-----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, J8qmf/LGzuiS2Sr/KKC0JJElzGh74XKrAnJ3UhDWPkKjSrZKMsQIi7XbUP6gpQ2Z eTHVdhWbmIN6HKbew5q1PQ== 0000950144-98-012013.txt : 19981106 0000950144-98-012013.hdr.sgml : 19981106 ACCESSION NUMBER: 0000950144-98-012013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN RETIREMENT CORP CENTRAL INDEX KEY: 0000787784 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 621674303 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13031 FILM NUMBER: 98738374 BUSINESS ADDRESS: STREET 1: 111 WESTWOOD PLACE CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 6152212250 10-Q 1 AMERICAN RETIREMENT CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1998 ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to _________ Commission file number 01-13031 AMERICAN RETIREMENT CORPORATION ----------------------------------------------------- (Exact name of Registrant as specified in its charter) Tennessee 62-1674303 --------- ------------------ (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 111 Westwood Place, Suite 402, Brentwood, TN 37027 - -------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (615) 221-2250 --------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ---- As of November 3, 1998 there were 17,107,453 shares of the Registrant's common stock, $.01 par value, outstanding. 2 INDEX PART I. FINANCIAL INFORMATION
Page Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 .........................................3 Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 1998 and September 30, 1997 ........................................4 Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 1998 and September 30, 1997 ........................................5 Condensed Consolidated Statements of Partners'/ Shareholders' Equity for the Nine Months Ended September 30, 1998 and September 30, 1997 ........................................6 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and September 30, 1997 ......................................................7 Notes to Condensed Consolidated Financial Statements .............................9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................12 Item 3. Quantitative and Qualitative Disclosure About Market Risk .......................24 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds .......................................24 Item 6. Exhibits and Reports on Form 8-K.................................................25 Signatures .................................................................................26
2 3 PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS AMERICAN RETIREMENT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) September 30, 1998 December 31, 1997 ------------------ ----------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 52,231 $ 44,583 Assets limited as to use 3,503 2,654 Accounts receivable, net 8,860 6,178 Inventory 866 483 Prepaid expenses 2,362 1,052 Deferred income taxes 3,542 4,332 Other current assets 8,942 1,003 --------- --------- Total current assets 80,306 60,285 Assets limited as to use, excluding amounts classified as current 50,571 7,332 Land, buildings and equipment, net 384,937 229,898 Notes receivable 15,517 -- Marketable securities -- 52 Costs in excess of net assets acquired, net 36,377 -- Other assets 30,672 19,587 --------- --------- Total assets $ 598,380 $ 317,154 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 1,326 $ 316 Accounts payable 5,849 2,429 Accrued expenses 15,398 9,796 Other current liabilities 6,087 -- --------- --------- Total current liabilities 28,660 12,541 Tenant deposits 6,566 5,290 Long-term debt, excluding current portion 161,989 99,038 Convertible subordinated debentures 138,000 138,000 Refundable portion of life estate purchase price 49,715 -- Deferred life estate income 44,774 -- Deferred gain on sale-leaseback transactions 3,733 4,073 Deferred income taxes 20,634 3,689 Other long-term liabilities 434 605 --------- --------- Total liabilities 454,505 263,236 Shareholders' equity: Preferred stock, no par value; 5,000,000 shares authorized, no shares issued or outstanding -- -- Common stock, $.01 par value; 50,000,000 shares authorized, 17,106,786 and 11,420,860 shares issued and outstanding, respectively 171 114 Additional paid-in capital 144,996 60,203 Accumulated deficit (928) (6,399) Net unrealized losses on investment securities (364) -- --------- --------- Total shareholders' equity 143,875 53,918 --------- --------- Total liabilities and shareholders' equity $ 598,380 $ 317,154 ========= =========
3 See accompanying notes to financial statements. 4 AMERICAN RETIREMENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share data)
Three Months Ended -------------------------------------------- September 30, 1998 September 30, 1997 ------------------- ----------------------- Revenues: Resident and health care revenue $ 37,816 $ 23,146 Management services and other revenue 3,748 497 -------- -------- Total revenues 41,564 23,643 Expenses: Community operating expenses 24,431 14,708 Lease expense, net 2,561 653 General and administrative 3,497 1,971 Depreciation and amortization 3,479 1,685 -------- -------- Total operating expenses 33,968 19,017 -------- -------- Income from operations 7,596 4,626 Other income (expense): Interest expense (5,087) (3,391) Interest income 1,307 421 Other (25) 4 -------- -------- Other income (expense), net (3,805) (2,966) -------- -------- Income before income taxes 3,791 1,660 Income tax expense 1,459 623 -------- -------- Net income $ 2,332 $ 1,037 ======== ======== Basic earnings per share $ 0.15 $ 0.09 ======== ======== Diluted earnings per share $ 0.15 $ 0.09 ======== ======== Weighted average shares used: Basic earnings per share 15,603 11,406 Common stock equivalents 92 178 ======== ======== Diluted earnings per share 15,695 11,584 ======== ========
See accompanying notes to financial statements. 4 5 AMERICAN RETIREMENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share data)
Nine months ended ------------------------------------------- September 30, 1998 September 30, 1997 ------------------------------------------- Revenues: Resident and health care revenue $ 92,281 $ 66,570 Management services and other revenue 7,673 1,462 --------------------------------------- Total revenues 99,954 68,032 Expenses: Community operating expenses 59,771 42,227 Lease expense, net 6,208 1,725 General and administrative 7,868 6,041 Depreciation and amortization 7,572 4,891 --------------------------------------- Total operating expenses 81,419 54,884 --------------------------------------- Income from operations 18,535 13,148 Other income (expense): Interest expense (12,395) (10,002) Interest income 2,494 785 Other 62 (56) --------------------------------------- Other income (expense), net (9,839) (9,273) --------------------------------------- Income before income taxes 8,696 3,875 Income tax expense 3,225 3,701 --------------------------------------- Net income $ 5,471 $ 174 ======================================= Basic earnings per share $ 0.42 =============== Diluted earnings per share $ 0.42 =============== Pro forma earnings data: Income before income taxes, as reported $ 3,875 Pro forma income tax expense 1,472 -------- Pro forma net income $ 2,403 ======== Pro forma basic earnings per share $ 0.23 ======== Pro forma diluted earnings per share $ 0.23 ======== Weighted average shares used: Basic earnings per share 12,893 10,298 Common stock equivalents 171 161 --------------------------------------- Diluted earnings per share 13,064 10,459 =======================================
5 See accompanying notes to financial statements. 6 AMERICAN RETIREMENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS'/SHAREHOLDERS' EQUITY (UNAUDITED) (in thousands, except share data)
General and Limited Common Stock Additional Partners' -------------------- Paid-in Accumulated Interests Shares Amount Capital Deficit ------------------------------------------------------------- Balance as of December 31, 1996 $ 37,882 Net income 1,599 $ (1,425) Distribution to partners (2,500) Reorganization note (21,875) Stock issued for: Transfer of partnership equity (15,106) 7,812,500 $ 78 $ 15,028 Initial public offering 3,593,750 36 45,185 ------------------------------------------------------------- Balance as of September 30, 1997 -- 11,406,250 $114 $ 60,213 $ (1,425) ------------------------------------------------------------- Balance as of December 31, 1997 11,420,860 $114 $ 60,203 $ (6,399) Comprehensive income: Net income 5,471 Net unrealized losses on investment securities Comprehensive income Stock issued for: Public offering 4,297,500 43 64,757 Acquisition of FGI 1,370,000 14 19,765 Employee stock options exercised 9,335 131 Employee stock purchase plan 9,091 140 ------------------------------------------------------------- Balance as of September 30, 1998 --- 17,106,786 $171 $144,996 $ (928) -------------------------------------------------------------
Net Unrealized Losses on Investment Comprehensive Securities Income Total ---------------------------------------------- Balance as of December 31, 1996 $ 37,882 Net income 174 Distribution to partners (2,500) Reorganization note (21,875) Stock issued for: Transfer of partnership equity 0 Initial public offering 45,221 ---------------------------------------------- Balance as of September 30, 1997 -- -- $ 58,902 ---------------------------------------------- Balance as of December 31, 1997 $ 53,918 Comprehensive income: Net income $5,471 5,471 Net unrealized losses on investment securities $ (364) (364) (364) ------ Comprehensive income $5,107 ------ Stock issued for: Public offering 64,800 Acquisition of FGI 19,779 Employee stock options exercised 131 Employee stock purchase plan 140 ---------------------------------------------- Balance as of September 30, 1998 $ (364) $143,875 ----------------------------------------------
6 See accompanying notes to financial statements. 7 AMERICAN RETIREMENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
Nine months ended --------------------------------------------- September 30, 1998 September 30, 1997 --------------------------------------------- Cash flows from operating activities: Net income $ 5,471 $ 174 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,572 4,891 Amortization of deferred entrance fee revenue (1,261) -- Deferred income taxes 3,077 3,562 Gain on sale of marketable securities (80) -- Amortization of deferred gain on sale-leaseback transactions (340) (228) Losses from unconsolidated joint ventures 184 -- Increase (decrease), net of acquisitions, in cash due to changes in: Accounts receivable (1,345) (1,909) Inventory (135) (1) Prepaid expenses (1,082) (568) Other assets (1,332) (359) Accounts payable 2,212 178 Accrued expenses (2,640) 1,760 Tenant deposits 359 611 Other liabilities (171) (47) -------------------------------------- Net cash provided by operating activities 10,489 8,064 Cash flows from investing activities: Net additions to land, buildings and equipment (20,100) (16,370) Expenditures for acquisitions, net of cash received (29,166) (11,524) Advances for development projects (6,705) -- Investments in joint ventures (1,213) (1,030) Purchases of assets limited as to use (36,630) (4,329) Proceeds from the sale of marketable securities 132 -- Increase in notes receivable (15,517) -- Proceeds from the sale of assets -- 28,789 Other investing activities (1,678) -- -------------------------------------- Net cash used by investing activities (110,877) (4,464)
See accompanying notes to financial statements. 7 8 AMERICAN RETIREMENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
Nine months ended ------------------------------------------------ September 30, 1998 September 30, 1997 ------------------------------------------------ Cash flows from financing activities: Proceeds from public offerings, net of expenses 64,800 45,221 Proceeds from convertible debenture offering, net of expenses -- 116,600 Repayment of reorganization note -- (21,875) Payment of redeemable preferred interests -- (5,195) Distributions to partners -- (4,132) Expenditures for financing costs (75) (32) Proceeds from exercise of stock options 131 -- Proceeds from issuance of stock through employee stock purchase plan 140 -- Proceeds from the issuance of long-term debt 53,673 22,441 Proceeds from life estate sales 2,298 -- Principal payments on indebtedness (12,931) (26,570) --------- --------- Net cash provided by financing activities 108,036 126,458 Net increase in cash and cash equivalents 7,648 130,058 --------- --------- Cash and cash equivalents at beginning of period 44,583 3,222 --------- --------- Cash and cash equivalents at end of period $ 52,231 $ 133,280 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 10,981 $ 9,668 ========= ========= Income taxes paid $ 249 -- ========= =========
Supplemental disclosure of non-cash transactions: During 1998, the Company acquired Freedom Group, Inc. In conjunction with the transaction, net assets and liabilities were assumed as follows: Current assets $ 7,378 -- Other assets 152,204 -- Current liabilities 15,471 -- Debt 22,368 -- Other liabilities 74,793 --
See accompanying notes to financial statements. 8 9 AMERICAN RETIREMENT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of American Retirement Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain 1997 amounts have been reclassified to conform with the 1998 presentation. Operating results for the three and nine months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1998. These financial statements should be read in conjunction with the combined and consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1997. Prior to its initial public offering in May 1997 (the "IPO"), the Company's communities were owned, managed and/or operated by one or more limited partnerships affiliated with the Company's predecessor, American Retirement Communities, LP (the "Partnership" or "Predecessor"). The Partnership was reorganized concurrent with the IPO such that all of its assets and liabilities were contributed to the Company in exchange for 7,812,500 shares of common stock and a promissory note in the original principal amount of approximately $21.9 million (the "Reorganization"). The promissory note was subsequently paid with net proceeds from the IPO. References to the Company in connection with historical financial data or otherwise include the Predecessor. The pro forma adjustment reflected on the statement of operations for the nine months ended September 30, 1997 provides for income taxes assuming the Partnership was subject to taxes. Pro forma earnings per share for the nine months ended September 30, 1997 is based on the number of shares that would have been outstanding assuming the partners had been shareholders and is based on the 7,812,500 shares received as a result of the Reorganization plus 1,562,500 shares representing the value of the $21.9 million promissory note. 2. EARNINGS PER SHARE Basic earnings per share for the three months ended September 30, 1998 and 1997 and the nine months ended September 30, 1998 has been computed on the basis of the weighted average number of shares outstanding. Diluted earnings per share also includes dilutive common stock equivalents, which consist of stock options. 9 10 3. ACQUISITIONS On July 14, 1998, the Company acquired privately-held Freedom Group, Inc. ("FGI") and certain entities affiliated with FGI and with its Chairman. The acquisition resulted in the ownership of three lifecare continuing care retirement communities ("CCRCs") and the management of four additional CCRCs. The Company also acquired options to purchase two of the managed CCRCs. Additionally, the Company entered into a development and management contract for, and acquired an option to purchase, one additional CCRC currently under development. The aggregate resident capacity for the owned and managed communities included in this transaction is approximately 3,700. The development project will add capacity for approximately 400 residents. The consideration paid was approximately $43.0 million, including $23.2 million of cash and 1,370,000 shares of the Company's common stock valued at $19.8 million. The Company paid an additional $4.0 million for the purchase options and $1.5 million to enter into two of the management contracts. The transaction was accounted for as a purchase and includes the operations of the acquired entities effective July 1, 1998. The transaction resulted in costs in excess of net assets acquired of approximately $33.9 million which is being amortized on a straight-line basis over forty years. The following unaudited condensed consolidated pro forma results of continuing operations assumes the above referenced acquisition had been consummated as of the beginning of the periods presented. The 1997 data also includes the pro forma tax adjustment and pro forma shares outstanding as described in Note 1.
Nine Months Ended September 30, 1998 1997 ------------------------------------------ Total revenues $117,398 $92,736 Net income 5,444 2,481 Diluted earnings per share 0.39 0.21 Weighted average number of diluted shares outstanding 13,972 11,829
4. COMMITMENTS During the nine month period ending September 30, 1998, the Company entered into various commitments related to the development of 19 assisted living residences (the "Developments"). The Company entered into loan agreements for an aggregate amount of $100.2 million with the owners of 10 of the Developments to provide funding for their construction. Typically, these loans bear interest at 200 basis points over 30 day LIBOR and require amortization over a 25 year term. As of September 30, 1998, $5.4 million was advanced under the loan agreements. The owners of the Developments ("the Lessors") have entered into construction agreements and operating leases with various third parties (the "Lessees") for the construction and operation of the Developments. In eight of these transactions, the 10 11 Lessee is an affiliate of a director of the Company. The operating leases have initial terms of five years and include renewal and purchase options. The Lessees have entered into construction management and guaranty agreements with the Company whereby the Company will manage the construction of the Developments for a fee equal to approximately 3.75% of total development costs. The Company has pledged certificates of deposit in the amount of $22.2 million as collateral for its agreement to fund operating deficits of the Lessees in excess of certain agreed-upon limits. These deposits are reflected on the Company's consolidated balance sheet as "non-current assets limited as to use." The Company has also entered into agreements with the Lessees to manage the Developments for a fee based on a percentage of revenues and to acquire the leasehold interests of the Lessees. The Company owns the land upon which four of the Developments are located and has leased the land to the owners for a term of 50 years. In connection with the execution of management contracts pursuant to the FGI transaction, the Company assumed debt guaranties on mortgage debt of three managed communities. At September 30, 1998, $46.3 million was outstanding under the related debt agreements. 5. LIFECARE AND MASTER TRUST ACCOUNTING Refundable Portion of Life Estate Purchase Price and Deferred Life Estate Income: The refundable portion of life estate purchase price represents the amount that is due and refundable to the resident or the resident's estate upon contract termination. The portion of the purchase price that is not refundable is recorded as deferred life estate income at the time of purchase and amortized into income over the resident's estimated life expectancy, estimated annually based upon actuarial projections. Lifecare income related to residency agreements that are fully refundable and contingent upon resale is recognized using the average life of the related buildings and improvements. Master Trust Agreements: Under certain of the Company's residency and care agreements, each resident entered into a master trust agreement whereby amounts were paid by the resident into a trust account ("Trust"). These funds were then available to the communities in the form of a non-interest bearing loan. The loans provided permanent financing and are collateralized by the property, plant, and equipment of the related communities. Upon termination of the resident's occupancy, the resident or the resident's estate receives payment of the remaining loan balance from the Trust and agrees to pay a lifecare fee based on a formula in the residency and care agreement, not to exceed a specified percentage of the resident's original deposit to the Trust. This lifecare fee is recognized ratably over the estimated life expectancy of the resident. The amortization of the lifecare fees is included in resident and health care revenue in the statement of operations and deferred lifecare fee receivable (included in other noncurrent assets) on the balance sheet. The Company reports the obligation under the master trust agreements as 11 12 refundable portion of life estate purchase price and deferred life estate income based on the applicable residency agreements. Obligation to Provide Future Services: Under the terms of certain lifecare and life estate sales contracts the Company is obligated to provide future services to its residents. The Company is required to calculate the present value of the net cost of future services and use of facilities annually and compare that amount with the present value of future cash inflows. If the present value of the net cost of future services and use of facilities exceeds discounted future cash inflows, a liability must be recorded with a corresponding charge to income. As of September 30, 1998, the Company did not have a liability associated with its obligation to provide future services and use of facilities. 6. RECENT ACCOUNTING PRONOUNCEMENT On April 3, 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities (SOP 98-5). The SOP requires that costs incurred during start-up activities, including organization costs, be expensed as incurred. SOP 98-5 defines start-up activities broadly to include those one-time activities related to: opening a new facility; introducing a new product or service; conducting business in a new territory; conducting business with a new class of customer or beneficiary; initiating a new process in an existing facility; or commencing some new operation. Start-up activities also include activities related to organizing a new entity (costs of such activities are commonly referred to as organization costs). SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. Earlier application is encouraged in fiscal years for which annual financial statements have not been issued. Initial application of the SOP should be as of the beginning of the fiscal year in which the SOP is first adopted. Restatement of previously issued financial statements is not permitted. Entities that previously capitalized start-up costs, such as the types of costs described above, or organization costs, are required to write-off the unamortized portion of such capitalized costs as the cumulative effect of a change in accounting principle upon adoption of SOP 98-5. Subsequent to adoption of the SOP, these types of costs must be expensed as incurred. The Company will adopt SOP 98-5 effective January 1, 1999. At September 30, 1998, the unamortized portion of capitalized start-up costs totaled approximately $690,000. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a national senior living and health care services company providing a broad range of care and services to seniors within a residential setting. The Company currently operates 39 senior living communities in 15 states with an aggregate capacity 12 13 for approximately 11,800 residents. The Company currently owns 19 communities, leases seven communities pursuant to long-term leases, and manages 13 communities pursuant to management agreements. The Company is currently constructing or developing 33 senior living communities with an estimated aggregate capacity for 3,700 residents and expanding seven of its communities which will add capacity for approximately 600 residents. Additionally, the Company currently operates four home health agencies based in or near its communities, and manages two home health agencies for third parties. The Company reported net income of $2.3 million, or $0.15 diluted earnings per share, on revenues of $41.6 million for the quarter ended September 30, 1998, as compared with net income of $1.0 million, or $0.09 diluted earnings per share, on revenues of $23.6 million for the comparable prior year period. The Company's growth strategy includes: (i) selective acquisitions of senior living communities, including continuing care retirement communities ("CCRCs") and assisted living residences; (ii) development of senior living communities, including special living units and programs for residents with Alzheimer's and other forms of dementia; (iii) expansion of existing communities; and (iv) selective development and acquisition of other properties and businesses that are complementary to the Company's operations and growth strategy. RESULTS OF OPERATIONS 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 and other revenue, which include fees, net of reimbursements, for the development, marketing and management of retirement communities and home health care agencies. The Company's resident and health care revenues are comprised of (i) monthly service fees from independent and assisted living residents representing 70.0% and 71.7% of total revenues for the three months ended September 30, 1998 and 1997, respectively, and 72.3% and 72.9% of total revenues for the nine months ended September 30, 1998 and 1997, respectively; (ii) per diem charges from residents receiving nursing care representing 13.1% and 14.2% of total revenues for the three months ended September 30, 1998 and 1997, respectively, and 12.6% and 14.1% of total revenues for the nine months ended September 30, 1998 and 1997, respectively; (iii) the amortization of entrance fees over each resident's actuarially determined life expectancy representing 4.1% and 1.7% of total revenues for the three months and nine months ended September 30, 1998, respectively (the Company did not own entrance fee communities prior to July 1, 1998); and (iv) per visit billings from home health care patients and companion services clients representing 3.8% and 12.0% of total revenues for the three months ended September 30, 1998 and 1997, respectively, and 5.7% and 10.9% of total revenues for the nine months ended September 30, 1998 and 1997, respectively. Management services and other revenue represented 9.0% and 2.1% of total revenues for the three months ended September 30, 1998 and 1997, respectively, and 7.7% and 2.1% of total revenues for the nine months ended September 30, 1998 and 1997, respectively. Approximately 13 14 95.2% and 87.1% of the Company's total revenues for the three months ended September 30, 1998 and 1997, respectively, and 93.7% and 88.5% of the Company's total revenues for the nine months ended September 30, 1998 and 1997, respectively, were attributable to private pay sources, with the balance attributable to Medicare, including Medicare-related private pay co-insurance. The Company's operating expenses are comprised of (i) community operating expenses, which includes all operating expenses of the Company's owned or leased communities, including the expenses of its home health care agencies; (ii) general and administrative expense, which includes all corporate office overhead; (iii) lease expense; and (iv) depreciation and amortization expense. The following table sets forth, for the periods indicated, certain resident capacity and occupancy data for the periods indicated:
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 ------------------ ------------------ END OF PERIOD CAPACITY STABLE(1) TOTAL STABLE(1) TOTAL --------- ----- --------- ----- Owned 4,727 5,042 2,914 3,068 Leased 2,073 2,173 483 573 Managed 3,797 4,493 2,159 2,159 ------ ------ ------ ------ Total 10,597 11,708 5,556 5,800 ====== ====== ====== ====== END OF PERIOD OCCUPANCY Owned 94% 91% 96% 92% Leased 92% 89% 92% 83% Managed 93% 84% 96% 96% ------ ------ ------ ------ Total 93% 88% 95% 92%
- -------------------- (1) Includes communities or expansions thereof that have (i) achieved 95% occupancy or (ii) have been open at least 12 months. 14 15 SAME COMMUNITY RESULTS The following table sets forth certain selected financial and operating data on a Same Community basis. For purposes of the following discussion, "Same Community basis" refers to communities that were owned and/or leased by the Company throughout each of the periods being compared. Revenues on a Same Community basis do not include any management services revenues. STATEMENT OF OPERATIONS DATA FOR SAME COMMUNITIES: (DOLLARS IN THOUSANDS, EXCEPT OTHER DATA)
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1998 1997 % +/- 1998 1997 % +/- ---- ---- ----- ---- ---- ----- Monthly/per diem service fees $21,792 $20,298 7.4% $62,744 $58,649 7.0% Home health and companion services revenue 1,313 2,842 -53.8% 4,809 7,405 -35.1% ------- ------- ------- ------- Resident and health care revenue 23,106 23,140 -0.2% 67,553 66,053 2.3% Community operating expense 14,670 14,581 0.6% 43,098 41,517 3.8% ------- ------- ------- ------- Resident income from operations 8,435 8,560 -1.5% 24,455 24,537 -0.3% Resident income from operations margin(1) 36.5% 37.0% 36.2% 37.1% Lease expense 781 719 8.6% 1,774 1,658 7.0% Depreciation and amortization 1,758 1,561 12.6% 4,872 4,531 7.5% ------- ------- ------- ------- Income from operations 5,897 6,280 -6.1% 17,809 18,348 -2.9% Other data: Resident Capacity 3,777 3,577 3,597 3,397 Number of communities 14 14 12 12 Average occupancy rate(2) 90% 92% 92% 95% Average monthly revenue per occupied unit(3) $2,412 $2,327 3.7% $2,422 $2,309 4.9% Average monthly expense per occupied unit(4) $1,496 $1,447 3.4% $1,481 $1,419 4.3%
(1) "Resident income from operations margin" represents "Resident income from operations" as a percentage of "Resident and health care revenue." (2) "Average occupancy rate" is based on the ratio of occupied apartments to available apartments expressed on a monthly basis for independent and assisted living residences, and occupied beds to available beds on a per diem basis for nursing beds. (3) "Average monthly revenue per occupied unit" is total resident and health care revenues, excluding home health care agency and companion services fees, divided by total occupied apartments and nursing beds expressed on a monthly basis. (4) "Average monthly expense per occupied unit" is total community operating expenses, excluding home health care agency and companion services expenses, divided by total occupied apartments and nursing beds, expressed on a monthly basis. 15 16 THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 Revenues Total revenues were $41.6 million for the three months ended September 30, 1998 compared to $23.6 million for the three months ended September 30, 1997, representing an increase of $17.9 million, or 75.8%. Resident and health care revenue increased by $14.7 million and management services and other revenue increased by $3.2 million. The increase in resident and health care revenue was attributable to revenues derived from senior living communities acquired or leased after September 30, 1997, including $8.1 million from acquired FGI communities. Management services and other revenue increased as a percentage of total revenue to 9.0% from 2.1% and includes development fees of $2.5 million for the three months ended September 30, 1998 and management fees which increased to $1.2 million from $467,000 for the three months ended September 30, 1998 as compared to the prior year period. The increase in development fees is a result of the significant increase in development services being provided to third parties. The increase in management fees is related to new management agreements entered into in the FGI transaction. Revenues attributable to Same Communities were $23.1 million for the three months ended September 30, 1998. Monthly/per diem service fee revenue on a Same Community basis increased $1.5 million, or 7.4%, over the three months ended September 30, 1997. Of this increase, 3.7% was due primarily to increases in average rates and 3.7% was due to a higher number of occupied units. Same Community average occupancy rates were 90% for the three months ended September 30, 1998 as compared to 92% for 1997. The Same Community average occupancy in 1998 includes the dilutive effect of the third quarter opening of an expansion at a leased community. In response to the negative effects of The Balanced Budget Act of 1997, Public Law 105-33BBA, on certain of the Company's home health care agencies, during the three months ended September 30, 1998, the Company suspended the operation of seven of its recently established home health care agencies pending either institution of prospective pay or major revisions to the interim payment system now in effect. As a result of this, home health and companion services fees on a Same Community basis decreased by $1.5 million, or 53.8%, over the prior period. Community Operating Expenses Community operating expenses increased to $24.4 million for the three months ended September 30, 1998, as compared to $14.7 million for the three months ended September 30, 1997, representing an increase of $9.7 million, or 66.1%. The increase in community operating expenses was primarily attributable to expenses from senior living communities acquired or leased after September 30, 1997, including $5.6 million from acquired FGI communities. Community operating expenses as a percentage of resident and health care revenues increased to 64.6% for the three months ended September 30, 1998, from 63.5% for the three months ended September 30, 1997. The increase primarily relates to lower operating margins from recently acquired FGI lifecare CCRCs. The retirement communities are financed interest-free by 16 17 up-front resident entrance fees; therefore, the monthly service fee revenues are generally lower than comparable rental communities. Same Community operating expenses increased to $14.7 million for the three months ended September 30, 1998, as compared to $14.6 million for the three months ended September 30, 1997. Same Community operating expenses, exclusive of home health and companion services expenses, increased 7.0% for the three months ended September 30, 1998, as compared to the three months ended September 30, 1997 primarily as a result of costs at communities with recent expansion openings. Excluding the two communities with recent expansion openings, Same Community operating expenses increased by 2.8%. Same Community operating expense as a percentage of Same Community resident and health care revenues increased to 63.5% for the three months ended September 30, 1998 from 63.0% in the comparable period in the prior year. Same Community operating expenses exclusive of home health and companion services expenses as a percentage of Same Community revenues exclusive of home health and companion services revenue decreased to 62.0% for the three months ended September 30, 1998 from 62.2% for the comparable period in 1997, primarily as a result of a higher number of occupied units. Same Community resident income from operations decreased 1.5% to $8.4 million for the three months ended September 30, 1998 as compared to $8.6 million for the comparable period of 1997. Same Community resident income from operations excluding home health and companion services increased 7.9% to $8.3 million for the three months ended September 30, 1998 as compared to $7.7 million for the three months ended September 30, 1997. General and Administrative General and administrative expense increased to $3.5 million for the three months ended September 30, 1998, as compared to $2.0 million for the three months ended September 30, 1997, representing an increase of $1.5 million, or 77.4%. The increase was primarily related to increases in salaries and benefits including corporate personnel retained as a result of the FGI acquisition and related integration costs. General and administrative expense as a percentage of total revenues increased to 8.4% for the three months ended September 30, 1998 as compared to 8.3% for the three months ended September 30, 1997. Lease Expense Lease expense increased to $2.6 million for the three months ended September 30, 1998, from $653,000 for the three months ended September 30, 1997. The increase of $1.9 million was attributable to leases entered into after September 30, 1997 for Imperial Plaza, Rossmoor Regency, Bahia Oaks, and Park Regency. Same Community lease expense was increased $62,000 related to the completion of the expansion at a leased community. Depreciation and Amortization Depreciation and amortization expense increased to $3.5 million for the three 17 18 months ended September 30, 1998, from $1.7 million for the three months ended September 30, 1997, representing an increase of $1.8 million, or 106.5%. The increase was primarily attributable to senior living communities acquired or leased after September 30, 1997, amortization of the issuance costs incurred in connection with the Company's 5 3/4% Convertible Subordinated Debentures due 2002 (the "Convertible Debentures") and amortization of goodwill resulting from the FGI acquisition. Same Community depreciation and amortization expense increased to $1.8 million for the three months ended September 30, 1998, from $1.6 million for the three months ended September 30, 1997, representing an increase of $196,000, or 12.6%, primarily related to expenditures for the expansion of a community. Other Income (Expense) Interest expense increased to $5.1 million, net of capitalized interest of $250,000, for the three months ended September 30, 1998, from $3.4 million for the three months ended September 30, 1997, representing an increase of $1.7 million, or 50.0%. The increase in interest expense was primarily attributable to the issuance in 1997 of $138.0 million of Convertible Debentures and additional indebtedness incurred in connection with acquisitions, partially offset by the early extinguishment of $65.1 million of fixed rate indebtedness at December 31, 1997. Interest income increased to $1.3 million in the three months ended September 30, 1998 from $421,000 for the comparable period of the prior year, primarily due to income generated from the investment of the net proceeds of the public offering closed in August 1998 and certificates of deposits associated with certain leasing transactions. Income Tax Expense The provision for income taxes was $1.5 million for the three months ended September 30, 1998 as compared to $623,000 for the three months ended September 30, 1997. The Company's effective tax rate was 38% for each of the comparative periods. Net Income As a result of the foregoing factors, the Company reported net income of $2.3 million for the three months ended September 30, 1998 compared to net income of $1.0 million for the three months ended September 30, 1997. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 Revenues Total revenues were $100.0 million for the nine months ended September 30, 1998 compared to $68.0 million for the nine months ended September 30, 1997, representing an increase of $31.9 million, or 46.9%. Resident and health care revenue increased by $25.7 million and management services and other revenue increased by $6.2 million. Of the increase in resident and health care revenue, $24.2 million, or 94.2%, was attributable to revenues derived from senior living communities acquired or leased after September 30, 1997, including $8.1 million from acquired FGI communities. The remaining $1.5 million, or 5.8%, of such increase was attributable to Same Community growth. Management services and other revenue increased as a percentage of total revenue to 7.7% from 2.2% and includes development fees which increased to $4.5 million from $270,000 for the nine months ended September 30, 1998 as compared to the prior year and management fees which increased to $2.9 million from $1.2 million for the 18 19 nine months ended September 30, 1998 as compared to the prior year period. The increase in development fees is a result of the significant increase in development services being provided to third parties. The increase in management fees is primarily related to new management agreements entered into in the FGI transaction. Revenues attributable to Same Communities were $67.6 million for the nine months ended September 30, 1998, representing an increase of $1.5 million, or 2.3%, over the same period in 1997. Monthly/per diem service fee revenue on a Same Community basis increased $4.1 million, or 7.0% over the nine months ended September 30, 1997. Of this increase, 4.9% was due primarily to increases in average rates and 2.1% was due to a higher number of occupied units. Same Community average occupancy rates were 92% for the nine months ended September 30, 1998 as compared to 95% for 1997. The Same Community average occupancy in 1998 includes the dilutive effect of expansions that opened in the first and third quarters of 1998. Home health and companion services fees on a Same Community basis decreased by $2.6 million, or 35.1%, over the prior period due to significant reductions in reimbursement rates and the elimination of certain qualifying services which resulted in the suspension of operations at seven of the Company's home health care agencies in the third quarter of 1998. Community Operating Expenses Community operating expenses increased to $59.8 million for the nine months ended September 30, 1998, as compared to $42.2 million for the nine months ended September 30, 1997, representing an increase of $17.5 million, or 41.6%. Of the increase in community operating expenses, $16.0 million, or 91.0%, was attributable to expenses from senior living communities acquired or leased after September 30, 1997, including $5.6 million related to acquired FGI communities. Approximately 9.0% of the increase was attributable to Same Community operating expenses, which increased by $1.6 million over the comparable period of the prior year. Community operating expenses as a percentage of resident and health care revenues increased to 64.8% for the nine months ended September 30, 1998, from 63.4% for the nine months ended September 30, 1997. Same Community operating expense as a percentage of Same Community resident and health care revenues increased to 63.8% for the nine months ended September 30, 1998 from 62.9% in the comparable period in the prior year. The increase primarily relates to lower operating margins from recently acquired FGI lifecare CCRCs. The retirement communities are financed interest-free by up-front resident entrance fees; therefore, the monthly service fee revenues are generally lower than comparable rental communities. Same Community operating expenses, exclusive of home health care agency and companion services expenses, increased 6.4% for the nine months ended September 30, 1998, as compared to the comparable period in the prior year. Same Community operating expenses exclusive of home health and companion services expenses as a percentage of Same Community revenues exclusive of home health and companion 19 20 services revenue decreased to 61.2% for the nine months ended September 30, 1998 from 61.5% for the comparable period in 1997, primarily as a result of a higher number of occupied units. Same Community resident income from operations remained was $24.5 million for the nine months ended September 30, 1998 and 1997. Same Community resident income from operations excluding home health and companion services increased 7.9% to $24.4 million for the nine months ended September 30, 1998 as compared to $22.6 million for the nine months ended September 30, 1997. General and Administrative General and administrative expense increased to $7.9 million for the nine months ended September 30, 1998, as compared to $6.0 million for the nine months ended September 30, 1997, representing an increase of $1.8 million, or 30.2%. The increase was primarily related to increases in salaries and benefits, including corporate personnel retained as a result of the FGI acquisition and related integration costs. General and administrative expense as a percentage of total revenues decreased to 7.9% for the nine months ended September 30, 1998, from 8.9% for the comparable period in the previous year. Lease Expense Lease expense increased to $6.2 million for the nine months ended September 30, 1998, from $1.7 million for the nine months ended September 30, 1997. The increase of $4.5 million was attributable to leases entered into after September 30, 1997 for Imperial Plaza, Rossmoor Regency, Bahia Oaks, and Park Regency. Same Community lease expense increased to $1.8 million for the nine months ended September 30, 1998, from $1.7 million for the nine months ended September 30, 1997 related to the completion of an expansion at a leased community. Depreciation and Amortization Depreciation and amortization expense increased to $7.6 million for the nine months ended September 30, 1998, from $4.9 million for the nine months ended September 30, 1997, representing an increase of $2.7 million, or 54.8%. The increase was primarily attributable to senior living communities acquired or leased after September 30, 1997, amortization of the issuance costs in connection with the Convertible Debentures, and amortization of goodwill resulting from the FGI acquisition. Same Community depreciation and amortization expense increased to $4.9 million for the nine months ended September 30, 1998, from $4.5 million for the nine months ended September 30, 1997, representing an increase of $341,000, or 7.5%, primarily related to expenditures for the expansion of a community. Other Income (Expense) Interest expense increased to $12.4 million, net of capitalized interest of $1.1 million, for the nine months ended September 30, 1998, from $10.0 million for the nine months ended September 30, 1997, representing an increase of $2.4 million, or 23.9%. The increase in interest expense was primarily attributable to the issuance in 1997 of $138.0 million of Convertible Debentures and additional indebtedness incurred in connection with acquisitions, partially offset by the early extinguishment of $65.1 million of fixed rate indebtedness at December 31, 1997. 20 21 Interest income increased to $2.5 million in the nine months ended September 30, 1998 from $785,000 for the comparable period of the prior year, primarily due to income generated from the investment of net proceeds of the public offering closed in August 1998 and certificates of deposits associated with certain leasing transactions. Income Tax Expense The conversion from a non-taxable limited partnership to a taxable corporation in connection with the Company's IPO resulted in a one-time $3.0 million charge related to the recognition of a deferred income tax liability for the difference between accounting and tax bases of the Company's assets and liabilities. For comparability, pro forma adjustments have been made to exclude the $3.0 million one-time tax charge related to the conversion from a limited partnership to a taxable corporation and to provide for income taxes as though the Company had been subject to corporate income taxes for the entire nine months ended September 30, 1997. Net Income As a result of the foregoing factors, the Company reported net income of $5.5 million for the nine months ended September 30, 1998 and pro forma net income of $174,000 for the nine months ended September 30, 1997. LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its activities with the net proceeds from public offerings of debt and equity, long-term mortgage borrowings, and cash flows from operations. At September 30, 1998, the Company had $301.3 million of indebtedness outstanding, including $138.0 million of Convertible Debentures, and $91.9 million of indebtedness to a capital corporation, with fixed maturities ranging from October 2000 to April 2028. As of September 30, 1998, approximately 91.2% of the Company's indebtedness bore interest at fixed rates, with a weighted average interest rate of 6.8%. The Company's variable rate indebtedness also carried an average rate of 6.8% as of September 30, 1998. As of September 30, 1998, the Company had working capital of $51.6 million. Net cash provided by operating activities was $10.5 million for the nine months ended September 30, 1998 as compared to $8.1 million provided by operating activities for the nine months ended September 30, 1997. The Company's unrestricted cash balance was $52.2 million as of September 30, 1998. Net cash used by investing activities was $110.9 million for the nine months ended September 30, 1998, as compared with $4.5 million for the nine months ended September 30, 1997. Effective July 1, 1998, the Company acquired FGI including related purchase option and management contract payments, net of cash acquired, for $29.2 million, made additions to land, buildings and equipment including construction activity, net of reimbursements, of $20.1 million, and increased notes receivable by $15.5 million, and purchased $36.6 million of assets limited as to use pursuant to certain leasing transactions. 21 22 Net cash provided by financing activities was $108.0 million for the nine months ended September 30, 1998, as compared with $126.5 million for the nine months ended September 30, 1997. The Company had net proceeds from its public offering of $64.8 million, borrowings of $53.7 million under long-term debt arrangements, and made principal payments on its indebtedness of $12.9 million during the nine months ended September 30, 1998. The principal payments primarily related to debt assumed in the FGI transaction and repaid immediately after closing. In early July 1998, the Company entered into a $36.0 million fixed rate first mortgage secured by one of its senior living communities. The mortgage bears interest at a rate of 6.87% and matures in July 2008. The Company maintains a $50.0 million revolving credit facility and a $4.0 million secured line of credit which are available for general use. As of September 30, 1998, $15.0 million was outstanding under the $50.0 million facility and approximately $470,000 of the $4.0 million line had been used to obtain letters of credit. Additionally, a $5.0 million secured line of credit is available for land acquisitions. No borrowings are outstanding under the $5.0 million line of credit. The $50.0 million revolving credit facility contains financial covenants that require the Company to maintain certain prescribed debt service coverage, liquidity, net worth, and capital expenditure reserve levels. All of the Company's owned communities are subject to mortgages. Seven of the Company's fourteen owned communities serve as blanket collateral for the indebtedness payable to a capital corporation and as collateral for the $50.0 million revolving credit facility. Each of the Company's debt agreements contains restrictive covenants that generally relate to the use, operation, and disposition of the communities that serve as collateral for the subject indebtedness, and prohibit the further encumbrance of such community or communities without the consent of the applicable lender. The Company does not believe such restrictions are material to its business because the Company does not intend to further encumber its owned properties and does not believe the covenants relating to the use, operation, and disposition of its communities materially limit its operations. Additionally, substantially all of such indebtedness is cross-defaulted. The Company has entered into non-binding letters of intent (the "REIT Facilities") pursuant to which two real estate investment trusts, at the Company's request and upon satisfaction of certain conditions, would develop, construct, or acquire up to $110.0 million and $74.7 million, respectively, of senior living communities and lease the communities to the Company. Currently, the Company has been allocated $41.6 million and $4.7 million, respectively, in commitments under the REIT Facilities. Effective July 1, 1998, the Company acquired privately-held FGI and certain entities affiliated with FGI and with its chairman. The acquisition resulted in the ownership of three lifecare CCRCs and management of four additional CCRCs. The Company also acquired options to purchase two of the managed CCRCs. Additionally, the Company 22 23 entered into a development and management contract for, and acquired an option to purchase, one additional CCRC currently under development. The aggregate resident capacity for the owned and managed communities included in this transaction was approximately 3,700. The development project will add capacity for approximately 400 residents. The consideration paid was approximately $43.0 million, including $23.2 million of cash and 1,370,000 shares of the Company's Common Stock valued at $19.8 million. The Company paid an additional $4.0 million for the purchase options and $1.5 million as consideration for entering into the two management contracts. The transaction was accounted for as a purchase. On August 4, 1998, the Company completed a public offering of 4,500,000 shares of common stock, of which 4,297,500 were sold by the Company and 202,500 shares were sold by certain selling shareholders. Net proceeds to the Company were approximately $64.8 million, net of underwriting commissions and offering costs. The aggregate estimated cost to complete and lease-up the 33 senior living communities currently under development is approximately $410.0 million to $435.0 million. In addition, the Company plans to expand seven of its owned or leased communities, which are expected to cost approximately $55.0 million to complete and lease-up. The Company expects that its current cash, together with cash flow from operations, the proceeds of the offering completed in August 1998, and credit available under the $50.0 million revolving credit facility, the REIT Facilities, and other existing credit arrangements, will be sufficient to meet its operating requirements and to fund its anticipated growth for at least the next 12 months. The Company expects to use a wide variety of financing sources to fund its future growth, including public and private debt and equity, conventional mortgage financing, and unsecured bank financing, among other sources. There can be no assurance that financing from such sources will be available in the future or, if available, that such financing will be available on terms acceptable to the Company. YEAR 2000 COMPLIANCE The Company has assessed the impact of Year 2000 issues on the Company's business, results of operations, and financial condition. The Company anticipates substantially completing the testing of its information systems by the first quarter of 1999. The majority of the Company's critical information systems were purchased from outside vendors who have upgraded their applications to be Year 2000 compliant. The Company is also evaluating other Year 2000 implications associated with its community operations, such as elevators, security systems, HVAC systems and utilities, which will include contacting the providers of such systems and services to determine the status of their Year 2000 compliance and is developing contingency plans for those systems and services that may not be Year 2000 compliant. The Company anticipates substantially completing the testing of such systems and services by the second quarter of 1999. The total cost of 23 24 compliance measures is not estimated to be material and is being funded through operating cash flows and expensed as incurred. RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS This Form 10-Q contains certain forward-looking statements within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, the discussions of the Company's operating and growth strategy, including its development plans and possible acquisitions. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, those set forth under the caption "Risk Factors" in the Company's Prospectus Supplement, dated July 30, 1998, and the accompanying Prospectus, dated July 9, 1998. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could prove to be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. The Company undertakes no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On July 14, 1998, the Company issued an aggregate of 1,370,000 shares of Common Stock to the former shareholders of FGI in connection with the merger of FGI with and into the Company. The shares of Common Stock were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits 10.1 Fixed Rate Program Promissory Note Secured by Mortgage, dated July 9, 1998, by ARCLP - Charlotte, LLC to Heller Financial, Inc. in the original principal amount of $36,000,000.
24 25 10.2 Registration Rights Agreement, dated July 14, 1998, by and between American Retirement Corporation and Robert G. Roskamp, PHC, LLC, and The Edgar and Elsa Prince Foundation. 10.3 Shareholder Agreement, dated July 14, 1998, by and between American Retirement Corporation and Robert G. Roskamp. 10.4 Consulting Agreement dated July 14, 1998, by and Additionally, substantially all of such indebtedness is cross-defaulted. 27 Financial Data Schedule for SEC use only.
b. Reports on Form 8-K The Company filed a Current Report on Form 8-K, dated July 28, 1998, to report pursuant to Item 2 that the Company acquired 100% of the ownership interests in FGI and certain entities affiliated with FGI and with its chairman, and to enter into certain related transactions. The Current Report contained audited financial statements for the entities acquired pursuant to the FGI transaction and pro forma financial statements for the Company giving effect to the FGI transaction. The Company filed a Current Report on Form 8-K, dated July 30, 1998, to report the announcement of selected results of operations for the quarter ended June 30, 1998. The press release was filed as an exhibit to such Form 8-K. 25 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. American Retirement Corporation Date: November 5, 1998 By: /s/ George T. Hicks ------------------------------ George T. Hicks Executive Vice President and Chief Financial Officer (principal financial and accounting officer) EX-10.1 2 FIXED RATE PROGRAM PROMISSORY NOTE 1 Exhibit 10.1 FIXED RATE PROGRAM PROMISSORY NOTE SECURED BY MORTGAGE LOAN NO. 98-216 July 9, 1998 Brentwood, Tennessee MAKER: ARCLP - Charlotte, LLC, a Tennessee limited liability company MAKER'S ADDRESS: 111 Westwood Place, Suite 402 Brentwood, Tennessee 37027 PRINCIPAL AMOUNT: THIRTY-SIX MILLION AND NO/100 DOLLARS ($36,000,000.00), together with all other amounts added thereto pursuant to this Note or otherwise payable in accordance with the Loan Documents. PAYEE AND HOLDER: Heller Financial, Inc., a Delaware corporation, and its successors and assigns. PAYMENT ADDRESS: 500 West Monroe Street, 31st Floor Chicago, Illinois 60661 or such other address as Holder may hereafter designate in writing to Maker. PRINCIPAL(S): American Retirement Corporation, a Tennessee corporation 111 Westwood Place, Suite 402 Brentwood, Tennessee 37027 INITIAL PAYMENT DATE: August 1, 1998 MATURITY DATE: July 1, 2008, or any earlier date on which the entire unpaid Principal Amount shall be paid or required to be paid in full, whether by prepayment, acceleration or otherwise. AMORTIZATION PERIOD: 30 Years. AMORTIZATION SCHEDULE: The amortization schedule attached hereto as Exhibit A. CONTRACT RATE: A rate of interest equal to six and 87/100 percent (6.87%) per annum. DEFAULT RATE: The Contract Rate plus 500 basis points per annum. LATE CHARGE: Five percent (5%) of each delinquent payment. PROPERTY: Carriage Club of Charlotte 5800 Old Providence Road Charlotte, Mecklenburg County, North Carolina MORTGAGE: The mortgage or deed of trust, assignment of rents and security agreement and fixture filing of even date herewith (and any modification, renewal or extension thereof) securing repayment of the Loan and encumbering, among other things, the Property. LOAN: The loan from Holder to Maker evidenced by this Note and secured by the other Loan Documents. LOAN DOCUMENTS: This Note, the Mortgage and any other documents evidencing or securing the Loan or executed in connection therewith, and any modification, renewal or extension thereof. NOTE: This Fixed Rate Program Promissory Note Secured by Mortgage and any modifications, renewals or extensions hereof and any substitutions therefor.
1. PROMISE TO PAY. FOR VALUE RECEIVED, Maker promises to pay to the order of Holder at the Payment Address the Principal Amount (or so much thereof as may from time to time be outstanding) on or before the Maturity Date, together with interest thereon as hereinafter set forth, payable in lawful money of the United States of America. 2 2. PRINCIPAL AND INTEREST. So long as no Event of Default exists, interest shall accrue on the Principal Amount from time to time outstanding at the Contract Rate based on the actual number of days in each given month and a 360 day year. Principal and interest shall be paid to the Holder hereof as follows: (a) On the Initial Payment Date and on the first day of each month thereafter, Maker shall pay to Holder monthly payments of principal and interest due for such period based upon the Amortization Schedule; and (b) the outstanding Principal Amount of this Note, together with all accrued and unpaid interest, shall be due and payable in full on the Maturity Date. Whenever any payment is stated to be due or a computation is to be made on a day which is not a business day, such payment or computation will be made on the next succeeding business day, and such extension of time will be included in the computation of interest. 3. PREPAYMENT AND DEFEASANCE. 3.1 Prepayments. This Note may not be prepaid in whole or in part during the term hereof, except as otherwise specifically provided herein. 3.2 Prepayment Fee. In the event the principal amount of this Note is paid prior to July 1, 2008 as a result of Holder's exercise of its rights upon Maker's default and acceleration of the Maturity Date of this Note (irrespective of whether foreclosure proceedings have been commenced), Holder shall be entitled to collect and Maker shall pay to Holder, in addition to any other sums due hereunder or under any of the other Loan Documents, a prepayment fee in an amount equal to the Yield Maintenance Amount. "YIELD MAINTENANCE AMOUNT" means an amount, never less than zero, equal to the present value of a series of "Monthly Amounts", assumed to be paid at the end of each month remaining from the date of prepayment through July 1, 2008, discounted at the U.S. Securities Rate. "MONTHLY AMOUNT" shall mean the following: (A) The Contract Rate, MINUS (B) The yield ("U.S. SECURITIES RATE"), as of the date of such prepayment, as published by the Federal Reserve System in its "Statistical Release H.15(519), Selected Interest Rates" under the caption "U.S. Government Securities/Treasury Constant Maturities", for a U.S. Government Security with a term equal to that remaining on this Note on the date of such prepayment (which term may be obtained by interpolating between the yields published for specific whole years), DIVIDED BY TWELVE (12) AND THE QUOTIENT THEREOF THEN MULTIPLIED BY (C) The amount prepaid on the date of such prepayment. All percentages shall be rounded to the nearest one hundred thousandth percent and dollar amounts to the nearest whole dollar. 3.3 End of Term. Notwithstanding the foregoing, the Loan may be paid without a prepayment fee or premium during the last ninety (90) days of the loan term. If the Loan has been defeased pursuant to Subparagraph 3.4, it may not be prepaid prior to July 1, 2008. 3.4 Defeasance. Notwithstanding any provision of this Paragraph 3 to the contrary, at any time after the later of (a) three (3) years after the closing of the Loan or (b) if Holder securitizes the Loan within three (3) years after the closing of the Loan, two (2) years after the "startup day," within the meaning of Section 860G(a)(9) of the Internal Revenue Code of 1986, as amended from time to time or any successor statute (the "CODE"), of a "real estate mortgage investment conduit" ("REMIC"), within the meaning of Section 860D of the Code, that holds this Note, and provided no Event of Default has occurred and is continuing hereunder or under any of the other Loan Documents, Maker may cause the release of the Property from the lien of the Mortgage and the other Loan Documents upon the satisfaction of the following conditions (the "DEFEASANCE"): (i) Not less than thirty (30) days prior written notice shall be given to Holder specifying a date (the "RELEASE DATE") on which the Defeasance Deposit (as hereinafter defined) is to be made, such date -2- 3 being a day on which a regularly scheduled monthly installment of principal and interest is required to be paid pursuant to Paragraph 2 above (a "DEBT SERVICE PAYMENT DATE"); (ii) All accrued and unpaid interest and all other sums due under this Note and under the other Loan Documents up to and including the Release Date, including, without limitation, all costs and expenses incurred by Holder or its agents in connection with the Defeasance (including, without limitation, the purchase of the Defeasance Collateral [as hereinafter defined] and the preparation of the Defeasance Security Agreement [as hereinafter defined] and related documentation, including reasonable attorneys' fees and expenses), shall be paid in full on or prior to the Release Date; (iii) Maker shall deliver to Holder on or prior to the Release Date: a) The estimated amount necessary to purchase the Defeasance Collateral (the "DEFEASANCE DEPOSIT"); b) A pledge and security agreement, in form and substance satisfactory to Holder in its sole discretion, creating a first priority security interest in favor of Holder in the Defeasance Deposit and the Defeasance Collateral (the "DEFEASANCE SECURITY AGREEMENT"); c) A certificate of Maker certifying that it is requesting the lien against the Property be released to facilitate a disposition or refinancing of, or other customary commercial transaction involving, the Property and that all of the other requirements set forth in this Paragraph 3.4 have been satisfied; d) An opinion of counsel for Maker in form and substance and delivered by counsel satisfactory to Holder in its sole discretion stating, among other things, that (i) the Defeasance Deposit has been duly and validly assigned and delivered to Holder; (ii) the posting of the Defeasance Deposit will not adversely affect the tax status of the REMIC under the Code; and (iii) Holder has a perfected first priority security interest in the Defeasance Collateral and that the Defeasance Security Agreement is enforceable against Maker in accordance with its terms; and e) Such other certificates, documents or instruments as Holder may reasonably require; and (iv) Holder receives reasonable assurances that the securities of the REMIC ("SECURITIES") that directly or indirectly holds this Note will not have a downgrade, withdrawal or qualification of the credit rating then assigned to the Securities by any rating agencies ("APPLICABLE RATING AGENCIES") as a result of the Defeasance; and (v) The holder of the Defeasance Collateral, which shall be Maker or a designee of Maker, shall be a single purpose entity, which shall not own any other assets or have any other liabilities or operate any other property. Notwithstanding anything that may be contained herein to the contrary, the Loan may not be defeased during the last ninety (90) days of the loan term if the Loan has not previously been defeased. 3.5 Defeasance Collateral. Upon compliance with the requirements of Subparagraph 3.4 above: (i) Holder shall use the Defeasance Deposit in accordance with Maker's express written instructions to purchase direct, non-callable obligations of the United States of America that provide, without reinvestment, for payments not later than the due dates of all successive monthly Debt Service Payment Dates occurring after the Release Date, with each such payment being equal to or greater than the amount of the corresponding installment of principal and interest required to be paid under this Note (including all amounts due on July 1, 2008 for the balance of the term hereof (the "DEFEASANCE COLLATERAL") as certified by an independent accountant satisfactory to Holder, each of which shall be duly endorsed as directed by Holder or accompanied by a written instrument of transfer in form and substance wholly satisfactory to Holder (including, without limitation, such instruments as may be required by the depository institution holding such securities to effectuate book-entry transfers and pledges through the book-entry facilities of such institution) in order to create a first priority security interest therein in favor of Holder in conformity with all applicable state and federal laws governing granting of such security interests. In connection with the conditions set forth above, Maker hereby appoints Holder as its agent and attorney-in-fact for the purpose of purchasing the Defeasance Collateral with the Defeasance Deposit. Maker, pursuant to the Defeasance Security Agreement, shall authorize and direct the payments received from the direct, non-callable obligations of the United States of America to be made directly to Holder and applied to satisfy the obligations of Maker under this Note. Any portion of the Defeasance Deposit in excess of the amount necessary to purchase the Defeasance Collateral and satisfy all of Maker's obligations to Holder shall be returned to Maker without interest. -3- 4 (ii) The Property shall be released from the lien of the Mortgage and the other Loan Documents, and the Defeasance Collateral shall constitute collateral which shall secure this Note and all other obligations under the Loan Documents. 3.6 Assignment. Upon the release of the Property in accordance with this Paragraph 3, Maker may assign all its obligations and rights under this Note, together with the pledged Defeasance Collateral, to a successor entity designated by Maker and approved by Holder in its sole discretion. Such successor entity shall execute an assumption agreement in form and substance satisfactory to Holder in its sole discretion pursuant to which it shall assume Maker's obligations under this Note and the Defeasance Security Agreement. As conditions to such assignments and assumption, Maker shall (i) deliver to Holder an opinion of counsel in form and substance and delivered by counsel satisfactory to Holder in its sole discretion stating, among other things, that such assumption agreement is enforceable against Maker and such successor entity in accordance with its terms and that this Note, the Defeasance Security Agreement and the other Loan Documents, as so assumed, are enforceable against such successor entity in accordance with their respective terms, (ii) if required by the Applicable Rating Agencies, pay the reasonable legal expenses of Holder's counsel incurred in connection with the delivery of a non-consolidation opinion with respect to the successor entity, if any, in form and substance satisfactory to the Applicable Rating Agencies, and (iii) pay all costs and expenses incurred by Holder or its agents in connection with such assignment and assumption (including, without limitation, the review of the proposed transferee and the preparation of the assumption agreement and related documentation). Upon such assumption, Maker shall be relieved of its obligations hereunder, under the other Loan Documents and under the Defeasance Security Agreement. 3.7 No Further Rights. Upon the release of the Property in accordance with this Paragraph 3, Maker shall have no further right to prepay this Note pursuant to the other provisions of this Paragraph 3 or otherwise. Notwithstanding the foregoing, the application of any insurance proceeds or condemnation awards to the Indebtedness in accordance with Paragraph 5 of the Mortgage shall not result in the payment of any prepayment fee, or Yield Maintenance Amount. 4. DEFAULT. 4.1 Events of Default. The following shall constitute an "Event of Default" under this Note: (i) failure to pay any amounts owed pursuant to this Note within five (5) calendar days after such payment is due; or (ii) the occurrence of any Event of Default under any of the other Loan Documents. 4.2 Remedies. So long as an Event of Default remains outstanding: (a) interest shall accrue at the Default Rate and, to the extent not paid when due, shall be added to the Principal Amount; (b) Holder may, at its option and without notice (such notice being expressly waived), declare the unpaid Principal Amount immediately due and payable. Holder's rights, remedies and powers, as provided in this Note and the other Loan Documents, are cumulative and concurrent, and may be pursued singly, successively or together against Maker, the security described in the other Loan Documents, any guarantor(s) hereof and any other security given at any time to secure the payment hereof, all at the sole discretion of Holder. Additionally, Holder may resort to every other right or remedy available at law or in equity without first exhausting the rights and remedies contained herein, all in Holder's sole discretion. Failure of Holder, for any period of time or on more than one occasion, to exercise its option to accelerate the Maturity Date shall not constitute a waiver of the right to exercise the same at any time during the continued existence of any Event of Default or any subsequent Event of Default. 5. LATE CHARGE. If payments of principal and/or interest, or any other amounts under the other Loan Documents are not timely made and remain overdue for a period of five days, Maker, without notice or demand by Holder, promptly shall pay the Late Charge computed on such past due amounts. Until paid, the Late Charge shall be added to the Principal Amount. Nothing in this Note shall be construed as an obligation on the part of Holder to accept, at any time, less than the full amount then due hereunder, or as a waiver or limitation of Holder's right to compel prompt performance. 6. JURY TRIAL WAIVER. MAKER, AND HOLDER BY ITS ACCEPTANCE OF THIS NOTE, HEREBY WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS NOTE AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY MAKER AND HOLDER, AND MAKER ACKNOWLEDGES THAT NEITHER THE HOLDER NOR ANY PERSON ACTING ON BEHALF OF THE HOLDER HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN -4- 5 ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. MAKER AND HOLDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT MAKER AND HOLDER HAVE ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS NOTE AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. MAKER AND HOLDER FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL. 7. WAIVER. Maker, for itself and all endorsers, guarantors and sureties of this Note, and each of them, and their heirs, legal representatives, successors and assigns, respectively hereby waives presentment for payment, demand, notice of nonpayment, notice of dishonor, protest of any dishonor, notice of protest and protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note, and agrees that its liability shall be unconditional and without regard to the liability of any other party and shall not be in any manner affected by any indulgence, extension of time, renewal, waiver or modification granted or consented to by the Holder. Maker, for itself and all endorsers, guarantors and sureties of this Note, and each of them, and their heirs, legal representatives, successors and assigns, respectively hereby consents to every extension of time, renewal, waiver or modification that may be granted by Holder with respect to the payment or other provisions of this Note, and to the release of any makers, endorsers, guarantors or sureties, or of any collateral given to secure the payment hereof, or any part hereof, with or without substitution, and agrees that additional makers or guarantors or endorsers may become parties hereto without notice to Maker and without affecting the liability of Maker hereunder. 8. SECURITY, APPLICATION OF PAYMENTS. This Note is secured by the liens, encumbrances, and obligations created hereby and by the other Loan Documents and the terms and provisions of the other Loan Documents are hereby incorporated herein. Each payment on the Loan is to be applied when received first to the payment of any fees, expenses or other costs Maker is obligated to pay hereunder or under the terms of the other Loan Documents, second to the payment of any accrued and unpaid Late Charge, third to the payment of interest on the Principal Amount from time to time remaining unpaid, and the remainder of such payment shall be used to reduce the Principal Amount. 9. MISCELLANEOUS. 9.1 Amendments. This Note may not be terminated or amended orally, but only by a termination or amendment in writing signed by Holder. 9.2 Lawful Rate of Interest. In no event whatsoever shall the amount of interest paid or agreed to be paid to Holder pursuant to this Note exceed the highest lawful rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision of this Note and the other Loan Documents shall involve exceeding the lawful rate of interest which a court of competent jurisdiction may deem applicable hereto, then ipso facto, the obligation to be fulfilled shall be reduced to the highest lawful rate of interest permissible under such law and if, for any reason whatsoever, Holder shall receive, as interest, an amount which would be deemed unlawful under such applicable law, such interest shall be applied to the Principal Amount (whether or not due and payable), and not to the payment of interest, or refunded to Maker if such Principal Amount has been paid in full. 9.3 Captions; Definitions. The captions of the Paragraphs of this Note are for convenience only and shall not be deemed to modify, explain, enlarge or restrict any of the provisions hereof. Each of the terms defined before Paragraph 1 hereof shall have the meaning set forth following such term when used throughout this Note. 9.4 Severable Provisions. Every provision of this Note is intended to be severable. If any term or provision hereof is declared by a court of competent jurisdiction to be illegal, invalid or unenforceable for any reason whatsoever, such illegality, invalidity or unenforceability shall not affect the balance of the terms and provisions hereof, which terms and provisions shall remain binding and enforceable. 9.5 Notices. Notices shall be given under this Note in conformity with the terms and conditions of the Mortgage. -5- 6 9.6 Joint and Several. The obligations of Maker in this Note shall be joint and several obligations of Maker and of each Maker, if more than one, and of each Maker's heirs, personal representatives, successors and assigns. 9.7 Time of Essence. Time is of the essence of this Note and the performance of each of the covenants and agreements contained herein. 9.8 Governing Law. This Note shall be governed by the laws of the State of Illinois. 10. EXCULPATION. Except as set forth below, neither Maker nor any Principal shall be personally liable to pay the Principal Amount, or any other amount due, or to perform any obligation, under the Loan Documents, and Holder agrees to look solely to the Property and any other collateral heretofore, now, or hereafter pledged by any party to secure the Loan. Maker and each Principal, jointly and severally, shall be personally liable for all losses, damages, costs and expenses including attorneys' fees and expenses incurred by Holder as a result of: (i) the collection and receipt of proceeds and income from the Property and the other assets and obligations securing the Loan by or for the benefit of Maker or any Principal following an Event of Default which are not paid to Holder or applied to the Property in the ordinary course of business; (ii) fraud; (iii) material misrepresentation; (iv) misapplication or misappropriation of funds which come into the possession of Maker or any Principal; (v) intentional or material waste to the Property; (vi) the breach of the obligations set forth in the Hazardous Substance Indemnification Agreement from Maker and Principals to Holder of even date herewith, as hereafter amended, if at all; (vii) the breach of the provisions contained in Paragraph 15 (transfers of the property or beneficial interest in Maker; assumption) of the Mortgage; (viii) the breach of the provisions contained in Paragraph 16 (no additional liens) of the Mortgage; or (ix) the breach of the provisions contained in Paragraph 17 (single asset entity) of the Mortgage. The foregoing shall in no way limit or impair the enforcement against the Property or any other security granted by the Loan Documents of any of the Holder's rights and remedies pursuant to the Loan Documents. IN WITNESS WHEREOF, Maker does execute this Note as of the date set forth above. MAKER: ARCLP - CHARLOTTE, LLC, (SEAL) a Tennessee limited liability company By: ARC CHARLOTTE, INC., a Tennessee corporation, its Managing Member Attest: By: By: ----------------------- --------------------------------------- Name: Name: George T. Hicks --------------------- --------------------------------------- Its: , Secretary Its: Executive Vice President - Finance ---------------------- ---------------------------------- (CORPORATE SEAL) -6- 7 EXHIBIT A AMORTIZATION SCHEDULE EX-10.2 3 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.2 REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of the 14th day of July, 1998, by and among AMERICAN RETIREMENT CORPORATION, a Tennessee corporation (the "Company"), and the shareholders of the Company listed on Exhibit A attached hereto (the "Shareholders"). WITNESSETH: WHEREAS, Freedom Group, Inc., a Florida corporation ("FGI"), the Shareholders, and the Company are parties to that certain Agreement and Plan of Merger, dated as of May 29, 1998 (the "Merger Agreement"), pursuant to which the Company has agreed to grant to the Shareholders certain registration rights with respect to shares of the common stock, par value $.01 per share, of the Company ("Common Stock") into which the Shareholders' shares of the capital stock of FGI shall be converted; NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the parties hereto agree as follows: 1. Definitions - As used in this Agreement, the following terms shall have the following meanings: "Affiliate" shall have the meaning set forth in Rule 144 promulgated under the Securities Act. "Holder" means each Shareholder that owns Registrable Securities, including their respective permitted successors and assigns who acquire Registrable Securities, directly or indirectly, from a Shareholder; provided, however, that a successor or assign will become a Holder and thereby be entitled to rights under this Agreement only if such successor or assign is a family member of a Holder, a trust for the benefit of a Holder or a family member of a Holder, or a transferee who receives such Registrable Securities as part of a pro rata distribution by a Holder that is not a natural person. For purposes of this Agreement, the Company may deem and treat the holder of a Registrable Security reflected on the Company's transfer agent's records as the Holder and absolute owner thereof and the Company shall not be affected by any notice to the contrary. "Prince Entities" means PHC, L.L.C., a Michigan limited liability company, and The Edgar and Elsa Prince Foundation, a Michigan corporation. "Registrable Securities" means (a) shares of Common Stock to be delivered to the Shareholders pursuant to the Merger Agreement (the "Merger Shares") and (b) any shares of Common Stock issued or issuable in respect of the Merger Shares by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, reclassification, merger, or consolidation, and any other securities of the Company issued pursuant to any pro rata distribution 2 with respect to such Merger Shares. For purposes of this Agreement, a Registrable Security ceases to be a Registrable Security upon the earlier of: (x) when its offer and sale has been effectively registered under the Securities Act and it has been sold or distributed in accordance with such effective registration statement; (y) when it has been or may be sold or distributed to the public in one transaction with all other Merger Shares owned by the Holder thereof pursuant to Rules 144 or 145 (or any successor or similar provisions) under the Securities Act; or (z) on the third anniversary of the date of this Agreement. "Roskamp" means Robert G. Roskamp. "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, if, at any time on or after July 14, 1999, the Company is and continues to be eligible to effect a Registration Statement on Form S-3 covering resales of Common Stock by the Company's shareholders and the Company shall receive a written request from Roskamp to register under the Securities Act twenty-five percent (25%) or more of the Registrable Securities held by Roskamp and his Affiliates, within 15 business days of receipt of such request the Company shall give written notice of such registration request to all other 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 the date of such notice. (b) Subject to the terms and conditions set forth herein, if, at any time on or after July 14, 1999, the Company is and continues to be eligible to effect a Registration Statement on Form S-3 covering resales of Common Stock by the Company's shareholders and the Company shall receive a written request from the Prince Entities to register under the Securities Act twenty-five percent (25%) or more of the Registrable Securities held by the Prince Entities, within 15 business days of receipt of such request the Company shall give written notice of such registration request to all other 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 the date of such notice (any Holder electing to include Registrable Securities in a registration statement pursuant to Section 2(a) or (b) is referred to herein as a "Requesting Holder"). (c) In the event the Company receives a request pursuant to Section 2(a) or (b), 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 the Registrable Securities requested to be included by each of such Requesting Holders; provided, however, that such requests shall express the present intention of the Requesting Holders to offer or cause the offering of such Registrable Securities for 2 3 distribution and shall state the intended method of distribution thereof. Each registration statement filed pursuant to Section 2(a) or (b) 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 Section 2(a) or (b) is subject to each of the following limitations, conditions, and qualifications: (i) If the Company shall have previously filed a Demand Registration Statement by reason of a request pursuant to this Section 2 that shall have become effective and remained effective for the period specified in Section 4(a)(ii), then the Company shall not be required to effect any additional registration requested pursuant to this Section 2 for a period of twelve months from the date of the termination of the effectiveness of such prior Demand Registration Statement. (ii) 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 Section 2(a) or (b) 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. (iii) The Company may postpone for a period of 90 days the filing or the effectiveness of a registration requested pursuant to Section 2(a) or (b) 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 exist, the Company shall give notice of that fact to the Requesting Holders and shall proceed with the registration unless the Requesting 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 Requesting Holders, to withdraw their request for registration, and such withdrawn request shall not constitute a request hereunder. (iv) The Company shall not be required to effect any registration pursuant to Section 2(a) or (b) unless such registration relates to Registrable Securities representing at least twenty-five percent (25%) of the then outstanding shares of such Registrable Securities. In addition, the Company shall not be required to effect any registration pursuant to Section 2(a) or (b) with respect to Registrable Securities which may be sold by the Holder thereof in 3 4 a single transaction pursuant to Rule 144 or 145 (or any successor or similar provisions) under the Securities Act. (v) The obligation of the Company to register the offer and sale of Registrable Securities pursuant to Section 2(a) or (b) shall expire with respect to such subsection after a Demand Registration Statement filed by reason of a request pursuant to such subsection shall have become effective and remained effective for the period specified in Section 4(a)(ii) hereof. (d) The Company agrees that, except as otherwise permitted by Section 2(f) 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 15th day prior to, and ending on the earlier of the 45th 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"). (e) The Company may, at its option and in its sole discretion, require that all shares proposed to be sold pursuant to a Demand Registration Statement 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. (f) 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) or (b) any shares of Common Stock that it or they shall determine so to include (the "Additional Registrable Securities") and the consent of the Requesting Holders shall not be required with respect thereto; provided, 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 Requesting 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 Requesting Holders' Registrable Securities. 3. Incidental Registration. Subject to the terms and conditions set forth herein, if the Company proposes on or after January 14, 1999 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 in an underwritten public offering, 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 Registrable Securities (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. 4 5 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) 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. (b) 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, or materially adversely affect the pricing 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 being exercised pursuant to a demand registration right or are expressly superior to the rights of the Holders pursuant to this Agreement, in which case such Other Holder's number of shares shall not be reduced pursuant to this Section 3(b)) 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 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 any 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. (c) 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. 5 6 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) or (b) 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 the Holders are notified by the Company that they may commence the sale of the Registrable Securities covered by such registration statement 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; (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 and each supplement thereto 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 that 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 6 7 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 Requesting 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) and make such representations and warranties to the Requesting Holders and underwriter(s) (in the case of underwritten offerings) in form, substance, and scope as are customarily made by issuers to sellers or underwriter(s) in similar offerings; (ix) make available for inspection by the Requesting 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 Requesting 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 Requesting 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 7 8 information in such Records has been generally disseminated to the public. Each Requesting 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 Requesting 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 Requesting Holders or the managing underwriter(s) reasonably request; (xi) obtain for delivery to the Requesting Holders and the underwriter(s) or agent an opinion or opinions from counsel for the Company in customary form and reasonably satisfactory to the Requesting 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 any Demand 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; (xv) cooperate with the Requesting 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) Each Holder shall provide (in writing and signed by each Holder 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 8 9 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 in which such Holder's Registrable Securities will be included. (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 hereby agrees (and agrees to execute any additional documents reasonably requested by the underwriters for the Company to such effect), 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) or (b) 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) 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 (b) or Section 3 hereof, as then in effect, contains any untrue statement of a 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. (e) The Company shall pay all expenses incurred in connection with any Demand Registration Statement filed pursuant to Section 2(a) or (b) hereof and any registration statement filed pursuant to Section 3 hereof, including, without limitation, all SEC and blue sky registration and filing fees (including NASD fees), printing expenses, transfer agents and registrar's 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, her, or its Registrable Securities sold pursuant to any such registration statement and any fees and expenses of his, her, or its own counsel. (f) Upon the filing of a registration statement that includes a Holder's Registrable Securities pursuant to a request from such Holder delivered to the Company in accordance with Section 2(a) or (b) or Section 3, such Holder shall be deemed to have irrevocably committed to sell 9 10 such Holder's Registrable Securities pursuant to the registration statement and shall be obligated to sell such Registrable Securities on the terms set forth in the registration statement. 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, or in any related 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, the underwriters participating in the offering, the underwriters' directors and officers, and each person, if any, who controls (within the meaning of the Securities Act) the Company or the underwriters 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, or in any related 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 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 10 11 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 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 Agreement 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 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, 11 12 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 Section 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 Agreement 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 Agreement, 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(e) 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, powers of attorney, underwriting agreements, and other documents customary in a proposed registration or deemed necessary by the Company to evidence such Holder's agreements and obligation under this Agreement, the Company will have no obligation to register such Holder's Registrable Securities. 7. Effect of Breach. In addition to any other statutory, equitable, or common law remedy the Company may have, in the event a Holder materially breaches any of its obligations pursuant to this Agreement and fails to cure the breach within ten days of its receipt of notice from the Company of such breach, such Holder shall have no further rights under Section 2 and 3 hereof and this Agreement will thereupon terminate with respect to such Holder and be of no continued force or effect. Notwithstanding the foregoing, in the event a Holder materially breaches any of its obligations hereunder and the Company reasonably determines that such breach may adversely affect the timing or other aspects of any offering, this Agreement shall terminate immediately with respect to such Holder and be of no continued effect. Additionally, in no event will a Holder have the rights set forth in Section 2 and 3 hereof during any period in which such Holder is in material breach of or material default under any other written agreement between such Holder and the Company. 8. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be effective upon the earlier of (a) 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 if delivered other than on a business day during normal business hours where such notice is to be received and (b) on the third business day following the date of mailing, by registered or certified mail, return receipt requested, postage prepaid, addressed as set forth below: 12 13 If to the Company: American Retirement Corporation 111 Westwood Place, Suite 402 Brentwood, Tennessee 37027 Telecopy (615) 221-2269 Attention: Chief Executive Officer with a copy to: Bass, Berry and Sims PLC 2700 First American Center Nashville, Tennessee 37238 Telecopy (615) 742-6266 Attention: T. Andrew Smith If to a Holder, to the address of such Holder shown on the stock records of the Company. The Company may from time to time change its address for notices under this Section 8 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 his, her, or its address for notices under this Section 8 by giving at least 10 days' written notice of such changed address to the Company. 9. Additional Registration Rights. Nothing in this Agreement 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 of whether such registration rights are senior, pari passu, or subordinate to the rights of the Holders hereunder; provided, however, that the Company shall not, without the prior consent of the Holders of at least fifty percent (50%) of the Registrable Securities, grant to any holder of Common Stock incidental registration rights superior to the rights of the Holders under Section 3 hereof. 10. Headings. The headings herein are for convenience of reference only, do not constitute a part of this Agreement, and shall not be deemed to limit or affect any of the provisions hereof. 11. Successors and Assigns; Amendments. This Agreement 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 amend, modify, supplement, or revoke this Agreement at any time with the consent of the Holders of at least fifty percent (50%) of the Registrable Securities. 12. No Third Party Beneficiaries. This Agreement 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. 13 14 13. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Tennessee applicable to agreements made and to be performed wholly within that jurisdiction without regard to the principles of conflict of laws thereof. 14. Entire Agreement; Integration. This Agreement supersedes all prior and contemporaneous agreements between or among any of the parties hereto with respect to the subject matter contained herein and therein and this Agreement embodies the entire understanding among the parties relating to such subject matter. 15. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, and all of which shall together constitute one and the same instrument. All signatures need not be on the same counterpart. 16. Severability. If any provision of this Agreement shall be invalid or unenforceable, such invalidity or unenforceability shall not affect the validity and enforceability of the remaining provisions of this Agreement, unless the result thereof would be unreasonable, in which case the parties hereto shall negotiate in good faith as to appropriate amendments hereto. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 14 15 IN WITNESS WHEREOF, this Agreement has been duly executed as of the date first written above. AMERICAN RETIREMENT CORPORATION By: /s/ H. Todd Kaestner -------------------------------- Name: H. Todd Kaestner -------------------------------- Title: Executive Vice President -------------------------------- SHAREHOLDERS: /s/ Robert G. Roskamp --------------------------------------- Robert G. Roskamp PHC, L.L.C. By: /s/ Robert Haveman -------------------------------- Name: Robert Haveman -------------------------------- Title: President -------------------------------- THE EDGAR AND ELSA PRINCE FOUNDATION By: /s/ Robert Haveman -------------------------------- Name: Robert Haveman -------------------------------- Title: Secretary/Treasurer -------------------------------- 15 16 EXHIBIT A Robert G. Roskamp PHC, L.L.C., a Michigan limited liability company The Edgar and Elsa Prince Foundation, a Michigan corporation 16 EX-10.3 4 SHAREHOLDER AGREEMENT 1 EXHIBIT 10.3 SHAREHOLDERS' AGREEMENT This SHAREHOLDERS' AGREEMENT (the "Agreement"), dated as of July 14, 1998, is made by and among American Retirement Corporation, a Tennessee corporation ("ARC"), and Robert G. Roskamp ("Roskamp"). WHEREAS, Roskamp has received 822,000 shares of common stock, par value $.01 per share, of ARC (the "Common Stock") in connection with the merger of Freedom Group, Inc., a Florida corporation ("FGI"), with and into ARC pursuant to that certain Agreement and Plan of Merger, dated May 29, 1998, by and among ARC, FGI, and the shareholders of FGI (the "Merger Agreement"); and WHEREAS, ARC and Roskamp desire to enter into this Agreement to set forth certain rights and obligations of Roskamp. NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, ARC and Roskamp agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the meanings set forth below: "Affiliate" means (a) any member of Roskamp's immediate family, or (b) any Person that, directly or indirectly through one or more intermediaries, is controlled by Roskamp or any member of his immediate family, with control being presumed by a greater than 10% ownership interest. "Disinterested Members of the Board of Directors of ARC" means the members of the Board of Directors of ARC other than Roskamp, any Affiliate of Roskamp, and the director appointed pursuant to Section 2 hereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. "Holder" means Roskamp and his Permitted Transferee(s), if any. "Merger Shares" means shares of Common Stock received by Roskamp pursuant to the Merger Agreement. "Permitted Transferee" means a family member of Roskamp or a trust for the benefit of Roskamp or a family member of Roskamp; provided such transferee agrees to be bound by the terms of this Agreement as if such transferee were originally named as a party herein and delivers to ARC the agreement set forth as Exhibit A hereto. 2 "Person" means an individual, a corporation, a limited liability company, a partnership, an association, a joint stock company, a trust, or any unincorporated organization. "Registration Rights Agreement" means the Registration Rights Agreement, dated the date hereof, between ARC and certain of the former shareholders of FGI. 2. Board Representation. (a) As soon as practicable following the date hereof, the Board of Directors of ARC shall take action to enlarge the Board of Directors and appoint Roskamp to serve as a Class II director of ARC, which class will stand for reelection at ARC's annual meeting of shareholders to be held during 1999. During the term of this Agreement and for so long as the Holders own greater than fifty percent (50%) of the Merger Shares (the "Director Term"), ARC shall use its best efforts to cause Roskamp or Roskamp's designee (the "Roskamp Designee") to be recommended to ARC's shareholders for election as a Class II director at each annual meeting of ARC's shareholders at which Class II directors stand for reelection. In the event the Roskamp Designee serving as a director ceases to serve as a director of ARC during the Director Term as a result of death or resignation, ARC shall appoint as a Class II director such other person as Roskamp may designate. (b) ARC shall have the right to approve the Roskamp Designee, such approval not to be unreasonably withheld. 3. Disposition of Shares. So long as this Agreement remains in effect, except for transfers by Roskamp to a Permitted Transferee or in connection with the sale of Merger Shares pursuant to the terms of the Registration Rights Agreement, no Holder or any of his or its Affiliates will, directly or indirectly, without the prior written consent of the majority of the Disinterested Members of the Board of Directors of ARC, sell, transfer, pledge, or otherwise dispose, by gift or otherwise, during any thirty day (30) period a number of shares of Common Stock which exceeds the greater of: (x) one percent of the shares of Common Stock then outstanding, and (y) the average weekly reported trading volume of the Common Stock on the New York Stock Exchange or such other exchange or quotation system on which the Common Stock is then traded for the four calender weeks preceding the date of the first such sale, transfer, pledge, or other disposition. 4. Restrictions on Certain Other Transactions. So long as this Agreement remains in effect, no Holder or any of his or its Affiliates will, directly or indirectly, without the prior written consent of the majority of the Disinterested Members of the Board of Directors of ARC: (a) acquire, or offer or propose to acquire, beneficial ownership of any shares of Common Stock or other securities of ARC (or direct or indirect rights or options to acquire any securities of ARC), except by way of stock dividends or other distributions made in respect of the Merger Shares; 2 3 (b) acquire or agree to acquire, by purchase or otherwise, more than one percent (1%) of any class of equity securities of any Person that, prior to the time of such acquisition, is publicly disclosed (by filing with the Securities and Exchange Commission or otherwise) or is otherwise known by such Holder or his or its Affiliate to be the beneficial owner of more than five percent (5%) of the outstanding shares of Common Stock or other securities of ARC (or direct or indirect rights or options to acquire any securities of ARC); (c) solicit proxies, seek to induce any other Person to solicit proxies, or become a "participant" in a "solicitation" of proxies, as those terms are defined in Item 4 of Schedule 14A and Rule 14A-1 under the Exchange Act, in respect of any shares of capital stock of ARC or call any shareholders meeting or initiate or propose, or otherwise solicit shareholders of ARC to approve or disapprove, any shareholder proposal; (d) enter into any shareholders' agreement or other agreement of similar effect with respect to the ownership or disposition of any shares of Common Stock, the voting of any shares of Common Stock, or the control of ARC, or deposit any securities in a voting trust or subject such securities to a voting trust agreement or any other agreement of similar effect with respect to ARC, other than, in each such case, an agreement, voting trust, or other arrangement involving only Holders and their respective Affiliates; (e) seek to advise, encourage, or influence any Person with respect to the voting of any securities of ARC, or induce, attempt to induce, or in any manner assist any other Person in initiating any shareholder proposal for a tender or exchange offer for securities of ARC or any change of control of ARC, or for the purpose of convening a shareholders meeting of ARC; (f) take any action (or permit any investment banker, attorney, accountant, or any other representative retained by any Holder or their respective Affiliates to take any action on behalf of such Holder or Affiliate), directly or indirectly, to (A) acquire or affect control of ARC, (B) participate in, or encourage the formation of, any "group" (as defined in Rule 13d-5 under the Exchange Act) with respect to any shares of capital stock of ARC (other than a group consisting solely of Holders and their Affiliates), or (C) initiate contact with any Person in an effort to solicit, encourage, or assist that Person in any proposal for a merger or other business combination involving ARC or for the acquisition of any of ARC's capital stock or any of ARC's assets; (g) make any public announcement or make any written or oral proposal or invitation to discuss any possibility, intention, plan, or arrangement relating to a tender or exchange offer for securities of ARC or a business combination (or other similar transaction that would result in a change of control), sale of assets, liquidation, or other extraordinary corporate transaction between the Holders or any of their respective Affiliates and ARC or take any action that might require ARC to make a public announcement regarding any of the foregoing; or 3 4 (h) enter into any oral or written contract, arrangement, or understanding (including, without limitation, any contract, arrangement, or understanding referred to in Item 6 of Schedule 13D under the Exchange Act) with respect to any of the foregoing, except for this Agreement and the Registration Rights Agreement. 5. Voting of Shares of Common Stock. During the Director Term, the Holders shall vote, and shall use their best efforts to cause their Affiliates to vote, at all meetings of shareholders of ARC, all shares of Common Stock then owned by them in favor of the persons nominated by ARC's Board of Directors to serve on the Board of Directors of ARC. 6. Termination of this Agreement. This Agreement shall terminate upon the earlier of (a) the execution and delivery by ARC and the Holders of a written agreement terminating this Agreement, or (b) such time as the Holders and their Affiliates own less than 1% of the then outstanding Common Stock. 7. Share Certificates. The certificates representing the Merger Shares subject to this Agreement shall bear the following legend: "NOTICE: THE SALE, ASSIGNMENT, TRANSFER, OR OTHER DISPOSITION OR ENCUMBRANCE OF THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE AND THE VOTING THEREOF ARE SUBJECT TO CERTAIN TERMS AND RESTRICTIONS CONTAINED IN A SHAREHOLDERS' AGREEMENT, DATED AS OF JULY 14, 1998, BY AND AMONG AMERICAN RETIREMENT CORPORATION AND ROBERT G. ROSKAMP." 8. Assignment; Benefit. This Agreement and all of the provisions hereof shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, assigns, executors, administrators, or successors. Neither ARC nor Roskamp shall assign its respective rights or obligations hereunder without the written consent of the other parties hereto. 9. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Tennessee applicable to agreements made and to be performed wholly within that jurisdiction, without regard to the conflict of laws principles thereof. 10. Notices. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be effective upon the earlier of (a) 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 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 4 5 date of mailing, by registered or certified mail, return receipt requested, postage prepaid, addressed as set forth below: If to ARC: American Retirement Corporation 111 Westwood Place, Suite 402 Brentwood, Tennessee 37027 Telecopy: (615) 221-2269 Attention: Chief Executive Officer With a copy to: Bass, Berry & Sims PLC 2700 First American Center Nashville, Tennessee 37238 Telecopy: (615) 742-2766 Attention: T. Andrew Smith If to Roskamp: Robert G. Roskamp 1401 Manatee Avenue West, Suite 800 Bradenton, FL 34205 Telecopy: ARC may from time to time change its address for notices under this Section 10 by giving at least 10 days' written notice of such changed address to Roskamp. Roskamp may from time to time change his address for notices under this Section 10 by giving at least 10 days' written notice of such changed address to ARC. 11. Entire Agreement; Integration. This Agreement supersedes all prior and contemporaneous agreements between or among any of the parties hereto with respect to the subject matter contained herein and therein and this Agreement embodies the entire understanding among the parties relating to such subject matter. 12. Injunctive Relief. Each of the parties hereto acknowledges that in the event of a breach by any of them of any material provision of this Agreement, the aggrieved party may be without an adequate remedy at law. Each of the parties therefore agrees that in the event of such a breach hereof the aggrieved party may elect to institute and prosecute proceedings in any court of competent jurisdiction to enforce specific performance or to enjoin the continuing breach hereof. By seeking or obtaining any such relief, the aggrieved party shall not be precluded from seeking or obtaining any other relief to which it may be entitled. 5 6 13. Headings. The headings are for convenience of reference only, do not constitute a part of this Agreement, and shall not be deemed to limit or affect any of the provisions hereof. 14. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, and all of which shall together constitute one and the same instrument. All signatures need not be on the same counterpart. 15. Severability. If any provision of this Agreement shall be invalid or unenforceable, such invalidity or unenforceability shall not affect the validity and enforceability of the remaining provisions of this Agreement, unless the result thereof would be unreasonable, in which case the parties hereto shall negotiate in good faith as to appropriate amendments hereto. 16. Amendment and Waiver. This Agreement may be amended, and the observance of any term hereof may be waived, only with the written consent of ARC and Roskamp, or their respective successors and assigns. No such amendment or waiver will extend to or affect any obligation, covenant, or agreement not expressly amended or waived or impair any right consequent thereon. No course of dealing between ARC and Roskamp, or their respective successors and assigns, nor any delay in exercising any rights hereunder shall operate as a waiver of any rights hereunder. 17. Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees (including any fees incurred in any appeal) in addition to its costs and expenses and any other available remedy. 18. No Third Party Beneficiaries. This Agreement is intended for the benefit of ARC and Roskamp and his Permitted Transferees and is not for the benefit of, nor may any provision hereof be enforced by, any other person. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 6 7 IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the date first written above. AMERICAN RETIREMENT CORPORATION By: /s/ H. Todd Kaestner ---------------------------------- Name: /s/ H. Todd Kaestner ---------------------------------- Title: Executive Vice President ---------------------------------- ROBERT G. ROSKAMP /s/ Robert G. Roskamp ----------------------------------------- 7 8 Exhibit A AGREEMENT TO BE BOUND BY THE SHAREHOLDERS' AGREEMENT The undersigned, being the transferee of __________ shares of the common stock, par value $.01 per share, of American Retirement Corporation, a Tennessee corporation (the "Company"), as a condition to the receipt of such securities, acknowledges that matters pertaining to such securities are governed by the Shareholders' Agreement, dated as of _______________, 1998 (the "Agreement"), initially between the Company and Robert G. Roskamp ("Roskamp") and the undersigned hereby (1) acknowledges receipt of a copy of the Agreement, and (2) agrees to be bound by the terms of the Agreement, with the same effect as if the undersigned were originally named as a party under the Agreement. Agreed to this _____ day of ______________, ______. ________________________________ ________________________________* ________________________________* *Include address for notices. 8 EX-10.4 5 CONSULTING AGREEMENT 1 EXHIBIT 10.4 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT (the "Agreement") is made and entered into as of the 14th day of July, 1998, by and between Robert G. Roskamp ("Roskamp") and American Retirement Corporation, a Tennessee corporation ("ARC"). WITNESSETH: WHEREAS, ARC, Freedom Group, Inc., a Florida corporation ("FGI"), and the shareholders of FGI have entered into that certain Agreement and Plan of Merger, dated as of May 29, 1998 (the "Merger Agreement"), to provide for the merger of FGI with and into ARC (the "Merger"); and WHEREAS, the closing of the transactions contemplated by the Merger Agreement (the "Closing") are taking place as of the date hereof. NOW, THEREFORE, to induce ARC to proceed with the Closing and the Merger and in consideration of such Closing and Merger, and in further consideration of the mutual covenants and agreements contained herein and in the Merger Agreement, and intending to be legally bound thereby, the parties hereto do hereby agree as follows: 1. Engagement as Consultant. a. ARC hereby retains and engages Roskamp to render to ARC consulting services in respect of the operations, properties, and business of ARC as reasonably requested by ARC for a period ending on the third anniversary of the date hereof (the "Consulting Term"). Such services shall include, without limitation, (i) consultation with respect to the development of new ARC projects, (ii) assistance in the transition and integration of the operations of FGI with and into ARC, and (iii) consultation in connection with applications for master trust or condominium life estate concepts in developed or acquired communities. Roskamp hereby accepts such engagement and agrees to render such services upon the terms and conditions herein set forth. b. At any time and from time to time during the Consulting Term, at ARC's request, Roskamp agrees to assist and support ARC in any manner reasonably requested in order to effectuate the transactions contemplated by the Merger Agreement. c. It is understood that Roskamp is to act as a consultant and adviser to ARC and is not an employee, agent of, or co-venturer with ARC in any respect. Roskamp shall have no right, authority, or power to act for or on ARC's behalf. The relationship between ARC and Roskamp shall be that of independent contractor. 2. Noncompetition and Nonsolicitation. For a period of three (3) years from the date hereof, Roskamp will not, directly or indirectly: 2 a. own, manage, operate, control, or participate in the ownership, management, operation, or control of, or be connected as an officer, employee, partner, director, consultant, or otherwise with, or have any financial interest in or aid or assist anyone else in the conduct of any independent living, assisted living, nursing home, retirement community or any other business that is in competition in any way with ARC, or any affiliate thereof (a "Competing Business"), within a ten (10) mile radius of the operations or facilities of ARC, or any affiliate thereof. b. for so long as Roskamp is a director of ARC, and in addition to subsection (a) above, own, manage, operate, control, or participate in the ownership, management, operation, or control of, or be connected as an officer, employee, partner, director, consultant, or otherwise with, or have any financial interest in or aid or assist anyone else in the conduct of any Competing Business outside of a ten (10) mile radius of the operations or facilities of ARC, or any affiliate thereof unless, prior to entering into, or agreeing to, any such matter or arrangement, Roskamp first offers to ARC the right to manage and acquire such Competing Business. c. Notwithstanding anything in subsection 2(a) or (b) above to the contrary, Roskamp shall be permitted to (i) retain his ownership interests in the Currently Owned Communities, and (ii) own, manage, operate, control, finance and be involved with any business or enterprise that is located in Maricopa County, Arizona and that is operated by a joint venture, partnership or company in which Sun Health Properties Investment or its affiliates has a significant and meaningful ownership and financial interest. As used herein, "Currently Owned Communities" shall mean (i) Freedom Square, located in Seminole, Florida, (ii) Seminole Nursing Pavilion, located in Seminole, Florida, (iii) Freedom Village at Brandywine, located in Brandywine, Pennsylvania, (iv) Sarasota Bay Club, located in Sarasota, Florida, (v) Grandview Terrace, located in Sun City, Arizona, (vi) Freedom Plaza, located in Peoria, Arizona, (vii) Freedom Village, located in Lake Forrest, California, and (viii) The Village, located in Hemet, California. d. solicit or accept business from any of ARC's, or any affiliate thereof's, former or current customers, including actively sought prospective customers, for purposes of providing products or services in competition with ARC, or any affiliate thereof; or e. solicit, interfere with, or endeavor to entice away any employee of ARC, or any affiliate thereof, other than Steve Roskamp or Brian Roskamp. f. Nothing in this Agreement shall be deemed to define, describe, alter, diminish, minimize or affect any fiduciary duty or duty of loyalty that Roskamp may now or hereafter owe to ARC or its affiliates. 3. Consideration and Compensation. In consideration of the performance by Roskamp of his obligations under Section 1 above and the agreements of Roskamp contained in Section 2 2 3 above, ARC agrees to pay Roskamp $150,000 per annum during the term of this Agreement, payable bi-weekly. 4. Nondisclosure. Roskamp shall not disclose to any person any confidential information possessed or obtained by him with respect to FGI's or ARC's, or any affiliate thereof's, services, products, improvements, intellectual property, designs or styles, processes, customers, methods of marketing or distribution, systems, procedures, plans, proposals, policies, or methods, the disclosure of which would be damaging to ARC, or any affiliate thereof, nor shall he make any false statements regarding FGI or ARC, or any affiliate thereof, or take any other action that would be damaging to ARC, or any affiliate thereof. 5. Remedies Upon Breach; Reasonableness of Provisions. a. In the event of a breach of this Agreement by Roskamp, ARC shall be entitled to any remedy available to it at law or in equity. In addition, in the event of such breach, Roskamp shall resign from his position as a member of ARC's board of directors (and any committee(s) thereof). b. ARC acknowledges that if ARC fails to make a payment required hereunder for any reason other than (i) Roskamp's breach hereof or (ii) as permitted by the terms of the Merger Agreement, this Agreement shall, at the election of Roskamp, be null and void and Roskamp shall be entitled to enforce Section 3 hereof by any remedy available to him at law or in equity. 6. Termination Upon a Change in Control. Upon a Change in Control (as defined below) of ARC, Roskamp shall have the right to terminate this Agreement and neither party shall have any further obligation hereunder. For purposes of this Agreement, a "Change in Control" means the happening of any of the following: any person or entity, including a "group" as defined in Section 13(d)(3) of the Exchange Act, other than ARC or a wholly-owned subsidiary of ARC or any employee benefit plan of ARC or any of its subsidiaries, becomes the beneficial owner of ARC's securities having greater than 50% of the combined voting power of the then outstanding securities of ARC that may be cast for the election of directors of ARC (other than as a result of an issuance of securities initiated by ARC in the ordinary course of business); (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 ARC or any successor corporation or entity entitled to vote generally in the election of the directors of ARC or such other corporation or entity after such transaction are held in the aggregate by the holders of ARC's securities entitled to vote generally in the election of directors of ARC immediately prior to such transaction; or (iii) during any period of two consecutive years, individuals who at the beginning of any such period constitute the Board of Directors of ARC cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by ARC's shareholders, of each director of ARC first elected during such period was 3 4 approved by a vote of at least two-thirds of the directors of ARC then still in office who were directors of ARC at the beginning of any such period. 7. Severability; Headings. In the event that any provision of this Agreement is declared invalid or unenforceable, such invalidity or unenforceability shall in no way effect the validity or enforceability of any other provision. The clauses and provisions of this Agreement that are deemed to be invalid or unenforceable shall be limited so that they shall remain in effect to the extent permitted by law. The headings herein are for reference purposes only and are not intended in any way to describe, interpret, define, or limit the extent or intent of this Agreement or any part hereof. 8. Modification. No modification, amendment, or waiver of any of the provisions of this Agreement shall be effective unless made in a writing specifically referring to this Agreement, and signed by each of the parties hereto. 9. Successors and Assigns. The rights and obligations of ARC hereunder shall be binding upon and run in favor of the successors and assigns of ARC. The rights and obligations of Roskamp hereunder shall be binding upon, shall inure to the benefit of, and shall be enforceable by the heirs, successors, assigns, and legal or personal representatives of Roskamp. Roskamp may not assign, transfer, or otherwise dispose of any of his rights or obligations without the prior written consent of ARC. 10. Notices. All notices and other communications pursuant to this Agreement shall be in writing and shall be deemed given if delivered personally, sent by nationally recognized, overnight courier, or mailed by registered or certified mail (return receipt requested), postage prepaid, or sent by facsimile (followed with a copy sent by courier or registered or certified mail) to the parties at the following addresses (or at such address for a party as shall be specified by notice hereunder): To ARC: American Retirement Corporation 111 Westwood Place, Suite 402 Brentwood, TN 37027 Attention: W.E. Sheriff Telephone: (615) 221-2250 Fax: (615) 221-2269 4 5 with a copy to: Bass, Berry & Sims PLC 2700 First American Center Nashville, TN 37238 Attention: T. Andrew Smith Telephone: (615) 742-6266 Fax: (615) 742-2766 To Roskamp: Robert G. Roskamp 1401 Manatee Avenue West Bradenton, FL 34205 Telephone: (941) 746-2201 Fax: (941) 747-9389 with a copy to: Holland & Knight LLP 315 Calhoun Street, Suite 600 Tallahassee, FL 32301 Attention: Morris H. Miller Telephone: (850) 425-5655 Fax: (850) 224-8832 All such notices and other communications shall be deemed to have been received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of delivery by nationally recognized, overnight courier, on the business day following dispatch, (c) in the case of mailing, on the fifth business day following such mailing, and (d) in the case of a facsimile, when the party receiving such facsimile shall have confirmed receipt of the communication (or when the copy sent by courier or registered or certified mail shall have been deemed to have been received pursuant to clause (a), (b), or (c)). 11. Entire Agreement; Governing Law. This Agreement shall constitute the entire Agreement between the parties with respect to the subject matter hereof and shall be governed by the laws of the State of Tennessee as such laws are applied to agreements between Tennessee residents entered into and to be performed entirely in Tennessee without regard to the principles of conflict of laws thereof. 12. Prevailing Party. In the event of any dispute that results in a suit or other legal proceeding to construe or enforce any provision of this Agreement or because of an alleged breach, default, or misrepresentation in connection with any of the provisions of this Agreement, the parties 5 6 agree that the prevailing party (in addition to all other amounts and relief to which such party may be entitled) shall be entitled to recover reasonable attorneys' fees and other costs incurred in any action or proceeding. 13. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall constitute an original hereof, but all of which together shall constitute one agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the date and year first above written. AMERICAN RETIREMENT CORPORATION By: /s/ H. Todd Kaestner --------------------------------- Name: H. Todd Kaestner --------------------------------- Title: Executive Vice President --------------------------------- ROBERT G. ROSKAMP /s/ Robert G. Roskamp ---------------------------------------- 6 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 52,231 0 8,860 0 866 80,306 409,858 24,921 598,380 28,660 349,704 0 0 171 143,704 598,380 0 99,954 0 81,419 0 0 9,901 8,696 3,225 5,471 0 0 0 5,741 $.42 $.42
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