 Return Of Contributions 25
ARTICLE IV EMPLOYEE CONTRIBUTIONS 4.1 Voluntary Contributions 26 4.2 Qualified Voluntary Contributions 26 4.3 Rollover Contribution 26 4.4 Transfer Contribution 27 4.5 Employer Approval Of Transfer Contributions 27 4.6 Salary Savings Contributions (Elective Deferrals) 28 4.7 Required Voluntary Contributions 28 4.8 Direct Rollover Of Benefits 29 4.9 Special Rules For Direct Rollovers 29
ARTICLE V PARTICIPANT ACCOUNTS 5.1 Separate Accounts 31 5.2 Adjustments To Participant Accounts 31 5.3 Allocating Employer Contributions 32 5.4 Allocating Investment Earnings And Losses 32 5.5 Participant Statements 33
ARTICLE VI RETIREMENT BENEFITS AND DISTRIBUTIONS 6.1 Normal Retirement Benefits 34 6.2 Early Retirement Benefits 34 6.3 Benefits On Termination Of Employment 34 6.4 Restrictions On Immediate Distributions 36 6.5 Normal Form Of Payment 37 6.6 Commencement Of Benefits 37
5 6.7 Claims Procedures 38 6.8 In-Service Withdrawals 38 6.9 Hardship Withdrawals 40 6.10 Previous Distribution Options 41
ARTICLE VII DISTRIBUTION REQUIREMENTS 7.1 Joint And Survivor Annuity Requirements 42 7.2 Minimum Distribution Requirements 42 7.3 Limits On Distribution Periods 42 7.4 Required Distributions On Or After The Required Beginning Date 42 7.5 Required Beginning Date 43 7.6 Transitional Rule 44 7.7 Designation Of Beneficiary For Death Benefit 46 7.8 Nonexistence Of Beneficiary 46 7.9 Distribution Beginning Before Death 46 7.10 Distribution Beginning After Death 46 7.11 Distribution Of Excess Elective Deferrals 47 7.12 Distributions Of Excess Contributions (ADP Amounts) 48 7.13 Distribution Of Excess Aggregate Contributions (ACP Amounts) 48
ARTICLE VIII JOINT AND SURVIVOR ANNUITY REQUIREMENTS 8.1 Applicability Of Provisions 50 8.2 Payment Of Qualified Joint And Survivor Annuity 50 8.3 Payment of Qualified Pre-Retirement Survivor Annuity 50 8.4 Qualified Election 50 8.5 Notice Requirements For Qualified Joint And Survivor Annuity 51 8.6 Notice Requirements For Qualified Pre- Retirement Survivor Annuity 51 8.7 Special Safe-Harbor Exception For Certain Profit-Sharing Plans 52 8.8 Transitional Joint And Survivor Annuity Rules 53 8.9 Automatic Joint And Survivor Annuity And Early Survivor Annuity 53 8.10 Annuity Contracts 54
ARTICLE IX VESTING 9.1 Employee Contributions 55 9.2 Employer Contributions 55 9.3 Computation Period 55 9.4 Requalification Prior To Five Consecutive One-Year Breaks In Service 55
6 9.5 Requalification After Five Consecutive One-Year Breaks In Service 55 9.6 Calculating Vested Interest 56 9.7 Forfeitures 56 9.8 Amendment Of Vesting Schedule 56 9.9 Service With Controlled Groups 57
ARTICLE X LIMITATIONS ON ALLOCATIONS AND ANTIDISCRIMINATION TESTING 10.1 Participation Only In This Plan 58 10.2 Disposition Of Excess Annual Additions 58 10.3 Participation In This Plan And Another Prototype Defined Contribution Plan Welfare Benefit Fund Or Individual Medical Account Maintained By The Employer 59 10.4 Disposition Of Excess Annual Additions Under Two Plans 60 10.5 Participation In This Plan And Another Defined Contribution Plan Which Is Not A Master Or Prototype Plan 60 10.6 Participation In This Plan And A Defined Benefit Plan 60 10.7 Average Deferral Percentage [ADP Or 401(k)] Test 60 10.8 Special Rules Relating To Application Of ADP Test 61 10.9 Recharacterization 62 10.10 Average Contribution Percentage [ACP or 401(m) Test 62 10.11 Special Rules Relating To Application Of ACP Test 63
ARTICLE XI ADMINISTRATION 11.1 Plan Administrator 65 11.2 Trustee/Custodian 65 11.3 Administrative Fees And Expenses 66 11.4 Division Of Duties And Indemnification 66
ARTICLE XII TRUST FUND/CUSTODIAL ACCOUNT 12.1 The Fund 69 12.2 Control Of Plan Assets 69 12.3 Exclusive Benefit Rules 69 12.4 Assignment And Alienation Of Benefits 69 12.5 Determination Of Qualified Domestic Relations Order (QDRO) 69
7 ARTICLE XIII INVESTMENTS 13.1 Fiduciary Standards 71 13.2 Funding Arrangement 71 13.3 Investment Alternatives Of The Trustee 71 13.4 Investment Alternatives Of The Custodian 73 13.5 Participant Loans 73 13.6 Insurance Policies 75 13.7 Employer Investment Direction 77 13.8 Employee Investment Direction 77
ARTICLE XIV TOP-HEAVY PROVISIONS 14.1 Applicability Of Rules 79 14.2 Minimum Contribution 79 14.3 Minimum Vesting 80 14.4 Limitations On Allocations 80
ARTICLE XV AMENDMENT AND TERMINATION 15.1 Amendment By Sponsor 81 15.2 Amendment By Employer 81 15.3 Termination 81 15.4 Qualification Of Employer's Plan 82 15.5 Mergers And Consolidations 82 15.6 Resignation And Removal 82 15.7 Qualification Of Prototype 83
ARTICLE XVI GOVERNING LAW 84 8 PROTOTYPE DEFINED CONTRIBUTION PLAN AND TRUST/CUSTODIAL ACCOUNT SPONSORED BY THIRD NATIONAL BANK IN NASHVILLE The Sponsor hereby establishes the following Prototype Retirement Plan and Trust/Custodial Account for use by those of its customers who qualify and wish to adopt a qualified retirement program. Any Plan and Trust/Custodial Account established hereunder shall be administered for the exclusive benefit of Participants and their beneficiaries under the following terms and conditions: ARTICLE I DEFINITIONS 1.1 ACTUAL DEFERRAL PERCENTAGE [FOR THE ADP OR 401(K) TEST] The ratio (expressed as a percentage and calculated separately for each Participant) of: (a) the amount of Employer contributions [as defined at (c) and (d)] actually paid over to the Fund on behalf of such Participant for the Plan Year to (b) the Participant's Compensation which includes amounts for the period during which the Employee was eligible to participate or if otherwise selected by the Employer in the Adoption Agreement, Compensation may include Compensation for the entire Plan Year (whether or not the Employee was a Participant for the entire Plan Year). Employer contributions on behalf of any Participant shall include: (c) any Elective Deferrals made pursuant to the Participant's deferral election, including Excess Elective Deferrals, but excluding Elective Deferrals that are taken into account in the Contribution Percentage test (provided the ADP test is satisfied both with and without exclusion of these Elective Deferrals) or are returned as excess Annual Additions; and (d) at the election of the Employer, Qualified Non-Elective Contributions and Qualified Matching Contributions. For purposes of computing Actual Deferral Percentages, an Employee who would be a Participant but for the failure to make Elective Deferrals shall be treated as a Participant on whose behalf no Elective Deferrals are made. 1.2 ADOPTION AGREEMENT The document attached to this Plan by which an Employer elects to establish a qualified retirement plan and trust/custodial account under the terms of this Prototype Plan and Trust/Custodial Account. 1 9 1.3 AGGREGATE LIMIT The sum of: (a) 125 percent of the greater of the ADP of the non-Highly Compensated Employees for the Plan Year or the ACP of non-Highly Compensated Employees under the Plan subject to Code Section 401(m) for the Plan Year beginning with or within the Plan Year of the cash or deferred arrangement as described in Code Section 401(k) or Code Section 402(h)(1)(B), and (b) the lesser of 200% or two percent plus the lesser of such ADP or ACP. Alternatively, the aggregate limit can be determined by substituting "the lesser of 200% or 2 percent plus" for "125% of" in (a) above, and substituting "125% of" for "the lesser of 200% or 2 percent plus" in (b) above. 1.4 ANNUAL ADDITIONS The sum of the following amounts credited to a Participant's account for the Limitation Year: (a) Employer Contributions, (b) Employee Contributions (under Article IV), (c) forfeitures, (d) amounts allocated after March 31, 1984 to an individual medical account, as defined in Code Section 415(l)(2), which is part of a pension or annuity plan maintained by the Employer (these amounts are treated as Annual Additions to a Defined Contribution Plan though they arise under a Defined Benefit Plan), and (e) amounts derived from contributions paid or accrued after 1985, in taxable years ending after 1985, which are either attributable to post-retirement medical benefits allocated to the account of a Key Employee under a Welfare Benefit Fund maintained by the Employer are also treated as Annual Additions to a Defined Contribution Plan. For purposes of this paragraph, an Employee is a Key Employee if he or she meets the requirements of paragraph 1.43 at any time during the Plan Year or any preceding Plan Year. Welfare Benefit Fund is defined at paragraph 1.89. Excess amounts applied in a Limitation Year to reduce Employer contributions will be considered Annual Additions for such Limitation Year, pursuant to the provisions of Article X. 1.5 ANNUITY STARTING DATE The first day of the first period for which an amount is paid as an annuity or in any other form. 1.6 APPLICABLE CALENDAR YEAR The First Distribution Calendar Year, and in the event of the recalculation of life expectancy, such succeeding calendar year. If payments commence in accordance with paragraph 7.4(e) before the Required Beginning Date, the Applicable Calendar Year is the year such payments commence. If distribution is in the form of an immediate annuity purchased after the Participant's death with the Participant's remaining interest, the Applicable Calendar Year is the year of purchase. 2 10 1.7 APPLICABLE LIFE EXPECTANCY Used in determining the required minimum distribution. The life expectancy (or joint and last survivor expectancy) calculated using the attained age of the Participant (or Designated Beneficiary) as of the Participant's (or Designated Beneficiary's) birthday in the Applicable Calendar Year reduced by one for each calendar year which has elapsed since the date life expectancy was first calculated. If life expectancy is being recalculated, the Applicable Life Expectancy shall be the life expectancy as so recalculated. The life expectancy of a non-Spouse Beneficiary may not be recalculated. 1.8 AVERAGE CONTRIBUTION PERCENTAGE [THE ACP FOR THE 401(M) TEST] The average of the Contribution Percentages for each Highly Compensated Employee and for each non-Highly Compensated Employee. 1.9 AVERAGE DEFERRAL PERCENTAGE [THE ADP FOR THE 401(K) TEST] The average of the Actual Deferral Percentages for each Highly Compensated Employee and for each non-Highly Compensated Employee. 1.10 BREAK IN SERVICE A 12-consecutive month period during which an Employee fails to complete more than 500 Hours of Service. 1.11 CODE The Internal Revenue Code of 1986, including any amendments thereto. 1.12 COMPENSATION The Employer may select one of the following three safe-harbor definitions of compensation in the adoption agreement. Compensation shall only include amounts earned while a Participant if Plan Year is chosen as the applicable computation period. (a) CODE SECTION 3401(A) WAGES. Compensation is defined as wages within the meaning of Code Section 3401(a) for the purposes of Federal income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed [such as the exception for agricultural labor in Code Section 3401(a)(2)]. (b) CODE SECTION 6041 AND 6051 WAGES. Compensation is defined as wages as defined in Code Section 3401(a) and all other payments of compensation to an Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the employee a written statement under Code Section 6041(d) and 6051(a)(3). Compensation must be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed [such as the exception for agricultural labor in Code Section 3401(a)(2)]. (c) CODE SECTION 415 COMPENSATION. For purposes of applying the limitations of Article X and Top-Heavy Minimums, the definition of Compensation shall be Code Section 415 Compensation as follows: a Participant's Earned Income, wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the Plan to the extent that the amounts are includible in gross income [including, but not limited to, commissions paid salesmen, 3 11 compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits and reimbursements or other expense allowances under a nonaccountable plan (as described in Regulation 1.62-2(c)], and excluding the following: 1. Employer contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a Simplified Employee Pension Plan or any distributions from a plan of deferred compensation, 2. Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture, 3. Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and 4. other amounts which received special tax benefits, or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Code Section 403(b) (whether or not the contributions are actually excludible from the gross income of the Employee). For purposes of applying the limitations of Article X and Top-Heavy minimums, the definition of Compensation shall be Code Section 415 Compensation described in this paragraph 1.12(c). Also, for purposes of applying the limitations of Article X, Compensation for a Limitation Year is the Compensation actually paid or made available during such Limitation Year. Notwithstanding the preceding sentence, Compensation for a Participant in a defined contribution plan who is permanently and totally disabled [as defined in Code Section 22(e)(3)] is the Compensation such Participant would have received for the Limitation Year if the Participant had been paid at the rate of Compensation paid immediately before becoming permanently and totally disabled. Such imputed Compensation for the disabled Participant may be taken into account only if the participant is not a Highly Compensated Employee [as defined in Code Section 414(q)] and contributions made on behalf of such Participant are nonforfeitable when made. If the Employer fails to pick the determination period in the Adoption Agreement, the Plan Year shall be used. Unless otherwise specified by the Employer in the adoption agreement, Compensation shall be determined as provided in 1.12(c). In Nonstandardized Adoption Agreements 003, 004 and 008, the Employer may choose to eliminate or exclude categories of Compensation which do not violate the provisions of Code Sections 401(a)(4), 414(s), regulations thereunder and Revenue Procedure 89-65. Beginning with 1989 Plan Years, the annual Compensation of each Participant which may be taken into account for determining all benefits provided under the Plan (including benefits under Article XIV) for any year shall not exceed $200,000, as adjusted under Code Section 415(d). 4 12 For Plan Years beginning on or after January 1, 1994, the annual Compensation of each Participant taken into account for determining all benefits provided under the Plan for any Plan Year shall not exceed $150,000, as adjusted for increases in the cost-of-living in accordance with Code Section 401(a)(17). The cost-of-living adjustment in effect for a calendar year applies to any determination period beginning in such year. In determining the Compensation of a Participant for purposes of this limitation, the rules of Code Section 414(q)(6) shall apply, except in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the end of the Plan year. If, as a result of the application of such rules the adjusted annual Compensation limitation is exceeded, then (except for purposes of determining the portion of Compensation up to the integration level if this Plan provides for permitted disparity), the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this section prior to the application of this limitation. In the event that "family aggregation" is repealed by Congress, such provisions contained herein shall be null and void. In that event, the Plan shall use each Participant's total Compensation, as provided in the Adoption Agreement, up to the maximum allowed under law for any Plan Year. If a Plan has a Plan Year that contains fewer than 12 Calendar Months, then the annual compensation limit for that period is an amount equal to the annual Compensation as adjusted for the calendar year in which the compensation period begins, multiplied by a fraction the numerator of which is the number of full months in the Short determination period and the denominator of which is 12. If Compensation for any prior Plan Year is taken into account in determining an employee's contributions or benefits for the current year, the Compensation for such prior year is subject to the applicable annual compensation limit in effect for that prior year. For this purpose, for years beginning before January 1, 1990, the applicable annual compensation limit is $200,000. Compensation shall not include deferred compensation other than contributions through a salary reduction agreement to a cash or deferred plan under Code Section 401(k), a Simplified Employee Pension Plan under Code Section 402(h)(1)(B), a cafeteria plan under Code Section 125 or a tax-deferred annuity under Code Section 403(b). Unless elected otherwise by the Employer in the Adoption Agreement, these deferred amounts will be considered as Compensation for Plan purposes. These deferred amounts are not counted as Compensation for purposes of Articles X and XIV. When applicable to a Self-Employed Individual, Compensation shall mean Earned Income. 1.13 CONTRIBUTION PERCENTAGE [FOR THE ACP OR 401(M) TEST] The ratio (expressed as a percentage and calculated separately for each Participant) of: (a) the Participant's Contribution Percentage Amounts [as defined at (c) through (f)] actually paid over to the Fund on behalf of such Participant for the Plan Year to (b) the Participant's Compensation which includes amounts for the period during which the Employee was eligible to participate or if otherwise selected by the Employer in the Adoption Agreement, Compensation may include Compensation for the entire Plan Year (whether or not the Employee was a Participant for the entire Plan Year). 5 13 The "Contribution Percentage Amount" on behalf of any Participant shall include: (c) the amount of Employee Voluntary Contributions, Matching Contributions and Qualified Matching Contributions (to the extent not taken into account for purposes of the ADP test) made under the Plan on behalf of the Participant for the Plan Year. (d) forfeitures of Excess Aggregate Contributions or Matching Contributions allocated to the Participant's matching account which shall be taken into account in the year in which such forfeiture is allocated, (e) at the election of the Employer, Qualified Non-Elective Contributions in the Contribution Percentage Amount, and (f) the Employer may also elect to use Elective Deferrals in the Contribution Percentage Amount so long as the ADP test is met before the Elective Deferrals are used in the ACP test and continues to be met following the exclusion of those Elective Deferrals that are used to meet the ACP test. (g) the amount of Elective Deferrals recharacterized as voluntary contributions under paragraph 10.9 Contribution Percentage amounts shall not include Matching Contributions, whether or not qualified, that are forfeited either to correct Excess Aggregate Contributions, or because the contributions to which they relate are Excess Deferrals, Excess Contributions or Excess Aggregate Contributions. 1.14 CUSTODIAN The individual or institution appointed by the Employer to have custody of all or part of the Fund. 1.15 DEFINED BENEFIT PLAN A Plan under which a Participant's benefit is determined by a formula contained in the Plan and no individual accounts are maintained for Participants. 1.16 DEFINED BENEFIT (PLAN) FRACTION A fraction, the numerator of which is the sum of the Participant's Projected Annual Benefits under all the Defined Benefit Plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of 125 percent of the dollar limitation determined for the Limitation Year under Code Sections 415(b) and (d) or 140 percent of the Highest Average Compensation, including any adjustments under Code Section 415(b). Notwithstanding the above, if the Participant was a Participant as of the first day of the first Limitation Year beginning after 1986, in one or more Defined Benefit Plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the Participant had accrued as of the close of the last Limitation Year beginning before 1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986. The preceding sentence applies only if the Defined Benefit Plans individually and in the aggregate satisfied the requirements of Section 415 for all Limitation Years beginning before 1987. 1.17 DEFINED CONTRIBUTION DOLLAR LIMITATION Thirty thousand dollars ($30,000) or if greater, one-fourth of the defined benefit dollar limitation set forth in Code Section 415(b)(1) as in effect for the Limitation Year. 6 14 1.18 DEFINED CONTRIBUTION PLAN A Plan under which individual accounts are maintained for each Participant to which all contributions, forfeitures, investment income and gains or losses, and expenses are credited or deducted. A Participant's benefit under such Plan is based solely on the fair market value of his or her account balance. 1.19 DEFINED CONTRIBUTION (PLAN) FRACTION A Fraction, the numerator of which is the sum of the Annual Additions to the Participant's account under all the Defined Contribution Plans (whether or not terminated) maintained by the Employer for the current and all prior Limitation Years (including the Annual Additions attributable to the Participant's nondeductible Employee contributions to all Defined Benefit Plans, whether or not terminated, maintained by the Employer, and the Annual Additions attributable to all Welfare Benefit Funds, as defined in paragraph 1.89 and individual medical accounts, as defined in Code Section 415(1)(2), maintained by the Employer), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior Limitation Years of service with the Employer (regardless of whether a Defined Contribution Plan was maintained by the Employer). The maximum aggregate amount in the Limitation Year is the lesser of 125 percent of the dollar limitation determined under Code Sections 415(b) and (d) in effect under Code Section 415(c)(1)(A) or 35 percent of the Participant's Compensation for such year. If the Employee was a Participant as of the end of the first day of the first Limitation Year beginning after 1986, in one or more Defined Contribution Plans maintained by the Employer which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the Defined Benefit Fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0 times (2) the denominator of this fraction will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning before 1987, and disregarding any changes in the terms and conditions of the Plan made after May 5, 1986, but using the Section 415 limitation applicable to the first Limitation Year beginning on or after January 1, 1987. The Annual Addition for any Limitation Year beginning before 1987, shall not be re-computed to treat all Employee Contributions as Annual Additions. 1.20 DESIGNATED BENEFICIARY The individual who is designated as the beneficiary under the Plan in accordance with Code Section 401(a)(9) and the regulations thereunder. 1.21 DIRECT ROLLOVER A payment by the plan to the Eligible Retirement Plan specified by the Participant. 1.22 DIRECT ROLLOVER OF BENEFITS Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Participant's election under this paragraph, for distributions made on or after January 1, 1993, a Participant may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Participant in a Direct Rollover. Any portion of a distribution which is not paid directly to an Eligible Retirement Plan shall be distributed to the Participant. For purposes of this paragraph, a Surviving Spouse or a Spouse or former Spouse who is an alternate payee under a Qualified Domestic Relations Order as defined in Code Section 414(p), will be permitted to elect to have any Eligible Rollover Distribution paid directly to an individual retirement account (IRA) or an individual retirement annuity (IRA). 7 15 The plan provisions otherwise applicable to distributions continue to apply to Rollover and Transfer Contributions. 1.23 DISABILITY An illness or injury of a potentially permanent nature, expected to last for a continuous period of not less than 12 months, certified by a physician selected by or satisfactory to the Employer which prevents the Employee from engaging in any occupation for wage or profit for which the Employee is reasonably fitted by training, education or experience. 1.24 DISTRIBUTION CALENDAR YEAR A calendar year for which a minimum distribution is required. 1.25 EARLY RETIREMENT AGE The age set by the Employer in the Adoption Agreement (but not less than 55), which is the earliest age at which a Participant may retire and receive his or her benefits under the Plan. 1.26 EARNED INCOME Net earnings from self-employment in the trade or business with respect to which the Plan is established, determined without regard to items not included in gross income and the deductions allocable to such items, provided that personal services of the individual are a material income-producing factor. Earned income shall be reduced by contributions made by an Employer to a qualified plan to the extent deductible under Code Section 404. For tax years beginning after 1989, net earnings shall be determined taking into account the deduction for one-half of self-employment taxes allowed to the Employer under Code Section 164(f) to the extent deductible. 1.27 EFFECTIVE DATE The date on which the Employer's retirement plan or amendments to such plan become effective. For amendment changes taking place after the Tax Reform Act of 1986 Effective Date, the Effective Date and effective periods of such plan amendments or plan changes for any restated Plan shall be the dates and periods specified in the Adoption Agreement Appendix A. 1.28 ELECTION PERIOD The period which begins on the first day of the Plan Year in which the Participant attains age 35 and ends on the date of the Participant's death. If a Participant separates from service prior to the first day of the Plan Year in which age 35 is attained, the Election Period shall begin on the date of separation, with respect to the account balance as of the date of separation. 1.29 ELECTIVE DEFERRAL Employer contributions made to the Plan at the election of the Participant, in lieu of cash Compensation. Elective Deferrals shall also include contributions made pursuant to a Salary Savings Agreement or other deferral mechanism. With respect to any taxable year, a Participant's Elective Deferral is the sum of all Employer contributions made on behalf of such Participant pursuant to an election to defer under any qualified cash or deferred arrangement as described in Code Section 401(k), any simplified employee pension cash or deferred arrangement as described in Code Section 402(h)(1)(B), any eligible deferred compensation plan under Code Section 457, any plan as described under Code Section 501(c)(18), and any Employer contributions made on the behalf of a Participant for the purchase of an annuity contract under Code Section 403(b) pursuant to a Salary Savings Agreement. Elective Deferrals which cause a Participant to have an excess Annual Addition shall not be deemed Annual Additions in that Limitation Year if such Elective Deferrals (whether voluntary or mandatory) are distributed. These amounts shall be disregarded for purposes of Code Section 402(g), the ADP test under Code Section 401(k)(3) and the ACP test under Code Section 401(m)(2). These distributions shall be in accordance with IRS Regulations Section 1.415-6(b)(6). Elective Deferrals shall not include any deferrals properly distributed as Excess Annual Additions. 8 16 1.30 ELIGIBLE PARTICIPANT Any Employee who is eligible to make a Voluntary Contribution, or an Elective Deferral (if the Employer takes such contributions into account in the calculation of the Contribution Percentage), or to receive a Matching Contribution (including forfeitures) or a Qualified Matching Contribution. If a Voluntary Contribution or Elective Deferral is required as a condition of participation in the Plan, any Employee who would be a Participant in the Plan if such Employee made such a contribution shall be treated as an Eligible Participant even though no Voluntary Contributions or Elective Deferrals are made. 1.31 ELIGIBLE RETIREMENT PLAN An individual retirement account (IRA) as described in Code Section 408(a), an individual retirement annuity (IRA) as described in Code Section 408(b), an annuity plan as described in Code Section 403(a), or a qualified trust as described in Code Section 401(a), which accepts Eligible Rollover Distributions. However, in the case of an Eligible Rollover Distribution to a Surviving Spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. 1.32 ELIGIBLE ROLLOVER DISTRIBUTION Any distribution of all or any portion of the balances to the credit of the Participant except that an Eligible Rollover Distribution does not include: (a) any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Participant or the joint lives (or joint life expectancies) of the Participant and the Participant's Designated Beneficiary, or for a specified period of ten years or more; (b) any distribution to the extent such distribution is required under Code Section 401(a)(9); and (c) the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Employer Securities). 1.33 EMPLOYEE Any person employed by the Employer (including Self-Employed Individuals and partners), all Employees of a member of an affiliated service group [as defined in Code Section 414(m)], Employees of a controlled group of corporations [as defined in Code Section 414(b)], all Employees of any incorporated or unincorporated trade or business which is under common control [as defined in Code Section 414(c)], leased Employees [as defined in Code Section 414(n)] and any Employee required to be aggregated by Code Section 414(o). All such Employees shall be treated as employed by a single Employer. 1.34 EMPLOYER The Self-Employed Individual, partnership, corporation or other organization which adopts this Plan including any firm that succeeds the Employer and adopts this Plan. For purposes of Article X, Limitations on Allocations, Employer shall mean the Employer that adopts this Plan, and all members of a controlled group of corporations [as defined in Code Section 414(b) as modified by Code Section 415(h)], all commonly controlled trades or businesses [as defined in Code Section 414(c) as modified by Code Section 415(h)] or affiliated service groups [as defined in Code Section 414(m)] of which the adopting Employer is a part, and any other entity required to be aggregated with the Employer pursuant to regulations under Code Section 414(o). 9 17 If this Plan provides contributions or benefits for one or more Owner-Employees who control both the business for which this Plan is established and one or more other trades or businesses, this Plan and the plan established for other trades or businesses must, when looked at as a single plan, satisfy Code Sections 401(a) and (d) for the employees of this and all other trades or businesses. If the Plan provides contributions or benefits for one or more Owner-Employees who control one or more other trades or businesses, the Employees of the other trades or businesses must be included in a plan which satisfies Code Sections 401(a) and (d) and which provides contributions and benefits not less favorable than provided for Owner-Employees under this Plan. If an individual is covered as an Owner-Employee under the plans of two or more trades or businesses which are not controlled and the individual controls a trade or business, then the contributions or benefits of the employees under the plan of the trades or businesses which are controlled must be as favorable as those provided for him under the most favorable plan of the trade or business which is not controlled. For purposes of the preceding paragraph, an Owner-Employee, or two or more owner-employees, will be considered to control a trade or business if the Owner-Employee, or two or more Owner-Employees together: (a) own the entire interest in an unincorporated trade or business, or (b) in the case of a partnership, own more than 50 percent of either the capital interest or the profits interest in the partnership. An Owner-Employee, or two or more Owner-Employees shall be treated as owning any interest in a partnership which is owned, directly or indirectly, by a partnership in which such Owner-Employee, or such two or more Owner-Employees, are considered to control within the meaning of the preceding paragraph. 1.35 ENTRY DATE The date on which an Employee commences participation in the Plan as determined by the Employer in the Adoption Agreement. Unless the Employer specifies otherwise in the Adoption Agreement, the Entry Date shall be the first day of the Plan Year or the first day of the seventh month of the Plan Year coinciding with or following the date on which an Employee meets the eligibility requirements. 1.36 EXCESS AGGREGATE CONTRIBUTIONS [ACP OR 401(M) TEST] The excess, with respect to any Plan Year, of: (a) The aggregate Contribution Percentage Amounts taken into account in computing the numerator of the Contribution Percentage actually made on behalf of Highly Compensated Employees for such Plan Year, over (b) The maximum Contribution Percentage Amounts permitted by the ACP test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of their Contribution Percentages beginning with the highest of such percentages). Such determination shall be made after first determining Excess Elective Deferrals pursuant to paragraph 1.35 and determining Excess Contributions pursuant to paragraph 1.34. 10 18 1.37 EXCESS AMOUNT (415 LIMITS) OR EXCESS ANNUAL ADDITIONS The excess of the Participant's Annual Additions for the Limitation Year over the Maximum Permissible Amount. 1.38 EXCESS CONTRIBUTION [ADP OR 401(K) TEST] With respect to any Plan Year, the excess of: (a) The aggregate amount of Employer contributions actually taken into account in computing the ADP of Highly Compensated Employees for such Plan Year, over (b) The maximum amount of such contributions permitted by the ADP test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of the ADPs, beginning with the highest of such percentages). 1.39 EXCESS ELECTIVE DEFERRALS ($7,000 AS INDEXED) Those Elective Deferrals that are includible in a Participant's gross income under Code Section 402(g) to the extent such Participant's Elective Deferrals for a taxable year exceed the dollar limitation under such Code Section. Excess Elective Deferrals shall be treated as Annual Additions under the Plan, unless such amounts are distributed no later than the first April 15th following the close of the Participants' taxable year. 1.40 FAMILY MEMBER The Employee's Spouse, any lineal descendants and ascendants and the Spouse of such lineal descendants and ascendants. 1.41 FIRST DISTRIBUTION CALENDAR YEAR For distributions beginning before the Participant's death, the First Distribution Calendar Year is the calendar year immediately preceding the calendar year which contains the Participant's Required Beginning Date. For distributions beginning after the Participant's death, the First Distribution Calendar Year is the calendar year in which distributions are required to begin pursuant to paragraph 7.10. 1.42 FUND All contributions received by the Trustee/Custodian under this Plan and Trust/Custodial Account, investments thereof and earnings and appreciation thereon. 1.43 HARDSHIP An immediate and heavy financial need of the Employee where such Employee lacks other available resources. 1.44 HIGHEST AVERAGE COMPENSATION The average Compensation for the three consecutive Years of Service with the Employer that produces the highest average. A Year of Service with the Employer is the 12-consecutive month period defined in the Adoption Agreement. 1.45 HIGHLY COMPENSATED EMPLOYEE Any Employee who performs service for the Employer during the determination year and who, during the immediate prior year: (a) received Compensation from the Employer in excess of $75,000 [as adjusted pursuant to Code Section 415(d)]; or (b) received Compensation from the Employer in excess of $50,000 [as adjusted pursuant to Code Section 415(d)] and was a member of the Top-Paid Group for such year; or 11 19 (c) was an officer of the Employer and received Compensation during such year that is greater than 50 percent of the dollar limitation in effect under Code Section 415(b)(1)(A). Notwithstanding (a), (b) and (c), an Employee who was not Highly Compensated during the preceding Plan Year shall not be treated as a Highly Compensated Employee with respect to the current Plan Year unless such Employee is a member of the 100 Employees paid the greatest Compensation during the year for which such determination is being made. (d) Employees who are five percent (5%) Owners at any time during the immediate prior year or determination year. If no officer has satisfied the Compensation requirement of subsection (c) above during either a determination year or the prior year, the highest paid officer for such year shall be treated as a Highly Compensated Employee. For purposes of this paragraph 1.41, the determination year shall be the Plan Year. The prior year shall be the twelve-month period immediately preceding the determination year. Highly Compensated Employee includes Highly Compensated active Employees and Highly Compensated former Employees. A Highly Compensated former Employee includes any employee who separated from service (or was deemed to have separated) prior to the determination year, performs no service for the employer during the determination year, and was an active Highly Compensated Employee for either the separation year or any determination year ending on or after the Employee's 55th birthday. If an Employee is, during a determination year or the prior year, a family member of either a 5 percent owner who is an active or former employee or a Highly Compensated Employee who is one of the 10 most highly compensated employees ranked on the basis of Compensation paid by the Employer during such year, then the family member and the 5 percent (5%) Owner or top-ten Highly Compensated Employee shall be aggregated. In such case, the family member and 5 percent (5%) Owner or top-ten Highly Compensated Employee shall be treated as a single Employee receiving Compensation and Plan contributions or benefits equal to the sum of such Compensation and contributions or benefits of the family member and 5 percent (5%) Owner or top-ten Highly Compensated Employee. For purposes of this section, family member includes the spouse, lineal ascendants and descendants of the employee or former employee and the spouses of such lineal ascendants and descendants. The determination of who is a Highly Compensated Employee, including the determinations of the number and identity of employees in the top-paid group, the top 100 employees, the number of employees treated as officers and the Compensation that is considered, will be made in accordance with Code Section 414(q) and the regulations thereunder. 1.46 HOUR OF SERVICE (a) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer. These hours shall be credited to the Employee for the computation period in which the duties are performed; and 12 20 (b) Each hour for which an Employee is paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. No more than 501 Hours of Service shall be credited under this paragraph for any single continuous period (whether or not such period occurs in a single computation period). Hours under this paragraph shall be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor Regulations which are incorporated herein by this reference; and (c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service shall not be credited both under paragraph (a) or paragraph (b), as the case may be, and under this paragraph (c). These hours shall be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made. (d) Hours of Service shall be credited for employment with the Employer and with other members of an affiliated service group [as defined in Code Section 414(m)], a controlled group of corporations [as defined in Code Section 414(b)], or a group of trades or businesses under common control [as defined in Code Section 414(c)] of which the adopting Employer is a member, and any other entity required to be aggregated with the Employer pursuant to Code Section 414(o) and the regulations thereunder. Hours of Service shall also be credited for any individual considered an Employee for purposes of this Plan under Code Section 414(n) or Code Section 414(o) and the regulations thereunder. (e) Solely for purposes of determining whether a Break in Service, as defined in paragraph 1.10, for participation and vesting purposes has occurred in a computation period, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, 8 Hours of Service per day of such absence. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence by reason of the pregnancy of the individual, by reason of a birth of a child of the individual, by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this paragraph shall be credited in the computation period in which the absence begins if the crediting is necessary to prevent a Break in Service in that period, or in all other cases, in the following computation period. No more than 501 hours will be credited under this paragraph. 13 21 (f) Hours of Service shall be determined on the basis of the method selected in the Adoption Agreement. 1.47 KEY EMPLOYEE Any Employee or former Employee (and the beneficiaries of such employee), who at any time during the determination period was an officer of the Employer if such individual's annual compensation exceeds 50% of the dollar limitation under Code Section 415(b)(1)(A) (the defined benefit maximum annual benefit), an owner (or considered an owner under Code Section 318) of one of the ten largest interests in the employer if such individual's compensation exceeds 100% of the dollar limitation under Code Section 415(c)(1)(A), a 5% owner of the Employer, or a 1% owner of the Employer who has an annual compensation of more than $150,000. For purposes of determining who is a Key Employee, annual compensation shall mean Compensation as defined for Article X, but including amounts deferred through a salary reduction agreement to a cash or deferred plan under Code Section 401(k), a Simplified Employee Pension Plan under Code Section 408(k), a cafeteria plan under Code Section 125 or a tax-deferred annuity under Code Section 403(b). The determination period is the Plan Year containing the Determination Date and the four preceding Plan Years. The determination of who is a Key Employee will be made in accordance with Code Section 416(i)(1) and the regulations thereunder. 1.48 LEASED EMPLOYEE Any person (other than an Employee of the recipient) who pursuant to an agreement between the recipient and any other person ("leasing organization"), has performed services for the recipient [or for the recipient and related persons determined in accordance with Code Section 414(n)(6)] on a substantially full-time basis for a period of at least one year, and such services are of a type historically performed by Employees in the business field of the recipient Employer. 1.49 LIMITATION YEAR The calendar year or such other 12-consecutive month period designated by the Employer in the Adoption Agreement for purposes of determining the maximum Annual Addition to a Participant's account. All qualified plans maintained by the Employer must use the same Limitation Year. If the Limitation Year is amended to a different 12-consecutive month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made. 1.50 MASTER OR PROTOTYPE PLAN A plan, the form of which is the subject of a favorable opinion letter from the Internal Revenue Service. 1.51 MATCHING CONTRIBUTION An Employer contribution made to this or any other defined contribution plan on behalf of a Participant on account of an Employee Voluntary or Mandatory Contribution made by such Participant, or on account of a Participant's Elective Deferral, under a Plan maintained by the Employer. 1.52 MAXIMUM PERMISSIBLE AMOUNT The maximum Annual Addition that may be contributed or allocated to a Participant's account under the plan for any Limitation Year shall not exceed the lesser of: (a) the Defined Contribution Dollar Limitation, or (b) 25% of the Participant's Compensation for the Limitation Year. 14 22 The compensation limitation referred to in (b) shall not apply to any contribution for medical benefits [within the meaning of Code Section 401(h) or Code Section 419A(f)(2)] which is otherwise treated as an Annual Addition under Code Section 415(l)(1) or 419A(d)(2). If a short Limitation Year is created because of an amendment changing the Limitation Year to a different 12-consecutive month period, the Maximum Permissible Amount will not exceed the Defined Contribution Dollar Limitation multiplied by the following fraction: Number of months in the short Limitation Year divided by 12. 1.53 NET PROFIT The current and accumulated operating earnings of the Employer before Federal and State income taxes, excluding nonrecurring or unusual items of income, and before contributions to this and any other qualified plan of the Employer. Alternatively, the Employer may fix another definition in the Adoption Agreement. 1.54 NORMAL RETIREMENT AGE The age, set by the Employer in the Adoption Agreement, at which a Participant may retire and receive his or her benefits under the Plan. 1.55 OWNER-EMPLOYEE A sole proprietor, or a partner owning more than 10% of either the capital or profits interest of the partnership. 1.56 PAIRED PLANS Two or more Plans maintained by the Sponsor designed so that a single or any combination of Plans adopted by an Employer will meet the antidiscrimination rules, the contribution and benefit limitations, and the Top-Heavy provisions of the Code. 1.57 PARTICIPANT Any Employee who has met the eligibility requirements and is participating in the Plan. 1.58 PARTICIPANT'S BENEFIT The account balance as of the last Valuation Date in the calendar year immediately preceding the Distribution Calendar Year (valuation calendar year) increased by the amount of any contributions or forfeitures allocated to the account balance as of the dates in the valuation calendar year after the Valuation Date and decreased by distributions made in the valuation calendar year after the Valuation Date. A special exception exists for the second distribution Calendar Year. For purposes of this paragraph, if any portion of the minimum distribution for the First Distribution Calendar Year is made in the second Distribution Calendar Year on or before the Required Beginning Date, the amount of the minimum distribution made in the second distribution calendar year shall be treated as if it had been made in the immediately preceding Distribution Calendar Year. 1.59 PERMISSIVE AGGREGATION GROUP Used for Top-Heavy testing purposes, it is the Required Aggregation Group of plans plus any other plan or plans of the Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of Code Sections 401(a)(4) and 410. 1.60 PLAN The Employer's retirement plan as embodied herein and in the Adoption Agreement. 1.61 PLAN ADMINISTRATOR The Employer. 1.62 PLAN YEAR The 12-consecutive month period designated by the Employer in the Adoption Agreement. 15 23 1.63 PRESENT VALUE When determining the Present Value of accrued benefits, with respect to any Defined Benefit Plan maintained by the Employer, interest and mortality rates shall be determined in accordance with the provisions of the respective plan. If applicable, interest and mortality assumptions will be specified by the Employer in the Adoption Agreement. 1.64 PROJECTED ANNUAL BENEFIT Used to test the maximum benefit which may be obtained from a combination of retirement plans, it is the annual retirement benefit (adjusted to an actuarial equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or Qualified Joint and Survivor Annuity) to which the Participant would be entitled under the terms of a Defined Benefit Plan or plans assuming: (a) the Participant will continue employment until Normal Retirement Age under the plan (or current age, if later), and (b) the Participant's Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the plan will remain constant for all future Limitation Years. 1.65 QUALIFIED DEFERRED COMPENSATION PLAN Any pension, profit-sharing, stock bonus, or other plan which meets the requirements of Code Section 401 and includes a trust exempt from tax under Code Section 501(a) or any annuity plan described in Code Section 403(a). 1.66 QUALIFIED DOMESTIC RELATIONS ORDER (QDRO) A Qualified Domestic Relations Order or QDRO is a signed domestic relations order issued by a State Court which creates, recognizes or assigns to an alternate payee(s) the right to receive all or part of a Participant's Plan benefit. An alternate payee is a Spouse, former Spouse, child, or other dependent who is treated as a beneficiary under the Plan as a result of the QDRO. Determination of a QDRO shall be made in accordance with paragraph 12.5. 1.67 QUALIFIED EARLY RETIREMENT AGE For purposes of paragraph 8.9, Qualified Early Retirement Age is the latest of: (a) the earliest date, under the Plan, on which the Participant may elect to receive retirement benefits, (b) the first day of the 120th month beginning before the Participant reaches Normal Retirement Age, or (c) the date the Participant begins participation. 1.68 QUALIFIED JOINT AND SURVIVOR ANNUITY An immediate annuity for the life of the Participant with a survivor annuity for the life of the Participant's Spouse which is at least 50% of but not more than the amount of the annuity payable during the joint lives of the Participant and the Participant's Spouse. The exact amount of the Survivor Annuity is to be specified by the Employer in the Adoption Agreement. If not designated by the Employer, the Survivor Annuity will be 50% of the amount paid to the Participant during his or her lifetime. The Qualified Joint and Survivor Annuity will be the amount of benefit which can be provided by the Participant's Vested Account Balance. 1.69 QUALIFIED MATCHING CONTRIBUTION Matching Contributions which when made are subject to the distribution and nonforfeitability requirements under Code Section 401(k). 16 24 1.70 QUALIFIED NON-ELECTIVE CONTRIBUTIONS Contributions (other than Matching Contributions or Qualified Matching Contributions) made by the Employer and allocated to Participants' accounts that the Participants may not elect to receive in cash until distributed from the Plan; that are nonforfeitable when made; and that are distributable only in accordance with the distribution provisions that are applicable to Elective Deferrals and Qualified Matching Contributions. 1.71 QUALIFIED VOLUNTARY CONTRIBUTION A tax-deductible voluntary Employee contribution. These contributions may no longer be made to the Plan. 1.72 REQUIRED AGGREGATION GROUP Used for Top-Heavy testing purposes, it consists of: (a) each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the determination period (regardless of whether the plan has terminated), and (b) any other qualified plan of the Employer which enables a plan described in (a) to meet the requirements of Code Sections 401(a)(4) or 410. 1.73 REQUIRED BEGINNING DATE The date on which a Participant is required to take his or her first minimum distribution under the Plan. The rules are set forth at paragraph 7.5. 1.74 ROLLOVER CONTRIBUTION A contribution made by a Participant of an amount distributed to such Participant from another Qualified Deferred Compensation Plan in accordance with Code Sections 402(a)(5), (6), and (7). 1.75 SALARY SAVINGS AGREEMENT An agreement between the Employer and a participating Employee where the Employee authorizes the Employer to withhold a specified percentage of his or her Compensation for deposit to the Plan on behalf of such Employee. 1.76 SELF-EMPLOYED INDIVIDUAL An individual who has Earned Income for the taxable year from the trade or business for which the Plan is established including an individual who would have had Earned Income but for the fact that the trade or business had no Net Profit for the taxable year. 1.77 SERVICE The period of current or prior employment with the Employer. If the Employer maintains a plan of a predecessor employer, Service for such predecessor shall be treated as Service for the Employer. 1.78 SHAREHOLDER EMPLOYEE An Employee or Officer who owns [or is consid- ered as owning within the meaning of Code Section 318(a)(1)], on any day during the taxable year of an electing small business corporation (S Corporation), more than 5% of such corporation's outstanding stock. 1.79 SIMPLIFIED EMPLOYEE PENSION PLAN An individual retirement account which meets the requirements of Code Section 408(k), and to which the Employer makes contributions pursuant to a written formula. These plans are considered for contribution limitation and Top-Heavy testing purposes. 1.80 SPONSOR Third National Bank in Nashville, or any successor(s) or assign(s). 17 25 1.81 SPOUSE (SURVIVING SPOUSE) The Spouse or Surviving Spouse of the Participant, provided that a former Spouse will be treated as the Spouse or Surviving Spouse and a current Spouse will not be treated as the Spouse or Surviving Spouse to the extent provided under a Qualified Domestic Relations Order as prescribed in Code Section 414(p). 1.82 SUPER TOP-HEAVY PLAN A Plan described at paragraph 1.81 under which the Top-Heavy Ratio [as defined at paragraph 1.82] exceeds 90%. 1.83 TAXABLE WAGE BASE For plans with an allocation formula which takes into account the Employer's contribution under the Federal Insurance Contributions Act (FICA), the maximum amount of earnings which may be considered wages for such Plan Year under the Social Security Act [Code Section 3121(a)(1)]. The Employer may, in the Adoption Agreement, specify an amount less than the Taxable Wage Base for the allocation formula. 1.84 TOP-HEAVY DETERMINATION DATE For any Plan Year subsequent to the first Plan Year, the last day of the preceding Plan Year. For the first Plan Year of the Plan, the last day of that year. 1.85 TOP-HEAVY PLAN For any Plan Year beginning after 1983, the Employer's Plan is top-heavy if any of the following conditions exists: (a) If the Top-Heavy Ratio for the Employer's Plan exceeds 60% and this Plan is not part of any Required Aggregation Group or Permissive Aggregation Group of Plans. (b) If the Employer's plan is a part of a Required Aggregation Group of plans but not part of a Permissive Aggregation Group and the Top-Heavy Ratio for the group of plans exceeds 60%. (c) If the Employer's plan is a part of a Required Aggregation Group and part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds 60%. 1.86 TOP-HEAVY RATIO (a) If the Employer maintains one or more Defined Contribution plans (including any Simplified Employee Pension Plan) and the Employer has not maintained any Defined Benefit Plan which during the 5-year period ending on the Determination Date(s) has or has had accrued benefits, the Top-Heavy Ratio for this Plan alone, or for the Required or Permissive Aggregation Group as appropriate, is a fraction, the numerator of which is the sum of the account balances of all Key Employees as of the Determination Date(s) [including any part of any account balance distributed in the 5-year period ending on the Determination Date(s)], and the denominator of which is the sum of all account balances [including any part of any account balance distributed in the 5-year period ending on the Determination Date(s)], both computed in accordance with Code Section 416 and the regulations thereunder. Both the numerator and denominator of the Top-Heavy Ratio are increased to reflect any contribution not actually made as of the Determination Date, but which is required to be taken into account on that date under Code Section 416 and the regulations thereunder. 18 26 (b) If the Employer maintains one or more Defined Contribution Plans (including any Simplified Employee Pension Plan) and the Employer maintains or has maintained one or more Defined Benefit Plans which during the 5-year period ending on the Determination Date(s) has or has had any accrued benefits, the Top-Heavy Ratio for any Required or Permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of account balances under the aggregated Defined Contribution Plan or Plans for all Key Employees, determined in accordance with (a) above, and the Present Value of accrued benefits under the aggregated Defined Benefit Plan or Plans for all Key Employees as of the Determination Date(s), and the denominator of which is the sum of the account balances under the aggregated Defined Contribution Plan or Plans for all Participants, determined in accordance with (a) above, and the Present Value of accrued benefits under the Defined Benefit Plan or Plans for all Participants as of the Determination Date(s), all determined in accordance with Code Section 416 and the regulations thereunder. The accrued benefits under a Defined Benefit Plan in both the numerator and denominator of the Top-Heavy Ratio are increased for any distribution of an accrued benefit made in the 5-year period ending on the Determination Date. (c) For purposes of (a) and (b) above, the value of account balances and the Present Value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the 12-month period ending on the Determination Date, except as provided in Code Section 416 and the regulations thereunder for the first and second plan years of a Defined Benefit Plan. The account balances and accrued benefits of a participant (1) who is not a Key Employee but who was a Key Employee in a prior year, or (2) who has not been credited with at least one hour of service with any Employer maintaining the Plan at any time during the 5-year period ending on the Determination Date will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Code Section 416 and the regulations thereunder. Qualified Voluntary Employee Contributions will not be taken into account for purposes of computing the Top-Heavy Ratio. When aggregating plans the value of account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year. The accrued benefit of a Participant other than a Key Employee shall be determined under (1) the method, if any, that uniformly applies for accrual purposes under all Defined Benefit Plans maintained by the Employer, or (2) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Code Section 411(b)(1)(C). 1.87 TOP-PAID GROUP The group consisting of the top 20% of Employees when ranked on the basis of Compensation paid during such year. For purposes of determining the number of Employees in the group (but not who is in it), the following Employees shall be excluded: (a) Employees who have not completed 6 months of Service. 19 27 (b) Employees who normally work less than 17-1/2 hours per week. (c) Employees who normally do not work more than 6 months during any year. (d) Employees who have not attained age 21. (e) Employees included in a collective bargaining unit, covered by an agreement between employee representatives and the Employer, where retirement benefits were the subject of good faith bargaining and provided that 90% or more of the Employer's Employees are covered by the agreement. (f) Employees who are nonresident aliens and who receive no earned income which constitutes income from sources within the United States. 1.88 TRANSFER CONTRIBUTION A non-taxable transfer of a Participant's benefit directly from a Qualified Deferred Compensation Plan to this Plan. 1.89 TRUSTEE The Sponsor of this Prototype Plan or the individual(s) appointed by the Employer in the Adoption Agreement. 1.90 VALUATION DATE The date all Participants' or former Participants' accounts are valued in accordance with Article V, as designated in the Adoption Agreement. 1.91 VALUATION PERIOD The time period set forth in the Adoption Agreement for issuing regularly scheduled Employer administrative reports, procedures and Participant statements. 1.92 VESTED ACCOUNT BALANCE The aggregate value of the Participant's Vested Account Balances derived from Employer and Employee contributions (including Rollovers), whether vested before or upon death, including the proceeds of insurance contracts, if any, on the Participant's life. The provisions of Article VIII shall apply to a Participant who is vested in amounts attributable to Employer contributions, Employee contributions (or both) at the time of death or distribution. For purposes of paragraph 8.7, Vested Account Balance shall mean, in the case of a money purchase pension plan, the Participant's separate account balance attributable solely to Qualified Voluntary Contributions. For profit-sharing plans the above definition shall apply. 1.93 VOLUNTARY CONTRIBUTION An Employee contribution made to the Plan by or on behalf of a Participant that is included in the Participant's gross income in the year in which made and that is maintained under a separate account to which earnings and losses are allocated. For Plan Years beginning after 1986, Voluntary Contributions may be made only under Adoption Agreements #007, #008 and #009 Cash or Deferred Profit-Sharing Plans. 20 28 1.94 WELFARE BENEFIT FUND Any fund that is part of a plan of the Employer, or has the effect of a plan, through which the Employer provides welfare benefits to Employees or their beneficiaries. For these purposes, Welfare Benefits means any benefit other than those with respect to which Code Section 83(h) (relating to transfers of property in connection with the performance of services), Code Section 404 (relating to deductions for contributions to an Employee's trust or annuity and Compensation under a deferred payment plan), Code Section 404(A) (relating to certain foreign deferred compensation plans), and the election under Code Section 463 (relating to the accrual of vacation pay) apply. For purposes of this paragraph, a "Fund" is any social club, voluntary employee benefit association, supplemental unemployment benefit trust or qualified group legal service organization described in Code Sections 501(c)(7), (9), (17) or (20); any trust, corporation, or other organization not exempt from income tax, or to the extent provided in regulations, any account held for an Employer by any person. 1.95 YEAR OF SERVICE A 12-consecutive month period during which an Employee is credited with not less than 1,000 (or such lesser number as specified by the Employer in the Adoption Agreement) Hours of Service. 21 29 ARTICLE II ELIGIBILITY REQUIREMENTS 2.1 PARTICIPATION Employees who meet the eligibility requirements in the Adoption Agreement on the Effective Date of the Plan shall become Participants as of the Effective Date of the Plan. If so elected in the Adoption Agreement, all Employees employed on the Effective Date of the Plan may participate, even if they have not satisfied the Plan's specified eligibility requirements. Other Employees shall become Participants on the Entry Date specified in the Adoption Agreement. Depending on the Plan's eligibility requirements, the entry date may actually be earlier than the date on which the Employee satisfies the eligibility requirements. The Employee must satisfy the eligibility requirements specified in the Adoption Agreement and be employed on the Entry Date to become a Participant in the Plan. Once an Employee has met the eligibility requirements, he or she will participate in the Plan no later than the earlier of: (a) the first day of the Plan Year beginning after the date on which the Employee has met the minimum age and service requirements, or (b) six months after the date the requirements have been met. In the event an Employee who is not a member of the eligible class of Employees becomes a member of the eligible class, such Employee shall participate immediately if such Employee has satisfied the minimum age and service requirements and would have previously become a Participant had he or she been in the eligible class. All Years of Service with the Employer will count towards eligibility except if an Employee has a one-year Break in Service before satisfying the Plan's eligibility requirements. Service prior to such Break in Service will not be taken into account. If an Employee's Years of Service are disregarded pursuant to the preceding sentence, the Employee will be treated as a newly hired Employee for eligibility purposes. A former Participant shall again become a Participant upon returning to the employ of the Employer as of the next Entry Date or if earlier, the next Valuation Date. For this purpose, the Participant's Compensation and Service shall be considered from the date of rehire. 2.2 CHANGE IN CLASSIFICATION OF EMPLOYMENT In the event a Participant becomes ineligible to participate because he or she is no longer a member of an eligible class of Employees, such Employee shall participate immediately upon his or her return to an eligible class of Employees. 2.3 COMPUTATION PERIOD For purposes of determining Years of Service and Breaks in Service for purposes of eligibility, the 12-consecutive month period shall commence on the date on which an Employee first performs an Hour of Service for the Employer and each anniversary thereof, such that the succeeding 12-consecutive month period commences with the employee's first anniversary of employment and so on. If, however, the period so specified is one year or less, the succeeding 12-consecutive month period shall commence on the first day of the Plan Year prior to the anniversary of the date the Employee first performed an Hour of Service regardless of whether the Employee is entitled to be credited with 1,000 Hours of Service (or such lesser number as specified by the Employer in the Adoption Agreement) during the Employee's first employment year. 22 30 2.4 EMPLOYMENT RIGHTS Participation in the Plan shall not confer upon a Participant any employment rights, nor shall it interfere with the Employer's right to terminate the employment of any Employee at any time. 2.5 SERVICE WITH CONTROLLED GROUPS All Years of Service with other members of a controlled group of corporations [as defined in Code Section 414(b)], trades or businesses under common control [as defined in Code Section 414(c)], or members of an affiliated service group [as defined in Code Section 414(m)] shall be credited for purposes of determining an Employee's eligibility to participate. 2.6 OWNER-EMPLOYEES If this Plan provides contributions or benefits for one or more Owner-Employees who control both the business for which this Plan is established and one or more other trades or businesses, this Plan and the Plan established for other trades or businesses must, when looked at as a single Plan, satisfy Code Sections 401(a) and (d) for the Employees of this and all other trades or businesses. If the Plan provides contributions or benefits for one or more Owner-Employees who control one or more other trades or businesses, the Employees of the other trades or businesses must be included in a Plan which satisfies Code Sections 401(a) and (d) and which provides contributions and benefits not less favorable than provided for Owner-Employees under this Plan. If an individual is covered as an Owner-Employee under the plans of two or more trades or businesses which are not controlled, and the individual controls a trade or business, then the contributions or benefits of the Employees under the plan of the trades or businesses which are controlled must be as favorable as those provided for him or her under the most favorable plan of the trade or business which is not controlled. For purposes of the preceding sentences, an Owner-Employee, or two or more Owner-Employees, will be considered to control a trade or business if the Owner-Employee, or two or more Owner-Employees together: (a) own the entire interest in an unincorporated trade or business, or (b) in the case of a partnership, own more than 50% of either the capital interest or the profits interest in the partnership. For purposes of the preceding sentence, an Owner-Employee, or two or more Owner-Employees shall be treated as owning any interest in a partnership which is owned, directly or indirectly, by a partnership which such Owner-Employee, or such two or more Owner-Employees, are considered to control within the meaning of the preceding sentence. 2.7 LEASED EMPLOYEES Any leased Employee shall be treated as an Employee of the recipient Employer; however, contributions or benefits provided by the leasing organization which are attributable to services performed for the recipient Employer shall be treated as provided by the recipient Employer. A leased Employee shall not be considered an Employee of the recipient if such Employee is covered by a money purchase pension plan providing: 23 31 (a) a non-integrated Employer contribution rate of at least 10% of Compensation, [as defined in Code Section 415(c)(3) but including amounts contributed by the Employer pursuant to a salary reduction agreement, which are excludable from the Employee's gross income under a cafeteria plan covered by Code Section 125, a cash or deferred profit-sharing plan under Section 401(k) of the Code, a Simplified Employee Pension Plan under Code Section 402(h)(1)(B) and a tax-sheltered annuity under Code Section 403(b)], (b) immediate participation, and (c) full and immediate vesting. This exclusion is only available if Leased Employees do not constitute more than twenty percent (20%) of the recipient's non-highly compensated work force. 2.8 THRIFT PLANS If the Employer makes an election in the Adoption Agreement to require Voluntary Contributions to participate in this Plan, the Employer shall notify each eligible Employee in writing of his or her eligibility for participation within a reasonable period of time prior to the appropriate Entry Date. The Employee shall indicate his or her intention to join the Plan by authorizing the Employer to withhold a percentage of his or her Compensation as provided in the Plan. Such authorization shall be returned to the Employer at least 10 days prior to the Employee's Entry Date. The Employee may decline participation by so indicating on the enrollment form or by failure to return the enrollment form to the Employer prior to the Employee's Entry Date. If the Employee declines to participate, such Employee shall be given the opportunity to join the Plan on the next Entry Date. The taking of a Hardship withdrawal under the provisions of paragraph 6.9 will impact the Participant's ability to make these contributions. 24 32 ARTICLE III EMPLOYER CONTRIBUTIONS 3.1 AMOUNT The Employer intends to make periodic contributions to the Plan in accordance with the formula or formulas selected in the Adoption Agreement. However, the Employer's contribution for any Plan Year shall be subject to the limitations on allocations contained in Article X. 3.2 EXPENSES AND FEES The Employer shall also be authorized to reimburse the Fund for all expenses and fees incurred in the administration of the Plan or Trust/Custodial Account and paid out of the assets of the Fund. Such expenses shall include, but shall not be limited to, fees for professional services, printing and postage. Brokerage commissions may not be reimbursed. 3.3 RESPONSIBILITY FOR CONTRIBUTIONS Neither the Trustee/Custodian nor the Sponsor shall be required to determine if the Employer has made a contribution or if the amount contributed is in accordance with the Adoption Agreement or the Code. The Employer shall have sole responsibility in this regard. The Trustee/Custodian shall be accountable solely for contributions actually received by it within the limits of Article XI. 3.4 RETURN OF CONTRIBUTIONS Contributions made to the Fund by the Employer shall be irrevocable except as provided below: (a) any contribution forwarded to the Trustee/Custodian because of a mistake of fact, provided that the contribution is returned to the Employer within one year of the contribution. The nondeductibility of the Employer's contribution does not in and of itself constitute a mistake of fact which may cause the return of contributions. (b) In the event that the Commissioner of Internal Revenue determines that the Plan is not initially qualified under the Internal Revenue Code, any contribution made incident to that initial qualification by the Employer must be returned to the Employer within one year after the date the initial qualification is denied, but only if the application for the qualification is made by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan is adopted, or such later date as the Secretary of the Treasury may prescribe. (c) Contributions forwarded to the Trustee/Custodian are presumed to be deductible and are conditioned on their deductibility. Contributions which are determined to be not deductible will be returned to the Employer within one year of the disallowance of the deduction. 25 33 ARTICLE IV EMPLOYEE CONTRIBUTIONS AND ROLLOVERS 4.1 VOLUNTARY CONTRIBUTIONS An Employee may make Voluntary Contributions to the Plan established hereunder if so authorized by the Employer in the Adoption Agreement under a uniform and nondiscriminatory manner. Such contributions are subject to the limitations on Annual Additions and together with Employer matching contributions as defined in Code Section 401(m) are subject to antidiscrimination testing as set forth in Code Section 401(m). For Plan Years beginning after 1986, Voluntary Contributions may be made only under Adoption Agreements #007, #008 and #009 Cash or Deferred Profit-Sharing Plans. 4.2 QUALIFIED VOLUNTARY CONTRIBUTIONS A Participant may no longer make Qualified Voluntary Contributions to the Plan. Amounts already contributed may remain in the Trust Fund/Custodial Account until distributed to the Participant. Such amounts will be maintained in a separate account which will be nonforfeitable at all times. The account will share in the gains and losses of the Trust in the same manner as described at paragraph 5.4 of the Plan. No part of the Qualified Voluntary Contribution account will be used to purchase life insurance. Subject to Article VIII, Joint and Survivor Annuity Requirements (if applicable), the Participant may withdraw any part of the Qualified Voluntary Contribution account by making a written application to the Plan Administrator. 4.3 ROLLOVER CONTRIBUTION Unless otherwise provided in the Adoption Agreement, a Participant may make a Rollover Contribution to any Defined Contribution Plan established hereunder of all or any part of an amount distributed or distributable to him or her from a Qualified Deferred Compensation Plan provided: (a) the amount distributed to the Participant is deposited to the Plan no later than the sixtieth day after such distribution was received by the Participant, (b) the amount distributed is not one of a series of substantially equal periodic payments made for the life (or life expectancy) of the Participant or the joint lives (or joint life expectancies) of the Participant and the Participant's Designated Beneficiary, or for a specified period of ten years or more; (c) the amount distributed is not required under Code Section 401(a)(9); (d) if the amount distributed includes property, such property is rolled over only upon the Trustee/Custodian's approval, or if sold the proceeds of such property may be rolled over, (e) the amount distributed is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (f) the amount rolled over does not include any amounts contributed on an after-tax basis by the Participant to the Qualified Deferred Compensation Plan. 26 34 In addition, if the Adoption Agreement allows Rollover Contributions, the Plan will also accept any Eligible Rollover Distribution directly to the Plan. Rollover Contributions which relate to distributions prior to January 1, 1993, must be made in accordance with paragraphs (a) through (f) and additionally meet the requirements of paragraph (g): (g) the distribution from the Qualified Deferred Compensation Plan constituted the Participant's entire interest in such Plan and was distributed within one taxable year to the Participant: (1) on account of separation from Service, a Plan termination, or in the case of a profit-sharing or stock bonus plan, a complete discontinuance of contributions under such plan within the meaning of Code Section 402(a)(6)(A), or (2) in one or more distributions which constitute a qualified lump sum distribution within the meaning of Code Section 402(e)(4)(A), determined without reference to subparagraphs (B) and (H), Such Rollover Contribution may also be made through an Individual Retirement Account qualified under Code Section 408 where the IRA was used as a conduit from the Qualified Deferred Compensation Plan, the Rollover Contribution is made in accordance with the rules provided under paragraph (a) through (c) and the Rollover Contribution does not include any regular IRA contributions, or earnings thereon, which the Participant may have made to the IRA. Rollover Contributions which relate to distributions prior to January 1, 1993, may be through an IRA in accordance with paragraphs (a) through (f) and additional requirements as provided in the previous sentence. The Trustee/Custodian shall not be held responsible for determining the tax-free status of any Rollover Contribution made under this Plan. 4.4 TRANSFER CONTRIBUTION Unless provided otherwise in the Adoption Agreement, a Participant may, subject to the provisions of paragraph 4.5, also arrange for the direct transfer of his or her benefit from a Qualified Deferred Compensation Plan to this Plan provided that the transfer is made in accordance with paragraphs 4.3(b), 4.3(c) and 4.3(d) hereof. For accounting and record keeping purposes, Transfer Contributions shall be identical to Rollover Contributions. In the event the Employer accepts a Transfer Contribution from a Plan in which the Employee was directing the investments of his or her account, the Employer may continue to permit the Employee to direct his or her investments in accordance with paragraph 13.8 with respect only to such Transfer Contribution. Notwithstanding the above, the Employer may refuse to accept such Transfer Contributions. 4.5 EMPLOYER APPROVAL OF TRANSFER CONTRIBUTIONS The Employer maintaining a safe-harbor Profit-Sharing Plan in accordance with the provisions of paragraph 8.7, acting in a nondiscriminatory manner, may in its sole discretion refuse to allow Transfer Contributions to its profit-sharing plan, if such contributions are directly or indirectly being transferred from a defined benefit plan, a money purchase pension plan (including a target benefit plan), a stock bonus plan, or another profit-sharing plan which would otherwise provide for a life annuity form of payment to the Participant. 27 35 4.6 SALARY SAVINGS CONTRIBUTIONS (ELECTIVE DEFERRALS) A Participant may enter into a Salary Savings Agreement with the Employer authorizing the Employer to withhold a portion of such Participant's Compensation not to exceed $7,000 per calendar year as adjusted under Code Section 415(d) or, if lesser, the percentage of Compensation specified in the Adoption Agreement and to deposit such amount to the Plan. No Participant shall be permitted to have Elective Deferrals made under this Plan or any other qualified plan maintained by the Employer, during any taxable year, in excess of the dollar limitation contained in Code Section 402(g) in effect at the beginning of such taxable year. Thus, the $7,000 limit may be reduced if a Participant contributes pre-tax contributions to qualified plans of this or other Employers. Any such contribution shall be credited to the Employee's Salary Savings Account. Unless otherwise specified in the Adoption Agreement, a Participant may amend his or her Salary Savings Agreement to increase, decrease or terminate the percentage upon 30 days written notice to the Employer. In the event a Participant does not enter into a Salary Savings Agreement at the beginning of a Plan Year, he or she may enter into a Salary Savings Agreement with the Employer upon 30 days notice or as otherwise specified in the Adoption Agreement for purposes of this and the preceding sentence. If a Participant terminates his or her agreement, such Participant shall not be permitted to put a new Salary Savings Agreement into effect until the first pay period in the next Plan Year, unless otherwise stated in the Adoption Agreement. The Employer may also amend or terminate said agreement on written notice to the Participant. If a Participant has not authorized the Employer to withhold at the maximum rate and desires to increase the total withheld for a Plan Year, such Participant may authorize the Employer upon 30 days notice to withhold a supplemental amount up to 100% of his or her Compensation for one or more pay periods up to the total annual percentage permitted by the Employer in the Adoption Agreement for the applicable period until the end of the Plan Year. In no event may the sum of the amounts withheld under the Salary Savings Agreement plus the supplemental withholding exceed 25% of a Participant's Compensation for a Plan Year. The Employer may also recharacterize as after-tax Voluntary Contributions all or any portion of amounts previously withheld under any Salary Savings Agreement within the Plan Year as provided for at paragraph 10.9. This may be done to insure that the Plan will meet one of the antidiscrimination tests under Code Section 401(k). Elective Deferrals shall be deposited in the Trust within 30 days after being withheld from the Participant's pay. 4.7 REQUIRED VOLUNTARY CONTRIBUTIONS If the Employer makes a thrift election in the Adoption Agreement, each eligible Participant shall be required to make Voluntary Contributions to the Plan for credit to his or her account as provided in the Adoption Agreement. This election is only available in 401(k) Adoption Agreements. Such Voluntary Contributions shall be withheld from the Employee's Compensation and shall be transmitted by the Employer to the Trustee/Custodian as agreed between the Employer and Trustee/Custodian. A Participant may discontinue participation or change his or her Voluntary Contribution percentage by so advising the Employer at least 30 days prior to the date on which such discontinuance or change is to be effective. If a Participant discontinues his or her Voluntary Contributions, such Participant may not again authorize Voluntary Contributions for a period of six months from the date of discontinuance. A Participant may voluntarily change his or her Voluntary Contribution percentage once during any Plan Year and may also agree to have a reduction in his or her contribution, if required to satisfy the requirements of the ACP test. 28 36 4.8 DIRECT ROLLOVER OF BENEFITS Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Participant's election under this paragraph, for distributions made on or after January 1, 1993, a Participant may elect, at the time in the manner prescribed by the Plan Administrator, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Participant in a Direct Rollover. Any portion of a distribution which is not paid directly to an Eligible Retirement Plan shall be distributed to the Participant. For purposes of this paragraph, a Surviving Spouse or a Spouse or Former Spouse who is an alternate payee under a Qualified Domestic Relations Order as defined in Code Section 414(p), will be permitted to elect to have any Eligible Rollover Distribution paid directly to an individual retirement account (IRA) or an individual retirement annuity (IRA). The plan provisions otherwise applicable to distributions continue to add to Rollover and Transfer Contributions. 4.9 SPECIAL RULES FOR DIRECT ROLLOVERS The following special rules apply to all Direct Rollovers: (a) MINIMUM DIRECT ROLLOVER No Direct Rollover is allowable hereunder with respect to any Eligible Rollover Distribution during a taxable year of the Distributee unless the sum of all Eligible Rollover Distributions to that Distributee during that taxable year are reasonably expected to equal or exceed Two Hundred Dollars ($200.00). (b) LIMIT ON NUMBER OF DIRECT ROLLOVERS A Distributee may not designate more than one Eligible Retirement Plan into which all or any portion of an Eligible Rollover Distribution is to be transferred by the Trustee. A Distributee may designate only one Eligible Retirement Plan as the recipient of a Direct Rollover with respect to any Eligible Rollover Distribution. (c) DISTRIBUTION AND DIRECT ROLLOVER A Distributee may direct the Trustee to make a payment of only a portion of an Eligible Rollover Distribution to an Eligible Retirement Plan and distribute the remainder to the Distributee in cash, provided that the total amount of the Eligible Rollover Distribution exceeds Five Hundred Dollars ($500.00) and the amount to be paid to the Eligible Retirement Plan as a Direct Rollover equals at least Five Hundred Dollars ($500.00). (d) DEEMED DISTRIBUTION IF NO DIRECT ROLLOVER In the event that the Distributee fails to make an election under Section B regarding all or any portion of an Eligible Rollover Distribution within the time period provided under the Plan (or rules and regulations promulgated by the Plan Administrator pursuant to its authority under the Plan), the Distributee shall be deemed to have elected not to make a Direct Rollover with respect to such Eligible Rollover Distribution or such portion thereof, whichever the case may be. 29 37 (e) WAIVER OF 30 DAYS The Plan Administrator shall provide written notice in accordance with Code Section 402(f) to the Distributee of the Distributee's right to make a Direct Rollover of an Eligible Rollover Distribution and the Plan Administrator shall advise the Distributee in writing that the Distributee has the right to elect whether or not to make a Direct Rollover within a prescribed time period determined by the Plan Administrator, which time period shall be no less than thirty (30) days nor no more than ninety (90) days after the date of such notice provided under Section 402(f); provided, however, that if the Distributee either affirmatively elects to make a Direct Rollover with respect to an Eligible Rollover Distribution or portion thereof or affirmatively elects not to make a Direct Rollover with respect to an Eligible Rollover Distribution or portion thereof, the Trustee shall distribute the amount subject to such election in accordance with the Distributee's election and as otherwise provided under the terms of the Plan, without regard to whether such distribution is made less than thirty (30) days after the date the notice described under Code Section 402(f) is provided to the Distributee. (f) DIRECT ROLLOVER OF LOANS NOT ALLOWED In the case of an adopting Employer that elects to allow Participant loans under the Plan, a Distributee may not elect a Direct Rollover with respect to any portion of an Eligible Rollover Distribution that is offset against such Participant loan. (g) RULES AND PROCEDURES The Plan Administrator may promulgate procedures and rules for the purpose of implementing the provisions of the Unemployment Compensation Act of 1992 affecting the Plan. The Plan Administrator may also adopt rules, regulations or procedures that incorporate any alternative provisions, alternative means of compliance or administrative practices otherwise allowable under the Unemployment Compensation Act of 1992, treasury regulations or official pronouncement of the Internal Revenue Service pertaining to the Unemployment Compensation Act of 1992, to the extent not inconsistent with the terms of this Plan. Any rule, regulation or procedure adopted hereunder shall be given full force and effect and shall not be overturned or invalidated unless arbitrary and capricious. 30 38 ARTICLE V PARTICIPANT ACCOUNTS 5.1 SEPARATE ACCOUNTS The Employer shall establish a separate bookkeeping account for each Participant showing the total value of his or her interest in the Fund. Each Participant's account shall be separated for bookkeeping purposes into the following sub-accounts: (a) Employer contributions. (1) Matching Contributions. (2) Qualified Matching Contributions. (3) Qualified Non-Elective Contributions. (4) Discretionary Contributions. (5) Elective Deferrals. (b) Voluntary Contributions (and additional amounts including required contributions and, if applicable, either repayments of loans previously defaulted on and treated as "deemed distributions" on which a tax report has been issued, and amounts paid out upon a separation from service which have been included in income and which are repaid after being re-hired by the Employer). (c) Qualified Voluntary Contributions (if the Plan previously accepted these). (d) Rollover Contributions and Transfer Contributions. 5.2 ADJUSTMENTS TO PARTICIPANT ACCOUNTS As of each Valuation Date of the Plan, the Employer shall add to each account: (a) the Participant's share of the Employer's contribution and for forfeitures as determined in the Adoption Agreement, (b) any Elective Deferrals, Voluntary, Rollover or Transfer Contributions made by the Participant, (c) any repayment of amounts previously paid out to a Participant upon a separation from Service and repaid by the Participant since the last Valuation Date, and (d) the Participant's proportionate share of any investment earnings and increase in the fair market value of the Fund since the last Valuation Date, as determined at paragraph 5.4. The Employer shall deduct from each account: (e) any withdrawals or payments made from the Participant's account since the last Valuation Date, and 31 39 (f) the Participant's proportionate share of any decrease in the fair market value of the Fund since the last Valuation Date, as determined at paragraph 5.4. 5.3 ALLOCATING EMPLOYER CONTRIBUTIONS The Employer's contribution shall be allocated to Participants in accordance with the allocation formula selected by the Employer in the Adoption Agreement, and the minimum contribution and allocation requirements for Top-Heavy Plans. Beginning with the 1990 Plan Year and thereafter, for plans on Standardized Adoption Agreements 001, 002, 005, 006, 007 and #009, Participants who are credited with more than 500 Hours of Service or are employed on the last day of the Plan Year must receive a full allocation of Employer contributions. In Nonstandardized Adoption Agreements 003, 004 and 008, Employer contributions shall be allocated to the accounts of Participants employed by the Employer on the last day of the Plan Year unless indicated otherwise in the Adoption Agreement. In the case of a non-Top-Heavy, Nonstandardized Plan, Participants must also have completed a Year of Service unless otherwise specified in the Adoption Agreement. For Nonstandardized Adoption Agreements 003, 004 and 008, the Employer may only apply the last day of the Plan Year and Year of Service requirements if the Plan satisfies the requirements of Code Sections 401(a)(26) and 410(b) and the regulations thereunder including the exception for 401(k) plans. If, when applying the last day and Year of Service requirements, the Plan fails to satisfy the aforementioned requirements, additional Participants will be eligible to receive an allocation of Employer Contributions until the requirements are satisfied. Participants who are credited with a Year of Service, but not employed at Plan Year end, are the first category of additional Participants eligible to receive an allocation. If the requirements are still not satisfied, Participants credited with more than 500 Hours of Service and employed at Plan Year end are the next category of Participants eligible to receive an allocation. Finally, if necessary to satisfy the said requirements, any Participant credited with more than 500 Hours of Service will be eligible for an allocation of Employer Contributions. The Service requirement is not applicable with respect to any Plan Year during which the Employer's Plan is Top-Heavy. In the case of a non-Top-Heavy Plan, Participants must also have completed a Year of Service as defined in the Adoption Agreement. The Service requirement is not applicable with respect to any Plan Year during which the Employer's Plan is Top-Heavy. 5.4 ALLOCATING INVESTMENT EARNINGS AND LOSSES A Participant's share of investment earnings and any increase or decrease in the fair market value of the Fund shall be based on the proportionate value of all active accounts (other than accounts with segregated investments) as of the last Valuation Date less withdrawals since the last Valuation Date. If Employer contributions are made monthly, quarterly, or on some other systematic basis, the adjusted value of such accounts for allocation of investment income and gains or losses shall include one-half the Employer contributions for such period. If Employer and/or Employee contributions are not made on a systematic basis, it is assumed that they are made at the end of the valuation period and therefore will not receive an allocation of investment earnings and gains or losses for such period. Account balances not yet forfeited shall receive an allocation of earnings and/or losses. Accounts with segregated investments shall receive only the income or loss on such segregated investments. 32 40 Alternatively, at the Plan Administrator's option, all Employer contributions will be credited with an allocation of the actual investment earnings and gains and losses from the actual date of deposit of each such contribution until the end of the period. Accounts with segregated investments shall receive only the income or loss on such segregated investments. In no event shall the selection of a method of allocating gains and losses be used to discriminate in favor of the Highly Compensated Employees. 5.5 PARTICIPANT STATEMENTS Upon completing the allocations described above for the Valuation Date coinciding with the end of the Plan Year, the Employer shall prepare a statement for each Participant showing the additions to and subtractions from his or her account since the last such statement and the fair market value of his or her account as of the current Valuation Date. Employers so choosing may prepare Participant statements for each Valuation Date. 33 41 ARTICLE VI RETIREMENT BENEFITS AND DISTRIBUTIONS 6.1 NORMAL RETIREMENT BENEFITS A Participant shall be entitled to receive the balance held in his or her account from Employer contributions upon attaining Normal Retirement Age or at such earlier dates as the provisions of this Article VI may allow. If the Participant elects to continue working past his or her Normal Retirement Age, he or she will continue as an active Plan Participant and no distribution shall be made to such Participant until his or her actual retirement date unless the employer elects otherwise in the Adoption Agreement, or a minimum distribution is required by law. Settlement shall be made in the normal form, or if elected, in one of the optional forms of payment provided below. 6.2 EARLY RETIREMENT BENEFITS If the Employer so provides in the Adoption Agreement, an early retirement benefit will be available to individuals who meet the age and Service requirements. An individual who meets the Early Retirement Age requirements and separates from Service, will become fully vested, regardless of any vesting schedule which otherwise might apply. If a Participant separates from Service before satisfying the age requirements, but after having satisfied the Service requirement, he or she will be entitled to elect an Early Retirement Benefit upon satisfaction of the age requirement. 6.3 BENEFITS ON TERMINATION OF EMPLOYMENT (a) If a Participant terminates employment prior to Normal Retirement Age, such Participant shall be entitled to receive the vested balance held in his or her account payable at Normal Retirement Age in the normal form, or if elected, in one of the optional forms of payment provided hereunder. If applicable, the Early Retirement Benefit provisions may be elected. Notwithstanding the preceding sentence, a former Participant may, if allowed in the Adoption Agreement, make application to the Employer requesting early payment of any deferred vested and nonforfeitable benefit due. (b) If a Participant terminates employment, and the value of that Participant's Vested Account Balance derived from Employer and Employee Contributions is not greater than $3,500, the Participant may receive a lump sum distribution of the value of the entire vested portion of such account balance and the nonvested portion will be treated as a forfeiture. The Employer shall continue to follow their consistent policy as may be established, regarding immediate cash-outs of Vested Account Balances of $3,500 or less. For purposes of this Article, if the value of a Participant's Vested Account Balance is zero, the Participant shall be deemed to have received a distribution of such Vested Account Balance immediately following termination. Likewise, if the Participant is reemployed prior to incurring 5 consecutive 1-year Breaks in Service they will be deemed to have immediately repaid such distribution. For Plan Years beginning 34 42 prior to 1989, a Participant's Vested Account Balance shall not include Qualified Voluntary Contributions. Notwithstanding the above, if the Employer maintains or has maintained a policy of not distributing any amounts until the Participant's Normal Retirement Age, the Employer can continue to uniformly apply such policy. (c) If a Participant terminates Employment with a Vested Account Balance derived from Employer and Employee contributions in excess of $3,500, and elects (with his or her Spouse's consent) to receive 100% of the value of his or her Vested Account Balance in a lump sum, the non-vested portion will be treated as a forfeiture. Except as provided in paragraph 6.4(c), the Participant (and his or her Spouse) must consent to any distribution, when the Vested Account Balance described above exceeds $3,500 or if at the time of any prior distribution it exceeded $3,500. For Plan Years beginning prior to 1989, a Participant's Vested Account Balance shall not include Qualified Voluntary Contributions. (d) Distribution of less than 100% of the Participant's Vested Account Balance shall only be permitted if the Participant is fully vested upon termination of employment. (e) BUY BACK RULE If a Participant who is not 100% vested receives or is deemed to receive a distribution pursuant to subsection (a), (b) or (c) of this paragraph, and such Participant's non-vested benefit is forfeited hereunder, and if such Participant resumes employment covered under this Plan, the Participant shall have the right to repay to the Plan the full amount of the distribution attributable to Employer contributions on or before the earlier of the date that the Participant incurs 5 consecutive 1-year Breaks in Service following the date of distribution or five years after the first date on which the Participant is subsequently reemployed. In such event, the Participant's forfeiture shall be restored to his or her account as of the Valuation Date at the end of the Plan Year following the date on which repayment of the distribution is received. Unless otherwise specified by the Employer in the Adoption Agreement, restoration of forfeitures will obtain from current year's forfeitures first, additional Employer contribution second and lastly from income or gain to the Plan for that Plan Year. (f) A Participant shall also have the option, to postpone payment of his or her Plan benefits until the first day of April following the calendar year in which he or she attains age 70-1/2. Any balance of a Participant's account resulting from his or her Employee contributions not previously withdrawn, if any, may be withdrawn by the Participant immediately following separation from Service. (g) If a Participant ceases to be an active Employee as a result of a Disability as defined at paragraph 1.21, such Participant shall be able to make an application for a disability retirement benefit payment. The Participant's account balance will be deemed "immediately distributable" as set forth in paragraph 6.4, and will be fully vested pursuant to paragraph 9.2. 35 43 6.4 RESTRICTIONS ON IMMEDIATE DISTRIBUTIONS (a) An account balance is immediately distributable if any part of the account balance could be distributed to the Participant (or Surviving Spouse) before the Participant attains (or would have attained if not deceased) the later of the Normal Retirement Age or age 62. (b) If the value of a Participant's Vested Account Balance derived from Employer and Employee Contributions exceeds (or at the time of any prior distribution exceeded) $3,500, and the account balance is immediately distributable, the Participant and his or her Spouse (or where either the Participant or the Spouse has died, the survivor) must consent to any distribution of such account balance. The consent of the Participant and the Spouse shall be obtained in writing within the 90-day period ending on the annuity starting date, which is the first day of the first period for which an amount is paid as an annuity or any other form. The Plan Administrator shall notify the Participant and the Participant's Spouse of the right to defer any distribution until the later of the date on which the Participant attains (or would have attained if not decreased) the Normal Retirement Age or age 62. Such notification shall include a general description of the material features, and an explanation of the relative values of, the optional forms of benefit available under the Plan in a manner that would satisfy the notice requirements of Code Section 417(a)(3), and shall be provided no less than 30 days and no more than 90 days prior to the Annuity Starting Date. (c) Notwithstanding the foregoing, only the Participant need consent to the commencement of a distribution in the form of a qualified Joint and Survivor Annuity while the account balance is immediately distributable. Furthermore, if payment in the form of a Qualified Joint and Survivor Annuity is not required with respect to the Participant pursuant to paragraph 8.7 of the Plan, only the Participant need consent to the distribution of an account balance that is immediately distributable. Neither the consent of the Participant nor the Participant's Spouse shall be required to the extent that a distribution is required to satisfy Code Section 401(a)(9) or Code Section 415. In addition, upon termination of this Plan if the Plan does not offer an annuity option (purchased from a commercial provider), and if the Employer does not maintain another Defined Contribution Plan [other than an employee stock ownership plan as defined in Code Section 4975(e)(7)], the Participant's account balance will, without the Participant's consent, be distributed to the Participant. However, if any entity within the same controlled group as the Employer maintains another Defined Contribution Plan [other than an employee stock ownership plan as defined in Code Section 4975(e)(7)], then the Participant's account balance will be transferred without the Participant's consent, to the other Plan if the Participant does not consent to an immediate distribution. 36 44 (d) For purposes of determining the applicability of the foregoing consent requirements to distributions made before the first day of the first Plan Year beginning after 1988, the Participant's Vested Account Balance shall not include amounts attributable to Qualified Voluntary Contributions. (e) In a profit-sharing plan in which distributions under Code Sections 401(a)(11) and 417 do not apply, such distributions may commence less than 30 days after the notice required under Regulations Section 1.411(a)-11(c) is given, provided that: (1) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects a distribution. 6.5 NORMAL FORM OF PAYMENT The normal form of payment for a profit-sharing plan satisfying the requirements of paragraph 8.7 hereof shall be a lump sum with no option for annuity payments. For all other plans, the normal form of payment hereunder shall be a Qualified Joint and Survivor Annuity as provided under Article VIII. However, a Participant whose Vested Account Balance derived from Employer and Employee contributions exceeds $3,500, or if at the time of any prior distribution it exceeds $3,500, shall (with the consent of his or her Spouse) have the right to receive his or her benefit in a lump sum or in monthly, quarterly, semi-annual or annual payments from the Fund over any period not extending beyond the life expectancy of the Participant and his or her Beneficiary. For Plan Years beginning prior to 1989, a Participant's Vested Account Balance shall not include Qualified Voluntary Contributions. The normal form of payment shall be automatic, unless the Participant files a written request with the Employer prior to the date on which the benefit is automatically payable, electing a lump sum or installment payment option. No amendment to the Plan may eliminate one of the optional distribution forms listed above. 6.6 COMMENCEMENT OF BENEFITS (a) Unless the Participant elects otherwise, distribution of benefits will begin no later than the 60th day after the close of the Plan Year in which the latest of the following events occur: (1) the Participant attains age 65 (or normal retirement age if earlier), (2) the 10th anniversary of the year in which the Participant commenced participation in the Plan, or (3) the Participant terminates Service with the Employer. 37 45 (b) Notwithstanding the foregoing, the failure of a Participant and Spouse (if necessary) to consent to a distribution while a benefit is immediately distributable, within the meaning of paragraph 6.4 hereof, shall be deemed an election to defer commencement of payment of any benefit sufficient to satisfy this paragraph. (c) Unless the Employer provides for an earlier commencement date in the Adoption Agreement, distributions of benefits will be made no later than 60 days following the close of the Plan Year during which a distribution is requested or otherwise becomes payable. 6.7 CLAIMS PROCEDURES Upon retirement, death, or other severance of employment, the Participant or his or her representative of such Participant may make application to the Employer requesting payment of benefits due and the manner of payment. If no application for benefits is made, the Employer shall automatically pay any vested benefit due hereunder in the normal form at the time prescribed at paragraph 6.5. If an application for benefits is made, the Employer shall accept, reject, or modify such request and shall notify the Participant in writing setting forth the response of the Employer and in the case of a denial or modification the Employer shall: (a) state the specific reason or reasons for the denial, (b) provide specific reference to pertinent Plan provisions on which the denial is based, (c) provide a description of any additional material or information necessary for the Participant or his representative to perfect the claim and an explanation of why such material or information is necessary, and (d) explain the Plan's claim review procedure as contained in this Plan. In the event the request is rejected or modified, the Participant or his representative may within 60 days following receipt by the Participant or representative of such rejection or modification, submit a written request for review by the Employer of its initial decision. Within 60 days following such request for review, the Employer shall render its final decision in writing to the Participant or representative stating specific reasons for such decision. If the Participant or representative is not satisfied with the Employer's final decision, the Participant or representative can institute an action in a federal court of competent jurisdiction; for this purpose, process would be served on the Employer. 6.8 IN-SERVICE WITHDRAWALS An Employee may withdraw all or any part of the fair market value of his or her Mandatory Contributions, Voluntary Contributions, Qualified Voluntary Contributions or Rollover Contributions, upon written request to the Employer. Transfer Contributions, which originate from a Plan meeting the safe-harbor provisions of paragraph 8.7, may also be withdrawn by an Employee upon written request to the Employer. Transfer Contributions not meeting the safe-harbor provisions may only be withdrawn upon retirement, death, Disability, termination or termination of the Plan, and will be subject to Spousal consent requirements contained in Code Sections 411(a)(11) and 417. No such withdrawals are permitted from a money purchase plan until the participant attains Normal Retirement Age. Such request shall include the Participant's address, social security number, birthdate, and amount of the withdrawal. If at the time a distribution of 38 46 Qualified Voluntary Contributions is received the Participant has not attained age 59-1/2 and is not disabled, as defined at Code Section 22(e)(3), the Participant will be subject to a federal income tax penalty, unless the distribution is rolled over to a qualified plan or individual retirement plan within 60 days of the date of distribution. A Participant may withdraw all or any part of the fair market value of his or her pre-1987 Voluntary Contributions with or without withdrawing the earnings attributable thereto. Post-1986 Voluntary Contributions may only be withdrawn along with a portion of the earnings thereon. The amount of the earnings to be withdrawn is determined by using the formula: DA[1-(V / V + E)], where DA is the distribution amount, V is the amount of Voluntary Contributions and V + E is the amount of Voluntary Contributions plus the earnings attributable thereto. A Participant withdrawing his or her other contributions prior to attaining age 59-1/2, will be subject to a federal tax penalty to the extent that the withdrawn amounts are includible in income. Unless the Employer provides otherwise in the Adoption Agreement, any Participant in a profit-sharing plan who is 100% fully vested in his or her Employer contributions may withdraw all or any part of the fair market value of any of such contributions, plus the investment earnings thereon, after attaining age 59-1/2 without separation from Service. In a profit-sharing plan where the Employer has so elected, the attainment of age 59-1/2 shall be deemed a distributable event. Such distributions shall not be eligible for redeposit to the Fund. A withdrawal under this paragraph shall not prohibit such Participant from sharing in any future Employer Contribution he or she would otherwise be eligible to share in. A request to withdraw amounts pursuant to this paragraph must if applicable, be consented to by the Participant's Spouse. The consent shall comply with the requirements of paragraph 6.4 relating to immediate distributions. Elective Deferrals, Qualified Non-elective Contributions, and Qualified Matching Contributions, and income allocable to each are not distributable to a Participant or his or her Beneficiary or Beneficiaries, in accordance with such Participant's or Beneficiary's or Beneficiaries' election, earlier than upon separation from Service, death, or Disability. Such amounts may also be distributed upon: (a) Termination of the Plan without the establishment of another Defined Contribution Plan. (b) The disposition by a corporation to an unrelated corporation of substantially all of the assets [within the meaning of Code Section 409(d)(2)] used in a trade or business of such corporation if such corporation continues to maintain this Plan after the disposition, but only with respect to Employees who continue employment with the corporation acquiring such assets. (c) The disposition by a corporation to an unrelated entity of such corporation's interest in a subsidiary [within the meaning of Code Section 409(d)(3)] if such corporation continues to maintain this plan, but only with respect to Employees who continue employment with such subsidiary. (d) The attainment of age 59-1/2. (e) The Hardship of the Participant as described in paragraph 6.9. All distributions that may be made pursuant to one or more of the foregoing distributable events are subject to the Spousal and Participant consent requirements, if applicable, contained in Code Sections 401(a)(11) and 417. 39 47 6.9 HARDSHIP WITHDRAWALS If permitted by the Trustee/Custodian and the Employer in the Adoption Agreement, a Participant may request a Hardship withdrawal. If the Participant has not attained age 59-1/2, the Participant may be subject to a federal income tax penalty. Such request shall be in writing to the Employer who shall have sole authority to authorize a hardship withdrawal, pursuant to the rules below. Hardship withdrawals may include Elective Deferrals regardless of when contributed and any earnings accrued and credited thereon as of the last day of the Plan Year ending before July 1, 1989 and Employer related contributions, including but not limited to Employer Matching Contributions, plus the investment earnings thereon to the extent vested. Qualified Matching Contributions, Qualified Non-Elective Contributions and Elective Deferrals reclassified as Voluntary Contributions plus the investment earnings thereon are only available for Hardship withdrawal prior to age 59-1/2 to the extent that they were credited to the Participant's Account as of the last day of the Plan Year ending prior to July 1, 1989. The Plan Administrator may limit withdrawals to Elective Deferrals and the earnings thereon as stipulated above. For purposes of this section, a hardship is defined as an immediate and heavy financial need of the Participant where the Participant lacks other available resources to meet the need. Hardship withdrawals are subject to the Spousal consent requirements contained in Code Section 401(a)(11) and 417. Only the following reasons are valid to obtain hardship withdrawal: (a) medical expenses [within the meaning of Code Section 213(d)] of the Participant, his or her Spouse, children and other dependents, (b) the purchase (excluding mortgage payments) of a principal residence for the Participant, (c) payment of tuition and related educational fees for the next twelve (12) months of post-secondary education for the Participant, his or her Spouse, children or other dependents, or (d) the need to prevent eviction of the Employee from or a foreclosure on the mortgage of, the Employee's principal residence. Furthermore, conditions (e), (f) and (h) below must be met in a cash or deferred profit-sharing plan in order for a withdrawal to be authorized, while condition (g) applies to all profit-sharing plans including cash or deferred plans. (e) The Participant has obtained all distributions, other than hardship distributions, and all nontaxable loans under all plans maintained by the Employer. (f) All plans maintained by the Employer (other than flexible benefit plans under Code Section 125 providing for current benefits) shall provide that the Employee's Elective Deferrals and Voluntary Contributions will be suspended for twelve months after the receipt of the Hardship distribution. (g) The distribution is not in excess of the amount of the immediate and heavy financial need [(a) through (d)] above. Heavy financial need includes amounts necessary to pay any Federal, State or local income taxes or penalties reasonably anticipated to result from the distribution. 40 48 (h) All plans maintained by the Employer provide that an Employee may not make Elective Deferrals for the Employee's taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under Code Section 402(g) for such taxable year, less the amount of such Employee's pre-tax contributions for the taxable year of the hardship distribution. (i) If a distribution is made at a time when a Participant has a nonforfeitable right to less than 100% of the account balance derived from Employer contributions and the Participant may increase the nonforfeitable percentage in the account: (1) A separate sub-account will be established for the Participant's interest in the Plan as of the time of the distribution, and (2) At any relevant time the Participant's nonforfeitable portion of the separate account will be equal to an amount ("X") determined by the formula: X = P (AB + D) - D For purposes of applying the formula: "P" is the nonforfeitable percentage at the relevant time, "AB" is the account balance at the relevant time, and "D" is the amount of the distribution. 6.10 PREVIOUS DISTRIBUTION OPTIONS Notwithstanding any restrictions required by law, any payment or distribution option previously offered by the Adopting Employer in a predecessor plan to this Plan shall continue to be offered to eligible Participants under this Plan. Such payment or distribution options shall be specifically set forth in the Adoption Agreement in the Distribution Options section. 41 49 ARTICLE VII DISTRIBUTION REQUIREMENTS 7.1 JOINT AND SURVIVOR ANNUITY REQUIREMENTS All distributions made under the terms of this Plan must comply with the provisions of Article VIII including, if applicable, the safe harbor provisions thereunder. 7.2 MINIMUM DISTRIBUTION REQUIREMENTS All distributions required under this Article shall be determined and made in accordance with the minimum distribution requirements of Code Section 401(a)(9) and the regulations thereunder, including the minimum distribution incidental benefit rules found at Regulations Section 1.401(a)(9)-2. The entire interest of a Participant must be distributed or begin to be distributed no later than the Participant's Required Beginning Date. Life expectancy and joint and last survivor life expectancy are computed by using the expected return multiples found in Tables V and VI of Regulations Section 1.72-9. Life expectancies of the Participant, Spouse (or Surviving Spouse) or non-Spouse beneficiary shall be calculated as specified in the adoption agreement. The life expectancy of a non-Spouse beneficiary however, may not be recalculated annually. 7.3 LIMITS ON DISTRIBUTION PERIODS As of the First Distribution Calendar Year, distributions if not made in a single-sum, may only be made over one of the following periods (or a combination thereof): (a) the life of the Participant, (b) the life of the Participant and a Designated Beneficiary, (c) a period certain not extending beyond the life expectancy of the Participant, or (d) a period certain not extending beyond the joint and last survivor expectancy of the Participant and a designated beneficiary. 7.4 REQUIRED DISTRIBUTIONS ON OR AFTER THE REQUIRED BEGINNING DATE (a) If a participant's benefit is to be distributed over (1) a period not extending beyond the life expectancy of the Participant or the joint life and last survivor expectancy of the Participant and the Participant's Designated Beneficiary or (2) a period not extending beyond the life expectancy of the Designated Beneficiary, the amount required to be distributed for each calendar year, beginning with distributions for the First Distribution Calendar Year, must at least equal the quotient obtained by dividing the Participant's benefit by the Applicable Life Expectancy. (b) For calendar years beginning before 1989, if the Participant's Spouse is not the Designated Beneficiary, the method of distribution selected must have assured that at least 50% of the Present Value of the amount available for distribution was to be paid within the life expectancy of the Participant. 42 50 (c) For calendar years beginning after 1988, the amount to be distributed each year, beginning with distributions for the First Distribution Calendar Year shall not be less than the quotient obtained by dividing the Participant's benefit by the lesser of (1) the Applicable Life Expectancy or (2) if the Participant's Spouse is not the Designated Beneficiary, the applicable divisor determined from the table set forth in Q&A-4 of Regulations Section 1.401(a)(9)-2. Distributions after the death of the Participant shall be distributed using the Applicable Life Expectancy as the relevant divisor without regard to Regulations Section 1.401(a)(9)-2. (d) The minimum distribution required for the Participant's First Distribution Calendar Year must be made on or before the Participant's Required Beginning Date. The minimum distribution for other calendar years, including the minimum distribution for the Distribution Calendar Year in which the Participant's Required Beginning Date occurs, must be made on or before December 31 of that Distribution Calendar Year. (e) If the Participant's benefit is distributed in the form of an annuity purchased from an insurance company, distributions thereunder shall be made in accordance with the requirements of Code Section 401(a)(9) and the Regulations thereunder. (f) For purposes of determining the amount of the required distribution for the First Distribution Calendar Year, the account balance to be used is the account balance determined as of the last valuation preceding the First Distribution Calendar Year. This balance will be increased by the amount of any contributions or forfeitures allocated to the account balance after the valuation date but before the last day of such preceding calendar year. Such balance will also be decreased by distributions made after the Valuation Date but before the last day of such preceding Calendar Year. For all other years, the account balance to be used is the last valuation preceding such Distribution Calendar Year. (g) For purposes of subparagraph 7.4(f), if any portion of the minimum distribution for the First Distribution Calendar Year is made in the second Distribution Calendar Year on or before the Required Beginning Date, the amount of the minimum distribution made in the second Distribution Calendar Year shall be treated as if it had been made in the immediately preceding Distribution Calendar Year. 7.5 REQUIRED BEGINNING DATE (a) General Rule. The Required Beginning Date of a Participant is the first day of April of the calendar year following the calendar year in which the Participant attains age 70-1/2. 43 51 (b) Transitional Rules. The Required Beginning Date of a Participant who attains age 70-1/2 before 1988, shall be determined in accordance with (1) or (2) below: (1) Non-5-percent owners. The Required Beginning Date of a Participant who is not a 5-percent owner is the first day of April of the calendar year following the calendar year in which the later of retirement or attainment of age 70- 1/2 occurs. In the case of a Participant who is not a 5-percent owner who attains age 70-1/2 during 1988 and who has not retired as of January 1, 1989, the Required Beginning Date is April 1 1990. (2) 5-percent owners. The Required Beginning Date of a Participant who is a 5-percent owner during any year beginning after 1979, is the first day of April following the later of: (i) the calendar year in which the Participant attains age 70-1/2, or (ii) the earlier of the calendar year with or within which ends the plan year in which the Participant becomes a 5- percent owner, or the calendar year in which the Participant retires. (c) A Participant is treated as a 5-percent owner for purposes of this Paragraph if such Participant is a 5-percent owner as defined in Code Section 416(i) (determined in accordance with Code Section 416 but without regard to whether the Plan is Top-Heavy) at any time during the Plan Year ending with or within the calendar year in which such Owner attains age 66-1/2 or any subsequent Plan Year. (d) Once distributions have begun to a 5-percent owner under this paragraph, they must continue to be distributed, even if the Participant ceases to be a 5-percent owner in a subsequent year. 7.6 TRANSITIONAL RULE (a) Notwithstanding the other requirements of this Article and subject to the requirements of Article VIII, Joint and Survivor Annuity Requirements, distribution on behalf of any Employee, including a 5-percent owner, may be made in accordance with all of the following requirements (regardless of when such distribution commences): (1) The distribution by the Trust is one which would not have disqualified such Trust under Code Section 401(a)(9) as in effect prior to amendment by the Deficit Reduction Act of 1984. 44 52 (2) The distribution is in accordance with a method of distribution designated by the Employee whose interest in the Trust is being distributed or, if the Employee is deceased, by a beneficiary of such Employee. (3) Such designation was in writing, was signed by the Employee or the beneficiary, and was made before 1984. (4) The Employee had accrued a benefit under the Plan as of December 31, 1983. (5) The method of distribution designated by the Employee or the beneficiary specifies the time at which distribution will commence, the period over which distributions will be made, and in the case of any distribution upon the Employee's death, the beneficiaries of the Employee listed in order of priority. (b) A distribution upon death will not be covered by this transitional rule unless the information in the designation contains the required information described above with respect to the distributions to be made upon the death of the Employee. (c) For any distribution which commences before 1984, but continues after 1983, the Employee or the beneficiary, to whom such distribution is being made, will be presumed to have designated the method of distribution under which the distribution is being made if the method of distribution was specified in writing and the distribution satisfies the requirements in subparagraphs (a)(1) and (a)(5) above. (d) If a designation is revoked, any subsequent distribution must satisfy the requirements of Code Section 401(a)(9) and the regulations thereunder. If a designation is revoked subsequent to the date distributions are required to begin, the Trust must distribute by the end of the calendar year following the calendar year in which the revocation occurs the total amount not yet distributed which would have been required to have been distributed to satisfy Code Section 401(a)(9) and the regulations thereunder, but for the section 242(b)(2) election of the Tax Equity and Fiscal Responsibility Act of 1982. For calendar years beginning after 1988, such distributions must meet the minimum distribution incidental benefit requirements in Regulations Section 1.401(a)(9)-2. Any changes in the designation will be considered to be a revocation of the designation. However, the mere substitution or addition of another beneficiary (one not named in the designation) under the designation will not be considered to be a revocation of the designation, so long as such substitution or addition does not alter the period over which distributions are to be made under the designation, directly or indirectly (for example, by altering the relevant measuring life). In the case in which an amount is transferred or rolled over from one plan to another plan, the rules in Q&A J-2 and Q&A J-3 of the regulations shall apply. 45 53 7.7 DESIGNATION OF BENEFICIARY FOR DEATH BENEFIT Each Participant shall file a written designation of beneficiary with the Employer upon qualifying for participation in this Plan. Such designation shall remain in force until revoked by the Participant by filing a new beneficiary form with the Employer. If provided for in the Adoption Agreement, a Participant may elect to have a portion of his or her account balance invested in an insurance contract. If an insurance contract is purchased under the Plan, the Trustee must be named as Beneficiary under the terms of the contract. However, the Participant shall designate a Beneficiary to receive the proceeds of the contract after settlement is received by the Trustee. Under a profit-sharing plan satisfying the requirements of paragraph 8.7 hereof, the Designated Beneficiary shall be the Participant's Surviving Spouse, if any, unless such Spouse properly consents otherwise. 7.8 NONEXISTENCE OF BENEFICIARY Any portion of the amount payable hereunder which is not disposed of because of the Participant's or former Participant's failure to designate a beneficiary, or because all of the Designated Beneficiaries predeceased the Participant, shall be paid to his or her Spouse. If the Participant has no Spouse at the time of death, payment shall be made to the personal representative of his or her estate in a lump sum. 7.9 DISTRIBUTION BEGINNING BEFORE DEATH If the Participant dies after distribution of his or her interest has begun, the remaining portion of such interest will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Participant's death. 7.10 DISTRIBUTION BEGINNING AFTER DEATH If the Participant dies before distribution of his or her interest begins, distribution of the Participant's entire interest shall be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death except to the extent that an election is made to receive distributions in accordance with (a) or (b) below: (a) If any portion of the Participant's interest is payable to a Designated Beneficiary, distributions may be made over the life or over a period certain not greater than the life expectancy of the Designated Beneficiary commencing on or before December 31 of the calendar year immediately following the calendar year in which the Participant died; (b) If the Designated Beneficiary is the Participant's surviving Spouse, the date distributions are required to begin in accordance with (a) above shall not be earlier than the later of (1) December 31 of the calendar year immediately following the calendar year in which the participant died or (2) December 31 of the calendar year in which the Participant would have attained age 70-1/2. If the Participant has not made an election pursuant to this paragraph 7.10 by the time of his or her death, the Participant's Designated Beneficiary must elect the method of distribution no later than the earlier of (1) December 31 of the calendar year in which distributions would be required to begin under this section, or (2) December 31 of the calendar year which contains the fifth anniversary of the date of death of the participant. If the Participant has no Designated Beneficiary, or if the Designated Beneficiary does not elect a method of distribution, then distribution of the Participant's entire interest must be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death. 46 54 For purposes of this paragraph if the Surviving Spouse dies after the Participant, but before payments to such Spouse begin, the provisions of this paragraph with the exception of paragraph (b) herein, shall be applied as if the Surviving Spouse were the Participant. For purposes of paragraph 7.9 and this paragraph, any amount paid to a child of the Participant will be treated as if it had been paid to the Surviving Spouse if the amount becomes payable to the Surviving Spouse when the child attains the age of majority. Distribution of a Participant's interest in the Plan is considered to begin on the Participant's Required Beginning Date (or if applicable, the date distribution is required to begin to the Surviving Spouse who takes instead of the Participant). If distribution in the form of an annuity irrevocably commences to the Participant before the Required Beginning Date, the date distribution is considered to begin is the date distribution actually commences. 7.11 DISTRIBUTION OF EXCESS ELECTIVE DEFERRALS (a) Notwithstanding any other provision of the Plan, Elective Deferrals plus any income and minus any loss allocable thereto, shall be distributed no later than April 15, 1988, and each April 15 thereafter, to Participants to whose accounts Excess Elective Deferrals were allocated for the preceding taxable year, and who claim Excess Elective Deferrals for such taxable year. Excess Elective Deferrals shall be treated as Annual Additions under the Plan, unless such amounts are distributed no later than the first April 15th following the close of the Participant's taxable year. A Participant is deemed to notify the Plan Administrator of any Excess Elective Deferrals that arise by taking into account only those Elective Deferrals made to this Plan and any other plans of this Employer. (b) The Participant's claim shall be in writing; shall be submitted to the Plan Administrator not later than March 1 of each year; shall specify the amount of the Participant's Excess Elective Deferrals for the preceding taxable year; and shall be accompanied by the Participant's written statement that if such amounts are not distributed, such Excess Elective Deferrals, when added to amounts deferred under other plans or arrangements described in Code Sections 401(k), 408(k) [Simplified Employee Pensions], or 403(b) [annuity programs for public schools and charitable organizations] will exceed the $7,000 limit as adjusted under Code Section 415(d) imposed on the Participant by Code Section 402(g) for the year in which the deferral occurred. (c) ADJUSTED BALANCE METHOD Excess Elective Deferrals shall be adjusted for any income or loss up to the end of the taxable year, during which such excess was deferred. Income or loss will be calculated under any reasonable method, provided it does not violate the general nondiscrimination requirements of Code Section 401(a)(4), the regulations under Code Section 401(k), and is consistently used for all Participants for their corrective distributions and is used by the Plan for income allocations to Participants' accounts. 47 55 (d) If the Participant receives a return of his or her Elective Deferrals, the amount of such contributions which are returned must be brought into the Employee's taxable income. 7.12 DISTRIBUTIONS OF EXCESS CONTRIBUTIONS (ADP AMOUNTS) (a) Notwithstanding any other provision of this Plan, Excess Contributions, plus any income and minus any loss allocable thereto, shall be distributed no later than the last day of each Plan Year to Participants to whose accounts such Excess Contributions were allocated for the preceding Plan Year. If such excess amounts are distributed more than 2-1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten (10) percent excise tax will be imposed on the Employer maintaining the Plan with respect to such amounts. Such distributions shall be made to Highly Compensated Employees on the basis of the respective portions of the Excess Contributions attributable to each of such Employees. Excess Contributions shall be allocated to Participants who are subject to the Family Member aggregation rules of Code Section 414(q)(6) in the manner prescribed by the regulations. (b) Excess Contributions (including the amounts recharacterized) shall be treated as Annual Additions under the Plan. (c) Excess Contributions shall be adjusted for any income or loss up to the end of the Plan Year. Income or loss will be calculated under any reasonable method, provided it does not violate the general nondiscrimination requirements of Code Section 401(a)(4), the regulations under Code Section 401(k), and is consistently used for all Participants for their corrective distributions and is used by the Plan for income allocations to Participants' accounts. (d) PROPORTIONATE DISTRIBUTION Excess Contributions shall be distributed from the Participant's Elective Deferral account and Qualified Matching Contribution account (if applicable) in proportion to the Participant's Elective Deferrals and Qualified Matching Contributions (to the extent used in the ADP test) for the Plan Year. Excess Contributions shall be distributed from the Participant's Qualified Non-Elective Contribution account only to the extent that such Excess Contributions exceed the balance in the Participant's Elective Deferral account and Qualified Matching Contribution account. 7.13 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS (ACP AMOUNTS) (a) Notwithstanding any other provision of this Plan, Excess Aggregate Contributions, plus any income and minus any loss allocable thereto, shall be forfeited, if the employer so elects in the Adoption Agreement, or if not forfeitable, distributed no later than the last day of each Plan Year to Participants to whose accounts such Excess Aggregate Contributions were allocated for the preceding Plan Year. Excess Aggregate Contributions shall be allocated to Participants who are subject to the Family Member aggregation rules of Code Section 414(q)(6) in the manner 48 56 prescribed by the regulations. If such Excess Aggregate Contributions are distributed more than 2-1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten (10) percent excise tax will be imposed on the Employer maintaining the Plan with respect to those amounts. Excess Aggregate Contributions shall be treated as Annual Additions under the plan. (b) Excess Aggregate Contributions shall be adjusted for any income or loss up to the end of the Plan Year. The income or loss allocable to Excess Aggregate Contributions is the sum of income or loss for the Plan Year allocable to the Participant's Voluntary Contribution account, Matching Contribution account (if any, and if all amounts therein are not used in the ADP test) and, if applicable, Qualified Non-Elective Contribution account and Elective Deferral account. Income or loss will be calculated under the method used to calculate investment earnings and losses elsewhere in the Plan. (c) Forfeitures of Excess Aggregate Contributions may either be reallocated to the accounts of non-Highly Compensated Employees or applied to reduce Employer contributions, as elected by the Employer in the Adoption Agreement. (d) Excess Aggregate Contributions shall be forfeited if such amount is not vested. If vested, such excess shall be distributed on a pro-rata basis from the Participant's Voluntary Contribution account (and, if applicable, the Participant's Qualified Non-Elective Contribution account or Elective Deferral account, or both). 49 57 ARTICLE VIII JOINT AND SURVIVOR ANNUITY REQUIREMENTS 8.1 APPLICABILITY OF PROVISIONS The provisions of this Article shall apply to any Participant who is credited with at least one Hour of Service with the Employer on or after August 23, 1984 and such other Participants as provided in paragraph 8.8. 8.2 PAYMENT OF QUALIFIED JOINT AND SURVIVOR ANNUITY Unless an optional form of benefit is selected pursuant to a Qualified Election within the 90-day period ending on the Annuity Starting Date, a married Participant's Vested Account Balance will be paid in the form of a Qualified Joint and Survivor Annuity and an unmarried Participant's Vested Account Balance will be paid in the form of a life annuity. The Participant may elect to have such annuity distributed upon attainment of the Early Retirement Age under the Plan. 8.3 PAYMENT OF QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY Unless an optional form of benefit has been selected within the Election Period pursuant to a Qualified Election, if a Participant dies before the Annuity Starting Date then the Participant's Vested Account Balance shall be applied towards the purchase of an annuity for the life of the Surviving Spouse. The Surviving Spouse may elect to have such annuity distributed within a reasonable period after the Participant's death. A Participant who does not meet the age 35 requirement set forth in the Election Period as of the end of any current Plan Year may make a special qualified election to waive the qualified Pre-retirement Survivor annuity for the period beginning the date of such election and ending on the first day of the Plan Year in which the Participant will attain age 35. Such election shall not be valid unless the Participant receives a written explanation of the Qualified Pre- retirement Survivor Annuity in such terms as are comparable to the explanation required under paragraph 8.5. Qualified Pre-retirement Survivor Annuity coverage will be automatically reinstated as of the first day of the Plan Year in which the Participant attains age 35. Any new waiver on or after such date shall be subject to the full requirements of this Article. 8.4 QUALIFIED ELECTION A Qualified Election is an election to either waive a Qualified Joint and Survivor Annuity or a qualified pre-retirement survivor annuity. Any such election shall not be effective unless: (a) the Participant's Spouse consents in writing to the election; (b) the election designates a specific beneficiary, including any class of beneficiaries or any contingent beneficiaries, which may not be changed without spousal consent (or the Spouse expressly permits designations by the Participant without any further spousal consent); (c) the Spouse's consent acknowledges the effect of the election; and (d) the Spouse's consent is witnessed by a Plan representative or notary public. 50 58 Additionally, a Participant's waiver of the Qualified Joint and Survivor Annuity shall not be effective unless the election designates a form of benefit payment which may not be changed without spousal consent (or the Spouse expressly permits designations by the Participant without any further spousal consent). If it is established to the satisfaction of the Plan Administrator that there is no Spouse or that the Spouse cannot be located, a waiver will be deemed a Qualified Election. Any consent by a Spouse obtained under this provision (or establishment that the consent of a Spouse may not be obtained) shall be effective only with respect to such Spouse. A consent that permits designations by the Participant without any requirement of further consent by such Spouse must acknowledge that the Spouse has the right to limit consent to a specific beneficiary, and a specific form of benefit where applicable, and that the Spouse voluntarily elects to relinquish either or both of such rights. A revocation of a prior waiver may be made by a Participant without the consent of the Spouse at any time before the commencement of benefits. The number of revocations shall not be limited. No consent obtained under this provision shall be valid unless the Participant has received notice as provided in paragraphs 8.5 and 8.6 below. 8.5 NOTICE REQUIREMENTS FOR QUALIFIED JOINT AND SURVIVOR ANNUITY The Plan Administrator shall provide each Participant a written explanation of: (a) the terms and conditions of a Qualified Joint and Survivor Annuity; (b) the Participant's right to make and the effect of an election to waive the Qualified Joint and Survivor Annuity form of benefit; (c) the rights of a Participant's Spouse; and (d) the right to make, and the effect of, a revocation of a previous election to waive the Qualified Joint and Survivor Annuity. Such notice shall be provided not less than 30 days and no more than 90 days prior to the Annuity Starting Date. 8.6 NOTICE REQUIREMENTS FOR QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY The Plan Administrator shall provide each Participant a written explanation of the qualified pre-retirement survivor annuity in such terms and in such manner as would be comparable to the explanation provided for meeting the requirements of paragraph 8.5 applicable to a Qualified Joint and Survivor Annuity. Such explanation shall be provided within whichever of the following periods ends last: (a) the period beginning with the first day of the Plan Year in which the Participant attains age 32 and ending with the close of the Plan Year preceding the Plan Year in which the Participant attains age 35; (b) a reasonable period ending after the individual becomes a Participant; (c) a reasonable period ending after this Article first applies to the Participant. Notwithstanding the foregoing, notice must be provided within a reasonable period ending after separation from Service in the case of a Participant who separates from Service before attaining age 35. 51 59 For purposes of applying the preceding paragraph, a reasonable period ending after the enumerated events described in (b) and (c) is the end of the two-year period beginning one-year prior to the date the applicable event occurs, and ending one-year after that date. In the case of a Participant who separates from Service before the Plan Year in which age 35 is attained, notice shall be provided within the two-year period beginning one year prior to separation and ending one year after separation. If such a Participant subsequently returns to employment with the Employer, the applicable period for such Participant shall be redetermined. 8.7 SPECIAL SAFE-HARBOR EXCEPTION FOR CERTAIN PROFIT-SHARING PLANS (a) This paragraph shall apply to a Participant in a profit-sharing plan, and to any distribution, made on or after the first day of the first plan year beginning after 1988, from or under a separate account attributable solely to Qualified Voluntary contributions, as maintained on behalf of a Participant in a money purchase pension plan, (including a target benefit plan) if the following conditions are satisfied: (1) the Participant does not or cannot elect payments in the form of a life annuity; and (2) on the death of a Participant, the Participant's Vested Account Balance will be paid to the Participant's Surviving Spouse, but if there is no Surviving Spouse, or if the Surviving Spouse has consented in a manner conforming to a Qualified Election, then to the Participant's Designated Beneficiary. The Surviving Spouse may elect to have distribution of the Vested Account Balance commence within the 90-day period following the date of the Participant's death. The account balance shall be adjusted for gains or losses occurring after the Participant's death in accordance with the provisions of the Plan governing the adjustment of account balances for other types of distributions. These safe-harbor rules shall not be operative with respect to a Participant in a profit-sharing plan if that plan is a direct or indirect transferee of a Defined Benefit Plan, money purchase plan, a target benefit plan, stock bonus plan, or profit-sharing plan which is subject to the survivor annuity requirements of Code Section 401(a)(11) and Code Section 417, and would therefore have a Qualified Joint and Survivor Annuity as its normal form of benefit. (b) The Participant may waive the spousal death benefit described in this paragraph at any time provided that no such waiver shall be effective unless it satisfies the conditions described in paragraph 8.4 (other than the notification requirement referred to therein) that would apply to the Participant's waiver of the Qualified Pre- Retirement Survivor Annuity. (c) If this paragraph 8.7 is operative, then all other provisions of this Article other than paragraph 8.8 are inoperative. 52 60 8.8 TRANSITIONAL JOINT AND SURVIVOR ANNUITY RULES Special transition rules apply to Participants who were not receiving benefits on August 23, 1984. (a) Any living Participant not receiving benefits on August 23, 1984, who would otherwise not receive the benefits prescribed by the previous paragraphs of this Article, must be given the opportunity to elect to have the prior paragraphs of this Article apply if such Participant is credited with at least one Hour of Service under this Plan or a predecessor Plan in a Plan Year beginning on or after January 1, 1976 and such Participant had at least 10 Years of Service for vesting purposes when he or she separated from Service. (b) Any living Participant not receiving benefits on August 23, 1984, who was credited with at least one Hour of Service under this Plan or a predecessor Plan on or after September 2, 1974, and who is not otherwise credited with any Service in a Plan Year beginning on or after January 1, 1976, must be given the opportunity to have his or her benefits paid in accordance with paragraph 8.9. (c) The respective opportunities to elect [as described in (a) and (b) above] must be afforded to the appropriate Participants during the period commencing on August 23, 1984 and ending on the date benefits would otherwise commence to said Participants. 8.9 AUTOMATIC JOINT AND SURVIVOR ANNUITY AND EARLY SURVIVOR ANNUITY Any Participant who has elected pursuant to paragraph 8.8(b) and any Participant who does not elect under paragraph 8.8(a) or who meets the requirements of paragraph 8.8(a), except that such Participant does not have at least 10 years of vesting Service when he or she separates from Service, shall have his or her benefits distributed in accordance with all of the following requirements if benefits would have been payable in the form of a life annuity. (a) Automatic Joint and Survivor Annuity. If benefits in the form of a life annuity become payable to a married Participant who: (1) begins to receive payments under the Plan on or after Normal Retirement Age, or (2) dies on or after Normal Retirement Age while still working for the Employer, or (3) begins to receive payments on or after the Qualified Early Retirement Age, or (4) separates from Service on or after attaining Normal Retirement (or the Qualified Early Retirement Age) and after satisfying the eligibility requirements for the payment of benefits under the Plan and thereafter dies before beginning to receive such benefits, 53 61 then such benefits will be received under this Plan in the form of a Qualified Joint and Survivor Annuity, unless the Participant has elected otherwise during the Election Period. The Election Period must begin at least 6 months before the Participant attains Qualified Early Retirement Age and end not more than 90 days before the commencement of benefits. Any such election will be in writing and may be changed by the Participant at any time. (b) Election of Early Survivor Annuity. A Participant who is employed after attaining the Qualified Early Retirement Age will be given the opportunity to elect, during the Election Period, to have a survivor annuity payable on death. If the Participant elects the survivor annuity, payments under such annuity must not be less than the payments which would have been made to the Spouse under the Qualified Joint and Survivor Annuity if the Participant had retired on the day before his or her death. Any election under this provision will be in writing and may be changed by the Participant at any time. The Election Period begins on the later of: (1) the 90th day before the Participant attains the Qualified Early Retirement Age, or (2) the date on which participation begins, and ends on the date the Participant terminates employment. 8.10 ANNUITY CONTRACTS Any annuity contract distributed under this Plan must be nontransferable. The terms of any annuity contract purchased and distributed by the Plan to a Participant or Spouse shall comply with the requirements of this Plan. 54 62 ARTICLE IX VESTING 9.1 EMPLOYEE CONTRIBUTIONS A Participant shall always have a 100% vested and nonforfeitable interest in his or her Elective Deferrals, Voluntary Contributions, Qualified Voluntary Contributions, Rollover Contributions, and Transfer Contributions plus the earnings thereon. No forfeiture of Employer related contributions (including any minimum contributions made under paragraph 14.2 hereof) will occur solely as a result of an Employee's withdrawal of any Employee contributions. 9.2 EMPLOYER CONTRIBUTIONS A Participant shall acquire a vested and nonforfeitable interest in his or her account attributable to Employer contributions in accordance with the table selected in the Adoption Agreement, provided that if a Participant is not already fully vested, he or she shall become so upon attaining Normal Retirement Age, Early Retirement Age, on death prior to normal retirement, on retirement due to Disability, or on termination of the Plan. 9.3 COMPUTATION PERIOD The computation period for purposes of determining Years of Service and Breaks in Service for purposes of computing a Participant's nonforfeitable right to his or her account balance derived from Employer contributions shall be determined by the Employer in the Adoption Agreement. If the Employer provides for other than full and immediate vesting and does not designate otherwise, the Computation Period shall be the Plan Year. In the event a former Participant with no vested interest in his or her Employer contribution account requalifies for participation in the Plan after incurring a Break in Service, such Participant shall be credited for vesting with all pre-break and post-break Service. 9.4 REQUALIFICATION PRIOR TO FIVE CONSECUTIVE ONE-YEAR BREAKS IN SERVICE The account balance of such Participant shall consist of any undistributed amount in his or her account as of the date of re-employment plus any future contributions added to such account plus the investment earnings on the account. The Vested Account Balance of such Participant shall be determined by multiplying the Participant's account balance (adjusted to include any distribution or redeposit made under paragraph 6.3) by such Participant's vested percentage. All Service of the Participant, both prior to and following the break, shall be counted when computing the Participant's vested percentage. 9.5 REQUALIFICATION AFTER FIVE CONSECUTIVE ONE-YEAR BREAKS IN SERVICE If such Participant is not fully vested upon re-employment, a new account shall be established for such Participant to separate his or her deferred vested and nonforfeitable account, if any, from the account to which new allocations will be made. The Participant's deferred account to the extent remaining shall be fully vested and shall continue to share in earnings and losses of the Fund. When computing the Participant's vested portion of the new account, all pre-break and post-break Service shall be counted. However, notwithstanding this provision, no such former Participant who has had five consecutive one-year Breaks in Service shall acquire a larger vested and nonforfeitable interest in his or her prior account balance as a result of requalification hereunder. 55 63 9.6 CALCULATING VESTED INTEREST A Participant's vested and nonforfeitable interest shall be calculated by multiplying the fair market value of his or her account attributable to Employer contributions on the Valuation Date preceding distribution by the decimal equivalent of the vested percentage as of his or her termination date. The amount attributable to Employer contributions for purposes of the calculation includes amounts previously paid out pursuant to paragraph 6.3 and not repaid. The Participant's vested and nonforfeitable interest, once calculated above, shall be reduced to reflect those amounts previously paid out to the Participant and not repaid by the Participant. The Participant's vested and nonforfeitable interest so determined shall continue to share in the investment earnings and any increase or decrease in the fair market value of the Fund up to the Valuation Date preceding or coinciding payment. 9.7 FORFEITURES Any balance in the account of a Participant who has separated from Service to which he or she is not entitled under the foregoing provisions, shall be forfeited and applied as provided in the Adoption Agreement. If not specified otherwise in the Adoption Agreement, forfeitures will be allocated to Participants in the same manner as the Employer's contribution. A forfeiture may only occur if the Participant has received a distribution under paragraphs 6.3(a) and (b) from the Plan or if the Participant has incurred five consecutive 1-year Breaks in Service. Forfeitures shall inure only to the accounts of Participants of the adopting Employer's plan. No forfeiture will occur solely as a result of a Participant's withdrawal of his or her Employee contributions. If not specified otherwise in the Adoption Agreement, forfeitures shall occur and be allocated at the end of the Plan Year during which the former Participant incurs five consecutive one-year Breaks in Service. Reallocation of forfeitures shall be made no later than one year after a cash out or the occurrence of the Participant's fifth consecutive one year Break in Service. If a Participant's Vested Account Balance is forfeited because the Participant or Designated Beneficiary cannot be found, such benefit will be reinstated if a claim is made by the Participant or Designated Beneficiary. Furthermore, a Highly Compensated Employee's Matching Contributions may be forfeited, even if vested, if the contributions to which they relate are Excess Deferrals, Excess Contributions, or Excess Aggregate Contributions. 9.8 AMENDMENT OF VESTING SCHEDULE No amendment to the Plan shall have the effect of decreasing a Participant's vested interest determined without regard to such amendment as of the later of the date such amendment is adopted or the date it becomes effective. Further, if the vesting schedule of the Plan is amended, or the Plan is amended in any way that directly or indirectly affects the computation of any Participant's nonforfeitable percentage or if the Plan is deemed amended by an automatic change to or from a Top-Heavy vesting schedule, each Participant with at least three Years of Service with the Employer may elect, within a reasonable period after the adoption of the amendment or change, to have his or her nonforfeitable percentage computed under the Plan without regard to such amendment or change. For Participant's who do not have at least one Hour of Service in any Plan Year beginning after 1988, the preceding sentence shall be applied by substituting "Five Years of Service" for "Three Years of Service" where such language appears. The period during which the election may be made shall commence with the date the amendment is adopted or deemed to be made and shall end on the later of: (a) 60 days after the amendment is adopted; (b) 60 days after the amendment becomes effective; or 56 64 (c) 60 days after the Participant is issued written notice of the amendment by the Employer or the Trustee/Custodian. If the Trustee/Custodian is asked to so notify, the Fund will be charged for the costs thereof. No amendment to the Plan shall be effective to the extent that it has the effect of decreasing a Participant's accrued benefit. Notwithstanding the preceding sentence, a Participant's account balance may be reduced to the extent permitted under section 412(c)(8) of the Code (relating to financial hardships). For purposes of this paragraph, a Plan amendment which has the effect of decreasing a Participant's account balance or eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment, shall be treated as reducing an accrued benefit. 9.9 SERVICE WITH CONTROLLED GROUPS All Years of Service with other members of a controlled group of corporations [as defined in Code Section 414(b)], trades or businesses under common control [as defined in Code Section 414(c)], or members of an affiliated service group [as defined in Code Section 414(m)] shall be considered for purposes of determining a Participant's nonforfeitable percentage. 57 65 ARTICLE X LIMITATIONS ON ALLOCATIONS AND ANTIDISCRIMINATION TESTING 10.1 PARTICIPATION ONLY IN THIS PLAN If the Participant does not participate in and has never participated in another qualified plan, a Welfare Benefit Fund (as defined in paragraph 1.89) or an individual medical account, as defined in Code Section 415(l)(2), maintained by the adopting Employer, which provides an Annual Addition as defined in paragraph 1.4, the amount of Annual Additions which may be credited to the Participant's account for any Limitation Year will not exceed the lesser of the Maximum Permissible Amount or any other limitation contained in this Plan. If the Employer contribution that would otherwise be contributed or allocated to the Participant's account would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the amount contributed or allocated will be reduced so that the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount. Prior to determining the Participant's actual Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount for a Participant on the basis of a reasonable estimate of the Participant's Compensation for the Limitation Year, uniformly determined for all Participants similarly situated. As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant's actual Compensation for the Limitation Year. 10.2 DISPOSITION OF EXCESS ANNUAL ADDITIONS If pursuant to paragraph 10.1 or as a result of the allocation of forfeitures, there is an Excess Amount, the excess will be disposed of under one of the following methods as determined in the Adoption Agreement. If no election is made in the Adoption Agreement then method "(a)" below shall apply. (a) Suspense Account Method (1) Any Elective Deferrals, nondeductible Employee Voluntary Contributions or required Voluntary Contributions to the extent they reduce the Excess Amount, will be returned to the Participant; (2) If after the application of paragraph (1) an Excess Amount still exists, and the Participant is covered by the Plan at the end of the Limitation Year, the Excess Amount in the Participant's account will be used to reduce Employer contributions (including any allocation of forfeitures) for such Participant in the next Limitation Year, and each succeeding Limitation Year if necessary; (3) If after the application of paragraph (1) an Excess Amount still exists, and the Participant is not covered by the Plan at the end of the Limitation Year, the Excess Amount will be held unallocated in a suspense account. The suspense account will be applied to reduce future Employer contributions (including allocation of any forfeitures) for all remaining Participants in the next Limitation Year, and each succeeding Limitation Year if necessary; 58 66 (4) If a suspense account is in existence at any time during the Limitation Year pursuant to this paragraph, it will not participate in the allocation of investment gains and losses. If a suspense account is in existence at any time during a particular Limitation Year, all amounts in the suspense account must be allocated and reallocated to Participants' accounts before any Employer contributions or any Employee or Voluntary Contributions may be made to the Plan for that Limitation Year. Excess amounts other than excess Elective Deferrals which may be returned to Participants under Paragraph 1.35 may not be distributed to Participants or former Participants. (b) Spillover Method (1) Any Elective Deferrals, nondeductible Employee Voluntary or required Voluntary Contributions, to the extent they reduce the Excess Amount, will be returned to the Participant. (2) Any Excess Amount which would be allocated to the account of an individual Participant under the Plan's allocation formula will be reallocated to other Participants in the same manner as other Employer contributions. No such reallocation shall be made to the extent that it will result in an Excess Amount being created in such Participant's own account. (3) To the extent that amounts cannot be reallocated under (1) above, the suspense account provisions of (a) above will apply. 10.3 PARTICIPATION IN THIS PLAN AND ANOTHER PROTOTYPE DEFINED CONTRIBUTION PLAN, WELFARE BENEFIT FUND OR INDIVIDUAL MEDICAL ACCOUNT MAINTAINED BY THE EMPLOYER The Annual Additions which may be credited to a Participant's account under this Plan for any Limitation Year will not exceed the Maximum Permissible Amount reduced by the Annual Additions credited to a Participant's account under the other plans and Welfare Benefit Funds and individual medical accounts as defined in Code Section 415(l)(2), maintained by the Employer which provides an Annual Addition as defined in paragraph 1.4 for the same Limitation Year. If the Annual Additions, with respect to the Participant under other Defined Contribution Plans and Welfare Benefit Funds maintained by the Employer, are less than the Maximum Permissible Amount and the Employer contribution that would otherwise be contributed or allocated to the Participant's account under this Plan would cause the Annual Additions for the Limitation Year to exceed this limitation, the amount contributed or allocated will be reduced so that the Annual Additions under all such plans and funds for the Limitation Year will equal the Maximum Permissible Amount. If the Annual Additions with respect to the Participant under such other Defined Contribution Plans and Welfare Benefit Funds in the aggregate are equal to or greater than the Maximum Permissible Amount, no amount will be contributed or allocated to the Participant's account under this Plan for the Limitation Year. Prior to determining the Participant's actual Compensation 59 67 for the Limitation Year, the Employer may determine the Maximum Permissible Amount for a Participant in the manner described in paragraph 10.1. As soon as administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant's actual Compensation for the Limitation Year. 10.4 DISPOSITION OF EXCESS ANNUAL ADDITIONS UNDER TWO PLANS If, pursuant to paragraph 10.3 or as a result of forfeitures, a Participant's Annual Additions under this Plan and such other plans would result in an Excess Amount for a Limitation Year, the Excess Amount will be deemed to consist of the Annual Additions last allocated except that Annual Additions attributable to a Welfare Benefit Fund or individual medical account as defined in Code Section 415(l)(2) will be deemed to have been allocated first regardless of the actual allocation date. If an Excess Amount was allocated to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the Excess Amount attributed to this Plan will be the product of: (a) the total Excess Amount allocated as of such date, times (b) the ratio of: (1) the Annual Additions allocated to the Participant for the Limitation Year as of such date under the Plan, to (2) the total Annual Additions allocated to the Participant for the Limitation Year as of such date under this and all the other qualified Master or Prototype Defined Contribution Plans. Any Excess Amount attributed to this Plan will be disposed of in the manner described in paragraph 10.2. 10.5 PARTICIPATION IN THIS PLAN AND ANOTHER DEFINED CONTRIBUTION PLAN WHICH IS NOT A MASTER OR PROTOTYPE PLAN If the Participant is covered under another qualified Defined Contribution Plan maintained by the Employer which is not a Master or Prototype Plan, Annual Additions which may be credited to the Participant's account under this Plan for any Limitation Year will be limited in accordance with paragraphs 10.3 and 10.4 as though the other plan were a Master or Prototype Plan, unless the Employer provides other limitations in the Adoption Agreement. 10.6 PARTICIPATION IN THIS PLAN AND A DEFINED BENEFIT PLAN If the Employer maintains, or at any time maintained, a qualified Defined Benefit Plan covering any Participant in this Plan, the sum of the Participant's Defined Benefit Plan Fraction and Defined Contribution Plan Fraction will not exceed 1.0 in any Limitation Year. For any Plan Year during which the Plan is Top-Heavy, the Defined Benefit and Defined Contribution Plan Fractions shall be calculated in accordance with Code Section 416(h). The Annual Additions which may be credited to the Participant's account under this Plan for any Limitation Year will be limited in accordance with the provisions set forth in the Adoption Agreement. 10.7 AVERAGE DEFERRAL PERCENTAGE [ADP OR 401(K)] TEST With respect to any Plan Year, the Average Deferral Percentage for Participants who are Highly Compensated Employees and the Average Deferral Percentage for Participants who are non-Highly Compensated Employees must satisfy one of the following tests: 60 68 (a) BASIC TEST The Average Deferral Percentage for Participants who are Highly Compensated Employees for the Plan Year is not more than 1.25 times the Average Deferral Percentage for Participants who are non-Highly Compensated Employees for the same Plan Year, or (b) ALTERNATIVE TEST The Average Deferral Percentage for Participants who are Highly Compensated Employees for the Plan Years does not exceed the Average Deferral Percentage for Participants who are non-Highly Compensated Employees for the same Plan Year by more than 2 percentage points provided that the Average Deferral Percentage for Participants who are Highly Compensated Employees is not more than 2.0 times the Average Deferral Percentage for Participants who are non-Highly Compensated Employees. 10.8 SPECIAL RULES RELATING TO APPLICATION OF ADP TEST (a) ADDITIONAL EMPLOYER 401(K) PLANS The Actual Deferral Percentage for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Elective Deferrals (and Qualified Non-Elective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferrals for purposes of the ADP test) allocated to his or her accounts under two or more arrangements described in Code Section 401(k), that are maintained by the Employer, shall be determined as if such Elective Deferrals (and, if applicable, such Qualified Non-Elective Contributions or Qualified Matching Contributions, or both) were made under a single arrangement. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different Plan Years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. (b) PLAN AGGREGATION In the event that this Plan satisfies the requirements of Code Sections 401(k), 401(a)(4), or 410(b), only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Code Sections only if aggregated with this Plan, then this Section shall be applied by determining the Actual Deferral Percentage of Employees as if all such plans were a single plan. For Plan Years beginning after 1989, plans may be aggregated in order to satisfy Code Section 401(k) only if they have the same Plan Year. (c) FAMILY MEMBER AGGREGATION For purposes of determining the Actual Deferral Percentage of a Participant who is a 5-percent owner or one of the ten most highly-paid Highly Compensated Employees, the Elective Deferrals (and Qualified Non-Elective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferrals for purposes of the ADP test) and Compensation of such Participants shall include the Elective Deferrals (and, if applicable, Qualified Non-Elective 61 69 Contributions and Qualified Matching Contributions, or both) for the Plan Year of Family Members as defined in paragraph 1.36 of this Plan. Family Members, with respect to such Highly Compensated Employees, shall be disregarded as separate Employees in determining the ADP both for Participants who are non-Highly Compensated Employees and for Participants who are Highly Compensated Employees. (d) TIMING OF CONTRIBUTIONS For purposes of determining the ADP test, Elective Deferrals, Qualified Non-Elective Contributions and Qualified Matching Contributions must be made before the last day of the twelve-month period immediately following the Plan Year to which contributions relate. In the event of repeal of the family aggregation rules under Code Section 414(q)(6), all applications of those rules under this Plan shall cease as of the effective date of such repeal. (e) DOCUMENTATION The Employer shall maintain records sufficient to demonstrate satisfaction of the ADP test and the amount of Qualified Non-Elective Contributions or Qualified Matching Contributions, or both, used in such test. (f) ADDITIONAL IRS REQUIREMENTS The determination and treatment of the Actual Deferral Percentage amounts of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. 10.9 RECHARACTERIZATION If the Employer allows for Voluntary Contributions in the Adoption Agreement, a Participant may treat his or her Excess Contributions as an amount distributed to the Participant and then contributed by the Participant to the Plan. Recharacterized amounts will remain nonforfeitable and subject to the same distribution requirements as Elective Deferrals. Amounts may not be recharacterized by a Highly Compensated Employee to the extent that such amount in combination with other Employee Contributions made by that Employee would exceed any stated limit under the Plan on Voluntary Contributions. Recharacterization must occur no later than two and one-half months after the last day of the Plan Year in which such Excess Contributions arose and is deemed to occur no earlier than the date the last Highly Compensated Employee is informed in writing of the amount recharacterized and the consequences thereof. Recharacterized amounts will be taxable to the Participant for the Participant's tax year in which the Participant would have received them in cash. 10.10 AVERAGE CONTRIBUTION PERCENTAGE [ACP OR 401(M)] TEST If the Employer makes Matching Contributions or if the Plan allows Employees to make Voluntary Contributions the Plan must meet additional nondiscrimination requirements provided under Code Section 401(m). If Employee Contributions (including any Salary Savings Contributions recharacterized as Voluntary Contributions) are made pursuant to this Plan, then in addition to the ADP test referenced in paragraph 10.7, the Average Contribution Percentage test is also applicable. The Average Contribution Percentage for Participants who are Highly Compensated Employees for each Plan Year and the Average Contribution Percentage for Participants who are Non-Highly Compensated Employees for the same Plan Year must satisfy one of the following tests: 62 70 (a) BASIC TEST The Average Contribution Percentage for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Contribution Percentage for Participants who are non-Highly Compensated Employees for the same Plan Year multiplied by 1.25; or (b) ALTERNATIVE TEST The ACP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Contribution Percentage for Participants who are non-Highly Compensated Employees for the same Plan Year multiplied by two (2), provided that the Average Contribution Percentage for Participants who are Highly Compensated Employees does not exceed the Average Contribution Percentage for Participants who are non-Highly Compensated Employees by more than two (2) percentage points. 10.11 SPECIAL RULES RELATING TO APPLICATION OF ACP TEST (a) AGGREGATE LIMIT If one or more Highly Compensated Employees participate in both a cash or deferred arrangement and a plan subject to the ACP test maintained by the Employer and the sum of the ADP and ACP of those Highly Compensated Employees subject to either or both tests exceeds the Aggregate Limit, then the ADP or ACP of those Highly Compensated Employees who also participate in a cash or deferred arrangement will be reduced (beginning with such Highly Compensated Employee whose ADP or ACP is the highest) as set forth in the Adoption Agreement so that the limit is not exceeded. The amount by which each Highly Compensated Employee's Contribution Percentage Amounts is reduced shall be treated as an Excess Aggregate Contribution. The ADP and ACP of the Highly Compensated Employees are determined after any corrections required to meet the ADP and ACP tests. Multiple use does not occur if either the ADP or the ACP of the Highly Compensated Employees does not exceed 1.25 multiplied by the ADP and ACP of the non-Highly Compensated Employees. (b) INDIVIDUAL AGGREGATION For purposes of this Article, the Contribution Percentage for any Participant who is a Highly Compensated Employee and who is eligible to have Contribution Percentage Amounts allocated to his or her account under two or more plans described in Code Section 401(a), or arrangements described in Code Section 401(k) that are maintained by the Employer, shall be determined as if the total of such Contribution Percentage Amounts was made under each Plan. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different plan years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. 63 71 (c) PLAN AGGREGATION In the event that this Plan satisfies the requirements of Code Sections 401(a)(4), 401(m), or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of the above listed Code Sections only if aggregated with this Plan, then this Section shall be applied by determining the Contribution Percentage of Employees as if all such plans were a single plan. For plan years beginning after 1989, plans may be aggregated in order to satisfy Code Section 401(m) only if the aggregated plans have the same Plan Year. (d) FAMILY MEMBER AGGREGATION For purposes of determining the Contribution percentage of a Participant who is a five-percent owner or one of the ten most highly-paid, Highly Compensated Employees, the Contribution Percentage Amounts and Compensation of such Participant shall include the Contribution Percentage Amounts and Compensation for the Plan Year of Family Members as defined in Paragraph 1.37 of this Plan. Family Members, with respect to Highly Compensated Employees, shall be disregarded as separate Employees in determining the Contribution Percentage both for Participants who are non-Highly Compensated Employees and for Participants who are Highly Compensated Employees. In the event of repeal of the family aggregation rules under Code Section 414(q)(6), all applications of those rules under this Plan shall cease as of the effective date of such repeal. (e) TIMING OF CONTRIBUTIONS For purposes of determining the Contribution Percentage test, Employee Contributions are considered to have been made in the Plan Year in which contributed to the trust. Matching Contributions and Qualified Non-Elective Contributions will be considered made for a Plan Year if made no later than the end of the twelve-month period beginning on the day after the close of the Plan Year. (f) DOCUMENTATION The Employer shall maintain records sufficient to demonstrate satisfaction of the ACP test and the amount of Qualified Non-Elective Contributions or Qualified Matching Contributions, or both, used in such test. (g) ADDITIONAL IRS REQUIREMENTS The determination and treatment of the Contribution Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (h) CONTRIBUTION USE LIMITATIONS Qualified Matching Contributions and Qualified Non-Elective Contributions used to satisfy the ADP test may not be used to satisfy the ACP test. 64 72 ARTICLE XI ADMINISTRATION 11.1 PLAN ADMINISTRATOR The Employer shall be the named fiduciary and Plan Administrator. These duties shall include: (a) appointing the Plan's attorney, accountant, actuary, or any other party needed to administer the Plan, (b) directing the Trustee/Custodian with respect to payments from the Fund, (c) communicating with Employees regarding their participation and benefits under the Plan, including the administration of all claims procedures, (d) filing any returns and reports with the Internal Revenue Service, Department of Labor, or any other governmental agency, (e) reviewing and approving any financial reports, investment reviews, or other reports prepared by any party appointed by the Employer under paragraph (a), (f) establishing a funding policy and investment objectives consistent with the purposes of the Plan and the Employee Retirement Income Security Act of 1974, and (g) construing and resolving any question of Plan interpretation. The Plan Administrator's interpretation of Plan provisions including eligibility and benefits under the Plan is final, and unless it can be shown to be arbitrary and capricious will not be subject to "de novo" review. 11.2 TRUSTEE/CUSTODIAN The Trustee/Custodian shall be responsible for the administration of investments held in the Fund. These duties shall include: (a) receiving contributions under the terms of the Plan, (b) making distributions from the Fund in accordance with written instructions received from an authorized representative of the Employer, and (c) keeping accurate records reflecting its administration of the Fund and making such records available to the Employer for review and audit. Within 90 days after each Plan Year, and within 90 days after its removal or resignation, the Trustee/Custodian shall file with the Employer an accounting of its administration of the Fund during such year or from the end of the preceding Plan Year to the date of removal or resignation. Such accounting shall include a statement of cash receipts and disbursements since the date of its last accounting and shall contain an asset list showing the fair market value of investments held in the Fund as of the end of the Plan Year. The value of marketable investments 65 73 shall be determined using the most recent price quoted on a national securities exchange or over the counter market. The value of non-marketable investments shall be determined in the sole judgement of the Trustee/Custodian which determination shall be binding and conclusive. The value of investments in securities or obligations of the Employer in which there is no market shall be determined in the sole judgement of the Employer and the Trustee/Custodian shall have no responsibility with respect to the valuation of such assets. The Employer shall review the Trustee/Custodian's accounting and notify the Trustee/Custodian in the event of its disapproval of the report within 90 days, providing the Trustee/Custodian with a written description of the items in question. The Trustee/Custodian shall have 60 days to provide the Employer with a written explanation of the items in question. If the Employer again disapproves, the Trustee/Custodian shall file its accounting in a court of competent jurisdiction for audit and adjudication. (d) employing such agents attorneys or other professionals as the Trustee may deem necessary or advisable in the performance of its duties. The Trustee's/Custodian's duties shall be limited to those described above. The Employer shall be responsible for any other administrative duties required under the Plan or by applicable law. 11.3 ADMINISTRATIVE FEES AND EXPENSES All reasonable costs, charges and expenses incurred by the Trustee/Custodian in connection with the administration of the Fund and all reasonable costs, charges and expenses incurred by the Plan Administrator in connection with the administration of the Plan (including fees for legal services rendered to the Trustee/Custodian or Plan Administrator) may be paid by the Employer, but if not paid by the Employer when due, shall be paid from the Fund. Such reasonable compensation to the Trustee/Custodian as may be agreed upon from time to time between the Employer and the Trustee/Custodian and such reasonable compensation to the Plan Administrator as may be agreed upon from time to time between the Employer and Plan Administrator may be paid by the Employer, but if not paid by the Employer when due shall be paid by the Fund. The Trustee shall have the right in accordance with the Adopting Employer's administrative procedure to liquidate trust assets to cover its fees. Notwithstanding the foregoing, no compensation other than reimbursement for expenses shall be paid to a Plan Administrator who is the Employer or a full- time Employee of the Employer. In the event any part of the Trust/Custodial Account becomes subject to tax, all taxes incurred will be paid from the Fund unless the Plan Administrator advises the Trustee/Custodian not to pay such tax. 11.4 DIVISION OF DUTIES AND INDEMNIFICATION (a) The Trustee/Custodian shall have the authority and discretion to manage and govern the Fund to the extent provided in this instrument, but does not guarantee the Fund in any manner against investment loss or depreciation in asset value, or guarantee the adequacy of the Fund to meet and discharge all or any liabilities of the Plan. 66 74 (b) The Trustee/Custodian shall not be liable for the making, retention or sale of any investment or reinvestment made by it, as herein provided, or for any loss to, or diminution of the Fund, or for any other loss or damage which may result from the discharge of its duties hereunder except to the extent it is judicially determined that the Trustee/Custodian has failed to exercise the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims. (c) The Employer warrants that all directions issued to the Trustee/Custodian by it or the Plan Administrator will be in accordance with the terms of the Plan and not contrary to the provisions of the Employee Retirement Income Security Act of 1974 and regulations issued thereunder. (d) The Trustee/Custodian shall not be answerable for any action taken pursuant to any direction, consent, certificate, or other paper or document on the belief that the same is genuine and signed by the proper person. All directions by the Employer, Participant or the Plan Administrator shall be in writing. The Employer shall deliver to the Trustee/Custodian certificates evidencing the individual or individuals authorized to act as set forth in the Adoption Agreement or as the Employer may subsequently inform the Trustee/Custodian in writing and shall deliver to the Trustee/Custodian specimens of their signatures. (e) The duties and obligations of the Trustee/Custodian shall be limited to those expressly imposed upon it by this instrument or subsequently agreed upon by the parties. Responsibility for administrative duties required under the Plan or applicable law not expressly imposed upon or agreed to by the Trustee/Custodian, shall rest solely with the Employer. (f) The Trustee shall be indemnified and saved harmless by the Employer from and against any and all liability to which the Trustee/Custodian may be subjected, including all expenses reasonably incurred in its defense, for any action or failure to act resulting from compliance with the instructions of the Employer, the employees or agents of the Employer, the Plan Administrator, or any other fiduciary to the Plan, and for any liability arising from the actions or non-actions of any predecessor Trustee/Custodian or fiduciary or other fiduciaries of the Plan. (g) The Trustee/Custodian shall not be responsible in any way for the application of any payments it is directed to make or for the adequacy of the Fund to meet and discharge any and all liabilities under the Plan. 67 75 (h) The Trustee/Custodian shall not be responsible in any way for any actions taken, or failure to act by a prior Trustee/Custodian under a prior document. The Employer shall indemnify and hold harmless the Trustee/Custodian for such prior Trustee/Custodian acts or inaction for any periods applicable, including periods for which the Trustee/Custodian must restate the Plan retroactively to comply with any tax law or regulations thereunder. 68 76 ARTICLE XII TRUST FUND/CUSTODIAL ACCOUNT 12.1 THE FUND The Fund shall consist of all contributions made under Article III and Article IV of the Plan and the investment thereof and earnings thereon. All contributions and the earnings thereon less payments made under the terms of the Plan, shall constitute the Fund. The Fund shall be administered as provided in this document. 12.2 CONTROL OF PLAN ASSETS The assets of the Fund or evidence of ownership shall be held by the Trustee/Custodian under the terms of the Plan and Trust/Custodial Account. If the assets represent amounts transferred from another trustee/custodian under a former plan, the Trustee/Custodian named hereunder shall not be responsible for any actions of the prior fiduciary including the review of the propriety of any investment under the former plan. Such review shall be the responsibility of the Employer. 12.3 EXCLUSIVE BENEFIT RULES No part of the Fund shall be used for, or diverted to, purposes other than for the exclusive benefit of Participants, former Participants with a vested interest, and the beneficiary or beneficiaries of deceased Participants having a vested interest in the Fund at death. 12.4 ASSIGNMENT AND ALIENATION OF BENEFITS No right or claim to, or interest in, any part of the Fund, or any payment from the Fund, shall be assignable, transferable, or subject to sale, mortgage, pledge, hypothecation, commutation, anticipation, garnishment, attachment, execution, or levy of any kind. The Trustee/Custodian shall not recognize any attempt to assign, transfer, sell, mortgage, pledge, hypothecate, commute, or anticipate the same, except to the extent required by law. The preceding sentences shall also apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order, unless such order is determined to be a Qualified Domestic Relations Order, as defined in Code Section 414(p), or any domestic relations order entered before January 1, 1985 which the Plan attorney and Plan Administrator deem to be qualified. 12.5 DETERMINATION OF QUALIFIED DOMESTIC RELATIONS ORDER (QDRO) A domestic relations order shall specifically state all of the following in order to be deemed a Qualified Domestic Relations Order ("QDRO"): (a) The name and last known mailing address (if any) of the Participant and of each alternate payee covered by the QDRO. However, if the QDRO does not specify the current mailing address of the alternate payee, but the Plan Administrator has independent knowledge of that address, the QDRO will still be valid. (b) The dollar amount or percentage of the Participant's benefit to be paid by the Plan to each alternate payee, or the manner in which the amount or percentage will be determined. (c) The number of payments or period for which the order applies. (d) The specific plan (by name) to which the domestic relations order applies. 69 77 The domestic relations order shall not be deemed a QDRO if it requires the Plan to provide: (e) any type or form of benefit, or any option not already provided for in the Plan; (f) increased benefits, or benefits in excess of the Participant's vested rights; (g) payment of a benefit earlier than allowed by the Plan's earliest retirement provisions or in the case of a profit-sharing plan, prior to the allowability of in-service withdrawals, or (h) payment of benefits to an alternate payee which are required to be paid to another alternate payee under another QDRO. Promptly, upon receipt of a domestic relations order ("Order") which may or may not be "Qualified", the Plan Administrator shall notify the Participant and any alternate payee(s) named in the Order of such receipt, and include a copy of this paragraph 12.5. The Plan Administrator shall then forward the Order to the Plan's legal counsel for an opinion as to whether or not the Order is in fact "Qualified" as defined in Code Section 414(p). Within a reasonable time after receipt of the Order, not to exceed 60 days, the Plan's legal counsel shall make a determination as to its "Qualified" status and the Participant and any alternate payee(s) shall be promptly notified in writing of the determination. If the "Qualified" status of the Order is in question, there will be a delay in any payout to any payee including the Participant, until the status is resolved. In such event, the Plan Administrator shall segregate the amount that would have been payable to the alternate payee(s) if the Order had been deemed a QDRO. If the Order is not Qualified, or the status is not resolved (for example, it has been sent back to the Court for clarification or modification) within 18 months beginning with the date the first payment would have to be made under the Order, the Plan Administrator shall pay the segregated amounts plus interest to the person(s) who would have been entitled to the benefits had there been no Order. If a determination as to the Qualified status of the Order is made after the 18-month period described above, then the Order shall only be applied on a prospective basis. If the Order is determined to be a QDRO, the Participant and alternate payee(s) shall again be notified promptly after such determination. Once an Order is deemed a QDRO, the Plan Administrator shall pay to the alternate payee(s) all the amounts due under the QDRO, including segregated amounts plus interest which may have accrued during a dispute as to the Order's qualification. Unless specified otherwise in the Adoption Agreement, the earliest retirement age with regard to the Participant against whom the QDRO is entered shall be the date the Order is deemed Qualified. This will only allow distributions to alternate payee(s) and not to the Participant. 70 78 ARTICLE XIII INVESTMENTS 13.1 FIDUCIARY STANDARDS The Trustee/Custodian shall invest and reinvest principal and income in the same Fund in accordance with the investment objectives established by the Employer, provided that: (a) such investments are prudent under the Employee Retirement Income Security Act of 1974 and the regulations thereunder, (b) such investments are sufficiently diversified or otherwise insured or guaranteed to minimize the risk of large losses, and (c) such investments are similar to those which would be purchased by another professional money manager for a like plan with similar investment objectives. 13.2 FUNDING ARRANGEMENT The Employer shall, in the Adoption Agreement, appoint the Sponsor to serve as either Trustee or Custodian of the Fund. If the Sponsor is appointed Trustee, the Fund shall be invested in any of the alternatives available to the Trustee under paragraph 13.3 herein. If the Sponsor is appointed Custodian, the Fund shall be invested only in the alternatives available to the Custodian under paragraph 13.4 herein. 13.3 INVESTMENT ALTERNATIVES OF THE TRUSTEE The Trustee shall implement an investment program based on the Employer's investment objectives and the Employee Retirement Income Security Act of 1974. In addition to powers given by law, the Trustee may: (a) invest the Fund in any form of property, including common and preferred stocks, exchange traded put and call options, bonds, money market instruments, mutual funds (including funds for which the Sponsor, Trustee or its affiliates serve as investment advisor or any other such capacity), savings accounts, certificates of deposit, Treasury bills, insurance policies and contracts, or in any other property, real or personal, having a ready market including securities issued by the Trustee and/or affiliates of the Trustee. The Trustee may invest in its own deposits and, if applicable, those of affiliates, which bear a reasonable interest rate. No portion of any Qualified Voluntary Contribution, or the earnings thereon, may be invested in life insurance contracts or, as with any Participant-directed investment, in tangible personal property characterized by the IRS as a collectible, (b) transfer any assets of the Fund to a group or collective trust established to permit the pooling of funds of separate pension and profit-sharing trusts, provided the Internal Revenue Service has ruled such group or collective trust to be qualified under Code Section 401(a) and exempt under Code Section 501(a) (or the applicable corresponding provision of any other Revenue Act) or to any other common, collective, or commingled trust fund which has been or may hereafter be established and maintained by the 71 79 Trustee and/or affiliates of the Trustee. Such commingling of assets of the Fund with assets of other qualified trusts is specifically authorized, and to the extent of the investment of the Fund in such a group or collective trust, the terms of the instrument establishing the group or collective trust shall be a part hereof as though set forth herein, (c) invest up to 100% of the Fund in the common stock, debt obligations, or any other security issued by the Employer or by an affiliate of the Employer within the limitations provided under Sections 406, 407, and 408 of the Employee Retirement Income Security Act of 1974 and further provided that such investment does not constitute a prohibited transaction under Code Section 4975. Any such investment in Employer securities shall only be made upon written direction by the Employer who shall be solely responsible for propriety of such investment, Voting and Tendering of Stock The shares of Employer stock which have been allocated to Participants' accounts shall be voted or tendered, as applicable, by the Trustee in accordance with the written directions provided by the Plan Administrator which are given pursuant to the Participants' written instructions. The Trustee shall vote or tender, as applicable, any unallocated Employer stock, and allocated but unvoted Employer stock, in accordance with the written direction received from the Plan Administrator. Whenever such voting or tendering rights are to be exercised, the Plan Administrator shall be responsible for ensuring that all Participants are provided with adequate opportunity to deliver their instructions to the Plan Administrator regarding the voting or tendering of Employer stock allocated to their Accounts. The Participants' instructions with respect to the voting or tendering of allocated shares hereunder shall be confidential. (d) hold cash uninvested and deposit same with any banking or savings institution, including its own banking department, or the banking department of an affiliate, (e) join in or oppose the reorganization, recapitalization, consolidation, sale or merger of corporations or properties, including those in which it is interested as Trustee, upon such terms as it deems wise, (f) hold investments in nominee or bearer form, (g) vote proxies and if appropriate pass them on to any investment manager which may have directed the investment in the equity giving rise to the proxy, (h) exercise all ownership rights with respect to assets held in the Fund. 72 80 13.4 INVESTMENT ALTERNATIVES OF THE CUSTODIAN The Custodian shall be depository of all or part of the Fund and shall, at the direction of the Trustee hold any assets received from the Trustee or its agents. The Custodian shall receive and deliver assets as instructed by the Trustee or its agents. To the extent that the Custodian holds title to Plan assets and such ownership requires action on the part of the registered owner, such action will be taken by the Custodian only upon receipt of specific instructions from the Trustee or its agents. Proxies shall be voted by or pursuant to the express direction of the Trustee or authorized agent of the Trustee. As Custodian, the Sponsor shall not give any investment advice, including any opinion on the prudence of directed investments. The Employer and Trustee and the agents thereof assume all responsibility for adherence to fiduciary standards under the Employee Retirement Income Security Act of 1974 (ERISA) and all amendments thereof, and regulations thereunder. 13.5 PARTICIPANT LOANS If agreed upon by the Trustee and permitted by the Employer in the Adoption Agreement, Participant Loans will be permitted in the Employer's Plan. A Plan Participant may make application only to the Employer to request a loan from the Fund. The Employer shall have the sole right to approve or disapprove a Participant's application provided that loans shall be made available to all Participants and beneficiaries on a reasonably equivalent basis. Loans shall not be made available to highly compensated employees [as defined in Code Section 414(q)] in an amount greater than the amount made available to other Employees. Any loan granted under the Plan shall be made subject to the following rules: (a) LIMITATIONS No loan, when aggregated with any outstanding Participant loans under the Employer's Plan(s), shall exceed the lesser of (i) $50,000 reduced by the excess, if any, of the highest outstanding balance of loans during the one year period ending on the day before the loan is made, over the outstanding balance of loans from the Plan on the date the loan is made or (ii) one-half of the fair market value of a Participant's Vested Account Balance built up from Employer Contributions, Voluntary Contributions, and Rollover Contributions. If the Participant's Vested Account Balance is $20,000 or less, the maximum loan shall not exceed the lesser of $10,000 or 100% of the Participant's Vested Account Balance. For the purpose of the above limitation, all loans from all plans of the Employer and other members of a group of employers described in Code Sections 414(b), 414(c), 414(m), and 414(o) are aggregated. An assignment or pledge of any portion of the Participant's interest in the Plan and a loan, pledge, or assignment with respect to any insurance contract purchased under the Plan, will be treated as a loan under this paragraph. (b) APPLICATION All applications must be made on forms provided by the Employer and must be signed by the Participant. (c) INTEREST Any loan under this Plan shall bear interest at a rate reasonable at the time of application, considering the purpose of the loan and the rate being charged by representative commercial banks in the local area for a similar loan unless the Employer sets forth a different method for determining loan interest rates in its loan procedures, such as using the prime rate or some other rate based on the prime rate. The loan agreement shall also provide that the payment of principal and interest be amortized in level payments not less frequently than quarterly. 73 81 (d) TERM The term of such loan shall not exceed five years except in the case of a loan for the purpose of acquiring any house, apartment, condominium, or mobile home (not used on a transient basis) which is used or is to be used within a reasonable time as the principal residence of the Participant. The term of such loan shall be determined by the Employer considering the maturity dates quoted by representative commercial banks in the local area for a similar loan. (e) ACCOUNTING The principal and interest paid by a Participant on his or her loan shall be credited to the Fund in the same manner as for any other Plan investment. If elected in the Adoption Agreement, loans may be treated as segregated investments of the individual Participants. This provision is not available if its election will result in discrimination in operation of the Plan. (f) SPOUSAL CONSENT If a Participant's loan application is approved by the Employer, such Participant shall be required to sign a note, loan agreement, and assignment of one-half of his or her interest in the Fund as collateral for the loan. In all plans except safe-harbor profit-sharing plans under paragraph 8.7, the Participant must obtain the consent of his or her Spouse, if any, within the 90 day period before the time his or her account balance is used as security for the loan. A new consent is required if the account balance is used for any renegotiation, extension, renewal or other revision of the loan, including an increase in the amount thereof. The consent must be written, must acknowledge the effect of the loan, and must be witnessed by a plan representative or notary public. Such consent shall subsequently be binding with respect to the consenting Spouse or any subsequent Spouse. (g) SECURITY If a valid Spousal consent has been obtained, then, notwithstanding any other provision of this Plan, the portion of the Participant's Vested Account Balance used as a security interest held by the Plan by reason of a loan outstanding to the Participant shall be taken into account for purposes of determining the amount of the account balance payable at the time of death or distribution, but only if the reduction is used as repayment of the loan. If less than 100% of the Participant's vested account balance (determined without regard to the preceding sentence) is payable to the Surviving Spouse, then the account balance shall be adjusted by first reducing the Vested Account Balance by the amount of the security used as repayment of the loan, and then determining the benefit payable to the Surviving Spouse. (h) ADDITIONAL SECURITY The Employer may also require additional collateral in order to adequately secure the loan. 74 82 (i) ACCELERATION OF MATURITY A Participant's loan shall immediately become due and payable if such Participant terminates employment for any reason or fails to make a principal and/or interest payment as provided in the loan agreement. If such Participant terminates employment, the Employer shall immediately request payment of principal and interest on the loan. If the Participant refuses payment following termination, the Employer shall reduce the Participant's Vested Account Balance by the remaining principal and interest on his or her loan. If the Participant's Vested Account Balance is less than the amount due, the Employer shall take whatever steps are necessary to collect the balance due directly from the Participant. However, no distribution of the Participant's note or attachment of the Participant's account balance will occur until a distributable event occurs in the Plan. (j) RESTRICTIONS No loans will be made to Owner-Employees (as defined in paragraph 1.51) or Shareholder-Employees (as defined in paragraph 1.74), unless the Employer obtains a prohibited transaction exemption from the Department of Labor. 13.6 INSURANCE POLICIES If agreed upon by the Trustee and approved by the Employer in the Adoption Agreement, Employees may elect the purchase of life insurance policies under the Plan. If elected, the maximum annual premium for a whole life policy shall not exceed 50% of the aggregate Employer contributions allocated to the account of a Participant. For profit-sharing plans the 50% test need only be applied against Employer contributions which are not Elective Deferrals, Qualified Matching Contributions or Qualified Non-Elective Contributions allocated in the last two years. Whole life policies are policies with both nondecreasing death benefits and nonincreasing premiums. The maximum annual premium for term contracts or universal life policies and all other policies which are not whole life shall not exceed 25% of aggregate Employer contributions allocated to the account of a Participant. The two year rule for profit-sharing plans again applies. The maximum annual premiums for a Participant with both a whole life and a term contract or universal life policies shall be limited to one-half of the whole life premium plus the term premium but shall not exceed 25% of the aggregate Employer contributions allocated to the account of a Participant, subject to the two year rule for profit-sharing plans. Any policies purchased under this Plan shall be held subject to the following rules: (a) OWNER The Trustee shall be applicant and owner of any policies issued hereunder. (b) NONTRANSFERABLE CONTRACTS All policies or contracts purchased, shall be endorsed as nontransferable, and must provide that proceeds will be payable to the Trustee; however, the Trustee shall be required to pay over all proceeds of the contracts to the Participant's Designated Beneficiary in accordance with the distribution provisions of this Plan. Under no circumstances shall the Trust retain any part of the proceeds. 75 83 (c) BENEFICIARY Each Participant shall be entitled to designate a beneficiary under the terms of any contract issued; however, such designation will be given to the Trustee which must be the named beneficiary on any policy. Such designation shall remain in force, until revoked by the Participant, by filing a new beneficiary form with the Trustee. A Participant's Spouse will be the Designated Beneficiary of the proceeds in all circumstances unless a Qualified Election has been made in accordance with paragraph 8.4. The beneficiary of a deceased Participant shall receive, in addition to the proceeds of the Participant's policy or policies, the amount credited to such Participant's investment account. (d) UNINSURABLE PARTICIPANT A Participant who is uninsurable or insurable at substandard rates, may elect to receive a reduced amount of insurance, if available, or may waive the purchase of any insurance. (e) DIVIDENDS Any dividends, credits earned or other returns received on any policy or contract purchased, shall be applied to reduce the next premium due on such Participant's insurance contract or policy, or if no further premium is due, such amount shall be credited to the Fund as part of the account of the Participant for whom the policy or contract is held. (f) PREMIUMS If Employer contributions are inadequate to pay all premiums on all insurance policies, the Trustee may, at the option of the Employer, utilize other amounts remaining in each Participant's account to pay the premiums on his or her respective policy or policies, allow the policies to lapse, reduce the policies to a level at which they may be maintained, or borrow against the policies on a prorated basis, provided that the borrowing does not discriminate in favor of the policies on the lives of Officers, Shareholders, and highly compensated Employees. (g) TERMINATION OF EMPLOYMENT On retirement or termination of employment of a Participant, the Employer shall direct the Trustee to cash surrender the Participant's policy and credit the proceeds to his or her account for distribution under the terms of the Plan. However, before so doing, the Employer shall direct the Trustee to first offer to transfer ownership of the policy to the Participant in exchange for payment by the Participant of the cash value of the policy at the time of transfer. Such payment shall be credited to the Participant's account for distribution under the terms of the Plan. All distributions resulting from the application of this paragraph shall be subject to the Joint and Survivor Annuity Rules of Article VIII, if applicable. (h) ADMINISTRATION The Employer shall be solely responsible to see that these insurance provisions are administered properly and that if there is any conflict between the provisions of this Plan and any insurance contracts issued that the terms of this Plan will control. 76 84 13.7 EMPLOYER INVESTMENT DIRECTION If agreed upon by the Trustee and approved by the Employer in the Adoption Agreement, the Employer shall have the right to direct the Trustee with respect to investments of the Fund, may appoint an investment manager (registered as an investment advisor under the Investment Advisors Act of 1940) to direct investments, or may give the Trustee sole investment management responsibility. The Employer may purchase and sell interests in a registered investment company (i.e., mutual funds) for which the Sponsor, its parent, affiliates, or successors, may serve as investment advisor and receive compensation from the registered investment company for its services as investment advisor. The Employer shall advise the Trustee in writing regarding the retention of investment powers, the appointment of an investment manager, or the delegation of investment powers to the Trustee. Any investment directive under this Plan shall be made in writing by the Employer or investment manager, as the case may be. In the absence of such written directive, the Trustee shall automatically invest the available cash in its discretion in an appropriate interim investment until specific investment directions are received. Such instructions regarding the delegation of investment responsibility shall remain in force until revoked or amended in writing. The Trustee shall not be responsible for the propriety of any directed investment made and shall not be required to consult with or advise the Employer regarding the investment quality of any directed investment held hereunder. If the Employer fails to designate an investment manager, the Trustee shall have full investment authority. If the Employer does not issue investment directions, the Trustee shall have authority to invest the Fund in its sole discretion. While the Employer may direct the Trustee with respect to Plan investments, the Employer may not: (a) borrow from the Fund or pledge any of the assets of the Fund as security for a loan, (b) buy property or assets from or sell property or assets to the Fund, (c) charge any fee for services rendered to the Fund, or (d) receive any services from the Fund on a preferential basis. 13.8 EMPLOYEE INVESTMENT DIRECTION If agreed to by the Trustee and approved by the Employer in the Adoption Agreement, Participants shall be given the option to direct the investment of their personal contributions and their share of the Employer's contribution among alternative investment funds established as part of the overall Fund. The Employee may have the Trustee purchase and sell for his or her account, shares of registered investment companies (i.e. mutual funds) for which the Sponsor, its parent, affiliates, or successors, may serve as investment advisor and receive compensation from the registered investment company for its services as investment advisor. Unless otherwise specified by the Employer in the Adoption Agreement, a Participant's directions shall be limited to the following investments (or such other investments as the Trustee may expressly approve): (1) registered securities obtainable through any brokerage house mutually designated by the Participant and the Trustee, either "over-the-counter" or on a registered national exchange; (2) any insurance or endowment policy issued by a corporation subject to the supervision of the insurance commissioner, bank commissioner, or any agency or officer performing like functions, of any state or territory of the United States or the District of Columbia; (3) savings accounts or deposits with the Sponsor, or its affiliates, or, with the Trustee's approval, with a similar financial institution supervised by the United States or a state--all such deposits to bear a reasonable rate of interest; (4) shares of investment companies registered under the Investment Company Act of 1940, as amended; or any combination of the above. The Participant may direct the Trustee to leave earnings on any securities so obtained with the designated brokerage house for reinvestment in accordance with the 77 85 instructions of the Participant, or the Participant may direct that earnings on such securities be invested in a savings account under option (3) above. If a Participant fails to direct the Trustee as to the investment of any portion of his account that is held by the Trustee and which is subject to direction of investment by the Participant, that portion of his account shall be held in a money market, a savings account or such other investment alternative which primary objective is the preservation of principal by the Trustee until such time as the Trustee receives an effective investment direction for such portion. The Trustee shall have no duty to inquire into or to invest that portion of the Participant's account that may be held with a broker or any person other than the Trustee. The right to direct investments under this Section shall be the sole and exclusive power granted to Participants. If investments outside the Trustee's control are allowed, Participants may not direct that investments be made in collectibles, other than U.S. Government or State issued gold and silver coins. The exercise of investment directions by a Participant shall not cause such a Participant to be a fiduciary solely by reason of such exercise, and neither the Trustee nor any other fiduciary of this Plan shall be liable for any loss, or by reason of any breach, which results from such Participant's exercise of investment directions. In its discretion, in the case of Plan assets that are subject to investment direction by Participants, the Trustee is hereby authorized to enter into a custodial and investment direction arrangement with a brokerage firm, under which arrangement: a Participant may transmit an investment instruction directly to such broker; the Trustee is notified of such transaction by wire and receives a broker's advice upon consummation of the trade; a portion of the assets of the Participant's account may be kept on deposit in the brokerage account maintained for such Participant, and is not reflected on the records of the Trustee; the Trustee and Participant receive a monthly statement of assets and transactions from the broker. Under said arrangement, the brokerage firm is hereby designated as the person charged with the responsibility of holding the assets of the Participant's account that is in the custody of the brokerage firm. All investment direction arrangements with brokerage firms that are outstanding under the Sponsor's Prototype Plan and Trust shall continue to apply hereunder until modified or rescinded. The following rules shall apply to the administration of such funds: (a) At the time an Employee becomes eligible for the Plan, he or she shall complete an investment designation form stating the percentage of his or her contributions to be invested in the available funds. (b) A Participant may change his or her election with respect to future contributions by filing a new investment designation form with the Employer in accordance with the procedures established by the Plan Administrator. (c) A Participant may elect to transfer all or part of his or her balance from one investment fund to another by filing an investment designation form with the Employer in accordance with the procedures established by the Plan Administrator. (d) The Employer shall be responsible when transmitting Employee and Employer contributions to show the dollar amount to be credited to each investment fund for each Employee. (e) Except as otherwise provided in the Plan, neither the Trustee, nor the Employer, nor any fiduciary of the Plan shall be liable to the Participant or any of his or her beneficiaries for any loss resulting from action taken at the direction of the Participant. 78 86 ARTICLE XIV TOP-HEAVY PROVISIONS 14.1 APPLICABILITY OF RULES If the Plan is or becomes Top-Heavy in any Plan Year beginning after 1983, the provisions of this Article will supersede any conflicting provisions in the Plan or Adoption Agreement. 14.2 MINIMUM CONTRIBUTION Notwithstanding any other provision in the Employer's Plan, for any Plan Year in which the Plan is Top-Heavy or Super Top-Heavy, the aggregate Employer contributions and forfeitures allocated on behalf of any Participant other than a Key Employee (without regard to any Social Security contribution) under this Plan and any other Defined Contribution Plan of the Employer shall be the lesser of 3% of such Participant's Compensation or (if the Employer has no Defined Benefit Plan which designates this Plan to satisfy Code Section 401) the largest percentage of Employer contributions and forfeitures, as a percentage of the first $200,000 as adjusted under Code Section 415(d) of the Key Employee's Compensation, allocated on behalf of any Key Employee for that year. For Plan Years beginning on or after January 1, 1994, the Compensation amount shall be revised to $150,000 as adjusted under Code Section 415(d). Each Participant who is employed by the Employer on the last day of the Plan Year shall be entitled to receive an allocation of the Employer's minimum contribution for such Plan Year. The minimum allocation applies even though under other Plan provisions the Participant would not otherwise be entitled to receive an allocation, or would have received a lesser allocation for the year because the Participant fails to make Voluntary Contributions or Elective Deferrals to the Plan, or the Participant receives no Employer contribution because of the Participant's failure to make any Employee contributions, the Participant's Compensation is less than a stated amount, or the Participant fails to complete 1,000 Hours of Service (or such lesser number designated by the Employer in the Adoption Agreement) during the Plan Year. A Paired profit-sharing plan designated to provide the minimum Top-Heavy contribution must do so regardless of profits. An Employer may make the minimum Top-Heavy contribution available to all Participants or just non-Key Employees. Unless the Employer specifies otherwise in the Adoption Agreement, the minimum Top-Heavy contribution will be allocated to the accounts of all eligible Participants even if they are Key Employees. For purposes of computing the minimum allocation, Compensation shall mean Compensation under Code Section 1.12(c) of the Plan. The Top-Heavy minimum contribution does not apply to any Participant to the extent the Participant is covered under any other plan(s) of the Employer and the Employer has provided in the Adoption Agreement that the minimum allocation or benefit requirements applicable to Top-Heavy Plans will be met in the other plan(s). If a Key Employee makes an Elective Deferral or has an allocation of Matching contributions made to his or her account, a Top-Heavy minimum will be required for all non-Key Employees who are Participants. However, neither Elective Deferrals by nor Matching Contributions to non-Key Employees may be taken into account for purposes of satisfying the Top-Heavy minimum contribution requirement. 79 87 14.3 MINIMUM VESTING For any Plan Year in which this Plan is Top-Heavy, the minimum vesting schedule elected by, or deemed elected by, the Employer in the Adoption Agreement will automatically apply to the Plan. If the vesting schedule selected by the Employer in the Adoption Agreement is less liberal than the allowable schedule, the schedule will automatically be modified. If the vesting schedule under the Employer's Plan shifts in or out of the Top-Heavy schedule for any Plan Year, such shift is an amendment to the vesting schedule and the election in paragraph 9.8 of the Plan applies. The minimum vesting schedule applies to all accrued benefits within the meaning of Code Section 411(a)(7) except those attributable to Employee contributions, including benefits accrued before the effective date of Code Section 416 and benefits accrued before the Plan became Top-Heavy. Further, no reduction in vested benefits may occur in the event the Plan's status as Top-Heavy changes for any Plan Year. However, this paragraph does not apply to the account balances of any Employee who does not have an Hour of Service after the Plan initially becomes Top-Heavy and such Employee's account balance attributable to Employer contributions and forfeitures will be determined without regard to this paragraph. 14.4 LIMITATIONS ON ALLOCATIONS In any Plan Year in which the plan is Top-Heavy, the denominators of the Defined Benefit Fraction (as defined in paragraph 1.16) and Defined Contribution Fraction (as defined in paragraph 1.19) shall be computed using 100% of the dollar limitation instead of 125%. For Paired Plans, each of the plans must benefit the same Participants (or the same Participants must be eligible to make Elective Deferrals in the event one plan is a Code Section 401(k) Cash or Deferred Savings Plan) in order to insure that only one plan need provide the Top-Heavy minimum contribution. In the event eligibility and participation of Employees differs, minimums will be required under both of the Paired Plans. 80 88 ARTICLE XV AMENDMENT AND TERMINATION 15.1 AMENDMENT BY SPONSOR The Sponsor may amend any or all provisions of this Plan and Trust/Custodial Account at any time without obtaining the approval or consent of any Employer which has adopted this Plan and Trust/Custodial Account provided that no amendment shall authorize or permit any part of the corpus or income of the Fund to be used for or diverted to purposes other than for the exclusive benefit of Participants and their beneficiaries, or eliminate an optional form of distribution. For purposes of Plan Sponsor amendments, the mass-submitter shall be recognized as the agent of the Plan Sponsor. If the Plan Sponsor does not adopt the amendments made by the mass-submitter, the Plan will no longer be identical to or a minor modifier of the mass-submitter plan. 15.2 AMENDMENT BY EMPLOYER The Employer may amend any option in the Adoption Agreement, and may include language as permitted in the Adoption Agreement, (a) to satisfy Code Section 415, or (b) to avoid duplication of minimums under Code Section 416 because of the required aggregation of multiple plans. The Employer may add certain model amendments published by the Internal Revenue Service which specifically provide that their adoption will not cause the Plan to be treated as individually designed plan for which the Employer must obtain a separate determination letter. No amendment to the Plan shall change or modify the Trustee/Custodian's duties unless either approved by the Trustee/Custodian or required by law. If the Employer amends the Plan and Trust/Custodial Account other than as provided above, including providing for a waiver of minimum funding under Code Section 412(d), the Employer's Plan shall no longer participate in this Prototype Plan and will be considered an individually designed plan for which the Employer must obtain a separate determination letter. In such event, all references to the institution as Plan Sponsor shall be deemed null and void since the Employer will become the Plan Sponsor of the Plan as it shall be deemed individually drafted. 15.3 TERMINATION Employers shall have the right to terminate their Plans upon 60 days notice in writing to the Trustee/Custodian. If the Plan is terminated, partially terminated, or if there is a complete discontinuance of contributions under a profit-sharing plan maintained by the Employer, all amounts credited to the accounts of Participants shall vest and become nonforfeitable. In the event of a partial termination, only those Participants who are affected by such partial termination shall become fully vested. In the event of termination, the Employer shall direct the 81 89 Trustee/Custodian with respect to the distribution of accounts to or for the exclusive benefit of Participants or their beneficiaries. The Trustee/Custodian shall dispose of the Fund in accordance with the written directions of the Plan Administrator, provided that no liquidation of assets and payment of benefits, (or provision therefor), shall actually be made by the Trustee/Custodian until after it is established by the Employer in a manner satisfactory to the Trustee/Custodian, that the applicable requirements, if any, of the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code governing the termination of employee benefit plans, have been or are being, complied with, or that appropriate authorizations, waivers, exemptions, or variances have been, or are being obtained. 15.4 QUALIFICATION OF EMPLOYER'S PLAN If the adopting Employer fails to attain or retain Internal Revenue Service qualification, such Employer's Plan shall no longer participate in this Prototype Plan and will be considered an individually designed plan. 15.5 MERGERS AND CONSOLIDATIONS (a) In the case of any merger or consolidation of the Employer's Plan with, or transfer of assets or liabilities of the Employer's Plan to, any other plan, Participants in the Employer's Plan shall be entitled to receive benefits immediately after the merger, consolidation, or transfer which are equal to or greater than the benefits they would have been entitled to receive immediately before the merger, consolidation, or transfer if the Plan had then terminated. (b) Any corporation into which the Trustee/Custodian or any successor trustee/custodian may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Trustee/Custodian or any successor trustee/custodian may be a party, or any corporation to which all or substantially all the trust business of the Trustee/Custodian or any successor trustee/custodian may be transferred, shall be the successor of such Trustee/Custodian without the filing of any instrument or performance of any further act, before any court. 15.6 RESIGNATION AND REMOVAL The Trustee/Custodian may resign by written notice to the Employer which shall be effective 60 days after delivery. The Employer may discontinue its participation in this Prototype Plan and Trust/Custodial Account effective upon 60 days written notice to the Sponsor. In such event the Employer shall, prior to the effective date thereof, amend the Plan to eliminate any reference to this Prototype Plan and Trust/Custodial Account and appoint a successor trustee or custodian or arrange for another funding agent. The Trustee/Custodian shall deliver the Fund to its successor on the effective date of the resignation or removal, or as soon thereafter as practicable, provided that this shall not waive any lien the Trustee/Custodian may have upon the Fund for its compensation or expenses. If the Employer fails to amend the Plan and appoint a successor trustee, custodian, or other funding agent within the said 60 days, or such longer period as the Trustee/Custodian may specify in writing, the Plan shall be deemed individually designed and the Employer shall be deemed the successor trustee/custodian. The Employer must then obtain its own determination letter. 82 90 15.7 QUALIFICATION OF PROTOTYPE The Sponsor intends that this Prototype Plan will meet the requirements of the Code as a qualified Prototype Retirement Plan and Trust/Custodial Account. Should the Commissioner of Internal Revenue or any delegate of the Commissioner at any time determine that the Plan and Trust/Custodial Account fails to meet the requirements of the Code, the Sponsor will amend the Plan and Trust/Custodial Account to maintain its qualified status. 83 91 ARTICLE XVI GOVERNING LAW Construction, validity and administration of the Prototype Plan and Trust/Custodial Account, and any Employer Plan and Trust/Custodial Account as embodied in the Prototype document and accompanying Adoption Agreement, shall be governed by Federal law to the extent applicable and to the extent not applicable by the laws of the State/Commonwealth in which the principal office of the Sponsor is located. 84 EX-10.4 9 ARC OFFICERS INCENTIVE PLAN 1 EXHIBIT 10.4 AMERICAN RETIREMENT CORPORATION OFFICERS' INCENTIVE COMPENSATION PLAN JANUARY 1, 1997 ================================================================================ ARTICLE I DEFINITIONS As used herein, the following words and phrases shall have the meaning indicated unless otherwise defined or required by the context: ADMINISTRATOR OR PLAN ADMINISTRATOR shall mean, with respect to the Plan, American Retirement Corporation ( the "Employer"), actions of which will be undertaken by the Chairman and the Compensation Committee of the Employer's Board of Directors. BENEFICIARY shall mean the designated recipient or recipients who shall receive any benefits payable under the Plan upon the death of a Participant. If a beneficiary has not been designated, the Administrator shall, upon the death of the Participant, pay any benefit payable under the Plan to the Participant's estate. BREAK IN EMPLOYMENT shall mean an interruption in continuous employment which shall be defined as a Plan Year during which an Employee has not been credited with at least ninety (90) days of employment. BASE COMPENSATION shall mean the salary from the Employer, exclusive of any other form of compensation and salary deferral (but unreduced by any Employee contribution to any pension plan sponsored by the Employer), of the Participant which is attributable to the period of his/her participation in the Plan for each Plan Year. EARNINGS PER SHARE shall mean the reported earnings before extraordinary items relative to each share of common stock as reported in the Company's audited financial statements. EFFECTIVE DATE shall mean the effective date of the Plan which shall be January 1, 1997. - -------------------------------------------------------------------------------- Officer Incentive Compensation Plan 1 03/04/97 2 EMPLOYER Shall mean American Retirement Corporation, a Tennessee corporation with its principal place of business in Brentwood, Tennessee, its successors and assigns, and any subsidiary authorized by the Board of Directors of American Retirement Corporation to participate in this Plan with respect to its employees. EMPLOYMENT shall mean the employment relationship as an Employee of the Employer. OFFICER shall mean an individual employed by the Employer and elected to an Officer position by the Board of Directors. PARTICIPANT shall mean any Officer who becomes a Participant hereunder as provided in Article II. PLAN shall mean the American Retirement Corporation Officer's Incentive Compensation Plan. PLAN YEAR shall mean the twelve month period ending on December 31st; the initial Plan Year shall commence on January 1, 1997. The Employer may change the consecutive twelve month period which comprises the Plan Year at its discretion prior to the beginning of any Plan Year. ARTICLE II ELIGIBILITY AND PARTICIPATION SECTION 2.01 - ELIGIBILITY. Officers eligible to participate in the Plan shall include the following officers of the Employer: (i) Chairman and Chief Executive Officer, (ii) President and Chief Operating Officer, (iii) any Executive Vice President, (iv) any Senior Vice President and, (v) any Vice President provided that any Employee otherwise eligible must also be approved to participate by the Plan Administrator (the "Eligible Employees"). SECTION 2.02 - ENTRY AND PARTICIPATION. An Officer shall become a Participant upon the later of either of his/her Officer election or the Effective Date. SECTION 2.03 - NOT A CONTRACT. The Plan shall not be deemed to constitute a contract between the Employer and an Employee; neither shall it be a consideration nor an inducement for the Employment of any Employee. No provisions of the Plan shall be deemed to abridge or limit any managerial right of the employer, give any Employee the right to be retained in Employment, or to interfere with the right of the Employer to discharge any Employee at any time regardless of the effect which such discharge may - -------------------------------------------------------------------------------- Officer Incentive Compensation Plan 2 03/04/97 3 have upon him/her as a Participant. By his/her act of participation in the Plan, each Participant on behalf of him/herself, his/her heirs assigns and Beneficiary shall be deemed conclusively to have agreed to and accepted the terms and conditions of the Plan. SECTION 2.04 - TERMINATION. A Participant shall cease to be a Participant in the Plan as of the effective date of the Participant's termination of Employment. In the event that a Participant's date of termination is after the last day of a Plan Year and before the date of the Incentive Compensation Payment, the Participant shall not be eligible for an Incentive Compensation Payment for the Plan Year preceding his/her date of termination. SECTION 2.05 - EMPLOYER'S RIGHT TO TERMINATE PLAN. Notwithstanding anything contained herein to the contrary, the Employer retains the right to terminate or suspend the Plan at any time, in accordance with the direction of the Employer's Board of Directors, at which time the Employer shall have no liability to Participants for payment of Incentive Compensation Payments which would have otherwise accrued during a Plan Year during which the Plan was terminated or suspended by the Employer. ARTICLE III DETERMINATION OF BONUS PAYMENTS SECTION 3.01 - INCENTIVE COMPENSATION PAYMENT. Incentive Compensation Payments, if any, shall be determined for each Participant for each Plan Year. The Plan shall be divided into two (2) parts, Part A and Part B. Part A and Part B Incentive Compensation shall add to a total maximum potential of 100% of Base Salary. The Officers shall have a maximum percentage of Base Salary per the table below: Maximum Bonus as a % Of Base Compensation (1) Chairman and CEO 100 (2) President and COO 100 (3) Executive Officers 100 (4) Senior Officers 100 (5) Officers 100 The Incentive Compensation calculations will be subject to the following parameters: - -------------------------------------------------------------------------------- Officer Incentive Compensation Plan 3 03/04/97 4 (1) Earnings per Share that fall below 90% of targeted EPS, as approved by the Compensation Committee of the Board of Directors, will result in no Incentive Compensation payment to any of the Participants. (2) OFFICER INCENTIVE COMPENSATION PART A -- Earnings per Share which are between 90% and 100% of targeted EPS will result in the following: (a) Part A Incentive Compensation shall equal up to 60% of Base Salary if EPS equals or exceeds 100% of targeted EPS. Part A Incentive Compensation potential shall equal 20% of Base Salary at 90% of EPS target. Between 90% and 100% of targeted EPS, Part A Incentive Compensation potential shall be prorated between 20% and 60% of Base Salary. (i.e. EPS at 95% of target results in a Incentive Compensation potential of 40% of Base Salary). (b) Each Participant's realization of Incentive Compensation potential shall be determined by measurement of individual performance against approved objectives. (2) OFFICER INCENTIVE COMPENSATION PART B -- Earnings per Share which exceed the EPS Part A target shall result in the following: (c) Part B Incentive Compensation potential equals 40% of Base Salary (d) A Part B EPS target will be established and approved by the Compensation Committee. (e) Part B Incentive Compensation will be prorated for EPS between the Part A target and the Part B target with full potential being realized when EPS meets or exceeds the Part B target. (f) Part B Incentive Compensation is not subject to individual performance against objectives. (4) Incentive Compensation payments shall be disbursed to the Officers within ten (10) days after the audited financial statements have been reviewed and approved by the Audit Committee of the Board of Directors and performance measurements and incentive calculations have been reviewed and approved by the Compensation Committee of the Board of Directors. SECTION 3.02 - UNANTICIPATED CIRCUMSTANCES. Notwithstanding anything contained herein to the contrary, the Compensation Committee, subject to Board of Directors Approval, retains the right to change the method of determination of Incentive Compensation to account for circumstances which were not anticipated at the time of the Plan design or establishment of annual targets and objectives. - ------------------------------------------------------------------------------- Officer Incentive Compensation Plan 4 03/04/97 EX-10.5 10 REGISTRATION RIGHT POLICY 1 EXHIBIT 10.5 REGISTRATION RIGHTS POLICY REGISTRATION RIGHTS POLICY (the "Policy"), dated as of ______, 1997, by American Retirement Corporation (the "Company") on behalf of each of the holders, as of the date hereof, of the Common Stock, par value $.01 per share, of the Company (the "Common Stock Holders"). WHEREAS, as of the date of this Policy, the Common Stock Holders own 7,812,500 shares of the Company's Common Stock; WHEREAS, the Board of Directors of the Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-1 (No. 333-__________) (the "Registration Statement") covering the underwritten initial public offering (the "IPO") by the Company of up to 3,125,000 shares of Common Stock (excluding 468,750 shares of Common Stock subject to an underwriters' overallotment option granted by the Company), and has authorized the officers of the Company to prepare and execute this Policy in the name and on behalf of the Company in connection with the IPO; and WHEREAS, the Board of Directors has authorized the officers of the Company to offer certain registration rights to the Common Stock Holders, pursuant to this Policy, the acceptance of which shall be evidenced by the performance of such Common Stock Holders of the covenants and agreements herein contained; NOW, THEREFORE, the Company hereby established this policy and offers to the Common Stock Holders the registration rights contained herein, subject to the terms and conditions hereof. 1. Definitions - As used in this Policy, the following terms shall have the following meanings: "Holder" means each Common Stock Holder that owns Registrable Securities, including their respective permitted successors and assigns who acquire Registrable Securities, directly or indirectly, from a Common Stock Holder; provided however, that a successor or assign will become a Holder only if such successor or assign is a family member of a Holder, a trust for the benefit of a family member of a Holder, or a transferee who receives such Registrable Securities upon a distribution by a Holder that is not a natural person. For purposes of this Policy, the Company may deem and treat the registered holder of a Registrable Security as the Holder and absolute owner thereof, and the Company shall not be affected by any notice to the contrary. "IPO Date" means the effective date, as declared by order of the SEC, of the Registration Statement. "Registrable Securities" means (a) the Common Stock owned of record by the Common Stock Holders as of the IPO Date (the "IPO Common Stock") and (b) any securities issued or issuable in respect of the IPO Common Stock by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, reclassification, merger, or consolidation, 2 and any other securities issued pursuant to any pro rata distribution with respect to such IPO Common Stock. For purposes of this Policy, a Registrable Security ceases to be a Registrable Security when (x) its offer and sale has been effectively registered under the Securities Act and has been sold or distributed in accordance with such effective registration statement, or (y) it has been or may be sold or distributed to the public pursuant to Rule 144 (or any successor or similar provision) under the Securities Act. "Required Holders" means the Holders of at least 25% of the Registrable Securities. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended from time to time. 2. Demand Registration. (a) Subject to the terms and conditions set forth herein, beginning one year after the IPO Date, if the Required Holders shall request the Company in writing to register under the Securities Act up to 20% of the Registrable Securities held by such Holders (a "Demand Registration"), within 15 business days of receipt of such request the Company shall give written notice of such registration request to all Holders and the Company will include in such registration all Registrable Securities of such Holders with respect to which the Company has received written requests for inclusion therein within 15 days after receipt by the Holders of such notice. The Company shall use all reasonable efforts to cause to be filed and declared effective as soon as reasonably practicable a registration statement, on such appropriate form as the Company in its discretion shall determine, providing for the sale of up to 20% of the Registrable Securities held by each of such Holders; provided, however, that such requests shall express the present intention of the Holders to offer or cause the offering of such Registrable Securities for distribution and shall state the intended method of distribution thereof. Each registration statement filed pursuant to this Section 2(a) is hereinafter referred to as a "Demand Registration Statement." The Company's obligation to use all reasonable efforts to cause Registrable Securities to be registered in accordance with this Section 2(a) is subject to each of the following limitations, conditions, and qualifications: (i) If the Company shall have previously given notice of a proposed registration to the Holders pursuant to Section 3 hereof, then the Company shall not be required to effect any registration requested pursuant to this Section 2(a) for a period of 180 days from the date of such notice; provided, however, that if the registration statement filed in connection therewith becomes effective within such 180-day period, such 180-day period shall be extended for such period as may be required pursuant to the terms and conditions of any underwriting agreement entered into in connection with such proposed registration. 2 3 (ii) The Company may postpone for a period of 90 days the filing or the effectiveness of a registration requested pursuant to this Section 2(a) if (A) such registration is demanded within 90 days following the effective date of a registration statement filed by the Company or (B) the Board of Directors of the Company determines in good faith that such registration might have an adverse effect on any plan or proposal by the Company or any of its subsidiaries with respect to any financing, acquisition, recapitalization, reorganization, or other material transaction or that the Company is in possession of material non-public information and disclosure of such information is not in the best interests of the Company or any of its subsidiaries; provided, however, that as soon as the conditions permitting such delay no longer obtain, the Company shall give notice of that fact to the Required Holders, and shall proceed with the registration unless the Required Holders shall have elected, at any time prior to the close of business on the tenth business day after the Company has so notified the Required Holders, to withdraw their request for registration, and such withdrawn request shall not constitute a request hereunder. (iii) The Company shall not be required to effect any registration pursuant to this Section 2(a) unless such registration relates to Registrable Securities representing at least 25% of the then outstanding shares of such Registrable Securities. (iv) In no event will any Holder participating in any Demand Registration be permitted to sell in excess of 20% of such Holder's Registrable Securities. (v) The obligation of the Company to register the offer and sale of Registrable Securities pursuant to this Section 2(a) shall expire after two Demand Registration Statements filed by reason of a request pursuant to Section 2(a) shall have become effective and remained effective for the period specified in Section 4(a)(ii) hereof. (b) The Company agrees that, except as otherwise permitted by Section 2(d) hereof, it will not effect any public sale or distribution (or any registration with respect thereto) of any of its Common Stock during a period beginning on the fifteenth day prior to, and ending on the earlier of the forty-fifth day after, the date such Demand Registration Statement is declared effective or the date when attempts to effect such registration are abandoned by or at the request of the Required Holders (the "Hold-Back Period"). (c) The Company may, at its option and in its sole discretion, require that all shares proposed to be sold in a Demand Registration be sold in a firm-commitment underwriting. The Company shall have the right to select any nationally recognized investment banking firm(s) to underwrite the offering. (d) The Company and, at the Company's election, any other holders of Common Stock with registration rights, may include in any registration requested pursuant to Section 2(a) any shares of Common Stock which it or they shall determine so to include (the "Additional Registrable Securities") and the consent of the Holders shall not be required with respect thereto; provided, 3 4 however, that, if, in the opinion of the managing underwriter(s) of such offering, the inclusion in such registration statement of all Additional Registrable Securities would materially interfere with the successful marketing of the Holders' Registrable Securities, then the number of the Additional Registrable Securities shall be reduced to such number, if any, that, in the opinion of such managing underwriter(s), can be included in such underwriting without such interference with the successful marketing of the Holders' Registrable Securities. 3. Incidental Registration. Subject to the terms and conditions set forth herein, if prior to the second anniversary of the IPO Date the Company proposes to register the offer and sale of shares of Common Stock for its own account (the "Initially Proposed Shares") for cash under the Securities Act, the Company will promptly give written notice to the Holders of its intention to effect such registration (such notice to specify, to the extent known, the proposed offering price, the number of shares of Common Stock proposed to be registered, and the distribution arrangements, including indemnification of underwriters), and the Holders shall be entitled to include in such registration statement, as a part of such underwritten offering, such number of shares (the "Holder Shares") to be sold for the account of the Holders (on the same terms and conditions as the Initially Proposed Shares) as shall be specified in a request in writing delivered to the Company within 15 days after the date upon which the Company gave the aforementioned notice. The Company's obligations to include Holder Shares in a registration statement pursuant to this Section 3 is subject to each of the following limitations, conditions, and qualifications: (a) In no event will a Holder have the right pursuant to this Section 3 to include his or her Registrable Securities in a registration on Form S-8 or any successor form relating to the securities to be issued pursuant to a Company employee benefit plan or a registration on Form S-4 or any successor form relating to a merger or other transaction described in Rule 145 of the Securities Act. (b) If, at any time after giving written notice of its intention to effect a registration of any of its shares of Common Stock prior to the effective date of any registration statement filed in connection with such registration, the Company shall determine for any reason not to register the offer and sale of such shares, the Company may, at its election, give written notice of such determination to the Holders of Holder Shares and thereupon it shall be relieved of its obligation to use any efforts to register any Holder Shares in connection with such aborted registration. (c) If, in the opinion of the managing underwriter(s) of such offering, the distribution of all or a specified portion of the Holder Shares would materially interfere with the registration and sale, in accordance with the intended method thereof, of the Initially Proposed Shares, then the number of Holder Shares and shares of Common Stock to be registered on behalf of any person (other than the Company) entitled to exercise incidental registration rights with respect to such registration ("Other Holders") to be included in such registration statement shall be reduced (pro rata among the Holders and Other Holders on the basis of the number of shares that each such Holder and Other Holder requested be included unless such Other Holder's rights are expressly superior to the rights of the Holders pursuant to this Policy, in which case such Other Holder's number of shares 4 5 shall not be reduced pursuant to this Section 3(c)) to such number, if any, that, in the opinion of such managing underwriter(s), can be included without such interference. If, as a result of the cutback provisions of the preceding sentence, any Holder is not entitled to include all of the Holder Shares in such registration, such Holder may elect to withdraw its request to include Holder Shares in such registration (a "Withdrawal Election"); provided, however, that a Withdrawal Election shall be irrevocable and such Holder shall no longer have any right to include any Holder Shares in the registration as to which such Withdrawal Election was made. (d) As a condition to each Holder's right to include Holder Shares in a registration pursuant to this Section 3, such Holder shall, if requested by the Company or the managing underwriter(s) in connection with such registration and distribution, (A) agree to sell the Holder Shares on the basis provided in any underwriting arrangements entered into in connection therewith and (B) complete and execute all questionnaires, powers of attorney, indemnities, underwriting agreements, and other documents that are customary in similar transactions and required under the terms of such underwriting arrangements. 4. Registration Procedures. (a) Whenever the Company is required to use all reasonable efforts to effect the registration of any Registrable Securities under the Securities Act pursuant to the terms and conditions of Section 2(a) regarding Demand Registrations, the Company will use all reasonable efforts to effect the registration and sale of the Registrable Securities in accordance with the intended method of disposition thereof. Without limiting the generality of the foregoing, the Company will as soon as practicable: (i) prepare and file with the SEC a registration statement on any appropriate form under the Securities Act with respect to the Registrable Securities and use all reasonable efforts to cause such registration statement to become effective; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all the Registrable Securities and other securities covered by such registration statement until the earlier of (A) the expiration of 60 days after such registration statement becomes effective and (B) until the Company has received written notice from all of the participating Holders that they do not intend to sell additional securities; provided, that, if the offering of Registrable Securities pursuant to such registration statement is terminated or suspended by any stop order, injunction, or other order or requirement of the SEC or any other governmental agency or court, the foregoing time period shall be extended by the number of days during the period from and including the date such stop order, injunction, or other order or requirement becomes effective to and including the date when such termination or suspension no longer exists; 5 6 (iii) furnish the Holders of the Registrable Securities covered by such registration statement, without charge, such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case without exhibits unless specifically requested), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus), such documents incorporated by reference in such registration statement or prospectus, and such other documents, as such Holders may reasonably request; (iv) use all reasonable efforts to register, qualify, or exempt the Registrable Securities covered by such registration statement under the securities or blue sky laws of such jurisdictions as the managing underwriter(s) shall reasonably recommend, and do any and all other acts and things which may be reasonably necessary or advisable to enable the Holders to consummate the disposition in such jurisdictions of the Registrable Securities covered by such registration statement, except that the Company shall not for any such purpose be required to (A) qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not so qualified, (B) subject itself to taxation in any such jurisdiction wherein it is not so subject, or (C) consent to general service of process in any such jurisdiction or otherwise take any action that would subject it to the general jurisdiction of the courts of any jurisdiction in which it is not so subject; (v) otherwise use all reasonable efforts to comply with all applicable rules and regulations of the SEC; (vi) furnish, at the Company's expense, unlegended certificates representing ownership of the securities being sold in such denominations as shall be requested and instruct the transfer agent to release any stop transfer orders with respect to the Registrable Securities being sold; (vii) notify each Holder at any time when a prospectus relating to the Registrable Securities is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such Registration Statement contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein (in the case of the prospectus or any preliminary prospectus, in light of the circumstances under which they were made) not misleading, and the Company will, as promptly as practicable thereafter, prepare and file with the SEC and furnish a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of Registrable Securities such prospectus will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (viii) enter into customary agreements (including an underwriting agreement in customary form in the case of an underwritten offering); make such representations and warranties to the Holders and underwriter(s) (in the case of underwritten offerings) in form, 6 7 substance, and scope as are customarily made by issuers to sellers or underwriter(s) in similar offerings; (ix) make available for inspection by the Holders, any underwriter or agent participating in any disposition pursuant to such Registration Statement, and any attorney, accountant, or other similar professional advisor retained by any such Holders, underwriter(s) or agents (collectively, the "Inspectors"), all pertinent financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors, and employees to supply all information reasonably requested by any such Inspectors in connection with such Registration Statement. The Holders agree that the Records and other information which the Company determines to be confidential and of which determination the Inspectors are so notified shall not be disclosed by the Inspectors unless (A) the release of such Records is ordered pursuant to a subpoena, court order, or regulatory or agency request, or (B) the information in such Records has been generally disseminated to the public. Each Holder agrees that it will, upon learning that disclosure of such Record is sought in a court of competent jurisdiction or by a governmental agency, give notice to the Company and allow the Company, at the Company's expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential; (x) obtain for delivery to the Company, the underwriter(s) or agent, with copies to the Holders, a "comfort" letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by "comfort" letters as the Holders or the managing underwriter(s) reasonably request; (xi) obtain for delivery to the Holders and the underwriter(s) or agent an opinion or opinions from counsel for the Company in customary form and reasonably satisfactory to the Holders, underwriter(s) or agents and their counsel; (xii) make available to its security holders earnings statements, which need not be audited, satisfying the provisions of Section 11(a) of the Securities Act no later than 90 days after the end of the 12-month period beginning with the first month of the Company's first quarter commencing after the effective date of the Registration Statement, which earnings statements shall cover said 12 month period; (xiii) make every reasonable effort to prevent the issuance of any stop order suspending the effectiveness of the registration statement or of any order preventing or suspending the effectiveness of such registration statement at the earliest possible moment; (xiv) cause the Registrable Securities to be registered with or approved by such other governmental agencies or authorities within the United States as may be reasonably necessary to enable the sellers or the underwriter(s) to consummate the disposition of such securities; 7 8 (xv) cooperate with the Holders and the managing underwriter(s), or any other interested party (including any interested broker-dealer) in making any filings or submission reasonably required to be made, and the furnishing of all appropriate information in connection therewith, with the National Association of Securities Dealers, Inc. ("NASD"); (xvi) effect the listing of the Registrable Securities on the New York Stock Exchange or such other national securities exchange or quotation system, on which shares of the Company's Common Stock shall then be listed or authorized for quotation; and (xvii) take all other reasonable steps necessary to effect the registration of the Registrable Securities contemplated hereby. (b) The Holders shall provide (in writing and signed by the Holders and stated to be specifically for use in the related registration statement, preliminary prospectus, prospectus, or other document incident thereto) all such information and materials, including without limitation, the intended plan of distribution, and take all such action as may be required in order to permit the Company to comply with all applicable requirements of the SEC and any applicable state securities laws and to obtain any desired acceleration of the effective date of any registration statement prepared and filed by the Company pursuant to this Policy. (c) If a registration pursuant to Section 2 involves an underwritten offering, and in connection with any registration by the Company of any class of equity securities of the Company for sale for its own account, including pursuant to Section 3 hereof, each Holder agrees, whether or not any of such Holder's Registrable Securities are included in such registration, not to effect any sale or distribution, including any sale pursuant to Section 144 of the Securities Act, of any securities of the Company which are similar to the securities included in such registration (other than as part of such underwritten offering), without the consent of the managing underwriter(s), for a period of 180 days after the date a request for registration is made pursuant to Section 2(a) hereof or the date the Company notifies the Holders of its intent to register such equity securities for its own account, including pursuant to Section 3 hereof, as the case may be; provided, however, that if the registration statement filed in connection therewith becomes effective within such 180-day period, such 180-day period shall be extended for such period as may be required pursuant to the terms and conditions of any underwriting agreement entered into in connection with such proposed registration. (d) The Holders shall, if requested by the Company or the managing underwriter(s) in connection with any proposed registration and distribution pursuant to this Policy, (i) agree to sell the Registrable Securities on the basis provided in any underwriting arrangements entered into in connection therewith and (ii) complete and execute all questionnaires, powers of attorney, indemnities, underwriting agreements, and other documents customary in similar offerings. (e) Upon receipt of any notice from the Company that the Company has become aware that the prospectus (including any preliminary prospectus) included in any registration statement filed pursuant to Section 2(a) or Section 3 hereof, as then in effect, contains any untrue statement of a 8 9 material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, the Holders shall immediately discontinue disposition of the Registrable Securities pursuant to the registration statement covering the same until the Holders' receipt of copies of a supplemented or amended prospectus and, if so directed by the Company, deliver to the Company all copies other than permanent file copies then in the Holder's possession, of the prospectus covering the Registrable Securities that was in effect prior to such amendment or supplement. (f) The Company shall pay all expenses incurred in connection with any Demand Registration Statements filed pursuant to Section 2(a) and any Registration Statement filed pursuant to Section 3 of this Policy, including, without limitation, all SEC and blue sky registration and filing fees (including NASD fees), printing expenses, transfer agents and registrars' fees, fees and disbursements of the Company's counsel and accountants, and fees and disbursements of experts used by the Company in connection with such registration statement, except that each Holder shall pay all underwriting discounts, commissions, and expenses attributable to his or her Registrable Securities sold pursuant to any such registration statement and any fees and expenses of his or her own counsel. 5. Indemnification; Contribution. (a) The Company agrees to indemnify and hold harmless, to the extent permitted by law, each Holder of Registrable Securities, its officers and directors, and each person, if any, who controls such Holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities, and expenses arising out of any untrue or alleged untrue statement of a material fact contained in any registration statement under which Registrable Securities owned by such Holder were registered under the Securities Act, prospectus, or preliminary prospectus, or any amendment thereof or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus or preliminary prospectus, in the light of the circumstances under which they were made) not misleading except insofar as the same are caused by or contained in any information or affidavit with respect to such Holder furnished in writing to the Company by such Holder expressly for use therein or by such Holder's failure to furnish the Company upon request with the information with respect to such Holder or such Holder's plan of distribution that is the subject of the untrue statement or omission or by such Holder's failure to deliver a copy of the applicable registration statement or prospectus (exclusive of the documents, if any, from which information is incorporated by reference) after the Company has furnished such Holder with a sufficient number of copies of the same. In connection with an underwritten offering, the Company will also indemnify the underwriters thereof, their officers and directors, and each person who controls (within the meaning of the Securities Act) such underwriters to the same extent as provided above with respect to the indemnification of the Holders of Registrable Securities. (b) In connection with any registration statement in which a Holder of Registrable Securities is participating, each such Holder agrees to indemnify and hold harmless, to the extent permitted by law, the Company, the directors and officers of the Company, and each person, if any, 9 10 who controls (within the meaning of the Securities Act) the Company against any losses, claims, damages, liabilities, and expenses arising out of any untrue or alleged untrue statement of a material fact contained in any registration statement under which Registrable Securities owned by such Holder were registered under the Securities Act, prospectus, or preliminary prospectus, or any amendment thereof or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, or preliminary prospectus, in the light of the circumstances under which they were made) not misleading, to the extent that such untrue statement or omission is contained in any information or affidavit with respect to such Holder furnished in writing to the Company by such Holder expressly for use therein or such untrue statement or omission relates to such Holder or such Holder's plan of distribution and such Holder failed to furnish such information to the Company upon request, or arising out of the Holder's failure to deliver a copy of the applicable registration statement or prospectus (exclusive of the documents, if any, from which information is incorporated by reference) after the Company has furnished such Holder with a sufficient number of copies of the same. Notwithstanding the provisions of this Section 5(b), the indemnification required from any Holder shall be limited to the amount of the proceeds received by such Holder from the sale of the Registrable Securities. The Company and, to the extent customary in underwriting agreements at the time, its directors and officers and each person, if any, who controls (within the meaning of the Securities Act) the Company, shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers, and similar securities industry professionals participating in the distribution to the same extent as provided above with respect to information so furnished in writing by such persons specifically for inclusion in any prospectus or registration statement, or the failure by such underwriters, selling brokers, dealer managers, and similar securities industry professionals to deliver a copy of the applicable registration statement or prospectus (exclusive of the documents, if any, from which information is incorporated by reference) after the Company has furnished such persons with a sufficient number of copies of the same. (c) Any person entitled to indemnification hereunder agrees to give prompt written notice to the indemnifying party after the receipt by such person of any written notice of the commencement of any action, suit, proceeding or investigation or threat thereof made in writing for which such person will claim indemnification or contribution pursuant to this Policy and permit the indemnifying party to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly situated, to assume the defense of such claim with counsel reasonably satisfactory to such indemnified party. If the indemnifying party elects to assume the defense of a claim, it shall not be liable to such indemnified party for legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. If the indemnifying party is not entitled to, or elects not to, assume the defense of a claim, it will not be obligated to pay the fees and expenses of more than one counsel with respect to such claim. The indemnifying party will not be subject to any liability for any settlement made without its consent, which consent shall not be unreasonably withheld. If the failure of any person to give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification prejudices such indemnifying party, such indemnifying party shall be relieved of its obligation to indemnify such person to the extent that such indemnifying party has been prejudiced. No indemnifying party will 10 11 consent to entry of any judgment or enter into any settlement agreement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such claim or litigation. (d) If the indemnification provided for in this Section 5 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities, or expenses referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities, or expenses in such proportion as is appropriate to reflect not only the relative benefits received by the indemnifying party on the one hand and the indemnified party on the other but also the relative fault of the indemnifying party and the indemnified party as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statements of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitation set forth in Section 5(c), any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the immediately preceding paragraph. No person guilty of fraudulent misrepresentation (within the meaning of Paragraph 11(f) of the Securities Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. 6. Conditions Precedent to Registration. The Company's obligations under this Policy to effect the registration of any Registrable Securities are subject to the agreement to and the performance by the Holders of such Registrable Securities of the obligations of such Holders contained in this Policy, including, without limitation, the agreement by such Holders to pay certain expenses incurred in connection with the sale of the Registrable Securities pursuant to Section 4(f) hereof and the agreement by such Holders to indemnify the Company pursuant to Section 5(b) hereof. Unless a Holder shall, if requested by the Company, complete, execute and deliver all agreements, questionnaires, indemnities, and other documents customary in a proposed registration or deemed necessary by the Company to evidence such Holder's agreements and obligation under this Policy, the Company will have no obligation to register such Holder's Registrable Securities. 7. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery or delivery by telecopy or facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery 11 12 (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the third business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: If to the Company: American Retirement Corporation 111 Westwood Place, Suite 402 Brentwood, Tennessee 37027 Telecopy (615) 221-2269 Attention: President with a copy to: Bass, Berry and Sims PLC 2700 First American Center Nashville, Tennessee 37238 Telecopy (615) 742-6298 Attention: J. Gentry Barden If to a Holder, to the address of such Holder shown on the stock ledger books of the Company. The Company may from time to time change its address for notices under this Section 7 by giving at least 10 days' written notice of such changed address to each of the Holders. Each Holder may from time to time change its address for notices under this Section 7 by giving at least 10 days' written notice of such changed address to the Company. 8. Additional Registration Rights. Nothing in this Policy shall limit the Company's right to authorize or grant demand or incidental registration rights to other persons who own or have the right to acquire securities of the Company (including Common Stock), regardless whether such registration rights are senior, pari parsu, or subordinate to the rights of the Holders hereunder. 9. Headings. The headings herein are for convenience only, do not constitute a part of this Policy and shall not be deemed to limit or affect any of the provisions hereof. 10. Successors and Assigns; Amendments. This Policy shall be binding upon and inure to the benefit of the Company and the Holders and their respective successors and assigns, including each subsequent Holder of any Registrable Securities; provided, however, that the Company may 12 13 amend, modify, supplement, or revoke this Policy at any time with the consent of the Holders of at least 50% of the Registrable Securities. 11. No Third Party Beneficiaries. This Policy is intended for the benefit of the Company and the Holders and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person thereof. 12. Governing Law. Upon acceptance by the Holders, this Policy shall be governed by and construed and enforced in accordance with the internal laws of the State of Tennessee without regard to the principles of conflicts of laws thereof. IN WITNESS WHEREOF, the Company has caused this Policy to be duly executed by its authorized officer as of the date hereof. AMERICAN RETIREMENT CORPORATION By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- 13 EX-10.6 11 LEASE AND SECURITY AGREEMENT 1 EXHIBIT 10.6 Lease and Security Agreement by and between Nationwide Health Properties, Inc., a Maryland corporation, as "Landlord" and American Retirement Communities, L.P., a Tennessee limited partnership as "Tenant" Dated January 2, 1997 2 TABLE OF CONTENTS
Page 1. Term............................................................... 2 1.1 Term............................................... 2 1.2 Renewal Terms...................................... 2 2. Rent............................................................... 3 2.1 Initial Term Minimum Rent.......................... 3 2.2 Renewal Term Minimum Rent.......................... 3 2.3 Initial Term Additional Rent....................... 6 2.4 Renewal Term Additional Rent....................... 7 2.5 Total Rent......................................... 7 2.6 Proration for Partial Periods...................... 9 2.7 Absolute Net Lease................................. 9 3. Taxes, Assessments and Other Charges............................... 10 3.1 Tenant's Obligations............................... 10 3.2 Proration.......................................... 10 3.3 Right to Protest................................... 10 3.4 Tax Bills.......................................... 10 3.5 Other Charges...................................... 11 4. Insurance.......................................................... 11 4.1 General Insurance Requirements..................... 11 4.2 Fire and Other Casualty............................ 12 4.3 Public Liability................................... 13 4.4 Professional Liability Insurance................... 13 4.5 Workers Compensation............................... 14 4.6 Boiler Insurance................................... 14 4.7 Business Interruption Insurance.................... 14 4.8 Deductible Amounts................................. 14 5. Use, Maintenance and Alteration of the Premises.................... 14 5.1 Tenant's Maintenance Obligations................... 14 5.2 Regulatory Compliance.............................. 16 5.3 Permitted Use...................................... 18 5.4 Tenant Repurchase Obligation....................... 18 5.5 No Liens; Permitted Contests....................... 19 5.6 Alterations by Tenant.............................. 20 5.7 Capital Improvements Funded by Landlord............ 21 5.8 Compliance With IRS Guidelines..................... 21
i 3 6. Condition And Title Of Premises; Right of First Offer.............. 22 6.1 Condition and Title of Premises.................... 22 6.2 Right of First Offer to Purchase Premises.......... 22 7. Landlord and Tenant Personal Property.............................. 27 7.1 Tenant Personal Property........................... 27 7.2 Landlord's Security Interest....................... 28 7.3 Financing Statements............................... 29 7.4 Intangible Property................................ 29 8. Representations And Warranties..................................... 30 8.1 Due Authorization And Execution.................... 30 8.2 Due Organization................................... 30 8.3 No Breach of Other Agreements...................... 31 9. Financial, Management and Regulatory Reports....................... 31 9.1 Monthly Facility Reports........................... 31 9.2 Quarterly Financial Statements..................... 31 9.3 Annual Financial Statement......................... 31 9.4 Accounting Principles.............................. 32 9.5 Regulatory Reports................................. 32 10. Events of Default and Landlord's Remedies.......................... 33 10.1 Events of Default.................................. 33 10.2 Remedies........................................... 36 10.3 Receivership....................................... 41 10.4 Late Charges....................................... 42 10.5 Remedies Cumulative; No Waiver..................... 43 10.6 Performance of Tenant's Obligations by Landlord.... 43 11. Security Deposit................................................... 44 12. Damage by Fire or Other Casualty................................... 44 12.1 Reconstruction Using Insurance..................... 44 12.2 Surplus Proceeds................................... 44 12.3 No Rent Abatement.................................. 45 12.4 End of Term........................................ 45 13. Condemnation....................................................... 45 13.1 Complete Taking.................................... 45 13.2 Partial Taking..................................... 46 13.3 Lease Remains in Effect............................ 46 14. Provisions on Termination of Term.................................. 46
ii 4 14.1 Surrender of Possession............................ 46 14.2 Removal of Personal Property....................... 47 14.3 Title to Personal Property Not Removed............. 47 14.4 Management of Premises............................. 47 14.5 Correction of Deficiencies......................... 48 15. Notices and Demands................................................ 48 16. Right of Entry; Examination of Records............................. 49 17. Landlord May Grant Liens........................................... 50 18. Quiet Enjoyment.................................................... 50 19. Applicable Law..................................................... 51 20. Preservation of Gross Revenues..................................... 51 21. Hazardous Materials................................................ 52 21.1 Hazardous Material Covenants....................... 52 21.2 Tenant Notices to Landlord......................... 53 21.3 Extension of Term.................................. 53 21.4 Participation in Hazardous Materials Claims........ 54 21.5 Environmental Activities........................... 54 21.6 Hazardous Materials................................ 54 21.7 Hazardous Materials Claims......................... 55 21.8 Hazardous Materials Laws........................... 55 22. Assignment and Subletting.......................................... 56 23. Indemnification.................................................... 58 24. Holding Over....................................................... 58 25. Estoppel Certificates.............................................. 59 26. Conveyance by Landlord............................................. 59 27. Waiver of Jury Trial............................................... 59 28. Attorneys' Fees.................................................... 60 29. Severability....................................................... 60
iii 5 30. Counterparts....................................................... 60 31. Binding Effect..................................................... 60 32. Waiver and Subrogation............................................. 60 33. Memorandum of Lease................................................ 60 34. Incorporation of Recitals and Attachments.......................... 61 35. Titles and Headings................................................ 61 36. Nature of Relationship; Usury Savings Clause....................... 61 37. Joint and Several.................................................. 61 38. Survival of Representations, Warranties and Covenants.............. 62 39. Interpretation..................................................... 62
EXHIBITS EXHIBIT A - LEGAL DESCRIPTION OF PREMISES EXHIBIT B - LANDLORD PERSONAL PROPERTY EXHIBIT C - APPRAISAL PROCESS EXHIBIT D - PERMITTED EXCEPTIONS EXHIBIT E - INITIAL TERM MINIMUM RENT iv 6 LEASE AND SECURITY AGREEMENT THIS LEASE AND SECURITY AGREEMENT ("LEASE") is made and entered into as of the 2nd day of January, 1997 by and between Nationwide Health Properties, Inc., a Maryland corporation ("LANDLORD") and American Retirement Communities, L.P., a Tennessee limited partnership ("TENANT"). W I T N E S S E T H: WHEREAS, Landlord is the owner of that certain real property, all improvements thereon and all appurtenances thereto, presently permitted for one hundred eighty (180) living units (currently operated as seventeen (17) assisted living facility beds and one hundred sixty-one (161) independent living facility beds), known as "Holley Court Terrace", located at 1111 Ontario Street, Oak Park, Illinois 60302, and more specifically described in Exhibit "A" attached hereto, together with certain of the furniture, machinery, equipment, appliances, fixtures, supplies and other personal property used in connection therewith as more specifically described on Exhibit "B" attached hereto ("LANDLORD PERSONAL PROPERTY"). The foregoing real and personal property owned by Landlord as described in this Recital shall be collectively referred to in this Lease as the "PREMISES"); and WHEREAS, any reference in this Lease to the "RETIREMENT CARE FACILITIES" shall mean the care facilities on the Premises as described above; and 1 7 WHEREAS, Landlord desires to lease the Premises to Tenant, and Tenant desires to lease the Premises from Landlord. NOW THEREFORE, in consideration of the mutual covenants, conditions and agreements set forth herein, Landlord hereby leases and lets unto Tenant the Premises for the term and upon the conditions and provisions hereinafter set forth. 1. TERM. 1.1 TERM. The term of this Lease shall commence on January 2, 1997 and shall end on December 31, 2006 (the "INITIAL TERM") unless extended pursuant to Section 1.2 or earlier terminated in accordance with the provisions hereof. The Initial Term and all Renewal Terms are referred to collectively as the "TERM". 1.2 RENEWAL TERMS. The Term may be extended for three (3) separate renewal terms (each a "RENEWAL TERM") of ten (10) years each, upon the satisfaction of all of the following terms and conditions: 1.2.1 Not more than ten (10) business days before or after the date which is fifteen (15) months prior to the end of the then current Term, Tenant shall give Landlord written notice that Tenant desires to exercise its right to extend the then current Term for one (1) Renewal Term. 1.2.2 There shall be no Event of Default (as defined in Section 10 below) under this Lease, either on the date of Tenant's notice to Landlord pursuant to Section 1.2.1 above, or on the last day of the then current Term. 1.2.3 Trinity Towers Limited Partnership, a Tennessee limited partnership ("NH TENANT"), concurrently exercises its right to extend the then 2 8 current term of that certain Lease and Security Agreement of even date herewith, by and between NH Texas Properties Limited Partnership, a Texas limited partnership ("NH TEXAS PROPERTIES LIMITED PARTNERSHIP"), and NH Tenant (the "NH AGREEMENT") and the terms and conditions of renewal of the NH Agreement are fully satisfied. 1.2.4 The amount of the letter of credit posted by Tenant pursuant to Section 11 of this Lease shall be increased for the remainder of the Term to Five Hundred Nine Thousand Two Hundred Fifty-Nine and 26/100 Dollars ($509,259.26) concurrently with the commencement of the first Renewal Term. 1.2.5 All other provisions of this Lease shall remain in full force and effect and shall continuously apply throughout the Renewal Term(s). 2. RENT. During the Initial Term and all Renewal Terms, minimum rent ("MINIMUM RENT") and additional rent ("ADDITIONAL RENT") shall accrue and/or be paid by Tenant to Landlord as follows: 2.1 INITIAL TERM MINIMUM RENT. During the Initial Term, the Minimum Rent shall be paid to Landlord by Tenant monthly in advance. Tenant shall pay to Landlord Minimum Rent according to the schedule on Exhibit "E" attached hereto, payable in advance on the first business day of each calendar month. Such monthly amount is referred to herein as the "INITIAL TERM MINIMUM RENT." 2.2 RENEWAL TERM MINIMUM RENT. The Minimum Rent for each Renewal Term shall be expressed as an annual amount but shall be payable in advance in equal monthly 3 9 installments on the first business day of each calendar month. Such annual Minimum Rent shall be equal to the product of: 2.2.1 the lesser of (i) the Adjusted Fair Market Value of the Premises (as such term is defined in Section 2.2.4 below) on the date of Tenant's notice of exercise pursuant to Section 1.2.1 or (ii) Landlord's Adjusted Investment in the Premises (as defined in Section 2.2.5 below); and 2.2.2 a percentage equal to three hundred (300) basis points over the twenty (20) day average 10 year United States Treasury rate in effect on the date of Tenant's notice of exercise pursuant to Section 1.2.1. 2.2.3 Notwithstanding the foregoing, in no event shall the Minimum Rent for the first Renewal Term exceed one hundred twenty-eight and one-eighth percent (128.125%) of the Total Rent (as such term is defined in Section 2.3.1 below) payable during calendar year 2005, and in no event shall the Minimum Rent for any Renewal Term other than the first Renewal Term exceed one hundred twenty-five percent (125%) of the Total Rent in effect for the Lease Year immediately preceding the first Lease Year of such Renewal Term. Furthermore, in no event shall the Minimum Rent for the first Lease Year of the first Renewal Term be less than one hundred two and one-half percent (102.5%) of the Total Rent payable during calendar year 2005. 2.2.4 As used herein, the "ADJUSTED FAIR MARKET VALUE" of the Premises shall mean fair market value as determined under this Lease with the following adjustments: (i) excluding the enterprise value of any home health 4 10 agency operated by Tenant out of space in the Premises but including the fair rental value of such space; and (ii) minus the value of any capital improvements to the Premises paid for by Tenant and not funded by Landlord under Section 5.7 below. 2.2.5 As used herein, "LANDLORD'S ADJUSTED INVESTMENT" in the Premises shall mean Landlord's Original Investment (as hereinafter defined in this Section 2.2.5) multiplied at the end of each Lease Year by a percentage equal to one hundred percent (100%) plus one-half (1/2) of the CPI Increase (as defined in Section 2.2.6 below) for such Lease Year. As used herein, "LANDLORD'S ORIGINAL INVESTMENT" shall mean (A) Eleven Million Dollars ($11,000,000), as increased by (B) any amount paid by Landlord pursuant to Section 5.7 below, and as decreased by (C) any net award paid to Landlord pursuant to Section 13.2 below, all as applicable. 2.2.6 As used herein, "CPI" shall be defined as the Consumer Price Index for All Urban Wage Earners and Clerical Workers, United States Average, Subgroup "All Items" (1982-1984=100), as published by the United States Department of Labor, Bureau of Labor Statistics. The "CPI INCREASE" shall be calculated annually by comparing the CPI in effect on the first calendar day of the immediately preceding Lease Year to the first calendar day of the then current Lease Year. If within ten (10) days of the date of Tenant's notice of exercise pursuant to Section 1.2.1, Landlord and Tenant are unable to agree on the Adjusted Fair Market Value of the Premises 5 11 for purposes of this calculation, such Adjusted Fair Market Value shall be established by the appraisal process described on Exhibit "C" attached hereto. The Minimum Rent for the applicable Renewal Term must be finally determined by such appraisal process on or before a date ninety (90) days after Tenant's notice of exercise pursuant to Section 1.2.1 or Tenant shall lose its right to extend the Term. Landlord and Tenant acknowledge and agree that this Section is designed to establish a fair market Minimum Rent for the Premises during the applicable Renewal Terms. 2.3 INITIAL TERM ADDITIONAL RENT. 2.3.1 Commencing with the second Lease Year of the Initial Term and continuing thereafter during the Initial Term, Tenant agrees to pay Additional Rent to Landlord on a monthly basis in arrears on the first business day of each calendar month. Such Additional Rent shall be equal to (a) twenty percent (20%) of the amount by which the Gross Revenues for the Lease Year through the applicable month exceed the prorated Gross Revenues for the applicable portion of the Base Year, minus (b) all Additional Rent theretofore paid by Tenant during such Lease Year. 2.3.2 "GROSS REVENUES" shall be calculated according to GAAP and shall be defined as all revenues generated by the operation, sublease and/or use of the Premises in any way, excluding (i) contractual allowances during the Term for billings not paid by or received from the appropriate governmental agencies or third party providers; (ii) all proper patient billing credits and adjustments according to GAAP relating to health care accounting; and 6 12 (iii) federal, state or local sales or excise taxes and any tax based upon or measured by said revenues which is added to or made a part of the amount billed to the patient or other recipient of such services or goods, whether included in the billing or stated separately. 2.3.3 "LEASE YEAR" shall be defined as the twelve (12) month periods commencing on January 1 of each year of the Term. 2.3.4 The "BASE YEAR" during the Initial Term shall mean the year ending on December 31, 1997. 2.4 RENEWAL TERM ADDITIONAL RENT. Except during the first Lease Year of any Renewal Term, Tenant shall pay to Landlord Additional Rent in each Renewal Term on a monthly basis in arrears no more than 30 days after the end of each month during the applicable Lease Year. The Additional Rent for each Renewal Term shall be calculated as provided in Section 2.3 except that the Base Year for the purpose of determining such Additional Rent shall be the first Lease Year of the applicable Renewal Term. 2.5 TOTAL RENT. 2.5.1 For all purposes of calculating and paying Minimum Rent and Additional Rent under this Lease, the total of the Minimum Rent and Additional Rent ("TOTAL RENT") payable by Tenant in any Lease Year will not be less than the Total Rent paid by Tenant for the previous Lease Year. 2.5.2 Notwithstanding any of the other terms of this Section 2 but subject to Section 2.5.3 below, the Total Rent due during each Lease Year shall not increase from one Lease Year to the next by an amount in excess of (i) two 7 13 and one-half percent (2.5%), multiplied by (ii) the Total Rent due during the immediately preceding Lease Year. 2.5.3 The terms of Section 2.5.2 above shall have no applicability in determining the calculation of the Minimum Rent due during the first Lease Year of any Renewal Term. 2.5.4 Within sixty (60) days of the end of each Lease Year, Tenant shall deliver to Landlord a report in a form mutually agreed upon by Landlord and Tenant, certified by an officer or general partner of Tenant, as applicable, setting forth the calculations required by the application of this Section 2.5. If said report provides that Tenant owes Landlord any sum of money, Tenant shall accompany such report delivered to Landlord with such funds. If said report provides that Landlord owes Tenant any sum of money, such sum shall be applied as a credit against future installments of Minimum Rent and Additional Rent due from Tenant to Landlord; provided, however, if such sum is owed by Landlord to Tenant with respect to the last Lease Year of the Term, Landlord shall pay such sum to Tenant within thirty (30) days of Landlord's receipt of the report in question. 2.5.5 For the purpose of comparing the Total Rent from Lease Year to Lease Year pursuant to this Section 2.5, the increase in Minimum Rent by reason of any disbursement by Landlord pursuant to Section 5.7 of the Lease shall be treated as follows: (i) for the purpose of comparing the Total Rent in the Lease Year in which such disbursement is made against the Total Rent in 8 14 the preceding Lease Year, such increase in Minimum Rent shall be ignored, and (ii) for the purpose of comparing the Total Rent in the Lease Year in which such disbursement is made to the Total Rent in the following Lease Year, such increase in Minimum Rent shall be deemed effective on the first day of the Lease Year in which the disbursement is made. 2.6 PRORATION FOR PARTIAL PERIODS. The rent for any month during the Term which begins or ends on other than the first or last calendar day of a calendar month shall be prorated based on actual days elapsed. 2.7 ABSOLUTE NET LEASE. All rent payments shall be absolutely net to the Landlord free of taxes (other than federal or state income taxes calculated on the net income of Landlord), assessments, utility charges, operating expenses, refurnishings, insurance premiums or any other charge or expense in connection with the Premises. All expenses and charges, whether for upkeep, maintenance, repair, refurnishing, refurbishing, restoration, replacement, insurance premiums, real estate or other property taxes, utilities, and other operating or other charges of a like nature or otherwise, shall be paid by Tenant. This provision is not in derogation of the specific provisions of this Lease, but in expansion thereof and as an indication of the general intention of the parties hereto. Tenant shall continue to perform its obligations under this Lease even if Tenant claims that Tenant has been damaged by any act or omission of Landlord. Therefore, Tenant shall at all times remain obligated under this Lease without any right of set-off, counterclaim, abatement, deduction, reduction or defense of any kind. Tenant's sole right to recover damages against Landlord by reason of a 9 15 breach or alleged breach of Landlord's obligations under this Lease shall be to prove such damages in a separate action against Landlord. 3. TAXES, ASSESSMENTS AND OTHER CHARGES: 3.1 TENANT'S OBLIGATIONS. Tenant agrees to pay and discharge (including the filing of all required returns) any and all taxes (including but not limited to real estate and personal property taxes, business and occupational license taxes, ad valorem sales, use, single business, gross receipts, transaction privilege, franchise rent or other excise taxes, but excluding federal or state income taxes calculated on the net income of Landlord, and other assessments levied, assessed, or payable against the Premises or any interest therein during the Term, prior to delinquency or imposition of any fine, penalty, interest or other cost. 3.2 PRORATION. At the end of the Term, all such taxes and assessments under Section 3.1 shall be prorated. 3.3 RIGHT TO PROTEST. Landlord and/or Tenant shall have the right, but not the obligation, to protest the amount or payment of any real or personal property taxes or assessments levied against the Premises; provided that in the event of any protest by Tenant, Landlord shall not incur any expense because of any such protest, Tenant shall diligently and continuously prosecute any such protest and notwithstanding such protest Tenant shall pay any tax, assessment or other charge before the imposition of any penalty or interest. 3.4 TAX BILLS. Landlord shall promptly forward to Tenant copies of all tax bills and payment receipts relating to the Premises received by Landlord. 3.5 OTHER CHARGES. Tenant agrees to pay and discharge, punctually as and when the same shall become due and payable without penalty, all electricity, gas, garbage 10 16 collection, cable television, telephone, water, sewer, and other utilities costs and all other charges, obligations or deposits assessed against the Premises during the Term. 4. INSURANCE. 4.1 GENERAL INSURANCE REQUIREMENTS. All insurance provided for in this Lease shall be maintained under valid and enforceable policies issued by insurers of recognized responsibility, licensed and approved to do business in the State of Illinois, having a general policyholders rating of not less than "A-" and a financial rating of not less than "VIII" in the then most current Best's Insurance Report. Any and all policies of insurance required under this Lease shall name the Landlord as an additional insured and shall be on an "occurrence" basis; provided, however, the proceeds of any business interruption policy shall be payable to Tenant without relieving Tenant in any way of its obligation to pay rent under this Lease. In addition, Landlord shall be shown as the loss payable beneficiary under the casualty insurance policy maintained by Tenant pursuant to Section 4.2. All policies of insurance required herein may be in the form of "blanket" or "umbrella" type policies which shall name the Landlord and Tenant as their interests may appear and allocate to the Premises the full amount of insurance required hereunder. Original policies or satisfactory certificates from the insurer evidencing the existence of all policies of insurance required by this Lease and showing the interest of the Landlord shall be filed with the Landlord prior to the commencement of the Term and shall provide that the subject policy may not be canceled except upon not less than ten (10) days prior written notice to Landlord. If Landlord is provided with a certificate, upon Landlord's request Tenant shall provide Landlord with a complete copy of the insurance policy evidenced by such certificate within 30 days of the 11 17 commencement of the Term. Originals of the renewal policies or certificates therefor from the insurer evidencing the existence thereof shall be deposited with Landlord upon renewal of the applicable policies. If Landlord is provided with a certificate for a renewal policy, upon Landlord's request Tenant shall deliver a copy of the complete renewal policy to Landlord within 30 days of the expiration of the replaced policy. Any claims under any policies of insurance described in this Lease shall be adjudicated by and at the expense of the Tenant or of its insurance carrier, but shall be subject to joint control of Tenant and Landlord. The provisions of this Section 4.1 also apply to any insurance coverage required under the Development Addendum. 4.2 FIRE AND OTHER CASUALTY. Tenant shall keep the Premises insured against loss or damage from all causes under standard "all risk" property insurance coverage, without exclusion for fire, lightning, windstorm, explosion, smoke damage, vehicle damage, sprinkler leakage, flood, vandalism, earthquake, malicious mischief or any other risk as is normally covered under an extended coverage endorsement, in the amounts that are not less than the full insurable value of the Premises including all equipment and personal property (whether or not Landlord Personal Property) used in the operation of the Premises, but in no event less than Nine Million Nine Hundred Thousand Dollars ($9,900,000); provided, however, that the amount of such insurance in respect of the required flood and earthquake coverage may be limited, at Tenant's option, to Five Million Dollars ($5,000,000). The term "FULL INSURABLE VALUE" as used in this Lease shall mean the actual replacement value of the Premises (including all improvements) and every portion thereof, including the cost of compliance with changes in zoning and building codes and other laws and regulations, 12 18 demolition and debris removal and increased cost of construction. In addition, the casualty insurance required under this Section 4.2 will include an agreed amount endorsement such that the insurance carrier has accepted the amount of coverage and has agreed that there will be no co-insurance penalty. 4.3 PUBLIC LIABILITY. Tenant shall maintain comprehensive general public liability insurance coverage (including products liability coverage) against claims for bodily injury, death or property damage occurring on, in or about the Premises and the adjoining sidewalks and passageways, such insurance to include a broad form endorsement and to afford protection to Landlord and Tenant of not less than One Million Dollars ($1,000,000) with respect to bodily injury or death to any one person, not less than Five Million Dollars ($5,000,000) with respect to any one accident, and not less than One Million Dollars ($1,000,000) with respect to property damage; provided, that Landlord shall have the right at any time hereafter to require such higher limits as may be reasonable and customary for transactions and properties that are similar to the Premises and that are located in the area of Chicago, Illinois. 4.4 PROFESSIONAL LIABILITY INSURANCE. Guarantor or Tenant shall maintain insurance against liability imposed by law upon Guarantor and its Affiliates (including Tenant) for damages on account of professional services rendered or which should have been rendered by Guarantor and Tenant or any person for which acts Guarantor or Tenant is legally liable on account of injury, sickness or disease, including death at any time resulting therefrom, and including damages allowed for loss of service, in a minimum amount of One Million Dollars ($1,000,000) for each claim and Five Million Dollars ($5,000,000) in the aggregate. 13 19 4.5 WORKERS COMPENSATION. Tenant shall comply with all legal requirements regarding worker's compensation, including any requirement to maintain worker's compensation insurance against claims for injuries sustained by Tenant's employees in the course of their employment. 4.6 BOILER INSURANCE. Tenant shall maintain boiler and pressure vessel insurance, including an endorsement for boiler business interruption insurance, on any fixtures or equipment which are capable of bursting or exploding, in an amount not less than Five Million Dollars ($5,000,000) for damage to property, bodily injury or death resulting from such perils. 4.7 BUSINESS INTERRUPTION INSURANCE. Tenant shall maintain, at its expense, business interruption and extra expense insurance insuring a period of not less than six (6) months. 4.8 DEDUCTIBLE AMOUNTS. The policies of insurance which Tenant is required to provide under this Lease will not have deductibles or self-insured retentions in excess of One Hundred Thousand Dollars ($100,000); provided, however, the worker's compensation coverage may have a deductible of up to Two Hundred Fifty Thousand Dollars ($250,000). 5. USE, MAINTENANCE AND ALTERATION OF THE PREMISES. 5.1 TENANT'S MAINTENANCE OBLIGATIONS. 5.1.1 Tenant will keep and maintain the Premises in good appearance, repair and condition and maintain proper housekeeping. Tenant shall promptly make or cause to be made all repairs, interior and exterior, structural and 14 20 nonstructural, ordinary and extraordinary, foreseen and unforeseen, necessary to keep the Premises in good and lawful order and condition and in substantial compliance with all applicable requirements for the licensing of the Retirement Care Facilities in the State of Illinois and certification for participation in Medicare and Medicaid (or any successor programs) as currently exist or as are obtained by Tenant at a later date or as otherwise required under all applicable local, state and federal laws. 5.1.2 As part of Tenant's obligations under this Section 5.1, Tenant shall be responsible to maintain, repair and replace all Landlord Personal Property and all Tenant Personal Property (as defined in Section 7.1 below) in good condition, ordinary wear and tear excepted, consistent with prudent industry practice as applicable to the Retirement Care Facilities. 5.1.3 Without limiting Tenant's obligations to maintain the Premises under this Lease, within thirty (30) days of the end of each Lease Year starting with the end of the sixth (6th) Lease Year, Tenant shall provide Landlord with evidence satisfactory to Landlord in the reasonable exercise of Landlord's discretion that Tenant has in such Lease Year and the two (2) immediately preceding Lease Years spent on Repair Expenditures for the Premises an annual average amount of at least Two Hundred Dollars ($200) per unit per year as such amount is adjusted annually at the end of each Lease Year for increases in the CPI from the date hereof). The term "REPAIR EXPENDITURES" is defined to mean repairs or modifications to the Premises which have the effect of 15 21 maintaining the competitive position of the Premises in its marketplace. Non-exclusive examples of Repair Expenditures are replacement wallpaper, tiles, window coverings, lighting fixtures, painting, landscaping, carpeting, architectural adornments, common area amenities and the like. It is expressly understood that capital improvements or repairs (such as but not limited to repairs or replacements to the structural elements, equipment, fixtures, appliances, parking area, or the roof or to the electrical, plumbing, HVAC or other mechanical or structural systems in the Premises) shall not be considered to be Repair Expenditures. If Tenant fails to make at least the above amount of Repair Expenditures, Tenant shall promptly on demand from Landlord (but in no event more than five days) pay to Landlord the applicable shortfall in Repair Expenditures. Such funds shall be the sole property of Landlord and Landlord may in its sole discretion provide such funds to Tenant to correct the shortfall in Repair Expenditures or may simply retain such funds as supplemental rent hereunder. 5.2 REGULATORY COMPLIANCE. 5.2.1 Tenant and the Premises shall comply in all material respects with all federal, state and local licensing and other laws and regulations applicable to the Retirement Care Facilities as well as with the certification requirements of Medicare and Medicaid (or any successor program) as currently exist or as are obtained by Tenant at a later date. Further, Tenant shall ensure that the Premises continue to be licensed and operated as Retirement Care 16 22 Facilities with a licensed and operating capacity as set forth in the Recitals to this Lease, fully certified for participation in Medicare and Medicaid (or any successor program) as currently exist or as are obtained by Tenant at a later date throughout the Term and at the time the Premises are returned to Landlord at the termination thereof, all without any suspension, revocation, decertification, material penalty or material limitation. Further, Tenant shall not commit any act or omission that would in any way violate any certificate of occupancy affecting the Premises. 5.2.2 During the Term, all inspection fees, costs and charges associated with a change of any licensure or certification shall be borne solely by Tenant. Tenant shall at its sole cost make any additions or alterations to the Premises necessitated by, or imposed in connection with, a change of ownership inspection survey for the transfer of operation of the Premises from Tenant or Tenant's assignee or subtenant to Landlord or Landlord's designee at the expiration or earlier termination of the Term in accordance herewith. 5.2.3 Landlord acknowledges that the Premises are not now certified to participate in Medicare or Medicaid. If Tenant elects to participate in such programs (or any successor program) in the future, Tenant shall comply in all material respects with the requirements to participate in such programs. However, it shall not be a default under this Lease if Tenant voluntarily for its own business reasons elects to discontinue its participation in such programs so long as at the time of such discontinuance there is no ongoing proceeding by the 17 23 applicable regulatory authority to decertify Tenant and so long as Tenant at the time of such discontinuance is not in material default of any material requirement of any such program. 5.2.4 The permit for one hundred eighty (180) living units is currently held by Holley Court Terrace, L.P., a Tennessee limited partnership, which is an Affiliate of Tenant. Tenant represents and warrants that applicable law does not require a transfer of such permit to Tenant in order for Tenant to operate the Premises for its intended use in compliance with all applicable regulations. However, Tenant agrees to accomplish a transfer of the permit into its name within one hundred eighty (180) days after the commencement of the Term. 5.3 PERMITTED USE. Tenant shall continuously use and occupy the Premises during the Term solely as Retirement Care Facilities licensed and operated as set forth in the Recitals to this Lease. 5.4 TENANT REPURCHASE OBLIGATION. In the event of an Event of Default arising from Tenant's failure to comply with Section 5.3 and during the pendency thereof, or if an Event of Default occurs and is continuing because the license of the Premises is revoked, suspended or materially limited for any of the uses included in the definition of Retirement Care Facilities, then in addition to Landlord's other rights and remedies under this Lease, Landlord shall have the right to put the Premises to Tenant. If Landlord exercises such right, Tenant shall purchase the Premises from Landlord for a cash price equal to the greater of the Adjusted Fair Market Value of the Premises or Landlord's Original Investment on the date of Landlord's notice of exercise. Such Adjusted Fair Market Value shall be as agreed between 18 24 Landlord and Tenant. However, failing such agreement within ten (10) days of Landlord's notice of exercise under this Section, such Adjusted Fair Market Value shall be determined by the appraisal process set forth in Exhibit "C" attached hereto. Within ninety (90) days of Landlord's exercise of its put under this Section 5.4, such purchase shall be consummated utilizing an escrow at a national title company selected by Landlord. Such escrow shall be documented on such title company's standard sale escrow instructions without representations or warranties and without any due diligence or other contingencies in favor of the buyer. Tenant shall pay all costs of such sale transaction. At the close of such sale, Landlord shall deliver to Tenant title to the Premises subject only to those title exceptions shown on Exhibit "D" attached hereto. 5.5 NO LIENS; PERMITTED CONTESTS. Tenant shall not cause or permit any liens, levies or attachments to be placed or assessed against the Premises or the operation thereof for any reason. However, Tenant shall be permitted in good faith and at its expense to contest the existence, amount or validity of any lien upon the Premises by appropriate proceedings sufficient to prevent the collection or other realization of the lien or claim so contested, as well as the sale, forfeiture or loss of any of the Premises or any rent to satisfy the same. Tenant shall provide Landlord with security satisfactory to Landlord in Landlord's reasonable judgment to assure the foregoing. Each contest permitted by this Section 5.5 shall be promptly and diligently prosecuted to a final conclusion by Tenant. 5.6 ALTERATIONS BY TENANT. Subject to Section 5.8, Tenant shall have the right of altering, improving, replacing, modifying or expanding the facilities, equipment or appliances in the Premises from time to time as it may determine is desirable for the 19 25 continuing and proper use and maintenance of the Premises under this Lease; provided, however, that any alterations, improvements, replacements, expansions or modifications to the Premises in excess of Six Hundred Thousand Dollars ($600,000) in any rolling twelve (12) month period shall require the prior written consent of the Landlord; provided, further, that the aggregate cost of tenant-funded improvements cannot exceed ten percent (10%) of Landlord's Original Investment for the Premises without securing the prior written consent of Landlord; provided, further, that the aggregate cost of tenant-funded improvements cannot exceed ten percent (10%) of Landlord's Original Investment without securing the prior written consent of the Landlord. Any amounts funded by Tenant as necessitated by damage to the Premises by casualty or condemnation shall not count towards the foregoing calculation. The cost of all alterations, improvements, replacements, modifications, expansions or other purchases, covered by this Section 5.6, whether undertaken as an on-going licensing, Medicare or Medicaid (or any successor program) requirement (if applicable) or other regulatory requirement or otherwise shall be borne solely and exclusively by Tenant (unless funded by Landlord under Section 5.7) and shall immediately become a part of the Premises and the property of the Landlord subject to the terms and conditions of this Lease. All work done in connection therewith shall be done in a good and workmanlike manner and in compliance with all existing codes and regulations pertaining to the Premises and shall comply with the requirements of insurance policies required under this Lease. In the event any items of the Premises have become inadequate, obsolete or worn out or require replacement (by direction of any regulatory body or otherwise), Tenant shall remove such items and exchange 20 26 or replace the same at Tenant's sole cost and the same shall become part of the Premises and property of the Landlord. 5.7 CAPITAL IMPROVEMENTS FUNDED BY LANDLORD. In the event Tenant desires to make a capital improvement or a related series of capital improvements to the Premises and if Tenant desires that Landlord fund the same, Landlord shall, in its discretion and without obligation, within thirty (30) days of Tenants' written request therefor, consider Tenant's request to fund such capital improvements. Each and every capital improvement funded by Landlord under this Section shall immediately become a part of the Premises and shall belong to Landlord subject to the terms and conditions of this Lease. If Landlord funds any capital improvements, Landlord's Original Investment shall be increased for all purposes under this Lease by the amount of the funds provided by Landlord for capital improvements. 5.8 COMPLIANCE WITH IRS GUIDELINES. Any improvement or modification to the Premises shall satisfy the requirements set forth in Sections 4(4).02 and .03 of Revenue Procedure 75-21, 1975-1 C.B. 715, as modified by Revenue Procedure 79-48, 1979-2 C.B. 529. Landlord reserves the right to refuse to consent to any improvement or modification to the Premises if, in its judgment, such improvement or modification does not meet the foregoing requirements. 6. CONDITION AND TITLE OF PREMISES; RIGHT OF FIRST OFFER. 6.1 CONDITION AND TITLE OF PREMISES. Tenant acknowledges that it is presently engaged in the operation of facilities in the State of Illinois similar to the uses included in the definition of Retirement Care Facilities in the Recitals to this Lease and has expertise in senior housing, independent living and assisted living. Tenant has thoroughly 21 27 investigated the Premises, has selected the Premises to its own specifications, and has concluded that no improvements or modifications to the Premises are required in order to operate the Premises for its intended use. Tenant accepts the Premises for use as Retirement Care Facilities under this Lease on an "AS IS" basis and will assume all responsibility and cost for the correction of any observed or unobserved deficiencies or violations. In making its decision to enter into this Lease, Tenant has not relied on any representations or warranties, express or implied, of any kind from Landlord. Tenant has examined the condition of title to the Premises prior to the execution and delivery of this Lease and has found the same to be satisfactory. 6.2 RIGHT OF FIRST OFFER TO PURCHASE PREMISES. 6.2.1 Tenant shall have the right of first offer to purchase the Premises upon the terms and conditions set forth in this Section 6.2; provided, however, Tenant shall not have the right to exercise its rights under this Section 6.2 if any Event of Default (as defined in Section 10 below) has occurred and is continuing as of any of the following dates: (i) the date on which Landlord delivers an Offering Notice to Tenant pursuant to Section 6.2.2(i), or (ii) the date of Tenant's delivery of an Exercise Notice pursuant to Section 6.2.2(ii), or (iii) or at the closing date established to consummate the purchase of the Premises pursuant to Section 6.2.2(iii). Additionally, if Landlord and NH Texas Properties Limited Partnership have received a bona fide offer to purchase both the Premises and the leased premises under the NH Agreement, Tenant acknowledges that Landlord may include in the Offering Notice the condition that Tenant may only purchase the Premises so long as NH Tenant concurrently purchases 22 28 Premises that certain Premises as defined in the NH Agreement. If the Offering Notice contains such a requirement, Tenant's rights under this Section 6.2 are exercisable only so long as NH Tenant also exercises its rights under Section 6.2 of the NH Agreement. 6.2.2 If during the Term Landlord receives a bona fide offer to purchase the Premises, or any portion thereof (the "OFFERED PROPERTY"), from any person or entity other than an Affiliate of Landlord (as such term is defined in Section 10.1.3 below), Landlord and Tenant shall take the following steps if Landlord has determined to accept such offer: (i) Landlord shall give written notice to Tenant of its intention to accept such offer, which notice shall set forth the price, terms and conditions contained in the offer to purchase the Offered Property which Landlord intends to accept ("OFFERING NOTICE"); (ii) Within fifteen (15) days after receipt of an Offering Notice, Tenant shall either (A) deliver to Landlord written notice that Tenant does not desire to purchase the Offered Property on the terms set forth in the Offering Notice, or (B) deliver to Landlord written notice of Tenant's desire to exercise its right to purchase the Offered Property on the terms set forth in the Offering Notice pursuant to this Section 6.2 ("EXERCISE NOTICE"); (iii) If Tenant delivers an Exercise Notice within such fifteen (15) day period, Landlord as seller and Tenant as buyer shall immediately open an escrow to consummate such purchase at a national title company selected by Landlord in its reasonable discretion on the following terms: (A) the form of 23 29 such instructions to be then signed by Landlord and Tenant shall be such title company's standard sale escrow instructions and, notwithstanding anything set forth in the Offering Notice to the contrary, shall not provide for any representations or warranties by Landlord as seller or for any due diligence or other contingencies in favor of Tenant as buyer, (B) the purchase price shall be payable in cash by Tenant or on such other terms as are set forth in the Offering Notice with escrow to close on or before the date set forth in the Offering Notice, (C) transaction costs shall be paid as set forth in the Offering Notice, (D) at close, Landlord shall deliver title to the Offered Property subject only to those title exceptions shown on Exhibit "D" attached hereto, (E) the sale escrow instructions shall provide for an earnest money deposit in the amount set forth in the Offering Notice and shall provide that such deposit may be retained by Landlord as liquidated damages in the event of any breach by Tenant of the terms of the escrow instructions (provided, however, such liquidated damages shall relate only to Landlord's damages by reason of a breach of the escrow instructions and shall in no way liquidate or limit Landlord's damages by reason of a breach of this Lease), and (F) the escrow instructions shall otherwise be in form and substance reasonably satisfactory to Landlord. If Tenant fails to close the escrow for any reason other than a breach by Landlord, then Landlord shall have the right in its option (to be exercised in Landlord's sole discretion) to either declare such breach to be a default under this Lease (as to which the cure period shall, notwithstanding anything else in this Lease, be ten (10) calendar 24 30 days after notice by Landlord, after which an Event of Default shall exist), or Landlord may elect to pursue all remedies available to Landlord against Tenant under the escrow instructions or under applicable law. (iv) If within the fifteen (15) day period following Landlord's delivery of an Offering Notice, Tenant either delivers to Landlord the notice set forth in Section 6.2.2 (ii)(A) or fails to deliver either of the notices set forth in Section 6.2.2(ii), then for a period of nine (9) months following the expiration of such fifteen (15) day period Landlord shall be free to sell the Offered Property on the terms set forth in the Offering Notice or on any other revised terms deemed appropriate by Landlord in its sole discretion; provided, however, if such other revised terms include a price that is more than ten percent (10%) below the price set forth in the Offering Notice, then prior to completing any sale on such revised terms Landlord shall notify Tenant of such revised offering terms. During the five (5) business day period after receipt by Tenant of such notice, Tenant shall have the right (to be exercised if at all by Tenant's execution of escrow instructions and deposit of earnest money under Section 6.2.2 (iii) within such five (5) business day period) to require that Landlord sell the Offered Property to Tenant on such revised offering terms. If Tenant fails to timely exercise its right as required by the preceding proviso, Landlord shall be free to sell the Offered Property to a third party on the revised offering terms. 25 31 (v) If at the end of the nine (9) month period described in Section 6.2.1(iv), Landlord has not sold the Offered Property, then Landlord shall again be required to comply with the provisions of this Section 6.2 if Landlord desires to accept a third party offer to purchase the Offered Property. (vi) If an escrow is opened pursuant to Section 6.2.2(iii) and such escrow fails to close by reason of Tenant's default, in addition to all of the other rights and remedies of Landlord with respect to such breach, Landlord shall thereafter be free to sell the Premises or any portion thereof to any Person on any terms whatsoever without being required to comply with this Section 6.2. (vii) If Landlord has hypothecated its interest in the Premises, this Section 6.2 shall not apply to any judicial or non-judicial sale of the Premises in connection with any foreclosure action or proceeding by the lender, or to any deed in lieu of such foreclosure. 7. LANDLORD AND TENANT PERSONAL PROPERTY. 7.1 TENANT PERSONAL PROPERTY. Tenant shall install, affix or assemble or place on the Premises all items of furniture, fixtures, equipment and supplies not included as Landlord Personal Property as Tenant reasonably considers to be appropriate for Tenant's use of the Premises as contemplated by this Lease (the "TENANT PERSONAL PROPERTY"). Tenant shall provide and maintain during the entire Term all Tenant Personal Property as shall be necessary in order to operate the Premises in compliance with all requirements set forth in this Lease. All Tenant Personal Property shall be and shall remain the property of Tenant and may 26 32 be removed by Tenant upon the expiration of the Term. However, if there is any Event of Default which is continuing, Tenant will not remove the Tenant Personal Property from the Premises and will on demand from Landlord, convey (subject to any existing security interest thereon) the Tenant Personal Property to Landlord by executing a bill of sale in a form reasonably required by Landlord. Upon any such conveyance of Tenant Personal Property to Landlord, the amount owing by Tenant to Landlord by reason of the applicable Event of Default shall be reduced by the fair market value of such Tenant Personal Property, net of any associated debt assumed by Landlord. Such fair market value shall be established by agreement of the parties, but failing such agreement, within ten (10) days of request by any party, such fair market value shall be established by the appraisal process set forth in Exhibit C. In any event, Tenant will repair all damage to the Premises caused by any removal of the Tenant Personal Property. 7.2 LANDLORD'S SECURITY INTEREST. 7.2.1 The parties intend that if Tenant defaults under this Lease, Landlord will control the Tenant Personal Property and the Intangible Property (as defined in Section 7.4 below) so that Landlord or its designee can operate or re-let the Premises intact for use as Retirement Care Facilities . 7.2.2 Therefore, to implement the intention of the parties, and for the purpose of securing the payment and performance of Tenant's obligations under this Lease, Tenant, as debtor, hereby grants to Landlord, as secured party, a security interest in and an express contractual lien upon, all of Tenant's right, title and interest in and to the Tenant Personal Property and in and to the 27 33 Intangible Property and any and all products and proceeds thereof, in which Tenant now owns or hereafter acquires an interest or right, including any leased Tenant Personal Property. This Lease constitutes a security agreement covering all such Tenant Personal Property and the Intangible Property. The security interest granted to Landlord in this Section 7.2.2. is intended by Landlord and Tenant to be subordinate to any security interest granted in connection with the financing or leasing of all or any portion of the Tenant Personal Property so long as the lessor or financier of such Tenant Personal Property agrees to give Landlord written notice of any default by Tenant under the terms of such lease or financing arrangement, to give Landlord a reasonable time following such notice to cure any such default and to consent to Landlord's written assumption of such lease or financing arrangement upon Landlord's curing of any defaults thereunder. This security agreement and the security interest created herein shall survive the termination of this Lease if such termination results from the occurrence of an Event of Default. 7.2.3 Notwithstanding the foregoing, in no event will Landlord's security interest extend to any of Tenant's motor vehicles, proprietary software or systems or operating manuals. 7.3 FINANCING STATEMENTS. If required by Landlord at any time during the Term, Tenant will execute and deliver to Landlord, in form reasonably satisfactory to Landlord, additional security agreements, financing statements, fixture filings and such other documents as Landlord may reasonably require to perfect or continue the perfection of 28 34 Landlord's security interest in the Tenant Personal Property and the Intangible Property and any and all products and proceeds thereof now owned or hereafter acquired by Tenant. Tenant shall pay all fees and costs that Landlord may incur in filing such documents in public offices and in obtaining such record searches as Landlord may reasonably require. In the event Tenant fails to execute any financing statements or other documents for the perfection or continuation of Landlord's security interest, Tenant hereby appoints Landlord as its true and lawful attorney-in-fact to execute any such documents on its behalf, which power of attorney shall be irrevocable and is deemed to be coupled with an interest. 7.4 INTANGIBLE PROPERTY. The term "INTANGIBLE PROPERTY" means documents, chattel paper, contract rights, residency agreements, management agreements, medical records, patient files, confidential patient materials, general intangibles, choses in action, now owned or hereafter acquired by Tenant (including any right to any refund of any taxes or other charges heretofore or hereafter paid to any governmental authority) arising from or in connection with Tenant's operation or use of the Premises; all licenses and permits now owned or hereinafter acquired by Tenant, necessary or desirable for Tenant's use of the Premises under this Lease, including without limitation, if applicable, any certificate of need or other similar certificate; and the right to use any trade or other name now or hereafter associated with the operation of the Premises by Tenant, including, without limitation, the name "Holley Court Terrace," but excluding any corporate names or logos used by Tenant or Guarantor. For purposes of this Lease, the term "INTANGIBLE PROPERTY" shall not include accounts receivable, negotiable instruments, rights to payment from third parties, security 29 35 deposits, utility deposits, proprietary software, training manuals, or general corporate trademarks, service marks, logos, insignia, books or records of Seller or Guarantor. 8. REPRESENTATIONS AND WARRANTIES. Landlord and Tenant do hereby each for itself represent and warrant to each other as follows: 8.1 DUE AUTHORIZATION AND EXECUTION. This Lease and all agreements, instruments and documents executed or to be executed in connection herewith by either Landlord or Tenant were duly authorized and shall be binding upon the party that executed and delivered the same. 8.2 DUE ORGANIZATION. Landlord and Tenant are duly organized, validly existing and in good standing under the laws of the State of their respective formations and are duly authorized and qualified to do all things required of the applicable party under this Lease within the State of Illinois. 8.3 NO BREACH OF OTHER AGREEMENTS. Neither this Lease nor any agreement, document or instrument executed or to be executed in connection herewith, violates the terms of any other agreement to which either Landlord or Tenant is a party where such violation would have a material adverse effect. 9. FINANCIAL, MANAGEMENT AND REGULATORY REPORTS. 9.1 MONTHLY FACILITY REPORTS. Within thirty (30) days after the end of each calendar month during the Term, Tenant shall prepare and deliver monthly financial reports to Landlord consisting of a balance sheet and income statement prepared in accordance with generally accepted accounting principles consistently applied ("GAAP"), and a summary of significant operating statistics concerning the business conducted at the Premises. These 30 36 reports will be accompanied by a statement signed by the President, Chief Financial Officer, Principal Accounting Officer, Controller, Executive Vice President for Corporate Development, Executive Vice President for Development Services or other officer of Tenant as approved by Landlord in writing in its sole discretion, affirming that said reports are true and correct in all material respects and do not fail to disclose any material adverse information, all after due inquiry ("OFFICER'S CERTIFICATE"). 9.2 QUARTERLY FINANCIAL STATEMENTS. Within forty-five (45) days of the end of each of the first three quarters of the fiscal year of Tenant, Tenant shall deliver to Landlord the unaudited quarterly consolidated financial statements of Tenant prepared in accordance with GAAP accompanied by an Officer's Certificate. 9.3 ANNUAL FINANCIAL STATEMENT. Within ninety (90) days of the fiscal year end of Tenant, Tenant shall deliver to Landlord the annual consolidated financial statement of Tenant prepared in accordance with GAAP and audited by a certified public accounting firm reasonably acceptable to Landlord. Notwithstanding any of the other terms of this Section 9.3, if Tenant becomes subject to any reporting requirements of the Securities and Exchange Commission (the "SEC") during the Term, Tenant shall concurrently deliver to Landlord such reports as are delivered to the SEC pursuant to applicable security laws. 9.4 ACCOUNTING PRINCIPLES. All of the reports and statements required hereby shall be prepared in accordance with GAAP. 9.5 REGULATORY REPORTS. In addition, Tenant shall within five (5) business days of receipt thereof deliver to Landlord all federal, state and local licensing and reimbursement certification surveys, inspection and other reports received by Tenant as to the 31 37 Premises or any portion thereof and the operation of business thereon, including, without limitation, state department of health licensing surveys, Medicare and Medicaid (and successor programs) certification surveys (if applicable) and life safety code reports. Within five (5) business days of receipt thereof, Tenant shall give Landlord written notice of any violation of any federal, state or local licensing or reimbursement certification statute or regulation including without limitation Medicare and Medicaid or successor programs (if applicable to the Premises or any portion thereof), any suspension, termination or restriction placed upon Tenant or the Premises or any portion thereof, the operation of business thereon or the ability to admit residents, or any violation of any other permit, approval or certification in connection with the Premises or any portion thereof or its business, by any federal, state or local authority including without limitation Medicare and Medicaid or successor programs if applicable to the Premises or any portion thereof. 10. EVENTS OF DEFAULT AND LANDLORD'S REMEDIES. 10.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an event of default on the part of Tenant hereunder ("EVENT OF DEFAULT"): 10.1.1 The failure to pay within ten (10) calendar days of (i) the date when due any Minimum Rent or Additional Rent, or (ii) the date when delinquent of any taxes or assessments required of Tenant under this Lease; 10.1.2 A material breach by the seller thereunder of any of the material representations, warranties or covenants in favor of Landlord as set forth in the Purchase and Sale Agreement of even date herewith; 32 38 10.1.3 Any Event of Default, as defined in Section 10 of the NH Agreement, shall be an Event of Default under this Lease without any further notice to Tenant and without the expiration of any cure period except as set forth in the NH Agreement; 10.1.4 A material default by Tenant (or any Affiliate thereof) ("AFFILIATE" being defined to mean, with respect to any person or entity, any other person or entity which controls, is controlled by or is under common control with the first person or entity) under any other material obligation other than this Lease owed by Tenant (or any Affiliate thereof) to Landlord or any Affiliate of Landlord (including without limitation any financing agreement or any other lease or the Letter of Credit Agreement of even date herewith pursuant to which the letter of credit referenced in Section 11 below is maintained), which default is not cured within any applicable cure period provided in the documentation for such obligation. It is expressly understood that Nationwide Health Properties, Inc. and NH Texas Properties Limited Partnership are Affiliates of each other; 10.1.5 A material default by Tenant with respect to any material obligation under any other lease or financing agreement with any other party, which default is not cured within any applicable cure period provided in the documentation for such obligation; 33 39 10.1.6 Any material misstatement or omission of any material fact in any written report, notice or communication from senior management of Tenant to Landlord with respect to Tenant or the Premises or any portion thereof; 10.1.7 Any change (voluntary or involuntary, by operation of law or otherwise) in the person, persons, entity or entities which ultimately exert effective control over the management of the affairs of Tenant as of the date hereof except as permitted in Section 22.2 below; 10.1.8 An assignment by Tenant of all or substantially all of its property for the benefit of creditors; 10.1.9 The appointment of a receiver, trustee, or liquidator for Tenant, or any of the property of Tenant, if within three (3) business days of such appointment Tenant does not inform Landlord in writing that Tenant intends to cause such appointment to be discharged or Tenant does not thereafter diligently prosecute such discharge to completion within sixty (60) days after the date of such appointment; 10.1.10 The filing by Tenant of a voluntary petition under any federal bankruptcy law or under the law of any state to be adjudicated as bankrupt or for any arrangement or other debtor's relief, or in the alternative, if any such petition is involuntarily filed against Tenant by any other party and Tenant does not within three (3) business days of any such filing inform Landlord in writing of the intent by Tenant to cause such petition to be dismissed, if Tenant does not 34 40 thereafter diligently prosecute such dismissal, or if such filing is not dismissed within ninety (90) days after filing thereof; 10.1.11 The failure to make any monetary payment required by Tenant under this Lease not covered in Section 10.1.1 or the failure to perform or comply in any material respect with any other term or provision of this Lease (other than those provisions set forth in Section 10.1.12 below) not requiring the payment of money, including, without limitation, the failure to comply with the provisions hereof pertaining to the use, operation and maintenance of the Premises (or any portion thereof) or the breach of any representation or warranty of Tenant in this Lease; provided, however, the default described in this Section 10.1.11 is curable and shall be deemed cured, if: (i) within five (5) business days of Tenant's receipt of a notice of default from Landlord, Tenant gives Landlord notice of its intent to cure such default; and (ii) Tenant cures such default within thirty (30) days after such notice from Landlord, unless such default cannot with due diligence be cured within a period of thirty (30) days because of the nature of the default or delays beyond the control of Tenant, and cure after such thirty (30) day period will not have a material and adverse effect upon the Premises, in which case such default shall not constitute an Event of Default if Tenant uses its best efforts to cure such default by promptly commencing and diligently pursuing such cure to the completion thereof, provided, however, no such default shall continue for more than one hundred twenty (120) days from Tenant's receipt of a notice of default from Landlord; 35 41 10.1.12 There shall be no cure period in the event of the breach by Tenant of (i) the obligation to provide replacement policies of insurance as required in Section 4.1 above, (ii) the provisions of Section 20 below, or (iii) the provisions of Section 22 below with respect to assignments and other related matters; and 10.1.13 All notice and cure periods provided herein shall run concurrently with any notice or cure periods provided by applicable law. 10.2 REMEDIES. Upon the occurrence of an Event of Default and during the pendency thereof, Landlord may exercise all rights and remedies under this Lease and the laws of the State of Illinois available to a lessor of real and personal property in the event of a default by its lessee, and as to the Tenant Personal Property and Intangible Property all remedies granted under the laws of such State to a secured party under its Uniform Commercial Code. Without limiting the foregoing, Landlord shall have the right to do any of the following: 10.2.1 If Landlord elects to terminate Tenant's right to possession only, without terminating the Lease, Landlord may, at Landlord's option, enter into the Premises, remove Tenant's sign and all other evidences of tenancy, and take and hold possession thereof, without such entry and possession terminating the Lease or releasing Tenant, in whole or in part, from Tenant's obligation to pay rent hereunder for the full Term. In the case of a default under Section 10.1.8 or 10.1.9, or in the event of a bankruptcy proceeding as described in Section 10.1.10 below, Tenant shall pay forthwith to Landlord, if Landlord so elects, a 36 42 sum equal to the entire amount of rent then known or subject to calculation for the remainder of the Term plus any other sums then due hereunder, and all amounts not then due and payable shall be discounted to the then-present value of such amount using a discount factor of five percent (5.0%); and in any case, unless such amount is paid to Landlord, Tenant shall remain liable for the Monthly Deficiency, as defined in this Section 10.2.1 below. Upon and after entry into possession without termination of the Lease, Landlord shall, if and to the extent required by law, take reasonable measures to mitigate the damages recoverable against Tenant by attempting to relet the Premises or any part thereof for the account of Tenant to any person, firm or corporation other than Tenant for such rent, for such term and upon such conditions (which term may extend beyond the lease term hereunder and which conditions include concessions and free rent periods), as Landlord in Landlord's sole discretion shall determine; provided, however, that Landlord shall not be required to accept any tenant offered by Tenant or to observe any instructions given by Tenant about such reletting. In any such case, Landlord may make repairs, alterations and additions in or to the Premises and redecorate the same to the extent deemed by Landlord necessary or desirable, and Tenant shall, upon demand, pay all costs thereof, plus all of Landlord's other expenses of the reletting, including all repossession costs, brokerage commissions, legal expenses, attorney's fees and disbursements (collectively called "LANDLORD'S MITIGATION EXPENSES"). If the consideration collected by Landlord upon any 37 43 such reletting for Tenant's account is not sufficient to pay monthly the full amount of rent reserved in this Lease, including all adjustments and escalations, together with the cost of repairs, alterations, additions, redecorating and Landlord's Mitigation Expenses, Tenant shall pay to Landlord the amount of each monthly deficiency ("MONTHLY DEFICIENCY") upon demand. In addition, Tenant shall provide to any resident under a "life care contract" as defined in the Life Care Facilities Act ("LIFE CARE CONTRACT") a refund of all fees paid pursuant to such contract if permitted by the terms of such contract. Tenant or any successor thereto shall be solely responsible for all costs, expenses, liabilities and obligations related to Life Care Contracts. Furthermore, the indemnity set forth in Section 23 herein shall cover all liability, expense, loss, costs, deficiency, fine, penalty or damage related to any Life Care Contract, including any ramifications resulting from the Premises being permitted to issue Life Care Contracts. 10.2.2 If Landlord elects to terminate this Lease and Tenant's right to possession of the Premises, Landlord may recover all damages to which Landlord is entitled under law, and in such event Landlord shall, if and to the extent required by law, take reasonable measures to mitigate damages recoverable against Tenant by attempting to relet the Premises or any part thereof for the account of Tenant, for such rent, for such term and upon such conditions (which term may extend beyond the lease term hereunder and which conditions may include concessions and free rent periods), as Landlord in 38 44 Landlord's sole discretion shall determine; provided, however, that Landlord shall not be required to accept any tenant offered by Tenant or to observe any instructions given by Tenant about such reletting. Landlord's damages shall specifically include (a) all of Landlord's expenses of reletting (including repairs, alterations, improvements, additions, decorations, and Landlord's Mitigation Expenses, plus (b) the amount of all rent owing under this Lease for the balance of the Term discounted at the rate of five percent (5%) per year, which amount shall be automatically considered accelerated and immediately due and payable in full by Tenant to Landlord upon Landlord's election to terminate this Lease. Landlord's right to terminate this Lease may also be exercised at any time after an election by Landlord under Section 10.2.1 to terminate Tenant's right to possession on the Premises. In addition, Tenant shall provide to any resident under a Life Care Contract a refund of all fees paid pursuant to such contract if permitted by the terms of such contract. Tenant or any successor thereto shall be solely responsible for all costs, expenses, liabilities and obligations related to Life Care Contracts. Furthermore, the indemnity set forth in Section 23 herein shall cover all liability, expense, loss, costs, deficiency, fine, penalty or damage related to any Life Care Contract, including any ramifications resulting from the Premises being permitted to issue Life Care Contracts. 10.2.3 If any involuntary action or proceeding under any section or sections of any bankruptcy act in any court or tribunal shall adjudge or declare Tenant insolvent or unable to pay Tenant's debts, or if any voluntary petition or 39 45 similar proceeding under any section or sections of any bankruptcy act shall be filed by Tenant in any court or tribunal to declare Tenant insolvent or unable to pay Tenant's debts, and if such action or proceeding shall not have been dismissed within ninety (90) days of the institution of such proceeding, then and in any such event Landlord may, to the extent permitted by law, if Landlord so elects but not otherwise, and with or without notice of such election, and with or without entry or other action by Landlord, forthwith terminate this Lease, and notwithstanding any other provision of this Lease, Landlord shall forthwith upon such termination be entitled to recover damages in any amount equal to the then present value of rent for the remainder of the Term, less the then present value of the fair rental value of the Premises for the remainder of the Term. 10.2.4 Tenant hereby grants to Landlord a first lien upon the interest of Tenant under this Lease subject to any lien now or hereafter granted by Tenant to secure financing for working capital or other general purposes in favor of Tenant's principal bank or other institutional lenders. 10.2.5 Sell the Tenant Personal Property in a non-judicial foreclosure sale. 10.2.6 For the purpose of calculating rent loss damages payable to Landlord, Additional Rent for all periods after an Event of Default shall be calculated based on a two and one half percent (2.5%) annual increase. 10.2.7 In the event that any remedy set forth in this Section 10.2 shall be declared unenforceable under any particular circumstances pursuant to any bankruptcy, 40 46 insolvency, or other applicable law, the unenforceability of such remedy shall not affect any other remedy available to Landlord in the same or any other circumstance. 10.3 RECEIVERSHIP. Tenant acknowledges that one of the rights and remedies available to Landlord under applicable law is to secure a court-appointed receiver to take possession of the Premises or any portion thereof, to collect the rents, issues, profits and income of the Premises or any portion thereof, and to manage the operation of the Premises or any portion thereof. Tenant further acknowledges that the revocation, suspension or material limitation of the certification of the Premises or any portion thereof for provider status under Medicare or Medicaid (or successor programs) as currently exist or as are obtained by Tenant at a later date and/or the revocation, suspension or material limitation of the license of the Premises or any portion thereof as Retirement Care Facilities for the number of beds and units shown in the Recitals to this Lease under the laws of the State of Illinois will materially and irreparably impair the value of Landlord's investment in the Premises. Therefore, in the event of any such revocation, suspension or material limitation, and in addition to any other right or remedy of Landlord under this Lease, Tenant hereby consents to the appointment of such a receiver to enter upon and take possession of the Premises or any portion thereof, to manage the operation of the Premises or any portion thereof, to collect and disburse all rents, issues, profits and income generated thereby and to preserve or replace to the extent possible the licenses and provider certifications of the Premises required for the operation of the Retirement Care Facilities or to otherwise substitute the licensee or provider thereof. The receiver shall be entitled to a reasonable fee for its services as a receiver. All such fees 41 47 and other expenses of the receivership estate shall be added to the monthly rent due to Landlord under this Lease. Tenant hereby irrevocably stipulates to the appointment of a receiver under such circumstances and for such purposes and agrees not to contest such appointment. 10.4 LATE CHARGES. Tenant acknowledges that the late payment of any Minimum Rent or Additional Rent will cause Landlord to lose the use of such money and incur costs and expenses not contemplated under this Lease, including, without limitation, administrative and collection costs and processing and accounting expenses, the exact amount of which is extremely difficult to ascertain. Therefore, if any installment of Minimum Rent or Additional Rent is not paid within five (5) calendar days after the due date for such rent payment, then Tenant shall thereafter pay to Landlord on demand a late charge equal to five percent (5%) of the amount of any installment of Minimum Rent or Additional Rent not paid on the due date. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the loss suffered from such nonpayment by Tenant. 10.5 REMEDIES CUMULATIVE; NO WAIVER. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity. No failure of Landlord to insist at any time upon the strict performance of any provision of this Lease or to exercise any option, right, power or remedy contained in this Lease shall be construed as a waiver, modification or relinquishment thereof as to any similar or different breach (future or otherwise) by Tenant. A receipt by Landlord of any rent or other sum due hereunder 42 48 (including any late charge) with knowledge of the breach of any provision contained in this Lease shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision of this Lease shall be deemed to have been made unless expressed in a writing signed by Landlord. 10.6 PERFORMANCE OF TENANT'S OBLIGATIONS BY LANDLORD. If Tenant at any time shall fail to make any payment or perform any act on its part required to be made or performed under this Lease, then Landlord may, without waiving or releasing Tenant from any obligations or default of Tenant hereunder, make any such payment or perform any such act for the account and at the expense of Tenant, and may enter upon the Premises for the purpose of taking all such action thereon as may be reasonably necessary therefor. No such entry shall be deemed an eviction of Tenant. All reasonable sums so paid by Landlord and all necessary and incidental costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred in connection with the performance of any such act by Landlord, together with interest at the rate of the Prime Rate as reported daily by the Wall Street Journal plus 5% (or if said interest rate is violative of any applicable statute or law, then the maximum interest rate allowable) from the date of the making of such payment or the incurring of such costs and expenses by Landlord, shall be payable by Tenant to Landlord on demand. 11. SECURITY DEPOSIT. Pursuant to a Letter of Credit Agreement of even date herewith, Tenant has posted with the Landlord a letter of credit in the sum of Two Hundred Fifty-Four Thousand Six Hundred Twenty-Nine and 63/100 Dollars ($254,629.63) 43 49 representing a security deposit against the faithful performance of the terms and conditions contained in this Lease. 12. DAMAGE BY FIRE OR OTHER CASUALTY. 12.1 RECONSTRUCTION USING INSURANCE. In the event of the damage or destruction of the Premises, Tenant shall forthwith notify Landlord and diligently repair or reconstruct the same to a like or better condition than existed prior to such damage or destruction. Any net insurance proceeds payable with respect to the casualty shall be used for the repair or reconstruction of the Premises pursuant to reasonable disbursement controls in favor of Landlord. If such proceeds are insufficient for such purposes, Tenant shall provide the required additional funds. 12.2 SURPLUS PROCEEDS. If there remains any surplus of insurance proceeds after the completion of the repair or reconstruction of the Premises, such surplus shall belong to and be paid to Tenant. 12.3 NO RENT ABATEMENT. The rent payable under this Lease shall not abate by reason of any damage or destruction of the Premises by reason of an insured or uninsured casualty. Tenant hereby waives all rights under applicable law to abate, reduce or offset rent by reason of such damage or destruction. 12.4 END OF TERM. Notwithstanding any other provision of this Section 12, if the Premises are more than 50% destroyed (measured by square footage) by casualty during the last six (6) months of the Initial Term or any Renewal Term, Tenant may terminate this Lease by written notice to Landlord delivered within thirty (30) days after the date of such casualty, in which event Landlord shall retain all insurance proceeds. 44 50 13. CONDEMNATION. 13.1 COMPLETE TAKING. If during the Term all or substantially all of the Premises is taken or condemned by any competent public or quasi-public authority, then Tenant may, at Tenant's election, made within thirty (30) days of such taking by condemnation, terminate this Lease, and the current Minimum Rent and Additional Rent shall be prorated as of the date of such termination. The award payable upon such taking shall be allocated between Landlord and Tenant as so allocated by the taking authority. In the absence of such allocation by the taking authority, the award shall be allocated as agreed by Landlord and Tenant. Failing such agreement within thirty (30) days after the effective date of such taking, the award shall be allocated between Landlord and Tenant pursuant to the appraisal procedure described on Exhibit "C" attached hereto. 13.2 PARTIAL TAKING. In the event such condemnation proceeding or right of eminent domain results in a taking of less than all or substantially all of the Premises, the Minimum Rent and Additional Rental thereto shall be abated to the same extent as the diminution in the fair market value of the Premises by reason of the condemnation. Such diminution in the fair market value shall be as agreed between Landlord and Tenant, but failing such agreement within thirty (30) days of the effective date of the condemnation the same will be determined by appraisal pursuant to Exhibit "C" attached hereto. Landlord shall be entitled to receive and retain any and all awards for the partial taking and damage and Tenant shall not be entitled to receive or retain any such award for any reason. Landlord's Original Investment will be reduced for all purposes under this Lease by reason of any award paid to Landlord under this Section 13.2. 45 51 13.3 LEASE REMAINS IN EFFECT. Except as provided above, this Lease shall not terminate and shall remain in full force and effect in the event of a taking or condemnation of the Premises, or any portion thereof, and Tenant hereby waives all rights under applicable law to abate, reduce or offset rent by reason of such taking. 14. PROVISIONS ON TERMINATION OF TERM. 14.1 SURRENDER OF POSSESSION. Tenant shall, on or before the last day of the Term, or upon earlier termination of this Lease (unless Tenant has purchased the Premises pursuant to Section 6.2), surrender to Landlord the Premises (including all resident charts and records along with appropriate resident consents) in good condition and repair, excepting only (i) ordinary wear and tear, (ii) any damage caused by condemnation pursuant to Section 13.1 above, or (iii) any damage caused by fire or other casualty resulting in the termination of the Lease per Section 12.4 above. 14.2 REMOVAL OF PERSONAL PROPERTY. If Tenant is not then in default hereunder Tenant shall have the right in connection with the surrender of the Premises to remove from the Premises all Tenant Personal Property but not the Landlord Personal Property (including the Landlord Personal Property replaced by Tenant or required by the State of Illinois or any other governmental entity to operate the Premises for the purpose set forth in Section 5.3 above). Any such removal shall be done in a workmanlike manner leaving the Premises in good and presentable condition and appearance, including repair of any damage caused by such removal. At the end of the Term or upon the earlier termination of this Lease, (unless Tenant has purchased the Premises pursuant to Section 6.2), Tenant shall return the Premises to Landlord with the Landlord Personal Property (or replacements thereof) 46 52 in the same condition and utility as was delivered to Tenant at the commencement of the Term, normal wear and tear excepted. 14.3 TITLE TO PERSONAL PROPERTY NOT REMOVED. Title to any of Tenant Personal Property which is not removed by Tenant upon the expiration of the Term shall, at Landlord's election, vest in Landlord; provided, however, that Landlord may remove and dispose at Tenant's expense of any or all of such Tenant Personal Property which is not so removed by Tenant without obligation or accounting to the Tenant. 14.4 MANAGEMENT OF PREMISES. Upon the expiration or earlier termination of the Term (unless Tenant has purchased the Premises pursuant to Section 6.2), Landlord or its designee, upon written notice to Tenant, may elect to assume the responsibilities and obligations for the management and operation of the Premises and Tenant agrees to cooperate fully with Landlord or its designee to accomplish the transfer of such management and operation without interrupting the operation of the Premises. Tenant shall not commit any act or be remiss in the undertaking of any act that would jeopardize any licensure or certification of the facility, and Tenant shall comply with all requests for an orderly transfer of the Retirement Care Facilities license, Medicare and Medicaid (or any successor program) certifications and possession at the time of any such surrender. Upon the expiration or earlier termination of the Term, Tenant shall promptly deliver copies of all of Tenant's books and records relating to the Premises and its operations to Landlord. 14.5 CORRECTION OF DEFICIENCIES. Upon termination or cancellation of this Lease, Tenant shall indemnify Landlord for any loss, damage, cost or expense incurred by Landlord to correct all deficiencies of a physical nature identified by the Illinois Department of 47 53 Public Health and/or the United State Department of Health and Human Services, or if Tenant chooses to become certified to participate in Medicare or Medicaid, the Illinois Department of Public Aid and/or the United States Department of Health and Human Services, Health Care Financing Administration, or any other government agency or Medicare or Medicaid (or any successor program) providers in the course of the change of ownership inspection and audit. 15. NOTICES AND DEMANDS. All notices and demands, certificates, requests, consents, approvals, and other similar instruments under this Lease shall be in writing and shall be deemed to have been properly given upon actual receipt thereof or within two (2) business days of being placed in the United States certified or registered mail, return receipt requested, postage prepaid (a) if to Tenant, addressed to American Retirement Communities, L.P., 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027, Attn: President and General Counsel Fax No. (615) 221-2269 with a copy to Bass, Berry & Sims PLC, 2700 First American Center, 25th Floor, Nashville, Tennessee 37238, Attn: T. Andrew Smith, Esq., Fax No. (615) 742-2766 or at such other address as Tenant from time to time may have designated by written notice to Landlord, (b) if to Landlord, addressed to Nationwide Health Properties, Inc., 4675 MacArthur Court, Suite 1170, Newport Beach, California 92660, Attn: President and General Counsel; Fax No. (714) 251-9644 with a copy to O'Melveny & Myers LLP, 610 Newport Center Drive, Suite 1700, Newport Beach, California 92660, Attn: Real Estate Department Chairman, Fax No. (714) 669-6994, or at such address as Landlord may from time to time have designated by written notice to Tenant. Refusal to accept delivery shall be deemed delivery. If Tenant is not an individual, notice may be made to any senior officer, 48 54 general partner or principal thereof. Notice to any one co-Tenant shall be deemed notice to all co-Tenants. 16. RIGHT OF ENTRY; EXAMINATION OF RECORDS. Landlord and its representative may enter the Premises at any reasonable time after reasonable notice to Tenant for the purpose of inspecting the Premises for any reason including, without limitation, Tenant's default under this Lease, or to exhibit the Premises for sale, lease or mortgage financing, or posting notices of default, or non-responsibility under any mechanic's or materialman's lien law or to otherwise inspect the Premises for compliance with the terms of this Lease. Any such entry shall not unreasonably interfere with residents, resident care, or any other of Tenant's operations. During normal business hours, Tenant will permit Landlord and Landlord's representatives, inspectors and consultants to examine all contracts, books and records relating to Tenant's operations at the Premises, whether kept at the Premises or at some other location, including, without limitation, Tenant's financial records. 17. LANDLORD MAY GRANT LIENS. Without the consent of Tenant, Landlord may, subject to the terms and conditions set forth below in this Section 17, from time to time, directly or indirectly, create or otherwise cause to exist any lien, encumbrance or title retention agreement ("ENCUMBRANCE") upon the Premises, or any portion thereof or interest therein (including this Lease), whether to secure any borrowing or other means of financing or refinancing or otherwise. Any such Encumbrance shall provide that it is subject to the rights of Tenant under this Lease, and shall further provide that so long as no Event of Default shall have occurred under this Lease, Tenant's occupancy hereunder, including but without limitation Tenant's right of quiet enjoyment provided in Section 18, shall not be disturbed in 49 55 the event any such lienholder or any other person takes possession of the Premises through foreclosure proceeding or otherwise. Upon the request of Landlord, Tenant shall subordinate this Lease to the lien of a new Encumbrance on the Premises, on the condition that the proposed lender agrees not to disturb Tenant's rights under this Lease so long as Tenant is not in default hereunder. 18. QUIET ENJOYMENT. So long as there is no Event of Default which is existing and continuing by Tenant, Landlord covenants and agrees that Tenant shall peaceably and quietly have, hold and enjoy the Premises for the Term, free of any claim or other action not caused or created by Tenant (excepting, however, intrusion of Tenant's quiet enjoyment occasioned by condemnation or destruction of the property as referred to in Section 12 and 13 hereof). 19. APPLICABLE LAW. This Lease shall be governed by and construed in accordance with the internal laws of the State of Illinois without regard to the conflict of laws rules of such State. 20. PRESERVATION OF GROSS REVENUES. 20.1 Tenant acknowledges that a fair return to Landlord on its investment in the Premises is dependent, in part, on the concentration on the Premises during the Term of the Retirement Care Facilities business of Tenant and its Affiliates in the geographical area of the Premises. Tenant further acknowledges that the diversion of resident care activities from the Premises to other facilities owned or operated by Tenant or its Affiliates will have a material adverse impact on the value and utility of the Premises. 50 56 20.1.1 Therefore, Tenant agrees that during the Term, and for a period of one (1) year thereafter (unless Tenant purchases the Premises), neither Tenant nor any of its Affiliates shall, without the prior written consent of Landlord, operate, own, participate in or otherwise receive revenues from any other facility or institution providing services or similar goods to those provided on or in connection with the Premises and the permitted use (including each use included in the definition of Retirement Care Facilities) thereof as contemplated under this Lease, within a three (3) mile radius of the Premises. 20.1.2 In addition, Tenant hereby covenants and agrees that for a period of one year following the expiration or earlier termination of this Lease (unless Tenant purchases the Premises), neither Tenant nor any of its Affiliates shall, without prior written consent of Landlord, hire, engage or otherwise employ any management or supervisory personnel working on or in connection with the Premises. Notwithstanding the foregoing, this Section 20.1.2 does not apply to any corporate manager or multi-facility employee to the extent such manager or employee is employed at other facilities operated by Tenant or its Affiliates. 20.2 Notwithstanding the foregoing, Landlord acknowledges that Tenant operates home health agencies out of the offices located on the Premises. Section 20.1 does not apply to such home health activities operated by Tenant or its Affiliates out of the Premises. 51 57 20.3 Except as required for medically appropriate reasons, prior to and after Lease termination, neither Tenant nor any of its Affiliates will recommend or solicit the removal or transfer of any resident from the Premises to any other facility. 21. HAZARDOUS MATERIALS. 21.1 HAZARDOUS MATERIAL COVENANTS. Tenant's use of the Premises shall comply in all material respects with all Hazardous Materials Laws. In the event any Environmental Activities occur or are suspected to have occurred in violation in any material respect of any Hazardous Materials Laws or if Tenant has received any Hazardous Materials Claim against the Premises, Tenant shall promptly obtain all permits and approvals necessary to remedy any such actual or suspected problem through the removal of Hazardous Materials or otherwise, and upon Landlord's approval of the remediation plan, remedy any such problem to the satisfaction of Landlord, in accordance with all Hazardous Materials Laws and good business practices. 21.2 TENANT NOTICES TO LANDLORD. Tenant shall immediately advise Landlord in writing of: 21.2.1 any Environmental Activities in violation of any Hazardous Materials Laws, 21.2.2 any Hazardous Materials Claims against Tenant or the Premises, 21.2.3 any remedial action taken by Tenant in response to any Hazardous Materials Claims or any Hazardous Materials on, under or about the Premises in violation of any Hazardous Materials Laws, 52 58 21.2.4 Tenant's discovery of any occurrence or condition on or in the vicinity of the Premises that materially increase the risk that the Premises will be exposed to Hazardous Materials, 21.2.5 all communications to or from Tenant, any governmental authority or any other person relating to Hazardous Materials Laws or Hazardous Materials Claims with respect to the Premises, including copies thereof. 21.3 EXTENSION OF TERM. Notwithstanding any other provision of this Lease, in the event any Hazardous Materials are discovered on, under or about the Premises in violation of any Hazardous Materials Law, the Term shall be automatically extended and this Lease shall remain in full force and effect until the earlier to occur of the completion of all remedial action or monitoring, as approved by Landlord in its reasonable discretion, in accordance in all material respects with all Hazardous Materials Laws, or the date specified in a written notice from Landlord to Tenant terminating this Lease (which date may be subsequent to the date upon which the Term was to have expired). 21.4 PARTICIPATION IN HAZARDOUS MATERIALS CLAIMS. Landlord shall have the right, at Tenant's sole cost and expense and with counsel chosen by Landlord, to join and participate in, as a party if it so elects, any legal proceedings or actions initiated in connection with any Hazardous Materials Claims. 21.5 ENVIRONMENTAL ACTIVITIES shall mean the use, generation, transportation, handling, discharge, production, treatment, storage, release or disposal of any Hazardous Materials at any time to or from the Premises or located on or present on or under the 53 59 Premises. Nothing contained in the foregoing or elsewhere in this Section 21 is intended to, nor shall it, limit the liability of Tenant, if any, to Landlord with respect to any representation or warranty given by Tenant to Landlord with respect to Hazardous Materials or environmental matters generally as set forth in that certain Purchase and Sale Agreement between Holley Court Terrace, L.P., a Tennessee limited partnership, an Affiliate of Tenant, and Landlord. 21.6 HAZARDOUS MATERIALS shall mean (i) any petroleum products and/or by-products (including any fraction thereof), flammable substances, explosives, radioactive materials, hazardous or toxic wastes, substances or materials, known carcinogens or any other materials, contaminants or pollutants which pose a hazard to the Premises or to persons on or about the Premises or cause the Premises to be in violation of any Hazardous Materials Laws; (ii) asbestos in any form which is friable; (iii) urea formaldehyde in foam insulation or any other form; (iv) transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million or any other more restrictive standard then prevailing; (v) medical wastes and biohazards; (vi) radon gas; and (vii) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or may or could pose a hazard to the health and safety of the occupants of the Premises or the owners and/or occupants of property adjacent to or surrounding the Premises. 21.7 HAZARDOUS MATERIALS CLAIMS shall mean any and all enforcement, clean-up, removal or other governmental or regulatory actions or orders threatened, instituted or completed pursuant to any Hazardous Material Laws, together with all claims made or 54 60 threatened by any third party against the Premises, Landlord or Tenant relating to damage, contribution, cost recovery compensation, loss or injury resulting from any Hazardous Materials. 21.8 HAZARDOUS MATERIALS LAWS shall mean any and all federal, state, and municipal laws, ordinances, regulations, rules, orders, guidelines or policies relating to the environment, health and safety, Environmental Activities, Hazardous Materials, air and water quality, waste, including medical and biohazardous waste, and any other environmental matters, as they exist now or as they are hereinafter enacted, promulgated, or amended. Hazardous Materials Laws include, but are not limited to, the Comprehensive Environmental Response, Compensation, and Liability Act, the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, the Illinois Environmental Protection Act, and the Illinois Responsible Property Transfer Act. 22. ASSIGNMENT AND SUBLETTING. Tenant shall not voluntarily or involuntarily assign or hypothecate this Lease or any interest herein or sublet the Premises or any part thereof. For the purposes of this Lease, a management or similar agreement shall be considered to be an assignment of this Lease by Tenant. Any of the foregoing acts shall be void but shall, at the option of Landlord in its sole discretion, constitute an Event of Default giving rise to Landlord's right, among other things, to terminate this Lease. Without limiting the foregoing, this Lease shall not, nor shall any interest of Tenant herein, be assigned or encumbered by operation of law. Notwithstanding the foregoing, Tenant may assign this Lease or sublet the Premises or any portion thereof to a Successor (as such term is defined below), to a wholly-owned subsidiary of Tenant provided that such Successor or subsidiary 55 61 fully assumes the obligations of Tenant under this Lease, Tenant remains fully liable under this Lease the use of the Premises remains unchanged, and no such assignment or sublease shall be valid and no such subsidiary or Successor shall take possession of the Premises until an executed counterpart of such assignment or sublease has been delivered to Landlord. Anything contained in this Lease to the contrary notwithstanding, Tenant shall not sublet the Premises on any basis such that the rental to be paid by the sublessee thereunder would be based, in whole or in part, on either the income or profits derived by the business activities of the sublessee, or any other formula, such that any portion of the sublease rental received by Landlord would fail to qualify as "rents from real property" within the meaning of Section 856(d) of the U.S. Internal Revenue Code, or any similar or successor provision thereto. 22.1 For the purpose of this Lease, the transfer, assignment, sale, hypothecation or other disposition of any partnership, stock or other ownership interest in Tenant which results in a change in the Person (as hereinafter defined) which ultimately exerts effective Control (as hereinafter defined) over the management of the affairs of Tenant as of the date hereof, shall be deemed to be an assignment of the Lease. For purposes herein, "CONTROL" shall mean, as applied to any individual, partnership, association, corporation or other entity (collectively, "PERSON"), the possession, directly or indirectly, of the power to direct the management and policies of that Person, whether through ownership, voting control, by contract or otherwise. 22.2 Notwithstanding anything to the contrary contained in Section 22.1, none of the following shall be deemed to be an assignment of the Lease (i) 56 62 an initial public offering ("IPO") of Tenant or any Successor thereto, or (ii) any secondary public offering(s) of Tenant or any Successor thereto, or (iii) subsequent to an IPO by Tenant or any Successor thereto, and so long as Tenant or its Successor is a publicly-traded entity on a national exchange, a change in the Person or Persons exercising Control of Tenant or its Successor, or (iv) a lease of a unit or bed to a resident of the Premises in the ordinary course of Tenant's business. 22.3 As used herein, a "SUCCESSOR" is any entity which succeeds to materially all of the assets, operations and business of Tenant by merger or reorganization and which is Controlled by the same Person or Persons as Control Tenant prior to such merger or reorganization. 23. INDEMNIFICATION. To the fullest extent permitted by law, Tenant agrees to protect, indemnify, defend and save harmless Landlord, its directors, officers, shareholders, agents and employees from and against any and all foreseeable or unforeseeable liability, expense loss, costs, deficiency, fine, penalty, or damage (including without limitation punitive or consequential damages) of any kind or nature, including reasonable attorneys' fees, from any suits, claims or demands, on account of any matter or thing, action or failure to act arising out of or in connection with this Lease (including, without limitation, the breach by Tenant of any of its obligations hereunder), the Premises, or the operations of Tenant on the Premises, including without limitation all Environmental Activities on the Premises, all Hazardous Materials Claims or any violation by Tenant of a Hazardous Materials Law with respect to the Premises. Upon receiving knowledge of any suit, claim or demand asserted by a third party 57 63 that Landlord believes is covered by this indemnity, Landlord shall give Tenant notice of the matter. Tenant shall defend Landlord against such matter at Tenant's sole cost and expense with legal counsel satisfactory to Landlord. Landlord may elect to defend the matter with its own counsel at Tenant's expense. 24. HOLDING OVER. If Tenant shall for any reason remain in possession of the Premises after the expiration or earlier termination of this Lease, such possession shall be a month-to-month tenancy during which time Tenant shall pay as rental each month, 1 1/2 times the aggregate of the monthly Minimum Rent payable with respect to the last Lease Year plus Additional Rent allocable to the month, all additional charges accruing during the month and all other sums, if any, payable by Tenant pursuant to the provisions of this Lease with respect to the Premises. Nothing contained herein shall constitute the consent, express or implied, of Landlord to the holding over of Tenant after the expiration or earlier termination of this Lease, nor shall anything contained herein be deemed to limit Landlord's remedies pursuant to this Lease or otherwise available to Landlord at law or in equity. 25. ESTOPPEL CERTIFICATES. Tenant shall, at any time upon not less than five (5) days prior written request by Landlord, execute, acknowledge and deliver to Landlord or its designee a statement in writing, executed by an officer or general partner of Tenant, certifying that this Lease is unmodified and in full force and effect (or, if there have been any modifications, that this Lease is in full force and effect as modified, and setting forth such modifications), the dates to which Minimum Rent, Additional Rent and additional charges hereunder have been paid, certifying that no default by either Landlord or Tenant exists 58 64 hereunder or specifying each such default and as to other matters as Landlord may reasonably request. 26. CONVEYANCE BY LANDLORD. If Landlord or any successor owner of the Premises shall convey the Premises in accordance with the terms hereof, Landlord or such successor owner shall thereupon be released from all future liabilities and obligations of Landlord under this Lease arising or accruing from and after the date of such conveyance or other transfer as to the Premises and all such future liabilities and obligations shall thereupon be binding upon the new owner. 27. WAIVER OF JURY TRIAL. Landlord and Tenant hereby waive any rights to trial by jury in any action, proceedings or counterclaim brought by either of the parties against the other in connection with any matter whatsoever arising out of or in any way connected with this Lease, including, without limitation, the relationship of Landlord and Tenant, Tenant's use and occupancy of the Premises, or any claim of injury or damage relating to the foregoing or the enforcement of any remedy hereunder. 28. ATTORNEYS' FEES. If Landlord or Tenant brings any action to interpret or enforce this Lease, or for damages for any alleged breach hereof, the prevailing party in any such action shall be entitled to reasonable attorneys' fees and costs as awarded by the court in addition to all other recovery, damages and costs. 29. SEVERABILITY. In the event any part or provision of the Lease shall be determined to be invalid or enforceable, the remaining portion of this Lease shall nevertheless continue in full force and effect. 59 65 30. COUNTERPARTS. This Lease may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement. 31. BINDING EFFECT. Subject to the provisions of Section 22 above, this Lease shall be binding upon and inure to the benefit of Landlord and Tenant and their respective heirs, personal representatives, successors in interest and assigns. 32. WAIVER AND SUBROGATION. Landlord and Tenant hereby waive to each other all rights of subrogation which any insurance carrier, or either of them, may have as to the Landlord or Tenant by reason of any provision in any policy of insurance issued to Landlord or Tenant, provided such waiver does not thereby invalidate the policy of insurance. 33. MEMORANDUM OF LEASE. Landlord and Tenant shall, promptly upon the request of either, enter into a short form memorandum of the Lease, in form suitable for recording under the laws of the State of Illinois in which reference to this Lease shall be made. The party requesting such recordation shall pay all costs and expenses of preparing and recording such memorandum of this Lease. 34. INCORPORATION OF RECITALS AND ATTACHMENTS. The recitals and exhibits, schedules, addenda and other attachments to this Lease are hereby incorporated into this Lease and made a part hereof. 35. TITLES AND HEADINGS. The titles and headings of sections of this Lease are intended for convenience only and shall not in any way affect the meaning or construction of any provision of this Lease. 60 66 36. NATURE OF RELATIONSHIP; USURY SAVINGS CLAUSE. The parties intend that their relationship shall be that of lessor and lessee only. Nothing contained in this Lease shall be deemed or construed to constitute an extension of credit by Landlord to Tenant, nor shall this Lease be deemed to be a partnership or venture agreement between Landlord and Tenant. Notwithstanding the foregoing, in the event any payment made to Landlord hereunder is deemed to violate any applicable laws regarding usury, the portion of any payment deemed to be usurious shall be held by Landlord to pay the future obligations of Tenant as such obligations arise and, in the event Tenant discharges and performs all obligations hereunder, such funds will be reimbursed to Tenant upon the expiration of the Term. No interest shall be paid on any such funds held by Landlord. 37. JOINT AND SEVERAL. If more than one person or entity is the Tenant hereunder, the liability and obligations of such persons or entities under this Lease shall be joint and several. 38. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All of the obligations, representations, warranties and covenants of Tenant under this Lease shall survive the expiration or earlier termination of the Term. 39. INTERPRETATION. Both Landlord and Tenant have been represented by counsel and this Lease has been freely and fairly negotiated. Consequently, all provisions of this Lease shall be interpreted according to their fair meaning and shall not be strictly construed against any party. [SIGNATURES ON NEXT PAGE] 61 67 Executed as of the date indicated above. TENANT: AMERICAN RETIREMENT COMMUNITIES, L.P., a Tennessee limited partnership By: AMERICAN RETIREMENT COMMUNITIES, LLC, a Tennessee limited liability company By: ___________________________ H. Todd Kaestner, Executive Vice President - Corporate Development LANDLORD: NATIONWIDE HEALTH PROPERTIES, INC., a Maryland corporation By: ___________________________ T. Andrew Stokes, Senior Vice President, Development S-1 68 EXHIBIT "A" Legal Description of Premises THE LAND REFERRED TO IN THIS POLICY IS IN THE STATE OF ILLINOIS, COUNTY OF COOK AND IS DESCRIBED AS FOLLOWS: THAT PART OF THE FOLLOWING DESCRIBED PARCELS (ALL TAKEN AS ONE TRACT) EXCEPT THE WEST 299.00 FEET OF SAID TRACT: (A) THE NORTH 92 FEET OF LOTS 7 AND 8 LYING NORTH OF THE NORTH LINE OF HOLLEY COURT (FORMERLY CEDAR STREET) IN SKINNER'S SUBDIVISION OF 30 ACRES IN THE SOUTHWEST CORNER OF THE NORTHWEST 1/4 OF SECTION 7, TOWNSHIP 39 NORTH, RANGE 13 EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS; (B) THE NORTH 92 FEET OF LOTS 1 AND 2 IN HENRY MOHLE'S SUBDIVISION OF LOT 9 IN SAMUEL P. SKINNER'S SUBDIVISION OF 30 ACRES IN THE SOUTHWEST CORNER OF THE NORTHWEST 1/4 OF SECTION 7, TOWNSHIP 39 NORTH, RANGE 13 EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS; (C) THE NORTH 98 FEET OF LOTS 1 THROUGH 4 AND THE NORTH 92 FEET OF LOTS 5 THROUGH 7 IN HOLLEY'S SUBDIVISION OF LOTS 2 TO 12 IN BLOCK 2 OF WHAPLE'S SUBDIVISION OF PART OF THE SOUTHWEST 1/4 OF THE NORTHWEST 1/4 OF SECTION 7, TOWNSHIP 39 NORTH, RANGE 13 EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS; (D) LOTS 1 THROUGH 4 IN BOLLE'S SUBDIVISION OF LOTS 7 AND 8 IN BLOCK 8 IN KETTLESTRING'S ADDITION TO HARLEM, A SUBDIVISION OF PART OF THE NORTHWEST 1/4 OF SECTION 7, TOWNSHIP 39 NORTH, RANGE 13 EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS; (E) LOT 6 IN BLOCK 8 IN KETTLESTRING'S ADDITION TO HARLEM, BEING A SUBDIVISION OF PART OF THE NORTHWEST 1/4 OF SECTION 7, TOWNSHIP 39 NORTH, RANGE 13 EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS; (F) ALL OF THE VACATED EAST AND WEST ALLEY (VACATED BY ORDINANCE RECORDED AUGUST 17, 1953 AS DOCUMENT 15696610) LYING NORTH OF AND ADJOINING LOTS 1, 2, AND 3 AFORESAID, SOUTH OF AND ADJOINING LOTS 1, 2, 3 AND PART OF LOT 4, AFORESAID EAST OF THE A-1 69 WEST LINE OF LOT 1, PRODUCED NORTH, AND WEST OF THE EAST LINE OF LOT 3, PRODUCED NORTH, SAID ALLEY BEING THAT PART OF THE SOUTH 12 FEET OF LOT 7 IN BLOCK 8 IN KETTLESTRING'S ADDITION TO HARLEM, AFORESAID LYING WEST OF THE EAST LINE OF LOT 3, PRODUCED NORTH, ALL IN COOK COUNTY, ILLINOIS; (G) ALL OF THE EAST-WEST 12 FOOT PUBLIC ALLEY (VACATED BY ORDINANCE RECORDED AUGUST 6, 1964 AS DOCUMENT 19207080) LYING SOUTH OF AND ADJOINING LOT 4 IN BOLLE'S SUBDIVISION OF LOTS 7 AND 8 OF BLOCK 8 IN KETTLESTRING'S ADDITION TO HARLEM, AND NORTH OF AND ADJOINING LOT 4 IN HOLLEY'S SUBDIVISION AFORESAID IN SECTION 7, TOWNSHIP 39 NORTH, RANGE 13 EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS. (H) ALL OF HARLEM COURT (VACATED BY ORDINANCE RECORDED AUGUST 6, 1964 AS DOCUMENT 19207080) LYING WEST OF AND ADJACENT TO LOT 6 IN BLOCK 8 IN KETTLESTRING'S ADDITION TO HARLEM IN SECTION 7, TOWNSHIP 39 NORTH, RANGE 13 EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS. A-2 70 EXHIBIT "B" Landlord Personal Property All furniture, furnishings, equipment, tools, machinery, fixtures, appliances and all other intangible and tangible personal property, other than the Fixtures (as defined in the Lease), conveyed to Landlord pursuant to that certain Purchase and Sale Agreement between Holley Court Terrace, L.P., a Tennessee limited partnership, an Affiliate of Tenant, and Landlord. B-1 71 EXHIBIT "C" Appraisal Process If Landlord and Tenant are unable to agree upon the Adjusted Fair Market Value of the Premises within any relevant period provided in this Lease, each shall within ten (10) days after written demand by the other select one MAI Appraiser to participate in the determination of Adjusted Fair Market Value. For all purposes under this Lease, the Adjusted Fair Market Value of the Premises shall be based on the Adjusted Fair Market Value of the Premises unencumbered by this Lease. Within ten (10) days of such selection, the MAI Appraisers so selected by Landlord and Tenant shall select a third MAI Appraiser. The three (3) selected MAI Appraisers shall each determine the Adjusted Fair Market Value of the Premises within thirty (30) days of the selection of the third appraiser. To the extent consistent with sound appraisal practices as then existing at the time of any such appraisal, and if requested by Landlord, such appraisal, shall be made on a basis consistent with the basis on which the Premises was appraised at the time of its acquisition by Landlord. Each of Tenant and Landlord shall pay the fees and expenses of any MAI Appraiser which such party appoints pursuant to this Exhibit plus 50% of the cost of the third appraiser. In the event either Landlord or Tenant fails to select a MAI Appraiser within the time period set forth in the foregoing paragraph, the MAI Appraiser selected by the other party shall alone determine the Adjusted Fair Market Value of the Premises in accordance with the provisions of this Exhibit and the Adjusted Fair Market Value so determined shall be binding upon Landlord and Tenant. In the event the MAI Appraisers selected by Landlord and Tenant are unable to agree upon a third MAI Appraiser within the time period set forth in the first paragraph of this Exhibit, either Landlord or Tenant shall have the right to apply at their mutual expense to the presiding judge of the court of original trial jurisdiction in the county in which the Premises is located to name the third MAI Appraiser. Within five (5) days after completion of the third MAI Appraiser's appraisal, all three MAI Appraisers shall meet and a majority of the MAI Appraisers shall attempt to determine the Adjusted Fair Market Value of the Premises. If a majority are unable to determine the Adjusted Fair Market Value at such meeting, the three appraisals shall be added together and their total divided by three. The resulting quotient shall be the Adjusted Fair Market Value of the Premises. If, however, either or both of the low appraisal or the high appraisal are more than ten percent (10%) lower or higher than the middle appraisal, any such lower or higher appraisal shall be disregarded. If only one appraisal is disregarded, the remaining two appraisals shall be added together and their total divided by two, and the resulting quotient shall be such Adjusted Fair Market Value. If both the lower appraisal and higher appraisal are disregarded as provided herein, the middle appraisal shall be such Adjusted Fair Market Value. In any event, the result of the foregoing appraisal process shall be final and binding. C-1 72 Landlord, Tenant and any Guarantor will exercise their respective best efforts to expedite the appraisal process and will cooperate fully and with all deliberate speed with each other and with all appraisers in order to allow the determination of Adjusted Fair Market Value to be finally completed. Notwithstanding anything else in this Exhibit, if any appraiser appointed hereunder fails to complete his or her report within 60 days of his or her appointment, the Adjusted Fair Market Value of the Premises will be determined by reference to the other report or reports completed within such period. "MAI APPRAISER" shall mean an appraiser licensed or otherwise qualified to do business in the State and who has substantial experience in performing appraisals of facilities similar to the Premises and is certified as a member of the American Institute of Real Estate Appraisers or certified as a SRPA by the Society of Real Estate Appraisers, or, if such organizations no longer exist or certify appraisers, such successor organization or such other organization as is approved by Landlord. C-2 73 EXHIBIT "D" Permitted Exceptions 1. The standard printed exceptions, conditions and exclusions from coverage contained in the standard coverage owner's title policy then prevailing in use at the title company which consummates the sale transaction. 2. Any matters which an accurate survey of the Premises may show. 3. Exception Nos. 7 (modified to provide that no taxes are due and payable), 10 and 12 through 15 on the preliminary title report issued by Fidelity National Title Insurance Company dated November 7, 1996 under Order Number 96-11331. 4. Such other matters burdening the Premises which were created with the consent or knowledge of Tenant or arising out of Tenant's acts or omissions. D-1 74 EXHIBIT "E" Initial Term Minimum Rent [attached] E-1 EX-10.7 12 LEASE AND SECURITY AGREEMENT 1 EXHIBIT 10.7 Lease and Security Agreement by and between NH Texas Properties Limited Partnership, a Texas limited partnership as "Landlord" and Trinity Towers Limited Partnership, a Tennessee limited partnership as "Tenant" Dated January 2, 1997 2 TABLE OF CONTENTS
Page 1. Term............................................................ 3 1.1 Term................................................... 3 1.2 Renewal Terms.......................................... 3 2. Rent............................................................ 4 2.1 Initial Term Minimum Rent.............................. 4 2.2 Renewal Term Minimum Rent.............................. 8 2.3 Initial Term Additional Rent........................... 11 2.4 Renewal Term Additional Rent........................... 12 2.5 Total Rent............................................. 12 2.6 Proration for Partial Periods.......................... 14 2.7 Absolute Net Lease..................................... 14 3. Taxes, Assessments and Other Charges............................ 16 3.1 Tenant's Obligations................................... 16 3.2 Proration.............................................. 17 3.3 Right to Protest....................................... 17 3.4 Tax Bills.............................................. 17 3.5 Other Charges.......................................... 17 4. Insurance....................................................... 17 4.1 General Insurance Requirements......................... 17 4.2 Fire and Other Casualty................................ 19 4.3 Public Liability....................................... 20 4.4 Professional Liability Insurance....................... 20 4.5 Workers Compensation................................... 20 4.6 Boiler Insurance....................................... 21 4.7 Business Interruption Insurance........................ 21 4.8 Course of Construction Insurance....................... 21 4.9 Deductible Amounts..................................... 21 5. Use, Maintenance and Alteration of the Premises................. 21 5.1 Tenant's Maintenance Obligations....................... 21 5.2 Regulatory Compliance.................................. 23 5.3 Permitted Use.......................................... 25 5.4 Tenant Repurchase Obligation........................... 25 5.5 No Liens; Permitted Contests........................... 26 5.6 Alterations by Tenant.................................. 27 5.7 Capital Improvements Funded by Landlord................ 28 5.8 Compliance With IRS Guidelines......................... 28 5.9 Skyway Improvements; Re-plotting....................... 29
i 3 6. Condition And Title Of Premises; Right of First Offer........... 32 6.1 Condition and Title of Premises........................ 32 6.2 Right of First Offer to Purchase Premises.............. 34 7. Landlord and Tenant Personal Property........................... 38 7.1 Tenant Personal Property............................... 38 7.2 Landlord's Security Interest........................... 39 7.3 Financing Statements................................... 41 7.4 Intangible Property.................................... 41 8. Representations And Warranties.................................. 42 8.1 Due Authorization And Execution........................ 42 8.2 Due Organization....................................... 42 8.3 No Breach of Other Agreements.......................... 42 9. Financial, Management and Regulatory Reports.................... 42 9.1 Monthly Facility Reports............................... 42 9.2 Quarterly Financial Statements......................... 43 9.3 Annual Financial Statement............................. 43 9.4 Accounting Principles.................................. 44 9.5 Regulatory Reports..................................... 44 10. Events of Default and Landlord's Remedies....................... 44 10.1 Events of Default...................................... 44 10.2 Remedies............................................... 48 10.3 Receivership........................................... 50 10.4 Late Charges........................................... 51 10.5 Remedies Cumulative; No Waiver......................... 52 10.6 Performance of Tenant's Obligations by Landlord........ 52 11. Security Deposit................................................ 53 12. Damage by Fire or Other Casualty................................ 53 12.1 Reconstruction Using Insurance......................... 53 12.2 Surplus Proceeds....................................... 53 12.3 No Rent Abatement...................................... 53 12.4 End of Term............................................ 54 13. Condemnation.................................................... 54 13.1 Complete Taking........................................ 54 13.2 Partial Taking......................................... 54 13.3 Lease Remains in Effect................................ 55 14. Provisions on Termination of Term............................... 55
ii 4 14.1 Surrender of Possession................................ 55 14.2 Removal of Personal Property........................... 55 14.3 Title to Personal Property Not Removed................. 56 14.4 Management of Premises................................. 56 14.5 Correction of Deficiencies............................. 57 15. Notices and Demands............................................. 57 16. Right of Entry; Examination of Records.......................... 58 17. Landlord May Grant Liens........................................ 58 18. Quiet Enjoyment................................................. 59 19. Applicable Law.................................................. 59 20. Preservation of Gross Revenues.................................. 59 21. Hazardous Materials............................................. 62 21.1 Hazardous Material Covenants........................... 62 21.2 Tenant Notices to Landlord............................. 62 21.3 Extension of Term...................................... 63 21.4 Participation in Hazardous Materials Claims............ 63 21.5 Environmental Activities............................... 63 21.6 Hazardous Materials.................................... 64 21.7 Hazardous Materials Claims............................. 64 21.8 Hazardous Materials Laws............................... 65 21.9 Existing Hazardous Materials........................... 65 23. Indemnification................................................. 67 24. Holding Over.................................................... 68 25. Estoppel Certificates........................................... 69 26. Conveyance by Landlord.......................................... 69 27. Waiver of Jury Trial............................................ 69 28. Attorneys' Fees................................................. 70 29. Severability.................................................... 70
iii 5 30. Counterparts.................................................... 70 31. Binding Effect.................................................. 70 32. Waiver and Subrogation.......................................... 70 33. Memorandum of Lease............................................. 70 34. Incorporation of Recitals and Attachments....................... 71 35. Titles and Headings............................................. 71 36. Nature of Relationship; Usury Savings Clause.................... 71 37. Joint and Several............................................... 71 38. Survival of Representations, Warranties and Covenants........... 71 39. Interpretation.................................................. 72
EXHIBITS EXHIBIT A-1 - LEGAL DESCRIPTION OF PREMISES EXHIBIT A-2 - LEGAL DESCRIPTION OF EXPANSION PARCEL EXHIBIT B - LANDLORD PERSONAL PROPERTY EXHIBIT C - APPRAISAL PROCESS EXHIBIT D - PERMITTED EXCEPTIONS EXHIBIT E - EXEMPTED PROPERTIES EXHIBIT F - BASIC INITIAL TERM MINIMUM RENT iv 6 LEASE AND SECURITY AGREEMENT THIS LEASE AND SECURITY AGREEMENT ("LEASE") is made and entered into as of the 2nd day of January, 1997 by and between NH Texas Properties Limited Partnership, a Texas limited partnership ("LANDLORD"), and Trinity Towers Limited Partnership, a Tennessee limited partnership ("TENANT"). W I T N E S E T H: WHEREAS, Landlord is the owner of that certain real property, all improvements thereon and all appurtenances thereto, presently used as a continuing care retirement community known as "Trinity Towers" licensed for sixty (60) Nursing Facility beds and thirty-nine (39) Personal Care Facility Unit (Type A Large) beds and also containing one hundred sixty-nine (169) independent living facility units, located at 101 North Upper Broadway, Corpus Christi, Texas 78401 and more specifically described in Exhibit "A-1" attached hereto, together with certain of the furniture, machinery, equipment, appliances, fixtures, supplies and other personal property used in connection therewith as more specifically described on Exhibit "B" attached hereto ("LANDLORD PERSONAL PROPERTY"). The foregoing real and personal property owned by Landlord as described in this Recital shall be collectively referred to in this Lease as the "PREMISES"; WHEREAS, an approximately two (2) acre portion of the Premises has been designated as the "EXPANSION PARCEL", as more specifically described in Exhibit "A-2" attached hereto. 1 7 Landlord has agreed to provide funds for the renovation of the Premises and the construction of an approximately one hundred four thousand (104,000) square foot five (5) story building on the Expansion Parcel, all as more particularly described in the "DEVELOPMENT ADDENDUM" attached hereto. The Expansion Parcel shall be deemed part of the Premises for all purposes of this Lease, and upon the funding of any furniture, machinery, equipment, appliances, fixtures, supplies and other personal property used in connection with the facility to be constructed on the Expansion Parcel, such personal property shall be deemed part of the Landlord Personal Property for all purposes of this Lease; and WHEREAS, after the completion of the expansion and renovation described in the Development Addendum, the Premises will consist of and be licensed for eighty-four (84) Personal Care Facility Unit (Type A Large) beds and seventy-six (76) Nursing Facility beds in the new building constructed on the Expansion Parcel, while the existing building will be reconfigured to be operated and licensed as one hundred ninety-six (196) independent living facility units and fifteen (15) dementia care units. As used in this Lease, the term "RETIREMENT CARE FACILITIES" shall mean the continuing care retirement community on the Premises as configured and licensed as described in these Recitals, both before and after its expansion pursuant to the Development Addendum; and WHEREAS, American Retirement Communities, L.P., a Tennessee limited partnership ("GUARANTOR") has agreed to guarantee Tenant's obligations under this Lease; and WHEREAS, Landlord desires to lease the Premises to Tenant, and Tenant desires to lease the Premises from Landlord. 2 8 NOW THEREFORE, in consideration of the mutual covenants, conditions and agreements set forth herein, Landlord hereby leases and lets unto Tenant the Premises for the term and upon the conditions and provisions hereinafter set forth. 1. TERM. 1.1 TERM. The term of this Lease shall commence on January 2, 1997 and shall end on December 31, 2006 (the "INITIAL TERM") unless extended pursuant to Section 1.2 or earlier terminated in accordance with the provisions hereof. The Initial Term and all Renewal Terms are referred to collectively as the "TERM". 1.2 RENEWAL TERMS. The Term may be extended for three (3) separate renewal terms (each a "RENEWAL TERM") of ten (10) years each, upon the satisfaction of all of the following terms and conditions: 1.2.1 Not more than ten (10) business days before or after the date which is fifteen (15) months prior to the end of the then current Term, Tenant shall give Landlord written notice that Tenant desires to exercise its right to extend the then current Term for one (1) Renewal Term. 1.2.2 There shall be no Event of Default (as defined in Section 10 below) under this Lease, either on the date of Tenant's notice to Landlord pursuant to Section 1.2.1 above, or on the last day of the then current Term. 1.2.3 Guarantor concurrently exercises its right to extend the then current term of that certain Lease and Security Agreement of even date herewith by and between Nationwide Health Properties, Inc., a Maryland corporation 3 9 ("NHP"), and Guarantor (the "NHP AGREEMENT") and the terms and conditions of renewal of the NHP Agreement are fully satisfied. 1.2.4 The amount of the letter of credit posted by Tenant pursuant to Section 11 of this Lease shall be increased for the remainder of the Term to Seven Hundred Forty Thousand Seven Hundred Forty and 74/100 Dollars ($740,740.74) concurrently with the commencement of the first Renewal Term. 1.2.5 All other provisions of this Lease shall remain in full force and effect and shall continuously apply throughout the Renewal Term(s). 2. RENT. During the Initial Term and all Renewal Terms, minimum rent ("MINIMUM RENT") and additional rent ("ADDITIONAL RENT") shall accrue and/or be paid by Tenant to Landlord as follows: 2.1 INITIAL TERM MINIMUM RENT. During the Initial Term, the Minimum Rent shall accrue or be paid to Landlord by Tenant monthly in advance and shall be calculated as follows: 2.1.1 BASIC INITIAL TERM MINIMUM RENT. Tenant shall pay to Landlord basic Minimum Rent according to the schedule on Exhibit "F" attached hereto, payable in advance on the first business day of each calendar month. Such monthly amount is referred to herein as the "BASIC INITIAL TERM MINIMUM RENT." 2.1.2 RENOVATION INITIAL TERM MINIMUM RENT. The monthly Minimum Rent payable by Tenant during the Initial Term shall increase with each advance for Renovation Work under the Development Addendum by an 4 10 amount equal to one-twelfth (1/12) of the product of (i) the amount of the applicable advance for Renovation Work, times (ii) a percentage equal to three hundred twenty-five (325) basis points over the twenty (20) day average 10 year United States Treasury rate in effect on the date such advance is made by Landlord (the "RENOVATION INITIAL TERM MINIMUM RENT"). Within ten (10) days after the end of each calendar month in which an advance for Renovation Work is made under the Development Addendum, Landlord shall notify Tenant of the Renovation Initial Term Minimum Rent. Renovation Initial Term Minimum Rent resulting from an advance made during the then current month shall be prorated (based on a thirty (30) day month and actual days elapsed) from the date of such advance to the last day of said month, and, together with Renovation Initial Term Minimum Rent resulting from advances made in prior months, shall be payable on the first business day of each calendar month thereafter along with the Basic Initial Term Minimum Rent. 2.1.3 EXPANSION INITIAL TERM MINIMUM RENT. During the Initial Term, Minimum Rent shall be calculated with respect to advances under the Development Addendum with respect to Expansion Work as follows: (i) Landlord shall determine the London Interbank Offering Rate for 30 day advances (the "LIBOR RATE") in effect on the first business day of each calendar month before Substantial Completion occurs as to the Expansion Work (as "Substantial Completion" is defined in the Development Addendum); 5 11 (ii) During each calendar month in the Initial Term until Substantial Completion occurs for the Expansion Work, Minimum Rent (referred to herein as the "CONSTRUCTION PERIOD EXPANSION RENT") shall accrue but shall not be paid: (A) on the total of (x) all advances made under the Development Addendum with respect to Expansion Work plus (y) all previously accrued but unpaid Construction Period Expansion Rent; (B) at a rate equal to one twelfth (1/12) of the sum of (x) the LIBOR Rate in affect for the applicable month, plus (y) one hundred fifty (150) basis points; (iii) The accrual of Construction Period Expansion Rent calculated under this Section 2.1.3 with respect to advances made other than on the first day of a calendar month shall be prorated in the month in which advances are made on the basis of a thirty (30) day month and actual days elapsed; (iv) On the day on which Substantial Completion occurs as to the Expansion Work (the "RESET DATE"), the monthly Minimum Rent with respect to the total of (A) all advances under the Development Addendum for Expansion Work plus (B) all accrued but unpaid Construction Period Expansion Rent shall be reset at an amount equal to one-twelfth (1/12) of the product of (I) the total of such advances made for Expansion Work plus accrued but unpaid 6 12 Construction Period Expansion Rent, times (II) three hundred twenty-five (325) basis points over the twenty (20) day average 10 year United States Treasury rate in effect on the Reset Date (the "EXPANSION INITIAL TERM MINIMUM RENT"); (v) The Expansion Initial Term Minimum Rent shall accrue but not be paid until ninety (90) days after the Reset Date. The total amount which accrues during such ninety (90) day period is referred to herein as the "DEFERRED RENT AMOUNT" and such ninety (90) day period is referred to as the "DEFERRAL PERIOD"; (vi) Commencing with the Reset Payment Commencement Date (as such term is defined in the next sentence) and on the first business day of each calendar month thereafter during the Initial Term, the Minimum Rent payable during the Initial Term shall include the Expansion Initial Term Minimum Rent. As used herein, the "RESET PAYMENT COMMENCEMENT DATE" shall mean the first business day of the calendar month immediately following the expiration of the Deferral Period. If the Reset Date falls on other than the first business day of a calendar month, on the Reset Payment Commencement Date, Tenant shall also pay a prorated amount of Expansion Initial Term Minimum Rent for the period from the end of the Deferral Period to the Reset Payment Commencement Date, based on a thirty (30) day month and actual days elapsed; 7 13 (vii) Commencing on the Reset Payment Commencement Date and monthly thereafter during the Initial Term, the Minimum Rent payable by Tenant shall also include an amount (the "AMORTIZING PAYMENT") equal to (A) the Deferred Rent Amount, divided by (B) the number of calendar months remaining after the end of the Deferral Period through the end of the Initial Term; (viii) Therefore, during the Initial Term but before the end of the Deferral Period, monthly Minimum Rent payable by Tenant consists of the Basic Initial Term Minimum Rent plus the Renovation Initial Term Minimum Rent; and (ix) After the end of the Deferral Period and continuing for the remainder of the Initial Term, monthly Minimum Rent payable by Tenant consists of (A) the Basic Initial Term Minimum Rent, plus (B) the Renovation Initial Term Minimum Rent, plus (C) the Expansion Initial Term Minimum Rent, plus (D) the Amortizing Payment. 2.2 RENEWAL TERM MINIMUM RENT. The Minimum Rent for each Renewal Term shall be expressed as an annual amount but shall be payable in advance in equal monthly installments on the first business day of each calendar month. Such annual Minimum Rent shall be equal to the product of: 2.2.1 the lesser of (i) the Adjusted Fair Market Value of the Premises (as such term is defined in Section 2.2.4 below) on the date of Tenant's notice 8 14 of exercise pursuant to Section 1.2.1 or (ii) Landlord's Adjusted Investment in the Premises (as defined in Section 2.2.5 below); and 2.2.2 a percentage equal to three hundred (300) basis points over the twenty (20) day average 10 year United States Treasury rate in effect on the date of Tenant's notice of exercise pursuant to Section 1.2.1. 2.2.3 notwithstanding the foregoing, in no event shall the Minimum Rent for the first Renewal Term exceed one hundred twenty-eight and one-eighth percent (128.125%) of the Total Rent (as such term is defined in Section 2.3.1 below) payable during calendar year 2005, and in no event shall the Minimum Rent for any Renewal Term other than the first Renewal Term exceed one hundred twenty-five percent (125%) of the Total Rent in effect for the Lease Year immediately preceding the first Lease Year of such Renewal Term. Furthermore, in no event shall the Minimum Rent for the first Lease Year of the first Renewal Term be less than one hundred two and one-half percent (102.5%) of the Total Rent payable during calendar year 2005. 2.2.4 As used herein, the "ADJUSTED FAIR MARKET VALUE" of the Premises shall mean fair market value as determined under this Lease with the following adjustments: (i) excluding the enterprise value of any home health agency operated by Tenant out of space in the Premises but including the fair rental value of such space; and (ii) minus the value of any capital improvements to the Premises paid for by Tenant and not funded by Landlord under Section 5.7 below. 9 15 2.2.5 As used herein, "LANDLORD'S ADJUSTED INVESTMENT" in the Premises shall mean Landlord's Original Investment (as hereinafter defined in this Section 2.2.5) multiplied at the end of each Lease Year by a percentage equal to one hundred percent (100%) plus one-half (1/2) of the CPI Increase (as defined in Section 2.2.6 below) for such Lease Year. As used herein, "LANDLORD'S ORIGINAL INVESTMENT" shall mean Sixteen Million Five Hundred Eighty Thousand Dollars ($16,580,000) as increased by (B) any amount paid by Landlord pursuant to Section 5.7 below or pursuant to the Development Addendum, plus (C) the total of accrued Construction Period Expansion Rent, and as decreased by (D) any net award paid to Landlord pursuant to Section 13.2 below, all as applicable. 2.2.6 As used herein, "CPI" shall be defined as the Consumer Price Index for All Urban Wage Earners and Clerical Workers, United States Average, Subgroup "All Items" (1982-1984=100), as published by the United States Department of Labor, Bureau of Labor Statistics. The "CPI INCREASE" shall be calculated annually by comparing the CPI in effect on the first calendar day of the immediately preceding Lease Year to the first calendar day of the then current Lease Year. If within ten (10) days of the date of Tenant's notice of exercise pursuant to Section 1.2.1, Landlord and Tenant are unable to agree on the Adjusted Fair Market Value of the Premises for purposes of this calculation, such Adjusted Fair Market Value shall be established by the appraisal process described on Exhibit "C" attached hereto. The Minimum Rent for the 10 16 applicable Renewal Term must be finally determined by such appraisal process on or before a date ninety (90) days after Tenant's notice of exercise pursuant to Section 1.2.1 or Tenant shall lose its right to extend the Term. Landlord and Tenant acknowledge and agree that this Section is designed to establish a fair market Minimum Rent for the Premises during the applicable Renewal Terms. 2.3 INITIAL TERM ADDITIONAL RENT. 2.3.1 Commencing with the second Lease Year of the Initial Term and continuing thereafter during the Initial Term, Tenant agrees to pay Additional Rent to Landlord on a monthly basis in arrears on the first business day of each calendar month. Such Additional Rent shall be equal to (a) twenty percent (20%) of the amount by which the Gross Revenues for the Lease Year through the applicable month exceed the prorated Gross Revenues for the applicable portion of the Base Year, minus (b) all Additional Rent theretofore paid by Tenant during such Lease Year. 2.3.2 "GROSS REVENUES" shall be calculated according to GAAP and shall be defined as all revenues generated by the operation, sublease and/or use of the Premises in any way, excluding (i) contractual allowances during the Term for billings not paid by or received from the appropriate governmental agencies or third party providers; (ii) all proper patient billing credits and adjustments according to GAAP relating to health care accounting; and (iii) federal, state or local sales or excise taxes and any tax based upon or measured by said revenues which is added to or made a part of the amount 11 17 billed to the patient or other recipient of such services or goods, whether included in the billing or stated separately. 2.3.3 "LEASE YEAR" shall be defined as the twelve (12) month periods commencing on January 1 of each year of the Term. 2.3.4 The "BASE YEAR" during the Initial Term shall mean the year ending on December 31, 1997. 2.4 RENEWAL TERM ADDITIONAL RENT. Except during the first Lease Year of any Renewal Term, Tenant shall pay to Landlord Additional Rent in each Renewal Term on a monthly basis in arrears no more than 30 days after the end of each month during the applicable Lease Year. The Additional Rent for each Renewal Term shall be calculated as provided in Section 2.3 except that the Base Year for the purpose of determining such Additional Rent shall be the first Lease Year of the applicable Renewal Term. 2.5 TOTAL RENT. 2.5.1 For all purposes of calculating and paying Minimum Rent and Additional Rent under this Lease, the total of the Minimum Rent and Additional Rent ("TOTAL RENT") payable by Tenant in any Lease Year will not be less than the Total Rent paid by Tenant for the previous Lease Year. 2.5.2 Notwithstanding any of the other terms of this Section 2 but subject to Section 2.5.3 below, the Total Rent due during each Lease Year shall not increase from one Lease Year to the next by an amount in excess of (i) two and one-half percent (2.5%), multiplied by (ii) the Total Rent due during the immediately preceding Lease Year. 12 18 2.5.3 The terms of Section 2.5.2 above shall have no applicability in determining the calculation of the Minimum Rent due during the first Lease Year of any Renewal Term. 2.5.4 Within sixty (60) days of the end of each Lease Year, Tenant shall deliver to Landlord a report in a form mutually agreed upon by Landlord and Tenant, certified by an officer or general partner of Tenant, as applicable, setting forth the calculations required by the application of this Section 2.5. If said report provides that Tenant owes Landlord any sum of money, Tenant shall accompany such report delivered to Landlord with such funds. If said report provides that Landlord owes Tenant any sum of money, such sum shall be applied as a credit against future installments of Minimum Rent and Additional Rent due from Tenant to Landlord; provided, however, if such sum is owed by Landlord to Tenant with respect to the last Lease Year of the Term, Landlord shall pay such sum to Tenant within thirty (30) days of Landlord's receipt of the report in question. 2.5.5 For the purpose of comparing the Total Rent from Lease Year to Lease Year pursuant to this Section 2.5, the increase in Minimum Rent by reason of any disbursement by Landlord pursuant to Section 5.7 of the Lease or pursuant to the Development Addendum shall be treated as follows: (i) for the purpose of comparing the Total Rent in the Lease Year in which such disbursement is made against the Total Rent in the preceding Lease Year, such increase in Minimum Rent shall be ignored, and (ii) for the purpose of 13 19 comparing the Total Rent in the Lease Year in which such disbursement is made to the Total Rent in the following Lease Year, such increase in Minimum Rent shall be deemed effective on the first day of the Lease Year in which the disbursement is made. 2.6 PRORATION FOR PARTIAL PERIODS. The rent for any month during the Term which begins or ends on other than the first or last calendar day of a calendar month shall be prorated based on actual days elapsed. 2.7 ABSOLUTE NET LEASE. 2.7.1 GENERALLY. All rent payments shall be absolutely net to the Landlord free of taxes (other than federal or state income taxes calculated on the net income of Landlord), assessments, utility charges, operating expenses, refurnishings, insurance premiums or any other charge or expense in connection with the Premises. All expenses and charges, whether for upkeep, maintenance, repair, refurnishing, refurbishing, restoration, replacement, insurance premiums, real estate or other property taxes, utilities, and other operating or other charges of a like nature or otherwise, shall be paid by Tenant. This provision is not in derogation of the specific provisions of this Lease, but in expansion thereof and as an indication of the general intention of the parties hereto. Tenant shall continue to perform its obligations under this Lease even if Tenant claims that Tenant has been damaged by any act or omission of Landlord. Therefore, Tenant shall at all times remain obligated under this Lease without any right of set-off, counterclaim, abatement, 14 20 deduction, reduction or defense of any kind. Tenant's sole right to recover damages against Landlord by reason of a breach or alleged breach of Landlord's obligations under this Lease shall be to prove such damages in a separate action against Landlord. 2.7.2 SALES TAX. Tenant hereby agrees to pay any and all sales or use taxes (and any interest or penalties related thereto) at any time assessed by the Texas Comptroller of Public Accounts against (i) Landlord, with respect to the Landlord's purchase of the Premises from Tenant under that certain Purchase and Sale Agreement of even date herewith (the "PURCHASE AGREEMENT"), or (ii) Tenant, with respect to Tenant's operation of such facility, including, without limitation, any lease of personal property at any time entered into by and between Landlord and Tenant. Tenant further agrees to indemnify Landlord against and/or reimburse Landlord for the amount of any such taxes actually paid by or assessed against Landlord regardless of the reason for any such payment or assessment. Any failure to make such reimbursement shall constitute an Event of Default under this Lease. 2.7.3 CCF PROVISIONS. Tenant hereby acknowledges that prior to Tenant's acquisition of the Premises, (i) the prior operator of such facility operated it as a Continuing Care Facility and sold Continuing Care Contracts (within the meaning of Chapter 246 of the Texas Health and Safety Code, (ii) such facility and prior operator had been the subject of bankruptcy proceedings, and certain individuals who had signed Continuing Care Contracts and paid 15 21 nonrefundable entrance fees were among the creditors of such prior operator in such bankruptcy proceedings, (iii) under the terms of the settlement of such bankruptcy proceedings, some or all of such individuals received an ongoing right to receive discounts off of certain services and/or room or unit rates, including, without limitation, nursing facility rates, and (iv) some of such individuals are or continue to be residents of such facility (referred to by Tenant and hereinafter designated "TIER ONE RESIDENTS"). Tenant hereby agrees to continue to abide by and respect any and all legal or monetary obligations it may have to or with the Tier One Residents and, upon request of Landlord, to provide a detailed alphabetical list of all then current residents of Premises who are Tier One Residents and any discounts or special rates for services or rent to which each such individual Tier One Resident is then entitled. Tenant and Tenant alone shall be responsible for such discounts, special services, rates or rent and for all other costs and expenses with respect to Continuing Care Contracts sold at the Premises and shall hold Landlord harmless therefrom (both before and after expiration of the Term). Furthermore, the indemnity set forth in Section 23 herein shall cover all liability, expense, loss, costs, deficiency, fine, penalty or damage relating to any Continuing Care Contract, including any ramifications resulting from the Premises being operated as a Continuing Care Facility. 3. TAXES, ASSESSMENTS AND OTHER CHARGES: 16 22 3.1 TENANT'S OBLIGATIONS. Tenant agrees to pay and discharge (including the filing of all required returns) any and all taxes (including but not limited to real estate and personal property taxes, business and occupational license taxes, ad valorem sales, use, single business, gross receipts, transaction privilege, franchise, rent or other excise taxes, but excluding federal or state income taxes calculated on the net income of Landlord, and other assessments levied or assessed against the Premises or any interest therein during the Term, prior to delinquency or imposition of any fine, penalty, interest or other cost. 3.2 PRORATION. At the end of the Term, all such taxes and assessments under Section 3.1 shall be prorated. 3.3 RIGHT TO PROTEST. Landlord and/or Tenant shall have the right, but not the obligation, to protest the amount or payment of any real or personal property taxes or assessments levied against the Premises; provided that in the event of any protest by Tenant, Landlord shall not incur any expense because of any such protest, Tenant shall diligently and continuously prosecute any such protest and notwithstanding such protest Tenant shall pay any tax, assessment or other charge before the imposition of any penalty or interest. 3.4 TAX BILLS. Landlord shall promptly forward to Tenant copies of all tax bills and payment receipts relating to the Premises received by Landlord. 3.5 OTHER CHARGES. Tenant agrees to pay and discharge, punctually as and when the same shall become due and payable without penalty, all electricity, gas, garbage collection, cable television, telephone, water, sewer, and other utilities costs and all other charges, obligations or deposits assessed against the Premises during the Term. 4. INSURANCE. 17 23 4.1 GENERAL INSURANCE REQUIREMENTS. All insurance provided for in this Lease shall be maintained under valid and enforceable policies issued by insurers of recognized responsibility, approved to do business in the State of Texas having a general policyholders rating of not less than "A-" and a financial rating of not less than "VIII" in he then most current Best's Insurance Report. Any and all policies of insurance required under this Lease shall name the Landlord as an additional insured and shall be on an "occurrence" basis; provided, however, the proceeds of any business interruption policy shall be payable to Tenant without relieving Tenant in any way of its obligation to pay rent under this Lease. In addition, Landlord shall be shown as the loss payable beneficiary under the casualty insurance policy maintained by Tenant pursuant to Section 4.2. All policies of insurance required herein may be in the form of "blanket" or "umbrella" type policies which shall name the Landlord and Tenant as their interests may appear and allocate to the Premises the full amount of insurance required hereunder. Original policies or satisfactory certificates from the insurers evidencing the existence of all policies of insurance required by this Lease and showing the interest of the Landlord shall be filed with the Landlord prior to the commencement of the Term and shall provide that the subject policy may not be canceled except upon not less than ten (10) days prior written notice to Landlord. If Landlord is provided with a certificate, upon Landlord's request Tenant shall provide Landlord with a complete copy of the insurance policy evidenced by such certificate within 30 days of the commencement of the Term. Originals of the renewal policies or certificates therefor from the insurers evidencing the existence thereof shall be deposited with Landlord upon renewal of the applicable policies. If Landlord is provided with a certificate for a renewal policy, upon Landlord's request Tenant shall deliver a 18 24 copy of the complete renewal policy to Landlord within 30 days of the expiration of the replaced policy. Any claims under any policies of insurance described in this Lease shall be adjudicated by and at the expense of the Tenant or of its insurance carrier, but shall be subject to joint control of Tenant and Landlord. The provisions of this Section 4.1 also apply to any insurance coverage required under the Development Addendum. 4.2 FIRE AND OTHER CASUALTY. Tenant shall keep the Premises insured against loss or damage from all causes under standard "all risk" property insurance coverage, without exclusion for fire, lightning, windstorm (including hurricane coverage), explosion, smoke damage, vehicle damage, sprinkler leakage, flood, vandalism, earthquake, malicious mischief or any other risk as is normally covered under an extended coverage endorsement, in the amounts that are not less than the full insurable value of the Premises including all equipment and personal property (whether or not Landlord Personal Property) used in the operation of the Premises, but in no event less than Fourteen Million Four Hundred Thousand Dollars ($14,400,000) before completion of the renovation and expansion of the Premises under the Development Addendum and Twenty-Seven Million Dollars ($27,000,000) thereafter; provided, however, that the amount of such insurance in respect of the required flood and earthquake coverage may be limited, at Tenant's option, to Five Million Dollars ($5,000,000). The term "FULL INSURABLE VALUE" as used in this Lease shall mean the actual replacement value of the Premises (including all improvements) and every portion thereof, including the cost of compliance with changes in zoning and building codes and other laws and regulations, demolition and debris removal and increased cost of construction. In addition, the casualty insurance required under this Section 4.2 will include an agreed amount endorsement 19 25 such that the insurance carrier has accepted the amount of coverage and has agreed that there will be no co-insurance penalty. 4.3 PUBLIC LIABILITY. Tenant shall maintain comprehensive general public liability insurance coverage (including products liability coverage) against claims for bodily injury, death or property damage occurring on, in or about the Premises and the adjoining sidewalks and passageways, such insurance to include a broad form endorsement and to afford protection to Landlord and Tenant of not less than One Million Dollars ($1,000,000) with respect to bodily injury or death to any one person, not less than Five Million Dollars ($5,000,000) with respect to any one accident, and not less than One Million Dollars ($1,000,000) with respect to property damage; provided, that Landlord shall have the right at any time hereafter to require such higher limits as may be reasonable and customary for transactions and properties that are similar to the Premises and that are located in the area of Corpus Christi, Texas. 4.4 PROFESSIONAL LIABILITY INSURANCE. Guarantor or Tenant shall maintain insurance against liability imposed by law upon Guarantor and its Affiliates (including Tenant) for damages on account of professional services rendered or which should have been rendered by Guarantor and Tenant or any person for which acts Guarantor or Tenant is legally liable on account of injury, sickness or disease, including death at any time resulting therefrom, and including damages allowed for loss of service, in a minimum amount of One Million Dollars ($1,000,000) for each claim and Five Million Dollars ($5,000,000) in the aggregate. 4.5 WORKERS COMPENSATION. Tenant shall comply with all legal requirements regarding worker's compensation, including any requirement to maintain 20 26 worker's compensation insurance against claims for injuries sustained by Tenant's employees in the course of their employment. 4.6 BOILER INSURANCE. Tenant shall maintain boiler and pressure vessel insurance, including an endorsement for boiler business interruption insurance, on any fixtures or equipment which are capable of bursting or exploding, in an amount not less than Five Million Dollars ($5,000,000) for damage to property, bodily injury or death resulting from such perils. 4.7 BUSINESS INTERRUPTION INSURANCE. Tenant shall maintain, at its expense, business interruption and extra expense insurance insuring a period of not less than six (6) months. 4.8 COURSE OF CONSTRUCTION INSURANCE. The requirement under the Development Addendum to carry course of construction or other insurance is in addition to the requirements of this Article 4. Upon Substantial Completion, all improvements on the Premises shall be insured under Section 4.2. 4.9 DEDUCTIBLE AMOUNTS. The policies of insurance which Tenant is required to provide under this Lease (including without limitation the Development Addendum) will not have deductibles or self-insured retentions in excess of One Hundred Thousand Dollars ($100,000); provided, however, the deductible for windstorm coverage may be equal to one percent (1%) of insurable value subject to a One Hundred Thousand Dollar ($100,000) minimum and the worker's compensation coverage may have a deductible of up to Two Hundred Fifty Thousand Dollars ($250,000). 5. USE, MAINTENANCE AND ALTERATION OF THE PREMISES. 21 27 5.1 TENANT'S MAINTENANCE OBLIGATIONS. 5.1.1 Tenant will keep and maintain the Premises in good appearance, repair and condition and maintain proper housekeeping. Tenant shall promptly make or cause to be made all repairs, interior and exterior, structural and nonstructural, ordinary and extraordinary, foreseen and unforeseen, necessary to keep the Premises in good and lawful order and condition and in substantial compliance with all applicable requirements for the licensing of the Retirement Care Facilities in the State of Texas and certification for participation in Medicare and Medicaid (or any successor programs) as currently exist or as are obtained by Tenant at a later date or as otherwise required under all applicable local, state and federal laws. 5.1.2 As part of Tenant's obligations under this Section 5.1, Tenant shall be responsible to maintain, repair and replace all Landlord Personal Property and all Tenant Personal Property (as defined in Section 7.1 below) in good condition, ordinary wear and tear excepted, consistent with prudent industry practice as applicable to the Retirement Care Facilities. 5.1.3 Without limiting Tenant's obligations to maintain the Premises under this Lease, within thirty (30) days of the end of each Lease Year starting with the end of the sixth (6th) Lease Year, Tenant shall provide Landlord with evidence satisfactory to Landlord in the reasonable exercise of Landlord's discretion that Tenant has in such Lease Year and the two (2) immediately preceding Lease Years spent on Repair Expenditures for the Premises an annual 22 28 average amount of at least Two Hundred Dollars ($200) per unit per year other than skilled nursing facility beds as such amount is adjusted annually at the end of each Lease Year for increases in the CPI from the date hereof). The term "REPAIR EXPENDITURES" is defined to mean repairs or modifications to the Premises which have the effect of maintaining the competitive position of the Premises in its marketplace. Non-exclusive examples of Repair Expenditures are replacement wallpaper, tiles, window coverings, lighting fixtures, painting, landscaping, carpeting, architectural adornments, common area amenities and the like. It is expressly understood that capital improvements or repairs (such as but not limited to repairs or replacements to the structural elements, equipment, fixtures, appliances, parking area, or the roof or to the electrical, plumbing, HVAC or other mechanical or structural systems in the Premises) and any advances under the Development Addendum shall not be considered to be Repair Expenditures. If Tenant fails to make at least the above amount of Repair Expenditures, Tenant shall promptly on demand from Landlord (but in no event more than five days) pay to Landlord the applicable shortfall in Repair Expenditures. Such funds shall be the sole property of Landlord and Landlord may in its sole discretion provide such funds to Tenant to correct the shortfall in Repair Expenditures or may simply retain such funds as supplemental rent hereunder. 5.2 REGULATORY COMPLIANCE. 23 29 5.2.1 Tenant and the Premises shall comply in all material respects with all federal, state and local licensing and other laws and regulations applicable to the Retirement Care Facilities as well as with the certification requirements of Medicare and Medicaid (or any successor program) as currently exist or as are obtained by Tenant at a later date. Further, Tenant shall ensure that the Premises continue to be licensed and operated as Retirement Care Facilities with a licensed and operating capacity as set forth in the Recitals to this Lease (both before and after the renovation and expansion of the Premises pursuant to the Development Addendum), fully certified for participation in Medicare and Medicaid (or any successor program) as currently exist or as are obtained by Tenant at a later date throughout the Term and at the time the Premises are returned to Landlord at the termination thereof, all without any suspension, revocation, decertification, material penalty or material limitation. Further, Tenant shall not commit any act or omission that would in any way violate any certificate of occupancy affecting the Premises. Without limiting the generality of the foregoing, Tenant shall be responsible to obtain any modifications to existing licenses or certificates of occupancy and/or to obtain new licenses or certificates of occupancy for the Premises upon completion of the renovation of the expansion contemplated by the Development Addendum in order to operate the Premises for its intended use in compliance with applicable legal and regulatory requirements. 24 30 5.2.2 During the Term, all inspection fees, costs and charges associated with a change of any licensure or certification shall be borne solely by Tenant. Tenant shall at its sole cost make any additions or alterations to the Premises necessitated by, or imposed in connection with, a change of ownership inspection survey for the transfer of operation of the Premises from Tenant or Tenant's assignee or subtenant to Landlord or Landlord's designee at the expiration or earlier termination of the Term in accordance herewith. 5.2.3 Landlord acknowledges that the Premises are not now certified to participate in Medicare or Medicaid. If Tenant elects to participate in such programs (or any successor program) in the future, Tenant shall comply in all material respects with the requirements to participate in such programs. However, it shall not be a default under this Lease if Tenant voluntarily for its own business reasons elects to discontinue its participation in such programs so long as at the time of such discontinuance there is no ongoing proceeding by the applicable regulatory authority to decertify Tenant and so long as Tenant at the time of such discontinuance is not in material default of any material requirement of any such program. 5.3 PERMITTED USE. Tenant shall continuously use and occupy the Premises during the Term solely as Retirement Care Facilities licensed and operated as set forth in the Recitals to this Lease (both before and after the renovation and expansion of the Premises pursuant to the Development Addendum). 25 31 5.4 TENANT REPURCHASE OBLIGATION. In the event of an Event of Default arising from Tenant's failure to comply with Section 5.3 and during the pendency thereof, or if an Event of Default occurs and is continuing because the license of the Premises is revoked, suspended or materially limited for any of the uses included in the definition of Retirement Care Facilities, then in addition to Landlord's other rights and remedies under this Lease, Landlord shall have the right to put the Premises to Tenant. If Landlord exercises such right, Tenant shall purchase the Premises from Landlord for a cash price equal to the greater of the Adjusted Fair Market Value of the Premises or Landlord's Original Investment on the date of Landlord's notice of exercise. Such Adjusted Fair Market Value shall be as agreed between Landlord and Tenant. However, failing such agreement within ten (10) days of Landlord's notice of exercise under this Section, such Adjusted Fair Market Value shall be determined by the appraisal process set forth in Exhibit "C" attached hereto. Within ninety (90) days of Landlord's exercise of its put under this Section 5.4, such purchase shall be consummated utilizing an escrow at a national title company selected by Landlord. Such escrow shall be documented on such title company's standard sale escrow instructions without representations or warranties and without any due diligence or other contingencies in favor of the buyer. Tenant shall pay all costs of such sale transaction. At the close of such sale, Landlord shall deliver to Tenant title to the Premises subject only to those title exceptions shown on Exhibit "D" attached hereto. 5.5 NO LIENS; PERMITTED CONTESTS. Tenant shall not cause or permit any liens, levies or attachments to be placed or assessed against the Premises or the operation thereof for any reason. However, Tenant shall be permitted in good faith and at its expense to 26 32 contest the existence, amount or validity of any lien upon the Premises by appropriate proceedings sufficient to prevent the collection or other realization of the lien or claim so contested, as well as the sale, forfeiture or loss of any of the Premises or any rent to satisfy the same. Tenant shall provide Landlord with security satisfactory to Landlord in Landlord's reasonable judgment to assure the foregoing. Each contest permitted by this Section 5.5 shall be promptly and diligently prosecuted to a final conclusion by Tenant. 5.6 ALTERATIONS BY TENANT. Subject to Section 5.8, Tenant shall have the right of altering, improving, replacing, modifying or expanding the facilities, equipment or appliances in the Premises from time to time as it may determine is desirable for the continuing and proper use and maintenance of the Premises under this Lease; provided, however, that any alterations, improvements, replacements, expansions or modifications to the Premises in excess of One Million Five Hundred Thousand Dollars ($1,500,000) in any rolling twelve (12) month period shall require the prior written consent of the Landlord; provided, further, that the aggregate cost of tenant-funded improvements cannot exceed ten percent (10%) of Landlord's Original Investment for the Premises without securing the prior written consent of Landlord. Any amounts funded under the Development Addendum or by Tenant as necessitated by damage to the Premises by casualty or condemnation shall not count towards the foregoing calculation. The cost of all alterations, improvements, replacements, modifications, expansions or other purchases, covered by this Section 5.6, whether undertaken as an on-going licensing, Medicare or Medicaid (or any successor program) requirement (if applicable) or other regulatory requirement or otherwise shall be borne solely and exclusively by Tenant (unless funded by Landlord under Section 5.7) and shall immediately become a part 27 33 of the Premises and the property of the Landlord subject to the terms and conditions of this Lease. All work done in connection therewith shall be done in a good and workmanlike manner and in compliance with all existing codes and regulations pertaining to the Premises and shall comply with the requirements of insurance policies required under this Lease. In the event any items of the Premises have become inadequate, obsolete or worn out or require replacement (by direction of any regulatory body or otherwise), Tenant shall remove such items and exchange or replace the same at Tenant's sole cost and the same shall become part of the Premises and property of the Landlord. 5.7 CAPITAL IMPROVEMENTS FUNDED BY LANDLORD. In the event Tenant desires to make a capital improvement or a related series of capital improvements to the Premises not covered by the Development Addendum and if Tenant desires that Landlord fund the same, Landlord shall, in its discretion and without obligation, within thirty (30) days of Tenants' written request therefor, consider Tenant's request to fund such capital improvements. Each and every capital improvement funded by Landlord under this Section shall immediately become a part of the Premises and shall belong to Landlord subject to the terms and conditions of this Lease. If Landlord funds any capital improvements, Landlord's Original Investment shall be increased for all purposes under this Lease by the amount of the funds provided by Landlord for capital improvements. 5.8 COMPLIANCE WITH IRS GUIDELINES. Any improvement or modification to the Premises shall satisfy the requirements set forth in Sections 4(4).02 and .03 of Revenue Procedure 75-21, 1975-1 C.B. 715, as modified by Revenue Procedure 79-48, 1979-2 C.B. 529. Landlord reserves the right to refuse to consent to any improvement or modification to 28 34 the Premises if, in its judgment, such improvement or modification does not meet the foregoing requirements. 5.9 SKYWAY IMPROVEMENTS; RE-PLOTTING. 5.9.1 The existing facility on the Premises is separated from the Expansion Parcel by Carancahua Street, a public street. In order to construct the new facility on the Expansion Parcel under the Development Addendum, Tenant plans to connect the existing and new buildings with an aerial walkway extending over Carancahua Street between such buildings. In addition, in order to construct the new building on the Expansion Parcel, Tenant must obtain from the City of Corpus Christi (the "CITY") certain leasehold rights to encroach on certain property of the City. The aerial walkway described in the foregoing shall be referred to herein as the "SKYWAY LEASE IMPROVEMENTS." The encroaching improvements described in the foregoing shall be referred to herein as the "ENCROACHING IMPROVEMENTS." 5.9.2 In order to obtain the necessary leasehold rights for the Skyway Lease Improvements and the Encroaching Improvements, Tenant will first obtain a lease from the City with a term of one year (the "ONE YEAR LEASE"). Tenant will use its best efforts to obtain the One Year Lease in substantially the same form as previously delivered by Tenant to Landlord. Tenant will not be in default hereunder if the City fails to enter into the One Year Lease, but if the One Year Lease is executed by the City, then Tenant will assign the One Year Lease to Landlord and Landlord will sublease the leasehold estate thereunder 29 35 back to Tenant. In any event, Tenant and Tenant alone will be entirely responsible for discharging all obligations of the lessee under a One Year Lease, including without limitation the payment of any rent to the City thereunder and the providing of any required insurance coverage. 5.9.3 Should the City approve a One Year Lease, Tenant shall use its best efforts to cause the City to approve a lease of the necessary rights for the Skyway Lease Improvements and the Encroaching Improvements from the City to Landlord (or to Tenant with the right to assign to Landlord) for a term of fifty-nine (59) years on substantially the same terms (other than the rent amount and lease term) as the One Year Lease (the "59 YEAR LEASE"). Tenant will not be in default hereunder, however, if the City fails to enter into the 59 Year Lease, but if the 59 Year Lease is executed Landlord will sub-lease the leasehold estate thereunder to Tenant for the Term of this Lease. In any event, Tenant and Tenant alone will be entirely responsible for discharging all obligations of the lessee under the 59 Year Lease, including without limitation the payment of any rent to the City thereunder and the providing of any required insurance coverage, all to the extent such obligations accrue during the term of this Lease. Upon execution of a 59 Year Lease, Tenant shall at its expense provide to Landlord a leasehold owner's policy of title insurance insuring Landlord as the owner of the leasehold estate under the 59 Year Lease in form and substance satisfactory to Landlord. 30 36 5.9.4 Tenant hereby represents, warrants and covenants to Landlord that (i) the Skyway Lease Improvements are not necessary or essential to the effective and profitable operation of either the existing facility on the Premises or the building to be constructed on the Expansion Parcel pursuant to the Development Addendum; (ii) the inability to build the Skyway Lease Improvements or the removal thereof after construction will not have a material adverse impact on the operation or profitability of the existing or future facilities on the Premises; and (iii) if the One Year Lease or 59 Year Lease terminates or expires during the term of this Lease without renewal or replacement, Tenant will, at its sole cost and expense, remove the Skyway Lease Improvements and the Encroaching Improvements and repair and restore all facilities on the Premises (including the existing facility and the new facilities to be built under the Development Addendum) to a complete and attractive condition as if the Skyway Improvements and the Encroaching Improvements were never constructed, including without limitation the improvement of the Premises at Tenant's expense as needed to continue the effective operation thereof without the Skyway Lease Improvements and the Encroaching Improvements. 5.9.5 As part of the development of the Expansion Parcel under the Development Addendum, Tenant has applied to the City for a re-platting of the Expansion Parcel. As used herein, "RE-PLATTING" shall mean the Plat of Pope's Broadway Addition, Block 2, Lot 23, File No. 1196137-NP 64 as applied for 31 37 by Tenant with the City. Tenant shall use its best efforts to obtain the Re-platting in a timely manner to permit the construction of the new facility on the Expansion Parcel pursuant to the Development Addendum. Landlord agrees to cooperate as reasonably requested by Tenant to obtain the Re-platting, including without limitation the execution of applications and other instruments as required therefor, provided that Landlord shall be at no expense in providing any such assistance. 5.9.6 The indemnification obligation of Tenant under Section 23 below shall extend to any claim or damage suffered by Landlord (including without limitation any decrease in the value of the Premises) by reason of (i) the terms and conditions of or performance under the One Year Lease or the 59 Year Lease; (ii) the construction, maintenance, removal or operation of the Skyway Lease Improvements or the Encroaching Improvements; (iii) the failure of the City to approve either the One Year Lease, the 59 Year Lease or the Re-platting, or (iv) the breach of any of Tenant's representations, warranties or covenants as set forth in Section 5.9.4. 5.9.7 All insurance policies maintained by Tenant pursuant to the One Year Lease or 59 Year Lease shall name Landlord as an additional insured and shall not be subject to cancellation without notice to Landlord. 6. CONDITION AND TITLE OF PREMISES; RIGHT OF FIRST OFFER. 6.1 CONDITION AND TITLE OF PREMISES. Tenant acknowledges that it is presently engaged in the operation of facilities in the State of Texas similar to the uses 32 38 included in the definition of Retirement Care Facilities in the Recitals to this Lease and has expertise in senior housing, independent living, assisted living, skilled and intermediate nursing, subacute care and dementia care. Tenant has thoroughly investigated the Premises, has selected the Premises to its own specifications, and has concluded that no improvements or modifications to the Premises are required in order to operate the Premises for its intended use. Tenant accepts the Premises for use as Retirement Care Facilities under this Lease on an "AS IS, WHERE IS, WITH ALL FAULTS" basis and will assume all responsibility and cost for the correction of any observed or unobserved deficiencies or violations. In making its decision to enter into this Lease, Tenant has not relied on any representations or warranties, express or implied, of any kind from Landlord. Notwithstanding any other provision of this Lease to the contrary, Tenant accepts the Premises in their present condition, AS IS, WHERE IS, WITH ALL FAULTS, and without any representations or warranties whatsoever, express or implied, including, without limitation, any express or implied representations or warranties as to the fitness, use, suitability, or condition of the Premises. Tenant hereby represents and warrants to Landlord that Tenant is thoroughly familiar with the Premises and the condition thereof, that Tenant is relying on Tenant's own personal knowledge of the condition of the Premises, that neither Landlord nor any person or entity acting or allegedly acting for or on behalf of Landlord or any other person or entity having or claiming any interest in the Premises has made any representations, warranties, agreements, statements, or expressions of opinions in any way or manner whatsoever related to, connected with, or concerning the Premises, the condition of the Premises, or any other fact or circumstance whatsoever on which Tenant is relying, and, to the maximum extent not prohibited by applicable law, Tenant 33 39 hereby releases and discharges Landlord and all other persons and entities having or claiming any interest in the Premises from all liability, damages, costs, and expenses of every kind and nature whatsoever in any way or manner arising out of, connected with, related to, or emanating from the condition of the Premises at any time during the Term of this Lease. Tenant has examined the condition of title to the Premises prior to the execution and delivery of this Lease and has found the same to be satisfactory. 6.2 RIGHT OF FIRST OFFER TO PURCHASE PREMISES. 6.2.1 Tenant shall have the right of first offer to purchase the Premises upon the terms and conditions set forth in this Section 6.2; provided, however, Tenant shall not have the right to exercise its rights under this Section 6.2 if any Event of Default has occurred and is continuing as of any of the following dates: (i) the date on which Landlord delivers an Offering Notice to Tenant pursuant to Section 6.2.2(i), or (ii) the date of Tenant's delivery of an Exercise Notice pursuant to Section 6.2.2(ii), or (iii) or at the closing date established to consummate the purchase of the Premises pursuant to Section 6.2.2(iii). Additionally, if Landlord and NHP have received a bona fide offer to purchase both the Premises and the leased premises under the NHP Agreement, Tenant acknowledges that Landlord may include in the Offering Notice the condition that Tenant may only purchase both the Premises and that so long as ARC concurrently purchases that certain Premises as defined in the NHP Agreement. If the Offering Notice contains such a requirement, Tenant's rights under this 34 40 Section 6.2 are exercisable only so long as ARC also exercises its rights under Section 6.2 of the NHP Agreement. 6.2.2 If during the Term Landlord receives a bona fide offer to purchase the Premises, or any portion thereof, (the "OFFERED PROPERTY"), from any person or entity other than an Affiliate of Landlord (as such term is defined in Section 10.1.3 below), Landlord and Tenant shall take the following steps if Landlord has determined to accept such offer: (i) Landlord shall give written notice to Tenant of its intention to accept such offer, which notice shall set forth the price, terms and conditions contained in the offer to purchase the Offered Property which Landlord intends to accept ("OFFERING NOTICE"); (ii) Within fifteen (15) days after receipt of an Offering Notice, Tenant shall either (A) deliver to Landlord written notice that Tenant does not desire to purchase the Offered Property on the terms set forth in the Offering Notice, or (B) deliver to Landlord written notice of Tenant's desire to exercise its right to purchase the Offered Property on the terms set forth in the Offering Notice pursuant to this Section 6.2 ("EXERCISE NOTICE"); (iii) If Tenant delivers an Exercise Notice within such fifteen (15) day period, Landlord as seller and Tenant as buyer shall immediately open an escrow to consummate such purchase at a national title company selected by Landlord in its reasonable discretion on the following terms: (A) the form of such instructions to be then signed by Landlord and Tenant shall be such title 35 41 company's standard sale escrow instructions and, notwithstanding anything set forth in the Offering Notice to the contrary, shall not provide for any representations or warranties by Landlord as seller or for any due diligence or other contingencies in favor of Tenant as buyer, (B) the purchase price shall be payable in cash by Tenant or on such other terms as are set forth in the Offering Notice with escrow to close on or before the date set forth in the Offering Notice, (C) transaction costs shall be paid as set forth in the Offering Notice, (D) at close, Landlord shall deliver title to the Offered Property subject only to those title exceptions shown on Exhibit "D" attached hereto, (E) the sale escrow instructions shall provide for an earnest money deposit in the amount set forth in the Offering Notice and shall provide that such deposit may be retained by Landlord as liquidated damages in the event of any breach by Tenant of the terms of the escrow instructions (provided, however, such liquidated damages shall relate only to Landlord's damages by reason of a breach of the escrow instructions and shall in no way liquidate or limit Landlord's damages by reason of a breach of this Lease), (F) the obligations of Tenant under the escrow instructions shall be included in the obligations guaranteed by Guarantor under the Guaranty, and (G) the escrow instructions shall otherwise be in form and substance reasonably satisfactory to Landlord. If Tenant fails to close the escrow for any reason other than a breach by Landlord, then Landlord shall have the right in its option (to be exercised in Landlord's sole discretion) to either declare such breach to be a default under this Lease (as to which the cure 36 42 period shall, notwithstanding anything else in this Lease, be ten (10) calendar days after notice by Landlord, after which an Event of Default shall exist), or Landlord may elect to pursue all remedies available to Landlord against Tenant and Guarantor under the escrow instructions or under applicable law. (iv) If within the fifteen (15) day period following Landlord's delivery of an Offering Notice, Tenant either delivers to Landlord the notice set forth in Section 6.2.2 (ii)(A) or fails to deliver either of the notices set forth in Section 6.2.2(ii), then for a period of nine (9) months following the expiration of such fifteen (15) day period Landlord shall be free to sell the Offered Property on the terms set forth in the Offering Notice or on any other revised terms deemed appropriate by Landlord in its sole discretion; provided, however, if such other revised terms include a price that is more than ten percent (10%) below the price set forth in the Offering Notice, then prior to completing any sale on such revised terms Landlord shall notify Tenant of such revised offering terms. During the five (5) business day period after receipt by Tenant of such notice, Tenant shall have the right (to be exercised if at all by Tenant's execution of escrow instructions and deposit of earnest money under Section 6.2.2 (iii) within such five (5) business day period) to require that Landlord sell the Offered Property to Tenant on such revised offering terms. If Tenant fails to timely exercise its right as required by the preceding proviso, Landlord shall be free to sell the Offered Property to a third party on the revised offering terms. 37 43 (v) If at the end of the nine (9) month period described in Section 6.2.1(iv), Landlord has not sold the Offered Property, then Landlord shall again be required to comply with the provisions of this Section 6.2 if Landlord desires to accept a third party offer to purchase the Offered Property. (vi) If an escrow is opened pursuant to Section 6.2.2(iii) and such escrow fails to close by reason of Tenant's default, in addition to all of the other rights and remedies of Landlord with respect to such breach, Landlord shall thereafter be free to sell the Premises or any portion thereof to any Person on any terms whatsoever without being required to comply with this Section 6.2. (vii) If Landlord has hypothecated its interest in the Premises, this Section 6.2 shall not apply to any judicial or non-judicial sale of the Premises in connection with any foreclosure action or proceeding by the lender, or to any deed in lieu of such foreclosure. 7. LANDLORD AND TENANT PERSONAL PROPERTY. 7.1 TENANT PERSONAL PROPERTY. Tenant shall install, affix or assemble or place on the Premises all items of furniture, fixtures, equipment and supplies not included as Landlord Personal Property as Tenant reasonably considers to be appropriate for Tenant's use of the Premises as contemplated by this Lease (the "TENANT PERSONAL PROPERTY"). Tenant shall provide and maintain during the entire Term all Tenant Personal Property as shall be necessary in order to operate the Premises in compliance with all requirements set forth in this Lease. All Tenant Personal Property shall be and shall remain the property of Tenant and may 38 44 be removed by Tenant upon the expiration of the Term. However, if there is any Event of Default which is continuing, Tenant will not remove the Tenant Personal Property from the Premises and will on demand from Landlord, convey (subject to any existing security interest thereon) the Tenant Personal Property to Landlord by executing a bill of sale in a form reasonably required by Landlord. Upon any such conveyance of Tenant Personal Property to Landlord, the amount owing by Tenant to Landlord by reason of the applicable Event of Default shall be reduced by the fair market value of such Tenant Personal Property, net of any associated debt assumed by Landlord. Such fair market value shall be established by agreement of the parties, but failing such agreement, within ten (10) days of request by any party, such fair market value shall be established by the appraisal process set forth in Exhibit C. In any event, Tenant will repair all damage to the Premises caused by any removal of the Tenant Personal Property. 7.2 LANDLORD'S SECURITY INTEREST. 7.2.1 The parties intend that if Tenant defaults under this Lease, Landlord will control the Tenant Personal Property and the Intangible Property (as defined in Section 7.4 below) so that Landlord or its designee can operate or re-let the Premises intact for use as Retirement Care Facilities . 7.2.2 Therefore, to implement the intention of the parties, and for the purpose of securing the payment and performance of Tenant's obligations under this Lease, Tenant, as debtor, hereby grants to Landlord, as secured party, a security interest in and an express contractual lien upon, all of Tenant's right, title and interest in and to the Tenant Personal Property and in and to the 39 45 Intangible Property and any and all products and proceeds thereof, in which Tenant now owns or hereafter acquires an interest or right, including any leased Tenant Personal Property. This Lease constitutes a security agreement covering all such Tenant Personal Property and the Intangible Property. The security interest granted to Landlord in this Section 7.2.2. is intended by Landlord and Tenant to be subordinate to any security interest granted in connection with the financing or leasing of all or any portion of the Tenant Personal Property so long as the lessor or financier of such Tenant Personal Property agrees to give Landlord written notice of any default by Tenant under the terms of such lease or financing arrangement, to give Landlord a reasonable time following such notice to cure any such default and to consent to Landlord's written assumption of such lease or financing arrangement upon Landlord's curing of any defaults thereunder. This security agreement and the security interest created herein shall survive the termination of this Lease if such termination results from the occurrence of an Event of Default. 7.2.3 Notwithstanding the foregoing, in no event will Landlord's security interest extend to any of Tenant's motor vehicles, proprietary software or systems or operating manuals. 7.3 FINANCING STATEMENTS. If required by Landlord at any time during the Term, Tenant will execute and deliver to Landlord, in form reasonably satisfactory to Landlord, additional security agreements, financing statements, fixture filings and such other documents as Landlord may reasonably require to perfect or continue the perfection of 40 46 Landlord's security interest in the Tenant Personal Property and the Intangible Property and any and all products and proceeds thereof now owned or hereafter acquired by Tenant. Tenant shall pay all fees and costs that Landlord may incur in filing such documents in public offices and in obtaining such record searches as Landlord may reasonably require. In the event Tenant fails to execute any financing statements or other documents for the perfection or continuation of Landlord's security interest, Tenant hereby appoints Landlord as its true and lawful attorney-in-fact to execute any such documents on its behalf, which power of attorney shall be irrevocable and is deemed to be coupled with an interest. 7.4 INTANGIBLE PROPERTY. The term "INTANGIBLE PROPERTY" means documents, chattel paper, contract rights, residency agreements, management agreements, medical records, patient files, confidential patient materials, general intangibles, choses in action, now owned or hereafter acquired by Tenant (including any right to any refund of any taxes or other charges heretofore or hereafter paid to any governmental authority) arising from or in connection with Tenant's operation or use of the Premises; all licenses and permits now owned or hereinafter acquired by Tenant, necessary or desirable for Tenant's use of the Premises under this Lease, including without limitation, if applicable, any certificate of need or other similar certificate; and the right to use any trade or other name now or hereafter associated with the operation of the Premises by Tenant, including, without limitation, the name "Trinity Towers," but excluding any corporate names or logos used by Tenant or Guarantor. For purposes of this Lease, the term "Intangible Property" shall not include accounts receivable, negotiable instruments, rights to payment from third parties, security 41 47 deposits, utility deposits, proprietary software, training manuals, or general corporate trademarks, service marks, logos, insignia, books of records of Seller or Guarantor. 8. REPRESENTATIONS AND WARRANTIES. Landlord and Tenant do hereby each for itself represent and warrant to each other as follows: 8.1 DUE AUTHORIZATION AND EXECUTION. This Lease and all agreements, instruments and documents executed or to be executed in connection herewith by either Landlord or Tenant were duly authorized and shall be binding upon the party that executed and delivered the same. 8.2 DUE ORGANIZATION. Landlord and Tenant are duly organized, validly existing and in good standing under the laws of the State of their respective formations and are duly authorized and qualified to do all things required of the applicable party under this Lease within the State of Texas. 8.3 NO BREACH OF OTHER AGREEMENTS. Neither this Lease nor any agreement, document or instrument executed or to be executed in connection herewith, violates the terms of any other agreement to which either Landlord or Tenant is a party where such violation would have a material adverse effect. 9. FINANCIAL, MANAGEMENT AND REGULATORY REPORTS. 9.1 MONTHLY FACILITY REPORTS. Within thirty (30) days after the end of each calendar month during the Term, Tenant shall prepare and deliver monthly financial reports to Landlord consisting of a balance sheet and income statement prepared in accordance with generally accepted accounting principles consistently applied ("GAAP"), and a summary of significant operating statistics concerning the business conducted at the Premises. These 42 48 reports will be accompanied by a statement signed by the President, Chief Financial Officer, Principal Accounting Officer, Controller, Executive Vice President for Corporate Development, Executive Vice President for Development Services, or other officer of Guarantor as approved by Landlord in writing in its sole discretion, affirming that said reports are true and correct in all material respects and do not fail to disclose any material adverse information, all after due inquiry ("OFFICER'S CERTIFICATE"). 9.2 QUARTERLY FINANCIAL STATEMENTS. Within forty-five (45) days of the end of each of the first three quarters of the fiscal year of Guarantor, Tenant shall deliver to Landlord the unaudited quarterly consolidated financial statements of Guarantor prepared in accordance with GAAP accompanied by an Officer's Certificate. 9.3 ANNUAL FINANCIAL STATEMENT. Within ninety (90) days of the fiscal year end of Guarantor, Tenant shall deliver to Landlord the annual consolidated financial statement of Guarantor prepared in accordance with GAAP and audited by a certified public accounting firm reasonably acceptable to Landlord. Notwithstanding any of the other terms of this Section 9.3, if Guarantor becomes subject to any reporting requirements of the Securities and Exchange Commission (the "SEC") during the Term, Tenant shall concurrently deliver to Landlord such reports as are delivered to the SEC pursuant to applicable security laws. 9.4 ACCOUNTING PRINCIPLES. All of the reports and statements required hereby shall be prepared in accordance with GAAP. 9.5 REGULATORY REPORTS. In addition, Tenant shall within five (5) business days of receipt thereof deliver to Landlord all federal, state and local licensing and reimbursement certification surveys, inspection and other reports received by Tenant as to the 43 49 Premises or any portion thereof and the operation of business thereon, including, without limitation, state department of health licensing surveys, Medicare and Medicaid (and successor programs) certification surveys (if applicable) and life safety code reports. Within five (5) business days of receipt thereof, Tenant shall give Landlord written notice of any violation of any federal, state or local licensing or reimbursement certification statute or regulation including without limitation Medicare and Medicaid or successor programs (if applicable to the Premises or any portion thereof), any suspension, termination or restriction placed upon Tenant or the Premises or any portion thereof, the operation of business thereon or the ability to admit residents, or any violation of any other permit, approval or certification in connection with the Premises or any portion thereof or its business, by any federal, state or local authority including without limitation Medicare and Medicaid or successor programs if applicable to the Premises or any portion thereof. 10. EVENTS OF DEFAULT AND LANDLORD'S REMEDIES. 10.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an event of default on the part of Tenant hereunder ("EVENT OF DEFAULT"): 10.1.1 The failure to pay within ten (10) calendar days of (i) the date when due any Minimum Rent or Additional Rent, or (ii) the date when delinquent of any taxes or assessments required of Tenant under this Lease; 10.1.2 A material breach by the seller thereunder of any of the material representations, warranties or covenants in favor of Landlord as set forth in the Purchase Agreement; 44 50 10.1.3 Any Event of Default, as defined in Section 10 of the NHP Agreement, shall be an Event of Default under this Lease without any further notice to Tenant and without the expiration of any cure period except as set forth in the NHP Agreement; 10.1.4 A material default by Tenant or any Guarantor (or any Affiliate of either) ("AFFILIATE" being defined to mean, with respect to any person or entity, any other person or entity which controls, is controlled by or is under common control with the first person or entity) under any other material obligation other than this Lease owed by Tenant or any Guarantor (or any Affiliate of either) to Landlord or any Affiliate of Landlord (including without limitation any financing agreement or any other lease or the Letter of Credit Agreement of even date herewith pursuant to which the letter of credit referenced in Section 11 below is maintained), which default is not cured within any applicable cure period provided in the documentation for such obligation. It is expressly understood that Nationwide Health Properties, Inc. and NH Texas Properties Limited Partnership are Affiliates of each other; 10.1.5 A material default by Tenant or any Guarantor with respect to any material obligation under any other lease or financing agreement with any other party, which default is not cured within any applicable cure period provided in the documentation for such obligation; 10.1.6 Any material misstatement or omission of any material fact in any written report, notice or communication from senior management of 45 51 Guarantor to Landlord with respect to Tenant, any Guarantor or the Premises or any portion thereof; 10.1.7 Any change (voluntary or involuntary, by operation of law or otherwise) in the person, persons, entity or entities which ultimately exert effective control over the management of the affairs of Tenant and/or any Guarantor as of the date hereof except as permitted in Section 22.2 below; 10.1.8 An assignment by Tenant or any Guarantor of all or substantially all of its property for the benefit of creditors; 10.1.9 The appointment of a receiver, trustee, or liquidator for Tenant or any Guarantor, or any of the property of Tenant or any Guarantor, if within three (3) business days of such appointment Tenant does not inform Landlord in writing that Tenant or Guarantor intends to cause such appointment to be discharged or Tenant or Guarantor does not thereafter diligently prosecute such discharge to completion within sixty (60) days after the date of such appointment; 10.1.10 The filing by Tenant or any Guarantor of a voluntary petition under any federal bankruptcy law or under the law of any state to be adjudicated as bankrupt or for any arrangement or other debtor's relief, or in the alternative, if any such petition is involuntarily filed against Tenant or any Guarantor by any other party and Tenant does not within three (3) business days of any such filing inform Landlord in writing of the intent by Tenant or Guarantor to cause such petition to be dismissed, if Tenant or Guarantor does 46 52 not thereafter diligently prosecute such dismissal, or if such filing is not dismissed within ninety (90) days after filing thereof; 10.1.11 The failure to make any monetary payment required by Tenant under this Lease (including without limitation the Development Addendum) not covered in Section 10.1.1 or the failure to perform or comply in any material respect with any other term or provision of this Lease including without limitation the Development Addendum (other than those provisions set forth in Section 10.1.12 below) not requiring the payment of money, including, without limitation, the failure to comply with the provisions hereof pertaining to the use, operation and maintenance of the Premises (or any portion thereof) or the breach of any representation or warranty of Tenant in this Lease; provided, however, the default described in this Section 10.1.11 is curable and shall be deemed cured, if: (i) within five (5) business days of Tenant's receipt of a notice of default from Landlord, Tenant gives Landlord notice of its intent to cure such default; and (ii) Tenant cures such default within thirty (30) days after such notice from Landlord, unless such default cannot with due diligence be cured within a period of thirty (30) days because of the nature of the default or delays beyond the control of Tenant, and cure after such thirty (30) day period will not have a material and adverse effect upon the Premises, in which case such default shall not constitute an Event of Default if Tenant uses its best efforts to cure such default by promptly commencing and diligently pursuing such cure to the completion thereof, provided, however, no such default shall 47 53 continue for more than one hundred twenty (120) days from Tenant's receipt of a notice of default from Landlord; 10.1.12 There shall be no cure period in the event of the breach by Tenant of (i) the obligation to provide replacement policies of insurance as required in Section 4.1 above, (ii) the provisions of Section 20 below, or (iii) the provisions of Section 22 below with respect to assignments and other related matters; and 10.1.13 All notice and cure periods provided herein shall run concurrently with any notice or cure periods provided by applicable law. 10.2 REMEDIES. Upon the occurrence of an Event of Default and during the pendency thereof, Landlord may exercise all rights and remedies under this Lease and the laws of the State of Texas available to a lessor of real and personal property in the event of a default by its lessee, and as to the Tenant Personal Property and Intangible Property all remedies granted under the laws of such State to a secured party under its Uniform Commercial Code. Without limiting the foregoing, Landlord shall have the right to do any of the following: 10.2.1 Sue for the specific performance of any covenant of Tenant under this Lease as to which Tenant is in breach; 10.2.2 Upon compliance with the requirements of applicable law and to the extent allowed thereunder, Landlord may do any of the following: enter upon the Premises, terminate this Lease, dispossess Tenant from the Premises and/or collect money damages by reason of Tenant's breach, including without 48 54 limitation all rent which would have accrued after such termination and all obligations and liabilities of Tenant under this Lease which survive the termination of the Term; 10.2.3 Elect to leave this Lease in place and sue for rent and/or other money damages as the same come due; 10.2.4 Before or after repossession of the Premises pursuant to Section 10.2.2, and whether or not this Lease has been terminated, Landlord shall have the right (but shall be under no obligation except to the extent required by applicable law) to relet any portion of the Premises to such tenant or tenants, for such term or terms (which may be greater or less than the remaining balance of the Term), for such rent, or such conditions (which may include concessions or free rent) and for such uses, as Landlord, in its absolute discretion, may determine, and Landlord may collect and receive any rents payable by reason of such reletting. Landlord shall have no duty to mitigate damages unless required by applicable law and shall not be responsible or liable for any failure to relet any of the Premises or for any failure to collect any rent due upon any such reletting. Tenant agrees to pay Landlord, immediately upon demand, all expenses incurred by Landlord in obtaining possession and in reletting any of the Premises, including fees, commissions and costs of attorneys, architects, agents and brokers; 10.2.5 Sell the Tenant Personal Property in a non-judicial foreclosure sale. 49 55 10.2.6 For the purpose of calculating rent loss damages payable to Landlord, Additional Rent for all periods after an Event of Default shall be calculated based on a two and one half percent (2.5%) annual increase. 10.3 RECEIVERSHIP. Tenant acknowledges that one of the rights and remedies available to Landlord under applicable law is to secure a court-appointed receiver to take possession of the Premises or any portion thereof, to collect the rents, issues, profits and income of the Premises or any portion thereof, and to manage the operation of the Premises or any portion thereof. Tenant further acknowledges that the revocation, suspension or material limitation of the certification of the Premises or any portion thereof for provider status under Medicare or Medicaid (or successor programs) as currently exist or as are obtained by Tenant at a later date and/or the revocation, suspension or material limitation of the license of the Premises or any portion thereof as Retirement Care Facilities for the number of beds and units shown in the Recitals to this Lease under the laws of the State of Texas will materially and irreparably impair the value of Landlord's investment in the Premises. Therefore, in the event of any such revocation, suspension or material limitation, and in addition to any other right or remedy of Landlord under this Lease, Tenant hereby consents to the appointment of such a receiver to enter upon and take possession of the Premises or any portion thereof, to manage the operation of the Premises or any portion thereof, to collect and disburse all rents, issues, profits and income generated thereby and to preserve or replace to the extent possible the licenses and provider certifications of the Premises required for the operation of the Retirement Care Facilities or to otherwise substitute the licensee or provider thereof. The receiver shall be entitled to a reasonable fee for its services as a receiver. All such fees and 50 56 other expenses of the receivership estate shall be added to the monthly rent due to Landlord under this Lease. Tenant hereby irrevocably stipulates to the appointment of a receiver under such circumstances and for such purposes and agrees not to contest such appointment. 10.4 LATE CHARGES. Tenant acknowledges that the late payment of any Minimum Rent or Additional Rent will cause Landlord to lose the use of such money and incur costs and expenses not contemplated under this Lease, including, without limitation, administrative and collection costs and processing and accounting expenses, the exact amount of which is extremely difficult to ascertain. Therefore, if any installment of Minimum Rent or Additional Rent is not paid within five (5) calendar days after the due date for such rent payment, then Tenant shall thereafter pay to Landlord on demand a late charge equal to five percent (5%) of the amount of any installment of Minimum Rent or Additional Rent not paid on the due date. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the loss suffered from such nonpayment by Tenant. 10.5 REMEDIES CUMULATIVE; NO WAIVER. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity. No failure of Landlord to insist at any time upon the strict performance of any provision of this Lease or to exercise any option, right, power or remedy contained in this Lease shall be construed as a waiver, modification or relinquishment thereof as to any similar or different breach (future or otherwise) by Tenant. A receipt by Landlord of any rent or other sum due hereunder 51 57 (including any late charge) with knowledge of the breach of any provision contained in this Lease shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision of this Lease shall be deemed to have been made unless expressed in a writing signed by Landlord. 10.6 PERFORMANCE OF TENANT'S OBLIGATIONS BY LANDLORD. If Tenant at any time shall fail to make any payment or perform any act on its part required to be made or performed under this Lease, then Landlord may, without waiving or releasing Tenant from any obligations or default of Tenant hereunder, make any such payment or perform any such act for the account and at the expense of Tenant, and may enter upon the Premises for the purpose of taking all such action thereon as may be reasonably necessary therefor. No such entry shall be deemed an eviction of Tenant. All reasonable sums so paid by Landlord and all necessary and incidental costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred in connection with the performance of any such act by Landlord, together with interest at the rate of the Prime Rate as reported daily by the Wall Street Journal plus 5% (or if said interest rate is violative of any applicable statute or law, then the maximum interest rate allowable) from the date of the making of such payment or the incurring of such costs and expenses by Landlord, shall be payable by Tenant to Landlord on demand. 11. SECURITY DEPOSIT. Pursuant to a Letter of Credit Agreement of even date herewith, Tenant has posted with the Landlord or caused Guarantor to post with Landlord a letter of credit in the sum of Three Hundred Seventy Thousand Three Hundred Seventy and 52 58 37/100 Dollars ($370,370.37) representing a security deposit against the faithful performance of the terms and conditions contained in this Lease. 12. DAMAGE BY FIRE OR OTHER CASUALTY. 12.1 RECONSTRUCTION USING INSURANCE. In the event of the damage or destruction of the Premises, Tenant shall forthwith notify Landlord and diligently repair or reconstruct the same to a like or better condition than existed prior to such damage or destruction. Any net insurance proceeds payable with respect to the casualty shall be used for the repair or reconstruction of the Premises pursuant to reasonable disbursement controls in favor of Landlord. If such proceeds are insufficient for such purposes, Tenant shall provide the required additional funds. 12.2 SURPLUS PROCEEDS. If there remains any surplus of insurance proceeds after the completion of the repair or reconstruction of the Premises, such surplus shall belong to and be paid to Tenant. 12.3 NO RENT ABATEMENT. The rent payable under this Lease shall not abate by reason of any damage or destruction of the Premises by reason of an insured or uninsured casualty. Tenant hereby waives all rights under applicable law to abate, reduce or offset rent by reason of such damage or destruction. 12.4 END OF TERM. Notwithstanding any other provision of this Section 12, if the Premises are more than 50% destroyed (measured by square footage) by casualty during the last six (6) months of the Initial Term or any Renewal Term, Tenant may terminate this Lease by written notice to Landlord delivered within thirty (30) days after the date of such casualty, in which event Landlord shall retain all insurance proceeds. 53 59 13. CONDEMNATION. 13.1 COMPLETE TAKING. If during the Term all or substantially all of the Premises is taken or condemned by any competent public or quasi-public authority, then Tenant may, at Tenant's election, made within thirty (30) days of such taking by condemnation, terminate this Lease, and the current Minimum Rent and Additional Rent shall be prorated as of the date of such termination. The award payable upon such taking shall be allocated between Landlord and Tenant as so allocated by the taking authority. In the absence of such allocation by the taking authority, the award shall be allocated as agreed by Landlord and Tenant. Failing such agreement within thirty (30) days after the effective date of such taking, the award shall be allocated between Landlord and Tenant pursuant to the appraisal procedure described on Exhibit "C" attached hereto. 13.2 PARTIAL TAKING. In the event such condemnation proceeding or right of eminent domain results in a taking of less than all or substantially all of the Premises, the Minimum Rent and Additional Rental thereto shall be abated to the same extent as the diminution in the fair market value of the Premises by reason of the condemnation. Such diminution in the fair market value shall be as agreed between Landlord and Tenant, but failing such agreement within thirty (30) days of the effective date of the condemnation the same will be determined by appraisal pursuant to Exhibit "C" attached hereto. Landlord shall be entitled to receive and retain any and all awards for the partial taking and damage and Tenant shall not be entitled to receive or retain any such award for any reason. Landlord's Original Investment will be reduced for all purposes under this Lease by reason of any award paid to Landlord under this Section 13.2. 54 60 13.3 LEASE REMAINS IN EFFECT. Except as provided above, this Lease shall not terminate and shall remain in full force and effect in the event of a taking or condemnation of the Premises, or any portion thereof, and Tenant hereby waives all rights under applicable law to abate, reduce or offset rent by reason of such taking. 14. PROVISIONS ON TERMINATION OF TERM. 14.1 SURRENDER OF POSSESSION. Tenant shall, on or before the last day of the Term, or upon earlier termination of this Lease (unless Tenant has purchased the Premises pursuant to Section 6.2), surrender to Landlord the Premises (including all resident charts and records along with appropriate resident consents) in good condition and repair, excepting only (i) ordinary wear and tear, (ii) any damage caused by condemnation pursuant to Section 13.1 above, or (iii) any damage caused by fire or other casualty resulting in the termination of the Lease pursuant to Section 12.4 above. 14.2 REMOVAL OF PERSONAL PROPERTY. If Tenant is not then in default hereunder Tenant shall have the right in connection with the surrender of the Premises to remove from the Premises all Tenant Personal Property but not the Landlord Personal Property (including the Landlord Personal Property replaced by Tenant or required by the State of Texas or any other governmental entity to operate the Premises for the purpose set forth in Section 5.3 above). Any such removal shall be done in a workmanlike manner leaving the Premises in good and presentable condition and appearance, including repair of any damage caused by such removal. At the end of the Term or upon the earlier termination of this Lease, (unless Tenant has purchased the Premises pursuant to Section 6.2), Tenant shall return the Premises to Landlord with the Landlord Personal Property (or replacements thereof) 55 61 in the same condition and utility as was delivered to Tenant at the commencement of the Term, normal wear and tear excepted. 14.3 TITLE TO PERSONAL PROPERTY NOT REMOVED. Title to any of Tenant Personal Property which is not removed by Tenant upon the expiration of the Term shall, at Landlord's election, vest in Landlord; provided, however, that Landlord may remove and dispose at Tenant's expense of any or all of such Tenant Personal Property which is not so removed by Tenant without obligation or accounting to the Tenant. 14.4 MANAGEMENT OF PREMISES. Upon the expiration or earlier termination of the Term (unless Tenant has purchased the Premises pursuant to Section 6.2), Landlord or its designee, upon written notice to Tenant, may elect to assume the responsibilities and obligations for the management and operation of the Premises and Tenant agrees to cooperate fully with Landlord or its designee to accomplish the transfer of such management and operation without interrupting the operation of the Premises. Tenant shall not commit any act or be remiss in the undertaking of any act that would jeopardize any licensure or certification of the facility, and Tenant shall comply with all requests for an orderly transfer of the Retirement Care Facilities license, Medicare and Medicaid (or any successor program) certifications and possession at the time of any such surrender. Upon the expiration or earlier termination of the Term, Tenant shall promptly deliver copies of all of Tenant's books and records relating to the Premises and its operations to Landlord. 14.5 CORRECTION OF DEFICIENCIES. Upon termination or cancellation of this Lease, Tenant shall indemnify Landlord for any loss, damage, cost or expense incurred by Landlord to correct all deficiencies of a physical nature identified by the Texas Department of 56 62 Human Services, local health, fire and safety agencies or any other government agency or Medicare or Medicaid (or any successor program) providers in the course of the change of ownership inspection and audit. 15. NOTICES AND DEMANDS. All notices and demands, certificates, requests, consents, approvals, and other similar instruments under this Lease shall be in writing and shall be deemed to have been properly given upon actual receipt thereof or within two (2) business days of being placed in the United States certified or registered mail, return receipt requested, postage prepaid (a) if to Tenant, addressed to American Retirement Communities, L.P., 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027, Attn: President and General Counsel Fax No. (615) 221-2269 with a copy to Bass, Berry & Sims PLC, 2700 First American Center, 25th Floor, Nashville, Tennessee 37238, Attn: T. Andrew Smith, Esq., Fax No. (615) 742-2766 or at such other address as Tenant from time to time may have designated by written notice to Landlord, (b) if to Landlord, addressed to NH Texas Properties Limited Partnership, 1280 Bison, Suite B9-203, Newport Beach, California 92660, Attn: Co-Trustees and General Counsel; Fax No. (714) 644-7757 with a copy to O'Melveny & Myers LLP, 610 Newport Center Drive, Suite 1700, Newport Beach, California 92660, Attn: Real Estate Department Chairman, Fax No. (714) 669-6994, or at such address as Landlord may from time to time have designated by written notice to Tenant. Refusal to accept delivery shall be deemed delivery. If Tenant is not an individual, notice may be made to any senior officer, general partner or principal thereof. Notice to any one co-Tenant shall be deemed notice to all co-Tenants. 57 63 16. RIGHT OF ENTRY; EXAMINATION OF RECORDS. Landlord and its representative may enter the Premises at any reasonable time after reasonable notice to Tenant for the purpose of inspecting the Premises for any reason including, without limitation, Tenant's default under this Lease, or to exhibit the Premises for sale, lease or mortgage financing, or posting notices of default, or non-responsibility under any mechanic's or materialman's lien law or to otherwise inspect the Premises for compliance with the terms of this Lease. Any such entry shall not unreasonably interfere with residents, resident care, or any other of Tenant's operations. During normal business hours, Tenant will permit Landlord and Landlord's representatives, inspectors and consultants to examine all contracts, books and records relating to Tenant's operations at the Premises, whether kept at the Premises or at some other location, including, without limitation, Tenant's financial records. 17. LANDLORD MAY GRANT LIENS. Without the consent of Tenant, Landlord may, subject to the terms and conditions set forth below in this Section 17, from time to time, directly or indirectly, create or otherwise cause to exist any lien, encumbrance or title retention agreement ("ENCUMBRANCE") upon the Premises, or any portion thereof or interest therein (including this Lease), whether to secure any borrowing or other means of financing or refinancing or otherwise. Any such Encumbrance shall provide that it is subject to the rights of Tenant under this Lease, and shall further provide that so long as no Event of Default shall have occurred under this Lease, Tenant's occupancy hereunder, including but without limitation Tenant's right of quiet enjoyment provided in Section 18, shall not be disturbed in the event any such lienholder or any other person takes possession of the Premises through foreclosure proceeding or otherwise. Upon the request of Landlord, Tenant shall subordinate 58 64 this Lease to the lien of a new Encumbrance on the Premises, on the condition that the proposed lender agrees not to disturb Tenant's rights under this Lease so long as Tenant is not in default hereunder. 18. QUIET ENJOYMENT. So long as there is no Event of Default which is existing and continuing by Tenant, Landlord covenants and agrees that Tenant shall peaceably and quietly have, hold and enjoy the Premises for the Term, free of any claim or other action not caused or created by Tenant (excepting, however, intrusion of Tenant's quiet enjoyment occasioned by condemnation or destruction of the property as referred to in Section 12 and 13 hereof). 19. APPLICABLE LAW. This Lease shall be governed by and construed in accordance with the internal laws of the State of Texas without regard to the conflict of laws rules of such State. 20. PRESERVATION OF GROSS REVENUES. 20.1 Tenant acknowledges that a fair return to Landlord on its investment in the Premises is dependent, in part, on the concentration on the Premises during the Term of the Retirement Care Facilities business of Tenant and its Affiliates in the geographical area of the Premises. Tenant further acknowledges that the diversion of resident care activities from the Premises to other facilities owned or operated by Tenant or its Affiliates will have a material adverse impact on the value and utility of the Premises. 20.1.1 Therefore, Tenant agrees that during the Term, and for a period of one (1) year thereafter (unless Tenant purchases the Premises), neither Tenant nor any of its Affiliates shall, without the prior written consent of 59 65 Landlord, operate, own, participate in or otherwise receive revenues from any other facility or institution providing services or similar goods to those provided on or in connection with the Premises and the permitted use (including each use included in the definition of Retirement Care Facilities) thereof as contemplated under this Lease, within a four (4) mile radius of the Premises; provided, however the facilities listed on Exhibit E attached hereto which are either in existence or under development as of the date hereof are exempted from the operation of this Section 20.1.1. 20.1.2 In addition, Tenant hereby covenants and agrees that for a period of one year following the expiration or earlier termination of this Lease (unless Tenant purchases the Premises), neither Tenant nor any of its Affiliates shall, without prior written consent of Landlord, hire, engage or otherwise employ any management or supervisory personnel working on or in connection with the Premises, except at facilities exempted from the operation of Section 20.1.1. This Section 20.1.2 does not apply to corporate managers and multi-facility employees to the extent such managers and employees are employed at other facilities operated by Tenant, Guarantor or an Affiliate of either. 20.2 Notwithstanding the foregoing, Landlord acknowledges that Tenant operates certain home health agencies out of its offices on the Premises. Section 20.1.1 does not apply to such home health activities operated by the Tenant, Guarantor or an Affiliate of either out of the Premises. 60 66 20.3 Except as required for medically appropriate reasons, prior to and after Lease termination, neither Tenant nor any of its Affiliates will recommend or solicit the removal or transfer of any resident from the Premises to any other facility. Tenant hereby specifically acknowledges and agrees that the temporal, geographical and other restrictions contained in this Section 20 are reasonable and necessary to protect the business and prospects of Landlord, and that the enforcement of the provisions of this Section 20 will not work an undue hardship on Tenant. Tenant further agrees that in the event either the length of time, geographical or any other restrictions, or portion thereof, set forth in this Section 20 is overly restrictive and unenforceable in any court proceeding, the court may reduce or modify such restrictions, but only to the extent necessary, to those which it deems reasonable and enforceable under the circumstances, and the parties agree that the restrictions of this Section 20 will remain in full force and effect as reduced or modified. Tenant further agrees and acknowledges that Landlord does not have an adequate remedy at law for the breach or threatened breach by Tenant of the covenants contained in this Section 20, and Tenant therefore specifically agrees that Landlord may, in addition to other remedies which may be available to Landlord hereunder, file a suit in equity to enjoin Tenant from such breach or threatened breach, without the necessity of posting any bond. Tenant further agrees, in the event that any provision of this Section 20 is held to be invalid or against public policy, the remaining provisions of this Section 20 and the remainder of this Lease shall not be affected thereby. 61 67 21. HAZARDOUS MATERIALS. 21.1 HAZARDOUS MATERIAL COVENANTS. Tenant's use of the Premises shall comply in all material respects with all Hazardous Materials Laws. In the event any Environmental Activities occur or are suspected to have occurred in violation in any material respect of any Hazardous Materials Laws or if Tenant has received any Hazardous Materials Claim against the Premises, Tenant shall promptly obtain all permits and approvals necessary to remedy any such actual or suspected problem through the removal of Hazardous Materials or otherwise, and upon Landlord's approval of the remediation plan, remedy any such problem to the satisfaction of Landlord, in accordance with all Hazardous Materials Laws and good business practices. 21.2 TENANT NOTICES TO LANDLORD. Tenant shall immediately advise Landlord in writing of: 21.2.1 any Environmental Activities in violation of any Hazardous Materials Laws, 21.2.2 any Hazardous Materials Claims against Tenant or the Premises, 21.2.3 any remedial action taken by Tenant in response to any Hazardous Materials Claims or any Hazardous Materials on, under or about the Premises in violation of any Hazardous Materials Laws, 21.2.4 Tenant's discovery of any occurrence or condition on or in the vicinity of the Premises that materially increase the risk that the Premises will be exposed to Hazardous Materials, 62 68 21.2.5 all communications to or from Tenant, any governmental authority or any other person relating to Hazardous Materials Laws or Hazardous Materials Claims with respect to the Premises, including copies thereof. 21.3 EXTENSION OF TERM. Notwithstanding any other provision of this Lease, in the event any Hazardous Materials are discovered on, under or about the Premises in violation of any Hazardous Materials Law, the Term shall be automatically extended and this Lease shall remain in full force and effect until the earlier to occur of the completion of all remedial action or monitoring, as approved by Landlord in its reasonable discretion, in accordance in all material respects with all Hazardous Materials Laws, or the date specified in a written notice from Landlord to Tenant terminating this Lease (which date may be subsequent to the date upon which the Term was to have expired). 21.4 PARTICIPATION IN HAZARDOUS MATERIALS CLAIMS. Landlord shall have the right, at Tenant's sole cost and expense and with counsel chosen by Landlord, to join and participate in, as a party if it so elects, any legal proceedings or actions initiated in connection with any Hazardous Materials Claims. 21.5 ENVIRONMENTAL ACTIVITIES shall mean the use, generation, transportation, handling, discharge, production, treatment, storage, release or disposal of any Hazardous Materials at any time to or from the Premises or located on or present on or under the Premises. Nothing contained in the foregoing or elsewhere in this Section 21 is intended to, nor shall it, limit the liability of Tenant, if any, to Landlord with respect to any representation 63 69 or warranty given by Tenant to Landlord with respect to Hazardous Materials or environmental matters generally as set forth in the Purchase Agreement. 21.6 HAZARDOUS MATERIALS shall mean (i) any petroleum products and/or by-products (including any fraction thereof), flammable substances, explosives, radioactive materials, hazardous or toxic wastes, substances or materials, known carcinogens or any other materials, contaminants or pollutants which pose a hazard to the Premises or to persons on or about the Premises or cause the Premises to be in violation of any Hazardous Materials Laws; (ii) asbestos in any form which is friable; (iii) urea formaldehyde in foam insulation or any other form; (iv) transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million or any other more restrictive standard then prevailing; (v) medical wastes and biohazards; (vi) radon gas; and (vii) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or may or could pose a hazard to the health and safety of the occupants of the Premises or the owners and/or occupants of property adjacent to or surrounding the Premises. 21.7 HAZARDOUS MATERIALS CLAIMS shall mean any and all enforcement, clean-up, removal or other governmental or regulatory actions or orders threatened, instituted or completed pursuant to any Hazardous Material Laws, together with all claims made or threatened by any third party against the Premises, Landlord or Tenant relating to damage, contribution, cost recovery compensation, loss or injury resulting from any Hazardous Materials. 64 70 21.8 HAZARDOUS MATERIALS LAWS shall mean any laws, ordinances, regulations, rules, orders, guidelines or policies relating to the environment, health and safety, Environmental Activities, Hazardous Materials, air and water quality, waste disposal and other environmental matters, if the failure to comply with the same does or would have a material adverse effect on the Premises or the operation thereof. 21.9 EXISTING HAZARDOUS MATERIALS. Landlord acknowledges that it has been provided with a Phase I Environmental Site Assessment dated March 14, 1996, a Report of Phase I Preliminary Environmental Site Assessment dated October 5, 1995, an Underground Storage Tank Closure Report dated September, 1994, and a Phase II Soil Assessment Report dated December 15, 1996 (the "EXISTING ENVIRONMENTAL REPORTS"). The Existing Environmental Reports disclose the presence on the Premises of certain Hazardous Materials (the "EXISTING CONTAMINANTS"). Tenant will take all steps necessary to remediate to Landlord's satisfaction all Existing Contaminants by July 2, 1997, including obtaining any permits, closure letters or other letters or documentation required by applicable governmental authorities. Tenant's indemnity as set forth in Section 23 shall extend to any Claims arising from the presence of Existing Contaminants on the Premises or the act of remediating such Existing Contaminants as provided in this Section 21.9. 22. ASSIGNMENT AND SUBLETTING. Tenant shall not, without the prior written consent of Landlord, which may be withheld at Landlord's sole discretion, voluntarily or involuntarily assign or hypothecate this Lease or any interest herein or sublet the Premises or any part thereof. For the purposes of this Lease, a management or similar agreement shall be considered to be an assignment of this Lease by Tenant. Any of the foregoing acts without 65 71 such consent shall be void but shall, at the option of Landlord in its sole discretion, constitute an Event of Default giving rise to Landlord's right, among other things, to terminate this Lease. Without limiting the foregoing, this Lease shall not, nor shall any interest of Tenant herein, be assigned or encumbered by operation of law without the prior written consent of Landlord which may be withheld at Landlord's sole discretion. Notwithstanding the foregoing, Tenant may without Landlord's consent assign this Lease or sublet the Premises or any portion thereof to a Successor (as such term is defined below), to a wholly-owned subsidiary of Tenant or any Guarantor, provided that such Successor, subsidiary or Guarantor fully assumes the obligations of Tenant under this Lease, Tenant remains fully liable under this Lease, any Guarantor remains fully liable with respect to its guaranty of this Lease, the use of the Premises remains unchanged, and no such assignment or sublease shall be valid and no such subsidiary, Successor or Guarantor shall take possession of the Premises until an executed counterpart of such assignment or sublease has been delivered to Landlord. Anything contained in this Lease to the contrary notwithstanding, Tenant shall not sublet the Premises on any basis such that the rental to be paid by the sublessee thereunder would be based, in whole or in part, on either the income or profits derived by the business activities of the sublessee, or any other formula, such that any portion of the sublease rental received by Landlord would fail to qualify as "rents from real property" within the meaning of Section 856(d) of the U.S. Internal Revenue Code, or any similar or successor provision thereto. 22.1 For the purpose of this Lease, the transfer, assignment, sale, hypothecation or other disposition of any partnership, stock or other ownership interest in Tenant or in any Guarantor which results in a change in the Person (as hereinafter defined) 66 72 which ultimately exerts effective Control (as hereinafter defined) over the management of the affairs of Tenant as of the date hereof, shall be deemed to be an assignment of the Lease. For purposes herein, "CONTROL" shall mean, as applied to any individual, partnership, association, corporation or other entity (collectively, "PERSON"), the possession, directly or indirectly, of the power to direct the management and policies of that Person, whether through ownership, voting control, by contract or otherwise. 22.2 Notwithstanding anything to the contrary contained in Section 22.1, none of the following shall be deemed to be an assignment of the Lease (i) an initial public offering ("IPO") of Guarantor or any Successor thereto, or (ii) any secondary public offering(s) of Guarantor or any Successor thereto, or (iii) subsequent to an IPO by Guarantor or any Successor thereto, and so long as Guarantor or its Successor is a publicly-traded entity on a national exchange, a change in the Person or Persons exercising Control of Guarantor or its Successor, or (iv) a lease of a unit or bed to a resident of the Premises in the ordinary course of Tenant's business. 22.3 As used herein, a "SUCCESSOR" is any entity which succeeds to materially all of the assets, operations and business of Guarantor by merger or reorganization and which is Controlled by the same Person or Persons as Control Guarantor prior to such merger or reorganization. 23. INDEMNIFICATION. To the fullest extent permitted by law, Tenant agrees to protect, indemnify, defend and save harmless Landlord, its directors, officers, shareholders, agents and employees from and against any and all foreseeable or unforeseeable liability, expense loss, costs, deficiency, fine, penalty, or damage (including without limitation punitive 67 73 or consequential damages) of any kind or nature, including reasonable attorneys' fees, from any suits, claims or demands, on account of any matter or thing, action or failure to act arising out of or in connection with this Lease (including, without limitation, the breach by Tenant of any of its obligations hereunder), the Premises, or the operations of Tenant on the Premises, including without limitation all Environmental Activities on the Premises, all Hazardous Materials Claims or any violation by Tenant of a Hazardous Materials Law with respect to the Premises. Upon receiving knowledge of any suit, claim or demand asserted by a third party that Landlord believes is covered by this indemnity, Landlord shall give Tenant notice of the matter. Tenant shall defend Landlord against such matter at Tenant's sole cost and expense with legal counsel satisfactory to Landlord. Landlord may elect to defend the matter with its own counsel at Tenant's expense. 24. HOLDING OVER. If Tenant shall for any reason remain in possession of the Premises after the expiration or earlier termination of this Lease, such possession shall be a month-to-month tenancy during which time Tenant shall pay as rental each month, 1 1/2 times the aggregate of the monthly Minimum Rent payable with respect to the last Lease Year plus Additional Rent allocable to the month, all additional charges accruing during the month and all other sums, if any, payable by Tenant pursuant to the provisions of this Lease with respect to the Premises. Nothing contained herein shall constitute the consent, express or implied, of Landlord to the holding over of Tenant after the expiration or earlier termination of this Lease, nor shall anything contained herein be deemed to limit Landlord's remedies pursuant to this Lease or otherwise available to Landlord at law or in equity. 68 74 25. ESTOPPEL CERTIFICATES. Tenant shall, at any time upon not less than five (5) days prior written request by Landlord, execute, acknowledge and deliver to Landlord or its designee a statement in writing, executed by an officer or general partner of Tenant, certifying that this Lease is unmodified and in full force and effect (or, if there have been any modifications, that this Lease is in full force and effect as modified, and setting forth such modifications), the dates to which Minimum Rent, Additional Rent and additional charges hereunder have been paid, certifying that no default by either Landlord or Tenant exists hereunder or specifying each such default and as to other matters as Landlord may reasonably request. 26. CONVEYANCE BY LANDLORD. If Landlord or any successor owner of the Premises shall convey the Premises in accordance with the terms hereof, Landlord or such successor owner shall thereupon be released from all future liabilities and obligations of Landlord under this Lease arising or accruing from and after the date of such conveyance or other transfer as to the Premises and all such future liabilities and obligations shall thereupon be binding upon the new owner. 27. WAIVER OF JURY TRIAL. Landlord and Tenant hereby waive any rights to trial by jury in any action, proceedings or counterclaim brought by either of the parties against the other in connection with any matter whatsoever arising out of or in any way connected with this Lease, including, without limitation, the relationship of Landlord and Tenant, Tenant's use and occupancy of the Premises, or any claim of injury or damage relating to the foregoing or the enforcement of any remedy hereunder. 69 75 28. ATTORNEYS' FEES. If Landlord or Tenant brings any action to interpret or enforce this Lease, or for damages for any alleged breach hereof, the prevailing party in any such action shall be entitled to reasonable attorneys' fees and costs as awarded by the court in addition to all other recovery, damages and costs. 29. SEVERABILITY. In the event any part or provision of the Lease shall be determined to be invalid or enforceable, the remaining portion of this Lease shall nevertheless continue in full force and effect. 30. COUNTERPARTS. This Lease may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement. 31. BINDING EFFECT. Subject to the provisions of Section 22 above, this Lease shall be binding upon and inure to the benefit of Landlord and Tenant and their respective heirs, personal representatives, successors in interest and assigns. 32. WAIVER AND SUBROGATION. Landlord and Tenant hereby waive to each other all rights of subrogation which any insurance carrier, or either of them, may have as to the Landlord or Tenant by reason of any provision in any policy of insurance issued to Landlord or Tenant, provided such waiver does not thereby invalidate the policy of insurance. 33. MEMORANDUM OF LEASE. Landlord and Tenant shall, promptly upon the request of either, enter into a short form memorandum of the Lease, in form suitable for recording under the laws of the State of Texas in which reference to this Lease shall be made. The party requesting such recordation shall pay all costs and expenses of preparing and recording such memorandum of this Lease. 70 76 34. INCORPORATION OF RECITALS AND ATTACHMENTS. The recitals and exhibits, schedules, addenda and other attachments to this Lease are hereby incorporated into this Lease and made a part hereof. 35. TITLES AND HEADINGS. The titles and headings of sections of this Lease are intended for convenience only and shall not in any way affect the meaning or construction of any provision of this Lease. 36. NATURE OF RELATIONSHIP; USURY SAVINGS CLAUSE. The parties intend that their relationship shall be that of lessor and lessee only. Nothing contained in this Lease shall be deemed or construed to constitute an extension of credit by Landlord to Tenant, nor shall this Lease be deemed to be a partnership or venture agreement between Landlord and Tenant. Notwithstanding the foregoing, in the event any payment made to Landlord hereunder is deemed to violate any applicable laws regarding usury, the portion of any payment deemed to be usurious shall be held by Landlord to pay the future obligations of Tenant as such obligations arise and, in the event Tenant discharges and performs all obligations hereunder, such funds will be reimbursed to Tenant upon the expiration of the Term. No interest shall be paid on any such funds held by Landlord. 37. JOINT AND SEVERAL. If more than one person or entity is the Tenant hereunder, the liability and obligations of such persons or entities under this Lease shall be joint and several. 38. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All of the obligations, representations, warranties and covenants of Tenant under this Lease shall survive the expiration or earlier termination of the Term. 71 77 39. INTERPRETATION. Both Landlord and Tenant have been represented by counsel and this Lease has been freely and fairly negotiated. Consequently, all provisions of this Lease shall be interpreted according to their fair meaning and shall not be strictly construed against any party. [SIGNATURES ON NEXT PAGE] 72 78 Executed as of the date indicated above. TENANT: TRINITY TOWERS LIMITED PARTNERSHIP, a Tennessee limited partnership By: ARC Corpus Christi, Inc., a Tennessee corporation, its general partner By: ____________________________________ H. Todd Kaestner, Executive Vice President - Corporate Development LANDLORD: NH TEXAS PROPERTIES LIMITED PARTNERSHIP, a Texas limited partnership By: MLD Texas Corporation, a Texas corporation, its general partner By: _______________________________________ T. Andrew Stokes, Vice President S-1 79 EXHIBIT "A-1" Legal Description of Premises TRACT I: Field Notes for a 2.02 acre tract of land, comprising all of Lots 1 through 22, Block 2, W.E. POPE'S BROADWAY ADDITION, a map of which is recorded in Volume 1, Page 56 of the Map Records of Nueces County, Texas, SAVE AND EXCEPT that portion of Lot 22, Block 2 conveyed to the City of Corpus Christi by Deed recorded in Volume 263, Page 605 of the Deed Records of Nueces County, Texas, and also comprising all of Block 6 of the BLUFF PORTION OF THE CENTRAL WHARF AND WAREHOUSE COMPANY'S SUBDIVISION as shown by a map recorded in Volume A, Page 15 of the Nueces County Map Records, and being a portion of the other land lying North of said Block 6, CENTRAL WHARF AND WAREHOUSE SUBDIVISION and being shown as Cooper's Alley on the map of said BROADWAY ADDITION; said 2.02 acre tract being more particularly described by metes and bounds as follows: BEGINNING at a 1" iron pipe found in concrete at the intersection of the northerly Right-Of-Way line of present Cooper's Alley (formerly Telco Street, formerly Kenedy Street), and the westerly line of Carancahua Street for the most southeasterly corner of Block 6, CENTRAL WHARF AND WAREHOUSE SUBDIVISION; said 1" iron pipe also being the most southeasterly corner of this tract; THENCE South 88 degrees 50 minutes 15 seconds West, along and with said southerly line of Block 6, being the said northerly line of Cooper's Alley, a distance of 250.16 feet to a 5/8" iron pipe found for the most southwesterly corner of said Lot 6, Block 1, same being a southwesterly exterior corner of this tract; THENCE North 00 degrees 42 minutes 29 seconds West, a distance of 43.82 feet to drill hole set for a point in the southerly line of said Lot 22, Block 2, W.E. POPE'S BROADWAY ADDITION; said drill hole also being an interior corner of this tract; THENCE South 59 degrees 42 minutes 29 seconds West, along and with the southerly line of said Lot 22, Block 2, W.E. POPE'S BROADWAY ADDITION, a distance of 13.28 feet to a 5/8" iron rod found for the most southeasterly corner of said portion of Lot 22, Block 2, conveyed to the City of Corpus Christi and also being in the most easterly Right-Of-Way line of present Tancahua Street for an exterior corner of this tract; THENCE North 04 degrees 19 minutes 38 seconds West, along and with said easterly line of Tancahua Street, a distance of 109.70 feet to a 5/8" iron rod found for an angle point of this tract; A-1-1 80 THENCE North 02 degrees 51 minutes 52 seconds West, continuing along and with said easterly line of Tancahua Street a distance of 30.06' to 5/8" iron rod found for the most northwesterly corner of said Lot 22, Block 2, BROADWAY ADDITION, also being the most southwesterly corner of said Lot 1, Block 2, BROADWAY ADDITION, also being an angle point of this tract; THENCE North 01 degrees 00 minutes 30 seconds East, continuing along and with said easterly line of Tancahua Street, a distance of 107.29 feet to 5/8" iron rod found at the intersection of said easterly line of Tancahua Street and the southerly line of Blucher Street, (formerly Chatham Street) for the most northwesterly corner of said Lot 1, Block 2, Broadway Addition, also being the most northwesterly corner of this tract; THENCE North 75 degrees 24 minutes 20 seconds East, along and with the southerly line of said Blucher Street, also being the North line of Block 2, W.E. POPE'S BROADWAY ADDITION, a distance of 298.31 feet to a drill hole found in concrete at the intersection of the said southerly line of Blucher Street and the westerly line of said Carancahua Street for the most northeasterly corner of this tract; THENCE southerly, along and with the said westerly line of Carancahua Street, the following courses; South 01 degrees 00 minutes 30 seconds West, a distance of 107.29 feet to a drill hole found in concrete for the southwesterly corner of Lot 11, Block 2, W.E. POPE'S ADDITION for an angle point of this tract; South 00 degrees 05 minutes 32 seconds West, a distance of 105.14 feet to a drill hole found in concrete for an angle point of this tract; South 86 degrees 47 minutes 35 seconds West, a distance of 7.98 feet to a drill hole found in concrete for an angle point of this tract; South 14 degrees 49 minutes 41 seconds West, a distance of 41.75 feet to a 1" iron rod found for an angle point of this tract; Thence South 01 degrees 08 minutes 51 seconds East, continuing along and with said westerly line of Carancahua Street, a distance of 100.71 feet to the POINT OF BEGINNING and containing 2.02 acres of land more or less. TRACT II: Description of 2.3638 acres of land out of Lots 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, Block 1, of W.E. POPE'S BROADWAY ADDITION, Corpus Christi, Nueces County, Texas, as shown by map recorded in Volume 1, Page 56 A-1-2 81 of the Nueces County Map Records; a portion of the WILLIAM HOFFMAN ARROYO TRACT, as shown in Volume 1, Page 56 of the Nueces County Map Records; and a portion of Block 1, of the BLUFF PORTION OF THE CENTRAL WHARF AND WAREHOUSE COMPANY'S SUBDIVISION, as shown by map or plat of record in Volume A, Page 15, of the Nueces County Map Records; said 2.3638 acre tract being more particularly described by metes and bound as follows: BEGINNING at a 5/8 inch iron rod found for the northwest corner of Lot 1, Block 1, of the W.E. POPE'S BROADWAY ADDITION, Corpus Christi, Nueces County, Texas, as shown by map recorded in Volume 1, Page 56 of the Nueces County Map Records, said point being the intersection of the east line of Carancahua Street (variable width R.O.W.) and the south line of Blucher (formerly Chatham Street) (60 foot R.O.W.); THENCE N 75 degrees 36 minutes 04 seconds E, with the said south line of Blucher Street, along the north line of Lots 1, 2, 3, 4, 5, 6 and 7 said Block 1, a distance of 314.44 feet to a 5/8 inch iron rod found for the northeast corner of said Lot 7, Block 1 for the northeast corner of this tract; THENCE S 01 degrees 46 minutes 04 seconds W, with the west line of Upper North Broadway Street (variable width R.O.W.), a distance of 176.77 feet to a 5/8 inch iron rod found at the point of curvature of a circular curve to the right, the west line of said Broadway Street being shown on Exhibit A of a deed from Whole Life, Inc. to the City of Corpus Christi and recorded in Volume 1868, Page 763, of the Nueces County Deed Records; THENCE continuing along the west line of said Broadway Street and along the arc of a circular curve to the right having a central angle of 32 degrees 00 minutes 00 seconds and a radius of 84.84 feet, a distance of 47.38 feet to a 5/8 inch iron rod found for the point of tangency; THENCE S 33 degrees 46 minutes 04 seconds W, continuing along the west line of said Broadway Street, a distance of 54.57 feet to a P.K. nail set in asphalt for the point of curvature of a circular curve to the left; THENCE continuing along the west line of said Broadway Street and along the arc of a circular curve to the left with a central angle of 34 degrees 34 minutes 20 seconds and a radius of 51.50 feet, a distance of 31.08 feet to a 5/8 inch iron rod set for the point of tangency; THENCE S 00 degrees 48 minutes 16 seconds E, continuing along the west line of said Broadway Street, a distance of 47.96 feet to a 5/8 inch iron rod found at the intersection of the west line of said Broadway Street and the north line of Cooper's Alley (variable width R.O.W.) as described in a deed recorded in Volume 1570, Page 956 of the Nueces County Deed Records; THENCE S 46 degrees 28 minutes 22 seconds W, along the north line of said Cooper's Alley, a distance of 36.00 feet to a point for a corner from which a 5/8 inch iron rod found bears S A-1-3 82 81 degrees 45 minutes 43 seconds E, a distance of 0.37 feet, said point being the point of curvature of a circular curve to the right; THENCE continuing along the north line of said Cooper's Alley with the arc of a circular curve to the right having a central angle of 42 degrees 43 minutes 22 seconds and a radius of 230.00 feet, a distance of 171.50 feet to a 5/8 inch iron rod found for the point of tangency; THENCE S 89 degrees 11 minutes 44 second W, continuing along the north line of said Cooper's Alley, a distance of 10.54 feet to a 5/8 inch iron rod found for a point of curvature of a circular curve to the right; THENCE continuing along the north line of said Cooper's Alley with the arc of a circular curve to the right having a central angle of 92 degrees 00 minutes 30 seconds and a radius of 60.00 feet, a distance of 96.35 feet to a 5/8 inch iron rod set in the east line of Carancahua Street. THENCE N 01 degrees 12 minutes 14 seconds E, with the east line of Carancahua Street, a distance of 292.67 feet to the POINT OF BEGINNING and containing 2.3638 acres of land, more or less. A-1-4 83 EXHIBIT "A-2" Legal Description of Expansion Parcel TRACT I: Field Notes for a 2.02 acre tract of land, comprising all of Lots 1 through 22, Block 2, W.E. POPE'S BROADWAY ADDITION, a map of which is recorded in Volume 1, Page 56 of the Map Records of Nueces County, Texas, SAVE AND EXCEPT that portion of Lot 22, Block 2 conveyed to the City of Corpus Christi by Deed recorded in Volume 263, Page 605 of the Deed Records of Nueces County, Texas, and also comprising all of Block 6 of the BLUFF PORTION OF THE CENTRAL WHARF AND WAREHOUSE COMPANY'S SUBDIVISION as shown by a map recorded in Volume A, Page 15 of the Nueces County Map Records, and being a portion of the other land lying North of said Block 6, CENTRAL WHARF AND WAREHOUSE SUBDIVISION and being shown as Cooper's Alley on the map of said BROADWAY ADDITION; said 2.02 acre tract being more particularly described by metes and bounds as follows: BEGINNING at a 1" iron pipe found in concrete at the intersection of the northerly Right-Of-Way line of present Cooper's Alley (formerly Telco Street, formerly Kenedy Street), and the westerly line of Carancahua Street for the most southeasterly corner of Block 6, CENTRAL WHARF AND WAREHOUSE SUBDIVISION; said 1" iron pipe also being the most southeasterly corner of this tract; THENCE South 88 degrees 50 minutes 15 seconds West, along and with said southerly line of Block 6, being the said northerly line of Cooper's Alley, a distance of 250.16 feet to a 5/8" iron pipe found for the most southwesterly corner of said Lot 6, Block 1, same being a southwesterly exterior corner of this tract; THENCE North 00 degrees 42 minutes 29 seconds West, a distance of 43.82 feet to drill hole set for a point in the southerly line of said Lot 22, Block 2, W.E. POPE'S BROADWAY ADDITION; said drill hole also being an interior corner of this tract; THENCE South 59 degrees 42 minutes 29 seconds West, along and with the southerly line of said Lot 22, Block 2, W.E. POPE'S BROADWAY ADDITION, a distance of 13.28 feet to a 5/8" iron rod found for the most southeasterly corner of said portion of Lot 22, Block 2, conveyed to the City of Corpus Christi and also being in the most easterly Right-Of-Way line of present Tancahua Street for an exterior corner of this tract; THENCE North 04 degrees 19 minutes 38 seconds West, along and with said easterly line of Tancahua Street, a distance of 109.70 feet to a 5/8" iron rod found for an angle point of this tract; A-2-1 84 THENCE North 02 degrees 51 minutes 52 seconds West, continuing along and with said easterly line of Tancahua Street a distance of 30.06' to 5/8" iron rod found for the most northwesterly corner of said Lot 22, Block 2, BROADWAY ADDITION, also being the most southwesterly corner of said Lot 1, Block 2, BROADWAY ADDITION, also being an angle point of this tract; THENCE North 01 degrees 00 minutes 30 seconds East, continuing along and with said easterly line of Tancahua Street, a distance of 107.29 feet to 5/8" iron rod found at the intersection of said easterly line of Tancahua Street and the southerly line of Blucher Street, (formerly Chatham Street) for the most northwesterly corner of said Lot 1, Block 2, Broadway Addition, also being the most northwesterly corner of this tract; THENCE North 75 degrees 24 minutes 20 seconds East, along and with the southerly line of said Blucher Street, also being the North line of Block 2, W.E. POPE'S BROADWAY ADDITION, a distance of 298.31 feet to a drill hole found in concrete at the intersection of the said southerly line of Blucher Street and the westerly line of said Carancahua Street for the most northeasterly corner of this tract; THENCE southerly, along and with the said westerly line of Carancahua Street, the following courses; South 01 degrees 00 minutes 30 seconds West, a distance of 107.29 feet to a drill hole found in concrete for the southwesterly corner of Lot 11, Block 2, W.E. POPE'S ADDITION for an angle point of this tract; South 00 degrees 05 minutes 32 seconds West, a distance of 105.14 feet to a drill hole found in concrete for an angle point of this tract; South 86 degrees 47 minutes 35 seconds West, a distance of 7.98 feet to a drill hole found in concrete for an angle point of this tract; South 14 degrees 49 minutes 41 seconds West, a distance of 41.75 feet to a 1" iron rod found for an angle point of this tract; Thence South 01 degrees 08 minutes 51 seconds East, continuing along and with said westerly line of Carancahua Street, a distance of 100.71 feet to the POINT OF BEGINNING and containing 2.02 acres of land more or less. A-2-2 85 EXHIBIT "B" Landlord Personal Property All furniture, furnishings, equipment, tools, machinery, fixtures, appliances and all other intangible and tangible personal property, other than the Fixtures (as defined in the Lease), conveyed to Landlord pursuant to the Purchase Agreement. B-1 86 EXHIBIT "C" Appraisal Process If Landlord and Tenant are unable to agree upon the Adjusted Fair Market Value of the Premises within any relevant period provided in this Lease, each shall within ten (10) days after written demand by the other select one MAI Appraiser to participate in the determination of Adjusted Fair Market Value. For all purposes under this Lease, the Adjusted Fair Market Value of the Premises shall be based on the Adjusted Fair Market Value of the Premises unencumbered by this Lease. Within ten (10) days of such selection, the MAI Appraisers so selected by Landlord and Tenant shall select a third MAI Appraiser. The three (3) selected MAI Appraisers shall each determine the Adjusted Fair Market Value of the Premises within thirty (30) days of the selection of the third appraiser. To the extent consistent with sound appraisal practices as then existing at the time of any such appraisal, and if requested by Landlord, such appraisal, shall be made on a basis consistent with the basis on which the Premises was appraised at the time of its acquisition by Landlord. Each of Tenant and Landlord shall pay the fees and expenses of any MAI Appraiser which such party appoints pursuant to this Exhibit plus 50% of the cost of the third appraiser. In the event either Landlord or Tenant fails to select a MAI Appraiser within the time period set forth in the foregoing paragraph, the MAI Appraiser selected by the other party shall alone determine the Adjusted Fair Market Value of the Premises in accordance with the provisions of this Exhibit and the Adjusted Fair Market Value so determined shall be binding upon Landlord and Tenant. In the event the MAI Appraisers selected by Landlord and Tenant are unable to agree upon a third MAI Appraiser within the time period set forth in the first paragraph of this Exhibit, either Landlord or Tenant shall have the right to apply at their mutual expense to the presiding judge of the court of original trial jurisdiction in the county in which the Premises is located to name the third MAI Appraiser. Within five (5) days after completion of the third MAI Appraiser's appraisal, all three MAI Appraisers shall meet and a majority of the MAI Appraisers shall attempt to determine the Adjusted Fair Market Value of the Premises. If a majority are unable to determine the Adjusted Fair Market Value at such meeting, the three appraisals shall be added together and their total divided by three. The resulting quotient shall be the Adjusted Fair Market Value of the Premises. If, however, either or both of the low appraisal or the high appraisal are more than ten percent (10%) lower or higher than the middle appraisal, any such lower or higher appraisal shall be disregarded. If only one appraisal is disregarded, the remaining two appraisals shall be added together and their total divided by two, and the resulting quotient shall be such Adjusted Fair Market Value. If both the lower appraisal and higher appraisal are disregarded as provided herein, the middle appraisal shall be such Adjusted Fair Market Value. In any event, the result of the foregoing appraisal process shall be final and binding. C-1 87 Landlord, Tenant and any Guarantor will exercise their respective best efforts to expedite the appraisal process and will cooperate fully and with all deliberate speed with each other and with all appraisers in order to allow the determination of Adjusted Fair Market Value to be finally completed. Notwithstanding anything else in this Exhibit, if any appraiser appointed hereunder fails to complete his or her report within 60 days of his or her appointment, the Adjusted Fair Market Value of the Premises will be determined by reference to the other report or reports completed within such period. "MAI APPRAISER" shall mean an appraiser licensed or otherwise qualified to do business in the State and who has substantial experience in performing appraisals of facilities similar to the Premises and is certified as a member of the American Institute of Real Estate Appraisers or certified as a SRPA by the Society of Real Estate Appraisers, or, if such organizations no longer exist or certify appraisers, such successor organization or such other organization as is approved by Landlord. C-2 88 EXHIBIT "D" Permitted Exceptions 1. The standard printed exceptions, conditions and exclusions from coverage contained in the standard coverage owner's title policy then prevailing in use at the title company which consummates the sale transaction. 2. Any matters which an accurate survey of the Premises may show. 3. Exception Nos. 1, 2 (modified to state "Any discrepancies in area."), 3, 4, 5 (with the year "1996" replaced by "1997"), 9 through 11, 12, 14, 16 through 25 on the preliminary title report issued by Fidelity National Title Insurance Company dated November 11, 1996 under Order Number 96-001054. 4. Such other matters burdening the Premises which were created with the consent or knowledge of Tenant or arising out of Tenant's acts or omissions. D-1 89 EXHIBIT E List of Exempted Facilities Existing Facilities 1. Alameda Oaks Nursing Center 1101 S. Alameda St. 2. Avante Villa at Corpus Christi 5607 Everhart Rd. 3. Del Mar Health Care Center 4130 Santa Elena 4. Harbor View Care Center 1314 3rd St. 5. Heartland of Corpus Christi 202 Dr. Fortune 6. Human Development Center 3031 Mc Ardle Rd. 7. Lyhaven Nursing Center 3030 Fig St. 8. Retama Manor - Corpus Christi 2322 Morgan Avenue 9. South Park Manor 3115 McArdle 10. Sunnybrook Health Care Center 3050 Sunnybrook 11. Westwood Manor Nursing Home 801 Cantwell 12. Wooldridge Place Nursing Center 7352 Wooldridge Rd. 13. Casa de Oro 3401 S. Alamdea 14. Coastal Haven Apartments 4710 Middlecroft Rd. 15. Mt. Carmel Home for the Aged 4130 S. Alameda 16. Sea Gulf Villa 416 N. Chaparral 17. Villa Residential Care Homes 2822 Robby E-1 90 Facilities in Development or Currently Planned 1. Esplanade Gardens 5813 Esplanade Drive 2. Grand Court 2709 Cimarron Blvd. 3. The Villa 4934 Yorktown 4. Remington Retirement Community 6410 Meadow Vista Drive E-2 91 EXHIBIT F Basic Initial Term Minimum Rent [attached] F-1 EX-10.8 13 AMENDED AND RESTATED LOAN AGREEMENT 1 EXHIBIT 10.8 AMENDED AND RESTATED LOAN AGREEMENT THIS AMENDED AND RESTATED LOAN AGREEMENT (the "Agreement") is executed effective as of the 21st day of December, 1994, by and between CARRIAGE CLUB OF DENVER, L.P., a Delaware limited partnership ("Borrower"), and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("Lender"). RECITALS A. Borrower is the owner of that certain real property located in the City and County of Denver, Colorado, more particularly described in Exhibit A attached hereto and incorporated herein by this reference, together with all buildings, other improvements, fixtures and personal property now or hereafter located thereon (together, the "Project"). B. Borrower and Lender entered into a loan agreement dated as of October 30, 1990, pursuant to which Borrower is the borrower and Lender is the lender under a loan in the principal amount of $11,640,000.00 (the "1990 Loan Agreement"). C. Borrower and Lender have agreed to amend and restate the 1990 Loan Agreement. AGREEMENT NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender hereby agree as follows: SECTION 1. INCORPORATION OF RECITALS. The Recitals set forth above are hereby incorporated into and made a part of this Agreement. SECTION 2. CERTAIN DEFINITIONS. Reference is made to Section of this Agreement for definitions of certain of the terms used herein. SECTION 3. COMMITMENT TO LEND. Subject to and upon the terms and conditions of this Agreement, Lender agrees to advance to Borrower up to $15,500,000.00 (the "Loan") as hereinafter provided. Lender has previously disbursed $11,640,000.00 of the proceeds of the Loan to Borrower, pursuant to the terms of the 1990 Loan Agreement. The balance of the proceeds of the Loan, $3,860,000.00, shall be disbursed by Lender to Borrower contemporaneously with the execution of this Agreement. SECTION 4. TERMS OF PAYMENT. The Loan and the interest thereon shall be evidenced by, and be payable in accordance with, the Note and the Deed of Trust (the Loan and 2 the interest thereon, together with any other sums payable by Borrower under the Loan Papers, are herein collectively called the "Obligation"). SECTION 5. ADDITIONAL COVENANTS OF BORROWER. In addition to those covenants set forth in the Deed of Trust, Borrower hereby covenants and agrees as follows: 5.1 Noncompliance. Borrower will promptly notify Lender of any noncompliance, or 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 the Project, of which Borrower is aware, or in connection with which Borrower has received any notice, correspondence or other communication of a material nature to or from any federal, state or local governmental official, body, board, department or regulatory authority. If any such notice or communication is received by Borrower, Borrower shall engage an independent consultant as described in Section below and shall provide Lender with a statement of Borrower setting forth Borrower's proposed action or response to the noncompliance situation. Borrower will promptly notify Lender of any proposed local, state or federal law that, if enacted, would materially and adversely affect Borrower's current operation of the Project. 5.2 Consultant. If (a) Borrower fails to maintain at all times a Debt Service Coverage of at least 1.05 to 1.00, calculated by taking the ratio of Net Revenues Available for Debt Service to Debt Service, or (b) the occupancy level of the Project is less than 85% for three (3) 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 statute, ordinance and/or regulation concerning Borrower, its operations or the Project, then Borrower will, 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 1.20 to 1.00, increase the occupancy level to at least 90%, or make recommendations to address the violation and/or noncompliance, as the case may be. With regard to a notice of violation or noncompliance received by Borrower as described in (c) 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 with 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, the receipt of a notice of noncompliance, or for any other reason. 5.3 Annual Budget. Within sixty (60) days prior to the commencement of each fiscal year during the term of the Loan, Borrower will provide to Lender its proposed annual budget for such fiscal year (the "Annual Budget") for review and approval by Lender. Such Annual Budget shall detail the proposed Replacement Disbursements (as hereinafter defined) for capital improvements. Borrower shall not be permitted to make any change, amendment, or supplement -2- 3 to such Annual Budget or schedule of capital improvements without the prior consent of Lender, which consent may be withheld in Lender's sole and absolute discretion; provided, however, Lender agrees to promptly notify Borrower of its approval or disapproval of any change, amendment or supplement to the Annual Budget or the schedule of capital improvements. As a part of its budget process, Borrower will also prepare and provide to Lender a pro forma calculation of the effect the proposed budget will have on the Debt Service Coverage for such fiscal year. Within thirty (30) days following the end of each calendar month, Borrower will provide to Lender a monthly statement setting forth any variance from the Annual Budget. SECTION 6. CERTAIN RIGHTS OF LENDER. 6.1 Remedies Upon Default. Subject to the provisions in the Loan Papers pertaining to the limitation on the liability of Borrower, should a Default occur and be continuing, Lender shall have all the rights and remedies provided in the Loan Papers, together with such additional remedies as may be available at law or in equity. Without limiting the generality of the foregoing, Lender shall have all rights of a Secured Party under Article 9 of the Uniform Commercial Code of Colorado with respect to any and all monies and accounts in which it is granted a security interest herein, including, without limitation, the Holdback, the Replacement Reserve Account, and the Operating Reserve. 6.2 Indemnification of Lender. Subject to the provisions in the Loan Papers pertaining to the limitation on the liability of Borrower, Borrower hereby indemnifies Lender, holds Lender harmless and defends Lender from and against any and all liabilities (including, without limitation, any and all taxes and special assessments levied against the Project, or personal property located thereon), obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses, and disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against Lender, in any way relating to, or arising (i) out of, the Loan Papers or any of the transactions contemplated therein, including, but not limited to, any brokerage commissions or finder's fees claimed by any broker or other party in connection with the loan commitment from Lender to Borrower or the Loan, or (ii) with respect to the Project. 6.3 Management of Project. In the event 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 Project, Borrower will 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. Lender shall approve all existing managers and management contracts as well. Lender and Borrower agree that A.R.C. Management Corporation shall serve as manager of the Project. Such manager shall be entitled to receive a management fee of four and one-half percent (4.50%) of Revenues, up to a maximum amount of $20,000.00 per month, pursuant to a management contract approved by Lender, in Lender's sole and absolute discretion. Borrower may replace the manager, provided that such replacement is experienced in the operation and management of comparable projects and subject to Lender's approval of such replacement, management fee and management contract. Any change in the ownership or control of the manager shall entitle Lender to exercise its approval right over the manager and the -3- 4 management contract. Each manager shall hold and maintain all licenses, certifications and permits required by law. Each manager shall execute a non-competition agreement under which such manager agrees not to acquire, construct, operate or manage an independent or assisted living facility within five (5) miles of the Project for so long as any Indebtedness is outstanding under the Loan; provided, however, that activities of a manager related to the facility known as "Parkplace" and located at 111 Emerson Street, Denver, Colorado, shall not be deemed a violation of this Section . Any payments payable under a management contract shall be subordinate to, and shall be paid following, the payment in full of Debt Service payments on the Loan in each fiscal year. Borrower shall, and shall cause its on-site administrator to meet with Lender at least quarterly to discuss the financial and physical condition of the Project and the management of the Project, including personnel, resident satisfaction, marketing and other issues pertinent to the success of the Project and, at Lender's reasonable request, provide Lender with reports relating to such information. Any management or leasing contract shall provide that: a. If Lender acquires ownership of the Project, Lender may, without cost or liability to Lender, within ninety (90) days of Lender's notice to such management or leasing agents, terminate the management and leasing agreement, and terminate the on-site administrator and director of leasing. b. If, at any time after three (3) months following the date of execution of this Agreement, there are fewer than 198 units (85%) leased for a period of three (3) consecutive months, Lender may require that Borrower terminate the leasing and management agents for the Property. SECTION 7. LIMITATION ON LIABILITY. Reference is hereby made to the provisions of the Note that limit the personal liability of Borrower. SECTION 8. CERTAIN DEFINITIONS. As used herein, the following terms have the meanings indicated: "Cash" means cash, negotiable instruments due on demand, readily marketable securities, demand deposit accounts, or other cash equivalents or assets similar to any of the foregoing. "Debt Service" means, for any period, the sum of regular payments of interest and principal under the Note for such period, together with any other payments of Borrower on the Loan and on all other outstanding permitted indebtedness, if any, relating to the Project for such period. "Debt Service Coverage" means, for any period, the ratio, as determined by Lender, of Net Revenues Available For Debt Service for such period to Debt Service for such period. "Deed of Trust" means the Amended and Restated First Deed of Trust and Security Agreement, in form and substance satisfactory to Lender, of even date herewith, executed by Borrower and encumbering the Project for the benefit of Lender. -4- 5 "Default" means any event of default (however defined), arising under any of the Loan Papers or in any other document or instrument evidencing, securing, guaranteeing or otherwise pertaining to the Loan and the passage of any applicable grace or cure period provided therein, if any. "Loan Papers" means: (a) this Agreement; (b) the Note; (c) the Deed of Trust; (d) that certain Amended and Restated Assignment of Rents and Leases of even date herewith, in form and substance satisfactory to Lender, executed by Borrower for the benefit of Lender; (e) certain UCC-1 financing statements; (f) the Hazardous Substances Indemnity Agreement dated of even date herewith from Borrower in favor of Lender; (g) the Subordination of Management Agreement dated of even date herewith, executed by Lender, Borrower and Manager; (h) any Letters of Credit; and (i) any and all other documents evidencing or securing the Obligation or executed in connection with the Loan. "Net Revenues Available For Debt Service" means, for any period, the Revenues less the Total Expenses. "Note" means that certain Amended and Restated Promissory Note, in form and substance satisfactory to Lender, dated of even date herewith, in the maximum principal sum of $15,500,000.00, executed by Borrower and payable to the order of Lender. "Revenues" means, for any period, all Cash receipts of Borrower from the operation or ownership of the Project after the date hereof which are properly allocable to the Project, including, without limitation, gross resident service revenues, less contractual allowances and provisions for uncollectible accounts, free care and discounted care, if any; other operating revenues; non-operating revenues; entrance fees actually paid, if any, less any refunds made; receipts from leases and parking agreements; concession fees and charges and other miscellaneous operating sources from the Property; proceeds from rental or business interruption insurance; and net proceeds of or recoveries from litigation in which Assignor is involved relating to the operation or ownership of the Property; but excluding security deposits and earnest money deposits until and unless such are forfeited by the depositor; any gain or loss resulting from the early extinguishment of indebtedness or from the sale, exchange, refinancing or other disposition of property not in the ordinary course of business; any proceeds from any condemnation or insurance coverage (other than business interruption), or recovery for damage to the Property; and any gifts, grants, bequests or donations. Revenues shall be determined in accordance with cash basis accounting principles consistently applied. "Total Expenses" means all Cash expenses of operating the Project which arise after the date hereof and which are paid by Borrower after the date hereof and which are directly associated with and fairly allocable to ownership or operation of the Project, including (without limitation but without duplication) insurance premiums and ad valorem real estate taxes and assessments (to the extent the same are not paid out of the Escrows as hereinafter defined), amounts deposited in escrows required under the Loan Papers for ad valorem real estate taxes and assessments (the "Escrows"), amounts deposited in the Replacement Reserve Account or the Operating Reserve (both as hereinafter defined), maintenance costs, management fees and costs not to exceed those -5- 6 set forth in the Management Agreement for the Project approved by Assignee, interest on the Note (to the extent actually paid), accounting, legal, and other professional fees, fees relating to environmental or financial audits, utility costs, amounts deposited into reserves established under the Operating Budgets, wages, salaries, personnel expenses, but excluding any capital expenditure not properly allocable to the calendar year in question, any payments of interest, principal, or fees (including fees to extend the term thereof) on any loans other than the Loan obtained by Borrower, any payment or expense to which Borrower was or is to be reimbursed from proceeds of the Loan, insurance or any other third party, and any non-cash expense item such as depreciation or amortization, as such terms are used for accounting or federal income tax purposes. Total Expenses shall be determined on an actual or pro forma basis and on a consolidated or combined basis, as determined by Lender in its sole discretion to be appropriate. For purposes of any calculation of Revenues or Total Expenses, any deduction from gross resident service revenues otherwise required by the definition of Revenues in this Section shall not be made if and to the extent that the amount of such deduction is included in Total Expenses. SECTION 9. LETTERS OF CREDIT; HOLDBACK. 9.1 Security. As additional security for the Loan, Borrower shall deposit $240,000.00 ("Deposit") in the form of one or more unconditional, irrevocable letters of credit, issued in favor of Lender by an issuer satisfactory to Lender, in form and substance satisfactory to Lender, and having an expiration date satisfactory to Lender ("Letters of Credit"), or a combination of cash and Letters of Credit. Borrower has previously delivered to Lender a Letter of Credit issued by ABN-AMRO Bank, N.V., in the amount of $177,450.00, of which Lender shall retain possession following the date hereof. The balance of the Deposit, $62,550.00 (the "Holdback"), shall be delivered to Lender in cash (or by wire transfer) simultaneously with execution of this Agreement. Such Holdback shall be disbursed to Borrower when Borrower either (a) replaces the $177,450.00 Letter of Credit with a Letter of Credit in the amount of $240,000.00, or (b) delivers to Lender an additional Letter of Credit in the amount of $62,550.00. Borrower hereby grants to Lender a security interest in the Holdback as additional collateral for the Loan. 9.2 Full Force and Effect. Except as hereinafter provided, any Letters of Credit and any renewals or replacements thereof shall remain in full force and effect until the Loan is paid in full and all obligations of Borrower under the Loan Papers have been fully performed. Additionally, this Agreement shall not in any manner be construed as amending or modifying the terms of any Letters of Credit. 9.3 Renewal of Letters of Credit. In connection therewith, it is hereby understood and agreed that no less than thirty (30) days prior to the expiration date of any Letter of Credit and each renewal or extension thereof (until such time as such Letter of Credit has been released by Lender), Borrower shall deliver to Lender a renewal or extension of such Letter of Credit for a term of not less than one (1) year, in form, content and issued by a bank acceptable to Lender in its sole discretion. If requested by Lender, each Letter of Credit (and each renewal or extension thereof) shall, at Borrower's sole cost and expense, be accompanied by an opinion of -6- 7 counsel regarding its due authorization, execution and enforceability (which opinion shall be in form, content and from counsel acceptable to Lender in its sole discretion). 9.4 Presentment. Lender shall be entitled to draw upon any Letter of Credit upon the occurrence of any Default (including, without limitation, Borrower's failure to deliver a renewal or extension of any Letter of Credit in the time and manner required hereinabove) or if Lender believes, in its sole judgment, that its rights to draw on any Letter of Credit could be in jeopardy. Without limiting the generality of the foregoing, Lender shall also be entitled to draw upon any Letter of Credit if the credit rating or financial condition of the issuing bank is no longer acceptable to Lender in its sole discretion. No draw by Lender on any Letter of Credit shall cure or be deemed to cure any default or limit in any respect any of Lender's remedies under the Loan Papers. Borrower shall replace or restore (to its original principal amount) any Letter of Credit immediately following any full or partial draw thereon by Lender. 9.5 Application of Proceeds of Letters of Credit. Proceeds of any draw upon any Letter of Credit (after reimbursement of any costs and expenses, including but not limited to attorneys' fees and disbursements, incurred by Lender in connection with such draw) may be applied by the Lender to the payment of the Deed of Trust, or the Note or any other indebtedness secured thereby, in such manner as the Lender, in its sole discretion, deems appropriate. 9.6 Application of Holdback. Lender shall be entitled to apply any Holdback to the satisfaction of any of Borrower's obligations hereunder upon the occurrence of any Default (including, without limitation, Borrower's failure to deliver a renewal or extension of any Letter of Credit in the time and manner required hereinabove) or if Lender believes, in its sole judgment, that its rights to draw on any Letter of Credit could be in jeopardy. No use or application of any Holdback by Lender shall cure or be deemed to cure any default or limit in any respect any of Lender's remedies under the Loan Papers. Borrower shall replace or restore (to its original amount) any Holdback immediately following any full or partial application of the Holdback by Lender. Any Holdback (after reimbursement of any costs and expenses, including but not limited to attorneys' fees and disbursements, incurred by Lender in connection with such Holdback) may be applied by the Lender to the payment of the Deed of Trust, or the Note or any other indebtedness secured thereby, in such manner as the Lender, in its sole discretion, deems appropriate. 9.7 Release of Letters of Credit and Holdback; No Waiver. In the event of a transfer of the Project and assumption of the Obligation by American Retirement Corporation, a Tennessee corporation ("ARC"), pursuant to Section 1.17(l) of the Deed of Trust, Lender shall return to Borrower any Letters of Credit received from Borrower, and shall disburse the Holdback to Borrower, upon receipt of a Letter or Letters of Credit or a combination of cash and Letters of Credit from ARC. Such cash and/or Letters of Credit received from ARC shall be subject to all of the terms and conditions of this Section just as if they constituted the original Deposit. After the payment in full of all sums due under the Deed of Trust, the Note secured thereby and all of the other Loan Papers, provided there is no Default or any event or condition which, with notice or the passage of time, or both, could constitute a Default, Lender shall, upon request, release its rights in any Letters of Credit and any Holdback, surrender such Letters of Credit to -7- 8 the issuing banks, and disburse the Holdback to Borrower. No delay or omission of Lender in exercising any right to draw on any Letter of Credit or any Holdback shall impair any such right, or shall be construed as a waiver of, or acquiescence in, any Default under this Agreement. Lender's rights and remedies hereunder shall be cumulative. SECTION 10. REPLACEMENT RESERVE ACCOUNT. 10.1 Deposits to Replacement Reserve Account. Borrower shall be required, on an annual basis, to spend, on property capital improvements or replacements, and/or pay into a non-interest bearing reserve account held by Lender (a "Replacement Reserve Account"), an amount equal to three percent (3%) of the Revenues of the Project. The actual amount required to be spent and/or paid on an annual basis will be determined by Lender upon completion of an engineering review. Any costs incurred by Lender in connection with any such review shall be paid by Borrower to Lender within five (5) days after written notice from Lender. 10.2 Use of Replacement Reserve Account. The Replacement Reserve Account shall be held by Lender for payment of costs relating to capital improvements or replacements at the Project requested by Borrower in writing and approved by Lender in writing. In order to qualify for a disbursement from the Replacement Reserve Account (a "Replacement Disbursement"), Borrower must satisfy the conditions precedent to Replacement Disbursements contained in Section below and Lender shall have approved the proposed repairs and replacements. Borrower hereby grants to Lender a security interest in the Replacement Reserve Account as additional collateral for the Loan. Upon the occurrence of a Default, in addition to any other rights and remedies that Lender shall be entitled to as a Secured Party under the Colorado Uniform Commercial Code, Lender, at Lender's sole option, may (but shall not be obligated to) disburse all or any portion of the balance of the Replacement Reserve Account to satisfy all or any part of Borrower's obligations under the Loan Papers, including, but not limited to, the obligation to pay principal and/or interest on the Loan, the payment of taxes or insurance for the Project, or the payment of the reasonable fees and expenses of Lender's counsel. 10.3 Disbursements from the Replacement Reserve Account. Replacement Disbursements shall be subject to satisfaction of the following terms and conditions: a. The amount of a Replacement Disbursement may not exceed the amount by which, during the loan year, actual expenditures for capital improvements or replacements pre-approved by Lender exceeded $25,000.00. b. There shall exist no Default or any event or condition which, with notice or the passage of time, or both, could constitute a Default. c. There shall have been no change in the financial condition of Borrower or of the Project which materially and adversely affects Borrower's ability to perform its obligations under the Note or the other Loan Papers. -8- 9 d. No condemnation or adverse zoning or usage change proceedings shall have been commenced or threatened against the Project, the Project shall not have suffered any significant damage by fire or other casualty, and no law, regulation, ordinance, moratorium, injunctive proceeding, restriction, litigation, action, citation or similar proceeding or matter shall be pending or threatened against Borrower or the Project, which would have the effect, in Lender's reasonable judgment, of materially and adversely affecting the financial condition of Borrower, or the Project, its operation or the anticipated benefits to be derived by Borrower therefrom or by Lender in connection with its assisting Borrower in financing the Project for any reason, whether because of Borrower's being prohibited or delayed in converting the Project to usage other than its present usage or otherwise. e. The representations and warranties made in the Loan Papers will be true and correct in all material respects on the date of each such request for a Replacement Disbursement and Borrower shall have performed all acts required by the Loan Papers to have been previously performed by Borrower. f. Replacement Disbursements shall be made only for reimbursement of Borrower for the cost of completed capital expenditures at the Project, and only where Lender has approved the capital improvements and any related plans and specifications. Replacement Disbursements shall be made not more frequently than once per calendar month. Borrower shall not request Replacement Disbursements for any other purpose nor shall Borrower use any Replacement Disbursements for payment of any other cost or expense except as specifically set forth in a request for Replacement Disbursement approved by Lender in writing. Lender shall have no duty or obligation to fund Replacement Disbursements except in accordance with this Agreement and only for expenses incurred in arrears. The expenses incurred in connection with the capital improvements that are funded from the Replacement Reserve Account shall not be considered Total Expenses of the Project. g. Requests for Replacement Disbursements shall specify the amount requested, shall be in minimum increments of $25,000.00, and shall be accompanied by appropriate invoices, bills paid affidavits, partial lien waivers, title endorsements and other documents required by Lender. Furthermore, all proceeds of all previous Replacement Disbursements will have been spent only in strict accordance with the purposes specified in the previous requests for Replacement Disbursements. Additionally, Lender shall have no duty to fund Replacement Disbursements if the sum of (i) the amounts advanced by Lender hereunder plus (ii) all other funds of Borrower available therefor and set aside in a manner which Lender has indicated in writing is satisfactory to it, will not enable Borrower to complete the capital improvements. Within ten (10) business days after the satisfaction of such requirements, Lender, or an engineer or architect selected by Lender, may inspect, for Lender's approval, the capital improvements as a further condition to the disbursement of funds. Any costs incurred by Lender in connection with any such inspection shall be paid by Borrower or reimbursed to Lender within five (5) days after written notice from Lender. Within five (5) days after -9- 10 the satisfaction of such requirements and the inspection, if any, Lender shall disburse to Borrower all sums documented by Borrower in the invoices previously submitted to Lender. h. Borrower shall have delivered to Lender for Lender's approval a list of the names and addresses of all contractors and major subcontractors and materialmen employed by Borrower for the construction, renovation or replacement of improvements at the Project, said list to be periodically updated during the course of construction, together with, if requested by Lender, true and correct copies of all executed contracts and subcontracts. In this connection, the parties agree that if any affiliate of Borrower is designated by Borrower as the contractor and such designation is approved by Lender, such affiliate shall provide all services and materials on such costs and terms no less favorable than could be procured from bona fide arm's length third parties for similar services and materials. 10.4 Application of Replacement Disbursements after Default. After the occurrence of a Default or any event or condition which, with notice or the passage of time, or both, could constitute a Default, Lender shall have the right, but not the obligation, to disburse and apply the proceeds of any Disbursement to the satisfaction of any of Borrower's obligations hereunder directly to any contractor or subcontractor, title company, and any other person or firm to whom payment is due under this Agreement or any other Loan Papers. Borrower hereby authorizes Lender to hold, use, disburse, and apply the Replacement Reserve Account for payment of costs of construction of the improvements, expenses incident to the Loan and the Project, and the payment or performance of any obligation of Borrower hereunder, including, without limitation, interest on the Loan, any Loan fees owing to Lender, legal fees of Lender's attorneys which are payable by Borrower, and such other sums as may be owing from time to time by Borrower to Lender with respect to the Loan. Notwithstanding the other provisions of this paragraph, nothing in this Agreement is intended to be for the benefit of, nor may be enforced by, nor should be relied upon by, any person, firm or corporation other than Borrower. SECTION 11. CASH OPERATING RESERVE FUND. During the term of the Loan, Borrower will maintain a cash operating reserve fund (the "Operating Reserve"), in which Borrower grants to Lender a security interest, in an amount representing twenty-one (21) days of routine Total Expenses. Such amount shall be estimated by Borrower, subject to Lender's approval. Borrower may withdraw monies from the Operating Reserve in order to pay ordinary operating expenses; provided, however, that within ninety (90) days of such withdrawal, Borrower shall restore to the Operating Reserve the full amount of the monies withdrawn. Borrower shall provide Lender with written notice of any withdrawal from or restoration of the Operating Reserve within ten (10) days of such withdrawal or restoration. Upon request by Lender, Borrower shall provide Lender with evidence of Borrower's maintenance of the Operating Reserve and the balance therein. SECTION 12. MISCELLANEOUS PROVISIONS: -10- 11 12.1 Default. Any breach of the requirements of this Agreement by Borrower shall constitute a "Default" under this Agreement and under each of the other Loan Papers. 12.2 Financial Reports. Borrower shall submit to Lender such financial statements and/or reports as are required by the Deed of Trust. 12.3 Books and Records. Borrower shall keep at the Project or at its offices at 2020 South Monroe Street, Denver, Colorado 80210, complete, true and accurate books and records relating to the Project and shall permit agents and employees of Lender (and any auditors selected by Lender) from time to time upon reasonable request to inspect and copy such books and records during regular office business hours. 12.4 Governing Law. The laws of the State of Colorado 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 this Agreement. 12.5 Construction. The parties acknowledge that each party and its counsel has reviewed this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments or exhibits hereto. 12.6 Entire Agreement. This Agreement and the other Loan Papers embody the entire agreement between Borrower and Lender and supersede all prior agreements and understandings relating hereto, including, without limitation, that certain Loan Application dated August 17, 1994, and that certain Commitment Letter dated November 10, 1994, between Borrower and Lender, and any letter agreement or alleged letter agreement and any correspondence between Borrower and Lender (all of the foregoing being merged into this document and deemed null, void and of no force and effect), and this Agreement and the other Loan Papers may only be amended or supplemented by an instrument in writing executed by Borrower and Lender. 12.7 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of Lender and Borrower and their respective successors and assigns, provided that Borrower may not, without prior written consent of Lender, assign any of its rights, duties or obligations hereunder except pursuant to a Permitted Transfer (as defined in the Deed of Trust). 12.8 Maximum Rate. All agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no event, whether by reason of acceleration of the maturity of the Note 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 rate permitted by applicable law. If fulfillment of any provision of this Agreement or any of the Loan Papers at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law (including the laws of the United States and the State of Colorado), then ipso -11- 12 facto, the terms and provisions of the Note limiting the amount of interest which shall be paid to or charged by Lender under the Loan shall be applied and followed. 12.9 Invalid Provisions. If any provision of this Agreement or any of the other Loan Papers is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable; the appropriate Loan Paper shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part thereof; and the remaining provisions thereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance therefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision there shall be added automatically as a part of such Loan Paper a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 12.10 Expenses. All costs and expenses of closing, including the fees and expenses of Lender's counsel, shall be paid by Borrower, some of which may be paid by proceeds of the Loan. 12.11 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 and/or management of Borrower, the power of Lender being limited to the right to exercise the remedies referred to in the Loan Papers. No covenant or provision of the Loan Papers 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 Project in Lender or to make Lender in any way responsible for the debts or losses of Borrower or with respect to the Project. Lender and Borrower disclaim any sharing of liabilities, losses, costs or expenses. 12.12 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 12.13 Warranty and Representation as to Net Operating Income. Borrower hereby warrants and represents to Lender that, as of the date hereof, the annualized Net Revenues Available For Debt Service is at least $2,196,000.00 from not more than 95% occupancy of the Project by tenants actually in occupancy and paying rent on a current basis (i.e., not more than one (1) month delinquent in their rental payment), assuming a five percent (5%) management fee and reserves for replacements of one percent (1%) of Revenues per year. 12.14 Warranty and Representation as to Compliance. Borrower hereby warrants and represents to Lender that as of the date hereof, (a) the Project is in full compliance with all zoning, building, health, fire, traffic, environmental, wetlands, coastal and other rules, regulations, ordinances, statutes and requirements applicable to the Project, including, without limitation, Ordinance No. 887, Series of 1991, recorded December 24, 1991, at Reception No. R-91-0127087, pertaining to zoning; and (b) no inspections, renovations, rehabilitation or modifications or changes to any of the improvements at the Project or any certificates of -12- 13 occupancy or any other approvals, consents or authorizations are necessary under any applicable laws, rules or regulations, as a result of Borrower's ownership or operation of the Project. 12.15 ADA Compliance. Borrower shall take such actions as are reasonably necessary from time to time pertaining to any laws, rules, regulations or codes relating to access for or discrimination against the disabled, including without limitation, the Americans with Disabilities Act, 42 U.S.C.A. ss.ss. 12101 et seq., as interpreted and amended from time to time, the Fair Housing Amendments Act of 1988, 42 U.S.C.A. ss.ss. 3601 et seq., as interpreted and amended from time to time, and the regulations promulgated pursuant thereto. 12.16 Notices. All notices hereunder shall be in writing and shall be deemed to have been sufficiently given or served for all purposes when delivered in person or sent by certified mail, return receipt requested, to either party hereto at the address set forth below, or at such other address of which it shall have notified the party giving such notice in writing as aforesaid: If to Borrower: Carriage Club of Denver, L.P. 2020 South Monroe Street Denver, Colorado 80210 Attention: Executive Director with a copy to: Mr. David L. Widener President Sagebrush, Inc. 2535 Tech Drive, Suite 111 Bettendorf, Iowa 52722 If to Lender: General Electric Capital Corporation 13355 Noel Road, Suite 2000 Dallas, Texas 75240 Attention: Manager - Real Estate Financing EXECUTED AND DELIVERED as of the date first above recited. BORROWER: CARRIAGE CLUB OF DENVER, L.P., a Delaware limited partnership By: Sagebrush, Inc., a Delaware corporation, its sole general partner By: /s/ David L. Widener ------------------------------- David L. Widener -13- 14 PRESIDENT LENDER: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation By: /s/ Christopher S. Peters ------------------------------------ Christopher S. Peters Project Manager -14- 15 EXHIBIT A (The Project) A TRACT OF LAND BEING A PART OF BLOCK 19, THE VACATED ALLEY THEREIN, PARTS OF VACATED EAST ASBURY AND BUCHTEL BLVD., UNIVERSITY PARK AMENDED MAP, MORE PARTICULARLY DESCRIBED AS FOLLOWS: BEGINNING AT A POINT ON THE EAST LINE OF SOUTH MONROE STREET, SAID POINT BEING 30.75 FEET NORTHERLY OF THE SOUTH LINE OF SAID BLOCK 19; THENCE NORTHERLY ON SAID EAST LINE OF SOUTH MONROE STREET, A DISTANCE OF 675.10 FEET TO THE SOUTHWESTERLY RIGHT-OF-WAY LINE OF BUCHTEL BOULEVARD AS DESCRIBED IN BOOK 8854 AT PAGE 283 OF THE CITY AND COUNTY OF DENVER RECORDS; THENCE ON AN ANGLE OF 100(degree)36'18" TO THE RIGHT AND ALONG SAID SOUTHWESTERLY RIGHT-OF-WAY LINE A DISTANCE OF 269.60 FEET; THENCE ON AN ANGLE TO THE RIGHT OF 79(degree)23'42" A DISTANCE OF 319.87 FEET; THENCE ON AN ANGLE TO THE LEFT OF 45(degree)00'00" A DISTANCE OF 35.36 FEET; THENCE ON AN ANGLE TO THE RIGHT OF 45(degree)00'00" A DISTANCE OF 311.11 FEET TO THE NORTH RIGHT-OF-WAY LINE OF EAST EVANS AVENUE; THENCE ON AN ANGLE TO THE RIGHT OF 89(degree)57'00" AND ALONG SAID NORTH RIGHT-OF-WAY LINE A DISTANCE OF 260.00 FEET TO A POINT 30.00 FEET EASTERLY OF THE EAST LINE OF SAID SOUTH MONROE STREET; THENCE ON AN ANGLE TO THE RIGHT OF 45(degree)44'00" A DISTANCE OF 42.94 FEET TO THE POINT OF BEGINNING, CITY AND COUNTY OF DENVER, STATE OF COLORADO. Exhibit A Page 1 EX-10.9 14 AMENDED AND RESTATED PROMISSORY NOTE 1 EXHIBIT 10.9 AMENDED AND RESTATED PROMISSORY NOTE $15,500,000.00 December 21, 1994 FOR VALUE RECEIVED, CARRIAGE CLUB OF DENVER, L.P., a Delaware limited partnership ("Borrower"), promises to pay to the order of GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("GECC"), the sum of Fifteen Million Five Hundred Thousand and No/100 Dollars ($15,500,000.00), with interest on the unpaid balance of such amount from the date of the disbursement of the loan (the "Loan") evidenced hereby, at the rate or rates of interest specified herein. This Note is secured by an Amended and Restated First Deed of Trust and Security Agreement (the "Deed of Trust") of even date herewith on certain property particularly described therein (the "Mortgaged Property") and by other security given or to be given to GECC as collateral for the Loan (collectively, the "Other Security Documents"). From and after the date hereof and through and including December 31, 2001 (the "Maturity Date"), Borrower shall pay to GECC monthly in arrears commencing on the first day of the first calendar month immediately after the date hereof, and continuing on the first day of each and every calendar month thereafter (such date for any particular month being hereinafter referred to as the "Due Date"), interest accrued for the preceding month on the outstanding principal amount hereof at the Contract Index Rate (as hereinafter defined). Interest at the Contract Index Rate shall be computed on the basis of a three hundred sixty (360) day year composed of twelve (12) months of thirty (30) days each, except that interest for a period less than a full month shall be computed by multiplying the actual number of days elapsed in such period by a daily rate based on such 360-day year. In addition to monthly payments of interest hereunder, commencing January 1, 1995, and continuing on the first day of each month thereafter, to and including December 31, 2001, Borrower shall pay to GECC, in reduction of the principal balance of this Note, Twenty Thousand and No/100 Dollars ($20,000.00); provided, however, that if, on the first day of any month, either (a) Debt Service Coverage (as hereinafter defined) for the most recent consecutive ninety (90) day period for which financial information 2 is available, is less than 1.2 to 1.0, or (b) annualized Net Revenues Available for Debt Service (as hereinafter defined) divided by the then outstanding principal balance of this Note is less than 0.13, then, in addition to regular monthly installments of interest on this Note, Borrower shall pay to GECC, in reduction of the principal balance of this Note, on the fifth day of such month, all Excess Cash Flow (as hereinafter defined) for the preceding month. Such Excess Cash Flow delivered to GECC shall be applied to the payment of principal of the Note. Borrower shall continue making such payments of Excess Cash Flow on the fifth day of each succeeding month until the month in which, on the first day of such month, (a) Debt Service Coverage as determined by GECC for the most recent consecutive ninety (90) day period, is equal to or greater than 1.2 to 1.0, and (b) annualized Net Revenues Available for Debt Service divided by the then outstanding principal balance of this Note is equal to or greater than 0.13. The entire principal amount of this Note, together with all accrued but unpaid interest thereon, any and all unpaid late charges and interest due at the Default Rate, and all other Maturity Obligations (as hereinafter defined) shall be due and payable to GECC on December 31, 2001 (the "Maturity Date"). As used herein, "Contract Index Rate" shall mean the rate of interest equal to four and one-quarter percent (4.25%) per annum in excess of the GECC Composite Commercial Paper Rate. "GECC Composite Commercial Paper Rate" shall mean the Average Interest Expense on the actual principal amount of the GECC Composite Commercial Paper outstanding for GECC's full fiscal month preceding the Interest Billing Month. "GECC Composite Commercial Paper" shall mean GECC's outstanding commercial paper for terms of nine (9) months or less from sources within the United States but excluding the current portion of GECC's long term debt and GECC Financial Corporation's borrowings and interest expense. "Average Interest Expense" shall mean the percentage obtained by dividing the interest expense on GECC Composite Commercial Paper for such fiscal month by the average daily principal amount of GECC Composite Commercial Paper outstanding during such fiscal month, divided by the actual number of days in such fiscal month and multiplied by the actual number of days in the calendar year. The "Interest Billing Month" shall mean the month preceding the month in which the interest shall be paid. The GECC Composite Commercial Paper Rate shall be determined by GECC and evidenced by a certificate issued by an authorized GECC employee. -2- 3 As used herein, "Debt Service Coverage" shall mean, for any period, the ratio, as determined by GECC, of Net Revenues Available For Debt Service for such period to Debt Service for such period. "Net Revenues Available For Debt Service" shall mean, for any period, the Revenues less the Total Expenses (both as hereinafter defined). "Debt Service" shall mean, for any period, the sum of regular payments of interest and principal under this Note for such period, together with any other payments of Borrower on the Loan and on all other outstanding permitted indebtedness, if any, relating to the Mortgaged Property for such period. As used herein, "Excess Cash Flow" shall mean, for any period, the Net Revenues Available for Debt Service for such period, together with any reserves required by GECC pursuant to the Loan Agreement, the Deed of Trust or the Other Security Documents, less the Debt Service for such period. Any negative Excess Cash Flow shall be carried over to the next applicable accounting period. As used herein, "Maturity Obligations" shall mean the entire outstanding principal amount of this Note, together with all accrued but unpaid interest thereon, and all other sums due and unpaid hereunder and under the Deed of Trust and the Other Security Documents. As used herein, "Revenues" shall mean all Cash receipts of Borrower from the operation or ownership of the Mortgaged Property after the date hereof which are properly allocable to the Mortgaged Property, including, without limitation, gross resident service revenues, less contractual allowances and provisions for uncollectible accounts, free care and discounted care, if any; other operating revenues; non-operating revenues; entrance fees actually paid, if any, less any refunds made; receipts from leases and parking agreements; concession fees and charges and other miscellaneous operating sources from the Mortgaged Property; proceeds from rental or business interruption insurance; and net proceeds of or recoveries from litigation in which Assignor is involved relating to the operation or ownership of the Mortgaged Property; but excluding security deposits and earnest money deposits until and unless such are forfeited by the depositor; any gain or loss resulting from the early extinguishment of indebtedness or from the sale, exchange, refinancing or other disposition of property not in the ordinary course of business; any proceeds from any condemnation or insurance coverage (other than business interruption), or recovery for damage to the Mortgaged -3- 4 Property; and any gifts, grants, bequests or donations. Revenues shall be determined in accordance with cash basis accounting principles consistently applied. "Cash" shall mean cash, negotiable instruments due on demand, readily marketable securities, demand deposit accounts, or other cash equivalents or assets similar to any of the foregoing. As used herein, "Total Expenses" shall mean all Cash expenses of operating the Mortgaged Property which arise after the date hereof and which are paid by Borrower after the date hereof and which are directly associated with and fairly allocable to ownership or operation of the Mortgaged Property, including (without limitation but without duplication) insurance premiums and ad valorem real estate taxes and assessments (to the extent the same are not paid out of the Escrows as hereinafter defined), amounts deposited in escrows required under the Deed of Trust or the loan agreement of even date herewith executed by Borrower and GECC (the "Loan Agreement") for ad valorem real estate taxes and assessments (the "Escrows"), amounts deposited in the Replacement Reserve Account (as defined in the Loan Agreement), maintenance costs, management fees and costs not to exceed those set forth in the management agreement for the Mortgaged Property approved by GECC, interest on this Note (to the extent actually paid), accounting, legal, and other professional fees, fees relating to environmental or financial audits, utility costs, amounts deposited into reserves established under the operating budgets for the Mortgaged Property, wages, salaries, personnel expenses, but excluding any capital expenditure not properly allocable to the calendar year in question, any payments of interest, principal, or fees (including fees to extend the term thereof) on any loans (other than the Loan) obtained by Borrower, any payment or expense to which Borrower was or is to be reimbursed from proceeds of the Loan, insurance or any other third party, and any non-cash expense item such as depreciation or amortization, as such terms are used for accounting or federal income tax purposes. Total Expenses shall be determined on an actual or pro forma basis and on a consolidated or combined basis, as determined by GECC in its sole discretion to be appropriate. For purposes of any calculation of Revenues or Total Expenses, any deduction from gross resident service revenues otherwise required by the definition of Revenues shall not be made if and to the extent that the amount of such deduction is included in Total Expenses. All payments due under this Note are payable at the lock box maintained by GECC and identified as "Lock-Box-GECC-CREF," P.O. -4- 5 Box 4748, Los Angeles, California 90051-2748, or at such other place as GECC or other holder hereof shall notify Borrower in writing. All payments received by GECC on this Note shall be applied by GECC as follows: first, to the payment of delinquency or "late" charges, if any; second, to accrued and unpaid interest at the Contract Index Rate; and third, to the reduction of principal. This Note may not be prepaid in whole or in part prior to December 31, 1996. Thereafter, upon ten (10) days' prior written notice to GECC, Borrower may prepay this Note in whole but not in part on any regularly scheduled interest payment due date hereof, by paying GECC the Maturity Obligations, without prepayment premium. GECC reserves the right to require any payment on this Note, 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. In the event Borrower fails to pay any installment of interest or any principal on this Note for five (5) days after the same shall become due, whether by acceleration or otherwise, GECC may, at its option, impose a delinquency or late charge on Borrower, payable upon demand, equal to the greater of: (a) Five percent (5%) per annum in excess of the Contract Index Rate of interest (the "Default Rate") that would have been applicable to a then- current installment as provided for elsewhere in this Note, as if such installment had been made when due, computed from the date such payment was due and payable to the date of receipt of such installment by GECC in good and immediately available funds, or (b) five percent (5%) of the amount of such past due payment, notwithstanding the date on which such payment is actually paid to GECC; provided, however, that if any such late charge under subsections (a) or (b) hereof is not recognized as liquidated damages for such delinquency (as contemplated by Borrower and GECC), and is deemed to be interest in excess of the amount permitted to be charged to Borrower under applicable law, GECC shall be entitled to collect a late charge only at the highest rate -5- 6 permitted by law, and any interest actually collected by GECC in excess of such lawful amount shall be deemed a payment in reduction of the principal amount then outstanding under this Note and shall be so applied. In the event of any conflict between the provisions of this Note and those of the Deed of Trust, the Other Security Documents or any other agreement relating to the Loan, the provisions of this Note shall govern. In the event Borrower fails to pay any installment of interest or any principal on this Note for five (5) days after the same shall become due or upon the happening of a default or any "Event of Default" as defined in the Deed of Trust or any of the Other Security Documents or other documents executed in connection with the Loan (subject to any applicable cure periods provided for in such documents), then and in any such event GECC may at its option declare the entire unpaid balance of this Note, together with interest accrued hereon, to be immediately due and payable, and GECC may proceed to exercise any rights or remedies that it may have under the Deed of Trust, under the Other Security Documents, under this Note or under any other agreement relating to the Loan or such other rights and remedies which GECC may have at law, equity or otherwise. In the event of such acceleration, Borrower may discharge its obligations to GECC by paying the Maturity Obligations, with interest at the Default Rate accruing from the date such acceleration is declared, plus any applicable prepayment premium, or if no prepayment is then permitted, a prepayment premium equal to five percent (5%) of the unpaid balance of the Loan. In the event this Note is turned over to an attorney at law for collection after default, in addition to the Maturity Obligations, GECC shall be entitled to collect all costs of collection, including but not limited to reasonable attorneys' fees, incurred in connection with protection of or realization of collateral or in connection with any of GECC's collection efforts, whether or not suit on this Note or any foreclosure proceeding is filed, and all such costs and expenses shall be payable on demand and shall also be secured by the Deed of Trust and the Other Security Documents. BORROWER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED BY COUNSEL IN CONNECTION WITH THE EXECUTION OF THIS NOTE AND THAT IT UNDERSTANDS THIS PROVISION FOR CONFESSION OF JUDGMENT, AND BORROWER -6- 7 WAIVES ANY RIGHT TO NOTICE OR A HEARING WHICH IT MIGHT OTHERWISE HAVE BEFORE ENTRY OF JUDGMENT. No failure on the part of GECC or other holder hereof to exercise any right or remedy hereunder, whether before or after the happening of a default shall constitute a waiver thereof, and no waiver of any past default shall constitute a waiver of any future default or of any other default. No failure to accelerate the debt evidenced hereby by reason of a default hereunder, or acceptance of a past due installment, or indulgence granted from time to time shall be construed to be a waiver of the right to insist upon prompt payment thereafter or to impose late charges retroactively or prospectively, or shall be deemed to be a novation of this Note or a reinstatement of the debt evidenced hereby or a waiver of such right to acceleration or of any other right, or be construed so as to preclude the exercise of any right which GECC may have, whether under the laws of the State of Colorado, by agreement or otherwise; and Borrower and each endorser or guarantor hereby expressly waives the benefit of any statute or rule of law or equity which would produce a result contrary to or in conflict with the foregoing. This Note may not be changed orally, but only by an agreement in writing signed by the party against whom such agreement is sought to be enforced. Borrower, for itself and its heirs, successors and assigns, and each endorser or guarantor of this Note, for its heirs, successors and assigns, hereby waives presentment, protest, demand, diligence, notice of dishonor and of nonpayment, and waives and renounces all rights to the benefits of any statute of limitations and any moratorium, appraisement, exemption and homestead now provided or which may hereafter be provided by any federal or state statute, including but not limited to exemptions provided by or allowed under the Bankruptcy Reform Act of 1978, both as to itself personally and as to all of its or their property, whether real or personal, against the enforcement and collection of the obligations evidenced by this Note and any and all extensions, renewals and modifications hereof. It is the intention of the parties to conform strictly to applicable usury laws from time to time in force, and all agreements between Borrower and GECC, whether now existing or hereafter arising and whether oral or written, are hereby expressly limited so that in no contingency or event whatsoever, whether by acceleration of maturity hereof or otherwise, shall the amount paid or agreed to be paid to GECC or the holder hereof, or collected by -7- 8 GECC or such holder, for the use, forbearance or detention of the money to be loaned hereunder or otherwise, or for the payment or performance of any covenant or obligation contained herein or in the Deed of Trust or in any Other Security Documents or in any other document evidencing, securing or pertaining to the indebtedness evidenced hereby, exceed the maximum amount permissible under applicable usury laws. If under any circumstances whatsoever fulfillment of any provision hereof or of the Deed of Trust or any Other Security Documents or any other document executed in connection with the Loan, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed or permitted by law, including judicial determination, then ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity; and if under any circumstances GECC or other holder hereof shall ever receive an amount deemed interest, by applicable law, which would exceed the highest lawful rate, such amount that would be excessive interest under applicable usury laws shall be applied to the reduction of the principal amount owing hereunder or to other indebtedness secured by the Deed of Trust and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal and other indebtedness, the excess shall be deemed to have been a payment made by mistake and shall be refunded to Borrower or to any other person making such payment on Borrower's behalf. All sums paid or agreed to be paid to the holder hereof for the use, forbearance or detention of the indebtedness of Borrower evidenced hereby, outstanding from time to time shall, to the extent permitted by applicable law, be amortized, pro-rated, allocated and spread from the date of disbursement of the proceeds of this Note until payment in full of such indebtedness so that the actual rate of interest on account of such indebtedness is uniform through the term hereof. The terms and provisions of this paragraph shall control and supersede every other provision of all agreements between GECC and Borrower and any endorser or guarantor of this Note. Neither Borrower nor any partner in Borrower shall be personally liable for the repayment of any of the principal of or interest due under this Note or for any deficiency judgment which GECC may obtain after foreclosure on its collateral after default by Borrower, provided, however, that neither Borrower nor any partner in Borrower shall be exonerated or exculpated for any deficiency, loss or damage suffered by GECC as a result of the failure by Borrower to comply with any of the terms or conditions of this Note, the Deed of Trust or any of the Other Security -8- 9 Documents (other than the provisions relating to the payment of principal, interest or late charges), including but not limited to losses resulting from: (i) Borrower's commission of a criminal act; (ii) Borrower's willful misconduct or gross negligence; (iii) Borrower's failure to perform its obligation to properly account to GECC as beneficiary for any proceeds of insurance or condemnation proceeds as required by the Deed of Trust; (iv) Borrower's failure to comply with provisions of the Deed of Trust prohibiting the sale or further encumbering of the collateral; (v) Borrower's attempt to interfere with GECC's rights under the assignment of rents or letters of credit, if any, issued in connection with the Loan (other than the good faith assertion of legal and equitable rights and defenses); (vi) Borrower's fraud or misrepresentation made in or in connection with this Note, the Deed of Trust or the Other Security Documents; (vii) Borrower's failure to apply proceeds of rents and other income of the collateral toward the costs of maintenance and operation of the Mortgaged Property and to the payment of taxes, lien claims, insurance premiums and debt service and other indebtedness to the extent that the Deed of Trust or Other Security Documents require such rents and income to be so applied; (viii) Borrower's failure to pay any taxes, assessments, and insurance premiums affecting any of the Mortgaged Property; (ix) Borrower's entering into or modifying leases, rental agreements or management contracts in violation of the provisions of the Deed of Trust or the Other Security Documents; (x) Borrower's collection of rentals for periods of more than sixty days (60 days) in advance under leases of the Mortgaged Property; (xi) the receipt by Borrower of monies in connection with the modification of any existing or future lease or the entering into of a new lease in violation of the applicable provisions of the Deed of Trust or the Other Security Documents; (xii) willful damage or destruction to any of the Mortgaged Property caused or occasioned by the acts or omissions of Borrower, its agents or employees, including electrical, plumbing, heating or air conditioning systems or elevators; (xiii) Borrower's failure to pay for any loss, liability, damage, costs or expense (including attorneys' fees) incurred by GECC in connection with any order, consent decree, settlement, judgment or verdict arising from the deposit, storage, disposal, burial, dumping, injecting, spilling, leaking or other placement or release in, on or from any of the Mortgaged Property of asbestos or a "hazardous substance" as defined in 42 U.S.C. ss. 9601, et seq., as amended from time to time, or any other toxic or hazardous waste or waste products, including without limitation, any liability of Borrower arising out of the Hazardous Substances Indemnity Agreement; or (xiv) Borrower's -9- 10 failure to pay for any loss, liability or expenses (including attorneys' fees) incurred by GECC arising out of any claim or allegation made by Borrower, its successors or assigns, or any creditor of Borrower, that this Note or the transactions contemplated hereby or by the Deed of Trust or Other Security Documents establish a joint venture or partnership arrangement between Borrower and GECC; and provided further, that the foregoing limitations on Borrower's personal liability with respect to principal and interest shall not impair the validity of the indebtedness secured by GECC's collateral or the lien on or security interest in the collateral or the right of GECC as beneficiary under the Deed of Trust or as secured party to foreclose and/or enforce its rights with respect to the collateral after default by Borrower or to seek and enforce any of GECC's rights pursuant to any guarantee which it may hold. None of the foregoing limitations on Borrower's personal liability shall modify, diminish or discharge the personal liability of any guarantor under any guarantee executed in connection with the indebtedness evidenced by the Note or of Borrower or any other entity or individual under the Hazardous Substances Indemnity Agreement of even date herewith or under any indemnification provisions of the Deed of Trust or any of the Other Security Documents. All of the representations, warranties, covenants and indemnities of the Hazardous Substances Indemnity Agreement and any indemnification provisions of this Note, the Deed of Trust or any Other Security Documents shall survive repayment of this Note and/or the release of the liens of any of the Deed of Trust and shall survive the transfer of any or all right, title and interest in and to any of the Mortgaged Property by Borrower to any party, whether or not affiliated with Borrower. Nothing herein shall be deemed to be a waiver of any right which GECC may have under Sections 506(a), 506(b), 1111(b) or any other provision of the Bankruptcy Reform Act of 1978, as such sections may be amended, or corresponding or superseding provisions of the Bankruptcy Amendments and Federal Judgeship Act of 1984, to file a claim for the full amount of the debt owing to GECC by Borrower or to require that all collateral shall continue to secure all of the indebtedness owing to GECC in accordance with this Note, the Deed of Trust and the Other Security Documents. Borrower shall hold harmless, defend, protect and indemnify GECC from and against any brokerage commissions or finder's fees claimed by any broker or any other party in connection with the Loan. This indemnification obligation shall -10- 11 not be subject to the limitation of liability contained in the preceding paragraph. This Note shall be governed by and construed under the laws of the State of Colorado. BORROWER HEREBY WAIVES THE RIGHT TO A TRIAL BY JURY IN CONNECTION WITH ANY DISPUTE ARISING IN CONNECTION WITH THIS NOTE, OR IN ANY WAY RELATED TO THE NEGOTIATION, ADMINISTRATION, MODIFICATION, EXTENSION OR COLLECTION OF THE INDEBTEDNESS EVIDENCED HEREBY. BORROWER STATES THAT IT HAS CONFERRED SPECIFICALLY WITH GECC WITH RESPECT TO THIS WAIVER, AND BORROWER HAS AGREED TO THIS WAIVER AFTER CONSULTATION WITH ITS COUNSEL AND WITH FULL UNDERSTANDING OF THE IMPLICATIONS HEREOF. Borrower hereby submits to personal jurisdiction in the State of Colorado for the enforcement of Borrower's obligations hereunder and under the Deed of Trust and the Other Security Documents, and waives any and all personal rights under the law of any other state to object to jurisdiction within the State of Colorado for the purposes of litigation to enforce such obligation of Borrower. In the event such litigation is commenced, Borrower agrees that, in addition to any other manner provided by applicable law or court rule, service of process may be made and personal jurisdiction over Borrower obtained, by service of a copy of the summons, complaint and other pleadings required by applicable law to commence such litigation upon Borrower's appointed Agent for Service of Process in the State of Colorado, which Agent Borrower hereby designates to be: Ireland, Stapleton, Pryor & Pascoe, P.C. 1675 Broadway, Suite 2600 Denver, Colorado 80202 Attention: Michael A. Smith, Esq. This Note amends and restates in its entirety that certain Promissory Note dated October 30, 1990, made by Borrower in favor of GECC in the original principal amount of $11,640,000.00. IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has caused this Note to be duly executed under seal the day and year first above written. CARRIAGE CLUB OF DENVER, L.P., a Delaware limited partnership -11- 12 By: Sagebrush, Inc., a Delaware corporation, its sole general partner By: /s/ David L. Widener ------------------------------ David L. Widener President -12- EX-10.10 15 ASSUMPTION, CONSENT AND LOAN AGREEMENT 1 EXHIBIT 10.10 ASSUMPTION, CONSENT AND LOAN MODIFICATION AGREEMENT This ASSUMPTION, CONSENT AND LOAN MODIFICATION AGREEMENT ("Agreement") is made and entered into as of the 8th day of February, 1995, by and among CARRIAGE CLUB OF DENVER, L.P., a Delaware limited partnership ("Seller"), AMERICAN RETIREMENT COMMUNITIES, L.P., a Tennessee limited partnership ("Purchaser"), and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("Lender"). RECITALS A. On October 30, 1990, Lender made an $11,640,000.00 loan to Seller, which loan was extended and increased to $15,500,000.00 (the "Loan") pursuant to that certain Amended and Restated Loan Agreement dated as of December 21, 1994 (the "Original Loan Agreement"). The Loan is evidenced by an Amended and Restated Promissory Note (the "Original Note") dated December 21, 1994, in the original principal amount of $15,500,000.00 from Seller as maker to Lender as holder. The Loan is secured by (1) an Amended and Restated First Deed of Trust and Security Agreement (the "Original Deed of Trust") dated December 21, 1994, in favor of Lender, encumbering certain real property and improvements thereon ("Property") located in the City and County of Denver, Colorado, and more particularly described in Exhibit A attached hereto; (2) an Amended and Restated Assignment of Rents and Leases (the "Original Assignment of Rents") dated December 21, 1994, in favor of Lender; and (3) the documents described in Exhibit B attached hereto and incorporated herein by this reference, together with all other documents evidencing and/or securing the Loan (collectively, with the Original Loan Agreement, the Original Note, the Original Deed of Trust and the Original Assignment of Rents, the "Original Loan Documents"). The Original Deed of Trust was recorded on December 23, 1994, and re-recorded on January 18, 1995, at Reception Nos. 9400189612 and 9500007531, respectively, of the Records of the Clerk and Recorder of the City and County of Denver, Colorado (the "Records"). The Original Assignment of Rents was recorded on December 23, 1994, at Reception No. 9400189613 of the Records. B. Seller wishes to sell and convey the Property, subject to the lien of the Original Deed of Trust and other 2 Original Loan Documents, to Purchaser and has requested that Lender permit such conveyance. C. In order to induce Lender to consent to the sale and conveyance of the Property, Purchaser has agreed, among other things, to (i) assume the obligations of Seller under the Original Note and the other Original Loan Documents (as modified by Section 3 of this Agreement), and (ii) modify the Original Loan Documents as set forth in this Agreement. D. Lender is willing to consent to the sale and conveyance of the Property and to permit Purchaser's assumption of the Original Loan Documents, as modified hereby, on the terms set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing premises, the following terms, conditions, covenants, warranties and representations, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Assumption. As of the date of this Agreement, Purchaser hereby assumes the indebtedness evidenced by the Original Note and all other obligations of Seller under the Original Note and the other Original Loan Documents as if each of the Original Loan Documents had been executed by Purchaser. Without limiting the generality of the foregoing, Purchaser hereby assumes and agrees to perform all obligations of Seller under that certain Amended and Restated Hazardous Substances Indemnity Agreement dated as of December 21, 1994, executed by Seller for the benefit of Lender (the "Original Hazardous Substances Indemnity Agreement"). 2. Conditions Precedent to Lender's Execution. Lender's execution and delivery of this Agreement are subject to receipt by Lender of all of the following, in form and substance satisfactory to Lender: (a) A duly executed and acknowledged guaranty agreement (the "Guaranty") by American Retirement Corporation, a Tennessee corporation ("Guarantor"); -2- 3 (b) A duly executed and acknowledged subordination of management agreement (the "Subordination of Management Agreement") by Purchaser and A.R.C. Management Corporation ("Manager"); (c) Duly executed UCC-1 financing statements (the "UCC-1 Financing Statements") by Purchaser; (d) Duly executed UCC-3 statements of change (the "UCC-3 Statements of Change") by Purchaser and Seller; (e) A duly executed and acknowledged chattel mortgage security agreement (the "Chattel Mortgage Security Agree- ment") by Purchaser; (f) A duly executed closing affidavit (the "Closing Affidavit") by Purchaser; (g) An ALTA-form title insurance policy in the amount of $15,500,000.00, naming Lender as insured mortgagee, issued by a title insurance company acceptable to Lender, insuring that the Deed of Trust constitutes a first priority lien, with such endorsements as may be required by Lender and with no exceptions or exclusions other than an exception for taxes not yet due and payable and such other exceptions as may be acceptable to Lender in its sole discretion; (h) A duly and validly authorized, executed and delivered letter of credit (the "Letter of Credit"), issued by First American National Bank, for the account of Purchaser in the amount of $240,000.00 for the benefit of Lender; (i) The favorable legal opinion of counsel for Purchaser and Guarantor as to such matters as Lender may request, including but not limited to the following: (i) Purchaser and Guarantor are duly formed, validly existing, and in good standing under the laws of the State of Tennessee. (ii)Purchaser has duly authorized, executed and delivered this Agreement, the Subordination of Management Agreement, the UCC-1 Financing Statements, the Chattel Mortgage Security Agreement and the Closing Affidavit. -3- 4 (iii) Guarantor has duly authorized, executed and delivered the Guaranty. (iv) The Letter of Credit is in a form sufficient to be enforceable against its issuer in accordance with its terms. (v) This Agreement, the Subordination of Management Agreement, the UCC-1 Financing Statements, the UCC-3 Statements of Change, the Chattel Mortgage Security Agreement, the Closing Affidavit and the Guaranty (collectively, the "Assumption Documents"), and the Original Loan Documents (as the same may be amended by the terms of this Agreement), constitute legal, valid and binding agreements, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, or other laws affecting creditors' rights generally and to application of general principles of equity. (vi) The execution and delivery of the Assumption Documents do not, and the performance and observance of the terms of the Loan Documents and the Assumption Documents will not, contravene any existing law or regulation, and do not and will not conflict with or result in any breach of the terms, conditions, or provisions of, or constitute a default under, or result in or permit the creation or imposition of any lien, charge or encumbrance upon any of the properties of Purchaser or Guarantor pursuant to any indenture, mortgage, or other agreement or instrument to which Purchaser or Guarantor is a party or by which the Property is bound. (vii) No action of, filing with, or consent, approval, or authorization of, any governmental or public body or authority is required in connection with the execution and delivery by Purchaser or Guarantor of the Assumption Documents. (j) Such evidence or certification as Lender may request that Purchaser and Guarantor have full power and authority to execute and deliver the Assumption Documents. (k) An ACORD Form 27 certificate of insurance evidencing compliance with the insurance coverage requirements set forth in Section 1.4 of the Deed of Trust (as hereinafter defined). (l) Such other documents as Lender may reasonably request. -4- 5 3. Modifications. The Original Loan Agreement, the Original Note, the Original Deed of Trust, the Original Assignment of Rents and the other Original Loan Documents are hereby modified as follows: (a) Modification of the Original Loan Agreement: (i) All references to the term "Borrower" contained in the Original Loan Agreement shall refer to American Retirement Communities, L.P., a Tennessee limited partnership. (ii) The first paragraph of Section 6.3 of the Original Loan Agreement is hereby amended and restated in its entirety as follows: "6.3 Management of Project Unless otherwise expressly approved in writing by Lender, the Property shall be managed by a third party manager pursuant to a written management contract, and such manager and management contract shall be subject to the prior written approval of Lender, which may be granted or withheld in Lender's sole discretion. In the event 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 Project, Borrower will 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. Lender shall approve all existing managers and management contracts as well. Lender and Borrower agree that A.R.C. Management Corporation shall serve as manager of the Project. Such manager shall be entitled to receive a management fee of $20,000.00 per month, pursuant to a management contract approved by Lender, in Lender's sole and absolute discretion. Borrower may replace the manager, provided that such replacement is experienced in the operation and management of comparable projects and subject to Lender's approval of such replacement, management fee and management contract. Any change in the ownership or control of the manager shall entitle Lender to exercise its approval right over the manager and the management contract. Each manager shall hold and maintain all licenses, certifications and permits required by law. Each manager shall execute a non-competition agreement under which such manager agrees not to acquire, construct, operate or manage an independent or assisted living facility within five (5) miles of the Project for so long as any Indebtedness is outstanding under the Loan; -5- 6 provided, however, that activities of a manager related to the facility known as "Parkplace" and located at 111 Emerson Street, Denver, Colorado, shall not be deemed a violation of this Section . Any payments payable under a management contract shall be subordinate to, and shall be paid following, the payment in full of Debt Service payments on the Loan in each fiscal year. Borrower shall, and shall cause its on-site administrator to meet with Lender at least quarterly to discuss the financial and physical condition of the Project and the management of the Project, including personnel, resident satisfaction, marketing and other issues pertinent to the success of the Project and, at Lender's reasonable request, provide Lender with reports relating to such information. Any management or leasing contract shall provide that:" (iii) All references to the term "Deed of Trust" contained in the Original Loan Agreement shall refer to the Original Deed of Trust, as modified by the terms of this Agreement. (iv) All references to the term "Loan Papers" contained in the Original Loan Agreement shall refer to: (a) the Original Loan Agreement, the Original Note, the Original Deed of Trust, the Original Assignment of Rents and the Original Hazardous Substances Indemnity Agreement, all as modified by the terms of this Agreement; (b) certain UCC-1 financing statements executed by Seller as modified by the UCC-3 Statements of Change, that certain Subordination of Management Agreement dated December 21, 1994, executed by Seller (the "Original Subordination Agreement"), and any letters of credit provided by Seller to Lender pursuant to the Original Loan Agreement; (c) the Assumption Documents and the Letter of Credit; and (d) any and all other documents evidencing or securing the Obligation (as defined in the Original Loan Agreement) or executed in connection with the Loan. (v) All references to the term "Note" contained in the Original Loan Agreement shall refer to the Original Note, as modified by the terms of this Agreement. (vi) Section 9 of the Original Loan Agreement is hereby amended and restated in its entirety as follows: "SECTION 9. LETTERS OF CREDIT. 9.1 Security. As additional security for the Loan, Borrower shall deposit $240,000.00 ("Deposit") in the form of one -6- 7 or more unconditional, irrevocable letters of credit, issued in favor of Lender by an issuer satisfactory to Lender, in form and substance satisfactory to Lender, and having an expiration date satisfactory to Lender ("Letters of Credit"). 9.2 Full Force and Effect. Except as hereinafter provided, any Letters of Credit and any renewals or replacements thereof shall remain in full force and effect until the Loan is paid in full and all obligations of Borrower under the Loan Papers have been fully performed. Additionally, this Agreement shall not in any manner be construed as amending or modifying the terms of any Letters of Credit. 9.3 Renewal of Letters of Credit. It is hereby understood and agreed that no less than thirty (30) days prior to the expiration date of any Letter of Credit and each renewal or extension thereof (until such time as such Letter of Credit has been released by Lender), Borrower shall deliver to Lender a renewal or extension of such Letter of Credit for a term of not less than one (1) year, in form, content and issued by a bank acceptable to Lender in its sole discretion. If requested by Lender, each Letter of Credit (and each renewal or extension thereof) shall, at Borrower's sole cost and expense, be accompanied by an opinion of counsel regarding its due authorization, execution and enforceability (which opinion shall be in form, content and from counsel acceptable to Lender in its sole discretion). 9.4 Presentment. Lender shall be entitled to draw upon any Letter of Credit upon the occurrence of any Default (including, without limitation, Borrower's failure to deliver a renewal or extension of any Letter of Credit in the time and manner required hereinabove) or if Lender believes, in its sole judgment, that its rights to draw on any Letter of Credit could be in jeopardy. Without limiting the generality of the foregoing, Lender shall also be entitled to draw upon any Letter of Credit if the credit rating or financial condition of the issuing bank is no longer acceptable to Lender in its sole discretion. No draw by Lender on any Letter of Credit shall cure or be deemed to cure any default or limit in any respect any of Lender's remedies under the Loan Papers. Borrower shall replace or restore (to its original principal amount) any Letter of Credit immediately following any full or partial draw thereon by Lender. 9.5 Application of Proceeds of Letters of Credit. Proceeds of any draw upon any Letter of Credit (after reimbursement -7- 8 of any costs and expenses, including but not limited to attorneys' fees and disbursements, incurred by Lender in connection with such draw) may be applied by the Lender to the payment of the Deed of Trust, or the Note or any other indebtedness secured thereby, in such manner as the Lender, in its sole discretion, deems appropriate. 9.6 Release of Letters of Credit; No Waiver. After the payment in full of all sums due under the Deed of Trust, the Note secured thereby and all of the other Loan Papers, provided there is no Default or any event or condition which, with notice or the passage of time, or both, could constitute a Default, Lender shall, upon request, release its rights in any Letters of Credit and surrender such Letters of Credit to the issuing banks. No delay or omission of Lender in exercising any right to draw on any Letter of Credit shall impair any such right, or shall be construed as a waiver of, or acquiescence in, any Default under this Agreement. Lender's rights and remedies hereunder shall be cumulative." (vii) The addresses for Borrower and David L. Widener contained in Section 12.16 of the Original Loan Agreement are hereby deleted and the following is substituted therefor: "American Retirement Communities, L.P. 111 Westwood Place, Suite 402 Brentwood, Tennessee 37027 Attn: Chief Executive Officer with a copy to: Bass, Berry & Sims 2700 First American Center Nashville, Tennessee 37238-2700 Attn: T. Andrew Smith, Esq." (b) Modification of the Original Note: (i) All references to the term "Borrower" contained in the Original Note shall refer to American Retirement Communities, L.P., a Tennessee limited partnership. (ii) All references to the term "Deed of Trust" contained in the Original Note shall refer to the Original Deed of Trust, as modified by the terms of this Agreement. -8- 9 (iii) All references to the term "Other Security Documents" contained in the Original Note shall refer to the Original Assignment of Rents, as modified by the terms of this Agreement, the UCC-1 Financing Statements, the Chattel Mortgage Security Agreement, the Letter of Credit and any other security given by Seller or Purchaser to Lender as collateral for the Loan. (iv) The name and address for Borrower's appointed Agent for Service of Process in the State of Colorado on page 9 of the Original Note are hereby deleted and the following name and address are substituted therefor: "Corporation Service Company 1535 Grant Street, Suite 140 Denver, Colorado 80203" (v) All references to the term "Hazardous Substances Indemnity Agreement" contained in the Original Note shall refer to the Original Hazardous Substances Indemnity Agreement, as modified by the terms of this Agreement. (c) Modification of the Original Deed of Trust: (i) The name and address of the "Grantor" in the first paragraph on Page 1 of the Original Deed of Trust are hereby deleted and the following is substituted therefor: "American Retirement Communities, L.P., a Tennessee limited partnership, as the Grantor, whose address is 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027;" (ii) All references to the term "Note" contained in the Original Deed of Trust shall refer to the Original Note, as modified by the terms of this Agreement. (iii) All references to the term "Loan Agreement" contained in the Original Deed of Trust shall refer to the Original Loan Agreement, as modified by the terms of this Agreement. (iv) All references to the term "Assignment of Rents and Leases" contained in the Original Deed of Trust shall refer to the Original Assignment of Rents, as modified by the terms of this Agreement. -9- 10 (v) All references to the term "Security Documents" contained in the Original Deed of Trust shall refer to any document or instrument evidencing, governing, securing or guaranteeing the Note, as such document may have been modified by the terms of this Agreement, including, without limitation, the Assumption Documents and the Letter of Credit. (vi) Section 1.17(l) of the Original Deed of Trust is hereby amended and restated in its entirety as follows: "SECTION 1.17. RESTRICTIVE COVENANTS. . . . (l) merge or consolidate with any other person or entity, or sell, transfer, convey or assign any interest in the Mortgaged Property or any part thereof (other than leases in the ordinary course of the Grantor's business)." The final paragraph of Section 1.17 (beginning "Upon the satisfac- tion . . . ") is hereby deleted in its entirety. (vii) Section 2.1(i) of the Original Deed of Trust is hereby amended and restated in its entirety as follows: "SECTION 2.1. EVENTS OF DEFAULT. . . . (i) if a receiver, liquidator or trustee of (1) the Grantor or (2) any of Grantor's properties or (3) any guarantor ("Guarantor") of the Indebtedness (or any portion thereof) shall be appointed;" (viii) Section 2.1(z) of the Original Deed of Trust is hereby amended and restated in its entirety as follows: "SECTION 2.1. EVENTS OF DEFAULT. . . . (z) any of the letters of credit required to be furnished by the Grantor to the Beneficiary in connection herewith (as provided in Section 9 of the Loan Agreement) shall expire and not be renewed or replaced without interruption prior to payment in full of all indebtedness secured hereby, except to the extent earlier released by the Beneficiary." (ix) The addresses for Borrower and David L. Widener contained in Section 3.3 of the Original Deed of Trust are hereby deleted and the following is substituted therefor: "American Retirement Communities, L.P. 111 Westwood Place, Suite 402 -10- 11 Brentwood, Tennessee 37027 Attn: Chief Executive Officer with a copy to: Bass, Berry & Sims 2700 First American Center Nashville, Tennessee 37238-2700 Attn: T. Andrew Smith, Esq." (d) Modification of the Original Assignment of Rents: (i) The name and address of the "Assignor" in the first paragraph on Page 1 of the Original Assignment of Rents are hereby deleted and the following is substituted therefor: "American Retirement Communities, L.P., a limited partnership organized and existing under the laws of the State of Tennessee, having an office at 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027" (ii) All references to the term "Deed of Trust" contained in the Original Assignment of Rents shall refer to the Original Deed of Trust, as modified by the terms of this Agreement. (iii) All references to the term "Loan Documents" contained in the Original Assignment of Rents shall refer to any document or instrument evidencing, governing, securing or guaranteeing the Note, as such document may have been modified by the terms of this Agreement, including, without limitation, the Assumption Documents and the Letter of Credit. (e) Modification of the Original Hazardous Substances Indemnity Agreement: (i) All references to the term "Indemnitor" contained in the Original Hazardous Substances Indemnity Agreement shall refer to American Retirement Communities, L.P., a Tennessee limited partnership. (ii) All references to the term "Note" contained in the Original Hazardous Substances Indemnity Agreement shall refer to the Original Note, as modified by the terms of this Agreement. -11- 12 (iii) All references to the term "Deed of Trust" contained in the Original Hazardous Substances Indemnity Agreement shall refer to the Original Deed of Trust, as modified by the terms of this Agreement. (iv) All references to the term "Loan Documents" contained in the Original Hazardous Substances Indemnity Agreement shall refer to any document or instrument evidencing, governing, securing or guaranteeing the Note, as such document may have been modified by the terms of this Agreement, including, without limitation, the Assumption Documents and the Letter of Credit. (v) The name and address for Indemnitor's appointed agent for service of process in Paragraph 8 of the Original Hazardous Substances Indemnity Agreement are hereby deleted and the following name and address are substituted therefor: "Corporation Service Company 1535 Grant Street, Suite 140 Denver, Colorado 80203" (vi) The addresses for Indemnitor contained in Paragraph 9 of the Original Hazardous Substances Indemnity Agreement are hereby deleted and the following is substituted therefor: "American Retirement Communities, L.P. 111 Westwood Place, Suite 402 Brentwood, Tennessee 37027 Attn: Chief Executive Officer with a copy to: Bass, Berry & Sims 2700 First American Center Nashville, Tennessee 37238-2700 Attn: T. Andrew Smith, Esq." (f) Modification of the other Original Loan Documents: -12- 13 (i) All references to the term "Borrower" contained in all Original Loan Documents shall refer to American Retirement Communities, L.P., a Tennessee limited partnership. (ii) All references to the terms "Loan Agreement," "Note" and "Deed of Trust" contained in the other Original Loan Documents shall refer to the Original Loan Agreement, the Original Note and the Original Deed of Trust, each as modified by this Agreement. (iii) All capitalized terms contained in the other Original Loan Documents, and not otherwise defined therein, shall have the meanings given to such terms in the Original Deed of Trust, as modified by this Agreement. 4. Original Loan Documents. Except as otherwise expressly modified by this Agreement, all terms and provisions of the Original Loan Agreement, the Original Note, the Original Deed of Trust and the other Original Loan Documents are ratified and confirmed and shall be, and shall remain, in full force and effect, enforceable in accordance with their terms. The Original Loan Agreement, the Original Note and the Original Deed of Trust, as modified by this Agreement, shall be referred to herein as the "Loan Agreement," the "Note" and the "Deed of Trust," respectively. The Original Loan Documents, as modified by this Agreement, together with the Assumption Documents, shall be referred to herein as the "Loan Documents." 5. First Lien. Purchaser hereby acknowledges and agrees that the liens and security interests of the Deed of Trust and the other Loan Documents are valid and subsisting first liens and security interests in the Mortgaged Property (as defined in the Original Deed of Trust). 6. Purchaser Indebted. Purchaser hereby acknowledges and agrees that it is well and truly indebted to Lender pursuant to the terms of the Note. Purchaser agrees and hereby promises to pay the Note to the order of Lender in accordance with the terms thereof and agrees to observe, comply with and perform all of the obligations, terms and conditions under or in connection with the Note, the Loan Agreement, the Deed of Trust and any and all other Loan Documents. 7. No Defenses. Purchaser, by its execution of this Agreement, hereby declares that it has no set-offs, counterclaims, -13- 14 defenses or other causes of action against Lender arising out of the indebtedness evidenced by the Note, the assumption by Purchaser of the Note, the assumption by Purchaser of the obligations, terms or conditions under or in connection with the Note, the Loan Agreement, the Deed of Trust and any and all other Loan Documents, the modification of the Original Note, the Original Loan Agreement, the Original Deed of Trust and any and all other Original Loan Documents, any documents mentioned herein or otherwise; and, to the extent any such set-offs, counterclaims, defenses or other causes of action may exist, whether known or unknown, such items are hereby waived by Purchaser. 8. Permits and Licenses. Purchaser hereby agrees that it shall obtain all permits and licenses necessary for operation of the Property from the appropriate governmental authorities within ninety (90) days of the date of this Agreement. Purchaser shall provide Lender with copies of all such permits and licenses immediately upon receipt thereof and, in any event, not later than ninety (90) days following the date of this Agreement. 9. Lender Consent. Lender hereby consents to the sale and conveyance of the Property by Seller to Purchaser subject to the lien of the Deed of Trust, which consent is granted subject to and in accordance with the terms of this Agreement and the Loan Documents. Nothing contained in this Agreement, nor any course of dealing by Lender, shall be deemed to constitute a waiver of Lender's rights to accelerate the indebtedness of the Note pursuant to the terms of the Deed of Trust upon the occurrence of any further transfer of the Property, or any part thereof or interest therein, to the extent such transfer is prohibited by the terms of the Deed of Trust. 10. Release. (a) Seller hereby releases and forever discharges Lender and all of Lender's successors and assigns, agents, attorneys and employees, as appropriate, from any and all causes of action, suits, liabilities, debts, damages, controversies, agreements, trespasses, judgments, executions, demands and claims of any nature whatsoever, whether in law or equity, whether known or unknown, whether primary or secondary, and any and all rights, duties, liabilities and obligations, whether presently enforceable or enforceable in the future, by reason of any matter or cause which directly or indirectly is based on or related to, arises out of, or is in any way connected with the Loan, the Loan Documents, -14- 15 Lender's administration of the Loan, or Lender's performance under the Loan Documents. (b) Lender hereby releases and forever discharges Seller and all of Seller's agents, attorneys and employees, as appropriate, from any and all causes of action, suits, liabilities, debts, damages, controversies, agreements, trespasses, judgments, executions, demands and claims of any nature whatsoever, whether in law or equity, whether known or unknown, whether primary or secondary, and any and all rights, duties, liabilities and obligations, whether presently enforceable or enforceable in the future, by reason of any matter or cause which directly or indirectly is based on or related to, arises out of, or is in any way connected with the Loan, the Loan Documents, Lender's administration of the Loan, or Lender's performance under the Loan Documents; provided, however, neither Seller nor any general partner of Seller shall be released from: (i) liability under that certain Hazardous Substances Indemnity Agreement dated December 21, 1994, executed by Seller for the benefit of Lender, for any act or omission occurring, or state of affairs existing, prior to the date hereof; or (ii) any full-recourse liability that has arisen prior to the date hereof under any of the Original Loan Documents or that could be based upon any event that has occurred or state of affairs that exists prior to or as of the date hereof. 11. Expenses. Purchaser hereby agrees to pay to Lender all attorneys' fees and expenses of Lender's counsel, filing and recording fees and all other expenses incurred by Lender in connection with the transfer of the Property, the assumption of the Loan Documents and the preparation and execution of the Assumption Documents. 12. Further Assurance. The parties hereto shall execute such other documents to be filed for record as may be necessary or as may be required, in the opinion of counsel to Lender, to effectuate the transactions contemplated hereby and to protect the liens and security interests of the Deed of Trust and the other Loan Documents and the insurance thereof. 13. Binding Effect. This Agreement shall be binding upon, and shall inure to the benefit of, the parties' respective heirs, representatives, successors and assigns. 14. Governing Law. This Agreement shall be governed by the laws of the State of Colorado. -15- 16 15. Waiver of Jury Trial. TO THE EXTENT PERMITTED BY APPLICABLE LAW, PURCHASER AND LENDER KNOWINGLY, IRREVOCABLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY ACTION, PROCEEDING OR COUNTERCLAIM BASED ON THE DEED OF TRUST, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THE DEED OF TRUST OR ANY LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY HERETO OR TO ANY LOAN DOCUMENT. THIS PROVISION IS A MATERIAL INDUCEMENT FOR PURCHASER AND LENDER TO ENTER INTO THE LOAN TRANSACTION EVIDENCED BY THE NOTE. 16. Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original, but all of which shall constitute one and the same original instrument. [The remainder of this page has been intentionally left blank.] -16- 17 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. SELLER: CARRIAGE CLUB OF DENVER, L.P., a Delaware limited partnership By: Sagebrush, Inc., a Delaware corporation, its sole general partner By: /s/ David L. Widener -------------------------------- David L. Widener President PURCHASER: AMERICAN RETIREMENT COMMUNITIES, L.P., a Tennessee limited partnership By: American Retirement Communities, LLC, a Tennessee limited liability company, its sole general partner By: /s/ H. Todd Kaestner -------------------------------- Name: Title: -17- 18 LENDER: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation By: /s/ Christopher S. Peters ------------------------------------------ Christopher S. Peters Project Manager STATE OF ) ----------------- ) ss. COUNTY OF ) ----------------- The foregoing instrument was acknowledged before me this ____ day of February, 1995, by David L. Widener, as President of Sagebrush, Inc., a Delaware corporation, on behalf of the corporation as the sole general partner of Carriage Club of Denver, L.P., a Delaware limited partnership. Witness my hand and official seal. My Commission expires: . ------------------------------------- ------------------------------------- Notary Public -18- 19 STATE OF ) ------------------- ) ss. COUNTY OF ) ------------------ The foregoing instrument was acknowledged before me this ____ day of February, 1995, by ________________, as _______________ of American Retirement Communities, LLC, a Tennessee limited liability company, on behalf of the limited liability company as the sole general partner of American Retirement Communities, L.P., a Tennessee limited partnership. Witness my hand and official seal. My Commission expires: . ------------------------------- ------------------------------- Notary Public STATE OF ) ------------------ ) ss. COUNTY OF ) ----------------- The foregoing instrument was acknowledged before me this ____ day of February, 1995, by Christopher S. Peters, as Project Manager of General Electric Capital Corporation, a New York corporation. Witness my hand and official seal. My Commission expires: . --------------------------------- --------------------------------- Notary Public -19- 20 EXHIBIT A [Legal Description] A TRACT OF LAND BEING A PART OF BLOCK 19, THE VACATED ALLEY THEREIN, PARTS OF VACATED EAST ASBURY AND BUCHTEL BLVD., UNIVERSITY PARK AMENDED MAP, MORE PARTICULARLY DESCRIBED AS FOLLOWS: BEGINNING AT A POINT ON THE EAST LINE OF SOUTH MONROE STREET, SAID POINT BEING 30.75 FEET NORTHERLY OF THE SOUTH LINE OF SAID BLOCK 19; THENCE NORTHERLY ON SAID EAST LINE OF SOUTH MONROE STREET, A DISTANCE OF 675.10 FEET TO THE SOUTHWESTERLY RIGHT-OF-WAY LINE OF BUCHTEL BOULEVARD AS DESCRIBED IN BOOK 8854 AT PAGE 283 OF THE CITY AND COUNTY OF DENVER RECORDS; THENCE ON AN ANGLE OF 100(degree)36'18" TO THE RIGHT AND ALONG SAID SOUTHWESTERLY RIGHT-OF-WAY LINE A DISTANCE OF 269.60 FEET; THENCE ON AN ANGLE TO THE RIGHT OF 79(degree)23'42" A DISTANCE OF 319.87 FEET; THENCE ON AN ANGLE TO THE LEFT OF 45(degree)00'00" A DISTANCE OF 35.36 FEET; THENCE ON AN ANGLE TO THE RIGHT OF 45(degree)00'00" A DISTANCE OF 311.11 FEET TO THE NORTH RIGHT-OF-WAY LINE OF EAST EVANS AVENUE; THENCE ON AN ANGLE TO THE RIGHT OF 89(degree)57'00" AND ALONG SAID NORTH RIGHT-OF-WAY LINE A DISTANCE OF 260.00 FEET TO A POINT 30.00 FEET EASTERLY OF THE EAST LINE OF SAID SOUTH MONROE STREET; THENCE ON AN ANGLE TO THE RIGHT OF 45(degree)44'00" A DISTANCE OF 42.94 FEET TO THE POINT OF BEGINNING, CITY AND COUNTY OF DENVER, STATE OF COLORADO. A-1 21 EXHIBIT B [Documents] 1. UCC-1 Financing Statements executed by Seller. 2. Guaranty dated December 21, 1994, executed by Onyx Holdings, Inc., for the benefit of Lender. 3. Hazardous Substances Indemnity Agreement dated as of December 21, 1994, executed by Seller for the benefit of Lender. 4. Subordination of Management Agreement dated as of December 21, 1994, executed by Seller for the benefit of Lender. B-1 EX-10.11 16 ARC LOAN AGREEMENT 1 EXHIBIT 10.11 =============================================================================== AMERICAN RETIREMENT COMMUNITIES, L.P. Borrower --------------------------------------- LOAN AGREEMENT $2,500,000 REVOLVING CREDIT LOAN $2,000,000 TERM LOAN Dated as of October 31, 1995 ---------------------------------------- FIRST UNION NATIONAL BANK OF TENNESSEE Lender =============================================================================== 2 TABLE OF CONTENTS RECITALS......................................................................................................... 1 I. DEFINITIONS.................................................................................................. 1 II. LOAN......................................................................................................... 9 2.1 Revolving Credit Loan................................................................ 9 2.2 Term Loan............................................................................ 9 2.3 Advances of Revolving Loans..........................................................10 2.4 Interest.............................................................................14 2.5 Principal Repayment..................................................................15 2.6 Fees.................................................................................15 2.7 Prepayment of Prime Rate Loans.......................................................16 2.8 Prepayment of LIBOR Loans............................................................16 2.9 Prepayment of Term Loan..............................................................17 2.10 Additional Costs.....................................................................17 III. CONDITIONS PRECEDENT.......................................................................................17 3.1 Conditions to Initial Advance........................................................17 3.2 Conditions to Subsequent Revolving Loans.............................................19 IV. REPRESENTATIONS AND WARRANTIES...............................................................................19 4.1 Capacity.............................................................................19 4.2 Authorization........................................................................19 4.3 Binding Obligations..................................................................20 4.4 No Conflicting Law or Agreement......................................................20 4.5 No Consent Required..................................................................20 4.6 Financial Statements.................................................................20 4.7 Fiscal Year..........................................................................20 4.8 Litigation...........................................................................20 4.9 Taxes; Governmental Charges..........................................................20 4.10 Title to Properties..................................................................21 4.11 No Default...........................................................................21 4.12 Casualties; Taking of Properties.....................................................21 4.13 Compliance with Laws.................................................................21 4.14 ERISA................................................................................21 4.15 Full Disclosure of Material Facts....................................................21 4.16 Accuracy of Projections..............................................................22 4.17 Investment Company Act...............................................................22 4.18 Personal Holding Company.............................................................22 4.19 Solvency.............................................................................22
i 3 4.20 Chief Executive Office...............................................................22 4.21 Subsidiaries.........................................................................22 4.22 Ownership of Patents, Licenses, Etc..................................................22 4.23 Environmental Compliance.............................................................22 4.24 Labor Matters........................................................................22 4.25 OSHA Compliance......................................................................23 4.26 Regulation U.........................................................................23 V. AFFIRMATIVE COVENANTS........................................................................................23 5.1 Payment of Obligations...............................................................23 5.2 Maintenance of Existence and Business................................................23 5.3 Financial Statements and Reports and Other Information...............................23 5.4 Operating Data.......................................................................25 5.5 Other Information....................................................................25 5.6 Certain Additional Reporting Requirements............................................25 5.7 Taxes and Other Encumbrances.........................................................26 5.8 Payment of Debts.....................................................................26 5.9 Compliance with Laws.................................................................26 5.10 Maintenance of Property..............................................................26 5.11 Maintenance of Bank Accounts.........................................................26 5.12 Compliance with Contractual Obligations..............................................26 5.13 Further Assurances...................................................................27 5.14 Security Interest; Setoff............................................................27 5.15 Insurance............................................................................27 5.16 Accounts and Records.................................................................29 5.17 Official Records.....................................................................29 5.18 Right of Inspection..................................................................29 5.19 ERISA Information and Compliance.....................................................30 5.20 Indemnity; Expenses..................................................................30 5.21 Assistance in Litigation.............................................................31 5.22 Name Changes.........................................................................31 5.23 Estoppel Letters.....................................................................31 5.24 Environmental Matters................................................................31 VI. NEGATIVE COVENANTS..........................................................................................32 6.1 Debts, Guaranties, and Other Obligations.............................................32 6.2 Change of Management.................................................................33 6.3 Distributions........................................................................33 6.4 Stock Acquisitions...................................................................33 6.5 Encumbrances.........................................................................33 6.6 Prepayment of Indebtedness...........................................................33 6.7 Investments..........................................................................33 6.8 Sales and Leasebacks.................................................................34
ii 4 6.9 Change of Control....................................................................34 6.10 Nature of Business...................................................................34 6.11 Further Acquisitions, Mergers, Etc...................................................34 6.12 Sale of Receivables..................................................................34 6.13 Disposition of Assets................................................................34 6.14 Loans to Others......................................................................34 6.15 Inconsistent Agreements..............................................................35 6.16 Fictitious Names.....................................................................35 6.17 Subsidiaries and Affiliates..........................................................35 6.18 Place of Business....................................................................35 6.19 Adverse Action With Respect to Plans.................................................35 6.20 Transactions With Affiliates.........................................................35 6.21 Constituent Document Amendments......................................................35 6.22 Adverse Transactions.................................................................35 6.23 Use of Lender's Name.................................................................35 6.24 Margin Securities....................................................................36 6.25 Accounting Changes...................................................................36 6.26 Capital Stock........................................................................36 6.27 Modification of Management Agreements................................................36 6.28 Action Outside Ordinary Course.......................................................36 VII. FINANCIAL COVENANTS.........................................................................................36 7.1 Debt Service Coverage Ratio..........................................................36 7.2 Liquidity............................................................................36 7.3 Capital Expenditure Reserves, Operating Expense Reserves.............................37 VIII. EVENTS OF DEFAULT.........................................................................................37 8.1 Events of Default....................................................................37 8.2 Remedies.............................................................................39 IX. GENERAL PROVISIONS..........................................................................................39 9.1 Notices..............................................................................40 9.2 Renewal, Extension, or Rearrangement.................................................40 9.3 Application of Payments..............................................................40 9.4 Computations; Accounting Principles..................................................41 9.5 Counterparts.........................................................................41 9.6 Negotiated Document..................................................................41 9.7 Consent to Jurisdiction; Exclusive Venue.............................................41 9.8 Not Partners; No Third Party Beneficiaries...........................................41 9.9 No Reliance on Lender's Analysis.....................................................41 9.10 No Marshalling of Assets.............................................................42 9.11 Impairment of Collateral.............................................................42 9.12 Business Days........................................................................42
iii 5 9.13 Participations.......................................................................42 9.14 Standard of Care; Limitation of Damages..............................................42 9.15 Incorporation of Schedules...........................................................42 9.16 Indulgence Not Waiver................................................................42 9.17 Cumulative Remedies..................................................................42 9.18 Amendment and Waiver in Writing......................................................42 9.19 Assignment...........................................................................43 9.20 Entire Agreement.....................................................................43 9.21 Severability.........................................................................43 9.22 Time of Essence......................................................................43 9.23 Applicable Law.......................................................................43 9.24 Gender and Number....................................................................43 9.25 Captions Not Controlling.............................................................43 9.26 Waiver of Right to Jury Trial........................................................43
iv 6 LOAN AGREEMENT This Loan Agreement is entered into as of the 31st day of October, 1995, by and between AMERICAN RETIREMENT COMMUNITIES, L.P. ("Borrower"), a Tennessee limited partnership; and FIRST UNION NATIONAL BANK OF TENNESSEE ("Lender"), a national banking association. RECITALS WHEREAS, Lender has agreed to extend credit to Borrower, on certain terms and conditions, as set forth in detail in this Agreement; NOW, THEREFORE, as an inducement to cause Lender to extend credit to Borrower, and for other valuable consideration, the receipt and sufficiency of which are acknowledged, it is agreed as follows: I. DEFINITIONS As used in this Agreement, the following capitalized terms shall have the following meanings, unless the context expressly requires otherwise: "ACCOUNT AGREEMENTS" has the meaning assigned in Section 2.3.1 hereof. "AFFILIATE" means, with respect to any Person, another Person that, directly or indirectly, (i) has an equity interest in that Person, in any degree, (ii) has common ownership with that Person, in any degree, (iii) Controls that Person, or (iv) shares common Control with that Person. "AGREEMENT" means this Loan Agreement (including all schedules and exhibits hereto), as the same may be amended from time to time. "ARC ENTITIES" means Borrower; American Retirement Communities, L.L.C. ("ARC, L.L.C."), a Tennessee limited liability company; American Retirement Corporation ("ARC"), a Tennessee corporation; ARC Management Corporation ("ARCM"), a Tennessee corporation; ARC Chattanooga, Inc., a Tennessee corporation; ARC Fort Austin Properties, Inc., a Tennessee corporation; ARC Corpus Christi, Inc., a Tennessee corporation; ARC Oak Park, Inc., a Tennessee corporation; ARC Lexington Equities, Inc., a Tennessee corporation; ARC Chattanooga, Inc.; and all other Subsidiaries of Borrower from time to time. 7 "BANKRUPTCY CODE" means Title I of the Bankruptcy Reform Act of 1978, as it may be amended from time to time. "BORROWER" means American Retirement Communities, L.P., a Tennessee limited partnership, its successors and assigns. This definition does not abrogate the requirement set forth below restricting Borrower's ability to assign its rights under this Agreement. "BORROWING NOTICE" has the meaning assigned in Section 2.3.2(b) hereof. "BUSINESS DAY" or "BUSINESS DAYS" means any day or days on which Lender's main office in Nashville, Tennessee is open for business with the public. "CAPITAL LEASE" means a lease that would be characterized as a financed sale under GAAP. "CHANGE OF CONTROL" means the occurrence, after the date of this Agreement, of the acquisition of Control of any ARC Entity by any Person which does not presently Control such entity. "CLOSING DATE" means the date of this Agreement. "COLLATERAL" means all Property now or hereafter securing the Obligations. "COMMITMENT LETTER" means that letter from Lender to Borrower dated September 25, 1995, describing the Loans. "CONTROL" or "CONTROLLED" means that a Person has the power to conduct or govern the policies of another Person. "DEBT" means, with respect to any Person, all obligations, contingent or otherwise, that would be classified under GAAP as a liability of that Person including, but not limited to, any nonrecourse obligations secured by Property of that Person. "DEFAULT RATE" means the highest lawful rate or such lesser rate as Lender may elect in writing in a given instance. "EVENT OF DEFAULT" means the occurrence of any of the events specified in Section 8.1 hereof, as to which any requirement for notice or lapse of time has been satisfied. "ENCUMBRANCE" means any interest in Property in favor of one not the owner thereof, whether voluntary or involuntary, including, but not limited to, (i) the lien or security interest arising from a deed of trust, mortgage, pledge, security agreement, conditional sale, 2 8 Capital Lease, consignment, or bailment for security purposes, and (ii) reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions. "ENVIRONMENTAL LAWS" means the Environmental Protection Act, the Resource Conservation and Recovery Act of 1976, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Hazardous Materials Transportation Act and any other federal, state or municipal law, rule or regulation relating to air emissions, water discharge, noise emissions, solid or liquid waste disposal, hazardous or toxic waste or materials, or other environmental or health matters. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, including (unless the context otherwise requires) any rules or regulations promulgated thereunder. "ERISA AFFILIATE" means any Person who for purposes of Title IV of ERISA is a member of Borrower's controlled group, or under common control with Borrower, within the meaning of Section 414 of the IRC, and the regulations promulgated pursuant thereto and the rulings issued thereunder. "ERISA EVENT" means (i) the occurrence of a reportable event, within the meaning of Section 4043 of ERISA, unless the 30-day notice requirement with respect thereto has been waived by the PBGC; (ii) the provision by the administrator of any Plan of a notice of intent to terminate such Plan, pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA); (iii) the cessation of operations at a facility in the circumstances described in Section 4068(f) of ERISA; (iv) the withdrawal by Borrower or an ERISA Affiliate from a Multiple Employer Plan during a plan year for which it was a substantial employer, as defined in 4001(a)(2) of ERISA; (v) the failure by Borrower or any ERISA Affiliate to make a material payment to a Plan required under Section 302(f)(1) of ERISA; (vi) the adoption of an amendment to a Plan requiring the provision of initial or additional security to such Plan, pursuant to Section 307 of ERISA; or (vii) the institution by the PBGC of proceedings to terminate a Plan, pursuant to Section 4042 of ERISA, or the occurrence of any event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, a Plan. "FINANCIAL STATEMENTS" means the consolidated balance sheet and income statement for ARC, L.P. and the consolidating balance sheet and income statement representing Richmond Place, Heritage Club, Trinity Towers Limited Partnership, Fort Austin Limited Partnership, Holley Court Terrace, L.P. and ARC, dated September 30, 1995, delivered by Borrower to Lender, and all subsequent financial statements delivered to Lender pursuant to this Agreement as of the date hereof, including all notes thereto. 3 9 "FIXED-RATE PERIOD" has the meaning assigned in Section 2.8 hereof. "FUNB-NC" means First Union National Bank of North Carolina, a national banking association and the issuer of the Richmond Place Letter of Credit. "GAAP" means generally accepted accounting principles pronounced by the Financial Accounting Standards Board or any successor thereto, as in effect from time to time. "GOVERNMENTAL AUTHORITY OR AUTHORITIES" shall mean any governmental or quasi-governmental entity, court or tribunal including, without limitation, any department, commission, board, bureau, agency, administration, service or other instrumentality of any foreign or domestic governmental entity. "HAZARDOUS SUBSTANCES" means those substances included from time to time within the definition of hazardous substances, hazardous materials, toxic substances, or solid waste under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended, 42 U.S.C. ss. 9601 et seq.; the Resource Conservation and Recovery Act of 1976, 42 U.S.C. ss. 6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. ss. 1801 et seq.; the Clean Water Act, 33 U.S.C. Section 1251 et. seq.; the Toxic Substances Control Act, 15 U.S.C. Section 2601 et. seq., and in the regulations promulgated pursuant to such acts and laws; and such other substances that are or become regulated under any applicable local, state, or federal law or regulation addressing environmental hazards. "INTEREST EXPENSE" means expenses for interest (including current charges on Capital Leases) and expenses for any interest rate swaps or similar derivative contracts used for the management of interest expense, letter of credit fees, remarketing and guaranty fees. "INTEREST PAYMENT DATE" means, as to Prime Rate Loans, the 10th day of each January, April, July and October, and as to LIBOR Loans, the last day of the applicable Interest Period and, as to all Loans, the maturity thereof, whether by acceleration or otherwise. "INTEREST PERIOD" means the period of one (1), two (2) or three (3) months selected for a LIBOR Loan in a Borrowing Notice. "IRC" means the Internal Revenue Code of 1986, as amended from time to time. "LAW" or "LAWS" means all applicable constitutional provisions, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, and requirements of all Governmental Authorities. 4 10 "LENDER" means First Union National Bank of Tennessee, its successors and assigns. "LIBOR LOAN" means a Loan for which Borrower has elected application of an interest rate based on the LIBOR Rate. "LIBOR RATE" means that rate (rounded upwards, if necessary, to the next higher 1/100 of 1%) for deposits in United States Dollars for a maturity of one, two or three months (as elected by Borrower; each such period is referred to herein as an "Interest Period"), which appears on the Telerate Page 3750 at approximately 11:00 a.m. London time, two (2) London business days prior to the effective date of the applicable LIBOR Rate, as such rate is adjusted in accordance with Lender's standard practices to reflect the LIBOR Reserve Percentage and other requirements. "LIBOR RESERVE PERCENTAGE" means, for the purpose of computing the LIBOR Rate, the daily arithmetic reserve requirements (percentage expressed as a decimal) imposed by the Board of Governors of the Federal Reserve System (or any successor) under Regulation D on LIBOR liabilities (as such term is defined in Regulation D) for the applicable Interest Period as of the first day of such Interest Period, but subject to any changes in such reserve requirement becoming effective during the Interest Period. For purposes of calculation of the LIBOR Reserve Percentage, the reserve requirement shall be as set forth in Regulation D without benefit or credit for prorations, exemptions or offsets under Regulation D, and further, without regard to whether or not Lender elects to actually fund the Revolving Loans with LIBOR liabilities. Lender, at its sole option, may elect, from time to time, to waive application of the Reserve Percentage on specified maturities. "LOAN" means an extension of credit under the Term Loan or the Revolving Credit Loan. "LOAN DOCUMENTS" means, collectively, each written agreement executed and delivered by any ARC Entity to Lender relating to the Revolving Credit Loan, whenever delivered, and each written agreement executed and delivered by any ARC Entity to Lender or FUNB-NC relating to the transactions evidenced by the Reimbursement Agreement. "MATERIAL ADVERSE CHANGE" means any material and adverse change in the business, Properties, or operations of Borrower or Trinity individually or of the ARC Entities on a consolidated basis. "MATERIAL ADVERSE EFFECT" means any event or condition which, singly or in the aggregate with other events or conditions, materially and adversely affects the business, Properties, or operations of Borrower or Trinity individually or of the ARC Entities on a consolidated basis. 5 11 "OBLIGATIONS" means all present and future debts and other obligations of Borrower to Lender, whether arising by contract, tort, guaranty, overdraft, or otherwise; whether or not the advances or events creating such debts or other obligations are presently foreseen; and regardless of the class of the debts or other obligations, be they otherwise secured or unsecured. Without limiting the foregoing, the "Obligations" specifically includes the obligations of Borrower under this Agreement and the other Loan Documents. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "PERMITTED DISTRIBUTION" means distributions made to Borrower's or Trinity's partners in the absence of any Event of Default or Unmatured Default hereunder or any default or unmatured default by any ARC Entity under any other obligation respecting borrowed money and shall in all circumstances be limited to (i) for any fiscal quarter, the amount of net income for that fiscal quarter plus depreciation, amortization and other non-cash charges, less the principal component of debt service (including debt service escrow payments, current maturities of long-term debt and current maturities of Capital Lease obligations due and payable within that quarter), and less capital expenditures of $500 per unit owned by the ARC Entity making the distribution (whether or not actually expended), and (ii) the ARC Entities will further be permitted to distribute excess cash in an amount up to $2,000,000 consisting of cash collateralizing letter of credit obligations in an amount of approximately $1,575,000 and an additional amount not to exceed $425,000. The ARC Entities will also be permitted to distribute amounts available as a result of Lender-approved asset sales or refinancings (subject in each case to the overriding limitation that there exists no default or unmatured default by any ARC Entity under any obligation respecting borrowed money). The calculation described in subsection (i) of this definition shall be made at the end of any fiscal quarter for the quarter just ended. Any Permitted Distribution calculated under subsection (i) may be paid at any time during the 12 months following the end of the quarter for which it was permitted. The term "Permitted Distribution" shall additionally include any cash distribution made on account of any partnership or shareholder interest from any ARC Entity (other than Trinity) to any ARC Entity (other than ARC, L.L.C.). "PERMITTED ENCUMBRANCES" means all of the following: (a) Encumbrances securing the payment of any of the Obligations. (b) Encumbrances securing taxes, assessments, or other governmental charges not yet due or which are being contested in good faith by appropriate action promptly initiated and diligently conducted, if Borrower has made reserve therefor as required by GAAP. 6 12 (c) Mechanics', repairmen's, materialmen's, warehousemen's and other like liens arising by operation of law securing accounts that are not delinquent. (d) Encumbrances on real property used by Borrower not securing monetary obligations, provided that the Encumbrances are of a type customarily placed on real property and do not materially impair the value of the affected property. (e) Pledges or deposits in the ordinary course of business to secure nondelinquent obligations under workman's compensation or unemployment laws or similar legislation or to secure the performance of leases or contracts entered into in the ordinary course of business. (f) Encumbrances described on the attached Schedule 1. "PERSON" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government, governmental agency or political subdivision thereof, or any other form of entity. "PLAN" means any employee benefit or other plan established or maintained, or to which contributions have been made, by Borrower or any Subsidiary and covered by Title IV of ERISA or to which Section 412 of the IRC applies. "PRIME RATE" shall be that rate announced by Lender from time to time as its Prime Rate and is one of several interest rate bases used by Lender. Lender lends at rates both above and below Lender's Prime Rate and Borrower acknowledges that Lender's Prime Rate is not represented or intended to be the lowest or most favorable rate of interest offered by Lender. "PRIME RATE LOAN" means a Loan for which Borrower has elected application of an interest rate based on the Prime Rate. "PROPERTY" or "PROPERTIES" means any interest in any kind of property, whether real, personal, or mixed, or tangible or intangible. "REIMBURSEMENT AGREEMENT" means the Reimbursement Agreement of even date herewith executed by Borrower in favor of Lender and FUNB-NC, pursuant to which the Richmond Place Letter of Credit has been issued. "REVOLVING CREDIT LOAN" has the meaning assigned in Article II hereof. 7 13 "REVOLVING CREDIT NOTE" means the Revolving Credit Note made by Borrower dated the date of this Agreement in the maximum principal amount of Two Million Five Hundred Thousand and No/100 Dollars ($2,500,000.00) in the form attached hereto as Exhibit A and all modifications, amendments, extensions, renewals and restatements thereof. "REVOLVING LOAN" means a Loan advanced under the Revolving Credit Loan. "RICHMOND PLACE LETTER OF CREDIT" means the Irrevocable Direct Pay Letter of Credit issued by FUNB-NC for the account of Borrower to Third National Bank in Nashville as Trustee under the Trust Indenture dated as of April 1, 1987, as amended and restated as of November 1, 1994, governing the issuance of the Lexington-Fayette Urban County Government Residential Facilities Refunding Revenue Bonds (Richmond Place Associates, L.P. Project) Series 1987. "SOLVENT" shall mean, as to any Person, that as of any date of determination, (i) the then fair value of the assets of such Person is (a) greater than the then total amount of liabilities (including subordinated liabilities) of such Person and (b) greater than the amount that will be required to pay such Person's probable liability on such Person's then existing debts as they become absolute and matured, (ii) such Person's capital is not unreasonably small in relation to its business, and (iii) such Person does not intend to incur, or believe or reasonably should believe that it will incur, debts beyond its ability to pay such debts as they become due. "SUBSIDIARY" means any present or future corporation, partnership or other entity at least a majority of whose outstanding voting stock shall at the time be owned directly or indirectly by Borrower, by one or more Subsidiaries of Borrower or a combination thereof, or any partnership in which Borrower or a Subsidiary of Borrower is a general partner. "TAXES" means all taxes and assessments whether general or special, ordinary or extraordinary, or foreseen or unforeseen, which at any time may be assessed, levied, confirmed or imposed on Borrower or on any of its properties or assets or any part thereof or in respect of any of its franchises, businesses, income or profits. "TERM LOAN" has the meaning assigned in Article II hereof. "TERM LOAN NOTE" means the Term Loan Note made by Borrower dated the date of this Agreement in the maximum principal amount of Two Million and No/100 Dollars ($2,000,000.00) in the form attached hereto as Exhibit B and all modifications, amendments, extensions, renewals and restatements thereof. "TRINITY" means Trinity Towers Limited Partnership, a Tennessee limited partnership. 8 14 "UCC" means the Uniform Commercial Code as adopted in Tennessee, as it may be amended from time to time. "UNMATURED DEFAULT" means any event or condition that, but for the giving of any required notice by Lender and/or the passing of time, would be an Event of Default hereunder. II. LOANS 2.1 Revolving Credit Loan. Concurrently with the execution of this Agreement, Lender shall make a Revolving Credit Loan (the "Revolving Credit Loan") available to Borrower under the following terms: 2.1.1 Amount of Revolving Credit Loan. The principal indebtedness of Borrower to Lender under the Revolving Credit Loan shall not exceed Two Million Five Hundred Thousand and No/100 Dollars ($2,500,000.00); provided, however, that until the closing of the contemplated loan transaction between Lender and Trinity described in the Commitment Letter, Borrower's availability under the Revolving Credit Loan shall be limited to $800,000 (including the $500,000 letter of credit described in the immediately succeeding subparagraph). 2.1.2 Use of Proceeds of Revolving Credit Loan. The proceeds of Revolving Loans shall be used by Borrower for general working capital needs, and the issuance of letters of credit. All letters of credit issued by Lender for any ARC Entity's account (including, but not limited to, the existing $500,000 letter of credit in favor of Reliance National Indemnity Company) shall be regarded as Loans outstanding under the Revolving Credit Loan for the purpose of determining the remaining availability under the Revolving Credit Loan. 2.1.3 Revolving Credit Note. Borrower's obligations under the Revolving Credit Loan shall be evidenced by the Revolving Credit Note. 2.2 Term Loan. Concurrently with the execution of this Agreement, Lender shall make a Term Loan (the "Term Loan") available to Borrower under the following terms: 2.2.1 Amount of Term Loan. The original principal indebtedness of Borrower to Lender under the Term Loan shall be Two Million and No/100 Dollars ($2,000,000.00). 9 15 2.2.2 Use of Proceeds of Term Loan. The proceeds of the Term Loan shall be used by Borrower to refinance the obligations of Borrower to Lender under that Promissory Note made by Borrower dated June 23, 1995 payable to the order of Lender in the original principal amount of Two Million and No/100 Dollars ($2,000,000.00). 2.2.3 Term Loan Note. Borrower's obligations under the Term Loan shall be evidenced by the Term Loan Note. 2.3 Advances of Revolving Loans. Subject to the terms and conditions of this Agreement, Borrower may from time to time request and repay Revolving Loans, provided that the total principal amount outstanding under the Revolving Credit Loan shall not at any time exceed the amount provided in Section 2.1.1 above. Revolving Loans shall be disbursed as follows: 2.3.1 Revolving Loans Advanced Pursuant to Cash Management Account. Borrower may have in effect from time to time separate agreements with depository institutions establishing cash management procedures ("Account Agreements") that may involve the automatic disbursement of amounts available under the Revolving Credit Loan. If Lender or its Affiliates serve as depository institutions under Account Agreements, they may use standardized forms for Account Agreements that do not address the specific circumstances of the Revolving Credit Loan. To resolve potential inconsistencies between this Agreement and Account Agreements, the terms of this Agreement and of Account Agreements entered into by Lender or its Affiliates shall relate to one another as follows: 2.3.1(a) Funding and Payment Procedures Controlled by Account Agreements. The Account Agreements shall control this Agreement as to (i) Section 2.3.2 hereof regarding funding procedures, and (ii) Interest Payment Dates, to the extent that an Account Agreement may provide for such payment more frequently than otherwise required under this Agreement. 2.3.1(b) Certain Provisions Controlled by this Agreement. Notwithstanding any provision of an Account Agreement to the contrary, except as provided above in Section 2.3.1(a), the provisions of this Agreement shall control any Account Agreement to the extent that an Account Agreement may be inconsistent with this Agreement. Without limiting the foregoing, Borrower acknowledges that Article III hereof shall remain in full effect notwithstanding any provision contained in an Account Agreement. Accordingly, and without limiting any other provision of this Agreement, Borrower 10 16 acknowledges that Lender shall have no obligation to make Revolving Loans under the Revolving Credit Loan after the occurrence of an Unmatured Default or an Event of Default under this Agreement or to allow balances to remain in Borrower's account after the occurrence of an Event of Default hereunder. Therefore, while an Unmatured Default is outstanding under this Agreement, Lender or its Affiliate may dishonor any item presented for payment on the applicable account that is not funded by the amount of collected balance then available in Borrower's account. Additionally, after the occurrence of an Event of Default, Lender may apply balances in Borrower's account(s) to the Obligations and may dishonor any item presented for payment on Borrower's account. Lender's right to dishonor items may be exercised without any liability whatsoever and shall apply regardless of when the item dishonored may have been issued by Borrower. 2.3.1(c) Continuing Warranty Under Account Agreements. Because Account Agreements may provide for the making of Revolving Loans without formal draw requests from Borrower, Borrower agrees that Borrower's warranty under Section 2.3.5 hereof as to the satisfaction of all conditions to the right to receive Revolving Loans shall be a continuing one during any period that such an Account Agreement may be in effect. Therefore, any Revolving Loans funded by Lender pursuant to an Account Agreement after the failure of a condition stated in Article III hereof shall be deemed made upon the affirmative misrepresentation of Borrower unless Lender has received written notice of and waived the failed condition in writing. Lender may terminate any Account Agreement upon ten (10) days written notice to Borrower or upon such lesser notice as may be provided in any Account Agreement. 2.3.1(d) Prime Rate Loans. All Revolving Loans made as advances pursuant to Account Agreements shall be Prime Rate Loans. 2.3.2 Revolving Loans Advanced Other Than Pursuant to Cash Management Account. 2.3.2(a) Applicability. Except for Revolving Loans made pursuant to Account Agreements, which shall be Prime Rate Loans, Revolving Loans advanced hereunder may be LIBOR Loans, Prime Rate Loans, or a combination thereof and the funding thereof shall be subject to this Section 2.3.2. 11 17 2.3.2(b) Borrowing Notices. As long as Borrower meets the conditions for funding stated in this Agreement, Borrower may submit requests for Revolving Loans ("Borrowing Notices") to Lender's representatives by telephone at 615-251-9365 or such other telephone number as Lender may advise Borrower from time to time. All requests shall be subject to any applicable security procedures that Lender may have in effect from time to time, shall be submitted or confirmed promptly in writing, and shall specify the requested date of the requested disbursement; the aggregate amount of such disbursement; the type of Revolving Loan, i.e., LIBOR Loan or Prime Rate Loan; and if a LIBOR Loan, the designated Interest Period. Each Borrowing Notice shall irrevocably obligate Borrower to accept the Revolving Loan requested thereby. No draw shall be requested in an amount less than $100,000. 2.3.2(c)Funding of Revolving Loans. Lender shall fund Prime Rate Loans so requested on the same Business Day if the request is received before 1:00 p.m. local time in Nashville, Tennessee, and on the succeeding Business Day if received after that time. Lender shall fund LIBOR Loans so requested on the third Business Day after receipt if the Borrowing Notice is received before 1:00 p.m. local time in Nashville, Tennessee, and on the fourth succeeding Business Day if received after that time. All funds shall be disbursed directly into an account maintained by Borrower with Lender. Borrower agrees that if Lender elects to fund any requested Revolving Loan(s) sooner after requested than is required of Lender hereunder, Lender may nevertheless use the entire response period allowed hereunder upon receipt of any subsequent request, at Lender's sole option. 2.3.3 Additional Limitations on Loans. 2.3.3(a) Prime Rate Loan Limitations. Individual Prime Rate Loans may be in any amount. Any number of Prime Rate Loans may be outstanding at any one time. 2.3.3(b) LIBOR Loan Limitations. Individual LIBOR Loans shall each be in the minimum amount of $100,000.00. No more than a total of six (6) LIBOR Loans may be outstanding at any one time under this Agreement and under any document evidencing Lender's credit relationship with Trinity. 12 18 2.3.3(c) Additional Limitation on LIBOR Interest Periods. No Interest Period may be selected for any LIBOR Loan that would end later than the maturity date of the applicable facility. 2.3.4 Conversion of Loans. Borrower shall have the right at any time, on prior irrevocable written notice to Lender not later than 1:00 p.m. local time in Nashville, Tennessee, three (3) Business Days prior to the date of any requested conversion, to convert any Prime Rate Loan or LIBOR Loan into a Loan of another type, or to continue any LIBOR Loan for another Interest Period (specifying in each case the applicable Interest Period), subject in each case to the following; 2.3.4(a) Application of Converted Loans. Each conversion shall be effected by applying the proceeds of the new LIBOR and/or Prime Rate Loan, as the case may be, to the Loan (or portion thereof) being converted. 2.3.4(b) Notices of Conversions. Each notice pursuant to this Section shall be irrevocable and shall refer to this Agreement and specify (i) the identity and principal amount of the particular Loan that Borrower's request be converted or continued, (ii) if such notice requests conversion, the date of such conversion (which shall be a Business Day), and (iii) if a Loan is to be converted to a LIBOR Loan or a LIBOR Loan is to be continued, the Interest Period with respect thereto. No LIBOR Loan shall be converted at any time other than at the end of the Interest Period applicable thereto. In the event that Borrower shall not give notice to continue any LIBOR Loan for a subsequent period, such LIBOR Loan (unless repaid) shall automatically be converted into a Prime Rate Loan. If Borrower fails to specify in any Borrowing Notice the type of borrowing or, in the case of a LIBOR Loan, the applicable Interest Period, Borrower will be deemed to have requested a Prime Rate Loan. 2.3.5 Implied Representations Upon Request for Revolving Loan. Upon making any request for a Revolving Loan, Borrower shall be deemed to have warranted to Lender that all conditions to funding are satisfied as of the submission of the request to Lender. 2.3.6 Advance Not Waiver. Lender's making of any Loan that it is not obligated to make under any provision of Article III hereof or any other provision hereof shall not be construed as a waiver of Lender's right to withhold future Loans, declare an Event of Default, or otherwise demand strict compliance with this Agreement. 13 19 2.3.7 Draws by Debit Memorandum. Lender may draw amounts available under the Revolving Credit Loan to pay any Obligation that is not otherwise timely paid. 2.4 Interest. Interest shall be charged and paid on each Loan as follows: 2.4.1 Revolving Credit Loan. Loans advanced under the Revolving Credit Loan may be Prime Rate Loans or LIBOR Loans, as elected by Borrower. 2.4.2 Term Loan. The Term Loan may constitute a single Prime Rate Loan or LIBOR Loan or, if elected by Borrower from time to time, a portion thereof may be designated as a Prime Rate Loan and the balance designated as a single LIBOR Loan. Additionally, should Borrower wish to convert the Term Loan to a fixed rate loan, Lender shall quote a rate at which Lender would be willing to agree to this conversion on one occasion during the term of the Term Loan. 2.4.3 Prime Rate Loans. Interest shall accrue on Prime Rate Loans at an annual rate equal to fifty basis points (.5%) above the Prime Rate, said rate to change contemporaneously with any change in the Prime Rate. 2.4.4 LIBOR Loans. Interest shall accrue on LIBOR Loans at a rate equal to the Adjusted LIBOR Rate for the selected Interest Period plus two hundred fifty basis points (2.50%); provided, however, in the event, and on each occasion, that on the date of commencement of any Interest Period for a LIBOR Loan, Lender shall have determined, in its sole discretion, that LIBOR funds are not available to it, then Lender's obligation to make, maintain or convert into a LIBOR Loan shall be suspended until such time as Lender shall have concluded that the circumstances giving rise to such suspension no longer exist. Upon a determination of unavailability of LIBOR funds as set out above, Lender shall, until notice to the Borrower that the circumstances giving rise to the suspension of availability of the LIBOR Rate no longer exist, charge interest on all Loans as Prime Rate Loans. Each determination by Lender hereunder as to the availability of the LIBOR Rate shall be conclusive absent manifest error. 2.4.5 Calculation of Interest. Interest for both Prime Rate Loans and LIBOR Loans shall be computed on the basis of a 360-day year counting the actual number of days elapsed. 2.4.6 Payment of Interest. Interest for both Prime Rate Loans and LIBOR Loans shall be due and payable in arrears without notice on each Interest Payment Date. 14 20 2.4.7 Default Rate. Notwithstanding the foregoing, upon the occurrence of an Event of Default and during the continuation of such Event of Default until it is cured or waived, interest shall be charged at the Default Rate, regardless of whether Lender has elected to exercise any other remedies available to Lender, including, without limitation, acceleration of the maturity of the outstanding principal of the Revolving Credit Loan and Term Loan. All such interest shall be paid at the time of and as a condition precedent to the curing of any such Event of Default to the extent any right to cure is given in this Agreement. 2.4.8 Usury Savings Provision. It is the intention of the parties that all charges under or in connection with this Agreement and the Obligations, however denominated, and including (without limitation) all interest, commitment fees, late charges and loan charges, shall be limited to the maximum lawful amount that may be assessed under Tennessee law or, if higher, applicable federal law. Such charges shall be characterized and all provisions of the Loan Documents shall be construed as to uphold the validity of charges provided for therein and, all such charges shall be spread over the entire term of the Loans to the extent permitted by law. If for any reason whatsoever, however, any charges paid or contracted to be paid in respect of the Revolving Credit Loan or Term Loan shall exceed the maximum amounts collectible under applicable laws in effect from time to time, then, ipso facto, the obligation to pay such interest and/or other charges shall be reduced to the maximum lawful amount in effect from time to time, and any amounts collected by Lender that exceed the maximum lawful amount shall be applied to the reduction of the principal balance of the Revolving Credit Loan or Term Loan and/or refunded to Borrower so that at no time shall the interest or loan charges paid or payable in respect of the Revolving Credit Loan or Term Loan exceed the maximum lawful amount. This provision shall control every other provision herein and in any and all other agreements and instruments now existing or hereafter arising between Borrower and Lender with respect to the Loans. 2.5 Principal Repayment. 2.5.1 Revolving Credit Loan. All remaining principal outstanding under the Revolving Credit Loan shall become due on October 31, 1996. 2.5.2 Term Loan. Payments of principal shall be made under the Term Loan in the amount of One Hundred Thousand and No/100 Dollars ($100,000.00) each due on the 10th day of each January, April, July and October until October 31, 1997, when all remaining principal, interest and expenses shall become due. 15 21 2.6 Fees. 2.6.1 Revolving Credit Loan Commitment Fee. Concurrently with the execution hereof, Borrower shall pay the balance due of the Twelve Thousand Five Hundred and No/100 Dollars ($12,500.00) commitment fee provided for by the Commitment Letter as a commitment fee for the Revolving Credit Loan. 2.6.2 Term Loan Commitment Fee. Concurrently with the execution hereof, Borrower shall pay the balance due of the Ten Thousand and No/100 Dollars ($10,000.00) commitment fee provided for by the Commitment Letter as a commitment fee for the Term Loan. 2.6.3 Letter of Credit Fees. Borrower will pay a letter of credit fee equal to 1.15% per annum of the face amount of any letter of credit issued under the Revolving Credit Loan, payable annually in advance. Borrower shall also pay Lender's standard administrative fees upon the issuance of any such letter of credit. 2.7 Prepayment of Prime Rate Loans. Borrower may at any time prepay any outstanding Prime Rate Loans in whole or in part without premium or penalty. 2.8 Prepayment of LIBOR Loans. Prepayment of a LIBOR Loan shall not be permitted; provided, however, in the event that Lender receives a prepayment of principal from Borrower on other than those dates specified by the Loan Agreement such that the prepayment must apply to a LIBOR Loan, or if Borrower elects to terminate a LIBOR Loan before its stated maturity date, and Lender, at its sole option in either case, elects to permit such prepayment, Borrower shall pay to Lender on demand any amounts required to compensate Lender for any losses, costs or expenses which it may incur as a result of such prepayment or election (including, but not limited to, reinvestment costs). Compensation due Lender as reinvestment costs shall be determined in accordance with the following formula: PREPAYMENT COMPENSATION = (A - B) X C X D A = The LIBOR Rate determined as of the funding date of the advance, on a per annum basis for deposits in United States Dollars for a term equal to the term of the LIBOR Loan being prepaid (the "Applicable Term") which appeared on the Telerate Page 3750 at 11:00 a.m. London time two Business Days prior to the effective date of the applicable LIBOR Rate, as such rate was adjusted in accordance with Lender's standard practices for reserves and other requirements. 16 22 B = The LIBOR Rate determined as of the prepayment date on a per annum basis for deposits in United States Dollars for the Applicable Term which appeared on the Telerate Page 3750 at 11:00 a.m. London time on such date, as such rate is adjusted in accordance with Lender's standard practices for reserves and other requirements. C = Principal amount prepaid. D = Number of days from the date of prepayment to the end of the Fixed-Rate Period divided by a year base of 360 days. As used herein, the "Fixed-Rate Period" shall be the period during which the applicable LIBOR Rate is to remain in effect. In addition, in the event the amount determined as variable B above is greater than the amount determined as variable A above, no prepayment compensation shall be due hereunder. The determination of prepayment compensation due Lender hereunder shall be made by Lender in good faith using such methodology as Lender deems appropriate and customary under the circumstances and shall be conclusive absent manifest error. 2.9 Prepayment of Term Loan. If Borrower elects at any time to convert the Term Loan to a fixed rate loan, a prepayment fee shall be assessed on any prepayment. Such prepayment fee shall be based on a prepayment compensation formula to be negotiated prior to conversion in form and substance satisfactory to Lender. 2.10 Additional Costs. If, at any time, a change in any law, regulation, or reserve requirement applicable to this Agreement or interpretation or administration of the same by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any reversal by such entities of an interpretation by Lender as to compliance with such law or regulation impose, increase, or modify any reserve, and the result of any of the foregoing is to increase the cost to Lender of maintaining its commitment to make LIBOR Loans by an amount deemed by Lender in its sole discretion to be material, then within fifteen (15) days after demand by Lender the Borrower agrees to pay to Lender such additional amount or amounts as will compensate Lender for such increased cost related to Lender's commitment to make LIBOR Loans hereunder. A certificate of Lender setting forth such amount or amounts as shall be necessary to compensate Lender (or its participating banks or other entities) for such additional costs shall be delivered to Borrower and shall be conclusive absent manifest error. III. CONDITIONS PRECEDENT 3.1 Conditions to Initial Advance. Lender shall not be obligated to make its initial Loan pursuant to this Agreement unless and until Borrower provides Lender with 17 23 the following documents, all fully executed by all appropriate parties and in form and substance satisfactory to Lender and its counsel (Lender may accept certain of the following requirements as satisfied for the purpose hereof by the documents provided by Borrower in connection with the Prior Loan Agreement): 3.1.1 This Agreement. 3.1.2 The Revolving Credit Note. 3.1.3 The Term Loan Note. 3.1.4 UCC Financing Statements to be filed at the office of the Tennessee Secretary of State and such other offices as Lender may require. 3.1.5 Collateral Assignment of Contract Rights in all management contracts and associated receivables owned by ARCM, accompanied by such third-party consents as Lender may require. 3.1.6 Collateral Assignment of Promissory Note granting Lender a first priority perfected security interest in a promissory note executed by ARC in favor of ARC, L.P. in the original principal amount of Two Million and No/100 Dollars ($2,000,000.00). 3.1.7 Deed of Trust on certain unimproved property located in Williamsburg, Virginia and owned by ARC, together with land survey, environmental survey, title insurance and other diligence matters as Lender may require. 3.1.8 Unlimited Guaranties by each of the ARC Entities other than Borrower. 3.1.9 Stock Pledge granting a first priority perfected pledge of 100% of the outstanding stock of the corporate ARC Entities (not including ARC, LLC). If such pledge is precluded by the primary debt instruments evidencing or securing obligations of any of the ARC Guarantors to their primary lenders, Lender will agree to waive this requirement in such cases, provided that in any event Lender must receive pledges in the stock of ARC, ARCM, ARC Equities-Lexington, Inc. and ARC Corpus Christi, Inc. 3.1.10 Opinions of Borrower's Counsel addressed to Lender, addressing matters reasonably required by Lender. 3.1.11 Evidence of insurance as required by this Agreement. 18 24 3.1.12 Such Corporate and Partnership Diligence materials as Lender may require, including but not limited to partnership agreements, corporate charters, authorizing resolutions, certificates of existence, and certified copies of Medicare provider contracts bearing the ARC Entities' provider numbers. 3.1.13 Such other documents as Lender may reasonably require. 3.1.14 Consummation of the Transactions evidenced by the Reimbursement Agreement. 3.2 Conditions to Subsequent Revolving Loans. Lender shall not be obligated to make any Revolving Loan unless all of the following conditions are satisfied as of the time of the request and of funding: 3.2.1 Conditions to Initial Advance. All of the conditions in Section 3.1 hereof must have been satisfied. 3.2.2 Warranties. All warranties made in the Loan Documents must be true as of the dates of the Borrowing Notice and as of the date of funding thereof, except such warranties as, by their terms, speak of a specific date. 3.2.3 Covenants. All covenants made in the Loan Documents must have been complied with as of the dates of the Borrowing Notice and funding thereof. 3.2.4 Absence of Unmatured Default. No Event of Default or Unmatured Default shall exist under this Agreement. 3.2.5 Material Adverse Change. There shall not have occurred a Material Adverse Change. IV. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to Lender that, as of the Closing Date: 4.1 Capacity. Each ARC Entity is a limited partnership or corporation, as applicable, duly organized, validly existing and in good standing under the laws of the State of Tennessee. Each ARC Entity is qualified or authorized to do business in all jurisdictions in which its ownership of property or conduct of business requires such qualification or authorization. Each ARC Entity has the power and authority to own its Properties and to carry on its business as now being conducted and as proposed to be conducted after the 19 25 execution hereof, to execute and deliver this Agreement and the other Loan Documents, and to perform its obligations hereunder and under the other Loan Documents. 4.2 Authorization. Each ARC Entity's execution, delivery and performance of this Agreement and the other Loan Documents, as applicable, have been duly authorized by all requisite partnership and corporate action. 4.3 Binding Obligations. This Agreement is and the other Loan Documents, when executed and delivered to Lender, will be, legal, valid and binding upon each ARC Entity, enforceable in accordance with their respective terms, subject only to principles of equity and laws applicable to creditors generally, including bankruptcy laws. 4.4 No Conflicting Law or Agreement. Each ARC Entity's execution, delivery and performance of the Loan Documents do not constitute a breach of or default under, and will not violate or conflict with, any provisions of the corporate charter of any ARC Entity; any contract, financing agreement, lease, or other agreement to which any ARC Entity is a party or by which its Properties may be affected; or any Law to which any ARC Entity is subject or by which its Properties may be affected; nor will the same result in the creation or imposition of any Encumbrance upon any Properties of any ARC Entity, other than those contemplated by the Loan Documents. 4.5 No Consent Required. Each ARC Entity's execution, delivery, and performance of this Agreement and the other Loan Documents do not require the consent or approval of or the giving of notice to any Person except for those consents which have been duly obtained and are in full force and effect on the date hereof. 4.6 Financial Statements. The Financial Statements are complete and correct, have been prepared in accordance with GAAP, and present fairly the financial condition and results of operations of the ARC Entities as of the date and for the period stated therein, subject to year-end adjustments. No Material Adverse Change has occurred since the date of the Financial Statements. Borrower acknowledges that Lender has advanced (or shall advance) the Loans in reliance upon the Financial Statements. 4.7 Fiscal Year. Each ARC Entity's fiscal year ends on December 31 of each year. 4.8 Litigation. Except as disclosed on Schedule 4.8 hereto, there is no litigation, arbitration, legal or administrative proceeding, tax audit, investigation, or other action or proceeding of any nature pending or, to the knowledge of Borrower, threatened against, likely to be instituted against or affecting any ARC Entity or any of its Properties, except any such proceeding involving only a claim for money damages less than $100,000. No ARC Entity is subject to any outstanding court, arbitral or administrative order, writ or injunction. To the best of Borrower's knowledge, information and belief, no facts exist under 20 26 which third parties have unasserted claims against any ARC Entity that would involve a claim for injunctive relief or payment of money damages in excess of $100,000. 4.9 Taxes; Governmental Charges. Each ARC Entity has filed or caused to be filed all tax returns and reports required to be filed. Each ARC Entity has paid, or made adequate provision for the payment of, all Taxes that have or may have become due pursuant to such returns or otherwise, or pursuant to any assessment received by Borrower, except such Taxes, if any, as are being contested in good faith by appropriate proceedings and for which adequate reserves have been provided. Borrower knows of no proposed material tax assessment against any ARC Entity. No extension of time for the assessment of federal, state or local taxes of borrower is in effect or has been requested, except as disclosed in the Financial Statements. Each ARC Entity has timely made all required remittances of withholding deposits and other assessments against payroll expenditures. 4.10 Title to Properties. Each ARC Entity has good and marketable title to its Properties, free and clear of all Encumbrances except for Permitted Encumbrances. 4.11 No Default. No ARC Entity is in default in any respect that affects its business, Properties, operations, or condition, financial or otherwise, under any document evidencing an obligation for the repayment of borrowed money. No ARC Entity is in default in any respect under any other instrument to which any ARC Entity is a party or by which its Properties are bound, except to the extent that such default could not reasonably be expected to have a Material Adverse Effect. To the best of Borrower's knowledge, information and belief, no other party to any contract with any ARC Entity is in default or breach thereof and no circumstances exist which, with the giving of notice and/or the passing of time would constitute such default or breach. No Event of Default or Unmatured Default exists under this Agreement. 4.12 Casualties; Taking of Properties. Neither the business nor the Property of any ARC Entity is presently impaired as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of property, cancellation of contracts, permits, concessions by any domestic or foreign government or any agency thereof, riot, activities of armed forces or acts of God or of any public enemy. 4.13 Compliance with Laws. No ARC Entity is in violation of any Law to which any ARC Entity, its business or any of its Properties are subject, the violation of which would likely have a Material Adverse Effect, and there are no outstanding citations, notices or orders of noncompliance issued to any ARC Entity under any such Law, the violation of which would likely have a Material Adverse Effect. Each ARC Entity has obtained all licenses, permits, franchises, or other governmental authorizations necessary to the ownership of its Properties or to the conduct of any ARC Entity's business. 21 27 4.14 ERISA. No ERISA Event has occurred with respect to any Plan or is reasonably expected to occur with respect to any Plan. 4.15 Full Disclosure of Material Facts. Borrower has fully advised Lender of all matters involving Borrower's, Trinity's and the consolidated ARC Entities' financial condition, business, operations, Properties or industry that would be reasonably expected to have a Material Adverse Effect. No information, exhibit, or report furnished or to be furnished by Borrower to Lender in connection with this Agreement contains, as of the date thereof, any misrepresentation of fact or failed or will fail to state any material fact, the omission of which would render the statements therein materially false or misleading. 4.16 Accuracy of Projections. With respect to all business plans and other forecasts and projections furnished by or on behalf of Borrower and made available to Lender relating to the financial condition, business, operations, Properties or prospects of the ARC Entities, to the best of Borrower's knowledge, information and belief, all facts stated as such therein are true and complete in all material respects and all estimates and assumptions were made in good faith and believed to be reasonable at the time made. 4.17 Investment Company Act. No ARC Entity is an "investment company" under the Investment Company Act of 1940, as amended. 4.18 Personal Holding Company. No ARC Entity is a "personal holding company" as defined in Section 542 of the IRC. 4.19 Solvency. Each ARC Entity is Solvent as of the Closing Date and will remain Solvent upon the consummation of the transactions contemplated hereby. 4.20 Chief Executive Office. The address designated herein to which notices are to be sent under this Agreement is the chief executive office for each ARC Entity within the meaning of Tennessee Code Annotated Section 47-9-103(3)(d). 4.21 Subsidiaries. No ARC Entity has any Subsidiaries other than those depicted in the organizational chart attached as Schedule 4.21 hereof. 4.22 Ownership of Patents, Licenses, Etc. Each ARC Entity owns all licenses, permits, franchises, registrations, patents, copyrights, trademarks, trade names or service marks, or the rights to use the foregoing, that are necessary for the continued operation of its business. 4.23 Environmental Compliance. Each ARC Entity has duly complied with, and its Properties are owned and operated in compliance with, all Environmental Laws, the violation of which would have a Material Adverse Effect. There have been no citations, notices or orders of non-compliance issued to any ARC Entity or, to Borrower's knowledge, 22 28 relating to any ARC Entity's business or Properties pursuant to any Environmental Law. Each ARC Entity has obtained all required federal, state and local licenses, certificates or permits relating to it and its Properties as required by applicable Environmental Laws. 4.24 Labor Matters. No ARC Entity is subject to any collective bargaining agreements or any agreements, contracts, decrees or orders requiring it to recognize, deal with or employ any Person. No demand for collective bargaining has been asserted against any ARC Entity by any union or organization. No ARC Entity has experienced any strike, labor dispute, slowdown or work stoppage due to labor dispute and, to the best knowledge of Borrower, there is no such strike, dispute, slowdown or work stoppage threatened against any ARC Entity. Each ARC Entity is in compliance in all material respects with the Fair Labor Standards Act of 1938, as amended. 4.25 OSHA Compliance. Each ARC Entity is in compliance in all material respects with the Federal Occupational Safety and Health Act, as amended, and all regulations under the foregoing. 4.26 Regulation U. No ARC Entity is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System). No proceeds of any Revolving Loan will be used to purchase or carry any margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System) in violation of applicable law, including, without limitation, Regulation U issued by the Board of Governors of the Federal Reserve System. V. AFFIRMATIVE COVENANTS Borrower covenants that, during the term of this Agreement (and thereafter where expressly stated herein), it will observe and cause the other ARC Entities to observe the following covenants: 5.1 Payment of Obligations. Borrower shall pay all amounts due under the Obligations when due. 5.2 Maintenance of Existence and Business. Except as permitted by Section 6.11 hereof, each ARC Entity shall maintain its corporate or partnership existence, name, rights, and franchises, and shall continue to operate in the same type of business as it engages in as of the date hereof. 5.3 Financial Statements and Reports and Other Information. Borrower shall furnish to Lender or cause Lender to receive all of the following, all of which must be in form and substance satisfactory to Lender: 23 29 5.3.1 Monthly Financial Reports. As soon as available, and in any event by the 45th day following the end of each month, Borrower shall deliver to Lender a consolidated balance sheet, income statement and, beginning on April 30, 1996, statement of cash flows, for and as of the end of the preceding month. Additionally, Lender shall receive consolidating financial statements for Borrower and for Trinity, Fort Austin Limited Partnership, Holley Court Terrace L.P. and ARC, as well as consolidating entries for Richmond Place and Heritage Club. All such financial statements shall be internally-prepared and certified by Borrower's chief financial officer or other representative chosen by Lender to be complete and correct and to present fairly, in accordance with GAAP (excluding year-end adjustments and required footnote disclosures), the financial condition of such entities and their consolidated affiliates as of the date of such statements and the results of their operations for such period. The monthly financial reports shall show comparisons to budget for Trinity, Richmond Place, Holley Court Terrace L.P., Heritage Club and Fort Austin Limited Partnership through March 31, 1996, and in addition, on a consolidated basis beginning April 30, 1996. Calculations of all financial ratios shall be included on applicable reporting dates, and each monthly financial report shall contain a certificate confirming that no Event of Default or Unmatured Default exists hereunder. 5.3.2 Annual Financial Reports. As soon as available, and in any event within 120 days after the end of each fiscal year, Borrower shall deliver to Lender its audited balance sheets as of the end of such year and the related audited statements of income, retained earnings and cash flows for such year, together with supporting schedules, all such statements prepared in accordance with GAAP on a consolidated basis and accompanied by an unqualified audit report prepared by an independent certified public accountant acceptable to Lender showing the financial condition of the ARC Entities and their consolidated affiliates at the close of such year and the results of their operations during such year. The annual financial information shall include calculations of all financial ratios as determined based upon the audited financial statements. Annual unaudited consolidating financial statements shall be delivered to Lender concurrently with the audited financial statements described herein. The unaudited statements shall be certified as to accuracy and completeness by Borrower's chief financial officer or other representative chosen by Lender. Lender shall retain the right to require audited financial statements on Trinity, in Lender's sole discretion, and to the extent that any other debt instrument of any of the ARC Entities requires that any such entity produce audited financial statements, such audited statements shall be delivered to Lender as well. 24 30 5.3.3 Budgets. Prior to the beginning of each fiscal year, Borrower shall provide Lender with consolidated and consolidating budgets, including proposed capital expenditures. 5.3.4 Licensure Reports. Promptly upon receipt thereof, Borrower shall provide Lender with copies of all regulatory and licensure inspection or audit reports for Richmond Place and Trinity, and for any other ARC Entity as requested. 5.3.5 Accountant Reports. Promptly upon the receipt thereof, the ARC Entities shall deliver to Lender a copy of each other report (other than work papers) submitted to any of them or their consolidated affiliates by their accountants in connection with any annual, interim or special audit made by them. The ARC Entities shall also provide Lender with copies of all management letters issued by their accountants. 5.4 Operating Data. Upon request, the ARC Entities will provide Lender with operating statistics on any or all Properties owned by any ARC Entity, including but not limited to occupancy reports. 5.5 Other Information. The ARC Entities shall provide Lender with such additional information regarding the financial condition, properties, operations and prospects of the ARC Entities and their consolidated affiliates as Lender may reasonably require. 5.6 Certain Additional Reporting Requirements. 5.6.1 Owner Mailings. Promptly upon the sending thereof, Borrower shall deliver to Lender a copy of each statement, report or notice sent by any ARC Entity to its partners or shareholders. 5.6.2 Notice to Lender Upon Perceived Breach. Borrower agrees to give Lender prompt written notice of any action or inaction by or on behalf of Lender in connection with this Agreement or the Obligations that Borrower believes may be actionable against Lender or a defense to payment of any or all Obligations for any reason, including, but not limited to, commission of a tort or violation of any contractual duty or duty implied by law, in order to give Lender the opportunity to mitigate any damages allegedly arising therefrom. 5.6.3 Changes in Constituent Documents. Borrower shall promptly notify Lender in writing of any change in the partnership agreement, corporate charter or bylaws of any ARC Entity, and shall provide Lender with a copy of such change (the ARC Entities are restricted in the adoption of such 25 31 amendments as provided elsewhere in the Loan Documents, and nothing contained in this Section shall be deemed a waiver of such restrictions). 5.6.4 Notice of Litigation. Borrower shall give Lender prompt written notice of any litigation, arbitration, tax audit, administrative proceeding or investigation that may hereafter be instituted or threatened in writing in which any ARC Entity would be a party or which otherwise may affect any ARC Entity or any of its business, operations or Properties, except for (i) actions seeking only monetary damages in an amount of less than $100,000, and (ii) matters arising from premises or vehicular liability seeking only monetary damages and which are fully covered by insurance, subject only to the applicable deductible. 5.6.5 Other Notices. Borrower shall promptly notify Lender in writing if Borrower learns of the occurrence of (i) any event that constitutes an Event of Default or an Unmatured Default, together with a detailed statement of the steps being taken as a result thereof, or (ii) any Material Adverse Change. 5.7 Taxes and Other Encumbrances. Each ARC Entity shall make due and timely payment or deposit of all federal, state and local taxes, assessments or contributions required of it by law, and execute and deliver to Lender, on demand, appropriate certificates attesting to the payment or deposit thereof; provided, however, that no ARC Entity Borrower shall be required to pay or discharge any such tax, assessment, charge or claim for as long as it is being diligently contested in good faith by proper proceedings and for which appropriate reserves are being maintained. 5.8 Payment of Debts. Each ARC Entity shall pay all of its Debts as and when the same become due in accordance with their terms. 5.9 Compliance with Laws. Each ARC Entity shall observe and comply with all Laws, and shall maintain all certificates, franchises, permits, licenses, and authorizations necessary to the conduct of its business or the operation of its Properties. 5.10 Maintenance of Property. Each ARC Entity shall maintain its Property (and any Property leased by or consigned to it or held under title retention or conditional sales contracts) in good and workable condition at all times and make all repairs, replacements, additions, and improvements to its Property reasonably necessary and proper to ensure that the business carried on in connection with its Property may be conducted properly and efficiently at all times. Without limiting the generality of the foregoing, the ARC Entities shall take such measures as identified in the structural engineering reports delivered to Lender to bring the Richmond Place Retirement Community and the Trinity Towers Retirement Community into compliance with the Americans with Disabilities Act. 26 32 5.11 Maintenance of Bank Accounts. The ARC Entities shall maintain their primary operating accounts and all escrow accounts described herein with Lender. Borrower acknowledges that this requirement is a material aspect of the consideration for Lender's willingness to make credit available to Borrower at the interest rates and other terms described herein. 5.12 Compliance with Contractual Obligations. Each ARC Entity will perform all of its obligations in respect of all material contracts to which it is a party will and use its best efforts to keep, and to take all action to keep, such contracts in full force and effect and not allow any such contract to lapse or be terminated or any rights to renew such to be forfeited or cancelled; provided, however, that any such contract may lapse or be terminated or such renewal rights may be forfeited or cancelled if in the reasonable business judgment of the ARC Entity in its best interests to allow or cause such lapse, termination, forfeiture or cancellation. 5.13 Further Assurances. Borrower shall promptly cure any defects in the creation, issuance, or delivery of the Loan Documents. Borrower at its expense will execute (or cause to be executed) and deliver to Lender upon request all such other and further documents, agreements, and instruments in compliance with or accomplishment of the covenants and agreements of Borrower in the Loan Documents, or to evidence further and to describe more fully any Collateral intended as security for the Obligations, or to correct any omissions in the Loan Documents, or to state more fully the Obligations and agreements set out in any of the Loan Documents, or to perfect, protect, or preserve any Encumbrances created pursuant to any of the Loan Documents, or to make any recordings, to file any notices, or to obtain any consents, all as may be reasonably necessary or appropriate in connection therewith. Borrower appoints Lender as Borrower's attorney-in-fact to execute any financing statements or other instruments of perfection with respect to the Collateral. 5.14 Security Interest; Setoff. In order to further secure the payment of the Obligations, Borrower hereby grants to Lender a security interest and right of setoff against all of Borrower's presently owned or hereafter acquired monies, items, credits, deposits and instruments (including certificates of deposit) presently or hereafter in the possession of Lender. By maintaining any such accounts or other property at Lender, Borrower acknowledges that Borrower voluntarily subjects the property to Lender's rights hereunder. Lender may exercise its rights under this Section without prior notice following an Event of Default. Borrower agrees that Lender shall not be liable for the dishonor of any instrument resulting from Lender's exercise of its rights under this Section. 27 33 5.15 Insurance. 5.15.1 General Insurance Requirements. In addition to the other specific requirements set forth in this Agreement and in other Loan Documents, the ARC Entities shall maintain insurance on all insurable Properties now or hereafter owned by them against such risks and to the extent customary in their industry, and shall maintain or cause to be maintained public liability, worker's compensation insurance to the extent customary in their industry, and loss of rental income or business interruption insurance coverage, all in form and amounts reasonably acceptable to Lender. A listing of the ARC Entities' current insurance coverages is provided on the attached Schedule 5.15.1, which is incorporated herein by reference. 5.15.2 Insurance on Tangible Collateral. Each ARC Entity shall keep its Property insured against "all risks of physical loss" (except earthquake, unless Lender specifically so requires at its election, and also including flood insurance, if applicable) under a casualty insurance policy with the "replacement cost" endorsement and a deductible calculated on an "occurrence" basis of no more than $10,000 (other than coverage for windstorm damage in Florida and Texas, where a deductible of one percent is permitted). Each ARC Entity shall maintain public liability coverage in an amount of at least $1,000,000 per occurrence. The following provisions shall apply to all such insurance policies issued with respect to tangible Collateral: 5.15.2(a) Rating of Insurer. Each insurance policy shall be issued by an insurance company with a rating of "A" or better by A. M. Best & Co. 5.15.2(b) Mortgagee Provisions. Each casualty policy covering Collateral shall name Lender as an insured mortgagee pursuant to a non-contribution mortgagee clause satisfactory to Lender, and all liability insurance policies shall name Lender as an additional insured. The issuers of such policies must agree in writing (by the policy provisions, endorsement or letter) to give Lender at least twenty (20) days prior written notice before termination or any reduction of amount or scope of coverage. 5.15.2(c) Original and Renewal Policies. Borrower shall deliver certificates of insurance in form and substance satisfactory to Lender on the Closing Date. Within 90 days thereafter, Borrower shall deliver certified copies of all insurance policies covering any Collateral and, if requested by Lender, Borrower shall deliver such original 28 34 policies to Lender. Not less than thirty (30) days prior to the expiration date of each policy of insurance required under this Instrument, Borrower shall deliver to Lender evidence of the renewal of such policy or policies or of the substitution of another policy or policies complying with the terms of this Agreement. Lender may require that such evidence consist of the presentment of a renewal policy or policies marked "premium paid." If Borrower fails to maintain the required insurance, Lender may, at Lender's option, obtain such insurance, or Lender may obtain single interest coverage insuring only Lender's interest in the Collateral. Lender agrees to give Borrower reasonable advance notice of its decision to purchase insurance pursuant to this paragraph unless in so doing it will be without the benefit of the required insurance for any period of time. In such later case, Lender will advise Borrower of its decision with reasonable promptness. In no event shall Lender be under any obligation to procure or maintain insurance on the Collateral. The cost of any insurance so obtained shall become part of the Obligations and shall be due from Borrower upon demand. 5.15.2(d) Application of Proceeds. Borrower hereby assigns to Lender, as further security for the payment of the Obligations, all policies of insurance which now or hereafter insure against any loss or damage to the Collateral. Borrower shall promptly give written notice to Lender of any loss or damage to the Collateral and will not adjust or settle any such loss without the written consent of Lender. If Lender, on account of any insurance on the Collateral, receives any money for loss or damage, such amount may, in the reasonable exercise of Lender's discretion, be retained and applied by Lender toward payment of the Obligations, or be paid to Borrower, wholly or in part, subject to such conditions as Lender may require. Lender is hereby irrevocably appointed attorney-in-fact for Borrower to receive any sums collected under insurance policies insuring the Collateral, to endorse any drafts or instruments received under such policies, and to make proof of loss for, settle, and give binding acquittances for claims under such policies. To the extent of any inconsistency regarding the application of insurance proceeds between this Agreement and the Mortgage securing the obligations under the Reimbursement Agreement (the "Kentucky Mortgage"), the provisions of the Kentucky Mortgage will control with respect to the Project as defined in the Kentucky Mortgage. 5.15.2(e) Impairment of Insurance. Borrower covenants that neither it nor any other ARC Entity will do any act or voluntarily 29 35 suffer or permit any act to be done whereby any insurance required hereunder shall or may be suspended, impaired or defeated, unless replaced with similar insurance required hereby without any intervening lapse of coverage. 5.16 Accounts and Records. Each ARC Entity shall maintain current books of record and account, in which full, true, and correct entries will be made of all transactions. 5.17 Official Records. Each ARC Entity shall maintain current corporate records, minute books and stock ledgers or partnership records, as applicable. 5.18 Right of Inspection. Borrower shall permit any officer, employee, or agent of Lender to visit and inspect any of the Property of any ARC Entity, to examine its books of record and accounts and corporate records, to take copies and extracts from such books of record and accounts, and to discuss the affairs, finances, and accounts of any ARC Entity with their respective officers, accountants, and auditors, all at such reasonable times and as often as Lender may reasonably desire and upon reasonable advance notice absent an Event of Default, and Borrower will further cause all other ARC Entities to afford such privileges to Lender. Without limiting Lender's right to obtain equitable relief as to any other appropriate right in this Agreement or in other Loan Documents, Borrower agrees that the rights in this Section may be enforced by affirmative injunction and, to the extent the right to review records may be denied, the right may be enforced by a restraining order prohibiting the interference by Borrower with Lender's exercise of its rights to review of the records. 5.19 ERISA Information and Compliance. Each ARC Entity shall comply with ERISA and all other applicable laws governing any pension or profit sharing plan or arrangement to which it is a party. Each ARC Entity shall (i) provide Lender with copies of any annual report required to be filed pursuant to ERISA with respect to any Plan or any other employee benefit plan; (ii) notify Lender upon the occurrence of any ERISA Event or of any additional act or condition arising in connection with any Plan which it believes might constitute grounds for termination thereof by the PBGC or for the appointment of a trustee to administer the Plan; and (iii) furnish to Lender, promptly upon request, such additional information concerning any Plan or any other employee benefit plan as Lender may request. 5.20 Indemnity; Expenses. Borrower agrees to indemnify, defend (with counsel reasonably satisfactory to Lender) and hold harmless Lender against any loss, liability, claim or expense, including reasonable attorneys' fees, that Lender may incur in connection with the Loan Documents or the Obligations, except those losses, etc. that may result from Lender's gross negligence or willful misconduct. Without limiting the foregoing, upon demand by Lender, Borrower will reimburse Lender for the following reasonable expenses if not paid by Borrower promptly after written demand by Lender: 30 36 5.20.1 Administration. All out-of-pocket expenses that Lender may incur in the preparation and negotiation hereof and in the course of administration of the Loans. 5.20.2 Taxes. All taxes that Lender may be required to pay because of the Obligations or because of Lender's interest in any property securing the payment of the Obligations, excepting taxes based upon the net income of Lender. 5.20.3 Protection of Collateral. All costs of preserving, insuring, preparing for sale (whether by improvement, repair or otherwise) or selling any collateral securing the Obligations. 5.20.4 Costs of Collection. All court costs and other reasonable costs of collecting any debt, overdraft or other obligation included in the Obligations. 5.20.5 Litigation. All reasonable costs arising from any litigation, investigation, or administrative proceeding (whether or not Lender is a party thereto) that Lender may incur as a result of the Obligations or as a result of Lender's association with the ARC Entities, including, but not limited to, expenses incurred by Lender in connection with a case or proceeding involving any ARC Entity under any chapter of the Bankruptcy Code or any successor statute thereto. 5.20.6 Attorneys' Fees. Reasonable attorneys' fees incurred in connection with any of the foregoing. If Lender pays any of the foregoing expenses, they shall become a part of the Obligations and shall bear interest at the Default Rate. This Section shall remain in full effect regardless of the full payment of the Obligations, the purported termination of this Agreement, the delivery of the executed original of this Agreement to Borrower, or the content or accuracy of any representation made by Borrower to Lender; provided, however, Lender may terminate this Section by executing and delivering to Borrower a written instrument of termination specifically referring to this Section. 5.21 Assistance in Litigation. Borrower covenants to, upon request, cooperatively participate in any proceeding in which Borrower is not an adverse party to Lender and which concerns Lender's rights regarding the Obligations or any Collateral. 5.22 Name Changes. Borrower shall give Lender at least thirty (30) days prior written notice before Borrower or any other ARC Entity changes its name or begins doing business under any trade name. 31 37 5.23 Estoppel Letters. Borrower covenants to provide Lender, within ten (10) days after request, an estoppel letter stating (i) the balance of the Obligations, (ii) whether Borrower is aware of any defenses to payment of the Obligations, and (iii) the nature of any defenses to payment of the Obligations. Such balance as presented for confirmation and the nonexistence of defenses shall be presumed (subject to rebuttal by Borrower) if Borrower fails to respond to such a request within the required period. 5.24 Environmental Matters. 5.24.1 Compliance With Environmental Laws. Each ARC Entity will (i) employ in connection with its operations, appropriate technology and compliance procedures to maintain compliance with any applicable Environmental Laws, (ii) obtain and maintain any and all materials permits or other permits required by applicable Environmental Laws in connection with its operations and (iii) dispose of any and all Hazardous Substances only at facilities and with carriers reasonably believed to possess valid permits under any applicable state and local Environmental Laws. Each ARC Entity shall use its best efforts to obtain all certificates required by law to be obtained from all contractors employed in connection with the transport or disposal of any Hazardous Substances. 5.24.2 Remedial Work. If any investigation, site monitoring, containment, clean-up, removal, restoration or other remedial work of any kind or nature with respect to any ARC Entity's Properties is required to be performed under any applicable local, state or federal law or regulation, any judicial order, or by any governmental or non-governmental entity or Person because of, or in connection with, the current or future presence, suspected presence, release or suspected release of a Hazardous Substance in or into the air, soil, groundwater, surface water or soil vapor at, on, about, under, or within any ARC Entity's Property (or any portion thereof), it shall within 30 days after written demand for performance thereof (or such shorter period of time as may be required under applicable law, regulation, order or agreement), commence and thereafter diligently prosecute to completion, all such remedial work. 5.24.3 Indemnification of Lender. Borrower agrees to indemnify, defend (with counsel satisfactory to Lender) and hold harmless Lender against any loss, liability claim or expense, including attorneys' fees, that Lender may incur as a result of the violation or alleged violation of any Environmental Law by Borrower or with respect to any other violation of Environmental Laws with respect to any Property of any ARC Entity. This covenant shall survive the repayment of the Loans but shall not extend to any affirmative misconduct of Lender with respect to environmental matters following Lender's acquisition of 32 38 any of any ARC Entity's Property following foreclosure or proceeding in lieu thereof. VI. NEGATIVE COVENANTS Borrower covenants and agrees that, without Lender's prior written consent: 6.1 Debts, Guaranties, and Other Obligations. No ARC Entity shall incur, create, assume, or in any manner become or be liable with respect to any Debt, except the following: 6.1.1 Obligations to Lender. Any Obligations to Lender. 6.1.2 Existing Liabilities. Liabilities, direct or contingent, of the ARC Entities existing on the date of this Agreement that are reflected in the Financial Statements. 6.1.3 Endorsements. Endorsements of negotiable or similar instruments for collection or deposit in the ordinary course of business. 6.1.4 Trade Debt. Trade payables from time to time incurred in the ordinary course of business. 6.1.5 Taxes. Taxes, assessments, or other governmental charges that are not delinquent or are being contested in good faith by appropriate action promptly initiated and diligently conducted, if Borrower has made the reserve therefor required by GAAP. 6.1.6 Miscellaneous Indebtedness. Miscellaneous indebtedness not to exceed $500,000 in the aggregate outstanding at any time. 6.2 Change of Management. Borrower shall not allow or suffer any change of management staffing or structure (other than as caused by death or disability) whereby W.E. Sheriff will cease active participation in the management of Borrower and the ARC Entities; provided, however, such a change shall not in itself cause an Event of Default hereunder, but shall only permit Lender at its option to accelerate the maturity of the Obligations upon ninety (90) days' prior written notice. Lender represents, and Borrower acknowledges, that the participation in management of the individuals named above is a primary factor in Lender's approval of the extension of the Loans. 33 39 6.3 Distributions. No ARC Entity shall declare or pay a distribution to its shareholders or partners (of cash, property or stock), except for Permitted Distributions. 6.4 Stock Acquisitions. No ARC Entity shall redeem or acquire any stock or warrants, such consent not to be unreasonably withheld. 6.5 Encumbrances. No ARC Entity shall create, incur, assume, or permit to exist any Encumbrance on any of its Property (now owned or hereafter acquired) except for Permitted Encumbrances. No ARC Entity shall sign or file under the Uniform Commercial Code a financing statement that names an ARC Entity as debtor or the equivalent or sign any security agreement authorizing any secured party thereunder to file any such financing statement, except to secure Permitted Encumbrances. 6.6 Prepayment of Indebtedness. No ARC Entity shall make any prepayment on any obligation for borrowed money. 6.7 Investments. Unless Lender gives its consent, not to be unreasonably withheld, no ARC Entity shall make investments (including but not limited to acquisitions or purchases of the obligations or stock of, or any other or additional interest) in any person, firm, partnership, joint venture or corporation except: (a) those investments in existence as of the Closing Date, (b) general obligations of, or obligations unconditionally guaranteed as to principal and interest by, the United States of America maturing within fifteen (15) months of the date of purchase, (c) commercial paper having a rating of not less than "A2" of "P2" from Moody's or S & P, respectively, and (d) certificates of deposit and bankers acceptances issued by a Lender or another banking institution with a minimum net worth of $200,000,000 and having a letter of credit rating of not less than "A" from Moody's or S & P, respectively. 6.8 Sales and Leasebacks. No ARC Entity shall enter into any arrangement, directly or indirectly, with any Person by which it shall sell or transfer any of its Property, whether now owned or hereafter acquired, and by which it shall then or thereafter rent or lease as lessee such Property or any part thereof or other Property that it intends to use for substantially the same purpose or purposes as the Property sold or transferred. 6.9 Change of Control. Except as permitted by Section 6.11, no ARC Entity shall suffer or permit the occurrence of a Change of Control. 6.10 Nature of Business. No ARC Entity shall suffer or permit any material changes to be made in the character of its business as carried on at the Closing Date. 6.11 Further Acquisitions, Mergers, Etc. No ARC Entity shall enter into any agreement to merge, consolidate, or otherwise reorganize or recapitalize, or sell, assign, lease, or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its Property (whether now owned or hereafter acquired), provided that 34 40 approval of proposed acquisitions (of assets or equity interests) shall not be unreasonably withheld. 6.12 Sale of Receivables. No ARC Entity shall sell any of its receivables at a discount or otherwise. 6.13 Disposition of Assets. No ARC Entity shall dispose of any of its assets other than in the ordinary course of its present business upon terms standard in its industry. Notwithstanding the foregoing, Lender agrees that, provided no Event of Default or Unmatured Default exists hereunder, American Retirement Corporation may sell the Williamsburg Property and, if at the time of such sale the Loan to Value Ratio does not exceed 75%, the proceeds from the sale of the Williamsburg Property need not be applied to reduce the Obligations. The term "Loan to Value Ratio" shall mean the total commitment of Lender to the ARC Entities expressed as a percentage of the market values (including the benefit of the favorable financing associated therewith and crediting any debt service escrow balance as a part of the value for this purpose) of the Richmond Place Retirement Community and the Trinity Towers Retirement Community established pursuant to the appraisals commissioned and approved by Lender. 6.14 Loans to Others. No ARC Entity shall make any loan or advance to any Person, other than trade credit extended in the ordinary course of business. Notwithstanding the foregoing, (a) loans among Borrower, ARC and Trinity (following the closing of the loan to Trinity described in the Commitment Letter) shall be unrestricted; (b) the transactions described on the attached Schedule 6.14 are permitted; and (c) the ARC Entities may make additional loans among themselves and their respective Subsidiaries in an aggregate amount not to exceed $500,000 at any time outstanding. 6.15 Inconsistent Agreements. No ARC Entity shall enter into any agreement containing any provision which would be violated or breached by the performance of the Obligations. 6.16 Fictitious Names. No ARC Entity shall use any name other than the name used in executing this Agreement or any assumed or fictitious name. 6.17 Subsidiaries and Affiliates. No ARC Entity shall create or acquire any direct or indirect Subsidiary or Affiliate or divest itself of any material assets by transferring them to any existing Subsidiary or Affiliate or to any Subsidiary or Affiliate to whose existence Lender has not consented; nor shall any ARC Entity enter into any partnership, joint venture, or similar arrangement, or otherwise make any material change in its corporate structure. 35 41 6.18 Place of Business. No ARC Entity shall transfer its executive offices, or maintain records with respect to accounts at any locations other than at the address for notices specified herein. 6.19 Adverse Action With Respect to Plans. No ARC Entity shall take any action to terminate any Plan which could reasonably result in a material liability to any Person. 6.20 Transactions With Affiliates. except as permitted by Section 6.14 hereof, no ARC Entity shall enter into any transaction with any Affiliate except in the ordinary course of business and on fair and reasonable terms no less favorable than it would obtain in a comparable arms length transaction with a Person not an Affiliate. 6.21 Constituent Document Amendments. No ARC Entity shall amend its partnership or corporate documents. 6.22 Adverse Transactions. No ARC Entity shall enter into any transaction that materially and adversely affects or may materially and adversely affect the Collateral or its ability to repay the Obligations. 6.23 Use of Lender's Name. No ARC Entity shall, without the prior written consent of Lender, use the name of Lender or the name of any Affiliates of Lender in connection with any of its business or activities, except in connection with internal business matters, as required in making required securities law disclosures, in dealings with governmental agencies and financial institutions and to trade creditors solely for credit reference purposes. 6.24 Margin Securities. No ARC Entity shall own, purchase or acquire (or enter into any contract to purchase or acquire) any "margin security" as defined by any regulation of the Federal Reserve Board as now in effect or as the same may hereafter be in effect. 6.25 Accounting Changes. No ARC Entity shall change its fiscal year, or make any other significant change in consolidated or consolidating accounting treatment and reporting practices, except as required or permitted by GAAP. 6.26 Capital Stock. No ARC Entity shall issue or sell any of its capital stock or equity interest or any rights, warrants or options to acquire any of its capital stock or equity interest, or dispose of any capital stock of any of its Subsidiaries. 6.27 Modification of Management Agreements. The management agreements between ARCM and Trinity and Borrower (as to the Richmond Place property), shall not be modified without Lender's prior written consent. 36 42 6.28 Action Outside Ordinary Course. No ARC Entity shall take any other action outside the ordinary course of its business. VII. FINANCIAL COVENANTS 7.1 Debt Service Coverage Ratio. On a rolling 4 quarter basis, tested quarterly, ARC, L.P. (to the extent accountable by the Richmond Place Complex), ARC, L.P. on a consolidated basis and Trinity each shall maintain a debt service coverage ratio of no less than 1.35:1. This ratio shall be determined as follows: NIBT + D/A + INT. EXP. + LEASE EXP. INT. EXP. (incl. Letter of Credit, Remarketing & Guaranty fees, as appl.) + CURRENT MATURITIES OF LTD (including required escrow payments) + LEASE EXP. As used in the formula above, NIBT means net income plus tax expense; D/A means expenses for depreciation and amortization, and other non-cash items; INT.EXP means Interest Expense; LEASE EXP. means expenses under leases other than Capital Leases; LTD means long-term Debt and CURRENT MATURITIES OF LTD means principal and escrow payments actually due and payable within the applicable test period. 7.2 Liquidity. ARC, ARCM and ARC, L.P. shall collectively maintain a minimum of $350,000 in unrestricted liquidity at all times. Up to $125,000 of the required liquidity amount may be held by Trinity. Assets qualifying as "unrestricted liquidity" shall be cash and cash deposits that are unencumbered. 7.3 Capital Expenditure Reserves, Operating Expense Reserves. ARC, L.P. (for the account of the Richmond Place Retirement Community) and Trinity shall maintain escrowed capital expenditure reserve accounts in an amount no less than $88,000 and $130,000 respectively ($500/unit). In addition, each shall similarly maintain escrowed operating expense reserve accounts in an amount no less than that amount representing fourteen (14) days of estimated annual operating expenses for each such facility. These capital expenditure and operating expense reserve accounts will serve as additional security for the Loans. 7.4 Security Deposit Escrows. The ARC Entities shall maintain tenant security deposits in full compliance with their contractual agreements and all applicable laws. 37 43 VIII. EVENTS OF DEFAULT 8.1 Events of Default. Any of the following events shall be considered an Event of Default under this Agreement: 8.1.1 Payments. Borrower's failure to make payment of any installment of principal, interest or expenses to Lender within 10 days of the date when due. 8.1.2 Representations and Warranties. Lender's determination that any representation or warranty made by any ARC Entity in any Loan Document was incorrect in any material respect as of the date thereof. 8.1.3 Negative Covenants. The failure of any ARC Entity to comply with any of the requirements of Article VI hereof. 8.1.4 Reporting Requirements. The failure of Borrower or any other party to timely perform all covenants in the Loan Documents requiring the furnishing of notices, financial reports or other information to Lender. 8.1.5 Other Covenants. The failure of any ARC Entity to observe or perform any covenant contained in any Loan Document, which covenant is not subject to any specific provision in this Article VIII; provided, however, as to any such breach that is reasonably susceptible to being cured (a "Curable Default"), the occurrence of such Curable Default shall not constitute an Event of Default hereunder if such Curable Default is fully cured and/or corrected within thirty (30) days (five (5) days, if such Curable Default may be cured by the payment of a sum of money) after the earlier of Borrower's knowledge of the facts giving rise thereto or Lender's written notice thereof to Borrower given in accordance with the provisions hereof. 8.1.6 Involuntary Bankruptcy or Receivership Proceedings. The appointment of a receiver, custodian, liquidator, or trustee for any ARC Entity, or for any of its Property, by the order or decree of any court or agency or supervisory authority having jurisdiction; or any ARC Entity's adjudication as being bankrupt or insolvent; or the sequestering of any of the Property of any ARC Entity by court order or the filing of a petition against any ARC Entity under any state or federal bankruptcy, reorganization, debt arrangement, insolvency, readjustment of debt, dissolution, liquidation, or receivership law of any jurisdiction, whether now or hereafter in effect, if such involuntary proceedings are not dismissed within 30 days. 38 44 8.1.7 Voluntary Petitions. Any ARC Entity's filing of a petition in voluntary bankruptcy or to seek relief under any provision of any bankruptcy, reorganization, debt arrangement, insolvency, receivership, readjustment of debt, dissolution, or liquidation law of any jurisdiction, whether now or hereafter in effect, or its consent to the filing of any petition against it under any such law. 8.1.8 Discontinuance of Business. Any ARC Entity's discontinuance of its usual business or its dissolution. 8.1.9 Default on Other Debt. Any ARC Entity shall fail to make any payment due from it on any indebtedness or other security for borrowed money beyond any applicable cure period (whether its liability therefor is direct or contingent), or if any other event (other than the mere passage of time) or any other condition in respect of any indebtedness or other security for borrowed money of any ARC Entity in a principal amount in excess of $100,000 (whether its liability therefor is direct or contingent) or under any agreement securing or relating to such indebtedness or other security for borrowed money shall occur the effect of which, after the giving of any required notice and the expiration of any applicable cure period, is to cause (or permit any holder of such indebtedness or other security or a trustee to cause) such indebtedness or other security, or a portion thereof, to become due prior to its stated maturity or prior to its regularly scheduled dates of payment, or if any such indebtedness or other security for borrowed money otherwise is accelerated and becomes due prior to its stated maturity or prior to its regularly scheduled dates of payment. 8.1.10 Undischarged Judgments. Any judgment against any ARC Entity or any attachment or levy against the property of any ARC Entity with respect to a claim for an amount in excess of $25,000 not adequately insured or indemnified against, remains unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of twenty (20) days. 8.1.11 Insolvency. Any ARC Entity's no longer being Solvent. For purposes of making the determination of solvency hereunder, any ARC Entity may include funds available from any other ARC Entity to the extent permitted under the terms of this Agreement. 8.1.12 Attachment. The issuance of an attachment or other process against any Property of any ARC Entity, unless removed (by bond or otherwise) within twenty (20) days. 39 45 8.1.13 Insurance. Any ARC Entity's failure to maintain any insurance required herein or in any other Loan Document. 8.1.14 Other Event. The occurrence of any event or condition which, in Lender's reasonable discretion, materially and adversely affects the ability of Borrower to perform the Obligations. 8.1.15 Contest. Any ARC Entity's challenge or contest the validity or enforceability of this Agreement or any other Loan Document or the validity, priority or perfection of any security interest created hereunder or under any other Loan Document in any action, suit or proceeding. 8.1.16 Cross-Default. The occurrence of an Event of Default under (i) the Reimbursement Agreement or (ii) any document evidencing or securing obligations of Trinity to Lender. 8.2 Remedies. Upon the happening of any Event of Default: 8.2.1 Default Rate. Lender may declare the Obligations to thereafter bear interest at the Default Rate. 8.2.2 Acceleration. Lender may declare the entire principal amount of all Obligations then outstanding, including interest accrued thereon, to be immediately due and payable without presentment, demand, protest, notice of protest, or dishonor or other notice of default of any kind, all of which are hereby expressly waived. 8.2.3 Exercise of Setoff. Lender may exercise its right of setoff against Borrower. 8.2.4 Other Remedies. Lender may exercise its remedies under any or all of the Loan Documents and all other rights afforded a creditor under applicable law. IX. GENERAL PROVISIONS 40 46 9.1 Notices. All communications relating to this Agreement or any of the other Loan Documents shall be in writing and shall effective when be delivered by mail, overnight courier, special courier or otherwise to the following addresses: if to Borrower: American Retirement Companies, L.P. Attn: Mr. W.E. Sheriff 111 Westwood Place, Suite 400 Brentwood, Tennessee 37027 With a Copy To: Bass, Berry & Sims Attn: T. Andrew Smith, Esq. First American Center Nashville, Tennessee 37238 if to Lender: First Union National Bank of Tennessee Attn: Scott Miler 150 Fourth Avenue North Nashville, Tennessee 37219 With a Copy To: Boult, Cummings, Conners & Berry Attn: John E. Murdock III, Esq. 414 Union Street, Suite 1600 Nashville, Tennessee 37219 Any party may change its address for receipt of notice by written direction to the other parties hereto. 9.2 Renewal, Extension, or Rearrangement. All provisions of this Agreement relating to Obligations shall apply with equal force and effect to each and all promissory notes executed hereafter which in whole or in part represent a renewal, extension for any period, increase, or rearrangement of any part of the Obligations originally represented by any part of such other Obligations. 9.3 Application of Payments. Amounts received with respect to the Obligations shall be applied (i) first, to any expenses due Lender, (ii) second, to accrued 41 47 interest under any of the Obligations, and (iii) third, to reduce principal of the Obligations, in such manner as determined by Lender. 9.4 Computations; Accounting Principles. Where the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, such determination or calculation, to the extent applicable and except as otherwise specified in this Agreement, shall be made in accordance with GAAP. 9.5 Counterparts. This Agreement may be executed in counterparts with all signatures or by counterpart signature pages, and it shall not be necessary that the signatures of all parties be contained on any one counterpart. Each counterpart shall be deemed an original, but all of them together shall constitute one and the same instrument. 9.6 Negotiated Document. This Agreement and the other Loan Documents have been negotiated by the parties with full benefit of counsel and should not be construed against any party as author. 9.7 Consent to Jurisdiction; Exclusive Venue. Borrower hereby irrevocably consents to the jurisdiction of the United States District Court for the Middle District of Tennessee and of all Tennessee state courts sitting in Davidson County, Tennessee, for the purpose of any litigation to which Lender may be a party and which concerns this Agreement or the Obligations. It is further agreed that venue for any such action shall lie exclusively with courts sitting in Davidson County, Tennessee, unless Lender agrees to the contrary in writing. 9.8 Not Partners; No Third Party Beneficiaries. The relationship of Lender and the ARC Entities is that of lender and borrower only, and neither is a fiduciary, partner or joint venturer of the other for any purpose. Except as described in the immediately succeeding sentence, this Agreement has been executed for the sole benefit of Lender, and no third party is authorized to rely upon Lender's rights or duties hereunder. Notwithstanding the foregoing, Borrower specifically acknowledges that the representations, warranties and covenants contained herein shall inure to the benefit of Lender and FUNB-NC for as long as any obligations under the Reimbursement Agreement remain outstanding, it being the expectation of the parties hereto that Lender and FUNB-NC will rely on such representations, warranties and covenants in connection with their consummation of the transactions evidenced by the Reimbursement Agreement. 9.9 No Reliance on Lender's Analysis. Borrower acknowledges and represents that, in connection with the Obligations, Borrower has not relied upon any financial projection, budget, assessment or other analysis by Lender or upon any representation by Lender as to the risks, benefits or prospects of Borrower's business activities or present or 42 48 future capital needs incidental thereto, all such considerations having been examined fully and independently by Borrower. 9.10 No Marshalling of Assets. Lender may proceed against collateral securing the Obligations and against parties liable therefor in such order as it may elect, and neither Borrower nor any surety or guarantor for Borrower nor any creditor of Borrower shall be entitled to require Lender to marshal assets. The benefit of any rule of law or equity to the contrary is hereby expressly waived. 9.11 Impairment of Collateral. Lender may, in its sole discretion, release any collateral securing the Obligations or release any party liable therefor. The defenses of impairment of collateral and impairment of recourse and any requirement of diligence on Lender's part in collecting the Obligations are hereby waived. 9.12 Business Days. If any payment date under the Obligations falls on a day that is not a Business Day, or if the last day of any notice period falls on such a day, the payment shall be due and the notice period shall end on the next following Business Day. 9.13 Participations. Lender may, from time to time, in its sole discretion, and without notice to Borrower or any other Person, sell participations in any credit subject hereto to such other investors or financial institutions as it may elect. Lender may from time to time disclose to any participant or prospective participant such information as Lender may have regarding the financial condition, operations, and prospects of Borrower. 9.14 Standard of Care; Limitation of Damages. Lender shall be liable to the ARC Entities only for matters arising from this Agreement or otherwise related to the Obligations resulting from Lender's gross negligence or willful misconduct, and liability for all other matters is hereby waived. Lender shall not in any event be liable to the ARC Entities for special or consequential damages arising from this Agreement or otherwise related to the Obligations. 9.15 Incorporation of Schedules. All Schedules and Exhibits referred to in this Agreement are incorporated herein by this reference. 9.16 Indulgence Not Waiver. Lender's indulgence in the existence of a default hereunder or any other departure from the terms of this Agreement shall not prejudice Lender's rights to declare a default or otherwise demand strict compliance with this Agreement. 9.17 Cumulative Remedies. The remedies provided Lender in this Agreement are not exclusive of any other remedies that may be available to Lender under any other document or at law or equity. 43 49 9.18 Amendment and Waiver in Writing. No provision of this Agreement can be amended or waived, except by a statement in writing signed by the party against whom enforcement of the amendment or waiver is sought. Additionally, no provision hereof may be amended or waived absent the written consent of First Union National Bank of North Carolina. 9.19 Assignment. This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of Borrower and Lender, except that Borrower shall not assign any rights or delegate any obligations arising hereunder without the prior written consent of Lender. Any attempted assignment or delegation by Borrower without the required prior consent shall be void. 9.20 Entire Agreement. This Agreement and the other written agreements between the ARC Entities and Lender represent the entire agreement between the parties concerning the subject matter hereof, and all oral discussions and prior agreements are merged herein. Provided, if there is a conflict between this Agreement and any other document executed contemporaneously herewith with respect to the Obligations, the provision in this Agreement shall control. 9.21 Severability. Should any provision of this Agreement be declared invalid or unenforceable for any reason, the remaining provisions hereof shall remain in full effect. 9.22 Time of Essence. Time is of the essence of this Agreement, and all dates and time periods specified herein shall be strictly observed. 9.23 Applicable Law. The validity, construction and enforcement of this Agreement and all other documents executed with respect to the Obligations shall be determined according to the laws of Tennessee applicable to contracts executed and performed entirely within that state. 9.24 Gender and Number. Words used herein indicating gender or number shall be read as context may require. 9.25 Captions Not Controlling. Captions and headings have been included in this Agreement for the convenience of the parties, and shall not be construed as affecting the content of the respective Sections. 9.26 Waiver of Right to Jury Trial. THE PARTIES HERETO HEREBY KNOWINGLY AND VOLUNTARILY, WITH BENEFIT OF COUNSEL, WAIVE THE RIGHT TO HAVE ANY DISPUTE ARISING FROM OR RELATED TO THIS AGREEMENT OR THE OBLIGATIONS TRIED BY A JURY, WITH THE RESULT THAT ANY SUCH DISPUTE WOULD BE TRIED BY A JUDGE RATHER THAN A JURY. 44 50 Executed as of the date first written above. AMERICAN RETIREMENT COMMUNITIES, L.P. By: American Retirement Communities, LLC, General Partner By: /s/ George T. Hicks ------------------------------------------- Title: EVP Finance ----------------------------------------- FIRST UNION NATIONAL BANK OF TENNESSEE, Lender By: /s/ S. Scott Miler ------------------------------------------- Title: VP ----------------------------------------- 45 51 EXHIBIT 10.12 FIRST AMENDMENT TO LOAN AGREEMENT This First Amendment to Loan Agreement is executed as of June 11th, 1996, by and between AMERICAN RETIREMENT COMMUNITIES, L.P. ("Borrower"), a Tennessee limited partnership, and FIRST UNION NATIONAL BANK OF TENNESSEE ("Lender"), a national banking association: WITNESSETH: WHEREAS, Borrower and Lender entered into that certain Loan Agreement ("Loan Agreement") dated as of October 31, 1995; and WHEREAS, Borrower and Lender wish to amend the Loan Agreement in certain particulars; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are acknowledged, the Loan Agreement is hereby amended as follows: 1. Paragraph 2.1.2 is hereby amended by adding the following sentence thereto: In no event shall the letters of credit issued under this section have a maturity in excess of one (1) year. 2. Paragraphs 2.2.1, 2.2.2 and 2.2.3 are hereby deleted in their entirety. They are hereby replaced with the following: 2.2.1 Amount of Term Loan. The original principal indebtedness of Borrower to Lender under Term Loan shall be Two Million Nine Hundred Fifty Thousand and No/100ths Dollars ($2,950,000.00). 2.2.2. Use of Proceeds of Term Loan. The proceeds of the Term Loan shall be used by Borrower to refinance the obligations of Borrower to Lender under that Amended and Restated Promissory Note made by Borrower dated October 31, 1995 payable to the order of Lender in the original principal amount of Two Million and No/100ths Dollars ($2,000,000.00), and for the purpose of repaying $1,150,000 of the preferred equity notes issued by Borrower to various investors in Borrower (the LEAAF transaction). 2.2.3 Term Loan Note. Borrower's obligations under the Term Loan shall be evidenced by the Term Loan Note, as amended from time to time. 52 3. The Loan Agreement is hereby further amended by deleting paragraphs 2.5 and 2.6 in their entirety and substituting therefore the following: 2.5 Principal Repayment. 2.5.1 Revolving Credit Loan. All remaining principal outstanding under the Revolving Credit Loan shall become due on October 31, 1997. 2.5.2 Term Loan. Payments of principal shall be made under the Term Loan in the amount of One Hundred Sixty Thousand and No/100 Dollars ($160,000.00) each due on the 10th day of each January, April, July and October until October 31, 1997, when all remaining principal, interest and expenses shall become due. 2.6 Fees. 2.6.1 Revolving Credit Loan Commitment Fee. Concurrently with the initial execution of this Agreement, Borrower paid the balance due of the Twelve Thousand Five Hundred and No/100 Dollars ($12,500.00) commitment fee provided for by the Commitment Letter as a commitment fee for the Revolving Credit Loan, and shall pay in connection with the amendment to the Agreement dated June 11, 1996 an additional commitment fee of $12,500.00. 2.6.2 Term Loan Commitment Fee. Concurrently with the initial execution of this Agreement, Borrower paid the balance due of the Ten Thousand and No/100 Dollars ($10,000.00) commitment fee provided for by the Commitment Letter as a commitment fee for the Term Loan, and shall pay in connection with the Amendment to the Agreement dated June 11, 1996 an additional commitment fee of $5,750.00. 2.6.3 Letter of Credit Fees. Borrower will pay a letter of credit fee equal to 1.15% per annum of the face amount of any letter of credit issued under the Revolving Credit Loan, payable annually in advance. Borrower shall also pay Lender's standard administrative fees upon the issuance of any such letter of credit. 2 53 4. The Loan Agreement is hereby amended by adding the following as additional paragraphs to Article II of the Loan Agreement. The additional paragraphs shall read as follows: 2.11 Vehicle Loan. Lender shall fund up to $500,000 at any time prior to June 11, 1997 for the use by American Retirement Corporation for the sole purpose of providing up to 100% of the invoice costs needed to purchase commercial vehicles. Any amounts paid or prepaid under the vehicle loan may not be reborrowed. All vehicles purchased pursuant to the vehicle loan shall be titled in the name of American Retirement Corporation and Lender shall be granted a first priority security interest in the vehicles so purchased. Borrower shall guarantee American Retirement Corporation's obligations under the vehicle loan. 2.12 Payment of Vehicle Loan. Payments of principal and interest under the vehicle loan shall be made as set forth in that certain Nonrevolving Line of Credit Note dated June 11, 1996. 2.13 Release of Vehicles. Provided that no Event of Default exists hereunder, Lender hereby agrees to release its lien on any vehicle purchased with proceeds of the vehicle loan provided that it is delivered the greater of the sales proceeds from the sale of the vehicle or the then current N.A.D.A. listed loan value of such vehicle. 2.14 Lien Perfections. As each vehicle is purchased pursuant to the provisions of this Agreement, Borrower covenants to cause American Retirement Corporation to comply with that certain Security Agreement dated June 11, 1996 2.15 Commitment Fee For Vehicle Loan. Borrower covenants to cause American Retirement Corporation to pay Lender an initial commitment of $1,250.00. On June 11, 1997, Borrower further covenants to cause American Retirement Corporation to pay an additional fee equal to one-half of one percent ( 1/2 of 1%) of all sums borrowed under the vehicle loan in excess of $250,000. For example, if the total amount borrowed equaled $400,000.00, an additional fee of $750.00 would be due and payable. 2.16 Interest. Subject to the provisions of Section 2.3., 2.4 and 2.8, amounts outstanding under that certain $500,000 Nonrevolving Line of Credit Note dated June 11, 1996 shall accrue interest, as elected by Borrower, as either a Prime Rate Loan or a LIBOR Loan. EXECUTED as of the day first set forth above. 3 54 AMERICAN RETIREMENT COMMUNITIES, L.P. BY: AMERICAN RETIREMENT COMMUNITIES, L.L.C., G.P. By: /s/ ----------------------------------------------- Title: -------------------------------------------- FIRST UNION NATIONAL BANK OF TENNESSEE By: /s/ ----------------------------------------------- Title: -------------------------------------------- 4 55 THIRD AMENDMENT TO LOAN AGREEMENT This Third Amendment to Loan Agreement is executed as of February 18, 1997 by and between AMERICAN RETIREMENT COMMUNITIES, L.P. ("Borrower"), a Tennessee limited partnership, and FIRST UNION NATIONAL BANK OF TENNESSEE ("Lender"), a national banking association: W I T N E S S E T H: WHEREAS, Borrower and Lender entered into that certain Loan Agreement dated as of October 31, 1995, as amended by that First Amendment to Loan Agreement dated as of June 11, 1996 and as amended by that Second Amendment to Loan Agreement dated as of December 31, 1996 (as amended, the "Loan Agreement") (capitalized terms not otherwise defined herein shall have the meaning assigned in the Loan Agreement); and WHEREAS, Borrower and Lender wish to further amend the Loan Agreement in certain particulars; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are acknowledged, the Loan Agreement is hereby amended as follows: 1. The Loan Agreement is hereby amended by revising the following definitions to read in full as follows: "REIMBURSEMENT AGREEMENT" means the Reimbursement Agreement of even date herewith executed by Borrower in favor of Lender and FUNB-NC, pursuant to which the Richmond Place Letter of Credit has been issued, as it may hereafter be modified, amended, restated or renewed. "RICHMOND PLACE LETTER OF CREDIT" means the Irrevocable Direct Pay Letter of Credit issued by FUNB-NC for the account of Borrower to SunTrust Bank, Nashville, N.A., as Trustee under the Trust Indenture dated as of April 1, 1987, as amended and restated as of November 1, 1994, governing the issuance of the Lexington-Fayette Urban County Government Residential Facilities Refunding Revenue Bonds (Richmond Place Associates, L.P. Project) Series 1987, and all modifications, extensions, restatements, amendments and renewals thereof. 2. The Loan Agreement is hereby further amended by deleting paragraph 2.5.2 in its entirety and substituting therefore the following: 56 2.5.2 Term Loan. Payments of principal shall be made under the Term Loan in the amount of One Hundred Sixty Thousand and No/100 Dollars ($160,000.00) each due on the 10th day of each January, April, July and October until April 30, 1998, when all remaining principal, interest and expenses shall become due. 3. Concurrently with the execution hereof, Borrower shall pay to Lender an extension fee for the extension of the Term Loan in the amount of $13,150.00 and an extension fee for the extension of the Revolving Loan entered into in December of 1996 in the amount of $6,250.00. 4. As amended hereby, the Loan Agreement remains in full effect, and all agreements among the parties with respect to the subject hereof are represented fully in this Amendment and the other written documents among the parties. The validity, construction and enforcement hereof shall be determined according to the substantive laws of the State of Tennessee. EXECUTED as of the day first set forth above. AMERICAN RETIREMENT COMMUNITIES, L.P. BY: AMERICAN RETIREMENT COMMUNITIES, L.L.C., G.P. By: /s/ ---------------------------------------------- Title: ------------------------------------------- FIRST UNION NATIONAL BANK OF TENNESSEE By: /s/ ---------------------------------------------- Title: ------------------------------------------- 2 57 NONREVOLVING LINE OF CREDIT NOTE $500,000.00 Nashville, Tennessee June 11, 1996 FOR VALUE RECEIVED, American Retirement Corporation ("Maker"), a Tennessee corporation, promises to pay to the order of First Union National Bank of Tennessee ("Payee"), a national banking association, the sum of Five Hundred Thousand Dollars ($500,000.00), or as much thereof as may be outstanding from time to time pursuant to that certain Loan Agreement dated October 31, 1995 between American Retirement Communities, L.P. and Payee (the "Loan Agreement"), together with interest thereon at the rate set forth in the Loan Agreement. Accrued and unpaid interest shall be due and payable on the 10th day of each successive calendar month beginning on July 10, 1996 and continuing on the 10th day of each successive month thereafter until June 10, 1997. Thereafter, this Note shall be due and payable in forty-eight (48) equal monthly installments of principal, plus accrued interest. The first installment, together with accrued interest, shall be due and payable on July 10, 1997 and a like installment of principal, together with accrued interest, shall be due and payable on the 10th day of each successive calendar month thereafter. All remaining principal and interest shall be due and payable on June 10, 2001. From time to time before June 7, 1997, Maker may borrow an aggregate amount not to exceed $500,000.00 against this Note (but may not reborrow any principal paid or prepaid) against written borrowing requests made to Payee, provided that no default has occurred under this Note or the Loan Agreement, and no event has occurred which, with notice, the passage of time or both would constitute such an event of default. The proceeds of this Note shall only be used to purchase commercial vehicles for the use by an ARC Entity and the operation of its retirement/nursing homes. As a condition precedent to any disbursement hereunder, Maker shall pay a fee as per Section 2.15 of First Amendment to Loan Agreement. Terms not otherwise defined herein shall have the meaning given such terms in the Loan Agreement. Interest hereunder shall be calculated based upon a 360-day year and actual days elapsed. The interest rate required hereby shall not exceed the maximum rate permissible under applicable law, and any amounts paid in excess of such rate shall be applied to reduce the principal amount hereof or shall be refunded to Maker, at the option of the holder of this Note. All amounts due under this Note are payable at par in lawful money of the United States of America, at the principal place of business of Payee in Nashville, Tennessee, or at such other address as the Payee or other holder hereof (herein "Holder") may direct. To the maximum extent permitted under applicable law, any payment not made within fifteen (15) days of its due date will be subject to assessment of a late charge equal to five percent (5%) of such payment. Holder's right to impose a late charge does not evidence a grace period for the making of payments hereunder. The occurrence of any Event of Default under the Loan Agreement shall constitute an Event of Default hereunder. Without limiting the foregoing, the failure of Maker to make payment of any installment of principal, interest or expenses due hereunder within ten (10) days of its due date. Page 1 of 2 Pages 58 Upon the occurrence of an Event of Default, as so defined, Holder may, at its option and without notice, declare all principal and interest provided for under this Note, and any other obligations of Maker to Holder, to be presently due and payable, and Holder may enforce any remedies available to Holder under any documents securing or evidencing debts of Maker to Holder. Holder may waive any Event of Default before or after it occurs and may restore this Note in full effect without impairing the right to declare it due for a subsequent Event of Default, this right being a continuing one. Following the occurrence of an Event of Default, the remaining unpaid principal balance of the indebtedness evidenced hereby and all expenses due Holder shall bear interest at the highest rate permissible under applicable law. All amounts received for payment of this Note shall be first applied to any expenses due Holder under this Note or under any other documents evidencing or securing obligations of Maker to Holder, then to accrued interest, and finally to the reduction of principal. Prepayment of principal or accrued interest may be made, in whole or in part, only as provided in the Loan Agreement. Any prepayment(s) shall reduce the final payment(s) and shall not reduce or defer installments next due. This Note may be freely transferred by Holder. Maker and all sureties, guarantors, endorsers and other parties to this instrument hereby consent to any and all renewals, waivers, modifications, or extensions of time (of any duration) that may be granted by Holder with respect to this Note and severally waive demand, presentment, protest, notice of dishonor, and all other notices that might otherwise be required by law. All parties hereto waive the defense of impairment of collateral and all other defenses of suretyship. Maker and all sureties, guarantors, endorsers and other parties hereto agree to pay reasonable attorneys' fees and all court and other costs that Holder may incur in the course of efforts to collect the debt evidenced hereby or to protect Holder's interest in any collateral securing the same. The validity and construction of this Note shall be determined according to the laws of Tennessee applicable to contracts executed and performed within that state. If any provision of this Note should for any reason be invalid or unenforceable, the remaining provisions hereof shall remain in full effect. The provisions of this Note may be amended or waived only by instrument in writing signed by the Holder and Maker and attached to this Note. Words used herein indicating gender or number shall be read as context may require. AMERICAN RETIREMENT CORPORATION By: /s/ ------------------------------ Title: --------------------------- Page 2 of 2 Pages EX-10.12 17 AMENDED AND RESTATED PROMISSORY NOTE 1 EXHIBIT 10.12 AMENDED AND RESTATED PROMISSORY NOTE $2,000,000 Nashville, Tennessee October 31, 1995 FOR VALUE RECEIVED, American Retirement Communities, L.P. ("Maker"), a Tennessee limited partnership, promises to pay to the order of First Union National Bank of Tennessee ("Payee"), a national banking association, the sum of Two Million Dollars ($2,000,000), together with interest thereon as provided in that certain Loan Agreement of even date herewith between Maker and Payee (the "Loan Agreement"). Payments of interest in arrears on the outstanding principal balance hereunder shall be made as provided in the Loan Agreement. Additionally, payments of principal in the amount of $100,000 each shall be due and payable on the 10th day of each January, April, July and October during the term hereof. All remaining principal and interest shall be due and payable on October 31, 1997. Interest hereunder shall be calculated based upon a 360-day year and actual days elapsed. The interest rate required hereby shall not exceed the maximum rate permissible under applicable law, and any amounts paid in excess of such rate shall be applied to reduce the principal amount hereof or shall be refunded to Maker, at the option of the holder of this Note. All amounts due under this Note are payable at par in lawful money of the United States of America, at the principal place of business of Payee in Nashville, Tennessee, or at such other address as the Payee or other holder hereof (herein "Holder") may direct. To the maximum extent permitted under applicable law, any payment not made within fifteen (15) days of its due date will be subject to assessment of a late charge equal to five percent (5%) of such payment. Holder's right to impose a late charge does not evidence a grace period for the making of payments hereunder. The occurrence of any Event of Default under the Loan Agreement shall constitute an Event of Default hereunder. Upon the occurrence of an Event of Default, as so defined, Holder may, at its option and without notice, declare all principal and interest provided for under this Note, and any other obligations of Maker to Holder, to be presently due and payable, and Holder may enforce any remedies available to Holder under any documents securing or evidencing debts of Maker to Holder. Holder may waive any Event of Default before or after it occurs and may restore this Note in full effect without impairing the right to declare it due for a subsequent Event of Default, this right being a continuing one. Following the occurrence of an Event of Default, the remaining unpaid principal balance of the indebtedness evidenced hereby and all expenses due Holder shall bear interest at the highest rate permissible under applicable law. All amounts received for payment of this Note shall be first applied to any expenses due Holder under this Note or under any other documents evidencing or securing obligations of Maker to Holder, then to accrued interest, and finally to the reduction of principal. Prepayment of principal or accrued interest may be made, in whole or in part, only as provided in the Loan Agreement. Any prepayment(s) shall reduce the final payment(s) and shall not reduce or defer installments next due. Page 1 of 2 Pages 2 This Note may be freely transferred by Holder. Maker and all sureties, guarantors, endorsers and other parties to this instrument hereby consent to any and all renewals, waivers, modifications, or extensions of time (of any duration) that may be granted by Holder with respect to this Note and severally waive demand, presentment, protest, notice of dishonor, and all other notices that might otherwise be required by law. All parties hereto waive the defense of impairment of collateral and all other defenses of suretyship. Maker and all sureties, guarantors, endorsers and other parties hereto agree to pay reasonable attorneys' fees and all court and other costs that Holder may incur in the course of efforts to collect the debt evidenced hereby or to protect Holder's interest in any collateral securing the same. The validity and construction of this Note shall be determined according to the laws of Tennessee applicable to contracts executed and performed within that state. If any provision of this Note should for any reason be invalid or unenforceable, the remaining provisions hereof shall remain in full effect. The provisions of this Note may be amended or waived only by instrument in writing signed by the Holder and Maker and attached to this Note. Words used herein indicating gender or number shall be read as context may require. This Amended and Restated Promissory Note is given in renewal and restatement, and not in extinguishment, of the obligations of Maker reflected by that certain Promissory Note in the original principal amount of $2,000,000 executed by Maker in favor of Payee on June 23, 1995 (the "Original Note"). All liens, guaranties, assignments and security interests securing the Original Note are hereby ratified, confirmed, renewed, extended and brought forward as security for this Note, in addition to and cumulative of all other security. AMERICAN RETIREMENT COMMUNITIES, L.P. By: American Retirement Communities LLC, General Partner By: /s/ -------------------------------- Title: ------------------------------ Page 2 of 2 Pages 3 FIRST AMENDMENT TO AMENDED AND RESTATED PROMISSORY NOTE This First Amendment to Amended and Restated Promissory Note is dated as of June 11, 1996 by and between AMERICAN RETIREMENT COMMUNITIES, L.P. ("Borrower"), a Tennessee limited partnership, and FIRST UNION NATIONAL BANK OF TENNESSEE ("Lender"), a national banking association. W I T N E S S E T H: WHEREAS, Borrower and Lender entered into that certain $2,000,000 Amended and Restated Promissory Note dated October 31, 1995 (the "Note"); and WHEREAS, Borrower and Lender wish to amend the Note and certain particulars; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned hereby agrees as follows: 1. The Note is hereby further amended by deleting the reference in the upper left hand corner to $2,000,000 on page one (1) and inserting therefore reference to $2,950,000. 2. The Note is hereby further amended by deleting the reference to $2,000,000 in the third line of paragraph 1 thereof and substituting therefore the phrase "Two Million Nine Hundred Fifty Thousand Dollars ($2,950,000)." It being the intent of the Borrower and Lender to increase the amount of the indebtedness evidenced by the Note from the present principal balance of $1,800,000 by the sum of $1,150,000 to $2,950,000. 3. The Promissory Note is hereby amended by deleting the final two sentences of the first paragraph on page 1 thereof and substituting therefore the following: Additionally, payments of principal in the amount of $160,000.00 each shall be due and payable on the 10th day of each January, April, July and October during the term hereof. All remaining principal and interest shall be due and payable on October 31, 1997. EXECUTED the date first written above. 4 FIRST UNION NATIONAL BANK OF TENNESSEE By: /s/ --------------------------------------------- Title: ----------------------------------------- AMERICAN RETIREMENT COMMUNITIES, L.P. BY: AMERICAN RETIREMENT COMMUNITIES, L.L.C., G.P. By: /s/ --------------------------------------------- Title: ----------------------------------------- 5 SECOND AMENDMENT TO AMENDED AND RESTATED PROMISSORY NOTE This Second Amendment to Amended and Restated Promissory Note is dated as of February 18, 1997 by and between AMERICAN RETIREMENT COMMUNITIES, L.P. ("Borrower"), a Tennessee limited partnership, and FIRST UNION NATIONAL BANK OF TENNESSEE ("Lender"), a national banking association. W I T N E S S E T H: WHEREAS, Borrower and Lender entered into that certain $2,000,000 Amended and Restated Promissory Note dated October 31, 1995, as amended by that First Amendment to Promissory Note dated as of June 11, 1996 (as amended, the "Note"); and WHEREAS, Borrower and Lender wish to further amend the Note in certain particulars; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned hereby agree as follows: 1. The Note is hereby amended by deleting the final sentence of the first paragraph on page 1 thereof and substituting therefore the following: All remaining principal and interest shall be due and payable on April 30, 1998. 2. As amended hereby, the Note remains in full effect, and all agreements among the parties with respect to the subject hereof are represented fully in this Amendment and the other written documents among the parties. The validity, construction and enforcement hereof shall be determined according to the substantive laws of the State of Tennessee. EXECUTED as of the date first written above. FIRST UNION NATIONAL BANK OF TENNESSEE By: /s/ --------------------------------------------- Title: ----------------------------------------- 6 AMERICAN RETIREMENT COMMUNITIES, L.P. BY: AMERICAN RETIREMENT COMMUNITIES, L.L.C., G.P. By: /s/ --------------------------------------------- Title: ----------------------------------------- EX-10.13 18 REVOLVING CREDIT PROMISSORY NOTE 1 EXHIBIT 10.13 REVOLVING CREDIT PROMISSORY NOTE $2,500,000 Nashville, Tennessee October 31, 1995 FOR VALUE RECEIVED, American Retirement Communities, L.P. ("Maker"), a Tennessee limited partnership, promises to pay to the order of First Union National Bank of Tennessee ("Payee"), a national banking association, the sum of Two Million Five Hundred Thousand Dollars ($2,500,000), or as much thereof as may be outstanding from time to time pursuant to that certain Loan Agreement of even date herewith between Maker and Payee (the "Loan Agreement"), together with interest thereon as provided in the Loan Agreement. Payments of interest in arrears on the outstanding principal balance hereunder shall be made as provided in the Loan Agreement. All remaining principal and interest shall be due and payable on October 31, 1996. Interest hereunder shall be calculated based upon a 360-day year and actual days elapsed. The interest rate required hereby shall not exceed the maximum rate permissible under applicable law, and any amounts paid in excess of such rate shall be applied to reduce the principal amount hereof or shall be refunded to Maker, at the option of the holder of this Note. All amounts due under this Note are payable at par in lawful money of the United States of America, at the principal place of business of Payee in Nashville, Tennessee, or at such other address as the Payee or other holder hereof (herein "Holder") may direct. To the maximum extent permitted under applicable law, any payment not made within fifteen (15) days of its due date will be subject to assessment of a late charge equal to five percent (5%) of such payment. Holder's right to impose a late charge does not evidence a grace period for the making of payments hereunder. The occurrence of any Event of Default under the Loan Agreement shall constitute an Event of Default hereunder. Upon the occurrence of an Event of Default, as so defined, Holder may, at its option and without notice, declare all principal and interest provided for under this Note, and any other obligations of Maker to Holder, to be presently due and payable, and Holder may enforce any remedies available to Holder under any documents securing or evidencing debts of Maker to Holder. Holder may waive any Event of Default before or after it occurs and may restore this Note in full effect without impairing the right to declare it due for a subsequent Event of Default, this right being a continuing one. Following the occurrence of an Event of Default, the remaining unpaid principal balance of the indebtedness evidenced hereby and all expenses due Holder shall bear interest at the highest rate permissible under applicable law. All amounts received for payment of this Note shall be first applied to any expenses due Holder under this Note or under any other documents evidencing or securing obligations of Maker to Holder, then to accrued interest, and finally to the reduction of principal. Prepayment of principal or accrued interest may be made, in whole or in part,only as provided in the Loan Page 1 of 2 Pages 2 Agreement. Any prepayment(s) shall reduce the final payment(s) and shall not reduce or defer installments next due. This Note may be freely transferred by Holder. Maker and all sureties, guarantors, endorsers and other parties to this instrument hereby consent to any and all renewals, waivers, modifications, or extensions of time (of any duration) that may be granted by Holder with respect to this Note and severally waive demand, presentment, protest, notice of dishonor, and all other notices that might otherwise be required by law. All parties hereto waive the defense of impairment of collateral and all other defenses of suretyship. Maker and all sureties, guarantors, endorsers and other parties hereto agree to pay reasonable attorneys' fees and all court and other costs that Holder may incur in the course of efforts to collect the debt evidenced hereby or to protect Holder's interest in any collateral securing the same. The validity and construction of this Note shall be determined according to the laws of Tennessee applicable to contracts executed and performed within that state. If any provision of this Note should for any reason be invalid or unenforceable, the remaining provisions hereof shall remain in full effect. The provisions of this Note may be amended or waived only by instrument in writing signed by the Holder and Maker and attached to this Note. Words used herein indicating gender or number shall be read as context may require. AMERICAN RETIREMENT COMMUNITIES, L.P. By: American Retirement Communities LLC, General Partner By: /s/ -------------------------------------------- Title: ----------------------------------------- Page 2 of 2 Pages 3 FIRST AMENDMENT TO REVOLVING CREDIT PROMISSORY NOTE This First Amendment to Revolving Credit Promissory Note is dated as of June 11, 1996 by and between AMERICAN RETIREMENT COMMUNITIES, L.P. ("Borrower"), a Tennessee limited partnership, and FIRST UNION NATIONAL BANK OF TENNESSEE ("Lender"), a national banking association. W I T N E S S E T H: WHEREAS, Borrower and Lender entered into that certain $2,500,000 Revolving Credit Promissory Note dated October 31, 1995 (the "Note"); and WHEREAS, Borrower and Lender wish to amend the Note and certain particulars; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned hereby agrees as follows: 1. The Promissory Note is hereby amended by deleting the final sentence of the first paragraph on page 1 thereof and substituting therefore the following: All remaining principal and interest shall be due and payable on October 31, 1997. EXECUTED the date first written above. FIRST UNION NATIONAL BANK OF TENNESSEE By: /s/ ----------------------------------------- Title: -------------------------------------- AMERICAN RETIREMENT COMMUNITIES, L.P. By: American Retirement Communities, L.L.C., G.P. By: /s/ ----------------------------------------- Title: -------------------------------------- 4 FIRST UNION NATIONAL BANK OF TENNESSEE STANDBY NOTE $8,176,875.00 October 31, 1995 FOR VALUE RECEIVED, the undersigned, AMERICAN RETIREMENT COMMUNITIES, L.P., a Tennessee limited partnership (the "Borrower"), hereby promises to pay to the order of First Union National Bank of North Carolina ("FUNB-NC") and First Union National Bank of Tennessee ("FUNB-TN"), as their respective interests may appear (collectively, the "Bank") the principal amount of Eight Million One Hundred Seventy-Six Thousand Eight Hundred Seventy-Five and No/100 Dollars ($8,176,875.00), or so much thereof as may be advanced from time to time as contemplated in that certain Reimbursement Agreement dated as of October 31, 1995 (the "Agreement") among the Borrower and the Bank, with interest thereon at a rate of one-quarter of one percent (0.25%) in excess of the Prime Rate as announced from time to time by FUNB-TN, with respect to drawings identified in clause (b) below, and two percent (2%) in excess of such Prime Rate, with respect to drawings identified in clause (a) below, or such greater rate as may be provided in the Agreement. As used in this Standby Note, the term "Prime Rate" means the fluctuating and floating rate of interest as established and declared as the Prime Rate by FUNB-TN at any time and from time to time. The interest rate hereon shall be adjusted on the day of each change in such Prime Rate, automatically and without the necessity of notice to or demand on the undersigned. Principal of and interest on this Standby Note shall be payable in lawful currency of the United States of America at the main office of FUNB-TN in Nashville, Tennessee, as follows: (a) In the event of any drawings under the Letter of Credit (as defined in the Agreement) other than a drawing specified in clause (b) below, principal of and interest on this Standby Note shall be payable in accordance with the provisions of Section 3.1 of the Agreement. (b) In the event of any Tender Drawing (as defined in the Agreement), principal of this Standby Note shall be payable on the earlier of (i) the date of any subsequent resale of the Bonds (as defined in the Agreement) that were purchased or paid with proceeds of such Tender Drawing, but only to the extent of the principal amount of such Bonds that have been so resold, (ii) the date on which any Bonds shall be prepaid or redeemed as provided in the Agreement and in the Indenture (as defined in the Agreement), but only to the extent of the principal amount of Bonds that have been prepaid or redeemed, or (iii) the Scheduled Termination Date (as defined in the Agreement); and interest hereon shall be payable monthly in arrears on the first Business Day (as defined in the Agreement) in each calendar month, commencing with the first calendar month following the date of such Tender Drawing to and including the Scheduled Termination Date, provided, however, that with respect to any Bonds that have been resold or prepaid as contemplated in clauses (i) and (ii) above, interest on the principal amount of such Bonds shall be due and payable on the date(s) of any such resale or prepayment. - 2 - 5 Principal and interest that may be paid from time to time by the Borrower with respect to this Standby Note shall be credited against the Borrower's corresponding reimbursement obligations under Section 3.1 of the Agreement. In the event any amount which may be due under this Standby Note shall not be paid within fifteen (15) days of the date when due, the Borrower shall, to the extent permitted by applicable law, also pay to the Bank a late charge equal to four percent (4%) of the amount of such overdue payment. In the event this Standby Note is placed in the hands of an attorney for collection or enforcement or if the Bank incurs any costs incident to the collection of the indebtedness evidenced hereby, the Borrower agrees to pay a reasonable attorney's fee, all other court and other costs, and the reasonable costs of any other collection efforts. Presentment for payment, demand, protest and notice of demand, protest and nonpayment are hereby waived by Borrower. No failure to accelerate the indebtedness evidenced hereby by reason of default hereunder, acceptance of a past-due installment or other indulgences granted from time to time, shall be construed as a novation of this Standby Note or as a waiver of such right of acceleration or of the right of the Bank thereafter to insist upon strict compliance with the terms hereof or to prevent the exercise of such right of acceleration or any other right granted hereunder or by applicable laws. Unless otherwise specifically agreed by Bank in writing, the liability of Borrower and all other persons now or hereafter liable for payment of the indebtedness evidenced hereby, or any portion thereof, shall not be affected by (1) any renewal hereof or other extension of the time for payment of the indebtedness evidenced hereby or any amount due in respect thereof, (2) the release of all or any part or any collateral now or hereafter securing the payment of the indebtedness evidenced hereby or any portion thereof, or (3) the release of or resort to any person now or hereafter liable for payment of the indebtedness evidenced hereby or any portion thereof. This Standby Note may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. This Standby Note has been negotiated, executed and delivered in the State of Tennessee, and is intended as a contract under and shall be construed and interpreted in accordance with the laws of said state. - 2 - 6 IN WITNESS WHEREOF, the undersigned Borrower has caused this Standby Note to be executed in its name by its duly authorized officer as of the date first above written. AMERICAN RETIREMENT COMMUNITIES, L.P. a Tennessee limited partnership By: American Retirement Communities, LLC, its sole general partner By: /s/ -------------------------------------------- Title: ----------------------------------------- - 4 - 7 By: /s/ --------------------------------------------- Title: ----------------------------------------- AMERICAN RETIREMENT COMMUNITIES, L.P. BY: AMERICAN RETIREMENT COMMUNITIES, L.L.C.,G.P. By: /s/ --------------------------------------------- Title: ----------------------------------------- EX-10.14 19 STANDBY NOTE 1 EXHIBIT 10.14 STANDBY NOTE $8,176,875.00 October 31, 1995 FOR VALUE RECEIVED, the undersigned, AMERICAN RETIREMENT COMMUNITIES, L.P., a Tennessee limited partnership (the "Borrower"), hereby promises to pay to the order of First Union National Bank of North Carolina ("FUNB-NC") and First Union National Bank of Tennessee ("FUNB-TN"), as their respective interests may appear (collectively, the "Bank") the principal amount of Eight Million One Hundred Seventy-Six Thousand Eight Hundred Seventy-Five and No/100 Dollars ($8,176,875.00), or so much thereof as may be advanced from time to time as contemplated in that certain Reimbursement Agreement dated as of October 31, 1995 (the "Agreement") among the Borrower and the Bank, with interest thereon at a rate of one-quarter of one percent (0.25%) in excess of the Prime Rate as announced from time to time by FUNB-TN, with respect to drawings identified in clause (b) below, and two percent (2%) in excess of such Prime Rate, with respect to drawings identified in clause (a) below, or such greater rate as may be provided in the Agreement. As used in this Standby Note, the term "Prime Rate" means the fluctuating and floating rate of interest as established and declared as the Prime Rate by FUNB-TN at any time and from time to time. The interest rate hereon shall be adjusted on the day of each change in such Prime Rate, automatically and without the necessity of notice to or demand on the undersigned. Principal of and interest on this Standby Note shall be payable in lawful currency of the United States of America at the main office of FUNB-TN in Nashville, Tennessee, as follows: (a) In the event of any drawings under the Letter of Credit (as defined in the Agreement) other than a drawing specified in clause (b) below, principal of and interest on this Standby Note shall be payable in accordance with the provisions of Section 3.1 of the Agreement. (b) In the event of any Tender Drawing (as defined in the Agreement), principal of this Standby Note shall be payable on the earlier of (i) the date of any subsequent resale of the Bonds (as defined in the Agreement) that were purchased or paid with proceeds of such Tender Drawing, but only to the extent of the principal amount of such Bonds that have been so resold, (ii) the date on which any Bonds shall be prepaid or redeemed as provided in the Agreement and in the Indenture (as defined in the Agreement), but only to the extent of the principal amount of Bonds that have been prepaid or redeemed, or (iii) the Scheduled Termination Date (as defined in the Agreement); and interest hereon shall be payable monthly in arrears on the first Business Day (as defined in the Agreement) in each calendar month, commencing with the first calendar month following the date of such Tender Drawing to and including the Scheduled Termination Date, provided, however, that with respect to any Bonds that have been resold or prepaid as contemplated in clauses (i) and (ii) above, interest on the principal amount of such Bonds shall be due and payable on the date(s) of any such resale or prepayment. 2 Principal and interest that may be paid from time to time by the Borrower with respect to this Standby Note shall be credited against the Borrower's corresponding reimbursement obligations under Section 3.1 of the Agreement. In the event any amount which may be due under this Standby Note shall not be paid within fifteen (15) days of the date when due, the Borrower shall, to the extent permitted by applicable law, also pay to the Bank a late charge equal to four percent (4%) of the amount of such overdue payment. In the event this Standby Note is placed in the hands of an attorney for collection or enforcement or if the Bank incurs any costs incident to the collection of the indebtedness evidenced hereby, the Borrower agrees to pay a reasonable attorney's fee, all other court and other costs, and the reasonable costs of any other collection efforts. Presentment for payment, demand, protest and notice of demand, protest and nonpayment are hereby waived by Borrower. No failure to accelerate the indebtedness evidenced hereby by reason of default hereunder, acceptance of a past-due installment or other indulgences granted from time to time, shall be construed as a novation of this Standby Note or as a waiver of such right of acceleration or of the right of the Bank thereafter to insist upon strict compliance with the terms hereof or to prevent the exercise of such right of acceleration or any other right granted hereunder or by applicable laws. Unless otherwise specifically agreed by Bank in writing, the liability of Borrower and all other persons now or hereafter liable for payment of the indebtedness evidenced hereby, or any portion thereof, shall not be affected by (1) any renewal hereof or other extension of the time for payment of the indebtedness evidenced hereby or any amount due in respect thereof, (2) the release of all or any part or any collateral now or hereafter securing the payment of the indebtedness evidenced hereby or any portion thereof, or (3) the release of or resort to any person now or hereafter liable for payment of the indebtedness evidenced hereby or any portion thereof. This Standby Note may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. This Standby Note has been negotiated, executed and delivered in the State of Tennessee, and is intended as a contract under and shall be construed and interpreted in accordance with the laws of said state. -2- 3 IN WITNESS WHEREOF, the undersigned Borrower has caused this Standby Note to be executed in its name by its duly authorized officer as of the date first above written. AMERICAN RETIREMENT COMMUNITIES, L.P. a Tennessee limited partnership By: American Retirement Communities, LLC, its sole general partner By: /s/ --------------------------------------------- Title: ----------------------------------------- -3- EX-10.15 20 REIMBURSEMENT AGREEMENT 1 EXHIBIT 10.15 REIMBURSEMENT AGREEMENT THIS REIMBURSEMENT AGREEMENT (such Reimbursement Agreement as supplemented or amended from time to time being referred to herein as this "Agreement" or this "Reimbursement Agreement") is made as of the 31st day of October, 1995, between American Retirement Communities, L.P. (the "Borrower"), a Tennessee limited partnership, FIRST UNION NATIONAL BANK OF NORTH CAROLINA ("FUNB-NC"), a national banking association, and FIRST UNION NATIONAL BANK OF TENNESSEE ("FUNB-TN"), a national banking association (FUNB-NC and FUNB-TN are sometimes referred to hereinafter collectively as the "Credit Institution"); WITNESSETH: WHEREAS, the Lexington-Fayette Urban County Government, a political subdivision of the Commonwealth of Kentucky (the "Issuer"), has financed a part of the cost of the acquisition of approximately 20 acres of land located at the corner of Rio Dosa Drive and Man O' War Boulevard in Lexington, Kentucky, and the renovation, development, equipping and installation by the Borrower of 175 apartment units (the "Project"), through the issuance, pursuant to a Trust Indenture dated as of May 1, 1985 (the "1985 Indenture") between the Issuer and Third National Bank in Nashville, a national banking association organized and existing under the laws of the United States of America, 424 Church Street, Sixth Floor, Nashville, Tennessee 37219, as Trustee (the "Trustee"), of Eleven Million Dollars ($11,000,000.00) aggregate principal amount of Issuer's Residential Facilities Revenue Bonds (Richmond Place Associates, L.P. Project) Series 1985 (the "Series 1985 Bonds"), to one or more bond purchasers (the "Bond Purchaser"); WHEREAS, the Richmond Place Associates, L.P. ("RPLP"), a Delaware limited partnership and predecessor in interest to Borrower, requested the Issuer to issue its Lexington-Fayette Urban County Government Residential Facilities Refunding Revenue Bonds (Richmond Place Associates, L.P. Project) Series 1987 (the "Bonds") in the aggregate principal amount of $11,000,000 issued under and pursuant to a Trust Indenture, dated as of April 1, 1987 by and between the Issuer and the Trustee in order to reimburse the Letter of Credit Issuer for the refunding of the Series 1985 Bonds; WHEREAS, at the time of issuance of the Bonds, the RPLP granted a mortgage on, and a first perfected security interest in, the Project in favor of the Issuer, pursuant to a Loan Agreement and Mortgage by and between the RPLP and Issuer (the "Loan Agreement"), which has been assigned to the Trustee under the Indenture to secure payment of the Bonds; and WHEREAS, Metropolitan Federal Savings and Loan Association issued its irrevocable letter of credit in an aggregate maximum amount of $11,916,667, as security for 2 payment of the principal and interest on the Bonds in order to provide for the making of payments due from RPLP under the Loan Agreement; WHEREAS, by Order No. 91-213, effective April 19, 1991, the Director of the Office of Thrift Supervision ("OTS") found that Metropolitan Federal Bank, the successor to Metropolitan Federal Savings and Loan Association and a Federal Savings Bank, Nashville, Tennessee (the "Association"), was in an unsafe and unsound condition to transact business because it had substantially insufficient capital, in that it had negative tangible capital, and that it was failing all of its capital requirements by significant margins. On that date, the OTS ordered the Association closed and appointed the Resolution Trust Corporation ("RTC") as Receiver for the Association. Also on that date, pursuant to the same order, the OTS created and chartered a new federal mutual savings association known as Metropolitan Federal Savings and Loan Association, F.A. ("Metropolitan Federal"). The RTC as Receiver for the Association entered into a Purchase and Assumption Agreement with Metropolitan Federal whereby Metropolitan Federal acquired certain assets and assumed certain liabilities of the Association. Following entry into that Agreement, the OTS took possession of Metropolitan Federal and appointed the RTC as Conservator of that institution, which appointment was accepted. On March 27, 1992, pursuant to OTS Order No. CIN-92-102, the OTS replaced the conservatorship with a receivership, and appointed the RTC as Receiver of Metropolitan Federal, which appointment was accepted; and WHEREAS, pursuant to a Settlement Agreement dated September 27, 1994, by and between RPLP and Resolution Trust Corporation, as Receiver for Metropolitan Federal Bank, certain Bonds totalling $2,500,000.00 in amount were purchased and cancelled by Resolution Trust Corporation, as Receiver for Metropolitan Federal Bank, and the Letter of Credit previously issued by Metropolitan Federal Savings and Loan Association was to be replaced by a substitute letter of credit; and WHEREAS, NationsBank of North Carolina, N.A. issued such substitute Letter of Credit (the "NBNC Letter of Credit") in the original stated amount of $8,176,875.00 to Trustee under the Indenture and RPLP assumed reimbursement obligations with respect thereto pursuant to a Reimbursement Agreement (the "NationsBank Reimbursement Agreement") dated as of November 1, 1994; and WHEREAS, the obligations of RPLP under the NationsBank Reimbursement Agreement were assumed by Borrower pursuant to an Amendment to Reimbursement Agreement and Standby Note with Assumption and Release dated as of March 31, 1995; and WHEREAS, Borrower has requested, and FUNB-NC has agreed, to replace the NBNC Letter of Credit by issuing its Letter of Credit in the original stated amount of $8,176,875.00 to the Trustee under the Indenture to secure the payment of the principal and purchase price of and interest on the remaining Bonds upon such terms and conditions as are mutually agreed upon by the Borrower, FUNB-NC and FUNB-TN; and -2- 3 WHEREAS, the Borrower, FUNB-NC and FUNB-TN desire (a) to specify the conditions precedent to the issuance of the Letter of Credit by FUNB-NC, and (b) to provide for the payment to the Credit Institution of certain fees for the Letter of Credit, the reimbursement by the Borrower of amounts paid by the Credit Institution under the Letter of Credit, the indemnity by the Borrower of the Credit Institution pursuant to the terms of this Agreement, the security to be provided by Borrower to secure Borrower's performance under this Agreement, and certain other matters. NOW, THEREFORE, in consideration of the premises and the agreements contained in this Agreement, the Borrower, FUNB-NC and FUNB-TN agree as follows: ARTICLE I. DEFINITIONS The terms "Code," "Note", "Loan Agreement", "Person," "Regulatory Agreement," "Remarketing Agent," "Remarketing Agreement," "Seasoned Moneys," "Trustee" and all other capitalized terms used and not defined herein shall have the meanings given thereto in the Indenture, as hereinafter defined. As used in this Agreement, in addition to the terms previously defined herein or defined in Section 1.01 of the Indenture, the following terms shall have the meanings as provided in this Article 1. Unless otherwise provided, each of the financial terms not specifically defined herein shall have the meaning given to it under generally accepted accounting principles applied on a consistent basis, and the computation of any such term is to be determined both as to classification of items and as to amounts in accordance with generally accepted accounting principles. Unless otherwise indicated, references to Articles or Sections refer to those in this Agreement. "Anniversary Date" shall mean the same day and month as the Date of Issuance occurring in any subsequent year. "Business Day" shall have the same meaning as provided in the Letter of Credit. "Collateral Agreement" shall mean the Collateral Assignment of Accounts Receivable dated as of the date hereof by and between A.R.C. Management Corporation and the Credit Institution, as supplemented or amended from time to time. "Collateral Real Estate" shall mean the fee simple interest of Borrower in the approximately 20 acres of real property in Fayette County, Kentucky and the fee simple interest of Borrower in the Project, conveyed pursuant to the Mortgage as security for the obligations of the Borrower under this Agreement. "Credit Institution" shall mean FUNB-NC and/or FUNB-TN, as the context may indicate, their successors and assigns. - 3 - 4 "Date of Issuance" shall mean the date on which the Letter of Credit is issued and becomes effective. "Default" shall mean any condition or event which with the giving of notice or lapse of time, or both, would constitute an Event of Default hereunder. "Environmental Laws" shall mean the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Superfund Amendments and Reauthorization Act (SARA); the Resource Conservation and Recovery Act (RCRA); the Emergency Planning and Community Right to Know Act; the Clean Water Act (the Federal Water Pollution Control Act); the Safe Drinking Water Act; the Clean Air Act; the Surface Mining Control and Reclamation Act; the Coastal Zone Management Act; the Noise Control Act; the Occupational Safety and Health Act; the Toxic Substances Control Act (TSCA); the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA); any so-called "Superfund" or "Superlien" law; or any other federal, state or local statute, law, ordinance, code, rule, regulation, order, decree or other requirement of any governmental body regulating, relating to or imposing liability or standards of conduct concerning any Hazardous Materials, or toxic or dangerous chemical, waste, substance or material. "Event of Default" shall mean any of the Events of Default as defined in Section 5.1 hereof. "Financing Documents" shall mean the Bonds, the Indenture, the Loan Agreement, the Note, this Reimbursement Agreement, the Standby Note, the Mortgage, the Security Agreement, the Collateral Agreement, the Pledge Agreement, the Guaranty Agreements, and the Remarketing Agreement. "Guarantors" shall mean American Retirement Corporation, a Tennessee corporation,; A.R.C. Management Corporation, a Tennessee corporation; American Retirement Communities, L.L.C. ("ARC, LLC"), a Tennessee limited liability company; ARC Fort Austin Properties, Inc., a Tennessee corporation; ARC Corpus Christi, Inc., a Tennessee corporation; ARC Oak Park, Inc., a Tennessee corporation; ARC Equities-Lexington, Inc., a Tennessee corporation; and ARC Chattanooga, Inc., a Tennessee corporation and their respective successors and assigns. "Guaranty Agreement" shall mean collectively, the Guaranty Agreements, dated as of the date hereof, made by the respective Guarantors in favor of the Credit Institution, pursuant to which, among other things, the Guarantors have agreed to guarantee all obligations of the Borrower hereunder, under the Standby Note and under the other Financing Documents, as supplemented or amended from time to time, subject however to such limitations (if any) as appear in such Guaranty Agreements. - 4 - 5 "Hazardous Materials" shall mean any hazardous, toxic or dangerous chemical, substance, waste or material defined as such in any of the Environmental Laws. "Indenture" shall mean the Trust Indenture dated as of April 1, 1987 by and between the Issuer and the Trustee as revised pursuant to that Amended and Restated Indenture between the Issuer and the Trustee dated as of November 1, 1994. "Letter of Credit" shall mean the Letter of Credit issued by FUNB-NC to the Trustee pursuant to this Agreement in the form of Exhibit A hereto, as supplemented or amended from time to time. "Maximum Rate" shall mean the maximum rate of interest permitted to be charged under applicable laws in effect from time to time. "Mortgage" shall mean the Mortgage with Security Agreement and Assignment of Rents on the Collateral Real Estate and certain personal property of the Borrower, dated as of the date hereof, from the Borrower for the benefit of the Credit Institution, as supplemented or amended from time to time. "Pledge Agreement" shall mean the Pledge Agreement dated as of the date hereof by and between the Borrower and the Credit Institution, as supplemented or amended from time to time. "Prime Rate" shall mean the fluctuating rate of interest established by FUNB-TN from time to time as its "Prime Rate," whether or not such rate shall be otherwise published. The Prime Rate is established by FUNB-TN as an index or base rate and may or may not at any time be the best or lowest rate charged by FUNB-TN on any loan. If at any time or from time to time the Prime Rate increases or decreases, then any interest rate hereunder based on the Prime Rate shall be correspondingly increased or decreased as of the date of the increase or decrease in the Prime Rate. In the event that FUNB-TN, during the term hereof, shall abolish or abandon the practice of establishing a Prime Rate, or should the same become unascertainable, the Credit Institution shall designate a comparable reference rate which shall thereafter be deemed to be the Prime Rate for purposes hereof. "Reimbursement Account" shall mean the Reimbursement Account established pursuant to Section 3.1 hereof. "Scheduled Termination Date" shall mean the "Stated Expiration Date" as set forth in the Letter of Credit. "Settlement Agreement" shall mean the Settlement Agreement dated September 27, 1994 between the Borrower and the Resolution Trust Corporation, as Receiver for Metropolitan Federal Savings and Loan Associates. - 5 - 6 "Standby Note" shall mean the standby promissory note of the Borrower described in Section 3.5 hereof, as supplemented or amended from time to time. "Stated Amount" shall mean the face amount of the Letter of Credit initially equal to $8,176,875.00, representing a $8,010,000.00 principal portion and a $166,875.00 interest portion to cover 50 days' interest on the Bonds at an assumed rate equal to fifteen percent (15%) per annum, as it may be reduced and reinstated from time to time in accordance with the terms of the Letter of Credit. "Tender Drawing" shall mean any drawing under the Letter of Credit pursuant to a drawing certificate in the form of Annex B to the Letter of Credit. "Termination Date" shall mean the last day a drawing is available under the Letter of Credit. ARTICLE II. REPRESENTATIONS BY BORROWER; CONDITIONS TO ISSUANCE OF LETTER OF CREDIT SECTION 2.1. REPRESENTATIONS BY BORROWER. The Borrower makes the following representations for the benefit of the Credit Institution (which representations shall survive the issuance of the Letter of Credit): (A) All representations and warranties made by the Borrower in the Loan Agreement are incorporated herein by reference and shall be deemed to have been made and reaffirmed by the Borrower for the benefit of the Credit Institution as if they were fully set forth herein. (B) The Borrower owns a fee simple estate in the real property on which the Project is located, and the Borrower owns fee simple title to the Project, subject only to the Permitted Encumbrances (as defined in the Mortgage). (C) The Borrower has the power to own its property and to carry on its business as now being conducted, is in good standing in the jurisdiction of its formation, and is qualified to do business in each jurisdiction in which the character of the properties owned by it therein or in which the transaction of its business makes such qualification necessary. (D) The Borrower has full partnership power and authority to enter into and execute and deliver each of the Financing Documents to which it is a party and to incur and perform the obligations provided for herein and therein, all of which have been duly authorized by all proper and necessary partnership action. No consent or approval of limited partners or of any other person or public authority or regulatory body is required as a condition to the validity - 6 - 7 or enforceability of any of such Financing Documents, or, if required, the same has been duly obtained. (E) The existing and contemplated use of the Project is and will be in conformity with all applicable governmental laws, ordinances, rules and regulations (including, but not limited to, the Americans with Disabilities Act and all other environmental, health, safety and zoning laws, ordinances, rules and regulations), and all variances and exceptions granted with respect thereto; and there is no existing, threatened or pending action, suit, proceeding, inquiry or investigation wherein an unfavorable decision, ruling or finding would in any way have an adverse effect on the Project, or its existing or intended use, or the repayment of the Bonds. (F) The Borrower is in compliance with all applicable governmental laws and regulations applicable to the conduct of its business and the operation of the Project, the noncompliance with which would have a material adverse effect on the Borrower's financial condition or operations or the operation of the Project. (G) The Borrower is in compliance with all applicable governmental laws and regulations and has all necessary certificates of need applicable to the conduct of its health agency business in Fayette County, Kentucky and in the surrounding counties of Bourbon, Scott, Jesamine and Franklin. (H) All of the Financing Documents to which the Borrower is a party have been duly authorized, executed and delivered by the Borrower, constitute valid and legally binding obligations of the Borrower, and are fully enforceable against the Borrower in accordance with their respective terms. (I) The execution, delivery and performance by the Borrower of the Financing Documents will not: conflict with or result in a breach of any of the terms, conditions or provisions of the partnership agreement or the partnership certificate of the Borrower; conflict with or result in a breach of any governmental requirement applicable to the Borrower; conflict with, result in a breach of or require consent under any agreement, instrument or indenture to which the Borrower is a party, or by which it or any of its property is bound, or conflict with, result in a breach of, or constitute (with notice, lapse of time, or both) a default thereunder; result in the creation or imposition of any lien (other than the lien of the Mortgage) upon any of the property or assets of the Borrower; or result in or require the acceleration of any indebtedness of the Borrower. (J) There are no actions, claims, suits or proceedings pending, or, to the knowledge of the Borrower, threatened or reasonably anticipated against or directly involving the Borrower at law or in equity or before or by any governmental authority and, to the best of the Borrower's knowledge, there is no possibility of any judgment, liability or award which may reasonably be expected to result in any material and adverse change in the business, operations, prospects, properties, assets or condition (financial or otherwise) of the Borrower. The Borrower - 7 - 8 has received no notice that it is in default with respect to any governmental requirement or any judgment, order, writ, injunction, decree, rule, award or regulation of any governmental authority. (K) The Borrower is not in default under any contract, agreement, commitment or other instrument which default would have a material adverse effect on the business, properties or condition (financial or otherwise) of the Borrower, or in the performance of any covenants or conditions respecting any of its indebtedness. No holder of any indebtedness of the Borrower has given notice of any asserted default thereunder. No liquidation or dissolution of the Borrower and no receivership, insolvency, bankruptcy, reorganization or other similar proceeding relative to the Borrower or its properties is pending or, to the knowledge of the Borrower, is threatened against it. (L) Borrower is not in default in the payment of the principal of or interest on any of its indebtedness for borrowed money, nor is the Borrower in default under any provision of any instrument under or subject to which any indebtedness for borrowed money has been incurred, and no event has occurred and is continuing under the provisions of any such instrument that with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder. (M) No information furnished by or on behalf of the Borrower in connection with the negotiation of the issuance of the Letter of Credit contains any untrue statement of a material fact or omits a material fact necessary to make such information not misleading. There is no fact that the Borrower has not disclosed to the Credit Institution that materially adversely affects or, so far as the Borrower can now foresee based on facts known to it and based on opinions of the Borrower's partners, employees, agents and advisors concerning such facts, will materially adversely affect the properties, business, prospects, profits or condition (financial or otherwise) of the Borrower, or the ability of the Borrower to perform its obligations under the Financing Documents. SECTION 2.2. LETTER OF CREDIT COMMITMENT; PARTICIPATION. (A) Subject to the terms and conditions set forth in this Agreement, FUNB-NC agrees to issue its Letter of Credit, in the form of Exhibit A hereto, in the original Stated Amount. (B) Effective on the Date of Issuance, FUNB-TN shall be deemed to have irrevocably and unconditionally purchased and received from FUNB-NC, without recourse or warranty and without any further action on the part of either of them, an undivided interest and participation in all obligations of the Borrower hereunder and any security therefor or guarantees relating thereto. FUNB-NC shall notify FUNB-TN telephonically of the making and amount of each drawing and confirm such notification by facsimile, promptly after the presentation of any draft and certificate or equivalent documents in connection with any drawing under the Letter of Credit not reimbursed by or on behalf of the Borrower on the date such drawing is made, and - 8 - 9 FUNB-TN shall, on or before 2:00 p.m. (Eastern time) on the date of any such drawing unconditionally pay to FUNB-NC the full amount of such drawing, provided that if FUNB-TN has not received such notice by 12:00 noon (Eastern time), FUNB-TN shall reimburse FUNB-NC on the next Business Day. FUNB-NC agrees that, for so long as FUNB-TN is not in default to FUNB- NC under this Section 2.2(B), FUNB-TN shall act as agent for FUNB-NC with respect to collection of payments due hereunder from the Borrower, receipt of financial and other information from the Borrower required hereunder, the declaration or waiver of any default hereunder, the giving or withholding of any consents, instructions or amendments hereunder or hereto, the exercise of any remedies following the occurrence of an Event of Default, and all other matters pertaining to relations and communications between the Borrower and the Credit Institution hereunder. To the extent any of the Financing Documents vests such authority in the Credit Institution, FUNB-NC agrees that it will act in accordance with the instructions of FUNB-TN. SECTION 2.3. CONDITIONS PRECEDENT TO ISSUANCE OF THE LETTER OF CREDIT. It is a condition precedent to the obligation of FUNB-NC to issue the Letter of Credit that the Credit Institution shall have received each of the following documents or other items in form and substance satisfactory to the Credit Institution, and, in the case of appraisals and environmental reports, insurance and similar certifications and the like, prepared by professionals satisfactory to the Credit Institution; or if any such item shall be waived by the Credit Institution as a condition to the issuance of the Letter of Credit, such item shall be furnished to the Credit Institution at or before the time set forth in such waiver: (A) Certified copies of the partnership agreement, partnership certificate and consent of partners of the Borrower, and certificate(s) of existence and incumbency certificate(s) for the Borrower's general partner, ARC, LLC, accompanied by an opinion of Bass, Berry & Sims, counsel to the Borrower, in form and substance satisfactory to the Credit Institution, including, without limitation, to the effect that the Borrower is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Tennessee and Kentucky and that the Financing Documents to which the Borrower is a party have been duly authorized, executed and delivered by the Borrower and constitute legal, valid and binding obligations of the Borrower enforceable in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws or equitable principles relating to or limiting creditors' rights generally and except as rights of indemnification relating to liability under federal and state securities laws may be limited by applicable law; (B) Certificates of existence, incumbency certificates, resolutions and certified copies of the organizational documents for the Guarantors, accompanied by an opinion of Bass, Berry & Sims, counsel to the Guarantors, in form and substance satisfactory to the Credit Institution, including without limitation, to the effect that each of the Guarantors is duly organized, validly existing and in good standing under the laws of the State of Tennessee and, if different, the State of its domestication, and that the Financing Documents to which each of them - 9 - 10 is a party have been duly authorized, executed and delivered and constitute the legal, valid and binding obligation of each Guarantor enforceable in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws or equitable principles relating to or limiting creditor's rights generally and except as rights of indemnification relating to liability under federal and state securities laws may be limited by applicable law; (C) A copy of the fully executed Indenture; (D) The fully executed original of the Standby Note and fully executed originals of this Agreement, the Mortgage, the Security Agreement, the Collateral Agreement, the Pledge Agreement and the Guaranty Agreements; (E) An ALTA lender's title insurance policy (the "Title Policy") on the Collateral Real Estate from Chicago Title Insurance Company with minimum coverage in an amount not less than the original Stated Amount of the Letter of Credit. The Title Policy shall insure that the Mortgage in favor of the Credit Institution is a lien on the Collateral Real Estate subject only to such exceptions as are Permitted Encumbrances and shall contain such endorsements and affirmative coverage as shall be requested by the Credit Institution; (F) An opinion of Rubin Hays & Foley, Bond Counsel, in form and substance satisfactory to the Trustee; (G) An opinion of Boult, Cummings, Conners & Berry, counsel to the Credit Institution, in form and substance satisfactory to the Trustee; (H) Evidence that the Mortgage has been recorded in the Clerk's Office of Fayette County, Kentucky (the "Register's Office") and evidence that financing statements perfecting the Credit Institution's security interest in personal property have been duly filed in all required filing offices; (I) A certificate of a person selected by the Borrower and knowledgeable in the insurance business, who is not a partner or employee of the Borrower, reciting that all policies of insurance required by the Loan Agreement to be in effect upon delivery of the Bonds are in full force and effect and that the amounts and types of insurance evidenced thereby comply with and satisfy all the requirements of the Loan Agreement, together with certificates or policies evidencing insurance coverage then in effect, which certificates and policies shall include flood insurance unless the Borrower shall have furnished the Credit Institution with written evidence satisfactory to the Credit Institution that the Collateral Real Estate is not located in an area shown as having special flood hazards on a map of the boundaries of Fayette County, Kentucky prepared by or on behalf of the U.S. Department of Housing and Urban Development; - 10 - 11 (J) A current survey of the Collateral Real Estate, prepared and certified by a certified land surveyor in the form required by the Credit Institution; (K) A copy of the certificate of occupancy required for the operation and occupancy of the Project by the Borrower, evidence that the Borrower has obtained and maintains in full force and effect all permits, licenses, certificates and authorizations needed to own and operate its home health business and the Project (including, without limitation, certificates of need and other regulatory approvals), and evidence that the Project complies with all zoning and building codes and ordinances applicable thereto; (L) A current appraisal of the Collateral Real Estate by an appraiser engaged by the Credit Institution at the Borrower's expense, indicating an appraised value of the Project satisfactory to the Credit Institution, and which satisfies all applicable regulations of bank regulatory agencies having jurisdiction over the Credit Institution; (M) An environmental engineer's environmental screening inspection report ("ESI") addressing environmental matters and indicating that the Collateral Real Estate is free of hazardous wastes and toxic substances and otherwise complying with the requirements of the Credit Institution; (N) Payment to the Credit Institution in cash of all fees which are due on the Date of Issuance under Section 3.2; (O) A copy of the Management Agreement for the Project between the Borrower and A.R.C. Management Corporation; and (P) Such other documents as may have been reasonably requested by the Credit Institution. ARTICLE III. REIMBURSEMENT OBLIGATION; OTHER PAYMENTS; LETTER OF CREDIT FEES SECTION 3.1. REIMBURSEMENT AND OTHER PAYMENTS. (A) The Borrower hereby agrees to establish an interest bearing escrow account with FUNB-TN known as the Richmond Place Reimbursement Account (the "Reimbursement Account") and to pay to the Credit Institution (and the Credit Institution is hereby authorized to deduct from any and all operating accounts maintained by the Borrower with the Credit Institution) the following amounts in the manner and at the times set forth below: - 11 - 12 (i) All funds deposited in the Reimbursement Account in accordance with subparagraphs (ii) and (iii) below shall be accounted for on a first-in, first-out basis. Amounts deposited in the Reimbursement Account shall be spent within a thirteen-month period beginning on the date of deposit; and earnings received from investment of money held in the Reimbursement Account shall be spent within a one-year period beginning on the date of receipt. Moneys in the Reimbursement Account at any time may be invested without restriction as to yield within the meaning of Section 148 of the Code at the direction of the Borrower. Any amounts in the appropriate subaccount of the Reimbursement Account on the date any payment is due under any subparagraph hereof shall be credited against the amount due. Any balance remaining in the Reimbursement Account after the Termination Date and the payment of all obligations of the Borrower due the Credit Institution hereunder and under all of the other Financing Documents shall be paid to the Borrower. (ii) Not later than 11:00 a.m. (Eastern time) on the Business Day next preceding the twenty-fifth (25th) day of each consecutive month commencing November 24, 1995, the Borrower shall pay the Credit Institution in collected funds for deposit in the interest subaccount of the Reimbursement Account an amount equal to the amount of interest due and payable to the Trustee under the Indenture on the first Business Day of the immediately succeeding month, the same being equal to one-sixth (1/6) of the amount of interest due and payable on the Bonds on the next succeeding Semi-Annual Interest Payment Date. The amounts received by the Credit Institution pursuant to this subparagraph shall be deposited in the interest subaccount of the Reimbursement Account which shall be debited by the Credit Institution as necessary to reimburse the Credit Institution for each drawing under the Letter of Credit for interest on the Bonds. (iii) Not later than the second Business Day preceding any date on which principal is due and payable on the Bonds at maturity or by sinking fund redemption or mandatory redemption, the Borrower shall pay the Credit Institution in collected funds for deposit in the principal subaccount of the Reimbursement Account the amount the Credit Institution will be required to advance under the Letter of Credit for such principal payment. In the event of a drawing under the Letter of Credit to pay principal on the Bonds as a result of an optional redemption or optional prepayment of the Bonds, the Borrower shall pay the Credit Institution in collected funds, or make other arrangements satisfactory to the Credit Institution pursuant to Section 4.1(B) below, to pay an amount sufficient to reimburse the Credit Institution for each drawing before the Trustee sends notice of redemption to the Bondholders. The principal amounts received by the Credit Institution pursuant to this subparagraph shall be deposited in the principal subaccount of the Reimbursement Account which shall be debited by the Credit Institution as necessary to reimburse the Credit Institution for each drawing under the Letter of Credit for principal on the Bonds. In the event the Trustee credits the amount to be drawn under the Letter of Credit for any principal payment made otherwise than from a draw on the Letter of Credit, a corresponding credit shall be granted to the Borrower for the amounts due hereunder. - 12 - 13 (iv) In addition to those amounts required to be paid by Borrower under subparagraphs (ii) and (iii) above, Borrower shall deposit into the principal subaccount of the Reimbursement Account the amount of $170,000, representing the current balance in Borrower's existing escrow account. Borrower shall also pay on a quarterly basis to the Credit Institution, the following amounts for deposit into the principal subaccount of the Reimbursement Account on the dates indicated:
PAYMENT DATE AMOUNT ------------ ------ December 31, 1995 $36,000 March 31, 1996, June 30, 1996 and $53,750 September 30, 1996 December 31, 1996 and March 31, 1997 $60,000
(B) In the event of a Tender Drawing under the Letter of Credit to purchase Bonds for the account of the Borrower pursuant to optional or mandatory tenders under the provisions of the Indenture, the Borrower shall continue to make the payments required by subparagraphs (A)(iii) and A(iv) above, and such payments shall be applied first to redeem Bonds purchased with the proceeds of such drawing and held for the account of the Borrower or the Credit Institution as of any maturity date or redemption date provided for in the Indenture. The Borrower shall cause all amounts received from the remarketing of such Bonds prior to any maturity date or redemption date provided for in the Indenture to be paid to the Credit Institution to reimburse it for the amount of such drawing. On the Termination Date, the Borrower shall pay the Credit Institution the aggregate amount of any and all such drawings that have not been previously reimbursed, subject to a credit for any amounts available therefor in the principal subaccount of the Reimbursement Account. (C) In the event of any drawing under the Letter of Credit to make payments due on the Bonds as a result of any event or circumstance not covered by subparagraph (A) or subparagraph (B) above, the Borrower shall by no later than 12:00 p.m. (Nashville, Tennessee Time) on the day of such drawing pay to the Credit Institution an amount sufficient to reimburse the Credit Institution for such drawing to the extent funds are not available in the principal subaccount of the Reimbursement Account to cover such drawing reimbursement. (D) In the event of a drawing under the Letter of Credit pursuant to subparagraph (B) above, the Borrower shall pay the Credit Institution interest on the entire amount of such drawing at the Prime Rate plus one- quarter of one percent (1/4%) per annum from the date of the draw until such amount is reimbursed in full, which interest shall be payable in arrears on the first Business Day of each month, on the Termination Date or on any earlier date of reimbursement pursuant to Section 3.6. In the event the payments required by subparagraphs (A), (B) or (C) above or subparagraph (G) below are not made on the due date thereof, the Borrower - 13 - 14 shall pay the Credit Institution interest on such outstanding amounts from the due date thereof until such amounts are paid in full at the Prime Rate plus two percent (2%) per annum. (E) In the event the Credit Institution holds Bonds as pledgee or for its own account pursuant to a Tender Drawing and it receives payment in full for such Bonds and for all amounts due to it under this Agreement, the Credit Institution shall release such Bonds to the Trustee as provided in the Indenture. (F) In any event, if as a result of a drawing under the Letter of Credit other than a Tender Drawing, the Credit Institution pays any amount under the Letter of Credit in excess of the amount in the Reimbursement Account applied to reimburse the Credit Institution therefor, the Borrower shall upon demand immediately reimburse the Credit Institution for such amount. Any amounts not so paid shall bear interest at the Prime Rate plus two percent (2%) per annum, which interest shall be payable on demand. (G) The Borrower shall pay the Credit Institution on demand any and all reasonable charges and expenses, including legal fees (and interest on such amounts as provided in subparagraphs (D) and (F) above), which the Credit Institution may pay or incur relative to the Letter of Credit or in reviewing, interpreting, administering or enforcing any of its rights or responsibilities under this Agreement or the other Financing Documents. SECTION 3.2. FEES. (A) In addition to any other fees payable to the Credit Institution, the Borrower shall pay to the Credit Institution a fee with respect to the Letter of Credit (a "Letter of Credit Fee") equal to either (i) 1.09% per annum, payable annually in advance on the date hereof and on each Anniversary Date thereafter; or (ii) 1.15% per annum, payable quarterly in advance on the date hereof and on each quarterly principal payment date described in Section 3.1(A)(iv) hereof (each such annual or quarterly payment date is referred to herein as a "Fee Payment Date"). If the annual payment date is chosen, the Letter of Credit Fee shall be calculated as a percentage of the initial Stated Amount of the Letter of Credit for the first year and of the maximum potential Stated Amount of the Letter of Credit then in effect for each year thereafter (as it is reduced from time to time by virtue of drawings to redeem the principal of the Bonds or to pay principal on the Bonds at maturity, but not drawings to purchase Bonds subject to optional or mandatory tender and as so determined on the date each fee payment is due). If the quarterly payment date is chosen, the Letter of Credit Fee shall be calculated as a percentage of the initial Stated Amount of the Letter of Credit for the first quarter and of the maximum potential Stated Amount of the Letter of Credit then in effect for each quarter thereafter (as it is reduced from time to time by virtue of drawings to redeem the principal of the Bonds or to pay principal on the Bonds at maturity, but not drawings to purchase Bonds subject to optional or mandatory tender and as so determined on the date each fee payment is due). The Letter of Credit fee shall be calculated on the basis of a 360-day year. There shall be no refund of any portion of such prepaid fee by reason of expiration, reduction, modification, termination, redemption or prepayment of - 14 - 15 any of the Stated Amount, the Letter of Credit or the Bonds subsequent to the date of receipt of such fee by the Credit Institution. (B) Notwithstanding the foregoing, if an Event of Default occurs hereunder and is continuing, then from and after the occurrence of such Event of Default the Letter of Credit fee shall be simultaneously increased to two percent (2%) per annum multiplied by the maximum potential stated amount of the Letter of Credit on the Fee Payment Date immediately preceding such Event of Default. The excess over any Letter of Credit fee previously paid for the year, together with any balance of the fee for the current year, shall be due and payable in prorated monthly installments on the first of each month for the balance of the year. For any new year the Letter of Credit fee payable pursuant to this Section 3.2(B) shall be payable in full on the Anniversary Date. (C) In addition to the fees payable pursuant to the preceding paragraph, a $1,000 transfer fee and a fee of $100 per draw shall be assessed against Borrower and payable on demand. SECTION 3.3. SUPPLEMENTAL PAYMENTS. (A) If after the Date of Issuance (i) the Credit Institution determines, or acquiesces in the determination by a court or administrative or governmental authority that its obligations under this Agreement or the Letter of Credit are a deposit insured by the Federal Deposit Insurance Corporation ("FDIC") or (ii) the Credit Institution determines that any law or regulation, or any change in any law or regulation or in the interpretation thereof by any court or administrative or governmental authority charged with the administration thereof shall either (A) impose, modify or deem applicable any insurance (including, without limitation, FDIC insurance), reserve, capital adequacy, special deposit or similar requirement for or against letters of credit issued or assets held by, or deposits in or for the account of, the Credit Institution or (B) impose on the Credit Institution any other condition regarding this Agreement or the Letter of Credit, including any relating to capital adequacy, and the result of any event referred to in clause (A)(i) or (ii) above shall be to increase the cost to the Credit Institution of issuing or maintaining the Letter of Credit (which increase in cost shall be the result of the Credit Institution's reasonable allocation of the aggregate of such cost increases resulting from such events and shall be calculated without giving effect to any participation granted in the Letter of Credit) then, upon demand by the Credit Institution, the Borrower shall immediately pay to the Credit Institution all additional amounts which are necessary to compensate the Credit Institution for such increased cost incurred by the Credit Institution. A certificate as to such increased cost incurred by the Credit Institution as a result of any event referred to in clause (A)(i) or (ii) above submitted by the Credit Institution to the Borrower shall be conclusive, absent manifest error, as to the amount thereof. - 15 - 16 (B) The Borrower shall also pay interest on such increased costs at the Prime Rate plus one-quarter of one percent (1/4%) per annum from the date the Credit Institution mails Borrower written notice of such change until such amount is paid in full. SECTION 3.4. COMPUTATION OF INTEREST; FORM AND PLACE OF PAYMENT. The interest payable hereunder shall be computed on the basis of the actual number of days elapsed over a year of 360 days. If the Prime Rate changes, the interest rate on all amounts due hereunder shall be adjusted on the day of each change in the Prime Rate. All payments by the Borrower to the Credit Institution hereunder shall be made in lawful currency of the United States and in immediately available funds on the date such payment is due at the Credit Institution's office at 150 Fourth Avenue North, Nashville, Tennessee 37219. SECTION 3.5. STANDBY NOTE AND SECURITY FOR REIMBURSEMENT OBLIGATION. (A) The Borrower shall execute and deliver the Standby Note to the Credit Institution on the Date of Issuance. In the event any sums are advanced under the Letter of Credit which are not immediately reimbursed to the Credit Institution, such sums shall be deemed to be advanced under the Standby Note. (B) As security for the payment of all of its obligations under this Agreement, whether now existing or hereafter arising, the Borrower shall grant the Credit Institution a lien on, and an assignment of and security interest in, the Collateral Real Estate, all leases of and rents derived by the Borrower from the Collateral Real Estate, a security interest in all equipment, inventory, accounts and other personal property located on, used in connection with or arising from the Collateral Real Estate, pursuant to the Mortgage (in each case subject only to Permitted Encumbrances), and the Borrower shall execute and deliver (and cause the Guarantors and the other parties thereto to execute and deliver) the other Financing Documents. (C) The Borrower hereby pledges, assigns, hypothecates, transfers and delivers to the Credit Institution all its right, title and interest in and to the Reimbursement Account and hereby grants to the Credit Institution a lien on, and security interest in, the Borrower's right, title and interest in and to the Reimbursement Account and in all proceeds thereof, and substitutions therefor, as additional collateral security for the prompt and complete payment when due of all amounts due from the Borrower to the Credit Institution under this Agreement and the other Financing Documents. SECTION 3.6. ACQUISITION OF BONDS. (A) In the event the Remarketing Agent is able to remarket any Bonds as of the date of any Tender Drawing and the proceeds of such remarketing are paid to the Credit Institution on the date of such drawing, the Credit Institution shall relinquish any interest it may have had in the Bonds purchased with the proceeds of such drawing, but only to the extent of such - 16 - 17 payment, and the Trustee shall deliver Bonds, in a principal amount equal to the amount so paid, to the purchasers of such Bonds free of any claim of the Credit Institution. (B) Subject to the provisions of this Agreement, in the event that as of the date of any Tender Drawing the Remarketing Agent has been unable to remarket any or all Bonds, a principal amount of Bonds equal to the amount owed the Credit Institution for such Tender Drawing shall immediately as of such date become, and be deemed to be, owned and held by the Credit Institution as pledgee of the Borrower (or, at the option of the Credit Institution upon prior written notice to the Borrower and the Trustee, for its own account), and the Borrower hereby and pursuant to the Pledge Agreement pledges to the Credit Institution, and grants the Credit Institution a security interest in, all Bonds so purchased for the account of the Borrower with the proceeds of a Tender Drawing. (C) Upon notice to the Credit Institution that any of the Bonds held by the Credit Institution as pledgee or for its own account are to be remarketed and upon payment to the Credit Institution of the proceeds thereof and all accrued interest which is due the Credit Institution on the Tender Drawing used to purchase such Bonds, the Credit Institution shall release to the Trustee, for delivery to the purchasers thereof a principal amount of Bonds equal to the principal amount of such payment from the proceeds of the remarketing thereof, free of any pledge or ownership interest of the Credit Institution. (D) The obligations of the Credit Institution hereunder shall remain in effect until the Termination Date. (E) All amounts paid to the Credit Institution by the Borrower on Bonds held by the Credit Institution as pledgee or for its own account shall be credited against amounts due from the Borrower under Section 3.1(B) and (D). ARTICLE IV. COVENANTS OF THE BORROWER; OTHER AGREEMENTS SECTION 4.1. INCORPORATED COVENANTS OF BORROWER. All covenants of the Borrower in the other Financing Documents, to the extent not inconsistent herewith, are incorporated herein by reference and shall be deemed to have been made and reaffirmed by the Borrower for the benefit of the Credit Institution as if they were fully set forth herein. The Borrower hereby further covenants and agrees that until the Termination Date and payment to the Credit Institution of all amounts due and performance of all other obligations of the Borrower under the Financing Documents, it shall comply with the following additional affirmative and negative covenants, unless the Credit Institution shall otherwise consent in writing: (A) ACCESS TO PROJECT AND RECORDS. The Borrower shall at any reasonable time and from time to time permit the Credit Institution or any agents or representatives thereof, (i) to - 17 - 18 examine and make copies of and abstracts from all relevant records and books of account of the Borrower, (ii) to discuss all relevant affairs, finances and accounts of the Borrower with any of its partners or employees, and (iii) to inspect the Project. ANY INSPECTIONS OF THE PROJECT BY THE CREDIT INSTITUTION SHALL IN NO WAY CONSTITUTE A WARRANTY TO THE BORROWER OR ANY THIRD PARTY AS TO THE STRUCTURAL, SOIL OR ENVIRONMENTAL CONDITIONS OF THE PROJECT OR OF THE LAND ON WHICH THE PROJECT IS LOCATED. (B) PREPAYMENT OF LOAN OBLIGATIONS. The Borrower may cause, at any time, any optional prepayment of the Note as may be permitted under the Loan Agreement and Indenture and direct any corresponding optional redemption of Bonds as may be permitted under the Indenture by providing the Credit Institution with notice of the desired prepayment and by making satisfactory arrangements with the Credit Institution for reimbursing the Credit Institution in full for the drawing on the Letter of Credit necessary to effect such redemption of the Bonds by no later than the date on which the Trustee first sends notice thereof to the owners of the Bonds. Thereupon the Credit Institution shall notify the Trustee to begin redemption proceedings and to request the Trustee to draw on the Letter of Credit as required by the Indenture. (C) GOOD STANDING. The Borrower shall maintain its status at all times as a limited partnership validly existing and in good standing under the laws of the State of Tennessee. (D) TAX EXEMPT STATUS OF BONDS. The Borrower shall not take, fail to take or, to the extent it exercises any control, permit to be taken, any action if such action or failure to act would adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds and will perform all of its obligations under the Financing Documents to prevent or cure any default by the Borrower which would adversely affect such exclusion. (E) BOOKS AND RECORDS. The Borrower shall keep or cause to be kept proper books of record and account, in which full and correct entries shall be made in accordance with generally accepted accounting principles, consistently applied, of all its business and affairs, and such books of record and account shall be kept at either (i) the principal place of business of the A.R.C. Management Corporation, or (ii) at the Borrower's principal place of business, being 111 Westwood Place, Brentwood, Tennessee. The Borrower shall not change its principal place of business or the location of its books and records relating to the Project without giving prior written notice of such change to the Credit Institution. (F) FINANCIAL STATEMENTS. The Borrower shall furnish or cause to be furnished at its expense to the Credit Institution (i) all such financial and other data required to be furnished to FUNB-TN under the Loan Agreement of even date herewith executed by Borrower and FUNB-TN (the "FUNB-TN Loan Agreement"), (ii) promptly after receipt, copies of any and all deficiency or other notices, complaints, attempts to seek injunctive relief or attempts to seek injunctive remedies issued by any regulatory agency or authority having jurisdiction or authority over the Project, and (iii) promptly upon a request from the Credit Institution, such additional - 18 - 19 information, reports and statements as the Credit Institution may from time to time reasonably request. (G) NOTICE OF DEFAULTS. The Borrower shall promptly notify the Credit Institution of any default by the Borrower under any of the Financing Documents or any filing by or against the Borrower of any petition in bankruptcy or any similar insolvency proceeding. (H) NOTICE OF LITIGATION. The Borrower shall promptly inform the Credit Institution of any litigation, the adverse determination of which might materially prejudice the payment of the Bonds, the performance of its obligations under the Financing Documents, or the operation of the Project. (I) GOVERNMENTAL LICENSES. The Borrower shall take all steps necessary to maintain in full force and effect all permits, licenses, certificates of need, and other authorizations and accreditations necessary for the Borrower to own and operate the Project as a 175 unit residential retirement community substantially as currently owned and operated and to own and operate its home health agency business as currently owned and operated in Fayette County and in each of the four surrounding counties of Bourbon, Scott, Jesamine, and Franklin. (J) COMPLIANCE WITH LAWS; PAYMENT OF OBLIGATIONS. The Borrower shall comply with all valid and applicable statutes, rules and regulations, and shall pay all taxes, assessments, governmental charges, claims for labor, supplies and rent, and other obligations which, if unpaid, might become a lien against the Project (except liabilities being contested in good faith and against which, if requested by the Credit Institution, the Borrower shall set up reserves satisfactory to the Credit Institution). (K) RESERVE ACCOUNTS. The Borrower shall maintain with FUNB-TN (i) a capital expenditure reserve account in an amount not less than $88,000 for the Project; and (ii) an operating expense reseve account in an amount equal to at least 14 times the annual average daily operating expenses for the Project. These reserve accounts shall be pledged to the Credit Institution as security for the obligations of Borrower hereunder. (L) SECURITY DEPOSIT ACCOUNTS. To the extent required by applicable law, Borrower shall maintain a segregated security deposit account for the Project and shall advise the Credit Institution of its location. (M) MERGER, ACQUISITION OR SALE OF ASSETS. The Borrower shall not merge or consolidate with, or sell or transfer all or substantially all of its property or assets to any person, firm, corporation or other entity. (N) COPIES OF NOTICES OR COMPLAINTS ISSUED BY REGULATORY AGENCIES; DEFICIENCY REPORTS. The Borrower shall promptly after receipt, provide the Credit Institution with copies of any and all notices, complaints, attempts to seek injunctive relief and attempts to - 19 - 20 seek injunctive remedies issued by regulatory agencies having authority over the Project. Without limiting the foregoing, if the Borrower shall: (1) receive written notice that any violation of any Environmental Laws may have been committed or is about to be committed by the Borrower; (2) receive written notice that any administrative or judicial complaint or order has been filed or is about to be filed against the Borrower alleging any material violation of any Environmental Laws or requiring the Borrower to take any action in connection with the release or threatened release of Hazardous Materials or solid waste into the environment; or (3) receive written notice from a federal, state, foreign or local governmental agency or private party alleging that the Borrower is liable or responsible for costs associated with the response to cleanup, stabilization or neutralization of any environmental activity; then it shall provide the Credit Institution with a copy of such notice within two Business Days of the Borrower's receipt thereof. Within ten days of the date the Borrower shall have learned of the enactment or promulgation of any Environmental Laws which may have a material adverse effect on the business, property, condition (financial or otherwise) or results of operations of the Borrower, taken as a whole, or which might materially impair the value of the Project, the Borrower shall provide the Credit Institution with notice thereof. (O) SALE OR LEASE OF PROJECT. The Borrower shall not sell, lease or otherwise assign any interest in the Project or any portion thereof, except for residential leases signed in the ordinary course of business. (P) NO FURTHER ENCUMBRANCES. The Borrower shall not mortgage, pledge or otherwise encumber, either directly or indirectly, or permit or suffer to exist any lien, security interest or encumbrance upon the Project or any of its other property except for (i) existing liens as of the date of this Agreement which are approved by the Credit Institution and are disclosed in the title policy delivered to the Credit Institution on the Date of Issuance, (ii) liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, (iii) easements, rights-of-way, and other minor defects and irregularities in the title to the Project which do not impair the use of the Project or such other property or adversely affect the value thereof, and (iv) other liens and encumbrances approved by the Credit Institution. (Q) NO PAYMENTS TO RELATED PARTIES. Without the prior written consent of the Credit Institution, the Borrower shall not directly or indirectly, except as permitted in the FUNB-TN Loan Agreement, enter into or permit the payment by the Borrower of any fee, service charge or other compensation or form of reimbursement to any Person or entity related to the Borrower, American Retirement Corporation, A.R.C. Management Corporation, or American Retirement Communities, LLC ("ARC-LLC") or any Person directly or indirectly controlled by or under - 20 - 21 common control with any one or more of them; provided however, so long as no Event of Default has occurred hereunder, the Credit Institution does consent to the payment of management fees to A.R.C. Management Corporation. (R) SUBSTITUTE LETTER OF CREDIT. The Borrower shall not provide a Substitute Letter of Credit for the Bonds except (i) during the sixty (60) day period ending immediately prior to the then Scheduled Termination Date of the Letter of Credit if the Borrower and the Credit Institution have been unable to reach an agreement upon the extension of the Letter of Credit beyond its then Scheduled Termination Date, or (ii) at any time after the Credit Institution fails to honor a valid draft under the Letter of Credit, or (iii) in connection with a conversion of the Interest Rate on the Bonds to a Fixed Rate. (S) CERTIFICATE AS TO NO DEFAULT. The Borrower shall furnish to the Credit Institution within ninety (90) days after the close of each of its fiscal years a certificate signed by an officer of the general partner of the Borrower, stating that during such fiscal year and as of the date of such certificate no event or condition has happened or existed, or is happening or existing, which constitutes a Default or an Event of Default under the Financing Documents, or if such an event or condition has occurred or is occurring, specifying the nature and period of such event or condition and what action the Borrower has taken, is taking or proposes to take with respect thereto. (T) MANAGEMENT OR OPERATING AGREEMENT. The Borrower shall not enter into any management or operating agreement for the Project with any person other than A.R.C. Management Corporation. The Borrower shall not modify or amend its management agreement with A.R.C. Management Corporation without the prior written consent of the Credit Institution. (U) GENERAL PARTNER. ARC-LLC shall at all times be the sole general partner of Borrower, and Borrower shall not change or remove said general partner or add additional general partners to its partnership without the prior written consent of the Credit Institution. (V) AMENDMENT OF FINANCING DOCUMENTS. The Borrower shall not amend or consent to the amendment of any of the Financing Documents, the FUNB-TN Loan Agreement, or any other document executed in connection therewith. SECTION 4.2. CONTINUOUS OBLIGATIONS; OBLIGATIONS ABSOLUTE. This Agreement is a continuing obligation and shall (a) be binding upon the Borrower, its successors and assigns, and (b) inure to the benefit of and be enforceable by the Credit Institution and its successors, transferees and assigns; provided, the Borrower may not assign all or any part of this Agreement without the prior written consent of the Credit Institution. The obligations of the Borrower under this Agreement shall be paid or performed strictly in accordance with the terms of this Agreement under all circumstances whatsoever, and shall be absolute, irrevocable, and unconditional. - 21 - 22 SECTION 4.3. TRANSFER OF LETTER OF CREDIT. The Letter of Credit may be transferred in accordance with the provisions set forth therein and upon any transfer the Borrower shall pay the Credit Institution a transfer fee of $1,000. SECTION 4.4. REDUCTION AND REINSTATEMENT OF STATED AMOUNT OF LETTER OF CREDIT. The reduction and reinstatement of the Stated Amount by virtue of drawings under the Letter of Credit shall be as provided therein. SECTION 4.5. EXTENSION OF THE SCHEDULED TERMINATION DATE. The Credit Institution, at its sole option, may extend the Scheduled Termination Date for purposes of this Agreement and the Letter of Credit for one or more years at a time. No exercise by the Credit Institution of such option shall obligate the Borrower to accept and pay any commission on the extension of this Agreement and the Letter of Credit unless the Borrower shall consent to such extension. If the Scheduled Termination Date is extended by agreement of the parties as provided herein, then the Credit Institution shall as soon as practicable thereafter give notice to the Trustee of such extension in the form of Exhibit G to the Letter of Credit. SECTION 4.6. EVIDENCE OF DEBT. The Credit Institution shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower resulting from each drawing under the Letter of Credit and the amounts of principal and interest payable and paid from time to time hereunder. In any legal action or proceeding in respect of this Agreement, the entries made in such account or accounts shall be conclusive evidence of the existence and amounts of the obligations of the Borrower therein recorded. SECTION 4.7. OBLIGATIONS ABSOLUTE. The payment obligations of the Borrower under this Agreement shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances: (i) any lack of validity or enforceability of any of the Financing Documents; (ii) any amendment or waiver of or any consent to departure from all or any of the Financing Documents; (iii) the existence of any claim, set-off, defense or other right that the Borrower or the Guarantor may have at any time against the Trustee or any other beneficiary or any transferee of the Letter of Credit (or any persons for whom the Trustee, any such beneficiary or any such transferee may be acting), the Credit Institution, or any other person whether in connection with this Agreement, the transactions contemplated hereby or by any and all other Financing Documents or any unrelated transaction; - 22 - 23 (iv) any statement or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (v) payment by the Credit Institution under the Letter of Credit against presentation of a draft or certificate which does not strictly comply with the terms of the Letter of Credit; or (vi) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including, without limitation, any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Borrower. ARTICLE V. DEFAULTS AND REMEDIES SECTION 5.1. EVENTS OF DEFAULT. Unless waived by the Credit Institution pursuant to Section 5.2 hereof, each of the following shall constitute an Event of Default under this Agreement: (A) Any representation or warranty made in this Agreement, in any certificate, report or opinion (including legal opinion), financial statement or other instrument furnished in connection with this Agreement or any of the other Financing Documents proves to have been untrue or incomplete in any material respect when made; (B) The Borrower fails to pay on the date on which the same is due and payable as herein provided any payment required by this Agreement and/or the Standby Note to be paid by the Borrower and the same is not cured within two (2) Business Days; (C) If, for any reason (other than release by the Credit Institution), the Mortgage, the Security Agreement, the Collateral Agreement, the Pledge Agreement or any Guaranty Agreement ceases to be in full force and effect; (D) The Borrower is dissolved; (E) Any judgment against the Borrower or any attachment or levy against the property of the Borrower with respect to a claim for an amount in excess of $100,000 not adequately insured or indemnified against, remains unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of twenty (20) days; (F) A default or an event of default occurs and continues beyond any applicable cure period under the Mortgage, the Security Agreement, the Collateral Agreement, the Pledge - 23 - 24 Agreement, any Guaranty Agreement, the Loan Agreement, or any of the other Financing Documents; (G) A default or an event of default occurs and continues beyond any applicable cure period under the FUNB-TN Loan Agreement or any other document evidencing indebtedness of the Borrower to FUNB-NC and/or FUNB-TN; (H) The Borrower shall fail to make any payment due from it on any indebtedness or other security for borrowed money beyond any applicable cure period (whether its liability therefor is direct or contingent), or if any event (other than the mere passage of time) or any condition in respect of any indebtedness or other security for borrowed money of the Borrower (whether its liability therefor is direct or contingent) or under any agreement securing or relating to such indebtedness or other security for borrowed money shall occur the effect of which, after the giving of any required notice and the expiration of any applicable cure period, is to cause (or permit any holder of such indebtedness or other security or a trustee to cause) such indebtedness or other security, or a portion thereof, to become due prior to its stated maturity or prior to its regularly scheduled dates of payment, or if any such indebtedness or other security for borrowed money otherwise is accelerated and becomes due prior to its stated maturity or prior to its regularly scheduled dates of payment; (I) The determination by the Credit Institution in good faith that a material adverse change has occurred in the financial condition of any Guarantor which will impair such Guarantor's ability to comply with its obligations under its Guaranty Agreement; provided, however, that any such material adverse change shall not constitute an Event of Default hereunder until thirty (30) days following written notice from the Credit Institution to the Borrower of such material adverse change; (J) (i) Failure of the Borrower to pay generally its debts as they become due, (ii) commencement by the Borrower of a voluntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law, (iii) consent by the Borrower to the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official for the Borrower or any substantial part of its property, or to the taking possession by any such official of any substantial part of the property of the Borrower, (iv) making by the Borrower of any assignment for the benefit of creditors or (v) taking of action by the Borrower in furtherance of any of the foregoing; (K) The (i) entry of any decree or order for relief by a court having jurisdiction over the Borrower or its property in an involuntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law, (ii) appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or similar official for the Borrower or any substantial part of its property or (iii) entry of any order for the termination or liquidation of the Borrower or its affairs; - 24 - 25 (L) Failure of the Borrower within thirty (30) days after the commencement of any proceedings against it under the federal bankruptcy laws or any other applicable federal or state bankruptcy, insolvency or other similar law, to have such proceedings dismissed or stayed; (M) Notwithstanding the provisions of Section 6.8 hereof, any material provision of this Agreement at any time for any reason ceases to be valid and binding on the Borrower, or is declared to be null and void, or the validity or enforceability thereof is contested by the Borrower or any governmental agency or authority, or the Borrower denies that it has any or further liability or obligation under this Agreement or any of the other Financing Documents; (N) The Borrower at any time shall not hold or shall fail to renew any certificates of need, material operating licenses or accreditation documents necessary to operate the Project or its related home health agency business; (O) The Credit Institution, at any time, shall not hold a valid, perfected security interest or lien in any of the collateral described in Section 3.5 and in Section 3.6(B) hereof (subject only to Permitted Encumbrances) or any subordinate liens will be placed against any of such collateral, including, but not limited to, any liens for any delinquent taxes whatsoever, except for a tax lien that is being contested in good faith and for which Borrower provides additional security satisfactory in all respects to the Credit Institution and except for Permitted Encumbrances; or (P) The Borrower defaults in the due and punctual observance or performance of any other term, covenant or agreement herein contained (other than as specified elsewhere in this Section 5.1), which default remains unremedied for thirty (30) days (or such other cure period as may be specified herein) after the earlier of (i) written notice from the Credit Institution to the Borrower of such breach or (ii) Borrower's knowledge of the occurrence of such breach. Upon the occurrence of an Event of Default under this Agreement, the Credit Institution, by notice to the Borrower (except that such notice to the Borrower shall not be required in the case of any Event of Default under Section 5.1(E), (J), (K) (L) or (M) above), may in its sole discretion, but shall not be obligated to (i) declare all amounts outstanding and payable by the Borrower under this Agreement to be forthwith due and payable, and the same shall thereupon become immediately due and payable without demand, presentment, protest or further notice of any kind, all of which are hereby expressly waived, and (ii) pursue any other remedy permitted to the Credit Institution under the Financing Documents, under any other collateral agreements securing the Borrower's obligations hereunder, or at law or in equity, including but not limited to directing the Trustee to accelerate the Bonds and the Trustee to make a drawing under the Letter of Credit to pay or purchase the Bonds in accordance with Section 702 of the Indenture. In the event the Credit Institution determines to exercise its right to direct the Trustee to accelerate the Bonds and the Trustee to make a drawing under the Letter of Credit to pay or purchase the Bonds in accordance with Section 702 of the Indenture as a result of a covenant default hereunder, the Credit Institution shall give the Trustee the notice pursuant to - 25 - 26 Section 702(c) of the Indenture. Upon the occurrence of an Event of Default hereunder, the Credit Institution may also exercise any right of a secured party under the Uniform Commercial Code as to (i) any Bonds held by it as pledgee pursuant to a Tender Drawing, (ii) the collateral in the Reimbursement Account, and (iii) the fixtures, equipment and other personal property located on, used in connection with or arising from the Collateral Real Estate and the collateral provided in the Collateral Agreement; and, in addition to all remedies available to the Credit Institution at law or in equity, pursuant to any claim of subrogation by reason of any payment made pursuant to the Letter of Credit, the Credit Institution in accordance with the Indenture shall be entitled to enforce the rights of the owners of the Bonds under the Indenture and the other Financing Documents against the Borrower notwithstanding any payment, satisfaction or discharge thereof, irrespective of whether such payment, satisfaction or discharge shall have been entered as a matter of record in any court or other office wherein liens, mortgages, deeds of trust or financing statements are filed pursuant to law. SECTION 5.2. NO WAIVER; REMEDIES CUMULATIVE. No failure by the Credit Institution to exercise, and no delay in exercising, any right under this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any right under this Agreement preclude any other further exercise thereof or the exercise of any other right. No waiver under this Agreement shall be valid unless in writing signed by the Borrower and the Credit Institution, and, unless otherwise specified in such waiver, shall be effective only in the specific instance and for the specific purpose for which given and shall not preclude the right of the Credit Institution to require strict compliance with the terms hereof in any subsequent instance, whether similar or dissimilar. The remedies in this Agreement are cumulative and not exclusive of any remedies provided by law. ARTICLE VI. MISCELLANEOUS SECTION 6.1. RIGHT OF SET-OFF. In addition to any other, right or remedy that the Credit Institution may have by operation of law or otherwise, upon the occurrence of any Event of Default under this Agreement, the Credit Institution shall be entitled to exercise its banker's lien upon and its right to set-off against any and all balances, credits, deposits, accounts or moneys at any time held and other indebtedness at any time owing by the Credit Institution to or for the credit or account of the Borrower and apply the same against the payment of any and all of the obligations of the Borrower now or hereafter existing under this Agreement or any of the other Financing Documents. SECTION 6.2. LIABILITIES. All acts, including any failure to act, relating to the Project and the issuance of the Bonds and the Letter of Credit by any director, officer, employee, agent, representative or designee of the Credit Institution are performed solely for the benefit of the Credit Institution to assure repayment of the Borrower's obligations to the Credit Institution hereunder and under the other Financing Documents and are not for the benefit of the Borrower - 26 - 27 or the benefit of any other person. Under no circumstances whatsoever shall the Credit Institution, its directors, officers or employees, be deemed to assume any responsibility for, or obligation or duty with respect to, any part or all of the collateral of any nature or kind whatsoever, or in any matter or proceedings arising out of or relating thereto. The Credit Institution shall not be required to take any action of any kind to collect or protect any interest in the collateral, including but not limited to, the collection of the Loan, or to take any action necessary to preserve the Credit Institution's or the Borrower's rights against prior parties to any of the collateral. To the extent permitted by law, the Credit Institution shall not be liable or responsible in any way for the safekeeping, care or custody of any of the collateral, for any loss or damage thereto or for any diminution in the value thereof, or for any act or default of the Borrower or any of its agents or any third party, but the same shall be at the Borrower's sole risk at all times. Neither the Credit Institution nor any of its directors, officers or employees shall be liable or responsible for: (a) the use which may be made of the Letter of Credit or moneys drawn thereunder or for any acts or omissions of the Trustee and any beneficiary in connection therewith; (b) the validity, sufficiency or genuineness of documents, or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; (c) payment by the Credit Institution against presentation of documents provided such documents on their face appear to be in order and in compliance with the Letter of Credit; and (d) any other circumstances whatsoever in making or failing to make payment under the Letter of Credit, except only that the Borrower shall have a claim against the Credit Institution, and the Credit Institution shall be liable to the Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential, damages suffered by the Borrower which the Borrower proves were caused by (i) the Credit Institution's willful misconduct or gross negligence in determining whether documents presented under the Letter of Credit comply with the terms of the Letter of Credit or (ii) the Credit Institution's willful failure to pay under the Letter of Credit after the presentation to it by the Trustee or a successor trustee of a sight draft and certificate strictly complying with the terms and conditions of the Letter of Credit (absent issuance of a court order purporting to enjoin such payment). In furtherance and not in limitation of the foregoing, the Credit Institution may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. Except as otherwise provided in this paragraph, the Borrower hereby releases the Credit Institution from any claims, causes of action and demands at any time arising out of or with respect to this Reimbursement Agreement and any actions taken or omitted to be taken by the Credit Institution with respect thereto, and the Borrower hereby agrees to hold the Credit Institution harmless from and with respect to any and all such claims, causes of action and demands. The Borrower further agrees that the Credit Institution shall not be chargeable for any negligence, mistake, act or omission of any accountant, examiner, agent, attorney, receiver or operator contracted for by the Credit Institution in making examinations or investigations, or otherwise in perfecting, maintaining, protecting or realizing upon any security for the Borrower's obligations hereunder and selected with reasonable care by the Credit Institution; provided, - 27 - 28 however, the Credit Institution shall be liable for the gross negligence or wilful misconduct of any such accountant, examiner, agent, attorney, receiver or operator. SECTION 6.3. ESTOPPEL CERTIFICATE. The Borrower will, upon not less than ten (10) days' request by the Credit Institution, execute, acknowledge and deliver to the Credit Institution or to such other person(s) as the Credit Institution shall identify a statement in writing, certifying (a) that this Agreement is unmodified and in full force and effect and the payments required by this Agreement to be paid by the Borrower have been paid, and (b) the then unpaid principal balance of the Bonds; and stating whether or not to the knowledge of the signer of such certificate any party to any of the Financing Documents is in default in the performance of any covenant, agreement or condition contained therein and, if so, specifying each such default of which the signer may have knowledge, it being intended that any such statement delivered pursuant to this section may be relied upon by the Credit Institution and such other person(s) to whom such statement is made. SECTION 6.4. MODIFICATIONS. No modification or waiver of any provision of this Agreement nor consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be approved in writing, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Borrower not provided for herein in any case shall entitle the Borrower to any other or further notice or demand not provided for herein in the same, similar or other circumstance. SECTION 6.5. SUCCESSORS; TERM. This Agreement shall inure to the benefit of and shall be binding upon each successor or assign of each party. This Agreement shall continue in full force and effect until the Credit Institution shall no longer be bound to fund under the Letter of Credit and the Borrower shall have paid all amounts due hereunder and under the other Financing Documents and complied with all other provisions and conditions of this Agreement. SECTION 6.6. FEES AND EXPENSES; EXPENSES OF COLLECTION. The Borrower shall pay all fees of the Issuer, the Trustee, the Placement Agent, the Remarketing Agent and the Credit Institution and shall pay all fees and expenses of, or reimburse the Credit Institution for amounts therefor paid by it to, all appraisers (regardless of whether engaged by the Borrower or the Credit Institution), engineers, surveyors, environmental auditors, architects, title insurers and counsel performing services for the Issuer, the Trustee, the Borrower, the Placement Agent, the Remarketing Agent and the Credit Institution and Bond Counsel with respect to or in any way connected with the Bonds, the Financing Documents and the transactions contemplated thereby. The Borrower agrees to pay all expenses, including reasonable attorneys fees, which are incurred or paid by the Credit Institution in administering this Agreement, determining its rights and responsibilities hereunder and under the other Financing Documents and collecting any amounts due it or protecting or enforcing any of its rights hereunder and thereunder, and notwithstanding any disposition of any collateral securing the Credit Institution hereunder and thereunder, the Borrower shall pay to the Credit Institution any deficiencies which remain after such disposition. In addition, the Borrower shall pay any and all stamp, recording, transfer and other taxes and fees - 28 - 29 payable or determined to be payable in connection with the execution, delivery, filing and any recording of any Financing Documents and agrees to save the Credit Institution harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. The Borrower shall pay any brokerage fees or commissions arising from the issuance of the Bonds and the Letter of Credit and shall defend, indemnify, and hold the Credit Institution harmless against any and all expenses, liabilities and losses arising from such claims in connection therewith. SECTION 6.7. NOTICES. All demands, notices, approvals, consents, requests and other communications provided for hereunder shall be in electronic, telephonic or written (including bank wire, telegram, telecopier, telex or similar writing) form and shall be given to the party to whom sent, addressed to it, at its address or telephone or telecopier number set forth below or such other address or telephone or telecopier number as such party may hereafter specify for the purpose by notice to the other party set forth below. Each such notice, request or communication shall be effective (a) if given by telephone, telex, telecopier or other electronic means, when such communication is transmitted to the address specified below and any appropriate answerback is received, (b) if given by mail, three (3) Business Days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, (c) if given by any other means, when delivered at the address specified below: (i) If to the Borrower: American Retirement Communities, L.P. c/o American Retirement Corporation Suite 402, 111 Westwood Place Brentwood, Tennessee 37027 Attention: George Hicks Telephone No.: (615) 221-2260 Telecopier No.: (615) 221-2269 (ii) If to the Credit Institution: First Union National Bank of Tennessee 150 Fourth Avenue North Nashville, Tennessee 37219 Attention: Scott Miler Telephone No.: (615) 251-0768 Telecopier No.: (615) 251-9461 or (iii) in either of the foregoing cases, at such other address or telex, telecopier, bank wire or telephone number as the addressee may hereafter specify for the purpose in a notice to the other party specifically captioned "Notice of Change of Address Pursuant to Section 6.7 of the Reimbursement Agreement." - 29 - 30 SECTION 6.8. ILLEGALITY. If fulfillment of any provision hereof at the time performance of such provision shall be due shall involve transcending the limit of validity prescribed by law, then ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity; and if any clause or provisions herein contained other than the provisions hereof pertaining to reimbursement of amounts drawn under the Letter of Credit and payment of Letter of Credit fees operates or would prospectively operate to invalidate this Agreement in whole or in part, then such clause or provision only shall be void, as though not herein contained, and the remainder of this Agreement shall remain operative and in full force and effect; and if such provision impairs reimbursement of any amounts drawn under the Letter of Credit or payment of fees due hereunder, then, at the option of the Credit Institution, all amounts due from the Borrower under this Agreement shall become immediately due and payable. SECTION 6.9. ASSIGNMENT. This Agreement may not be assigned by the Borrower without the prior written consent of the Credit Institution. SECTION 6.10. PARTICIPATIONS. The Borrower recognizes that the Credit Institution or a participant may sell and transfer interests in the Letter of Credit to one or more participants or subparticipants and that all documentation, financial statements, appraisals and other data, or copies thereof, relevant to the Borrower or the Letter of Credit may be exhibited to and retained by any such participant or subparticipant whether actual or prospective. SECTION 6.11. COUNTERPARTS. This Agreement may be executed in multiple counterparts or copies, each of which shall be deemed an original hereof for all purposes. One or more counterparts or copies of this Agreement may be executed by one or more of the parties hereto, and some different counterparts or copies executed by other parties. Each counterpart or copy hereof executed by any party hereto shall be binding upon the party executing same even though other parties may execute one or more different counterparts or copies and all counterparts or copies hereof so executed shall constitute but one and the same instrument. Each party hereto ("Signing Party"), by execution of a counterpart or copy hereof, expressly authorizes and directs any other party hereto to detach the signature pages and/or acknowledgment, attestation, witness, jurat or similar pages thereto from the counterpart or copy hereof executed by Signing Party and affix same to another identical counterpart or copy hereof such that upon execution of multiple counterparts or copies hereof by all parties hereto, there shall be one counterpart or copy hereof to which the attached signature pages containing signatures of all parties hereto together with any such acknowledgment, attestation, witness, jurat or similar pages relating thereto. SECTION 6.12. RULE OF CONSTRUCTION. As to the rights and obligations of the Borrower and the Credit Institution against and to each other, the provisions of this Agreement and the Mortgage shall control to the extent they are inconsistent with the provisions of the Indenture, the Loan Agreement or any other Financing Documents. SECTION 6.13. GOVERNING LAW. This Agreement shall be governed by the internal laws of the State of Tennessee without reference to choice of law principles. - 30 - 31 SECTION 6.14. INDENTURE. The Borrower acknowledges and consents to the provisions of the Indenture. SECTION 6.15. CONSENT TO SERVICE; WAIVER OF JURY. (A) The Borrower agrees that any suit, action or proceeding arising out of or relating to this Reimbursement Agreement, the Standby Note, the other Financing Documents or any related documents may be instituted against it in any Tennessee court or in any U.S. District Court sitting in the State of Tennessee (assuming such latter court has jurisdiction over such suit, action or proceeding), at the option of the person or entity bringing such suit, action or proceeding, and the Borrower waives any objection which it may have to the laying of the venue of any such suit, action or proceeding, and irrevocably submits to the jurisdiction of any such court in any such suit, action or proceeding. Nothing herein shall affect the right of the Credit Institution to serve process in any manner permitted by law or to commence legal proceedings or otherwise proceed against the Borrower in any other jurisdiction. (B) TO THE FULLEST EXTENT PERMITTED BY LAW, THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS REIMBURSEMENT AGREEMENT, THE STANDBY NOTE OR THE OTHER FINANCING DOCUMENTS. SECTION 6.16. ACTION BY CREDIT INSTITUTION THROUGH AND RELIANCE UPON OTHERS. The Credit Institution may execute and perform any of the duties or powers required of it hereunder by or through attorneys, receivers or agents, shall be entitled to advice of counsel concerning all matters with respect to its duties hereunder, and shall not be answerable for the default or negligence of any such attorney, receiver or agent selected by it with reasonable care, or for the exercise of any discretion or power under this Agreement except only for its own gross negligence or willful misconduct, or that of its attorneys, receivers or agents. SECTION 6.17. CREDIT INSTITUTION MAY RELY UPON INSTRUMENTS. Absent its own gross negligence or willful misconduct, the Credit Institution shall be protected and shall incur no liability in acting or proceeding in good faith upon any resolution, notice, telegram, request, consent, waiver, certificate, statement, affidavit, voucher, bond, requisition or other paper or document which it shall in good faith believe to be genuine and to have been passed or signed by the proper person or to have been prepared and furnished pursuant to any of the provisions of this Agreement, and the Credit Institution shall be under no duty to make any investigation or inquiry as to any statements contained or matters referred to in any such instrument, but may accept and rely upon the same as evidence of the truth and accuracy of such statements. SECTION 6.18. ENTIRE AGREEMENT. The Financing Documents shall completely and fully supersede all other prior commitments, both written and oral, between the Credit Institution - 31 - 32 and the Borrower relating to the obligations of the Borrower thereunder, and neither the Credit Institution nor the Borrower shall hereafter have any rights under such other prior commitments but shall look solely to the Financing Documents for definition and determination of all of their respective rights, liabilities and responsibilities relating to the obligations of the Borrower thereunder. SECTION 6.19. GENDER. Whenever used herein, the singular number shall include the plural, the plural the singular and the use of the masculine, feminine or neuter gender shall include all genders. SECTION 6.20. HEADINGS. The headings in this Agreement are for convenience only and shall not limit or otherwise affect any of the terms hereof. WITNESS the following signatures, all as of the date first above written. American Retirement Communities, L.P., a Tennessee limited partnership By: American Retirement Communities, LLC, a Tennessee limited liability company, its sole general partner By: /s/____________________________ Its:_______________________________ FIRST UNION NATIONAL BANK OF TENNESSEE, a national banking association By /s/__________________________________ Its_____________________________________ FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association By /s/__________________________________ Its_____________________________________ - 32 - 33 FIRST AMENDMENT TO REIMBURSEMENT AGREEMENT This First Amendment to Reimbursement Agreement ("Amendment") is entered into as of the 18th day of February, 1997 by FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association; FIRST UNION NATIONAL BANK OF TENNESSEE, a national banking association (these two banks are referred to herein collectively as the "Credit Institution"); and AMERICAN RETIREMENT COMMUNITIES, L.P. ("Borrower"), a Tennessee limited partnership. RECITALS: WHEREAS, the Credit Institution and Borrower have previously entered into that Reimbursement Agreement (the "Reimbursement Agreement") dated as of October 31, 1994 (capitalized terms not otherwise defined herein shall have the meaning assigned in the Reimbursement Agreement); and WHEREAS, the parties wish to amend the Reimbursement Agreement in certain respects; NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are acknowledged, the parties agree as follows: 1. The Reimbursement Agreement is hereby amended by revising the table of required deposits set forth in Section 3.1(A)(iv) thereof to provide in full as follows:
Payment Date Amount ------------ ------ March 31, 1997, $60,000.00 June 30, 1997 and September 30, 1997 December 31, 1997 $65,000.00
2. The Reimbursement Agreement is hereby amended by revising the definition of "Letter of Credit" on page 5 thereof to read in full as follows: "Letter of Credit" shall mean the Letter of Credit issued by FUNB-NC to the Trustee pursuant to this Agreement in the form of Exhibit A hereto, as supplemented, modified, extended, restated or amended from time to time. 34 3. The Reimbursement Agreement is hereby amended by revising the definition of "Scheduled Termination Date" on page 5 thereof to read in full as follows: "Scheduled Termination Date" shall mean the "Stated Expiration Date" as set forth in the Letter of Credit from time to time. 4. The Reimbursement Agreement is hereby amended by revising the reference to "Exhibit G" in the last sentence of Section 4.5 thereof to be a reference to "Annex D". 5. Pursuant to Section 3.2(A) of the Reimbursement Agreement, Borrower hereby elects the quarterly payment option of Section 3.2(A)(ii) at the rate of 1.15%, as provided therein. 6. Concurrently with the execution hereof, the Credit Institution shall issue and deliver to the Trustee an extension of the Stated Expiration Date to March 31, 1998 in the form annexed to the Letter of Credit as Annex D. 7. Concurrently with the execution of this Amendment, Borrower shall pay to the Credit Institution a renewal fee in the amount of $10,221.13 (1/8% of the stated amount of the Letter of Credit). 8. As amended hereby, the Reimbursement Agreement remains in full effect, and all agreements among the parties with respect to the subject hereof are represented fully in this Amendment and the other written documents among the parties. The validity, construction and enforcement hereof shall be determined according to the substantive laws of the State of Tennessee. Dated as of the date stated above. FIRST UNION NATIONAL BANK OF NORTH CAROLINA By: /s/__________________________ Title:___________________________ FIRST UNION NATIONAL BANK OF TENNESSEE By: /s/__________________________ Title:___________________________ - 2 - 35 AMERICAN RETIREMENT COMMUNITIES, L.P. BY: AMERICAN RETIREMENT COMMUNITIES, L.L.C., G.P. By: /s/__________________________ Title:___________________________ - 3 - EX-10.16 21 LOAN AGREEMENT 1 EXHIBIT 10.16 ================================================================================ LOAN AGREEMENT between FORT AUSTIN LIMITED PARTNERSHIP, as Borrower and GENERAL ELECTRIC CAPITAL CORPORATION as Lender January ___, 1996 ================================================================================ 2 TABLE OF CONTENTS
Page No. -------- ARTICLE 1 CERTAIN DEFINITIONS Section 1.1 Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2 COMMITMENT TO LEND Section 2.1 Commitment to Lend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 2.2 Interest Rate; Late Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 3 TERMS OF PAYMENT Section 3.1 Terms of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE 4 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE Section 4.1 Conditions Precedent to the Initial Advance . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE 5 RESERVES, HOLDBACKS AND ADVANCES Section 5.1 Subsequent Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 5.2 Capital Expenditures Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 5.3 Monthly Principal Reductions and Advances for Ad Valorem Taxes . . . . . . . . . . . . . . 22 Section 5.4 Existing Reserves for Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE 6 CERTAIN RIGHTS OF LENDER Section 6.1 Remedies Upon Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 6.2 Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 6.3 Indemnification of Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE 7 OTHER AGREEMENTS
i 3 Section 7.1 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 7.2 Limitation on Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 7.3 Invalid Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 7.4 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 7.5 Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 7.6 Lender Not in Control; No Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 7.7 Time of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 7.8 Limitation on Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 7.9 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 7.10 Promotional Material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 7.11 Right of First Offer for Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 7.12 Substitution and Replacement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 7.13 Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE 8 COVENANTS Section 8.1 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 8.2 Liens, Mortgages, Encumbrances, Transfers . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 8.3 Operating Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 8.4 Rent Rolls, Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 8.5 Site Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 8.6 Noncompliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 8.7 Consultant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 8.8 Annual Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 8.9 Reserves, Deposits, Escrows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 8.10 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 8.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 8.12 Cash Operating Reserve Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 8.13 Security Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 8.14 Cash Flow Summaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 8.15 Limitation on Other Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 8.16 Legal Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 8.17 Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 8.19 Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 8.20 Non-Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 8.21 Key Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 8.22 Medicare Certification, Licenses and Compliance . . . . . . . . . . . . . . . . . . . . . . 32 Section 8.23 Immediate Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
ii 4 LIST OF DEFINED TERMS
Page No. -------- Additional Facilities Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARC, LP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARC, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARC Fort Austin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Assignment of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Assignment of Management Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Assignment of Rents and Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Broadway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Business Purpose Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Capital Expenditures Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Capital Expenditures Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Capital Expenditures Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Cash on Cash Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Debt Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Debt Service Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Deed of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Default Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Excess Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Existing Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Facility Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Fourth Modification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 GENEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Guarantors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Hampton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Hazardous Substances Indemnity Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Holdbacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Immediate Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
iii 5 Initial Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Loan Papers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Loan Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Maturity Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Net Revenues Available for Debt Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Note 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Note 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Operating Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Parkplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Preceding Loan Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 REIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Residency Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Resident . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Santa Catalina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Security Deposit Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Subsequent Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Summit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Westlake Village . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Yield Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
iv 6 LOAN AGREEMENT This Loan Agreement (this "AGREEMENT") is entered into as of January 4, 1996 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: "ARC" means American Retirement Corporation, a Tennessee corporation. "AFFILIATE" means ARC, ARC Fort Austin Properties, Inc., a Tennessee corporation ("ARC FORT AUSTIN"), American Retirement Communities, L.P., a Tennessee limited partnership ("ARC, LP"), and American Retirement Communities, L.L.C., a Tennessee limited liability company ("ARC, LLC") and any person which, directly or indirectly, controls or is controlled by or is under common control with Borrower, and/or any one of ARC, ARC Fort Austin, ARC, LP and ARC, LLC. For the purpose of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of management and policies, whether through the ownership of voting securities or interests or by contract or otherwise and shall include, without limitation, any and all constituent partners (at any tier), at any time, comprising a partnership. "AGREEMENT" means this Loan Agreement, which is in complete substitution for and replacement of each earlier Loan Agreement between Borrower and Lender and between Borrower and GENEL. "ASSIGNMENT OF RENTS AND LEASES" means, collectively, and as amended, the following Assignments of Rents and Leases: (a) Assignment of Rents and Leases dated June 14, 1994, executed by Borrower, recorded in Docket 9814, Page 1959 in the Real Property Records of Pima County, Arizona, relating to Santa Catalina, assigned to Lender and modified to relate to the Loan; 1 7 (b) Assignment of Rents and Leases dated April 1, 1992, executed by Borrower recorded in Volume 10585, Page 1435, et seq., of the Real Property Records of Tarrant County, Texas, and in Volume 11656, Page 0665, et seq., of the Real Property Records of Travis County, Texas, assigning to Lender all of the rents and leases of Broadway and Summit, as modified; (c) the Assignments 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, filed in the Real Property Records of Denver County, Colorado for Parkplace, and filed in the office of the County Clerk of Harris County, Texas for Hampton, assigning to Lender all of the rents and leases of Parkplace, Hampton, and Westlake Village; and (d) any other assignment of rents and leases in favor of Lender and pertaining to the rents and leases of the Projects. "ASSIGNMENT OF MANAGEMENT AGREEMENT" means, collectively, those agreements styled Assignment and Subordination of Management Agreement, in form and substance satisfactory to Lender, executed by Borrower and A.R.C. Management Corporation, assigning to Lender the management agreements for the Projects. "ASSIGNMENT OF CONTRACTS" means, collectively, those agreements styled Assignment and Subordination of Service Contract, in form and substance satisfactory to Lender, executed by Borrower and contractors under service agreements for the operation of the Projects. "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" means any costs approved in writing by Lender, including the Immediate Repairs described on Exhibit D, for (a) 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, 2 8 ventilating and air conditioning systems, plumbing, electrical and mechanical systems, and (b) any additions constructed in, on, about, or under such Projects, provided, further that none of the costs for any Capital Expenditures shall be paid from any Loan proceeds and no costs incurred for or amounts included as Capital Expenditures shall be included as a part of Total Expenses. "CAPITAL EXPENDITURES RESERVE" has the meaning assigned to such term in Article 5 of this Agreement. "CASH ON CASH RETURN" means the amount, expressed as a percentage, equal to annualized Net Revenues Available for Debt Service divided by the outstanding principal balance on the Loan. "COMMITMENT" means the commitment letter, dated December 21, 1995, issued by Lender to Borrower and accepted by Borrower on December 21, 1995. "COMMITMENT FEE" means a fee in the amount of $245,000, payable to Lender in consideration for the Commitment and payable as provided in Section 8.1. "DEBT SERVICE" means the aggregate principal payments (other than payments of Excess Cash Flow applied to reduction of principal), 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 permitted indebtedness (other than indebtedness evidenced by the Subordinated Notes), if any, relating to the Projects for the period of time for which calculated. "DEBT SERVICE COVERAGE" means the ratio of total Net Revenues Available for Debt Service to total Debt Service. "DEED OF TRUST" means, collectively, and as amended, the following Deeds of Trust: (a) First Deed of Trust and Security Agreement, dated April 1, 1992, executed by Borrower for the benefit of Lender, recorded at Volume 10585, Page 1351, et. seq., of the Real Property Records of Tarrant County, Texas, and recorded at Volume 11656, Page 0625, et. seq., of the Real Property Records of Travis County, Texas, encumbering Broadway and Summit, and amended by (i) First Modification Agreement dated May 27, 1993, among Lender, Borrower, and ARC; (ii) Second Renewal, Extension and Modification Agreement dated June 14, 1994, among Lender, Borrower and ARC, recorded at Volume 12209, Page 0555, et seq., of the Real Property Records of Tarrant County, Texas and 3 9 recorded at Volume 12209, Page 0555, et seq., of the Real Property Records of Travis County, Texas; and (iii) the Third Modification and (iv) the Fourth Modification; (b) First Deed of Trust and Security Agreement, dated October 31, 1994, executed by Borrower for the benefit of GENEL, recorded in Docket 9814, Page 1910, et seq., of the Real Property Records of Pima County, Arizona, encumbering Santa Catalina, assigned to Lender and modified to secure the Loan; (c) Second Deed of Trust and Security Agreement, dated of even date herewith, executed by Borrower for the benefit of Lender and encumbering Broadway and Summit; (d) First Deed of Trust and Security Agreement, 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; (e) First Deed of Trust and Security Agreement, dated of even date herewith, executed by Borrower for the benefit of Lender, encumbering Hampton and filed in the Office of the County Clerk of Harris County, Texas; (f) Open-End Mortgage and Security Agreement, 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; and (g) any other deed of trust, mortgage or similar instrument encumbering the Projects as security for the Loan. "DEFAULT" means an Event of Default as defined in the Deed of Trust or any event of default (however defined), arising under any of the other Loan Papers or in any other document or instrument evidencing or securing the Loan. "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. "EXCESS CASH FLOW" means with respect to the Projects in any period, the Net Revenues Available for Debt Service for such period, less any required additions to the Capital Expenditures Reserve and any other additions to reserves deemed necessary by Lender, less the Debt Service for such period. As such term is used in Note 1, "Excess Cash Flow" shall mean total Excess Cash Flow 4 10 multiplied by a fraction, the numerator of which shall be the principal balance of Note 1 and the denominator of which shall be the total principal balance of the Loan; as such term is used in Note 2, "Excess Cash Flow" shall mean total Excess Cash Flow multiplied by a fraction, the numerator of which shall be the principal balance of Note 2 and the denominator of which shall be the total principal balance of the Loan. "FACILITY CAPACITY" means the total number of independent living units and the total number of assisted living units and skilled nursing beds in the Projects. "FIXED RATE" shall mean the rate of interest equal to eight and twenty one-hundredths percent (8.20%) per annum for the principal balance under the Initial Advance, and, as applicable, the rate of interest under any Fixed Rate Election. "FIXED RATE ELECTION" shall mean Borrower's election to have a portion of the principal balance of the Loan bear interest at a Fixed Rate under Section 2.2. "FLOATING RATE" shall mean the rate of interest equal to two and sixty-five one hundredths percent (2.65%) per annum in excess of the GECC Composite Commercial Paper Rate (defined below). "GECC COMPOSITE COMMERCIAL PAPER RATE " shall mean the Average Interest Expense (defined below) on the actual principal amount of the GECC Composite Commercial Paper outstanding for Lender for the full fiscal month preceding the interest billing month. " GECC COMPOSITE COMMERCIAL PAPER" shall mean GECC's outstanding commercial paper for terms of nine (9) months or less from sources within the United States but excluding the current portion of GECC's long term debt and GECC Financial Corporation's borrowings and interest expense. " AVERAGE INTEREST EXPENSE" shall mean the percentage obtained by dividing the interest expense on GECC Composite Commercial Paper for such fiscal month by the average daily principal amount of GECC Commercial Paper outstanding during such fiscal month, divided by the actual number of days in such fiscal month and multiplied by the actual number of days in the calendar year. The GECC Composite Commercial Paper Rate shall be determined by Lender and evidenced by a certificate issued by an authorized employee of Lender. "FOURTH MODIFICATION" means the Fourth Renewal, Extension and Modification Agreement, of even date herewith, between Lender, Borrower, and Guarantors, modifying, renewing and extending the indebtedness evidenced by Note 1 and the documents securing or otherwise pertaining to Note 1. "GENEL" means GENEL Company, Inc., an Oregon corporation. "GUARANTORS" means ARC, ARC Fort Austin, ARC, LP, and ARC, LLC. 5 11 "GUARANTY" means that Unconditional Guaranty of Payment and Performance, of even date herewith, executed by Guarantors for the benefit of Lender and guarantying the payment and performance of all indebtedness, obligations and liabilities of Borrower under and with respect to the Loan and the Loan Papers. "HAMPTON" shall mean The Hampton at Post Oak Road Retirement Community, consisting of 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. "HAZARDOUS SUBSTANCES INDEMNITY AGREEMENT" means, collectively, those Hazardous Substances Indemnity Agreements relating to environmental conditions of the Projects, executed by Borrower, ARC, Fort Austin Associates and ARC Fort Austin for the benefit of Lender. "IMMEDIATE REPAIRS" means those repairs to the Projects described on Exhibit D. "INDEMNITY" means the Indemnity, of even date herewith, executed by ARC, Fort Austin Associates and ARC Fort Austin, indemnifying Lender against certain losses relating to the Loan and the Projects. "LETTER OF CREDIT" means the unconditional, irrevocable letter of credit in the amount of $650,000, in form and substance satisfactory to Lender, from a national banking association satisfactory to Lender, and having an expiration date not earlier than one year following the date of issuance, as the same may be renewed, extended, or replaced. "LOAN PAPERS" means: (a) this Agreement, (b) the Note, (c) the Guaranty, (d) the Letter of Credit, (e) the Indemnity, (f) the Deed of Trust, (g) the Assignment of Rents and Leases, (h) the Assignment of Management Agreement, (i) the Assignment of Contracts, (j) financing statements, (k) the Commitment, (l) the Hazardous Substances Indemnity Agreement, (m) the Fourth Modification, and (n) any and all other documents evidencing, securing, governing or otherwise pertaining to the Loan or the Obligations. "LOAN YEAR" shall mean the period between the date hereof and December 31, 1996 for the first Loan Year and the period between each succeeding January 1 and December 31 until the Maturity Date. 6 12 "MATURITY DATE" means December 31, 2002, or any earlier date 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 Papers. "NET REVENUES AVAILABLE FOR DEBT SERVICE" means, as to any period of time, all Revenues minus Total Expenses of Borrower (including reserves in an amount equal to one percent (1%) of Revenues, other than depreciation, amortization and interest, all as determined on an actual or pro forma and consolidated or combined basis, as appropriate. As such term is used in Note 1, "Net Revenues Available for Debt Service" shall mean total Net Revenues Available for Debt Service multiplied by a fraction, the numerator of which shall be the principal balance of Note 1 and the denominator of which shall be the total principal balance of the Loan; as such term is used in Note 2, "Net Revenues Available for Debt Service" shall mean total Net Revenues Available for Debt Service multiplied by a fraction, the numerator of which shall be the principal balance of Note 2 and the denominator of which shall be the total principal balance of the Loan. "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 determined on a book basis in accordance with generally accepted accounting principles. "NOTE" means, collectively, the following Promissory Notes: (a) Promissory Note dated April 1, 1992, in the stated principal amount of $24,000,000, executed by Borrower, payable to the order of Lender, as modified by First Modification Agreement dated May 27, 1993, among Lender, Borrower and ARC, as assigned and endorsed payable to the order of GENEL, as further modified by Second Renewal, Extension and Modification Agreement dated June 14, 1994 among GENEL, Borrower and ARC, as further modified by the Third Modification, as assigned and endorsed payable to the order of Lender, and as further modified by the Fourth Modification (as modified, "NOTE 1"), and (b) Promissory Note of even date herewith, in the stated principal amount of $73,500,000.00, executed by Borrower and payable to the order of Lender as therein provided ("NOTE 2"). "PARKPLACE" means Parkplace Retirement Community, consisting of approximately 173 independent residential living units, and 53 assisted living units on 1.623 acres located at 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 any other retirement communities 7 13 acquired, constructed or developed by Borrower from proceeds of Subsequent Advances, 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. "REVENUES" means for any period, all revenues actually received by Borrower from its operations of the Projects, including (a) gross resident service revenues less contractual allowances and provisions for uncollectible accounts, free care and discounted care, if any, plus (b) other operating revenues, plus (c) non-operating revenues, plus (d) entrance fees actually paid, if any, net of refunds; however, that no determination thereof shall take into account (1) income derived from irrevocable deposits, (2) 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, (3) gifts, grants, bequests or donations restricted as to use by the donor or grantor for a purpose inconsistent with the payment of Debt Service and (4) insurance (other than business interruption) and condemnation proceeds. For purposes of any calculation that is made with reference to both Revenues and Total 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 Total Expenses. "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. "SUBORDINATED NOTES" means those Non-Negotiable Promissory Notes in the aggregate principal amount of $10,000,000, issued by Borrower to various investors in Borrower. 8 14 "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. "TOTAL EXPENSES" means, for any period, the total operating and non-operating expenses of Borrower relating to the Projects, determined on an actual or pro forma consolidated or combined basis, as appropriate; however, "Total Expenses" shall not include any required additions to the Capital Expenditures Reserve and any additions to the other reserves deemed necessary by Lender. "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. "YIELD MAINTENANCE" shall mean, with respect to that portion of the Loan for which the calculation is to be made, the sum of the Present Value on the date of prepayment of each Monthly Interest Shortfall for the remaining term of the loan discounted at the monthly Replacement Treasury Yield. The Monthly Interest Shortfall is calculated for each monthly payment date as follows: (i) the positive difference, if any, of the Fixed Rate less the Treasury Yield, plus the Break Contract Fee of 20 basis points; (ii) divided by 12; (iii) multiplied by the portion of the Loan for which the calculation is to be made 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. The "BREAK CONTRACT FEE" shall be 20 basis points at all times. The "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 of the Treasury's being quoted, then the Replacement Treasury Yield will equal the yield for the 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. 9 15 ARTICLE 2 COMMITMENT TO LEND Section 2.1 COMMITMENT TO LEND. Subject to and upon the terms and conditions of this Agreement, Lender agrees to advance to Borrower up to NINETY-SEVEN MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($97,500,000.00) (the "LOAN") in one or more advances ("ADVANCES") in accordance with the Approved Budget attached hereto as Exhibit C and made a part hereof and as hereinafter provided, for the purposes of (1) refinancing of Broadway, Summit, Santa Catalina, Parkplace, Hampton, and Westlake Village, (2) providing up to an additional $17,000,000 in financing for Borrower's acquisition and construction of additional senior living facilities, acquisition of land for construction of new senior living facilities, and/or expansion of the existing and new Projects as described in Section 5.1(a), (3) providing up to $18,000,000 in financing for Borrower's general business purposes as described in Section 5.1(b), and (4) providing funds for Borrower's payment of the Commitment Fee and other costs of closing the Loan as described in Section 5.1(c). The initial Advance of the Loan (the "INITIAL ADVANCE") shall be made on Borrower's satisfaction of conditions to the Initial Advance described in Article 4. Advances subsequent to the Initial Advance ("SUBSEQUENT ADVANCES") shall be made on Borrower's satisfaction of condition to Subsequent Advances set forth in Article 5. Section 2.2 INTEREST RATE; LATE CHARGE. The outstanding principal balance of the Loan arising from the Initial Advance, including the entire outstanding principal balance of Note 1, shall bear interest at the Fixed Rate, and the Fixed Rate shall be effective as of November 1, 1995, and the outstanding principal balance of the Loan arising from Subsequent Advances shall bear interest at the Floating Rate; provided, however, that so long as no Event of Default exists, Borrower may on a one-time basis at any time on or before the expiration of the third Loan Year, December 31, 1998, and on at least five (5) Business Days prior written notice to Lender make an election, specifying the Business Day, not less than five (5) Business Days after the notice, on which the election is to be effective, to have all or any portion of the existing principal balance of the Loan (other than as arising from the Initial Advance) bear interest at a rate of interest equal to 2.65% per annum in excess of the closing price (yield to maturity) of the most recently issued U.S. Treasury security having a maturity of December 31, 2002 (or a date as closely corresponding to that date as is possible), as quoted in the Wall Street Journal on the Business Day on which the election becomes effective. If the Wall Street Journal (i) quotes more than one such U.S. Treasury security, the higher or highest of such quotes shall apply, (ii) publishes a retraction or correction of any such quote, the quote in the retraction or correction shall apply, or (iii) ceases to publish such quotes, the U.S. Treasury security shall be determined from such financial reporting service or source as Lender shall determine. Lender shall endeavor to communicate the applicable Fixed Rate to Borrower as soon as possible after the Fixed Rate Election. 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 of the preceding interest installment due date, as the case may be, to the date of the next interest installment due date or the Maturity Date. 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 10 16 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 Default exists, the Loan shall bear interest at the Default Rate. ARTICLE 3 TERMS OF PAYMENT Section 3.1 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 Papers, are herein collectively called the "OBLIGATIONS"); (1) INTEREST. Commencing on February 1, 1996, 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 Papers are paid in full. The February 1, 1996 payment will be adjusted to reflect the Fixed Rate of interest effective as of November 1, 1995. (2) PRINCIPAL AMORTIZATION. In addition to monthly payments of interest hereunder, commencing February 1, 1996, adjusted to be effective as of November 1, 1995, and continuing on the first day of each month thereafter, to and including December 1, 2002, Borrower shall pay to Lender, in reduction of the principal balance of the Loan an amount equal to twelve one hundredths percent (.12%) of the total of all amounts which have been advanced under the Loan; provided, however, that if during any 90-consecutive day period, either (i) the Cash on Cash Return is less than twelve and ninety-five one hundredths percent (12.95%), or (ii) the Net Worth of ARC, LP is less than $10,000,000, then, in addition to regular monthly installments of principal and interest, Borrower shall pay to Lender, in reduction of the principal balance of the Loan, on the twentieth (20th) day of each month, fifty percent (50%) all Excess Cash Flow for the preceding month until for a 90-consecutive day period the Cash on Cash Return equals or exceeds 12.95% and the Net Worth of ARC, L.P. equals or exceeds $10,000,000. The February 1, 1996 payment will be adjusted to include amortization payments commencing November 1, 1995. (3) 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 Papers. (4) PREPAYMENT. Borrower may not prepay the Loan in whole or in part at any time before the expiration of the second Loan Year. From and after January 1, 1998, the commencement of the third Loan Year, Borrower may prepay the Loan in whole or in part, upon ten (10) days prior written notice to Lender, and on any regularly scheduled 11 17 interest payment due date, by paying Lender all or a portion of the principal balance of the Loan, plus a prepayment premium, equal to either: (i) two percent (2%) of the entire principal amount of any prepayment made during the third Loan Year (January 1, 1998 through December 31, 1998), (ii) one percent (1%) of the entire principal amount of any prepayment made during the fourth Loan Year (January 1, 1999 through December 31, 1999), or (iii) zero percent (0%) of the entire principal amount of any prepayment made after the end of the fourth Loan Year, December 31, 1999. Each prepayment shall be applied first in reduction of that portion of the Loan which bears interest at the Floating Rate until all of the principal balance which bears interest at the Floating Rate has been paid in full, after which prepayment amounts shall be applied in reduction of that portion of the principal balance of the Loan which bears interest at the Fixed Rate. In addition to any prepayment fees outlined above, upon repayment prior to the Maturity Date of any portion of the Loan which bears interest at a Fixed Rate, Borrower shall also pay to Lender the Yield Maintenance for the portion of the Loan prepaid that bears interest at the Fixed Rate. (5) APPLICATION OF PAYMENTS. All payments received by Lender under the Loan Papers shall be applied: first, to any fees and expenses due to Lender under the Loan Papers; second, to any Default Rate interest or late charges; third, to accrued and unpaid interest; fourth, to the principal sum which is payable at the Floating Rate, and fifth, to the principal sum which is payable at a Fixed Rate and other amounts due under the Loan Papers. Lender reserves the right to require any payment on this Note, 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. 12 18 ARTICLE 4 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE Section 4.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE. The Initial Advance shall not exceed $97,500,000 less the Holdbacks under Section 5.1 of this Agreement (collectively, the "HOLDBACKS"). Lender shall not be obligated to make the Initial Advance unless and until Borrower shall have delivered to lender of the following, all of which shall be in form and substance satisfactory to Lender: (a) The fully-executed Note and the other Loan Papers; (b) The Guaranty; (c) The Letter of Credit; (d) The Commitment Fee of $245,000, to the extent the Commitment Fee is required to be paid under Section 8.1. (e) ALTA or equivalent loan or mortgagee policy(ies) of title insurance, or written undertaking(s) by a title insurance company to provide said policy(ies) within seven (7) days, in form and substance and in amount acceptable to Lender and insuring that the liens and security interests created by the Deed of Trust constitute valid first priority and second priority liens, as applicable, encumbering the Projects, subject to no exceptions other than those approved in writing by Lender; (f) The limited partnership agreement of Borrower, and all amendments thereto, the articles of organization and regulations of ARC, LLC, and all amendments thereto, the certificate of limited partnership for each of Borrower and ARC, LP, and the articles of incorporation, bylaws, certificates of good standing (Tennessee, Texas, Arizona, Ohio and Colorado), certificates of authority to do business (Texas, Arizona, Ohio and Colorado), certificate of incumbency and authorizing resolution for ARC Fort Austin; (g) Legal opinion(s) issued by Borrower's counsel, in form and content acceptable to Lender and Lender's counsel, as to the valid existence of Borrower and each of Guarantors and the due authorization, execution, delivery, enforceability and validity of this Agreement and the other Loan Papers executed and delivered by Borrower and Guarantors; that the Loan is not usurious; that Borrower's counsel has no knowledge and has received no notice that any of the Projects is in violation of any zoning, building, health, fire, traffic, environmental, wetlands, coastal or other rules, regulations, ordinances, statutes and requirements applicable to the Projects; and that the Loan Papers do not create or constitute a partnership, joint venture or other trust or fiduciary relationship between Borrower and Lender; and as to such other matters as Lender or Lender's counsel reasonably may specify; 13 19 (h) Current UCC searches for Borrower and the immediately preceding owner of each of the Projects, in form and content acceptable to Lender; (i) Evidence of insurance as described in the Deed of Trust, including, without limitation, all- risk casualty insurance, use and occupancy insurance covering rental income loss, and comprehensive general liability insurance, in form and substance and from issuing companies acceptable to Lender, naming Lender as an additional or named insured, as its interests may appear, and conforming in all respects to the requirements of the Commitment; (j) Evidence of professional liability or medical malpractice insurance in form and amount and from an insurer satisfactory in all respects to Lender; (k) Current "as-built" surveys for each Project prepared by a surveyor or engineer acceptable to Lender and certified to Lender's benefit in form and substance acceptable to Lender; (l) Engineering reports or architect's certificates, in form and content acceptable to Lender with respect to the Projects, 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 (which must be approved by Lender) or with any applicable local, state or federal law, a schedule of which engineering reports or architect's certificates are listed on Exhibit E attached hereto and made a part hereof; (m) Environmental engineering reports with respect to the Projects, in form and content acceptable to Lender, conducted by an engineer and in a manner both of which are satisfactory to Lender, based upon an investigation relating to toxic or hazardous wastes, waste products, or substances on the Projects; (n) Evidence acceptable to Lender that all requisite certificates of occupancy, building permits, and other licenses, certificates, approvals or consents required of any regulatory authority having jurisdiction over the Projects 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; (o) A current rent roll of each of the Projects, certified by Borrower or the current owner of each of the Projects, and copies of all Residency Agreements, and a copy of each standard lease form, admission agreement, or 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; (p) Copies of all management agreements for the Projects, approved by Lender and certified by Borrower; 14 20 (q) Evidence satisfactory to Lender (based on Lender's audit, at Borrower's expense, of all income and expenses of the Projects) that the Net Revenues Available for Debt Service generated by the Projects equals or exceeds $11,270,000 on an annualized basis from Residency Agreements for not more than ninety-five percent (95%) of the units of the Projects after application of a management fee equal to three percent (3%) of Revenues and a Capital Expenditures Reserve of one percent (1%) of Revenues per annum; (r) 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 States of Texas, Arizona, Ohio and Colorado, the Texas Department of Health, the Texas Department of Human Services, the Arizona Department of Health Services, the Ohio Department of Health, the Ohio Department on Aging, Colorado Department of Public Health and Environment, the Colorado Department of Healthcare Policy and Financing and the United States Department of Health and Human Services; (s) Certified copies of (i) Medicare provider agreements, as applicable, issued under Title XVIII and Title XIX of the Social Security Act of 1965, with current provider numbers, (ii) as applicable, Nursing Home Licenses (or "long-term-care licenses") issued by the Texas Department of Health, or the Texas Department of Human Services for Broadway and Summit, and the Arizona Department of Health Services for Santa Catalina, (iii) a Personal Care Facilities License issued by the Texas Department of Health, or the Texas Department of Human Services, for Broadway, Summit and Hampton, the Arizona Department of Health Services for Santa Catalina, the Ohio Department of Health or the Ohio Department on Aging for Westlake Village, and the Colorado Department of Public Health and Environment, the Colorado Department of Healthcare Policy and Financing for Parkplace, and (iv) 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; (t) Evidence satisfactory to Lender that the Projects and the operation thereof comply with all covenants and restrictions of record and applicable laws, ordinances, rules and regulations, including, without limitation, the Americans with Disabilities Act and regulations thereunder; (u) Evidence satisfactory to Lender that there shall have been no change in the financial condition of Borrower or in the Net Revenues Available for Debt Service which materially and adversely affects Borrower's ability to perform its obligations under the Note or under any of the other Loan Papers; (v) Evidence satisfactory to Lender that no condemnation or adverse zoning or usage change proceedings shall have been commenced or threatened against any of the 15 21 Projects, that the Projects shall not have suffered any damage in excess of $100,000 by fire or other casualty, and no law, regulation, ordinance, moratorium, injunctive proceeding, restriction or similar matter shall have been enacted, adopted or threatened by any federal, state or local government or any board, authority, commission, agency or department asserting jurisdiction over the subject matter, and no litigation, action, citation or similar proceeding or matter shall be pending or threatened against Borrower or any Project, which would have the effect, in Lender's judgment, of materially and adversely affecting the financial condition of Borrower or any Project, its operation or the anticipated benefits to be derived by Borrower therefrom or by Lender in connection with its assisting Borrower in refinancing any Project for any reason, whether because of Borrower's being prohibited or delayed in converting any Project to usage other than its present usage or otherwise; (w) Evidence satisfactory to Lender that the representations and warranties made in the Loan Papers are true and correct in all material respects on the date of the Initial Advance, and that Borrower shall have performed all acts required by the Loan Papers to have been previously performed by Borrower; (x) Evidence satisfactory to Lender that there is no lien, other encumbrance or other title matter encumbering any Project and not approved by Lender (other than for taxes not yet due and payable and title matters permitted by the Deed of Trust) and that there has been no other change in the state of title to any Project; (y) Evidence that 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; and (z) Such other documents or items as Lender or its counsel reasonably may require. ARTICLE 5 RESERVES, HOLDBACKS AND ADVANCES Section 5.1 SUBSEQUENT ADVANCES. Up to $35,400,000 of the Loan is allocated for Subsequent Advances, including up to $17,000,000 which is to be advanced for Borrower's acquisition of additional senior living facilities, Borrower's acquisition of land for new senior living facilities, Borrower's construction of new senior living facilities, and the expansion of the existing Projects, as approved by Lender and as described below (the "ADDITIONAL FACILITIES HOLDBACK"), up to $18,000,000 for general corporate or partnership purposes as approved by Lender and as described below (the "BUSINESS PURPOSE HOLDBACK"), and up to $400,000 for financing costs of closing the Loan (including but not limited to costs of title insurance, professional fees, all credit and legal evaluations, evaluating collateral and the like, travel expenses, fees and costs of appraisers, attorneys and engineers and other out-of-pocket expenses 16 22 incurred by Lender) and paying the Commitment Fee (the "TRANSACTION COSTS HOLDBACK"). The Additional Facilities Holdback, the Business Purpose Holdback, and the Transaction Costs Holdback are to be advanced on the following terms and conditions: (a) ADDITIONAL FACILITIES ADVANCES. The Additional Facilities Holdback shall be disbursed in several advances ("ADDITIONAL FACILITIES ADVANCES") to be made periodically on the following terms and conditions: (1) Additional retirement communities acquired by Borrower through Additional Facilities Advances, any renovation or expansion of any such retirement community, any construction of a new retirement community, and any acquisition of land for construction of a new retirement community through Additional Facilities Advances shall be subject in all respects to Lender's underwriting and due diligence review, it being understood that Lender may determine not to make advances for any such acquisition, renovation, expansion, new construction, or land acquisition in its sole and absolute discretion; (2) Lender shall not be obligated to make any Additional Facilities Advance after December 31, 1998; (3) Lender shall have no obligation to make any Additional Facilities Advance in an amount less than $500,000, except for the last Additional Facilities Advance which may be in the amount of the then remaining amount of the Additional Facilities Holdback; (4) Lender shall not be obligated to make any Additional Facilities Advance unless, after giving effect to such Additional Facilities Advance (and, on or before December 31, 1997, any unfunded portion of the Business Purpose Holdback), (i) Debt Service Coverage is at least 1.30:1 calculated on the then current interest rates (a blending of Fixed Rates and the Floating Rate, as appropriate), and (ii) the Cash on Cash Return is at least 14%. Calculation of Debt Service Coverage and Cash on Cash Return will be based on Lender's audit (using Lender's normal audit procedures), at Borrower's sole cost and expense, of the Projects then securing the Loan (excluding any released Project) and of any Project which is being acquired by Borrower through such Additional Facilities Advance, and the minimum required Cash on Cash Return and the minimum required Debt Service Coverage will be calculated based on Lender's audit of the twelve (12)-month period immediately preceding the requested Additional Facilities Advance; (5) Lender shall have a first deed of trust or mortgage, an assignment of rents and leases, and perfected Uniform Commercial Code security interests, on each new retirement community for which any Additional Facilities Advance is made. Each mortgage or other security instrument on any retirement community in addition to the existing Projects shall be cross-collateralized and cross- defaulted with the Deed of Trust and all other Loan Papers; 17 23 (6) Borrower shall give Lender a written notice of each request for an Additional Facilities Advance at least ten (10) Business Days prior to the date on which such requested Additional Facilities Advance is to be made and shall include in such notice the amount of the Additional Facilities Advance being requested and Lender may, at Borrower's expense, conduct an audit, inspection, or review of the Projects to confirm the amount of the requested Additional Facilities Advance; (7) All renovation or construction work by Borrower on any Project or on any other retirement community or land acquired by Borrower prior to the date an Additional Facilities Advance is requested for such work shall be completed to the satisfaction of Lender in accordance with (i) the plans therefor, if any, approved by Lender, and (ii) all applicable laws, regulations, ordinances, and other requirements of any municipality or governmental agency having jurisdiction over the Projects (or such other retirement community); (8) Borrower shall not use any Additional Facilities Advance, or any portion of any Additional Facilities Advance, for payment of any other cost or expense except as specifically set forth in a budget approved by Lender and in a request for a Additional Facilities Advance approved by Lender in writing. Lender shall have no duty or obligation to fund any Additional Facilities Advance except in accordance with this Agreement and a budget approved by Lender, and only for expenses incurred in arrears. Borrower shall promptly furnish to Lender true and correct copies of all proposed changes, amendments, or supplements to any such budget, and Borrower shall not be permitted to make any such change, amendment, or supplement without the prior written consent of Lender; (9) Requests for Additional Facilities Advances shall specify the amount requested, shall be on forms satisfactory to Lender, and shall be accompanied by appropriate invoices, bills paid affidavits, lien waivers, title updates and title endorsements satisfactory to Lender, and other documents required by Lender. Additional Facilities Advances may be made either (i) in reimbursement for costs and expenses paid by Borrower, or (ii) for payment of costs and expenses incurred and invoiced but not yet paid by Borrower, and shall be made within ten (10) business days following request therefor and satisfaction of all conditions specified herein; (10) Lender shall have the right, but not the obligation, to disburse and apply the proceeds of any Additional Facilities Advances to the satisfaction of any of Borrower's obligations hereunder (other than Borrower's obligations which are being diligently contested by Borrower in accordance with the Deed of Trust, and for which Borrower has provided Lender security in accordance with the Deed of Trust) directly to any contractor or subcontractor, materialman, title company, and any other person or firm to whom payment is due under this Agreement or under any other Loan Papers. Any Additional Facilities Advances made by Lender for such purpose shall be part of the Loan and shall be secured by the Loan Papers. 18 24 No further direction or authorization from Borrower shall be necessary to warrant such direct Additional Facilities Advances and all such Additional Facilities Advances shall satisfy pro tanto the obligations of Lender hereunder and shall be secured by the Loan Papers as fully as if made directly to Borrower. Notwithstanding the other provisions of this Section 5.1, nothing in this Agreement is intended to be for the benefit of, nor may be enforced by, nor should be relied upon by, any person, firm or corporation other than Borrower, its partners, successors, or assigns; and (11) All certificates of occupancy, building permits, licenses, certificates, approvals or consents required for the Projects shall continue to be valid and issued without variance or condition; and there shall be no litigation, action, citation, injunctive proceeding or like matter pending or threatened with respect to any such matter and, if requested by Lender, any of such certificates of occupancy, building permits, licenses, certificates, approvals and consents shall be delivered to and approved by Lender. (b) BUSINESS PURPOSE ADVANCES. The Business Purpose Holdback shall be disbursed in several advances ("BUSINESS PURPOSE ADVANCES") to be used for general corporate or partnership purposes of Borrower and its Affiliates approved by Lender in its sole and absolute discretion, including up to $10,000,000 to satisfy the Subordinated Notes, up to $8,000,000 for payment of taxes and other corporate and partnership purposes as approved by Lender, including $517,061 which is allocated specifically for the completion of the Immediate Repairs (as detailed in Exhibit D), and otherwise for acquisition, construction, or renovation of new retirement communities (including the acquisition of raw land for the construction thereof) and expansion of the existing Projects. Business Purpose Advances shall be made on the following terms and conditions: (1) Lender shall not be obligated to make any Business Purpose Advances after December 31, 1997; (2) Lender shall not be obligated to make any Business Purpose Advance if annualized Net Revenues Available for Debt Service are less than $11,270,000; and (3) Business Purpose Advances for acquisition, renovation and construction of new retirement communities, acquisition of land for construction of new retirement communities, and expansions of the existing Projects shall be subject to Lender's approval in its sole and absolute discretion, and further subject to the Advance conditions of Subsections 5.1(a)(5) through 5.1(a)(11), including Lender being furnished with a first deed of trust or mortgage, an assignment of rents and leases and perfected Uniform Commercial Code security interests on each new retirement community. Each mortgage or other security instrument on each retirement community in addition to the Projects shall be cross-collateralized and cross-defaulted with the Deed of Trust and all other Loan Papers; 19 25 (4) Until completion of the Immediate Repairs, Lender shall hold back the unfunded portion of the amount of the Business Purpose Holdback which is allocated for the Immediate Repairs; (5) On completion of the Immediate Repairs in a manner satisfactory to Lender and Lender's engineer, any unfunded portion of the amount of the Business Purpose Holdback which is allocated for the Immediate Repairs automatically shall be reallocated to be available for other general corporate or business purposes as approved by Lender. (c) TRANSACTION COSTS HOLDBACK. The Transaction Costs Holdback shall be disbursed in one or more Advances for payment of bona fide costs of closing the Loan which have been approved by Lender in its sole and absolute discretion, and for payment of the Commitment Fee, as and when the Commitment Fee is due and payable under Section 8.1 of this Agreement. When the Commitment Fee and all costs of closing have been paid in full, any unfunded portion of the Transaction Costs Holdback automatically shall be reallocated to the Additional Facilities Holdback. (d) ALL SUBSEQUENT ADVANCES. All Subsequent Advances shall be subject to the following terms and conditions: (1) There shall exist no Default and no event or condition which, with notice or the passage of time, or both, could constitute a Default; (2) There shall have been no change in the financial condition of Borrower or of the Projects taken as a whole which materially and adversely affects Borrower's ability to perform its obligations under the Note or the other Loan Papers; (3) No condemnation or zoning or usage change proceedings shall have been commenced or threatened against any Project which, in Lender's judgment, would materially adversely affect the operation or financial performance of the Projects taken as a whole, no Project shall have suffered any significant damage by or other casualty, and no law, regulation, ordinance, moratorium, injunctive proceedings, restriction, litigation, action, citation or similar proceeding or matter shall be pending or threatened against Borrower or any Project, which would have the effect, in Lender's judgment, of materially and adversely affecting the financial condition of Borrower or the Projects taken as a whole, their operation or the anticipated benefits to be derived by Borrower therefrom or by Lender in connection with its assisting Borrower in financing the Projects for any reason, whether because of Borrower's being prohibited or delayed in converting a Project to usage other than its present usage or otherwise; (4) The representations and warranties made in the Loan Papers will be true and correct in all material respects on the date of each such request for a 20 26 Subsequent Advance, and Borrower shall have performed all acts required by the Loan Papers to have been previously performed by Borrower; (5) Borrower shall give Lender a written notice of each request for a Subsequent Advance at least thirty (30) days prior to the date on which such disbursement is to be made and shall include the amount of the Subsequent Advance being requested, accompanied by such invoices, lien waivers and other documents as Lender shall request, and Lender may at Borrower's expense conduct an audit of the Projects to confirm the amount of the requested Subsequent Advance; and (6) There shall be no lien, other encumbrance or other title matter not approved by Lender (other than for taxes not yet due and payable and title matters permitted by the Deed of Trust) and there shall be no other change in the state of title to any Project. Lender may require title insurance date-down endorsements to insure no change in the state of title. Section 5.2 CAPITAL EXPENDITURES RESERVE. Borrower shall make monthly payments to Lender on the first day of each month in the amount of two percent (2%) of Revenues for the preceding month, such payments to be applied in reduction of the principal balance of Note 2 (without premium, penalty or Yield Maintenance), and the amount of such principal reduction shall constitute a reserve to be advanced for Capital Expenditures (the "CAPITAL EXPENDITURES RESERVE"). Borrower shall submit to Lender annually a budget for Capital Expenditures for the Projects for the next succeeding year (the "CAPITAL EXPENDITURES BUDGET"), and Lender shall approve or disapprove, or request changes in the Capital Expenditures Budget at Lender's reasonable discretion. Items contained within an approved Capital Expenditures Budget shall be deemed approved for disbursements from the Capital Expenditures Reserve during the applicable budget period. Borrower may, not more frequently than once every month, and in amounts of not less than $25,000 for each Project, request Lender to make Advances (or readvance) the Capital Expenditures Reserve ("CAPITAL EXPENDITURES ADVANCES") to reimburse Borrower for, pay, or provide funds for Borrower's payment of, the cost of completed Capital Expenditures at any Project, subject to the conditions to Subsequent Advances under Subsection 5.1(d) and the following terms and conditions: (a) Lender shall have approved the Capital Expenditures and all plans and specifications therefor and all work for which a Capital Expenditures Advance has been requested shall have been completed in a manner satisfactory to Lender and Lender's engineer; and (b) Advances of the Capital Expenditures Reserve shall be evidenced by Note 2 and shall bear interest at the Floating Rate. 21 27 Section 5.3 MONTHLY PRINCIPAL REDUCTIONS AND ADVANCES FOR AD VALOREM TAXES. In addition to any other principal reductions, Lender and Borrower agree that, notwithstanding any contrary term of the Note or the Deed of Trust, monthly deposits by Borrower required under the Deed of Trust for ad valorem taxes and assessments shall be applied in reduction of the principal balance of the Note (without premium, penalty or Yield Maintenance), and re- advanced to Borrower or to the applicable taxing authorities, subject to the conditions to Subsequent Advances in Subsection 5.1(d)(1) and the requirement that there shall be no change in the state of title, as insured by title insurance date-down endorsements as required by Lender, for payment of such taxes and assessments as and when taxes and assessments are due and owing on the Projects. Advances for ad valorem taxes and assessments shall be evidenced by Note 2 and shall bear interest at the Floating Rate. Section 5.4 EXISTING RESERVES FOR CAPITAL EXPENDITURES. Lender shall continue to hold all reserves for Capital Expenditures currently held by Lender and shall disburse the same prior to any Capital Expenditures Advances under Section 5.2 to reimburse Borrower for the cost of Capital Expenditures, provided such Capital Expenditures and all plans and specifications therefor shall have been approved by Lender, all work for which a Capital Expenditures disbursement has been requested shall have been completed in a manner satisfactory to Lender and Lender's engineer, and provided further that all of the conditions to Subsequent Advances in Subsection 5.1(d) shall have been satisfied. Upon the occurrence of any Default and the expiration of any applicable period of grace or notice and cure, Lender may, at Lender's option, apply any undisbursed portion of such reserves for Capital Expenditures in reduction of the amount owing on the Loan. ARTICLE 6 CERTAIN RIGHTS OF LENDER Section 6.1 REMEDIES UPON DEFAULT. Should a Default occur and be continuing after the expiration of any applicable period of grace or notice and cure, Lender shall have all the rights and remedies provided in the Loan Papers. Section 6.2 LETTER OF CREDIT. If a Default should occur and be continuing after the expiration of any applicable period of grace or notice and cure, Lender may, in addition to and not in limitation on Lender's rights under the Letter of Credit, present a draft or drafts on the Letter of Credit for any unpaid amounts owing to Lender under the Loan Papers up to the full amount of the Letter of Credit, and may apply amounts disbursed under the Letter of Credit to the payment of any sums owing under the Loan Papers; however, the (a) honor and payment of any such draft to Lender, or Lender's application of any such payment to sums owing under the Loan Papers, shall not cure or be deemed to have cured such Default, (b) Lender shall continue to have all the rights and remedies provided in the Loan Papers on account of such Default, including the right to accelerate the maturity of the indebtedness evidenced by the Note and foreclose the liens and security interests created under the Deed of Trust, unless and until the issuer of the Letter of Credit provides to Lender such amendments or modifications to the Letter of Credit as are necessary in Lender's sole judgment to restore the Letter of Credit to its original 22 28 amount such that Lender may draw on the Letter of Credit as if no prior draft had been honored and paid. Section 6.3 INDEMNIFICATION OF LENDER. Borrower shall indemnify, defend and hold Lender harmless from and against any and all liabilities (including, without limitation, any and all taxes and special assessments levied against the Projects, or personal property located thereon), obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature which may be imposed on, incurred by, or asserted against Lender, in any way relating to, or arising out of (i) any brokerage commissions or finder's fees claimed by any broker or other party in connection with the Commitment or the Loan, (ii) any failure by Borrower to comply with provisions of the Loan Papers (other than provisions relating to the payment of principal, interest or late charges), (iii) any breach of any representation, warranty or covenant set forth in Section 8.22, or (iv) any professional malpractice or negligence relating to the operation of any Project. ARTICLE 7 OTHER AGREEMENTS Section 7.1 GOVERNING LAW. THE LOAN PAPERS ARE BEING EXECUTED AND DELIVERED, AND ARE INTENDED TO BE PERFORMED, IN THE STATE OF TEXAS AND THE LAWS OF SUCH 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 PAPERS, EXCEPT TO THE EXTENT OTHERWISE SPECIFIED IN ANY OF THE LOAN PAPERS. ALL OBLIGATIONS OF BORROWER UNDER THE LOAN PAPERS SHALL BE PERFORMABLE IN DALLAS COUNTY, TEXAS, UNLESS LENDER DESIGNATES ANOTHER PLACE FOR PERFORMANCE. Section 7.2 LIMITATION ON INTEREST. All agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no event, whether by reason of acceleration of the maturity of the Note 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 fulfillment of any provision of this Agreement or any of the Loan Papers at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law (including the laws of the United States and the State of Texas), then ipso facto, the terms and provisions of the Note limiting the amount of interest which shall be paid to, agreed to be paid to or charged by Lender under the Loan shall be applied and followed. Section 7.3 INVALID PROVISIONS. If any provision of this Agreement or any of the other Loan Papers is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable; the appropriate Loan Paper shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part thereof; and the remaining provisions thereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance 23 29 therefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision there shall be added automatically as a part of such Loan Paper a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible to be legal, valid and enforceable. Section 7.4 EXPENSES. All costs and expenses of closing, including, without limitation, the reasonable fees and actual expenses of Lender's counsel, shall be paid by Borrower. Section 7.5 COMMITMENT. This Agreement includes the terms and conditions of the Commitment and the same are hereby incorporated herein by reference and made a part hereof; however, if any conflict or inconsistency exists between the Commitment and this Agreement or any of the Loan Papers, the terms of the Commitment shall control. Section 7.6 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 and/or management of Borrower, the power of Lender being limited to the rights to exercise the remedies referred to in the Loan Papers. No covenant or provision of the Loan Papers 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 or to make Lender in any way responsible for the debts or losses of Borrower or with respect to the Projects. 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 7.7 TIME OF THE ESSENCE. Time is of the essence with respect to the provisions of this Agreement. Section 7.8 LIMITATION ON LIABILITY. Reference is made to the limitation of liability provisions contained in the Note, which provisions are incorporated herein and made a part hereof. Section 7.9 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of Lender and Borrower and the respective successors and assigns of Lender and Borrower, provided that no party comprising Borrower may, without the prior written consent of Lender, assign any rights, duties or obligations hereunder. Section 7.10 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 general terms or in detail 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. 24 30 Section 7.11 RIGHT OF FIRST OFFER FOR CREDIT FACILITY. If Borrower or ARC or any Affiliate desires to form a real estate investment trust which will include the Projects (the "REIT"), Lender shall have a right of first offer with respect to any acquisition and/or revolving credit facility to be established by the REIT ("CREDIT FACILITY"). Under such right of first offer, Lender may offer terms for a Credit Facility to the REIT either on its own initiative or on request by the REIT within thirty (30) days of the REIT's request. The REIT may accept or decline such terms, provided that if the Credit Facility terms offered by Lender are declined by the REIT, the REIT shall not accept any other Credit Facility on terms that are materially less favorable than those offered by Lender without first requesting such Credit Facility terms from Lender. Section 7.12 SUBSTITUTION AND REPLACEMENT. Reference is made to the Loan Agreement dated April 1, 1992 between Lender and Borrower, the Loan Agreement dated July 14, 1994 between GENEL and Borrower, and the Loan Agreement dated October 31, 1994 between GENEL and Borrower (collectively, the "PRECEDING LOAN AGREEMENT") pertaining to financing for Borrower's acquisition, refinancing, and development of Broadway, Summit, Santa Catalina, Parkplace, Hampton, and Westlake Village (the "EXISTING LOAN"). The Existing Loan is included within and as part of the Loan, as such term is defined herein; and is being increased, renewed, extended and modified under this Agreement and the Loan Papers. This Agreement is made in complete substitution for and replacement of the Preceding Loan Agreement for all purposes, and the terms of this Agreement shall control and govern the Loan, notwithstanding any contrary or different terms of the Preceding Loan Agreement. Section 7.13 RELEASES. Lender agrees that from and after January 1, 1998, but not before January 1, 1998, Lender will release one or more Projects from the liens, assignments and security interests of the Deed of Trust and the other Loan Papers if: (a) There exists no Default and no event or condition which, with notice or passage of time, or both, would constitute a Default; (b) Borrower shall have delivered notice to Lender of any requested release of a Project at least thirty (30) days prior to the scheduled date of such release; (c) Borrower shall pay to Lender, in reduction of the principal balance of the Loan, an amount equal to 1.15 times the principal amount of the Loan related to the Project(s) to be released, calculated by Lender on the basis of (i) the amount which according to Lender and Lender's records has been advanced under the Loan for such Project(s), less (ii) the pro rata portion of any principal amortization payments on the Note related to such Project(s) (each Project's pro rata portion being the sum of all principal amortization payments multiplied by a fraction, the numerator of which is the outstanding amount which has been advanced under the Loan for such Project and the denominator of which is the total of all Advances under the Loan) (the "RELEASE AMOUNT") with respect to each of the Projects as it is subject to being released; and shall pay to Lender the 25 31 additional amount, if any, required to be paid in order that the Projects which have not been released will satisfy the requirements of Subsection 7.13(f) of this Agreement, together with any prepayment premium or Yield Maintenance (as applicable) (the sum of the Release Amount and any such additional amount being herein called the "MINIMUM RELEASE AMOUNT"); (d) Borrower shall pay all costs and expenses of Lender arising in connection with the release of the Deed of Trust and the other Loan Papers, 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; (e) 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; and (f) After application of the Minimum Release Amount, (i) the remaining outstanding principal balance (as determined by Lender in its sole discretion) must be greater than $45,000,000, and (ii) the Projects which have not been released must be generating annualized Net Revenues Available for Debt Service equal to at least 14% of the outstanding principal balance of the Loan from leases 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. ARTICLE 8 COVENANTS Borrower warrants, represents, covenants and agrees with Lender as follows: Section 8.1 COMMITMENT FEE. The Commitment Fee is fully earned by Lender effective on Borrower's acceptance of the Commitment. Borrower shall pay the Commitment Fee to Lender as follows: (a) at the time of each Advance (excluding Advances for Capital Expenditures under Section 5.2 and Advances for ad valorem taxes and assessments under Section 5.3) in excess of $73,000,000, $.01 for every $1.00 advanced, and (b) to the extent the Commitment Fee has not sooner been paid, on the earlier of (i) the Maturity Date, or (ii) the date on which Borrower repays any part of the principal balance of the Loan (excluding principal reductions for Capital Expenditures and ad valorem taxes and assessments under Sections 5.2 and 5.3). Section 8.2 LIENS, MORTGAGES, ENCUMBRANCES, TRANSFERS. Borrower shall not create or permit (a) the imposition of any lien, mortgage or other encumbrance against any of the Projects, except for the Deed of Trust, (b) the termination of any Lender-approved management 26 32 agreement relating to the operation and management of any Project, (c) the transfer of ownership of any Project, or (d) the transfer of ownership of any other collateral or of any stock or general partnership interest in Borrower; however, that Lender shall not unreasonably withhold its consent or impose any transfer fee (other than out-of-pocket transaction costs) if Borrower desires to transfer one or more of the Projects or interests in Borrower to an Affiliate, so long as (i) there exists no Default, event or condition which, with notice or the passage of time or both, could constitute a Default, (ii) any transferee of the Projects assumes Borrower's obligations under the Loan, (iii) the net worth and liquidity of any transferee of the Projects are equivalent to or better than those of Borrower on the date of this Agreement, and (iv) the proposed transferee is considered, in Lender's reasonable discretion, to be capable of managing and maintaining the marketability of the Projects. Section 8.3 OPERATING STATEMENTS. Borrower shall provide Lender with annual and monthly operating statements on each of the Projects, including income from all sources, and annual financial statements on Borrower, in scope and detail satisfactory to Lender with all such statements to be certified by the chief financial officer of Borrower, prepared on a review basis and certified by a certified public accountant within ninety (90) days after the end of each fiscal year for annual statements. Monthly income/expense statements and statements of cash flow and balance sheets shall be delivered within thirty (30) days of the end of each calendar month, shall be certified as true and correct by the chief financial officer of Borrower, shall be in such form and substance as Lender may request, and shall be accompanied by such supporting documentation as Lender may request. In addition, from time to time, Borrower shall provide appropriate reports as to its operating results as requested by Lender. Lender's employees or agents shall have the right to audit, at any time, Borrower's financial statements and records pertaining to the Projects. Section 8.4 RENT ROLLS, LEASES. Borrower shall provide Lender with certified copies of all rent rolls relating to the Projects. If requested, Lender shall be furnished with certified copies of all existing Residency Agreements. In addition a requirement that all present and future Residency Agreements shall be approved as to form and content by Lender and no material modifications thereof shall be made without Lender's prior written approval. Section 8.5 SITE INSPECTIONS. Lender shall be entitled, upon request, to make periodic site inspections of the Projects; in addition, Borrower shall pay, upon request, all expenses incurred by Lender during the term of the Loan to conduct financial audits, site inspections, title updates, the filing of UCC continuation statements and other reasonable loan administration expenses. Section 8.6 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, without limitation, any inspections by the Texas Department of Health, the Texas Department of Human Services, the Arizona Department of Health Services, the Ohio Department of Health, the Ohio Department on Aging, the State of Ohio Fire Marshall/local fire department, or the Colorado Department of 27 33 Public Health and Environment, the Colorado Department of Healthcare Policy and Financing. Lender shall have the right to 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, of which Borrower is aware, 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 8.7 below and shall provide Lender with a statement of Borrower setting forth its proposed action or response to the noncompliance situation. Borrower will promptly notify Lender of any proposed local, state or federal law that, if enacted, would materially and adversely affect Borrower's current operation of any of the Projects. Section 8.7 CONSULTANT. If (a) Borrower fails to maintain at all times a Debt Service Coverage of at least 1.20:1, calculated by taking the ratio of Net Revenues Available for Debt Service to Debt Service calculated on an interest only basis, or (b) the consolidated occupancy level of the Projects is less than (i) 80% for three consecutive months before December 31, 1997, or (ii) 87% by December 31, 1997, 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 will, 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 calculated on an interest only basis, 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 8.7(c) 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 8.8 ANNUAL BUDGET. Within sixty (60) days prior to the commencement of each fiscal year during the term of the Loan, Borrower will provide to Lender its proposed annual budget for such fiscal year for review and approval by Lender. Thereafter, within thirty (30) days following the end of each calendar month, Borrower will provide to Lender a monthly statement 28 34 setting forth any variance from such annual budget. As a part of its budget process, Borrower will prepare a pro forma calculation of the effect the proposed budget will have on the Debt Service Coverage for such fiscal year. Section 8.9 RESERVES, DEPOSITS, ESCROWS. Borrower shall at all times maintain all reserves, deposits and/or escrows required by Lender or state statutes applicable from time to time to Borrower by virtue of the nature of Borrower's business. Section 8.10 MANAGEMENT. Lender and Borrower agree that Borrower, or an Affiliate, shall serve as manager of the Projects. Such manager, if other than Borrower, shall be entitled to receive a management fee of three percent (3%) of 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 shall enter a non-competition 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 (except for the Heritage Club of Denver which ARC, LP owns and manages). 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. Section 8.11 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 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 8.12 CASH OPERATING RESERVE FUND. During the term of the Loan, Borrower will maintain a cash operating reserve fund (the "OPERATING RESERVE") in which Lender will take a security interest, in an amount representing 21 days' of estimated, routine Total Expenses. If monies from the Operating Reserve are withdrawn and used by Borrower to pay ordinary operating expenses, Borrower shall replenish the Operating Reserve within 60 days of such withdrawal, by depositing an amount sufficient to restore the Operating Reserve to its full amount. 29 35 Section 8.13 SECURITY DEPOSITS. Borrower covenants and agrees with Lender that it will maintain a separate account for each of Broadway and Summit ("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 will 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 extent allowed by applicable law, Borrower pledges, and grants Lender a security interest in, the Security Deposit Accounts and all funds therein to Lender as security for the Loan and agrees that upon the occurrence of a Default and the expiration of any applicable grace or notice and cure period, Lender may withdraw funds from the Security Deposit Accounts and apply such funds to satisfy any of the indebtedness and obligations of Borrower under the Loan Papers. With respect to security deposits and other deposits received by Borrower under Residency Agreements for Santa Catalina, Parkplace, Westlake Village and Hampton, Borrower has provided the Guaranty in lieu of maintaining Security Deposit amounts. Section 8.14 CASH FLOW SUMMARIES. Borrower shall annually provide to 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 8.15 LIMITATION ON OTHER INDEBTEDNESS. Borrower shall not, without the prior written consent of Lender, incur any indebtedness (whether personal or non-recourse, secured or unsecured) other than the Loan and customary trade payables which are payable and are actually paid within sixty (60) days after they are incurred (or such longer period as may be allowed by trade creditors) and equipment or automobile lease obligations of not more than $50,000 for any single lease obligation and of not more than $350,000 for all such lease obligations in the aggregate, and the Subordinated Notes. Section 8.16 LEGAL EXISTENCE. Borrower shall preserve its separate legal existence and shall not, without the prior written consent of Lender, merge or consolidate with any other person or entity or sell or convey, except as otherwise permitted in the Deed of Trust, all or substantially all of its assets to any other person or entity, such consent not to be unreasonably withheld with respect to any merger or consolidation (a) which involves only ARC, LP wholly-owned subsidiaries and Affiliates, and (b) from which the surviving merged or consolidated entity is a single-purpose entity which owns only the Projects and which is in compliance with Section 8.15 of this Agreement. Section 8.17 NET WORTH. ARC, LP shall at all times maintain a Net Worth of at least $10,000,000. 30 36 Section 8.18 OPERATION. Broadway and Summit shall be operated as continuing care retirement communities comprised of independent living units, assisted living units, and skilled nursing beds, and Parkplace, Hampton, Westlake Village, Santa Catalina shall be operated as an independent living and assisted living facility. All of the Projects shall be operated 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 8.19 SERVICES. Borrower shall maintain and continue to provide throughout the term of the Loan the same services to Residents as are currently being provided at the Projects by Borrower or otherwise on the date hereof; Borrower shall not materially change such services or change the Facility Capacity without the prior written consent and approval of Lender. Section 8.20 NON-COMPETITION. Borrower will not acquire, construct, operate or manage any congregate care facility, assisted living facility, skilled or intermediate nursing facility, adult day care facility, home health care agency, or any business comprised of any combination of the aforementioned, to the extent revenues derived therefrom are not included in Project's Revenues, within a 5-mile radius of any Project at any time while any portion of the Loan is outstanding (except for the Heritage Club at Denver which ARC, LP owns and manages). Section 8.21 KEY PERSONS. Borrower will promptly notify Lender if persons or entities key to Borrower's operations, as designated by Lender from time to time, are terminated or cease providing services to Borrower. Section 8.22 MEDICARE CERTIFICATION, LICENSES AND COMPLIANCE. Borrower further represents, warrants and covenants to Lender that: (a) Broadway is certified for participation in the Medicare program of the Social Security Act of 1965, and the regulations promulgated thereunder, and is not in violation of any condition of participation in such Medicare program; (b) Borrower is currently a party to a provider agreement for Broadway with the Secretary of the United States Department of Health and Human Services with respect to its participation in the Medicare program with the State of Texas, which provider agreement is currently in full force and effect; (c) All licenses, permits and approvals required for the operation of the Projects as nursing home and personal care facilities under applicable law have been issued and are in good standing, including, without limitation, the Social Security Act of 1965, the regulations promulgated thereunder, and for Broadway and Summit all conditions of participation in the Medicare program thereunder imposed by the State of Texas and the United States Department of Health and Human Services, including, without limitation, 31 37 (i) Medicare provider agreements issued under Title XVIII and Title XIX of the Social Security Act of 1965 (as applicable to the Projects), with current provider numbers; (ii) Nursing Home Licenses issued by, as applicable, the Texas Department of Health, the Texas Department of Human Services, and the Arizona Department of Health Services; and (iii) Personal Care Facilities Licenses issued by, as applicable the Texas Department of Health, the Texas Department of Human Services, the Arizona Department of Health Services, the State of Ohio Department of Health, Ohio Department on Aging, the State of Ohio Fire Marshall/local fire department, and the Colorado Department of Public Health and Environment, the Colorado Department of Healthcare Policy and Financing which are currently in full force and effect; and (d) Borrower shall comply with all local, state or federal laws or regulations governing the operation of each Project as a nursing home and a personal care facility, including but not limited to, the requirements of the Texas [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 32 38 Department of Health, the Texas Department of Human Services, the Arizona Department of Health Services, the State of Ohio Department of Health, Ohio Department on Aging, the State of Ohio Fire Marshall/local fire department, the Colorado Department of Public Health and Environment, the Colorado Department of Healthcare Policy and Financing or the United States Department of Health and Human Services, and any applicable requirements under the Medicare program. Section 8.23 IMMEDIATE REPAIRS. Borrower shall complete all of the Immediate Repairs to the satisfaction of Lender and Lender's inspecting architect/engineer and shall pay all costs and expenses therefor prior to December 31, 1996. EXECUTED as of the date first written above. LENDER: GENERAL ELECTRIC CAPITAL CORPORATION, an New York corporation By: /s/ Barry P. Skolnick -------------------------------------------- Barry P. Skolnick, Senior Investment Manager BORROWER: FORT AUSTIN LIMITED PARTNERSHIP, a Texas limited partnership By: ARC Fort Austin Properties, Inc., a Tennessee corporation, General Partner By: /s/ W. E. Sheriff -------------------------------------------- W. E. Sheriff, Chief Executive Officer 33 39 EXHIBIT A [DESCRIPTION OF PROJECTS] A-1 40 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 will 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 reasonable request, provide Lender with reports relating to such information. 3. Borrower's agreements with its management and leasing agents shall be written so that: (a) If Lender acquires ownership of the Projects, Lender can, without cost or liability to Lender, within sixty days' of Lender's notice, terminate the management and leasing agreement, and the on-site administrator and director of leasing. (b) If, commencing three months following closing, there are fewer than eighty percent (80%) of the total number of units leased for each of three (3) consecutive months, the leasing and management agents for the Projects may be terminated. B-1 41 EXHIBIT C APPROVED BUDGET Refinance Existing Loan $62,100,000 Transaction Costs 400,000 ------------ Initial Advance $62,500,000 Additional Facilities Holdback 17,000,000 Business Purpose Holdback 18,000,000 ------------ Commitment $97,500,000
C-1 42 EXHIBIT D IMMEDIATE REPAIRS (1)
PROPERTY ITEM COST -------- ---- ---- Santa Catalina Villas Sitework $ 7,550.00 Architectural Work $ 2,500.00 ADA Compliance $ 250.00 ------------ TOTAL SANTA CATALINA VILLAS $ 10,300.00 Broadway Plaza Gutters & Downspouts $ 7,500.00 Fascia boards Repair & Paint $ 18,500.00 Steel Masonry Lintels $ 3,000.00 Other Deferred Maintenance $ 1,300.00 ------------ TOTAL BROADWAY PLAZA $ 30,300.00 Forum at Westlake Hills Sidewalk Repairs $ 550.00 Paving/Erosion Repairs $ 10,000.00 Acoustical Ceiling Tiles $ 3,000.00 Ceramic Tile $ 3,000.00 Other Deferred Maintenance $ 3,600.00 ------------ TOTAL FORUM AT WESTLAKE HILLS $ 20,150.00 Westlake Village Exterior Restaining $ 378,176.00 Guardrail $ 1,200.00 ------------ TOTAL WESTLAKE VILLAGE $ 379,376.00 Hampton at Post Oak Cooling Tower $ 64,000.00 Other Deferred Items $ 775.00 Water Damage - Garage $ 2,500.00 ------------ TOTAL HAMPTON AT POST OAK $ 67,275.00 Park Place Sealcoat Parking Lot $ 1,000.00 Carbon-Monoxide Monitoring $ 4,000.00 Electrical Outlets $ 4,660.00 TOTAL PARK PLACE $ 9,660.00 Grand Total All Properties $ 517,061.00
(1) AS MORE FULLY DESCRIBED IN THE ENGINEERING REPORTS D-1 43 EXHIBIT E 1. BROADWAY AECC, Inc. Property Update dated October 30, 1995 and prepared by Andy Brundige (AECC, Inc. Project No. 95325). 2. SUMMIT AECC, Inc. Property Update dated October 27, 1995 and prepared by David Browning (AECC, Inc. Project No. 95324). 3. SANTA CATALINA Abacus Project Management Abbreviated Physical Audit dated October 30, 1995. 4. PARKPLACE Eckland Consultants, Inc. Property Condition Report Update dated October 31, 1995 (Comm. No. 95-D15-113-01). 5. HAMPTON Eckland Consultants, Inc. Property Condition Report Update dated October 27, 1995 (Comm. No. 95-D15-113-02). 6. WESTLAKE VILLAGE Eckland Consultants, Inc. Property Condition Report Update dated October 27, 1995 (Comm. No. 95-D15-113-03). E-1 EX-10.17 22 PROMISSORY NOTE JANUARY 4, 1996 1 EXHIBIT 10.17 PROMISSORY NOTE $73,500,000.00 January 4, 1996 1. FOR VALUE RECEIVED, FORT AUSTIN LIMITED PARTNERSHIP, a Texas limited partnership ("BORROWER"), promises to pay to the order of GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("LENDER"), the sum of SEVENTY-THREE MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($73,500,000.00), or so much thereof as shall be advanced by Lender from time to time on the loan (the "LOAN") which is evidenced hereby and governed by that Loan Agreement of even date herewith between Lender and Borrower (the "LOAN AGREEMENT"), with interest on the unpaid balance of such amount from the date of the initial disbursement hereunder (the "INITIAL DISBURSEMENT") at the rate or rates of interest specified in the Loan Agreement. The Loan is further evidenced by that Promissory Note dated as of April 1, 1992, in the stated principal amount of $24,000,000, executed by Borrower, bearing interest and being payable to the order of Lender, as modified by First Modification Agreement dated May 27, 1993, among Borrower, Lender and American Retirement Corporation ("ARC"), as endorsed payable to the order of GENEL Company, Inc. ("GENEL"), as further modified by Second Renewal, Extension and Modification Agreement dated June 14, 1994 among Borrower, GENEL and ARC, as further modified by Third Renewal, Extension and Modification Agreement dated October 31, 1994 among ARC, ARC Fort Austin Properties, Inc., a Tennessee corporation, and Fort Austin Associates Limited Partnership, a Texas limited partnership (collectively, "GUARANTORS"), Borrower and GENEL, as endorsed payable to the order of Lender, and as further modified by Fourth Renewal, Extension and Modification Agreement of even date herewith among Borrower, Lender and Guarantors (as modified, the "OTHER NOTE"). This Note and the Other Note are secured by those Deeds of Trust and Security Agreements and that Open-End Mortgage and Security Agreement (collectively the "MORTGAGE") on real property and improvements known as the Santa Catalina Retirement Community located in the City of Tucson, Pima County, Arizona ("SANTA CATALINA"), the Summit at Westlake Retirement Community in the City of Austin, Travis County, Texas ("SUMMIT"), the Broadway Plaza at Cityview Retirement Community in the City of Fort Worth, Tarrant County, Texas ("BROADWAY"), the Parkplace Retirement Community in the City of Denver, Denver County, Colorado ("PARKPLACE"), the Westlake Village Retirement Community in the City of Cleveland, Cuyahoga County, Ohio ("WESTLAKE"), and The Hampton at Post Oak Road Retirement Community in the City of Houston, Harris County, Texas ("HAMPTON") and described therein (collectively, the "MORTGAGED PROPERTY") and by other security given or to be given to Lender as collateral for the Loan. All other documents or instruments executed to evidence, secure or otherwise in connection with the Loan are collectively referred to herein as the "OTHER SECURITY DOCUMENTS." To the extent of payments against the principal balance from applications in lieu of impounds for taxes and assessments and in lieu of reserves for Capital Expenditures (as defined 1 2 in the Loan Agreement), the Loan shall be a "revolving line of credit"; that is, portions of the principal sum of this Note may be advanced, repaid, and readvanced. The books and records of Lender shall be prima facie evidence of all sums due Lender under this Note and the Other Security Documents. 2. PAYMENTS. Interest shall accrue on this Note and interest and principal shall be payable on this Note as provided in the Loan Agreement. The entire principal amount of this Note, together with all accrued but unpaid interest thereon, any and all unpaid late charges and interest due at the Default Rate (as defined in the Loan Agreement), and all other amounts owing under this Note, the Other Note, and the Other Security Documents (the "MATURITY OBLIGATIONS") shall be due and payable to Lender on December 31, 2002 (the "MATURITY DATE"). 3. PAYMENTS; APPLICATION. All payments due under this Note are payable at P.O. Box 102771, Atlanta, Georgia 30368-0771 or at such other place as Lender or other holder hereof shall notify Borrower in writing. 4. DEFAULT. If Borrower fails to pay any installment of interest or any principal on this Note or on the Other Note for five (5) days after the same shall become due or upon the happening of any "Event of Default" as defined in the Mortgage or any of the Other Security Documents, then and in any such event Lender may at its option declare the entire unpaid balance of this Note, together with interest accrued hereon, to be immediately due and payable and Lender may proceed to exercise any rights or remedies that it may have under the Mortgage, under the Other Security Documents, under this Note or under any other agreement relating to the Loan or such other rights and remedies which Lender may have at law, equity or otherwise. In the event of such acceleration, Borrower may discharge its obligations to Lender by paying the Maturity Obligations, with interest at the Default Rate accruing from the date such acceleration is declared, plus any applicable prepayment premium provided for in the Loan Agreement, or if no prepayment is then permitted, a prepayment premium equal to five percent (5%) of the unpaid balance of the Loan. 5. COSTS OF COLLECTION. If this Note is turned over to an attorney at law for collection after default, in addition to the Maturity Obligations, Lender shall be entitled to collect all costs of collection, including but not limited to attorneys' fees incurred in connection with protection of or realization of collateral or in connection with any of Lender's collection efforts, whether or not suit on this Note or any foreclosure proceeding is filed, and all such costs and expenses shall be payable on demand and shall also be secured by the Mortgage and the Other Security Documents. 6. NO WAIVER. No failure on the part of Lender or other holder hereof to exercise any right or remedy hereunder, whether before or after the happening of a default, shall constitute a waiver thereof, and no waiver of any past default shall constitute waiver of any future default or of any other default. No failure to accelerate the debt evidenced hereby by reason of default hereunder, or acceptance of a past-due installment, or indulgence granted from time to time shall be construed to be a waiver of the right to insist upon prompt payment thereafter or to impose late 2 3 charges retroactively or prospectively, or shall be deemed to be a novation of this Note or as a reinstatement of the debt evidenced hereby or as a waiver of such right of acceleration or any other right, or be construed so as to preclude the exercise of any right which Lender may have, whether by the laws of the State of Texas, by agreement, or otherwise; and Borrower and each endorser or guarantor hereby expressly waives the benefit of any statute or rule of law or equity which would produce a result contrary to or in conflict with the foregoing. This Note may not be changed orally, but only by an agreement in writing signed by the party against whom such agreement is sought to be enforced. 7. WAIVERS. Borrower, for itself and its heirs, successors and assigns, and each endorser or guarantor of this Note, for its heirs, successors and assigns, hereby waives presentment, protest, demand, diligence, notice of dishonor and of nonpayment, and waives and renounces all rights to the benefits of any statute of limitations and any moratorium, appraisement, exemption or homestead right now provided or which may hereafter be provided by any federal or state statute, including but not limited to exemptions provided by or allowed under the Bankruptcy Reform Act of 1978, both as to itself personally and as to all of its or their property, whether real or personal, against the enforcement and collection of the obligations evidenced by this Note and any and all extensions, renewals and modifications hereof. 8. JOINT AND SEVERAL. If Borrower consists of more than one (1) person, corporation or other entity, the obligations and liabilities of such persons, corporations or other entities under this Note and under the Mortgage and the Other Security Documents shall be joint and several, and the word "Borrower" shall mean all or some or any of them. 9. USURY. It is the intention of the parties to conform strictly to applicable usury laws from time to time in force, and all agreements between Borrower and Lender, whether now existing or hereafter arising and whether oral or written, are hereby expressly limited so that in no contingency or event whatsoever, whether by acceleration of maturity hereof or otherwise, shall the amount paid or agreed to be paid to Lender or the holder hereof, or collected by Lender or such holder, for the use, forbearance or detention of the money to be loaned hereunder or otherwise, or for the payment or performance of any covenant or obligation contained herein or in the Mortgage or in any Other Security Documents, or in any other document evidencing, securing or pertaining to the indebtedness evidenced hereby, exceed the maximum amount permissible under applicable usury laws. If under any circumstances whatsoever fulfillment of any provisions hereof or of the Mortgage or any Other Security Documents, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed or permitted by law, including judicial determination, then ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity; and if under any circumstances Lender or any other holder hereof shall ever receive any amount deemed interest by applicable law which would exceed interest at the highest lawful rate, such amount that would be excessive interest under applicable usury laws shall be applied to the reduction of the principal amount owing hereunder or to other indebtedness secured by the Mortgage and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal and other indebtedness, the excess shall be deemed to have been a payment made by mistake and shall be refunded to 3 4 Borrower or to any other person making such payment on Borrower's behalf. All sums paid or agreed to be paid to the holder hereof for the use, forbearance or detention of the indebtedness of Borrower evidenced hereby and outstanding from time to time shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread from the date of disbursement of the proceeds of this Note until payment in full of such indebtedness so that the actual rate of interest on account of such indebtedness is uniform through the term hereof. The terms and provisions of this paragraph shall control and supersede every other provision of all agreements between Lender and Borrower and any endorser or guarantor of this Note. 10. LIMITATION OF LIABILITY. Borrower shall not be personally liable for the repayment of any of the principal of or interest due under this Note or for any deficiency judgment which Lender may obtain after foreclosure on its collateral after default by Borrower, provided, however, that Borrower and any general partner of Borrower shall not be exonerated or exculpated for any deficiency, loss or damage suffered by Lender as a result of the failure by Borrower to comply with any of the terms or conditions of the Mortgage or any of the Other Security Documents (other than the provisions relating to the payment of principal, interest or late charges), including but not limited to losses resulting from: (a) Borrower's failure to perform its obligation to properly account to Lender as mortgagee for any proceeds of insurance or condemnation proceeds as required by the Mortgage; (b) Borrower's failure to comply with provisions of the Mortgage prohibiting the sale or further encumbering of the collateral; (c) Borrower's attempt to interfere with Lender's rights under the Assignments of Rents and Leases (collectively the "ASSIGNMENT OF RENTS AND LEASES") from Borrower to Lender, or any other assignment of rents granted or any letter of credit issued in connection with the Loan; (d) Borrower's failure to apply proceeds of rents and other income of the collateral toward the costs of maintenance and operation of the Mortgaged Property and to the payment of taxes, lien claims, insurance premiums and debt service and other indebtedness to the extent that the Mortgage or Other Security Documents require such rents and income to be so applied; (e) Borrower's entering into or modifying leases in violation of the provisions of the Mortgage or the Assignment of Rents and Leases; (f) Borrower's collection of rentals for periods of more than one month in advance under leases of the Mortgaged Property; (g) the receipt by Borrower of monies in connection with the modification of any existing or future lease or the entering into of a new lease in violation of the applicable provisions of the Mortgage or the Assignment of Rents and Leases; (h) damage or destruction to the Mortgaged Property, including its electrical, plumbing, heating or air-conditioning systems or its elevators, except as a result of casualty; (i) Borrower's failure to pay for any loss, liability, damage, cost or expense (including attorneys' fees) incurred by Lender in connection with any order, consent decree, settlement, judgment or verdict arising from the deposit, storage, disposal, burial, dumping, injecting, spilling, leaking, or other placement or release in, on or from the Mortgaged Property of asbestos or a "hazardous substance" as defined in 42 U.S.C. Section 9601, et seq., as amended from time to time, or any other toxic or hazardous waste or waste products; (j) Borrower's failure to pay for any loss, liability or expense (including attorney's 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 Note or the transactions contemplated hereby establish a joint venture or partnership arrangement between Borrower and Lender; (k) any failure on the part of Borrower to comply with any local, state or 4 5 federal laws or regulations governing the operation of the Mortgaged Property as nursing homes and personal care facilities, including but not limited to the requirements of the Texas Department of Health, the Texas Department of Human Services, and the Arizona Department of Health Services, the Ohio Department of Health, the Ohio Department on Aging, the State of Ohio Fire Marshall/local fire department, Colorado Department of Public Health and Environment, the Colorado Department of Healthcare Policy and Financing, or the United States Department of Health and Human Services, and any requirements under Medicare (Title XVIII of the Social Security Act of 1965) or Medicaid (Title XIX of the Social Security Act of 1965); (l) any liability for professional malpractice or negligence relating to the operation of the Mortgaged Property; (m) any claim for brokerage commissions or finders' fees claimed by any broker or any other party in connection with the Loan or the Mortgaged Property, or (n) the failure of Borrower to account for all security deposits and other deposits received by Borrower under any leases of the Mortgaged Property, as required by the Assignment of Rents and Leases; and provided further, that the foregoing limitations on Borrower's personal liability with respect to principal and interest shall not impair the validity of the indebtedness secured by Lender's collateral, or the lien on or security interest in the collateral, or the right of Lender as mortgagee or secured party to foreclose and/or enforce the collateral after default by Borrower. In the event any party shall have guaranteed all or part of the Loan by separate written guaranty, none of the foregoing limitations on Borrower's personal liability for payment of principal and interest shall modify, diminish or discharge the personal liability of any such guarantor as set forth in any such written guaranty. None of the foregoing limitations on Borrower's personal liability shall modify, diminish or discharge the personal liability of Borrower or any individual under the Hazardous Substances Indemnity Agreement executed and delivered by Borrower and others of even date herewith or under any indemnification provisions of the Mortgage or any of the Other Security Documents. 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 Bankruptcy Reform Act of 1978 to file a claim for the full amount of the debt owing to Lender by Borrower or to require that all collateral shall continue to secure all of the indebtedness owing to Lender in accordance with this Note, the Mortgage and the Other Security Documents. 11. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES APPLICABLE TO TRANSACTIONS IN TEXAS. Borrower hereby submits to personal jurisdiction in the State of Texas for the enforcement of Borrower's obligations hereunder and under the Mortgage and the Other Security Documents, and waives any and all personal rights under the law of any other state to object to jurisdiction within the State of Texas for the purposes of litigation to enforce such obligation of Borrower. In the event such litigation is commenced, Borrower agrees that, in addition to any other manner provided by applicable law or court rule, service of process may be made and personal jurisdiction over Borrower obtained, by service of a copy of the summons, complaint and other pleadings required 5 6 by applicable law to commence such litigation upon Borrower's appointed Agent for Service of Process in the State of Texas, which Agent Borrower hereby designates to be: CT Corporation 350 North St. Paul Dallas, Texas 75201 12. RENEWAL, EXTENSION AND INCREASE. The indebtedness evidenced by this Note is in renewal, extension and increase, but not in extinguishment, of the indebtedness evidenced by that Promissory Note, dated October 31, 1994, in the stated principal amount of $49,000,000, executed by Borrower, bearing interest and being payable to the order of GENEL as therein provided (the "EXISTING NOTE"). The terms of this Note supersede and replace the terms of the Existing Note. 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/ W. E. Sheriff ------------------------------- W. E. Sheriff, Chief Executive Officer 6 EX-10.18 23 PROMISSORY NOTE APRIL 1, 1992 1 EXHIBIT 10.18 PROMISSORY NOTE $24,000,000.00 April 1, 1992 FOR VALUE RECEIVED, FORT AUSTIN LIMITED PARTNERSHIP, a Texas limited partnership ("Borrower"), promises to pay to the order of GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("GECC"), the sum of TWENTY-FOUR MILLION AND NO/100 DOLLARS ($24,000,000.00), or so much thereof as shall be advanced by GECC from tine to time under that Loan Agreement of even date herewith between GECC and Borrower (the "Loan Agreement"), with interest on the unpaid balance of such amount from the date of the initial disbursement (the "Initial Disbursement") of the loan (the "Loan") evidenced hereby, at the rate or rates of interest specified herein. This Note is secured or to be secured by a First Deed of Trust and Security Agreement (the "Mortgage") on two (2) retirement communities (together the "Projects" and each individually, a "Project") described as follow.: (a) Weatlake Hills Retirement Community, a retirement community consisting of approximately 150 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 78746, including parking for 212 automobiles; and (b) The Broadway Plaza at Cityview, a retirement community consisting of approximately 126 independent residential living units, 88 villas, 40 assisted living units, and a 120-bed skilled/intermediate care health center on 20.013 acres located at 5301 Bryant Irvin Road, Fort Worth, Texas 76132, including parking for 355 automobiles; and more particularly described in the Mortgage (the Mortgaged Property") and by other security given or to be given to GECC as collateral for the Loan (collectively, the "Other Security Documents"). Interest only on the outstanding balance of principal of this Note shall be payable monthly on the first day of each month beginning May 1, 1992 and continuing to and including the first day of the month in which Income Achievement (as defined in the Loan Agreement) occurs, at the Contract Index Rate (as hereinafter defined); commencing the first day of the first month immediately following Income Achievement and continuing on the first day of each month thereafter to and including March 1, 1999, installments of principal and interest shall be payable in the amount of the sum of (a) all accrued but unpaid interest hereon, plus (b) the amount of the corresponding principal increment in an amortization of the principal balance hereof in equal monthly installments of principal and interest over twenty-five (25) years (commencing with the first principal and interest installment) at the Contract Index Rate from time to time in effect; the amount of each principal increment shall be recomputed for the remainder of the amortization period at each change in the Contract Index 2 Rate. A final payment of the Maturity Obligations (as hereinafter defined) shall be payable on March 31, 1999 (the "Maturity Date"). Interest at the Contract Index Rate 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 Disbursement or the date of the preceding interest installment due date, as the case may be, to the date of the next interest installment due date or the Maturity Date. As used herein, "Maturity Obligations" shall mean the entire outstanding principal amount of this Note, together with all accrued but unpaid interest thereon, and all other sums due and unpaid hereunder and under the Mortgage and the Other Security Documents, including, as applicable, the Profits Participation and Right of First Refusal Agreement and Assignment of even date herewith between Borrower and GECC (the "Profits Agreement"), as hereinafter defined. As used herein, "Loan Year" shall mean the period between the date hereof and March 31, 1993 for the first Loan Year and the period between each succeeding April 1 and March 31 until the Maturity Date. As used herein, "Contract Index Rate" shall mean the rate of interest equal to two percent (2%) per annum in excess of the higher of either the "Prime Rate" or the "Commercial Paper Rate," as hereinafter defined. As used herein, "Prime Rate" shall mean the highest prime rate (or base rate) reported in the Money Rates column or section of The Wall Street Journal published on the second business day of the month preceding the month in which a payment of interest and/or principal is due on the Loan, as having been the rate in effect for corporate loans at large U.S. money center commercial banks (whether or not such rate has actually been charged by any such bank) as of the first calendar day of such month for which such rate is published. In the event The Wall Street Journal ceases publication of the Prime Rate, the "Prime Rate" shall mean the prime rate (or base rate) announced by Bankers Trust Company, New York, New York (whether or not such rate has actually been charged by such bank). In the event such bank discontinues the practice of announcing the Prime Rate, the "Prime Rate" shall mean the highest rate charged by such bank on short-term, unsecured loans to its most creditworthy large corporate borrowers. As used herein, "Commercial Paper Rate" shall mean the highest discount rate reported in the Money Rates column or section of The Wall Street Journal (the "Published Rate"), published on the second business day of the month preceding the month in which a payment of interest and/or principal is due on the Loan, as having been the rate in effect for "high-grade unsecured notes having 90-day maturities, sold through dealers by mayor Corporations in multiples of One Thousand Dollars ($1,000)" (whether or not such notes have actually been sold by such dealers at such rates) as of the first calendar day of each month, for which such rate is published, adjusted to a per annum rate by applying the following formula: 2 3 (Published Rate) times 1000 = X -------------- ( 4 ) ( X ) times 4 = "Commercial Paper Rate" --------------- ( 1000 - X ) In the event The Wall Street Journal (i) publishes more than any one Prime Rate or Published Rate, the higher or highest of such rates shall apply, or (ii) publishes a retraction or correction of any such rate, the rate reported in such retraction or correction shall apply. All payments due under this Note are payable at P. O. Box 302771, Atlanta, Georgia 30368-0771 or at such other place as GECC or other holder hereof shall notify Borrower in writing. All payments received by GECC on this Note shall be applied by GECC as follows fires, to the payment of delinquency or "late" charges, if any; second, to accrued and unpaid interests and third, to the reduction of principal. Borrower may prepay this Note in whole, but not in part, in the event of any third party sale of the Projects, or any refinancing of the Loan, upon ten (10) day prior written notice to GECC and on any regularly scheduled interest payment due date, by paying the principal balance of, and all accrued but unpaid interest under, this Note, and any Net Profit Participation due under the Profits Agreement GECC reserves the right to require any payment on this Note, 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. The provisions contained herein and in the Mortgage and Other Security Documents giving GECC the right to participate in the proceeds of the sale or increase in the appraised value of the Mortgaged Property in addition to the right to receive repayment of the Maturity Obligations in full, represent additional consideration for the Loan and shall not be deemed to create a joint venture or partnership arrangement between GECC and Borrower, it being Borrower's intention that the transaction will be a loan and not a joint venture or partnership and the transaction shall not be deemed to be an agreement by GECC to share in any losses incurred by Borrower or to be responsible for any liabilities of Borrower to third parties. In the event Borrower fails to pay any installment of interest or any principal on this Note for five (5) days after the same shall become due, whether by acceleration or otherwise, GECC may, at its option, impose a delinquency or late charge on Borrower, payable upon demand, equal to the greater of: (a) Five percent (5%) per annum in excess of the Contract Index Rate (the 3 4 "Delinquency Rate") that would have been applicable to a then current installment as provided elsewhere in this Note, as if such installment had been made when due, computed from the date said payment was due and payable to the date of receipt of such installment by GECC in good and immediately available funds, or (b) Five percent (5%) of the amount of such past due payment (the "Late Charge"), notwithstanding the date on which such payment is actually paid to GECC; provided, however, that if any such late charge under subsections (a) or (b) hereof is not recognized as liquidated damages for such delinquency (as contemplated by Borrower and GECC), is demand to be interest and, then added to all other interact contracted for, charged or received on the indebtedness evidenced by this Note, is in excess of the amount permitted to be charged to Borrower under applicable law, GECC shall be entitled to collect a late charge only in the amount which, when added to such other interest, would not exceed interest at the highest rate permitted by law, and any interest actually collected by GECC in excess of such lawful amount shall be deemed a payment in reduction of the principal amount then outstanding under this Note and shall be so applied. In the event of any conflict between the provisions of this Note and those of the Mortgage, the Other Security Documents or any other agreement relating to the Loan, the provisions of this Note shall govern. In the event Borrower fails to pay any installment of interest or any principal on this Note for five (5) days after the same shall become due or upon the happening of any "Event of Default" as defined in the Mortgage or any of the Other Security Documents, then and in any such event GECC may at its option declare the entire unpaid balance of this Note, together with interest accrued hereon, to be immediately due and payable and GECC may proceed to exercise any rights or remedies that it may have under the Mortgage, under the Other Security Documents, under this Note or under any other agreement relating to the Loan or such other rights and remedies which GECC may have at law, equity or otherwise. In the event of such acceleration, Borrower may discharge its obligations to GECC by paying the Maturity Obligations, with interest at the Delinquency Rate accruing from the date such acceleration is declared, plus any applicable prepayment premium, or if no prepayment is then permitted, a prepayment premium equal to five percent (5%) of the unpaid balance of the loan. In the event this Note is turned over to an attorney at law for collection after default, in addition to the Maturity Obligations, GECC shall be entitled to collect all costs of collection, including but not limited to attorneys' fees incurred in connection with protection of or realization of collateral or in connection with any of GECC's collection efforts, whether or not suit on this Note or any foreclosure proceeding is filed, and all such coats and expenses shall be payable on demand and shall also be secured by the Mortgage and the Other Security Documents. 4 5 No failure on the part of GECC or other holder hereof to exercise any right or remedy hereunder, whether before or after the happening of a default shall constitute a waiver thereof, and no waiver of any past default shall constitute waiver of any future default or of any other default. No failure to accelerate the debt evidenced hereby by reason of default hereunder, or acceptance of a past due installment, or indulgence granted from time to time shall be construed to be a waiver of the right to insist upon prompt payment thereafter or to impose late charges retroactively or prospectively, or shall be deemed to be a notation of this Note or as a reinstatement of the debt evidenced hereby or as a waiver of such right of acceleration or any other right, or be construed so as to preclude the exercise of any right which GECC may have, whether by the laws of the State of Texas, by agreement, or otherwise; and Borrower and each endorser or guarantor hereby expressly waives the benefit of any statute or rule of law or equity which would produce a result contrary to or in conflict with the foregoing. This Note may not be changed orally, but only by an agreement in writing signed by the party against whom such agreement is sought to be enforced. Borrower, for itself and its heirs, successors and assigns, and each endorser or guarantor of this Note, for its heirs, successors and assigns, hereby waives presentment, protest, demand, diligence, notice of dishonor and of nonpayment, and waives and renounces all rights to the benefits of any statute of limitations and any moratorium, appraisement, exemption and homestead now provided or which may hereafter be provided by any federal or state statute, including but not limited to exemptions provided by or allowed under the Bankruptcy Reform Act of 1978, both as to itself personally and as to all of its or their property, whether real or personal, against the enforcement and collection of the obligations evidenced by this Note and any and all extensions, renewals and modifications hereof. If Borrower consists of more than one (1) person, corporation or other entity, the obligations and liabilities of such persons, corporation or other entities under this Note and under the Mortgage and the Other Security Documents shall be joint and several, and the word "Borrower" shall mean all or some or any of them. It is the intention of the parties to conform strictly to applicable usury laws from time to time in force, and all agreements between Borrower and GECC, whether now existing or hereafter arising and whether oral or written, are hereby expressly limited so that in no contingency or event whatsoever, whether by acceleration of maturity hereof or otherwise, shall the amount paid or agreed to be paid to GECC or the holder hereof, or collected by GECC or such holder, for the use, forbearance or detention of the money to be loaned hereunder or otherwise, or for the payment or performance of any covenant or obligation contained herein or in the Mortgage or in any Other Security Documents, or in any other document evidencing, securing or pertaining to the indebtedness evidenced hereby, exceed the maximum amount permissible under applicable usury laws. If under any circumstances whatsoever fulfillment of any provisions hereof or of the Mortgage or any Other Security Documents, at the time performance of such provision shall be due, shall involve transcending 5 6 the limit of validity prescribed or permitted by law, including judicial determination, then ipso facto, obligation to be fulfilled shall be reduced to the limit of such validity; and if under any circumstances GECC or any other holder hereof shall ever receive any amount deemed interest by applicable law which would exceed interest at the highest lawful rate, such amount that would be excessive interest under applicable usury laws shall be applied to the reduction of the principal amount owing hereunder or to other indebtedness secured by the Mortgage and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal and other indebtedness, the excess shall be deemed to have been a payment made by mistake and shall be refunded to Borrower or to any other person making such payment on Borrower's behalf. All sums paid or agreed to be paid to the holder hereof for the use, forbearance or detention of the indebtedness of Borrower evidenced hereby and outstanding from time to time shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread from the date of disbursement of the proceeds of this Note until payment in full of such indebtedness so that the actual rate of interest on account of such indebtedness is uniform through the term hereof. The terms and provisions of this paragraph shall control and supersede every other provision of all agreements between GECC and Borrower and any endorser or guarantor of this Note. Borrower shall not be personally liable for the repayment of any of the principal of or interest due under this Note or for any deficiency judgment which GECC any obtain after foreclosure on its collateral after default by Borrower, provided, however, that Borrower and any general partner of Borrower shall not be exonerated or exculpated for any deficiency, loss or damage suffered by GECC as a result of the failure by Borrower to comply with any of the terms or conditions of the Mortgage or any of the Other Security Documents (other than the provisions relating to the payment of principal, interest or late charges), including but not limited to losses resulting from: (i) Borrower's failure to perform its obligation to properly account to GECC as mortgagee for any proceeds of insurance or condemnation proceeds as required by the Mortgage; (ii) Borrower's failure to comply with provisions of the Mortgage prohibiting the sale or further encumbering of the collateral; (iii) Borrower's attempt to interfere with GECC's rights under the Assignment of Rents and Leases (herein so called) of even date herewith from Borrower to GECC, or any other assignment of rents granted or any letter of credit issued in connection with the Loan; (iv) Borrower's failure to apply proceeds of rents and other income of the collateral toward the coats of maintenance and operation of the Mortgaged Property and to the payment of taxes, lien claims, insurance premiums and debt service and other indebtedness to the extent that the Mortgage or Other Security Documents require such rents and income to be so applied; (v) Borrower's entering into or modifying leases in violation of the provisions of the Mortgage or the Assignment of Rents and Leases; (vi) Borrower's collection of rentals for periods of more than one month in advance under lease of the Mortgaged Property; (vii) the receipt by Borrower of monies in connection with the modification of any existing or future lease or the entering into of a new lease in violation of the applicable provisions of the Mortgage or the assignment of Rents and Leases; (viii) damage or destruction to the Mortgaged Property, including its electrical, plumbing, heating or air-conditioning systems or its elevators, except as a result of casualty; (ix) Borrower's 6 7 failure to pay for any lose, liability, damage, coat or expense (including attorneys' fees) incurred by GECC in connection with any order, consent decree, settlement, judgment or verdict arising from the deposit, storage, disposal, burial, dumping, injecting, spilling, leaking, or other placement or release in, on or from the Mortgaged Property of asbestos or a "hazardous substance" as defined in 42 U.S.C. Section 9601, et seq., as amended from time to time, or any other toxic or hazardous waste or waste products; (x) Borrower's failure to pay for any loss, liability or expense (including attorney's fees) incurred by GECC arising out of any claim or allegation made by Borrower, its successors or assigns, or any creditor of Borrower, that this Note or the transactions contemplated hereby establish a joint venture or partnership arrangement between Borrower and GECC; (xi) 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 but not limited to the requirements of the Texas Department of Health, the Texas Department of Human Services, or the United States Department of Health and Human Services, and any requirements under Medicare (Title XVIII of the Social Security Act of 1965) or Medicaid (Title XIX of the Social Security Act of 1965); or (xii) any liability for professional malpractice or negligence relating to the operation of the Projects; and provided further, that the foregoing limitations on Borrower's personal liability with respect to principal and interest shall not impair the validity of the indebtedness secured by GECC's collateral, or the lien on or security interest in the collateral, or the right of GECC as mortgagee or secured party to foreclose and/or enforce the collateral after default by Borrower in the event any party shall have guaranteed all or part of the Loan by separate written guaranty, none of the foregoing limitations on Borrower's personal liability for payment of principal and interest shall modify, diminish or discharge the personal liability of any such guarantor as set forth in any such written guaranty. None of the foregoing limitations on Borrower's personal liability shall modify, diminish or discharge the personal liability of Borrower or any individual under the Hazardous Substances Indemnity Agreement executed and delivered by Borrower of even date herewith or under any indemnification provisions of the Mortgage or any of the Other Security Documents. Nothing herein shall be deemed to be a waiver of any right which GECC may have under sections 506(a), 506(b), 1111(b) or any other provision of the Bankruptcy Reform Act of 1978 to file a claim for the full amount of the debt owing to GECC by Borrower or to require that all collateral shall continue to secure all of the indebtedness owing to GECC in accordance with this Note, the Mortgage and the Other Security Documents. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES APPLICABLE TO TRANSACTIONS IN TEXAS. Borrower hereby submits to personal jurisdiction in the State of Texas for the enforcement of Borrower's obligations hereunder and under the Mortgage and the Other Security Documents, and waives any and all personal rights under the law of any other state to object to jurisdiction within the State of Texas for the purposes of litigation to enforce such obligation of Borrower. In the event such litigation is commenced, Borrower agrees that, in addition to any other manner provided by applicable law or court rule, service of process may be made and personal jurisdiction over Borrower obtained, by 7 8 service of a copy of the summons, complaint and other pleadings required by applicable law to commence such litigation upon Borrower's appointed Agent for Service of Process in the State of Texas, which Agent Borrower hereby designates to be: CT Corporation 350 North St. Paul Dallas, Texas 75201 IN WITNESS WHEREOF, Borrower, intending to bo legally bound hereby, has caused this Note to be duly executed under seal the day and year first above written. FORT AUSTIN LIMITED PARTNERSHIP, a Texas limited partnership- By: FORT AUSTIN ASSOCIATES LIMITED PARTNERSHIP, a Texas limited partnership, General Partner By: ARC FORT AUSTIN PROPERTIES, INC., a Tennessee corporation, Managing General Partner By: /s/ James H. Drass, Jr. --------------------------- James H. Drass, Jr. Senior Vice President 8 9 THIRD RENEWAL, EXTENSION AND MODIFICATION AGREEMENT This Third Renewal, Extension and Modification Agreement (this "AGREEMENT") is executed as of October 31, 1994 between AMERICAN RETIREMENT CORPORATION, a Tennessee corporation, ARC FORT AUSTIN PROPERTIES, INC., a Tennessee corporation, and FORT AUSTIN ASSOCIATES LIMITED PARTNERSHIP, a Texas limited partnership (collectively, "GUARANTORS" and each a "GUARANTOR"), FORT AUSTIN LIMITED PARTNERSHIP, a Texas limited partnership ("BORROWER") and GENEL COMPANY, INC., an Oregon corporation ("GENEL"). RECITALS: A. GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("GECC") and Borrower entered into the Loan Agreement dated as of April 1, 1992 (the "ORIGINAL LOAN AGREEMENT"), in which GECC made a loan (the "LOAN") to Borrower in the amount of TWENTY FOUR MILLION AND NO/100 DOLLARS ($24,000,000.00) as evidenced by the Promissory Note of even date therewith, in the stated principal amount of $24,000,000, executed by Borrower and payable to the order of GECC as therein provided (the "NOTE"); B. The indebtedness evidenced by the Note is secured by, among other things, (i) the First Deed of Trust and Security Agreement dated as of April 1, 1992 (the "DEED OF TRUST"), executed by Borrower to Michael R. Boulden, Trustee, recorded at Volume 10585, Page 1351, et seq., of the Real Property Records of Tarrant County, Texas, and at Volume 11656, Page 0625, et seq., of the Real Property Records of Travis County, Texas, and encumbering (a) the real property and improvements described therein and known as the Broadway Plaza at Cityview Retirement Community located in the City of Fort Worth, Tarrant County, Texas ("BROADWAY") and (b) the real property and improvements known as the Summit at Westlake Retirement Community in the City of Austin, Travis County, Texas ("SUMMIT") (collectively, the "MORTGAGED PROPERTY"), and (i) Assignment of Rents and Leases dated April 1, 1992 (the "ASSIGNMENT OF RENTS"), executed by Borrower and recorded in Volume 10585, Page 1435, et seq., of the Real Property Records of Tarrant County, and in Volume 11656, Page 0665, et seq., of the Real Property Records of Travis County, Texas, assigning to GECC all of the rents and leases of the Mortgaged Property; C. American Retirement Corporation, a Tennessee corporation ("ORIGINAL GUARANTOR") executed and delivered to GECC the Guarantee, dated as of April 1, 1992, guaranteeing to GECC the payment and performance of certain obligations and liabilities of Borrower under the Loan and the Security Documents (the "ORIGINAL GUARANTEE"); D. The Loan Agreement, the Note, the Deed of Trust, the Assignment of Rents, the Original Guarantee, and all other documents or instruments evidencing, governing, securing, or 1 10 otherwise pertaining to the Loan are collectively referred to herein as the "ORIGINAL SECURITY DOCUMENTS"; E. GECC, Borrower and Guarantor entered into the First Modification Agreement dated May 27, 1993 (the "FIRST MODIFICATION"), recorded in Volume 11097, Page 1062, et. seq., of the Real Property Records of Tarrant County, Texas, and in Volume 11954, Page 2231, et. seq., of the Real Property Records of Travis County, Texas, modifying and amending the Loan Agreement, the Note, the Deed of Trust, the Assignment of Rents and the other Original Security Documents; F. GECC and GENEL entered into the Assignment of Note, Liens and Other Security Documents, dated as of June 14, 1994, whereby GECC assigned all of its right, title and interest in the Original Security Documents to GENEL, and GENEL became the owner and holder of the Note, "Beneficiary" of the Deed of Trust, and became substituted in all respects for GECC under the Assignment of Rents and the other Original Security Documents; G. GENEL, Borrower and Guarantor entered into the Second Renewal, Extension and Modification Agreement dated as of June 14, 1994 (the "SECOND MODIFICATION"), recorded in Volume 11620, Page 0230, et seq., of the Real Property Records of Tarrant County, Texas, and in Volume 12209, Page 0555, et seq., of the Real Property Records of Travis County, Texas, modifying and amending the Loan Agreement, the Note, the Deed of Trust, the Assignment of Rents and Other Security Documents and providing for, among other things, financing by GENEL for Borrower's acquisition and development of the Santa Catalina Villas Retirement Community located in the City of Tucson, Pima County, Arizona ("SANTA CATALINA"), the satisfaction of certain second lien indebtedness on Summit and Broadway, and the replacement of the (a) Original Loan Agreement with the Loan Agreement, dated as of June 14, 1994, between GENEL and Borrower (the "FIRST REPLACEMENT LOAN AGREEMENT") (b) the Original Guarantee with the Unconditional Guarantee of Payment and Performance, dated as of July 14, 1994, executed by Guarantors for the benefit of GENEL (the "FIRST REPLACEMENT GUARANTEE"); and H. Borrower and Guarantors have requested GENEL to extend additional financing to Borrower for its acquisition of the Parkplace Retirement Community located in the City of Denver, Denver County, Colorado ("PARKPLACE"), The Hampton at Post Oak Road Retirement Community located in the City of Houston, Harris County, Texas ("HAMPTON"), and the Westlake Village Retirement Community located in the City of Westlake, Cuyahoga County, Ohio ("WESTLAKE") and in renewal and execution of second lien indebtedness on Summit and Broadway and certain first lien indebtedness on Santa Catalina, and GENEL has agreed to extend the additional financing subject to, among other conditions, execution and delivery by Borrower of (a) the Loan Agreement of even date herewith between GENEL and Borrower, in substitution for the First Replacement Loan Agreement, with respect to the Loan and the additional financing (the "LOAN AGREEMENT"), (b) the Guaranty of Payment and Performance of even date herewith executed by Guarantors for the benefit of GENEL, in substitution of the First Replacement Guarantee (the "GUARANTY"), and (c) certain modifications and amendments of the Note, the Deed of Trust and the other Original Security Documents, as amended or replaced to date, as hereinafter 2 11 provided. As used herein, "SECURITY DOCUMENTS" shall include the Original Security Documents, as modified and replaced by the First Modification, the Second Modification this Agreement, the Guaranty and the Loan Agreement. AGREEMENTS: For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, GENEL, Borrower and Guarantors hereby modify and amend the Note, the Deed of Trust, the Assignment of Rents and the other Security Documents as follows: 1. MODIFICATION OF THE NOTE. The Note is hereby amended and modified as follows: (a) RENEWAL AND EXTENSION. The maturity date of the Note, defined in the Note as the "Maturity Date," is hereby modified and extended so that the outstanding principal balance of the Note and all accrued but unpaid interest thereon shall be fully due and payable on October 31, 2001. Prior to default or maturity, interest on the unpaid principal balance of the Note shall continue to be payable as provided in the Note, as it is modified by this Agreement. Borrower hereby renews the indebtedness evidenced by the Note and promises to pay to the order of GENEL the unpaid principal balance of the Note plus all accrued but unpaid interest and charges thereon in accordance with the Note and this Agreement. (b) PAYMENT TERMS. The second grammatical paragraph of the Note is amended and restated as follows: Interest and principal on this Note shall be payable as follows: (1) INTEREST. Commencing November 1, 1994, and continuing on the first day of each month thereafter, to and including October 1, 2001, Borrower shall pay to GENEL in arrears, all accrued and unpaid interest for the immediately preceding month on the outstanding principal balance of this Note at the Contract Index Rate (as hereinafter defined). Interest at the Contract Index Rate 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 Disbursement or the date of the preceding interest installment due date, as the case may be, to the date of the next interest installment due date or the Maturity Date. (2) PRINCIPAL. In addition to monthly payments of interest hereunder, (i) commencing December 1, 1994 and continuing on the first day of each month thereafter, to and including August 1, 1995, Borrower shall pay to GENEL, in reduction of the principal balance of this Note, NINE THOUSAND FOUR HUNDRED AND NO/100 DOLLARS ($9,400.00); and (ii) commencing September 1, 1995 and continuing on the first day of each month thereafter to and 3 12 including October 1, 2001, Borrower shall pay to GENEL, in reduction of the principal balance of this Note, THIRTY TWO THOUSAND EIGHT HUNDRED AND NO/100 DOLLARS ($32,800.00); provided, however, that if on the first day of any month, either (A) Debt Service Coverage as defined below but calculated on an interest only basis for the most recent consecutive 90-day period, as determined by GENEL, is less than 1.20:1 or (B) annualized Net Revenues Available for Debt Services (defined below) divided by the then outstanding principal balance of the Note is less than 0.145, then, in addition to regular monthly installments of interest and principal on this Note, Borrower shall pay to GENEL, in reduction of the principal balance of this Note, on the twentieth (20th) day of each month, all Excess Cash Flow (defined below) for the preceding month. (3) MATURITY DATE. The entire principal amount of this Note, together with all accrued but unpaid interest thereon, any and all unpaid late charges and interest due at the Delinquency Rate, and all other Maturity Obligations (defined below) shall be due and payable to GENEL on October 31, 2001 (the "MATURITY DATE"). (c) DEFINED TERMS. Defined terms in the Note are hereby modified and amended effective on the date of this Agreement as follows: (1) The definition of "LOAN AGREEMENT" is amended to mean and refer solely to the Loan Agreement dated October 31, 1994 between GENEL and Borrower. (2) The definition of "MATURITY OBLIGATIONS" is amended and restated as follows: As used herein, "Maturity Obligations" shall mean the entire outstanding principal amount of this Note and the Promissory Note dated as of October 31, 1994, in the stated principal amount of $49,000,000 executed by Borrower, bearing interest and being payable to the order of GENEL (the "OTHER NOTE"), together with all accrued but unpaid interest thereon, and all other sums due and unpaid hereunder and under the Mortgage, the Other Security Documents, and all documents evidencing, governing, securing or otherwise pertaining to the indebtedness evidenced by the Other Note. 4 13 (3) The definition of "LOAN YEAR" is amended and restated as follows: As used herein, "LOAN YEAR" shall mean the period between the date hereof and October 31, 1995 for the first Loan Year, and the period between each succeeding November 1 and October 31 until the Maturity Date. (4) The definition of "CONTRACT INDEX RATE" is amended and restated as follows: As used herein, "Contract Index Rate" shall mean the rate of interest equal to four and five-tenths percent (4.5%) per annum in excess of the GECC Composite Commercial Paper Rate (as hereinafter defined). "GECC COMPOSITE COMMERCIAL PAPER RATE" shall mean the "Average Interest Expense" (as hereinafter defined) on the actual principal amount of the GECC Composite Commercial Paper outstanding for General Electric Capital Corporation ("GECC") for the full fiscal month preceding the interest billing month. "GECC Composite Commercial Paper" shall mean GECC's outstanding commercial paper for terms of nine (9) months or less from sources within the United States but excluding the current portion of GECC's long term debt and GECC Financial Corporation's borrowings and interest expense. "Average Interest Expense" shall mean the percentage obtained by dividing the interest expense on GECC Composite Commercial Paper for such fiscal month by the average daily principal amount of GECC Commercial Paper outstanding during such fiscal month, divided by the actual number of days in such fiscal month and multiplied by the actual number of days in the calendar year. The GECC Composite Commercial Paper Rate shall be determined by GECC and evidenced by a certificate issued by an authorized GECC employee. (d) ADDITIONAL DEFINITIONS. The following paragraph is added immediately following the second grammatical paragraph of the Note, as amended and restated above: As used herein, the terms "DEBT SERVICE COVERAGE," "EXCESS CASH FLOW" and "NET REVENUES AVAILABLE FOR DEBT SERVICE" shall have the same meanings assigned to such terms in the Loan Agreement. All capitalized terms used herein but not defined shall be given the meaning assigned to them in the Loan Agreement. (e) The eleventh grammatical paragraph of the Note (fifth grammatical paragraph on page 3 of the Note) is amended and restated as follows: Borrower may prepay this Note in whole, but not in part, and only in conjunction with the payment in full of the Other Note, in the event of any third 5 14 party sale of all of the Mortgaged Property or any refinancing of the Loan, upon ten (10) days prior written notice to GENEL and on any regularly scheduled interest payment due date, by paying GENEL the Maturity Obligations, plus an aggregate prepayment premium allocable to Broadway and Summit, for both this Note and the Other Note, equal to the sum of (i) two percent (2%) of the entire principal amount of any prepayment, if such prepayment is made during the first Loan Year, and (ii) one percent (1%) of the entire principal amount of any prepayment, if such prepayment is made during the second Loan Year, and (iii) zero percent (0%) of the entire principal amount of any prepayment if such prepayment if such prepayment is made after the expiration of the second Loan Year. GENEL reserves the right to require any payment on this Note, 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. (f) The fifteenth grammatical paragraph of the Note (last grammatical paragraph commencing on page 4 of the Note) is amended and restated as follows: If Borrower fails to pay any installment of interest or any principal on this Note or on the Other Note for five (5) days after the same shall become due or upon the happening of any "Event of Default" as defined in the Mortgage or any of the Other Security Documents, then and in any such event GENEL may at its option declare the entire unpaid balance of this Note, together with interest accrued hereon, to be immediately due and payable and GENEL may proceed to exercise any rights or remedies that it may have under the Mortgage, under the Other Security Documents, under this Note or under any other agreement relating to the Loan or such other rights and remedies which GENEL may have at law, equity or otherwise. In the event of such acceleration, Borrower may discharge its obligations to GENEL by paying the Maturity Obligations, with interest at the Delinquency Rate accruing from the date such acceleration is declared, plus any applicable prepayment premium, or if no prepayment is then permitted, a prepayment premium equal to five percent (5%) of the unpaid balance of the Loan. 2. MODIFICATION OF DEED OF TRUST. The Deed of Trust is hereby modified and amended as follows: (a) CROSS-DEFAULT. Section 2.01(v) is amended and restated as follows:: "; or (v) default when and as the same shall become due and payable of any payment of principal or interest on Promissory Note dated October 31, 1994, in the stated principal amount of $49,000,000 executed by the Grantor, bearing interest and being payable to the order of Genel Company, Inc. as therein provided; whether by maturity or acceleration, which default has continued for a period of five (5) days, except such five (5) day grace period shall not be allowed for payments becoming due and owing by reason of acceleration." 6 15 (b) GENERAL MODIFICATION. The Deed of Trust is further modified to provide that (1) all references therein to the "Note" or the like shall mean the Note, as modified by this Agreement, and (2) all references to the Loan Agreement shall mean and refer solely to the Loan Agreement (that is, that Loan Agreement dated October 31, 1994, between Borrower and GENEL). 3. MODIFICATION OF ASSIGNMENT OF RENTS. The Assignment of Rents is hereby modified and amended as follows: (a) REFERENCE TO DOCUMENTS. Section 2(b)(ii) of the Assignment of Rents is hereby amended and restated as follows: "(ii) interest, principal or other amounts payable to GENEL pursuant to: (A) the Loan Agreement dated October 31, 1994, between GENEL and Assignor (the "LOAN AGREEMENT"); (B) the following Promissory Notes (collectively, and as amended, the "NOTE"): (i) Promissory Note dated April 1, 1992, in the stated principal amount of $24,000,000, executed by Assignor, bearing interest and being payable to the order of General Electric Capital Corporation ("GECC"), and endorsed payable to the order of GENEL, as modified by the First Modification Agreement (the "FIRST MODIFICATION") dated May 27, 1993 between Assignor, GECC, and American Retirement Corporation ("ARC") and recorded in Volume 11097, Page 1062, et seq., of the Real Property Records of Tarrant County, Texas, and in Volume 11954, Page 2231, et seq., of the Real Property Records of Travis County, Texas, as further modified by the Second Renewal, Extension and Modification Agreement (the "SECOND MODIFICATION") dated June 14, 1994, between Assignor, GENEL, and ARC, and recorded in Volume 11620, Page 0230, et seq., of the Real Property Records of Tarrant County, Texas, and in Volume 12209, Page 0555, et seq., of the Real Property Records of Travis County, Texas, and as further modified by the Third Renewal, Extension and Modification Agreement (the "THIRD MODIFICATION") dated October 31, 1994, between Assignor, GENEL and ARC; and (ii) Promissory Note dated October 14, 1994, in the stated principal amount of $49,000,000, executed by Assignor, bearing interest and being payable to the order of GENEL as therein provided; and 7 16 (C) the following deeds of trust: (i) First Deed of Trust and Security Agreement dated April 1, 1992, executed by Assignor in favor of GECC, the interest of GECC herein having been assigned to GENEL under that Assignment of Note, Liens and Other Security Documents dated as of June 14, 1994 between GECC and GENEL, and recorded in Volume 11620, Page 0222, et seq., of the Real Property Records of Tarrant County, Texas, and in Volume 12209, Page 0548, et seq., of the Real Property Records of Travis County, Texas, as amended by the First Modification, the Second Modification, and the Third Modification and (ii) Second Deed of Trust and Security Agreement dated October 31, 1994, executed by Assignor in favor of GENEL (collectively, the "DEED OF TRUST")." 4. MODIFICATION OF SECURITY DOCUMENTS. The other Security Documents are modified to provide that all references to the "Loan Agreement" shall mean the Loan Agreement dated October 31, 1994 between GENEL and Borrower and that all references therein to the "Note" or the like shall mean, collectively, (a) the Promissory Note dated April 1, 1992, in the stated principal amount of $24,000,000, executed by Borrower, bearing interest and being payable to the order of GECC, endorsed payable to the order of GENEL, as modified by (i) the First Modification Agreement, dated as of May 27, 1993 between GECC, Borrower and Original Guarantor, and recorded in Volume 11097, Page 1062, et seq., of the Real Property Records of Tarrant County, Texas, and in Volume 11954, Page 2231, et seq., of the Real Property Records of Travis County, Texas, (ii) the Second Modification and (iii) this Agreement, and (b) Promissory Note, of even date herewith, in the stated principal amount of $49,000,000 executed by Borrower, bearing interest and being payable to the order of GENEL as therein provided. 5. LIENS. In conjunction with the renewal, extension and modification of the Note, the Deed of Trust, the Assignment of Rents, and the other Security Documents, Borrower hereby agrees that such modification shall in no manner affect or impair the Note (except to the extent renewed, extended and amended hereby) or the liens, assignments and security interests under the Deed of Trust and the other Security Documents, and that said liens, assignments and security interests shall not in any manner be waived, the purpose of this Agreement being simply to modify the Note and the other Security Documents, and Borrower further agrees that, as modified by this Agreement and heretofore modified in writing, all terms and provisions of the Note, the Deed of Trust, the Assignment of Rents, and the other Security Documents shall be and remain in full force and effect as therein written. 6. NO DEFENSES. Borrower and Guarantor hereby covenant and warrant that GENEL is not in default in the performance of any of its obligations or warranties under the Security Documents, that there are no defenses, counterclaims or offsets to the Security Documents, and that all of the provisions of the Security Documents are in full force and effect. 8 17 7. COSTS. Borrower agrees to pay all costs incurred in connection with the execution and consummation of this Agreement, including but not limited to, all recording costs and the fees and expenses of GENEL's counsel. 8. ACKNOWLEDGMENT AND CONSENT OF GUARANTOR. Guarantors hereby (a) acknowledge and consent to all of the terms and conditions of this Agreement, (b) ratify and confirm the Guaranty to and for the benefit of Lender, and (c) acknowledge that the Guaranty is valid and in full force and effect and is subject to no claims, defenses, or off-sets. Further, Guarantors agree that nothing contained in this Agreement shall adversely affect any right or remedy of Lender under the Guaranty and that with respect to the Guaranty all references to any of the Security Documents in the Guaranty shall mean such documents as amended by this Agreement; that the execution and delivery of this Agreement shall in no way change or modify their obligations as Guarantors pursuant to the Guaranty; and that the execution and delivery of any agreements by Borrower and Lender shall not constitute a waiver by Lender of any of Lender's rights against Guarantors, and (d) waive all claims, defenses, and rights of offset that they may have against their obligations thereunder as of the date hereof, if any, whether known or unknown, whether arising under tort, contract, at law, or in equity. 9. MAXIMUM AMOUNT. All agreements between Borrower and GENEL, whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency, whether by reason of acceleration of the maturity of the Note or otherwise, shall the interest contracted for, charged, received, paid or agreed to be paid to the holder of the Note exceed the maximum amount permissible under applicable law. If from any circumstance whatsoever interest would otherwise be payable to the holder of the Note in excess of the maximum lawful amount, the interest payable to the holder of the Note shall be reduced to the maximum amount permitted by applicable law; and if from any circumstance the holder of the Note shall ever receive anything of value deemed interest by applicable law, an amount equal to any excessive interest shall be applied to the reduction of the principal amount owing under the Note, and not to the payment of interest, or if such excessive interest exceeds such unpaid balance of principal of the Note, such excess shall be refunded to Borrower. All interest paid or agreed to be paid to the holder of the Note shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of the Note (including the period of any renewal or extension thereof), so that the interest on the Note shall not exceed the maximum amount permitted by applicable law. This section shall control all agreements between Borrower and the holder of the Note. EXECUTED as of the date and year first recited above. GUARANTORS: AMERICAN RETIREMENT CORPORATION, a Tennessee corporation By: ----------------------------------- James T. Money 9 18 Executive Vice President ARC FORT AUSTIN PROPERTIES, INC., a Tennessee corporation By: ---------------------------------- James T. Money Executive Vice President FORT AUSTIN ASSOCIATES LIMITED PARTNERSHIP, a Texas limited partnership By: ARC Fort Austin Properties, Inc., a Tennessee corporation, its Managing General Partner By: ----------------------------- James T. Money Executive Vice President BORROWER: FORT AUSTIN LIMITED PARTNERSHIP, a Texas limited partnership By: Fort Austin Associates Limited Partnership, a Texas limited partnership, General Partner By: ARC Fort Austin Properties, Inc., a Tennessee corporation, Managing General Partner By: -------------------------- James T. Money Executive Vice President 10 19 LENDER: GENEL COMPANY, INC., an Oregon corporation By: -------------------------------------- Barry P. Skolnick Senior Investment Manager STATE OF TEXAS ss. ss. COUNTY OF DALLAS ss. This instrument was acknowledged before me on October ___, 1994, by James T. Money, Executive Vice President of AMERICAN RETIREMENT CORPORATION, a Tennessee corporation, on behalf of said corporation. (SEAL) ------------------------------------- Notary Public, State of Texas ------------------------------------- Printed name of notary My Commission Expires: --------------- STATE OF TEXAS ss. ss. COUNTY OF DALLAS ss. This instrument was acknowledged before me on October ___, 1994, by James T. Money, Executive Vice President of ARC FORT AUSTIN PROPERTIES, INC., a Tennessee corporation, on behalf of said corporation. (SEAL) ------------------------------------- Notary Public, State of Texas ------------------------------------- Printed name of notary My Commission Expires: --------------- 11 20 STATE OF TEXAS ss. ss. COUNTY OF DALLAS ss. This instrument was acknowledged before me on October ___, 1994, by James T. Money, Executive Vice President of ARC Fort Austin Properties, Inc., a Tennessee corporation and Managing General Partner of FORT AUSTIN ASSOCIATES LIMITED PARTNERSHIP, a Texas limited partnership, on behalf of said corporation and limited partnership. (SEAL) ------------------------------------- Notary Public, State of Texas ------------------------------------- Printed name of notary My Commission Expires: --------------- STATE OF TEXAS ss. ss. COUNTY OF DALLAS ss. This instrument was acknowledged before me on October ___, 1994, by James T. Money, Executive Vice President of ARC Fort Austin Properties, Inc., a Tennessee corporation, the Managing General Partner of Fort Austin Associates Limited Partnership, a Texas limited partnership, the General Partner of FORT AUSTIN LIMITED PARTNERSHIP, a Texas limited partnership, on behalf of said Tennessee corporation and Texas limited partnerships. (SEAL) ------------------------------------- Notary Public, State of Texas ------------------------------------- Printed name of notary My Commission Expires: --------------- 12 21 STATE OF TEXAS ss. ss. COUNTY OF DALLAS ss. This instrument was acknowledged before me on October ___, 1994, by Barry P. Skolnick, Senior Investment Manager of GENEL COMPANY, INC., an Oregon corporation, on behalf of said corporation. ------------------------------------- Notary Public, State of Texas My Commission Expires: --------------- ------------------------------------- Printed Name of Notary [For purposes of reference, copies of the Note, the First Modification and the Second Modification are attached hereto.] 13 22 FOURTH RENEWAL, EXTENSION AND MODIFICATION AGREEMENT This Fourth Renewal, Extension and Modification Agreement (this "AGREEMENT") is executed as of January ___, 1996 among AMERICAN RETIREMENT CORPORATION, a Tennessee corporation, and ARC FORT AUSTIN PROPERTIES, INC., a Tennessee corporation (collectively, "GUARANTORS" and each a "GUARANTOR"), FORT AUSTIN LIMITED PARTNERSHIP, a Texas limited partnership ("BORROWER") and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("GECC"). RECITALS: A. GECC and Borrower entered into that Loan Agreement dated as of April 1, 1992 (the "ORIGINAL LOAN AGREEMENT"), in which GECC made a loan (the "LOAN") to Borrower in the amount of TWENTY FOUR MILLION AND NO/100 DOLLARS ($24,000,000.00), as evidenced by the Promissory Note of even date therewith, in the stated principal amount of $24,000,000, executed by Borrower and payable to the order of GECC as therein provided (the "NOTE"); B. The indebtedness evidenced by the Note is secured by, among other things, (i) that First Deed of Trust and Security Agreement dated as of April 1, 1992 (the "DEED OF TRUST"), executed by Borrower to Michael R. Boulden, Trustee, recorded at Volume 10585, Page 1351, et seq., of the Real Property Records of Tarrant County, Texas, and at Volume 11656, Page 0625, et seq., of the Real Property Records of Travis County, Texas, and encumbering (a) the real property and improvements described therein and known as the Broadway Plaza at Cityview Retirement Community located in the City of Fort Worth, Tarrant County, Texas ("BROADWAY") and (b) the real property and improvements known as the Summit at Westlake Retirement Community in the City of Austin, Travis County, Texas ("SUMMIT") (collectively, the "MORTGAGED PROPERTY"), and (i) that Assignment of Rents and Leases dated April 1, 1992 (the "ASSIGNMENT OF RENTS"), executed by Borrower and recorded in Volume 10585, Page 1435, et seq., of the Real Property Records of Tarrant County, and in Volume 11656, Page 0665, et seq., of the Real Property Records of Travis County, Texas, assigning to GECC all of the rents and leases of Broadway and Summit; C. American Retirement Corporation, a Tennessee corporation ("ORIGINAL GUARANTOR") executed and delivered to GECC the Guarantee, dated as of April 1, 1992, guaranteeing to GECC the payment and performance of certain obligations and liabilities of Borrower under the Loan and the Security Documents (as hereinafter defined) (the "ORIGINAL GUARANTEE"); D. The Loan Agreement, the Note, the Deed of Trust, the Assignment of Rents, the Original Guarantee, and all other documents or instruments evidencing, governing, securing, or 1 23 otherwise pertaining to the Loan are collectively referred to herein as the "ORIGINAL SECURITY DOCUMENTS"; E. GECC, Borrower and American Retirement Corporation entered into that First Modification Agreement dated May 27, 1993 (the "FIRST MODIFICATION"), recorded in Volume 11097, Page 1062, et seq., of the Real Property Records of Tarrant County, Texas, and in Volume 11954, Page 2231, et seq., of the Real Property Records of Travis County, Texas, modifying and amending the Original Loan Agreement, the Note, the Deed of Trust, the Assignment of Rents and the other Original Security Documents; F. GECC and GENEL Company, Inc. ("GENEL") entered into that Assignment of Note, Liens and Other Security Documents, dated as of June 14, 1994, and recorded at Volume 11620, Page 0222, et seq., of the Real Property Records of Tarrant County, Texas and at Volume 12209, Page 0548, et seq., of the Real Property Records of Travis County, Texas, whereby GECC assigned all of its right, title and interest in the Original Security Documents to GENEL, and GENEL became the owner and holder of the Note, "Beneficiary" of the Deed of Trust, and became substituted in all respects for GECC under the Assignment of Rents and the other Original Security Documents; G. GENEL, Borrower, Guarantors and Fort Austin Associates Limited Partnership ("FORT AUSTIN") entered into that Second Renewal, Extension and Modification Agreement dated as of June 14, 1994 (the "SECOND MODIFICATION"), recorded in Volume 11620, Page 0230, et seq., of the Real Property Records of Tarrant County, Texas, and in Volume 12209, Page 0555, et seq., of the Real Property Records of Travis County, Texas, modifying and amending the Note, the Deed of Trust, the Assignment of Rents and other Original Security Documents and providing for, among other things, financing by GENEL for Borrower's acquisition and development of the Santa Catalina Villas Retirement Community located in the City of Tucson, Pima County, Arizona ("SANTA CATALINA"), the satisfaction of certain second lien indebtedness on Summit and Broadway, and the replacement of (a) the Original Loan Agreement with that Loan Agreement, dated as of June 14, 1994, between GENEL and Borrower (the "FIRST REPLACEMENT LOAN AGREEMENT") and (b) the Original Guarantee with that Unconditional Guaranty of Payment and Performance, dated as of June 14, 1994, executed by Guarantors and Fort Austin for the benefit of GECC (the "FIRST REPLACEMENT GUARANTEE"); H. GENEL, Borrower, Guarantors and Fort Austin entered into that Third Renewal, Extension and Modification Agreement dated as of October 31, 1994 (the "THIRD MODIFICATION"), recorded in Volume 11777, Page 2053, et seq., of the Real Property Records of Tarrant County, Texas, and in Volume 12305, Page 102, et seq., of the Real Property Records of Travis County, Texas, modifying and amending the Note, the Deed of Trust, the Assignment of Rents, and the other Original Security Documents, and providing for, among other things, financing to Borrower for its acquisition of the Parkplace Retirement Community located in the City of Denver, Denver County, Colorado ("PARKPLACE"), The Hampton at Post Oak Road Retirement Community located in the City of Houston, Harris County, Texas ("HAMPTON"), and the Westlake Village Retirement Community located in the City of Westlake, Cuyahoga County, Ohio ("WESTLAKE"; Broadway, 2 24 Summit, Santa Catalina, Parkplace, Hampton, and Westlake being herein collectively called the "MORTGAGED PROPERTY"), and the replacement of (a) the First Replacement Loan Agreement with that Loan Agreement dated as of October 31, 1994 between GENEL and Borrower (the "SECOND REPLACEMENT LOAN AGREEMENT"), and (b) the First Replacement Guarantee with that Unconditional Guaranty of Payment and Performance, dated as of October 31, 1994, executed by Guarantors and Fort Austin for the benefit of GENEL (the "SECOND REPLACEMENT GUARANTEE"); I. GENEL and GECC entered into that Assignment of Note, Liens and Other Security Documents, dated of even date herewith, whereby GENEL assigned all of its right, title and interest in the Original Security Documents to GECC and GECC became the owner and holder of the Note, "Beneficiary" under the Deed of Trust, and became substituted in all respects for GENEL under the Assignment of Rents and other Original Security Documents. As used herein, "SECURITY DOCUMENTS" shall include the Original Security Documents, as modified and replaced by the First Modification, the Second Modification, the Third Modification, this Agreement, the Guaranty (as hereinafter defined) and the Loan Agreement (as hereinafter defined); and J. Borrower and Guarantors have requested GECC to commit to extend additional financing to Borrower for its acquisition and development of additional senior living facilities, and in further renewal and extension of second lien indebtedness on Summit and Broadway and extension of the indebtedness on Santa Catalina, Hampton, Parkplace and Westlake, and GECC has agreed to extend the additional financing subject to, among other conditions, execution and delivery by Borrower of (a) that Loan Agreement of even date herewith between GECC and Borrower, in substitution for the Second Replacement Loan Agreement, with respect to the Loan, as modified to include said additional financing (the "LOAN AGREEMENT"), (b) the Unconditional Guaranty of Payment and Performance of even date herewith executed by Guarantors, American Retirement Communities, L.L.C., and American Retirement Communities, L.P. for the benefit of GECC, in substitution of the Second Replacement Guaranty (the "GUARANTY"), and (c) certain modifications and amendments of the Note, the Deed of Trust and the other Original Security Documents, as amended or replaced to date, as hereinafter provided. AGREEMENTS: For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, GECC, Borrower and Guarantors hereby modify and amend the Note, the Deed of Trust, the Assignment of Rents and the other Security Documents as follows: 1. MODIFICATION OF THE NOTE. The Note is hereby amended and modified as follows: (a) RENEWAL AND EXTENSION. The maturity date of the Note, defined in the Note as the "Maturity Date," is hereby modified and extended so that the outstanding principal balance of the Note and all accrued but unpaid interest thereon shall be fully due and payable on December 31, 2002. Prior to default or maturity, interest on the unpaid principal balance of the Note shall accrue and be payable as provided in the Loan Agreement. Borrower hereby renews the indebtedness evidenced by the Note and 3 25 promises to pay to the order of GECC the unpaid principal balance of the Note plus all accrued but unpaid interest and charges thereon in accordance with the Note and the Loan Agreement. (b) PAYMENT TERMS. From and after the date hereof, interest and principal of this Note shall be payable as set forth in the Loan Agreement. The entire principal amount of this Note, together with all accrued but unpaid interest thereon, any and all unpaid late charges, and all other Maturity Obligations (defined below) shall be due and payable to GECC on December 31, 2002 (the "MATURITY DATE"). (c) DEFINED TERMS. Defined terms in the Note are hereby modified and amended effective on the date of this Agreement as follows: (1) The definition of "LOAN AGREEMENT" is amended to mean and refer solely to the Loan Agreement dated January ___, 1996 between GECC and Borrower. (2) The definition of "MATURITY OBLIGATIONS" is amended and restated as follows: As used herein, "Maturity Obligations" shall mean the entire outstanding principal amount of this Note and that Promissory Note dated as of January ___, 1996, in the stated principal amount of $73,500,000, executed by Borrower, bearing interest and being payable to the order of GECC (the "OTHER NOTE"), together with all accrued but unpaid interest thereon, and all other sums due and unpaid hereunder and under the Mortgage, the Other Security Documents, and all documents evidencing, governing, securing or otherwise pertaining to the indebtedness evidenced by the Other Note. 2. MODIFICATION OF DEED OF TRUST. The Deed of Trust is hereby modified and amended as follows: (a) CROSS-DEFAULT. Section 2.01(v) is amended and restated as follows:: "; or (v) default when and as the same shall become due and payable of any payment of principal or interest on Promissory Note dated January ___, 1996, in the stated principal amount of $73,500,000 executed by the Grantor, bearing interest and being payable to the order of General Electric Capital Corporation as therein provided; whether by maturity or acceleration, which default has continued for a period of five (5) days, except such five (5) day grace period shall not be allowed for payments becoming due and owing by reason of acceleration." 4 26 (b) GENERAL MODIFICATION. The Deed of Trust is further modified to provide that (1) all references therein to the "Note" or the like shall mean the Note, as modified by this Agreement, and (2) all references to the Loan Agreement shall mean and refer solely to the Loan Agreement (that is, that Loan Agreement dated January ___, 1996, between Borrower and GECC). 3. MODIFICATION OF ASSIGNMENT OF RENTS. The Assignment of Rents is hereby modified and amended as follows: (a) REFERENCE TO DOCUMENTS. Section 2(b)(ii) of the Assignment of Rents is hereby amended and restated as follows: "(ii) interest, principal or other amounts payable to GECC pursuant to: (A) the Loan Agreement dated January ___, 1996, between GECC and Assignor (the "LOAN AGREEMENT"); (B) the following Promissory Notes (collectively, and as amended, the "NOTE"): (i) Promissory Note dated April 1, 1992, in the stated principal amount of $24,000,000, executed by Assignor, bearing interest and being payable to the order of General Electric Capital Corporation ("GECC"), as modified by the First Modification Agreement (the "FIRST MODIFICATION") dated May 27, 1993 among Assignor, GECC, and American Retirement Corporation ("ARC") and recorded in Volume 11097, Page 1062, et seq., of the Real Property Records of Tarrant County, Texas, and in Volume 11954, Page 2231, et seq., of the Real Property Records of Travis County, Texas, as endorsed payable to the order of GENEL Company, Inc. ("GENEL"), as further modified by the Second Renewal, Extension and Modification Agreement (the "SECOND MODIFICATION") dated June 14, 1994, among Assignor, GENEL, and ARC, recorded in Volume 11620, Page 0230, et seq., of the Real Property Records of Tarrant County, Texas, and in Volume 12209, Page 0555, et seq., of the Real Property Records of Travis County, Texas, as further modified by the Third Renewal, Extension and Modification Agreement (the "THIRD MODIFICATION") dated October 31, 1994, among Assignor, GENEL, ARC, ARC Fort Austin Properties, Inc. ("ARC FORT AUSTIN") and Fort Austin Associates Limited Partnership ("FORT AUSTIN ASSOCIATES") and recorded in Volume 11777, Page 2035, et seq. of the Real Property Records of Tarrant County, Texas and in Volume 12305, Page 141, et seq., of the Real Property Records of Travis County, Texas, as endorsed by GENEL 5 27 payable to the order of GECC, and as further modified by the Fourth Renewal, Extension and Modification Agreement dated January ___, 1996 among Assignor, GECC, ARC, ARC Fort Austin and Fort Austin Associates (the "FOURTH MODIFICATION"), and (ii) Promissory Note dated January ___, 1996, in the stated principal amount of $73,500,000, executed by Assignor, bearing interest and being payable to the order of GECC as therein provided; and (C) the following deeds of trust: (i) First Deed of Trust and Security Agreement dated April 1, 1992, executed by Assignor in favor of GECC, as amended by the First Modification, the interest of GECC herein having been assigned to GENEL under that Assignment of Note, Liens and Other Security Documents dated as of June 14, 1994 between GECC and GENEL, and recorded in Volume 11620, Page 0222, et seq., of the Real Property Records of Tarrant County, Texas, and in Volume 12209, Page 0548, et seq., of the Real Property Records of Travis County, Texas, as further amended by the Second Modification and the Third Modification, as reassigned to GECC under that Assignment of Note, Liens and Other Security Documents dated as of January __, 1996 between GENEL and GECC, and as further modified under the Fourth Modification, and (ii) Second Deed of Trust and Security Agreement dated January ___, 1996, executed by Assignor in favor of GECC (collectively, the "DEED OF TRUST")." 4. MODIFICATION OF SECURITY DOCUMENTS. The other Security Documents are modified to provide that all references to the "Loan Agreement" shall mean the Loan Agreement dated January ___, 1996 between GECC and Borrower and that all references therein to the "Note" or the like shall mean, collectively, (a) the Promissory Note dated April 1, 1992, in the stated principal amount of $24,000,000, executed by Borrower, bearing interest and being payable to the order of GECC, endorsed payable to the order of GENEL, as modified by (i) the First Modification, (ii) the Second Modification, and (iii) the Third Modification, as endorsed by GENEL payable to the order of GECC and as further modified by this Agreement, and (b) Promissory Note, of even date herewith, in the stated principal amount of $73,500,000 executed by Borrower, bearing interest and being payable to the order of GECC as therein provided. 5. LIENS. In conjunction with the renewal, extension and modification of the Note, the Deed of Trust, the Assignment of Rents, and the other Security Documents, Borrower hereby agrees that such modification shall in no manner affect or impair the Note (except to the extent renewed, extended and amended hereby) or the liens, assignments and security interests under the Deed of Trust and the other Security Documents, and that said liens, assignments and security 6 28 interests shall not in any manner be waived, the purpose of this Agreement being simply to modify the Note and the other Security Documents, and Borrower further agrees that, as modified by this Agreement and heretofore modified in writing, all terms and provisions of the Note, the Deed of Trust, the Assignment of Rents, and the other Security Documents shall be and remain in full force and effect as therein written. 6. NO DEFENSES. Borrower and Guarantors hereby covenant and warrant that neither GENEL nor GECC is in default in the performance of any of its obligations or warranties under the Security Documents, that there are no defenses, counterclaims or offsets to the Security Documents, and that all of the provisions of the Security Documents are in full force and effect. 7. COSTS. Borrower agrees to pay all costs incurred in connection with the execution and consummation of this Agreement, including but not limited to, all recording costs and the fees and expenses of GECC's counsel. 8. ACKNOWLEDGMENT AND CONSENT OF GUARANTOR. Guarantors hereby (a) acknowledge and consent to all of the terms and conditions of this Agreement, (b) ratify and confirm the Guaranty to and for the benefit of GECC, and (c) acknowledge that the Guaranty is valid and in full force and effect and is subject to no claims, defenses, or off-sets. Further, Guarantors agree that nothing contained in this Agreement shall adversely affect any right or remedy of GECC under the Guaranty and that with respect to the Guaranty all references to any of the Security Documents in the Guaranty shall mean such documents as amended by this Agreement; that the execution and delivery of this Agreement shall in no way change or modify their obligations as Guarantors pursuant to the Guaranty; and that the execution and delivery of any agreements by Borrower and GECC shall not constitute a waiver by GECC of any of GECC's rights against Guarantors, and (d) waive all claims, defenses, and rights of offset that they may have against their obligations thereunder as of the date hereof, if any, whether known or unknown, whether arising under tort, contract, at law, or in equity. 9. MAXIMUM AMOUNT. All agreements between Borrower and GECC, whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency, whether by reason of acceleration of the maturity of the Note or otherwise, shall the interest contracted for, charged, received, paid or agreed to be paid to the holder of the Note exceed the maximum amount permissible under applicable law. If from any circumstance whatsoever interest would otherwise be payable to the holder of the Note in excess of the maximum lawful amount, the interest payable to the holder of the Note shall be reduced to the maximum amount permitted by applicable law; and if from any circumstance the holder of the Note shall ever receive anything of value deemed interest by applicable law, an amount equal to any excessive interest shall be applied to the reduction of the principal amount owing under the Note, and not to the payment of interest, or if such excessive interest exceeds such unpaid balance of principal of the Note, such excess shall be refunded to Borrower. All interest paid or agreed to be paid to the holder of the Note shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of the Note (including the period of any renewal or extension thereof), so that the interest on the Note shall not exceed the maximum 7 29 amount permitted by applicable law. This section shall control all agreements between Borrower and the holder of the Note. EXECUTED as of the date and year first recited above. GUARANTORS: AMERICAN RETIREMENT CORPORATION, a Tennessee corporation By: /s/ W. E. Sheriff --------------------------------------- W. E. Sheriff Chief Executive Officer ARC FORT AUSTIN PROPERTIES, INC., a Tennessee corporation By: /s/ W. E. Sheriff --------------------------------------- W. E. Sheriff Chief Executive Officer BORROWER: FORT AUSTIN LIMITED PARTNERSHIP, a Texas limited partnership By: ARC FORT AUSTIN PROPERTIES, INC., a Tennessee corporation, General Partner By: /s/ W. E. Sheriff --------------------------------- W. E. Sheriff Chief Executive Officer LENDER: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation By: /s/ Barry P. Skolnick --------------------------------------- Barry P. Skolnick Senior Investment Manager 8 30 STATE OF ________ ss. ss. COUNTY OF ________ ss. This instrument was acknowledged before me on January ___, 1996, by W. E. Sheriff, Chief Executive Officer of AMERICAN RETIREMENT CORPORATION, a Tennessee corporation, on behalf of said corporation. (SEAL) -------------------------------------- Notary Public, State of --------------- Printed name of notary My Commission Expires: ---------------- STATE OF __________ ss. ss. COUNTY OF ___________ ss. This instrument was acknowledged before me on January ___, 1996, by W. E. Sheriff, Chief Executive Officer of ARC FORT AUSTIN PROPERTIES, INC., a Tennessee corporation, on behalf of said corporation. (SEAL) -------------------------------------- Notary Public, State of --------------- -------------------------------------- Printed name of notary My Commission Expires: ---------------- 9 31 STATE OF _________ ss. ss. COUNTY OF ________ ss. This instrument was acknowledged before me on January __, 1996 by W. E. Sheriff, Chief Executive Officer of ARC Fort Austin Properties, Inc., a Tennessee corporation and General Partner of FORT AUSTIN LIMITED PARTNERSHIP, a Texas limited partnership, on behalf of said Tennessee corporation and said Texas limited partnership. (SEAL) -------------------------------------- Notary Public, State of Texas -------------------------------------- Printed name of notary My Commission Expires: ---------------- STATE OF TEXAS ss. ss. COUNTY OF DALLAS ss. This instrument was acknowledged before me on January ___, 1996, by Barry P. Skolnick, Senior Investment Manager of GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation, on behalf of said corporation. -------------------------------------- Notary Public, State of Texas My Commission Expires: ---------------- -------------------------------------- Printed name of Notary [For purposes of reference, copies of the Note, the First Modification and the Second Modification are attached hereto.] 10 EX-10.19 24 LOAN AGREEMENT 1 EXHIBIT 10.19 ================================================================================ LOAN AGREEMENT BETWEEN ARCLP - CHARLOTTE, LLC AND AMERICAN RETIREMENT COMMUNITIES, L.P. INDIVIDUALLY AND COLLECTIVELY, AS BORROWER AND GENERAL ELECTRIC CAPITAL CORPORATION AS LENDER MAY 7, 1996 $51,750,000 Carriage Club Charlotte, Charlotte, North Carolina Carriage Club Jacksonville, Jacksonville, Florida ================================================================================ 1 2 TABLE OF CONTENTS
Page No. ARTICLE 1 CERTAIN DEFINITIONS 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.4 Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 2.5 Application of Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 3 INSURANCE, CONDEMNATION, AND IMPOUNDS Section 3.1 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 3.2 Use and Application of Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.3 Condemnation Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.4 Impounds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE 4 ENVIRONMENTAL MATTERS Section 4.1 Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 4.2 Representations and Warranties on Environmental Matters . . . . . . . . . . . . . . . . . . 13 Section 4.3 Covenants on Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 4.4 Allocation of Risks and Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 4.5 Collateral Assignment of Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 4.6 No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE 5 LEASING MATTERS Section 5.1 Representations and Warranties on Residency Agreements . . . . . . . . . . . . . . . . . . 14 Section 5.2 Standard Residency Agreement Form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 5.3 Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
i 3
ARTICLE 6 REPRESENTATIONS AND WARRANTIES Section 6.1 Organization and Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 6.2 Validity of Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 6.3 Liabilities; Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 6.4 Taxes and Assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 6.5 Other Agreements; Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 6.6 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 6.7 Location of Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 6.8 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 6.9 Margin Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 6.10 Tax Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 6.11 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 6.12 Full and Accurate Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 6.13 Single Purpose Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 6.14 Licenses and Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE 7 FINANCIAL REPORTING Section 7.1 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 7.2 Accounting Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 7.3 Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 7.4 Annual Budget and Cash Flow Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 7.5 Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE 8 COVENANTS Section 8.1 Due on Sale and Encumbrance; Transfers of Interests . . . . . . . . . . . . . . . . . . . . 19 Section 8.2 Taxes; Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 8.3 Control; Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 8.4 Noncompliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 8.5 Consultant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 8.6 Permits and Licenses; Operation; Maintenance; Inspection . . . . . . . . . . . . . . . . . 21 Section 8.7 Taxes on Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 8.8 Reserves, Deposits, Escrows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 8.9 Legal Existence; Name, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 8.10 Affiliate Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 8.11 Limitation on Other Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 8.12 Limitation on Affiliate Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 8.13 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 8.14 Estoppel Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 8.15 Notice of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 8.16 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ii 4 Section 8.17 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 8.18 Cash Operating Reserve Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 8.19 Security Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 8.20 Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 8.21 Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 8.22 Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 8.23 Non-Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 8.24 Key Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 8.25 Immediate Repairs; Expansion Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 8.26 Fort Austin Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 8.27 Right of First Offer for Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 8.28 Assignment of Construction Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 8.29 Assignment of Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ARTICLE 9 EVENTS OF DEFAULT Section 9.1 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 9.2 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 9.3 Sale, Encumbrance, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 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 9.10 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 Section 10.4 Joint and Several Liability; Co-Borrower Relationship . . . . . . . . . . . . . . . . . . . 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
iii 5 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 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
iv 6 LIST OF EXHIBITS AND SCHEDULES EXHIBIT A LEGAL DESCRIPTION OF PROJECTS EXHIBIT B BUDGET EXHIBIT C IMMEDIATE REPAIRS EXHIBIT D MANAGEMENT STANDARDS SCHEDULE 2.1 ADVANCE CONDITIONS SCHEDULE 2.2 INDEX RATES SCHEDULE 2.3(4) DISCOUNTED YIELD MAINTENANCE SCHEDULE 2.4(2) CAPITAL IMPROVEMENTS RESERVE v 7 LOAN AGREEMENT This Loan Agreement (this "AGREEMENT") is entered into as of May 7, 1996 between GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("LENDER"), and ARCLP - CHARLOTTE, LLC, a Tennessee limited liability company and AMERICAN RETIREMENT COMMUNITIES, L.P., a Tennessee limited partnership (individually and collectively, "BORROWER"). ARTICLE 1 CERTAIN DEFINITIONS Section 1.1 CERTAIN DEFINITIONS. As used herein, the following terms have the meanings indicated: (1) "ADJUSTED OPERATING EXPENSES" means Operating Expenses as determined and adjusted by Lender in accordance with its current audit policies and procedures. (2) "ADJUSTED OPERATING REVENUES" means Operating Revenues as determined and adjusted by Lender in accordance with its current audit policies and procedures. (3) "AFFILIATE" means (a) 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, (b) 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, (c) any trust in which Borrower or any partner, shareholder, director, officer, member or manager of Borrower is a trustee or beneficiary, (d) 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, (e) any partner, shareholder, director, officer, member, manager or employee of Borrower, (f) any Person related by birth, adoption or marriage to any partner, shareholder, director, officer, member, manager, or employee of Borrower, or (g) any Borrower Party. (4) "AGREEMENT" means this Loan Agreement, as amended from time to time. (5) "ASSIGNMENT OF CONTRACTS" means, collectively, the Assignments and Subordinations of Service Contracts, executed by Borrower and contractors under service agreements for the operation of the Projects. (6) "ASSIGNMENTS OF RENTS AND LEASES" means, collectively, the Senior Assignment of Rents and Leases and the Junior Assignment of Rents and Leases. (7) "BORROWER'S EQUITY" means the amount of up to $14,750,000 invested by Borrower for Borrower's acquisition of the Projects, as the same may be reduced from time to time upon the return (in whole or in part) of Borrower's Equity and any other additional amounts invested by Borrower in the Projects and approved by Lender. (8) "BORROWER PARTY" means any Joinder Party, any Guarantor, any general partner in Borrower, and any general partner in any partnership that is a general partner in Borrower, at any level. 1 8 (9) "BORROWER'S RETURN" means a return on the initial investment of Borrower's Equity at eight and one-tenth percent (8.10%), such return to be payable only out of available Operating Revenues in accordance with Section 2.5, and to be non-cumulative and non-compounding if not paid. (10) "BUDGET" means the budget attached as Exhibit B showing total costs relating to the subject transaction, use of the initial advance of the Loan, and amounts allocated for future advances (if any). (11) "BUSINESS DAY" means a day other than a Saturday, a Sunday, or a legal holiday on which national banks located in the State of New York are not open for general banking business. (12) "CARRIAGE CLUB CHARLOTTE" means the senior living facility located in Charlotte, North Carolina and known as "Carriage Club Charlotte," consisting of 372 units upon completion or modification of certain units (276 independent living units, 54 assisted living units and 42 skilled nursing units). (13) "CARRIAGE CLUB JACKSONVILLE" means the senior living facility located in Jacksonville, Florida and known as "Carriage Club Jacksonville," consisting of 298 units upon completion or modification of certain units (238 independent living units, and 60 assisted living units). (14) "CASH ON CASH RETURN" means the ratio, expressed as a percentage, of (a) annualized Net Operating Income (after application of capital replacement reserves of one percent [1%] of Operating Revenues and notwithstanding that actual capital replacement reserves will be three percent [3%] of Operating Revenues), to (b) the sum of the outstanding principal balance of the Loan. (15) "CONSTRUCTION CONTRACTS" means all contracts and agreements, written or oral, between Borrower and any original contractor, between any of the foregoing and any subcontractor and between any of the foregoing and any other Person relating in any way to the Expansion Work, including the performing of labor or the furnishing of standard or specially fabricated materials in connection therewith. (16) "CONSTRUCTION GUARANTY" means the Construction Guaranty executed by American Retirement Communities, L.P., a Tennessee limited partnership, Fort Austin Limited Partnership, a Texas limited partnership, American Retirement Corporation, a Tennessee corporation, ARC Fort Austin Properties, Inc., a Tennessee corporation, and American Retirement Communities, LLC, a Tennessee limited liability company (17) "DEBT" means, for any Person, without duplication: (a) 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, (b) 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, (c) 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, (d) all indebtedness guaranteed by such Person, directly or indirectly, (e) all obligations under leases that constitute capital leases for which such Person is liable, and (f) 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. 2 9 (18) "DEBT SERVICE" means the aggregate interest, fixed principal, and other payments due under the Loan, and on any other outstanding permitted Debt relating to the Projects approved by Lender for the period of time for which calculated. (19) "DEBT SERVICE COVERAGE" means, for the period of time for which calculation is being made, the ratio of Net Operating Income to Debt Service. (20) "DEFAULT RATE" means the lesser of (a) the maximum rate of interest allowed by applicable law, and (b) five percent (5%) per annum in excess of the Junior Note Contract Rate. (21) "ENVIRONMENTAL LAWS" has the meaning assigned in Article 4. (22) "EVENT OF DEFAULT" has the meaning assigned in Article 9. (23) "EXPANSION WORK" means the construction work to add fifty-four (54) assisted living units to Carriage Club Charlotte, convert thirty (30) assisted living units in Carriage Club Charlotte to forty-two (42) skilled nursing beds, and add thirty-eight (38) independent living villas to Carriage Club Jacksonville. (24) "FACILITY CAPACITY" means the total number of independent living units, assisted living units and skilled nursing beds, if applicable, in the Projects. (25) "FORT AUSTIN LOAN" means the loan by Lender to Fort Austin Limited Partnership, an Affiliate of Borrower, in the amount of up to $97,500,000, under the Fort Austin Loan Agreement, as such loan may be amended, modified, enlarged, renewed or replaced from time to time. (26) "FORT AUSTIN LOAN AGREEMENT" means the Loan Agreement dated January 4, 1996 between Lender and Fort Austin Limited Partnership. (27) "GUARANTORS" means the Persons, if any, executing a Guaranty, including American Retirement Communities, L.P., a Tennessee limited partnership, Fort Austin Limited Partnership, a Texas limited partnership, American Retirement Corporation, a Tennessee corporation, ARC Fort Austin Properties, Inc., a Tennessee corporation, and American Retirement Communities, LLC, a Tennessee limited liability company. (28) "GUARANTY" means the instruments of guaranty, if any, now or hereafter in effect from a Guarantor to Lender. (29) "HAZARDOUS MATERIALS" has the meaning assigned in Article 4. (30) "IMMEDIATE REPAIRS" means those repairs to the Projects described on Exhibit C. (31) "INDEMNITY" means the Indemnity Agreement executed by American Retirement Communities, L.P., a Tennessee limited partnership, Fort Austin Limited Partnership, a Texas limited partnership, American Retirement Corporation, a Tennessee corporation, ARC Fort Austin Properties, Inc., a Tennessee corporation, and American Retirement Communities, LLC, a Tennessee limited liability company. (32) "JOINDER PARTY" means the Persons, if any, executing the Joinder hereto. 3 10 (33) "JUNIOR ASSIGNMENT OF RENTS AND LEASES" means, collectively, the Junior Assignments of Rents and Leases, executed by Borrower for the benefit of Lender and for purposes of paying and discharging the Junior Note, and pertaining to Residency Agreements and leases of space in the Projects. (34) "JUNIOR MORTGAGE" means, collectively, the Junior Mortgage, Security Agreement and Fixture Filing, executed by American Retirement Communities, L.P. and encumbering Carriage Club Jacksonville, and the Junior Deed of Trust, Security Agreement and Fixture Filing, executed by ARCLP-Charlotte, LLC and encumbering Carriage Club Charlotte, each in favor of Lender as security for the indebtedness under the Junior Note. (35) "JUNIOR NOTE" means the Junior Promissory Note of even date, in the stated principal amount of $14,750,000, executed by Borrower and payable to the order of Lender in evidence of a portion of the Loan. (36) "JUNIOR NOTE CONTRACT RATE" has the meaning assigned in Article 2. (37) "JUNIOR NOTEHOLDER" means Lender or any other holder of the Junior Note and beneficiary or mortgagee of the Junior Mortgage from time to time. (38) "LENDER" means General Electric Capital Corporation, and its successors and assigns, and upon any sale or assignment of the Senior Note or the Junior Note shall mean and refer to the Senior Noteholder and the Junior Noteholder, as their interests may appear. (39) "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. (40) "LOAN" means the loan to be made by Lender to Borrower under this Agreement and all other amounts secured by the Loan Documents. (41) "LOAN DOCUMENTS" means: (a) this Agreement, (b) the Notes, (c) the Guaranty, (d) the Construction Guaranty, (e) any letter of credit provided to Lender in connection with the Loan, (f) the Mortgages, (g) the Assignments of Rents and Leases, (h) Uniform Commercial Code financing statements, (i) the Assignment of Contracts, (j) the Indemnity, (k) the Subordination Agreement, (l) such assignments of contracts and other rights as may be requested by Lender, (m) all other documents evidencing, securing, governing or otherwise pertaining to the Loan, and (n) all amendments, modifications, renewals, substitutions and replacements of any of the foregoing. (42) "LOAN YEAR" means the period between the date hereof and April 30, 1997 for the first Loan Year and the period between each succeeding May 1 and April 30 until the Maturity Date. (43) "MATURITY DATE" means the earlier of (a) April 30, 2003, or (b) any earlier date 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. 4 11 (44) "MORTGAGES" means, collectively, the Senior Mortgage, the Junior Mortgage, and the Third Mortgage. (45) "NET CASH FLOW" means, for any period, the amount by which Operating Revenues exceed the sum of (a) Operating Expenses, (b) Debt Service, (c) any actual payment into impounds, escrows, or reserves required by Lender, except to the extent included within the definition of Operating Expenses, and (d) Borrower's Return. (46) "NET OPERATING INCOME" means the amount by which Adjusted Operating Revenues exceed Adjusted Operating Expenses. (47) "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. (48) "NOTES" means, collectively, the Senior Note and the Junior Note. (49) "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 other Loan Documents, capital expenditures specifically identified in a Capital Expenditures Budget (as defined in Schedule 2.4[2]), deposits to any capital replacement reserves 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. (50) "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 (a) gross resident service revenues less contractual allowances and provisions for uncollectible accounts, free care and discounted care, if any, (b) non-operating revenues, (c) entrance fees actually paid, if any, net of refunds, (d) revenues from parking agreements, concession fees and charges and other miscellaneous operating revenues, (e) proceeds from rental or business interruption insurance, (f) 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 5 12 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), (g) withdrawals from cash reserves (except to the extent any operating expenses paid therewith are excluded from Operating Expenses). Operating Revenues shall not include (i) security deposits and earnest money deposits until they are forfeited by the depositor, (ii) advance rentals until they are earned, (iii) proceeds from a sale or other disposition, (iv) 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, (v) 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 (vi) 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. (51) "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. (52) "PLANS" means all contracts and agreements, written or oral, between Borrower and design professionals for the Expansion Work, together with the final plans, specifications, shop drawings and other technical descriptions prepared for the Expansion Work, and all amendments and modifications thereof. (53) "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. (54) "PROJECTS" means Carriage Club Charlotte and Carriage Club Jacksonville, and all related facilities, amenities, fixtures, and personal property owned by Borrower relating to the real property described in Exhibit A, and any improvements now or hereafter located on such real property. (55) "RESIDENCY AGREEMENT" means (a) any lease, residency or other rental agreement for the occupancy of residential living units of the Projects, (b) any admission and financial agreement for the use and occupancy of an assisted living unit of the Projects, (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 the Projects or for space in or use of the Projects. (56) "SENIOR ASSIGNMENT OF RENTS AND LEASES" means the Senior Assignment of Rents and Leases, executed by Borrower for the benefit of Lender and for purposes of paying and discharging the Senior Note, and pertaining to Residency Agreements and leases of space in the Projects. (57) "SENIOR MORTGAGE" means, collectively, the Senior Mortgage, Security Agreement and Fixture Filing, executed by American Retirement Communities, L.P. and encumbering Carriage Club Jacksonville, and the Senior Deed of Trust, Security Agreement and Fixture Filing, executed by ARCLP-Charlotte, LLC and encumbering Carriage Club Charlotte, each in favor of Lender as security for the indebtedness under the Senior Note. 6 13 (58) "SENIOR NOTE" means the Senior Promissory Note of even date, in the stated principal amount of $37,000,000, executed by Borrower, and payable to the order of Lender in evidence of a portion of the Loan. (59) "SENIOR NOTE CONTRACT RATE" has the meaning assigned in Article 2. (60) "SENIOR NOTEHOLDER" means Lender or any other holder of the Senior Note and beneficiary or mortgagee of the Senior Mortgage from time to time. (61) "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, 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. (62) "SITE ASSESSMENT" means an environmental engineering report for the 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 the Project, and the past or present discharge, disposal, release or escape of any such substances, all consistent with good customary and commercial practice. (63) "STATE" means the State of Texas. (64) "STATE AGENCIES" means any governmental authority having jurisdiction over Borrower, any Guarantor or the Project, including, with respect to Carriage Club Jacksonville, the State of Florida Agency for Health Care Administration, and with respect to Carriage Club Charlotte, the North Carolina Department of Human Resources and the North Carolina Department of Insurance, and the statutes, rulings, rules, regulations, permits, certificates and ordinances promulgated or enforced by such governmental authorities. (65) "SUBORDINATION AGREEMENT" means the Subordination Agreement executed by Fort Austin Limited Partnership, a Texas limited partnership, Borrower and American Retirement Communities, L.P., a Tennessee limited partnership, and other Affiliates of Borrower. (66) "THIRD MORTGAGE" means, collectively, the Third Mortgage, Security Agreement and Fixture Filing, executed by American Retirement Communities, L.P. and encumbering Carriage Club Jacksonville, and the Third Deed of Trust, Security Agreement and Fixture Filing, executed by ARCLP-Charlotte, LLC and encumbering Carriage Club Charlotte, each in favor of Lender as security for the indebtedness under the Fort Austin Loan. 7 14 ARTICLE 2 LOAN TERMS Section 2.1 THE LOAN. The Loan of up to FIFTY-ONE MILLION SEVEN HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($51,750,000) shall be funded in one or more advances and repaid in accordance with this Agreement. All advances of the Loan shall be made in accordance with the Budget. The initial advance of the Loan, in the amount of up to $47,705,910 (the purchase price for the Projects, including the audited cost of Expansion Work incurred and paid as of the date hereof, minus Borrower's Equity and holdbacks for construction costs and Immediate Repairs), shall be made in accordance with the Budget upon Borrower's satisfaction of the conditions to initial advance described in Schedule 2.1. The initial advance of the Loan shall be made first under the Senior Note (with any excess funded under the Junior Note) and all other advances on the Loan shall be made under the Junior Note. Subsequent advance for the items shown on the Budget shall be made upon Borrower's satisfaction of the conditions for such advances described in Schedule 2.1. 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 Senior Note shall bear interest at a fixed rate of interest equal to nine and twenty-eight one hundredths percent (9.28%) per annum (the "SENIOR NOTE CONTRACT RATE"); and (b) the Junior Note shall bear interest at a floating rate of interest equal to three and twenty- five one hundredths percent (3.25%) per annum in excess of the GECC Composite Commercial Paper Rate, as defined in Schedule 2.2 (the "JUNIOR NOTE CONTRACT RATE"). 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 (i) interest at the Default Rate on such amount from the date when due until paid, or (ii) 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 shall be payable as follows: (1) INTEREST. Commencing on June 1, 1996, Borrower shall pay interest in arrears on the first day of each month until all amounts due under the Loan Documents are paid in full. (2) PRINCIPAL AMORTIZATION. Commencing May 1, 1997 and continuing on the first day of each month thereafter to and including April 1, 2003, Borrower shall pay to Lender $80,000; provided no Event of Default exists, $19,000 of such amount shall be applied to the reduction of the principal balance of the Junior Note and the remaining amount ($61,000) shall be applied to reduction of the principal balance of the Senior Note. In addition, if at any time the Cash on Cash Return (as defined in, and determined in accordance with, the Fort Austin Loan Agreement) under the Fort Austin Loan is less than fourteen percent (14%), then all Net Cash Flow for each month, at Borrower's option, shall be (a) deposited into an escrow with Lender or with a third party under an escrow agreement satisfactory to Lender, or (b) applied, without penalty or premium, in reduction of the principal balance of the Loan or, at Lender's election, to the Fort 8 15 Austin Loan, until the Cash on Cash Return under the Fort Austin Loan exceeds fourteen percent (14%) for six (6) consecutive months. (3) 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. (4) PREPAYMENT. The Loan is closed to prepayments in whole or in part, during the first two (2) Loan Years. From the beginning of the third (3rd) Loan Year to the Maturity Date, upon not less than fifteen (15) days' prior written notice to Lender, Borrower may prepay the Loan, in whole but not in part, without premium or penalty, provided that any prepayment of the Senior Note shall be accompanied by the Yield Maintenance Amount, calculated as provided in Schedule 2.3(4) and Lender's participation interest, calculated as provided in Schedule 2.3(6). Prepayments of principal shall be applied to the reduction of the principal balance of the Junior Note before any application thereof to the principal balance of the Senior Note. If the Loan is accelerated for any reason other than casualty or condemnation, while the Loan is closed to prepayment, Borrower shall pay, in addition to all other amounts outstanding under the Loan Documents, a prepayment premium equal to five percent (5%) of the outstanding balance of the Loan plus the Yield Maintenance Amount on the Senior Note. (5) APPLICATION OF PAYMENTS. Unless an Event of Default exists, all payments received by Lender under the Loan Documents (other than scheduled principal amortization payments which shall be applied in reduction of principal as provided in Section 2.3(2)) 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 sums of the Junior Note and the Senior Note as set forth in 2.3(2); fifth, to other amounts due under the Loan Documents, except participation amounts under Schedule 2.3(6), and sixth, to participation amounts under Schedule 2.3(6). If an Event of Default exists, all payments received hereunder shall be applied to amounts owing on the Senior Note and the Junior Note in such order and manner as Lender shall determine in Lender's sole and absolute discretion. (6) PARTICIPATION. In addition to other payments under the Loan, Borrower shall pay to Lender the participation under Schedule 2.3(6). Section 2.4 SECURITY. The Loan shall be secured by the Senior Mortgage creating a first lien on the Projects, the Junior Mortgage creating a second lien on the Projects, 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(2). Section 2.5 APPLICATION OF OPERATING REVENUES. Borrower shall apply Operating Revenues in the following order: (1) first, to pay Operating Expenses; (2) second, to Debt Service under the Loan; (3) third, to make deposits into the reserves, deposits and/or escrows required hereunder; (4) fourth, to the payment of the performance and discharge of the obligations under the Loan Documents (other than Debt Service, but including any escrow deposit or principal amortization through application of Net Cash Flow under Section 2.3(2)); 9 16 (5) fifth, to Borrower's Return; (6) sixth, to the payment of Lender's Participation Percentage in Net Cash Flow in accordance with Schedule 2.3(6); and (7) seventh, if Lender shall have given Borrower a notice that a default exists under the Fort Austin Loan, to the payment of amounts owing under the Fort Austin Loan, and otherwise to be retained by Borrower for purposes not inconsistent with the Loan Documents. ARTICLE 3 INSURANCE, CONDEMNATION, AND IMPOUNDS Section 3.1 INSURANCE. Borrower shall maintain insurance as follows: (1) 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 (i) the maximum amount of the Loan or (ii) 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. (2) LIABILITY. Borrower shall maintain (a) 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 (b) other liability insurance as reasonably required by Lender. (3) 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 10 17 have and hold the same as security for the payment of the Loan. Borrower shall deliver copies of all original policies certified to 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. (4) 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(4), 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: (1) if the loss is less than or equal to $300,000, Lender shall apply the insurance proceeds to restoration provided (a) no Event of Default or Potential Default exists, and (b) Borrower promptly commences and is diligently pursuing restoration of the Project; (2) 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 (a) no Event of Default or Potential Default exists; (b) Lender determines that there are sufficient funds available to restore and repair the Project to a condition approved by Lender; (c) Lender determines that the Net Operating Income of the Project during restoration will be sufficient to pay Debt Service; (d) Lender determines that after restoration the Debt Service Coverage will be at least (i) 1.0:1 in the first two Loan Years, and (ii) 1.15:1 after the first two Loan Years, and the Cash on Cash Return will be at least (i) 9.5% in the first Loan Year, (ii) 12% in the second Loan Year, and (iii) 14% after the second Loan Year; (e) 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 (f) Borrower promptly commences and is diligently pursuing restoration of the Project; (3) if the conditions set forth above are not satisfied or the loss exceeds the maximum amount specified in Subsection 3.2(2) 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 (4) 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 11 18 or required by Lender to permit such participation. Without Lender's prior consent, Borrower (1) shall not agree to any compensation or award, and (2) shall not take any action or fail to take any action which would cause the 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. ARTICLE 4 ENVIRONMENTAL MATTERS Section 4.1 CERTAIN DEFINITIONS. As used herein, the following terms have the meanings indicated: (1) "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. 12 19 (2) "HAZARDOUS MATERIALS" means (a) petroleum or chemical products, whether in liquid, solid, or gaseous form, or any fraction or by-product thereof, (b) asbestos or asbestos-containing materials, (c) polychlorinated biphenyls (pcbs), (d) radon gas, (e) underground storage tanks, (f) any explosive or radioactive substances, (g) lead or lead-based paint, or (h) 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, (1) no Hazardous Material is now or was formerly used, stored, generated, manufactured, installed, disposed of or otherwise present at or about either 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), (2) 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 (3) 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 either Project concerning Hazardous Materials or Environmental Laws. Section 4.3 COVENANTS ON ENVIRONMENTAL MATTERS. (1) Borrower shall (a) comply strictly and in all respects with applicable Environmental Laws; (b) 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; (c) 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 or in the matter relating to the leaking underground storage tank affecting Carriage Club Charlotte, enforce Borrower's Indemnification and Remediation Agreement with Exxon USA, Inc.; and (d) 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. (2) 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 (a) 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 used in connection with routine maintenance or repair of the Project in full compliance with Environmental Laws), (b) installing any underground storage tanks at a Project, or (c) conducting any activity that requires a permit or other authorization under Environmental Laws. (3) 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(1), a reasonable suspicion of Hazardous Materials at or near a Project (exclusive of the matters 13 20 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 Exxon Corporation (or any affiliate thereof) or the 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." 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: (1) to Borrower's knowledge, the rent roll delivered to Lender is true and correct, and the Residency Agreements are valid and in and full force and effect; (2) the Residency Agreements (including amendments) are in writing, and, to Borrower's knowledge, there are no oral agreements with respect thereto; (3) the copies of the Residency Agreements available to be furnished to Lender at Lender's request are true and complete; (4) to Borrower's knowledge, neither the landlord nor any resident is in default under any of the Residency Agreements; 14 21 (5) Borrower has no knowledge of any notice of termination or default with respect to any Residency Agreement; (6) Borrower has not assigned or pledged any of the Residency Agreements, the rents or any interests therein except to Lender; (7) except as set forth in the rent roll delivered to Lender, no resident or other party has an option to purchase all or any portion of a Project; and (8) 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 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 (1) shall perform the obligations which Borrower is required to perform under the Residency Agreements; (2) shall enforce the obligations to be performed by the residents in accordance with the normal prudent operation of the Projects; (3) 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; (4) shall not enter into any ground lease or master lease of any part of a Project; (5) shall not further assign or encumber any Residency Agreement; (6) 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 (7) 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 Section 1445(f)(3) of the Internal Revenue Code. Section 6.2 VALIDITY OF LOAN DOCUMENTS. The execution, delivery and performance by Borrower and each Borrower Party of the Loan Documents: (1) are duly authorized and do not require the consent or approval of any other party or governmental authority which has not been obtained; and (2) 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. 15 22 (1) The financial statements 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. (2) 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 either 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. (1) 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 tear. Neither Project constitutes, in whole or in part, a legally non-conforming use under applicable legal requirements; (2) 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 (3) 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 16 23 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. Except for the 401K plan established by ARCLP for its employees, 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 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. ARCLP-Charlotte, L.L.C. 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,(i) Nursing Home Licenses issued by State Agencies; and (ii) Personal Care Facilities Licenses issued by State Agencies, which are currently in full force and effect. 17 24 ARTICLE 7 FINANCIAL REPORTING Section 7.1 FINANCIAL STATEMENTS. (1) 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, as requested by Lender, an updated rent roll, and, as requested by Lender, 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. (2) QUARTERLY REPORTS. Within forty-five (45) days after the end of each calendar quarter, Borrower shall furnish to Lender a detailed operating statement (showing quarterly activity and year-to-date) stating Operating Revenues, Operating Expenses, operating income and Net Cash Flow for the calendar quarter just ended. (3) 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(2)), and, if required by Lender, prepared on a review basis and certified by an independent public accountant satisfactory to Lender. (4) 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. 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 sixty (60) days prior to 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 sixty (60) 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 (i) preserve its partnership, limited liability company or other separate legal existence, (ii) preserve all its rights and licenses to the extent necessary or desirable in the operation of its business and affairs and (iii) 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. 18 25 Section 7.5 AUDITS. Lender shall have the right to choose and appoint a certified public accountant to perform financial and cash flow audits as it deems necessary, at Borrower's expense; however, Lender shall not require such audits at Borrower's expense more often than two times each year or for an amount in any year in excess of $5,000. 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. ARTICLE 8 COVENANTS Borrower covenants and agrees with Lender as follows: Section 8.1 DUE ON SALE AND ENCUMBRANCE; TRANSFERS OF INTERESTS. Without the prior written consent of Lender, (1) neither Borrower nor any other Person having an ownership or beneficial interest in Borrower shall (a) 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, other than new limited partner interests which are issued, and existing limited partner interests which are transferred or encumbered, in accordance with the terms of the Limited Partnership Agreement of American Retirement Communities, L.P.); (b) further encumber, alienate, grant a Lien or grant any other interest in a Project or any part thereof (including any partnership or other ownership interest in Borrower, other than new limited partner interests which are issued, and existing limited partner interests which are transferred or encumbered, in accordance with the terms of the Limited Partnership Agreement of American Retirement Communities, L.P.), whether voluntarily or involuntarily; or (c) enter into any easement or other agreement granting rights in or restricting the use or development of a Project; (2) 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 American Retirement Communities, L.P. to own less than ninety-nine percent (99%) of the beneficial interest and voting membership interest in ARCLP-Charlotte, LLC and Carriage Club Charlotte or one hundred percent (100%) of the beneficial interest in Carriage Club Jacksonville. 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 (a) a Project, (b) any partnership interest in any general partner in Borrower that is a partnership, and (c) any voting stock in any general partner in Borrower that is a corporation; "transfer" shall not include (i) 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; or (ii) the transfers of limited partner interests in Borrower so long as the provisions of Sections 8.1(2) and 8.1(3) are satisfied. After the Loan is fully funded, Lender shall not unreasonably withhold its consent or impose any transfer fee (other than out-of-pocket transaction costs) if Borrower desires to transfer one or both of the Projects or interests in Borrower to an Affiliate, so long as (A) there exists no Event of Default or Potential Default, (B) any transferee of the Projects assumes Borrower's obligations under the Loan, including the 19 26 execution of a Consent and Assumption Agreement, financing statement(s) and any other documents reasonably requested by Lender (each in form satisfactory to Lender) to evidence such transfer and maintain the perfection of Lender's liens and security interests against the Projects, (C) the Net Worth and liquidity of any transferee of the Projects are equivalent to or better than those of American Retirement Communities, L.P. on the date of this Agreement, (D) the proposed transferee is considered, in Lender's reasonable discretion, to be capable of managing and maintaining the marketability of the Projects, (E) American Retirement Communities, L.P. owns one hundred percent (100%) of the voting stock in every corporate general partner of Borrower's constituent general partner and members, as applicable, and (F) American Retirement Communities, L.P. directly or indirectly maintains sole control over Borrower (including the sole discretion regarding the sale, exchange, refinancing or disposition of the Projects and the selection of any manager therefor) and any controlling limited partner or member of Borrower, each as determined by Lender taking into account the requested transfer. 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, 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; however, Borrower may contest the validity of such claims and demands so long as (a) Borrower notifies Lender that it intends to contest such claim or demand, (b) 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 (c) 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. There shall be no change in the day-to-day control and management of Borrower or Borrower's general partner, if any, without the prior written consent of Lender. 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 shall enter a non-competition 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 20 27 time while any portion of the Loan is outstanding. Borrower shall strictly comply with the Management Standards set forth in Exhibit D 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 either 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 either of the Projects is less than 87% (not including the occupancy of space under the Expansion Work until such space is anticipated to be occupied according to projections approved by Lender) 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 either 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 shall furnish to Lender true and correct copies of such licenses, permits, approvals and agreements on or before July 1, 1996. Borrower shall observe and comply with all legal requirements applicable to the ownership, use and operation of the Projects as nursing 21 28 homes and personal care facilities, 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 Note 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, and ARCLP-Charlotte, LLC shall not acquire all or substantially all of the assets of the business of any Person, except that Borrower may engage in a merger or consolidation on the conclusion of which (a) American Retirement Communities, L.P. directly or indirectly owns one hundred percent (100%) of the voting stock in every corporate general partner of the surviving entity's constituent general partner and members, as applicable, and (b) American Retirement Communities, L.P. (or substantially the present effective ownership of American Retirement Communities, L.P.) directly or indirectly maintains sole control over the surviving entity (including the sole discretion regarding the sale, exchange, refinancing or disposition of the Projects and the selection of any manager therefor) and any controlling limited partner or member of the surviving entity, each as determined by Lender taking into account the requested transfer. 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 (c) shall have obtained the prior written consent of Lender to such change, and (d) 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. 22 29 Section 8.10 AFFILIATE TRANSACTIONS. Without the prior written consent of Lender, except for management agreements complying with the provisions hereof, Borrower shall not engage in any transaction affecting a Project with an Affiliate of Borrower. 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 (a) Debt incurred by American Retirement Communities, L.P. in compliance with all financial covenants of this Agreement or the Fort Austin Loan Agreement, (b) the Loan, and (c) 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. Section 8.12 LIMITATION ON AFFILIATE DEBT. Neither Borrower nor any other Affiliate shall lend or borrow funds from any other Affiliate unless such parties have acknowledged that all such debt is unsecured and subordinate to the Loan on the terms of the Subordination Agreement (which acknowledgment shall be in the form of the Joinder Page attached to the Subordination Agreement). Section 8.13 FURTHER ASSURANCES. Borrower shall promptly (1) cure any defects in the execution and delivery of the Loan Documents, and (2) 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 (1) 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; (2) any notice of default received by Borrower under other obligations relating to a Project or otherwise material to Borrower's business; and (3) any threatened or pending 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 (1) any inspection, review or testing of or with respect to the Projects, (2) 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 either Project, (3) any proceeding instituted by any Person claiming a Lien, (4) any brokerage commissions or finder's fees claimed by any broker or other party in connection with the Loan, either Project, or any of the transactions contemplated in the Loan Documents, except commissions and fees arising solely from Lender's actions, (5) the breach of any of the representations, warranties or covenants contained in any Loan Document, and 23 30 (6) 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 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. During the term of the Loan, 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. Section 8.20 NET WORTH. American Retirement Communities, L.P. shall at all times maintain a Net Worth of at least $10,000,000 and ARCLP-Charlotte, LLC shall at all times maintain a Net Worth of at least $1.00. Section 8.21 OPERATION. The Projects shall be operated as continuing care retirement communities comprised of independent living units, assisted living units, and, if applicable, skilled nursing beds. The Projects shall be operated using prudent business judgment and 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 24 31 or otherwise on the date hereof. Borrower shall not materially change such services or change the Facility Capacity without the prior written consent and approval of Lender. Section 8.23 NON-COMPETITION. Borrower shall not acquire, construct, operate or manage any congregate care facility, assisted living facility, skilled or intermediate nursing facility, adult day care facility, home health care agency, or any business comprised of any combination of the aforementioned, to the extent revenues derived therefrom are not included in Projects' Operating Revenues, within a 5-mile radius of either Project at any time while any portion of the Loan is outstanding. Section 8.24 KEY PERSONS. Borrower shall promptly notify Lender if persons or entities key to Borrower's operations, as designated by Lender from time to time, are terminated or cease providing services to Borrower. Section 8.25 IMMEDIATE REPAIRS; EXPANSION WORK. Borrower shall complete all of the Immediate Repairs to the satisfaction of Lender and Lender's inspecting architect/engineer and shall pay all costs and expenses therefor prior to December 1, 1996. Borrower shall complete all Expansion Work to the satisfaction of Lender and Lender's inspecting architect/engineer and shall pay all expenses therefor prior to December 31, 1996. Section 8.26 FORT AUSTIN LOAN. Borrower acknowledges that the initial investment of Borrower's Equity is derived from advances on the Fort Austin Loan and covenants and agrees that any return of any of Borrower's Equity hereunder which is derived from the Fort Austin Loan (not including any Borrower's Return or Net Cash Flow entitled to be retained by Borrower) shall be applied without prepayment premium (other than Yield Maintenance or Make Whole Breakage) in reduction of the principal balance of the Fort Austin Loan. Section 8.27 RIGHT OF FIRST OFFER FOR CREDIT FACILITY. If Borrower or any Affiliate desires to form a real estate investment trust which will include either of the Projects (the "REIT"), General Electric Capital Corporation shall have a right of first offer with respect to any acquisition and/or revolving credit facility to be established by the REIT ("CREDIT FACILITY"). Under such right of first offer, General Electric Capital Corporation may offer terms for a Credit Facility to the REIT either on its own initiative or on request by the REIT within thirty (30) days of the REIT's request. The REIT may accept or decline such terms, provided that if the Credit Facility terms offered by General Electric Capital Corporation are declined by the REIT, the REIT shall not accept any other Credit Facility on terms that are materially less favorable than those offered by General Electric Capital Corporation without first requesting such Credit Facility terms from General Electric Capital Corporation. Section 8.28 ASSIGNMENT OF CONSTRUCTION CONTRACTS. As additional security for the payment of amounts owing by Borrower under or with respect to the Loan, Borrower hereby transfers and assigns to Lender, and grants to Lender a security interest in, all of Borrower's rights, title and interests, but not its obligations, in, under and to the Construction Contracts upon the following terms and conditions: (1) Borrower represents and warrants that, to Borrower's knowledge, each copy of any Construction Contract furnished to Lender is a true and complete copy thereof and that Borrower's interest therein is not subject to any claim, setoff or encumbrance. (2) Neither this assignment nor any action by Lender constitutes an assumption by Lender of any obligations under the Construction Contracts. Borrower shall continue to be liable for all obligations of Borrower thereunder and shall perform all of its obligations under the Construction Contracts. 25 32 Borrower shall indemnify, defend, and hold Lender harmless against and from any loss, liability or expense (including, without limitation, reasonable attorneys' fees) incurred by Lender and resulting from any failure of Borrower to so perform. (3) If an Event of Default exists, Lender may at any time (but shall have no obligation) take, in its name or in the name of Borrower, such action as Lender may at any time determine to be necessary or advisable to cure any default under the Construction Contracts or to protect the rights of Borrower or Lender thereunder. Lender shall incur no liability if any action so taken by it or in its behalf shall be inadequate or invalid, and Borrower shall hold Lender free and harmless from any loss, liability or expense (including, without limitation, reasonable attorneys' fees) incurred in connection with any such action, EVEN IF IT ARISES FROM THE NEGLIGENCE OF LENDER, BUT NOT IF THE LOSS, LIABILITY, OR EXPENSE ARISES FROM THE GROSS NEGLIGENCE OF LENDER OR LENDER'S WILLFUL MISCONDUCT. (4) Borrower irrevocably constitutes and appoints Lender as Borrower's attorney-in-fact, in Borrower's name or in Lender's name, to enforce all rights of Borrower under the Construction Contracts while any Event of Default or Potential Default exists; however, Lender is not obligated to enforce such rights. (5) If no Event of Default exists, Borrower may exercise its rights as owner under the Construction Contracts; however, Borrower shall not cancel or amend the Construction Contracts or do, or suffer to be done, any act which would impair the security constituted by this assignment without the prior written consent of Lender. (6) This assignment shall inure to the benefit of Lender, its successors and assigns, including any purchaser upon foreclosure of the Projects (or either Project) or any grantee under a deed in lieu of foreclosure, any receiver in possession of the Projects (or either Project) and any corporation formed by or on behalf of Lender which assumes Lender's rights and obligations under this Agreement. Section 8.29 ASSIGNMENT OF PLANS. As additional security for the payment of amounts owing by Borrower under or with respect to the Loan, Borrower hereby transfers and assigns to Lender, and grants to Lender a security interest in, all of Borrower's rights, title and interest in and to the Plans, and hereby represents and warrants to and agrees with Lender as follows: (1) To Borrower's knowledge, the original counterparts of the Plans furnished to Lender are true and complete. (2) To Borrower's knowledge, the schedule of the Plans delivered to Lender is a complete and accurate description of the Plans. (3) To Borrower's knowledge, the Plans are complete and adequate for the Expansion Work, and there have been no modifications thereof except as described in such schedule. The Plans shall not be modified without the prior written consent of Lender. (4) Lender may use the Plans for any purpose relating to the Expansion Work, including, but not limited to, inspections of construction and the completion of the Expansion Work. (5) Lender's acceptance of this assignment shall not constitute approval of the Plans by Lender. Lender has no liability or obligation whatsoever in connection with the Plans and no 26 33 responsibility for the adequacy thereof or for the construction of the Improvements contemplated by the Plans. (6) This assignment shall inure to the benefit of Lender, its successors and assigns, including any purchaser upon foreclosure of the Projects (or either Project) or any grantee under a deed in lieu of foreclosure, any receiver in possession of the Projects (or either Project) and any corporation formed by or on behalf of Lender which assumes Lender's rights and obligations under this Agreement. 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 (1) such failure does not involve the failure to make payments on a monetary obligation; (2) such failure cannot reasonably be cured within ten (10) days; (3) Borrower is diligently undertaking to cure such default, and (4) 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 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 27 34 "BANKRUPTCY PARTY") which seeks liquidation, reorganization or other relief with respect to it or its debts or 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 the Fort Austin Loan or 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 Mortgages. 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 (1) 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, (2) terminate the obligation, if any, of Lender to advance amounts hereunder, and (3) exercise all rights and remedies therefor under the Loan Documents and at law or in equity. 28 35 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. Section 10.4 JOINT AND SEVERAL LIABILITY; CO-BORROWER RELATIONSHIP. The entities comprising Borrower acknowledge that (1) they are jointly and severally liable for every obligation of Borrower under the Loan Documents and (2) Lender shall have no responsibility or liability for the allocation or use of the Loan between the parties constituting Borrower. No disputes among the parties constituting Borrower related to the Loan or the use and operation of the Projects shall in any way affect the obligations of Borrower hereunder. Lender shall be entitled to accept from either party constituting Borrower any notices or other communications under the Loan Documents as if such communication were received from both parties comprising Borrower. 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: ARCLP - Charlotte, LLC American Retirement Communities, L.P. c/o American Retirement Communities, L.P. 29 36 111 Westwood Place, Suite 402 Brentwood, Tennessee 37027 Attention: H. Todd Kaestner, Executive Vice President Telecopy: (615) 221-2269 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 13355 Noel Road, Suite 2000 One Galleria Tower, LB54 Dallas, Texas 75240 Attention: Region Manager, Portfolio Management Operations Telecopy: (214) 960-1365 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 (1) when actually delivered, (2) on the first Business Day after deposit with an overnight air courier service, or (3) 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 Mortgages), 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: (1) 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 30 37 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 (2) 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 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 31 38 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 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. Notwithstanding the foregoing, if the Senior Noteholder and the Junior Noteholder are different Persons and shall not be in agreement on the exercise of approval rights, or on enforcement of this Agreement (exclusive of enforcement of any Mortgage or Assignment of Rents and Leases which is solely in favor of Senior Noteholder or Junior Noteholder), or on satisfaction of conditions to advances, the determination of Senior Noteholder shall control. 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: (1) 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; (2) Lender shall in no event be liable for any Debts, expenses or losses incurred or sustained by Borrower; and (3) 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 the Senior Note or the Junior 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, except in accordance with Section 8.1. 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. 32 39 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. 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 33 40 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. 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: (1) Borrower's commission of a criminal act, (2) 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; (3) the misapplication by Borrower or any Borrower Party of any funds derived from the Projects, including security deposits, insurance proceeds and condemnation awards; (4) the fraud or misrepresentation by Borrower or any Borrower Party made in or in connection with the Loan Documents or the Loan; (5) 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; (6) 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; (7) Borrower's interference with Lender's exercise of rights under the Assignments of Rents and Leases; (8) Borrower's failure to timely renew any letter of credit issued in connection with the Loan; (9) Borrower's failure to maintain insurance as required by this Agreement or to pay any taxes or assessments affecting a Project; (10) damage or destruction to a Project directly caused by the acts or omissions of Borrower, its agents, employees, or contractors; (11) Borrower's obligations with respect to environmental matters under Article 4; (12) 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; (13) 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; (14) any liability for professional malpractice or negligence relating to the operation of the Projects; (15) the failure of Borrower to maintain separate accounts for security deposits as required in Section 8.19; (16) 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; or (17) any violation of the Subordination Agreement. None of the foregoing limitations 34 41 on the personal liability of Borrower shall modify, diminish or discharge the personal liability of (i) any Guarantor or (ii) 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 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 42 EXECUTED as of the date first written above. LENDER: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation By: /s/ Kevin A. Moyer ------------------------------------ Kevin A. Moyer Attorney-In-Fact BORROWER: ARCLP - CHARLOTTE, LLC, a Tennessee limited liability company By: /s/ H. Todd Kaestner ------------------------------------ H. Todd Kaestner Executive Vice President - Corporate Development AMERICAN RETIREMENT COMMUNITIES, L.P., a Tennessee limited partnership By: American Retirement Communities, LLC, a Tennessee limited liability company, its sole general partner By: /s/ H. Todd Kaestner ------------------------------ H. Todd Kaestner Executive Vice President - Corporate Development 36 43 JOINDER By executing this Joinder (the "JOINDER"), the undersigned ("JOINDER PARTIES") jointly and severally guaranty the performance by Borrower of 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 Guarantor or other Joinder Party; (b) any release or other action or inaction taken by Lender with respect to the collateral, the Loan, Borrower, any Guarantor and/or other 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, any Guarantor and/or any other 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 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 (i) renew, modify, extend or accelerate the Loan, (ii) pursue some or all of its remedies against Borrower, any Guarantor or any Joinder Party, (iii) add, release or substitute any collateral for the Loan or party obligated thereunder, and (iv) release Borrower, any Guarantor 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 45 Executed as of May 7, 1996. JOINDER PARTIES: FORT AUSTIN LIMITED PARTNERSHIP, a Texas limited partnership By: ARC Fort Austin Properties, Inc., a Tennessee corporation, its sole general partner By: /s/ H. Todd Kaestner ------------------------------- H. Todd Kaestner Vice President and Assistant Secretary AMERICAN RETIREMENT COMMUNITIES, LLC, a Tennessee limited liability company By: /s/ H. Todd Kaestner ------------------------------------ H. Todd Kaestner Executive Vice President- Corporate Development ARC FORT AUSTIN PROPERTIES, INC., a Tennessee corporation By: /s/ H. Todd Kaestner ------------------------------------ H. Todd Kaestner Vice President and Assistant Secretary AMERICAN RETIREMENT CORPORATION, a Tennessee corporation By: /s/ H. Todd Kaestner ------------------------------------ H. Todd Kaestner Executive Vice President- Corporate Development 39 46 EXHIBIT A LEGAL DESCRIPTION OF PROJECTS Carriage Club Charlotte, North Carolina All that lot or parcel of land lying and being in Charlotte, Mecklenburg County, North Carolina, and being more particularly described as follows: BEGINNING at a point located in the centerline of Blueberry Lane, said point being the northeasterly corner of the R. Kent Goolsby property as recorded in Deed Book 4905, Page 570, of the Public Registry; thence with the centerline of Blueberry Lane in eight courses as follows: (1) N. 89-03-31 E. 116.60 feet to a point; (2) N. 83-24-00 E. 24.05 feet to a point; (3) N. 64-29-00 E. 34.10 feet to a point; (4) N. 51-14-00 E. 25.28 feet to a point; (5) N. 51-14-00 E. 28.77 feet to a point; (6) N. 43-57-00 E. 161.85 feet to a point; (7) N. 49-15-00 E. 42.15 feet to a point; (8) N. 47-05-00 E. 11.55 feet to a point; thence with the alignment of the southwesterly right-of-way of Blueberry Lane in three courses as follows: (1) S. 42-20-00 E. 274.48 feet to a point; (2) S. 62-20-00 E. 73.58 feet to a point; (3) N. 88-13-50 E. 127.18 feet to a point; thence N. 88-13-50 E. 313.84 feet to a point; thence N. 88-12-18 E. 225.02 feet to a point; thence N. 88-11-43 E. 109.65 feet to a point; thence N. 88-11-24 E. 138.67 feet to a point within the right-of-way of Old Providence Road near its intersection with Providence Road; thence a line within the right-of-way of Old Providence Road S. 19-18-33 W. 201.35 feet to a point in the centerline of Old Providence Road; thence with the centerline of Old Providence Road in three courses as follows: (1) S. 28-02-55 W. 564.41 feet to a point; (2) with the arc of a circular curve to the left with a radius of 736.37 feet an arc length of 276.70 feet to a point; (3) S. 6-31-09 W. 188.36 feet to a point; thence S. 84-57-46 W. 634.91 feet to a point; thence S. 84-45-40 W. 89.81 feet to a point; thence S. 84-44-38 W. 170.15 feet to a point; thence S. 84-52-13 W. 472.20 feet to a point; thence S. 84-49-48 W. 368.06 feet to a point in or near the centerline of Swan Run Branch; thence with or near the centerline of Swan Run Branch in fourteen courses as follows: (1) N. 22-04-41 E. 150.88 feet to a point; (2) N. 8-49-03 E. 74.60 feet to a point; (3) N. 15-29-29 E. 58.73 feet to a point; (4) N. 20-55-03 E. 79.69 feet to a point; (5) N. 12-53-54 W. 38.37 feet to a point; (6) N. 19-06-20 E. 23.68 feet to a point; (7) N. 53-51-21 E. 29.91 feet to a point; (8) N. 12-20-00 E. 66.66 feet to a point; (9) N. 17-02-08 E. 76.91 feet to a point; (10) N. 1-08-29 W. 69.61 feet to a point; (11) N. 20-58-16 E. 64.33 feet to a point; (12) N. 5-58-51 E. 96.22 feet to a point; (13) N. 13-24-24 E. 100.64 feet to a point; (14) N. 18-21-03 E. 23.46 feet to a point; thence S. 83-43-59 E. 344.67 feet to a point; thence N. 7-26-20 E. 431.39 feet to the point or place of beginning containing 45.440 acres, more or less. LESS AND EXCEPT, all of that property conveyed to The North Carolina Department of Transportation in that deed dated February 20, 1996, recorded in Book 8504, Page 250, Mecklenburg County Registry. Carriage Club Jacksonville, Florida Parcel "A" A portion of Section 14, Township 3 South, Range 27 East, Duval County, Florida, being more particularly described as follows: For a point of reference, commence at the Southeast corner of Section 14, and run North 00 degrees 37 minutes 00 seconds West, along the East line of said Section 14, a distance of 675.00 feet; run thence North Exhibit A - 1 47 89 degrees 42 minutes 50 seconds West, a distance of 120.00 feet to the point of beginning, said point being on the Northerly boundary of a 150-foot power line easement, as described in Official Records Volume 3040, Page 963, Public Records of said County; run thence North 89 degrees 42 minutes 50 seconds West, along said Northerly line, a distance of 795.00 feet; thence departing from said Northerly line, North 0 degrees 02 minutes 10 seconds West, a distance of 1,190.00 feet; run thence North 89 degrees 57 minutes 50 seconds East, a distance of 794.99 feet to the Westerly line of that land described in Official Records Volume 5809, Page 1938; run thence along said Westerly line, South 0 degrees 02 minutes 10 seconds East, a distance of 1,194.47 feet to the point of beginning. Parcel "B" Together with a non-exclusive easement for ingress and egress as described in Amended and Restated Declaration of Easement recorded in Official Records Volume 6163 page 2383, of the current public records of Duval County, Florida, over and across the following described lands: A portion of Section 13 and 14, Township 3 South, Range 27 East, Jacksonville, Duval County, Florida, being more particularly described as follows: For point of beginning, commence at the Northeast corner of that property described in Official Records Volume 5141, Page 126, Public Records of said County, said point lying on the Westerly right of way line of Southside Boulevard, State Road No. 115, U.S. Alternate No. 1 (a 200-foot right of way as now established) at a point 100 feet Northerly of the intersection of said right of way line with the line dividing Sections 13 and 24, Township and Range aforementioned, and run North 89 degrees 45 minutes 47 seconds West, along the Northerly boundary line of said Official Records Volume 5141, Page 126, a distance of 1,534.86 feet; run thence North 0 degrees 14 minutes 06 seconds East, a distance of 150.00 feet to the Northerly line of a 150-foot power line easement as recorded in Official Records Volume 3040, Page 983, of said County; run thence North 89 degrees 45 minutes 47 seconds West, a distance of 462.85 feet to a point lying on the Westerly line of said Section 13; run thence North 37 degrees 32 minutes 14 seconds West, a distance of 460.31 feet to a point of tangent intersection, with a curve, concave to the Northeast and having a radius of 100.00 feet; run thence Northerly, along said curve an arc distance of 66.01 feet through a central angle of 37 degrees 49 minutes 23 seconds, a chord bearing and distance of North 18 degrees 37 minutes 30 seconds West, a distance of 64.82 feet to a point of intersection with a non-tangent line, said point being on the Northerly line of a 150-foot power line easement, as recorded in Official Records Volume 3040, Page 963; run thence South 89 degrees 42 minutes 50 seconds East, along the Northerly line of said power line easement, a distance of 176.59 feet to the Southerly and most Westerly corner of that land described in Official Records Volume 5809, Page 1938, of said County; run thence South 37 degrees 45 minutes 02 seconds East, a distance of 245.40 feet to a point of tangent intersection with a curve, concave to the Northeast and having a radius of 342.30 feet; run thence along said curve, an arc distance of 310.74 feet, through a central angle of 52 degrees 00 minutes 45 seconds, a chord bearing and distance of South 63 degrees 45 minutes 24 seconds East, 300.18 feet to a point of tangency, run thence South 89 degrees 45 minutes 47 seconds East, a distance of 1,666.86 feet; run thence North 45 degrees 06 minutes 01 seconds East, a distance of 49.62 feet to the Westerly right of way line of said Southside Boulevard; run thence South 0 degrees 02 minutes 10 seconds East, along said Westerly line, a distance of 285.17 feet to the point of beginning, excepting therefrom that portion lying within the right of way of State Road No. 115 (Southside Boulevard) as now established and as described in instrument recorded in Official Records Volume 6333, page 2257, public records of said County. Parcel "C" Exhibit A - 2 48 Together with a non-exclusive easement for ingress and egress as described in Easement recorded in Official Records Volume 6164, page 6 of the current public records of Duval County, Florida, over and across the following described lands: A parcel of land, lying in Section 14, Township 3 South, Range 27 East, Duval County, Florida, being more particularly described as follows: For point of reference, commence at the Southeast corner of Section 14, and run North 00 degrees 37 minutes 00 seconds West, along the East line of said Section 14, a distance of 675.00 feet to the North line of a 150-foot power line easement, as described in Official Records Volume 3040, Page 963, of the current public records of said County; run thence North 89 degrees 42 minutes 50 seconds West, along said easement line, a distance of 296.58 feet to the point of beginning; thence continue North 89 degrees 42 minutes 50 seconds West, along said easement line, a distance of 149.01 feet to the intersection of a tangent curve, and having a radius of 250.00 feet, concave to the Southwest; run thence Southeasterly, along the arc of a curve, curving to the right through a central angle of 52 degrees 10 minutes 36 seconds, a distance of 227.66 feet, the chord bearing and distance being South 63 degrees 37 minutes 32 seconds East, 219.88 feet, to the point of tangency; run thence North 37 degrees 32 minutes 14 seconds West, a distance of 44.78 feet to the beginning of a tangent curve, with a radius of 100.00 feet, concave to the East; run thence Northerly, along the arc of said curve, curving to the right, through a central angle of 37 degrees 49 minutes 23 seconds, a distance of 66.01 feet, the chord bearing and distance being North 18 degrees 37 minutes 30 seconds West, 64.82 feet, to the point of beginning. Parcel "D" Together with the rights and easement, in common with others, for sign purposes as described in Sign and Landscaping Agreement recorded in Official Records Volume 5987, page 669 of the current public records of Duval County, Florida, as partially assigned by Partial Assignment recorded in Official Records Volume 5987 page 675, of the current public records of Duval County, Florida, upon, across, over and under the following described lands: A portion of Section 13, Township 3 South, Range 27 East, Jacksonville, Duval County, Florida, being more particularly described as follows: For point of beginning, commence at the Northeast corner of that property described in Official Records Volume 5141, Page 126, Public Records of said County, said point lying on the Westerly right of way line of Southside Boulevard, State Road No. 115, U.S. Alternate No. 1 (a 200-foot right of way, as now established) at a point 100 feet Northerly of the intersection of said right of way line with the line dividing Sections 13 and 24, Township and Range aforementioned. From the point of beginning thus described, run N89 degrees 45'47"W., along the Northerly boundary line of the aforementioned property described in Official Records Volume 5141, Page 126, a distance of 1,995.48 feet to the Northwest corner of the aforementioned property described in Official Records Volume 5141, Page 126, said point lying on the line dividing Sections 13 and 14, Township and Range aforementioned; run thence N00 degrees 37'00"W., along said dividing line, a distance of 150.02 feet to a point; run thence N37 degrees 32'14"W. a distance of 460.30 feet to a point of curvature; run thence 328.99 feet along the arc of a curve, concave Southeasterly and having a radius of 100.00 feet; a chord distance of 199.45 feet to the point of tangency, the bearing of the aforementioned chord being N56 degrees 42'42"E.; run thence S29 degrees 02'11"E. a distance of 228.22 feet to a point of curvature; run thence 362.80 feet, along the arc of a curve, concave Northeasterly and having a radius of 342.303 feet, a chord distance of 346.06 feet to the point of tangency, Exhibit A - 3 49 the bearing of the aforementioned chord being S59 degrees 23'59"E; run thence S89 degrees 45'47"E. a distance of 1,666.86 feet to a point; run thence N45 degrees 06'01"E. a distance of 49.62 feet to a point; run thence S00 degrees 02'10"E., along the Westerly right of way line of said Southside Boulevard, a distance of 285.17 feet to the point of beginning. Said Parcel being subject to a 150-foot power line easement along the Southerly and Westerly sides, as recorded in Official Records Volume 3040, Page 963, of the Public Records of said County. LESS AND EXCEPT the following described land: A portion of Section 14, Township 3 South, Range 27 East, Jacksonville, Duval County, Florida, being more particularly described as follows: For point of reference, commence at the Northeast corner of that property described in Official Records Volume 5141, Page 126, Public Records of said County, said point lying on the Westerly right of way line of Southside Boulevard, State Road No. 115, U.S. Alternate No. 1 (a 200-foot right of way, as now established) at a point 100 feet Northerly of the intersection of said right of way line with the line dividing Sections 13 and 24, Township and Range aforementioned; run thence N89 degrees 45'47"W., along the Northerly boundary line of the aforementioned property described in Official Records Volume 5141, Page 126, a distance of 1,995.48 feet to the Northwest corner of the aforementioned property described in Official Records Volume 5141, Page 126, said point lying on the line dividing Sections 13 and 14, Township and Range aforementioned; run thence N00 degrees 37'00"W., along said dividing line, a distance of 574.99 feet to a point; run thence N89 degrees 42'50"W, a distance of 120.00 feet to a point for point of beginning; thence continue N89 degrees 42'50"W. a distance of 176.59 feet to a point on a curve; run thence 243.75 feet, along the arc of a curve, concave Southeasterly and having a radius of 100.00 feet, a chord distance of 187.74 feet to a point on a curve, the bearing of the aforementioned chord being N70 degrees 06'58"E.; run thence S00 degrees 02'10"E. a distance of 64.73 feet to the point of beginning, also expecting therefrom that portion lying within the right of way of State Road No. 115 (Southside Boulevard) as now established and a described in instrument recorded in Official Records Volume 6333, Page 2257, Public Records of said County. Parcel "E" Together with a non-exclusive easement for drainage purposes as described in Drainage and Storm Water Easement recorded in Official Records Volume 5987 page 677, of the current public records of Duval County, Florida, on, over, across, under and through the following described lands: A portion of that certain parcel of land lying within the power line easement recorded in Official Records Volume 1192, page 261, and also described in Official Records Volume 3040, page 963, current public records of Duval County, Florida, which lies in the Westerly six hundred thirty feet (630') or the most easterly one thousand forty feet (1040') thereof. Additional Parcel A portion of Section 14, Township 3 South, Range 27 East, Duval County, Florida, being more particularly described as follows: For a point of reference, commence at the Southeast corner of said Section 14; thence North 00 degrees 37 minutes 00 seconds West, along the East line of said Section 14, a distance of 675.00 feet to the Northerly line of a 150 foot power line easement, as described in Official Records Volume 3040, page 963 of the current public records of Duval County; thence North 89 degrees 42 minutes 50 seconds West, along said Northerly line, a distance of 120.00 feet to a point; thence departing said Northerly line, North 00 degrees 02 minutes 10 seconds West, a distance of 1,194.47 feet to the point of beginning; thence South 89 degrees Exhibit A - 4 50 57 minutes 50 seconds West, a distance of 794.99 feet; thence North 00 degrees 02 minutes 10 seconds West, a distance of 730.24 feet; thence South 82 degrees 45 minutes 00 seconds East, a distance of 801.46 feet; thence South 00 degrees 02 minutes 10 seconds East, a distance of 628.60 feet to the point of beginning. Exhibit A - 5 51 EXHIBIT B BUDGET ---------------------------------------------------------------------- Acquisition $ 46,862,146 ---------------------------------------------------------------------- Closing Costs and Fees 1,000,000 ---------------------------------------------------------------------- Completion of Expansion Work - Carriage Club of Jacksonville (to be allocated by agreement) 2,241,417 ---------------------------------------------------------------------- Completion of Expansion Work - Carriage Club of Charlotte (to be allocated by agreement) 1,646,437 ------------ ---------------------------------------------------------------------- TOTAL $ 51,750,000 ----------------------------------------------------------------------
B - 1 52 EXHIBIT C IMMEDIATE REPAIRS(1)
Property Item Cost -------- ---- ---- Carriage Club Charlotte Remove and replace damaged $ 2,930.00 sections of asphalt paving Repair minor cracks in concrete $ 527.00 walkways Repair damaged downspouts and $ 723.00 gutters TOTAL $ 4,180.00 Carriage Club Jacksonville Seal coat asphalt $ 21,462.00 Restrip parking and drive areas $ 1,844.00 Repair/replace damaged aluminum $ 7,500.00 siding and stucco Pressure wash exterior siding, $ 21,000.00 stucco and composite roof surfaces Paint exterior surfaces $ 14,000.00 Repair or replace damaged $ 2,500.00 composition roof shingles Insulate exposed roof mounted $ 8,750.00 HVAC ductwork Replace fire detection and $ 75,000.00 suppression system =========== TOTAL $152,056.00
- -------------------------------------- (1) As more fully described in the engineering reports. C-1 53 EXHIBIT D 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: (a) 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) If, commencing three months following closing, there are fewer than eighty percent (80%) of the total number of units leased for each of three (3) consecutive months, the leasing and management agents for the Projects may be terminated. D-1 54 SCHEDULE 2.1 ADVANCE CONDITIONS Part A - Initial Advance Part B - General Conditions Part C - Improvements Advances 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 commitment fee of $435,816.32 in cash. 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 Senior Mortgage is a first-priority Lien on the Projects and related collateral and that the Junior Mortgage is a second-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. A current "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 55 9. A current 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 current 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 (i) Medicare provider agreements, as applicable, issued under Title XVIII and Title XIX of the Social Security Act of 1965, with current provider numbers, (ii) as applicable, nursing home licenses (or "long-term-care licenses") issued by the State Agencies, (iii) a personal care facilities license issued by the State Agencies, and (iv) 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. At Lender's request, Borrower shall furnish Lender with a zoning endorsement to Lender's title insurance policy, zoning letters from applicable municipal agencies, and utility letters from applicable service providers. 16. No change shall have occurred in the financial condition of Borrower or any Borrower Party or in the Net Operating Income of either 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; neither Project shall have suffered any significant damage by fire or Schedule 2.1 - 2 56 other casualty which has not been repaired; 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 Borrower, any Borrower Party or a Project. 18. The annualized Net Operating Income of the Projects equals or exceeds $4,850,000 and the Debt Service Coverage equals or exceeds 1.10:1, each from Residency Agreements of not more than 95% occupancy of each Project, after application of a management fee of not less than 3% of Operating Revenues and reserves for replacements of not less than 1% of Operating Revenues. 19. The acquisition cost of the Projects is at least equal to the sum of (a) $56,000,000, including all closing costs and related fees, and (b) the total cost of the Expansion Work incurred and paid as of the date hereof. 20. Borrower's cash investment for the acquisition of the Projects is at least $14,750,000. 21. 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. 22. The Budget showing total costs relating to closing of the proposed transaction, all uses of the initial advance, and amounts allocated for future advances (if any). 23. 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. 24. Such other documents or items as Lender or its counsel reasonably may require. 25. The representations and warranties contained in this Loan Agreement and in all other Loan Documents are true and correct. 26. No Potential Default or Event of Default shall have occurred or exist. 27. Lender shall have audited costs of Expansion Work incurred and paid to date, as certified by the contractors and architects for the Expansion Work, and Lender's inspecting architect/engineer shall have certified that the total amounts incurred and paid for Expansion Work is for Expansion Work actually completed. 28. Borrower shall have received an assignment of all Construction Contracts and Plans for the Expansion Work, copies of which Construction Contracts and Plans must be furnished to and approved by Lender, and Borrower shall have received written agreements from the contractors and design professionals for the Expansion Work, consenting to the assignment of such Construction Contracts and Plans to Borrower, and the further assignment of such Construction Contracts and Plans to Lender. Schedule 2.1 - 3 57 PART B. GENERAL CONDITIONS Each advance of the Loan following the initial advance 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. 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, as evidenced by title insurance endorsements satisfactory to Lender. 4. 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). 5. 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 any major or anchor tenant, 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. 6. No condemnation or adverse, as determined by Lender, zoning or usage change proceeding shall have occurred or shall have been threatened against a Project; neither 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. 7. Lender shall have no obligation to make any additional advance for less than $10,000, except for the final additional advance, or to make advances more often than once in any one-month period, or to make any advance after the twelfth (12th) month of the Loan. 8. At the option of Lender (i) each advance request shall be submitted to Lender at least ten (10) Business Days prior to the date of the requested advance; and (ii) 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. 9. Borrower shall immediately deposit all proceeds of the Loan advanced by Lender in a separate and exclusive account to be used solely for the purposes specified in this Agreement and in Borrower's advance request and, upon Lender's request, shall promptly furnish Lender with evidence thereof. Schedule 2.1 - 4 58 PART C. IMPROVEMENTS ADVANCES Additional advances shall be made to finance completion of Expansion Work on the following terms and conditions: 1. Each request for such an advance shall specify the amount requested, shall be on forms satisfactory to Lender, and shall be accompanied by appropriate invoices, bills paid affidavits, lien waivers, title updates, endorsements to the title insurance, and other documents as may be required by Lender. Such advances may be made, at Lender's election, either: (a) in reimbursement for expenses paid by Borrower, or (b) for payment of expenses incurred and invoiced but not yet paid by Borrower. Lender, at its option and without further direction from Borrower, may disburse any improvements advance to the Person to whom payment is due or through an escrow satisfactory to Lender. Borrower hereby irrevocably directs and authorizes Lender to so advance the proceeds of the Loan. All sums so advanced shall constitute advances of the Loan and shall be secured by the Loan Documents. Any improvements advance for such purpose shall be part of the Loan and shall be secured by the Loan Documents. Lender may, at Borrower's expense, conduct an audit, inspection, or review of the Projects to confirm the amount of the requested improvements advance. 2. Borrower shall have submitted and Lender shall have approved (a) the improvements to be constructed, (b) the plans and specifications for such improvements, which plans and specifications may not be changed without Lender's prior written consent, and (c) if requested by Lender, each contract or subcontract for an amount in excess of $5,000 for the performance of labor or the furnishing of materials for such improvements. 3. Borrower shall have submitted and Lender shall have approved the time schedule for completing the capital improvements. After Lender's approval of a detailed budget, such budget may not be changed without Lender's prior written consent. If the estimated cost of such improvements exceeds the unadvanced portion of the amount allocated for such improvements in the approved budget, then Borrower shall provide such security as Lender may require to assure the lien-free completion of improvements before the scheduled completion date. 4. All improvements constructed by Borrower prior to the date an improvements advance is requested shall be completed to the satisfaction of Lender and Lender's engineer and in accordance with the plans and budget for such improvements, as approved by Lender, and all legal requirements. 5. Borrower shall not use any portion of any improvements advance for payment of any other cost except as specifically set forth in a request for advance approved by Lender in writing. 6. Lender shall not under any circumstances be obligated to make any improvements advance after April 30, 1997. 7. No funds will be advanced for materials stored at the Projects unless Borrower furnishes Lender satisfactory evidence that such materials are properly stored and secured at the Project. Schedule 2.1 - 5 59 SCHEDULE 2.2 INDEX RATES (1) "GECC COMPOSITE COMMERCIAL PAPER RATE" shall mean the Average Interest Expense on the actual principal amount of the GECC Composite Commercial Paper outstanding for Lender's full fiscal month preceding the interest billing month. "AVERAGE INTEREST EXPENSE" shall mean the percentage obtained by dividing the interest expense on GECC Composite Commercial Paper for such fiscal month by the average daily principal amount of GECC Composite Commercial Paper outstanding during such fiscal month, divided by the actual number of days in such fiscal month and multiplied by the actual number of days in the calendar year. The GECC Composite Commercial Paper Rate shall be determined by Lender and evidenced by a certificate issued by an authorized Lender employee. "GECC COMPOSITE COMMERCIAL PAPER" shall mean Lender's outstanding commercial paper for terms of nine (9) months or less from sources within the United States, but excluding the current portion of Lender's long term Debt and GECC Financial Corporation's borrowings and interest expense. (2) "TREASURY RATE" shall mean 6.63%, which is the yield to maturity of the most recently issued seven year U.S. Treasury Security as quoted in The Wall Street Journal on the closing date. If the closing date is not a Business Day, then the quote shall be obtained on the Business Day immediately preceding the closing date. If The Wall Street Journal (a) quotes more than one such seven year U.S. Treasury Security, the highest of such quotes shall apply, or (b) ceases to publish such quotes, the seven year U.S. Treasury Security shall be determined from such substitute financial reporting service or source as Lender in its discretion shall determine. Schedule 2.2 - 1 60 SCHEDULE 2.3(4) DISCOUNTED YIELD MAINTENANCE A. YIELD MAINTENANCE AMOUNT 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 / 12 ================ Equals the monthly rate difference = .0035 Times the principal balance x $10,000,000 ---------------- Equals the Monthly Interest Shortfall = $35,000.000
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. Schedule 2.3(4) - 1 61 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(4) - 2 62 SCHEDULE 2.3(6) PARTICIPATION 1. DEFINITIONS. The following terms shall have the meanings assigned in this Schedule 2.3(6): "ECONOMIC VALUE" means the fair market value of the Projects as determined by agreement between Borrower and Junior Noteholder, or failing agreement, by an appraisal as set forth below. Junior Noteholder and Borrower shall seek to determine the fair market value of the Projects for a period of fifteen (15) Business Days after notice by Junior Noteholder or Borrower requesting a determination of value. If Borrower and Junior Noteholder are unable to agree on the fair market value within said fifteen (15) Business Days, such value may be determined, at the request of Junior Noteholder or Borrower, by three independent appraisers who shall be members of the American Institute of Real Estate Appraisers or the National Association of Realtors, one appointed by Junior Noteholder, one appointed by Borrower (such appraisers to be appointed within ten (10) days after a request by either Junior Noteholder or Borrower), and a third appraiser who shall be selected by the appointed appraisers within ten (10) Business Days after the appointment of the second appraiser. If either Junior Noteholder or Borrower shall fail to timely appoint an appraiser, the appointed appraiser shall select the second appraiser within ten (10) days after such failure by Junior Noteholder or Borrower to appoint an appraiser. If the two appraisers so determined shall be unable to agree on the selection of a third appraiser, then either appraiser, on behalf of both, may request such appointment by the presiding judge of any United States District Court in the district where the Project is located. A Project's "Economic Value" shall be the average of the valuations of such Project as determined by such appraisers; however, if any appraiser's valuation deviates more than ten percent (10%) from the average of the other two appraisers' valuations, then Junior Noteholder and Borrower shall again seek to determine the fair market value of a the Project by mutual agreement for a period of fifteen (15) Business Days based on the existing appraisals, and if Junior Noteholder and Borrower are unable to agree on the fair market value of a Project within said fifteen (15) Business Days, then at the request of Junior Noteholder or Borrower, the Economic Value may be determined by three (3) new independent appraisers in accordance with the foregoing appraisal procedures. The averaged appraisal shall be submitted to Junior Noteholder and Borrower within thirty (30) days after any panel of three (3) appraisers is constituted. Junior Noteholder shall pay a percentage of the cost of each appraisal equal to the Participation Percentage, unless there exists an Event of Default or a Potential Default, in which event Borrower shall pay the entire cost of the appraisals. The appraisers shall be instructed to assume that such Project is well managed with no deferred maintenance and that actual rents and occupancy levels are not above market. "NET ECONOMIC VALUE" means the sum of the Economic Value, and any reserves or impounds funded out of Operating Revenues, less the sum of the principal amount owing on the Loan (or any refinancing of the Loan), Borrower's Equity, and normal and customary costs which would be incurred in selling the Projects (with brokerage commissions not to exceed 3% of the sales price). "NET REFINANCING PROCEEDS" means the sum of the proceeds of any refinancing of the Loan, and any reserves or impounds funded out of Operating Revenues, less the sum of the principal amount owing on the Loan, and normal and customary costs incurred in such refinancing. Schedule 2.3(6) - 1 63 "NET SALE PROCEEDS" means the sum of the proceeds of any sale of a Project, and any reserves or impounds funded out of Operating Revenues plus the excess value, as determined by Junior Noteholder, of any management, services or other agreement retained by Borrower or any Affiliate of Borrower which requires payments in excess of normal market rates, less the sum of the principal amount owing on the Loan or any other financing on the Project which has been approved by Junior Noteholder and which is secured by Liens on the Project, Borrower's Equity, and normal and customary costs of selling the Project (with brokerage commissions not to exceed 3% of the sales price). "PARTICIPATION PERCENTAGE" means thirty percent (30%) of Net Economic Value, Net Refinancing Proceeds, Net Sale Proceeds, or Net Cash Flow, as applicable. "THIRD PARTY SALE" means a sale or other transaction (1) in which the consideration of a Project is all cash, does not include the transfer or conveyance to Borrower of any interest in real property, and does not involve the sale, transfer or other disposition by Borrower of any other property, (2) in which the purchaser is a third party which is not an Affiliate of Borrower or a party with whom Borrower has a material contractual relationship (excluding incidental management contracts), (3) in which neither Borrower nor any Affiliate is retaining or receiving any residual interest in such Project, any interest in the purchaser or any contract (excluding incidental management contracts) with the purchaser for management or other services (except as approved by Junior Noteholder), and (4) which is an arm's length bona fide sale. Third Party Sale shall include any transfer as a result of the exercise of the power of eminent domain, any transfer in avoidance of the power of eminent domain, or any casualty which results in the payment of any award, insurance proceeds or other amount in excess of the principal amount of the Loan; however, Junior Noteholder's participation interest hereunder shall continue and shall not be terminated with respect to (a) any portion of a Project which is not condemned or transferred in lieu of condemnation or (b) a Project in its condition following such casualty. 2. PARTICIPATION PAYMENTS. As additional consideration for the commitment to make the Loan, Borrower shall pay to Junior Noteholder the following amounts: (1) SALE. On any Third Party Sale, the Participation Percentage of Net Sale Proceeds; (2) MATURITY; OTHER DISPOSITIONS. On the Maturity Date, or in the event of a sale or other disposition of a Project other than (a) a Third Party Sale (including ground leases, exchanges or refinancings in which Junior Noteholder does not elect to retain an interest in future Net Sale Proceeds or future Net Economic Value) or (b) a Sale, with Lender's consent as required in Section 8.1, to an Affiliate which assumes the Loan and the obligation to pay the Participation Percentage, the Participation Percentage of Net Economic Value; and (3) REFINANCING. On any refinancing of the Loan before the Maturity Date, at Junior Noteholder's election, either (a) the Participation Percentage of Net Economic Value, or (b) if Junior Noteholder elects to retain its interest in future Net Cash Flow, future Net Sale Proceeds and future Net Economic Value until sale of a Project or the Maturity Date (whichever occurs earlier), the Participation Percentage of Net Refinancing Proceeds. If Junior Noteholder elects to retain its interest in future Net Cash Flow, future Net Sale Proceeds and future Net Economic Value until sale of a Project or the Maturity Date (whichever occurs earlier), such interests shall be secured by a subordinate deed of trust or mortgage satisfactory to Junior Noteholder and encumbering a Project. Schedule 2.3(6) - 2 64 3. NET CASH FLOW PARTICIPATION. As an additional part of Junior Noteholder's participation interest, Borrower shall pay to Junior Noteholder quarterly on or before the last day of each month, the Participation Percentage of Net Cash Flow for the previous calendar month, or with respect to the first calendar month of the Loan term, for the portion of such period during which the Loan was outstanding. Such obligation shall continue until full payment of all amounts owing under the Loan Documents has been received. 4. RIGHT OF FIRST OFFER. Borrower hereby grants, conveys and transfers to Junior Noteholder a right of first offer with respect to any sale of a Project by Borrower. If Borrower desires to sell a Project, Borrower must offer the Project for sale to Junior Noteholder at Borrower's stated sales price of such Project, net of Junior Noteholder's interest in Net Sale Proceeds and Junior Noteholder shall have thirty (30) days after Junior Noteholder's receipt of such offer to accept or decline such offer. If Junior Noteholder declines the offer, the Borrower may sell such Project within one hundred eighty (180) days thereafter in a Third Party Sale at a price no less than the stated sales price used to compute the offer to Junior Noteholder. After said one hundred eighty (180) days, Borrower must re-offer such Project to Junior Noteholder. This right of first offer shall continue until Junior Noteholder has purchased such Project or has received payment of its entire interest in Net Sale Proceeds or Net Economic Value. 5. NOT A JOINT VENTURE. The provisions herein and in the Loan Documents giving Lender interests in Net Sale Proceeds, Net Economic Value, Net Refinancing Proceeds and Net Cash Flow, in addition to the right to receive repayment of all other amounts owing under the Loan Documents, is additional consideration for the Loan, and such provisions shall not be deemed to create a joint venture or partnership arrangement between Lender and Borrower or between Junior Noteholder and Borrower, it being Borrower's intention that the transaction shall not be deemed to be an agreement by Lender or Junior Noteholder to share in any losses incurred by Borrower or to be responsible for any liabilities of Borrower to third parties. Schedule 2.3(6) - 3 65 SCHEDULE 2.4(2) CAPITAL IMPROVEMENTS RESERVE 1. CAPITAL IMPROVEMENTS RESERVE. On January 15, 1997 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 positive difference between (1) three percent (3%) of Operating Revenues for the immediately preceding calendar year, and (2) the sum of all expenditures by Borrower for capital improvements and replacements to the Projects 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. The Capital Improvements Reserve will be held by Lender without interest and may be commingled with Lender's own funds. The Capital Improvement Reserve shall be advanced by Lender to Borrower for capital improvements and capital repairs to the Projects, as approved by Lender; however, funds in the Capital Improvements Reserve shall not be available for financing any of the improvements for which capital improvements advances are contemplated by the Budget. 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. Borrower and Lender shall meet annually on a date selected by Lender to establish monthly, quarterly, and annual budgets for capital expenditures for the Projects for the succeeding 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 improvements advances under Schedule 2.1. Schedule 2.4(2) - 1 66 LIST OF DEFINED TERMS
Page No. -------- Adjusted Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Adjusted Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Assignment of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Assignments of Rents and Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Average Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SCHEDULE 2.2 - 1 Bankruptcy Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Borrower Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Borrower's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Borrower's Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Carriage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Carriage Club Charlotte . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Cash on Cash Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Construction Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Construction Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Debt Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Debt Service Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Default Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Expansion Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Facility Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Fort . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Fort Austin Loan Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 GECC Composite Commercial Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SCHEDULE 2.2 - 1 GECC Composite Commercial Paper Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SCHEDULE 2.2 - 1 Guarantors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Hazardous Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Hazardous Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Immediate Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Joinder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Joinder Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Junior Assignment of Rents and Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Junior Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Junior Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
List - 1 67 Junior Note Contract Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Junior Noteholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Loan Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Maturity Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Net Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Net Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Operating Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Potential Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 REIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Residency Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Security Deposit Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Senior Assignment of Rents and Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Senior Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Senior Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Senior Note Contract Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Senior Noteholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Single Purpose Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Site Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 State Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Subordination Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Third Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Treasury Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SCHEDULE 2.2 - 1
List - 2 EX-10.20 25 JUNIOR PROMISSORY NOTE 1 EXHIBIT 10.20 JUNIOR PROMISSORY NOTE $14,750,000 May 7, 1996 For value received, ARCLP-CHARLOTTE, LLC, a Tennessee limited liability company, and AMERICAN RETIREMENT COMMUNITIES, L.P., a Tennessee limited partnership (individually and collectively, "BORROWER"), jointly and severally promise and agree 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 $14,750,000 or so much thereof as may be advanced and remain outstanding under this Note and the Loan Agreement of even date herewith between Borrower and Lender (as from time to time amended, modified or supplemented, the "LOAN AGREEMENT"), with interest on the unpaid principal sum owing hereunder at the rate or rates or in the amounts designated for this Note and computed in accordance with the Loan Agreement, together with 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. This Note is the Junior Note as identified and defined in the Loan Agreement. This Note is executed and delivered in conjunction with Borrower's execution and delivery of the Senior Promissory Note of even date herewith, in the stated principal amount of $37,000,000 bearing interest and being payable to the order of Lender as provided therein and in the Loan Agreement (the "SENIOR NOTE"). 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 April 30, 2003, 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 GECC Commercial Real Estate, GECC/CRE Depository, P.O. Box 910361, Dallas, Texas 75391-0361. 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 evidences advances made, interest due and all amounts otherwise owed to Lender under 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 Junior 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). 1 2 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. 3 Executed as of the date first written above. ARCLP - CHARLOTTE, LLC, a Tennessee limited liability company By: /s/ H. Todd Kaestner ----------------------------------------------- H. Todd Kaestner Executive Vice President-Corporate Development AMERICAN RETIREMENT COMMUNITIES, L.P., a Tennessee limited partnership By: American Retirement Communities, LLC, a Tennessee limited liability company, its sole general partner By: /s/ H. Todd Kaestner ------------------------------------------ H. Todd Kaestner Executive Vice President- Corporate Development FLORIDA DOCUMENTARY STAMP TAXES DUE ON THE INDEBTEDNESS EVIDENCED HEREBY HAVE BEEN PAID UPON RECORDATION OF THE JUNIOR MORTGAGE, SECURITY AGREEMENT AND FIXTURE FILING OF EVEN DATE HEREWITH, RECORDED IN THE PUBLIC RECORDS OF DUVAL COUNTY, FLORIDA, ON OR ABOUT THE DATE HEREOF. 4 EXHIBIT 10.21 SENIOR PROMISSORY NOTE $37,000,000 May 7, 1996 For value received, ARCLP-CHARLOTTE, LLC, a Tennessee limited liability company, and AMERICAN RETIREMENT COMMUNITIES, L.P., a Tennessee limited partnership (individually and collectively, "Borrower"), jointly and severally promise and agree 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 $37,000,000 or so much thereof as shall be advanced and remain outstanding under this Note and the Loan Agreement of even date herewith between Borrower and Lender (the "Loan Agreement"), with interest on the unpaid principal sum owing hereunder at the rate or rates or in the amounts designated for this Note and computed in accordance with the Loan Agreement, together with 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. This Note is the Senior Note as identified and defined in the Loan Agreement. This Note is executed and delivered in conjunction with Borrower's execution and delivery of the Junior Promissory Note of even date herewith, in the stated principal amount of $14,750,000, bearing interest and being payable to the order of Lender as provided therein and in the Loan Agreement (the "Junior Note"). 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 April 30, 2003, 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 GECC Commercial Real Estate, GECC/CRE Depository, P.O. Box 910361, Dallas, Texas 75391-0361. 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 evidences advances made, interest due and all amounts otherwise owed to Lender under the Loan Agreement. This Note is executed in conjunction with the Loan Agreement and is secured by liens and security interests created under the Loan Documents (including those arising under the Senior 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). 1 5 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. 6 Executed as of the date first written above. ARCLP - CHARLOTTE, LLC, a Tennessee limited liability company By: /s/ H. Todd Kaestner ------------------------------------------------ H. Todd Kaestner Executive Vice President-Corporate Development AMERICAN RETIREMENT COMMUNITIES, L.P., a Tennessee limited partnership By: American Retirement Communities, LLC, a Tennessee limited liability company, its sole general partner By: /s/ H. Todd Kaestner ------------------------------------- H. Todd Kaestner Executive Vice President- Corporate Development FLORIDA DOCUMENTARY STAMP TAXES DUE ON THE INDEBTEDNESS EVIDENCED HEREBY HAVE BEEN PAID UPON RECORDATION OF THE SENIOR MORTGAGE, SECURITY AGREEMENT AND FIXTURE FILING OF EVEN DATE HEREWITH, RECORDED IN THE PUBLIC RECORDS OF DUVAL COUNTY, FLORIDA, ON OR ABOUT THE DATE HEREOF. EX-11 26 COMPUTATION OF EARNINGS 1 EXHIBIT 11 AMERICAN RETIREMENT COMMUNITIES, L.P. Computation of Earnings per Common Share Year ended December 31, 1996 (in thousands, except per share amounts)
Amount Per Share ------ --------- Pro forma income before extraordinary item $3,659 $0.39 Preferred return on special redeemable preferred limited partnership interests 1,104 0.12 ------ ----- Pro forma net income before extraordinary item available for distribution to partners and shareholders $2,555 $0.27 ------ ----- Shares used in calculation: Number of shares to be issued to existing partners upon reorganization 7,812.5 Equivalent number of shares applicable to reorganization note of $25,000 assuming issue price of $16.00 per share 1,562.5 ------- Share used in calculation 9,375.0 -------
EX-21 27 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21 Subsidiaries of the Registrant American Retirement Corporation II ARCLP - Charlotte, LLC A.R.C. Management Corporation ARC Corpus Christi, Inc. ARC Oak Park, Inc. ARC Equities - Lexington, Inc. ARC Fort Austin Properties, Inc. Fort Austin Limited Partnership Trinity Towers Limited Partnership Holley Court Terrace, L.P. Carriage Club of Charlotte, L.P. Carriage Club of Jacksonville, L.P. A.R.C. Chattanooga, Inc. EX-23.1 28 KPMG PEAT MARWICK LLP LETTER 1 Exhibit 23.1 The Partners American Retirement Communities, L.P.: The audits of American Retirement Communities, L.P. referred to in our report dated January 22, 1997, included the related financial statement schedule for the year ended December 31, 1994, the three months ended March 31, 1995, the nine months ended December 31, 1995, and the year ended December 31, 1996, included in the registration statement. The financial statement schedule is the responsibility of the Partnership's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic combined and consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. Our report dated January 22, 1997 contains an explanatory paragraph which refers to a change in cost basis as a result of a purchase business combination. We consent to the use of our reports included herein on (1) American Retirement Communities L.P. and (2) Carriage Club of Charlotte, Limited Partnership and Carriage Club of Jacksonville, Limited Partnership and to the reference to our firm under the headings "Selected Combined and Consolidated Financial Data" and "Experts" in the prospectus. KPMG PEAT MARWICK LLP Nashville, Tennessee March , 1997 EX-27 29 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN RETIREMENT COMMUNITIES, L.P. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 3,222 52 3,455 108 420 9,271 230,547 17,423 228,162 23,560 170,689 0 0 0 37,882 228,162 0 75,617 0 53,866 0 0 12,160 4,613 (920) 5,533 0 2,335 0 3,198 0 0
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