-----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, GUKcV48ihCkSXQUT6eIwiVbOXgP1Z2z2HuKf8buAxxqkqXC9q2WJrcVz6sTSdwkh C2roQEQA99tq7iYCqg+AXA== 0000950133-98-001176.txt : 19980401 0000950133-98-001176.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950133-98-001176 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNRISE ASSISTED LIVING INC CENTRAL INDEX KEY: 0001011064 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-NURSING & PERSONAL CARE FACILITIES [8050] IRS NUMBER: 541746596 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20765 FILM NUMBER: 98582263 BUSINESS ADDRESS: STREET 1: 9401 LEE HIGHWAY STREET 2: STE 300 CITY: FAIRFAX STATE: VA ZIP: 22031 BUSINESS PHONE: 7032737500 MAIL ADDRESS: STREET 1: 9401 LEE HIGHWAY STREET 2: STE 300 CITY: FAIRFAX STATE: VA ZIP: 22031 10-K 1 ANNUAL REPORT ON FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K [xx] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] 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 0-20765 SUNRISE ASSISTED LIVING, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 54-1746596 - --------------------------------------- --------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9401 Lee Highway, Suite 300 Fairfax, VA 22031 - --------------------------------------- --------------------------- (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (703) 273-7500 Securities registered pursuant to Section 12(b) of the Act: (Not applicable) Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of class) 5 1/2% Convertible Subordinated Notes due 2002 ---------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. --- The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the registrant's common stock as of March 16, 1998 was $330,863,008. */ The number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date is: Class: Common Stock, par value $.01 per share. Outstanding at March 16, 1998: 19,227,450 shares. Documents Incorporated by Reference: Part II: Portions of the Annual Report to Stockholders for the year ended December 31, 1997. Part III: Portions of the definitive proxy statement for the Annual Meeting of Stockholders to be held on April 27, 1998. - ------------------ */ Solely for the purposes of this calculation, all directors and executive officers of the registrant and all stockholders beneficially owning more than 5% of the registrant's common stock are considered to be affiliates. 2 TABLE OF CONTENTS
Page(s) PART I Item 1. Business........................................................... 3 Item 2. Properties......................................................... 17 Item 3. Legal Proceedings.................................................. 17 Item 4. Submission of Matters to a Vote of Security Holders................ 17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters....................................... 17 Item 6. Selected Financial Data............................................ 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 17 Item 7A. Quantitative and Qualitative Disclosure About Market Risk.......... 18 Item 8. Financial Statements and Supplementary Data........................ 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................ 18 PART III Item 10. Directors and Executive Officers of the Registrant................. 18 Item 11. Executive Compensation............................................. 18 Item 12. Security Ownership of Certain Beneficial Owners and Management..................................................... 18 Item 13. Certain Relationships and Related Transactions..................... 18 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................................ 18 SIGNATURES.............................................................................. 20
-2- 3 This Form 10-K contains certain forward-looking statements relating to the Company's development and acquisition program that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the captions "Item 1. Business -- Facility Development," " -- Facility Acquisitions" and " -- Need for Additional Financing." Unless the context suggests otherwise, references in this Form 10-K to the "Company" or "Sunrise" mean Sunrise Assisted Living, Inc. and its subsidiaries and predecessor entities. PART I ITEM 1. BUSINESS. GENERAL Sunrise Assisted Living, Inc. (the "Company" or "Sunrise") is a leading provider of assisted living services for seniors. The Company currently operates 66 facilities in 13 states with a capacity of approximately 5,750 residents, including 59 facilities owned by the Company or in which it has ownership interests and seven facilities managed for third parties. The Company had revenues of $89.9 million and net income of $4.0 million in 1997. Approximately 99% of the Company's revenues were derived from private pay sources. The Company's previously announced three-year growth objectives include developing at least 55 new Sunrise model assisted living facilities with an additional resident capacity of more than 4,500 by the end of 1999. To date, the Company has completed development of 27 such facilities with a resident capacity of 2,400 and has 16 facilities currently under construction with a resident capacity of 1,490. The Company has also entered into contracts to purchase 33 additional sites and to lease two additional sites. During 1997, the Company acquired four assisted living and independent living facilities with resident capacity of 274. The Company is pursuing additional development opportunities and also plans to acquire additional facilities as market conditions warrant. See "--Facility Development" and "--Facility Acquisitions." A subsidiary of the Company has obtained a syndicated revolving credit facility for $250.0 million to be used for general corporate purposes, including the continued construction and development of assisted living facilities. The credit facility is for a term of three years with the right to extend, and is secured by cross-collateralized first mortgages on the real property and improvements and first liens on all assets of the subsidiary. Advances under the facility bear interest at rates from LIBOR plus 1.0% to LIBOR plus 1.5%. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." On June 6, 1997, the Company issued and sold $150.0 million aggregate principal amount of 5 1/2% convertible subordinated notes due 2002 (the "Notes"). The Notes bear interest at 5 1/2% per annum payable semiannually on June 15 and December 15 of each year, beginning December 15, 1997. The conversion price is $37.1875 (equivalent to a conversion rate of 26.89 shares per $1,000 principal amount of the Notes). The Notes are redeemable at the option of the Company commencing June 15, 2000, at specified premiums. The net proceeds to the Company from the sale of the Notes, after deducting underwriting discounts and offering expenses, were approximately $145.6 million. On June 10, 1997, the Company used $57.7 million of the net proceeds to pay down floating rate indebtedness from four financial institutions at a weighted average interest rate of 8.4%. The balance of the net proceeds are being used to fund continued development of new Sunrise model facilities and for possible acquisitions, as well as for working capital and general corporate purposes. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." -3- 4 On June 5, 1996, the Company completed its initial public offering and on October 31, 1996 the Company completed a follow-on public offering. Net proceeds to the Company from these two offerings totaled approximately $196.1 million. The Company was incorporated in Delaware on December 14, 1994 in order to combine various activities relating to the development, ownership and operation of the Sunrise assisted living facilities held by predecessor entities. The predecessor entities consisted of a management company, a development company, and various entities that held 100% ownership interests in 15 facilities, 50% ownership interests in five facilities and minority ownership interests in two facilities. THE ASSISTED LIVING INDUSTRY The Company believes that the assisted living industry is emerging as a preferred alternative to meet the growing demand for a cost-effective setting in which to care for the elderly who do not require the more intensive medical attention provided by a skilled nursing facility but cannot live independently due to physical or cognitive frailties. In general, assisted living represents a combination of housing and 24-hour a day personal support services designed to aid elderly residents with activities of daily living ("ADLs"), such as bathing, eating, personal hygiene, grooming and dressing. Certain assisted living facilities may also provide assistance to residents with low acuity medical needs, or may offer higher levels of personal assistance for incontinent residents or residents with Alzheimer's disease or other forms of dementia. Annual expenditures in the assisted living industry have been estimated to be approximately $12 billion, including facilities ranging from "board and care" to full-service assisted living facilities such as those operated by the Company. The Company believes that consumer preference and demographic trends will allow assisted living to remain one of the fastest growing segments of elder care. The assisted living industry is highly fragmented and characterized by numerous small operators. The scope of assisted living services varies substantially from one operator to another. Many smaller assisted living providers do not operate in purpose-built facilities, do not have professionally trained staff, and may provide only limited assistance with low-level care activities. The Company believes that few assisted living operators provide a comprehensive range of assisted living services, such as Alzheimer's care and other services designed to permit residents to "age in place" within the facility as they develop further physical or cognitive frailties. THE SUNRISE OPERATING PHILOSOPHY The Sunrise approach to assisted living is a unique combination of operating philosophy and a signature facility design. Since the first Sunrise facility opened in 1981, the Company's operating philosophy has been to provide care and services to its residents in a residential environment in a manner that: "nurtures the spirit, protects privacy, fosters individuality, personalizes services, enables freedom of choice, encourages independence, preserves dignity and involves family and friends." The Company believes that its operating philosophy is one of its strengths. Furthermore, in implementing its philosophy, the Company continuously seeks to refine and improve the care and services it offers. The elements of the operating philosophy focus on: the involvement of the resident and the resident's family in important care giving decisions; the Company's proprietary training programs for its management, Administrators and Care Managers; the Company's quality assurance programs; the full range of assisted living services offered by the Company; and the architecture and purpose-built design of Sunrise's "Victorian" model facilities. -4- 5 SERVICES The Company offers a full range of assisted living services based upon individual resident needs. Upon admission, the Company, the resident and the resident's family assess the level of care required and jointly develop a specific care plan. This care plan includes selection of resident accommodations and determination of the appropriate level of care. The care plan is periodically reviewed and updated by the Company, the resident and the resident's family. By offering a full range of services, including Basic Care, Assisted Living Plus Care ("Plus Care"), Medication Management and Alzheimer's Care, the Company can accommodate residents with a broad range of service needs and enable residents to age in place. In addition, upon admission the Company generally charges each new resident a one-time community fee typically equal to two months of daily resident fees, which is refundable on a prorated basis if the resident leaves the facility during the first 90 days. Daily resident fees are periodically revised based on increased care or modifications to a resident's care plan. The average daily resident fee for owned facilities operated by the Company for at least 12 months, or that have achieved stabilization of 95%, was approximately $78 for 1997 and $80 for 1996 and 1995. Excluding acquired facilities, the average daily resident fee was approximately $84 for 1997 and 1996 and $80 for 1995. BASIC CARE The Company's Basic Care program is provided to all residents and includes: assistance with ADLs, such as eating, bathing, dressing, personal hygiene, and grooming; three meals per day served in a common dining room (including two seating times per meal); coordination of special diets; 24-hour security; emergency call systems in each unit; transportation to physician offices, stores and community services; assistance with coordination of physician care, physical therapy and other medical services; health promotion and related programs; personal laundry services; housekeeping services; and social and recreational activities. ASSISTED LIVING PLUS CARE Through the Company's Plus Care program, residents who require more frequent or intensive assistance or increased care or supervision are provided extra care and supervision. The Company charges an additional daily fee based on additional staff hours of care and services provided. The Plus Care program allows the Company, through consultation with the resident, the resident's family and the resident's personal physician, to create an individualized care and supervision program for residents who might otherwise have to move to a more medically intensive facility. At December 31, 1997, approximately 32% of the Company's assisted living residents participated in the Plus Care program. MEDICATION MANAGEMENT Many of the Company's residents also require assistance with medications. To the extent permitted by state law, the Medication Management program includes the storage of medications, the distribution of medications as directed by the resident's physician and compliance monitoring. The Company charges an additional fixed daily fee for this service. At December 31, 1997, approximately 46% of the Company's assisted living residents participated in the Medication Management program. ALZHEIMER'S CARE The Company believes its Alzheimer's Care called the Sunrise Reminiscence Program distinguishes it from many other assisted living providers who do not provide such specialized care. The Sunrise Reminiscence Program provides the attention, care programs and services needed to help cognitively impaired residents maintain a higher quality of life. Specially trained staff provide Basic -5- 6 Care and other specifically designed care and services to cognitively impaired residents in separate areas of facilities. The Company charges each cognitively impaired resident a daily fee that includes one hour of additional staff time per day. Cognitively impaired residents who require additional care and services pay a higher daily rate based on additional staff hours of care and services provided. At December 31, 1997, approximately 21% of the Company's assisted living residents participated in the Sunrise Reminiscence Program. THE SUNRISE "VICTORIAN" MODEL FACILITY The Company's signature Victorian model facility, first designed in 1985, is a freestanding, residential-style facility with a capacity of 70 to 110 residents. The building ranges in size from approximately 40,000 to 65,000 square feet and is built generally on sites ranging from two to five acres. Approximately 40% of the building is devoted to common areas and amenities, including reading rooms, family or living rooms and other areas (such as bistros and ice cream parlors) designed to promote interaction among residents. The Company has four basic building plan designs, which provide it with flexibility in adapting the model to a particular site. The building is usually two or three stories and of steel frame construction built to institutional health care standards but strongly residential in appearance. The interior layout is designed to promote a home-like environment, efficient delivery of resident care and resident independence. Resident units are functionally arranged to provide a "community- within-a-community" atmosphere. The model facility may be configured with as many as eight different types of resident units, including double occupancy units, single units and two- and three-room suites. Sitting areas on each floor serve as a family or living room. The ground level typically contains a kitchen and common dining area, administrative offices, a laundry room, a private dining room, library or living room, and bistro or ice cream parlor. Typically, one floor or one or two wings of a facility contain resident units and common areas, including separate dining facilities, specifically designed to serve residents with Alzheimer's disease or other special needs. The architectural and interior design concepts incorporate the Sunrise operating philosophy of protecting resident privacy, enabling freedom of choice, encouraging independence and fostering individuality in a homelike setting. The Company believes its model facility meets the desire of many individuals to move to a new residence at least as comfortable as their former home. The Company believes that its residential environments also accomplish several other objectives, including: (i) lessening the trauma of change for elderly residents and their families; (ii) achieving operational efficiencies through proven designs; (iii) facilitating resident mobility and ease of access by care givers; and (iv) differentiating the Company from other assisted living and long-term care operators. OWNED FACILITIES The table below sets forth certain information regarding owned facilities or facilities in which Sunrise has an ownership interest that are currently operating as well as those under construction or are subject to purchase contracts and zoned:
YEAR DEVELOPED, SUNRISE OPENED BY ACQUIRED OR MODEL RESIDENT OWNERSHIP FACILITY LOCATION SUNRISE CONST. STATUS FACILITY CAPACITY PERCENTAGE(1) -------- -------- ------- ------------- --------- -------- ------------- Sunrise of Oakton Oakton, VA 1981 Acquired(2) 51 100.0% Sunrise of Leesburg Leesburg, VA 1984 Acquired(2) 35 100.0 Sunrise of Warrenton Warrenton, VA 1986 Acquired(2) 37 100.0 Sunrise of Arlington Arlington, VA 1988 Developed X 58 100.0 Sunrise of Bluemont Park Arlington, VA 1990 100.0 Potomac Developed X 59 Shenandoah Developed X 77
-6- 7 James Developed X 59 Sunrise of Mercer Island Seattle, WA 1990 Developed X 59 100.0 Sunrise of Fairfax Fairfax, VA 1990 Developed X 59 100.0(3) Sunrise of Queen Anne Seattle, WA 1991 Acquired 136 33.3(4) Sunrise of Frederick Frederick, MD 1992 Developed X 86 100.0 Sunrise of Countryside Sterling, VA 1992 100.0 East Building Developed(5) X 66 West Building Developed(5) X 64 Sunrise of Gunston Lorton, VA 1992 Developed(5) X 67 100.0 Sunrise of Atrium Boca Raton, FL 1992 Acquired 210 100.0 Sunrise of Falls Church Falls Church, VA 1993 Developed X 66 100.0 Sunrise of Village House Gaithersburg, MD 1993 Acquired 155(6) 100.0 Sunrise of Towson Towson, MD 1994 Developed X 66 13.9(7) Sunrise of Gardner Park Peabody, MA 1994 Developed X 59 50.0(7)(8) Sunrise of Annapolis Annapolis, MD 1995 Developed X 88 100.0 Chanate Lodge Santa Rosa, CA 1996 Acquired 120 100.0 Sunrise of Raleigh Raleigh, NC 1996 Developed X 93 100.0 Sunrise of Pikesville Pikesville, MD 1996 Developed X 103 100.0 Huntcliff Summitt Atlanta, GA 1996 Acquired 254 100.0(9) Sunrise of Northshore St. Petersburg, FL 1996 Acquired 157 100.0(10) Sunrise of Augusta Augusta, GA 1996 Acquired 42 100.0 Sunrise of Columbus Columbus, GA 1996 Acquired 26 100.0 Sunrise of Greenville Greenville, SC 1996 Acquired 39 100.0 Sunrise of Blue Bell Philadelphia, PA 1996 Developed X 97 100.0 Sunrise of Columbia Columbia, MD 1996 Developed X 96 100.0 Sunrise of Hunter Mill Oakton, VA 1997 Developed X 96 100.0 Sunrise of Sterling Canyon Valencia, CA 1997 Acquired 130 100.0 Sunrise of Napa Napa Valley, CA 1997 Acquired 83 100.0 Sunrise of Petaluma Petaluma, CA 1997 Developed 84 100.0(11) Sunrise of Springfield Springfield, VA 1997 Developed X 98 100.0 Sunrise of Severna Park Building I Severna Park, MD 1997 Developed X 99 50.0(3)(7) Sunrise of Severna Park Building II Severna Park, MD 1997 Developed X 74 50.0(3)(7) Sunrise of Morris Plains Morris Plains, NJ 1997 Developed X 95 100.0 Sunrise of Old Tappan Old Tappan, NJ 1997 Developed X 95 100.0 Sunrise of Granite Run Granite Run, PA 1997 Developed X 95 100.0 Sunrise of Abington Building I Abington, PA 1997 Developed X 97 100.0 Sunrise of Abington Building II Abington, PA 1997 Developed X 71 100.0 Sunrise of Rockville Rockville, MD 1997 Developed X 86 100.0 Sunrise of Alexandria Alexandria, VA 1997 Developed X 92 100.0 Sunrise of Wayne Wayne, NJ 1997 Developed X 90 100.0 Sunrise of Norwood Norwood, MA 1997 Developed X 90 100.0 Sunrise of Wayland Wayland, MA 1997 Developed X 68 100.0 Sunrise of Westfield Westfield, NJ 1997 Developed X 95 100.0 Sunrise of East Cobb East Cobb, GA 1997 Developed X 96 100.0 Sunrise of Dunwoody Dunwoody, GA 1997 Acquired 30 100.0 Sunrise of Weston Weston, MA 1997 Acquired 31 100.0 Sunrise of Fresno Fresno, CA 1998 Developed 84 100.0(11) Sunrise of Haverford Haverford, PA 1998 Developed X 73 100.0 Sunrise of Decatur Decatur, GA 1998 Developed X 96 100.0 Sunrise of Walnut Creek Walnut Creek, CA 1998 Developed X 85 100.0 Sunrise of Glen Cove Glen Cove, NY 1998 Developed X 83 100.0 Sunrise of Ivey Ridge Ivey Ridge, GA 1998 Developed X 97 100.0 Sunrise of Cohasset Cohasset, MA 1998 Developed X 71 100.0 Sunrise of Holly Orchard Denver, CO 1998 Developed X 97 100.0 ------------- 5,065 Sunrise of Pinehurst Denver, CO 2nd Q 1998 Construction X 100 100.0
-7- 8 Sunrise of Danville Danville, CA 2nd Q 1998 Construction 84 100.0(11) Sunrise of Huntcliff Summit (Assisted Living Expansion) Atlanta, GA 2nd Q 1998 Construction X 96 100.0 Sunrise of Bellevue Bellevue, WA 2nd Q 1998 Construction X 84 100.0 Sunrise of Paramus Paramus, NJ 2nd half 1998 Construction X 75 100.0 Sunrise of Lafayette Hill Philadelphia, PA metro region 2nd half 1998 Construction X 86 100.0 Sunrise of Mission Viejo Mission Viejo, CA 2nd half 1998 Construction X 103 9.0 Sunrise of Fairfield Fairfield, NJ 2nd half 1998 Construction X 93 100.0 Sunrise of Oakland Hills Oakland Hills, CA 2nd half 1998 Construction X 102 100.0 Sunrise of Paoli Paoli, PA 2nd half 1998 Construction X 96 100.0 Sunrise of East Brunswick East Brunswick, NY 2nd half 1998 Construction X 94 9.0 Sunrise of Smithtown Smithtown, NY 1st half 1999 Construction X 90 100.0 Sunrise of Carlsbad Carlsbad, CA 1st half 1999 Construction X 102 9.0 Sunrise of Naperville Naperville IL 1st half 1999 Construction X 91 9.0 Sunrise of Rochester Hills Rochester, MI 1st half 1999 Construction X 101 9.0 Sunrise of Buffalo Grove Buffalo Grove, IL 1st half 1999 Construction X 93 100.0 Sunrise of Chanate II Santa Rosa, CA 2nd half 1998 Zoned X 49 100.0 Sunrise of Richmond Richmond, VA 1st half 1999 Zoned X 91 9.0 Sunrise of Charlotte Charlotte, NC 2nd half 1999 Zoned X 95 100.0 Sunrise of Farmington Hills Farmington Hills, MI 2nd half 1999 Zoned X 90 100.0 Sunrise of Ann Arbor Ann Arbor, MI 2nd half 1999 Zoned X 85 100.0 Sunrise of Northville Northville, MI 2nd half 1999 Zoned X 91 100.0 Sunrise of Exton Exton, PA 2nd half 1999 Zoned X 78 100.0 ------------- 2,069 (12) ------------- Total 7,134 =============
- ---------- (1) Fifteen of the wholly owned facilities (Oakton, Leesburg, Warrenton, Arlington, Bluemont Park (three facilities), Mercer Island, Fairfax, Frederick, Countryside (two facilities), Gunston, Atrium and Falls Church) serve as collateral for a $86.7 million mortgage loan. Nineteen other wholly owned facilities (Springfield, Morris Plains, Old Tappan, Granite Run, Abington (two facilities), Wayne, Westfields, Decatur, Walnut Creek, Haverford, Huntcliff Summit (assisted living expansion), Lafayette Hill, Oakland Hills, Paramus, Paoli, Fairfield, Smithtown, and Bellevue) serve as collateral for a $250.0 million syndicated revolving credit facility. Sixteen other owned facilities are subject to one or more mortgages or deeds of trust that mature between 1998 and 2033 and bear interest at rates ranging from 6.870% to 9.750% annually as of December 31, 1997. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 6 of Notes to Consolidated Financial Statements. All facilities that are wholly owned by the Company are consolidated in the Consolidated Financial Statements. The Gardner Park and Severna Park facilities are held by limited liability companies or limited partnerships in which the Company holds the ownership interests indicated in the table. The Company is the general partner or managing member of such entities and through the partnership or operating agreements and the management agreements for the facilities the Company controls their ordinary course business operations. Therefore, the Gardner Park and Severna Park facilities are also consolidated in the Consolidated Financial Statements. The ordinary course business operations of the Queen Anne and Towson facilities are not currently controlled by the Company and, therefore, are accounted for under the equity method of accounting. (2) Each of these facilities has been redeveloped in a manner consistent with the Sunrise model. (3) Subject to long-term ground lease. -8- 9 (4) This property is held as a tenancy-in-common. The remaining ownership interests are owned by unaffiliated third parties. The Company manages this facility pursuant to a management contract that is subject to annual renewal at the option of the owners. (5) These facilities were initially developed by the Company for third parties and were subsequently acquired by the Company in 1992. (6) This facility is licensed for 40 assisted living residents. The remainder of the resident capacity is for independent living residents. (7) The remaining ownership interests are owned by third parties. Sunrise manages each of these facilities. (8) A current officer and a former employee of the Company each have a 25% ownership interest in this facility. Sunrise has the right to acquire these minority ownership interests for fair market value, as determined by an appraiser mutually agreeable to the parties. (9) This facility is licensed for 24 assisted living residents. The remainder of the resident capacity is for independent living residents. Excludes 12 units owned by the occupants thereof. The occupants can require the Company to repurchase the units for their original purchase prices (aggregating approximately $1.9 million) under certain circumstances. The Company has a right to purchase the units at fair market value upon the happening of certain events and has a right of first refusal on sales of the units. (10) This facility is licensed for 26 skilled nursing residents. The remainder of the resident capacity is for assisted living residents. (11) These are not Sunrise model facilities. Sunrise has entered into operating leases with a third-party owner/developer who completed the facilities under a design reviewed and approved by Sunrise. These facilities are operated under 15-year operating leases, with two 10-year extension options. (12) There can be no assurance that construction delays will not be experienced. FACILITY DEVELOPMENT The Company targets sites for development located in major metropolitan areas and their surrounding suburban communities. In evaluating a prospective market, the Company considers a number of factors, including population, income and age demographics, target site visibility, probability of obtaining zoning approvals, estimated level of market demand and the ability to maximize management resources in a specific market by clustering its development and operating activities. The Company continues to develop its Victorian model facilities in major metropolitan markets. The Company's previously announced three-year growth objectives include developing at least 55 new Sunrise model assisted living facilities with an additional resident capacity of more than 4,500 by the end of 1999. To date, the Company has completed development of 27 such new model facilities with a resident capacity of 2,400 (East Cobb, GA, Fresno, CA, Haverford, PA, Decatur, GA, Walnut Creek, CA, Glen Cove, NY, Ivey Ridge, GA, Cohasset, MA, Denver, CO, Alexandria, VA, Norwood, MA, Wayne, NJ, Wayland, MA, Westfield, NJ, Rockville, MD, Philadelphia, PA (3), Old Tappan, NJ, Morris Plains, NJ, Severna Park, MD (2), Springfield, VA, Oakton, VA, Petaluma, CA, Blue Bell, PA, and Columbia, MD) and has 16 facilities under construction with resident capacity of 1,490. The Company has also entered into contracts to purchase 33 additional sites and to lease two additional sites, and is negotiating purchase terms for the remaining sites. These sites are located in Pennsylvania, Massachusetts, New Jersey, Connecticut, New York, Illinois, California, Missouri, Kansas, and Virginia. The Company is pursuing additional development opportunities as market conditions warrant. Historically, the Company has completed all but one of the facilities for -9- 10 which it has obtained zoning approval. The Company bases its development upon its "Victorian" model facility that it has developed and refined since the first model facility was designed in 1985. Use of a standard model allows the Company to control development costs, maintain facility consistency and improve operational efficiency. Use of the Sunrise model also creates "brand" awareness in the Company's markets. The primary milestones in the development process are (i) site selection and contract signing, (ii) zoning and site plan approval and (iii) completion of construction. Once a market has been identified, site selection and contract signing typically take approximately one to three months. Zoning and site plan approval generally take 10 to 12 months and are typically the most difficult steps in the development process due to the Company's selection of sites in established communities which usually require site rezoning. Facility construction normally takes 10 to 12 months. The Company believes its extensive development experience gives it an advantage relative to certain of its competitors in obtaining necessary governmental approvals and completing construction in a timely manner. After a facility receives a certificate of occupancy, residents usually begin to move in within one month. Since 1993, the total capitalized cost to develop, construct and open a Sunrise model facility, including land acquisition and construction costs, has ranged from approximately $8.5 million to $12.0 million. The cost of any particular facility may vary considerably based on a variety of site-specific factors. The Company's development activities are coordinated by its experienced 30-person development staff, which has extensive real estate acquisition, engineering, general construction and project management experience. Architectural design and hands-on construction functions are usually contracted to experienced outside architects and contractors. The Company's ability to achieve its development plans will depend upon a variety of factors, many of which are beyond the Company's control. There can be no assurance that the Company will not suffer delays in its development program, which could slow the Company's growth. The successful development of additional assisted living facilities will involve a number of risks, including the possibility that the Company may be unable to locate suitable sites at acceptable prices or may be unable to obtain, or may experience delays in obtaining, necessary zoning, land use, building, occupancy, licensing and other required governmental permits and authorizations. The Company may also incur construction costs that exceed original estimates, may not complete construction projects on schedule and may experience competition in the search for suitable development sites. The Company relies on third-party general contractors to construct its new assisted living facilities. There can be no assurance that the Company will not experience difficulties in working with general contractors and subcontractors, which could result in increased construction costs and delays. Further, facility development is subject to a number of contingencies over which the Company will have little control and that may adversely affect project cost and completion time, including shortages of, or the inability to obtain, labor or materials, the inability of the general contractor or subcontractors to perform under their contracts, strikes, adverse weather conditions and changes in applicable laws or regulations or in the method of applying such laws and regulations. Accordingly, if the Company is unable to achieve its development plans, its business, financial condition and results of operations could be adversely affected. FACILITY ACQUISITIONS The Company's previously announced growth plan included the acquisition of up to 15 facilities by the end of 1999, of which nine have been acquired. In evaluating possible acquisitions, the Company considers, among other factors, (i) location, construction quality, condition and design of the facility, (ii) current and projected facility cash flow, (iii) the ability to increase revenue, occupancy and cash flow by -10- 11 providing a full range of assisted living services, (iv) costs of facility repositioning (including renovations, if any) and (v) the extent to which the acquisition will complement the Company's development plans. There can be no assurance that the Company's acquisition of assisted living facilities will be completed at the rate currently expected, if at all. The success of the Company's acquisitions will be determined by numerous factors, including the Company's ability to identify suitable acquisition candidates, competition for such acquisitions, the purchase price, the financial performance of the facilities after acquisition and the ability of the Company to integrate effectively the operations of acquired facilities. Any failure by the Company to integrate or operate acquired facilities effectively may have a material adverse effect on the Company's business, financial condition and results of operations. NEED FOR ADDITIONAL FINANCING To achieve its growth objectives, the Company will need to obtain substantial additional resources to fund its development, construction and acquisition activities. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation." The Company expects that the number of owned and operated facilities will increase substantially as it pursues its development and acquisition programs for new assisted living facilities. This rapid growth will place significant demands on the Company's management resources. The Company's ability to manage its growth effectively will require it to continue to expand its operational, financial and management information systems and to continue to attract, train, motivate, manage and retain key employees. If the Company is unable to manage its growth effectively, its business, financial condition and results of operations could be adversely affected. MANAGED FACILITIES The Company also manages for third-party owners seven operating facilities and one facility under construction with total resident capacity of 756, including, four in Massachusetts, two in New Jersey, one in Pennsylvania, and one in Virginia. The two facilities in New Jersey are Sunrise model facilities. The management contract expiration dates range from October 1998 to January 2002. The Company owns $5.4 million carrying value of tax exempt mortgage bonds on the Pennsylvania facility. One of the Massachusetts facilities is licensed for 139 continuing care retirement community residents. Pursuant to the management agreement with one of the New Jersey facilities, the company has a right of first refusal to purchase the facility if the owner receives a bona fide offer to purchase the facility during the term of the management agreement. The Company does not provide financial or accounting services to the Virginia facility. The Company also manages two skilled nursing facilities, Pembrook and Prospect Park, located in West Chester and Prospect Park, Pennsylvania, respectively. The Pembrook facility has 240 beds and the Prospect Park facility has 180 beds. Both of these facilities are owned by a single unaffiliated nonprofit corporation. The management contracts for these facilities were initially entered into in May 1994 and expire in April 1999. The Company received management fee revenues of approximately $0.4 million in 1997 for these two facilities. The Company is entitled to receive a deferred management fee of approximately $0.7 million, as of December 31, 1997, if the owners terminate the management agreement or sell the properties. The Company does not provide financial or accounting services for these facilities. -11- 12 COMPANY OPERATIONS OPERATING STRUCTURE The Company has centralized accounting, finance and other operational functions at the corporate headquarters and regional office levels in order to allow facility-based personnel to focus on resident care, consistent with the Company's operating philosophy. Headquarters staff members in Fairfax, Virginia are responsible for: the establishment of Company-wide policies and procedures relating to, among other things, resident care, facility design and facility operations; billing and collection; accounts payable; finance and accounting; management of the Company's development and acquisition activities; development of employee training materials and programs; and providing overall strategic direction to the Company. Regional staff are responsible for: overseeing all aspects of facility-based operations, including marketing activities; resident care; the hiring of Administrators, Care Managers and other facility-based personnel; compliance with applicable local and state regulatory requirements; and implementation of the Company's development and acquisition plans within a given geographic region. The Company is currently organized into several regions. Each of the regions is headed by a Regional Senior Vice President or Vice President with extensive experience in the long-term care and assisted living industries. The regional staff typically consists of a Marketing Specialist, a Resident Care Specialist and a Human Resources Specialist. The Company's largest region also has separate Marketing Specialists for existing facilities and those in development, an Activities Specialist, a Regulatory Specialist, a Dietary Specialist and a Maintenance Specialist. The Company expects that all regions will create similar staff positions as the number of facilities in those regions increases. FACILITY STAFFING Each of the Company's facilities has an Administrator responsible for the day-to-day operations of the facility, including quality of care, social services and financial performance. Each Administrator receives specialized training from the Company. The Company believes that the quality and size of its facilities, coupled with its competitive compensation philosophy, have enabled it to attract high-quality, professional Administrators. The Administrator is supported by the Director of Resident Care, a nurse who oversees the Care Managers and is directly responsible for day-to-day care of the residents, and by the Director of Community Relations, who oversees marketing and outreach programs. Other key positions include the Director of Dining Services, the Activities Director, and in certain homes, the Director of Alzheimer's Care. Care Managers, who work on full-time, part-time and flex-time schedules, provide most of the hands-on resident care, such as bathing, dressing and other personalized care services (including housekeeping, meal service and resident activities). To the extent permitted by state law, nurses, or Care Managers who complete a special training program, supervise the storage and distribution of medications. The use of Care Managers to provide substantially all services to residents has the benefits of consistency and continuity in resident care. In most cases, the same Care Manager assists the resident in dressing, dining and coordinating daily activities. The number of Care Managers working in a facility varies according to the level of care required by the residents of the facility and the numbers of residents receiving Alzheimer's Care and Plus Care services. The number of Care Managers ranges from three (Leesburg facility) to 20 (Atrium facility) on the day shifts and from two Care Managers (Leesburg) to seven Care Managers (Atrium) on the night shift. The Company believes that its facilities can be most efficiently managed by maximizing direct resident and staff contact. Employees involved in resident care, including the administrative staff, are trained in the Care Manager duties and participate in supporting the care needs of the residents. Accounting functions are centralized so that administrative staff may devote substantially all of their time to care giving. -12- 13 The Company has attracted, and continues to seek, highly dedicated, experienced personnel. The Company has adopted formal training procedures and review and evaluation procedures to help ensure quality care for its residents. The Company believes that education, training and development enhance the effectiveness of its employees. All employees are required to complete the Company's training program, which centers around its proprietary "Five-Star Educational Program." This program includes a core curriculum consisting of care basics, Alzheimer's care, resident care procedures and communication skills. For Care Managers who desire to advance into facility management, the Five-Star Education Program provides additional training in medical awareness and management skills. There are also leadership certifications in areas such as community relations, facility management, recruiting, staffing, human resources and regulations. Sunrise also has developed an "Administrator-in-Training ("AIT") Program" that places an Administrator trainee in an existing facility to learn the position based on hands-on experience and direct supervision from a current Administrator. The AIT Program is intended to ensure that enough Sunrise-trained professionals will be available to manage acquired and newly developed facilities. QUALITY ASSURANCE The Company coordinates quality assurance programs at each of its facilities through its corporate headquarters staff and through its regional offices. The Company's commitment to quality assurance is designed to achieve a high degree of resident and family member satisfaction with the care and services provided by the Company. In addition to ongoing training and performance reviews of Care Managers and other employees, the Company's quality control measures include: Family and Resident Feedback. The Company surveys residents and family members on a regular basis to monitor the quality of services provided to residents. Approximately 30 days after moving into a facility, a resident or family member is surveyed by a Sunrise representative to inquire about their initial level of satisfaction. Thereafter, annual written surveys are used to appraise and monitor the level of satisfaction of residents and their families. A toll-free telephone line also is maintained which may be used at any time by a resident's family members to convey comments. Regular Facility Inspections. Facility inspections are conducted by regional vice presidents and other regional staff on at least a monthly basis. These inspections cover: the appearance of the exterior and grounds; the appearance and cleanliness of the interior; the professionalism and friendliness of staff; resident care plans; the quality of activities and the dining program; observance of residents in their daily living activities; and compliance with government regulations. Third-Party Reviews. To further evaluate customer service, the Company engages an independent service evaluation company to "mystery shop" the Company's facilities. These professionals assess the Company's performance from the perspective of a customer, without the inherent biases of a Company employee. Each facility is "shopped" at least three times per year in person, as well as one or more times per month by telephone. To evaluate medication management, third-party pharmacists conduct periodic reviews of on-site handling and storage of medications, record-keeping and coordination of medications. MARKETING AND SALES The Company's marketing strategy is intended to create awareness of the Company and its services among potential residents and their family members and referral sources, such as hospital discharge planners, physicians, clergy, area agencies for the elderly, skilled nursing facilities, home health agencies and social workers. A central marketing staff develops overall strategies for promoting the Company throughout its markets and monitors the success of the Company's marketing efforts. Each regional office generally has at least one Marketing Specialist and each facility typically has a Director of Community Relations who oversees marketing and outreach programs. In addition to direct contacts -13- 14 with prospective referral sources, the Company also relies on print advertising, yellow pages advertising, direct mail, signage and special events, such as grand openings for new facilities, health fairs and community receptions. THIRD-PARTY RESIDENT SERVICES While the Company serves the vast majority of a resident's needs with its own staff, certain services, such as physician care, infusion therapy, physical and speech therapy and other home health care services, may be provided to residents at Sunrise facilities by third parties. Company staff assist residents in locating qualified providers for such health care services. In October 1996, the Company entered into an affiliation agreement with Jefferson Health System ("JHS"), an integrated health care system located in Philadelphia, Pennsylvania, pursuant to which JHS has agreed to provide residents of Sunrise facilities located in the Philadelphia metropolitan region, on a preferred (but non-exclusive) basis, with access to certain health care services offered by JHS. Such health care services may include hospital services, physician services, rehabilitation services, home health services and products and mental health services. COMPETITION The long-term care industry is highly competitive and the Company believes that the assisted living segment, in particular, will become even more competitive in the future. The Company will be competing with numerous other companies providing similar long-term care alternatives such as home health care agencies, facility-based service programs, retirement communities and convalescent centers. In general, regulatory and other barriers to competitive entry in the assisted living industry are not substantial. In pursuing its growth strategy, the Company expects to face competition in its efforts to develop and acquire assisted living facilities. Some of the Company's present and potential competitors are significantly larger and have, or may obtain, greater financial resources than the Company. Consequently, there can be no assurance that the Company will not encounter increased competition that could limit its ability to attract residents or expand its business and that could have a material adverse effect on its business, financial condition and results of operations. Moreover, if the development of new assisted living facilities outpaces demand for those facilities in certain markets, such markets may become saturated. Such an oversupply of facilities could cause the Company to experience decreased occupancy, depressed margins and lower operating results. Providers of assisted living and related services compete for residents primarily on the basis of quality of care, price, reputation, physical appearance of the facilities, services offered, family and physician preferences and location. As assisted living receives increased attention, the Company believes that competition will grow from new local and regional companies that operate, manage and develop assisted living facilities within the same geographic areas as the Company. STAFFING AND LABOR COSTS The Company competes with various health care services providers, including other elderly care providers, in attracting and retaining qualified or skilled personnel. A shortage of nurses or other trained personnel or general inflationary pressures may require the Company to enhance its wage and benefits package to compete effectively for personnel. The Company's general and administrative expenses (which consist primarily of staffing and labor expenses, including hiring additional staff and increasing the salary and benefits of existing staff) as a percentage of operating revenue were 11.6% for 1997, 21.2% for 1996, and 18.5% for 1995. The reduction of general and administrative expenses as a percentage of operating revenue decreased in 1997 as compared to 1996 primarily because operating revenue increased at a much faster rate than general and administrative expenses. There can be no assurance that the Company's labor costs will not increase as a percentage of operating revenue. Any significant failure by the Company to attract and retain qualified employees, to control its labor costs or -14- 15 STAFF EDUCATION AND TRAINING to match increases in its labor expenses with corresponding increases in revenues could have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION The Company's facilities are subject to regulation and licensing by state and local health and social service agencies and other regulatory authorities, although requirements vary from state to state. In general, these requirements address, among other things: personnel education, training, and records; facility services, including administration of medication, assistance with self-administration of medication, and limited nursing services; monitoring of resident wellness; physical plant specifications; furnishing of resident units; food and housekeeping services; emergency evacuation plans; and resident rights and responsibilities, including in some states the right to receive certain health care services from providers of a resident's choice. Certain of the Company's facilities are also licensed to provide independent living services which generally involve lower levels of resident assistance. In several states in which the Company operates or intends to operate, assisted living facilities also require a certificate of need before the facility can be opened. In most states, assisted living facilities also are subject to state or local building code, fire code and food service licensure or certification requirements. Like other health care facilities, assisted living facilities are subject to periodic survey or inspection by governmental authorities. From time to time in the ordinary course of business, the Company receives deficiency reports. The Company reviews such reports and seeks to take appropriate corrective action. Although most inspection deficiencies are resolved through a plan of correction, the reviewing agency typically is authorized to take action against a licensed facility where deficiencies are noted in the inspection process. Such action may include imposition of fines, imposition of a provisional or conditional license or suspension or revocation of a license or other sanctions. Any failure by the Company to comply with applicable requirements could have a material and adverse effect on the Company's business, financial condition and results of operations. Regulation of the assisted living industry is evolving and the Company's operations could also be adversely affected by, among other things, future regulatory developments such as mandatory increases in scope and quality of care to be afforded residents and revisions to licensing and certification standards. Increased regulatory requirements could increase costs of compliance with such requirements. The Company also is subject to Federal and state anti-remuneration laws, such as the Medicare/ Medicaid anti-kickback law which govern certain financial arrangements among health care providers and others who may be in a position to refer or recommend patients to such providers. These laws prohibit, among other things, certain direct and indirect payments that are intended to induce the referral of patients to, the arranging for services by, or the recommending of, a particular provider of health care items or services. The Medicare/Medicaid anti-kickback law has been broadly interpreted to apply to certain contractual relationships between health care providers and sources of patient referral. Similar state laws vary from state to state, are sometimes vague and seldom have been interpreted by courts or regulatory agencies. Violation of these laws can result in loss of licensure, civil and criminal penalties, and exclusion of health care providers or suppliers from participation in (i.e., furnishing covered items or services to beneficiaries of) the Medicare and Medicaid programs. There can be no assurance that such laws will be interpreted in a manner consistent with the practices of the Company. Management is not aware of any non-compliance by the Company with applicable regulatory requirements that would have a material adverse effect on the Company's financial condition or results of operations. -15- 16 ENVIRONMENTAL RISKS Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the cost of removal or remediation of certain hazardous or toxic substances, including, without limitation, asbestos-containing materials, that could be located on, in or under such property. Such laws and regulations often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. The costs of any required remediation or removal of these substances could be substantial and the liability of an owner or operator as to any property is generally not limited under such laws and regulations and could exceed the property's value and the aggregate assets of the owner or operator. The presence of these substances or failure to remediate such substances properly may also adversely affect the owner's ability to sell or rent the property, or to borrow using the property as collateral. Under these laws and regulations, an owner, operator or an entity that arranges for the disposal of hazardous or toxic substances, such as asbestos-containing materials, at a disposal site may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at the disposal site. In connection with the ownership or operation of its properties, the Company could be liable for these costs, as well as certain other costs, including governmental fines and injuries to persons or properties. As a result, the presence, with or without the Company's knowledge, of hazardous or toxic substances at any property held or operated by the Company, or acquired or operated by the Company in the future, could have an adverse effect on the Company's business, financial condition and results of operations. Environmental audits performed on the Company's properties have not revealed any significant environmental liability that management believes would have a material adverse effect on the Company's business, financial condition or results of operations. No assurance can be given that existing environmental audits with respect to any of the Company's properties reveal all environmental liabilities. LIABILITY AND INSURANCE The Company's business entails an inherent risk of liability. In recent years, participants in the long-term care industry, including the Company, have become subject to an increasing number of lawsuits alleging negligence or related legal theories, many of which involve large claims and significant legal costs. The Company is from time to time subject to such suits as a result of the nature of its business. The Company currently maintains insurance policies in amounts and with such coverage and deductibles as it believes are adequate, based on the nature and risks of its business, historical experience and industry standards. The Company also currently maintains professional liability insurance and general liability insurance. The Company's medical professional liability coverage is limited to $1,000,000 per occurrence and $3,000,000 in the aggregate for all claims per annual policy period. The non-medical professional liability insurance coverage is limited to $5,000,000 per wrongful act and $7,000,000 in the aggregate. The general liability insurance is limited to $1,000,000 per facility/per event, with additional specific limitations of $100,000 per event (premises damage), $5,000 per event (medical expenses) and $1,000 per event (resident's property damage). The Company also has an umbrella excess liability protection policy in the total amount of $25,000,000. There can be no assurance that claims will not arise which are in excess of the Company's insurance coverage or are not covered by the Company's insurance coverage. A successful claim against the Company not covered by, or in excess of, the Company's insurance could have a material adverse effect on the Company's financial condition and results of operations. Claims against the Company, regardless of their merit or eventual outcome, may also have a material adverse effect on the Company's ability to attract residents or expand its business and would require management to devote time to matters unrelated to the operation of the Company's business. In addition, the Company's insurance policies must be renewed annually and there can be no assurance that the Company will be able to continue to obtain liability insurance coverage in the future or, if available, that such coverage will be available on acceptable terms. -16- 17 EMPLOYEES At December 31, 1997, the Company had 3,377 employees, including 2,060 full-time employees, of which 105 were employed at the Company's headquarters. The Company believes employee relations are good. ITEM 2. PROPERTIES. The Company leases its corporate office, regional offices, and warehouse space under various leases. The leases have terms of five to seven years. The corporate lease has an option to terminate after twelve months from the most recent expansion commencement. The initial annual lease payments of the corporate leases amount to $258,000, and the base rent is subject to annual increases based on the Consumer Price Index from a minimum of 2% to a maximum cap of 3% per year. The initial annual base rent payments under the warehouse lease amount to $148,000. Various other leases expire during 1998 and 1999. The Company also has entered into operating leases for five facilities and three long-term ground leases related to other facilities. The operating lease terms vary from fifteen years, with two ten-year extension options. The ground leases have terms of seventy-five years to ninety-nine years. For information regarding facilities owned by the Company or in which it holds interests, see "Item 1. Business -- Owned Facilities" and "-- Facility Development." ITEM 3. LEGAL PROCEEDINGS. The Company is involved in various lawsuits and claims arising in the normal course of business. In the opinion of management of the Company, although the outcomes of these suits and claims are uncertain, in the aggregate they should not have a material adverse effect on the Company's business, financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the Nasdaq National Market under the symbol "SNRZ." Other information set forth under the caption "Corporate Information" on page 40 of the Company's 1997 Annual Report to Stockholders is incorporated by reference herein. ITEM 6. SELECTED FINANCIAL DATA. The information set forth under the caption "Selected Financial and Operating Data" on page 17 of the Company's 1997 Annual Report to Stockholders is incorporated by reference herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 18 to 24 of the Company's 1997 Annual Report to Stockholders is incorporated by reference herein. -17- 18 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements set forth on pages 26 to 37 of the Company's 1997 Annual Report to Stockholders are incorporated by reference herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information set forth under the captions "Election of Directors - -- Information as to Nominees and Other Directors," "-- Other Executive Officers," and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 1998 Annual Meeting Proxy Statement, which the Company intends to file within 120 days after its fiscal year-end, is incorporated by reference herein. ITEM 11. EXECUTIVE COMPENSATION. The information set forth under the captions "Compensation of Directors" and "Executive Compensation and Other Information" in the Company's 1998 Annual Meeting Proxy Statement, which the Company intends to file within 120 days after its fiscal year-end, is incorporated herein by reference. ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information set forth under the captions "Stock Owned by Management" and "Principal Holders of Voting Securities" in the Company's 1998 Annual Meeting Proxy Statement, which the Company intends to file within 120 days after its fiscal year-end, is incorporated by reference herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information set forth under the caption "Certain Transactions" in the Company's 1998 Annual Meeting Proxy Statement, which the Company intends to file within 120 days after its fiscal year-end, is incorporated by reference herein. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) List of documents filed as part of Form 10-K. (1) Financial Statements: Consolidated Balance Sheets -- December 31, 1997 and 1996. Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995. Consolidated Statements of Changes in Stockholders' (Deficit) Equity. Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995. -18- 19 Notes to Consolidated Financial Statements. Report of Independent Auditors. The remaining information appearing in the Company's 1997 Annual Report to Stockholders is not deemed to be filed as part of this Report, except as expressly provided herein. (2) Financial Statements Schedules: All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable or are included in the consolidated financial statements. (3) Exhibits: The Exhibits filed as part of this Annual Report on Form 10-K are listed on the Index to Exhibits on pages 23 to 28 and are incorporated by reference herein. (b) Reports on Form 8-K. None. (c) Exhibits. The Company hereby files as part of this Annual Report on Form 10-K the Exhibits listed in the Index to Exhibits. (d) Financial Statement Schedules. Not applicable. -19- 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. SUNRISE ASSISTED LIVING, INC. ------------------------------------------ Registrant By: /s/ Paul J. Klaassen --------------------------------------- Paul J. Klaassen Chairman of the Board and Chief Executive Officer 3/26/98 --------------------------------------- Date Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Paul J. Klaassen 3/26/98 ---------------------------------- ------------------------------------ Paul J. Klaassen Date Chairman of the Board, and Chief Executive Officer (Principal Executive Officer) By: /s/ David W. Faeder 3/24/98 ---------------------------------- ------------------------------------ David W. Faeder Date President, Chief Financial Officer and Director (Principal Financial Officer) By: /s/ Larry E. Hulse 3/26/98 ---------------------------------- ------------------------------------ Larry E. Hulse Date Controller (Principal Accounting Officer) By: /s/ Ronald V. Aprahamian 3/24/98 ---------------------------------- ------------------------------------ Ronald V. Aprahamian Date Director By: ---------------------------------- ------------------------------------ David G. Bradley Date Director
-20- 21 By: /s/ Thomas J. Donohue 3/29/98 ---------------------------------- ------------------------------------ Thomas J. Donohue Date Director By: ---------------------------------- ------------------------------------ Richard A. Doppelt Date Director By: /s/ Teresa M. Klaassen 3/24/98 ---------------------------------- ------------------------------------ Teresa M. Klaassen Date Executive Vice President, Secretary and Director By: ---------------------------------- ------------------------------------ Scott F. Meadow Date Director
-21- 22 INDEX TO EXHIBITS
Page (by Sequential Exhibit Numbering Number Identity of Exhibit System) - ------ ------------------- --------- 3.1 Restated Certificate of Incorporation of the Company (Exhibit 3.1 to the Company's Form S-1 Registration Statement No. 333- 13731). 3.2 Amended and Restated Bylaws of the Company, as amended (Exhibit 3 to the Company's Form 10-Q for the quarter ended September 30, 1997). 4.1 Form of Common Stock certificate (Exhibit 4.1 to the Company's Form S-1 Registration Statement No. 333-13731). 4.2 Stockholder Rights Agreement (Exhibit 4.2 to the Company's Form S-1 Registration Statement No. 333-13731). 10.1 Assignment and Contribution Agreement, effective as of January 4, 1995, by and between Paul and Teresa Klaassen and the Company (Exhibit 10.1.1 to the Company's Form S-1 Registration Statement No. 333-2582). 10.2 Assignment and Contribution Agreement, dated as of January 4, 1995, by and between Paul J. Klaassen and Teresa M. Klaassen, Sunrise Partners, L.P. and Sunrise Assisted Living Investments, Inc. (Exhibit 10.1.2 to the Company's Form S-1 Registration Statement No. 333-2582). 10.3 Letter Agreement, dated January 4, 1995, from Paul J. Klaassen and Teresa M. Klaassen to the Series A Preferred Stockholders regarding cash distributions from Sunrise Retirement Investments, Inc., Sunrise Terrace of Gunston, Inc., Sunrise Terrace of Countryside, Inc. and Sunrise Atrium, Inc. (Exhibit
-22- 23 10.19 to the Company's Form S-1 Registration Statement No. 33-2852). 10.4 Registration Agreement, dated January 4, 1995, by and among the Company, the Investors (as defined therein) and Paul and Teresa Klaassen (Exhibit 10.3 to the Company's Form S-1 Registration Statement No. 333-2582). 10.5 Promissory Note, dated June 8, 1994, executed by Sunrise Assisted Living Limited Partnership in favor of General Electric Capital Corporation (Exhibit 10.4 to the Company's Form S-1 Registration Statement No. 333-2582). 10.6 Indemnity Agreement dated as of June 8, 1994 by Paul J. Klaassen and Teresa M. Klaassen to and for the benefit of General Electric Capital Corporation (Exhibit 10.4.1 to the Company's Form S-1 Registration Statement No. 333-2582). 10.7 First Loan Modification Agreement dated as of February 15, 1996 by and between General Electric Capital Corporation and Sunrise Assisted Living Limited Partnership (Exhibit 10.4.2 to the Company's Form S-1 Registration Statement No. 333-2582). 10.8 Second Loan Modification Agreement dated as of May 1, 1996 by and between General Electric Capital Corporation and Sunrise Assisted Living Limited Partnership (Exhibit 10.4.3 to the Company's Form S-1 Registration Statement No. 333-2582). 10.9 Letter Agreement dated as of May 1, 1996 by and between General Electric Capital Corporation and Sunrise Assisted Living Limited Partnership (Exhibit 10.4.4 to the Company's Form S-1 Registration Statement No. 333-2582). 10.10 Letter agreement dated as of December 30, 1996 by and between General Electric Capital Corporation and Sunrise Assisted Living Partnership (Exhibit 10.11 to the Company's 1996 Form 10-K).
-23- 24 10.11 Third Loan Modification Agreement dated as of March 4, 1997 by and between General Electric Capital Corporation and Sunrise Assisted Living Limited Partnership. 10.12 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Arlington, Bluemont Park and Falls Church) (Exhibit 10.5 to the Company's Form S-1 Registration Statement No. 333-2582). 10.13 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Gunston and Oakton) (Exhibit 10.6 to the Company's Form S-1 Registration Statement No. 333-2582). 10.14 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and financing Statement, dated as of June 8, 1994 (Fairfax Leasehold) (Exhibit 10.7 to the Company's Form S-1 Registration Statement No. 333-2582). 10.15 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Warrenton) (Exhibit 10.8 to the Company's Form S-1 Registration Statement No. 333-2582). 10.16 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Countryside and Leesburg) (Exhibit 10.9 to the Company's Form S-1 Registration Statement No. 333-2582). 10.17 First Mortgage and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Boca Raton) (Exhibit 10.10 to the Company's Form S-1 Registration Statement No. 333-2582). 10.18 First Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and
-24- 25 Financing Statement, dated as of June 8, 1994 (Frederick) (Exhibit 10.11 to the Company's Form S-1 Registration Statement No. 333-2582). 10.19 First Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, Dated as of June 8, 1994 (Mercer Island) (Exhibit 10.12 to the Company's Form S-1 Registration Statement No. 333-2582). 10.20 1995 Stock Option Plan, as amended. 10.21 1996 Directors' Stock Option Plan, as amended. 10.22 Stock Option Agreement, entered into, effective as of January 4, 1995, by and between the Company and David W. Faeder (Exhibit 10.14 to the Company's Form S-1 Registration Statement No. 333-2582). 10.23 Amendment No. 1 to Stock Option Agreement by and between the Company and David W. Faeder (Exhibit 10.14.1 to the Company's Form S-1 Registration Statement No. 333-13731). 10.24 1996 Non-Incentive Stock Option Plan, as amended. 10.25 1997 Stock Option Plan, as amended. 10.26 Amended and Restated Lease Agreement and Assignment of Leasehold Right, dated June 6, 1994, by and among Barbara M. Volentine and Teresa M. Klaassen, the Executor of the Estate of Eldon J. Merritt, Sunrise Assisted Living Limited Partnership Assisted Living Group -- Fairfax Associates, and Sunrise Foundation, Inc. (Exhibit 10.15 to the Company's Form S-1 Registration Statement No. 333-2582). 10.27 Ground Lease, dated June 7, 1994, by and between Sunrise Assisted Living Limited Partnership and Paul J. Klaassen and Teresa M. Klaassen (Exhibit 10.16 to the Company's Form S-1 Registration Statement No. 333-2582). 10.28 Amended and Restated Agreement of Sublease, Indemnification and Easements dated February 5,
-25- 26 1995 by and between Assisted Living Group -- Fairfax Associates and Sunrise Foundation, as amended (Exhibit 10.17 to the Company's Form S-1 Registration Statement No. 333-2582). 10.29 Loan Agreement, dated as of March 19, 1996, between the Company and Creditanstalt-Bankverein (Exhibit 10.20 to the Company's Form S-1 Registration Statement No. 333-2582). 10.30 Warrant Agreement, dated as of March 19, 1996, between the Company and Creditanstalt-Bankverein (Exhibit 10.21 to the Company's Form S-1 Registration Statement No. 333-2582). 10.31.1 Amended, Restated, Consolidated and Increased Master Promissory Note dated as of December 23, 1997 by and between NationsBank, N. A. as agent and for certain additional lenders and Sunrise East Assisted Living Limited Partnership. 10.31.2 Amended and Restated Financing and Security Agreement dated as of December 23, 1997 by and between NationsBank, N. A. as agent and for certain additional lenders and Sunrise East Assisted Living Limited Partnership. 10.31.3 Amended and Restated Master Construction Loan Agreement dated as of December 23, 1997 by and between NationsBank, N. A. as agent and for certain additional lenders and Sunrise East Assisted Living Limited Partnership. 10.31.4 Management Fee Subordination Agreement dated as of December 23, 1997 by and between NationsBank, N. A. as agent and for certain additional lenders and Sunrise East Assisted Living Limited Partnership. 10.31.5 Amended and Restated Pledge, Assignment and Security Agreement dated as of December 23, 1997 by and between NationsBank, N. A. as agent and for certain additional lenders and Sunrise East Assisted Living Limited Partnership.
-26- 27 10.31.6 Master Guaranty of Performance dated as of December 23, 1997 by and between NationsBank, N. A. as agent and for certain additional lenders and Sunrise East Assisted Living Limited Partnership. 10.31.7 Amended and Restated Collateral Assignment of Operating Agreements and Management Contracts dated as of December 23, 1997 by and between NationsBank, N. A. as agent and for certain additional lenders and Sunrise East Assisted Living Limited Partnership. 10.31.8 Amended and Restated Collateral Assignment of Licenses, Participation Agreements and Resident Agreements dated as of December 23, 1997 by and between NationsBank, N. A. as agent and for certain additional lenders and Sunrise East Assisted Living Limited Partnership. 10.31.9 Amended and Restated Master Guarantee of Payment Agreement dated as of December 23, 1997 by and between NationsBank, N. A. as agent and for certain additional lenders and Sunrise East Assisted Living Limited Partnership. 10.32 Form of Indemnification Agreement (Exhibit 10.24 to the Company's Form S-1 Registration Statement No. 333-2582). 13 1997 Annual Report to Stockholders (which is not deemed to be "filed" except to the extent that portions thereof are expressly incorporated by reference in this Annual Report on Form 10-K). 21 Subsidiaries of the Registrant. 23 Consent of Ernst & Young LLP. 27.1 Financial Data Schedule as of and for the year ended December 31, 1997. 27.2 Restated Financial Data Schedule as of and for the nine months ended September 30, 1997, as of and for the six months ended June 30, 1997, and as of and for the three months ended March 31, 1997. 27.3 Restated Financial Data Schedule as of and for the year ended December 31, 1996, as of and for the nine months ended September 30, 1996, and as of and for the six months ended June 30, 1996.
-27- EX-10.20 2 1995 STOCK OPTION PLAN, AS AMENDED 1 EXHIBIT 10.20 SUNRISE ASSISTED LIVING, INC. 1995 STOCK OPTION PLAN, AS AMENDED SUNRISE ASSISTED LIVING, INC., a Delaware corporation (the "Corporation"), sets forth herein the terms of this 1995 Stock Option Plan, as amended (the "Plan") as follows: 1. PURPOSE The Plan is intended to advance the interests of the Corporation and any subsidiary thereof within the meaning of Rule 405 of Regulation C under the Securities Act of 1933, as amended (with the term "person" as used in such Rule 405 being defined as in Section 2(2) of such Act) (a "Subsidiary"), by providing eligible individuals (as designated pursuant to Section 4 below) with incentives to improve business results, by providing an opportunity to acquire or increase a proprietary interest in the Corporation, which thereby will create a stronger incentive to expend maximum effort for the growth and success of the Corporation and its Subsidiaries, and will encourage such eligible individuals to continue to serve the Corporation and its Subsidiaries, whether as an employee, as a director, as a consultant or advisor or in some other capacity. To this end, the Plan provides for the grant of stock options, as set out herein. This Plan provides for the grant of stock options (each of which is an "Option") in accordance with the terms of the Plan. An Option may be an incentive stock option (an "ISO") intended to satisfy the applicable requirements under Section 422 of the Internal Revenue Code of 1986, as amended from time to time, or the corresponding provision of any subsequently-enacted tax statute (the "Code"), or a nonqualified stock option (an "NSO"). An Option is an NSO to the extent that the Option would exceed the limitations set forth in Section 7 below. An Option is also an NSO if either (i) the Option is specifically designated at the time of grant as an NSO or not being an ISO or (ii) the Option does not otherwise satisfy the requirements of Code Section 422 at the time of grant. Each Option shall be evidenced by a written agreement between the Corporation and the recipient individual that sets out the terms and conditions of the grant as further described in Section 8. 2. ADMINISTRATION (a) BOARD The Plan shall be administered by the Board of Directors of the Corporation (the "Board"), which shall have the full power and authority to take all actions and to make all determinations required or provided for under the Plan or any Option granted or Option Agreement (as defined in Section 8 below) 2 entered into hereunder and all such other actions and determinations not inconsistent with the specific terms and provisions of the Plan deemed by the Board to be necessary or appropriate to the administration of the Plan or any Option granted or Option Agreement entered into hereunder. The interpretation and construction by the Board of any provision of the Plan or of any Option granted or Option Agreement entered into hereunder shall be final, binding and conclusive. (b) ACTION BY COMMITTEE The Board from time to time may appoint a Stock Option Committee consisting of two or more members of the Board of Directors who, in the sole discretion of the Board, may be the same Directors who serve on the Compensation Committee, subject to Section 2(d), or may appoint the Compensation Committee to serve as the Stock Option Committee (the "Committee"), subject to Section 2(d). The Board, in its sole discretion, may provide that the role of the Committee shall be limited to making recommendations to the Board concerning any determinations to be made and actions to be taken by the Board pursuant to or with respect to the Plan, or the Board may delegate to the Committee such powers and authorities related to the administration of the Plan, as set forth in Section 2(a) above, as the Board shall determine, consistent with the Certificate of Incorporation and By-laws of the Corporation and applicable law. In the event that the Plan or any Option granted or Option Agreement entered into hereunder provides for any action to be taken by or determination to be made by the Board, such action may be taken by or such determination may be made by the Committee if the power and authority to do so has been delegated to the Committee by the Board as provided for in this Section. Unless otherwise expressly determined by the Board, any such action or determination by the Committee shall be final and conclusive. (c) NO LIABILITY No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted or Option Agreement entered into hereunder. (d) APPLICABILITY OF RULE 16b-3 Those provisions of the Plan that make express reference to Rule 16b-3 shall apply to the Corporation only at such time as the Corporation's Stock (as defined in Section 3) or any other equity security of the Corporation is registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and then only to such persons as are required to file reports under Section 16(a) of the Exchange Act (each of whom is a "Reporting Person"). Unless not required by Rule 16b-3, from and after such time as the Corporation's Stock or any other equity security of the Corporation is registered 2 3 under the Exchange Act (the "Registration Date"), the Board may act under the Plan (i) only if all members of the Board are "disinterested persons" as defined in Rule 16b-3 or (ii) by the determination of the Committee constituted as set forth in the following sentence. From and after the Registration Date, unless not required by Rule 16b-3, the Committee appointed pursuant to Section 2(b) shall consist of not fewer than two members of the Board each of whom shall qualify (at the time of appointment to the Committee and during all periods of service on the Committee) in all respects as a "disinterested person" as defined in Rule 16b-3. 3. STOCK The stock that may be issued pursuant to Options under the Plan shall be shares of common stock, par value $.01 per share, of the Corporation (the "Stock"), which shares may be treasury shares or authorized but unissued shares. The number of shares of Stock that may be issued pursuant to Options under the Plan shall not exceed, in the aggregate, one million two hundred ninety eight thousand and sixty-five (1,298,065) shares. If any Option expires, terminates, or is terminated or canceled for any reason prior to exercise, the shares of Stock that were subject to the unexercised, forfeited, terminated or canceled portion of such Option shall be available immediately for future grants of Options under the Plan; provided, however, shares of Stock that were subject to an Option that has been purchased pursuant to Section 11(c) shall not be available for future grants of Options under the Plan. 4. ELIGIBILITY (a) DESIGNATED RECIPIENTS Subject to the next sentence, Options may be granted under the Plan to (i) any full-time employee of the Corporation or any Subsidiary (including any such individual who is an officer or director of the Corporation or any Subsidiary) as the Board shall determine and designate from time to time or (ii) any other individual (including a non-employee director of, or consultant or advisor providing bona fide services to, the Corporation or any Subsidiary provided that such services must not be in connection with the offer or sale of securities in a capital-raising transaction) whose participation in the Plan is determined by the Board to be in the best interests of the Corporation and is so designated by the Board. Options granted to a full-time employee of the Corporation or a "subsidiary corporation" thereof within the meaning of Section 424(f) of the Code shall be either ISOs or NSOs, as determined in the sole discretion of the Board, and Options granted to any other individual shall be NSOs. 3 4 (b) SUCCESSIVE GRANTS An individual may hold more than one Option, subject to such restrictions as are provided herein. 5. EFFECTIVE DATE AND TERM OF THE PLAN (a) EFFECTIVE DATE The Plan shall be effective as of the date of adoption by the Board, subject to approval of the Plan within one year of such effective date by the affirmative vote of stockholders who hold more than fifty percent (50%) of the combined voting power of the outstanding shares of voting stock of the Corporation present or represented, and entitled to vote thereon at a duly constituted stockholders' meeting, or by consent as permitted by law and in a manner that satisfies applicable requirements of Rule 16b-3(b) of the Exchange Act. Upon approval of the Plan by the stockholders of the Corporation as set forth above, however, all Options granted under the Plan on or after the effective date shall be fully effective as if the stockholders of the Corporation had approved the Plan on the Plan's effective date. If the stockholders fail to approve the Plan within one year of such effective date, any Options granted hereunder shall be null and void and of no effect. (b) TERM The Plan shall have no termination date, but no grant of an ISO may occur after the date that is ten years after the effective date. 6. GRANT OF OPTIONS (a) GENERAL Subject to the terms and conditions of the Plan, the Board may, at any time and from time to time, grant to such eligible individuals as the Board may determine (each of the whom is an "Optionee"), Options to purchase such number of shares of Stock on such terms and conditions as the Board may determine, including any terms or conditions that may be necessary to qualify such Options as ISOs under Section 422 of the Code. Such authority specifically includes the authority, in order to effectuate the purposes of the Plan but without amending the Plan, to modify grants to eligible individuals who are foreign nationals or are individuals who are employed outside the United States to recognize differences in local law, tax policy, or custom. 4 5 (b) LIMITATION ON GRANTS OF OPTIONS The maximum number of shares subject to Options that can be granted under the Plan to any executive officer of the Company or a Subsidiary, or to any other person eligible for a grant of an Option under Section 4, is 250,000 shares during the first ten years after the effective date of the Plan and 50,000 shares per year thereafter (in each case, subject to adjustment as provided in Section 16(a) hereof). 7. LIMITATIONS ON INCENTIVE STOCK OPTIONS (a) PRICE AND DOLLAR LIMITATIONS An Option that is designated as being one that is intended to qualify as an ISO shall qualify for treatment as an ISO only to the extent that the aggregate fair market value (determined at the time the Option is granted) of the Stock with respect to which all options that are intended to constitute "incentive stock options," within the meaning of Code Section 422, are exercisable for the first time by any Optionee during any calendar year (under the Plan and all other plans of the Optionee's employer corporation and its parent and subsidiary corporations within the meaning of Section 422(d) of the Code) does not exceed $100,000. (b) PARACHUTE LIMITATIONS Notwithstanding any other provision of this Plan or of any other agreement, contract, or understanding heretofore or hereafter entered into by the Optionee with the Corporation, except an agreement, contract, or understanding hereafter entered into that expressly modifies or excludes application of this paragraph (an "Other Agreement"), and notwithstanding any formal or informal plan or other arrangement for the direct or indirect provision of compensation to the Optionee (including groups or classes of participants or beneficiaries of which the Optionee is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for the Optionee (a "Benefit Arrangement"), if the Optionee is a "disqualified individual," as defined in Section 280G(c) of the Code, any Option held by that Optionee and any right to receive any payment or other benefit under this Plan shall not become exercisable or vested (i) to the extent that such right to exercise, vesting, payment, or benefit, taking into account all other rights, payments, or benefits to or for the Optionee under this Plan, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to the Optionee under this Plan to be considered a "parachute payment" within the meaning of Section 280G(b)(2) of the Code as then in effect (a "Parachute Payment") and (ii) if, as a result of receiving a Parachute Payment, the 5 6 aggregate after-tax amounts received by the Optionee from the Corporation under this Plan, all Other Agreements, and all Benefit Arrangements would be less than the maximum after-tax amount that could be received by him without causing any such payment or benefit to be considered a Parachute Payment. In the event that the receipt of any such right to exercise, vesting, payment, or benefit under this Plan, in conjunction with all other rights, payments, or benefits to or for the Optionee under any Other Agreement or any Benefit Arrangement would cause the Optionee to be considered to have received a Parachute Payment under this Plan that would have the effect of decreasing the after-tax amount received by the Optionee as described in clause (ii) of the preceding sentence, then the Optionee shall have the right, in the Optionee's sole discretion, to designate those rights, payments, or benefits under this Plan, any Other Agreements, and any Benefit Arrangements that should be reduced or eliminated so as to avoid having the payment or benefit to the Optionee under this Plan be deemed to be a Parachute Payment. 8. OPTION AGREEMENTS All Options granted pursuant to the Plan shall be evidenced by agreements ("Option Agreements"), to be executed by the Corporation and by the Optionee, in such form or forms as the Board shall from time to time determine. Option Agreements covering Options granted from time to time or at the same time need not contain similar provisions; provided, however, that all such Option Agreements shall comply with all terms of the Plan. 9. OPTION PRICE The purchase price of each share of the Stock subject to an Option (the "Option Price") shall be fixed by the Board and stated in each Option Agreement. The Option Price shall be not less than the greater of par value or 100 percent of the fair market value of a share of Stock on the date on which the Option is granted (as determined in good faith by the Board); provided, however, that in the event the Optionee would otherwise be ineligible to receive an ISO by reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating to stock ownership of more than ten percent), the Option Price of an Option that is intended to be an ISO shall not be less than the greater of par value or 110 percent of the fair market value of a share of Stock at the time such Option is granted. In the event that the Stock is listed on an established national or regional stock exchange or The Nasdaq Stock Market, is admitted to quotation on the National Association of Securities Dealers Automated Quotation System, or is publicly traded in an established securities market, in determining the fair market value of the Stock, the Board shall use the closing price of the Stock on such exchange or system or in such market (the highest such closing price if there is more than one such exchange or market) on the trading date immediately before the Option is granted (or, if there is no such 6 7 closing price, then the Board shall use the mean between the highest bid and lowest asked prices or between the high and low prices on such date), or, if no sale of the Stock has been made on such day, on the next preceding day on which any such sale shall have been made. 10. TERM AND EXERCISE OF OPTIONS (a) TERM Upon the expiration of ten years from the date on which an ISO is granted or on such date prior thereto as may be fixed by the Board and stated in the Option Agreement relating to such Option, that ISO shall be ineligible for treatment as an "incentive stock option," as defined in Section 422 of the Code, and shall be exercisable only as an NSO. In the event the Optionee otherwise would be ineligible to receive an "incentive stock option" by reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating to stock ownership of more than 10 percent), such ten year restriction on exercisability as an ISO shall be read to impose a five year restriction on such exercisability. If an Optionee shall terminate employment prior to the ten-year or five-year limitation described in the immediately preceding sentences, any outstanding ISO shall be ineligible for treatment as an "incentive stock option," as defined in Section 422 of the Code, and shall be exercisable only as an NSO, unless exercised within three months after such termination or, in the case of termination on account of "permanent and total disability" (within the meaning of Section 22(e)(3) of the Code), within one year after such termination. (b) OPTION PERIOD AND LIMITATIONS ON EXERCISE Each Option granted under the Plan shall be exercisable, in whole or in part, at any time and from time to time, over a period commencing on or after the date of grant and, to the extent that the Board determines and sets forth a termination date for such Option in the Option Agreement (including any amendment thereto), ending upon the stated expiration or termination date. The Board in its sole discretion may specify events or circumstances, including the giving of notice, which will cause an Option to terminate as set forth in the Option Agreement or in this Plan. No Option granted to a Reporting Person shall be exercisable during the first six months after the date of grant. Without limiting the foregoing but subject to the terms and conditions of the Plan, the Board may in its sole discretion provide that an Option may not be exercised in whole or in part for any period or periods of time during which such Option is outstanding and may condition exercisability (or vesting) of an Option upon the attainment of performance objectives, upon continued service, upon certain events or transactions, or a combination of one or more of such factors, or otherwise, as set forth in the Option Agreement. Subject to the parachute payment restrictions under Section 7(b), however, the Board, in its 7 8 sole discretion, may rescind, modify, or waive any such limitation or condition on the exercise of an Option contained in any Option Agreement, so as to accelerate the time at which the Option may be exercised or extend the period during which the Option may be exercised. Notwithstanding any other provisions of the Plan, no Option granted to an Optionee under the Plan shall be exercisable in whole or in part prior to the date on which the stockholders of the Corporation approve the Plan, as provided in Section 5 above. (c) METHOD OF EXERCISE An Option that is exercisable hereunder may be exercised by delivery to the Corporation on any business day, at the Corporation's principal office, addressed to the attention of the President, of written notice of exercise, which notice shall specify the number of shares with respect to which the Option is being exercised and shall be accompanied by payment in full of the Option Price of the shares for which the Option is being exercised. The minimum number of shares of Stock with respect to which an Option may be exercised, in whole or in part, at any time shall be the lesser of (i) 100 shares or such lesser number set forth in the applicable Option Agreement and (ii) the maximum number of shares available for purchase under the Option at the time of exercise. Payment of the Option Price for the shares of Stock purchased pursuant to the exercise of an Option shall be made (i) in cash or in cash equivalents; (ii) to the extent permitted by applicable law and under the terms of the Option Agreement with respect to such Option, through the tender to the Corporation of shares of Stock, which shares shall be valued, for purposes of determining the extent to which the Option Price has been paid thereby, at their fair market value (determined in accordance with Section 9) on the date of exercise; (iii) to the extent permitted by applicable law and under the terms of the Option Agreement with respect to such Option, by the delivery of a promissory note of the person exercising the Option to the Corporation on such terms as shall be set out in such Option Agreement; (iv) to the extent permitted by applicable law and under the terms of the Option Agreement with respect to such Option, by causing the Corporation to withhold shares of Stock otherwise issuable pursuant to the exercise of an Option equal in value to the Option Price or portion thereof to be satisfied pursuant to this clause (iv); or (v) by a combination of the methods described in (i), (ii), (iii), and (iv). An attempt to exercise any Option granted hereunder other than as set forth above shall be invalid and of no force and effect. Payment in full of the Option Price need not accompany the written notice of exercise provided the notice directs that the Stock certificate or certificates for the shares for which the Option is exercised be delivered to a licensed broker acceptable to the Corporation as the agent for the individual exercising the Option and, at the time such Stock certificate or certificates are delivered, the broker tenders to the Corporation cash (or cash equivalents acceptable to the Corporation) equal to the Option Price. Promptly after the exercise of an Option and the payment in full of the Option Price of the 8 9 shares of Stock covered thereby, the individual exercising the Option shall be entitled to the issuance of a Stock certificate or Stock certificates evidencing his ownership of such shares. A separate Stock certificate or separate Stock certificates shall be issued for any shares purchased pursuant to the exercise of an Option that is an ISO, which certificate or certificates shall not include any shares that were purchased pursuant to the exercise of an Option that is an NSO. Unless otherwise stated in the applicable Option Agreement, an individual holding or exercising an Option shall have none of the rights of a stockholder (for example, the right to receive cash or stock dividend payments attributable to the subject shares or to direct the voting of the subject shares) until the shares of Stock covered thereby are fully paid and issued to him. Except as provided in Section 16 below, no adjustment shall be made for dividends or other rights for which the record date is prior to the date of such issuance. Shares issued pursuant to the exercise of any Option shall be subject to the applicable restrictions set out in Section 11 hereof. (d) DATE OF GRANT The date of grant of an Option under this Plan shall be the date as of which the Board approves the grant. 11. TRANSFERABILITY OF STOCK AND OPTIONS (a) LIMITATIONS ON TRANSFER During the lifetime of an Optionee, only such Optionee (or, in the event of legal incapacity or incompetency, the guardian or legal representative of the Optionee) may exercise the Option, except as otherwise specifically permitted by this Section 11(a). No Option shall be assignable or transferable other than by will or in accordance with the laws of descent and distribution; provided, however, subject to the terms of the applicable Option Agreement, and to the extent the transfer is in compliance with any applicable restrictions on transfers, an Optionee (other than, unless permissible under Rule 16b-3, an Optionee who is, or during the preceding six months has been, a Reporting Person) may transfer an NSO to a family member of the Optionee (defined as an individual who is related to the Optionee by blood or adoption) or to a trust established and maintained for the benefit of the Optionee or a family member of the Optionee (as determined under applicable state law and the Code). (b) REPURCHASE RIGHTS In the Board's sole discretion, the Board may provide in an Option Agreement that upon the termination of an Optionee's employment or other relationship with the Corporation or a Subsidiary (whether as an employee, a director, a consultant or advisor providing bona fide services to the Corporation or any Subsidiary, or otherwise), the Corporation shall have the right, for a 9 10 period of up to twelve months following such termination, to repurchase any or all of the shares acquired by the individual pursuant to this Plan under an Option (including shares that were previously transferred pursuant to Section 11(d) below, unless otherwise specified in the Option Agreement), at a price equal to the fair market value of such shares on the date of termination (or at such other price or the fair market value on such other date as shall have been specified by the Board at the time of grant and set out in the appropriate Option Agreement with respect to the grant). In the Board's sole discretion and pursuant to the terms of Section 12, the Board may also provide in an Option Agreement that upon the exercise of an Option following termination of an Optionee's employment or other relationship with the Corporation or a Subsidiary (whether as an employee, a director, a consultant or advisor providing bona fide services to Corporation or any Subsidiary, or otherwise), the Corporation shall have the right, for a period of up to twelve months following such exercise, to repurchase any or all such shares of Stock acquired by the Optionee pursuant to such exercise of such Option at a price that is equal to the fair market value of such shares (including shares that were previously transferred pursuant to Section 11(d) below, unless otherwise specified in the Option Agreement) on the date of exercise (or at such other price or the fair market value on such other date as shall have been specified by the Board at the time of grant and set out in the appropriate Option Agreement with respect to the grant). In the event that the Corporation determines that it cannot or will not exercise its rights to purchase Stock under this Section 11(b) and the applicable Option Agreement, in whole or in part, the Corporation may assign its rights, in whole or in part, to (i) any holder of stock or securities of the Corporation (a "Stockholder"), (ii) any employee benefit plan (within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended) maintained by the Corporation or a Subsidiary for the benefit of employees of the Corporation or a Subsidiary (a "Benefit Plan"), or (iii) any corporation or other trade or business that is controlled by or under common control with the Corporation (determined in accordance with the principles of Sections 414(b) and (c) of the Code and regulations thereunder) (an "Affiliate"). The Corporation shall give reasonable written notice to the individual of any assignment of its rights. "Fair market value," for purposes of this Section 11(b), shall be determined by the Board in the same manner used by it in good faith to determine fair market value for purposes of determining the Option Price pursuant to Section 9. (c) PURCHASE OF OPTIONS In the Board's sole discretion, the Board may provide in an Option Agreement that upon or after the termination of an Optionee's employment or other relationship with the Corporation or a Subsidiary (whether as an employee, a director, a consultant or advisor providing bona fide services to the Corporation or a Subsidiary, or otherwise), the Corporation shall have the right, 10 11 at all times before the Option is exercised, to purchase in whole or in part each Option held by the Optionee (and each Option transferred by the Optionee pursuant to Section 11(a) above unless otherwise specified in the Option Agreement), at a price equal to the value of such Option on the date such purchase right is exercised, provided the Corporation delivers to the Optionee a notice that it is exercising such purchase right within 10 business days of such date. For this purpose, the value of the Option (or portion thereof being purchased) is equal to the excess (if any) of the fair market value of the shares of Stock that are subject to the Option, (determined by the Board in the same manner used by it in good faith to determine fair market value for purposes of determining the Option Price pursuant to Section 9) as of the date of the exercise of such right, over the aggregate Option Price of such shares. Upon payment (or tender of payment) of the applicable amount to the Optionee (or transferee of the Option), the Option shall be terminated and, if payment has been tendered but not made, shall only represent the right to receive such payment without interest. (d) NONTRANSFERABILITY OF SHARES In the Board's sole discretion, the Board may provide in an Option Agreement that an Optionee (or such other individual who is entitled to exercise an Option) shall not sell, pledge, assign, gift, transfer, or otherwise dispose of any shares of Stock acquired pursuant to an Option to anyone without first offering such shares to the Corporation for purchase on the same terms and conditions as those offered the proposed transferee. If such a restriction applies to an individual pursuant to an Option Agreement, an individual who proposes such a transfer (the "Transferor") shall notify the Corporation, in writing, of the identity of the proposed transferee and the terms and conditions of such proposed transfer. The Corporation may exercise its right of first refusal within 90 days after receiving such notice of the proposed transfer. The Corporation may assign its right of first refusal under this Section 11(d), in whole or in part, to a Stockholder, a Benefit Plan, or an Affiliate. The Corporation shall give reasonable written notice to the Transferor of any such assignment of its rights. If the Corporation (or its permitted assignee) fails to exercise such right of first refusal during this 90-day period, the Transferor may proceed with the proposed transfer at any time within the next 45 days, and if he does not do so, the restrictions of this Section 11(d) shall re-apply. The Option Agreement may provide that the restrictions of this Section 11(d) re-apply to any person to whom Stock that was originally acquired pursuant to an Option is sold, pledged, assigned, bequeathed, gifted, transferred or otherwise disposed of, without regard to the number of such subsequent 1transferees or the manner in which they acquire the Stock, but the Option Agreement may provide that the restrictions of this Section 11(d) do not apply to a transfer of Stock that occurs as a result of the death of the Transferor or of any subsequent transferee (but 11 12 shall apply to the executor, the administrator or personal representative, the estate, and the legatees, beneficiaries and assigns thereof). (e) LEGEND In order to enforce the restrictions imposed upon shares of Stock under this Plan or as provided in an Option Agreement, the Board may cause a legend or legends to be placed on any certificate representing shares issued pursuant to this Plan that complies with the applicable securities laws and regulations and makes appropriate reference to the restrictions imposed under it. (f) PUT RIGHTS The Board, by inclusion of appropriate language in the Option Agreement, may grant the person acquiring shares of Stock thereunder the right to put such shares to the Corporation at the fair market value of such shares (as determined hereunder) at the time of exercise of such put, or at such other value as shall be specified in the Option Agreement, subject to such further terms and conditions as the Board shall include in the Option Agreement. (g) TERMINATION OF SECTIONS 11(b) THROUGH 11(f) Sections 11(b) through 11(f) shall terminate, and shall be of no further force and effect, from and after the Registration Date. 12. TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP OF OPTIONEE In the Board's sole discretion, the Board may include language in an Option Agreement providing for the termination of any unexercised Option in whole or in part upon or at any time after the termination of employment or other relationship of the Optionee with the Corporation or a Subsidiary (whether as an employee, a director, a consultant or advisor providing bona fide services to the Corporation or a Subsidiary, or otherwise). Whether a leave of absence or leave on military or government service shall constitute a termination of employment or other relationship of the Optionee with the Corporation or a Subsidiary for purposes of the Plan shall be determined by the Board, which determination shall be final and conclusive. 13. USE OF PROCEEDS The proceeds received by the Corporation from the sale of Stock pursuant to the exercise of Options granted under the Plan shall constitute general funds of the Corporation. 12 13 14. REQUIREMENTS OF LAW The Corporation shall not be required to sell or issue any shares of Stock under any Option if the sale or issuance of such shares would constitute a violation by the Optionee, the individual exercising the Option, or the Corporation of any provisions of any law or regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. If at any time the Corporation shall determine, in its discretion, that the listing, registration, or qualification of any shares subject to the Option upon any securities exchange or under any state or federal law, or the consent or approval of any government regulatory or self-regulatory body is necessary or desirable as a condition of, or in connection with, the issuance or purchase of shares, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Corporation, and any delay caused thereby shall in no way affect the date of termination of the Option. Specifically in connection with the Securities Act of 1933 (as now in effect or as hereafter amended), upon the exercise of any Option, unless a registration statement under such Act is in effect with respect to the shares of Stock covered thereby, the Corporation shall not be required to sell or issue such shares unless the Board has received evidence satisfactory to it that the holder of such Option may acquire such shares pursuant to an exemption from registration under such Act. Any determination in this connection by the Board shall be final, binding, and conclusive. The Corporation may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Securities Act of 1933 (as now in effect or as hereafter amended) or to register its common stock pursuant to the Securities Exchange Act of 1934 (as now in effect or as hereafter amended). The Corporation shall not be obligated to take any affirmative action in order to cause the exercisability or vesting of an Option or to cause the exercise of an Option or the issuance of shares pursuant thereto to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that an Option shall not be exercisable unless and until the shares of Stock covered by such Option are registered or are subject to an available exemption from registration, the exercise of such Option (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption. 15. AMENDMENT AND TERMINATION OF THE PLAN The Board may, at any time and from time to time, amend, suspend, or terminate the Plan as to any shares of Stock as to which Options have not been granted; provided, however, that any amendment by the Board which, if not approved by the Corporation's stockholders in accordance with applicable requirements of Rule 16b-3, would cause the Plan to not comply with Rule 16b-3 13 14 (or any successor rule or other regulatory requirements) or the Code shall not be effective unless approved by the affirmative vote of stockholders who hold more than fifty percent (50%) of the combined voting power of the outstanding shares of voting stock of the Corporation present or represented, and entitled to vote thereon at a duly constituted stockholders' meeting, or by consent as permitted by law. The Corporation, however, may retain the right in an Option Agreement to convert an ISO into an NSO. The Corporation may also retain the right in an Option Agreement to cause a forfeiture of the shares of Stock or gain realized by a holder of an Option (a) if the holder violates any agreement covering non-competition with the Corporation or any Subsidiary or nondisclosure of confidential information of the Corporation or any Subsidiary, (b) if the holder's employment is terminated for cause or (c) if the Board determines that the holder committed acts or omissions which would have been the basis for a termination of holder's employment for cause had such acts or omissions been discovered prior to termination of holder's employment. Furthermore, the Corporation may, in the Option Agreement, retain the right to annul the grant of an Option, if the holder of such grant was an employee of the Corporation or a Subsidiary and the holder's employment is terminated for cause, as defined in the applicable Option Agreement. Except as permitted under this Section 15 or Section 16 hereof, no amendment, suspension, or termination of the Plan shall, without the consent of the holder of the Option, alter or impair rights or obligations under any Option theretofore granted under the Plan. 16. EFFECT OF CHANGES IN CAPITALIZATION (a) CHANGES IN STOCK If the number of outstanding shares of Stock is increased or decreased or the shares of Stock are changed into or exchanged for a different number or kind of shares or other securities of the Corporation on account of any recapitalization, reclassification, stock split-up, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or other increase or decrease in such shares effected without receipt of consideration by the Corporation, occurring after the effective date of the Plan, the number and kind of shares for the acquisition of which Options may be granted under the Plan, and the limitations on the maximum number of shares subject to Options that can be granted to any individual under the Plan as set forth in Section 6(b) hereof, shall be adjusted proportionately and accordingly by the Corporation. In addition, the number and kind of shares for which Options are outstanding shall be adjusted proportionately and accordingly so that the proportionate interest of the holder of the Option immediately following such event shall, to the extent practicable, be the same as immediately before such event. Any such adjustment in outstanding Options shall not change the aggregate Option Price payable with respect to shares that are subject to the 14 15 unexercised portion of the Option outstanding but shall include a corresponding proportionate adjustment in the Option Price per share. (b) REORGANIZATION IN WHICH THE CORPORATION IS THE SURVIVING CORPORATION Subject to Subsection (c)(iv) hereof, if the Corporation shall be the surviving corporation in any reorganization, merger, or consolidation of the Corporation with one or more other corporations, any Option theretofore granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to such Option would have been entitled immediately following such reorganization, merger, or consolidation, with a corresponding proportionate adjustment of the Option Price per share so that the aggregate Option Price thereafter shall be the same as the aggregate Option Price of the shares remaining subject to the Option immediately prior to such reorganization, merger, or consolidation. (c) DISSOLUTION, LIQUIDATION, SALE OF ASSETS, REORGANIZATION IN WHICH THE CORPORATION IS NOT THE SURVIVING CORPORATION, ETC. The Plan and all Options outstanding hereunder shall terminate (i) upon the dissolution or liquidation of the Corporation, or (ii) upon a merger, consolidation, or reorganization of the Corporation with one or more other corporations in which the Corporation is not the surviving corporation, or (iii) upon a sale of substantially all of the assets of the Corporation to another person or entity, or (iv) upon a merger, consolidation or reorganization (or other transaction if so determined by the Board in its sole discretion) in which the Corporation is the surviving corporation, that is approved by the Board and that results in any person or entity (other than persons who are holders of Stock of the Corporation at the time the Plan is approved by the stockholders and other than an Affiliate) owning 80 percent or more of the combined voting power of all classes of stock of the Corporation, except to the extent provision is made in writing in connection with any such transaction covered by clauses (i) through (iv) for the continuation of the Plan or the assumption of such Options theretofore granted, or for the substitution for such Options of new options covering the stock of a successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and exercise prices, in which event the Plan and Options theretofore granted shall continue in the manner and under the terms so provided. In the event of any such termination of the Plan, each individual holding an Option shall have the right (subject to the general limitations on exercise set forth in Section 10(b) above), during such period occurring before such termination as the Board in its sole discretion shall determine and designate, and in any event immediately before the occurrence of such termination, to exercise such Option in whole or in part, to the extent that such Option was otherwise exercisable at the time such 15 16 termination occurs, except that, by inclusion of appropriate language in an Option Agreement, the Board may provide that the Option may be exercised before termination without regard to any installment limitation or other condition on exercise imposed pursuant to Section 10(b) above. The Corporation shall send written notice of a transaction or event that will result in such a termination to all individuals who hold Options not later than the time at which the Corporation gives notice thereof to its stockholders. (d) ADJUSTMENTS Adjustments under this Section 16 related to stock or securities of the Corporation shall be made by the Board, whose determination in that respect shall be final, binding, and conclusive. No fractional shares of Stock or units of other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share or unit. (e) NO LIMITATIONS ON CORPORATION The grant of an Option pursuant to the Plan shall not affect or limit in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure or to merge, consolidate, dissolve, or liquidate, or to sell or transfer all or any part of its business or assets. 17. DISCLAIMER OF RIGHTS No provision in the Plan or in any Option granted or Option Agreement entered into pursuant to the Plan shall be construed to confer upon any individual the right to remain in the employ or service of or to maintain a relationship with the Corporation or any Subsidiary, or to interfere in any way with any contractual or other right or authority of the Corporation or any Subsidiary either to increase or decrease the compensation or other payments to any individual at any time, or to terminate any employment or other relationship between any individual and the Corporation or any Subsidiary. The obligation of the Corporation to pay any benefits pursuant to this Plan shall be interpreted as a contractual obligation to pay only those amounts described herein, in the manner and under the conditions prescribed herein. The Plan shall in no way be interpreted to require the Corporation to transfer any amounts to a third party trustee or otherwise hold any amounts in trust or escrow for payment to any participant or beneficiary under the terms of the Plan. 18. NONEXCLUSIVITY OF THE PLAN Neither the adoption of the Plan nor the submission of the Plan to the stockholders of the Corporation for approval shall be construed as creating 16 17 any limitations upon the right and authority of the Board to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or particular individuals) as the Board in its discretion determines desirable, including, without limitation, the granting of stock options otherwise than under the Plan. 19. CAPTIONS The use of captions in this Plan or any Option Agreement is for the convenience of reference only and shall not affect the meaning of any provision of the Plan or such Option Agreement. 20. DISQUALIFYING DISPOSITIONS If Stock acquired by exercise of an ISO granted under this Plan is disposed of within two years following the date of grant of the ISO or one year following the transfer of the subject Stock to the Optionee (a "disqualifying disposition"), the holder of the Stock shall, immediately prior to such disqualifying disposition, notify the Corporation in writing of the date and terms of such disposition and provide such other information regarding the disposition as the Corporation may reasonably require. 21. WITHHOLDING TAXES (a) The Corporation shall have the right to deduct from payments of any kind otherwise due to an Optionee any Federal, state, or local taxes of any kind required by law to be withheld with respect to any shares issued upon the exercise of an Option under the Plan or in connection with the purchase of an Option by the Corporation. At the time of exercise, the Optionee shall pay to the Corporation any amount that the Corporation may reasonably determine to be necessary to satisfy such withholding obligation. The Board in its sole discretion may provide in the Option Agreement that, subject to the prior approval of the Corporation, which may be withheld by the Corporation in its sole discretion, the Optionee may elect to satisfy such obligations, in whole or in part, (i) by causing the Corporation to withhold shares of Stock otherwise issuable pursuant to the exercise of an Option or (ii) by delivering to the Corporation shares of Stock already owned by the Optionee. The shares so delivered or withheld shall have a fair market value equal to such withholding obligations. The fair market value of the shares used to satisfy such withholding obligation shall be determined by the Corporation as of the date that the amount of tax to be withheld is to be determined. An Optionee who has made an election pursuant to this Section 21(a) may only satisfy his or her withholding obligation with shares of Stock that are not subject to any repurchase, forfeiture, unfulfilled vesting, or other similar requirements. 17 18 (b) Notwithstanding the foregoing, in the case of a Reporting Person, no election to use shares for the payment of withholding taxes shall be effective unless made in compliance with any applicable requirements under Rule 16b-3(e) or any successor rule under the Exchange Act. 22. OTHER PROVISIONS Each Option granted under the Plan may be subject to, and the Option Agreement relating to such Option may contain, such other terms and conditions not inconsistent with the Plan as may be determined by the Board, in its sole discretion. Notwithstanding the foregoing, each ISO granted under the Plan shall include those terms and conditions that are necessary to qualify the ISO as an "incentive stock option" within the meaning of the Section 422 of the Code or the regulations thereunder and shall not include any terms or conditions that are inconsistent therewith. 23. NUMBER AND GENDER With respect to words used in this Plan, the singular form shall include the plural form, the masculine gender shall include the feminine gender, etc., as the context requires. 24. SEVERABILITY If any provision of the Plan or any Option Agreement shall be determined to be illegal or unenforceable by any court of law in any jurisdiction, the remaining provisions hereof and thereof shall be severable and enforceable in accordance with their terms, and all provisions shall remain enforceable in any other jurisdiction. 25. GOVERNING LAW The validity and construction of this Plan and the instruments evidencing the Options granted hereunder shall be governed by the laws of the State of Delaware (excluding its choice of law rules). * * * 18 EX-10.21 3 1996 DIRECTORS' STOCK OPTION PLAN, AS AMENDED 1 EXHIBIT 10.21 SUNRISE ASSISTED LIVING, INC. 1996 DIRECTORS' STOCK OPTION PLAN, AS AMENDED 1. NAME AND PURPOSE. 1.1 This plan is the SUNRISE ASSISTED LIVING, INC. 1996 DIRECTORS' STOCK OPTION PLAN (the "Plan"). 1.2 The purposes of the Plan are to enhance the Company's ability to attract and retain highly qualified individuals to serve as members of the Company's Board of Directors and to provide additional incentives to Directors to promote the success of the Company. The Plan provides Directors of the Company an opportunity to purchase shares of the Stock of the Company pursuant to Options. Options granted under the Plan shall not constitute "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. 1.3 This Plan is intended to constitute a "formula plan" and the Directors are intended to be "disinterested administrators" of Other Plans for purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 2. DEFINITIONS. For purposes of interpreting the Plan and related documents (including Stock Option Agreements), the following definitions shall apply: 2.1 "Additional Option" means any Option other than an Initial Option. 2.2 "Board" means the Board of Directors of the Company. 2.3 "Commencement of Service" means the date of election of the Director to his or her first term as a Director. 2.4 "Company" means Sunrise Assisted Living, Inc., a Delaware corporation. 2.5 "Director" means a member of the Company's Board who is not an officer or employee of the Company or any of its subsidiaries and was not serving as a Series A Director (as defined in that certain Stockholders' Agreement dated as of January 4, 1995) on the Effective Date. 2.6 "Effective Date" means the date the Plan was adopted by the Board. 2.7 "Exercise Price" means the Option Price multiplied by the number of shares of Stock purchased pursuant to exercise of an Option. 2.8 "Expiration Date" means the tenth anniversary of the Grant Date, or, if earlier, the termination of the Option pursuant to Section 4.2(c). 2 2.9 "Fair Market Value" means the value of each share of Stock subject to this Plan determined as follows: If on the Grant Date or other determination date the Stock is listed on an established national or regional stock exchange, is admitted to quotation on the National Association of Securities Dealers Automated Quotation System, or is publicly traded on an established securities market, the Fair Market Value of the Stock shall be the closing price of the Stock on such exchange or in such market (the highest such closing price if there is more than one such exchange or market) on the trading day immediately preceding the Grant Date or other determination date (or, if there is no such reported closing price, the Fair Market Value shall be the mean between the highest bid and lowest asked prices or between the high and low sale prices on such trading day), or, if no sale of the Stock is reported for such trading day, on the next preceding day on which any sale shall have been reported. If the Stock is not listed on such an exchange, quoted on such System or traded on such a market, Fair Market Value shall be determined by the Board in good faith. 2.10 "Grant Date" means the date on which an Option takes effect pursuant to Section 7 of this Plan. 2.11 "Initial Option" means an Option received by each Director as of the Director's Commencement of Service. 2.12 "Option" means any option to purchase one or more shares of Stock pursuant to this Plan including both Initial Options and Additional Options. 2.13 "Optionee" means a person who holds an Option under this Plan. 2.14 "Option Period" means the period during which Options may be exercised as defined in Section 9. 2.15 "Option Price" means the purchase price for each share of Stock subject to an Option. 2.16 "Other Plan" means the Sunrise Assisted Living, Inc. 1995 Stock Option Plan and any other stock option plan adopted by the Company or any of its subsidiaries other than the Plan. 2.17 "1933 Act" means the Securities Act of 1933, as now in effect or as hereafter amended. 2.18 "Stock" means the Common Stock, par value $.01 per share, of the Company. 2.19 "Stock Option Agreement" means the written agreement evidencing the grant of an Option hereunder. 2 3 3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Board. The Board's responsibilities under the Plan shall be limited to taking all legal actions necessary to document the Options provided herein, to maintain appropriate records and reports regarding those Options, and to take all acts authorized by this Plan. 4. STOCK SUBJECT TO THE PLAN. 4.1 Subject to adjustments made pursuant to Section 4.2, the maximum number of shares of Stock which may be issued pursuant to the Plan shall not exceed 100,000. If any Option expires, terminates or is canceled for any reason before it is exercised in full, the shares of Stock that were subject to the unexercised portion of the Option shall be available for future Options granted under the Plan. 4.2 (a) If the outstanding shares of Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of any recapitalization, reclassification, stock split-up, combination of shares, exchange of shares, stock dividend or other distribution payable on capital stock, or other increase or decrease in such shares effected without receipt of consideration by the Company, occurring after the effective date of the Plan, the number and kinds of shares for the purchase of which Options may be granted under the Plan shall be adjusted proportionately and accordingly by the Company. In addition, the number and kind of shares for which Options are outstanding shall be adjusted proportionately and accordingly so that the proportionate interest of the holder of the Option immediately following such event shall, to the extent practicable, be the same as immediately prior to such event. Any such adjustment in outstanding Options shall not change the aggregate Option Price payable with respect to shares subject to the unexercised portion of the Option outstanding but shall include a corresponding proportionate adjustment in the Option Price per share. (b) Subject to Subsection (c) hereof, if the Company shall be the surviving corporation in any reorganization, merger or consolidation of the Company with one or more other corporations, any Option theretofore granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to such Option would have been entitled immediately following such reorganization, merger or consolidation, with a corresponding proportionate adjustment of the Option Price per share so that the aggregate Option Price thereafter shall be the same as the aggregate Option Price of the shares remaining subject to the Option immediately prior to such reorganization, merger or consolidation. (c) Upon the dissolution or liquidation of the Company, or upon a merger, consolidation or reorganization of the Company with one or more other corporations in which the Company is not the surviving corporation, or upon a sale of all or substantially all of the assets of the Company to another corporation, or upon any transaction (including, without limitation, a merger or reorganization in which the Company is the surviving corporation) approved by the Board which results in any person 3 4 or entity owning 80 percent or more of the combined voting power of all classes of stock of the Company, the Plan and all Options outstanding hereunder shall terminate, except to the extent provision is made in writing in connection with such transaction for the continuation of the Plan, the assumption of the Options theretofore granted, or for the substitution for such Options of new options covering the stock of a successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kinds of shares and exercise prices, in which event the Plan (if applicable) and Options theretofore granted shall continue in the manner and under the terms so provided. In the event of any such termination of the Plan and Options, each individual holding an Option shall have the right immediately prior to the occurrence of such termination and during such period occurring prior to such termination as the Board in its sole discretion shall determine and designate, to exercise such Option to the extent that such Option was otherwise exercisable at the time such termination occurs. The Board shall send written notice of an event that will result in such a termination to all individuals who hold Options not later than the time at which the Company gives notice thereof to its stockholders. (d) Adjustments under this Section 4.2 related to stock or securities of the Company shall be made by the Board, whose determination in that respect shall be final, binding, and conclusive. No fractional shares of Stock or units of other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share or unit. (e) The grant of an Option pursuant to the Plan shall not affect or limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets. 5. ELIGIBILITY. Eligibility under this Plan is limited to Directors of the Company. 6. THE OPTION PRICE. The Option Price of the Stock covered by each Option granted under this Plan shall be the greater of the Fair Market Value or the par value of such Stock on the Grant Date. The Option Price shall be subject to adjustment as provided in Section 4.2 hereof. 7. NUMBER OF SHARES AND GRANT DATES. Each Director whose Commencement of Service is after the Effective Date and before termination of the Plan shall be granted an Initial Option, as of the date of the Director's Commencement of Service, to purchase 10,000 shares of Stock. An Additional 4 5 Option to purchase 5,000 shares of Stock shall be granted immediately after each subsequent annual meeting of the Company's stockholders (commencing with the 1997 annual meeting) occurring before the Plan terminates to each Director who is then serving on the Board. Notwithstanding the foregoing, no Director shall be eligible to receive an Additional Option grant if on the Grant Date such individual also is an officer or employee of the Company or any of its subsidiaries. 8. VESTING OF OPTIONS. Subject to the provisions of Section 9, the Initial and Additional Options shall be vested upon the respective Grant Date (but shall not be exercisable before approval of the Plan by stockholders). 9. OPTION PERIOD. An Option shall be exercisable only during the Option Period. The Option Period shall commence six months after the later of (i) the Grant Date or (ii) the date on which the Plan is approved by the stockholders of the Company (or, if a six-month delay on the sale of stock acquired pursuant to the exercise of an Option is no longer necessary to satisfy the requirements of Rule 16b-3 under the Exchange Act, upon the later of such dates), and shall end at the close of business on the Expiration Date. Termination of the Optionee's status as a Director for any reason shall not cause an Option to terminate. 10. TIMING AND METHOD OF EXERCISE. Subject to the limitations of Sections 8 and 9, an Optionee may, at any time, exercise an Option with respect to all or any part of the shares of Stock then subject to such Option by giving the Company written notice of exercise, specifying the number of shares as to which the Option is being exercised. Such notice shall be addressed to the Secretary of the Company at its principal office, and shall be effective when actually received (by personal delivery, fax or other delivery) by the Secretary of the Company. Such notice shall be accompanied by an amount equal to the Exercise Price of such shares, in the form of any one or combination of the following: cash or cash equivalents, or shares of Stock valued at Fair Market Value in accordance with the Plan. If shares of Stock that are acquired by the Optionee through exercise of an Option or an option issued under an Other Plan are surrendered in payment of the Exercise Price of Options, the Stock surrendered in payment must have been (i) held by the Optionee for more than six months at the time of surrender, or (ii) acquired under an Option granted not less than six months prior to the time of surrender. However, payment in full of the Exercise Price need not accompany the written notice of exercise provided the notice of exercise directs that the Stock certificate or certificates for the shares for which the Option is exercised be delivered to a licensed broker acceptable to the Company as the agent for the individual exercising the Option and, at the time such Stock certificate or certificates are delivered, the broker tenders to the Company cash (or cash equivalents acceptable to the Company) equal to the Exercise Price. 5 6 11. NO STOCKHOLDER RIGHTS UNDER OPTION. No Optionee shall have any of the rights of a stockholder with respect to the shares of Stock subject to an Option except to the extent the certificates for such shares shall have been issued upon the exercise of the Option. 12. CONTINUATION OF SERVICE. Nothing in the Plan shall confer upon any person any right to continue to serve as a Director. 13. STOCK OPTION AGREEMENT. Each Option granted pursuant to the Plan shall be evidenced by a written Stock Option Agreement notifying the Optionee of the grant and incorporating the terms of this Plan. The Stock Option Agreement shall be executed by the Company and the Optionee. 14. WITHHOLDING. The Company shall have the right to withhold, or require an Optionee to remit to the Company, an amount sufficient to satisfy any applicable federal, state, local or foreign withholding tax requirements imposed with respect to exercise of Options. To the extent permissible under applicable tax, securities, and other laws, the Optionee may satisfy a tax withholding requirement by directing the Company to apply shares of Stock to which the Optionee is entitled as a result of the exercise of an Option to satisfy withholding requirements under this Section 14. 15. NON-TRANSFERABILITY OF OPTIONS. Each Option granted pursuant to this Plan shall, during Optionee's lifetime, be exercisable only by Optionee, and neither the Option nor any right thereunder shall be transferable by the Optionee by operation of law or otherwise other than by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined in Section 414(p)(1)(B) of the Internal Revenue Code of 1986, as amended and shall not be pledged or hypothecated (by operation of law or otherwise) or subject to execution, attachment or similar processes. 16. USE OF PROCEEDS. Cash proceeds realized from the sale of Stock pursuant to Options granted under the Plan shall constitute general funds of the Company. 6 7 17. ADOPTION, AMENDMENT, SUSPENSION AND TERMINATION OF THE PLAN. 17.1 The Plan shall be effective as of the date of adoption by the Board, subject to approval of the Plan within one year of its adoption by the Board by the affirmative votes of the holders of a majority of the Stock of the Company present, or represented, and entitled to vote at a meeting duly held in accordance with applicable laws of the state of Delaware, or by consent as permitted by law, provided, that upon approval of the Plan by the stockholders of the Company, all Options granted under the Plan on or after the Effective Date shall be fully effective as if the stockholders had approved the Plan on the Effective Date. 17.2 Subject to the limitation of Section 17.4, the Board may at any time suspend or terminate the Plan, and may amend it from time to time in such respects as the Board may deem advisable; provided, however, to the extent required under Rule 16b-3 under the Exchange Act as in effect at the time of such amendment, the Board shall not amend the Plan in the following respects without the approval of stockholders then sufficient to approve the Plan in the first instance: (a) To materially increase the benefits accruing to participants under the Plan (for example, to increase the number of Options that may be granted to any Director); (b) To materially increase the maximum number of shares of Stock that may be issued under the Plan; or (c) To materially modify the requirements as to eligibility for participation in the Plan. 17.3 No Option may be granted during any suspension or after the termination of the Plan, and no amendment, suspension or termination of the Plan shall, without the Optionee's consent, alter or impair any rights or obligations under any Stock Option Agreement previously entered into under the Plan. This Plan shall terminate ten years after the Effective Date unless previously terminated pursuant to Section 4.2 or by the Board pursuant to this Section 17. 17.4 Notwithstanding the provisions of Section 17.2, except to the extent permissible under Rule 16b-3 under the Exchange Act, the formula provisions of this Plan shall not be amended more than once in any six-month period other than to comport with changes in the Internal Revenue Code of 1986, the Employee Retirement Income Security Act of 1974, or the rules promulgated thereunder. 18. REQUIREMENTS OF LAW. 18.1 The Company shall not be required to sell or issue any shares of Stock under any Option if the sale or issuance of such shares would constitute a violation by the individual exercising the Option or the Company of any provisions of any law or 7 8 regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. Specifically in connection with the 1933 Act, upon exercise of any Option, unless a registration statement under such Act is in effect with respect to the shares of Stock covered by such Option, the Company shall not be required to sell or issue such shares unless the Board has received evidence satisfactory to the Board that the holder of such Option may acquire such shares pursuant to an exemption from registration under such Act. Any determination in this connection by the Board shall be final, binding, and conclusive. The Company may, but shall in no event be obligated to, register any securities covered hereby pursuant to the 1933 Act. The Company shall not be obligated to take any affirmative action in order to cause the exercise of an Option or the issuance of shares pursuant thereto to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that an Option shall not be exercisable unless and until the shares of Stock covered by such Option are registered or are subject to an available exemption from registration, the exercise of such Option (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption. 18.2 The intent of this Plan is to qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent any provision of the Plan or action by the Plan administrators does not comply with the requirements of Rule 16b-3, it shall be deemed inoperative, to the extent permitted by law and deemed advisable by the Plan administrators, and shall not affect the validity of the Plan. In the event Rule 16b-3 is revised or replaced, the Board may exercise discretion to modify this Plan in any respect necessary to satisfy the requirements of the revised exemption or its replacement. 19. GOVERNING LAW. The validity, interpretation and effect of this Plan, and the rights of all persons hereunder, shall be governed by and determined in accordance with the laws of Delaware, other than the choice of law rules thereof. * * * * * 8 EX-10.24 4 1996 NON-INCENTIVE STOCK OPTION PLAN, AS AMENDED 1 EXHIBIT 10.24 SUNRISE ASSISTED LIVING, INC. 1996 NON-INCENTIVE STOCK OPTION PLAN, AS AMENDED SUNRISE ASSISTED LIVING, INC., a Delaware corporation (the "Corporation"), sets forth herein the terms of this 1996 Non-Incentive Stock Option Plan, as amended (the "Plan") as follows: 1. PURPOSE The Plan is intended to advance the interests of the Corporation and any subsidiary thereof within the meaning of Rule 405 of Regulation C under the Securities Act of 1933, as amended (with the term "person" as used in such Rule 405 being defined as in Section 2(2) of such Act) (a "Subsidiary"), by providing eligible individuals (as designated pursuant to Section 4 below) with incentives to improve business results, by providing an opportunity to acquire or increase a proprietary interest in the Corporation, which thereby will create a stronger incentive to expend maximum effort for the growth and success of the Corporation and its Subsidiaries, and will encourage such eligible individuals to continue to serve the Corporation and its Subsidiaries, whether as an employee, as a director, as a consultant or advisor or in some other capacity. To this end, the Plan provides for the grant of stock options, as set out herein. This Plan provides for the grant of stock options (each of which is an "Option") in accordance with the terms of the Plan. An Option will be a non-incentive stock option (an "NSO"). Each Option shall be evidenced by a written agreement between the Corporation and the recipient individual that sets out the terms and conditions of the grant as further described in Section 8. 2. ADMINISTRATION (a) BOARD The Plan shall be administered by the Board of Directors of the Corporation (the "Board"), which shall have the full power and authority to take all actions and to make all determinations required or provided for under the Plan or any Option granted or Option Agreement (as defined in Section 8 below) entered into hereunder and all such other actions and determinations not inconsistent with the specific terms and provisions of the Plan deemed by the Board to be necessary or appropriate to the administration of the Plan or any Option granted or Option Agreement entered into hereunder. The interpretation and construction by the Board of any provision of the Plan or of any Option granted or Option Agreement entered into hereunder shall be final, binding and conclusive. 2 (b) ACTION BY COMMITTEE The Board from time to time may appoint a Stock Option Committee consisting of two or more members of the Board of Directors who, in the sole discretion of the Board, may be the same Directors who serve on the Compensation Committee, or may appoint the Compensation Committee to serve as the Stock Option Committee (the "Committee"). The Board, in its sole discretion, may provide that the role of the Committee shall be limited to making recommendations to the Board concerning any determinations to be made and actions to be taken by the Board pursuant to or with respect to the Plan, or the Board may delegate to the Committee such powers and authorities related to the administration of the Plan, as set forth in Section 2(a) above, as the Board shall determine, consistent with the Restated Certificate of Incorporation and By-Laws of the Corporation and applicable law. In the event that the Plan or any Option granted or Option Agreement entered into hereunder provides for any action to be taken by or determination to be made by the Board, such action may be taken by or such determination may be made by the Committee if the power and authority to do so has been delegated to the Committee by the Board as provided for in this Section. Unless otherwise expressly determined by the Board, any such action or determination by the Committee shall be final and conclusive. (c) NO LIABILITY No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted or Option Agreement entered into hereunder. 3. STOCK The stock that may be issued pursuant to Options under the Plan shall be shares of common stock, par value $.01 per share, of the Corporation (the "Stock"), which shares may be treasury shares or authorized but unissued shares. The number of shares of Stock that may be issued pursuant to Options under the Plan shall not exceed, in the aggregate, one million one hundred thousand (1,100,000) shares. If any Option expires, terminates, or is terminated or canceled for any reason prior to exercise, the shares of Stock that were subject to the unexercised, forfeited, terminated or canceled portion of such Option shall be available immediately for future grants of Options under the Plan. 3 4. ELIGIBILITY (a) DESIGNATED RECIPIENTS Options may be granted under the Plan to (i) any employee of the Corporation or any Subsidiary (including any such individual who is an officer or director of the Corporation or any Subsidiary) as the Board shall determine and designate from time to time or (ii) any consultant or advisor providing bona fide services to the Corporation or any Subsidiary (provided that such services must not be in connection with the offer or sale of securities in a capital-raising transaction) whose participation in the Plan is determined by the Board to be in the best interests of the Corporation and is so designated by the Board. (b) SUCCESSIVE GRANTS An individual may hold more than one Option, subject to such restrictions as are provided herein. 5. EFFECTIVE DATE AND TERM OF THE PLAN (a) EFFECTIVE DATE The Plan shall be effective as of the date of adoption by the Board. (b) TERM The Plan shall have no termination date. 6. GRANT OF OPTIONS Subject to the terms and conditions of the Plan, the Board may, at any time and from time to time, grant to such eligible individuals as the Board may determine (each of the whom is an "Optionee"), Options to purchase such number of shares of Stock on such terms and conditions as the Board may determine. Such authority specifically includes the authority, in order to effectuate the purposes of the Plan but without amending the Plan, to modify grants to eligible individuals who are foreign nationals or are individuals who are employed outside the United States to recognize differences in local law, tax policy, or custom. 7. PARACHUTE LIMITATIONS Notwithstanding any other provision of this Plan or of any other agreement, contract, or understanding heretofore or hereafter entered into by the Optionee with the Corporation, except an agreement, contract, or understanding hereafter entered into that expressly modifies or excludes 4 application of this paragraph (an "Other Agreement"), and notwithstanding any formal or informal plan or other arrangement for the direct or indirect provision of compensation to the Optionee (including groups or classes of participants or beneficiaries of which the Optionee is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for the Optionee (a "Benefit Arrangement"), if the Optionee is a "disqualified individual," as defined in Section 280G(c) of the Internal Revenue Code of 1986, as amended (the "Code"), any Option held by that Optionee and any right to receive any payment or other benefit under this Plan shall not become exercisable or vested (i) to the extent that such right to exercise, vesting, payment, or benefit, taking into account all other rights, payments, or benefits to or for the Optionee under this Plan, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to the Optionee under this Plan to be considered a "parachute payment" within the meaning of Section 280G(b)(2) of the Code as then in effect (a "Parachute Payment") and (ii) if, as a result of receiving a Parachute Payment, the aggregate after-tax amounts received by the Optionee from the Corporation under this Plan, all Other Agreements, and all Benefit Arrangements would be less than the maximum after-tax amount that could be received by him without causing any such payment or benefit to be considered a Parachute Payment. In the event that the receipt of any such right to exercise, vesting, payment, or benefit under this Plan, in conjunction with all other rights, payments, or benefits to or for the Optionee under any Other Agreement or any Benefit Arrangement would cause the Optionee to be considered to have received a Parachute Payment under this Plan that would have the effect of decreasing the after-tax amount received by the Optionee as described in clause (ii) of the preceding sentence, then the Optionee shall have the right, in the Optionee's sole discretion, to designate those rights, payments, or benefits under this Plan, any Other Agreements, and any Benefit Arrangements that should be reduced or eliminated so as to avoid having the payment or benefit to the Optionee under this Plan be deemed to be a Parachute Payment. 8. OPTION AGREEMENTS All Options granted pursuant to the Plan shall be evidenced by agreements ("Option Agreements"), to be executed by the Corporation and by the Optionee, in such form or forms as the Board shall from time to time determine. Option Agreements covering Options granted from time to time or at the same time need not contain similar provisions; provided, however, that all such Option Agreements shall comply with all terms of the Plan. 9. OPTION PRICE The purchase price of each share of the Stock subject to an Option (the "Option Price") shall be fixed by the Board and stated in each Option Agreement. 5 The Option Price shall be not less than the greater of par value or 100 percent of the fair market value of a share of Stock on the date on which the Option is granted (as determined in good faith by the Board). In the event that the Stock is listed on an established national or regional stock exchange or The Nasdaq Stock Market, is admitted to quotation on the National Association of Securities Dealers Automated Quotation System, or is publicly traded in an established securities market, in determining the fair market value of the Stock, the Board shall use the closing price of the Stock on such exchange or system or in such market (the highest such closing price if there is more than one such exchange or market) on the trading date immediately before the Option is granted (or, if there is no such closing price, then the Board shall use the mean between the highest bid and lowest asked prices or between the high and low prices on such date), or, if no sale of the Stock has been made on such day, on the next preceding day on which any such sale shall have been made. 10. TERM AND EXERCISE OF OPTIONS (a) OPTION PERIOD AND LIMITATIONS ON EXERCISE Each Option granted under the Plan shall be exercisable, in whole or in part, at any time and from time to time, over a period commencing on or after the date of grant and, to the extent that the Board determines and sets forth a termination date for such Option in the Option Agreement (including any amendment thereto), ending upon the stated expiration or termination date. The Board in its sole discretion may specify events or circumstances, including the giving of notice, which will cause an Option to terminate as set forth in the Option Agreement or in this Plan. No Option granted to a person who is required to file reports under Section 16(a) of the Securities Exchange Act of 1934 (as now in effect or as hereafter amended) shall be exercisable during the first six months after the date of grant. Without limiting the foregoing but subject to the terms and conditions of the Plan, the Board may in its sole discretion provide that an Option may not be exercised in whole or in part for any period or periods of time during which such Option is outstanding and may condition exercisability (or vesting) of an Option upon the attainment of performance objectives, upon continued service, upon certain events or transactions, or a combination of one or more of such factors, or otherwise, as set forth in the Option Agreement. Subject to the parachute payment restrictions under Section 7, however, the Board, in its sole discretion, may rescind, modify, or waive any such limitation or condition on the exercise of an Option contained in any Option Agreement, so as to accelerate the time at which the Option may be exercised or extend the period during which the Option may be exercised. 6 (b) METHOD OF EXERCISE An Option that is exercisable hereunder may be exercised by delivery to the Corporation on any business day, at the Corporation's principal office, addressed to the attention of the President, of written notice of exercise, which notice shall specify the number of shares with respect to which the Option is being exercised and shall be accompanied by payment in full of the Option Price of the shares for which the Option is being exercised. The minimum number of shares of Stock with respect to which an Option may be exercised, in whole or in part, at any time shall be the lesser of (i) 100 shares or such lesser number set forth in the applicable Option Agreement and (ii) the maximum number of shares available for purchase under the Option at the time of exercise. Payment of the Option Price for the shares of Stock purchased pursuant to the exercise of an Option shall be made (i) in cash or in cash equivalents; (ii) to the extent permitted by applicable law and under the terms of the Option Agreement with respect to such Option, through the tender to the Corporation of shares of Stock, which shares shall be valued, for purposes of determining the extent to which the Option Price has been paid thereby, at their fair market value on the date of exercise; (iii) to the extent permitted by applicable law and under the terms of the Option Agreement with respect to such Option, by the delivery of a promissory note of the person exercising the Option to the Corporation on such terms as shall be set out in such Option Agreement; (iv) to the extent permitted by applicable law and under the terms of the Option Agreement with respect to such Option, by causing the Corporation to withhold shares of Stock otherwise issuable pursuant to the exercise of an Option equal in value to the Option Price or portion thereof to be satisfied pursuant to this clause (iv); or (v) by a combination of the methods described in (i), (ii), (iii), and (iv). An attempt to exercise any Option granted hereunder other than as set forth above shall be invalid and of no force and effect. Payment in full of the Option Price need not accompany the written notice of exercise provided the notice directs that the Stock certificate or certificates for the shares for which the Option is exercised be delivered to a licensed broker acceptable to the Corporation as the agent for the individual exercising the Option and, at the time such Stock certificate or certificates are delivered, the broker tenders to the Corporation cash (or cash equivalents acceptable to the Corporation) equal to the Option Price. Promptly after the exercise of an Option and the payment in full of the Option Price of the shares of Stock covered thereby, the individual exercising the Option shall be entitled to the issuance of a Stock certificate or Stock certificates evidencing his ownership of such shares. Unless otherwise stated in the applicable Option Agreement, an individual holding or exercising an Option shall have none of the rights of a stockholder (for example, the right to receive cash or stock dividend payments attributable to the subject shares or to direct the voting of the subject shares) until the shares of Stock covered thereby are fully paid and issued to him. Except as provided in Section 16 below, no adjustment shall be made for 7 dividends or other rights for which the record date is prior to the date of such issuance. (c) DATE OF GRANT The date of grant of an Option under this Plan shall be the date as of which the Board approves the grant. 11. TRANSFERABILITY OF OPTIONS During the lifetime of an Optionee, only such Optionee (or, in the event of legal incapacity or incompetency, the guardian or legal representative of the Optionee) may exercise the Option, except as otherwise specifically permitted by this Section 11. No Option shall be assignable or transferable other than by will or in accordance with the laws of descent and distribution; provided, however, subject to the terms of the applicable Option Agreement, and to the extent the transfer is in compliance with any applicable restrictions on transfers, an Optionee may transfer an Option to a family member of the Optionee (defined as an individual who is related to the Optionee by blood or adoption) or to a trust established and maintained for the benefit of the Optionee or a family member of the Optionee (as determined under applicable state law and the Code). 12. TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP OF OPTIONEE In the Board's sole discretion, the Board may include language in an Option Agreement providing for the termination of any unexercised Option in whole or in part upon or at any time after the termination of employment or other relationship of the Optionee with the Corporation or a Subsidiary (whether as an employee, a director, a consultant or advisor providing bona fide services to the Corporation or a Subsidiary, or otherwise). Whether a leave of absence or leave on military or government service shall constitute a termination of employment or other relationship of the Optionee with the Corporation or a Subsidiary for purposes of the Plan shall be determined by the Board, which determination shall be final and conclusive. 13. USE OF PROCEEDS The proceeds received by the Corporation from the sale of Stock pursuant to the exercise of Options granted under the Plan shall constitute general funds of the Corporation. 8 14. REQUIREMENTS OF LAW The Corporation shall not be required to sell or issue any shares of Stock under any Option if the sale or issuance of such shares would constitute a violation by the Optionee, the individual exercising the Option, or the Corporation of any provisions of any law or regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. If at any time the Corporation shall determine, in its discretion, that the listing, registration, or qualification of any shares subject to the Option upon any securities exchange or under any state or federal law, or the consent or approval of any government regulatory or self-regulatory body is necessary or desirable as a condition of, or in connection with, the issuance or purchase of shares, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Corporation, and any delay caused thereby shall in no way affect the date of termination of the Option. Specifically in connection with the Securities Act of 1933 (as now in effect or as hereafter amended), upon the exercise of any Option, unless a registration statement under such Act is in effect with respect to the shares of Stock covered thereby, the Corporation shall not be required to sell or issue such shares unless the Board has received evidence satisfactory to it that the holder of such Option may acquire such shares pursuant to an exemption from registration under such Act. Any determination in this connection by the Board shall be final, binding, and conclusive. The Corporation may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Securities Act of 1933 (as now in effect or as hereafter amended). The Corporation shall not be obligated to take any affirmative action in order to cause the exercisability or vesting of an Option or to cause the exercise of an Option or the issuance of shares pursuant thereto to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that an Option shall not be exercisable unless and until the shares of Stock covered by such Option are registered or are subject to an available exemption from registration, the exercise of such Option (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption. 15. AMENDMENT AND TERMINATION OF THE PLAN The Board may, at any time and from time to time, amend, suspend, or terminate the Plan as to any shares of Stock as to which Options have not been granted. The Corporation may also retain the right in an Option Agreement to cause a forfeiture of the shares of Stock or gain realized by a holder of an Option (a) if the holder violates any agreement covering non-competition with the Corporation or any Subsidiary or nondisclosure of confidential information of the Corporation or any Subsidiary, (b) if the holder's 9 employment is terminated for cause or (c) if the Board determines that the holder committed acts or omissions which would have been the basis for a termination of holder's employment for cause had such acts or omissions been discovered prior to termination of holder's employment. Furthermore, the Corporation may, in the Option Agreement, retain the right to annul the grant of an Option, if the holder of such grant was an employee of the Corporation or a Subsidiary and the holder's employment is terminated for cause, as defined in the applicable Option Agreement. Except as permitted under this Section 15 or Section 16 hereof, no amendment, suspension, or termination of the Plan shall, without the consent of the holder of the Option, alter or impair rights or obligations under any Option theretofore granted under the Plan. 16. EFFECT OF CHANGES IN CAPITALIZATION (a) CHANGES IN STOCK If the number of outstanding shares of Stock is increased or decreased or the shares of Stock are changed into or exchanged for a different number or kind of shares or other securities of the Corporation on account of any recapitalization, reclassification, stock split-up, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or other increase or decrease in such shares effected without receipt of consideration by the Corporation, occurring after the effective date of the Plan, the number and kind of shares for the acquisition of which Options may be granted under the Plan shall be adjusted proportionately and accordingly by the Corporation. In addition, the number and kind of shares for which Options are outstanding shall be adjusted proportionately and accordingly so that the proportionate interest of the holder of the Option immediately following such event shall, to the extent practicable, be the same as immediately before such event. Any such adjustment in outstanding Options shall not change the aggregate Option Price payable with respect to shares that are subject to the unexercised portion of the Option outstanding but shall include a corresponding proportionate adjustment in the Option Price per share. (b) REORGANIZATION IN WHICH THE CORPORATION IS THE SURVIVING CORPORATION Subject to Subsection (c)(iv) hereof, if the Corporation shall be the surviving corporation in any reorganization, merger, or consolidation of the Corporation with one or more other corporations, any Option theretofore granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to such Option would have been entitled immediately following such reorganization, merger, or consolidation, with a corresponding proportionate adjustment of the Option Price per share so that the aggregate Option Price thereafter shall be the same 10 as the aggregate Option Price of the shares remaining subject to the Option immediately prior to such reorganization, merger, or consolidation. (c) DISSOLUTION, LIQUIDATION, SALE OF ASSETS, REORGANIZATION IN WHICH THE CORPORATION IS NOT THE SURVIVING CORPORATION, ETC. The Plan and all Options outstanding hereunder shall terminate (i) upon the dissolution or liquidation of the Corporation, or (ii) upon a merger, consolidation, or reorganization of the Corporation with one or more other corporations in which the Corporation is not the surviving corporation, or (iii) upon a sale of substantially all of the assets of the Corporation to another person or entity, or (iv) upon a merger, consolidation or reorganization (or other transaction if so determined by the Board in its sole discretion) in which the Corporation is the surviving corporation, that is approved by the Board and that results in any person or entity (other than persons who are holders of Stock of the Corporation at the time the Plan is approved by the stockholders and other than an Affiliate) owning 80 percent or more of the combined voting power of all classes of stock of the Corporation, except to the extent provision is made in writing in connection with any such transaction covered by clauses (i) through (iv) for the continuation of the Plan or the assumption of such Options theretofore granted, or for the substitution for such Options of new options covering the stock of a successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and exercise prices, in which event the Plan and Options theretofore granted shall continue in the manner and under the terms so provided. In the event of any such termination of the Plan, each individual holding an Option shall have the right (subject to the general limitations on exercise set forth in Section 10(a) above), during such period occurring before such termination as the Board in its sole discretion shall determine and designate, and in any event immediately before the occurrence of such termination, to exercise such Option in whole or in part, to the extent that such Option was otherwise exercisable at the time such termination occurs, except that, by inclusion of appropriate language in an Option Agreement, the Board may provide that the Option may be exercised before termination without regard to any installment limitation or other condition on exercise imposed pursuant to Section 10(a) above. The Corporation shall send written notice of a transaction or event that will result in such a termination to all individuals who hold Options not later than the time at which the Corporation gives notice thereof to its stockholders. (d) ADJUSTMENTS Adjustments under this Section 16 related to stock or securities of the Corporation shall be made by the Board, whose determination in that respect shall be final, binding, and conclusive. No fractional shares of Stock or units of other securities shall be issued pursuant to any such adjustment, and 11 any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share or unit. (e) NO LIMITATIONS ON CORPORATION The grant of an Option pursuant to the Plan shall not affect or limit in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure or to merge, consolidate, dissolve, or liquidate, or to sell or transfer all or any part of its business or assets. 17. DISCLAIMER OF RIGHTS No provision in the Plan or in any Option granted or Option Agreement entered into pursuant to the Plan shall be construed to confer upon any individual the right to remain in the employ or service of or to maintain a relationship with the Corporation or any Subsidiary, or to interfere in any way with any contractual or other right or authority of the Corporation or any Subsidiary either to increase or decrease the compensation or other payments to any individual at any time, or to terminate any employment or other relationship between any individual and the Corporation or any Subsidiary. The obligation of the Corporation to pay any benefits pursuant to this Plan shall be interpreted as a contractual obligation to pay only those amounts described herein, in the manner and under the conditions prescribed herein. The Plan shall in no way be interpreted to require the Corporation to transfer any amounts to a third party trustee or otherwise hold any amounts in trust or escrow for payment to any participant or beneficiary under the terms of the Plan. 18. NONEXCLUSIVITY OF THE PLAN The adoption of the Plan shall not be construed as creating any limitations upon the right and authority of the Board to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or particular individuals) as the Board in its discretion determines desirable, including, without limitation, the granting of stock options otherwise than under the Plan. 19. CAPTIONS The use of captions in this Plan or any Option Agreement is for the convenience of reference only and shall not affect the meaning of any provision of the Plan or such Option Agreement. 12 20. WITHHOLDING TAXES The Corporation shall have the right to deduct from payments of any kind otherwise due to an Optionee any Federal, state, or local taxes of any kind required by law to be withheld with respect to any shares issued upon the exercise of an Option under the Plan or in connection with the purchase of an Option by the Corporation. At the time of exercise, the Optionee shall pay to the Corporation any amount that the Corporation may reasonably determine to be necessary to satisfy such withholding obligation. The Board in its sole discretion may provide in the Option Agreement that, subject to the prior approval of the Corporation, which may be withheld by the Corporation in its sole discretion, the Optionee may elect to satisfy such obligations, in whole or in part, (i) by causing the Corporation to withhold shares of Stock otherwise issuable pursuant to the exercise of an Option or (ii) by delivering to the Corporation shares of Stock already owned by the Optionee. The shares so delivered or withheld shall have a fair market value equal to such withholding obligations. The fair market value of the shares used to satisfy such withholding obligation shall be determined by the Corporation as of the date that the amount of tax to be withheld is to be determined. An Optionee who has made an election pursuant to this Section 20 may only satisfy his or her withholding obligation with shares of Stock that are not subject to any repurchase, forfeiture, unfulfilled vesting, or other similar requirements. 21. OTHER PROVISIONS Each Option granted under the Plan may be subject to, and the Option Agreement relating to such Option may contain, such other terms and conditions not inconsistent with the Plan as may be determined by the Board, in its sole discretion. 22. NUMBER AND GENDER With respect to words used in this Plan, the singular form shall include the plural form, the masculine gender shall include the feminine gender, etc., as the context requires. 23. SEVERABILITY If any provision of the Plan or any Option Agreement shall be determined to be illegal or unenforceable by any court of law in any jurisdiction, the remaining provisions hereof and thereof shall be severable and enforceable in accordance with their terms, and all provisions shall remain enforceable in any other jurisdiction. 13 24. GOVERNING LAW The validity and construction of this Plan and the instruments evidencing the Options granted hereunder shall be governed by the laws of the State of Delaware (excluding its choice of law rules). * * * EX-10.25 5 1997 STOCK OPTION PLAN, AS AMENDED 1 EXHIBIT 10.25 SUNRISE ASSISTED LIVING, INC. 1997 STOCK OPTION PLAN, AS AMENDED SUNRISE ASSISTED LIVING, INC., a Delaware corporation (the "Corporation"), sets forth herein the terms of this 1997 Stock Option Plan (the "Plan") as follows: 1. PURPOSE The Plan is intended to advance the interests of the Corporation and any subsidiary thereof within the meaning of Rule 405 of Regulation C under the Securities Act of 1933, as amended (with the term "person" as used in such Rule 405 being defined as in Section 2(2) of such Act) (a "Subsidiary"), by providing eligible individuals (as designated pursuant to Section 4 below) with incentives to improve business results, by providing an opportunity to acquire or increase a proprietary interest in the Corporation, which thereby will create a stronger incentive to expend maximum effort for the growth and success of the Corporation and its Subsidiaries, and will encourage such eligible individuals to continue to serve the Corporation and its Subsidiaries, whether as an employee, as a director, as a consultant or advisor or in some other capacity. To this end, the Plan provides for the grant of stock options, as set out herein. This Plan provides for the grant of stock options (each of which is an "Option") in accordance with the terms of the Plan. An Option may be an incentive stock option (an "ISO") intended to satisfy the applicable requirements under Section 422 of the Internal Revenue Code of 1986, as amended from time to time, or the corresponding provision of any subsequently-enacted tax statute (the "Code"), or a nonqualified stock option (an "NSO"). An Option is an NSO to the extent that the Option would exceed the limitations set forth in Section 7 below. An Option is also an NSO if either (i) the Option is specifically designated at the time of grant as an NSO or not being an ISO or (ii) the Option does not otherwise satisfy the requirements of Code Section 422 at the time of grant. Each Option shall be evidenced by a written agreement between the Corporation and the recipient individual that sets out the terms and conditions of the grant as further described in Section 8. 2. ADMINISTRATION (a) BOARD The Plan shall be administered by the Board of Directors of the Corporation (the "Board"), which shall have the full power and authority to take all actions and to make all determinations required or provided for under the Plan or any Option granted or Option 2 Agreement (as defined in Section 8 below) entered into hereunder and all such other actions and determinations not inconsistent with the specific terms and provisions of the Plan deemed by the Board to be necessary or appropriate to the administration of the Plan or any Option granted or Option Agreement entered into hereunder. The interpretation and construction by the Board of any provision of the Plan or of any Option granted or Option Agreement entered into hereunder shall be final, binding and conclusive. (b) ACTION BY COMMITTEE The Board from time to time may appoint a Stock Option Committee consisting of two or more members of the Board of Directors who, in the sole discretion of the Board, may be the same Directors who serve on the Compensation Committee, or may appoint the Compensation Committee to serve as the Stock Option Committee (the "Committee"). The Board, in its sole discretion, may provide that the role of the Committee shall be limited to making recommendations to the Board concerning any determinations to be made and actions to be taken by the Board pursuant to or with respect to the Plan, or the Board may delegate to the Committee such powers and authorities related to the administration of the Plan, as set forth in Section 2(a) above, as the Board shall determine, consistent with the Restated Certificate of Incorporation and By-Laws of the Corporation and applicable law. In the event that the Plan or any Option granted or Option Agreement entered into hereunder provides for any action to be taken by or determination to be made by the Board, such action may be taken by or such determination may be made by the Committee if the power and authority to do so has been delegated to the Committee by the Board as provided for in this Section. Unless otherwise expressly determined by the Board, any such action or determination by the Committee shall be final and conclusive. (c) NO LIABILITY No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted or Option Agreement entered into hereunder. 3. STOCK The stock that may be issued pursuant to Options under the Plan shall be shares of common stock, par value $.01 per share, of the Corporation (the "Stock"), which shares may be treasury shares or authorized but unissued shares. The number of shares of Stock that may be issued pursuant to Options under the Plan shall not exceed, in the aggregate, one million eight hundred thousand (1,800,000) shares. If any Option expires, terminates, or is terminated or canceled for any reason prior to exercise, the shares of Stock that were subject to the unexercised, forfeited, terminated or canceled portion of such Option shall be available immediately for future grants of Options under the Plan. 4. ELIGIBILITY (a) DESIGNATED RECIPIENTS Subject to the next sentence, Options may be granted under the Plan to (i) any employee of the Corporation or any Subsidiary (including any such individual 3 who is an officer or director of the Corporation or any Subsidiary) as the Board shall determine and designate from time to time or (ii) any consultant or advisor providing bona fide services to the Corporation or any Subsidiary (provided that such services must not be in connection with the offer or sale of securities in a capital-raising transaction) whose participation in the Plan is determined by the Board to be in the best interests of the Corporation and is so designated by the Board. Options granted to a full-time employee of the Corporation or a "subsidiary corporation" thereof within the meaning of Section 424(f) of the Code shall be either ISOs or NSOs, as determined in the sole discretion of the Board, and Options granted to any other eligible individual shall be NSOs. (b) SUCCESSIVE GRANTS An individual may hold more than one Option, subject to such restrictions as are provided herein. 5. EFFECTIVE DATE AND TERM OF THE PLAN (a) EFFECTIVE DATE The Plan shall be effective as of the date of adoption by the Board, subject to approval of the Plan within one year of such effective date by the affirmative vote of stockholders who hold more than fifty percent (50%) of the combined voting power of the outstanding shares of voting stock of the Corporation present or represented, and entitled to vote thereon at a duly constituted stockholders' meeting, or by consent as permitted by law. Upon approval of the Plan by the stockholders of the Corporation as set forth above, however, all Options granted under the Plan on or after the effective date shall be fully effective as if the stockholders of the Corporation had approved the Plan on the Plan's effective date. If the stockholders fail to approve the Plan within one year of such effective date, any Options granted hereunder shall be null and void and of no effect. (b) TERM The Plan shall have no termination date, but no grant of an ISO may occur after the date that is ten years after the effective date. 6. GRANT OF OPTIONS (a) GENERAL Subject to the terms and conditions of the Plan, the Board may, at any time and from time to time, grant to such eligible individuals as the Board may determine (each of the whom is an "Optionee"), Options to purchase such number of shares of Stock on such terms and conditions as the Board may determine, including any terms or conditions that may be necessary to qualify such Options as ISOs under Section 422 of the Code. Such authority specifically includes the authority, in order to effectuate the purposes of the Plan but without amending the Plan, to modify grants to 4 5 eligible individuals who are foreign nationals or are individuals who are employed outside the United States to recognize differences in local law, tax policy, or custom. (b) LIMITATION ON GRANTS OF OPTIONS The maximum number of shares subject to Options that can be granted under the Plan to any executive officer of the Company or a Subsidiary, or to any other person eligible for a grant of an Option under Section 4, is 500,000 shares during the first ten years after the effective date of the Plan and 200,000 shares per year thereafter (in each case, subject to adjustment as provided in Section 16(a) hereof). 7. LIMITATIONS ON INCENTIVE STOCK OPTIONS (a) PRICE AND DOLLAR LIMITATIONS An Option that is designated as being one that is intended to qualify as an ISO shall qualify for treatment as an ISO only to the extent that the aggregate fair market value (determined at the time the Option is granted) of the Stock with respect to which all options that are intended to constitute "incentive stock options," within the meaning of Code Section 422, are exercisable for the first time by any Optionee during any calendar year (under the Plan and all other plans of the Optionee's employer corporation and its parent and subsidiary corporations within the meaning of Section 422(d) of the Code) does not exceed $100,000. (b) PARACHUTE LIMITATIONS Notwithstanding any other provision of this Plan or of any other agreement, contract, or understanding heretofore or hereafter entered into by the Optionee with the Corporation, except an agreement, contract, or understanding hereafter entered into that expressly modifies or excludes application of this paragraph (an "Other Agreement"), and notwithstanding any formal or informal plan or other arrangement for the direct or indirect provision of compensation to the Optionee (including groups or classes of participants or beneficiaries of which the Optionee is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for the Optionee (a "Benefit Arrangement"), if the Optionee is a "disqualified individual," as defined in Section 280G(c) of the Code, any Option held by that Optionee and any right to receive any payment or other benefit under this Plan shall not become exercisable or vested (i) to the extent that such right to exercise, vesting, payment, or benefit, taking into account all other rights, payments, or benefits to or for the Optionee under this Plan, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to the Optionee under this Plan to be considered a "parachute payment" within the meaning of Section 280G(b)(2) of the Code as then in effect (a "Parachute Payment") and (ii) if, as a result of receiving a Parachute Payment, the aggregate after-tax amounts received by the Optionee from the Corporation under this Plan, all Other Agreements, and all Benefit Arrangements would be less than the maximum after-tax amount that could be received by him without causing any such payment or benefit to be considered a Parachute Payment. 6 In the event that the receipt of any such right to exercise, vesting, payment, or benefit under this Plan, in conjunction with all other rights, payments, or benefits to or for the Optionee under any Other Agreement or any Benefit Arrangement would cause the Optionee to be considered to have received a Parachute Payment under this Plan that would have the effect of decreasing the after-tax amount received by the Optionee as described in clause (ii) of the preceding sentence, then the Optionee shall have the right, in the Optionee's sole discretion, to designate those rights, payments, or benefits under this Plan, any Other Agreements, and any Benefit Arrangements that should be reduced or eliminated so as to avoid having the payment or benefit to the Optionee under this Plan be deemed to be a Parachute Payment. 8. OPTION AGREEMENTS All Options granted pursuant to the Plan shall be evidenced by agreements ("Option Agreements"), to be executed by the Corporation and by the Optionee, in such form or forms as the Board shall from time to time determine. Option Agreements covering Options granted from time to time or at the same time need not contain similar provisions; provided, however, that all such Option Agreements shall comply with all terms of the Plan. 9. OPTION PRICE The purchase price of each share of the Stock subject to an Option (the "Option Price") shall be fixed by the Board and stated in each Option Agreement. The Option Price shall be not less than the greater of par value or 100 percent of the fair market value of a share of Stock on the date on which the Option is granted (as determined in good faith by the Board); provided, however, that in the event the Optionee would otherwise be ineligible to receive an ISO by reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating to stock ownership of more than ten percent), the Option Price of an Option that is intended to be an ISO shall not be less than the greater of par value or 110 percent of the fair market value of a share of Stock at the time such Option is granted. In the event that the Stock is listed on an established national or regional stock exchange or The Nasdaq Stock Market, is admitted to quotation on the National Association of Securities Dealers Automated Quotation System, or is publicly traded in an established securities market, in determining the fair market value of the Stock, the Board shall use the closing price of the Stock on such exchange or system or in such market (the highest such closing price if there is more than one such exchange or market) on the trading date immediately before the Option is granted (or, if there is no such closing price, then the Board shall use the mean between the highest bid and lowest asked prices or between the high and low prices on such date), or, if no sale of the Stock has been made on such day, on the next preceding day on which any such sale shall have been made. 7 10. TERM AND EXERCISE OF OPTIONS (a) TERM Upon the expiration of ten years from the date on which an ISO is granted or on such date prior thereto as may be fixed by the Board and stated in the Option Agreement relating to such Option, that ISO shall be ineligible for treatment as an "incentive stock option," as defined in Section 422 of the Code, and shall be exercisable only as an NSO. In the event the Optionee otherwise would be ineligible to receive an "incentive stock option" by reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating to stock ownership of more than 10 percent), such ten year restriction on exercisability as an ISO shall be read to impose a five year restriction on such exercisability. If an Optionee shall terminate employment prior to the ten-year or five-year limitation described in the immediately preceding sentences, any outstanding ISO shall be ineligible for treatment as an "incentive stock option," as defined in Section 422 of the Code, and shall be exercisable only as an NSO, unless exercised within three months after such termination or, in the case of termination on account of "permanent and total disability" (within the meaning of Section 22(e)(3) of the Code), within one year after such termination. (b) OPTION PERIOD AND LIMITATIONS ON EXERCISE Each Option granted under the Plan shall be exercisable, in whole or in part, at any time and from time to time, over a period commencing on or after the date of grant and, to the extent that the Board determines and sets forth a termination date for such Option in the Option Agreement (including any amendment thereto), ending upon the stated expiration or termination date. The Board in its sole discretion may specify events or circumstances, including the giving of notice, which will cause an Option to terminate as set forth in the Option Agreement or in this Plan. No Option granted to a person who is required to file reports under Section 16(a) of the Securities Exchange Act of 1934 (as now in effect or as hereafter amended) shall be exercisable during the first six months after the date of grant. Without limiting the foregoing but subject to the terms and conditions of the Plan, the Board may in its sole discretion provide that an Option may not be exercised in whole or in part for any period or periods of time during which such Option is outstanding and may condition exercisability (or vesting) of an Option upon the attainment of performance objectives, upon continued service, upon certain events or transactions, or a combination of one or more of such factors, or otherwise, as set forth in the Option Agreement. Subject to the parachute payment restrictions under Section 7(b), however, the Board, in its sole discretion, may rescind, modify, or waive any such limitation or condition on the exercise of an Option contained in any Option Agreement, so as to accelerate the time at which the Option may be exercised or extend the period during which the Option may be exercised. Notwithstanding any other provisions of the Plan, no Option granted to an Optionee under the Plan shall be exercisable in whole or in part prior to the date on which the stockholders of the Corporation approve the Plan, as provided in Section 5 above. 8 (c) METHOD OF EXERCISE An Option that is exercisable hereunder may be exercised by delivery to the Corporation on any business day, at the Corporation's principal office, addressed to the attention of the President, of written notice of exercise, which notice shall specify the number of shares with respect to which the Option is being exercised and shall be accompanied by payment in full of the Option Price of the shares for which the Option is being exercised. The minimum number of shares of Stock with respect to which an Option may be exercised, in whole or in part, at any time shall be the lesser of (i) 100 shares or such lesser number set forth in the applicable Option Agreement and (ii) the maximum number of shares available for purchase under the Option at the time of exercise. Payment of the Option Price for the shares of Stock purchased pursuant to the exercise of an Option shall be made (i) in cash or in cash equivalents; (ii) to the extent permitted by applicable law and under the terms of the Option Agreement with respect to such Option, through the tender to the Corporation of shares of Stock, which shares shall be valued, for purposes of determining the extent to which the Option Price has been paid thereby, at their fair market value (determined in accordance with Section 9) on the date of exercise; (iii) to the extent permitted by applicable law and under the terms of the Option Agreement with respect to such Option, by the delivery of a promissory note of the person exercising the Option to the Corporation on such terms as shall be set out in such Option Agreement; (iv) to the extent permitted by applicable law and under the terms of the Option Agreement with respect to such Option, by causing the Corporation to withhold shares of Stock otherwise issuable pursuant to the exercise of an Option equal in value to the Option Price or portion thereof to be satisfied pursuant to this clause (iv); or (v) by a combination of the methods described in (i), (ii), (iii), and (iv). An attempt to exercise any Option granted hereunder other than as set forth above shall be invalid and of no force and effect. Payment in full of the Option Price need not accompany the written notice of exercise provided the notice directs that the Stock certificate or certificates for the shares for which the Option is exercised be delivered to a licensed broker acceptable to the Corporation as the agent for the individual exercising the Option and, at the time such Stock certificate or certificates are delivered, the broker tenders to the Corporation cash (or cash equivalents acceptable to the Corporation) equal to the Option Price. Promptly after the exercise of an Option and the payment in full of the Option Price of the shares of Stock covered thereby, the individual exercising the Option shall be entitled to the issuance of a Stock certificate or Stock certificates evidencing his ownership of such shares. A separate Stock certificate or separate Stock certificates shall be issued for any shares purchased pursuant to the exercise of an Option that is an ISO, which certificate or certificates shall not include any shares that were purchased pursuant to the exercise of an Option that is an NSO. Unless otherwise stated in the applicable Option Agreement, an individual holding or exercising an Option shall have none of the rights of a stockholder (for example, the right to receive cash or stock dividend payments attributable to the subject shares or to direct the voting of the subject shares) until the shares of Stock covered thereby are fully paid and issued to him. Except as provided in Section 16 below, no adjustment shall be made for dividends or other rights for which the record date is prior to the date of such issuance. 9 (d) DATE OF GRANT The date of grant of an Option under this Plan shall be the date as of which the Board approves the grant. 11. TRANSFERABILITY OF OPTIONS During the lifetime of an Optionee, only such Optionee (or, in the event of legal incapacity or incompetency, the guardian or legal representative of the Optionee) may exercise the Option, except as otherwise specifically permitted by this Section 11. No Option shall be assignable or transferable other than by will or in accordance with the laws of descent and distribution; provided, however, subject to the terms of the applicable Option Agreement, and to the extent the transfer is in compliance with any applicable restrictions on transfers, an Optionee may transfer an NSO to a family member of the Optionee (defined as an individual who is related to the Optionee by blood or adoption) or to a trust established and maintained for the benefit of the Optionee or a family member of the Optionee (as determined under applicable state law and the Code). 12. TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP OF OPTIONEE In the Board's sole discretion, the Board may include language in an Option Agreement providing for the termination of any unexercised Option in whole or in part upon or at any time after the termination of employment or other relationship of the Optionee with the Corporation or a Subsidiary (whether as an employee, a director, a consultant or advisor providing bona fide services to the Corporation or a Subsidiary, or otherwise). Whether a leave of absence or leave on military or government service shall constitute a termination of employment or other relationship of the Optionee with the Corporation or a Subsidiary for purposes of the Plan shall be determined by the Board, which determination shall be final and conclusive. 13. USE OF PROCEEDS The proceeds received by the Corporation from the sale of Stock pursuant to the exercise of Options granted under the Plan shall constitute general funds of the Corporation. 14. REQUIREMENTS OF LAW The Corporation shall not be required to sell or issue any shares of Stock under any Option if the sale or issuance of such shares would constitute a violation by the Optionee, the individual exercising the Option, or the Corporation of any provisions of any law or regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. If at any time the Corporation shall determine, in its discretion, that the listing, registration, or qualification of any shares subject to the Option upon any securities exchange or under any state or federal law, or the consent or approval of any government regulatory or 10 self-regulatory body is necessary or desirable as a condition of, or in connection with, the issuance or purchase of shares, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Corporation, and any delay caused thereby shall in no way affect the date of termination of the Option. Specifically in connection with the Securities Act of 1933 (as now in effect or as hereafter amended), upon the exercise of any Option, unless a registration statement under such Act is in effect with respect to the shares of Stock covered thereby, the Corporation shall not be required to sell or issue such shares unless the Board has received evidence satisfactory to it that the holder of such Option may acquire such shares pursuant to an exemption from registration under such Act. Any determination in this connection by the Board shall be final, binding, and conclusive. The Corporation may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Securities Act of 1933 (as now in effect or as hereafter amended). The Corporation shall not be obligated to take any affirmative action in order to cause the exercisability or vesting of an Option or to cause the exercise of an Option or the issuance of shares pursuant thereto to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that an Option shall not be exercisable unless and until the shares of Stock covered by such Option are registered or are subject to an available exemption from registration, the exercise of such Option (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption. 15. AMENDMENT AND TERMINATION OF THE PLAN The Board may, at any time and from time to time, amend, suspend, or terminate the Plan as to any shares of Stock as to which Options have not been granted; provided, however, that any amendment by the Board which, if not approved by the Corporation's stockholders, would cause the Plan to not comply with Sections 162(m) or 422 of the Code shall not be effective unless approved by the affirmative vote of stockholders who hold more than fifty percent (50%) of the combined voting power of the outstanding shares of voting stock of the Corporation present or represented, and entitled to vote thereon at a duly constituted stockholders' meeting, or by consent as permitted by law. The Corporation, however, may retain the right in an Option Agreement to convert an ISO into an NSO. The Corporation may also retain the right in an Option Agreement to cause a forfeiture of the shares of Stock or gain realized by a holder of an Option (a) if the holder violates any agreement covering non-competition with the Corporation or any Subsidiary or nondisclosure of confidential information of the Corporation or any Subsidiary, (b) if the holder's employment is terminated for cause or (c) if the Board determines that the holder committed acts or omissions which would have been the basis for a termination of holder's employment for cause had such acts or omissions been discovered prior to termination of holder's employment. Furthermore, the Corporation may, in the Option Agreement, retain the right to annul the grant of an Option, if the holder of such grant was an employee of the Corporation or a Subsidiary and the holder's employment is terminated for cause, as defined in the applicable Option Agreement. Except as permitted under this Section 15 or Section 16 hereof, no amendment, suspension, or termination of the Plan shall, without the 11 consent of the holder of the Option, alter or impair rights or obligations under any Option theretofore granted under the Plan. 16. EFFECT OF CHANGES IN CAPITALIZATION (a) CHANGES IN STOCK If the number of outstanding shares of Stock is increased or decreased or the shares of Stock are changed into or exchanged for a different number or kind of shares or other securities of the Corporation on account of any recapitalization, reclassification, stock split-up, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or other increase or decrease in such shares effected without receipt of consideration by the Corporation, occurring after the effective date of the Plan, the number and kind of shares for the acquisition of which Options may be granted under the Plan, and the limitations on the maximum number of shares subject to Options that can be granted to any individual under the Plan as set forth in Section 6(b) hereof, shall be adjusted proportionately and accordingly by the Corporation. In addition, the number and kind of shares for which Options are outstanding shall be adjusted proportionately and accordingly so that the proportionate interest of the holder of the Option immediately following such event shall, to the extent practicable, be the same as immediately before such event. Any such adjustment in outstanding Options shall not change the aggregate Option Price payable with respect to shares that are subject to the unexercised portion of the Option outstanding but shall include a corresponding proportionate adjustment in the Option Price per share. (b) REORGANIZATION IN WHICH THE CORPORATION IS THE SURVIVING CORPORATION Subject to Subsection (c)(iv) hereof, if the Corporation shall be the surviving corporation in any reorganization, merger, or consolidation of the Corporation with one or more other corporations, any Option theretofore granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to such Option would have been entitled immediately following such reorganization, merger, or consolidation, with a corresponding proportionate adjustment of the Option Price per share so that the aggregate Option Price thereafter shall be the same as the aggregate Option Price of the shares remaining subject to the Option immediately prior to such reorganization, merger, or consolidation. (c) DISSOLUTION, LIQUIDATION, SALE OF ASSETS, REORGANIZATION IN WHICH THE CORPORATION IS NOT THE SURVIVING CORPORATION, ETC. The Plan and all Options outstanding hereunder shall terminate (i) upon the dissolution or liquidation of the Corporation, or (ii) upon a merger, consolidation, or reorganization of the Corporation with one or more other corporations in which the Corporation is not the surviving corporation, or (iii) upon a sale of substantially all of the assets of the Corporation to another person or entity, or (iv) upon a merger, 12 consolidation or reorganization (or other transaction if so determined by the Board in its sole discretion) in which the Corporation is the surviving corporation, that is approved by the Board and that results in any person or entity (other than persons who are holders of Stock of the Corporation at the time the Plan is approved by the stockholders and other than an Affiliate) owning 80 percent or more of the combined voting power of all classes of stock of the Corporation, except to the extent provision is made in writing in connection with any such transaction covered by clauses (i) through (iv) for the continuation of the Plan or the assumption of such Options theretofore granted, or for the substitution for such Options of new options covering the stock of a successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and exercise prices, in which event the Plan and Options theretofore granted shall continue in the manner and under the terms so provided. In the event of any such termination of the Plan, each individual holding an Option shall have the right (subject to the general limitations on exercise set forth in Section 10(b) above), during such period occurring before such termination as the Board in its sole discretion shall determine and designate, and in any event immediately before the occurrence of such termination, to exercise such Option in whole or in part, to the extent that such Option was otherwise exercisable at the time such termination occurs, except that, by inclusion of appropriate language in an Option Agreement, the Board may provide that the Option may be exercised before termination without regard to any installment limitation or other condition on exercise imposed pursuant to Section 10(b) above. The Corporation shall send written notice of a transaction or event that will result in such a termination to all individuals who hold Options not later than the time at which the Corporation gives notice thereof to its stockholders. (d) ADJUSTMENTS Adjustments under this Section 16 related to stock or securities of the Corporation shall be made by the Board, whose determination in that respect shall be final, binding, and conclusive. No fractional shares of Stock or units of other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share or unit. (e) NO LIMITATIONS ON CORPORATION The grant of an Option pursuant to the Plan shall not affect or limit in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure or to merge, consolidate, dissolve, or liquidate, or to sell or transfer all or any part of its business or assets. 17. DISCLAIMER OF RIGHTS No provision in the Plan or in any Option granted or Option Agreement entered into pursuant to the Plan shall be construed to confer upon any individual the right to remain in the employ or service of or to maintain a relationship with the Corporation or any Subsidiary, or to interfere in any way with any contractual or other right or authority of the Corporation or any Subsidiary either to increase or decrease the compensation or other payments to any individual at any time, or to terminate any 13 employment or other relationship between any individual and the Corporation or any Subsidiary. The obligation of the Corporation to pay any benefits pursuant to this Plan shall be interpreted as a contractual obligation to pay only those amounts described herein, in the manner and under the conditions prescribed herein. The Plan shall in no way be interpreted to require the Corporation to transfer any amounts to a third party trustee or otherwise hold any amounts in trust or escrow for payment to any participant or beneficiary under the terms of the Plan. 18. NONEXCLUSIVITY OF THE PLAN Neither the adoption of the Plan nor the submission of the Plan to the stockholders of the Corporation for approval shall be construed as creating any limitations upon the right and authority of the Board to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or particular individuals) as the Board in its discretion determines desirable, including, without limitation, the granting of stock options otherwise than under the Plan. 19. CAPTIONS The use of captions in this Plan or any Option Agreement is for the convenience of reference only and shall not affect the meaning of any provision of the Plan or such Option Agreement. 20. DISQUALIFYING DISPOSITIONS If Stock acquired by exercise of an ISO granted under this Plan is disposed of within two years following the date of grant of the ISO or one year following the transfer of the subject Stock to the Optionee (a "disqualifying disposition"), the holder of the Stock shall, immediately prior to such disqualifying disposition, notify the Corporation in writing of the date and terms of such disposition and provide such other information regarding the disposition as the Corporation may reasonably require. 21. WITHHOLDING TAXES The Corporation shall have the right to deduct from payments of any kind otherwise due to an Optionee any Federal, state, or local taxes of any kind required by law to be withheld with respect to any shares issued upon the exercise of an Option under the Plan or in connection with the purchase of an Option by the Corporation. At the time of exercise, the Optionee shall pay to the Corporation any amount that the Corporation may reasonably determine to be necessary to satisfy such withholding obligation. The Board in its sole discretion may provide in the Option Agreement that, subject to the prior approval of the Corporation, which may be withheld by the Corporation in its sole discretion, the Optionee may elect to satisfy such obligations, in whole or in part, (i) by causing the Corporation to withhold shares of Stock otherwise issuable pursuant to the exercise of an Option or (ii) by delivering to the Corporation shares of Stock already owned by the Optionee. The shares so delivered or withheld shall have a fair market value equal to such withholding 14 obligations. The fair market value of the shares used to satisfy such withholding obligation shall be determined by the Corporation as of the date that the amount of tax to be withheld is to be determined. An Optionee who has made an election pursuant to this Section 21 may only satisfy his or her withholding obligation with shares of Stock that are not subject to any repurchase, forfeiture, unfulfilled vesting, or other similar requirements. 22. OTHER PROVISIONS Each Option granted under the Plan may be subject to, and the Option Agreement relating to such Option may contain, such other terms and conditions not inconsistent with the Plan as may be determined by the Board, in its sole discretion. Notwithstanding the foregoing, each ISO granted under the Plan shall include those terms and conditions that are necessary to qualify the ISO as an "incentive stock option" within the meaning of Section 422 of the Code or the regulations thereunder and shall not include any terms or conditions that are inconsistent therewith. 23. NUMBER AND GENDER With respect to words used in this Plan, the singular form shall include the plural form, the masculine gender shall include the feminine gender, etc., as the context requires. 24. SEVERABILITY If any provision of the Plan or any Option Agreement shall be determined to be illegal or unenforceable by any court of law in any jurisdiction, the remaining provisions hereof and thereof shall be severable and enforceable in accordance with their terms, and all provisions shall remain enforceable in any other jurisdiction. 25. GOVERNING LAW The validity and construction of this Plan and the instruments evidencing the Options granted hereunder shall be governed by the laws of the State of Delaware (excluding its choice of law rules). * * * EX-10.31.1 6 AMENDED AND RESTATED PROMISSORY NOTE 1 EXHIBIT 10.31.1 AMENDED, RESTATED, CONSOLIDATED AND INCREASED MASTER PROMISSORY NOTE THIS AMENDED, RESTATED, CONSOLIDATED AND INCREASED MASTER PROMISSORY NOTE is made this 23rd, day of December, 1997, by SUNRISE EAST ASSISTED LIVING LIMITED PARTNERSHIP, a limited partnership organized and existing under the laws of the Commonwealth of Virginia (the "Borrower") and NATIONSBANK, N.A. as agent (the "Agent") for itself and for certain additional lenders (collectively with the Agent, the "Lenders") who are participating in a bank group pursuant to an Amended and Restated Agency Agreement of even date herewith (as amended, restated or substituted from time to time, the "Agency Agreement"). RECITALS A. The Borrower obtained from the Agent and certain other lenders (collectively, the "Original Lenders") a credit facility in the maximum principal sum of $90,000,000 (the "Original Credit Facility") which was a non-revolving line of credit pursuant to which the Borrower could obtain certain construction/interim loans (each a "Facility Loan;" collectively, the "Facility Loans") for assisted living facilities and independent living facilities. The Original Credit Facility has been evidenced by a Master Promissory Note dated June 13, 1996 as amended pursuant to a First Amendment to Master Promissory Note dated September 5, 1996 and by a Second Amendment to Master Promissory Note dated March 31, 1997 (collectively, the "Master Note"). B. In connection with the making of each Facility Loan, the Borrower executed a promissory note in the maximum principal sum of each Facility Loan (each a "Facility Note" and collectively, the "Facility Notes"). Availability under the Master Note was reduced by the principal sum of each Facility Note. As of the date hereof, seven (7) Facility Loans have been made under the Original Credit Facility evidenced by eight (8) notes as hereinafter described. The assisted or independent living facilities for which Facility Loans were obtained is 2 referred to herein by its location and word "Facility." C. The Borrower obtained a construction/interim loan for the Franconia Facility evidenced by a Note dated June 13, 1996 in the maximum principal sum of $7,940,400 (the "Franconia Note") which is secured by, among other things a Credit Line Deed of Trust, Assignment and Security Agreement also dated June 13, 1996 (the "Franconia Deed of Trust") in favor of trustees designated by the Agent and recorded in the Land Records of Fairfax County, Virginia in Deed Book 9749, Page 1562. A principal balance of $100,000 remains outstanding under the Franconia Note. D. The Borrower obtained a construction/interim loan for the Granite Run Facility evidenced by a Note dated June 13, 1996 in the maximum principal sum of $7,688,000 (the "Granite Run Note") which is secured by, among other things an Open-End Mortgage, Assignment and Security Agreement also dated June 13, 1996 (the "Granite Run Deed of Trust") and recorded in the Land Records of Delaware County, Pennsylvania in Volume 1500, Page 1704 and re-recorded in Volume 1526, Page 977. A principal balance of $100,000 remains outstanding under the Granite Run Note. E. The Borrower obtained a construction/interim loan for the Abington Assisted Living Facility evidenced by a Note dated June 13, 1996 in the maximum principal sum of $8,995,000 (the "Abington Assisted Note") which is secured by, among other things an Open-End Mortgage, Assignment and Security Agreement also dated June 13, 1996 (the "Abington Deed of Trust") and recorded in the Land Records of Montgomery County, Pennsylvania in Deed Book 7783, Page 849. A principal balance of $100,000 remains outstanding under the Abington Assisted Note. F. The Borrower obtained a construction/interim loan for the Abington Independent Living Facility evidenced by a Note dated June 13, 1996 in the maximum principal sum of $4,430,000 (the "Abington Independent Note") which is also secured by, among other things the Abington Deed of Trust. A principal balance of $100,000 remains outstanding under the Abington Independent Note. The Loans evidenced by the Abington Assisted Note and the Abington Independent Note are treated as one Loan. G. The Borrower obtained a construction/interim loan for the Morris Plains Facility evidenced by a Note dated September 5, 1996 in the maximum principal sum of $7,993,000 (the "Morris Plains Note") which is secured by, among other things a Mortgage, Assignment and Security Agreement also dated September 5, 1996 (the "Morris Plains Deed of Trust") and recorded in the Land Records of Morris County, New Jersey in Deed Book 6632, Page 58. A principal balance of $100,000 remains outstanding under the Morris Plains Note. 2 3 H. The Borrower obtained a construction/interim loan for the Wayne Facility evidenced by a Note dated September 5, 1996 in the maximum principal sum of $8,020,000 (the "Wayne Note") which is secured by, among other things a Mortgage, Assignment and Security Agreement also dated September 5, 1996 (the "Wayne Deed of Trust") and recorded in the Land Records of Passaic County, New Jersey in Mortgage Book 0-164, Page 17. A principal balance of $100,000 remains outstanding under the Wayne Note. I. The Borrower obtained a loan for the Old Tappan Facility evidenced by a Note dated September 5, 1996 in the maximum principal sum of $8,300,000 (the "Old Tappan Note") which is secured by, among other things a Mortgage, Assignment and Security Agreement also dated September 5, 1996 (the "Old Tappan Deed of Trust") and recorded in the Land Records of Bergen County, New Jersey in Mortgage Book 9272, Page 700. A principal balance of $100,000 remains outstanding under the Old Tappan Note. J. The Borrower obtained a loan for the Westfield Facility evidenced by a Note dated May 12, 1997 in the maximum principal sum of $8,388,000 (the "Westfield Note") which is secured by, among other things a Mortgage, Assignment and Security Agreement also dated May 12, 1997 (the "Westfield Deed of Trust") and recorded in the Land Records of Union County, New Jersey in Deed Book 6259, Page 141. A principal balance of $100,000 remains outstanding under the Westfield Note. K. The Borrower has applied to the Lenders to increase the maximum principal sum of the Original Credit Facility to $250,000,000 or such greater amount as the Lenders may from time to time commit to lend pursuant to the Agency Agreement (such increased and modified credit facility being hereinafter referred to as the "Credit Facility" or the "Loan") and to provide that the Credit Facility will be revolving. Advances or readvances are to be made pursuant to, and secured by, the provisions of that certain Amended and Restated Financing and Security Agreement dated the same date as this Agreement by and between the Agent and the Borrower (as amended, restated or substituted from time to time, the "Financing Agreement") and that certain Amended and Restated Master Construction Loan Agreement dated the same as this Agreement by and between the Agent and the Borrower (as amended, restated or substituted from time to time, the "Construction Agreement"). L. The Borrower and the Lenders have agreed to (1) the consolidation of the indebtedness evidenced by the Facility Notes with the Master Note which will continue to be secured by, among other things, the Franconia Deed of Trust, the Granite Run Deed of Trust, the Abington Deed of Trust, the Morris Plains Deed of 3 4 Trust, the Wayne Deed of Trust, the Old Tappan Deed of Trust and the Westfield Deed of Trust, (collectively, the "Existing Deeds of Trust") and (2) modification of the terms or repayment of the indebtedness evidenced by the Master Note and the Facility Notes. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Agent and the Borrower covenant and agree as follows: 1. The above Recitals are incorporated herein by reference. 2. The Facility Notes are hereby consolidated with the Master Note and the Master Note is hereby amended and restated in its entirety as follows: $250,000,000 December 23, 1997 FOR VALUE RECEIVED, SUNRISE EAST ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia limited partnership (the "Borrower"), promises to pay to the order of NATIONSBANK, N.A., its successors and assigns (the "Agent") as agent for itself and the other lenders who are or shall be from time to time participating as lenders (collectively with the Agent, the "Lenders") hereunder pursuant to the Amended and Restated Agency Agreement of even date herewith (as amended, restated or substituted from time to time the "Agency Agreement"), the maximum principal sum of TWO HUNDRED FIFTY MILLION AND NO/100 DOLLARS ($250,000,000) (the "Principal Sum") or such greater amount as the Lenders may from time commit to lend pursuant hereto and to the Agency Agreement, or so much thereof as may be advanced or readvanced to or for the account of the Borrower pursuant to the terms and conditions of the Financing Agreement (as hereinafter defined) and the Construction Agreement (as hereinafter defined), together with interest thereon at the rate or rates hereinafter provided. All defined terms not otherwise defined herein shall have the meaning set forth in the Financing Agreement or the Construction Agreement. 1. Interest. Interest on portions of the outstanding Principal Sum shall accrue and be payable for periods of thirty (30) days each or periods of seven (7) days each (each a "Eurodollar Period") at a fixed rate equal to the Eurodollar Rate (as defined in the Financing Agreement), which rate shall be 4 5 adjusted for any Federal Reserve Board reserve requirements imposed upon the Agent or any of the Lenders from time to time plus that certain number of basis points per annum applicable pursuant to the conditions set forth below. The Eurodollar Rate determined pursuant to the preceding sentence shall be in effect to the end of the applicable Eurodollar Period. Interest payable hereunder shall also be subject to the conditions set forth in Section 2.4 of the Financing Agreement. No more than six (6) different Eurodollar Periods may be in effect at any one time provided that not more than one (1) Eurodollar Period may be a seven day Eurodollar Period. Interest shall be computed for the actual number of days which have elapsed from the date of each advance of a portion of the Principal Sum calculated on the basis of a 365-day year.
PRE-CONDITIONS RATE -------------- ---- (a) if the aggregate Asset Value Eurodollar Rate (as defined in the Financing plus 150 basis Agreement) of the Facilities points on which liens are granted in in favor of the Lenders as Optional Collateral (if any) is less than $50,000,000, the rate shall be as follows. (b) If the aggregate Asset Value Eurodollar Rate of the Facilities on which plus 125 basis liens are granted in favor of points the Lenders as Optional Collateral is greater than or equal to $50,000,000 but less than $100,000,000, the rate shall be as follows: (c) If the aggregate Asset Value Eurodollar Rate of the Facilities on which plus 100 basis liens are granted in favor of points the Lenders as Optional Collateral is equal to or greater than $100,000,000, the rate shall be as follows:
2. Payments and Maturity. (a) Interest only on the outstanding principal balance of the Loan shall be due and payable on the fifteenth (15th) day of the first (1st) month following the Credit Facility Closing (as hereinafter defined) and on the fifteenth (15th) day of each and every month thereafter for a total of thirty-six (36) consecutive months unless otherwise extended pursuant to the terms of the Financing 5 6 Agreement; and (b) Principal sums repaid prior to the Maturity Date may be reborrowed pursuant to the terms of the Financing Documents. (c) The outstanding principal balance of the Loan and all accrued and unpaid interest thereon shall be due and owing at the Maturity Date. (d) The Loan shall mature and the entire principal balance of the Loan, together with all accrued and unpaid interest thereon, shall be due and payable on the date (the "Maturity Date") referred to in the Financing Agreement as the Revolving Credit Termination Date. The fact that the balance hereunder may be reduced to zero from time to time pursuant to the Financing Agreement will not affect the continuing validity of this Note or the Financing Agreement, and the balance may be increased to the Principal Sum after any such reduction to zero. 3. Default Interest. Upon the occurrence of an Event of Default (as hereinafter defined), the unpaid Principal Sum shall bear interest thereafter until such Event of Default is cured at a rate which is at all times equal to three percent (3%) per annum in excess of the rate or rates of interest otherwise payable hereunder. 4. Late Charges. In the event that any payment due hereunder is not received by the Agent within fifteen (15) days of the date such payment is due (inclusive of the date when due), the Borrower shall pay to the Agent on demand a late charge equal to four percent (4%) of such payment. 5. Application and Place of Payments. Unless an Event of Default (as hereinafter defined) has occurred, all payments made on account of this Note, including prepayments, shall be applied first to the payment of any prepayment penalty due under Section 4.5 of the Financing Agreement, second to any late charge then due hereunder, third to the payment of accrued and unpaid interest then due hereunder, and the remainder, if any, shall be applied to the unpaid Principal Sum. The application of payments after an Event of Default shall be determined by the Agent. All payments on account of this Note shall be paid in lawful money of the United States of America in immediately available funds during regular business hours of the Agent at its principal office in Baltimore, Maryland or at such other times and places as the Agent may at any time and from time to time designate in writing to the Borrower. Any payment received after 1:00 p.m. (Baltimore Time) shall be deemed to have been received on the 6 7 next Banking Day. 6. Prepayment. The Borrower shall have the right to prepay the Principal Sum in full or in part, at any time and from time to time in accordance with Section 4.5 of the Financing Agreement. Sums repaid may be reborrowed. 7. Financing Agreement and Other Financing Documents. This Note is the Note described in the Amended and Restated Financing and Security Agreement of even date herewith executed by and between the Borrower and the Agent (as amended or otherwise modified from time to time, the "Financing Agreement"). The term "Financing Documents" as used in this Note shall mean collectively this Note, the Financing Agreement, the Master Construction Loan Agreement of even date herewith (the "Construction Agreement"), the Amended and Restated Master Guaranty of Payment Agreement of even date herewith, the Master Guaranty of Performance of even date herewith, the Existing Deeds of Trust, any other Deeds of Trust (as defined in the Construction Agreement), the Security Documents (as defined in the Financing Agreement) and any other instrument, agreement, or document previously, simultaneously, or hereafter executed and delivered by the Borrower and/or any other person, singularly or jointly with any other person, evidencing, securing, guaranteeing, or in connection with the Credit Facility or the Loan. 8. Security. This Note is secured by, among other things, certain deeds of trust or mortgages (each as amended, restated or substituted from time to time, a "Deed of Trust" collectively, the "Deeds of Trust"), covering that real estate owned by the Borrower or one or more of the Borrower's subsidiaries and the improvements thereon more particularly described in the Deeds of Trust identified on any Borrowing Base Report or listing of Optional Collateral and all other property, real and personal, more particularly described in the Existing Deeds of Trust or any other Deeds of Trust (collectively, the "Property"). 9. Events of Default. The occurrence of any one or more of the following events shall constitute an event of default (individually, an "Event of Default" and collectively, the "Events of Default") under the terms of this Note: (a) The failure of the Borrower to pay to the Agent when due any and all amounts payable by the Borrower to the Lenders under the terms hereunder and such failure continues for five (5) calendar days after notice thereof by the Agent, except with regard to payment of amounts due at maturity for which no notice or cure period shall be required to be given and except for a Borrowing Base Deficiency (as defined in the Financing Agreement) which shall be payable as provided in the Financing Agreement; or 7 8 (b) The occurrence of a Default or an Event of Default (as those terms are defined in the Financing Agreement) under the terms and conditions of any of the other Financing Documents, which Default or Event of Default remains uncured beyond any applicable grace and/or cure period provided therefor. 10. Remedies. Upon the occurrence of an Event of Default, at the option of the Lenders, all amounts payable by the Borrower to the Lenders under the terms hereof shall immediately become due and payable by the Borrower to the Lenders without notice to the Borrower or any other person, and the Lenders shall have all of the rights, powers, and remedies available under the terms of this Note, any of the other Financing Documents and all applicable laws. The Borrower and all endorsers, guarantors, and other parties who may now or in the future be primarily or secondarily liable for the payment of the indebtedness under the Loan hereby severally waive presentment, protest and demand, notice of protest, notice of demand and of dishonor and non-payment of this Note and expressly agree that this Note or any payment hereunder may be extended from time to time without in any way affecting the liability of the Borrower, guarantors and endorsers. The Borrower and all endorsers, guarantors, and other parties who may now or in the future be liable for payment of the Obligations hereby acknowledge that all advances under the Loan will be made under and will be evidenced by this Note. 11. Mandatory Arbitration. Any controversy or claim between or among the parties hereto including but not limited to those arising out of or relating to this Note or any related agreements or instruments, including any claim based on or arising from an alleged tort, shall be determined by binding arbitration in accordance with the Federal Arbitration Act (or if not applicable, the applicable state law), as promulgated from time to time by the Rules of Practice and Procedure for the Arbitration of Commercial Disputes of Judicial Arbitration and Mediation Services, Inc., predecessor in interest to Endispute, Inc., doing business as "J.A.M.S./Endispute" and the "Special Rules" set forth below. In the event of any inconsistency, the Special Rules shall control. Judgment upon any arbitration award may be entered in any court having jurisdiction. Any party to this Note may bring an action, including a summary or expedited proceeding, to compel arbitration of any controversy or claim to which this agreement applies in any court having jurisdiction over such action. The foregoing notwithstanding, in a claim pertaining to a Deed of Trust or Collateral located in a state with "one-action" rule which might limit to Lenders' remedies, the Agent shall have the right in its sole discretion to restrict the application of this arbitration provision to the extent that it would otherwise result in a limitation on the Lenders' remedies in such state. 8 9 (i) Special Rules. The arbitration shall be conducted in Fairfax County, Virginia and administered by J.A.M.S./Endispute who will appoint an arbitrator pursuant to its rules of practice and procedure; if J.A.M.S./Endispute is unable or legally precluded from administering the arbitration, then the American Arbitration Association will serve. All arbitration hearings will be commenced within ninety (90) calendar days of the demand for arbitration; further, the arbitrator shall only, upon a showing of cause, be permitted to extend the commencement of such hearing for up to an additional sixty (60) calendar days. (ii) Reservations of Rights. Nothing in this Note shall be deemed to (i) limit the applicability of any otherwise applicable statutes of limitation or repose and any waivers contained in this Note; or (ii) be a waiver by Agent of the protection afforded to it by 12 U.S.C. Sec. 91 or any substantially equivalent state law; or (iii) limit the right of the Agent or the Lenders (A) to exercise self help remedies such as (but not limited to) setoff, or (B) to foreclose against any real or personal property collateral, or (C) to obtain from a court provisional or ancillary remedies such as (but not limited to) injunctive relief or the appointment of a receiver. The Agent or the Lenders may exercise such self help rights, foreclose upon such property, or obtain such provisional or ancillary remedies before, during or after the pendency of any arbitration proceeding brought pursuant to this Note. At the Agent's or the Lenders' option, foreclosure under a deed of trust or mortgage may be accomplished by any of the following: the exercise of a power of sale under the deed of trust or mortgage, or by judicial sale under the deed of trust or mortgage, or by judicial foreclosure. Neither the exercise of self help remedies nor the institution or maintenance of an action for foreclosure or provisional or ancillary remedies shall constitute a waiver of the right of any party, including the claimant in any such action, to arbitrate the merits of the controversy or claim occasioning resort to such remedies. Notwithstanding the foregoing, in the event that the Agent or the Lenders exercise such self help remedies or other actions, the Borrower has not waived any of its rights to seek legal or equitable relief to defend against the Agent's or the Lenders' exercise of such self help remedies or other actions. No provision in the Financing Documents regarding submission to jurisdiction and/or venue in any court is intended or shall be construed to be in derogation of the provisions in any Financing Document for arbitration of any controversy or claim. (iii) Confidentiality. Any arbitration proceeding, award, findings of fact, conclusions of law, or other information concerning such arbitration matters shall be held in confidence by the parties and shall not be disclosed except to each party's 9 10 employees or agents as shall be reasonably necessary for such party to conduct its business; provided, however, that either party may disclose such information for auditing purposes by independent certified public accountants, for complying with applicable governmental laws, regulations or court orders, or that is or becomes part of the public domain through no breach of this Note. 12. Consent to Jurisdiction. The Borrower irrevocably submits to the jurisdiction of any state or federal court sitting in the Commonwealth of Virginia over any suit, action, or proceeding arising out of or relating to this Note. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection that the Borrower may now or hereafter have to the laying the venue of any such suit, action, or proceeding brought in any such court and any claim that any such suit, action, or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment in any such suit, action, or proceeding brought in any such court shall be conclusive and binding upon the Borrower and may be enforced in any court in which the Borrower is subject to jurisdiction by a suit upon such judgment provided that service of process is effected upon the Borrower as provided in this Note or as otherwise permitted by applicable law. 13. Service of Process. (a) The Borrower hereby irrevocably designates and appoints Wayne G. Tatusko, Esquire of Watt, Tieder & Hoffar, 7929 Westpark Drive, McLean, Virginia 22102, as the Borrower's authorized agent to accept and acknowledge on the Borrower's behalf service of any and all process that may be served in any suit, action, or proceeding instituted in connection with this Note in any state or federal court sitting in the Commonwealth of Virginia. If such agent shall cease so to act, the Borrower shall irrevocably designate and appoint without delay another such agent in the Commonwealth of Virginia satisfactory to the Lenders and shall promptly deliver to the Agent evidence in writing of such agent's acceptance of such appointment and its agreement that such appointment shall be irrevocable. (b) The Borrower hereby consents to process being served in any suit, action, or proceeding instituted in connection with this Note by (i) the mailing of a copy thereof by certified mail, postage prepaid, return receipt requested, to the Borrower and (ii) serving a copy thereof upon the agent hereinabove designated and appointed by the Borrower as the Borrower's agent for service of process. The Borrower irrevocably agrees that such service shall be deemed to be service of process upon the Borrower in any such suit, action, or proceeding. Nothing in this Note shall affect the right of the Lenders to serve process in any manner otherwise permitted by law and nothing in this Note 10 11 will limit the right of the Lenders otherwise to bring proceedings against the Borrower in the courts of any jurisdiction or jurisdictions. 14. WAIVER OF TRIAL BY JURY. THE BORROWER AND THE LENDERS HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING NOT REQUIRED TO BE ARBITRATED PURSUANT TO THE TERMS HEREOF TO WHICH THE BORROWER AND THE LENDERS, OR ANY OF THEM, MAY BE PARTIES, ARISING OUT OF OR IN ANY WAY PERTAINING TO (A) THIS NOTE, (B) THE OTHER FINANCING DOCUMENTS OR (C) ANY OF THE PROPERTY. IT IS AGREED AND UNDERSTOOD THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS NOTE. THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY THE BORROWER, AND THE BORROWER HEREBY REPRESENTS THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. THE BORROWER FURTHER REPRESENTS THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. 15. Expenses. The Borrower promises to pay to the Agent on demand by the Agent all costs and expenses incurred by the Lenders in connection with the collection and enforcement of this Note, including, without limitation, all reasonable attorneys' fees and expenses and all court costs. 16. Notices. Any notice, request, or demand to or upon the Borrower or the Lenders shall be deemed to have been properly given or made when delivered in accordance with Section 11.1 of the Financing Agreement. 17. Miscellaneous. Each right, power, and remedy of the Lenders as provided for in this Note or any of the other Financing Documents, or now or hereafter existing under any applicable law or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power, or remedy provided for in this Note or any of the other Financing Documents or now or hereafter existing under any applicable law, and the exercise or beginning of the exercise by the Lenders of any one or more of such rights, powers, or remedies shall not preclude the simultaneous or later exercise by the Lenders of any or all such other rights, powers, or remedies. No failure or delay by the Lenders to insist upon the strict performance of any term, condition, covenant, or agreement of this Note or any of the other Financing Documents, or to exercise any right, power, or remedy consequent upon a breach thereof, shall constitute a waiver of any such term, condition, covenant, or agreement or of any such breach, or preclude the Lenders from exercising any such 11 12 right, power, or remedy at a later time or times. By accepting payment after the due date of any amount payable hereunder, the Lenders shall not be deemed to waive the right either to require prompt payment when due of all other amounts payable under the terms hereof or to declare an Event of Default for the failure to effect such prompt payment of any such other amount. No course of dealing or conduct shall be effective to amend, modify, waive, release, or change any provisions of this Note. 18. Partial Invalidity. In the event any provision of this Note (or any part of any provision) is held by a court of competent jurisdiction to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision (or remaining part of the affected provision) of this Note; but this Note shall be construed as if such invalid, illegal, or unenforceable provision (or part thereof) had not been contained in this Note, but only to the extent it is invalid, illegal, or unenforceable. 19. Captions. The captions herein set forth are for convenience only and shall not be deemed to define, limit, or describe the scope or intent of this Note. 20. Governing Law. The provisions of this Note shall be construed, interpreted and enforced in accordance with the laws of the Commonwealth of Virginia as the same may be in effect from time to time. 3. It is expressly understood and agreed that the indebtedness evidenced by the Master Note and the Facility Notes has not been extinguished or discharged hereby and is consolidated herein. The Borrower and/or the Agent agree that the execution of this Note is not intended and shall not cause or result in a novation with regard to the Master Note or the Notes. 4. This Note may be executed in one or more counterparts each of which shall constitute an original for all purposes; provided, however, that all such counterparts shall together constitute one and the same instrument. 12 13 IN WITNESS WHEREOF, the Borrower and the Agent have caused this Amended, Restated, Consolidated and Increased Master Promissory Note to be executed, under seal, by their duly authorized representatives, as of the date first written above. WITNESS OR ATTEST: SUNRISE EAST ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia limited partnership By: Sunrise Assisted Living Investments, Inc., general partner /s/ Wayne G. Tatusko By:/s/ James S. Pope (SEAL) - -------------------- ------------- James S. Pope Vice President WITNESS: NATIONSBANK, N.A., as Agent for itself and the Other Lenders /s/ Wayne G. Tatusko By: /s/ Robert J. Montanari (SEAL) - -------------------- ------------------------ Robert J. Montanari Vice President STATE/COMMONWEALTH OF VIRGINIA, CITY/COUNTY OF Fairfax, TO WIT: I, Dawn A. Washington , a Notary Public in and for the jurisdiction aforesaid, do hereby certify that James S. Pope as Vice President of Sunrise Assisted Living Investments, Inc., a Virginia corporation, the general partner of Sunrise East Assisted Living Limited Partnership, a Virginia limited partnership, who executed the foregoing instrument, personally appeared before me and acknowledged said Instrument to be his act and deed that he executed said Instrument for the purposes therein contained. WITNESS my hand and Notarial Seal. /s/ Dawn A. Washington -------------------------- Notary Public My Commission Expires: 13 14 STATE/COMMONWEALTH OF VIRGINIA, CITY/COUNTY OF Fairfax, TO WIT: I, Dawn A. Washington, a Notary Public in and for the jurisdiction aforesaid, do hereby certify that Robert J. Montanari, a Vice President of NationsBank, N.A., who executed the foregoing instrument, personally appeared before me and acknowledged said Instrument to be his act and deed that he executed said Instrument for the purposes therein contained. WITNESS my hand and Notarial Seal. /s/ Dawn A. Washington ------------------------- Notary Public My Commission Expires: 14 EX-10.31.2 7 AMENDED & RESTATED FINANCING & SECURITY AGREEMENT 1 EXHIBIT 10.31.2 AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT (MASTER AGREEMENT) SUNRISE EAST ASSISTED LIVING LIMITED PARTNERSHIP AS BORROWER NATIONSBANK, N.A. AS AGENT December 23, 1997 2 TABLE OF CONTENTS I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ----------- Section 1.1. Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 --------------------- Section 1.2. Accounting Terms and Other Definitional ---------------------------------------- Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ---------- II. BORROWING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 --------- Section 2.1. The Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 -------- Section 2.2. Procedure for Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ---------------------- Section 2.3. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ---- Section 2.4. Interest Rate Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 --------------------- Section 2.5. Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ---------- III. COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ---------- Section 3.1. Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ---------- Section 3.2. Eligible Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ----------------- Section 3.3. Optional Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ------------------- Section 3.4. Assignment of Partnership Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ----------------------------------- Section 3.5. Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ---------- Section 3.6. Collateral for Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 -------------------------- Section 3.7. Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ----- IV. GENERAL FINANCING PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ---------------------------- Section 4.1. Computation of Interest and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 -------------------------------- Section 4.2. Liens; Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ------------- Section 4.3. Payment and Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 30 -------------------------------------- Section 4.4. Payments to Others for the Account of the Borrower . . . . . . . . . . . . . . . . . . . . 31 -------------------------------------------------- Section 4.5. Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ---------- V. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ------------------------------ Section 5.1. Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 ------------- Section 5.2. Power and Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 ------------------- Section 5.3. Binding Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 ------------------ Section 5.4. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 ---------- Section 5.5. No Conflicting Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 ------------------------- Section 5.6. Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 --------------------- Section 5.7. No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 ---------- Section 5.8. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 ----- Section 5.9. Place(s) of Business and Location of Collateral . . . . . . . . . . . . . . . . . . . . . . 34 ----------------------------------------------- Section 5.10. Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ------------------- Section 5.11. Margin Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ------------ Section 5.12. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ----- Section 5.13. Governmental Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 -------------------- Section 5.14. Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 --------------- Section 5.15. Business Names and Addresses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 ---------------------------- Section 5.16. Licenses and Certifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 --------------------------- Section 5.17. Operating Agreements and Management Contracts . . . . . . . . . . . . . . . . . . . . . . . 36 ---------------------------------------------
3 Section 5.18. Participation Agreements and Resident -------------------------------------- Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 ---------- Section 5.19. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 -------------------- Section 5.20. Presence of Hazardous Materials or ------------------------------------ Hazardous Materials Contamination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 --------------------------------- Section 5.21. Nature of Credit Facility; Usury; Disclosures . . . . . . . . . . . . . . . . . . . . . . . 38 --------------------------------------------- Section 5.22. Survival; Updates of Representations and ----------------------------------------- Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 ---------- Section 5.23. Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 -------- VI. CONDITIONS OF LENDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 --------------------- Section 6.1. No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 ---------- Section 6.2. Opinion of Counsel for the Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 ----------------------------------- Section 6.3. Approval of Counsel for the Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 ----------------------------------- Section 6.4. Supporting Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 -------------------- Section 6.5. Financing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 ------------------- Section 6.6. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 --------- Section 6.7. Security Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 ------------------ Section 6.8. Joinder Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 ----------------- VII. AFFIRMATIVE COVENANTS OF BORROWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 --------------------------------- Section 7.1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 -------------------- Section 7.2. Taxes and Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 ---------------- Section 7.3. Legal Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 --------------- Section 7.4. Conduct of Business and Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . 43 --------------------------------------------- Section 7.5. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 --------------- Section 7.6. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 --------- Section 7.7. Flood Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 --------------- Section 7.8. Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 ------------------------- Section 7.9. Maintenance of the Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 ----------------------------- Section 7.10. Other Liens, Security Interests, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 ------------------------------------- Section 7.11. Defense of Title and Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . 47 --------------------------------------- Section 7.12. Subsequent Opinion of Counsel as to Recording --------------------------------------------- Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 ------------ Section 7.13. Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 ----------------- Section 7.14. Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 ----------- Section 7.15. Notice to Account Debtors and Escrow Account . . . . . . . . . . . . . . . . . . . . . . . 49 -------------------------------------------- Section 7.16. Business Names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 -------------- Section 7.17. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 ----- Section 7.18. Change in Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 -------------------- Section 7.19. Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 ---------- Section 7.20. Fees and Expenses; Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 ---------------------------- Section 7.21. Governmental Surveys or Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 ----------------------------------- Section 7.22. Cost Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 ------------ Section 7.23. Updated Appraisals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 ------------------ Section 7.24. Notification of Certain Events, Events --------------------------------------- of Default and Adverse Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 ----------------------------------- Section 7.25. Compliance with Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 ---------------------------------- Section 7.26. Hazardous Materials; Contamination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 ---------------------------------- Section 7.27. Participation in Reimbursement Programs . . . . . . . . . . . . . . . . . . . . . . . . . . 53 --------------------------------------- Section 7.28. Minimum Pool A Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 -----------------------
4 Section 7.29. Subordination of Distributions and Management Fees . . . . . . . . . . . . . . . . . . . . 54 -------------------------------------------------- Section 7.30. Depository Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 --------------- VIII. NEGATIVE COVENANTS OF BORROWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 ------------------------------ Section 8.1. Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 ---------- Section 8.2. Deeds of Trust and Pledges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 -------------------------- Section 8.3. Sale or Transfer of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 -------------------------- Section 8.4. Advances and Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 ------------------ Section 8.5. Contingent Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 ---------------------- Section 8.6. Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 -------- Section 8.7. ERISA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 ---------------- Section 8.8. Transfer of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 ---------------------- Section 8.9. Sale of Accounts or Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 ------------------------------- Section 8.10. Amendments; Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 ------------------------ Section 8.11. Prohibition on Hazardous Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 ---------------------------------- Section 8.12. Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 ------------ Section 8.13. Distributions to Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 ------------------------- Section 8.14. Mergers or Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 ----------------------- Section 8.15. Partnership Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 --------------------- IX. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 ----------------- Section 9.1. Failure to Pay and/or Perform the Obligations . . . . . . . . . . . . . . . . . . . . . . . 58 --------------------------------------------- Section 9.2. Breach of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . 58 ---------------------------------------- Section 9.3. Failure to Comply with Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 -------------------------------- Section 9.4. Failure to Comply with Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . 58 ---------------------------------------- Section 9.5. Other Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 -------------- Section 9.6. Default Under Other Financing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . 59 --------------------------------------- Section 9.7. Receiver; Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 -------------------- Section 9.8. Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 -------- Section 9.9. Execution; Attachment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 --------------------- Section 9.10. Default Under Other Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 ------------------------------ Section 9.11. Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 ----------------------- Section 9.12. Impairment of Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 ---------------------- Section 9.13. Change in Status or Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 ----------------------------- Section 9.14. Zoning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 ------ Section 9.15. Change in Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 -------------------- Section 9.16. Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 -------- Section 9.17. Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 ------------------- X. RIGHTS AND REMEDIES UPON DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 -------------------------------- Section 10.1. DEMAND; ACCELERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 -------------------- Section 10.2. Further Advances; Immediate Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . 61 ---------------------------------------- Section 10.3. Specific Rights With Regard to Collateral . . . . . . . . . . . . . . . . . . . . . . . . . 61 ----------------------------------------- Section 10.4. Performance by Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 ---------------------- Section 10.5. Uniform Commercial Code and Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . 63 ------------------------------------------ Section 10.6. Receiver or Other Court Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 ----------------------------- XI. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 ------------- Section 11.1. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 ------- Section 11.2. Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 ----------------------
5 Section 11.3. Remedies, etc. Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 ------------------------- Section 11.4. No Waiver of Rights by the Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 ---------------------------------- Section 11.5. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 ---------------- Section 11.6. Survival of Agreement; Successors and -------------------------------------- Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 ------- Section 11.7. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 -------- Section 11.8. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 ------------ Section 11.9. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 ------------- Section 11.10. Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 ------------- Section 11.11. Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 ---------- Section 11.12. Gender, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 ------------ Section 11.13. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 -------- Section 11.14. Waiver of Trial by Jury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 ----------------------- Section 11.15. Liability of the Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 ------------------------ Section 11.16. License of Tradename . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 --------------------
EXHIBITS: A Form of Note B Form of Borrowing Base Report C Initial Borrowing Base Report D Places of Business E List of Optional Collateral F Form of Subsidiary Joinder Agreement 6 AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT (MASTER AGREEMENT) THIS AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT (the "Agreement") is made this 23rd day of December, 1997, by and between SUNRISE EAST ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia limited partnership (the "Borrower"), and NATIONSBANK, N.A., as agent (the "Agent") for itself and for certain additional lenders who are or shall be from time to time participating as lenders hereunder pursuant to the Agency Agreement, as hereinafter defined (collectively with the Agent, the "Lenders"). RECITALS A. The Borrower obtained from the Agent and certain other lenders (collectively, the "Original Lenders") a credit facility in the maximum principal sum of $90,000,000 (the "Original Credit Facility") which was a non-revolving line of credit pursuant to which the Borrower could obtain certain construction/interim loans (each a "Facility Loan;" collectively, the "Facility Loans") for assisted living facilities and independent living facilities. The Original Credit Facility has been evidenced by a Master Promissory Note dated June 13, 1996 as amended pursuant to a First Amendment to Master Promissory Note dated September 5, 1996 and by a Second Amendment to Master Promissory Note dated March 31, 1997 (collectively, the "Master Note"). B. In connection with the making of each Facility Loan, the Borrower executed a promissory note in the maximum principal sum of each Facility Loan (each a "Facility Note" and collectively, the "Facility Notes"). Availability under the Master Note was reduced by the principal sum of each Facility Note. As of the date hereof, seven (7) Facility Loans have been made under the Original Credit Facility as hereinafter described. The assisted or independent living facilities for which Facility Loans were obtained is referred to herein by its location and word "Facility." C. The Borrower obtained a construction/interim loan for the Franconia Facility evidenced by a Note dated June 13, 1996 in the maximum principal sum of $7,940,400 (the "Franconia Note") which is secured by, among other things a Credit Line Deed of Trust, Assignment and Security Agreement also dated June 13, 1996 (the "Franconia Deed of Trust") in favor of trustees designated by the Agent and recorded in the Land Records of Fairfax County, Virginia in Deed Book 9749, Page 1562. A principal balance of $100,000 remains outstanding under the Franconia Note. D. The Borrower obtained a construction/interim loan for 7 the Granite Run Facility evidenced by a Note dated June 13, 1996 in the maximum principal sum of $7,688,000 (the "Granite Run Note") which is secured by, among other things an Open-End Mortgage, Assignment and Security Agreement also dated June 13, 1996 (the "Granite Run Deed of Trust") and recorded in the Land Records of Delaware County, Pennsylvania in Volume 1500, Page 1704 and re-recorded in Volume 1526, Page 977. A principal balance of $100,000 remains outstanding under the Granite Run Note. E. The Borrower obtained a construction/interim loan for the Abington Assisted Living Facility evidenced by a Note dated June 13, 1996 in the maximum principal sum of $8,995,000 (the "Abington Assisted Note") which is secured by, among other things an Open-End Mortgage, Assignment and Security Agreement also dated June 13, 1996 (the "Abington Deed of Trust") and recorded in the Land Records of Montgomery County, Pennsylvania in Deed Book 7783, Page 849. A principal balance of $100,000 remains outstanding under the Abington Assisted Note. F. The Borrower obtained a construction/interim loan for the Abington Independent Living Facility evidenced by a Note dated June 13, 1996 in the maximum principal sum of $4,430,000 (the "Abington Independent Note") which is also secured by, among other things the Abington Deed of Trust. A principal balance of $100,000 remains outstanding under the Abington Independent Note. The Facility Loans evidenced by the Abington Assisted Note and the Abington Independent Note are treated as one Loan. G. The Borrower obtained a construction/interim loan for the Morris Plains Facility evidenced by a Note dated September 5, 1996 in the maximum principal sum of $7,993,000 (the "Morris Plains Note") which is secured by, among other things a Mortgage, Assignment and Security Agreement also dated September 5, 1996 (the "Morris Plains Deed of Trust") and recorded in the Land Records of Morris County, New Jersey in Deed Book 6632, Page 58. A principal balance of $100,000 remains outstanding under the Morris Plains Note. H. The Borrower obtained a construction/interim loan for the Wayne Facility evidenced by a Note dated September 5, 1996 in the maximum principal sum of $8,020,000 (the "Wayne Note") which is secured by, among other things a Mortgage, Assignment and Security Agreement also dated September 5, 1996 (the "Wayne Deed of Trust") and recorded in the Land Records of Passaic County, New Jersey in Mortgage Book 0-164, Page 17. A principal balance of $100,000 remains outstanding under the Wayne Note. I. The Borrower obtained a loan for the Old Tappan Facility evidenced by a Note dated September 5, 1996 in the maximum principal sum of $8,300,000 (the "Old Tappan Note") which 2 8 is secured by, among other things a Mortgage, Assignment and Security Agreement also dated September 5, 1996 (the "Old Tappan Deed of Trust") and recorded in the Land Records of Bergen County, New Jersey in Mortgage Book 9272, Page 700. A principal balance of $100,000 remains outstanding under the Old Tappan Note. J. The Borrower obtained a loan for the Westfield Facility evidenced by a Note dated May 12, 1997 in the maximum principal sum of $8,388,000 (the "Westfield Note") which is secured by, among other things a Mortgage, Assignment and Security Agreement also dated May 12, 1997 (the "Westfield Deed of Trust") and recorded in the Land Records of Union County, New Jersey in Deed Book 6259, Page 141. A principal balance of $100,000 remains outstanding under the Westfield Note. K. The Borrower has applied to the Lenders to increase the maximum principal sum of the Original Credit Facility to $250,000,000 or such greater amount as the Lenders may from time to time commit to lend pursuant to the Agency Agreement (such increased and modified credit facility being hereinafter referred to as the "Credit Facility" or the "Loan") and to provide that the Credit Facility will be revolving. Advances or readvances are to be made pursuant to the provisions of this Agreement and that certain Amended and Restated Master Construction Loan Agreement dated the same as this Agreement by and between the Agent and the Borrower (as amended, restated or substituted from time to time, the "Construction Loan Agreement"). L. Except as otherwise set forth herein, advances of the Loan may be made to the Borrower for the general business purposes of the Borrower or its Wholly Owned Subsidiaries which are Guarantor Subsidiaries (as hereinafter defined), including, but not limited to, financing the construction or purchase of assisted living facilities or independent living facilities. M. The Borrower and the Lenders have agreed to (1) the consolidation of the indebtedness evidenced by the Facility Notes with the Master Note which will continue to be secured by, among other things, the Franconia Deed of Trust, the Granite Run Deed of Trust, the Abington Deed of Trust, the Morris Plains Deed of Trust, the Wayne Deed of Trust, the Old Tappan Deed of Trust and the Westfield Deed of Trust, (collectively, the "Existing Deeds of Trust") and (2) modification of the terms or repayment of the indebtedness evidenced by the Master Note and the Facility Notes. N. The Loan is evidenced by that certain Amended, Restated, Consolidated and Increased Master Promissory Note of even date herewith payable by the Borrower to Agent on behalf of the Lenders (as amended, restated, renewed or substituted from time to time, the "Note"). 3 9 O. The Lenders have agreed to make available the Credit Facility upon the conditions that this Agreement amending and restating the Existing Financing Agreement be executed and delivered to the Agent. AGREEMENTS NOW, THEREFORE, in consideration of the premises, the mutual agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower and the Agent, on behalf of the Lenders, hereby agree as follows: I. DEFINITIONS Section I.1. Certain Defined Terms. As used herein, the terms defined in the Preamble and Recitals hereto shall have the respective meanings specified therein, and the following terms shall have the following meanings: "Account", individually, and "Accounts", collectively, mean with respect to any and all Facilities, all presently existing or hereafter acquired or created accounts, accounts receivable, contract rights, notes, drafts, instruments, acceptances, chattel paper, leases and writings evidencing a monetary obligation or a security interest in or a lease of goods, all rights to receive the payment of money or other consideration under present or future contracts arising out of or relating to any and all Facilities (including, without limitation, all rights to receive the payment of money or other consideration from, or on behalf of, any private pay patient), or by virtue of services rendered, loans and advances made or other considerations given, by or set forth in, or arising out of, any present or future chattel paper, note, draft, lease, acceptance, writing, bond, insurance policy, instrument, document or general intangible, and all extensions and renewals of any thereof, all rights under or arising out of present or future contracts, agreements which gave rise to any or all of the foregoing, including all claims or causes of action now existing or hereafter arising in connection with or under any agreement or document or by operation of law or otherwise, all collateral security of any kind (including real property mortgages) given by any person with respect to any of the foregoing, including, without limitation, all rights to receive payment of money or other consideration from, or on behalf of, any private pay patient, all rights to receive payments under all Resident Agreements, and all third-party payor contracts (including Medicare and Medicaid to the extent permitted by Law), including, but not limited to, the Veterans Administration, Participation Agreements, and any and all depository accounts 4 10 (other than resident trust accounts) into which the proceeds of all or any portion of such accounts may be now or hereafter deposited, and all proceeds (cash and non-cash) of the foregoing. "Account Debtor" means any Person who is obligated on a Receivable and "Account Debtors" mean all Persons who are obligated on the Receivables. "Act of Bankruptcy" means the filing of a petition in bankruptcy under the Bankruptcy Code or the other commencement of a proceeding under any other applicable law concerning insolvency, reorganization or bankruptcy, now or hereafter in effect. "Adjusted EBITDA" shall have the meaning set forth in Section 8.13 hereof. "Affiliate" means an entity in which SALI or another entity which SALI controls, holds an ownership interest equal to or greater than twenty-five percent (25%). "Agency Agreement" means that certain Amended and Restated Agency Agreement of even date herewith by and among the Agent and the other Lenders, as the same may be amended, restated or substituted from time to time. "Agent" means NationsBank, N.A., its successors and assigns. "Agreement" means this Amended and Restated Financing and Security Agreement and all amendments, extensions, restatements, substitutions and supplements hereto which may from time to time become effective in accordance with the provisions of Section 0 hereof. "Asset Value" means for any Facility included in Optional Collateral the greater of (a) such Facility's Total Project Costs Incurred or (b) its Net Operating Income for the immediately prior twelve (12) consecutive months capitalized at the rate of 10.5% "Banking Day" means any day that is not a Saturday, Sunday or banking holiday in the Commonwealth of Virginia and a day on which banks are open for the transaction of business in U.S. Dollar deposits in London, England. "Bankruptcy Code" means the United States Bankruptcy Code, 11 U.S.C. 101 et seq. "Borrowing Base" means at any time an amount equal to the lesser of (a) the aggregate dollar amounts of the Deed of Trust Lien Amounts for each of the Eligible Projects or, in cases where 5 11 an appraisal is obtained pursuant to Section 7.23 hereof, the lesser of the Deed of Trust Lien Amount or 75% of the appraised value of such Eligible Project; or (b) the aggregate dollar amount equal to 80% of the Costs Incurred to Date for each Pool A Project, 60% of the Costs Incurred to Date for each Pool B Project, and 40% of the Costs Incurred to Date for each Pool C Project. "Borrowing Base Report" shall have the meaning set forth in Section 0 hereof. "Chattel Paper" means a writing or writings which evidence both a monetary obligation and a security interest in or lease of specific goods; any returned, rejected or repossessed goods covered by any such writing or writings and all proceeds (in any form including, without limitation, accounts, contract rights, documents, chattel paper, instruments and general intangibles) of such returned, rejected or repossessed goods; and all proceeds (cash and non-cash) of the foregoing. "Collateral" means all of the Borrower's and any Guarantor Subsidiary's Accounts, Equipment, General Intangibles, documents, Chattel Paper, Instruments and Inventory, all right, title and interest of the Borrower and any Guarantor Subsidiary in and to the Operating Agreements and Management Contracts (including, without limitation, the Management Agreement), Resident Agreements, Physician Contracts, Participation Agreements, the Licenses (whether or not designated with initial capital letters), and all other management contracts, operating agreements, service agreements and any other agreements pertaining to the Eligible Projects or the Optional Collateral as those terms are defined herein and in the Uniform Commercial Code as presently adopted and in effect in the Commonwealth of Virginia, and shall also cover, without limitation, (i) any and all property specifically included in those respective terms in this Agreement or in the Financing Documents, (ii) all right, title and interest of the Borrower and any Guarantor Subsidiary in and to Leases or subleases, rents, royalties, issues, profits, revenues, earnings, income or other benefits of the Property, or arising from the use or enjoyment of the Property, or from any lease or other use and occupancy agreement pertaining to the Property, (iii) all right, title and interest of the Borrower and any Guarantor Subsidiary under all construction, architectural and design contracts and plans and specifications, (iv) any and all property and/or collateral described in any of the Security Documents, including, without limitation, this Agreement, the Deeds of Trust and the Pledge, Assignment and Security Agreement, (v) any and all bank accounts or other deposit accounts of the Borrower and any Guarantor Subsidiary wherever located, and (vi) all proceeds (cash and non-cash, including, without limitation, insurance proceeds), of the foregoing. 6 12 "Collateral Assignments" means collectively the Amended and Restated Collateral Assignment of Licenses, Participation Agreements and Resident Agreements of even date herewith between the Borrower and the Agent and the Amended and Restated Collateral Assignment of Operating Agreements and Management Contracts of even date herewith among the Borrower, the Management Company and the Agent. "Commonly Controlled Entity" shall mean an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 414(b) or (c) of the Internal Revenue Code of 1986, as amended and the regulations promulgated or issued thereunder. "Completed Facility" means an Eligible Project which has met the conditions set forth in Section 2.06 of the Construction Loan Agreement. "Completion Guaranty" means that certain Amended and Restated Guaranty of Completion of even date herewith executed by the Guarantor in favor of the Lenders. "Construction Loan Agreement" means that certain Amended and Restated Master Construction Loan Agreement of even date herewith between the Borrower and the Agent on behalf of the Lenders. "Costs Incurred to Date" means as to an Eligible Project actual costs expended by the Borrower or a Guarantor Subsidiary under a Total Development Budget and reported to the Agent through the requisition process as verified by the Agent pursuant to the provisions of the Construction Loan Agreement; provided, however, no cost overruns not otherwise covered by a contingency category in the Total Development Budget will be included in the definition of Costs Incurred to Date without the Agent's prior written consent. "Credit Facility" means the revolving line of credit in a maximum principal sum at any one time outstanding equal to the Credit Facility Committed Amount. "Credit Facility Closing" shall mean the date on which the documents evidencing and initially securing the Credit Facility, are executed and delivered to the Agent. "Credit Facility Committed Amount" means $250,000,000 or such larger amount which the Lenders may from time to time severally commit to lend to the Borrower pursuant to the terms of Agency Agreement and the Note. "Debt Service" means for any period of determination an 7 13 amount equal to 80% of an Eligible Project's Costs Incurred to Date multiplied by a mortgage constant of 10%. "Deed of Trust" or "Deeds of Trust" means, individually or collectively, a Deed of Trust, Assignment and Security Agreement, a Mortgage, Assignment and Security Agreement, an Indemnity Deed of Trust, Assignment and Security Agreement or an Indemnity Mortgage, Assignment and Security Agreement or comparable security documents covering Property and securing the Obligations as the same may be from time to time amended, restated, or replaced. "Deed of Trust Lien Amount" means the dollar amount of the Lien created by a Deed of Trust on the Borrower's or a Guarantor Subsidiary's fee simple interest in an Eligible Project, the lien amount being the lesser of (i) 75% of such Eligible Project's appraised value at stabilization, or (ii) 80% of such Eligible Project's Total Development Budget. "Default" means, with respect to each Financing Document, a default which, with the giving of notice or the passage of time, or both, would constitute an Event of Default. "EBITDA" means earnings before interest, federal and state income taxes, depreciation, amortization, but after an imputed Replacement Reserve and a Management Fee equal to the greater of 5% of gross revenues or the actual Management Fee paid to the Management Company. "Eligible Project" means any location in the United States where (a) the Borrower or a Guarantor Subsidiary proposes to construct or has constructed a Facility (unless the Lenders also authorize inclusion of one or more Facilities acquired by the Borrower or a Guarantor Subsidiary); (b) the Agent has received and reviewed an appraisal and a Phase I Environmental Assessment of the property where the proposed Facility is to be located and found them acceptable; (c) using the services of a consulting engineer selected by the Agent, the Agent has received, reviewed and found to be acceptable the plans and specifications and the Total Development Budget for the proposed Facility; (d) the Agent has received a pro forma operating budget acceptable to the Agent; (e) a Deed of Trust has been recorded on the Property; (f) other documentation necessary to perfect a lien on the Collateral in favor of the Lenders has been executed and delivered to the Agent and recorded, if required; and (g) construction has commenced and is being carried on in good faith with reasonable dispatch and is not abandoned or discontinued for a period of more than fifteen (15) consecutive days except for delays caused by Force Majeure. Each acceptable pro forma operating budget provided pursuant to (d) must demonstrate that the Facility can satisfy the criteria for a Pool A Project. 8 14 "Enforcement Costs" means all expenses, charges, costs and fees whatsoever (including, without limitation, attorney's fees and expenses) of any nature whatsoever paid or incurred by or on behalf of the Lenders in connection with (a) the collection or enforcement of any or all of the Obligations, (b) the preparation of or changes to this Agreement, the Construction Loan Agreement, the Note, the Security Documents and/or any of the other Financing Documents, (c) the creation, perfection, collection, maintenance, preservation, defense, protection, realization upon, disposition, sale or enforcement of all or any part of the Collateral, including, without limitation, those sums paid or advanced, and costs and expenses, more specifically described in Sections 0 and 0, (d) the monitoring, administration, processing, servicing of any or all of the Obligations and/or the Collateral (e) post-judgment enforcement or collection actions, and (f) bankruptcy proceedings of the Borrower, any Guarantor Subsidiary or the Guarantor. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Equipment" shall mean all equipment, machinery, furniture and fixtures and supplies of every nature, presently existing or hereafter acquired or created and wherever located, together with all accessions, additions, fittings, accessories, special tools, and improvements thereto and substitutions therefor and all parts and equipment which may be attached to or which are necessary for the operation and use of such personal property, whether or not the same shall be deemed to be affixed to real property, and all rights under or arising out of present or future contracts relating to the foregoing and all proceeds (cash and non-cash) of the foregoing. "Eurodollar Period" or "Eurodollar Periods" shall have the meaning set forth in the Note. "Eurodollar Rate" means, for any Eurodollar Loan for any Eurodollar Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London Time) two Banking Days prior to the first day of such Eurodollar Period for a term comparable to such Eurodollar Period. If for any reason such rate is not available, the term "Eurodollar Rate" shall mean, for any Eurodollar Loan for any Eurodollar Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London Time) two Banking Days prior to the first day of such Eurodollar Period for a term comparable to 9 15 such Eurodollar Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. "Event(s) of Default" shall mean the occurrence of any one or more of the events specified in Part IX of this Agreement or in the Deeds of Trust and the continuance of such event beyond the applicable grace and/or cure periods therefor, if any, set forth in Part IX. "Expense Payments" shall have the meaning set forth in Section 0 hereof. "Facility" and "Facilities" mean, individually or collectively, an assisted living facility or independent living facility owned by the Borrower or a Guarantor Subsidiary. "Financing Documents" means at any time collectively and includes this Agreement, the Note, the Deeds of Trust, the Construction Loan Agreement, the Guaranty Agreement, the Performance Guaranty, any Joinder Agreements, the Management Fee Subordination Agreement, the Security Documents, the Interest Rate Protection Documents and any other instrument, agreement or document previously, simultaneously or hereafter executed and delivered by the Borrower and/or any other Person, singly or jointly with another Person or Persons, evidencing, securing, guarantying or in connection with any of the Obligations and/or in connection with this Agreement, the Note and/or any of the Security Documents, as the same may from time to time be amended, restated, supplemented or otherwise modified. "Fixed Charge Coverage Ratio" means starting after the issuance of an occupancy permit for any given Facility, such Facility shall maintain a ratio of EBITDA for the Facility to Debt Service for the Facility equal to not less than 0.6 to 1.0 as of the end of the second (2nd) full fiscal quarter, a ratio of 1.1 to 1.0 as of the end of the third (3rd) full fiscal quarter and a ratio of 1.25 to 1.0 as of the end of each of the fourth (4th) through sixth (6th) full fiscal quarters and thereafter measured as of the end of each full fiscal quarter on a rolling four-quarter basis. "Force Majeure" shall mean events occasioned by strikes, lock-outs, labor unrest war or civil disturbance, materials shortages, unavailability of materials, fire, natural disaster or acts of God which cause a delay in the Borrower's performance of an obligation; provided, however, that the Borrower must give Notice to the Agent within ten (10) days after the Borrower knew of or should have known of the occurrence of an event which it believes to constitute an event of Force Majeure. 10 16 "Funded Debt" of the Guarantor, at any time means the sum at such time of (a) indebtedness for borrowed money or for the deferred purchase price of property or services, (b) any obligations in respect of letters of credit, banker's or other acceptances or similar obligations issued or created for the account of the Guarantor, (c) lease obligations which have been or should be, in accordance with GAAP, capitalized on the books of the Guarantor, (d) all liabilities secured by any property owned by the Guarantor to the extent attached to the Guarantor's interest in such property, even though the Guarantor has not assumed or become liable for the payment thereof, and in the case of the Guarantor (e) any obligation of the Guarantor or a Commonly Controlled Entity to a Multiemployer Plan; but excluding trade and other accounts payable in the ordinary course of business in accordance with customary trade terms and which are not overdue (as determined in accordance with customary trade practices) or which are being disputed in good faith by the Guarantor and for which adequate reserves are being provided on the books of the Guarantor in accordance with GAAP. "GAAP" shall mean generally accepted accounting principles in effect in the United States of America from time to time. "General Intangibles" shall mean any and all general intangibles of every nature, whether presently existing or hereafter acquired or created arising out of or relating to any or all of the Facilities, including without limitation all books, correspondence, credit files, records, computer programs, computer tapes, cards and other papers and documents in the possession or control of the Borrower or any Guarantor Subsidiary, claims (including without limitation all claims for income tax and other refunds), choses in action, judgments, patents, patent licenses, trademarks (excluding the "Sunrise" trademark or tradename), trademark licenses (excluding any license to the Borrower or any Guarantor Subsidiary for the "Sunrise" or "Reminiscence" trademarks or tradenames), licensing agreements, rights in intellectual property, goodwill, as that term is defined in accordance with GAAP (including all goodwill of the Borrower's business symbolized by, and associated with, any and all trademarks, trademark licenses, copyrights and/or service marks), royalty payments, contractual rights, rights as lessee under any lease of real or personal property, literary rights, copyrights, service names, service marks, logos, trade secrets, all amounts received as an award in or settlement of a suit in damages, deposit accounts, interests in joint ventures or general or limited partnerships, all Licenses, construction permits, Operating Agreements and Management Contracts, Participation Agreements and Resident Agreements, and all proceeds (cash and non-cash) of the foregoing. "Governmental Authority or Authorities" shall mean any 11 17 nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantor" means Sunrise Assisted Living, Inc., a Delaware corporation. "Guarantor Subsidiary" means any Wholly Owned Subsidiary of the Borrower which provides a Joinder Agreement and a Deed of Trust for the benefit of the Lenders as an Eligible Project or as Optional Collateral. "Guaranty Agreement" means the Amended and Restated Master Guaranty of Payment Agreement by SALI of even date herewith. "Hazardous Materials" means any flammable explosives, radioactive materials, hazardous waste, toxic substances or related materials, including, without limitation, asbestos, polychlorinated biphenyls, urea-formaldehyde, radon, and any substance defined as or included in the definition of (a) any "hazardous waste" as defined by the Resource Conservation Recovery Act of 1976, as amended from time to time, and regulations promulgated thereunder; (b) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time, and regulations promulgated thereunder; (c) any "toxic substance" as defined by the Toxic Substances Control Act, as amended from time to time, and regulations promulgated thereunder; (d) any hazardous or infectious medical waste including, but not limited to, cultures and stocks of infectious agents and associated biologicals, pathological wastes, human and animal blood specimens and blood products, anatomical materials, blood, blood-soiled articles, contaminated materials, microbiological laboratory wastes, sharps, chemical wastes, infectious wastes, chemotherapeutic wastes, and radioactive wastes; (e) any substance, the presence of which on any property now or hereafter owned, operated or acquired by the Borrower is prohibited or regulated under any applicable Federal or state laws or regulations; and (f) any other substance, pollutant, contaminant, chemical, or industrial toxic hazardous substance or waste, including without limitation hazardous materials, which by law is prohibited or is otherwise regulated as a hazardous material. "Hazardous Materials Contamination" shall mean the contamination by, release or spill of (whether presently existing or occurring after the date of this Agreement), Hazardous Materials of or on any property owned, operated or controlled by the Borrower, or for which the Borrower, has responsibility, including, without limitation, improvements, facilities, soil, 12 18 ground water, air or other elements on, or of, any property now or hereafter owned, operated or acquired by the Borrower, and any other contamination by Hazardous Materials for which the Borrower is, or is claimed to be, responsible. "Improvements" shall have the meaning given to that term in each Deed of Trust. "Instruments" means any and all notes, notes receivable, drafts, acceptances, and similar instruments or documents, both now owned or hereafter created or acquired arising out of or relating to the Facility (or any part thereof). "Interest Rate Protection" means any or all of the interest rate protection agreements that have been or may from time to time be entered into between the Borrower and the Agent or another Lender in connection with the Credit Facility. "Interest Rate Protection Documents" means the documents evidencing and governing the Interest Rate Protection at any time and from time to time. "Inventory" means any and all inventory of the Borrower or any Guarantor Subsidiary and all right, title and interest of the Borrower or any Guarantor Subsidiary in, and to, all of its now owned and hereafter acquired goods, merchandise and other personal property furnished under any contract of service or intended for sale or lease arising out of or relating to any and all Facilities, including, without limitation, all supplies of any kind, nature or description which are used or consumed in the Borrower's or any Guarantor Subsidiary's business and all documents of title or documents representing the same and all proceeds (cash and non-cash) and products of the foregoing. "Joinder Agreement" means a Joinder Agreement in the form attached hereto as EXHIBIT F executed by a Guarantor Subsidiary to acknowledge its joinder as a party to this Agreement, the Collateral Assignments and the Management Fee Subordination Agreements and to guaranty payment of the Obligations pursuant to and in connection with its delivery of a Deed of Trust. "Klaassens" means Paul J. Klaassen and Teresa M. Klaassen. "Laws" means all ordinances, statutes, rules, regulations, orders, injunctions, writs or decrees of any Governmental Authority or any court or similar entity established by any thereof. "Lease" has the meaning set forth in a Deed of Trust. "Lender Tax" means any present or future tax, levy, cost or 13 19 charge of any nature imposed by any Governmental Authority, excluding taxes on or measured by the net income of any Lender imposed by any jurisdiction in which the principal or relevant lending office of such Lender is located. "Licenses" means any and all licenses, certificates of need, operating permits, franchises, and other licenses, authorizations, certifications, permits, or approvals, other than construction permits, issued by, or on behalf of, any Governmental Authority now existing or at any time hereafter issued, with respect to the acquisition, construction, renovation, expansion, leasing, management, ownership and/or operation of any and all Facilities, accreditation of any Facility, and/or the participation or eligibility for participation in any third party payment or reimbursement pro grams to the extent the Borrower or any Guarantor Subsidiary is participating in such programs (but specifically excluding any and all Participation Agreements to the extent required by law), any and all operating licenses issued by any state Governmental Authority, any and all pharmaceutical licenses and other licenses related to the purchase, dispensing, storage, prescription or use of drugs, medications, and other "controlled substances," any and all licenses relating to the operation of food or beverage facilities or amenities, if any, and any and all certifications and eligibility for participation in Medicare, Medicaid, Blue Cross and/or Blue Shield, or any of the Managed Care Plans, private insurer, employee assistance programs or other third party payment or reimbursement programs as the same may from time to time be amended, renewed, restated, reissued, restricted, supplemented or otherwise modified. "Lien" means any mortgage, deed of trust, deed to secure debt, grant, pledge, security interest, assignment, encumbrance, judgment, lien or charge of any kind, whether perfected or unperfected, avoidable or unavoidable, consensual or non-consensual, including, without limitation, any conditional sale or other title retention agreement, filed or un-filed tax liens, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction. "Liquid Assets" means cash, cash equivalents and readily marketable securities. "Liquidation Costs" shall have the meaning set forth in Section 0 hereof. "Loan" shall have the meaning set forth in Section 0 hereof. "Managed Care Plans" shall mean any health maintenance organization, preferred provider organization, individual 14 20 practice association, competitive medical plan, or similar arrangement, entity, organization, or Person. "Management Agreement" shall mean any and all Management Agreements entered into or to be entered into by and between the Borrower or any Guarantor Subsidiary and the Management Company relating to the management of the Facilities, as the same may from time to time be amended, restated, supplemented or otherwise modified. "Management Company" means SALMI, its successors and assigns and any other Person which may become the manager of the Facilities. "Management Fee Subordination Agreement" shall have the meaning set forth in Section 0 hereof. "Material Adverse Change" means a significant adverse change in a Person's financial position or capacity including but not limited to significant adverse changes in (a) liquidity (b) gross revenues (c) total expenses (d) such Person's net worth or (e) ability to meet payment obligations under such Person's Funded Debt, the Obligations and/or contingent liabilities. "Material Lease" has the meaning set forth in a Deed of Trust. "Minimum Occupancy Requirement" means for an Eligible Project a minimum Resident Occupancy of (A) 50% by the sixth (6th) Operating Month, (B) 70% by the ninth (9th) Operating Month and (C) 85% by the twelfth (12th) Operating Month and thereafter. "Multiemployer Plan" shall mean a Plan which is a multiemployer plan as defined in SECTION 4001(a)(3) of ERISA. "Net Operating Income" means total operating revenue less total operating expenses (excluding interest, federal and state income taxes, depreciation and amortization) but including a management fee to the Management Company of the higher of five percent (5%) of gross revenues or the actual management fee for the period in question as shown in financial information provided by the Borrower. "Net Operating Income Margin" means Net Operating Income divided by total revenues. "Note" shall have the meaning set forth in Section 0 hereof. "Obligations" means all present and future debts, obligations, and liabilities, whether now existing or contemplated or hereafter arising, of the Borrower to the Agent 15 21 or any Lender under, arising pursuant to, in connection with and/or on account of the provisions of this Agreement, the Construction Loan Agreement, the Note, the Deeds of Trust, each Security Document, and any of the other Financing Documents, including, without limitation, the principal of, and interest on, the Note, late charges, Enforcement Costs, and other prepayment penalties (if any), letter of credit fees or fees charged with respect to any guaranty of any letter of credit, any indebtedness to the Agent or other Lender who makes available the Interest Rate Protection arising out of such Interest Rate Protection pursuant to the Interest Rate Protection Documents, and also means all other present and future indebtedness, liabilities and obligations, whether now existing or contemplated or hereafter arising, of the Borrower to the Lenders of any nature whatsoever regardless of whether such debts, obligations and liabilities be direct, indirect, primary, secondary, joint, several, joint and several, fixed or contingent, and any and all renewals, extensions and rearrangements of any such debts, obligations and liabilities. "Operating Month" means a full calendar month after the issuance of a certificate of occupancy for any Facility. "Operating Agreements and Management Contracts" means any and all contracts and agreements previously, now or at any time hereafter at any time entered into by the Borrower or any Guarantor Subsidiary with respect to the acquisition, construction or renovation of a significant nature, expansion, ownership, operation, maintenance, use or management of any or all of the Facilities or otherwise concerning the operations and business of any or all of the Facilities, including, without limitation, any and all service and maintenance contracts, any employment contracts, any and all management agreements, any and all consulting agreements, laboratory servicing agreements, pharmaceutical contracts, physician, other clinician or other professional services provider contracts, resident agreements, food and beverage service contracts, and other contracts for the operation and maintenance of, or provision of services to, a Facility, as the same may from time to time be amended, restated, supplemented, renewed, or modified. "Optional Collateral" means individually or collectively, a Facility which meets and at all times continues to meet all of the following criteria: (a) a certificate of occupancy (or equivalent permit or certificate) has been issued by the appropriate governmental authorities for such Facility; (b) an operating license and/or a certificate of need (if either is applicable in the jurisdiction where the Facility 16 22 is located) has been obtained; (c) the Facility has maintained a minimum Resident Occupancy of not less than 75% for the preceding three (3) consecutive months; and (d) the Facility has maintained a Net Operating Income Margin of not less than thirty percent (30%) for the preceding three (3) consecutive months. "Participation Agreements" means any and all third party payor participation or reimbursement agreements now or at any time hereafter existing for the benefit of the Borrower or any Guarantor Subsidiary relating to rights to payment or reimbursement from, and claims against, private insurers, Managed Care Plans, material employee assistance programs, Blue Cross and/or Blue Shield, federal, state and local Governmental Authorities, including without limitation, Medicare and Medicaid, and other third party payors, as the same may from time to time be amended, restated, extended, supplemented or modified. "Performance Guaranty" means the Guaranty of Performance by SALI of even date herewith. "Permitted Liens" means: (a) Liens for Taxes which are not delinquent or which the Agent has determined in the exercise of its sole and absolute discretion (i) are being diligently contested in good faith and by appropriate proceedings, (ii) the Borrower has the financial ability to pay, with all penalties and interest, at all times without materially and adversely affecting the Borrower, and (iii) are not, and will not be with appropriate filing, the giving of notice and/or the passage of time, entitled to priority over any Lien of the Lenders; (b) deposits or pledges to secure obligations under workers' compensation, social security or similar laws, or under unemployment insurance in the ordinary course of business; (c) Liens in favor of the Lenders pursuant to the Credit Facility or the Interest Rate Protection; (d) judgment Liens to the extent the entry of such judgment does not constitute an Event of Default under the terms of this Agreement or result in the sale of, or levy of execution on, any of the Collateral; (e) Liens approved by the Agent which have been created to secure permitted subordinated debt on a junior lien basis; and (f) such other Liens, if any, as are identified as Permitted Encumbrances as defined in the Deed of Trust. "Person" shall mean and include an individual, a corporation, a partnership, a limited liability company, a joint venture, a trust, an unincorporated association, any Governmental Authority or any other entity. "Pledge, Assignment and Security Agreement" means the 17 23 Amended and Restated Pledge Assignment and Security Agreement of even date herewith executed by the partners of the Borrower in favor of the Agent, pursuant to which such owners of the Borrower have pledged and assigned all of their respective partners' interests in the Borrower to the Lenders as additional security for the Credit Facility. "Pool A Project" means any Eligible Project for which, when the Borrowing Base is computed at the end of a reporting period, (a) either (i) construction has been on-going for not more than fifteen (15) months or (ii) it is a Completed Facility not later than fifteen (15) months after the date on which the applicable Deed of Trust was executed; or (b) after it is a Completed Facility, meets the Minimum Occupancy Requirement and Fixed Charge Coverage Ratio Requirement. "Pool B Project" means any Eligible Project which, when the Borrowing Base is computed at the end of any reporting period, does not meet the definition of a Pool A Project. "Pool C Project" means any Eligible Project which, when the Borrowing Base is computed at the end of two or more consecutive reporting periods, does not meet the definition of a Pool A Project. "Post Default Rate" means the interest rate on the Note in the absence of an Event of Default plus three percent (3%) per annum. "Property" shall mean collectively the "Property" as that term is defined in each of the Deeds of Trust. "Receivables" means all of the Borrower's or any Guarantor Subsidiary's now or hereafter owned, acquired or created Accounts, Chattel Paper, Contract Rights, General Intangibles and Instruments, and all cash and noncash proceeds and products thereof. "Replacement Reserves" means $250 per year per bed in each Facility. "Reportable Event" shall mean any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder. "Resident Agreements" means any and all contracts, authorizations, agreements and/or consents executed by, or on behalf of any resident or other person seeking services from the Borrower or any Guarantor Subsidiary pursuant to which the Borrower or any Guarantor Subsidiary provides or furnishes health or assisted living care and related services at any and all of the Facilities, including the consent to treatment, assignment of 18 24 payment of benefits by third party, as the same may from time to time be amended, restated, supplemented or modified. "Resident Occupancy" means the number of residents who are in occupancy at a Facility and paying fees pursuant to a resident agreement divided by the pro forma resident occupancy for such Facility as contained in the pro forma operating budget of an Eligible Facility or an operating budget for a Facility included in Optional Collateral. "Revolving Credit Expiration Date" means December 22, 2000 or any date to which it may be extended from time to time pursuant to the terms of Section 0 hereof. "Revolving Credit Termination Date" means the earlier of (a) the Revolving Credit Expiration Date, or (b) the date on which the Credit Facility is terminated pursuant to Section X hereof or otherwise. "SALI" means Sunrise Assisted Living, Inc., a Delaware corporation. "SALII" means Sunrise Assisted Living Investments, Inc., a Virginia corporation. "SALMI" means Sunrise Assisted Living Management, Inc., a Virginia corporation, formerly known as Sunrise Terrace, Inc. "Security Documents" shall mean, collectively, any assignment, including, without limitation, the Pledge, Assignment and Security Agreement, the Collateral Assignments and any assignment, pledge agreement, security agreement, mortgage, deed of trust (including the Deeds of Trust), leasehold mortgage, leasehold deed of trust, deed to secure debt, financing statement, initial transaction statement and any similar instrument, document or agreement under or pursuant to which a Lien is now or hereafter granted to, or for the benefit of, the Lenders on any collateral to secure the Obligations, as the same may from time to time be amended, restated, supplemented or otherwise modified. "Stabilized Facility" means an Eligible Project with a Resident Occupancy of at least 85% and a ratio of Net Operating Income to Debt Service of not less than 1.25 to 1.00 measured for two consecutive fiscal quarters. "Taxes" means all taxes and assessments whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character (including all penalties or interest thereon), which at any time may be assessed, levied, confirmed or imposed by any Governmental Authority on the Borrower or any of its 19 25 properties or assets or any part thereof or in respect of any of its franchises, businesses, income or profits. "Total Development Budget" means the development, construction and opening operating expense budget for an Eligible Project as reviewed and approved by the Agent. "Total Project Costs Incurred" means as to Optional Collateral all costs incurred through completion of construction and commencement of operation of the Facility or the purchase price of an acquisition from an unrelated third party, each as verified by the Agent in its reasonable discretion. "Unused Commitment Amount" shall have the meaning set forth in Section 0 hereof. "Unused Line Fee" shall have the meaning set forth in Section 0 hereof. "Wholly Owned Subsidiary" or "Wholly Owned Subsidiaries" means one or more subsidiaries 100% owned by the Borrower which is or has been created for the sole purpose of acquiring or constructing and owning and operating a Facility. Section I.2. Accounting Terms and Other Definitional Provisions. Unless otherwise defined in this Agreement, as used in this Agreement and in any certificate, report or other document made or delivered pursuant hereto, accounting terms not otherwise defined in this Agreement, and accounting terms only partly defined in this Agreement, to the extent not defined, shall have the respective meanings given to them under GAAP. Unless otherwise defined in this Agreement, all terms used in this Agreement which are defined by the Virginia Uniform Commercial Code shall have the same meanings as assigned to them by the Virginia Uniform Commercial Code unless and to the extent varied by this Agreement. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, section, subsection, schedule and exhibit references are references to sections or subsections of, or schedules or exhibits to, as the case may be, this Agreement unless otherwise specified. As used in this Agreement, the singular number shall include the plural, the plural the singular and the use of the masculine, feminine or neuter gender shall include all genders, as the context may require. Reference to any one or more of the Financing Documents and any of the Financing Documents shall mean the same as the foregoing may from time to time be amended, restated, substituted, extended, renewed, supplemented or otherwise modified. 20 26 II. BORROWING Section II.1. The Loan. (a) The Lenders agree to lend to the Borrower pursuant to the terms and conditions of this Agreement and the Construction Loan Agreement, and the Borrower agrees to borrow on a revolving basis from the Lenders from time to time the principal amount (the "Loan") not to exceed at any time outstanding the lesser of (i) the Credit Facility Committed Amount, or (ii) the Borrowing Base. (b) The obligation of the Borrower to repay the Loan shall be evidenced by the Amended, Restated, Consolidated and Increased Master Note of even date herewith (as amended, restated, substituted, extended, renewed and otherwise modified from time to time, the "Note") payable to the Agent in the form attached hereto as EXHIBIT A. The Note shall bear interest and shall be repaid by the Borrower in the manner and at the times set forth in the Note. (c) The conditions precedent for making an advance under the Loan shall be as set forth in this Agreement and the Construction Loan Agreement. Sums borrowed and repaid may be readvanced under the terms and conditions of this Agreement and the Construction Loan Agreement. (d) No advances may be made or be outstanding under the Credit Facility until and during such times as there are at least five (5) Pool A Projects in the Borrowing Base. The Agent will prepare a Borrowing Base Report (each a "Borrowing Base Report") in the form attached hereto as EXHIBIT B which must be certified by the Borrower listing for each of the Eligible Projects (i) the applicable Deed of Trust Lien Amount, (ii) the Costs Incurred to Date, and (iii) its status as of the most recent reporting date as a Pool A, Pool B or Pool C Project within forty-five (45) days after the end of each of the Borrower's fiscal quarters. The Borrowing Base Report will be based on the outcome of the requisition procedures hereinafter described, appraisals obtained by the Agent and other information on the Eligible Projects provided by the Borrower or obtained by the Agent. The Borrowing Base shall be computed based on the Borrowing Base Report most recently prepared by the Agent. In the event the Borrower shall fail to furnish other current reports or information as reasonably required by the Agent pursuant to the Financing Documents, or in the event the Agent believes that a Borrowing Base Report is no longer accurate, the Agent may, in its reasonable discretion exercised from time to time and without limiting its other rights and remedies under the Financing Documents, upon notice to the Borrower and the expiration of a cure period of five (5) Banking Days, designate any Eligible Project as a Pool C Project or suspend the making of or limit advances under the Loan. The Borrowing Base shall be 21 27 subject to reduction as a result of the following events: (i) the release of an Eligible Project from the lien of the applicable Deed of Trust, (ii) by the change of any Eligible Project's status as a Pool A or B Project to a Pool B or C Project respectively as determined by the Agent quarterly, or (iii) the change in appraised value of an Eligible Project pursuant to Section 0. The Borrowing Base shall be subject to increase as a result of the following events: (i) addition of Eligible Projects, (ii) increase in the Costs Incurred to Date as determined by the Agent quarterly, or (iii) the change of an Eligible Project's status as a Pool B or C Project to a Pool A as determined by the Agent quarterly. The Borrower may request and the Requisite Lenders (as defined in the Agency Agreement) may in their sole discretion agree to include as an Eligible Project a completed Facility which the Borrower or a Guarantor Subsidiary has acquired which meets both the requirements for Optional Collateral and the other conditions precedent to including a Facility as an Eligible Project. (e) The Borrower shall furnish to the Agent such schedules, certificates, lists, records, reports, information and documents as required by the Agent from time to time so that the Agent may, in its reasonable discretion, determine the Borrowing Base. (f) If at any time the aggregate principal amount of the Loan outstanding exceeds the Borrowing Base, a borrowing base deficiency ("Borrowing Base Deficiency") shall exist. Each time a Borrowing Base Deficiency exists, the Borrower shall within three (3) banking days of notice thereof from the Agent either pay the amount and/or add Eligible Projects to increase the Borrowing Base to an amount which is at least equal to the aggregate principal amount outstanding under the Loan. (g) The initial Borrowing Base Report is attached hereto as EXHIBIT C. Section II.2. Procedure for Advances. (a) The Agent will make advances from time to time upon receipt of written request from the Borrower in the form designated by the Agent, provided that after giving effect to the Borrower's request, the outstanding principal balance of the Loan would not exceed the lesser of the Credit Facility Committed Amount or the Borrowing Base. Each advance under the Loan shall be in an amount of not less than $1,000,000, and in increments of $250,000 in excess thereof. Advances or the renewal of a Eurodollar Period shall be requested by the Borrower orally or in writing by 10:00 A.M. (Baltimore time) three (3) Banking Days prior to the Banking Day on which the funds will be advanced. The Borrower shall advise the Agent at the time of such notice which Eurodollar Period it is selecting. The Agent shall have no obligation to make any 22 28 advance if at the time such advance is requested and/or is proposed to be funded, there exists an Event of Default or an event which upon notice or lapse of time or both would constitute an Event of Default under the Financing Documents. If the Borrower fails to advise the Agent three (3) Banking Days in advance of the expiration of a Eurodollar Period of its intention to either pay off such portion of the Loan or renew the applicable Eurodollar Period, it shall be assumed by the Agent that the Eurodollar Period is to be renewed. (b) In addition, if the Agent has reason to believe a Default or an Event of Default has occurred, the Borrower hereby irrevocably authorizes the Lenders to make advances of the Loan at any time and from time to time, without further request from or notice to the Borrower, which the Lenders, in their sole and absolute discretion, deems necessary or appropriate to protect the Lenders' interests under this Agreement or otherwise, including, without limitation, advances of the Loan made to cover interest on the Loan, fees, and/or Enforcement Costs, prior to, on, or after the termination of this Agreement, regardless of whether the aggregate amount of the advances of the Loan which the Lenders may make hereunder exceeds the Credit Facility Committed Amount. The Lenders shall have no obligation whatsoever to make any advance under this subsection and the making of one or more advances under this subsection shall not obligate the Lenders to make other similar advances. Any such advances will be evidenced by the Note secured by the Collateral and the Deeds of Trust. Section II.3. Fees. The Borrower shall pay to the Agent the following fees: (a) Commitment Fee. The Borrower shall have paid as of the date hereof a non-refundable commitment fee in the amount of $825,000. (b) Unused Line Fee. The Borrower shall pay to the Agent for the benefit of the Lenders beginning on the date set forth below a quarterly revolving credit facility fee (the "Unused Line Fee") in an amount equal to twenty-five (25) basis points of the average undisbursed portion of the "Unused Commitment Amount" for the applicable quarter specified in the right-hand column below. The accrued and unpaid portion of the Unused Line Fee shall be paid by the Borrower to the Agent on the first day of each fiscal quarter commencing October 1, 1998 and on the Revolving Credit Termination Date.
Period Unused Commitment Amount ------ ------------------------ Quarter ending 9/30/98 $65,000,000 less the average daily principal
23 29 amount outstanding for the quarter then ended Quarter ending 12/31/98 $115,000,000 less the average daily principal amount outstanding for the quarter then ended Quarter ending 3/31/99 $155,000,000 less the average daily principal amount outstanding for the quarter then ended Quarter ending 6/30/99 $180,000,000 less the average daily principal amount outstanding for the quarter then ended Quarter ending 9/30/99 and Credit Facility Committed each fiscal quarter there- Amount less the average after daily principal amount outstanding for the quarter then ended
(c) Loan Administration Fee. Simultaneously with the addition of each Eligible Project to the Borrowing Base, the Borrower shall pay a loan administration fee related to such Eligible Project to the Agent only in the amount of $4,000. (d) Other Fees. The Borrower shall pay to the Agent certain other fees as more fully set forth in a letter from the Agent to the Borrower. (e) Appraisal Fees. Upon the receipt of an appraiser's invoice from the Agent, the Borrower shall pay the fee of the appraiser for an Eligible Project. (f) Extension Fee. In the event the Revolving Credit Expiration Date of the Credit Facility is extended for a twelve-month period pursuant to the terms of Section 0 hereof, the Borrower shall pay to the Agent for the benefit of the Lenders, an extension fee for each such extension of fifteen (15) basis points of the Credit Facility Committed Amount. Section II.4. Interest Rate Matters. (a) Lender Tax Adjustment. Each payment made by the Borrower under the Note shall either (i) be exempt from, and be made without reduction by reason of, any Lender Tax or (ii) to the extent that any such payment shall be subject to any Lender Tax, be accompanied by an additional payment by the Borrower of such amount as may be necessary so that the net amount received by each Lender (after 24 30 deducting all applicable Taxes) is the same as such Lender would have received had such payment not been subject to such Lender Tax. Upon any payment of Lender Tax by the Borrower, the Borrower shall promptly (and in any event within 30 days) furnish to the Agent and applicable Lender such tax receipts, certificates an other evidence of such payment as the Borrower may have or the Agent or the applicable Lender may reasonably request. (b) Inability to Determine Eurodollar Rate. In the event that the Agent determines (which determination shall be conclusive absent manifest error) that, by reason of circumstances affecting the London interbank market, quotation of Eurodollar Rates for any portion of the Note are not being provided in the relevant amounts or for the relevant maturities for the purpose of determining a Eurodollar Rate for any portion of the Principal Sum, the Agent will give notice of such determination to the Borrower and each Lender at least one day prior to the date of an advance or any subsequent Eurodollar Period for the Loan. If any such notice is given, no Lender shall have any obligation to make any advance or maintain any principal sum outstanding at a Eurodollar Rate. Until the earlier of the date any such notice has been withdrawn by the Agent or the date when the Lenders and the Borrower have mutually agreed upon an alternate method of determining the rates of interest payable on the Loan, as the case may be, the Borrower shall not have the right to have additional advances or maintain any portion of the Credit Facility at a Eurodollar Rate, whereupon the Lenders and the Borrower shall mutually agree upon an alternate method of determining the rates of interest payable on the Loan or such Lender's portion of the principal outstanding under all the Note shall be immediately due and payable. (c) Illegality. Notwithstanding any other provision of the Financing Documents to the contrary, in the event that it shall become unlawful for any Lender to obtain funds in the London interbank market or for such Lender to maintain the Loan at the Eurodollar Rate, then, by written notice to the Borrower and to the Agent, such Lender may declare that advances will not thereafter be made or the Loan maintained by such Lender hereunder at the Eurodollar Rate, whereupon the Lenders and the Borrower shall mutually agree upon an alternate method of determining the rates of interest payable on the Loan or such Lender's portion of the principal outstanding under the Note shall be immediately due and payable. (d) Increased Costs and Reduced Return. (i) If any event shall occur (whether in the form of a reserve requirement (not included in the definition of the Eurodollar Rate), exchange control regulations, governmental charges, compliance with any guideline or request from any central bank or other Governmental 25 31 Authority, changes in the London interbank market or the position of any Lender in such market or otherwise) and the result of any such event is, in such Lender's reasonable judgment, to increase the costs which such Lender determines are attributable to its making or maintaining the Loan at the Eurodollar Rate, or its obligation to make available the Loan at the Eurodollar Rate or to reduce the amount of any sum received or receivable by such Lender under the Note, then, within ten (10) days after demand by such Lender, Borrower hereby agrees to pay to such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduction. (ii) In addition to any amounts payable pursuant to Section 0(i), if any Lender shall have determined that the applicability of any law, rule, regulation or guideline adopted pursuant to or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards," or the adoption after the date hereof of any other law, rule, regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the enforcement or interpretation or administration of any of the foregoing by any court or any central bank or other Governmental Authority, charged with the enforcement or interpretation or administration thereof, or compliance by such Lender (or any lending office of such Lender) or such Lender's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of its making or maintaining the Loan or its incurring any obligations under this Agreement to a level below that which such Lender or such Lender's holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then, upon demand by such Lender, the Borrower hereby agrees to pay to such Lender from time to time such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered. (e) Notice of Amounts Payable to Lenders. If any Lender shall seek payment of any amounts from Borrower pursuant to this Section 0 or under Section 0, it shall notify the Borrower and the Agent of the amount payable by the Borrower to such Lender hereunder. A certificate of such Lender seeking payment setting forth in reasonable detail the factual basis for and the computation of the amount specified, shall be conclusive and binding on all parties for all purposes, absent manifest 26 32 error, as to the amounts owned. The Borrower's obligations under this Section shall survive the termination of this Agreement and the repayment of the Obligations. (f) Change in Basis Point Spread. Any change in the basis point margin added to the Eurodollar Rate based on a change in the Optional Collateral pursuant to the terms of Section 3.3 shall take effect one (1) Banking Day following notice by the Agent to the Lenders of such rate change. Section II.5. Extensions. At any time not later than thirty (30) days nor earlier than one hundred twenty (120) days prior to the Revolving Credit Expiration Date or any anniversary of the Facility Closing, the Borrower may request that the Agent and the Lenders, in their sole discretion, may agree to extend the Revolving Credit Expiration Date one or more times for a period of twelve (12) months each. III. COLLATERAL Section III.1. Collateral. As security for the payment of any and all of the Obligations and for the Borrower's performance of, and compliance with, all of the terms, covenants, conditions, stipulations and agreements contained in the Financing Documents, the Borrower hereby assigns, grants and conveys to the Lenders, and agrees that the Lenders shall have, to the extent permitted by law a perfected, continuing security interest in, all of the Collateral. The Borrower further agrees that the Lenders shall have in respect of the Collateral all of the rights and remedies of a secured party under the Virginia Uniform Commercial Code and the Uniform Commercial Code of those other states in which the Facilities are located, whichever is applicable, and under other applicable Laws as well as those provided in this Agreement. The Borrower covenants and agrees to execute and deliver such financing statements and other instruments and filings as are necessary in the opinion of the Agent to perfect such security interest. Notwithstanding the fact that the proceeds of the Collateral constitute a part of the Collateral, the Borrower may not dispose of the Collateral, or any part thereof, other than in the ordinary course of its business or as otherwise may be permitted by this Agreement or other Security Agreements. Section III.2. Eligible Projects. The Borrower shall from time to time designate Facilities owned by the Borrower or a Guarantor Subsidiary as Eligible Projects included in the Borrowing Base pursuant to the terms hereof. The Facilities which are Eligible Projects are listed on EXHIBIT C attached hereto and incorporated herein by reference or any future Borrowing Base Report. The Credit Facility shall be secured by (a) the first lien Deeds of Trust on the fee simple interests of 27 33 the Borrower or the Guarantor Subsidiaries in the Eligible Projects, (b) a first lien security interest in all fixtures, building materials and all other machinery, equipment and other personalty used or installed by the Borrower or Guarantor Subsidiary or each of the premises of an Eligible Project or in the Improvements constructed thereon, and (c) all of the other Collateral relating to the Eligible Projects. The Borrower may release an Eligible Project from the lien of its Deed of Trust at any time provided no Event of Default has occurred and is continuing and provided at least five (5) Pool A Projects remain in the Borrowing Base. Section III.3. Optional Collateral. The Borrower or a Guarantor Subsidiary may at its sole option grant to the Agent for the benefit of the Lenders a first lien Deed of Trust on a Facility as Optional Collateral and pledge the related Collateral and a first lien security interest in all fixtures, building materials and all other machinery, equipment and other personalty used or installed by the Borrower or Guarantor Subsidiary on each of the Premises of the Optional Collateral or the Improvements constructed thereon in connection with that Facility as security for the Credit Facility if each of the conditions for Optional Collateral is met and continues to be maintained. The Optional Collateral will not be included in the Borrowing Base. It will only be referred to by the Agent in calculating the interest rate applicable to the Credit Facility pursuant to the terms of the Note and this Agreement. Provided no Event of Default has occurred under the Financing Documents and is continuing, the Borrower may in its sole discretion add, substitute or remove Facilities from the Optional Collateral; provided, however, that any change in the Optional Collateral may only become effective at the end of a fiscal quarter. The Borrower shall notify the Agent in writing of its intent to release Optional Collateral. The Facilities included in Optional Collateral as of the date hereof, if any, are listed on EXHIBIT E attached hereto and incorporated herein by reference. Additions or deletions from the Facilities included in Optional Collateral shall be set forth on lists issued from time to time by the Agent and certified by the Borrower. The foregoing notwithstanding, the Borrower may in the future elect to include in Optional Collateral the Facilities referred to as Franconia, Morris Plains, Old Tappan, Granite Run, Wayne, Abington (Assisted Living) and Abington (Independent Living) regardless of whether they meet the conditions set forth in Sub-parts (c) and (d) of the definition of Optional Collateral; provided, however, that each such Facility must meet such conditions within twelve (12) months from the issuance of its certificate of occupancy in order to continue to be included in Optional Collateral. Section III.4. Assignment of Partnership Interests. The Obligations are further secured by the Pledge, Assignment and 28 34 Security Agreement, pursuant to which the partners of the Borrower have assigned to the Agent for the benefit of the Lenders one hundred percent (100%) of all partnership interests in the Borrower. Section III.5. Guaranties. The Obligations are the subject of the Guaranty Agreement and the Completion Guaranty executed and delivered by the Guarantor in favor of the Lenders. Payment of the Obligations will also be guaranteed by any Guarantor Subsidiary pursuant to a Joinder Agreement in form attached hereto as EXHIBIT F executed as of the same date as the Deed of Trust from such Guarantor Subsidiary. Section III.6. Collateral for Obligations. The Borrower acknowledges that it is the intention of the Borrower that the Collateral and all the Deeds of Trust be security for all of the Obligations, both those now existing and those hereafter created or incurred by future loans, advances, extensions of credit or otherwise and whether or not currently contemplated by the Borrower and/or the Lenders on or about the date hereof. Section III.7. Costs. The Borrower agrees to pay on demand, to the fullest extent permitted by applicable laws, all reasonable fees, commissions, costs, charges, travel expenses and other expenses incurred by the Lenders, or any of them, in connection with the taking, perfection, preservation, protection and/or release of any security interest or lien on any of the Collateral or Deeds of Trust. The foregoing notwithstanding, the Borrower shall not be obligated to pay the travel expenses of the Lenders with the exception of travel expenses incurred in connection with any enforcement actions following the occurrence of an Event of Default. IV. GENERAL FINANCING PROVISIONS Section IV.1. Computation of Interest and Fees. All applicable fees and interest shall be calculated on the basis of a year of 365 days for the actual number of days elapsed pursuant to the terms of each Note and interest shall be payable monthly in arrears. Section IV.2. Liens; Setoff. The Borrower hereby grants to the Lenders a continuing lien and security interest for all the Obligations upon any and all monies, securities, and other property of the Borrower and the proceeds thereof, now or hereafter held or received by or in transit to, the Lenders, or any affiliate of any of the Lenders, from or for the Borrower, and also upon any and all deposits (general or special) and credits of the Borrower with any of the Lenders, if any, at any time existing. During the continuance of any Event of Default under 29 35 this Agreement, each Lender is hereby authorized by the Borrower at any time and from time to time, without notice to the Borrower, to set off, appropriate and apply any or all items hereinabove referred to against all Obligations then outstanding. Section IV.3. Payment and Performance of Obligations. The payment and performance by the Borrower of the Obligations shall be absolute and unconditional, irrespective of any defense or any rights of set-off, recoupment or counterclaim it might otherwise have against the Lenders, or any of them, and the Borrower shall pay absolutely net all of the Obligations, free of any deductions and without abatement, diminution or set-off; and until payment in full of all of the Obligations, the Borrower: (a) will not suspend or discontinue any payments provided for in the Note and (b) will perform and observe all of its other agreements contained in this Agreement, including (without limitation) all payments required to be made to the Agent, and (c) will not terminate or attempt to terminate this Agreement or any of the other Financing Documents to which the Borrower is a party for any cause. Section IV.4. Payments to Others for the Account of the Borrower. At the option of the Lenders and without any request from the Borrower, and without waiving any of its rights hereunder, the Lenders may elect to cure or avoid any default by the Borrower under the Financing Documents by applying amounts due hereunder or advancing the Lenders' own funds to the satisfaction of the conditions of the Financing Documents and any amounts so applied shall be part of the Loan and shall be secured by the Deeds of Trust and the other Collateral. The Agent agrees to endeavor to give the Borrower notice of any such payment or performing such act and the amount of any payment whether prior to or contemporaneously with its making such payment or performance of such act; provided, however, that failure to give such notice shall not constitute a waiver by the Lenders of, or constitute a defense to, any of the rights of the Lenders under this Agreement, the Construction Loan Agreement or the Deeds of Trust, including (without limitation) the right of the Lenders to repayment of the amount of such payment. Section IV.5. Prepayment. The Borrower shall have the right to prepay the Loan in full or in part, at any time and from time to time, upon ten (10) days' prior written notice to the Agent without premium or penalty. The foregoing notwithstanding, in connection with any prepayment of a principal sum on any day other than the last day of the Eurodollar Period applicable thereto, the Borrower shall pay to the Agent upon request by the Agent, such amount as shall be sufficient to compensate any of the Lenders for any and all losses or expenses which such Lender may sustain or incur (including without limitation, any such loss or expense arising from the redeployment of funds obtained by 30 36 such Lender). Unless an Event of Default has occurred, any partial prepayment shall be applied first to such breakage costs, second to accrued and unpaid interest and third to the outstanding principal balance of the Loan due and owing at maturity. Sums borrowed and repaid may be readvanced. The Borrower's obligations under this Section shall survive the termination of this Agreement and the repayment of the Obligations. V. REPRESENTATIONS AND WARRANTIES To induce the Lenders to make available the Credit Facility, the Borrower represents and warrants to the Lenders that: Section V.1. Good Standing. The Borrower (a) is a limited partnership duly organized and existing and in good standing under the laws of the Commonwealth of Virginia, (b) has the power to own its property and to carry on its business as now being conducted, and (c) is duly qualified to do business and is in good standing in each jurisdiction in which each Facility is located and in which the character of the properties owned by it therein or in which the transaction of its business makes such qualification necessary. Section V.2. Power and Authority. The Borrower has full power and authority to execute and deliver this Agreement and each of the other Financing Documents executed and delivered by it, to make the borrowing hereunder, and to incur the Obligations, all of which have been duly authorized by all proper and necessary partnership action. No consent or approval of partners of, or lenders to, the Borrower, and no consent or approval of any Governmental Authority or any third party payor on the part of the Borrower, is required as a condition to the validity or enforceability of this Agreement or any of the other Financing Documents executed and delivered by the Borrower or to the payment or performance by the Borrower of the Obligations. Section V.3. Binding Agreements. This Agreement and each of the other Financing Documents executed and delivered by the Borrower have been properly executed by the Borrower, constitute valid and legally binding obligations of the Borrower, and are fully enforceable against the Borrower in accordance with their respective terms. Section V.4. Litigation. There are no proceedings pending before any court or arbitrator or before or by any Governmental Authority which, in any one case or in the aggregate, will cause a Material Adverse Change in the Borrower or affect the authority of the Borrower to enter into this Agreement or any of the other Financing Documents executed and delivered by the Borrower. 31 37 There is no pending revocation, suspension, termination, probation, restriction, limitation or non-renewal of any License, Participation Agreement or any similar accreditation or approval organization or Governmental Authority for healthcare providers, including, without limitation, the issuance of any provisional License or other License with a term of less than twelve (12) months, as a consequence of any sanctions imposed by any Governmental Authority, nor is there any pending assessment of any civil or criminal penalties by any Governmental Authority, the outcome of which, if determined adversely to the Borrower, could result in a Material Adverse Change in the Borrower. The Borrower does not have any appeals regarding rates or reimbursements currently pending or contemplated before any Governmental Authority or any administrator of any third party payor or preferred provider program or referral source, the outcome of which, if determined adversely to the Borrower, could result in a Material Adverse Change in the Borrower. There are no Medicare or Medicaid recoupments or recoupments of any other third party payor being sought, requested or claimed, against the Borrower, the outcome of which, if determined adversely to the Borrower could materially impair the Borrower's ability to pay the Obligations, except as otherwise disclosed in writing to, and approved by, the Agent. Section V.5. No Conflicting Agreements. There is (a) no provision of the Borrower's partnership agreement and no provision of any existing mortgage, indenture, contract or agreement binding on the Borrower or affecting its property, and (b) to the knowledge of the Borrower no provision of law or order of court binding upon the Borrower, which would conflict with or in any way prevent the execution, delivery, or performance of the terms of this Agreement or of any of the other Financing Documents executed and delivered by the Borrower, or which would be violated as a result of such execution, delivery or performance, or, if so, all necessary consents have been obtained. Section V.6. Financial Information. All financial statements or information hereto furnished to the Lenders with respect to the Borrower, each Facility, the Guarantor and any Guarantor Subsidiaries is complete and correct in all material respects and fairly presents the financial position of the Borrower and the financial condition of the Facilities. There are no liabilities, direct or indirect, fixed or contingent, of the Borrower, Guarantor or any Guarantor Subsidiaries which are not reflected in the their respective financial statements or in the notes thereto. There has been no Material Adverse Change in the financial condition or operations of the Guarantor since the financial statements dated December 31, 1996 (and to the Borrower's and Guarantor's knowledge, no such Material Adverse Change is pending), and neither the Borrower nor the Guarantor 32 38 has guaranteed the obligations of, or made any investments in or advances to, any company, individual or other entity, except as disclosed in such information. Section V.7. No Default. The Borrower is not in default under or with respect to any obligation under any agreement to which the Borrower is a party in any respect which could result in a Material Adverse Change. There is no Event of Default hereunder. Section V.8. Taxes. The Borrower has filed or has caused to have been filed all federal, state and local tax or informational returns which are required by law to be filed, and has paid or caused to have been paid all Taxes as shown on such returns or on any assessment received by it, to the extent that such Taxes have become due, or which are required by law to be paid, unless and to the extent only that such Taxes, assessments and governmental charges are currently contested in good faith and by appropriate proceedings by the Borrower and adequate reserves therefor have been established as required under GAAP. Section V.9. Place(s) of Business and Location of Collateral. The Borrower warrants that the address of the Borrower's chief executive office is as specified in EXHIBIT D attached hereto and made a part hereof and that the address of each other place of business of the Borrower, if any, is as disclosed in EXHIBIT D. The Collateral and all books and records pertaining to the Collateral are and/or will be located at the addresses indicated on EXHIBIT D. The Borrower will immediately advise the Agent in writing of the opening of any new place of business or the closing of any existing place of business of the Borrower, and of any change in the location of the places where the Collateral, or any part thereof, or the books and records concerning the Collateral, or any part thereof, are kept. EXHIBIT D may be modified from time to time to add the locations of additional Facilities. Section V.10. Title to Properties. The Borrower and any Guarantor Subsidiaries have good and marketable title to all of their properties, including, without limitation, the Property, the Collateral and the Optional Collateral, and the Property, the Collateral and the Optional Collateral are free and clear of mortgages, pledges, liens, charges and other encumbrances other than the Permitted Liens. Section V.11. Margin Stock. None of the proceeds of the Loan will be used, directly or indirectly, by the Borrower for the purpose of purchasing or carrying, or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry, any "margin security" within the meaning of Regulation G (12 CFR Part 207), or "margin stock" 33 39 within the meaning of Regulation U (12 CFR Part 221), of the Board of Governors of the Federal Reserve System (herein called "margin security" and "margin stock") or for any other purpose which might make the transactions contemplated herein a "purpose credit" within the meaning of said Regulation G or Regulation U, or cause this Agreement to violate any other regulation of the Board of Governors of the Federal Reserve System or the Securities Exchange Act of 1934 or the Small Business Investment Act of 1958, as amended, or any rules or regulations promulgated under any of such statutes. Section V.12. ERISA. With respect to any "pension plan", as defined in Section 3(2) of ERISA, which plan is now or previously has been maintained or contributed to by the Borrower and/or by any Commonly Controlled Entity: (a) no "accumulated funding deficiency" as defined in Code Section 412 or ERISA Section 302 has occurred, whether or not that accumulated funding deficiency has been waived; (b) no "reportable event" as defined in ERISA Section 4043 has occurred; (c) no termination of any plan subject to Title IV of ERISA has occurred; (d) neither the Borrower nor any Commonly Controlled Entity has incurred a "complete withdrawal" within the meaning of ERISA Section 4203 from any multiemployer plan; (e) neither the Borrower nor any Commonly Controlled Entity has incurred a "partial withdrawal" within the meaning of ERISA Section 4205 with respect to any multiemployer plan; (f) no multiemployer plan to which the Borrower or any Commonly Controlled Entity has an obligation to contribute is in "reorganization" within the meaning of ERISA Section 4241 nor has notice been received by the Borrower or any Commonly Controlled Entity that such a multiemployer plan will be placed in "reorganization". Section V.13. Governmental Consent. Neither the nature of the Borrower or of its business or properties, nor any relationship between the Borrower and any other Person, nor any circumstance in connection with the making of the Loan, or the offer, issue, sale or delivery of the Note is such as to require a consent, approval or authorization of, or filing, registration or qualification with, any Governmental Authority, on the part of the Borrower, as a condition to the execution and delivery of this Agreement or any of the other Financing Documents, the borrowing of the principal amounts of the Loan or the offer, issue, sale or delivery of the Note. Section V.14. Full Disclosure. The financial statements referred to in this Part V do not, nor does this Agreement, nor do any written statements furnished by the Borrower to the Agent in connection with the making available of the Credit Facility, contain any untrue statement of fact or knowingly omit a material fact necessary to make the statements contained therein or herein not materially misleading. The Borrower has not failed to disclose any fact to the Agent in writing which materially 34 40 adversely affects or, will or could prove to materially adversely affect the properties, business, prospects, profits or condition (financial or otherwise) of the Borrower or the ability of the Borrower to perform this Agreement or any of the other Financing Documents. Section V.15. Business Names and Addresses. The Borrower has not conducted business under any name other than its current name, and has not conducted its business in any jurisdiction other than those listed on EXHIBIT D. The Borrower intends to operate the Facilities under the names set forth on EXHIBIT D. The Borrower shall promptly notify the Agent of any change in the name of any Facility. Section V.16. Licenses and Certifications. The Borrower further represents and warrants to the Lenders that, with respect to any License it possesses or has applied for, (a) no Default or Event of Default has occurred or is continuing under the terms of any of the Licenses, or any condition to the issuance, maintenance, renewal and/or continuance of any License, (b) the Borrower has paid all fees, charges and other expenses to the extent due and payable with respect to, and has provided all information and otherwise complied with all material conditions precedent to, the issuance, maintenance, renewal, and continuance of all Licenses, (c) the Borrower has not received any notice from any Governmental Authority relating to any actual or pending suspension, revocation, restriction, or imposition of any probationary use, of any License, nor has any License been materially amended, supplemented, rescinded, terminated, or otherwise modified except as otherwise disclosed in writing to, and approved by, the Agent, (d) the Borrower has not made any previous assignment of any of the Licenses to any Person, and (e) no financing statement covering any of the Licenses is on file in any public office except financing statements in favor of the Lenders. Without implying any limitation to the other representations and warranties contained in this Agreement, the Borrower is not required by any applicable Law of any state, county or city in which any of the Facilities is located to obtain a certificate of need to operate any Facility as an assisted living facility or, in the case of one of the two Abington, Pennsylvania Facilities, an independent living facility or has applied for and obtained such Certificate(s) of Need. Licenses to operate are required in all states where the Facilities are located and Certificates of Need are also required in the State of New Jersey. Section V.17. Operating Agreements and Management Contracts. The Borrower has furnished to the Agent photocopies of all material Operating Agreements and Management Contracts entered into with respect to the Facilities, and all amendments, supplements and modifications thereto including, without limita- 35 41 tion, the Management Agreement. The Borrower further represents and warrants to the Lenders that (a) all of the material Operating Agreements and Management Contracts are or will be at the time of execution and delivery thereof valid and binding on the parties thereto and in full force and effect, (b) no Default or Event of Default has occurred or is continuing under the terms of any of the material Operating Agreements and Management Contracts, and no party thereto has attempted or threatened to terminate any such Management Contract or Operating Agreement, (c) the Borrower has not made any previous assignment of any Operating Agreements and Management Contracts to any Person, and (d) no financing statement covering any of the Operating Agreements and Management Contracts is on file in any public office, except financing statements in favor of the Lenders in connection with the Credit Facility. Section V.18. Participation Agreements and Resident Agreements. The Borrower has furnished to the Agent, on or before the Facility Closing, the Borrower's form of Resident Agreement used with respect to all Facilities and, if requested by the Agent, copies of all current, executed Resident Agreements. (a) The Borrower further covenants to the Lenders that, with respect to the Participation Agreements, if any, (i) to the best of its knowledge, all Participation Agreements will be at the time of execution and delivery thereof valid and binding on the parties thereto and in full force and effect, and (ii) all Participation Agreements will provide for payment to the Borrower for services rendered to residents. The Borrower represents and warrants that as of the date hereof it has not entered into any Participation Agreement for any Facility. (b) To the extent the Borrower participates or will participate in Medicare or Medicaid payment and reimbursement programs, the Borrower has complied and will comply with all notice and other requirements under Title XVIII and Title XIX of the Social Security Act to enable the Borrower to participate in the Medicare and Medicaid payment and reimbursement programs. Section V.19. Compliance with Laws. The Borrower is not in violation of any applicable laws of any Governmental Authority pertaining to employment practices, health standards or controls, environmental and occupational standards or controls or order of any court or arbitrator, the violation of which, considered in the aggregate, would result in a Material Adverse Change in the Borrower. The Borrower is in compliance with all accreditation standards and requirements to which it is subject. The Borrower has obtained or will obtain all Licenses necessary to the ownership of its property or to the conduct of its activities which, if not obtained, could materially adversely affect the ability of the Borrower to conduct its activities of operating each Facility 36 42 as an assisted living facility, including, without limitation if and as required by any Governmental Authorities for the dispensing, storage, prescription, disposal, and use of drugs, medications and other "controlled substances" and for the maintenance of cafeteria and other food and beverage facilities or services or the condition (financial or otherwise) of the Borrower. Section V.20. Presence of Hazardous Materials or Hazardous Materials Contamination. The Borrower has not placed Hazardous Materials on any real property owned, controlled or operated by the Borrower or for which the Borrower is responsible. To the best of the Borrower's knowledge, no Hazardous Materials are located on any real property owned, controlled or operated by the Borrower or for which the Borrower is responsible, except for reasonable quantities of necessary supplies for use by the Borrower in the ordinary course of its current line of business and stored, used and disposed of in accordance with applicable Laws, and no property owned, controlled or operated by the Borrower has ever been used as a manufacturing, storage, or dump site for Hazardous Materials nor is such property affected by Hazardous Materials Contamination. Section V.21. Nature of Credit Facility; Usury; Disclosures. The Borrower is a business or commercial organization, and the Credit Facility is being made solely for the purpose of carrying on or acquiring a business or commercial enterprise. The rate or rates of interest charged on the Note do not, and will not, violate any usury Law or interest rate limitation. The Credit Facility is not subject to the federal Consumer Credit Protection Act (15 U.S.C. Section 1601 et. seq.) nor any other federal or state disclosure or consumer protection laws. The Credit Facility is being transacted solely for business or commercial purposes and not for personal, family or household purposes. Section V.22. Survival; Updates of Representations and Warranties. All representations and warranties contained in or made under or in connection with this Agreement and the other Financing Documents shall survive the date of this Agreement and the Loan made hereunder. The Lenders acknowledge and agree that any and all representations and warranties contained in, or made under, or in connection with, this Agreement may be amended, changed or otherwise modified by the Borrower at any time and from time to time after the date of this Agreement so as to accurately reflect the matters represented and warranted therein; provided, that such amendments, changes and/or modifications are disclosed in writing to the Agent. The Lenders shall have no obligation to waive any Event of Default due to any present or future inaccuracy of such representation or warranty or to agree to any amendment, change or modification of any such representation or warranty. 37 43 Section V.23. Accounts. With respect to all of the Borrower's Accounts and to the best of the Borrower's knowledge (a) they are genuine, and in all respects what they purport to be, and are not evidenced by a judgment, an instrument, or chattel paper (unless such judgment has been assigned and such instrument or chattel paper has been endorsed and delivered to the Agent); (b) they represent undisputed, bona fide transactions completed in accordance with the terms and provisions contained in the invoices relating thereto; (c) the services rendered which resulted in the creation of the Accounts have been delivered or rendered to and accepted by the Account Debtor; (d) the amounts shown on the Borrower's books and records, with respect thereto are actually and absolutely owing to the Borrower and are not contingent for any reason; (e) there are no set-offs, counterclaims or disputes known by the Borrower or asserted with respect thereto, and the Borrower has made no agreement with any Account Debtor thereof for any deduction or discount of the sum payable thereunder except regular discounts allowed by the Borrower in the ordinary course of its business for prompt payment; (f) there are no facts, events or occurrences known to the Borrower which in any way impair the validity or enforcement thereof or tend to reduce the amount payable thereunder; (g) all Account Debtors thereof, to the best of the Borrower's knowledge, have the capacity to contract; (h) the services furnished giving rise thereto are not subject to any Liens other than Permitted Liens; (i) the Borrower has no knowledge of any fact or circumstance which would impair the validity or collectibility thereof; and (j) there are no proceedings or actions known to the Borrower which are pending against any Account Debtor which might result in any material adverse change in its financial condition. VI. CONDITIONS OF LENDING The making of any advance under the Loan is subject to the conditions set forth in the Construction Loan Agreement and the following conditions precedent: Section VI.1. No Default. No Event of Default and no event which with the giving of notice or the passage of time would become an Event of Default has occurred and is existing and all representations and warranties set forth herein or in the other Financing Documents are true and correct. Section VI.2. Opinion of Counsel for the Borrower. At the Facility Closing and when a lien on an Eligible Project or Optional Collateral is subsequently granted by the Borrower or a Guarantor Subsidiary, the Lenders shall receive a written opinion of counsel for the Borrower and the Guarantor and, if applicable, the Guarantor Subsidiary, satisfactory in all respects to the 38 44 Agent. Section VI.3. Approval of Counsel for the Lenders. All legal matters incident to the Loan and all documents necessary in the opinion of the Agent to make the Loan or the addition of either an Eligible Project to the Borrowing Base or Optional Collateral or add such Deeds of Trust and related Collateral shall be satisfactory in all material respects to counsel for the Lenders. Section VI.4. Supporting Documents. The Agent shall receive at the Facility Closing and in connection with the subsequent granting of a Lien on an Eligible Project or Optional Collateral: (a) a certificate of the general partner of the Borrower, in a form acceptable to the Agent in all respects, dated as of the date hereof and certifying (i) that attached thereto is a true, complete and correct copy of resolutions duly adopted by the partners of the Borrower authorizing the execution and delivery of this Agreement, the Construction Loan Agreement, the Note and the other Financing Documents, the borrowing thereunder, and the performance of the Obligations, and (ii) as to the incumbency and specimen signature of the authorized officer of the general partner of the Borrower executing this Agreement, the Note and the other Financing Documents; (b) such other documents as the Agent may reasonably require the Borrower and/or the partners of the Borrower to execute, in form and substance acceptable to the Agent; and (c) such additional information, instruments, opinions, documents, certificates and reports as the Agent may reasonably deem necessary. Section VI.5. Financing Documents. All of the Financing Documents required by the Agent whether at the Facility Closing or any subsequent addition of a Deed of Trust and related Collateral shall be executed, delivered and, if deemed necessary by the Agent, recorded, all at the sole expense of the Borrower. Section VI.6. Insurance. The Borrower shall have satisfied the Agent that any and all insurance required by this Agreement is in effect as of the date of this Agreement or as of the date of the addition of a Deed of Trust and related Collateral, and that, to the extent required by the Financing Documents, the Lenders have been named as an insured lienholder. Section VI.7. Security Documents. In order to perfect the lien and security interest created by this Agreement, the Borrower shall have executed and delivered to the Agent all Security Documents (in form and substance acceptable to the Agent in its sole discretion) deemed necessary by the Agent, in a sufficient number of counterparts for recordation, and, at the Borrower's sole expense, shall record all such financing statements and Security Documents, or cause them to be recorded, in all public 39 45 offices deemed necessary by the Agent. Section VI.8. Joinder Agreement. In order to perfect the lien and security interest of the Lenders in the Collateral related to the construction and operation of any Facility encumbered by a Deed of Trust provided by a Guarantor Subsidiary, such Guarantor Subsidiary shall execute and deliver to the Agent, a Joinder Agreement joining in such assignments of Collateral and such other Security Documents as the Agent may require and in sufficient number of counterparts for recordation, and, at the Borrower's sole expense shall record all such financing agreements and other Security Documents, or cause them to be recorded, in all public offices deemed necessary to the Agent. VII. AFFIRMATIVE COVENANTS OF BORROWER Until payment in full and the performance of all of the Obligations hereunder, the Borrower shall: Section VII.1. Financial Statements. Furnish to the Agent: (a) as soon as available but in no event more than forty-five (45) days after the close of each of the Borrower's fiscal quarters internally prepared, consolidated and consolidating financial statements of the Borrower and its Subsidiaries and a balance sheet on a year-to-date basis and as of the close of such period and an income and expense statement for such period, certified by the chief financial officer of the Borrower's general partner unless such report is included in the quarterly report of the Guarantor; and (b) as soon as available but in no event more than one hundred twenty (120) days after the close of each of the Borrower's fiscal years, (i) a copy of the consolidated annual financial statement of the Borrower and its Wholly Owned Subsidiaries in reasonable detail satisfactory to the Agent, prepared in accordance with GAAP and audited by an independent certified public accountant satisfactory to the Agent, which financial statement shall include a balance sheet of the Borrower and its Wholly Owned Subsidiaries, as at the end of such fiscal year and the related statements of operations and retained earnings and cash flow statements for such fiscal year in a format acceptable to the Agent, (ii) an unqualified letter or opinion of the accountant who examined and audited the Borrower's financial statement and stating whether anything in such independent accountant's examination has revealed the occurrence of an event which constitutes an Event of Default under the Financing Documents or which would constitute such an Event of Default with the giving of notice or the lapse of time or both, (iii) if requested by the Agent a copy of the Management Letter 40 46 prepared by the auditor, and (iv) the related statements of operations and retained earnings and cash flows in a format acceptable to the Agent; and (c) beginning with the first Operating Month (as hereinafter defined), as soon as available but in no event more than thirty (30) days after the last day of each such calendar month, operating statements for each Eligible Project for such month, including an income and expense statement for such period and census and billing reports with respect to each Eligible Project then operating for such period; (d) as soon as available, but in no event more than thirty (30) days after the end of each of the Borrower's fiscal quarters, operating statements for each Facility included in Optional Collateral for such period; including an income and expense statement for such period and census and billing reports with respect to each Facility which is Optional Collateral during such period. (e) as soon as available but in no event more than thirty (30) days after the date of filing, the federal and state income tax returns for the Borrower for the year in question as well as any requests for extensions filed in connection therewith; and (f) with reasonable promptness such additional information, reports or statements as the Agent may from time to time reasonably request. (g) all required financial statements, required pursuant to Sub-paragraphs (a) and (b) hereof shall include the following certification: "The undersigned as _____________ of ____________ certifies that the financial information contained in the financial statement dated _________, is true and complete as of this date. This statement is provided to NationsBank, N.A. (the "Bank") as agent for the Lenders set forth in the Amended and Restated Agency Agreement dated December ___, 1997 as amended, restated or substituted from time to time for the purpose of obtaining credit or in fulfillment of the terms and conditions of credit already provided. Accordingly, it is intended that the Bank may rely on this information". Section VII.2. Taxes and Claims. Pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or any of its income or properties prior to the date on which penalties attach thereto, and all lawful claims which, if 41 47 unpaid, might become a lien or charge upon any of its properties; provided, however, the Borrower shall not be required to pay any such tax, assessment, charge, levy or claim, the payment of which is being contested in good faith and by proper proceedings. Section VII.3. Legal Existence. Maintain its existence as a limited partnership in good standing in the Commonwealth of Virginia and in each jurisdiction where it is required to register or qualify to do business. Section VII.4. Conduct of Business and Compliance with Laws. (a) Do or cause to be done all things necessary to obtain, enter into, preserve and to keep in full force and effect its material rights and its trade names, patents, trademarks and Licenses, Participation Agreements, and Operating Agreements and Management Contracts which are necessary for the operation of each Facility as an adult assisted living facility (or independent living facility, as applicable) as contemplated by the Borrower, (b) engage in and continue to engage substantially only in the business of owning and operating an adult assisted living facility (or independent living facility, as applicable) and related services in compliance with all applicable laws of the state in which the applicable Facility is located or any other Governmental Authority having jurisdiction over such Facility, and (c) comply with all applicable Laws, including, without limitation, regulations issued under the Omnibus Budget Reconciliation Act of 1987 (OBRA'87) (Pub.L.No. 100-203), as amended, and observe the valid requirements of Governmental Authorities, and perform the terms of all Participation Agreements to which it is a party, the noncompliance with or the nonobservance of which might materially interfere with the performance of its Obligations or the proper or prudent conduct of its business or the applicable Property. In addition, the Borrower covenants and agrees that it will: (i) obtain and maintain in full force and effect all Licenses necessary to the acquisition and/or ownership and/or operation of each Facility including, without limitation, Licenses and other approvals related to the storage, dispensation, use, prescription and disposal of drugs, medications and other "controlled substances" and, to the extent offered by the Borrower, the maintenance of cafeteria and other food and beverage facilities or services; (ii) administer, maintain and operate (or will cause to be administered, maintained and operated) each Facility as a revenue-producing assisted living facility (or independent living facility, as applicable); (iii) to the extent the Borrower participates in 42 48 any such programs, maintain and operate each Facility to meet the standards and requirements and to provide healthcare of such quality and in such manner as would enable the Borrower to participate in, and provide services in connection with, recognized medical and healthcare insurance programs; (iv) obtain, maintain and comply with all conditions for the continuance of, all Licenses, including without limitation, Licenses which may at any time be required by the state in which the applicable Facility is located or other appropriate governmental entity, necessary or desirable for the operation of each Facility as an adult assisted living facility (or independent living facility, as applicable); and (v) to the extent the Borrower presently participates or in the future will participate in such programs, obtain, maintain and comply with all conditions for the continuance of certification from each applicable Governmental Authority that the Borrower meets all conditions for participation in the Medicare and Medicaid programs. Section VII.5. Use of Proceeds. Use the proceeds of the Loan for the purpose or purposes set forth in Recital L above and Sections 8.01 and 8.13(b) herein, and Section 2.02 of the Construction Loan Agreement and, without the prior written consent of the Agent for no other purpose or purposes. Section VII.6. Insurance. Provide or cause to be provided to the Agent and maintain in full force and effect at all times during the term of the Loan, such policies of insurance as may be required by the terms of the Financing Documents from a company or companies, and in form and amounts satisfactory to the Agent including, by way of example and not by way of limitation, at least the following: (a) During any period of construction in or on an Eligible Project, "builder's risk" insurance, including vandalism and malicious mischief and collapse endorsements in amounts not less than the replacement cost of the Improvements being constructed or of the Property and naming the Agent on behalf of the Lenders as a loss payee in the mortgagee clause thereof; (b) Casualty or physical damage insurance coverage for each Eligible Project affording protection against loss or damage by fire or other hazards covered by the standard all-risk fire and hazard insurance policy with "extended coverage" endorsement and such other risks as shall be customarily covered with respect to projects similar in construction, location and use as the 43 49 Property, or as the Agent may from time to time otherwise require in amounts necessary to prevent the application of any co-insurance provisions of any applicable policies up to an amount not less than the greater of the full insurable value of the Improvements (as defined in the Deed of Trust) or the aggregate principal amount of the Obligations; no policy of insurance shall be written such that the proceeds thereof will produce less than the minimum coverage required by this Section by reason of co-insurance provisions or otherwise; the term "full insurable value" means the actual replacement cost of the Property (as defined in the Deed of Trust) (excluding foundation and excavation costs and costs of underground flues, pipes, drains and other uninsurable items); and as to Eligible Projects naming the Agent on behalf of the Lenders as loss payee in the mortgagee clause thereof; (c) Evidence that the same insurance described in sub-paragraph (b) is in effect for each Facility included in the Optional Collateral and naming the Agent on behalf of all the Lenders as a certificate holder for such insurance. Upon the occurrence of an Event of Default, the Borrower (i) shall take all steps necessary to list the Lender as an additional insured for such policies covering the Optional Collateral and (ii) shall surrender any proceeds of claims under such insurance; (d) General public liability insurance in amounts usually carried by similar operations against claims for bodily injury or death and property damage insurance for claims for damage to property (including loss of use) occurring upon, in or about the Property naming the Agent on behalf of the Lenders as loss payee thereunder, with such insurance to afford protection to the limit of not less than $5,000,000 for the aggregate of all occurrences during any given annual policy period for each Eligible Project; (e) Workers' compensation insurance in accordance with the requirements of applicable law or regulation naming the Agent on behalf of the Lenders as loss payee thereunder; (f) Business interruption insurance naming the Lenders as additional insureds with respect to each Facility once a certificate of occupancy has been issued for such Facility in an amount equal to at least twelve (12) months' debt service on the applicable Loan; and (g) To the extent that healthcare professionals are employed by the Borrower, medical liability, malpractice and other healthcare professional liability insurance protecting the Borrower and its employees against claims arising from the professional services performed by the Borrower and its employees with limits of (i) not less than One Million Dollars 44 50 ($1,000,000.00) with respect to injury or death for each person or occurrence, and (ii) not less than Three Million Dollars ($3,000,000.00) in the aggregate for claims made for injury or death in any one year, and an umbrella policy insuring against such liability in an aggregate amount of Five Million Dollars ($5,000,000.00). In addition, the Borrower shall ensure that all healthcare providers with whom the Borrower contracts to provide services at any Facility are insured against claims arising from such services with limits as set forth in clauses (i) and (ii) above. The Borrower shall file with the Agent, upon its request, a detailed list of the insurance then in effect and stating the names of the insurance companies, the amounts and rates of the insurance, dates of the expiration thereof and the properties and risks covered thereby. Each policy of insurance shall (A) be issued by one or more recognized, financially sound and responsible insurance companies approved by the Agent and which are qualified or authorized by the laws of the state in which the applicable Facility is located to assume the risk covered by such policy, (B) with respect to the insurance described under the preceding subsections (a), (b) and (f) have attached thereto standard noncontributing, non-reporting mortgagee clauses in favor of and entitling the Lenders without contribution to collect any and all proceeds payable under such insurance, (C) provide that such policy shall not be canceled or modified without at least thirty (30) days prior written notice to the Agent, and (D) provide that any loss otherwise payable thereunder shall be payable notwithstanding any act or negligence of the Borrower which might, absent such agreement, result in a forfeiture of all or a part of such insurance payment. Unless an escrow account has been established for insurance premiums pursuant to the provisions of a Deed of Trust, the Borrower shall promptly pay all premiums when due on such insurance and, not less than ten (10) days prior to the expiration date of each such policy, the Borrower will deliver to the Agent a renewal policy or policies marked "premium paid" or other evidence of payment satisfactory to the Agent. The Borrower will immediately give the Agent notice of any cancellation of, or change in, any insurance policy. The Lenders shall not, because of accepting, rejecting, approving or obtaining insurance, incur any liability for (i) the existence, nonexistence, form or legal sufficiency thereof, (ii) the solvency of any insurer, or (iii) the payment of losses. Section VII.7. Flood Insurance. If required by applicable law or regulation, provide or cause to be provided to the Agent a separate policy of flood insurance in the aggregate amount of the applicable Loan or the maximum limit of coverage available with respect to the Property, whichever is the lesser, from a company or companies satisfactory to the Agent and written in strict conformity with the Flood Disaster Protection Act of 1973, as amended, and all applicable regulations adopted pursuant thereto. In the event that flood insurance is not required by applicable 45 51 law or regulation to be provided in connection with the applicable Loan or is not otherwise available with respect to the Property, the Borrower shall supply the Agent with written evidence, in form and substance satisfactory to the Agent, to that effect. Any such policy shall provide that the policy may not be surrendered, canceled or substantially modified (including, without limitation, cancellation for nonpayment of premiums) without at least thirty (30) days' prior written notice to any and all insureds named therein, including the Lenders. Section VII.8. Maintenance of Properties. Keep its properties, whether owned in fee or otherwise, or leased, including, without limitation, all of the Property, in good operating condition; make all proper repairs, renewals, replacements, additions and improvements thereto needed to maintain such properties in good operating condition; comply with the provisions of all leases to which it is a party or under which it occupies property so as to prevent any loss or forfeiture thereof or thereunder; and comply with all laws, rules, regulations and orders applicable to its properties or business or any part thereof. Section VII.9. Maintenance of the Collateral. Not permit anything to be done to the Collateral which may impair the value thereof. Any of the Lenders or an agent designated by such Lender, shall be permitted to enter the premises of the Borrower and examine, audit and inspect the Collateral at any reasonable time and from time to time without notice. The Lenders shall not have any duty to, and the Borrower hereby releases the Lenders from, all claims of loss or damage caused by the delay or failure to collect or enforce any of the Accounts or Receivables or to preserve any rights against any other party with an interest in the Collateral. Section VII.10. Other Liens, Security Interests, etc. Keep the Collateral and the Property free from all liens, security interests and claims of every kind and nature, other than Permitted Liens. Section VII.11. Defense of Title and Further Assurances. At its expense defend the title to the Collateral (or any part thereof), and promptly upon request execute, acknowledge and deliver any financing statement, renewal, affidavit, deed, assignment, continuation statement, security agreement, certificate or other document the Agent may reasonably require in order to perfect, preserve, maintain, protect, continue and/or extend any lien or security interest granted to the Lenders under this Agreement or any of the Security Documents and its priority. The Borrower shall pay to the Agent, on demand all taxes, costs and expenses incurred by any of the Lenders, in connection with the preparation, execution, recording and filing of any such document 46 52 or instrument. Section VII.12. Subsequent Opinion of Counsel as to Recording Requirements. Provide to the Agent a subsequent opinion of counsel as to the filing, recording and other requirements with which the Borrower or any Guarantor Subsidiary has complied to maintain the liens and security interests in favor of the Lenders in the Collateral in the event that the Borrower or any Guarantor Subsidiary shall transfer its principal place of business or the office where it keeps its records pertaining to the Accounts and Receivables. Section VII.13. Books and Records. (a) Keep and maintain accurate books and records, (b) make entries on such books and records in form reasonably satisfactory to the Agent disclosing the Lenders' assignment of, and security interest in and lien on, the Collateral and all collections received by the Borrower on its Accounts, (c) furnish to the Agent promptly upon request such information, reports, contracts, invoices, lists of purchases of Inventory (showing names, addresses and amount owing) and other data concerning Account Debtors and the Borrower's Accounts and Inventory and all contracts and collection(s) relating thereto as the Agent may from time to time specify, (d) unless the Agent shall otherwise consent in writing, keep and maintain all such books and records mentioned in (a) above only at the addresses listed in EXHIBIT D, and (e) permit any person designated by any of the Lenders to enter the premises of the Borrower and examine, audit and inspect the books and records at any reasonable time and from time to time. Section VII.14. Collections. Until such time as the Agent shall notify the Borrower of the revocation of such privilege following an Event of Default, (a) at its own expense have the privilege for the account of and in trust for the Lenders of collecting its Accounts and receiving in respect thereto all items of payment and shall otherwise completely service all of the Accounts including (i) the billing, posting and maintaining of complete records applicable thereto, and (ii) the taking of such action with respect to such Accounts as the Agent may reasonably request or in the absence of such request, as the Borrower may deem advisable; and (b) in its discretion, grant, in the ordinary course of business, to any Account Debtor, any rebate, refund or adjustment to which the Account Debtor may be lawfully entitled, and may accept, in connection therewith, the return of goods, the sale or lease of which shall have given rise to an Account. The Agent may, at its option but solely in accordance with applicable law, at any time or from time to time after the occurrence of an Event of Default hereunder, revoke the collection privilege given to the Borrower herein by either giving notice of its assignment of, and lien on the Collateral, subject to the provisions of Section 0 hereof, to the Account 47 53 Debtors or giving notice of such revocation to the Borrower. Section VII.15. Notice to Account Debtors and Escrow Account. In the event that (a) a Default or an Event of Default exists, or (b) demand has been made for any or all of the Obligations, promptly upon the request of the Agent in such form and at such times as reasonably specified by the Agent, give notice of the Lenders' lien on the Accounts to the Account Debtors requiring those Account Debtors which are permitted by applicable law to make payments thereon directly to the Agent. Section VII.16. Business Names. Immediately notify the Agent of any change in the name under which it conducts its business. Section VII.17. ERISA. With respect to any pension plan which the Borrower and/or any Commonly Controlled Entity maintains or contributes to, either now or in the future, that: (a) such bonding as is required under ERISA Section 412 will be maintained; (b) as soon as practicable and in any event within 15 days after the Borrower or any Commonly Controlled Entity knows or has reason to know that a "reportable event" has occurred or is likely to occur, the Borrower will deliver to the Agent a certificate signed by its chief financial officer setting forth the details of such "reportable event"; (c) neither the Borrower nor any Commonly Controlled Entity will: (i) engage in or permit any "prohibited transaction" (as defined in ERISA Section 406 or Code Section 4975) to occur; (ii) cause any "accumulated funding deficiency" as defined in ERISA Section 302 and/or Code Section 412; (iii) terminate any pension plan in a manner which could result in the imposition of a lien on the property of the Borrower pursuant to ERISA Section 4068; (iv) terminate or consent to the termination of any multiemployer plan; (v) incur a complete or partial withdrawal with respect to any multiemployer plan within the meaning of ERISA Sections 4203 and 4205; and (d) within 15 days after notice is received by the Borrower or any Commonly Controlled Entity that any multiemployer plan has been or will be placed in "reorganization" within the meaning of ERISA Section 4241, the Borrower will notify the Agent to that effect. Upon the Agent's request, the Borrower will deliver to the Agent a copy of the most recent actuarial report, financial statements and annual report completed with respect to any "defined benefit plan", as defined in ERISA Section 3(35). Section VII.18. Change in Management. Notify the Agent in advance of any change of the Management Company for any Facility. Section VII.19. Management. (a) Subject to the terms of that certain Management Fee Subordination Agreement by and among the Borrower, SALMI and the Agent of even date herewith, the 48 54 Borrower shall cause SALMI to subordinate payment of any and all management fees under, or in connection with, the Management Agreement (the "Management Fees") to payment of the Obligations, in accordance with the terms and conditions of one or more subordination agreements in form and content acceptable to the Agent in its reasonable discretion, and not amend, restate, supplement, terminate, cancel or otherwise modify any of the terms or conditions of such Management Agreement, in any material respect, without the prior written consent of the Agent, and (b) terminate the Management Agreement upon receipt of notice from the Agent directing the Borrower to terminate the Management Agreement after the occurrence of an Event of Default, and, if requested to do so by the Agent, enter into a management agreement for the management of any Facility with an independent manager. The Management Agreement shall be approved in writing by the Agent prior to execution. A fully executed copy of the Management Agreement shall be delivered to the Agent by the Borrower promptly after it is signed. Section VII.20. Fees and Expenses; Indemnity. Pay all reasonable fees, charges, costs and expenses required to satisfy the conditions of the Financing Documents. The Borrower shall hold the Lenders harmless and indemnify the Lenders against all claims of brokers and "finders" arising by reason of the execution and delivery of the Financing Documents or the consummation of the transaction contemplated hereby. Section VII.21. Governmental Surveys or Inspections. Furnish to the Agent upon its request, within thirty (30) days of receipt thereof, copies of any and all annual surveys or inspections performed by any Governmental Authority or accreditation or certification organization with respect to any Facility. Section VII.22. Cost Reports. Prepare and file all applicable cost reports to all third-party payors, if any, to the extent required by any such third-party payor and, within thirty (30) days thereafter, notify the Agent of any settlement of any cost report disclosed to the Agent as being open or unsettled as of the Closing Date to the extent any such cost report would have a materially adverse effect on the Borrower. Section VII.23. Updated Appraisals. In addition, the Agent shall have the right but not the obligation to require annual updated appraisals of any or all the Property and the Facilities, which appraisals shall be prepared by an appraiser or appraisers designated by the Agent and shall be in all respects reasonably acceptable to the Agent which appraisals shall include, if deemed necessary by the Agent, in its reasonable discretion, updated discounted cash flow analysis, inspections of and commentary on the physical status of the applicable Facility 49 55 and an engineering review. The basis of the appraisal calculations shown on such appraisal reports and all other aspects of the appraisal reports must be satisfactory to the Agent in all material respects. The release of such appraisal reports by the Agent to the Borrower shall be at the Agent's sole option if the Borrower has not paid the cost of such appraisal. If the Borrower has paid the cost of the appraisal, a copy of the appraisal will be provided to the Borrower upon its signing of the Agent's standard appraisal release letter. The Borrower shall reimburse the Agent upon demand for all costs and expenses incurred by any of the Lenders with respect to the preparation and review of all future appraisals required pursuant to the terms hereof, if either (i) such appraisal is required by law or banking regulation, (ii) an event of default has occurred under the Financing Documents, or (iii) the Agent has reason to believe a change in value has occurred in the Facility being appraised due to an adverse change in the Facility's occupancy status or operating performance. Section VII.24. Notification of Certain Events, Events of Default and Adverse Developments. Promptly give written notice to the Agent who will forward a copy of the notice to the Lenders upon obtaining knowledge of the occurrence of any of the following: (a) any Event of Default under the Financing Documents; (b) any event, development or circumstance whereby the financial statements furnished under the Financing Documents fail in any material respect to present fairly, in accordance with GAAP, the financial condition and operational results of the Borrower; (c) any judicial, administrative or arbitral proceeding pending against the Borrower or any judicial or administrative proceeding known by the Borrower to have been threatened against it in a written communication which threatened proceeding, if adversely decided, could cause a Material Adverse Change in the Borrower; (d) (i) the revocation, suspension, probation, restriction, limitation or refusal to renew, or any administrative procedure then in process for the revocation, suspension, probation, restriction, limitation, or refusal to renew, of any License, or (ii) the decertification, revocation, suspension, probation, restriction, limitation, or refusal to renew, or the pending, decertification, revocation, suspension, probation, restriction, limitation, or refusal to renew or any administrative procedure then in process for any participation or eligibility in any third party payor program in which the 50 56 Borrower elects to participate, including, without limitation, Medicare, Medicaid or other private insurer programs or any accreditation of the Borrower, or (iii) the issuance or pending issuance of any License for a period of less than twelve (12) months, as a consequence of sanctions imposed by any Governmental Authority, or (iv) the assessment or pending assessment, of any civil or criminal penalties by any Government Authority, any third party payor or any accreditation organization or Person, which could materially adversely affect the financial condition or operations of the Borrower or an Affiliate (present or prospective) as determined by the Agent, in its sole but reasonable discretion; (e) any action, including, but not limited to, the filing of any certificate of need application if required by law, the amendment of any facility license or certification, or the issuance of any new license or certification for any Facility, under which the Borrower proposes (i) to develop a new facility or service and/or (ii) eliminate, materially expand or materially reduce any service; (f) any actual contingent liability or a potential contingent liability threatened or noticed in a written communication of the Borrower or its Subsidiaries of $50,000 or more per Facility; (g) any other development in the business or affairs of the Borrower results in a Material Adverse Change; and in each case listed in clauses (a) through (g), inclusive, of this Section 0 describing in detail satisfactory to the Agent the nature thereof and, in the case, if any, of notification under clause (a), the action the Borrower proposes to take with respect thereto or a statement that the Borrower intends to take no action and an explanation of the reasons for such inaction. In addition, the Borrower will furnish to the Agent immediately after receipt thereof copies of all administrative notices material to Borrower's business and operation of any Facility and all responses by or on behalf of the Borrower with respect to such administrative notices. Section VII.25. Compliance with Environmental Laws. If any Hazardous Materials are used, present or generated on any real property owned or controlled by the Borrower or for which the Borrower is responsible, use, process, distribute, handle, maintain, treat, store, dispose of and transport such substance in compliance with all applicable laws, including, but not limited to, those regulating PCB, underground storage tanks, radon and medical waste tracking, as well as any laws that are enacted after the date of this Agreement. 51 57 Section VII.26. Hazardous Materials; Contamination. (a) Give notice to the Agent within five (5) Banking Days of the Borrower's acquiring knowledge of the presence of any Hazardous Materials on any property owned or controlled by the Borrower or for which the Borrower is responsible or of any Hazardous Materials Contamination with a full description thereof, except for reasonable quantities of necessary supplies for use by the Borrower in the ordinary course of its current line of business and stored, used and disposed of in accordance with applicable Laws; (b) promptly comply with any laws requiring special handling, maintenance, servicing, removal, treatment or disposal of Hazardous Materials or Hazardous Materials Contamination and provide the Agent upon request with satisfactory evidence of such compliance; (c) provide the Agent, within thirty (30) days after a demand by the Agent, with a bond, letter of credit or similar financial assurance evidencing to the Agent's satisfaction that funds are available to pay the cost of removing, treating, and disposing of such Hazardous Materials or Hazardous Materials Contamination and discharging any lien which may be established as a result thereof on any property owned, operated or controlled by the Borrower or for which the Borrower is responsible; and (d) defend, indemnify and hold harmless the Lenders and each of their agents, employees, trustees, successors and assigns from any and all claims which may now or in the future (whether before or after the termination of this Agreement) be asserted as a result of the presence of any Hazardous Materials on any property owned, operated, controlled or managed by the Borrower for which the Borrower is responsible for any Hazardous Materials Contamination. Section VII.27. Participation in Reimbursement Programs. In the event the Borrower elects to participate in any or all plans and/or programs for third party payment and/or reimbursement, and the revenues derived from a single plan or program exceed ten percent (10%) of the gross revenues of the applicable Facility, continue its participation in any and all such plans and/or programs for third party payment and/or reimbursement from, and claims against, private insurers or programs for payment and/or reimbursement from federal, state and local governmental agencies and/or private or quasi-public insurers, including, without limitation, Managed Care Plans, Medicaid and Medicare and the Veterans Administration (as determined by the Borrower in the good faith exercise of its prudent and commercially reasonable business judgment). While participating in such plans, the Borrower shall comply with any and all rules, regulations, standards, procedures and decrees necessary to maintain the Borrower's participation in any such third party payment or reimbursement program or plan. Section VII.28. Minimum Pool A Projects. At least 83% of the number of Eligible Projects in the Borrowing Base and in 52 58 no event fewer than five (5) of the Eligible Projects in the Borrowing Base at any one time shall qualify as Pool A Projects. Section VII.29. Subordination of Distributions and Management Fees. Subordinate, and cause the partners of the Borrower to subordinate, all distributions of the Borrower to principal and interest payments on the Loan; provided, however, that the Borrower may pay distributions to partners of the Borrower in accordance with Section 0 prior to the occurrence of an Event of Default and so long as the payment of any such distributions will not result in the occurrence of an Event of Default. Subordinate the payment of management fees with respect to each Facility pursuant to the terms of that certain Management Fee Subordination Agreement of even date herewith (as the same may be modified from time to time) by and among the Borrower, the Agent and the Management Company. Section VII.30. Depository Bank. The Borrower shall maintain its primary operating accounts, including those accounts containing the Liquid Assets, if any required pursuant to Section 0 with the Agent or one of the other Lenders; provided that such Lender shall agree that it will exercise any right of set-off against such account to pay the Obligations prior to applying them to any other indebtedness owed to such Lender and provided such Agent or other Lender pays commercially competitive rates on the Borrower's funds. VIII. NEGATIVE COVENANTS OF BORROWER Until payment in full and the performance of all of the Obligations, without the prior written consent of the Agent as permitted pursuant to the Agency Agreement, the Borrower will not directly or indirectly: Section VIII.1. Borrowings. Create, incur, assume or suffer to exist any liability for borrowed money other than the Credit Facility or unsecured loans from Affiliates which are fully subordinated (either by their terms or by separate written agreement) to the Credit Facility and bearing interest at a rate no higher than that then applicable to the Credit Facility; provided, however, so long as no Event of Default has occurred or will occur upon the payment of interest on such indebtedness under the Financing Documents, the Borrower may make scheduled payments of interest on such debt and may, with the prior written consent of the Agent, use proceeds of the Loan to make payments on such loans from Affiliates if the loans were for the purpose of acquiring or constructing an Eligible Project. Section VIII.2. Deeds of Trust and Pledges. Create, incur, assume or suffer to exist any deed of trust, mortgage, 53 59 pledge, Lien or other encumbrance of any kind upon, or any security interest in, any of its property or assets, including the Collateral, whether now owned or hereafter acquired. Section VIII.3. Sale or Transfer of Assets. Directly or indirectly enter into any arrangement whereby the Borrower shall sell, lease, transfer, assign or otherwise dispose of more than $250,000 of its assets in any one year or $750,000 in the aggregate during the term of the Credit Facility other than (a) sales or other disposition of assets in the ordinary course of business for value, provided the proceeds thereof are used to pay down one or more of the Loans or the asset sold or disposed of is replaced by one of equal or greater value or (b) the transfer of an Eligible Project or the sale of an Eligible Project, in either case, in which case the Borrowing Base will be reduced by the availability attributed to such Facility. Section VIII.4. Advances and Loans. Make loans or advances to any Person, including, without limitation, Affiliates, partners and employees of the Borrower with the exception of loans or advances to Guarantor Subsidiaries. Section VIII.5. Contingent Liabilities. Assume, guarantee, endorse, contingently agree to purchase or otherwise become liable upon the obligation of any Person, except by the endorsement of negotiable instruments for deposit and collection or similar transactions in the ordinary course of business. Section VIII.6. Licenses. Allow any Licenses, permit, right, franchise or privilege necessary for the ownership or operation of any Facility for the purposes for which any Facility is intended to be used to lapse, be suspended or be forfeited unless solely due to administrative delay by the licensing authority. Section VIII.7. ERISA Compliance. (A) Restate or amend any Plan established and maintained by the Borrower or any Commonly Controlled Entity and subject to the requirements of ERISA, in a manner designed to disqualify such Plan and its related trusts under the applicable requirements of the Code; (B) permit any partners of the Borrower or any Commonly Controlled Entity to materially adversely affect the qualified tax-exempt status of any Plan or related trusts of the Borrower or any Commonly Controlled Entity under the Code; (C) engage in or permit any Commonly Controlled Entity to engage in any Prohibited Transaction; (D) incur or permit any Commonly Controlled Entity to incur any Accumulated Funding Deficiency, whether or not waived, in connection with any Plan; (E) take or permit any Commonly Controlled Entity to take any action or fail to take any action which causes a termination of any Plan in a manner which could result in the imposition of a lien on the property of the 54 60 Borrower or any Commonly Controlled Entity pursuant to Section 4068 of ERISA; (F) fail to notify the Agent that notice has been received of a "termination" (as defined in ERISA) of any Multiemployer Plan to which the Borrower or any Commonly Controlled Entity has an obligation to contribute; (G) incur or permit any Commonly Controlled Entity to incur a "complete withdrawal" or "partial withdrawal" (as defined in ERISA) from any Multiemployer Plan to which the Borrower or any Commonly Controlled Entity has an obligation to contribute; or (H) fail to notify the Agent that notice has been received from the administrator of any Multiemployer Plan to which the Borrower or any Commonly Controlled Entity has an obligation to contribute that any such Plan will be placed in "reorganization" (as defined in ERISA). Section VIII.8. Transfer of Collateral. Transfer, or permit the transfer, to another location of any of the Collateral or the books and records related to any of the Collateral; provided, however, that the Borrower may transfer the Collateral or the books and records related thereto to another location if the Borrower shall have provided to the Agent prior to such transfer an opinion of counsel addressed to the Agent to the effect that the Lenders' perfected security interest shall not be affected by such move or if it shall be affected, setting forth the steps necessary to continue the Lender's perfected security interest together with the commencement of such steps by the Borrower at its expense. Section VIII.9. Sale of Accounts or Receivables. Sell, discount, transfer, assign or otherwise dispose of any of its Accounts or Receivables of any Facility, such as accounts receivable, notes receivable, installment or conditional sales agreements or any other rights to receive income, revenues or moneys, however evidenced. Section VIII.10. Amendments; Terminations. Amend or terminate or agree to amend or terminate any License, the Management Agreement, or any participation agreement which exceeds 10% of the gross revenue of the applicable Facility, or except in the ordinary course of business any other Management Contracts and Operating Agreements which may have been entered into by the Borrower with respect to any Facility and which exceeds 10% of its gross revenue, or consent to or waive any material provisions thereof. Section VIII.11. Prohibition on Hazardous Materials. Place, manufacture or store or permit to be placed, manufactured or stored, any Hazardous Materials on any property owned, controlled or operated by the Borrower or any Wholly Owned Subsidiary or for which the Borrower or any Wholly Owned Subsidiary is responsible, except for reasonable quantities of 55 61 necessary supplies for use by the Borrower or any Wholly Owned Subsidiary in the ordinary course of its current line of business and stored, used and disposed of in accordance with applicable Laws. Section VIII.12. Subsidiaries. Create or otherwise acquire any subsidiaries other than Wholly Owned Subsidiaries. Section VIII.13. Distributions to Partners. (a) Make any distributions of net operating income to partners of the Borrower unless no Event of Default exists, and at such time or times as the Borrower has, both before and after the distribution, at least $2,000,000 plus, for each Facility which is not a Stabilized Facility, $500,000 in Liquid Assets; provided, however, that after deducting the amount of such distribution from the EBITDA (the "Adjusted EBITDA") of the Stabilized Facilities in the aggregate, the Borrower's consolidated ratio of Adjusted EBITDA to Debt Service for the Stabilized Facilities in the aggregate shall not be less than 1.0 to 1.0. For the purposes of computing EBITDA and Debt Service, the period measured shall be on a rolling four-quarters basis. Distributions may be made only within thirty (30) days of the end of a fiscal quarter. (b) Make a distribution to partners of the Borrower from proceeds of the Loan as a repayment of equity in an Eligible Project unless the Borrower gives advance written notice to the Agent of the amount of such proposed distribution and the Agent acknowledges in writing the availability of equity to make such a distribution. Section VIII.14. Mergers or Acquisitions. Enter into any merger or consolidation or amalgamation, wind up or dissolve itself (or suffer any liquidation or dissolution), or acquire all or substantially all of the assets of any person, firm, joint venture or corporation except to acquire a Wholly Owned Subsidiary. Section VIII.15. Partnership Interests. Repurchase, redeem or retire any partnership interest in the Borrower. IX. EVENTS OF DEFAULT The occurrence of one or more of the following events shall be "Events of Default" under this Agreement, and the terms "Event of Default" shall mean, whenever they are used in this Agreement, any one or more of the following events: Section IX.1. Failure to Pay and/or Perform the Obligations. The Borrower shall fail to (a) make any payment of 56 62 interest on the Note, or (b) pay any of the other Obligations including but not limited to the Expense Payments and Liquidation Costs and such failure continues for more than five (5) calendar days after notice thereof by the Agent, except with regard to payment of (a) any Borrowing Base Deficiency which shall be due as provided in Section 0 hereof, and (b) amounts due at maturity for which no notice or cure period shall be required to be given. Section IX.2. Breach of Representations and Warranties. Any material representation or warranty made in this Agreement or in any report, certificate, opinion (including any opinion of counsel for the Borrower), financial statement or other instrument furnished in connection with the Obligations or with the execution and delivery of any of the Financing Documents, shall prove to have been false or misleading when made (or, if applicable, when reaffirmed) in any material respect. Section IX.3. Failure to Comply with Covenants. Default shall be made by the Borrower in the due observance and perfor mance of any covenant, condition or agreement contained in Part VII hereof (except for Sections 0, 0, 0, and 0) or in Part VIII hereof. Section IX.4. Failure to Comply with Books and Records. Default shall be made by the Borrower in the due observance or performance of Section 0, which default shall remain unremedied, and the Borrower shall cure such default promptly, but in no event more than ten (10) days after written notice thereof to the Borrower by the Agent. Section IX.5. Other Defaults. Default shall be made by the Borrower in the due observance or performance of any other term, covenant or agreement other than as set forth in this Article IX, which default shall remain unremedied for more than thirty (30) days after written notice thereof to the Borrower by the Agent, unless the nature of the failure is such that (a) it cannot be cured within the thirty (30) day period, and (b) the Borrower institutes corrective action within the thirty (30) day period and (c) the Borrower diligently pursues such action and completes the cure within ninety (90) days. Section IX.6. Default Under Other Financing Documents. A Default shall occur under any of the other Financing Documents, and such Default is not cured within any applicable grace period provided therein. Section IX.7. Receiver; Bankruptcy. An Act of Bankruptcy occurs with respect to the Borrower or the Borrower becomes generally unable to pay its debts as they become due; provided, however, if a proceeding with respect to an Act of Bankruptcy is filed or commenced against the Borrower, the same shall not 57 63 constitute an Event of Default if such proceeding is dismissed within sixty (60) days from the date of such Act of Bankruptcy. Section IX.8. Judgment. Any judgment against the Borrower of $250,000 or more or any attachment or other levy against the property of the Borrower remains unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of thirty (30) days. Section IX.9. Execution; Attachment. Any execution or attachment shall be levied against the Collateral, or any part thereof, and such execution or attachment shall not be set aside, discharged or stayed within thirty (30) days after the same shall have been levied. Section IX.10. Default Under Other Borrowings. (a) Default which continues beyond any applicable grace period shall be made under any obligation of or guaranteed by the Borrower or any Guarantor Subsidiary equal to or greater than $250,000, if the effect of such default is to accelerate the maturity of such obligation or to permit the holder or obligee thereof to cause such obligation to become due prior to its stated maturity. (b) Default shall be made under any obligation equal to or greater than $1,000,000 of a consolidated Affiliate, which is otherwise non-recourse to the Borrower or any Guarantor Subsidiary, if the holder or obligee of such obligation has commenced action on any of the remedies available to it under the obligation. Section IX.11. Material Adverse Change. If the Agent in its reasonable discretion determines that a Material Adverse Change has occurred in the financial condition of the Borrower. Section IX.12. Impairment of Position. If the Agent in its reasonable discretion determines that an event has occurred which impairs the prospect of payment of the Obligations and/or the value of the Facilities or the Collateral. Section IX.13. Change in Status or Ownership. The Borrower is dissolved, merged, consolidated or reorganized, or any change occurs in the ownership without the prior written consent of the Agent. Section IX.14. Zoning. Any change in any zoning ordinance or any other public restriction is enacted, limiting or defining the uses which may be made of any of the Property or a part thereof, such that the use of any of the Property, as specified herein, would be in material violation of such restriction or zoning change. 58 64 Section IX.15. Change in Management. The Management Agreement is terminated without the prior written consent of the Agent. Section IX.16. Licenses. The involuntary, imposed or required revocation, suspension, probation, restriction, limitation or refusal to renew, or the pending revocation, suspension, probation, restriction, limitation, of, or refusal to renew, of any License; other than in the ordinary course of business or to the extent that the Borrower or a Guarantor Subsidiary deems such action to be, in the exercise of prudent business judgment, in the best interest of Borrower or a Guarantor Subsidiary, the decertification, revocation, suspension, probation, restriction, limitation, or refusal to renew, or the pending decertification, revocation, suspension, probation, restriction, limitation, or refusal to renew any participation or eligibility in any third party payor program in which the Borrower or a Guarantor Subsidiary elects to participate, including, without limitation, the Medicaid or Medicare programs; or the issuance or pending issuance of any License for a period of less than twelve (12) months as a consequence of any sanctions imposed by any Governmental Authority; or the assessment or pending assessment, of any civil or criminal penalties by any Governmental Authority, any third party payor or any accreditation organization or person. Without limiting the generality of the foregoing, the failure of the Borrower or a Guarantor Subsidiary to obtain an operating license for any Facility within sixty (60) days of the issuance of the certificate of occupancy for such Facility. Section IX.17. Compliance with Law. The Borrower or a Guarantor Subsidiary fails to comply with any requirement of any Governmental Authority having jurisdiction within the time required by such Governmental Authority; or any proceeding is commenced or action taken to enforce any remedy for a violation of any requirement of a Governmental Authority or any restrictive covenant affecting the Property or any part thereof. X. RIGHTS AND REMEDIES UPON DEFAULT Section X.1. DEMAND; ACCELERATION. THE OCCURRENCE OR NONOCCURRENCE OF AN EVENT OF DEFAULT UNDER THIS AGREEMENT SHALL IN NO WAY AFFECT OR CONDITION THE RIGHT OF THE LENDERS TO DEMAND PAYMENT AT ANY TIME OF ANY OF THE OBLIGATIONS WHICH ARE PAYABLE ON DEMAND REGARDLESS OF WHETHER OR NOT AN EVENT OF DEFAULT HAS OCCURRED. Upon the occurrence of an Event of Default, and in every such event and at any time thereafter, the Agent may declare the Obligations due and payable, without presentment, demand, protest, or any notice of any kind, all of which are hereby expressly waived, anything contained herein or in any of 59 65 the other Financing Documents to the contrary notwithstanding. Section X.2. Further Advances; Immediate Acceleration. Following an Event of Default the Agent may from time to time without notice to the Borrower suspend, terminate or limit any further advances under the Loan or other extensions of credit under this Agreement and under any of the other Financing Documents. Further, upon the occurrence of an Event of Default or Default specified in Section 0 above, the unpaid principal amount of the Note (with accrued interest thereon) and all other Obligations then outstanding, shall immediately become due and payable without further action of any kind and without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Borrower. Section X.3. Specific Rights With Regard to Collateral. Following an Event of Default, in addition to all other rights and remedies provided hereunder or as shall exist at law or in equity from time to time, the Agent may, without notice to the Borrower or any Guarantor Subsidiary and subject to the terms of the Agency Agreement: (a) assign any and all Operating Agreements and Management Contracts to any Person designated by the Agent, and/or exercise all rights and privileges of the Borrower or Guarantor Subsidiary under such contracts and agreements for the purpose of realizing on the Collateral and to the extent and for the time required to realize the value of the Collateral; (b) to the extent permitted by applicable law, assume such management, operation and control of the Property to the extent and for the time necessary to realize the value of the Collateral; (c) cause the Borrower to engage, contract with, and/or hire qualified service, billing, collection and other such agents, organizations and companies acceptable to the Agent to collect and/or realize upon any or all of the Collateral and to remit the proceeds to the Agent; (d) subject to applicable state and federal laws pertaining to resident confidentiality, request any Account Debtor obligated on any of the Accounts to make payments thereon directly to the Agent to the extent permitted by applicable law, with the Agent taking control of the cash and non-cash proceeds thereof and/or direct the Borrower to (and the Borrower shall) turn over to the Agent immediately following receipt all payments with respect to the Collateral in the form received (with the addition of all necessary endorsements) and not to deposit, negotiate or otherwise deal with those payments; 60 66 (e) compromise, extend or renew any of the Collateral or deal with the same as it may deem advisable; (f) make exchanges, substitutions or surrenders of all or any part of the Collateral; (g) remove from any of the Borrower's places of business all books, records, ledger sheets, correspondence, invoices and documents, relating to or evidencing any of the Collateral or without cost or expense to the Lenders, make such use of the Borrower's place of business as may be reasonably necessary to administer, control and collect the Collateral; (h) demand, collect, receipt for and give renewals, extensions, discharges and releases of any of the Collateral; (i) institute and prosecute legal and equitable proceedings to enforce collection of, or realize upon, any of the Collateral; (j) settle, renew, extend, compromise, compound, exchange or adjust claims in respect of any of the Collateral or any legal proceedings brought in respect thereof; (k) endorse the name of the Borrower upon any items of payment relating to the Collateral or on any Proof of Claim in Bankruptcy against an Account Debtor; and (l) notify the Post Office authorities to change the address for the delivery of mail to the Borrower to such address or Post Office Box as the Agent may designate and receive and open all mail addressed to the Borrower. In addition, the Borrower shall, following an Event of Default promptly, upon request, execute and deliver to the Agent written assignments, to the extent permitted by applicable law, in form and content acceptable to the Agent, of specific Accounts or groups of Accounts; provided, however, that the lien and/or security interest granted to the Lenders under this Agreement shall not be limited in any way to or by the inclusion or exclusion of Accounts within such assignments. Such Accounts shall secure payment of the Obligations and are not sold to the Lenders whether or not any assignment thereof, which is separate from this Agreement, is in form absolute. Following an Event of Default, the Lenders may also direct the Borrower or a Guarantor Subsidiary to appoint a manager for any or all of the Facilities and enter into a management agreement with one or more management companies approved by the Lenders, the terms of which agreement shall be approved by the Lenders. 61 67 Section X.4. Performance by Lenders. Following an Event of Default, the Agent without the necessity of prior notice to or demand upon the Borrower or any Guarantor Subsidiary and without waiving or releasing any of the Obligations or any Event of Default, may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of the Borrower, and may enter upon the premises of the Borrower or any Guarantor Subsidiary for that purpose and take all such action thereon as the Agent may consider necessary or appropriate for such purpose. The Agent will give the Borrower notice at least subsequently of any such performance by the Agent. All sums so paid or advanced by the Agent and all costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred in connection therewith (the "Expense Payments") together with interest thereon from the date of payment, advance or incurring until paid in full at the Post-Default Rate shall be paid by the Borrower to the Agent on demand and shall constitute and become a part of the Obligations. Section X.5. Uniform Commercial Code and Other Remedies. Upon the occurrence of an Event of Default (and in addition to all of its rights, powers and remedies under this Agreement), the Lenders shall have all of the rights and remedies of a secured party under the applicable Uniform Commercial Code and other applicable laws, and the Lenders are authorized to offset and apply to all or any part of the Obligations all moneys, credits and other property of any nature whatsoever of the Borrower now or at any time hereafter in the possession of, in transit to or from, under the control or custody of, or on deposit with, any of the Lenders; and upon demand by the Agent, the Borrower shall assemble the Collateral and make it available to the Lenders, at a place designated by the Agent; and the Lenders or their agents may enter upon the Borrower's or a Guarantor Subsidiary's premises to take possession of the Collateral, to remove it, to render it unusable, or to sell or otherwise dispose of it. Any written notice of the sale, disposition or other intended action by the Lenders with respect to the Collateral which is sent by regular mail, postage prepaid, to the Borrower or the Guarantor Subsidiaries at the address set forth in Part XI hereof, or such other address of the Borrower or the Guarantor Subsidiaries which may from time to time be shown on the Lenders' records, at least ten (10) days prior to such sale, disposition or other action, shall constitute reasonable notice to the Borrower or the Guarantor Subsidiaries. The Borrower or the Guarantor Subsidiaries shall pay on demand all costs and expenses, including, without limitation, attorney's fees and expenses, incurred by or on behalf of the Lenders, or any of them, in preparing for sale or other disposition, selling, managing, 62 68 collecting or otherwise disposing of, the Collateral. All of such costs and expenses (the "Liquidation Costs") together with interest thereon from the date incurred until paid in full at the Post-Default Rate, shall be paid by the Borrower or the Guarantor Subsidiaries to the Agent on demand and shall constitute and become a part of the Obligations. Any proceeds of sale or other disposition of the Collateral will be applied by the Lenders to the payment of the Liquidation Costs and Expense Payments, and any balance of such proceeds will be applied by the Lenders to the payment of the balance of the Obligations in such order and manner of application as the Lenders may from time to time in its sole discretion determine. After such application of the proceeds, any balance shall be paid to the Borrower or the Guarantor Subsidiaries or to any other party entitled thereto. Section X.6. Receiver or Other Court Order. Following an Event of Default, as a matter of right, following ten (10) days notice and without regard to the adequacy of the security, and upon application to a court of competent jurisdiction, the Lenders shall be entitled to the immediate appointment of a receiver for all or any part of the Collateral, and of the payments and proceeds thereof and therefrom, whether such receivership be incidental to a proposed sale of the Collateral or otherwise, and the Borrower and any Guarantor Subsidiaries hereby consent to the appointment of such a receiver and to an order of court directing that payments, including Medicare and Medicaid payments, be made directly to the receiver. The Borrower will pay to the Beneficiary, upon demand, all expenses, including receiver's fees, attorney's fees, costs and agents compensation, advanced by the Borrower and incurred pursuant to the provisions contained in this Section. XI. MISCELLANEOUS Section XI.1. Notices. All notices, certificates or other communications hereunder shall be deemed given when delivered by hand or courier, or three (3) Banking Days after being mailed by certified mail, postage prepaid, return receipt requested, addressed as follows: if to the Agent or the Lenders: NATIONSBANK, N.A. 10 Light Street Baltimore, Maryland 21202 Attn: Robert J. Montanari Vice President 63 69 if to the Borrower: SUNRISE EAST ASSISTED LIVING LIMITED or any Guarantor PARTNERSHIP Subsidiaries c/o Sunrise Assisted Living Investments, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Attention to each of the following separately delivered or mailed: David W. Faeder Thomas B. Newell, Esq. James S. Pope with a Courtesy Wayne G. Tatusko, Esquire copy to: Watt, Tieder & Hoffar 7929 Westpark Drive McLean, Virginia 22102 Section XI.2. Consents and Approvals. If any consent, approval, or authorization of any Governmental Authority or of any Person having any interest therein, should be necessary to effectuate any sale or other disposition of the Collateral, the Borrower and any Guarantor Subsidiaries agree to execute all such applications and other instruments, and to take all other action, as may be required in connection with securing any such consent, approval or authorization. Section XI.3. Remedies, etc. Cumulative. Each right, power and remedy of the Lenders as provided for in this Agreement or in any of the other Financing Documents or now or hereafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Agreement or in any of the other Financing Documents or now or hereafter existing at law or in equity, by statute or otherwise, and the exercise or beginning of the exercise by the Lenders of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise by the Lenders of any or all such other rights, powers or remedies. In order to entitle the Lenders to exercise any remedy reserved to it herein, it shall not be necessary to give any notice, other than such notice as may be expressly required in this Agreement. Section XI.4. No Waiver of Rights by the Lenders. No failure or delay by the Agent or the Lenders to insist upon the strict performance of any term, condition, covenant or agreement of this Agreement or of any of the other Financing Documents, or to exercise any right, power or remedy consequent upon a breach thereof, shall constitute a waiver of any such term, condition, covenant or agreement or of any such breach or preclude the Agent or the Lenders from exercising any such right, power or remedy at any later time or times. By accepting payment after the due date of any amount payable under this Agreement or under any of the other Financing Documents, neither the Agent nor the Lenders 64 70 shall be deemed to waive the right either to require prompt payment when due of all other amounts payable under this Agreement or under any of the other Financing Documents, or to declare a default for failure to effect such prompt payment of any such other amount. Section XI.5. Entire Agreement. The Financing Documents shall completely and fully supersede all other agreements, both written and oral, between the Lenders and the Borrower relating to the Obligations. Neither the Lenders nor the Borrower shall hereafter have any rights under such prior agreements but shall look solely to the Financing Documents for definition and determination of all of their respective rights, liabilities and responsibilities relating to the Obligations. Section XI.6. Survival of Agreement; Successors and Assigns. All covenants, agreements, representations and warranties made by the Borrower herein and in any certificate, in the Financing Documents and in any other instruments or documents delivered pursuant hereto shall survive the making by the Lenders of the Loan and the execution and delivery of the Note, and shall continue in full force and effect so long as any of the Obligations are outstanding and unpaid. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrower and/or the Guarantor Subsidiaries, which are contained in this Agreement shall inure to the benefit of the respective successors and assigns of each of the Lenders, and all covenants, promises and agreements by or on behalf of the Lenders which are contained in this Agreement shall inure to the benefit of the permitted successors and permitted assigns of the Borrower and/or the Guarantor Subsidiaries, but this Agreement may not be assigned by the Borrower without the prior written consent of the Lenders. Section XI.7. Expenses. The Borrower agrees to pay all reasonable out-of-pocket expenses of the Lenders and NationsBanc Montgomery Securities, Inc. (excluding travel expenses but including the reasonable fees and expenses of the legal counsel of the Agent or any other Lender) in connection with the preparation of this Agreement, the issuance of the Loan hereunder, the recordation of all financing statements and such other instruments as may be required by the Agent at the time of, or subsequent to, the execution of this Agreement to secure the Obligations (including any and all recordation tax and other costs and taxes incident to recording), the administration of the Credit Facility (not otherwise contemplated by any fee paid by the Borrower), any future modification of the Financing Documents, the addition of Eligible Projects to the Borrowing Base or the addition of Optional Collateral, or the enforcement of any provision of this Agreement and the collection of the Obligations. The Borrower agrees to indemnify and save harmless the Lenders from any liability resulting from the failure to pay 65 71 any required recordation tax, transfer taxes, recording costs or any other expenses incurred by the Lenders in connection with the Obligations. The provisions of this Section shall survive the execution and delivery of this Agreement and the repayment of the Obligations. The Borrower further agrees to reimburse the Lenders upon demand for all reasonable out-of-pocket expenses (including reasonable attorneys' fees and legal expenses and travel expenses) incurred by the Lenders, or any of them, in enforcing any of the Obligations or any security therefor or incurred in connection with any bankruptcy proceeding or in any post-judgment enforcement or collection action, together with interest at the Post-Default Rate which agreement shall survive the termination of this Agreement and the repayment of the Obligations. Section XI.8. Counterparts. This Agreement may be executed in any number of counterparts all of which together shall constitute a single instrument. Section XI.9. Governing Law. This Agreement and all of the other Financing Documents shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia; provided, however, any Deed of Trust and any financing statements covering fixtures securing such Loan shall be governed by, and construed in accordance with, the laws of the state in which the applicable Facility is located. Section XI.10. Modifications. No modification or waiver of any provision of this Agreement or of any of the other Financing Documents, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Agent, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in the same, similar or other circumstance. Section XI.11. Illegality. If fulfillment of any provision hereof or any transaction related hereto or to any of the other Financing Documents, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law, then ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity; and if any clause or provisions herein contained other than the provisions hereof pertaining to repayment of the Obligations operates or would prospectively operate to invalidate this Agreement in whole or in part, then such clause or provision only shall be void, as though not herein contained, and the remainder of this Agreement shall remain operative and in full force and effect; and if such provision pertains to repayment of the Obligations, then, at the options of the Lenders, all of the Obligations of the Borrower to the Lenders shall become immediately due and payable. 66 72 Section XI.12. Gender, etc. Whenever used herein, the singular number shall include the plural, the plural the singular and the use of the masculine, feminine or neuter gender shall include all genders. Section XI.13. Headings. The headings in this Agreement are for convenience only and shall not limit or otherwise affect any of the terms hereof. Section XI.14. Waiver of Trial by Jury. THE BORROWER AND THE LENDERS HEREBY JOINTLY AND SEVERALLY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH ANY OF THEM MAY BE PARTIES, NOT GOVERNED BY THE ARBITRATION PROVISIONS OF THE NOTE OR THE GUARANTIES ARISING OUT OF OR IN ANY WAY PERTAINING TO (A) THIS AGREEMENT, (B) ANY OF THE FINANCING DOCUMENTS, OR (C) THE COLLATERAL. THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS AGREEMENT. This waiver is knowingly, willingly and voluntarily made by the Borrower and the Lenders, and the Borrower and the Lenders hereby represent that no representations of fact or opinion have been made by any individual to induce this waiver of trial by jury or to in any way modify or nullify its effect. The Borrower and the Lenders further represent that they have been represented in the signing of this Agreement and in the making of this waiver by independent legal counsel, selected of their own free will, and that they have had the opportunity to discuss this waiver with counsel. Section XI.15. Liability of the Lenders. No Lender shall be liable for another Lender's failure to fund its ratable share of any advance under the Loan. The Lenders shall not be liable for any other act or omission by the Lenders, or any of them, pursuant to the provisions of this Agreement in the absence of fraud or gross negligence. The Lenders shall incur no liability to the Borrower or any other party in connection with the acts or omissions of any of the Lenders in reliance upon any certificate or other paper believed by the Lenders to be genuine or with respect to any other thing which the Lenders may do or refrain from doing, unless such act or omission amounts to fraud or gross negligence. The Borrower hereby agrees that the Lenders shall not be chargeable for any negligence, mistake, act or omission of any accountant, examiner, agency or attorney employed by the Lenders, or any of them, (except for the gross negligence or willful misconduct of any person, corporation, partnership or other entity employed by any of the Lenders) in making examinations, investigations or collections, or otherwise in perfecting, maintaining, protecting or realizing upon any lien or security interest or any other interest in the Collateral or other security for the Obligations. The Borrower shall indemnify, defend and hold the Lenders and their successors and assigns harmless from and against any and all claims, demands, 67 73 suits, losses, damages, assessments, fines, penalties, costs or other expenses (including reasonable attorney's fees and court costs) arising from or in connection with this Agreement. Any indemnity provision for the benefit of the Lenders set forth herein or in any of the Financing Documents shall extend to any other lender who becomes a Lender under the Credit Facility. The provisions of this Section shall survive the termination of the Credit Facility. Section XI.16. License of Tradename. The Borrower and any Guarantor Subsidiaries do hereby grant to each of the Lenders and their affiliates and any trustee under a Deed of Trust and their management company a license to use the Borrower's name, the names of any Guarantor Subsidiaries and the name "Sunrise" and any marks associated therewith in the operation of a Facility upon such Lender's or trustee's taking of possession or taking over management of a Facility or acquiring title thereto at a foreclosure sale which license shall be in effect for a period of thirty (30) months from the date thereof. The Borrower further agrees that a third-party purchaser of a Facility may continue to operate the Facility under the Borrower's name unless the Borrower objects in writing thereto. 68 74 IN WITNESS WHEREOF, the parties hereto have signed and sealed this Agreement on the day and year first above written. WITNESS/ATTEST: SUNRISE EAST ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia limited partnership By: Sunrise Assisted Living Investments, Inc., General Partner /s/ Wayne G. Tatusko By: /s/ James S. Pope (SEAL) - --------------------------- -------------------------- Name: James S. Pope Title: Vice President WITNESS: NATIONSBANK, N.A., as Agent for the Lenders /s/ Wayne G. Tatusko By: /s/ Robert J. Montanari (SEAL) - ------------------------- ------------------------ Robert J. Montanari Vice President
69 75 LIST OF EXHIBITS A Form of Note B Form of Borrowing Base Report C Initial Borrowing Base Report D Places of Business E List of Optional Collateral F Form of Subsidiary Joinder Agreement 70 76 EXHIBIT A FORM OF NOTE See Exhibit 10.31.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 77 EXHIBIT B FORM OF BORROWING BASE REPORT See Exhibit C. 78 EXHIBIT C INITIAL BORROWING BASE REPORT BORROWING BASE REPORT
Total Appraised Deed of Trust Development Value @ Lien Budget 80% of Stabilization 75% of Amount (000's) Costs (000's) Value (000's) ------------------------------------------------------------------------------------------------------ Abington, PA $ 17,900 $ 14,320 $ 17,900 $ 13,425 $ 13,425 (6/6/96) (5/96) Morris Plains, NJ $ 9,764 $ 7,811 $ 11,450 $ 8,588 $ 7,811 (6/10/96) (6/96) Franconia, VA $ 9,925 $ 7,940 $ 10,775 $ 8,081 $ 7,940 (3/05/96) (4/96) Wayne, NJ $ 9,705 $ 7,764 $ 10,725 $ 8,044 $ 7,764 (6/4/96) (4/96) Old Tappan, NJ $ 10,375 $ 8,300 $ 11,750 $ 8,813 $ 8,300 (6/4/96) (7/96) Granite Run, PA $ 9,717 $ 7,774 $ 10,250 $ 7,688 $ 7,688 (5/28/96) (5/96) Westfield, NJ $ 10,485 $ 8,388 $ 11,425 $ 8,569 $ 8,388 (9/22/96) (4/96) ------------------------------------------------------------------------------------------------------ TOTAL $ 77,871 $ 62,297 $ 84,275 $ 63,206 $ 61,316 Costs Most Recent Incurred Verified % To Date Project Availablility Requisition Complete (000's) Status (000's) ---------------------------------------------------------------------------------------------- Abington, PA Jul-97 100% $ 15,093 a $ 12,075 Morris Plains, NJ 10/6/97 99% $ 9,229 a $ 7,383 Franconia, VA 9/1/97 100% $ 9,435 a $ 7,548 Wayne, NJ 10/24/97 100% $ 8,468 a $ 7,014 Old Tappan, NJ 10/6/97 99% $ 9,895 a $ 7,916 Granite Run, PA 10/6/97 99% $ 9,242 a $ 7,393 Westfield, NJ 10/6/97 99% $ 8,226 a $ 6,581 ---------------------------------------------------------------------------------------------- TOTAL $ 69,888 $ 55,910
Acknowledge and Agree Sunrise East Assisted Living, LP By: ---------------------------- Vice President Date: -------------------------- 79 EXHIBIT D PLACES OF BUSINESS AS OF DECEMBER 23, 1997 The Borrower's Chief Executive Office is: 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Locations of Collateral: 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Sunrise of Franconia 6541 Franconia Road Springfield, Virginia 22150 Sunrise of Abington 1801 Susquehana Road Abington, Pennsylvania 19001 Sunrise of Granite Run Route 352 and Barren Road Middletown Township, Pennsylvania 19063 Sunrise of Morris Plains 209 Littleton Road Morris Plains, New Jersey 07950 Sunrise of Old Tappan 195 Old Tappan Road Old Tappan, New Jersey 07675 Sunrise of Wayne 184 Berdan Avenue Wayne, New Jersey 07470 Sunrise of Westfield 240 Springfield Avenue Westfield, New Jersey 07090 80 EXHIBIT E LIST OF OPTIONAL COLLATERAL AS OF THE FACILITY CLOSING None. 81 EXHIBIT F FORM OF SUBSIDIARY JOINDER AGREEMENT SUBSIDIARY JOINDER AGREEMENT THIS SUBSIDIARY JOINDER AGREEMENT (this "Agreement") is made this ___ day of _________, 199_, by __________________, a corporation/limited partnership/limited liability company organized under the laws of the State/Commonwealth of _______ ("Subsidiary") in favor of each of the Lenders under the Agency Agreement (as hereinafter defined) and NATIONSBANK, N. A., a national banking association (the "Agent"). NOW, THEREFORE, for value received the undersigned agree as follows: 1. Reference is hereby made to the Amended and Restated Financing and Security Agreement dated December 23, 1997 (as amended, modified, restated, substituted, extended and renewed at any time and from time to time, the "Financing Agreement") by and among Sunrise East Assisted Living Limited Partnership, a limited partnership organized and existing under the laws of the Commonwealth of Virginia (the "Borrower"), the Agent and certain additional lenders (collectively with the Agent, the "Lenders") who are participating in a bank group pursuant to the Amended and Restated Agency Agreement by and among the Lenders party thereto dated December 23, 1997 (as amended, restated or substituted from time to time, the "Agency Agreement"). Capitalized terms not otherwise defined in this Agreement shall have the meanings given to them in the Financing Agreement. 2. Pursuant to the Financing Agreement, the Lenders have agreed to extend to the Borrower a credit facility in the maximum aggregate principal amount of $250,000,000 or such greater amount as the Lenders may from time to time commit to lend pursuant to the Agency Agreement (the "Credit Facility") for the purposes set forth in the Financing Agreement. The Loans and all other obligations relating to the Credit Facility shall be evidenced by the Amended, Restated, Consolidated and Increased Master Promissory Note dated December 23, 1997 made by the Borrower to the Agent in the maximum principal amount of $250,000,000 (as amended, restated or substituted from time to time, the "Note"). The Credit Facility will be subject to the terms and conditions of the Financing Agreement and the Amended and Restated Master Construction Loan Agreement (as amended, restated or substituted from time to time, the "Construction Agreement") dated December 23, 1997 by and between the Borrower and the Agent. 3. As a condition precedent to extending the Credit Facility to the Borrower, the Lenders required that any Wholly Owned Subsidiary which owns a Facility to be encumbered with a Deed of Trust to secure the Credit Facility execute this Agreement to evidence its agreement to the terms of the Financing Documents as applicable. The Subsidiary is a Wholly Owned Subsidiary of the Borrower. 1 82 4. The Subsidiary and the Borrower hereby acknowledge, confirm and agree that on and as of the date of this Agreement Subsidiary has received the benefit of advances made under the Loan and granted a first lien Mortgage/Deed of Trust, Assignment and Security Agreement covering its Facility located in _____________, __________ and known as "Sunrise ________" (the "Property") to secure the Obligations, and as such shall be jointly and severally liable, as provided in the Financing Documents, for all Obligations thereunder (whether incurred or arising prior to, on, or subsequent to the date hereof) and otherwise bound by all of the terms, provisions and conditions thereof. 5. The Subsidiary hereby represents and warrants to the Agent and the Lenders that it will derive benefits, directly and indirectly, from each advance of the Credit Facility, both in its individual capacity and as a member of the integrated group comprised of the Borrower and the Guarantor Subsidiaries and that the successful operation of the integrated group is dependent upon the continued successful performance of the functions of the integrated group as a whole. Subsidiary acknowledges and agrees that the terms of the consolidated financing provided under the Financing Agreement are more favorable than would otherwise would be obtainable by the Subsidiary individually, and the Subsidiary's additional administrative and other costs and reduced flexibility associated with individual financing arrangements which would otherwise be required if obtainable would substantially reduce the value to the Subsidiary of the financing. 6. For administrative convenience, the Subsidiary hereby irrevocably appoints the Borrower as the Subsidiary's attorney-in-fact, with power of substitution (with the prior written consent of the Agent in the exercise of its sole and absolute discretion), in the name of the Borrower or in the name of the Subsidiary or otherwise to take any and all actions with respect to the this Agreement, the other Financing Documents, the Obligations and/or the Collateral (including, without limitation, the proceeds thereof) as the Borrower may so elect from time to time, including, without limitation, actions to (a) request advances under the Credit Facility and direct the Agent to disburse or credit the proceeds of any Loan directly to an account of the Borrower, any one or more of the Guarantor Subsidiaries, the Subsidiary or otherwise, which direction shall evidence the making of such Loan and shall constitute the acknowledgement by each of the Borrower and the Guarantor Subsidiaries of the receipt of the proceeds of such Loan, (b) enter into, execute, deliver, amend, modify, restate, substitute, extend and/or renew this Agreement, any other Financing Documents, security agreements, mortgages, deposit account agreements, instruments, certificates, waivers, letter of credit applications, releases, documents and agreements from time to time, and (c) endorse any check or other item of payment in the name of the Subsidiary or in the name of the Borrower. The foregoing appointment is coupled with an interest, cannot be revoked without the prior written consent of the Agent, and may be exercised from time to time through the Borrower's duly authorized officer, officers or other Person or Persons designated by the Borrower to act from time to time on behalf of the Borrower. 2 83 7. The Subsidiary hereby irrevocably authorizes each of the Lenders to make Loans to any one or more all of the Borrower and the Guarantor Subsidiaries pursuant to the provisions of the Financing Agreement upon the written, oral or telephone request any one or more of the Persons who is from time to time a Responsible Officer of the Borrower under the provisions of the most recent certificate of corporate resolutions and/or incumbency of the Borrower on file with the Agent. 8. Neither the Agent nor any of the Lenders assumes any responsibility or liability for any errors, mistakes, and/or discrepancies in the oral, telephonic, written or other transmissions of any instructions, orders, requests and confirmations between the Agent and the Borrower or the Agent and any of the Lenders in connection with the Credit Facility or any other transaction in connection with the provisions of this Agreement. The Borrower and the Guarantor Subsidiaries have agreed among themselves, and the Agent and the Lenders consent to that agreement, that each Borrower and Guarantor Subsidiary shall have rights of contribution from all of the other of them to the extent the Borrower or such Guarantor Subsidiary incurs Obligations in excess of the proceeds of the Loans received by, or allocated to purposes for the direct benefit of, the Borrower or such Guarantor Subsidiary. All such indebtedness and rights shall be, and are hereby agreed by the Borrower and the Guarantor Subsidiaries to be, subordinate in priority and payment to the indefeasible repayment in full in cash of the Obligations, and, unless the Agent agrees in writing otherwise, shall not be exercised or repaid in whole or in part until all of the Obligations have been indefeasibly paid in full in cash. The Subsidiary agrees that all of such inter-company indebtedness and rights of contribution are part of the Collateral and secure the Obligations. The Subsidiary hereby waives all rights of counterclaim, recoupment and offset between or among the Borrower and the other Guarantor Subsidiaries arising on account of that indebtedness and otherwise. The Subsidiary shall not evidence the inter-company indebtedness or rights of contribution by note or other instrument, and shall not secure such indebtedness or rights of contribution with any Lien or security. 9. Without in any way implying any limitation on any of the provisions of this Agreement, the Financing Agreement, or any of the other Financing Documents, the Subsidiary hereby assigns, pledges and grants to the Agent, for the ratable benefit of the Lenders as security for the Obligations, and agrees that the Agent, for the ratable benefit of the Lenders, shall have a perfected and continuing security interest in, and Lien on, (a) all of the Subsidiary's Accounts, Equipment, General Intangibles, documents, Chattel Paper, Instruments and Inventory, all right title and interest of the Subsidiary in and to the Operating Agreements and Management Contracts (including, without limitation, the Management Agreement), Resident Agreements, Physician Contracts, Participation Agreements, the Licenses (whether or not designated with initial capital letters), and all other management contracts, operating agreements, service agreements and any other agreements pertaining to the Property as those terms are defined in the Uniform Commercial Code as presently adopted and in effect in the Commonwealth of Virginia, and shall also cover, without limitation, (a) any and all property specifically included in those 3 84 respective terms in the Financing Agreement or in the Financing Documents, (b) all right, title and interest of the Subsidiary in and to Leases or subleases, rents, royalties, issue, profits, revenues, earnings, income or other benefits of the Property or arising from the use or enjoyment of the Property, or from any lease or other use and occupancy agreement pertaining to the Property, (c) all right, title and interest of the Subsidiary under all construction, architectural and design contracts and plans and specifications, (d) any and all property and/or collateral described in any of the Security Documents, including, without limitation, the Financing Agreement, the Deed of Trust [MORTGAGE] and the Pledge, Assignment and Security Agreement, (e) any and all bank accounts or other deposit accounts of the Subsidiary wherever located, and (f) all proceeds (cash and non-cash, including, without limitation, insurance proceeds), of the foregoing. The Subsidiary further agrees that the Agent, shall have in respect thereof all of the rights and remedies of a secured party under the Uniform Commercial Code as well as those provided in this Agreement, under each of the other Financing Documents and under applicable Laws. In addition to the foregoing provision and without in any way implying any limitation on any of the provisions of this Agreement, the Financing Agreement or any of the other Financing Documents, by its execution of this Agreement, the Subsidiary specifically joins in each of the following documents as they relate to the Property, as if the Subsidiary had been a party thereto as of the date originally executed: the Management Fee Subordination Agreement, the Amended and Restated Collateral Assignment of Licenses, Participation Agreements and Resident Agreements and the Amended and Restated Collateral Assignment of Operating Agreements and Management Contracts, each dated December 23, 1997 by and between the Borrower and the Agent. 1. Without in any way implying any limitation on any of the provisions of this Agreement, the Subsidiary agrees to execute such financing statements, instruments, and other documents as the Agent may require. 2. Subsidiary hereby covenants and agrees with the Agent and the Lenders that the Obligations include all present and future indebtedness, duties, obligations, and liabilities, whether now existing or contemplated or hereafter arising, of the Borrower. 3. Guaranty. (a) Subsidiary hereby unconditionally and irrevocably, guarantees to the Agent and the Lenders: (i) the due and punctual payment in full (and not merely the collectibility) by the Borrower of the Obligations, including unpaid and accrued interest thereon, in each case when due and payable, all according to the terms of this Agreement, the Note and the other Financing Documents; 4 85 (ii) the due and punctual payment in full (and not merely the collectibility) by the Borrower of all other sums and charges which may at any time be due and payable in accordance with this Agreement, the Note or any of the other Financing Documents; (iii) the due and punctual performance by the Borrower of all of the other terms, covenants and conditions contained in the Financing Documents; and (iv) all the other Obligations of the Borrower. (b) The obligations and liabilities of the Subsidiary shall be absolute and unconditional and joint and several, irrespective of the genuineness, validity, priority, regularity or enforceability of this Agreement, the Note or any of the Financing Documents or any other circumstance which might otherwise constitute a legal or equitable discharge of a surety or guarantor. The Subsidiary expressly agrees that the Agent may, in its sole and absolute discretion, without notice to or further assent of the Subsidiary without in any way releasing, affecting or in any way impairing the obligations and liabilities of the Subsidiary hereunder: (v) waive compliance with, or any defaults under, or grant any other indulgences under or with respect to any of the Financing Documents; (vi) modify, amend, change or terminate any provisions of any of the Financing Documents; (vii) grant extensions or renewals of or with respect to the Credit Facilities, the Note or any of the other Financing Documents; (viii) effect any release, subordination, compromise or settlement in connection with this Agreement, the Note or any of the other Financing Documents; (ix) agree to the substitution, exchange, release or other disposition of the Collateral or any part thereof, or any other collateral for the Credit Facility or to the subordination of any lien or security interest therein; (x) make advances for the purpose of performing any term, provision or covenant contained in this Agreement, the Note or any of the other Financing Documents with respect to which the Borrower shall then be in default; 5 86 (xi) make future advances pursuant to the Financing Agreement or any of the other Financing Documents; (xii) assign, pledge, hypothecate or otherwise transfer the Obligations, the Note, any of the other Financing Documents or any interest therein, all as and to the extent permitted by the provisions of this Agreement; (xiii) deal in all respects with the Borrower or any other Guarantor Subsidiary as if this paragraph Guaranty. were not in effect; (xiv) effect any release, compromise or settlement with the Borrower or any other Guarantor Subsidiary, whether in their capacity as a Borrower or as a guarantor under this paragraph Guaranty. or any other guarantor; and (xv) provide debtor-in-possession financing or allow use of cash collateral in proceedings under the Bankruptcy Code, it being expressly agreed by the Borrower and the Subsidiary that any such financing and/or use would be part of the Obligations. (c) The obligations and liabilities of the Subsidiary, as guarantor under this paragraph Guaranty. shall be primary, direct and immediate, shall not be subject to any counterclaim, recoupment, set off, reduction or defense based upon any claim that Subsidiary may have against any one or more of the Borrower or any other Guarantor Subsidiary that has executed a Subsidiary Joinder Agreement, the Agent, and of the Lenders and/or any other guarantor and shall not be conditional or contingent upon pursuit or enforcement by the Agent of any remedies it may have against the Borrower with respect to this Agreement, the Note or any of the other Financing Documents, whether pursuant to the terms thereof or by operation of law. Without limiting the generality of the foregoing, the Agent shall not be required to make any demand upon the Borrower or any Guarantor Subsidiary that has executed a Subsidiary Joinder Agreement, or to sell the Collateral or otherwise pursue, enforce or exhaust its remedies against the Borrower, any Guarantor Subsidiary or the Collateral either before, concurrently with or after pursuing or enforcing its rights and remedies hereunder. Any one or more successive or concurrent actions or proceedings may be brought against Borrower and any Guarantor Subsidiary under this paragraph Guaranty., either in the same action, if any, brought against the Borrower or any Guarantor Subsidiary or in separate actions or proceedings, as often as the Agent may deem expedient or advisable. Without limiting the foregoing, it is specifically understood that any modification, limitation or discharge of any of the liabilities or obligations of any one or more of the Borrowers, any Guarantor Subsidiary, any other guarantor or any obligor under any of the Financing Documents, arising out of, or by virtue of, any bankruptcy, arrangement, reorganization or similar proceeding for relief of debtors under federal or state law initiated by or against the Borrower or any Guarantor Subsidiary, in their respective capacities as 6 87 borrowers and guarantors under this paragraph Guaranty., or under any of the Financing Documents shall not modify, limit, lessen reduce, impair, discharge, or otherwise affect the liability of the Borrower and each Guarantor Subsidiary under this paragraph Guaranty. in any manner whatsoever, and this paragraph Guaranty. shall remain and continue in full force and effect. It is the intent and purpose of this paragraph Guaranty. that the Borrower shall and does hereby waive all rights and benefits which might accrue to any Guarantor Subsidiary or any other guarantor by reason of any such proceeding, and the Borrower agrees that it shall be liable for the full amount of the obligations and liabilities under this paragraph Guaranty. regardless of, and irrespective to, any modification, limitation or discharge of the liability of any Guarantor Subsidiary, any other guarantor or any obligor under any of the Financing Documents, that may result from any such proceedings. (d) The Subisidiary, as guarantor under this paragraph Guaranty., hereby unconditionally, irrevocably and expressly waives: (xvi) presentment and demand for payment of the Obligations and protest of non-payment; (xvii) notice of acceptance of this paragraph Guaranty. and of presentment, demand and protest thereof; (xviii) notice of any default hereunder or under the Note or any of the other Financing Documents and notice of all indulgences; (xix) notice of any increase in the amount of any portion of or all of the indebtedness guaranteed by this paragraph Guaranty.; (xx) demand for observance, performance or enforcement of any of the terms or provisions of this paragraph Guaranty., the Note or any of the other Financing Documents; (xxi) all errors and omissions in connection with the Agent's administration of all indebtedness guaranteed by this paragraph Guaranty.; (xxii) any right or claim of right to cause a marshalling of the assets of any one or more of the Borrower or any other Guarantor Subsidiary; (xxiii) any act or omission of the Agent which changes the scope of the risk as guarantor hereunder; and 7 88 (xxiv) all other notices and demands otherwise required by law which Subsidiary may lawfully waive. (e) Within ten (10) days following any request of the Agent so to do, the Subsidiary will furnish the Agent and such other persons as the Agent may direct with a written certificate, duly acknowledged stating in detail whether or not any credits, offsets or defenses exist with respect to this paragraph Guaranty. 1. This Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Virginia, without regard to principles of choice of law. WITNESS the due execution hereof as of the day and year first written above. WITNESS OR ATTEST: --------------------------- By: (SEAL) - ------------------------ ---------------------- Name: Title: WITNESS: NATIONSBANK, N. A., as Agent By: (SEAL) - ------------------------ ------------------------ Robert J. Montanari Vice President 8 EX-10.31.3 8 AMD. & REST. MASTER CONSTRUCT. LOAN AGREEMENT 1 EXHIBIT 10.31.3 AMENDED AND RESTATED MASTER CONSTRUCTION LOAN AGREEMENT SUNRISE EAST ASSISTED LIVING LIMITED PARTNERSHIP as BORROWER NATIONSBANK, N.A. as AGENT December 23, 1997 2 TABLE OF CONTENTS ARTICLE I. DEFINITIONS; RULES OF CONSTRUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 1.01. Incorporation of Recitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ------------------------- Section 1.02. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ----------- Section 1.03. Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 --------------------- ARTICLE II. AVAILABILITY UNDER THE LOAN AND VERIFYING REQUISITIONS. . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.01. The Loan and Procedures for Adding a Deed of Trust . . . . . . . . . . . . . . . . . . . . . . . 7 -------------------------------------------------- Section 2.02. Permitted Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 --------------- Section 2.03. Requisitions Demonstrating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ----------------------------------- Section 2.04. Conditions Precedent to Facility Closing and Addition of Deeds of Trust . . . . . . . . . . . . . 9 ----------------------------------------------------------------------- Section 2.05. Conditions Precedent to Determining Availability Under Borrowing Base . . . . . . . . . . . . . . 14 --------------------------------------------------------------------- Section 2.06. Conditions Under Which an Eligible Project is a Completed Facility . . . . . . . . . . . . . . . 16 ------------------------------------------------------------------ Section 2.07. Advances to Others for the Account of the Borrower . . . . . . . . . . . . . . . . . . . . . . . 16 -------------------------------------------------- Section 2.08. Requisitions for the Operating Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 -------------------------------------- Section 2.09. Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ----------- Section 2.10. Liability of the Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ------------------------ Section 2.11. Stored Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ---------------- Section 2.12. Limitations on Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ----------------------- ARTICLE III. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 3.01. Compliance in Zoning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 -------------------- Section 3.02. Plans and Specifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ------------------------ Section 3.03. Building Permits; Other Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ------------------------------- Section 3.04. Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 --------- Section 3.05. Access; Roads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ------------- Section 3.06. Other Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ----------- Section 3.07. Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 -------- Section 3.08. Affirmation of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . 19 --------------------------------------------- ARTICLE IV. AFFIRMATIVE COVENANTS AND AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 4.01. Compliance with Laws; Encroachments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ----------------------------------- Section 4.02. Surveys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ------- Section 4.03. Inspections; Cooperation; Payment of Inspecting Engineer . . . . . . . . . . . . . . . . . . . . 20 -------------------------------------------------------- Section 4.04. Vouchers and Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 --------------------- Section 4.05. Payments for Labor and Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 -------------------------------- Section 4.06. Correction of Construction Defects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ---------------------------------- Section 4.07. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 --------- Section 4.08. Fees and Expenses; Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ---------------------------- Section 4.09. Copies of Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 -----------------
3 ARTICLE V. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 5.01. Other Liens; Transfers; "Due-on-Sale"; etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ------------------------------------------ Section 5.02. Impairment of Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ---------------------- Section 5.03. Conditional Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ----------------- Section 5.04. Changes to Plans and Specifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ----------------------------------- Section 5.05. Construction Contract; Construction Management . . . . . . . . . . . . . . . . . . . . . . . . . 23 ---------------------------------------------- ARTICLE VI. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 6.01. Defaults Under Other Financing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ---------------------------------------- Section 6.02. Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ------------------------------ Section 6.03. Compliance with Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ------------------------- Section 6.04. Damage to Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ---------------------- Section 6.05. Disclosure of Contractors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ------------------------- Section 6.06. Mechanic's Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 --------------- Section 6.07. Survey Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 -------------- Section 6.08. General Contractor Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 -------------------------- ARTICLE VII. REMEDIES ON DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 7.01. Remedies on Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ------------------- Section 7.02. No Conditions Precedent to Exercise of Remedies . . . . . . . . . . . . . . . . . . . . . . . . . 25 ----------------------------------------------- Section 7.03. Remedies Cumulative and Concurrent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ---------------------------------- Section 7.04. Strict Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ------------------ ARTICLE VIII. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 8.01. No Warranty by Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ---------------------- Section 8.02. Liability of Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 -------------------- Section 8.03. No Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 -------------- Section 8.04. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ------------ Section 8.05. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ---------------------- Section 8.06. Modification; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 -------------------- Section 8.07. Third Parties; Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ---------------------- Section 8.08. Conditions; Verification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ------------------------ Section 8.09. Captions and Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 --------------------- Section 8.10. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ------------ Section 8.11. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ------- Section 8.12. Signs; Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ---------------- Section 8.13. Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 -------------- Section 8.14. Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ---------------
4 AMENDED AND RESTATED MASTER CONSTRUCTION LOAN AGREEMENT THIS AMENDED AND RESTATED MASTER CONSTRUCTION LOAN AGREEMENT (this "Agreement"), made as of the 23rd day of December, 1997, by and between SUNRISE EAST ASSISTED LIVING LIMITED PARTNERSHIP, a limited partnership organized and existing under the laws of the Commonwealth of Virginia (the "Borrower") and NATIONSBANK, N.A., as agent (the "Agent") for itself and for certain additional lenders (collectively with the Agent, the "Lenders"), who are or shall be from time to time participating as lenders hereunder pursuant to the Agency Agreement. RECITALS A. The Borrower obtained from the Agent and certain other lenders (collectively, the "Original Lenders") a credit facility in the maximum principal sum of $90,000,000 (the "Original Credit Facility") which was a non-revolving line of credit pursuant to which the Borrower could obtain certain construction/interim loans (each a "Facility Loan;" collectively, the "Facility Loans") for assisted living facilities and independent living facilities. The Original Credit Facility has been evidenced by a Master Promissory Note dated June 13, 1996 as amended pursuant to a First Amendment to Master Promissory Note dated September 5, 1996 and by a Second Amendment to Master Promissory Note dated March 31, 1997 (collectively, the "Master Note"). B. In connection with the making of each Facility Loan, the Borrower executed a promissory note in the maximum principal sum of each Facility Loan (each a "Facility Note" and collectively, the "Facility Notes"). Availability under the Master Note was reduced by the principal sum of each Facility Note. As of the date hereof, seven (7) Facility Loans have been made under the Original Credit Facility as hereinafter described. The assisted or independent living facilities for which Facility Loans were obtained is referred to herein by its location and word "Facility." Advances under the Notes were made pursuant to the terms of a Master Construction Loan Agreement by and between the Borrower and the Agent dated June 13, 1996 (the "Original Construction Agreement") C. The Borrower obtained a construction/interim loan for the Franconia Facility evidenced by a Note dated June 13, 1996 in the maximum principal sum of $7,940,400 (the "Franconia Note") which is secured by, among other things a Credit Line Deed of Trust, Assignment and Security Agreement also dated June 13, 1996 (the "Franconia Deed of Trust") in favor of trustees designated 5 by the Agent and recorded in the Land Records of Fairfax County, Virginia in Deed Book 9749, Page 1562. A principal balance of $100,000 remains outstanding under the Franconia Note. D. The Borrower obtained a construction/interim loan for the Granite Run Facility evidenced by a Note dated June 13, 1996 in the maximum principal sum of $7,688,000 (the "Granite Run Note") which is secured by, among other things an Open-End Mortgage, Assignment and Security Agreement also dated June 13, 1996 (the "Granite Run Deed of Trust") and recorded in the Land Records of Delaware County, Pennsylvania in Volume 1500, Page 1704 and re-recorded in Volume 1526, Page 977. A principal balance of $100,000 remains outstanding under the Granite Run Note. E. The Borrower obtained a construction/interim loan for the Abington Assisted Living Facility evidenced by a Note dated June 13, 1996 in the maximum principal sum of $8,995,000 (the "Abington Assisted Note") which is secured by, among other things an Open-End Mortgage, Assignment and Security Agreement also dated June 13, 1996 (the "Abington Deed of Trust") and recorded in the Land Records of Montgomery County, Pennsylvania in Deed Book 7783, Page 849. A principal balance of $100,000 remains outstanding under the Abington Assisted Note. F. The Borrower obtained a construction/interim loan for the Abington Independent Living Facility evidenced by a Note dated June 13, 1996 in the maximum principal sum of $4,430,000 (the "Abington Independent Note") which is also secured by, among other things the Abington Deed of Trust. A principal balance of $100,000 remains outstanding under the Abington Independent Note. The Loans evidenced by the Abington Assisted Note and the Abington Independent Note are treated as one Loan. G. The Borrower obtained a construction/interim loan for the Morris Plains Facility evidenced by a Note dated September 5, 1996 in the maximum principal sum of $7,993,000 (the "Morris Plains Note") which is secured by, among other things a Mortgage, Assignment and Security Agreement also dated September 5, 1996 (the "Morris Plains Deed of Trust") and recorded in the Land Records of Morris County, New Jersey in Deed Book 6632, Page 58. A principal balance of $100,000 remains outstanding under the Morris Plains Note. H. The Borrower obtained a construction/interim loan for the Wayne Facility evidenced by a Note dated September 5, 1996 in the maximum principal sum of $8,020,000 (the "Wayne Note") which is secured by, among other things a Mortgage, Assignment and Security Agreement also dated September 5, 1996 (the "Wayne Deed of Trust") and recorded in the Land Records of Passaic County, New Jersey in Mortgage Book 0-164, Page 17. A principal balance - 2 - 6 of $100,000 remains outstanding under the Wayne Note. I. The Borrower obtained a loan for the Old Tappan Facility evidenced by a Note dated September 5, 1996 in the maximum principal sum of $8,300,000 (the "Old Tappan Note") which is secured by, among other things a Mortgage, Assignment and Security Agreement also dated September 5, 1996 (the "Old Tappan Deed of Trust") and recorded in the Land Records of Bergen County, New Jersey in Mortgage Book 9272, Page 700. A principal balance of $100,000 remains outstanding under the Old Tappan Note. J. The Borrower obtained a loan for the Westfield Facility evidenced by a Note dated May 12, 1997 in the maximum principal sum of $8,388,000 (the "Westfield Note") which is secured by, among other things a Mortgage, Assignment and Security Agreement also dated May 12, 1997 (the "Westfield Deed of Trust") and recorded in the Land Records of Union County, New Jersey in Deed Book 6259, Page 141. A principal balance of $100,000 remains outstanding under the Westfield Note. K. The Borrower has applied to the Lenders to increase the maximum principal sum of the Original Credit Facility to $250,000,000 or such greater amount as the Lenders may from time to time commit to lend pursuant to the Agency Agreement (such increased and modified credit facility being hereinafter referred to as the "Credit Facility" or the "Loan") and to provide that the Credit Facility will be revolving. Advances or readvances are to be made pursuant to, and secured by, the provisions of that certain Amended and Restated Financing and Security Agreement dated the same date as this Agreement by and between the Agent and the Borrower (as amended, restated or substituted from time to time, the "Financing Agreement") and this Agreement. L. Advances of the Loan may be made to the Borrower for the general business purposes of the Borrower or its Wholly Owned Subsidiaries which are Guarantor Subsidiaries, including, but not limited to, financing the construction or purchase of assisted living facilities or independent living facilities. M. The Borrower and the Lenders have agreed to (1) the consolidation of the indebtedness evidenced by the Facility Notes with the Master Note which will continue to be secured by, among other things, the Franconia Deed of Trust, the Granite Run Deed of Trust, the Abington Deed of Trust, the Morris Plains Deed of Trust, the Wayne Deed of Trust, the Old Tappan Deed of Trust and the Westfield Deed of Trust, (collectively, the "Existing Deeds of Trust") and (2) modification of the terms or repayment of the indebtedness evidenced by the Master Note and the Facility Notes pursuant to the terms of the Amended, Restated, Increased and Consolidated Master Promissory Note of even date herewith (as - 3 - 7 amended, restated, renewed or substituted from time to time, the "Note") and pursuant to the terms of the Amended and Restated Financing and Security Agreement of even date herewith (as amended, restated or substituted from time to time, the Financing Agreement. N. The Loan will be evidenced by the Amended, Restated and Increased Master Promissory Note of even date herewith (as amended, restated, renewed or substituted from time to time, the "Note"). O. The Lenders have agreed to make available the Credit Facility upon the conditions that this Agreement amending and restating the Original Construction Agreement in its entirety be executed and delivered to the Agent. NOW, THEREFORE, and in consideration of these presents, and in further consideration of the mutual covenants and agreements herein set forth and of the sum of Ten Dollars ($10.00) lawful money of the United States of America by each of the parties to the other paid, receipt of which is hereby acknowledged, the parties hereto do hereby covenant and agree as follows: ARTICLE I. DEFINITIONS; RULES OF CONSTRUCTION. Section I.01. Incorporation of Recitals. The Recitals set forth hereinabove are incorporated herein by reference. Section I.02. Definitions. The Borrower and the Agent hereby agrees that, unless the context otherwise specifies or requires, the following terms shall have the meanings herein specified, such definitions to be applicable equally to the singular and the plural forms of such terms and to all genders and that other capitalized terms used but not defined herein shall have the meaning set forth in the Financing Agreement: "Architect" shall mean the architect named in the Architect's Contract, if any, and his or its successors and permitted assigns. "Architect's Contract" shall mean the architect's agreement by and between the Borrower, as owner, and , the architect for the particular Facility, or any contract for architectural services relating to the development of the Land and/or the construction of the Improvements for all of the Facilities made by the Borrower and an architect and approved in writing by the Agent, as the same may be amended from time to time with the prior written approval of the Agent. "Completion Date" shall mean the date which is fifteen - 4 - 8 (15) months from the recordation of the Deed of Trust on such Facility or upon the issuance of an occupancy permit. "Construction Contract" or "Construction Contracts" shall mean individually or collectively the general contractor's agreements by and between the Borrower or any Guarantor Subsidiary, as owner, and a general contractor for the development of any of the Land and/or the construction of any of the Improvements and approved in writing by the Agent, as the same may be amended from time to time with the prior written approval of the Agent. "Default" shall mean an event which, with the giving of Notice or lapse of time, or both, would constitute an Event of Default under the provisions of this Agreement. "Development Fee" shall have the meaning set forth in Section 2.01(c) hereof. "Event(s) of Default" shall mean the occurrence of any one or more of the events specified in Article VI of this Agreement and the continuance of such event beyond the applicable grace and/or cure periods therefor, if any, set forth in Article VI or in another Financing Document. "Financing Agreement" shall mean the Amended and Restated Financing and Security Agreement between the Borrower and the Agent of even date herewith as the same may from time to time be extended, amended, restated, supplemented or otherwise modified. "General Contractor" or "General Contractors" shall mean individually or collectively the general contractors named in the Construction Contracts and his or its respective successors and permitted assigns. "Hydric Soils" shall mean any soil category upon which building would be prohibited or restricted under applicable governmental requirements (including, without limitation, those imposed by the U.S. Army Corps of Engineers based upon its guidelines as to, among other things, soil, vegetation and effect on the ecosystem). "Inspecting Engineer" shall mean such person or firm as the Agent may from time to time appoint or designate for purposes related to the inspection of the progress of the development of any of the Land and the construction of any of the Improvements, conformity of construction with the applicable Plans and Specifications, and for such other purposes as the Agent may from time to time deem appropriate or as may be required by the terms of this Agreement. - 5 - 9 "Interest Reserve" shall have the meaning set forth in Section 2.01 hereof. "Land" shall mean the land described in the applicable Deed of Trust. "Major Subcontractor" shall mean a subcontractor under a subcontract in an amount of $100,000 or more pertaining to any Facility. "Material Lease" shall mean a lease of a portion of a Facility to a party other than a resident which exceeds 1,000 square feet of space or $15,000 per annum in rent. "Notice" shall mean a written communication delivered as specified in Section 11.1 of the Financing Agreement. "Operating Reserve" shall mean a reserve in an amount approved by the Agent included in each Total Development Budget to cover the costs of leasing up a Facility and initial operating deficits. "Plans and Specifications" shall mean any and all plans and specifications prepared in connection with the development of the Land and/or the construction of the Improvements for any Facility for which a Loan is made and which are approved in writing by the Agent, as the same may from time to time be amended with the prior written approval of the Agent, including but not limited to, the plans and specifications prepared by the Architect, a copy of which have been initialed by the Borrower and the Agent for identification and delivered to the Agent. "Requisition" or "Requisitions" shall have the meaning set forth in Section 2.03 hereof. "Stored Materials" shall have the meaning set forth in Section 2.11 hereof. "Survey" shall mean a plat of the Land for any Facility which clearly designates at least (i) the location of the perimeter of such Land by courses and distances; (ii) the location of all easements, rights-of-way, alleys, streams, waters, paths and encroachments; (iii) the location of all building restriction lines and set-backs, however established; (iv) the location of any streets or roadways abutting such Land; and (v) the then "as-built" location of the Improvements located on such Land and the relation of such Improvements by courses and distances to the perimeter of such Land, building restriction lines and set-backs, all in conformity with the Minimum Standard Detail Requirements for Land Title Surveys adopted by the - 6 - 10 American Congress on Surveying and Mapping (1992 Edition). "Total Development Budget" or "Total Development Budgets" shall mean individually or collectively the budget for the construction of the Improvements for and the initial operating phase of a Facility as such Total Development Budget is approved by the Agent (as amended from time to time with the approval of the Agent). Section I.03. Rules of Construction. The words "hereof", "herein", "hereunder", "hereto", and other words of similar import refer to this Agreement in its entirety. The terms "agree" and "agreements" mean and include "covenant" and "covenants". The headings of this Agreement are for convenience only and shall not define or limit the provisions hereof. All references (a) made in the neuter, masculine or feminine gender shall be deemed to have been made in all such genders, (b) made in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well, (c) to the Land, the Improvements or the Property shall mean all or any portion of each of the foregoing, respectively unless the context indicates that such terms refer to an individual Facility, and (d) to Section numbers are to the respective Sections contained in this Agreement unless expressly indicated otherwise. ARTICLE II. AVAILABILITY UNDER THE LOAN AND VERIFYING REQUISITIONS. Section II.01. The Loan and Procedures for Adding a Deed of Trust. (a) Pursuant to the terms of the Note and the Financing Agreement, the Borrower may obtain advances from time to time under the Loan on a revolving basis not to exceed at any time outstanding the lesser of the (i) the Credit Facility Committed Amount or (ii) the Borrowing Base. As of the date hereof the Borrower has designated and the Lenders have accepted certain Facilities into the Borrowing Base as Eligible Projects. This Agreement shall govern the procedures for verification by the Agent of Costs Incurred to Date on each Eligible Project. This Agreement shall also govern the terms, conditions and procedures under which Eligible Projects may be added to the Borrowing Base. (b) Also pursuant to the terms of the Note and the Financing Agreement, the Borrower may designate and the Lenders may accept certain Facilities which are not designated as Eligible Facilities as Optional Collateral. This Agreement will govern the terms, conditions and procedures under which the Total Project Costs for the Optional Collateral is determined and under which Optional Collateral may be added. - 7 - 11 (c) The Borrower will give notice to the Agent in writing in advance of its intention to add a particular Facility as an Eligible Project under the Credit Facility. Each Total Development Budget for an Eligible Project shall include an interest reserve (the "Interest Reserve"), an Operating Reserve, a hard cost contingency reserve of not less than five percent (5%) of the total budgeted construction costs and a development fee payable to the Borrower (the "Development Fee") and shall demonstrate to the Agent's satisfaction in its sole discretion that the Eligible Project will be designated as a Pool A Project. (d) The Borrower will give notice to the Agent in writing in advance of its intention to add a particular Facility as Optional Collateral. Section II.02. Permitted Costs. (a) Advances under the Borrowing Base shall be made available by the Lenders pursuant to a Borrowing Base Report issued quarterly by the Agent and certified by the Borrower in accordance with the terms of the Financing Agreement. That portion of the Borrowing Base composed of Costs Incurred to Date shall be related to expenditures for each Eligible Facility described in the applicable Total Development Budget. Each Total Development Budget may include the cost of (i) the acquisition by the Borrower of the Land which is the site of such Facility, (ii) the construction on the Premises of a Facility containing residential units and common facilities (iii) marketing, staffing and similar pre-opening expenses and (iv) an Operating Reserve. Unless otherwise agreed to by the Agent and to the extent specifically permitted by the Agent, the process of verification of Requisitions shall confirm the payment by the Borrower of the following costs and expenses related to the development of the Premises and the construction of the Improvements and no others may be included in a Total Development Budget: (i) the payment of interest when due without further authorization or consent of the Borrower; (ii) the actual cost of the Land and all labor, services, materials, supervision, construction fees and the like reasonably incurred by the Borrower in connection with the construction upon the Land of the Improvements in accordance with the Plans and Specifications; (iii) for the actual cost of pre-opening expenses, marketing expenses and operations of the Facility to the extent of operating deficits; (iv) for the actual cost of commitment fees, extension fees, appraisal fees, closing or settlement costs, fees of attorneys, engineers, architects and accountants, insurance and bond premiums, ad valorem real estate taxes and other costs directly related to the development of the Land and the construction, marketing, initial start-up operating of the Improvements and (v) for the Development Fee and other pre-opening fees. Section II.03. Requisitions Demonstrating Expenses. - 8 - 12 Verification of the Borrower's Costs Incurred to Date will be administered by the Agent's Real Estate Loan Administration Group. Requisitions for each Eligible Project shall be submitted by the Borrower from time to time setting forth costs incurred by the Borrower or a Guarantor Subsidiary shall be in the form approved by the Agent (each a "Requisition" collectively, the "Requisitions") signed by James S. Pope, Larry Hulse or David W. Faeder on behalf of the Borrower and approved by the Architect, showing the percentage of completion and setting forth in trade breakdown form and in such detail as may be required by the Agent the amounts expended and/or costs incurred for work done and necessary materials incorporated in the Improvements. The Requisition shall also show the percentage of completion of each line item on the Borrower's cost breakdown approved by the Agent. The Borrower shall submit with each Requisition a statement that the work completed to the date of such Requisition is of quality consistent with the applicable Plans and Specifications. In addition, at the time of delivery of each Requisition by the Borrower, the Borrower shall furnish to the Agent such additional information (such as paid receipts, invoices, statements of accounts, etc.) as the Agent may reasonably require to assure that amounts shown in the Requisition have been paid by the Borrower. Requisitions verified by the Real Estate Loan Administration Group during the course of a fiscal quarter will be included in the calculation of the next Borrowing Base Report. Section II.04. Conditions Precedent to Facility Closing and Addition of Deeds of Trust. (a) Conditions Precedent to Facility Closing. The following shall be conditions precedent to the Facility Closing or to the addition of a Guarantor Subsidiary: (i) The Note, the Deeds of Trust and Security Documents and the other Financing Documents in connection with the Loan shall have been properly executed and delivered to the Agent, the applicable Deeds of Trust shall be acknowledged and recorded in the appropriate public office or delivered to a representative of the title company for recording and payment shall have been made for all conveyancing and recording in connection with the settlement of the Loan, and for any transfer or documentary stamp taxes due under any federal, state or municipal law. (ii) The Agent shall have received and approved a copy of the Borrower's fully executed Partnership Agreement and a certified copy of the recorded Certificate of Limited Partnership or a certificate of no changes therein since the closing of the Original Credit Facility. In connection with the provision of a Deed of Trust by a Guarantor Subsidiary, the Agent shall have received and approved copies of all organizational documents, - 9 - 13 including certified copies of all documents on record with the State in which such entity is organized. (iii) The Agent shall have received and approved a certificate executed by all of the general and limited partners of the Borrower authorizing the execution and delivery of the Financing Documents and consenting to the Loan and similar authority certificates or resolutions of any Guarantor Subsidiary. (iv) The Agent shall have received and approved a current certificate of fact from the Commonwealth of Virginia for the Borrower and a certificate of good standing or certificate of fact from the State in which any Guarantor Subsidiary is formed. (v) The Agent shall have received and approved an opinion of counsel for the Borrower as to the Borrower's good standing, form, powers and authority and as to the validity, binding effect and enforceability of the Financing Documents. (vi) The Agent shall have received and properly executed a Subsidiary Guaranty and a Joinder Agreement. (b) Conditions Precedent to Accepting an Eligible Project: (i) The Facility Closing shall have been completed. (ii) The Agent shall have received a certificate of authority to do business for the Borrower in each other jurisdiction where a Facility is located. (iii) The Total Development Budget for such Eligible Project shall have been reviewed and approved in writing by the Agent consistent with the provision of Section 2.01. (iv) The Agent shall have received a paid policy of title insurance (American Land Title Association Standard Form "B" Loan Policy - Current Edition) covering the Facility or a valid and enforceable commitment to issue the same, together with such reinsurance agreements and direct access agreements as may be required by the Agent and/or endorsements to policies issued to the Agent in connection with the Original Credit Facility, in the amount agreed upon by the Agent from a company satisfactory to the Agent and which may be endorsed or assigned to the successors and assigns of the Lenders and to additional Lenders without additional cost, insuring the liens of the Deeds of Trust to be valid first liens on the Property, free and clear of all defects, exception and encumbrances except such as the Agent and its - 10 - 14 counsel shall have approved but without a creditor's rights exception and (unless otherwise agreed by the Agent) containing affirmative insurance against mechanics liens. (v) The Agent shall have received advice, in form and substance and from a source satisfactory to the Agent, to the effect that a search of the applicable public records discloses no conditional sales contracts, chattel mortgages, leases of personalty, financing statements or title retention agreements filed or recorded against the Property except such as the Agent shall have approved. (vi) The Agent shall have received all policies of insurance required by the terms hereof and by the other Financing Documents to be in effect from a company or companies and in form and amount satisfactory to the Agent, including without limitation, flood insurance (in the amount or evidence that flood insurance is not available or otherwise required with respect to the Property), together with written evidence, in form and substance satisfactory to the Agent, that all fees and premiums due on account thereof have been paid in full. (vii) The Agent shall have received and accepted an appraisal of the Facility. (viii) The Agent shall have received from the Borrower a complete set of the Plans and Specifications signed and sealed by the Architect, together with written evidence, in form and substance satisfactory to the Agent, to the effect that the Plans and Specifications are satisfactory to the Borrower, the General Contractor, the Inspecting Engineer and, to the extent required by applicable law or any effective restrictive covenant, have been approved by all Governmental Authorities having or claiming jurisdiction and by the beneficiary of any such restrictive covenant, respectively. (ix) The Agent shall have received and approved a fully executed copy of the applicable Construction Contract, the Architect's Contract and a list of Major Subcontractors as well as any information regarding the General Contractor, the Architect and the Major Subcontractors which the Agent has requested. (x) The Agent shall have received and approved a copy of a current Survey of the Land certified to the Agent and to the title insurance company and any recorded subdivision plat of the Land. (xi) The Agent shall have received and approved a site plan for the Improvements approved by all appropriate Governmental Authorities. - 11 - 15 (xii) The Agent shall have received from the Borrower written evidence, in form and substance satisfactory to the Agent, from all Governmental Authorities having or claiming jurisdiction to the effect that all building, construction and other permits required in connection with the development of the Land and the construction of the Improvements have been validly issued, that all fees and bonds required in connection therewith have been paid in full or posted, as the circumstances may require, and that the Improvements meet zoning requirements and all sewer and storm drain requirements. (xiii) The Agent shall have received and approved a report setting forth a construction progress schedule in form and substance satisfactory to the Agent, calling for the completion of the Improvements by a date no later than the Completion Date. (xiv) If construction work of any kind has commenced upon the Land or materials have been placed or stored upon the Land prior to the recordation of the Deed of Trust among the Land Records where the Land is located, the same shall be fully insured against by the title insurance company. (xv) The Agent shall have received and approved evidence that the applicable General Contractor carries public liability and property damage insurance and workers' compensation insurance in form and amounts and issued by companies acceptable to the Agent. (xvi) The Agent shall have received and accepted a Phase I environmental audit of the applicable Facility prepared by a person or firm acceptable to the Agent. (xvii) The Agent shall have received evidence acceptable in all respects through certification by the Architect or other source acceptable to the Agent that the applicable Improvements, when constructed, will comply with all legal requirements regarding access and facilities for handicapped or disabled persons, including, without limitation and to the extent applicable to assisted living facilities (or, if applicable, independent living facilities), The Federal Architectural Barriers Act (42 U.S.C. Section 4151 et seq.), The Fair Housing Amendments Act of 1988 (42 U.S.C. Section 3601 et seq.), The Americans With Disabilities Act of 1990 (42 U.S.C. Section 12101 et seq.), The Rehabilitation Act of 1973 (29 U.S.C. Section 794) and any applicable state statutes relating to access and facilities for handicapped or disabled persons. (xviii) The Agent shall have received and approved soil reports which shall (i) demonstrate that the soil - 12 - 16 conditions of the Land for the applicable Facility are suitable for the construction of the Improvements and (ii) evidence to the Agent's satisfaction that there are no Hydric Soils on the Land. (xix) The Agent shall have received and approved copies of any executed Material Leases of the applicable Property or of any portion thereof. (xx) The Agent shall have received and approved an opinion of local counsel in the jurisdiction where the applicable Facility is located that the Financing Documents applicable to that Facility are enforceable and for the Borrower that neither the making nor the servicing of the Loan will subject the Lenders to a requirement of qualifying to do business or taxation (except ad valorem taxes on the Property) in the State where the applicable Facility is located and that the Loan is not usurious, which opinion must also inform the Lenders (i) of the cost and timing of foreclosure; (ii) of any limitations on the Lenders' right to obtain, or the amount of, a deficiency judgment; and (iii) the existence of and details surrounding any redemption period enjoyed by the Borrower following a sale at foreclosure. (xxi) With regard to any Deed of Trust for a Facility located in any state having such requirement, the Agent shall have received evidence satisfactory to the Agent that a Certificate of Need has been issued for such Facility. (c) Conditions Precedent to Accepting a Facility as Optional Collateral: (i) The Facility Closing shall have been completed. (ii) The Agent shall have received a certificate of authority to do business for the Borrower in each other jurisdiction where a Facility is located. (iii) The Agent shall have received a copy of the Borrower's paid policy of owner's title insurance and a current title report covering the Facility. (iv) The Agent shall have received advice, in form and substance and from a source satisfactory to the Agent, to the effect that a search of the applicable public records discloses no conditional sales contracts, chattel mortgages, leases of personalty, financing statements or title retention agreements filed or recorded against the Property except such as the Agent shall have approved. (v) The Agent shall have received all policies of - 13 - 17 insurance required by the terms hereof and by the other Financing Documents to be in effect from a company or companies and in form and amount satisfactory to the Agent, including without limitation, flood insurance (in the amount or evidence that flood insurance is not available or otherwise required with respect to the Property), together with written evidence, in form and substance satisfactory to the Agent, that all fees and premiums due on account thereof have been paid in full. (vi) The Agent shall have received and accepted a Phase I environmental audit of the applicable Facility prepared by a person or firm acceptable to the Agent. (vii) The Agent shall have received and approved copies of any executed Material Leases of the applicable Property or of any portion thereof. (viii) The Agent shall have received and approved an opinion of local counsel in the jurisdiction where the applicable Facility is located that the Financing Documents applicable to that Facility are enforceable and for the Borrower that neither the making nor the servicing of the Loan will subject the Lenders to a requirement of qualifying to do business or taxation (except ad valorem taxes on the Property) in the State where the applicable Facility is located and that the Loan is not usurious, which opinion must also inform the Lenders (i) of the cost and timing of foreclosure; (ii) of any limitations on the Lenders' right to obtain, or the amount of, a deficiency judgment; and (iii) the existence of and details surrounding any redemption period enjoyed by the Borrower following a sale at foreclosure. (ix) With regard to any Deed of Trust for a Facility located in any state having such requirement, the Agent shall have received evidence satisfactory to the Agent that a Certificate of Need has been issued for such Facility. (x) For each Facility in the Optional Collateral, the Agent shall have received copies of all applicable Licenses and the certificate of occupancy. Section II.05. Conditions Precedent to Determining Availability Under Borrowing Base. The Lenders shall not be obligated to include any Requisition for an Eligible Facility in the calculation of the Borrowing Base unless the conditions described in Section 2.04(b) and the following additional conditions shall have been satisfied to the Agent's satisfaction: (a) The Agent shall have received a monthly title report on each Eligible Project which is under construction from the applicable title insurance company, indicating that since the - 14 - 18 last preceding report, there has been no change in the status of title and no other exceptions not theretofore approved by the Agent, if required by the terms of the existing title insurance policy, the Agent shall have received an endorsement which shall have the effect of advancing the effective date of the policy to the date of the advance then being made and increasing the coverage of the policy by an amount equal to the Requisition being verified if the policy does not by its terms provide for such an increase. (b) No Default or Event of Default shall have occurred and be continuing under any Note or any of the other Financing Documents. (c) The Improvements shall not have been materially damaged by fire or other casualty unless the Agent shall have received proceeds of insurance sufficient in the judgment of the Agent to effect a satisfactory restoration of such Improvements in accordance with the terms of the Deed of Trust. (d) The Agent shall have received written evidence, in form and substance satisfactory to the Agent, to the effect that all work requiring inspection by Governmental Authorities having or claiming jurisdiction has been duly inspected and approved by such authorities and by any rating or inspection organization, bureau, association or office having or claiming jurisdiction. (e) The representations and warranties made in Article III of this Agreement and in the Financing Agreement shall be true and correct in all material respects on and as of the date of the advance with the same effect as if made on such date. (f) All terms and conditions of the Financing Documents required to be met as of the date of the applicable advance shall have been met to the complete satisfaction of the Agent. (g) In the reasonable judgment of the Agent, all work completed on the applicable Property at the time of the application for an advance has been performed in a good and workmanlike manner and all materials and fixtures usually furnished and installed at that stage of construction have been furnished and installed and that all costs covered by the Requisition have been paid by the Borrower. (h) There shall be at least five (5) Pool A Projects in the Borrowing Base. The Agent shall have determined whether each Eligible Project is a Pool A, Pool B or Pool C Project. (i) Before verifying any Requisition, the Agent shall require the Borrower to obtain from the applicable General Contractor and if required by the applicable title insurance - 15 - 19 company from all subcontractors and material suppliers acknowledgments of payment and releases of liens and rights to claim liens for work performed or materials delivered covered by such Requisition. All such acknowledgments and releases shall be in form AIA Forms G706 and G706A. (j) The Agent's Inspecting Engineer will inspect work performed which is covered by each Requisition being verified. Section II.06. Conditions Under Which an Eligible Project is a Completed Facility. The Agent shall verify that an Eligible Project is a Completed Facility based on the satisfaction of the following additional conditions: (a) The Agent shall have received the final "as built" Survey for the applicable Property. (b) The Agent shall have received written evidence from a qualified third party, in form and substance satisfactory to the Agent, to the effect that the applicable Improvements have been substantially completed in accordance with their Plans and Specifications. (c) The Agent shall have received written evidence, in form and substance satisfactory to the Agent, to the effect that requisite certificates for permanent occupancy or completion of the Improvements have been validly issued. (d) Final waivers of liens of the General Contractor, and if required by the applicable title insurance company, subcontractors, laborers and material suppliers have been furnished to the Agent or, as to any disputed lien or claim of lien, a bond in form and substance acceptable to the Agent has been provided or other arrangements satisfactory to the Agent have been made. (e) The Agent shall have received a copy of an operating License for the Facility or other evidence satisfactory to the Agent that the Facility may be lawfully operated as contemplated by the Financing Documents. Section II.07. Advances to Others for the Account of the Borrower. At the option of the Agent, the Agent may apply amounts due hereunder to the satisfaction of the conditions of the Financing Documents and any amounts so applied shall be part of the Loan and shall be secured by the Deed of Trust. At the option of the Agent, and without limiting the generality of the foregoing, the Agent may pay directly from the Loan proceeds all interest bills rendered by the Agent in connection with the Loan, and following the occurrence of an Event of Default may make advances directly to the General Contractor, the title insurance - 16 - 20 company, any subcontractor or materialman, or to any of them jointly, and the execution hereof by the Borrower shall, and hereby does, constitute an irrevocable authorization to so advance the proceeds of the Loan. No further direction or authorization from the Borrower shall be necessary to warrant such direct advances and all such advances shall satisfy pro tanto the obligations of the Lenders hereunder and shall be secured by the Deeds of Trust and other Collateral as fully as if made to the Borrower, regardless of the disposition thereof by the party or parties to whom such advance is made. Section II.08. Requisitions for the Operating Reserve. No portion of any Requisition for costs included in the Operating Reserve shall be verified until both a certificate of occupancy has been issued by the applicable governmental authorities and, if applicable to the Facility, an operating License has been issued for the Facility by the appropriate Governmental Authority or Authorities. Advances from the Operating Reserve shall be for the sole purpose of paying a portion of the Debt Service on the Loan or net operating losses as shown on a monthly financial report for such Facility prepared in accordance with the requirements set forth in the Financing Agreement, and certified by the Chief Financial Officer of the Guarantor. Section II.09. Assignments. The Borrower agrees not to transfer, assign, pledge or hypothecate any right or interest in any payment or advance due pursuant to this Agreement, or any of the other benefits of this Agreement, without the prior written consent of the Agent. Any assignment made or attempted by the Borrower without the prior written consent of the Agent shall be void and of no effect. No consent by the Agent to an assignment by the Borrower shall release the Borrower as the party primarily obligated and liable under the terms of this Agreement unless the Borrower shall be released specifically by the Agent in writing. No consent by the Agent to an assignment shall be deemed to be a waiver of the requirement of prior written consent by the Agent with respect to each and every further assignment and as a condition precedent to the effectiveness of such assignment. Section II.10. Liability of the Lenders. The Lenders shall in no event be responsible or liable to any person other than the Borrower for the disbursement of or failure to disburse the Loan proceeds or any part thereof and neither the General Contractor nor any subcontractor, laborer or material supplier shall have any right or claim against the Lenders under this Agreement or the administration thereof. Section II.11. Stored Materials. The Agent will permit inclusion of materials (the "Stored Materials") to be included in Requisitions prior to their incorporation into the Improvements if they have been fully paid for by the Borrower. The Borrower - 17 - 21 shall securely store of cause to be securely stored any stored materials. Section II.12. Limitations on Advances. The following additional limitations on certain advances shall apply to each of the Loans: (a) Interest Reserve. Except as provided in Section 2.02 hereof, after the earlier of the issuance of certificate of occupancy for a Facility or the expiration of the Construction Phase, no further advances shall be made from the Interest Reserve in such Total Development Budget. (b) Development Fee. The Development Fee will be advanced ratably with the first twelve (12) monthly Requisitions. (c) Operating Reserve. No advances from the Operating Reserve shall be made until both a certificate of occupancy has been issued by the applicable governmental authorities and, if applicable to the Facility, an operating license has been issued for the Facility by the appropriate Governmental Authority or Authorities. Advances from the Operating Reserve shall be for the sole purpose of paying Debt Service or net operating losses as shown on a monthly financial report for such Facility prepared in accordance with the requirements set forth in the Financing Agreement, and certified by the chief Financial Officer of the Guarantor. ARTICLE III. REPRESENTATIONS AND WARRANTIES. Section III.01. Compliance in Zoning. The Borrower represents and warrants that the anticipated use of each Eligible Project and any Optional Collateral complies with applicable zoning ordinances, regulations and restrictive covenants affecting such Land, all use requirements of any Governmental Authority having jurisdiction have been satisfied, and no violation of any law or regulation exists with respect thereto. Section III.02. Plans and Specifications. The Borrower represents and warrants that, to the extent required by applicable law or any effective restrictive covenant, the Plans and Specifications for each Eligible Project and any Optional Collateral have been approved by all Governmental Authorities having or claiming jurisdiction and by any beneficiary of any such restrictive covenant. Section III.03. Building Permits; Other Permits. The Borrower represents and warrants that all building, construction and other permits necessary or required in connection with the development of the Land and the construction of the Improvements - 18 - 22 have been or, prior to any advance under the applicable Loan, will be, unless otherwise agreed to by the Agent, validly issued and all fees and bonds required in connection therewith have been paid or posted, as the circumstances may require. Section III.04. Utilities. The Borrower represents and warrants that all utility services necessary for the development of all the Land and the construction of the Improvements for each Eligible Project and the operation thereof for their intended purpose are or will be available at the boundaries of all the Land, including, without limitation, telephone service, water supply, storm and sanitary sewer facilities, natural gas (if available) and electric facilities. Section III.05. Access; Roads. The Borrower represents and warrants that all roads and other accesses necessary for the development of all the Land and the construction of all the Improvements for all Eligible Projects and full utilization thereof for their intended purposes have either been completed or the necessary rights of way therefor have either been or will be acquired by the appropriate Governmental Authorities or have been or will be dedicated to public use and accepted by such Governmental Authorities and all necessary steps have been taken by the Borrower or such Governmental Authorities to assure the complete construction and installation thereof by a date sufficient to ensure the timely completion of the Improvements and in no event later than the Completion Date. Section III.06. Other Liens. The Borrower represents and warrants that except as otherwise provided in the Financing Documents, the Borrower has made no contract or arrangement of any kind the performance of which by the other party thereto would give rise to a lien on any Eligible Project or Optional Collateral. Section III.07. Defaults. The Borrower represents and warrants that there is no default on the part of the Borrower under the Financing Documents and no event has occurred and is continuing which, with notice or the passage of time, or both, would constitute a default under the Note or any of the other Financing Documents. Section III.08. Affirmation of Representations and Warranties. Each Requisition, and any request for an advance under the Loan shall constitute an affirmation that the foregoing representations and warranties of the Borrower and those set forth in the other Financing Documents are true and correct as of the date thereof and, unless the Agent is notified to the contrary prior to the disbursement of the advance Requisitioned, will be so on the date thereof. - 19 - 23 ARTICLE IV. AFFIRMATIVE COVENANTS AND AGREEMENTS. Section IV.01. Compliance with Laws; Encroachments. The Improvements shall be constructed in accordance with all applicable (whether present or future) laws, ordinances, rules, regulations, requirements and orders of any Governmental Authority having or claiming jurisdiction. The Improvements shall be constructed entirely on the Land and shall not encroach upon any easement or right-of-way, or upon the land of others. Construction of the Improvements shall occur wholly within all applicable building restriction lines and set-backs, however established, and shall be in strict compliance with all applicable use or other restrictions and the provisions of any prior agreements, declarations, covenants and all applicable zoning and subdivision ordinances and regulations unless a variance shall have been obtained. Section IV.02. Surveys. Upon the Agent's request from time to time as construction of a Facility progresses and upon the completion of the construction of the Improvements, the Borrower shall furnish the Agent with a Survey with a current certification to the Agent by a registered land surveyor of the jurisdiction in which the Land is located. At any time the Borrower is required to furnish a Survey to the Agent pursuant to the terms of this Agreement, the Borrower shall also furnish an original print thereof to the title insurance company and such Survey shall not be sufficient for the purposes of this Agreement unless and until the title insurance company shall advise the Agent, by endorsement to the title insurance policy or otherwise, that the Survey discloses no violations, encroachments or other variances from applicable set-backs or other restrictions except such as the Agent and its counsel shall approve. Section IV.03. Inspections; Cooperation; Payment of Inspecting Engineer. The Borrower shall permit the Lenders and their duly authorized representatives (including, without limitation, the Inspecting Engineer) to enter upon any of the Land, to inspect the Improvements and any and all materials to be used in connection with the development of any of the Land and/or the construction of the Improvements, to examine all detailed plans and shop drawings and similar materials as well as all records and books of account maintained by or on behalf of the Borrower relating thereto and to discuss the affairs, finances and accounts pertaining to any Facility and any of the Improvements with representatives of the Borrower. The Borrower shall at all times cooperate and cause the General Contractor and each and every one of its subcontractors and materialmen to cooperate with the Lenders and their duly authorized representatives (including, without limitation, the Inspecting Engineer) in connection with or in aid of the performance of the Agent's or Lenders' functions - 20 - 24 under this Agreement. The reasonable fees of any Inspecting Engineer engaged or employed by the Agent in connection with or in aid of the performance of the Agent's or the Lenders' functions under this Agreement shall be paid by the Borrower. Section IV.04. Vouchers and Receipts. The Borrower shall furnish to the Agent, promptly on demand, any contracts, bills of sale, statements, receipted vouchers or agreements pursuant to which the Borrower has any claim of title to any materials, fixtures or other articles delivered or to be delivered to the Land or incorporated or to be incorporated into any of the Improvements. The Borrower shall furnish to the Agent, promptly on demand, a verified written statement, in such form and detail as the Agent may require, showing all amounts paid for labor and materials and all items of labor and materials furnished or to be furnished for which payment has not been made and the amounts to be paid therefor. Section IV.05. Payments for Labor and Materials. The Borrower shall pay when due all bills for services or labor performed and materials supplied in connection with the development of the Land and the construction of the Improvements. In the event any mechanics' lien or other lien or encumbrance shall be filed or attached against the Property without the prior written consent of the Agent in each instance, the Borrower covenants and agrees that, within twenty (20) days after the filing of such lien, the Borrower will promptly discharge the same by payment or filing bond or otherwise as permitted by law; and if the Borrower fails to do so, the Agent may, at its option, in addition to, and not in limitation of, all other rights and remedies of the Agent in the Event of Default by the Borrower, and without regard to the priority of said mechanics' lien or other lien or encumbrance, pay the same, and all amounts expended by the Agent for such purpose shall constitute loans to the Borrower and shall be secured by the Deed of Trust and the other Financing Documents, and be due and payable forthwith by the Borrower to the Agent with interest thereon at the Reimbursement Rate provided for in the Deed of Trust. Section IV.06. Correction of Construction Defects. Promptly following any demand by the Agent, the Borrower shall correct or cause the correction of any structural defects in the Improvements and any material departures or deviations from the Plans and Specifications, as determined by the Agent in its sole but reasonable discretion, not approved in writing by the Agent. Section IV.07. Insurance. The Borrower shall provide or cause to be provided to the Agent, and shall maintain in full force and effect at all times during the term of the Loan, such policies of insurance as may be required by the terms of the Plans and Specifications, the Financing Agreement, the Deeds of - 21 - 25 Trust and the Financing Documents from a company or companies, and in form and amounts satisfactory to the Agent. Section IV.08. Fees and Expenses; Indemnity. The Borrower shall pay all fees, charges, costs and expenses required to satisfy the conditions of the Financing Documents. The Borrower shall hold the Lenders harmless and indemnify the Lenders against all claims of brokers and "finders" arising by reason of the execution and delivery of the Financing Documents or the consummation of the transaction contemplated hereby. Neither party is aware of any broker having a claim for payment. Section IV.09. Copies of Notices. Promptly following the giving or receipt by the Borrower of any notice given to or received from the General Contractor or any subcontractor or materialman with respect to the Property, if such notice concerns any default or failure to perform by any party, or relates to any matter requiring the Agent's or the Lenders' approval under this Agreement, the Borrower shall forward to the Agent copies of any such notice. ARTICLE V. NEGATIVE COVENANTS. Section V.01. Other Liens; Transfers; "Due-on-Sale"; etc. The Borrower shall not, without the prior written consent of the Agent, create or permit to be created or remain with respect to any of the Property or any part thereof or income therefrom, any mortgage, pledge, lien, encumbrance or charge, or security interest, or conditional sale or other title retention agreement, whether prior or subordinate to the lien of the Financing Documents, other than in connection with the Financing Documents or as otherwise provided or permitted therein. Except for any grant, conveyance, sale, assignment or transfer in the ordinary course of the Borrower's business and which is specifically conditioned upon the release of record of the lien of the Deed of Trust and the other Financing Documents as to that portion of the Property granted, conveyed, sold, assigned or transferred, the Borrower shall not, without the prior written consent of the Agent, make, create, permit or consent to any conveyance, sale, assignment or transfer of any of the Property or any part thereof, other than in connection with the Financing Documents or as otherwise provided or permitted therein. Section V.02. Impairment of Security. The Borrower shall take no action which shall impair in any manner the value of any of the Property or the validity, priority or security of any Deed of Trust. Section V.03. Conditional Sales. The Borrower shall not incorporate in the Improvements any property acquired under a - 22 - 26 conditional sales contract, or lease, or as to which the vendor retains title or a security interest, without the prior written consent of the Agent. Section V.04. Changes to Plans and Specifications. After review and approval of a Total Development Budget by the Agent, the Borrower shall not permit any change order increasing the price of the Improvements for an Eligible Project by more than $50,000 for any one change order or by more than 10% of the total hard cost portion of the Total Development Budget in the aggregate or materially altering the scope of the Improvements, without the prior written consent of the Agent which consent will not be unreasonably withheld. Section V.05. Construction Contract; Construction Management. The Borrower shall not execute any contract or agreement or become a party to any arrangement for the construction of any Improvements or for construction management services with respect to any Property without the prior written consent of the Agent. ARTICLE VI. EVENTS OF DEFAULT. The terms "Event(s) of Default", as used in this Agreement shall mean the occurrence or happening, from time to time, of any one or more of the following: Section VI.01. Defaults Under Other Financing Documents. Any default or event of default (as defined therein) shall occur under the Master Note, any Note or any of the other Financing Documents. Section VI.02. Representations and Warranties. Any representation or warranty contained in this Agreement, or in any other document, certificate or opinion delivered to the Agent in connection with the Credit Facility, shall prove at any time to be incorrect or misleading in any material respect either on the date when made or on the date when reaffirmed pursuant to Article III of this Agreement. Section VI.03. Compliance with Covenants. The Borrower shall fail to comply with the terms of any covenant or agreement contained in this Agreement and such failure shall continue uncured for a period of thirty (30) days after Notice from the Agent to the Borrower, unless the nature of the failure is such that (a) it cannot be cured within the thirty (30) day period, and (b) the Borrower institutes corrective action within the thirty (30) day period and (c) the Borrower diligently pursues such action and completes the cure within ninety (90) days. - 23 - 27 Section VI.04. Damage to Improvements. At any time prior to the issuance of a certificate of occupancy or completion therefor, any of the Improvements are substantially damaged or destroyed by fire or other casualty and the Agent determines in good faith that such Improvements cannot be restored and completed in accordance with the terms and provisions of the Deed of Trust. Section VI.05. Disclosure of Contractors. The Borrower shall fail to disclose to the Agent, upon demand, the names of all persons with whom the Borrower has contracted or intends to contract for the construction of the Improvements or for the furnishing of labor or materials therefor. Section VI.06. Mechanic's Lien. A lien for the performance of work or the supply of materials which is perfected against any of the Land remains unsatisfied or un-bonded or for which no other arrangements satisfactory to the Agent have been made for a period of twenty (20) days after the date of perfection. Section VI.07. Survey Matters. Any Survey required by the Lenders during the period of construction shows any matters not approved by the Agent and such matters not approved are not removed within 30 days after Notice thereof by the Agent to the Borrower. Section VI.08. General Contractor Default. The General Contractor shall have defaulted under any Construction Contract, which default the Agent, in its sole discretion, shall deem substantial, and the Borrower, after thirty (30) days Notice from the Agent, shall fail to commence exercising any resulting right or remedy to which it may be entitled thereunder and diligently pursue such right or remedy. ARTICLE VII. REMEDIES ON DEFAULT. Section VII.01. Remedies on Default. The Agent shall have the right, upon the happening of any Event of Default, to terminate this Agreement by Notice from the Agent to the Borrower and, in addition to any rights or remedies available to them under the Deed of Trust or any of the other Financing Documents, to enter into possession of any of the Property and perform any and all work and labor necessary to complete the development of such Land and the construction of the Improvements thereon (whether or not in accordance with the Plans and Specifications therefor) and to employ watchmen to protect the Property and the Improvements. All sums expended by the Lenders for such purposes shall be deemed to have been advanced to the Borrower under the applicable Note and shall be secured by the Deed of Trust. For - 24 - 28 this purpose, the Borrower hereby constitutes and appoints the Lenders, or the Agent on behalf of the Lenders, its true and lawful attorney-in-fact with full power of substitution to complete work on any Eligible Project in the name of the Borrower, and hereby empowers said attorney or attorneys as follows: (a) To use any funds of the Borrower including any balance which may be held in escrow and any funds which may remain un-advanced under any of the Loan for the purpose of completing the development of any of the Land and the construction of any of the Improvements, whether or not in the manner called for in the Plans and Specifications; (b) To make such additions and changes and corrections to any of the Plans and Specifications which shall be necessary or desirable in the judgment of the Agent to complete the development of any of the Land and the construction of any of the Improvements; (c) To employ such contractors, subcontractors, agents, architects and inspectors as shall be necessary or desirable for said purpose; (d) To pay, settle or compromise all existing bills and claims which are or may be liens against any of the Property, or may be necessary or desirable for the completion of the work or the clearance of title to any of the Property; (e) To execute all applications and certificates which may be required in the name of the Borrower; and (f) To do any and every act with respect to the development of the Land and the construction of the Improvements which the Borrower may do in its own behalf. It is understood and agreed that this power of attorney shall be deemed to be a power coupled with an interest which cannot be revoked. Said attorney-in-fact shall also have the power to prosecute and defend all actions or proceedings in connection with the development of the Land and the construction of the Improvements and to take such actions and to require such performance as the Lenders may deem necessary. Section VII.02. No Conditions Precedent to Exercise of Remedies. The Borrower shall not be relieved of any obligation by reason of the failure of the Lenders to comply with any request of the Borrower or of any other person to take action to foreclose on the Property under the Deed of Trust or otherwise to enforce any provision of the Financing Documents, or by reason of the release, regardless of consideration, of all or any part of - 25 - 29 the Property, or by reason of any agreement or stipulation between any subsequent owner of the Property and the Lenders extending the time of payment or modifying the terms of the Financing Documents without first having obtained the consent of the Borrower; and in the latter event, the Borrower shall continue to be liable to make payments according to the terms of any such extension or modification agreement, unless expressly released and discharged in writing by the Lenders. Section VII.03. Remedies Cumulative and Concurrent. No remedy herein conferred upon or reserved to the Lenders or the Agent is intended to be exclusive of any other remedies provided for in the Financing Documents, and each and every such remedy shall be cumulative, and shall be in addition to every other remedy given hereunder, or under the Financing Documents, or now or hereafter existing at law or in equity or by statute. Every right, power and remedy given by the Financing Documents to the Lenders or the Agent shall be concurrent and may be pursued separately, successively or together against the Borrower or the Property or any part thereof, and every right, power and remedy given by the Financing Documents may be exercised from time to time as often as may be deemed expedient by the Lenders or the Agent. Section VII.04. Strict Performance. No delay or omission of the Lenders or the Agent to exercise any right, power or remedy accruing upon the happening of an Event of Default shall impair any such right, power or remedy or shall be construed to be a waiver of any such Event of Default or any acquiescence therein. No delay or omission on the part of the Lenders or the Agent to exercise any option for acceleration of the maturity of the Obligations, or any of them, or for foreclosure of the Deeds of Trust, or any of them, following any Event of Default as aforesaid, or any other option granted to the Lenders hereunder in any one or more instances, or the acceptance by the Lenders of any partial payment on account of the Obligations shall constitute a waiver of any such Event of Default and each such option shall remain continuously in full force and effect. ARTICLE VIII. MISCELLANEOUS. Section VIII.01. No Warranty by Lenders. By accepting or approving anything required to be observed, performed or fulfilled by the Borrower or to be given to the Agent or the Lenders pursuant to this Agreement, including, without limitation, any certificate, balance sheet, statement of profit and loss or other financial statement, Survey, receipt, appraisal or insurance policy, the Lenders shall not be deemed to have warranted or represented the sufficiency, legality, effectiveness or legal effect of the same, or of any term, provision or condition - 26 - 30 thereof and any such acceptance or approval thereof shall not be or constitute any warranty or representation with respect thereto by the Lenders. Section VIII.02. Liability of Lenders. The Lenders shall not be liable for any act or omission by them pursuant to the provisions of this Agreement in the absence of fraud, willful misconduct or gross negligence. The Lenders shall incur no liability to the Borrower or any other party in connection with the acts or omissions of the Lenders or the Agent in reliance upon any certificate or other paper believed by the Lenders or the Agent to be genuine or with respect to any other thing which the Lenders or the Agent may do or refrain from doing, unless such act or omission amounts to fraud or gross negligence. In connection with the performance of their duties pursuant to this Agreement, the Lenders may consult with counsel of their own selection, and anything which the Lenders may do or refrain from doing, in good faith, in reliance upon the opinion of such counsel shall be full justification and protection to the Lenders. Section VIII.03. No Partnership. Nothing contained in this Agreement shall be construed in a manner to create any relationship between the Borrower and the Lenders other than the relationship of borrower and lender and the Borrower and the Lenders shall not be considered partners or co-venturers for any purpose on account of this Agreement. Section VIII.04. Severability. In the event any one or more of the provisions of this Agreement shall for any reason be held to be invalid, illegal or unenforceable, in whole or in part or in any other respect, or in the event any one or more of the provisions of any of the Financing Documents operates or would prospectively operate to invalidate this Agreement, then and in either of those events, at the option of the Lenders, such provision or provisions only shall be held for naught and shall not affect any other provision of the Note or of any of the other Financing Documents or the validity of the remaining Obligations and the remaining provisions of the Note and the Financing Documents shall remain operative and in full force and effect and shall in no way be affected, prejudiced or disturbed thereby. Section VIII.05. Successors and Assigns. Each and every one of the covenants, terms, provisions and conditions of this Agreement and the Financing Documents shall apply to, bind and inure to the benefit of the Borrower, its successors and those assigns of the Borrower consented to in writing by the Lenders, and shall apply to, bind and inure to the benefit of the Lenders and the endorsees, transferees, successors and assigns of each of the Lenders, and all persons claiming under or through any of them. - 27 - 31 Section VIII.06. Modification; Waiver. None of the terms or provisions of this Agreement may be changed, waived, modified, discharged or terminated except by instrument in writing executed by the party or parties against whom enforcement of the change, waiver, modification, discharge or termination is asserted. None of the terms or provisions of this Agreement shall be deemed to have been abrogated or waived by reason of any failure or failures to enforce the same. Section VIII.07. Third Parties; Benefit. All conditions to the obligation of the Lenders to make advances hereunder are imposed solely and exclusively for the benefit of the Lenders and their assigns and no other persons shall have standing to require satisfaction of such conditions in accordance with their terms or be entitled to assume that the Lenders will refuse to make advances in the absence of strict compliance with any or all thereof and no other person shall, under any circumstances, be deemed to be the beneficiary of such conditions, any or all of which may be freely waived in whole or in part by the Agent at any time in the sole and absolute exercise of its discretion pursuant to its agreements with the Lenders. The terms and provisions of this Agreement are for the benefit of the parties hereto and, except as herein specifically provided, no other person shall have any right or cause of action on account thereof. Section VIII.08. Conditions; Verification. Any condition of this Agreement which requires the submission of evidence of the existence or non-existence of a specified fact or facts implies as a condition to the existence or non-existence, as the case may be, of such fact or facts that the Lenders shall, at all times, be free independently to establish to their satisfaction and in its absolute discretion such existence or non-existence. Section VIII.09. Captions and Headings. The captions and headings contained in this Agreement are included herein for convenience of reference only and shall not be considered a part hereof and are not in any way intended to limit or enlarge the terms hereof. Section VIII.10. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be considered an original for all purposes; provided, however, that all such counterparts shall together constitute one and the same instrument. Section VIII.11. Notices. All Notices shall be deemed to have been received when delivered by hand, when delivered by an overnight courier, or when deposited in the mail in the manner provided for the giving of Notice except in any case where it is - 28 - 32 expressly provided in this Agreement that a Notice is not effective until actually received by the party to whom it is addressed. Section VIII.12. Signs; Publicity. At the Agent's request, but at the expense of the Agent, the Borrower shall place a sign acceptable to the Borrower at a location on each of the Eligible Projects satisfactory to the Agent, which sign shall recite, among other things, that the Lenders are financing the development of the Land and the construction of the Improvements. The Borrower expressly authorizes the Agent to prepare and to furnish to the news media for publication from time to time news releases with respect to the Credit Facility and each Eligible Project, specifically to include but not limited to, releases detailing the Agent's and the Lenders' involvement with the Credit Facility and the financing of any Eligible Project, all subject to prior review by the Borrower. Section VIII.13. Applicable Law. This Agreement shall be governed by and construed, interpreted and enforced in accordance with the laws of the Commonwealth of Virginia. Section VIII.14. Time of Essence. Time shall be of the essence for each and every provision of this Agreement of which time is an element. Section 8.15 Document Controlling. In the event of any conflict between this Agreement and the Financing Agreement, the Financing Agreement shall control. IN WITNESS WHEREOF, the Borrower and the Agent have caused this Agreement to be executed under seal as of the day and year first above written. WITNESS OR ATTEST: SUNRISE EAST ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia limited partnership /s/ Wayne G. Tatusko By: Sunrise Assisted Living - --------------------- Name: Investments, Inc., general partner Title: By: /s/ James S. Pope (SEAL) ----------------------- James S. Pope Vice President WITNESS: NATIONSBANK, N.A., as Agent for the Lenders - 29 - 33 _/s/ Wayne G. Tatusko__ By: _/s/ Robert J. Montanari_(SEAL) -------------------- ----------------------- Robert J. Montanari Vice President STATE/COMMONWEALTH OF VIRGINIA, CITY/COUNTY OF _Fairfax_, TO WIT: I HEREBY CERTIFY, that on this 23rd day of December, 1997, before me, the undersigned Notary Public of said State/Commonwealth, personally appeared James S. Pope, who acknowledged himself to be a Vice President of Sunrise Assisted Living Investment, Inc., known to me (or satisfactorily proven) to be the person whose name is subscribed to the within instrument, and acknowledged that he executed the same for the purposes therein contained as duly authorized officer of said corporation by signing the name of the corporation by himself as vice president. WITNESS my hand and Notarial Seal. _/S/ Dawn A. Washington_____ ---------------------- Notary Public My Commission Expires: STATE/COMMONWEALTH OF VIRGINIA, CITY/COUNTY OF Fairfax_ , TO WIT: I HEREBY CERTIFY, that on this 23rd day of December,1997, before me, the undersigned Notary Public of said State/Commonwealth, personally appeared Robert J. Montanari, who acknowledged himself to be a vice president of NationsBank, N.A., as Agent for the Lenders, known to me (or satisfactorily proven) to be the person whose name is subscribed to the within instrument, and acknowledged that he executed the same for the purposes therein contained as the duly authorized officer of said Bank by signing the name of the Bank by himself as vice president. WITNESS my hand and Notarial Seal. _/S/ Dawn A. Washington______ ---------------------- Notary Public My Commission Expires: - 30 - EX-10.31.4 9 MANAGEMENT FEE SUBORDINATION AGREEMENT 1 EXHIBIT 10.31.4 MANAGEMENT FEE SUBORDINATION AGREEMENT THIS MANAGEMENT FEE SUBORDINATION AGREEMENT (this "Agreement") is made as of the 23rd day of December, 1997, in favor of NATIONSBANK, N.A. as agent ("Agent") for itself and for certain additional lenders (collectively with the Agent, the "Lenders") who are or shall be from time to time participating as lenders in a bank group pursuant to the Amended and Restated Agency Agreement of even date herewith (as amended, restated or substituted from time to time, the "Agency Agreement") by SUNRISE EAST ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia limited partnership (the "Borrower"), and SUNRISE ASSISTED LIVING MANAGEMENT, INC., a corporation organized and existing under the laws of the Commonwealth of Virginia, formerly known as Sunrise Terrace, Inc. (the "Management Company"). RECITALS A. The Borrower obtained from the Agent and certain other lenders (collectively, the "Original Lenders") a credit facility in the maximum principal sum of $90,000,000 (the "Original Credit Facility") which was a non-revolving line of credit pursuant to which the Borrower could obtain certain construction/interim loans (each a "Facility Loan;" collectively, the "Facility Loans") for assisted living facilities and independent living facilities. The Original Credit Facility has been evidenced by a Master Promissory Note dated June 13, 1996 as amended pursuant to a First Amendment to Master Promissory Note dated September 5, 1996 and by a Second Amendment to Master Promissory Note dated March 31, 1997 (collectively, the "Master Note"). B. In connection with the making of each Facility Loan, the Borrower executed a promissory note in the maximum principal sum of each Facility Loan (each a "Facility Note" and collectively, the "Facility Notes"). Availability under the Master Note was reduced by the principal sum of each Facility Note. In connection with the Original Credit Facility, the Management Company executed a Management Fee Subordination Agreement dated June 13, 1996 for the benefit of the Original Lenders. C. The Borrower has applied to the Lenders to increase the maximum principal sum of the Original Credit Facility to $250,000,000 or such greater amount as the Lenders may from time to time commit to lend pursuant to the Agency Agreement (such increased and modified credit facility being hereinafter referred to as the "Credit Facility" or the "Loan") and to provide that the Credit Facility will be revolving. Advances or readvances are to be made pursuant to, and secured by, the provisions of 2 that certain Amended and Restated Financing and Security Agreement dated the same date as this Agreement by and between the Agent and the Borrower (as amended, restated or substituted from time to time, the "Financing Agreement") and that certain Amended and Restated Master Construction Loan Agreement dated the same as this Agreement by and between the Agent and the Borrower (as amended, restated or substituted from time to time, the "Construction Agreement"). D. The Loan is evidenced by that certain Amended, Restated, Consolidated and Increased Master Promissory Note of even date herewith payable by the Borrower to Agent on behalf of the Lenders (as amended, restated, renewed or substituted from time to time, the "Note"). E. In accordance with, and pursuant to, that certain management agreement by and between the Management Company and the Borrower dated September 5, 1996 covering Facilities (as hereinafter defined) known as Sunrise of Morris Plains, Sunrise of Old Tappan and Sunrise of Wayne and other management agreements to be executed by the Borrower or Guarantor Subsidiaries for other Facilities, the Management Company has agreed or will agree to manage and operate those assisted living and independent living facilities (collectively, the "Facilities") owned by the Borrower or the Guarantor Subsidiaries (the management agreements, together with any and all amendments thereto, extensions thereof and substitutions therefor are herein collectively referred to as the "Management Agreement"). F. The Management Company and the Borrower have requested that the Agent enter into the Financing Agreement with the Borrower and have requested that the Lenders make the Loan to the Borrower pursuant thereto. G. The Lenders have required, as a condition precedent to the execution and delivery of the Financing Agreement and the making of the Loan thereunder, the execution and delivery of this Agreement by both the Management Company and the Borrower. H. All capitalized terms used in this Agreement and not defined herein shall have the meaning given to such terms in the Financing Agreement. AGREEMENTS NOW, THEREFORE, in order to induce the Agent to enter into the Financing Agreement and the Construction Agreement whereby the Lenders shall make advances under the Loan to the Borrower thereunder and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Management Company and the Borrower hereby covenants and agrees 2 3 with the Agent as follows: 1. Recitals. The Recitals set forth above are incorporated into this Agreement by reference. 2. Subordination. (a) To the extent provided herein, the Management Company hereby subordinates and postpones the payment and the time of payment of any and all compensatory payments, whether direct or indirect, due and payable to the Management Company by, or on behalf of, the Borrower or any Guarantor Subsidiary under, and in connection with, services rendered or to be rendered by the Management Company under the Management Agreement, including, without limitation, any and all fees, salaries, compensation, commissions, bonuses and other payments and distributions due and payable under, and in connection with, the Management Agreement, to, or for the account or benefit of, the Management Company, but excluding, however, any and all payments to the Management Company by the Borrower or any Guarantor Subsidiary as reimbursement for any and all necessary and out-of-pocket reasonable costs and expenses incurred and paid by the Management Company in connection with the Management Company's management and operation of the Facilities to the extent such payments are properly reimbursable in accordance with the terms and conditions of the Management Agreement (collectively, the "Subordinated Management Fees"), to, and in favor of, the payment and the time of payment of all of the "Obligations" (as hereinafter defined). As used in this Agreement, the term "Obligations" shall mean all present and future debts, obligations and liabilities of the Borrower or any Guarantor Subsidiary to the Lenders arising pursuant to, and/or on account of, the provisions of the Financing Agreement, the Construction Agreement, the Note, and any of the other Financing Documents, including, without limitation, the obligation (i) to pay all principal (including, without limitation, any principal advanced after the date of the Financing Agreement and any principal that is repaid and readvanced), interest, late charges and prepayment premiums (if any) due at any time under the Note; (ii) to pay all Expenses (as defined in the Financing Agreement), indemnification payments and other sums due at any time under the Financing Documents, together with interest thereon as may be provided in the Financing Documents; and (iii) to perform, observe and comply with all of the terms, covenants and conditions, expressed or implied, which the Borrower or any Guarantor Subsidiary is required to perform, observe or comply with pursuant to the terms of the Financing Documents. (b) So long as all or any part of the Obligations remain unpaid, the Management Company shall not, without the prior written consent of the Agent ask, demand, sue for, set off, accept or receive any payment of all or any part of the Subordinated Management Fees, except as provided herein. Any and 3 4 all amounts paid by the Borrower to the Management Company in accordance with, and subject to, the terms and conditions of the Management Agreement, shall be and remain the property of the Management Company; provided, that any such payments are paid and received in compliance with the terms and conditions of this Agreement. Prior to the occurrence of an Event of Default under the Financing Documents or a default by the Management Company under the Management Agreement, the Management Company shall be entitled to collect the Subordinated Management Fees, as and when the same become due and payable pursuant to the terms of the Management Agreement. For purposes of this Agreement only, the term "Event of Default" shall mean that one of the following events has occurred: (i) the Borrower and the Guarantor Subsidiary do not have sufficient net cash flow from its operations or the operating reserves contained in the Total Development Budget to pay the Subordinated Management Fees, (ii) the Borrower has failed to satisfy one or more of the financial covenants set forth in the Financing Agreement, and/or (iii) the Agent has exercised its right to accelerate payment of the Loan. (c) The Management Company agrees that the failure of the Borrower to pay any or all of the Subordinated Management Fees as and when required because of the provisions of this Agreement shall not in any respect relieve or excuse the Management Company for the prompt and proper performance and discharge of any of its duties, obligations or responsibilities under the Management Agreement; and the failure of the Management Company to continue to perform its duties, obligations and responsibilities under the Management Agreement in accordance with the terms and conditions of the Management Agreement shall constitute a default by the Management Company under the Management Agreement. The terms and conditions of this Agreement are incorporated in, and made a part of, the Management Agreement. In addition, the Borrower and the Management Company agree not to amend, modify, supplement, restate, rescind, terminate, waive, or otherwise change any of the terms or conditions of the Management Agreement without the prior written consent of the Agent, which consent shall not be unreasonably withheld. (d) The Management Company agrees not to subordinate, assign or transfer all or any part of the Subordinated Management Fees or any of the other rights of the Management Company under, and in connection with, the Management Agreement, to any other person without the prior written consent of the Agent, which consent shall not be unreasonably withheld. 3. Distributions, etc. In the event of any distribution, division or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part 4 5 of the assets of the Borrower or the proceeds thereof to creditors of the Borrower or to any indebtedness, liabilities and obligations of the Borrower, by reason of the liquidation, dissolution or other winding up of the Borrower or the Borrower's business, or in the event of any sale, receivership, insolvency or bankruptcy proceeding, or assignment for the benefit of creditors, or any proceeding by or against the Borrower for any relief under any bankruptcy or insolvency law or other laws relating to the relief of debtors, readjustment of indebtedness, reorganizations, compositions or extensions, then and in any such event any payment or distribution of any kind or character, either in cash, securities or other property, which shall be payable or deliverable upon or with respect to all or any part of the Subordinated Management Fees shall be paid or delivered directly to the Agent for application to the Obligations (in such order and manner as the Agent may elect in its sole and absolute discretion; and including, without limitation any interest accruing subsequent to the commencement of any such event or proceeding) until the Obligations shall have been fully paid and satisfied. In the event the Management Company defaults in the performance of any of the terms and conditions of this Agreement, the Management Company hereby irrevocably authorizes and empowers the Agent, and irrevocably appoints the Agent as the Management Company's attorney-in-fact to demand, sue for, collect and receive every such payment or distribution and give acquittance therefor and to file claims and take such other proceedings in the name of the Agent or in the name of the Management Company or otherwise, as the Agent may deem necessary or advisable to carry out the provisions of this Agreement. The Management Company hereby agrees to execute and deliver to the Agent such powers of attorney, assignments, endorsements or other instruments as may be requested by the Agent in order to enable the Agent to enforce any and all claims upon or with respect to the Subordinated Management Fees, and to collect and receive any and all payments or distributions which may be payable or deliverable at any time upon or with respect to any of the Subordinated Management Fees. 4. Receipt of Payments by Management Company. Should any payment or distribution not permitted by the provisions of this Agreement or security or proceeds thereof be received by the Management Company upon or with respect to all or any part of the Subordinated Management Fees prior to the full payment and satisfaction of the Obligations, the Management Company will deliver the same to the Agent in precisely the form received (except for the endorsement or assignment of the Management Company where necessary), for application to the Obligations, first, to the payment of those Obligations which are due and payable, second to any and all unpaid and accrued interest on the Obligations, and then to such other Obligations which may be outstanding, and, until so delivered, the same shall be held in 5 6 trust by the Management Company as property of the Agent. In the event of the failure of the Management Company to make any such endorsement or assignment, the Agent, or any of its officers or employees on behalf of the Agent, is hereby irrevocably authorized in its own name or in the name of the Management Company to make the same, and is hereby appointed the Management Company's attorney-in-fact for those purposes, that appointment being coupled with an interest and irrevocable. 5. Consents, Waivers, etc. The Management Company hereby consents that at any time and from time to time and with or without consideration, the Agent may, without further consent of or notice to the Management Company and without in any manner affecting, impairing, lessening or releasing any of the provisions of this Agreement, renew, extend, change the manner, time, place and terms of payment of, sell, exchange, release, substitute, surrender, realize upon, modify, waive, grant indulgences with respect to and otherwise deal with in any manner: (a) all or any part of the Obligations; (b) all or any of the Financing Documents; (c) all or any part of any property at any time securing all or any part of the Obligations; and (d) any person at any time primarily or secondarily liable for all or any part of the Obligations and/or any collateral and security therefor, all as if this Agreement did not exist. The Management Company hereby waives demand, presentment for payment, protest, notice of dishonor and of protest with respect to the Obligations, notice of acceptance of this Agreement, notice of the making of any of the Obligations and notice of default under any of the Financing Documents. 6. Continuing Agreement. This is a continuing Agreement and shall remain in full force and effect until (a) all of the Obligations have been performed and satisfied, (b) the Lenders have no obligation or outstanding agreement to allow further advances or additional loans to the Borrower, and (c) the Financing Agreement has been terminated by the Agent, or has otherwise expired; at which time this Agreement shall automatically terminate without further action of any kind. 7. Transfer or Assignment of Obligations. If any of the Obligations should be transferred or assigned by the Agent, this Agreement will inure to the benefit of the respective transferee or assignee to the extent of such transfer or assignment, provided that the Agent shall continue to have the unimpaired right to enforce this Agreement as to any of the Obligations not so transferred or assigned. 8. Further Agreements. (a) If the Management Company, contrary to this Agreement, commences or participates in any action or proceeding against the Borrower, the Borrower may interpose as a defense or dilatory plea the making of this 6 7 Agreement, and the Agent may intervene and interpose such defense or plea in the name of the Agent or in the name of the Borrower. Should the Management Company, contrary to this Agreement, in any way attempt to enforce payment of the Subordinated Management Fees or any part thereof, the Agent in its own name or in the name of the Borrower, may restrain the Management Company from so doing, it being understood and agreed by the Management Company that (i) the damages of the Borrower, and the Agent from its actions may at that time be difficult to ascertain and may be irreparable, and (ii) the Management Company waives any defense that the Borrower or the Agent cannot demonstrate damage and/or can be made whole by the awarding of damages. (b) If the Management Company, the Borrower or both contrary to this Agreement, make, attempt to or threaten to make any payment or take any action contrary to this Agreement, the Agent may restrain the Management Company and the Borrower from so doing, it being understood and agreed by the Management Company and the Borrower that (i) the damages of the Agent from their actions may at that time be difficult to ascertain and may be irreparable and (ii) the Management Company and the Borrower waive any defense or claim that the Agent cannot demonstrate damage and/or cannot be made whole by the awarding of damages. (c) The Management Company and the Borrower agrees to indemnify the Lenders and to hold the Lenders harmless for any and all expenses and obligations, including attorney's fees, as they arise, relating to actions of the Management Company, the Borrower or both taken contrary to this Agreement. (d) Nothing herein contained shall obligate the Lenders to grant credit to, or continue financing arrangements with, the Borrower, except as otherwise provided in any of the Financing Documents. (e) The provisions of this Agreement are solely for the benefit of the Lenders and their successors and assigns and there are no other parties, persons or entities whatsoever (including, without limitation, the Management Company, its successors and assigns and the Borrower, its successors and assigns) who are intended to be benefitted in any manner whatsoever by this Agreement. (f) No delay or failure on the part of the Agent to exercise any of its rights and remedies or the rights or remedies of the Lenders hereunder or now or hereafter existing at law or in equity or by statute or otherwise, or any partial or single exercise thereof, shall constitute a waiver thereof. All such rights and remedies are cumulative and may be exercised singly or concurrently and the exercise of any one or more of them will not be a waiver of any other. No waiver of any of its rights and 7 8 remedies hereunder, and no modification or amendment of this Agreement shall be deemed to be made by the Lenders unless the same shall be in writing, duly signed on behalf of the Agent, and each such waiver, if any, shall apply only with respect to the specific instance involved and shall in no way impair the rights and remedies of the Lenders hereunder in any other respect at any other time. (g) This Agreement shall be binding upon the Borrower and the Management Company and the respective successors and assigns of the Management Company and Borrower and shall inure to the benefit of the Lenders and their respective successors and assigns. (h) As used herein, the singular number shall include the plural and the plural shall include the singular and the use of the masculine, feminine or neuter gender shall include all genders, as the context may require. As used herein, the term "person" shall include an individual, a corporation, an association, a partnership, a trust, an organization and any other entity. (i) The paragraph headings of this Agreement are for convenience only, and shall not limit or otherwise affect any of the terms hereof. (j) This Agreement shall be governed and construed in accordance with the laws of the Commonwealth of Virginia and shall be deemed to have been executed, delivered and accepted in the Commonwealth of Virginia. IN WITNESS THEREOF, the Management Company has caused this Management Fee Subordination Agreement to be executed by its duly authorized officer and the Borrower has caused this Management Fee Subordination Agreement to be executed by its duly authorized general partner under seal as of the date first written above. ATTEST: SUNRISE ASSISTED LIVING MANAGEMENT, INC. a Virginia corporation, as the Management Company _/s/ Wayne G. Tatusko__ By:__/s/ James s. Pope___(SEAL) -------------------- ----------------- James S. Pope Vice President 8 9 WITNESS: SUNRISE EAST ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia limited partnership, as the Borrower By: Sunrise Assisted Living Investments, Inc., its general partner __/s/ Wayne G. Tatusko__ By: _/s/ James s. Pope____(SEAL) -------------------- ----------------- James S. Pope Vice President 9 EX-10.31.5 10 AMENDED PLEDGE, ASSIGNMENT & SECURITY AGREEMENT 1 EXHIBIT 10.31.5 AMENDED AND RESTATED PLEDGE, ASSIGNMENT AND SECURITY AGREEMENT (MASTER) THIS AMENDED AND RESTATED PLEDGE, ASSIGNMENT AND SECURITY AGREEMENT (this "Agreement") is made this 23rd day of December, 1997, by SUNRISE ASSISTED LIVING, INC., a Delaware Corporation ("SALI") and SUNRISE ASSISTED LIVING INVESTMENTS, INC., a Virginia Corporation ("SALII;" SALI and SALII are collectively referred to herein as the "Assignor"), in favor of NATIONSBANK, N.A. as agent (the "Agent") for itself and for certain additional lenders (collectively with the Agent, the "Lenders") who are participating in a bank group pursuant to an Agency Agreement of even date herewith (as amended, restated or substituted from time to time, the "Agency Agreement"). R E C I T A L S A. SALII is the general partner of and SALI is the limited partner of Sunrise East Assisted Living Limited Partnership, a limited partnership organized and existing under the laws of the Commonwealth of Virginia (the "Borrower"). The Borrower had obtained from the Agent and certain other Lenders a credit facility for the making of certain construction/interim loans in the aggregate principal amount of $90,000,000 (the "Original Credit Facility"). In connection with the Original Credit Facility, the Assignor executed a Pledge, Assignment and Security Agreement in favor of the Agent dated June 13, 1996 granting a lien on the collateral described therein (the "Pledge Agreement"). B. The Borrower has applied to the Lenders to increase the maximum principal sum of the Credit Facility to $250,000,000 or such greater amount as the Lenders may from time to time commit to lend pursuant to the Amended and Restated Agency Agreement and to provide that the Credit Facility will be revolving. Advances or readvances are to be made pursuant to, and secured by, the provisions of that certain Amended and Restated Financing and Security Agreement dated the same date as this Agreement by and between the Agent and the Borrower (as amended, restated or substituted from time to time, the "Financing Agreement") and that certain Amended and Restated Master Construction Loan Agreement dated the same date as this Agreement by and between the Agent and the Borrower (as amended, restated or substituted from time to time, the "Construction Agreement"). The Loan is evidenced by that certain Amended, Restated, Consolidated and Increased Master Promissory Note dated the same date as this Agreement from the Borrower, as maker, payable to the order of the Lenders (as amended, restated and substituted at any time and 2 from time to time, the "Master Note"). C. It is a condition precedent, among others, to the Agent's agreement to enter into the Financing Agreement and for the Lenders to make the Loan to the Borrower that the Assignor enter into this Agreement in order to secure the full and prompt payment and performance of all of the "Obligations" (as defined in Financing Agreement). D. All defined terms used in this Agreement and not defined in this Agreement shall have the meaning given to such terms in the Financing Agreement. As used in this Agreement, the singular number shall include the plural, the plural the singular and the use of the masculine, feminine or neuter gender shall include all genders, as the context may require. AGREEMENTS NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the Assignor and the Agent hereby amend and restate the Pledge Agreement in its entirety as follows: ARTICLE _._.1 SECURITY SECTION _.1.1 Collateral. As security for the prompt and full payment and performance of all of the Obligations, and as security for the prompt and full performance of all of the obligations of the Assignor under this Agreement and all of the Obligations of the Assignor, the Borrower, any Facility Owner and/or any other Person under the Financing Agreement and all of the other Financing Documents, whether now in existence or hereafter created and whether joint, several, or both, primary, secondary, direct, contingent or otherwise, the Assignor hereby pledges, assigns and grants to the Lenders a first priority security interest in, assignment of, and Lien on, the following property of the Assignor (collectively, the "Collateral"), whether now existing or hereafter created or arising: _.1.1.1 all rights, title and interest in and to and as a general and limited partner of the Borrower under the Borrower's partnership agreement dated June 6, 1996, as the same may have been or may be amended, supplemented, restated, or otherwise modified at any time and from time to time (the "Partnership Agreement"); _.1.1.2 all rights to receive any and all cash and non-cash distributions (regardless of how such distributions are classified and including any and all distributions-in-kind 2 3 and liquidating distributions), profits, losses, income, revenue, returns of capital, repayments of any loans made by either Assignor to the Borrower (including interest and fees with respect to such loans), and any and all development, management and similar fees payable by the Borrower to either Assignor of any kind or nature whatsoever, together with any and all other rights and property interests including, but not limited to, accounts, contract rights, instruments and general intangibles arising out of, under or relating to the Borrower and/or the Partnership Agreement; _.1.1.3 all other or additional equity or debt interests, other securities or property (including cash) paid or distributed in respect of the Borrower by way of any spin-off, merger, consolidation, dissolution, combination, reclassification or exchange of equity interests, asset sales, or similar rearrangement or reorganization; and _.1.1.4 all proceeds and products (both cash and non-cash) of the foregoing, whether now or hereafter arising under any of the foregoing. SECTION _.1.2 Rights of the Lenders in the Collateral. The Assignor agrees that with respect to the Collateral the Lenders shall have all the rights and remedies of a secured party under the Uniform Commercial Code, as well as those provided by law and/or in this Agreement. Notwithstanding the fact that the proceeds of the Collateral constitute part of the Collateral, the Assignor may not dispose of the Collateral, or any part thereof, without the prior written consent of the Agent. SECTION _.1.3 Registration of Pledge. If and to the extent requested by the Agent, the Assignor agrees, to notify the Borrower immediately of the pledge, assignment and security agreement under this Agreement and to request that the Borrower acknowledge the Lender's Lien in writing. The Assignor hereby authorizes and directs the Borrower to register the Assignor's pledge to the Lenders of the Collateral on the Borrower's books and, following written notice to do so by the Agent, to make direct payment to the Agent of any amounts due or to become due to the Assignor with respect to the Collateral. SECTION _.1.4 Rights of the Assignor in the Collateral. Until the occurrence of an Event of Default (as hereinafter defined), the Assignor shall be entitled (i) to vote all ownership or equity interests, (ii) to give consents, waivers and ratification to any and all actions of the Borrower requiring partner approval, and (iii) to receive all cash and non-cash distributions which may be paid on account of the Collateral and which are not otherwise prohibited by the Financing Agreement, this Agreement or any of the other Financing Documents. Any 3 4 cash distribution payable in respect of the Collateral which represents, in whole or in part, a return of capital or is paid in violation of this Agreement, the Financing Agreement or any of the other Financing Documents shall be received by the Assignor in trust for the Lenders, shall be paid immediately to the Lenders and shall be retained by the Lenders as part of the Collateral. The Assignor covenants and agrees that no distribution or other benefit with respect to the Collateral shall be received by or for the benefit of the Assignor, and no vote shall be cast or partner's consent, waiver or ratification given or action taken by the Assignor in its capacity as a partner of the Borrower, which would violate or be inconsistent with any of the terms and provisions of this Agreement or the Financing Agreement or which would materially impair the position or interest of the Lenders in the Collateral or dilute the percentage of the equity interests in the Borrower pledged to the Lenders. SECTION _.1.5 Pledge Unconditional. The obligations and liabilities of the Assignor under, and in connection with, this Agreement shall be absolute and unconditional. The Assignor expressly agrees that the Lenders may, in their sole and absolute discretion, without notice to, or further assent of, the Assignor and without in any way releasing, affecting or in any way impairing the obligations and liabilities of the Assignor hereunder: _.1.5.1 agree to the substitution, exchange, release or other disposition of any collateral or security for any or all of the Obligations, or to the subordination of any Lien or security interest therein; _.1.5.2 assign, pledge, participate, mortgage, hypothecate or otherwise transfer this Agreement, the Note, the Financing Agreement or all or any of the Obligations, or any interest therein or rights thereunder; and _.1.5.3 effect any release, compromise or settlement with the Borrower, any guarantor of, or other obligor with respect to, all or any part of the Obligations. SECTION _.1.6 Obligations Hereunder Primary. The obligations and liabilities of the Assignor under this Agreement shall be primary, direct and immediate, shall not be subject to any counterclaim, recoupment, set off, reduction or defense based upon any claim that the Assignor may have against the Lenders or any other obligor and shall not be conditional or contingent upon pursuit or enforcement by the Lenders of any remedies they may have against any other person with respect to the Obligations. 4 5 SECTION _.1.7 Certain Waivers by the Assignor. The Assignor hereby unconditionally, irrevocably and expressly waives: _.1.7.1 presentment and demand for payment of the Obligations and protest of non-payment; _.1.7.2 notice of acceptance of this Agreement and of presentment, demand and protest thereof; _.1.7.3 notice of any default hereunder and notice of all indulgences; _.1.7.4 demand for observance, performance or enforcement of any of the terms or provisions of this Agreement; and _.1.7.5 all other notices and demands otherwise required by law which the Assignor may lawfully waive. SECTION _.1.8 Waiver of Restrictions on Transfer of Collateral. The Assignor hereby unconditionally, irrevocably and expressly waives any restrictions to the transfer or assignment of the Collateral as set forth in Section 17 of the Partnership Agreement as well as any other provisions therein which may limit or restrict the assignment as set forth in this Agreement. ARTICLE _.2 REPRESENTATIONS AND WARRANTIES To induce the Lenders to make the Loan to the Borrower under the Financing Agreement, the Assignor represents and warrants to the Lenders, as follows: SECTION _.2.1 Percentage Ownership. The partnership interests assigned as part of the Collateral represent in the aggregate one hundred percent (100%) of the partnership interests of the Borrower. Each Assignor's partnership interest in the Borrower is as follows:
Interest in % of Partner's Name Partnership Partnership -------------- ----------- ----------- SALII General Partner 1% SALI Limited Partner 99%
SECTION _.2.2 No Amendments. The Partnership Agreement has not been amended, modified, restated, substituted, extended or renewed, except as expressly described in Section 0 of this 5 6 Agreement. SECTION _.2.3 Partnership Agreement. The Assignor has furnished the Agent with a true and complete copy of the executed Partnership Agreement. SECTION _.2.4 Good Standing of Assignor. Each Assignor (a) is a corporation duly organized, existing and in good standing under the laws of the jurisdiction of its organization, (b) has the power to own its property and to carry on its business as now being conducted, and (c) is duly qualified to do business and is in good standing in each jurisdiction in which the character of the properties owned by it therein or in which the transaction of its business makes such qualification necessary. SECTION _.2.5 Power and Authority. Each Assignor has full power and authority to execute and deliver this Agreement and the other Financing Documents to which it is a party, to assign and pledge the Collateral and perform all other obligations required under this Agreement with respect to the Collateral, and to incur and perform its obligations whether under this Agreement, the other Financing Documents or otherwise, all of which have been duly authorized by all proper and necessary action. No consent or approval of any shareholders or creditors of either Assignor, the Borrower, or partners of the Borrower, and no consent, approval, filing or registration with or notice to any Governmental Authority (as that term is defined in the Financing Agreement) on the part of the Assignor, is required as a condition to the execution, delivery, validity or enforceability of this Agreement or the other Financing Documents or the performance of the Obligations, including, without limitation, the right of the Lenders to dispose of the Collateral following an Event of Default. The Assignor has full right, power and authority and has all voting rights in any matters as may be represented by the Collateral. SECTION _.2.6 Good Standing of Borrower. The Borrower (a) is a Virginia limited partnership duly organized, validly existing and in good standing under the laws of the Commonwealth of Virginia, and is duly qualified to do business and in good standing in each other jurisdiction in which the character of its properties or the transaction of its business makes such qualification necessary and (ii) has the power, authority and legal right to own its property and to conduct its business as now owned and conducted. SECTION _.2.7 Binding Agreements. This Agreement and the other Financing Documents executed and delivered by the Assignor have been properly executed and delivered and constitute the valid and legally binding obligations of the Assignor and are fully enforceable against the Assignor in accordance with their 6 7 respective terms. SECTION _.2.8 No Conflicts. Neither the execution, delivery and performance of the terms of this Agreement or of any of the other Financing Documents executed and delivered by the Assignor nor the consummation of the transactions contemplated by this Agreement will conflict with, violate or be prevented by (a) the Assignor's partnership agreement, (b) any existing mortgage, indenture, contract or agreement binding on the Assignor or affecting its property, or (c) any Laws. SECTION _.2.9 Compliance with Laws. The Assignor is not in violation of any applicable Laws (including, without limitation, any Laws relating to employment practices, to environmental, occupational and health standards and controls) or order, writ, injunction, decree or demand of any court, arbitrator, or any Governmental Authority affecting the Assignor or any of its properties, the violation of which could adversely affect the authority of the Assignor to enter into, or the ability of the Assignor to perform under, this Agreement or any of the other Financing Documents executed by the Assignor. SECTION _.2.10 Litigation. There are no proceedings, actions or investigations pending or, so far as the Assignor knows, threatened before or by any court, arbitrator any Governmental Authority which could adversely affect the authority of the Assignor to enter into, or the ability of the Assignor to perform under, this Agreement or any of the other Financing Documents executed and delivered by the Assignor. SECTION _.2.11 Title to Properties. The Assignor has good and marketable title to the Collateral. The Assignor has legal, enforceable and uncontested rights to use freely such property and assets. The Assignor is the sole owner of all of the Collateral, free and clear of all security interests, pledges, voting trusts, agreements, Liens, claims and encumbrances whatsoever, other than the security interest, assignment and Lien granted under this Agreement. The ownership interests assigned as Collateral are subject to no outstanding options or other requirements with respect to such interests. SECTION _.2.12 Perfection and Priority of Collateral. The Lenders have, or upon execution and delivery of this Agreement and recording of the financing statements executed by the Assignor as part of the Security Documents, will have, and will continue to have as security for the Obligations, a valid and perfected, first priority, Lien on and security interest in all of the Collateral, free of all other Liens, claims and rights of third parties whatsoever. SECTION _.2.13 Business Information. The information 7 8 contained in EXHIBIT A, which is attached to and a part of this Agreement, is complete and correct in all material respects. SECTION _.2.14 Taxes. Each Assignor has filed or caused to be filed all federal, state and local tax returns, and have paid or caused to be paid all taxes required in connection therewith, to the extent such taxes have become due and payable. ARTICLE _.3 COVENANTS Until payment in full and the performance of all of the Obligations and all of the obligations of the Assignor hereunder or secured hereby, the Assignor covenants and agrees with the Lenders as follows: SECTION _.3.1 Organizational Existence. Each Assignor shall maintain its organizational existence in good standing in the jurisdiction in which it is organized and in each other jurisdiction where it is required to register or qualify to do business if the failure to do so in such other jurisdiction might have a material adverse effect on the ability of the Assignor to perform its obligations under this Agreement, on the conduct of the Assignor's operations, on the Assignor's financial condition, or on the value of, or the ability of the Lenders to realize upon, the Collateral. SECTION _.3.2 Delivery of Collateral. The Assignor shall deliver immediately to the Agent any certificates representing ownership interests in the Borrower, and all instruments, items of payment and other Collateral received by the Assignor. All Collateral at any time received or held by the Assignor shall be received and held by the Assignor in trust for the benefit of the Lenders, and shall be kept separate and apart from, and not commingled with, the Assignor's other assets. SECTION _.3.3 Defense of Title and Further Assurances. The Assignor will do or cause to be done all things necessary to preserve and to keep in full force and effect its interests in the Collateral, and shall defend, at its sole expense, the title to the Collateral and any part thereof. Further, the Assignor shall promptly, upon request by the Agent, execute, acknowledge and deliver any financing statement, endorsement, renewal, affidavit, deed, assignment, continuation statement, security agreement, certificate or other document as the Agent may require in order to perfect, preserve, maintain, protect, continue, realize upon, and/or extend the Lien and security interest of the Lenders under this Agreement and the priority thereof. The Assignor shall pay to the Agent upon demand all taxes, costs and 8 9 expenses (including but not limited to reasonable attorney's fees) incurred by the Agent in connection with the preparation, execution, recording and filing of any such document or instrument mentioned aforesaid. Each Assignor hereby irrevocably appoints the Agent as its attorney-in-fact, with power of substitution from time to time, to take such actions as are described in this Section as well as any other action which Assignor is required to take under this Agreement or under any of the other Financing Documents. SECTION _.3.4 Compliance with Laws. The Assignor shall comply with all applicable Laws and observe the valid requirements of Governmental Authorities, the noncompliance with or the nonobservance of which might have a material adverse effect on the ability of the Assignor to perform its obligations under this Agreement or any of the Financing Documents to which the Assignor is a party or on the conduct of the Assignor's operations, on the Assignor's financial condition, or on the value of, or the ability of the Lenders to realize upon, the Collateral. SECTION _.3.5 Protection of Collateral. The Assignor agrees that the Lenders may at any time take such steps as the Lenders deem reasonably necessary to protect the Lenders' interest in, and to preserve the Collateral. The Assignor agrees to cooperate fully with the Lenders' efforts to preserve the Collateral and will take such actions to preserve the Collateral as the Agent may in good faith direct. All of the Lenders' expenses of preserving the Collateral, including, without limitation, reasonable attorneys fees, shall be part of the Enforcement Costs. SECTION _.3.6 Certain Notices. The Assignor will promptly notify the Agent in writing of any Event of Default and of any litigation, regulatory proceeding, or other event which materially and adversely affects the value of the Collateral, the ability of the Assignor or the Lenders to dispose of the Collateral, or the rights and remedies of the Lenders in relation thereto. SECTION _.3.7 Locations. The Assignor shall give the Agent not less than thirty (30) days' prior written notice of any change to the information set forth on EXHIBIT A. SECTION _.3.8 Books and Records; Information. _.3.8.1 The Assignor shall maintain proper books and record and account in which full, true and correct entries are made of all dealings and transactions in relation to the Collateral and which reflect the Lien of the Lenders thereon. _.3.8.2 The Assignor agrees that the Agent may 9 10 from time to time and at its option (a) require the Assignor to, and the Assignor shall, periodically deliver to the Agent records and schedules, which show the status of the Collateral and such other matters which affect the Collateral, as well as copies of each Assignor's tax returns and filings; (b) verify the Collateral and inspect the books and records of the Assignor and make copies thereof or extracts therefrom; (c) notify any prospective buyers or transferees of the Collateral or any other Persons (as that term is defined in the Financing Agreement) of the Lenders' interest in the Collateral; and (d) disclose to prospective buyers or transferees from the Lenders any and all information regarding the Borrower, the Collateral and/or the Assignor. SECTION _.3.9 Disposition of Collateral. The Assignor will not sell, discount, allow credits or allowances, assign, extend the time for payment on, convey, lease, assign, transfer or otherwise dispose of the Collateral or any part thereof. SECTION _.3.10 Distributions. Subject to Section 7.30 of the Financing Agreement, the Assignor shall receive no dividend or distribution or other benefit with respect to the Borrower, and shall not vote, consent, waive or ratify any action taken, which would violate or be inconsistent with any of the terms and provisions of this Agreement, the Financing Agreement or any of the other Financing Documents. The Assignor authorizes and directs the Borrower to make all distributions and other payments constituting a part of the Collateral directly to the Agent upon written request of the Agent, without any additional authorization by the Assignor, after the occurrence of an Event of Default (as hereinafter defined). In the event any distribution or other payment constituting a part of the Collateral is received by the Assignor after the occurrence of an Event of Default, the Assignor shall immediately remit such distribution or payment to the Agent, together with any necessary endorsement or assignment. All amounts received by the Agent in accordance with this Section 3.10 shall, at the Lenders' option, be held as additional collateral for the Obligations or applied to the repayment of the Obligations, in such order and manner as the Agent may determine and without regard to the existence of an Event of Default. SECTION _.3.11 Liens. The Assignor will not create, incur, assume or suffer to exist any Lien upon any of the Collateral, other than Liens in favor of the Lenders. SECTION _.3.12 Taxes. Each Assignor shall pay all taxes and similar charges imposed upon or assessed against such Assignor or any of such Assignor's property prior to the date on which penalties are attached thereto. The Assignor shall cause the Borrower to pay all taxes and similar charges imposed upon or 10 11 assessed against the Borrower or any of the Borrower's property prior to the date on which penalties are attached thereto. SECTION _.3.13 Insurance. The Assignor shall maintain and shall cause the Borrower to maintain adequate insurance with respect to the Assignor's and the Borrower's respective operations and property, including without limitation, insurance against loss, damage or destruction by fire or other similar casualties and public liability and property damage insurance, all in conformity with prudent business practices. ARTICLE _.4 DEFAULT AND RIGHTS AND REMEDIES SECTION _.4.1 Events of Default. The occurrence of any one or more of the following events which continues beyond any applicable cure period shall constitute an "Event of Default" under the provisions of this Agreement: _.4.1.1 Default under Financing Agreement. An Event of Default (as that term is defined in the Financing Agreement) shall occur under the Financing Agreement. _.4.1.2 Default under this Agreement. If either Assignor shall fail to duly perform, comply with or observe any of the terms, conditions or covenants of this Agreement; or _.4.1.3 Breach of Representations and Warranties. Any representation or warranty made in this Agreement or in any report, statement, schedule, certificate, opinion (including any opinion of counsel for either Assignor), financial statement or other document furnished by either Assignor or its agents or representatives in connection with this Agreement, any of the other Financing Documents, or the Obligations or the other obligations secured by this Agreement, shall prove to have been false or misleading when made (or, if applicable, when reaffirmed) in any material respect. _.4.1.4 Failure to Comply with Covenants. The failure of either Assignor to perform, observe or comply with any covenant, condition or agreement contained in this Agreement. _.4.1.5 Receiver; Bankruptcy. Either Assignor shall (a) apply for or consent to the appointment of a receiver, trustee or liquidator of itself or any of its property, (b) admit in writing its inability to pay its debts as they mature, (c) make a general assignment for the benefit of creditors, (d) be adjudicated a bankrupt or insolvent, (e) file a voluntary petition in bankruptcy or a petition or an answer seeking or 11 12 consenting to reorganization or an arrangement with creditors or to take advantage of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or an answer admitting the material allegations of a petition filed against it in any proceeding under any such law, or take any action for the purposes of effecting any of the foregoing, or (f) by any act indicate its consent to, approval of or acquiescence in any such proceeding or the appointment of any receiver of or trustee for any of its property, or suffer any such receivership, trusteeship or proceeding to continue undischarged for a period of sixty (60) days, or (g) by any act indicate its consent to, approval of or acquiescence in any order, judgment or decree by any court of competent jurisdiction or any Governmental Authority enjoining or otherwise prohibiting the operation of a material portion of the Assignor's business or the use or disposition of a material portion of the Assignor's assets. _.4.1.6 Involuntary Bankruptcy, etc. (a) An order for relief shall be entered in any involuntary case brought against either Assignor under the United States Bankruptcy Code, or (b) any such case shall be commenced against either Assignor and shall not be dismissed within sixty (60) days after the filing of the petition, or (c) an order, judgment or decree under any other Law is entered by any court of competent jurisdiction or by any other Governmental Authority on the application of a Governmental Authority or of a Person other than either Assignor (i) adjudicating either Assignor bankrupt or insolvent, or (ii) appointing a receiver, trustee or liquidator of either Assignor, or of a material portion of either Assignor's assets, or (iii) enjoining, prohibiting or otherwise limiting the operation of a material portion of either Assignor's business or the use or disposition of a material portion of either Assignor's assets, and such order, judgment or decree continues unstayed and in effect for a period of thirty (30) days from the date entered. _.4.1.7 Liquidation, Termination, Dissolution of Assignor. If either Assignor shall liquidate, dissolve or terminate its existence. _.4.1.8 Judgment. Unless adequately covered by insurance in the opinion of the Agent, the entry of a final judgment for the payment of money involving more than $100,000 against either Assignor and the failure by such Assignor to discharge the same, or cause it to be discharged, or bonded off to the Agent's satisfaction, within thirty (30) days from the date of the order, decree or process under which or pursuant to which such judgment was entered. _.4.1.9 Execution; Attachment. Any execution, attachment or charging order is levied against the Collateral, 12 13 and such execution, attachment or charging order is not set aside, discharged or stayed within thirty (30) days after the same is levied. _.4.1.10 Default Under the Master Note. An Event of Default shall occur under any of the promissory notes issued under the Master Note. _.4.1.11 Liquidation, Termination, Dissolution of Borrower. The Borrower is dissolved either pursuant to the provisions of its Partnership Agreement, by operation of law, or in any other manner, voluntarily or otherwise; the Partnership Agreement of the Borrower is terminated pursuant to any of its provisions or by operation of law, or amended or modified in any manner; partner of the Borrower sells, assigns, mortgages, pledges, hypothecates, transfers, encumbers, permits to be encumbered or otherwise disposes of any or all of his, her or its interest in the Borrower or withdraws voluntarily or involuntarily (by operation of law or otherwise) from the Borrower; any new general or limited partner is admitted to the Borrower. SECTION _.4.2 Remedies. Upon the occurrence of any Default or Event of Default, the Agent may at any time thereafter exercise any one or more of the following rights, powers or remedies: _.4.2.1 Accelerate Obligations. The Agent may declare all or any portion of the Obligations to be immediately due and payable, without notice to Assignor and without demand, protest or notice of protest or dishonor. _.4.2.2 Legal Proceedings. The Agent may proceed to protect or enforce the Lenders' rights by an action or actions at law or in equity or by any other appropriate proceeding, whether for the specific performance of any of the covenants herein contained or of any other agreement contained herein, or for an injunction against the violation of any of the terms hereof, or in aid of the exercise or execution of any right, remedy or power granted herein or by law. _.4.2.3 Uniform Commercial Code. The Lenders shall have all of the rights and remedies of a secured party under Title 9 of the Virginia Uniform Commercial Code and other applicable Laws and in connection therewith may exercise all or any of the rights, powers and remedies of a secured party under Title 9 of the Virginia Uniform Commercial Code. Any notification of a sale or other disposition of all or any part of the Collateral required pursuant to Section 9-504 of Title 9 of the Virginia Uniform Commercial Code shall be deemed commercially reasonable if sent in accordance with Section 5.1 of this 13 14 Agreement at least ten (10) days prior to the sale or other disposition. Upon demand by the Agent, the Assignor shall assemble the Collateral and all books and records and make it available to the Agent, at a place designated by the Agent. The Agent or its agents may without notice from time to time enter upon the Assignor's premises to take possession of the Collateral and all books and records, to remove it, or otherwise to prepare it for sale, or to sell or otherwise dispose of it. _.4.2.4 Sale or Other Disposition of Collateral. The Agent may sell or redeem the Collateral, or any part thereof, in one or more sales, at public or private sale, conduct by any officer or agent of, or auctioneer or attorney for, the Lenders, at the Agent's place of business or elsewhere, for cash, upon credit or future delivery, and at such price or prices as the Agent shall, in its sole discretion, determine, and the Lenders may be the purchaser of any or all of the Collateral so sold. Further: (a) Each purchaser of all or any portion of the Collateral (including the Lenders) at any such sale shall hold the Collateral so sold, absolutely free from any claim or right of whatsoever kind, including, without limitation, any equity or right of redemption, of the Assignor, which the Assignor hereby specifically waives, to the extent it may lawfully do so, all rights of redemption, stay or appraisal which the Assignor has or may have under any rule of law or statute now existing or hereafter adopted. (b) Any written notice required by law of any sale, public or private, of all or any part of the Collateral shall be deemed in all circumstances to have been given in a commercially reasonable manner if sent at least ten (10) days prior to such sale by mail to the Assignor at the address for the Assignor set forth in Section 5.1. At any such sale the Collateral may be sold in one lot as an entirety or in separate parcels. The Agent shall not be obligated to make any sale pursuant to any such notice. In case of any sale of all or any part of the Collateral or credit or for future delivery, the Collateral so sold may be retained by the Agent until the selling price is paid by the purchaser thereof, but the Lenders shall not incur any liability in case of the failure of such purchaser to take up and pay for the Collateral so sold, and in case of any such failure, such Collateral may again be sold under and pursuant to the provisions hereof. The Agent, as attorney-in-fact, pursuant to Section 3.3 hereof, may, in the name and stead of the Assignor, make and execute all conveyances, assignments and transfers of the Collateral sold pursuant to this Section. The Assignor shall, if so requested by the Agent, ratify and confirm any sale or sales by executing and delivering to the Agent, or to such purchaser or purchasers, all such documents as may, in the 14 15 judgment of the Agent, be advisable for the purpose. (c) If any consent, approval, or authorization of any Governmental Authority or any Person having any interest therein, should be necessary to effectuate any sale or other disposition of the Collateral, the Assignor agrees to execute all such applications and other instruments, and to take all other action, as may be required in connection with securing any such consent, approval or authorization. (d) The Assignor recognizes that the Lenders may be unable to effect a public sale of all or a part of the Collateral consisting of "securities" by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and other applicable federal and state Laws. The Agent may, therefore, in its discretion, take such steps as it may deem appropriate to comply with such Laws and may, for example, at any sale of the Collateral consisting of securities restrict the prospective bidders or purchasers as to their number, nature of business and investment intention, including, without limitation, a requirement that the Persons making such purchases represent and agree to the satisfaction of the Agent that they are purchasing such securities for their account, for investment, and not with a view to the distribution or resale of any thereof. The Assignor covenants and agrees to do or cause to be done promptly all such acts and things as the Agent may request from time to time and as may be necessary to offer and/or sell the securities or any part thereof in a manner which is valid and binding and in conformance with all applicable Laws. _.4.2.5 Specific Rights With Regard to Collateral. In addition to all other rights and remedies provided hereunder or as shall exist at law or in equity from time to time, the Agent may (but shall be under no obligation to), without notice to the Assignor, and the Assignor hereby irrevocably appoints the Agent as its attorney-in-fact, with power of substitution, in the name of the Lenders or in the name of the Assignor or otherwise, for the use and benefit of the Lenders, but at the cost and expense of the Assignor and without notice to the Assignor: (a) direct any person or entity obligated to make payments or distributions directly to the Agent; (b) compromise, extend or renew any of the Collateral or deal with the same as it may deem advisable; (c) make exchanges, substitutions or surrenders of all or any part of the Collateral; (d) copy, transcribe, or remove from any 15 16 place of business of the Assignor all books, records, ledger sheets, correspondence, invoices and documents, relating to or evidencing any of the Collateral or without cost or expense to the Lenders, make such use of the Assignor's places of business as may be reasonably necessary to administer, control and collect the Collateral; (e) demand, collect, receipt for and give renewals, extensions, discharges and releases of any of the Collateral; (f) institute and prosecute legal and equitable proceedings to enforce collection of, or realize upon, any of the Collateral; (g) settle, renew, extend, compromise, compound, exchange or adjust claims in respect of any of the Collateral or any legal proceedings brought in respect thereof; (h) endorse or sign the name of the Assignor upon any items of payment, certificates of title, instruments, securities, powers, documents, documents of title, or other writing relating to or part of the Collateral and on any proof of claim in bankruptcy against an account debtor; (i) take any action and execute any instruments which such attorney-in-fact may deem necessary or advisable to accomplish the purposes of this Agreement; (j) take control in any manner of any cash or non-cash items of payments comprising the Collateral; (k) subject to obtaining all necessary consents, approvals, and authorizations, if any, required by applicable laws, cause the Collateral to be transferred to the Lenders or to the name of one or more of the Lenders' nominees and thereafter exercise as to such Collateral all rights, powers and remedies of owners; (l) collect by legal proceedings or otherwise all distributions, interest, principal payments, and other sums now or hereafter payable on account of the Collateral, and hold the same as Collateral, or apply the same to the expenses incurred by the Lenders in such legal proceedings or to the Obligations, the manner and distribution of the application to be determined by the Agent in its sole and absolute discretion; (m) enter into any extension, subordination, reorganization, deposit, merger or consolidation agreement, or any other agreement relating to or affecting the Collateral and 16 17 in connection therewith deposit or surrender control of such Collateral thereunder, and accept other property in exchange therefor and hold or apply such property or money so received in accordance with the provisions hereof; (n) take any other action necessary or beneficial to realize upon or dispose of the Collateral. (o) upon written instructions to the Borrower, the Lenders or their designees shall be entitled to become either a general and/or limited partner in the Borrower in the place and stead of the Assignor and shall be entitled to exercise and enjoy all rights and privileges pertaining thereto, including without limitation, the right to (i) participate in the management and administration of the Borrower's business and affairs, (ii) require information regarding or an accounting of Borrower transactions and (iii) inspect the Borrower's books. _.4.2.6 Application of Proceeds. Any proceeds of sale or other disposition of the Collateral will be applied by the Agent to the payment of the Enforcement Costs, and any balance of such proceeds will be applied by the Agent to the payment of the Obligations and the other obligations secured by this Agreement in such order and manner of application as the Agent may from time to time in its sole and absolute discretion determine. If the sale or other disposition of the Collateral fails to fully satisfy the Obligations and the other obligations secured by this Agreement, the Assignor shall remain liable to the Lenders for any deficiency, if and to the extent the Assignor is liable for the payment or performance of the Obligations under the provisions of any of the Financing Documents. _.4.2.7 Performance by Lenders. If the Assignor shall fail to perform, observe or comply with any of the conditions, covenants, terms, stipulations or agreements contained in this Agreement or any of the other Financing Documents, the Agent without notice to or demand upon the Assignor and without waiving or releasing any of the Obligations or any Event of Default, may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of the Assignor, and may enter upon the premises of the Assignor for that purpose and take all such action thereon as the Agent may consider necessary or appropriate for such purpose and the Assignor hereby irrevocably appoints the Agent as its attorney-in-fact to do so, with power of substitution, in the name of the Lenders or in the name of the Assignor or otherwise, for the use and benefit of the Lenders, but at the cost and expense of the Assignor and without notice to the Assignor. All sums so paid or advanced by the Lenders together with interest thereon from the date of payment, advance or incurring until paid in full at the highest rate of interest 17 18 charged under the Note and all costs and expenses, shall be deemed part of the Enforcement Costs, shall be paid by the Assignor to the Agent on demand, and shall constitute and become a part of the Obligations. _.4.2.8 Other Remedies. The Lenders may from time to time proceed to protect or enforce its rights by an action or actions at law or in equity or by any other appropriate proceeding, whether for the specific performance of any of the covenants contained in this Agreement or in any of the other Financing Documents, or for an injunction against the violation of any of the terms of this Agreement or any of the other Financing Documents, or in aid of the exercise or execution of any right, remedy or power granted in this Agreement, the Financing Documents, and/or applicable Laws. SECTION _.4.3 Costs and Expenses. The Assignor shall pay on demand all reasonable costs and expenses (including reasonable attorney's fees), all of which shall be deemed part of the Obligations, incurred by and on behalf of the Lenders incident to the preparation of and in connection with this Agreement, any collection, servicing, sale, disposition or other action taken by the Lenders with respect to the Collateral or any portion thereof. Such costs and expenses shall become part of the Obligations. SECTION _.4.4 Receipt Sufficient Discharge to Purchaser. Upon any sale or other disposition of the Collateral or any part thereof, the receipt of purchase money by the Lenders or other Person making the sale or disposition shall be a sufficient discharge to the purchaser for the purchase money, and such purchaser shall not be obligated to see to the application thereof. SECTION _.4.5 Remedies, etc. Cumulative. Each right, power and remedy of the Lenders as provided for in this Agreement or in any of the other Financing Documents or in any related instrument or agreement or now or thereafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Agreement or in the other Financing Documents or in any related document, instrument or agreement or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by the Lenders of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise by the Lenders of any or all such other rights, powers or remedies. SECTION _.4.6 No Waiver, etc. No failure or delay by the Agent to insist upon the strict performance of any term, condition, covenant or agreement of this Agreement or of any of the 18 19 other Financing Documents or of any related documents, instruments or agreements, or to exercise any right, power or remedy consequent upon a breach thereof, shall constitute a waiver of any such term, condition, covenant or agreement or of any such breach, or preclude the Lenders from exercising any such right, power or remedy at any later time or times. By accepting payment after the due date of any amount payable under this Agreement or under any of the other Financing Documents or under any related document, instrument or agreement, the Lenders shall not be deemed to waive the right either to require prompt payment when due of all other amounts payable under this Agreement or under any other of the Financing Documents, or to declare a default for failure to effect such prompt payment of any such other amount. ARTICLE _.5 MISCELLANEOUS SECTION _.5.1 Notices. All notices, requests or demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing, hand delivered, sent by nationally recognized overnight courier or mailed, addressed as follows:: the Lender: NationsBank, N.A. 10 Light Street, 20th Floor Baltimore, Maryland 21202 Attn: Robert J. Montanari Vice President the Assignor: Sunrise Assisted Living, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Attn: Thomas B. Newell, Esquire Sunrise Assisted Living Investments, Inc. c/o Sunrise Assisted Living, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Attn: James S. Pope with a copy Wayne G. Tatusko, Esquire to: Watt, Tieder & Hoffar 7929 Westpark Drive McLean, Virginia 22102 19 20 or to such other address as any party may designate by written notice to the other party. SECTION _.5.2 Amendments; Waivers. This Agreement and the other Financing Documents may not be amended, modified, or changed in any respect except by an agreement in writing signed by the Agent and the Assignor. No waiver of any provision of this Agreement or of any of the other Financing Documents, nor consent to any departure by the Assignor therefrom, shall in any event be effective unless the same shall be in writing. No course of dealing between the Assignor and the Lenders and no act or failure to act from time to time on the part of the Lenders shall constitute a waiver, amendment or modification of any provision of this Agreement or any of the other Financing Documents or any right or remedy under this Agreement, under any of the other Financing Documents or under applicable Laws. SECTION _.5.3 Cumulative Remedies. The rights, powers and remedies provided in this Agreement and in the other Financing Documents are cumulative, may be exercised concurrently or separately, may be exercised from time to time and in such order as the Agent shall determine and are in addition to, and not exclusive of, rights, powers and remedies provided by existing or future applicable Laws. In order to entitle the Agent to exercise any remedy reserved to it in this Agreement, it shall not be necessary to give any notice, other than such notice as may be expressly required in this Agreement. Without limiting the generality of the foregoing, the Agent may: (a) proceed against the Assignor with or without proceeding against the Borrower or any other Person who may be liable for all or any part of the Obligations; (b) proceed against the Assignor with or without proceeding under any of the other Financing Documents or against any Collateral or other collateral and security for all or any part of the Obligations; (c) without notice, release or compromise with any guarantor or other Person liable for all or any part of the Obligations under the Financing Documents or otherwise; and (d) without reducing or impairing the obligations of the Assignor and without notice thereof: (i) fail to perfect the Lien in any or all Collateral or to release any or all the Collateral or to accept substitute collateral, (ii) waive any provision of this Agreement or the other Financing Documents, (iii) exercise or fail to exercise rights of set-off or other rights, or (iv) accept partial payments or extend from time to time the maturity of all or any part of the Obligations. 20 21 SECTION _.5.4 Severability. In case one or more provisions, or part thereof, contained in this Agreement or in the other Financing Documents shall be invalid, illegal or unenforceable in any respect under any Law, then without need for any further agreement, notice or action: (a) the validity, legality and enforceability of the remaining provisions shall remain effective and binding on the parties thereto and shall not be affected or impaired thereby; (b) the obligation to be fulfilled shall be reduced to the limit of such validity; (c) if such provision or part thereof pertains to repayment of the Obligations, then, at the sole and absolute discretion of the Agent, all of the Obligations of the Assignor to the Lenders shall become immediately due and payable; and (d) if affected provision or part thereof does not pertain to repayment of the Obligations, but operates or would prospectively operate to invalidate this Agreement in whole or in part, then such provision or part thereof only shall be void, and the remainder of this Agreement shall remain operative and in full force and effect. SECTION _.5.5 Assignments by Lenders. The Lenders may, without notice to, or consent of, the Assignor, sell, assign or transfer to or participate with any Person or Persons all or any part of the Obligations, and each such Person or Persons shall have the right to enforce the provisions of this Agreement and any of the other Financing Documents as fully as the Lenders, provided that the Lenders shall continue to have the unimpaired right to enforce the provisions of this Agreement and any of the other Financing Documents as to so much of the Obligations that the Lenders has not sold, assigned or transferred. In connection with the foregoing, the Lenders shall have the right to disclose to any such actual or potential purchaser, assignee, transferee or participant all financial records, information, reports, financial statements and documents obtained in connection with this Agreement and any of the other Financing Documents or otherwise. SECTION _.5.6 Successors and Assigns. This Agreement and all other Financing Documents shall be binding upon and inure to the benefit of the Assignor and the Lenders and their respective heirs, personal representatives, successors and assigns, except that the Assignor shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Agent. 21 22 SECTION _.5.7 Applicable Law. This Agreement, shall be governed by the Laws of the Commonwealth of Virginia, as if each of the Financing Documents and this Agreement had each been executed, delivered, administered and performed solely within the Commonwealth of Virginia. SECTION _.5.8 Headings. The headings in this Agreement are included herein for convenience only, shall not constitute a part of this Agreement for any other purpose, and shall not be deemed to affect the meaning or construction of any of the provisions hereof. SECTION _.5.9 Entire Agreement. This Agreement is intended by the Lenders and the Assignor to be a complete, exclusive and final expression of the agreements contained herein. Neither the Lenders nor the Assignor shall hereafter have any rights under any prior agreements but shall look solely to this Agreement for definition and determination of all of their respective rights, liabilities and responsibilities under this Agreement. SECTION _.5.10 Counterparts. This Agreement may be executed in any number of duplicate originals, each of which shall be an original but all of which together shall constitute one and the same institute. SECTION _.5.11 Waiver of Trial by Jury. EACH ASSIGNOR AND EACH OF THE LENDERS HEREBY JOINTLY AND SEVERALLY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH EITHER ASSIGNOR AND ANY OF THE LENDERS MAY BE PARTIES, ARISING OUT OF OR IN ANY WAY PERTAINING TO (A) THIS AGREEMENT, (B) ANY OF THE FINANCING DOCUMENTS, OR (C) THE COLLATERAL. THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS AGREEMENT. This waiver is knowingly, willingly and voluntarily made by each Assignor and each of the Lenders, and each Assignor and each of the Lenders hereby represent that no representations of fact or opinion have been made by any individual to induce this waiver of trial by jury or to in any way modify or nullify its effect. Each Assignor and each of the Lenders further represent that they have been represented in the signing of this Agreement and in the making of this waiver by independent legal counsel, selected of their own free will, and that they have had the opportunity to discuss this waiver with counsel. SECTION _.5.12 Service of Process. _.5.12.1 (i) The Assignor hereby irrevocable 22 23 designates and appoints Wayne G. Tatusko, Esquire of Watt, Tieder & Hoffar, 7929 Westpark Drive, McLean, Virginia 22102, as their authorized agent to receive on their behalf service of any and all process that may be served in any suit, action, or proceeding instituted in connection with this Agreement in any state or federal court sitting in the Commonwealth of Virginia. If such agent shall cease so to act, the Assignor shall irrevocably designate and appoint without delay another such agent in the Commonwealth of Virginia reasonably satisfactory to the Agent and shall promptly deliver to the Agent evidence in writing of such agent's acceptance of such appointment and its agreement that such appointment shall be irrevocable. (ii) The Assignor hereby consents to process being served in any suit, action, or proceeding instituted in connection with this Agreement by (A) the mailing of a copy thereof by certified mail, postage prepaid, return receipt requested, to them at their address designated above, and (B) serving a copy thereof upon the agent hereinabove designated and appointed by the Assignor as the Assignor's agent for service of process. The Assignor irrevocably agrees that such service shall be deemed in every respect to be effective service of process upon each of them in any such suit, action, or proceeding. Nothing in this Section shall affect the right of the Lenders to serve process in any manner otherwise permitted by law and nothing in this Section will limit the right of the Lenders otherwise to bring proceedings against the Assignor in the courts of any other appropriate jurisdiction or jurisdictions. 23 24 SECTION _.5.13 Liability of the Lenders. The Assignor hereby agrees that the Lenders shall not be chargeable for any negligence, mistake, act or omission of any accountant, examiner, agency or attorney employed by the Lenders in making examinations, investigations or collections, or otherwise in perfecting, maintaining, protecting or realizing upon any lien or security interest or any other interest in the Collateral or other security for the Obligations. Except for willful misconduct or gross negligence, the Lenders shall be under no liability for, and the Assignor hereby releases the Lenders from, all claims for loss or damage caused by (a) the Lenders' failure to perform or collect any of the Collateral, or (b) the Lenders' failure to preserve or protect any rights of the Assignor under the Collateral. The Assignor agrees that the duties of the Lenders with respect to the Collateral shall be solely to use reasonable care in the custody and preservation of the Collateral in Agent's possession, which shall not include any steps necessary to preserve rights against prior parties. In the event the Agent enforces or seeks to enforce any of the rights of an owner of the Borrower under any of the Collateral, the Assignor shall immediately reimburse the Lenders for such costs and expenses (including actual attorney's fees reasonably incurred) so incurred and payment of such sums shall be secured by this Agreement. IN WITNESS WHEREOF, the Assignor has caused this Agreement to be executed, sealed and delivered, as of the day and year first written above. WITNESS/ATTEST: SUNRISE ASSISTED LIVING, INC. __/s/ Wayne G. Tatusko By: _/S/ David W. Faeder___(SEAL) --------------------- ------------------- David W. Faeder President and Chief Financial Officer __/s/ Wayne G. Tatusko By: _/s/ Thomas B. Newell _(SEAL) --------------------- --------------------- Thomas B. Newell Executive Vice President 24 25 WITNESS/ATTEST: SUNRISE ASSISTED LIVING INVESTMENTS, INC. __/s/ Wayne G. Tatusko By: _/s/ James S. Pope_(SEAL) --------------------- ----------------- James S. Pope Vice President 25 26 EXHIBIT A TO PLEDGE, ASSIGNMENT AND SECURITY AGREEMENT Each Assignor further represent and warrant to the Lenders as follows: 1. The exact legal name of each Assignor is as stated in the initial paragraph to this Agreement. 2. SALI's Federal Tax Identification Number is: 54-1746596 2. SALII's Federal Tax Identification Number is: 54-1674683 3. (a) Each Assignor's chief executive office is: c/o Sunrise Assisted Living, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 (b) Each Assignor in fact manages the main part of its business operations from that address; and (c) Each Assignor is at that address that persons dealing with such Assignor would normally look for credit information. 4. The mailing address of each Assignor to be inserted on financing statements covering the Collateral is: c/o Sunrise Assisted Living, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Attn: Thomas B. Newell, Esquire 5. In the twelve years preceding the date hereof, neither Assignor has changed its name, identity or organizational structure, has conducted business under any name other than its current name, and has conducted its business in any jurisdiction other than the jurisdiction in which its chief executive office is currently located, except as follows: NONE EX-10.31.6 11 MASTER GUARANTY OF PERFORMANCE 1 EXHIBIT 10.31.6 MASTER GUARANTY OF PERFORMANCE THIS MASTER GUARANTY OF PERFORMANCE (the "Agreement") is made this 23rd day of December, 1997, by SUNRISE ASSISTED LIVING, INC., a Delaware corporation (the "Guarantor") in favor of NATIONSBANK, N.A., as agent ("Agent") for itself and for certain additional lenders (collectively with the Agent, the "Lenders") who are or shall be from time to time participating as lenders in a bank group pursuant to the Amended and Restated Agency Agreement of even date herewith (as amended, extended or substituted from time to time, the "Agency Agreement"). RECITALS A. The Borrower obtained from the Agent and certain other lenders (collectively, the "Original Lenders") a credit facility in the maximum principal sum of $90,000,000 (the "Original Credit Facility") which was a non-revolving line of credit pursuant to which the Borrower could obtain certain construction/interim loans (each a "Facility Loan;" collectively, the "Facility Loans") for assisted living facilities and independent living facilities. The Original Credit Facility has been evidenced by a Master Promissory Note dated June 13, 1996 as amended pursuant to a First Amendment to Master Promissory Note dated September 5, 1996 and by a Second Amendment to Master Promissory Note dated March 31, 1997 (collectively, the "Master Note"). B. In connection with the making of each Facility Loan, the Borrower executed a promissory note in the maximum principal sum of each Facility Loan (each a "Facility Note" and collectively, the "Facility Notes"). Availability under the Master Note was reduced by the principal sum of each Facility Note. As of the date hereof, seven (7) Facility Loans have been made under the Original Credit Facility evidenced by eight (8) Notes. C. The Borrower has applied to the Lenders to increase the maximum principal sum of the Original Credit Facility to $250,000,000 or such greater amount as the Lenders may from time to time commit to lend pursuant to the Agency Agreement (such increased and modified credit facility being hereinafter referred to as the "Credit Facility" or the "Loan") and to provide that the Credit Facility will be revolving. Advances or readvances are to be made pursuant to, and secured by, the provisions of that certain Amended and Restated Financing and Security Agreement dated the same date as this Agreement by and between the Agent and the Borrower (as amended, restated or substituted from time to time, the "Financing Agreement") and that certain 2 Amended and Restated Master Construction Loan Agreement of even date herewith by and between the Agent and the Borrower (as amended, restated or substituted from time to time, the "Construction Agreement"). D. The Loan is evidenced by that certain Amended, Restated, Consolidated and Increased Master Promissory Note of even date herewith payable by the Borrower to Agent on behalf of the Lenders (as amended, restated, renewed or substituted from time to time, the "Note") E. The Credit Facility shall be secured by among other things certain Deeds of Trust (as defined in the Financing Agreement) (individually, a "Deed of Trust," collectively, the "Deeds of Trust") from the Borrower and any Guarantor Subsidiaries in favor of the Lenders each covering the Borrower's or Guarantor Subsidiary's interest in certain Land (as defined in each of the Deeds of Trust) and the Improvements (as defined in each of the Deeds of Trust) thereon and such other real and personal property as therein more particularly set forth (collectively, the "Property"). F. On the Land secured by each of the Deeds of Trust, the Borrower has agreed to construct certain Improvements as more particularly described in the Amended and Restated Financing and Security Agreement of even date herewith by and between the Borrower and the Agent (as amended, extended or substituted from time to time, the "Financing Agreement") and an Amended and Restated Construction Loan Agreement of even date herewith by and between the Borrower and the Agent (as amended, extended or substituted from time to time, the "Construction Agreement") in accordance with plans, drawings and specifications (the "Plans and Specifications") heretofore submitted by the Borrower to the Agent for the Agent's approval. G. The Note, the Deeds of Trust, this Agreement, the Financing Agreement, the Construction Agreement, and all other documents evidencing or securing the Loan are hereinafter referred to collectively as the "Financing Documents." H. It is a condition of making available the Credit Facility by the Lenders to the Borrower that the Guarantor executes and delivers this Agreement to the Agent. NOW, THEREFORE, IN CONSIDERATION of the agreement by the Lenders to make the Credit Facility available to the Borrower and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Guarantor hereby agrees with the Lenders as follows: 1. If the Borrower or any Guarantor Subsidiary shall, - 2 - 3 subject to any applicable cure periods and the other terms of the Financing Agreement and the Construction Agreement, a. fail to complete any of the Improvements free of liens and within the period or periods required by the Financing Agreement or the Construction Agreement in accordance with the Plans and Specifications with only such material amendments thereto as shall be approved by the Lenders, and in accordance with all laws, rules, regulations and requirements of all governmental authorities having jurisdiction, or b. fail to keep any of the Property free from all liens and claims which may be filed or made for performing work and labor thereon or furnishing materials therefor in connection with the construction thereof or fail to bond off such liens or make other arrangements therefor satisfactory to the Agent, or both, then the Guarantor hereby guarantees to the Lenders that it shall, provided that advances of the Loan are thereafter advanced in the manner provided in the Financing Agreement and the Construction Agreement: (1) cause the Improvements to be completed free and clear of mechanics' and materialmens' liens in the manner and within the period of time required by the Construction Agreement, in accordance with the Plans and Specifications, amended only as aforesaid, and in accordance with all laws, rules, regulations and requirements of all governmental authorities having jurisdiction, (2) cause any such mechanics' or materialmens' liens and claims to be removed or bonded off or make other arrangements therefor satisfactory to the Agent and thereafter keep the Property thereon free from all such liens and claims, (3) make payment in full to all laborers, subcontractors and materialmen on or before the date of completion for the costs of the Improvements and related costs, and (4) pay all costs and expenses incurred in doing (l), (2) and (3) of this Section l and pay to or reimburse the Lenders for all expenses incurred by, or other moneys due, the Lenders pursuant to - 3 - 4 the Financing Documents. The Guarantor further agrees to indemnify and hold harmless the Lenders from any loss (including reasonable attorney's fees) resulting from any default by the Guarantor under the terms of this Agreement. 2. The Guarantor hereby waives notice of acceptance of this Agreement by the Agent and any and all notices and demands of every kind and description which may be required to be given by any statute or rule or law, and agrees that the liability of the Guarantor hereunder shall in no way be affected, diminished or released (a) by any forbearance which may be granted to the Borrower or any Guarantor Subsidiary (or to any successor to it or to any person or entity which shall have assumed the obligations of the Borrower under the Note or any Subsidiary Guaranty), (b) by any waiver by the Agent of any term, covenant or condition in any of the Financing Documents, (c) by reason of any change or modification in any of the Financing Documents (provided such change or modification does not materially affect the amount of the funds budgeted for the costs of any of the Improvements or the manner in which the same are to be advanced under the Construction Agreement), or (d) by the acceptance of additional security for the Obligations (as defined in the Financing Agreement) or the release by the Agent of any security or of any party primarily or secondarily liable for the Obligations, including one or more of the undersigned. 3. The Guarantor hereby agrees that the Plans and Specifications for any Facility, and any other terms, covenants and conditions contained in the Construction Agreement, the construction contract with any contractor or any of the Financing Documents may be altered, extended, changed, modified or released by the Borrower or an applicable Guarantor Subsidiary, with the approval of the Agent, and without notice to or the consent of the Guarantor, without in any manner affecting the obligations of the Guarantor under this Agreement or releasing the Guarantor therefrom. The Guarantor specifically acknowledges and agrees that change orders approved by the Borrower or an applicable Guarantor Subsidiary shall in no manner release the Guarantor from the obligations evidenced by this Agreement. 4. The Guarantor agrees that this Agreement may be enforced by the Lenders without the necessity at any time of resorting to or exhausting any other security or collateral and without the necessity at any time of having recourse to the Note, any Subsidiary Guaranty or any of the Property through foreclosure proceedings or otherwise. The Guarantor further agrees that nothing herein contained shall prevent the Agent from suing on the Note or foreclosing any of the Deeds of Trust or from exercising any other right available to it under any of the - 4 - 5 Financing Documents, and the exercise of any of the aforementioned rights shall not constitute a legal or equitable discharge of the Guarantor, it being the purpose and intent of the Guarantor that its obligations under this Agreement be released therefrom upon payment of all sums due hereunder and completion of the Improvements in accordance with the Financing Documents and this Agreement. 5. Nothing herein contained shall operate as a release or discharge in whole or in part, of any claim of the Guarantor against the Borrower or any Guarantor Subsidiary by subrogation or otherwise, by reason of any act done or any payment made by the Guarantor pursuant to the provisions of this Agreement; provided, however, all such claims shall be subordinate to the lien of the Deeds of Trust and to the claims of the Lenders and the Guarantor assigns all of its right, title and interest in all claims of the Guarantor as security for the fulfillment of all of the Guarantor's obligations under this Agreement. 6. The Guarantor hereby acknowledges, consents and agrees (a) that the provisions of this Agreement and the rights of all parties mentioned herein shall be governed by the laws of the Commonwealth of Virginia and interpreted and construed in accordance with such laws and (b) that any court of competent jurisdiction of the Commonwealth of Virginia shall have jurisdiction in any proceeding instituted to enforce this Agreement and any objections to venue are hereby waived. 7. THE GUARANTOR HEREBY WAIVES TRIAL BY JURY in any action or proceeding not required to be arbitrated pursuant to the Financing Documents to which the Guarantor and any of the Lenders may be parties, arising out of or in any way pertaining to (a) this Agreement, (b) the Loan or (c) the Financing Documents. It is agreed and understood that this waiver constitutes a waiver of trial by jury of all claims against all parties to such actions or proceedings, including claims against parties who are not parties to this Agreement. This waiver is knowingly, willingly and voluntarily made by the Guarantor, and the Guarantor hereby represents that no representations of fact or opinion have been made by any individual to induce this waiver of trial by jury or to in any way modify or nullify its effect. The Guarantor further represents that it has been represented in the signing of this Agreement and in the making of this waiver by independent legal counsel, selected of its own free will, and that it has had the opportunity to discuss this waiver with counsel. 8. The rights, powers, privileges and discretions (the "Rights") to which the Lenders may be entitled hereunder shall inure to the benefit of their successors and assigns. All the Rights of the Lenders are cumulative and not alternative and may be enforced successively or concurrently. Failure of the Agent - 5 - 6 or the Lenders to exercise any of the Rights shall not be deemed a waiver thereof and no waiver of any of their Rights shall be effective unless in writing and signed by the Agent or the Lenders. The terms, covenants and conditions of or imposed upon the Guarantor herein shall be binding upon its respective heirs, personal representatives, successors and assigns. 9. The Guarantor represents and warrants that it has examined or has had an opportunity to examine the Financing Documents, and that it has full power, authority and legal right to execute and deliver this Agreement, and that this Agreement is a binding legal obligation of the Guarantor. 10. In case any provision contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement but this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. WITNESS the signature and seal of the Guarantor as of the day and year first above written. WITNESS/ATTEST: SUNRISE ASSISTED LIVING, INC. _/s/ Wayne G. Tatusko_ By: _/s/ David W. Faeder________(SEAL) -------------------- ------------------- David W. Faeder President and Chief Financial Officer _/s/ Wayne G. Tatusko_ By: _/s/ Thomas B. Newell______(SEAL) -------------------- -------------------- Thomas B. Newell Executive Vice President - 6 - 7 STATE/COMMONWEALTH OF VIRGINIA, CITY/COUNTY OF __Fairfax_ , TO WIT: I, __Dawn A. Washington_ , a Notary Public in and for the jurisdiction aforesaid, do hereby certify that David W. Faeder as President and Chief Financial Officer and Thomas B. Newell as Executive Vice President of Sunrise Assisted Living, Inc., who executed the foregoing instrument, personally appeared before me and acknowledged said Instrument to be his act and deed that he executed said Instrument for the purposes therein contained. WITNESS my hand and Notarial Seal. Date: December 23, 1997 __/s/Dawn A. Washington ----------------------- Notary Public My Commission Expires: - 7 - EX-10.31.7 12 AMENDED AND RESTATED COLLATERAL ASSIGNMENT 1 EXHIBIT 10.31.7 AMENDED AND RESTATED COLLATERAL ASSIGNMENT OF OPERATING AGREEMENTS AND MANAGEMENT CONTRACTS (MASTER) THIS AMENDED AND RESTATED COLLATERAL ASSIGNMENT OF OPERATING AGREEMENTS AND MANAGEMENT CONTRACTS (this "Collateral Assignment") is made this 23rd day of December, 1997, by SUNRISE EAST ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia limited partnership (the "Borrower"), and SUNRISE ASSISTED LIVING MANAGEMENT, INC., a Virginia corporation, formerly known as Sunrise Terrace, Inc. (the "Management Company"; the Borrower and the Management Company being hereinafter referred to collectively and individually as the "Assignor"), to NATIONSBANK, N.A. as agent (the "Agent") for itself and for certain additional lenders (collectively with the Agent, the "Lenders") who are participating in a bank group pursuant to an Amended and Restated Agency Agreement of even date herewith (as amended, restated or substituted from time to time, the "Agency Agreement"). R E C I T A L S A. The Borrower obtained from the Agent and certain other lenders (collectively, the "Original Lenders") a credit facility in the maximum principal sum of $90,000,000 (the "Original Credit Facility") which was a non-revolving line of credit pursuant to which the Borrower could obtain certain construction/interim loans (each a "Facility Loan;" collectively, the "Facility Loans") for assisted living facilities and independent living facilities. The Original Credit Facility has been evidenced by a Master Promissory Note dated June 13, 1996 as amended pursuant to a First Amendment to Master Promissory Note dated September 5, 1996 and by a Second Amendment to Master Promissory Note dated March 31, 1997 (collectively, the "Master Note"). B. In connection with the making of each Facility Loan, the Borrower executed a promissory note in the maximum principal sum of each Facility Loan (each a "Facility Note" and collectively, the "Facility Notes"). Availability under the Master Note was reduced by the principal sum of each Facility Note. In connection with the Original Credit Facility, the Management Company executed a Collateral Assignment of Operating Agreements and Management Contracts dated June 13, 1996 for the benefit of the Original Lenders (the "Original Collateral Assignment"). C. The Borrower has applied to the Lenders to increase the maximum principal sum of the Original Credit Facility to $250,000,000 or such greater amount as the Lenders may from time to time commit to lend pursuant to the Agency Agreement (such 2 increased and modified credit facility being hereinafter referred to as the "Credit Facility" or the "Loan") and to provide that the Credit Facility will be revolving. Advances or readvances are to be made pursuant to, and secured by, the provisions of that certain Amended and Restated Financing and Security Agreement dated the same date as this Agreement by and between the Agent and the Borrower (as amended, restated or substituted from time to time, the "Financing Agreement") and that certain Amended and Restated Master Construction Loan Agreement dated the same as this Agreement by and between the Agent and the Borrower (as amended, restated or substituted from time to time, the "Construction Agreement"). D. The Loan will be evidenced by an Amended, Restated and Increased Master Promissory Note (as amended, restated, renewed or resubstituted from time to time, the "Note"). The Note will be secured by, among other things, certain Deeds of Trust (as defined in the Financing Agreement) from the Borrower or a Guarantor Subsidiary in favor of the Lenders covering the Borrower's or the Guarantor Subsidiary's interest in the Land and the Improvements for the applicable Facility (as defined hereinafter) and such other real and personal property as shall be therein more particularly set forth (collectively, the "Property"). The Credit Facility is evidenced, secured and guaranteed by certain Financing Documents (as defined in the Financing Agreement). E. The Management Company is one hundred percent (100%) owned by Sunrise Assisted Living, Inc., a Delaware corporation. F. The Lenders have agreed to make the Loan to the Borrower with the condition precedent that, to the extent permitted by Laws (as hereinafter defined) and the applicable Operating Agreements (as hereinafter defined) and Contracts (as hereinafter defined), the Assignor collaterally assigns to the Agent on behalf of the Lenders and their respective successors and assigns, all of their right, title and interest in, under and to any and all contracts and agreements previously, now or hereafter at any time executed and delivered by the Assignor with respect to the acquisition, operation, maintenance, and management of and employment of those assisted living facilities and/or independent living facilities owned by the Borrower or a Guarantor Subsidiary which are encumbered by a Deed of Trust (individually, the "Facility", collectively, the "Facilities"), or otherwise concerning the operations and business of the Facilities, including, without limitation: (i) any and all agreements entered into by the Assignor in connection with the operation of the Facilities (hereinafter collectively referred to as the "Operating Agreements") and (ii) any and all service and maintenance contracts, any and all employment contracts, any and all management contracts, consulting agreements, medical service agreements, transfer agreements, laboratory servicing agreements, - 2 - 3 physician, other clinician or other professional services provider contracts, resident agreements, food and beverage service contracts, pharmaceutical contracts and all other contracts for the maintenance of, or provision of services to the Facilities, and including, but not limited to, the Management Agreement to be entered into on or before the issuance of the first certificate of occupancy for the Facilities (the "Management Agreement"), by and between the Borrower and the Management Company (all as amended, restated, supplemented or modified, collectively the "Contracts" and singularly, a "Contract"), and collaterally assigns and grants to the Lenders a security interest in, and lien on, all right, title and interest of the Assignor in, to, and under such Operating Agreements and Contracts as collateral and security for the Loan and other Obligations. G. In accordance with, and pursuant to, that certain management agreement by and between the Management Company and the Borrower dated September 5, 1996 pertaining to the Facilities known as Sunrise of Morris Plains, Sunrise of Old Tappan and Sunrise of Wayne and pursuant to other agreements to be executed for other Facilities, the Management Company has agreed or will agree to manage and operate each of the Facilities (all of such management agreements, together with any and all amendments thereto, extensions thereof and substitutions therefor are herein collectively referred to as the "Management Agreement"). H. The Management Company and the Borrower have requested that the Agent enter into the Financing Agreement with the Borrower and have requested that the Lenders make the Loan to the Borrower pursuant thereto. I. The Lenders have required, as a condition precedent to the execution and delivery of the Financing Agreement and the making of the Loan thereunder, the execution and delivery of this Agreement by both the Management Company and the Borrower. J. All capitalized terms used in this Agreement and not defined herein shall have the meaning given to such terms in the Financing Agreement. AGREEMENTS NOW, THEREFORE, in consideration of the premises, of the respective representations, covenants and agreements hereinafter contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce the Lenders to make the Loan to the Borrower and as security for the Obligations, the Assignor hereby covenants and agrees with the Agent and amends and restates the Original Collateral Assignment in its entirety as follows: - 3 - 4 ARTICLE 1 DEFINITIONS AND CONSTRUCTION SECTION 1.1 Recitals. The Recitals set forth hereinabove are incorporated herein by reference. SECTION 1.2 Definitions. All capitalized terms used in this Collateral Assignment shall have the respective meanings specified in the Financing Agreement, unless the context clearly indicates otherwise. SECTION 1.3 Rules of Construction. (a) The words "hereof", "herein", "hereunder" "hereto", and other words of similar import refer to this Collateral Assignment in its entirety. (b) The terms "agree" and "agreements" contained herein are intended to include and mean "covenant" and "covenants". (c) References to Articles, Sections, and other subdivisions of this Collateral Assignment are to the designated Articles, Sections, and other subdivisions of this Collateral Assignment as originally executed. (d) The headings of this Collateral Assignment are for convenience only and shall not define or limit the provisions hereof. (e) All references made (i) in the neuter, masculine or feminine gender shall be deemed to have been made in all such genders, and (ii) in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well. ARTICLE II REPRESENTATIONS AND WARRANTIES SECTION 2.1. Operating Agreements and Contracts. The Assignor represents and warrants to the Lenders that (a) the Operating Agreements and Contracts will be at the time of execution and delivery thereof valid and binding on the parties thereto, will be at the time of execution and delivery thereof in full force and effect, and will not be evidenced by any chattel paper or instrument, (b) the Assignor has not made any previous collateral assignment of the Operating Agreements or Contracts to any person except for collateral assignments which have been terminated prior to or as of the date hereof, and (c) no financing statement covering any of the Operating Agreements or Contracts is on file in any public office except financing statements in favor of the Lenders and except those which have - 4 - 5 been terminated prior to or as of the date hereof. ARTICLE III COLLATERAL ASSIGNMENT SECTION 3.1. Collateral Assignment. As security and collateral for the payment and performance of, and compliance with, all of the Obligations, and to the extent permitted under Laws or by the applicable Operating Agreements or Contracts, the Assignor hereby collaterally assigns to the Lenders, and grants to the Lenders, a lien on, and security interest in, all right, title and interest of the Assignor in, to, and under the Operating Agreements and Contracts (as Operating Agreements and Contracts are defined in Recital F of this Collateral Assignment, which Operating Agreements and Contracts shall specifically include, but shall not be limited to, the Management Agreement), together with all cash and non-cash proceeds thereof; provided, however, that nothing contained herein shall impose upon the Lenders any of the obligations or liabilities of the Assignor under any of the Operating Agreements or Contracts and provided further that the Lenders shall not exercise any rights under such Operating Agreements or Contracts unless and until an Event of Default under the Financing Documents has occurred. The Lenders also acknowledge that, in connection with any exercise of such of the security interests or other rights created herein, it may be necessary to obtain approvals of, consents from, or new agreements with, various third parties. ARTICLE IV COVENANTS Until payment and performance in full of all of the Obligations, the Assignor hereby covenants and agrees as follows: SECTION 4.1. Further Assurances. The Assignor shall promptly upon request execute, acknowledge and deliver any financing statement, renewal, affidavit, deed, collateral assignment, continuation statement, security agreement, certificate or other document as the Agent may reasonably require in order to perfect, preserve, maintain, protect, continue and/or extend the collateral assignment, lien or security interest of the Lenders under this Collateral Assignment and its priority. The Assignor shall pay to the Agent on demand all taxes, costs and expenses incurred by the Lenders in connection with the preparation, execution, recording and filing of any such document or instrument mentioned aforesaid. Such taxes, costs and expenses shall constitute and become a part of the Obligations. SECTION 4.2. Performance under and Amendments to Operating Agreements and Contracts. The Assignor shall fully, promptly and - 5 - 6 faithfully comply with and perform all of its obligations and duties under all terms of the Operating Agreements and Contracts in accordance with the terms thereof, and will make no changes or amendments to the Operating Agreements and Contracts which are not customarily made in the ordinary course of business and which result in a material adverse effect on the financial condition or operations of the Assignor, or terminate or cancel any of the Operating Agreements and Contracts, other than in the ordinary course of business. Copies of all amendments to the Operating Agreements and Contracts will be delivered by the Assignor to the Agent. SECTION 4.3. Information and Notifications. The Assignor shall promptly notify the Agent in writing of the modification of any of the material provisions of any of the Operating Agreements or Contracts which would result in a materially adverse change in the financial condition or operations of the Assignor. SECTION 4.4. Books and Records; Inspections. The Assignor shall at all times keep accurate and complete records of performance by the Assignor under the Operating Agreements and Contracts, and the Agent, or any of its respective agents, shall have the right to call at the place or places of business of the Assignor at reasonable intervals to be determined by the Agent, during normal business hours, and without hindrance or delay, to inspect, audit, check and make extracts from the books, records, journals, orders, receipts, correspondence and other data relating to the Operating Agreements and Contracts. ARTICLE V DEFAULTS AND REMEDIES SECTION 5.1. Remedies upon Default. Subject to the provisions and understandings of Section 3.1 of this Collateral Assignment, upon or at any time after the occurrence and during the continuance of an Event of Default, the Agent may, without notice, without regard to the adequacy of security for the Obligations and in addition to any other remedy which the Lenders may have at law or in equity under the Financing Documents, either in person or by agent with or without bringing any action or proceeding, or by a receiver to be appointed by a court, enforcing any and all rights and remedies of the Assignor under and in connection with any of the Operating Agreements or Contracts, to the extent permitted by Law, and subject to the provisions of the Financing Agreement, Section 3.1 of this Collateral Assignment, the Operating Agreements and the Contracts, make, cancel, enforce or modify any of the Operating Agreements or the Contracts and do any acts which the Agent deems proper to protect the security hereof, including, without limitation, the collateral assignment of any such Operating Agreements or Contracts to third parties, and either with or - 6 - 7 without taking possession of the Facilities, in its own name as agent for the Lenders sue for or otherwise collect and receive such fees, issues and profits, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including just and reasonable compensation for all of its employees and other agents, to the Obligations. The Assignor agrees that the failure of the Assignor to comply with any of the covenants contained herein for a period of thirty (30) days after the date the Agent notifies the Assignor in writing shall constitute an immediate Default under the Financing Agreement. SECTION 5.2. Indemnification. The Assignor shall and does hereby agree to indemnify and to hold the Lenders harmless of and from any and all liability, loss or damage which it may or might incur under any of the Operating Agreements or the Contracts or by reason of this Collateral Assignment, except those arising from any fraud, willful misconduct or gross negligence of the Lenders, and of and from any and all claims and demands whatsoever which may be asserted against the Lenders, by reason of any alleged obligations or undertaking on its part to perform or discharge any of the terms, covenants or conditions contained in any of the Operating Agreements or the Contracts, except those claims arising by reason of any such alleged obligations or undertakings on the part of the Lenders subsequent to the date on which the Borrower has no legal title or any other interest in the Facilities. Should the Lenders incur any such liability, loss or damage under any of the Operating Agreements or the Contracts or under or by reason of this Collateral Assignment, or in the defense of any such claims or demands, the amount thereof, including costs, expenses and attorneys' fees, shall be secured hereby, and the Assignor shall reimburse the Lenders therefor immediately upon demand, with interest at the Post-Default Rate. ARTICLE VI MISCELLANEOUS SECTION 6.1. Continuation of Collateral Assignment. Upon the payment and performance in full of all of the Obligations, this Collateral Assignment shall become and be void and of no effect, but the affidavit of any officer of the Agent showing any part of the Obligations to remain unpaid or unperformed, shall be and constitute conclusive evidence of the validity, effectiveness and continuing force of this Collateral Assignment, and any Person may and is hereby authorized to rely thereon. A demand on any party under any of the Operating Agreements or Contracts by the Agent for the payment of any moneys to be paid to the Assignor in connection with or under any one of the Operating Agreements or Contracts, upon any Event of Default claimed by the Agent shall be sufficient to warrant such party to make future payments of such moneys to the Agent without the necessity for - 7 - 8 further consent by the Assignor. SECTION 6.2. Successors and Assigns. The rights, powers, privileges and discretions (hereinafter collectively called the "rights") specifically granted to the Lenders are not in limitation of, but in addition to, those to which the Lenders are entitled under any general or local law relating to such collateral assignments. The rights to which the Lenders may be entitled shall inure to the benefit of their successors and assigns. All the rights of the Lenders are cumulative and not alternative and may be enforced successfully or concurrently. Failure of the Lenders to exercise any of their rights shall not impair any of their rights nor be deemed a waiver thereof and no waiver of any of their rights shall be deemed to apply to any other such rights nor shall it be effective unless in writing and signed by the Agent. The terms and conditions agreed to by the Assignor and the covenants of the Assignor shall be binding upon its successors and assigns, but this provision does not waive any prohibition of assignment or any requirement of consent to an assignment. SECTION 6.3. Waiver of Acceptance by Assignor. The Assignor hereby waives acceptance of this Collateral Assignment by the Lenders. SECTION 6.4. Illegality; Severability. If fulfillment of any provision hereof or any transaction related hereto, at the time transcending the limit of validity prescribed by law, then ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity; and if any clause or provision herein contained operates or would prospectively operate to invalidate this Collateral Assignment in whole or part, then such clause or provision only shall be void as though not herein contained, and the remainder of this Collateral Assignment shall remain operative and in full force and effect. SECTION 6.5. Amendments. Neither this Collateral Assignment nor any term, condition, representation, warranty, covenant or agreement hereof may be changed, waived, discharged or terminated orally, but, rather, only by an instrument in writing by the party against whom such change, waiver, discharge or termination is sought. SECTION 6.6. Governing Law. This Collateral Assignment shall be governed and construed in accordance with the laws of the Commonwealth of Virginia. SECTION 6.7. Duplicate Originals. This Collateral Assignment may be executed in any number of duplicate originals, each of which shall be an original but all of which together shall constitute one and the same instrument. - 8 - 9 IN WITNESS WHEREOF, each Assignor has executed this Collateral Assignment by its duly authorized partner or officer, under seal, as of the day and year first above written. ASSIGNOR: BORROWER: WITNESS OR ATTEST: SUNRISE EAST ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia limited partnership __/s/ Wayne G. Tatusko _ By: Sunrise Assisted Living --------------------- Investments, Inc., general partner By: /S/ James S. Pope (SEAL) ------------------ James S. Pope Vice President MANAGEMENT COMPANY: WITNESS OR ATTEST: SUNRISE ASSISTED LIVING MANAGEMENT, INC., a Virginia corporation __/s/ Wayne G. Tatusko By: /S/ James S. Pope (SEAL) -------------------- ---------------------------- James S. Pope Vice President - 9 - EX-10.31.8 13 AMENDED COLLATERAL ASSIGMENT OF LICENSES 1 Exhibit 10.31.8 AMENDED AND RESTATED COLLATERAL ASSIGNMENT OF LICENSES, PARTICIPATION AGREEMENTS AND RESIDENT AGREEMENTS (MASTER) THIS AMENDED AND RESTATED COLLATERAL ASSIGNMENT OF LICENSES, PARTICIPATION AGREEMENTS AND RESIDENT AGREEMENTS (this "Collateral Assignment") is made as of this 23rd day of December, 1997, by SUNRISE EAST ASSISTED LIVING LIMITED PARTNERSHIP, a limited partnership organized and existing under the laws of the Commonwealth of Virginia (the "Assignor") for the benefit of NATIONSBANK, N.A. (the "Agent") as agent for itself and for certain additional lenders (collectively with the Agent, the "Lenders") who are participating as lenders in a bank group pursuant to an Agency Agreement of even date (as amended, restated or substituted from time to time, the "Agency Agreement"). RECITALS A. The Assignor obtained from the Agent and certain other lenders (collectively, the "Original Lenders") a credit facility in the maximum principal sum of $90,000,000 (the "Original Credit Facility") which was a non-revolving line of credit pursuant to which the Assignor could obtain certain construction/interim loans (each a "Facility Loan;" collectively, the "Facility Loans") for assisted living facilities and independent living facilities. The Original Credit Facility has been evidenced by a Master Promissory Note dated June 13, 1996 as amended pursuant to a First Amendment to Master Promissory Note dated September 5, 1996 and by a Second Amendment to Master Promissory Note dated March 31, 1997 (collectively, the "Master Note"). B. In connection with the making of each Facility Loan, the Assignor executed a promissory note in the maximum principal sum of each Facility Loan (each a "Facility Note" and collectively, the "Facility Notes"). Availability under the Master Note was reduced by the principal sum of each Facility Note. As of the date hereof, seven (7) Facility Loans have been made under the Original Credit Facility evidenced by eight (8) Notes. In connection with the Original Credit Facility, the Assignor executed a Collateral Assignment of Licenses, Participation Agreements and Resident Agreements in favor of the Original Lenders dated June 13, 1996 (the "Original Collateral Assignment"). C. The Assignor has applied to the Lenders to increase the maximum principal sum of the Original Credit Facility to $250,000,000 or such greater amount as the Lenders may from time to time commit to lend pursuant to the Agency Agreement (such 2 increased and modified credit facility being hereinafter referred to as the "Credit Facility" or the "Loan") and to provide that the Credit Facility will be revolving. Advances or readvances are to be made pursuant to, and secured by, the provisions of that certain Amended and Restated Financing and Security Agreement dated the same date as this Agreement by and between the Agent and the Assignor (as amended, restated or substituted from time to time, the "Financing Agreement") and that certain Amended and Restated Master Construction Loan Agreement dated the same as this Agreement by and between the Agent and the Assignor (as amended, restated or substituted from time to time, the "Construction Agreement"). D. The Loan will be evidenced by an Amended, Restated and Increased Master Promissory Note (as amended, restated, renewed or substituted from time to time, the "Note"). The Note will be secured by, among other things, certain Deeds of Trust (as defined in the Financing Agreement) from the Borrower or a Guarantor Subsidiary in favor of the Lenders covering the Borrower's or the Guarantor Subsidiary's interest in the Land and the Improvements for the applicable Facility (as defined hereinafter) and such other real and personal property as shall be therein more particularly set forth (collectively, the "Property"). The Credit Facility is evidenced, secured and guaranteed by certain Financing Documents (as defined in the Financing Agreement). E. The Note, the Deeds of Trust, this Agreement, this Collateral Assignment, Financing Agreement, the Construction Agreement, and all other documents evidencing or securing the Loan are hereinafter referred to collectively as the "Financing Documents." F. It is a condition of the making available of the Credit Facility by the Lenders to the Assignor that the Guarantor executes and delivers this Agreement to the Agent. G. The Lenders have agreed to make the Loan on the condition, among others, that the Assignor execute and deliver this Agreement and that any Guarantor Subsidiaries join in this Collateral Assignment pursuant to a Joinder Agreement and related Security Documents at such time as the Guarantor Subsidiary executes a Deed of Trust. - 2 - 3 AGREEMENTS NOW, THEREFORE, in consideration of the premises, of the respective representations, covenants and agreements hereinafter contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce the Lenders to make the Loan to the Assignor and as additional security for payment and performance of the Obligations, the Assignor hereby covenants and agrees with the Agent and amends and restates the Original Collateral Assignment in its entirety as follows: ARTICLE 1 DEFINITIONS AND CONSTRUCTION SECTION 1.1 Recitals. The Recitals set forth hereinabove are incorporated herein by reference. SECTION 1.2 Definitions. All capitalized terms used in this Collateral Assignment and not otherwise defined herein shall have the respective meanings specified in the Financing Agreement, unless the context clearly indicates otherwise. The following terms shall have the following meanings: "Agreements" means collectively the Licenses, Participation Agreements and Resident Agreements. "Collateral" means (a) all of the Licenses, Participation Agreements and Resident Agreements, whether now owned or existing or hereafter acquired or arising, (b) all books and records in whatever media (paper, electronic or otherwise) recorded or stored, with respect to the foregoing and all equipment and general intangibles necessary or beneficial to retain, access and/or process the information contained in those books and records, and (c) all cash and non-cash proceeds and products of the foregoing. "Governmental Authority" or "Governmental Authorities" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Licenses" means any and all licenses, certificates of need, operating permits, operating rights, franchises, and other licenses, governmental authorizations, certifications, permits and approvals issued by, or on behalf of, any Governmental Authority, now or hereafter existing with respect to the acquisition, construction, renovation, expansion, leasing, ownership and/or operation by the Assignor of assisted living facilities and/or independent living facilities (within the - 3 - 4 meaning of the applicable law in which the applicable Property is located) (individually, the "Facility"; collectively, the "Facilities"), including (without limitation) if and as required by any Governmental Authority any and all operating licenses, pharmaceutical licenses and other licenses related to the purchase, dispensing, storage, prescription and/or use of drugs, medications and other "controlled substances", and any and all licenses issued by any Governmental Authority relating to the operation of food and beverage facilities and/or other amenities. "Lien" means any mortgage, deed of trust, deed to secure debt, grant, pledge, security interest, assignment, encumbrance, judgment, lien or charge of any kind, whether perfected or unperfected, avoidable or unavoidable, including, without limitation, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction. "Participation Agreements" means any and all third party payor participation and/or reimbursement agreements relating to the care of patients located at and the operation of the Facilities previously, now or hereafter, at any time existing relating to rights to payment and/or reimbursement from, and claims against, governmental and private insurers, including rights to payment and/or reimbursement from, and claims against, federal, state and local Governmental Authorities, and/or private or quasi-public insurers, including, without limitation, rights and claims relating to Medicare, Medicaid, Veterans Administration, or other private insurers, as the same may from time to time be amended, restated, extended, supplemented or modified. "Resident Agreement" or "Resident Agreements" means one or more agreements for resident services between the Assignor and each resident of the Facilities in which the Assignor has agreed and will agree to provide certain assisted living services, independent living services and other related services at the Facilities, for which each Resident will pay certain Service Charges for professional services rendered by the Assignor (collectively, the "Service Charges") in accordance with, and subject to the terms and conditions of, a Resident Agreement. Unless otherwise defined in this Collateral Assignment, all terms used in this Collateral Assignment which are defined by the applicable Uniform Commercial Code shall have the same meanings as assigned to them by the applicable Uniform Commercial Code unless and to the extent varied by this Collateral Assignment. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Collateral Assignment shall refer to this Collateral Assignment as a whole and not to any particular provision of this Collateral Assignment, and section, subsection, - 4 - 5 schedule and exhibit references are references to sections or subsections of, or schedules or exhibits to, as the case may be, this Collateral Assignment unless otherwise specified. As used in this Collateral Assignment, the singular number shall include the plural, the plural the singular and the use of the masculine, feminine or neuter gender shall include all genders, as the context may require. Reference to any one or more of the Financing Documents and any of the Financing Documents shall mean the same as the foregoing may from time to time be amended, restated, substituted, extended, renewed, supplemented or otherwise modified. - 5 - 6 ARTICLE 2 COLLATERAL ASSIGNMENT SECTION 2.1 Collateral Assignment. As security and collateral for the payment of all of the Obligations, and for performance of, and compliance with, by the Assignor, all of the terms, covenants, conditions, stipulations and agreements contained in this Collateral Assignment, the Financing Agreement and each of the other Financing Documents, and to the extent permitted under Laws and the Agreements, as applicable, the Assignor hereby transfers, pledges, sets over and collaterally assigns to the Agent, for itself and for the ratable benefit of the Lenders, and grants to the Agent, for itself and for the ratable benefit of the Lenders, a lien on, and security interest in, all right, title and interest of the Assignor in, to, and under the Agreements, together with all rights, privileges and entitlements thereunder and all cash and non-cash proceeds thereof including, among other things, all of the Assignor's rights to the payment of Service Charges and all other rights and remedies under, and in connection with, any and all Resident Agreements, hereafter executed and delivered to the Assignor, including, without limitation, the rights to enforce, collect and liquidate any such Service Charges. The Agent expressly acknowledges that the collateral assignment, grant and exercise of security interests as are created hereby are subject to Laws applicable to health care providers and health care facilities such as those operated by the Assignor, including, Laws protecting the confidentiality of patient information. The Agent also acknowledges that, in connection with any exercise of any of the security interests or other rights created herein, it may be necessary to obtain approvals of, consents from, or new agreements with, various third parties, including third party payors such as Medicare, Medicaid, Veterans Administration, and other private insurance carriers, and from relevant health care regulatory authorities and agencies. Notwithstanding anything to the contrary contained herein, the Agent acknowledges and agrees that, except to the extent permitted by applicable Laws, none of the receivables which arise out of accounts payable by Medicare and/or Medicaid to Assignor, including, without limitation, any and all depository accounts into which the proceeds of all or any such receivables may at any time hereafter be deposited are intended to be absolutely or collaterally assigned to the Lenders by this Collateral Assignment unless payments on such Receivables have been first paid to and deposited with the Assignor; the Assignor acknowledges and agrees, however, that this Collateral Assignment is intended to grant to the Lenders a security interest in any and all receivables which arise out of accounts payable by Medicare and/or Medicaid. The Assignor makes no representations regarding whether this assignment of Licenses will be accepted by applicable - 6 - 7 Governmental Authorities. Notwithstanding anything herein to the contrary, nothing contained herein shall impose upon the Agent any of the obligations or liabilities of the Assignor under the Agreements and provided further that the Agent shall not exercise any rights under such Agreements unless and until an Event of Default has occurred and continues beyond the expiration of any applicable grace and/or notice and cure periods, under the Financing Agreement. ARTICLE 3 REPRESENTATIONS AND WARRANTIES SECTION 3.1 Licenses. The Assignor represents and warrants to the Lenders that (a) to its best knowledge, information and belief no event has occurred which, with the giving of notice or the lapse of time, or both, would constitute a material breach of any condition to issuance, maintenance, renewal and/or continuance of any License, (b) the Assignor has paid or will pay when necessary to obtain a License all fees, charges and other expenses to the extent due and payable, and has provided all information and otherwise complied with all material conditions precedent, to the extent feasible, to the issuance, maintenance, renewal, and continuance of all material Licenses and (c) no License has been or is expected to be issued for a period of less than twelve (12) months from the date of issuance as a consequence of any sanctions imposed by any Governmental Authority. SECTION 3.2 Participation Agreements. The Assignor represents and warrants to the Lenders that (a) the Participation Agreements, if any, to which the Assignor will be a party will be valid and binding on the Assignor and, to the best knowledge of the Assignor, on the other parties thereto, and will be at the time of execution and delivery thereof in full force and effect, and will not be evidenced by any chattel paper or instrument, (b) the Assignor is eligible for third party payments under, and in connection with, any and all Participation Agreements to which it is presently a party, and (c) the Assignor is currently not a party to any Participation Agreement. SECTION 3.3 Resident Agreements. The Resident Agreements will be valid and binding on the Assignor, and to the best of the Assignor's knowledge, on the other parties thereto, will be, at the time of execution and delivery thereof in full force and effect. All Resident Agreements will be entered into on the Assignor's standard form, pre-approved by the Agent. SECTION 3.4 Places of Business, Location of Collateral, Names and Addresses. The Assignor warrants that the address of the Assignor's chief executive office and each other place of - 7 - 8 business of the Assignor is or will be as specified on Exhibit A attached to and made a part of this Collateral Assignment. The Collateral and all books and records pertaining to the Collateral are and will be located at the address or addresses indicated on Exhibit A as may be modified from time to time. The Assignor will immediately advise the Agent in writing of the opening of any new place of business or the closing of any of its existing places of business, and of any change in the location of the places where the Collateral, or any part thereof, or the books and records concerning the Collateral, or any part thereof, are kept. SECTION 3.5 Title to Collateral. The Assignor has or will have good and marketable title to all of the Collateral, and the Collateral is or will be free and clear of any and all Liens other than Liens in favor of the Lenders and Permitted Liens. SECTION 3.6 Perfection of Security Interest. The Lenders will have and will continue to have as security for the Obligations a first priority, valid and perfected security interest in, and Lien on, all of the Collateral. SECTION 3.7 Accuracy of Information The information contained in Exhibit A attached to and a part of this Collateral Assignment, is true, complete and correct in all respects. ARTICLE 4 COVENANTS Until payment in full of the Loan and the other Obligations, the Assignor hereby covenants and agrees as follows: SECTION 4.1 Defense of Title and Further Assurances. To promptly upon request, execute, acknowledge and deliver any financing statement, renewal, affidavit, deed, collateral assignment, continuation statement, security agreement, certificate or other document the Agent may reasonably require in order to perfect, preserve, maintain, protect, continue and/or extend the collateral assignment, lien or security interest granted to the Lenders under this Collateral Assignment and its priority. The Assignor shall pay to the Agent on demand all taxes, costs and expenses incurred by the Agent in connection with the preparation, execution, recording and filing of any such document or instrument. Such taxes, costs and expenses shall constitute and become a part of the Obligations. A copy of a fully executed financing statement shall be sufficient to satisfy for all purposes the requirements of a financing statement as set forth in Article 9 of the applicable Uniform Commercial Code. The Assignor will from time to time do whatever the Agent may request by way of obtaining, executing, delivering, and/or filing financing statements, landlords' or mortgagees' waivers, and other - 8 - 9 notices and amendments and renewals thereof and the Assignor will take any and all steps and observe such formalities as the Agent may request, in order to create and maintain a valid Lien upon, pledge of, or paramount security interest in, the Collateral, subject to the Permitted Liens. The Assignor shall pay to the Agent on demand all taxes, costs and expenses incurred by the Agent in connection with the preparation, execution, recording and filing of any such document or instrument. To the extent that the proceeds of any of the Accounts are expected to become subject to the control of, or in the possession of, a party other than the Assignor, the Assignor shall cause all such parties to execute and deliver such security documents, financing statements or other documents as requested by the Agent and as may be necessary to evidence and/or perfect the security interest and Lien of the Lenders in those proceeds. The Assignor hereby irrevocably appoints the Agent as its attorney-in-fact, with power of substitution from time to time, to take such actions as are described in this Section as well as any other action which the Assignor is required to take under this Collateral Assignment or under any of the other Financing Documents. SECTION 4.2 Performance under Licenses; Amendments to Licenses. To promptly and faithfully comply with and perform in all material respects its obligations and duties under all terms of all Licenses in accordance with the terms thereof, including, without limitation, the payment of any and all issuance, renewal or other fees, charges, assessments and other expenses assessed by any issuing Governmental Authority in connection with any of the Licenses, and including, further, the filing of any and all reports, surveys, schedules, certificates, applications and other items required by any issuing authority as a condition precedent to any renewal, issuance, or continuance of any of the Licenses. The Assignor will not request any changes or amendments to any of the Licenses which are not customarily made in the ordinary course of business and which would result in a material adverse change in the financial condition or operations of the Assignor, or terminate, restrict, or cancel any of the Licenses, to the extent any such termination, restriction or cancellation would have a materially adverse effect on the financial condition or operations of the Assignor. If requested by the Agent, copies of all Licenses, together with any amendments to, or renewals of, the Licenses, will be delivered by the Assignor to the Agent. If the Assignor fails to make or cause to be made any payment of any fee, charge, expense or other assessment necessary to the issuance, renewal or continuance of any License, or otherwise fails to perform any condition to the issuance, renewal, maintenance or issuance of any License, or the preservation of any License from any restriction or limitation, the Agent may, without notice to the Assignor and without waiving any default or releasing the Assignor from any of the Obligations, and without being under any obligation to do so, make such payment or perform such condition, for the account of the Assignor. All amounts so - 9 - 10 paid by the Agent and all reasonable costs, fees and expenses incurred by the Agent in connection with such payment or performance (including, without limitation, reasonable attorney's fees and expenses) shall be immediately due and payable by the Assignor as part of the Obligations, together with interest at the default rate of interest charged under the Note, until the same are paid in full by the Assignor. The Assignor will take any and all steps necessary to renew the Licenses in accordance with all Laws, except to the extent that the Assignor deems such renewal to be, in the exercise of prudent business judgment, contrary to its best interests. SECTION 4.3 Performance under Resident Agreements. To faithfully abide by, perform and fulfill in all material respects each and every term, covenant and condition of each Resident Agreement binding on the Assignor; and, unless, and until such time as the Agent notifies the Assignor to the contrary after the occurrence and during the continuance of an Event of Default, to use its best efforts to enforce or secure the performance of each and every term, covenant and condition of each such Resident Agreement by the patients to be performed or fulfilled, unless the Assignor elects otherwise in the exercise of its good faith, commercially reasonable, and prudent business judgment. SECTION 4.4 Performance under Contracts; Amendments to Participation Agreements. To promptly and faithfully comply with and perform in all material respects all of its obligations and duties under all terms of the Participation Agreements in accordance with the terms thereof, and will make no changes or amendments to the Participation Agreements which are not customarily made in the ordinary course of business and which result in a material adverse effect on the financial condition or operations of the Assignor, or terminate or cancel any of the Participation Agreements, other than in the ordinary course of business, or to the extent the Assignor deems such termination or cancellation to be, in the exercise of prudent business judgment, in the best interests of the Assignor. If requested by the Agent, copies of all amendments to the Participation Agreements will be delivered by the Assignor to the Agent. The Assignor will take any and all steps necessary to renew the Participation Agreements to which it is a party, except to the extent that the Assignor deems such renewal to be, in the exercise of prudent business judgment, contrary to its best interests. SECTION 4.5 Information and Notifications. To promptly (i) furnish to the Agent to the extent reasonably requested by the Agent, evidence of the issuance, renewal or continuance of any License, and compliance with all conditions under which such License exists, (ii) inform the Agent of any written notices received relating to the threatened or actual revocation, restriction, suspension or expiration of any License, and (iii) notify the Agent in writing of the happening of any of the - 10 - 11 following events: (a) any modification of any of the provisions of any of such Licenses which substantially affect any of such Licenses, (b) failure or inability of the Assignor to comply in all material respects with any conditions of such Licenses, (c) any revocation, suspension, probation, expiration, amendment, or rescission of any of the Licenses or pending or threatened revocation, suspension, probation, expiration, amendment, or rescission of any of the Licenses (d) as a consequence of any sanction of a Governmental Authority, the issuance or threatened issuance of any License for a period of less than twelve (12) months from the date of issuance, and (e) any modification of any of the provisions of any of the Participation Agreements to which it is a party which substantially affect any of the Participation Agreements and which would result in a materially adverse change in the financial condition or operations of the Assignor; and (f) any voluntary, involuntary, pending or threatened decertification or declared ineligibility of any of the Assignor's rights to participate under any of the Participation Agreements. SECTION 4.6 Maintenance of the Collateral. The Assignor shall not permit anything to be done to the Collateral which may impair the value thereof. The Agent, or an agent designated by the Agent, shall be permitted to enter the premises of the Assignor and examine, audit and inspect the Collateral at any reasonable time and from time to time without notice. The Agent shall not have any duty to, and the Assignor hereby releases the Agent from all claims of loss or damage caused by the delay or failure to collect or enforce any of the Accounts or to preserve any rights against any other party with an interest in the Collateral. SECTION 4.7 Business Names; Locations. The Assignor will notify the Agent not less than thirty (30) days prior to (a) any change in the name under which the Assignor conducts its business, (b) any change of the location of the chief executive office of the Assignor or of its general partner, and (c) the opening of any new place of business or the closing of any existing place of business, and any change in the location of the places where the Collateral, or any part thereof, or the books and records, or any part thereof, are kept. SECTION 4.8 Liens. The Assignor will not create, incur, assume or suffer to exist any Lien upon any of the Collateral, except for Liens securing the Obligations and Permitted Liens. SECTION 4.9 Transfer of Collateral. The Assignor will not transfer, or permit the transfer, to another location of any of the books and records related to any of the Collateral, without the prior written consent of the Agent. - 11 - 12 ARTICLE 5 DEFAULTS AND REMEDIES SECTION 5.1 Remedies Upon Default. Subject to the provisions and understandings of Section 2.1 of this Collateral Assignment and to the extent permitted by applicable Laws, upon or at any time after the occurrence and during the continuance of an Event of Default, the Agent may, without notice and without regard to the adequacy of security for the obligations and in addition to any other remedy which the Agent may have at law or in equity under the Financing Documents, either in person or by agent with or without bringing any action or proceeding, or by a receiver to be appointed by a court: (a) enforce any and all rights and remedies of the Assignor under and in connection with any of the Licenses, to the extent permitted by Law, and subject to the provisions of the Financing Agreement and Section 2.1 of this Collateral Assignment, (b) make, cancel, enforce or modify any of the Licenses, (c) enforce any and all rights and remedies of the Assignor under and in connection with any of the Participation Agreements, to the extent permitted by Law, and subject to the provisions of the Financing Agreement, Section 2.1 of this Collateral Assignment and the Participation Agreements, (d) make, cancel, enforce or modify any of the Participation Agreements, including, without limitation, the collateral assignment of any such Participation Agreements to third parties, contacting Governmental Authorities, seeking approvals and consents of any and all Governmental Authorities to the transfer of any of the Participation Agreements, (e) make, cancel, enforce or modify any of the Resident Agreements, fix or modify fees, (f) either with or without taking possession of any of the Facilities, in its own name sue for or otherwise collect and receive such fees, issues and profits, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including just and reasonable compensation for all its employees and other agents (including, without limitation, reasonable attorneys' fees and management commissions) upon any indebtedness secured hereby, in such order and manner as the Agent may determine in its reasonable discretion; provided, however, that the Agent shall at all times act in accordance with Section 2.1 of this Collateral Assignment, the provisions of the Financing Agreement, the Financing - 12 - 13 Documents, and each of the Agreements. The Agent may act upon any notice, request, consent, demand, statement, note or other paper or document believed by it to be genuine and to have been signed by the party or parties purporting to sign the same. The Lenders shall not be liable to the Assignor for any error of judgment, or for any act done or step taken or omitted, or for any mistake of law or fact, or for anything which it may do or refrain from doing in good faith, and generally shall not have any accountability hereunder except for fraud, gross negligence or willful misconduct. Any default by the Assignor in the performance of any term, covenant or condition herein contained which shall continue uncured for a period of thirty (30) days after the date of written notice thereof to the Assignor shall constitute and be deemed to be an immediate Event of Default under the terms of the Construction Agreement, entitling the Lenders, without additional notice or cure periods, to every and all rights, privileges and remedies contained in this Collateral Assignment, the Financing Agreement and the other Financing Documents. Except as provided in the Financing Agreement or any of the other Financing Documents, the entering upon and taking possession of any or all of the Facilities, the collection of such fees, issues and profits and the application thereof as aforesaid, shall not cure or waive any Event of Default or waive, modify or affect notice of an Event of Default under the Financing Agreement or any of the other Financing Documents or invalidate any act done pursuant to such notice. The Lenders may exercise their rights and privileges under this Collateral Assignment as often as any default shall occur and continue under this Collateral Assignment. ARTICLE 6 REMEDIES Upon the occurrence of an Event of Default, the Lenders shall be entitled, at their option, to exercise the following rights and remedies: SECTION 6.1 Costs. The Assignor agrees to pay to Agent as part of the Obligations all reasonable expenses, charges, costs, taxes, and fees (including, without limitation, reasonable attorneys' fees and expenses, whether incurred prior to the institution of any suit or other proceeding or otherwise) of any nature whatsoever paid or incurred by or on behalf of Agent in connection with the perfection, collection, maintenance, inspection, preservation, insuring, defense, protection, realization upon, disposition, sale or enforcement of all or any part of the Collateral or the enforcement or collection of the - 13 - 14 Obligations. SECTION 6.2 Remedies Cumulative. The rights, powers and remedies provided in this Collateral Assignment are cumulative, may be exercised concurrently or separately, may be exercised from time to time and in such order as the Agent shall determine, and are in addition to, and not exclusive of, rights, powers and remedies provided by applicable Laws. Without limiting the generality of the foregoing, the Agent may: (a) proceed against the Assignor and/or the Collateral with or without proceeding against any person obligated under any of the Obligations; (b) proceed against the Assignor with or without proceeding under the other documents or agreements; (c) without reducing or impairing the Obligations of the Assignor and without notice, release or compromise with any guarantor or other person liable for all or any part of the Obligations; (d) without reducing or impairing the Obligations of the Assignor and without notice thereof: (i) fail to perfect the security interests and/or other interests of the Lenders in any or all Collateral or to release any or all the Collateral or to accept substitute Collateral, (ii) allow all or any Obligations to arise after the date of this Collateral Assignment, (iii) waive any provision of this Collateral Assignment, (iv) exercise or fail to exercise rights of set-off or other rights, (v) accept partial payments or extend from time to time the maturity of all or any part of the Obligations, and (vi) take or fail to take any action under this Collateral Assignment or against any one or more persons obligated under the Obligations. The Assignor hereby waives and releases all claims and defenses against the Lenders and/or with respect to the payment or the enforcement of the Obligations and the Lenders' rights in the Collateral on account of any of the foregoing. ARTICLE 7 MISCELLANEOUS SECTION 7.1 Indemnification. The Lenders shall not be obligated to perform or fulfill, nor do they hereby undertake to perform or fulfill, any term, condition or covenant under any of the Agreements, or - 14 - 15 by reason of this Collateral Assignment. The Assignor shall and does hereby agree to indemnify and to hold the Lenders harmless of and from any and all liability, loss or damage which it may or might incur under any of the Agreements or by reason of this Collateral Assignment, including, without limitation, any amounts claimed or asserted by any parties under the Agreements, except those arising from any fraud, gross negligence or willful misconduct of the Lenders, and of and from any and all claims and demands whatsoever which may be asserted against the Lenders, by reason of any alleged obligation or undertaking on its part to perform or discharge any of the terms, covenants or conditions contained in the Agreements. Should the Lenders incur any such liability, loss or damage under any of the Agreements or under or by reason of this Collateral Assignment, or in the defense of any such claims or demands, the amount thereof, including Enforcement Costs, shall be secured hereby, and the Assignor shall reimburse the Lenders therefor immediately upon demand, with interest at the default rate of interest charged under the Note. SECTION 7.2 Continuation of this Collateral Assignment. Upon the payment and performance in full of all of the Obligations, this Collateral Assignment shall become and be void and of no effect, but the affidavit of any officer of the Agent showing any part of the Obligations remaining unpaid or the continuing effect of the Financing Agreement, shall be and constitute conclusive evidence of the validity, effectiveness and continuing force of this Collateral Assignment, and any Person may and is hereby authorized to rely thereon. A demand on any patient under any of the Resident Agreements by the Agent for the payment of Service Charges or any other fees due under, or in connection with, any Resident Agreement or upon the occurrence of any Event of Default claimed by the Agent shall be sufficient to warrant such patient to make future payments of such fees to the Agent without the necessity for further consent by the Assignor. SECTION 7.3 Successors and Assigns. The rights, powers, privileges and discretions (hereinafter collectively called the "rights") specifically granted to the Lenders herein are not in limitation of, but in addition to, those to which the Lenders are entitled under any general or local law relating to security interests and Liens. The rights to which the Lenders may be entitled shall inure to the benefit of their successors and assigns. All the rights of the Lenders are cumulative and not alternative and may be enforced successfully or concurrently. Failure of the Lenders to exercise any of its rights shall not impair any of their rights nor be deemed a waiver thereof and no waiver of any of its rights shall be deemed to apply to any other such rights nor shall any waiver be effective unless in writing and signed by the Lenders. The terms and conditions agreed to by the Assignor and the covenants of the Assignor shall be binding upon the successors and assigns of the Assignor, but this provision does not waive any prohibition of assignment or any requirement of consent to an assignment. SECTION 7.4 Illegality. If fulfillment of any provision - 15 - 16 hereof or any transaction related hereto, at the time transcending the limit of validity prescribed by law, then ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity; and if any clause or provision herein contained operates or would prospectively operate to invalidate this Collateral Assignment in whole or part, then such clause or provision only shall be void, as though not herein contained, and the remainder of this Collateral Assignment shall remain operative and in full force and effect. SECTION 7.5 Waiver of Acceptance by Assignor. The Assignor hereby waives acceptance of this Collateral Assignment by the Lenders. SECTION 7.6 Counterparts. This Collateral Assignment may be executed in any number of duplicate originals, each of which shall be an original but all of which together shall constitute one and the same instrument. SECTION 7.7 Amendments. Neither this Collateral Assignment nor any term, condition, representation, warranty, covenant or agreement hereof may be changed, waived, discharged or terminated orally, but, rather, only by an instrument in writing by the party against whom such change, waiver, discharge or termination is sought. Section 7.8 Assignments by Lenders. The Lenders may, without notice to, or consent of, the Assignor, sell, assign or transfer to or participate with any Person or Persons all or any part of the Obligations, and each such Person or Persons shall have the right to enforce the provisions of this Collateral Assignment and any of the other Financing Documents as fully as the Lenders, provided that the Lenders shall continue to have the unimpaired right to enforce the provisions of this Collateral Assignment and any of the other Financing Documents as to so much of the Obligations that the Lenders have not sold, assigned or transferred. SECTION 7.9 Governing Law. This Collateral Assignment shall be governed and construed in accordance with the laws of the Commonwealth of Virginia. IN WITNESS WHEREOF, the Assignor has executed and delivered this Collateral Assignment under seal as of the day and year first written above. WITNESS OR ATTEST: SUNRISE EAST ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia limited partnership By: Sunrise Assisted Living Investments, Inc., general partner - 16 - 17 __/s/ Wayne G. Tatusko By: __/s/ James S. Pope__(SEAL) --------------------- ----------------- James S. Pope Vice President STATE/COMMONWEALTH OF VIRGINIA, CITY/COUNTY OF __Fairfax__, TO WIT: I, _Dawn A. Washington_, a Notary Public in and for the jurisdiction aforesaid, do hereby certify on this 23rd day of December, 1997, that James S. Pope as Vice President of Sunrise Assisted Living Investments, Inc., a Virginia corporation, the general partner of Sunrise East Assisted Living Limited Partnership, a Virginia limited partnership, who executed the foregoing instrument, personally appeared before me and acknowledged said Instrument to be his act and deed that he executed said Instrument for the purposes therein contained. WITNESS my hand and Notarial Seal. __/s/ Dawn A. Washington___ ---------------------- Notary Public My Commission Expires: - 17 - 18 EXHIBIT A TO COLLATERAL ASSIGNMENT AS OF DECEMBER 23, 1997 The Assignor further represents and warrants to the Lenders as follows: 1. The exact legal name of Assignor is as stated in the initial paragraph to this Collateral Assignment. 2. The Assignor's Federal Tax Identification Number is: __________54-1746596_________ 3. (a) The Assignor's chief executive office is: c/o Sunrise Assisted Living, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 (b) The Assignor in fact manages the main part of its business operations from that address; and (c) It is at that address that persons dealing with the Assignor would normally look for credit information. 4. Location of Books and Records Sunrise Assisted Living, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Sunrise of Franconia 6541 Franconia Road Springfield, Virginia 22150 Fairfax County Sunrise of Abington 1801 Susquehana Road Abington, Pennsylvania 19001 Montgomery County Sunrise of Granite Run Rte. 352 and Barren Road Middletown Township, Pennsylvania 19063 Delaware County Sunrise of Morris Plains 209 Littleton Road Morris Plains, New Jersey 07950 19 PG. 2 - EXHIBIT A Sunrise of Old Tappan 195 Old Tappan Road Old Tappan, New Jersey 07675 Sunrise of Wayne 184 Berdan Avenue Wayne, New Jersey 07470 Sunrise of Westfield 240 Springfield Avenue Westfield, New Jersey 07090 5. The mailing address of the Assignor to be inserted on financing statements covering the Collateral is: c/o Sunrise Assisted Living Investments, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Attn: Thomas B. Newell, Esquire 6. In the twelve years preceding the date hereof, the Assignor has not changed its name, identity or structure, has not conducted business under any name other than its current name, and has not conducted its business in any jurisdiction other than the jurisdiction in which its chief executive office is currently located, except as follows: EX-10.31.9 14 AMENDED AND RESTATED MASTER GUARANTEE OF PAYMENT 1 EXHIBIT 10.31.9 AMENDED AND RESTATED MASTER GUARANTY OF PAYMENT AGREEMENT THIS AMENDED AND RESTATED MASTER GUARANTY OF PAYMENT AGREEMENT (this "Agreement") is made this 23rd day of December, 1997, by SUNRISE ASSISTED LIVING, INC., a Delaware corporation (the "Guarantor") for the benefit of NATIONSBANK, N.A., as agent ("Agent") for itself and for certain additional lenders (collectively with the Agent, the "Lenders") who are or shall be from time to time participating as lenders in a bank group pursuant to the Amended and Restated Agency Agreement of even date herewith (as amended, restated or substituted from time to time, the "Agency Agreement"). RECITALS A. SUNRISE EAST ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia limited partnership (the "Borrower"), obtained from the Agent and certain other lenders (collectively, the "Original Lenders") a credit facility in the maximum principal sum of $90,000,000 (the "Original Credit Facility") which was a non-revolving line of credit pursuant to which the Borrower could obtain certain construction/interim loans (each a "Facility Loan;" collectively, the "Facility Loans") for assisted living facilities and independent living facilities. The Original Credit Facility has been evidenced by a Master Promissory Note dated June 13, 1996 as amended pursuant to a First Amendment to Master Promissory Note dated September 5, 1996 and by a Second Amendment to Master Promissory Note dated March 31, 1997 (collectively, the "Master Note"). B. In connection with the making of each Facility Loan, the Borrower executed a promissory note in the maximum principal sum of each Facility Loan (each a "Facility Note" and collectively, the "Facility Notes"). Availability under the Master Note was reduced by the principal sum of each Facility Note. As of the date hereof, seven (7) Facility Loans have been made under the Original Credit Facility evidenced by eight (8) Notes. C. The Borrower has applied to the Lenders to increase the maximum principal sum of the Original Credit Facility to $250,000,000 or such greater amount as the Lenders may from time to time commit to lend pursuant to the Agency Agreement (such increased and modified credit facility being hereinafter referred to as the "Credit Facility" or the "Loan") and to provide that the Credit Facility will be revolving. Advances or readvances are to be made pursuant to, and secured by, the provisions of that certain Amended and Restated Financing and Security 2 Agreement dated the same date as this Agreement by and between the Agent and the Borrower (as amended, restated or substituted from time to time, the "Financing Agreement") and that certain Amended and Restated Master Construction Loan Agreement dated the same as this Agreement by and between the Agent and the Borrower (as amended, restated or substituted from time to time, the "Construction Agreement"). D. The Loan is evidenced by that certain Amended, Restated, Consolidated and Increased Master Promissory Note of even date herewith payable by the Borrower to Agent on behalf of the Lenders (as amended, restated, renewed or substituted from time to time, the "Note"). E. The Guarantor has requested the Lenders to enter into the Financing Agreement with the Borrower and to make the Loan to the Borrower pursuant thereto. F. The Note, the Deeds of Trust (as defined in the Financing Agreement), this Agreement, the Financing Agreement, the Construction Agreement (as defined in the Financing Agreement), and all other documents evidencing or securing the Loan are hereinafter referred to collectively as the "Financing Documents." G. The Lenders have required, as a condition to the making of the Loan, that the Guarantor execute and deliver this Agreement to the Agent. E. All defined terms used in this Agreement and not defined herein shall have the meaning given to such terms in the Financing Agreement. NOW, THEREFORE, in order to induce the Lenders to make the Loans to the Borrower, the Guarantor covenants and agrees with the Lenders as follows: ARTICLE 1 THE GUARANTY SECTION 1.1 Recitals. The Recitals set forth above are incorporated into this Agreement by reference. SECTION 1.2 Guaranty. The Guarantor hereby unconditionally and irrevocably guarantees to the Lenders: (a) the due and punctual payment in full (and not merely the collectibility) of the principal of the Note and the interest thereon, in each case when due and payable, whether on any installment payment date or at the stated or accelerated 2 3 maturity, all according to the terms of the Note and the other Financing Documents; (b) the due and punctual payment in full (and not merely the collectibility) of all Obligations and other sums and charges which may at any time be due and payable in accordance with, or secured by, the Note or any of the other Financing Documents; (c) the due and punctual performance of all of the other terms, covenants and conditions contained in the Financing Documents; and (d) all indebtedness, obligations and liabilities of any kind and nature of the Borrower to the Lenders, whether now existing or hereafter created or arising, direct or indirect, matured or unmatured, and whether absolute or contingent, joint, several or joint and several, and howsoever owned, held or acquired. Section 1.3 Guaranty Unconditional. The obligations and liabilities of the Guarantor under this Agreement shall be absolute and unconditional, irrespective of the genuineness, validity, priority, regularity or enforceability of the Note or any of the Financing Documents or any other circumstance which might otherwise constitute a legal or equitable discharge of a surety or guarantor. The Guarantor expressly agrees that the Lenders may, in their sole and absolute discretion, without notice to or further assent of the Guarantor and without in any way releasing, affecting or in any way impairing the obligations and liabilities of the Guarantor hereunder: (a) waive compliance with, or any defaults under, or grant any other indulgences under or with respect to any of the Financing Documents; (b) modify, amend, change or terminate any provisions of any of the Financing Documents; (c) grant extensions or renewals of or with respect to the Note or any of the other Financing Documents; (d) effect any release, subordination, compromise or settlement in connection with the Note or any of the other Financing Documents; (e) agree to the substitution, exchange, release or other disposition of the Collateral or any part thereof, or any other collateral for the Loans or to the subordination of any lien or security interest therein; 3 4 (f) make advances for the purpose of performing any term, provision or covenant contained in the Note or any of the other Financing Documents with respect to which the Borrower shall then be in default; (g) make future advances to the Borrower pursuant to the Financing Agreement or any of the other Financing Documents; (h) assign, pledge, hypothecate or otherwise transfer the Note, any of the other Financing Documents or this Agreement or any interest therein; (i) deal in all respects with the Borrower as if this Agreement were not in effect; and (j) effect any release, compromise or settlement with any of the Guarantor or any other guarantor. Section 1.4 Guaranty Primary. The obligations and liabilities of the Guarantor under this Agreement shall be primary, direct and immediate, shall not be subject to any counterclaim, recoupment, set off, reduction or defense based upon any claim that the Guarantor may have against the Borrower, the Lenders and/or any other guarantor and shall not be conditional or contingent upon pursuit or enforcement by the Lenders of any remedies it may have against the Borrower with respect to the Note or any of the other Financing Documents, whether pursuant to the terms thereof or by operation of law. Without limiting the generality of the foregoing, the Lenders shall not be required to make any demand upon the Borrower, or to sell the Collateral or otherwise pursue, enforce or exhaust their remedies against the Borrower or the Collateral either before, concurrently with or after pursuing or enforcing their rights and remedies hereunder. Any one or more successive or concurrent actions or proceedings may be brought against the Guarantor under this Agreement, either in the same action, if any, brought against the Borrower or in separate actions or proceedings, as often as the Lenders may deem expedient or advisable. Without limiting the foregoing, it is specifically understood that any modification, limitation or discharge of any of the liabilities or obligations of the Borrower or any other obligor under any of the Financing Documents, arising out of, or by virtue of, any bankruptcy, arrangement, reorganization or similar proceeding for relief of debtors under federal or state law initiated by or against the Borrower or the Guarantor or any obligor under any of the Financing Documents shall not modify, limit, lessen, reduce, impair, discharge, or otherwise affect the liability of the Guarantor hereunder in any manner whatsoever, and this Agreement shall remain and continue in full force and effect. It is the intent and purpose of this Agreement that the Guarantor shall and does hereby waive all rights and benefits which might accrue to 4 5 any other guarantor by reason of any such proceeding, and the Guarantor agrees that it shall be liable for the full amount of the obligations and liabilities under this Agreement, regardless of, and irrespective to, any modification, limitation or discharge of the liability of the Borrower, any other guarantor or any obligor under any of the Financing Documents, that may result from any such proceedings. Section 1.5 Certain Waivers by the Guarantor. The Guarantor hereby unconditionally, irrevocably and expressly waives: (a) presentment and demand for payment of the principal of or interest on the Note and protest of non-payment; (b) notice of acceptance of this Agreement and of presentment, demand and protest thereof; (c) notice of any default hereunder or under the Note or any of the other Financing Documents and notice of all indulgences; (d) notice of any increase in the amount of any portion of or all of the indebtedness guaranteed by this Agreement; (e) demand for observance, performance or enforcement of any of the terms or provisions of this Agreement, the Note or any of the other Financing Documents; (f) all errors and omissions in connection with the Lenders' administration of all indebtedness guaranteed by this Agreement, except errors and omissions resulting from acts of bad faith; (g) any right or claim of right to cause a marshalling of the assets of the Borrower; (h) any act or omission of the Lenders (except acts or omissions in bad faith) which changes the scope of the Guarantor's risk hereunder; and (i) all other notices and demands otherwise required by law which the Guarantor may lawfully waive. Section 1.6 Reimbursement for Expenses. In the event the Lenders shall commence any action or proceeding for the enforcement of this Agreement, then the Guarantor will reimburse the Lenders, promptly upon demand, for any and all reasonable expenses incurred by the Lenders in connection with such action or proceeding including, without limitation, reasonable 5 6 attorneys' fees together with interest thereon at the Post-Default Rate. Section 1.7 Events of Default. The occurrence of any one or more of the following events shall constitute an "Event of Default" under the provisions of this Agreement (individually, an "Event of Default" and collectively, the "Events of Default"): (a) The failure of the Guarantor to pay and/or perform any of the Obligations as and when due and payable in accordance with the provisions of this Agreement and such failure continues for five (5) calendar days after written notice thereof to the Guarantor by the Agent, except with regard to payment of amounts due at maturity, whether by acceleration or otherwise, for which no notice or cure period shall be required to be given. (b) Any representation or warranty made in this Agreement or in any report, statement, schedule, certificate, opinion (including any opinion of counsel for the Guarantor), financial statement or other document furnished in connection with this Agreement, shall prove to have been false or misleading when made (or, if applicable, when reaffirmed) in any material respect. (c) The failure of the Guarantor to comply with Section 3.1.3 hereof which default shall remain unremedied for ten (10) days after written notice thereof to the Guarantor by the Agent. (d) The failure of the Guarantor to perform, observe or comply with any covenant, condition or agreement contained in this Agreement other than as set forth in this Section, which default shall remain unremedied for thirty (30) days after written notice thereof to the Guarantor by the Agent, unless the nature of the failure is such that (a) it cannot be cured within the thirty (30) day period, and (b) the Guarantor institutes corrective action within the thirty (30) day period and (c) the Guarantor diligently pursues such action and completes the cure within ninety (90) days. (e) A default shall occur under any of the other Financing Documents and such default is not cured within any applicable grace period provided therein. (f) The Guarantor shall (i) apply for or consent to the appointment of a receiver, trustee or liquidator of itself or any of its property, (ii) admit in writing its inability to pay its debts as they mature, (iii) make a general assignment for the benefit of creditors, (iv) be adjudicated a bankrupt or insolvent, (v) file a voluntary petition in bankruptcy or a petition or an answer seeking or consenting to reorganization or an arrangement with creditors or to take advantage of any bank- 6 7 ruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or an answer admitting the material allegations of a petition filed against it in any proceeding under any such law, or take corporate action for the purposes of effecting any of the foregoing, or (vi) by any act indicate its consent to, approval of or acquiescence in any such proceeding or the appointment of any receiver of or trustee for any of its property, or suffer any such receivership, trusteeship or proceeding to continue undischarged for a period of sixty (60) days, or (vii) by any act indicate its consent to, approval of or acquiescence in any order, judgment or decree by any court of competent jurisdiction or any Governmental Authority enjoining or otherwise prohibiting the operation of a material portion of the Guarantor's business or the use or disposition of a material portion of the Guarantor's assets. (g) (i) An order for relief shall be entered in any involuntary case brought against the Guarantor under the Bankruptcy Code, or (ii) any such case shall be commenced against the Guarantor and shall not be dismissed within sixty (60) days after the filing of the petition, or (iii) an order, judgment or decree under any other Law is entered by any court of competent jurisdiction or by any other Governmental Authority on the application of a Governmental Authority or of a Person other than the Guarantor (A) adjudicating the Guarantor bankrupt or insolvent, or (B) appointing a receiver, trustee or liquidator of the Guarantor, or of a material portion of the Guarantor's assets, or (C) enjoining, prohibiting or otherwise limiting the operation of a material portion of the Guarantor's businesses or the use or disposition of a material portion of the Guarantor's assets, and such order, judgment or decree continues unstayed and in effect for a period of thirty (30) days from the date entered. (h) Unless adequately insured in the reasonable opinion of the Agent, the entry of a final judgment for the payment of money involving more than $1,000,000 against the Guarantor, and the failure by the Guarantor to discharge the same, or cause it to be discharged, within thirty (30) days from the date of the order, decree or process under which or pursuant to which such judgment was entered, or to secure a stay of execution pending appeal of such judgment. (i) Default which continues beyond any applicable grace period shall be made under any obligation of or guaranteed by the Guarantor equal to or greater than $1,000,000, if the effect of such default is to accelerate the maturity of such obligation or to permit the holder or obligee thereof to cause such obligation to become due prior to its stated maturity. (j) Default shall be made under any obligation equal to or greater than $1,000,000 of a consolidated Affiliate, which 7 8 is otherwise non-recourse to the Guarantor, if the holder or obligee of such obligation has commenced action on any of the remedies available to it under the obligation. (k) If the Agent, in its reasonable discretion, determines in good faith that a Material Adverse Change has occurred in the financial condition of the Guarantor. (l) If the Guarantor shall liquidate, dissolve or terminate its existence or any change occurs in the management or control of the Guarantor without the prior written consent of the Agent. (m) If the Guarantor transfers any of its assets in violation of Section 3.3 hereof. (n) Any execution or attachment shall be levied against any collateral for this Agreement, or any part thereof, and such execution or attachment shall not be set aside, discharged or stayed within thirty (30) days after the same shall have been levied. Section 1.8 Rescission of Election to Accelerate. In the event the Agent shall elect to accelerate the maturity of the Note as to the Guarantor pursuant to the provisions of this Agreement, such election may be rescinded by written acknowledgment to that effect by the Agent; provided, however, that the acceptance of a partial payment on account of the Note shall not alone effect or rescind such election. Section 1.9 Subordination; Subrogation. In the event the Guarantor shall advance any sums to the Borrower, or in the event the Borrower has heretofore or shall hereafter become indebted to the Guarantor before the Obligations have been paid in full, all such advances and indebtedness shall be subordinate in all respects to the Obligations (the "Guarantor Subordinated Debt"). Any payment to the Guarantor after the occurrence of an Event of Default on account of the Guarantor Subordinated Debt shall be collected and received by the Agent or the Guarantor in trust for the Lenders and shall be paid over to the Lenders on account of the Obligations without impairing or releasing the obligations of the Guarantor hereunder. Without the prior written consent of the Agent, the Guarantor shall not ask, demand, receive, accept, sue for, set off, collect or enforce the Guarantor Subordinated Debt or any collateral and security therefor. The Guarantor represents and warrants to the Lenders that the Guarantor Subordinated Debt is unsecured and agrees not to receive or accept any collateral or security therefor without the prior written permission of the Agent. The Guarantor shall assign, transfer, hypothecate or 8 9 dispose of the Guarantor Subordinated Debt while this Agreement is in effect. In the event of any sale, receivership, insolvency or bankruptcy proceeding, or assignment for the benefit of creditors, or any proceeding by or against the Borrower for any relief under any bankruptcy or insolvency law or other laws relating to the relief of debtors, readjustment of indebtedness, reorganizations, compositions or extensions, then and in any such event any payment or distribution of any kind or character, either in cash, securities or other property, which shall be payable or deliverable upon, or with respect to, all or any part of the Guarantor Subordinated Debt or otherwise shall be paid or delivered directly to the Agent for application to the obligations and liabilities of the Guarantor under this Agreement (whether due or not due and in such order and manner as the Agent may determine in the exercise of its sole discretion) until the obligations of the Guarantor hereunder shall have been fully paid and satisfied. The Guarantor hereby irrevocably authorizes and empowers the Lenders to demand, sue for, collect and receive every such payment or distribution on account of the Guarantor Subordinated Debt and give acquittance therefor and to file claims and take such other proceedings in the name of the Lenders or in the names of the Guarantor or otherwise, as the Lenders may deem necessary or advisable to carry out the provisions of this Agreement. The Guarantor hereby agrees to execute and deliver to the Agent such powers of attorney, assignments, endorsements or other instruments as may be requested by the Agent in order to enable the Lenders to enforce any and all claims upon, or with respect to, the Guarantor Subordinated Debt, and to collect and receive any and all payments or distributions which may be payable or deliverable at any time upon or with respect thereto. So as to secure the performance by the Guarantor of the provisions of this Agreement, the Guarantor assigns, pledges and grants to the Lenders a security interest in, and lien on, the Guarantor Subordinated Debt, all proceeds thereof and all and any security and collateral therefor. Upon the request of the Agent, the Guarantor shall endorse, assign and deliver to the Agent all notes, instruments and agreements evidencing, securing, guarantying or made in connection with the Guarantor Subordinated Debt. Notwithstanding any provision contained in this Agreement to the contrary, if the Guarantor is or at any time becomes an "insider" (as defined from time to time in Section 101 of the United States Bankruptcy Code) with respect to the Borrower, or any other guarantor, then the Guarantor irrevocably and absolutely waives any and all rights of contribution, indemnification, reimbursement or any similar rights against the Borrower and/or any such guarantor, with respect to this Guaranty (including any right of subrogation) whether such rights arise under an express or implied contract or by operation of law. It is the intention 9 10 of the Guarantor that it shall not be deemed to be a "creditor" (as defined in Section 101 of the United States Bankruptcy Code) of the Borrower, or any such guarantor, by reason of the existence of this Agreement in the event that the Borrower or any such guarantor, becomes a debtor in any proceeding under the United States Bankruptcy Code. This waiver is given to induce the Lenders to make the Loans to the Borrower. Section 1.10 Mandatory Arbitration. Any controversy or claim between or among the parties hereto including but not limited to those arising out of or relating to this Guaranty or any related agreements or instruments, including any claim based on or arising from an alleged tort, shall be determined by binding arbitration in accordance with the Federal Arbitration Act (or if not applicable, the applicable state law), as promulgated from time to time by the Rules of Practice and Procedure for the Arbitration of Commercial Disputes of Judicial Arbitration and Mediation Services, Inc., predecessor in interest to Endispute, Inc., doing business as "J.A.M.S./Endispute" and the "Special Rules" set forth below. In the event of any inconsistency, the Special Rules shall control. Judgment upon any arbitration award may be entered in any court having jurisdiction. Any party to this Guaranty may bring an action, including a summary or expedited proceeding, to compel arbitration of any controversy or claim to which this agreement applies in any court having jurisdiction over such action. The foregoing notwithstanding, in a claim pertaining to a Deed of Trust or Collateral located in a state with "one-action" rule which might limit to Lenders' remedies, the Agent shall have the right in its sole discretion to restrict the application of this arbitration provision to the extent that it would otherwise result in a limitation on the Lenders' remedies in such state. (i) Special Rules. The arbitration shall be conducted in Fairfax County, Virginia and administered by J.A.M.S./Endispute who will appoint an arbitrator pursuant to its rules of practice and procedure; if J.A.M.S./Endispute is unable or legally precluded from administering the arbitration, then the American Arbitration Association will serve. All arbitration hearings will be commenced within ninety (90) calendar days of the demand for arbitration; further, the arbitrator shall only, upon a showing of cause, be permitted to extend the commencement of such hearing for up to an additional sixty (60) calendar days. (ii) Reservations of Rights. Nothing in this Guaranty shall be deemed to (i) limit the applicability of any otherwise applicable statutes of limitation or repose and any waivers contained in this Guaranty; or (ii) be a waiver by the Agent or the Lenders of the protection afforded to it by 12 U.S.C. Sec. 91 or any substantially equivalent state law; or (iii) limit the right of Lender (A) to exercise self help remedies such as (but 10 11 not limited to) setoff, or (B) to foreclose against any real or personal property collateral, or (C) to obtain from a court provisional or ancillary remedies such as (but not limited to) injunctive relief or the appointment of a receiver. The Lenders may exercise such self help rights, foreclose upon such property, or obtain such provisional or ancillary remedies before, during or after the pendency of any arbitration proceeding brought pursuant to this Guaranty. At the Agent or the Lenders' option, foreclosure under a deed of trust or mortgage may be accomplished by any of the following: the exercise of a power of sale under the deed of trust or mortgage, or by judicial sale under the deed of trust or mortgage, or by judicial foreclosure. Neither the exercise of self help remedies nor the institution or maintenance of an action for foreclosure or provisional or ancillary remedies shall constitute a waiver of the right of any party, including the claimant in any such action, to arbitrate the merits of the controversy or claim occasioning resort to such remedies. Notwithstanding the foregoing, in the event that the Lender exercises such self help remedies or other actions, the Guarantor has not waived any of its rights to seek legal or equitable relief to defend against the Agent's or Lenders' exercise of such self help remedies or other actions. No provision in the Financing Documents regarding submission to jurisdiction and/or venue in any court is intended or shall be construed to be in derogation of the provisions in any Financing Document for arbitration of any controversy or claim. (iii) Confidentiality. Any arbitration proceeding, award, findings of fact, conclusions of law, or other information concerning such arbitration matters shall be held in confidence by the parties and shall not be disclosed except to each party's employees or agents as shall be reasonably necessary for such party to conduct its business; provided, however, that either party may disclose such information for auditing purposes by independent certified accounts, for complying with applicable governmental laws, regulations or court orders, or that is or becomes part of the public domain through no breach of this Agreement. ARTICLE 2 REPRESENTATIONS AND WARRANTIES SECTION 2.1 The Guarantor represents and warrants to the Lenders as follows: 2.1.1 Good Standing. The Guarantor (a) is duly organized, existing and in good standing under the laws of the jurisdiction of its organization, (b) has the power to own its property and to carry on its business as now being conducted, and (c) is duly qualified to do business and is in good standing 11 12 in each jurisdiction in which the character of the properties owned by it therein or in which the transaction of its business makes such qualification necessary. 2.1.2 Power and Authority. The Guarantor has full power and authority to execute and deliver this Agreement and the other Financing Documents to which it is a party and to incur and perform the Obligations whether under this Agreement, the other Financing Documents or otherwise, all of which have been duly authorized by all proper and necessary action. No consent or approval of shareholders, members, or any creditors of the Guarantor, and no consent, approval, filing or registration with or notice to any Governmental Authority on the part of the Guarantor, is required as a condition to the execution, delivery, validity or enforceability of this Agreement or the other Financing Documents or the performance by the Guarantor of the Obligations. 2.1.3 Binding Agreements. This Agreement and the other Financing Documents executed and delivered by the Guarantor have been properly executed and delivered and constitute the valid and legally binding obligations of the Guarantor and are fully enforceable against the Guarantor in accordance with their respective terms, subject to (a) bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, (b) general principles of equity (regardless of whether such principles of equity are asserted in an action or proceeding at law or in equity) or the discretion of the court before which any action or proceeding may be brought and (c) other applicable laws which may limit the enforceability of certain of the remedial or procedural provisions contained in this Agreement. 2.1.4 Compliance with Laws. The Guarantor is not in violation of any applicable Laws (including, without limitation, any Laws relating to employment practices, to environmental, occupational and health standards and controls) or order, writ, injunction, decree or demand of any court, arbitrator, or any Governmental Authority affecting the Guarantor or any of its properties, the violation of which, considered in the aggregate, could materially adversely affect the business, operations or properties of the Guarantor. 2.1.5 Litigation. There are no proceedings, actions or investigations pending or, so far as the Guarantor knows, threatened before or by any court, arbitrator or any Governmental Authority which, in any one case or in the aggregate, if determined adversely to the interests of the Guarantor, would have a material adverse effect on the business, properties, condition (financial or otherwise) or operations, present or 12 13 prospective, of the Guarantor. 2.1.6 Financial Condition. The financial statements of the Guarantor dated December 31, 1996, are complete and correct and fairly present the financial position of the Guarantor and the results of its operations and transactions in its surplus accounts as of the date and for the period referred to and have been prepared in accordance with GAAP applied on a consistent basis throughout the period involved. There are no liabilities, direct or indirect, fixed or contingent, of the Guarantor as of the date of such financial statements which are not reflected therein or in the notes thereto. There has been no Material Adverse Change in the financial condition or operations of the Guarantor since the date of such financial statements and to the Guarantor's knowledge no such Material Adverse Change is pending or threatened. The Guarantor has not guaranteed the obligations of, or made any investment in or advances to, any Person, except as disclosed in such financial statements or as otherwise disclosed in writing to the Lenders. The representations and warranties contained in this Section shall also cover financial statements furnished from time to time to the Agent pursuant to Section 0 of this Agreement. 2.1.7 Full Disclosure. The financial statements referred to in Section 0 of this Agreement, the Financing Documents (including, without limitation, this Agreement), and the statements, reports or certificates furnished by the Guarantor in connection with the Financing Documents (a) do not contain any untrue statement of a material fact and (b) when taken in their entirety, do not omit any material fact necessary to make the statements contained therein not misleading. There is no fact known to the Guarantor which the Guarantor has not disclosed to the Lenders in writing prior to the date of this Agreement which constitutes a Material Adverse Change with respect to the Guarantor or in the future could, in the reasonable opinion of the Guarantor, constitute a Material Adverse Change with respect to the Guarantor. 2.1.8 Financial Interest. The Guarantor has a financial interest in the Borrower and will derive a benefit from the Loan. SECTION 2.2 Survival; Updates of Representations and Warranties. All representations and warranties contained in or made under or in connection with this Agreement and the other Financing Documents shall survive the Closing Date, the making of any advance under the Loans and the incurring of any Obligations. 13 14 ARTICLE 3 COVENANTS SECTION 3.1 The Guarantor hereby covenants and agrees as follows: 3.1.1 Existence. The Guarantor shall maintain its existence in good standing in the jurisdiction in which it is organized and in each other jurisdiction where it is required to register or qualify to do business if the failure to do so in such other jurisdiction might have a material adverse effect on the ability of the Guarantor to perform the Obligations, on the conduct of the Guarantor's operations, on the Guarantor's financial condition, or on the value of, or the ability of the Lenders to realize upon, the Collateral. 3.1.2 Further Assurances. The Guarantor will make, execute, acknowledge and deliver all and every such further acts and assurances as the Lenders shall from time to time require for confirming or carrying out the intentions or facilitating the performance of the terms of this Agreement. 3.1.3 Financial Records - Inspection. The Guarantor will (a) maintain or cause to be maintained full, complete, accurate and adequate records and books of account in accordance with generally accepted accounting principles consistently applied; (b) permit the Lenders and their duly authorized agents, attorneys and accountants to inspect, examine, and copy its records and books of account at all reasonable times; (c) (i) as soon as available, but in no event more than one hundred twenty (120) days after the close of the Guarantor's fiscal years, provide the Agent with copies of (1) the Guarantor's consolidated financial statements for the year in question, in form and detail satisfactory to the Agent, prepared in accordance with generally accepted accounting principles, consistently applied, and audited by an independent certified public accountant satisfactory to the Agent, which financial statements shall include a balance sheet as of the end of such fiscal year, (2) the related statements of operations and retained earnings and cash statements for such fiscal year in a format acceptable to the Agent, and (3) an unqualified letter or opinion of the independent accountant, (ii) as soon as available, but in no event more than forty-five (45) days after the end of the Guarantor's fiscal quarters, provide the Agent with copies of internally prepared consolidated and consolidating financial statements of the Guarantor on a year-to-date basis and as of the close of such period and income and expense statements for the Guarantor for such period, each certified as to accuracy by the chief financial officer of Guarantor; and (iii) as soon as available but in no event more than thirty (30) days after the 14 15 date of filing, provide the Agent with copies of the federal and state income tax returns for Guarantor for the year in question as well as any requests for extensions, schedules and exhibits filed in connection therewith; (d) the Guarantor shall provide to the Agent copies of each 10K or 10Q reports as soon as possible, but in no event more than thirty (30) days after filing such report with the Securities and Exchange Commission; (e) promptly deliver to the Agent such other information with respect to the financial statements of the Guarantor as the Lenders may from time to time require; and (f) all required financial statements shall be accompanied by a certificate of compliance with the financial covenants set forth in this Agreement (and shall include the Guarantor's computation of such covenants) signed by the Guarantor's Chief Financial Officer and a representation whether or not there has occurred a Default or Event of Default under the Financing Documents and, if so, stating the facts with respect thereto. All financial statements will include the following certification: "The undersigned as ____________ of ____________ certifies that the financial information contained in the financial statement dated _________, is true and complete as of this date. This statement is provided to NationsBank, N.A. (the "Bank") as agent for the Lenders set forth in the Amended and Restated Agency Agreement dated December ___, 1997 as amended, restated or substituted from time to time for the purpose of obtaining credit or in fulfillment of the terms and conditions of credit already provided. Accordingly, it is intended that the Bank may rely on this information". 3.1.4 Estoppel Certificates. Within ten (10) days following any request of the Agent so to do, the Guarantor will furnish the Agent and such other persons as the Agent may direct with a written certificate, duly acknowledged stating in detail whether or not any credits, offsets or defenses exist with respect to this Agreement. SECTION 3.2 Financial Covenants. Guarantor hereby covenants and agrees that, until the Loans and all of the other Obligations have been paid and performed in full, it will: (a) Minimum Tangible Net Worth. Maintain, on a consolidated basis with all subsidiaries, at all times during the term of the Loan measured quarterly beginning with the quarter ending September 30, 1997, a minimum Tangible Net Worth of not less than the sum of a $175,202,000 as of June 30, 1997 plus 75% of the Guarantor's net income (if positive) for each subsequent quarter plus 85% of the net proceeds to the Guarantor of any equity capital transaction received during such quarter. 15 16 "Tangible Net Worth" means, at any time, the sum at such time of Net Worth (as defined by GAAP) less the total of (aa) all assets which would be classified as intangible assets under GAAP, including goodwill, trademarks, trademark applications, trade names, service marks, patent applications and licenses, and deferred charges, (bb) any revaluation or other write-up in book value of assets subsequent to the date of the most recent financial statements delivered to the Agent, (cc) the amount of all loans and advances to, or investments in, any person or entity, excluding cash equivalents and deposit accounts maintained by the Guarantor with any financial institution; certain mortgage revenue bonds issued by the Bucks County, Pennsylvania Industrial Development Authority and investments of less than $2,500,000 individually (not to exceed $10,000,000 in the aggregate), and (dd) advances or loans made to or receivables from any unconsolidated affiliates of which the Guarantor owns less than fifty percent (50%) or any stockholder of the Guarantor or any affiliate. (b) Minimum Liquidity. Maintain at all times, on an individual basis (i.e. parent company only), Minimum Liquid Assets (as defined in the Financing Agreement) at all times of the greater of $25,000,000 or ninety (90) days of Debt Service (as defined in the Financing Agreement) on all of the Guarantor's direct and contingent liabilities. (c) Notification of Certain Events. Promptly notify the Agent upon obtaining knowledge of the occurrence of any of the following: (i) any Event of Default under the Financing Documents; (ii) any event, development or circumstance whereby the financial statements furnished under the Financing Documents fail in any material respect to present fairly, in accordance with GAAP, the financial condition and operational results of the Guarantor; (iii) any judicial, administrative or arbitral proceeding pending against the Guarantor in any judicial or administrative proceeding known by the Guarantor to have been threatened in a written communication against it which, if adversely decided, could materially adversely affect its financial condition or operations (present or prospective); (iv) (A) the revocation, suspension, probation, restriction, limitation or refusal to renew, or the pending, revocation, suspension, probation, restriction, limitation, or refusal to renew, of any License (as defined in the Financing Agreement) held by the Borrower, the Guarantor or the Management 16 17 Company (as defined in the Financing Agreement), or (B) the decertification, revocation, suspension, probation, restriction, limitation, or refusal to renew, or the pending, decertification, revocation, suspension, probation, restriction, limitation, or refusal to renew any participation or eligibility in any third party payor program in which the Borrower, the Guarantor or Management Company elects to participate which exceeds 10% of the gross revenue of a Facility, including, without limitation, Medicare, Medicaid, or private insurer, or any accreditation of the Guarantor or Management Company, or (C) the issuance or pending issuance of any License for a period of less than twelve (12) months, as a consequence of sanctions imposed by any governmental authority, or (D) the assessment or pending assessment, of any civil or criminal penalties by any government authority, any third party payor or any accreditation organization or Person, if any, which could materially adversely affect the financial condition or operations of the Guarantor or the Management Company; and (v) any other development in the business or affairs of the Guarantor or the Management Company which may be a Material Adverse Change; and (vi) any actual contingent liability or a potential contingent liability threatened or noticed in a written communication of the Borrower of $1,000,000 or more, in each case described in (i) through (vi) above, such notification shall describe in detail satisfactory to the Agent the nature thereof and, in the case of notification under this clause (iii), the action the Guarantor or the Management Company proposes to take with respect thereto or a statement that the Guarantor or the Management Company intends to take no action and an explanation of the reasons for such inaction. In addition, the Guarantor or the Management Company will furnish to the Agent immediately after receipt thereof copies of all administrative notices material to the Guarantor's or the Management Company's business and operation of any Facility and all responses by or on behalf of the Guarantor or the Management Company with respect to such administrative notices. SECTION 3.3 Negative Covenants. Until the Credit Facility is terminated and the Loans and the other Obligations have been paid or performed in full, the Guarantor will not, without the prior written consent of the Agent: (a) Mergers or Acquisitions. Enter into any merger or consolidation or amalgamation, wind up or dissolve itself (or suffer any liquidation or dissolution), or acquire all or substantially all of the assets of any person, firm, joint venture or corporation. The foregoing notwithstanding, the 17 18 consent of the Agent shall not be required for any merger or consolidation or acquisition of the Guarantor pursuant to which the Guarantor retains its corporate identity and Paul J. Klaassen or Teresa M. Klaassen remains the Chairman of the Board and Chief Executive Officer with responsibility for managing the businesses of the Guarantor and which does not result in either a Material Adverse Change or a breach of any covenant under the Credit Facility. (b) Sale of Assets. Sell, lease, or otherwise dispose of any substantial portion of its assets (except for customary political and charitable contributions and assets disposed of in the ordinary course of business) unless such disposition is in exchange for not less than fair market value and does not result in either a Material Adverse Change or a breach of any covenant under the Credit Facility. (c) Subsidiaries. Except for the purpose of acquiring real property to construct an assisted living facility or acquiring an existing assisted living facility, create or otherwise acquire any subsidiaries if such creation or acquisition will result in a Material Adverse Change. (d) Additional Stock and Transfers of Stock. The Guarantor may issue or grant options or rights to purchase its capital stock and there shall be no limitations on the right of shareholders of the Guarantor to pledge, assign, transfer or encumber any of their stock in the Guarantor provided, (1) the Guarantor is an entity whose common equity is registered under an applicable Federal Securities Act and is traded on a National Securities Exchange or NASDAQ national market, and (2) either Paul J. Klaassen or Teresa M. Klaassen is the Chief Executive Officer and Chairman of the Board with responsibility for managing the businesses of the Guarantor; and provided, that, the Guarantor shall provide written notice to Agent of transfers of stock in the Guarantor under such circumstances and in such manner as the Guarantor is required to give notice thereof to the Securities Exchange Commission. (e) ERISA Compliance. (A) Restate or amend any Plan established and maintained by the Guarantor or any Commonly Controlled Entity and subject to the requirements of ERISA, in a manner designed to disqualify such Plan and its related trusts under the applicable requirements of the Code; (B) permit any officer of the Guarantor or any Commonly Controlled Entity to materially adversely affect the qualified tax-exempt status of any Plan or related trusts of the Guarantor or any Commonly Controlled Entity under the Code; (C) engage in or permit any Commonly Controlled Entity to engage in any Prohibited Transaction; (D) incur or permit any Commonly Controlled Entity to incur any Accumulated Funding Deficiency, whether or not 18 19 waived, in connection with any Plan; (E) take or permit any Commonly Controlled Entity to take any action or fail to take any action which causes a termination of any Plan in a manner which could result in the imposition of a lien on the property of the Guarantor or any Commonly Controlled Entity pursuant to Section 4068 of ERISA; (F) fail to notify the Agent that notice has been received of a "termination" (as defined in ERISA) of any Multiemployer Plan to which the Guarantor or any Commonly Controlled Entity has an obligation to contribute; (G) incur or permit any Commonly Controlled Entity to incur a "complete withdrawal" or "partial withdrawal" (as defined in ERISA) from any Multiemployer Plan to which the Guarantor or any Commonly Controlled Entity has an obligation to contribute; or (H) fail to notify the Agent that notice has been received from the administrator of any Multiemployer Plan to which the Guarantor or any Commonly Controlled Entity has an obligation to contribute that any such Plan will be placed in "reorganization" (as defined in ERISA). (f) Amendments; Terminations. Amend or terminate or agree to amend or terminate any License, participation agreement, the Management Agreement, by the Guarantor with the Borrower or except in the ordinary course of business, any other operating agreements which may be entered into by Guarantor with respect to the Facility, or consent to or waive any material provisions thereof. ARTICLE 4 MISCELLANEOUS SECTION 4.1 Notices. All notices, requests and demands to or upon the parties to this Agreement shall be in writing and shall be deemed to have been given or made when delivered by hand on a Business Day, or three (3) days after the date when deposited in the mail, postage prepaid by registered or certified mail, return receipt requested, or when sent by overnight courier, on the Business Day next following the day on which the notice is delivered to such overnight courier, addressed as follows: Guarantor: Sunrise Assisted Living, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Attention: Thomas B. Newell, Esq. Sunrise Assisted Living, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Attention: David W. Faeder 19 20 Sunrise Assisted Living, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Attention: James S. Pope With a Courtesy Copy to: Wayne G. Tatusko, Esquire Watt, Tieder & Hoffar 7929 Westpark Drive McLean, Virginia 22102 Agent: NationsBank, N.A. 10 Light Street, 20th Floor Baltimore, Maryland 21202 Attention: Robert J. Montanari By written notice, each party to this Agreement may change the address to which notice is given to that party, provided that such changed notice shall include a street address to which notices may be delivered by overnight courier in the ordinary course on any Business Day. SECTION 4.2 Amendments; Waivers. This Agreement may not be amended, modified, or changed in any respect except by an agreement in writing signed by the Agent and the Guarantor. No waiver of any provision of this Agreement, nor consent to any departure by the Guarantor therefrom, shall in any event be effective unless the same shall be in writing. No course of dealing between the Guarantor and the Lenders and no act or failure to act from time to time on the part of the Lenders shall constitute a waiver, amendment or modification of any provision of this Agreement or any right or remedy under this Agreement or under applicable Laws. Without implying any limitation on the foregoing: (a) any waiver or consent shall be effective only in the specific instance, for the terms and purpose for which given, subject to such conditions as the Agent may specify in any such instrument. (b) no waiver of any Default or Event of Default shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereto. (c) no notice to or demand on the Guarantor in any case shall entitle the Guarantor to any other or further notice or demand in the same, similar or other circumstance. 20 21 (d) no failure or delay by the Lenders to insist upon the strict performance of any term, condition, covenant or agreement of this Agreement or of any of the other Financing Documents, or to exercise any right, power or remedy consequent upon a breach thereof, shall constitute a waiver, amendment or modification of any such term, condition, covenant or agreement or of any such breach or preclude the Lenders from exercising any such right, power or remedy at any time or times. (e) by accepting payment after the due date of any amount payable under this Agreement or under any of the other Financing Documents, the Lenders shall not be deemed to waive the right either to require prompt payment when due of all other amounts payable under this Agreement or under any of the other Financing Documents, or to declare a default for failure to effect such prompt payment of any such other amount. SECTION 4.3 Cumulative Remedies. The rights, powers and remedies provided in this Agreement and in the other Financing Documents are cumulative, may be exercised concurrently or separately, may be exercised from time to time and in such order as the Lenders shall determine and are in addition to, and not exclusive of, rights, powers and remedies provided by existing or future applicable Laws. In order to entitle the Lenders to exercise any remedy reserved to them in this Agreement, it shall not be necessary to give any notice, other than such notice as may be expressly required in this Agreement. Without limiting the generality of the foregoing, the Lenders may: (a) proceed against the Guarantor with or without proceeding against the Borrower and any other guarantor or any other Person who may be liable for all or any part of the Obligations; (b) proceed against the Guarantor with or without proceeding under any of the other Financing Documents or against any Collateral or other collateral and security for all or any part of the Obligations; (c) without reducing or impairing the obligation of the Guarantor and without notice, release or compromise with any other Person liable for all or any part of the Obligations under the Financing Documents or otherwise; (d) without reducing or impairing the obligations of the Guarantor and without notice thereof: 4.3.0(d)(i) fail to perfect the Lien in any or all Collateral or to release any or all the Collateral or to accept substitute Collateral, 4.3.0(d)(ii) approve the making of advances under the Loans under the Loan Agreement, 4.3.0(d)(iii) waive any provision of this Agreement or the other Financing Documents, 4.3.0(d)(iv) exercise 21 22 or fail to exercise rights of set-off or other rights, or 4.3.0(d)(v) accept partial payments or extend from time to time the maturity of all or any part of the Obligations. SECTION 4.4 Severability. In case one or more provisions, or part thereof, contained in this Agreement or in the other Financing Documents shall be invalid, illegal or unenforceable in any respect under any Law, then without need for any further agreement, notice or action: (a) the validity, legality and enforceability of the remaining provisions shall remain effective and binding on the parties thereto and shall not be affected or impaired thereby; (b) the obligation to be fulfilled shall be reduced to the limit of such validity; (c) if such provision or part thereof pertains to repayment of the Obligations, then, at the sole and absolute discretion of the Lenders, all of the Obligations shall become immediately due and payable; and (d) if the affected provision or part thereof does not pertain to repayment of the Obligations, but operates or would prospectively operate to invalidate this Agreement in whole or in part, then such provision or part thereof only shall be void, and the remainder of this Agreement shall remain operative and in full force and effect. SECTION 4.5 Assignments by Lenders. The Lenders may, without notice to, or consent of, the Guarantor, sell, assign or transfer to or participate with any Person or Persons all or any part of the Obligations, and each such Person or Persons shall have the right to enforce the provisions of this Agreement and any of the other Financing Documents as fully as the Lenders, provided that the Lenders shall continue to have the unimpaired right to enforce the provisions of this Agreement and any of the other Financing Documents as to so much of the Obligations that such Lender has not sold, assigned or transferred. In connection with the foregoing, the Lenders shall have the right to disclose to any such actual or potential purchaser, assignee, transferee or participant all financial records, information, reports, financial statements and documents obtained in connection with this Agreement and any of the other Financing Documents or otherwise. In connection with any sale, assignment, transfer or participation to a Person who is an affiliate or successor of the Lenders, such Lender shall give notice to Borrower of such transaction either before or after the transaction has occurred as such Lender shall determine; however, such Lender shall give notice to the Borrower in advance of any such transaction with a non-affiliate. 22 23 SECTION 4.6 Successors and Assigns. This Agreement shall be binding upon the Guarantor and its respective successors and assigns, and shall inure to the benefit of the Lenders and their respective successors and assigns. SECTION 4.7 Continuing Agreements. All covenants, agreements, representations and warranties made by the Guarantor in this Agreement and in any certificate delivered pursuant hereto shall survive the making by the Lenders of the Loans and the execution and delivery of the Note, shall be binding upon the Guarantor regardless of how long before or after the date hereof any of the Obligations were or are incurred, and shall continue in full force and effect so long as any of the Obligations are outstanding and unpaid. From time to time upon the Agent's request, and as a condition of the release of any one or more of the Security Documents, the Guarantor and other Persons obligated with respect to the Obligations shall provide the Agent with such acknowledgments and agreements as the Agent may require to the effect that there exists no defenses, rights of setoff or recoupment, claims, counterclaims, actions or causes of action of any kind or nature whatsoever against the Lenders, their respective agents and others, or to the extent there are, the same are waived and released. SECTION 4.8 Enforcement Costs. The Guarantor agrees to pay to the Lenders on demand all Enforcement Costs, together with interest thereon from the date incurred or advanced until paid in full at a per annum rate of interest equal at all times to the Post-Default Rate. Enforcement Costs shall be immediately due and payable at the time advanced or incurred, whichever is earlier. Without implying any limitation on the foregoing, the Guarantor agrees, as part of the Enforcement Costs, to pay upon demand any and all stamp and other Taxes and fees payable or determined to be payable in connection with the execution and delivery of this Agreement and to save the Lenders harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay any Taxes or fees referred to in this Section. The provisions of this Section shall survive the execution and delivery of this Agreement, the repayment of the other Obligations and shall survive the termination of this Agreement. SECTION 4.9 Applicable Law. As a material inducement to the Lenders to enter into this Agreement, the Guarantor acknowledges and agrees that the Financing Documents, including, this Agreement, shall be governed by the Laws of the Commonwealth of Virginia as if each of the Financing Documents and this Agreement had each been executed, delivered, administered and performed solely within the Commonwealth of Virginia even though for the convenience and at the request of the Borrower, one or 23 24 more of the Financing Documents may be executed elsewhere. The Lenders acknowledge, however, that remedies under certain of the Financing Documents which relate to property outside the Commonwealth of Virginia may be subject to the laws of the state in which the property is located. SECTION 4.10 Duplicate Originals and Counterparts. This Agreement may be executed in any number of duplicate originals or counterparts, each of such duplicate originals or counterparts shall be deemed to be an original and all taken together shall constitute but one and the same instrument. SECTION 4.11 Headings. The headings in this Agreement are included herein for convenience only, shall not constitute a part of this Agreement for any other purpose, and shall not be deemed to affect the meaning or construction of any of the provisions hereof. SECTION 4.12 No Partnership - Third Parties. Nothing contained in this Agreement shall be construed in a manner to create any relationship between the Guarantor and any of the Lenders other than the relationship of guarantor and lenders and the Guarantor and the Lenders shall not be considered partners or co-venturers for any purpose. The terms and provisions of this Agreement are for the benefit of the Lenders and their respective successors, assigns, endorsees and transferees and all persons claiming under or through it and no other person shall have any right or cause of action on account thereof. The Lenders have no obligation to make any advance of any Loans for the benefit of the Guarantor; the Guarantor has no beneficial interest in the proceeds of the Loans or rights or claims under the Financing Agreement or any of the other Financing Documents. The obligations and liabilities of the Guarantor shall in no manner be affected by the actual use of the proceeds of the Loans or whether the Lenders waive any or all of the conditions to advances set forth in the Financing Agreement. SECTION 4.13 Entire Agreement. The Financing Documents shall completely and fully supersede all prior agreements, both written and oral, between the Lenders and the Borrower relating to the Loans. Neither the Lenders, the Borrower nor the Guarantor shall hereafter have any rights under such prior agreements but shall look solely to the Financing Documents for definition and determination of all of their respective rights, liabilities and responsibilities relating to the Obligations. SECTION 4.14 Consent to Jurisdiction. The Guarantor irrevocably submits to the jurisdiction of any state or federal court sitting in the Commonwealth of Virginia over any suit, action, or proceeding arising out of or relating to this Agreement. The Guarantor irrevocably waives, to the fullest 24 25 extent permitted by law, any objection that it may now or hereafter have to laying the venue of any such suit, action, or proceeding brought in any such court and any claim that any such suit, action, or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment in any such suit, action, or proceeding brought in any such court shall be conclusive and binding upon the Guarantor and may be enforced in any court to the jurisdiction of which the Guarantor is subject, by a suit upon such judgment provided that service of process is effected upon the Guarantor in a manner specified in this Agreement or as otherwise permitted by applicable law. SECTION 4.15 Service of Process. The Guarantor hereby consents to process being served in any suit, action, or proceeding instituted in connection with this Agreement by (a) the mailing of a copy thereof by certified mail, postage prepaid, return receipt requested, to it at its address designated in Section 0 hereof and (b) serving a copy thereof upon Wayne G. Tatusko, Esquire, 7929 Westpark Drive, McLean, Virginia 22102, the agent hereby designated and appointed as its agent for service of process. The Guarantor irrevocably agrees that such service (i) shall be deemed in every respect to be effective service of process upon it in any such suit, action, or proceeding and (ii) shall, to the fullest extent permitted by law, be taken and held to be valid personal service upon the Guarantor. Nothing in this Section shall affect the right of the Lenders to serve process in any manner otherwise permitted by law or limit the right of the Lenders otherwise to bring proceedings against the Guarantor in the courts of any other jurisdiction or jurisdictions. SECTION 4.16 WAIVER OF TRIAL BY JURY. THE GUARANTOR AND THE LENDERS HEREBY JOINTLY AND SEVERALLY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING NOT REQUIRED TO BE ARBITRATED PURSUANT TO THE TERMS HEREOF TO WHICH THE GUARANTOR AND THE LENDERS, OR ANY OF THEM, MAY BE PARTIES, ARISING OUT OF OR IN ANY WAY PERTAINING TO (A) THIS AGREEMENT, (B) ANY OF THE FINANCING DOCUMENTS, OR (C) THE COLLATERAL. THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS AGREEMENT. This waiver is knowingly, willingly and voluntarily made by the Guarantor and the Lenders, and the Guarantor and the Lenders hereby represent that no representations of fact or opinion have been made by any individual to induce this waiver of trial by jury or to in any way modify or nullify its effect. The Guarantor and the Lenders further represent that they have been represented in the signing of this Agreement and in the making of this waiver by independent legal counsel, selected of their own free will, and that they have had the opportunity to discuss this 25 26 waiver with counsel. SECTION 4.17 Liability of the Lenders. The Guarantor hereby agrees that the Lenders shall not be chargeable for any negligence, mistake, act or omission of any accountant, examiner, agency or attorney employed by the Lenders in making examinations, investigations or collections, or otherwise in perfecting, maintaining, protecting or realizing upon any lien or security interest or any other interest in the Collateral or other security for the Obligations. By inspecting the Collateral or any other properties of the Borrower or by accepting or approving anything required to be observed, performed or fulfilled by the Borrower or to be given to the Lenders pursuant to this Agreement or any of the other Financing Documents, the Lenders shall not be deemed to have warranted or represented the condition, sufficiency, legality, effectiveness or legal effect of the same, and such acceptance or approval shall not constitute any warranty or representation with respect thereto by the Lenders. SECTION 4.18 Reinstatement. If at any time any payment, or portion thereof, made by, or for the account of, the Borrower or the Guarantor on account of any of the obligations and liabilities arising hereunder or under any of the Financing Documents is set aside by any court or trustee having jurisdiction as a voidable preference or fraudulent conveyance or must otherwise be restored or returned by the Lenders to the Borrower or to the Guarantor under any insolvency, bankruptcy or other federal and/or state laws or as a result of any dissolution, liquidation or reorganization of the Borrower or upon, or as a result of, the appointment of any receiver, intervenor or conservator of, or trustee, or similar officer for, the Borrower or any substantial part of its properties or assets, the Guarantor hereby agrees that this Agreement shall continue and remain in full force and effect or be reinstated, as the case may be, all as though such payment(s) had not been made. Section 4.19 Complete and Final Expression of Agreement. This Agreement is intended by the Lenders and the Guarantor to be a complete, exclusive and final expression of the agreements contained herein. No course of dealing, course of performance or trade usage, and no parol evidence of any nature, shall be used to supplement or modify any terms of this Agreement. The Lenders and the Guarantor further agrees that there are no conditions to the full effectiveness of this Agreement, unless otherwise expressly stated herein. The Guarantor has unconditionally delivered this Agreement to the Agent, and failure to sign this or any other guarantee by any other person shall not discharge the liability of the Guarantor hereunder. 26 27 WITNESS the signature and seal of the Guarantor as of the day and year first above written. WITNESS OR ATTEST: SUNRISE ASSISTED LIVING, INC. _/s/ Wayne G. Tatusko___ By: _/s/ David W. Faeder____(SEAL) -------------------- ------------------- David W. Faeder President and Chief Financial Officer _/s/ Wayne G. Tatusko___ By: _/s/ Thomas B. Newell___(SEAL) -------------------- -------------------- Thomas B. Newell Executive Vice President 28 STATE/COMMONWEALTH OF VIRGINIA, COUNTY/CITY OF _Fairfax_, TO WIT: I HEREBY CERTIFY, that on this 23rd day of December, 1997, before me, the undersigned Notary Public of said Commonwealth, personally appeared David W. Faeder who acknowledged himself to be the President and Chief Financial Officer of Sunrise Assisted Living, Inc., known to me (or satisfactorily proven) to be the person whose name is subscribed to the within instrument, and acknowledged that he executed the same for the purposes therein contained as the duly authorized officer of said corporation by signing the name of the corporation by himself as President and Chief Financial Officer. WITNESS my hand and Notarial Seal. _/s/ Dawn A. Washington____ ---------------------- Notary Public My Commission Expires: STATE/COMMONWEALTH OF VIRGINIA, COUNTY/CITY OF _Fairfax_, TO WIT: I HEREBY CERTIFY, that on this 23rd day of December, 1997, before me, the undersigned Notary Public of said Commonwealth, personally appeared Thomas B. Newell who acknowledged himself to be the Executive Vice President of Sunrise Assisted Living, Inc., known to me (or satisfactorily proven) to be the person whose name is subscribed to the within instrument, and acknowledged that he executed the same for the purposes therein contained as the duly authorized officer of said corporation by signing the name of the corporation by himself as Executive Vice President. WITNESS my hand and Notarial Seal. _/s/ Dawn A. Washington_____ ---------------------- Notary Public My Commission Expires: EX-13 15 PORTIONS OF THE 1997 ANNUAL REPORT TO SHAREHOLDERS 1 Sunrise Assisted Living, Inc.
SELECTED FINANCIAL AND OPERATING DATA Year Ended December 31, - --------------------------------------------------------------------------------------------------------------------- (in thousands, except operating and other data) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA:(1) Operating revenue $ 89,884 $ 47,345 $ 37,258 $ 33,969 $25,598 Facility operating expenses 53,286 28,274 20,882 17,983 17,761 Facility development and pre-rental expenses 5,586 2,420 1,172 263 474 General and administrative expenses 10,454 10,042 6,875 4,183 2,034 Depreciation and amortization 10,592 4,048 3,009 3,160 2,799 Interest expense, net 4,613 6,425 15,327 8,023 3,491 Income (loss) before extraordinary item 4,001 (4,760) (10,137) 562 (637) Extraordinary item -- -- -- 850 -- Net income (loss)(2) (3) 4,001 (4,760) (10,137) 1,412 (637) Cash provided by operating activities 8,264 758 944 2,736 3,070 EBITDA(4) 19,206 5,713 8,199 11,745 5,653 BALANCE SHEET DATA:(1) Cash and cash equivalents $ 82,643 $101,811 $ 6,253 $ 8,089 $ 3,268 Working capital (deficit) 70,340 102,822 2,051 (7,305) 1,288 Total assets 556,260 342,839 123,321 109,003 61,159 Total debt 340,987 145,511 122,289 110,029 55,207 Series A convertible preferred stock -- -- 23,964 -- -- Stockholders' equity (deficit) 195,340 185,824 (31,774) (16,391) (2,925) OPERATING AND OTHER DATA: Facilities (at end of period): Owned(5) 54 30 20 19 16 Managed 7 5 8 9 7 - --------------------------------------------------------------------------------------------------------------------- Total 61 35 28 28 23 ===================================================================================================================== Resident capacity (at end of period): Owned(5) 4,632 2,584 1,557 1,473 1,289 Managed 683 528 712 772 652 - --------------------------------------------------------------------------------------------------------------------- Total 5,315 3,112 2,269 2,245 1,941 ===================================================================================================================== Occupancy rate(6) 94% 94% 92% 95% 95%
(1) See Notes 2 and 10 of Notes to Consolidated Financial Statements. The historical financial data for years prior to 1995 represent combined historical financial data for Sunrise Entities. (2) Basic net income (loss) per share was $0.21 and $(0.52), while diluted net income (loss) per share was $0.20 and $(0.51) for the years ended December 31, 1997 and 1996, respectively. In 1997, the Company adopted the provisions of Financial Accounting Standards No. 128 "Earnings Per Share," ("Statement 128"). Statement 128 replaces the presentation of primary and fully diluted earnings per share with a presentation of basic and diluted earnings per share. The Company has restated its results for the year ended December 31, 1996, to conform to the provisions of Statement 128. (3) Net loss for 1996 includes a one-time unusual charge of $981,000. See Note 16 of Notes to Consolidated Financial Statements. (4) Earnings before interest, taxes, depreciation and amortization expense. The Company has included information concerning EBITDA because it understands that such information is used by certain investors as one measure of a company's operating performance. EBITDA is not determined in accordance with GAAP, is not indicative of cash provided by operating activities and should not be considered in isolation or as a substitute for measures of performance determined in accordance with GAAP. (5) Includes all facilities wholly owned by the Company or in which it owns interests. Prior to 1994, several of the owned facilities were leased from predecessor entities. (6) Based on monthly occupancy for owned facilities operated for at least 12 months or that have achieved stabilization of 95%, excluding facilities with temporary vacancies due to renovations or resident relocation. Financials 17 2 Sunrise Assisted Living, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the information contained in the Consolidated Financial Statements, including the related notes thereto, and the other financial information appearing elsewhere herein. This Management's Discussion and Analysis contains certain forward-looking statements relating to the Company's development and acquisition programs that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth elsewhere herein under "Liquidity and Capital Resources." Unless the context suggest otherwise, references herein to the "Company" or "Sunrise" mean Sunrise Assisted Living, Inc. and its subsidiaries and predecessor entities. OVERVIEW The Company is a leading provider of assisted living services for seniors. The Company currently operates 66 facilities in 13 states with a capacity of approximately 5,750 residents, including 59 facilities owned by the Company or in which it has ownership interests and seven facilities managed for third parties. The Company also operates two skilled nursing facilities owned by a third party. The Company provides assistance with the activities of daily living and other personalized support services ("Basic Care") in a residential setting for elderly residents who cannot live independently but who do not need the level of medical care provided in a skilled nursing facility. The Company also provides additional specialized care and services to residents with certain low acuity medical needs--Assisted Living Plus Care ("Plus Care") and residents with Alzheimer's disease or other forms of dementia ("Alzheimer's Care"). By offering this full range of services, the Company is able to accommodate the changing needs of residents as they age and develop further physical or cognitive frailties. The Company reported net income of $4.0 million, or $0.20 per share (diluted), on revenue of $89.9 million for 1997, compared to a loss of $4.8 million, or $0.51 per share (diluted), on revenue of $47.3 million for 1996, including an unusual charge of $1.0 million. Without the one-time unusual charge, the Company's net loss for 1996 would have been $3.8 million. The Company had a net loss of $10.1 million for 1995. A subsidiary of the Company has obtained a syndicated revolving credit facility for $250.0 million to be used for general corporate purposes, including the continued construction and development of assisted living facilities. The Company guarantees the repayment of all amounts outstanding under this credit facility. The credit facility is for a term of three years with the right to extend, and is secured by cross-collateralized first mortgages on the real property and improvements and first liens on all assets of the subsidiary. Advances under the facility bear interest at rates from LIBOR plus 1.0% to LIBOR plus 1.5%. On June 6, 1997, the Company issued and sold $150.0 million aggregate principal amount of 51/2% convertible subordinated notes due 2002 (the "Notes"). The Notes bear interest at 51/2% per annum payable semiannually on June 15 and December 15 of each year, beginning December 15, 1997. The conversion price is $37.1875 (equivalent to a conversion rate of 26.89 shares per $1,000 principal amount of the Notes). The Notes are redeemable at the option of the Company commencing June 15, 2000, at specified premiums. The holders of the Notes may require the Company to repurchase the Notes upon a Change of Control (as defined) of the Company. The net proceeds to the Company from the sale of the Notes, after deducting underwriting discounts and offering expenses, were approximately $145.6 million. On June 10, 1997, the Company used $57.7 million of the net proceeds to pay down floating rate indebtedness from four financial institutions at a weighted average interest rate of 8.4%. The balance of the net proceeds are being used to fund continued development of new Sunrise model facilities and for possible acquisitions, as well as for working capital and general corporate purposes. On February 5, 1997, the Company acquired a 120-unit assisted and independent living facility in Valencia, California and on August 19, 1997, the Company purchased a 76-unit assisted living facility in Napa, California. The Company had initially leased the Napa facility on April 1, 1997. On December 24, 1997, the Company acquired a 30-unit assisted and independent living facility in Dunwoody, Georgia and on December 31, 1997, the Company purchased a 29-unit assisted living facility located in Weston, Massachusetts. The combined acquisition price for all four facilities totaled $27.1 million. On May 1, 1997, the Company purchased the minority 50% interest held by an unrelated third party in a facility located in Raleigh, North Carolina. The purchase price of approximately $1.0 million was based on a buy-out schedule specified in the operating agreement of the limited liability company that holds title to the property. On October 1, 1997, the Company purchased each of the remaining 49% interests held by an unrelated third party in facilities located in Annapolis and Pikesville, Maryland for a purchase price of $3.1 million and $2.9 million, respectively. Each of these facilities are currently 100% owned by the Company. During 1997, the Company completed 20 facilities. Between December 31, 1997, and March 4, 1998, the Company completed construction of five additional facilities. Financials 18 3 The Company's previously announced growth objectives include developing at least 55 new Sunrise model assisted living facilities with an additional resident capacity of more than 4,500 by the end of 1999. To date, the Company has completed development of 27 such facilities with a resident capacity of 2,400 and has 16 facilities currently under construction with a resident capacity of 1,490. The Company has also entered into contracts to purchase 33 additional sites and to lease two additional sites. The Company is pursuing additional development opportunities and also plans to acquire additional facilities as market conditions warrant. In order to achieve its growth plans, the Company will be required to obtain a substantial amount of additional financing. The Company currently estimates that the net proceeds to the Company of the Notes, together with existing working capital, financing commitments and financing expected to be available, will be sufficient to fund its development and acquisition programs for at least the next 18 months. See "--Liquidity and Capital Resources." The Company derives its revenues from two primary sources: (i) resident fees for the delivery of assisted living services and (ii) management services income for management and development of facilities owned by third parties. Historically, most of the Company's operating revenue has come from resident fees, which in 1997 and 1996 comprised 95.3% and 93.3% of total operating revenues, respectively. Resident fees typically are paid monthly by residents, their families or other responsible parties. In 1997 and 1996, approximately 99% of the Company's revenue was derived from private pay sources. Resident fees include revenue derived from Basic Care, community fees, Plus Care, Alzheimer's Care and other sources. Community fees are one-time fees generally equal to 60 times the daily resident fee payable by a resident upon admission. Plus Care and Alzheimer's Care fees are paid by residents who require personal care in excess of services provided under the Basic Care program. Management services income, which in 1997 and 1996 accounted for the remaining 4.7% and 6.7% of revenues, consists of management fees which are generally in the range of 5% to 7% of a managed facility's total operating revenues and development fees for site acquisition, development services, facility design and construction management services. The Company classifies its operating expenses into the following categories: (i) facility operating, which includes labor, food, marketing and other direct facility expenses; (ii) facility development and pre-rental, which include non-capitalized development expenses and pre-opening labor and marketing expenses; (iii) general and administrative, which primarily include headquarters and regional staff expenses and other overhead costs; (iv) depreciation and amortization; and (v) facility lease, which represents rental expenses for facilities not owned by the Company. In connection with implementation of of its growth plans, the Company made significant investments in its infrastructure through the addition of information technology in 1997, as well as continued additions to headquarters and regional staff. RESULTS OF OPERATIONS The following table sets forth certain data expressed as a percentage of operating revenue:
Year Ended December 31, - ---------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------- Operating revenue 100.0% 100.0% 100.0% Operating expenses: Facility operating 59.3 59.7 56.0 Facility development and pre-rental 6.2 5.1 3.1 General and administrative 11.6 21.2 18.5 Depreciation and amortization 11.8 8.6 8.1 Facility lease 1.7 0.3 0.4 - ---------------------------------------------------------------------------- Income from operations 9.4 5.1 13.9 Other income (expense): Interest income 7.6 7.0 3.3 Interest expense (12.8) (20.6) (44.4) Equity in earnings of unconsolidated partnerships 0.1 -- -- Minority interests 0.2 0.5 -- Unusual charge -- (2.1) -- - ---------------------------------------------------------------------------- Net income (loss) 4.5% (10.1)% (27.2)% ============================================================================
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 Operating Revenue. Operating revenue for 1997 increased 89.8% to $89.9 million from $47.3 million in 1996 due primarily to the growth in resident fees. Resident fees (including community fees and fees for Basic Care, Plus Care, Alzheimer's Care and other services) for 1997 increased 93.9% to $85.6 million from $44.2 million in 1996. This increase was due primarily to the inclusion, in 1997, of additional total revenue of $23.1 million generated from 23 Sunrise developed facilities opened in late 1996 and throughout 1997, and $16.1 million generated from the operations of 9 acquired facilities. Other increases in revenue were due primarily to increases in average resident occupancy and management services income. Average resident occupancy for owned facilities operated by the Company for at least 12 months, or that have achieved stabilization of 95% ("Stabilized Facilities"), remained unchanged in 1997 at 94% compared to 1996. The average daily resident fee (excluding community fees) for Stabilized Facilities decreased to $78 for 1997 from $80 for 1996. Excluding acquired facilities, the average daily resident fee (excluding community fees) remained unchanged at $84 in 1997 compared to 1996. Financials 19 4 Management services income for 1997 increased by $1.1 million, or 33.6%, to $4.2 million from $3.2 million in 1996 due to an increase in fees for management and development services relating to the development of facilities for joint ventures and third party owners. Operating Expenses. Operating expenses for 1997 increased 81.3% to $81.5 million from $44.9 million in 1996. The increase in operating expenses in 1997 is attributable to increases in all of the following areas: facility operating, facility development and pre-rental, depreciation and amortization, and facility lease expenses. Facility operating expenses for 1997 increased 88.5% to $53.3 million from $28.3 million in 1996. As a percentage of operating revenue, facility operating expenses in 1997 decreased to 59.3% from 59.7% in 1996 as revenues increased at a faster rate than facility operating expenses. The $25.0 million increase was primarily related to expenses from the operations of 9 acquired and 23 developed facilities during 1996 and 1997. Facility development and pre-rental expenses for 1997 increased by 130.8% to $5.6 million from $2.4 million in 1996. As a percentage of operating revenue, facility development and pre-rental expenses increased to 6.2% from 5.1%. This increase was due to a $1.0 million increase in non-capitalized labor and related development costs, and a $2.2 million increase in start up costs relating to 20 new facilities opened during 1997. General and administrative expenses in 1997 increased 4.1% to $10.5 million from $10.0 million in 1996. As a percentage of operating revenue, general and administrative expenses decreased to 11.6% in 1997 from 21.2% in 1996. The $0.4 million increase was due to a $1.0 million increase in labor costs, offset, in part, by a $0.6 million decrease attributable to various other corporate and regional expenses. The provision for bad debts was $0.9 million in 1997 and $0.7 million in 1996, respectively. Of the 1997 provision, $0.4 million relates to certain subordinated management fees, $0.1 million relates to one-time consulting fees and the remainder relates to resident services revenue. Depreciation and amortization in 1997 increased 161.7% to $10.6 million from $4.0 million in 1996 primarily due to the opening of 23 developed facilities and the acquisition of 9 other facilities during 1996 and 1997. Other Income (Expense). Interest income for 1997 increased 108.1% to $6.9 million from $3.3 million in 1996. This increase was primarily due to the investment of funds received from the Company's initial public offering (the "Initial Offering") and follow-on offering (the "Second Offering") completed during 1996, as well as net proceeds received from the issuance and sale of the Notes in June 1997. Interest expense for 1997 increased 18.0% to $11.5 million from $9.7 million in 1996. This increase was due to $4.7 million of interest on $150.0 million aggregate principal amount of the Notes and an increase of $1.6 million of interest for other borrowings, net of interest rate reductions described below, offset, in part, by an increase in capitalized interest of $4.5 million. Interest rate reductions include the following: (i) a lender agreeing (effective March 4, 1997) to reduce the interest rate applicable to the $22.0 million outstanding portion of variable rate indebtedness from LIBOR plus 3.75% to LIBOR plus 1.75%; (ii) the Company renegotiating interest rate reductions from LIBOR plus 2.75% to corresponding U.S. Treasuries plus 1.00% on $15.7 million of credit facilities; (iii) the Company renegotiating interest rate reductions from LIBOR plus 2.95% to corresponding U.S. Treasuries plus 1.10% on a $7.4 million credit facility; and (iv) the Company entering into a swap transaction (effective August 20, 1997) whereby outstanding advances of up to $7.0 million under LIBOR floating rate debt bear interest at a fixed LIBOR base rate of 7.14%. Net Income (loss). The Company had net income of $4.0 million in 1997, compared to a net loss of $4.8 million in 1996. The net income for 1997 resulted primarily from a $42.6 million increase in operating revenue coupled with a $1.8 million decrease in net interest expense and a $1.0 million decrease from a one time unusual charge in 1996 offset, in part, by a $36.6 million increase in operating expenses. The Company did not recognize any Federal income tax expense in 1997 because tax deductions generated from the exercise of employee stock options exceeded pretax income. At December 31, 1997, the Company had net operating loss carryforwards for income tax purposes of approximately $19.2 million which expire in years 2010 and 2012. See Note 12 of Notes to Consolidated Financial Statements. YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995 Operating Revenue. Operating revenue for 1996 increased 27.1% to $47.3 million from $37.3 million in 1995 due primarily to the growth in resident fees. Resident fees (including community fees and fees for Basic Care, Plus Care, Alzheimer's Care and other services) for 1996 increased 27.1% to $44.2 million from $34.8 million in 1995. This increase was due primarily to the inclusion, in 1996, of six acquired facilities with total revenue of $4.5 million, three newly developed facilities with revenue totaling $2.2 million and additional revenue generated by increases in the average resident occupancy and average daily rate for owned facilities operated by the Company for at least 12 months, totaling $1.1 million and $1.3 million, respectively. Average resident occupancy for Stabilized Facilities was 93.6% in 1996 compared to 91.7% in 1995. Resident occupancy, including vacancies attributable to renovations at two facilities in order to meet requirements for accepting non-ambulatory residents and the relocation of non-ambulatory residents at a third facility, was 89.6% for 1995. The average daily resident fee (excluding community fees) for Stabilized Facilities remained unchanged in 1996 at $80 compared to 1995. Excluding acquired facilities, the average daily resident fee (excluding community fees) increased to $84 in 1996. Management services income for 1996 increased by $0.7 million, or 26.7%, to $3.2 million from $2.5 million in 1995 due to an increase in management fees and one-time consulting fees. Financials 20 5 Operating Expenses. Operating expenses for 1996 increased 40.1% to $44.9 million from $32.1 million in 1995. The increase in operating expenses in 1996 is attributable primarily to growth in facility operating and general and administrative expenses. Facility operating expenses for 1996 increased 35.4% to $28.3 million from $20.9 million in 1995. As a percentage of operating revenue, facility operating expenses in 1996 increased to 59.7% from 56.0% in 1995. Of the $7.4 million increase in facility operating expenses, $5.0 million was attributable to the opening in 1996 of three newly developed facilities as well as the acquisition of six facilities. The remaining $2.4 million was due to an increase in salaries, benefits, training, marketing and other general expenses at existing facilities. Facility development and pre-rental expenses for 1996 increased by 106.5% to $2.4 million from $1.2 million in 1995. This increase was due to a $0.7 million increase in non-capitalized labor and related development costs, a $0.7 increase in start up costs offset, in part, by a $0.2 increase in other capitalized costs. There were 20 facilities under construction at December 31, 1996, compared to 6 facilities at December 31, 1995. General and administrative expenses in 1996 increased 46.1% to $10.0 million from $6.9 million in 1995. As a percentage of operating revenue, general and administrative expenses increased to 21.2% in 1996 from 18.5% in 1995. Of the $3.2 million increase in general and administrative expenses in 1996, approximately 47.3% was related to labor costs. The remaining increase of $1.7 million was attributable to marketing, consulting, taxes, travel and other general expenses. The provision for bad debts was $0.7 million in 1996 and $0.2 million in 1995, respectively. Of the $0.5 million increase, $0.2 million relates to a one-time consulting fee and $0.3 million relates to certain subordinated management fees. Depreciation and amortization in 1996 increased 34.5% to $4.0 million from $3.0 million in 1995 primarily due to the opening of three developed facilities and the acquisition of six other facilities and amortization of $0.3 million of capitalized pre-rental costs over 12 months. Other Income (Expense). Interest income for 1996 increased 168.3% to $3.3 million from $1.2 million in 1995 primarily due to a $1.7 million increase from the investment of funds received from the Initial and Second Offerings and interest earned on $5.8 million of revenue bonds purchased in March 1995 (the Company has an option to purchase the facility subject to the revenue bonds, at any time, for fair market value). Interest expense for 1996 decreased 41.3% to $9.7 million from $16.6 million in 1995. In June 1996, the Company paid approximately $8.6 million to a lender as payment in full of a 25% participation interest. During 1995, the Company recorded $5.4 million of expense related to such participation Interest. In addition, the Company paid $8.0 million to prepay a portion of the variable rate indebtedness. The lender reduced the interest rate applicable to the $22.0 million outstanding portion of variable rate indebtedness from LIBOR plus 5.75% to LIBOR plus 3.75%. On March 4, 1997, the Company entered into an agreement with the lender reducing further the interest rate from LIBOR plus 3.75% down to LIBOR plus 1.75%. Unusual Charge. In order to avoid a possible change in the Company's ability to continue to manage two facilities resulting from the reduction in Paul and Teresa Klaassen's (the "Founders") ownership interest in the Company following completion of the Company's Initial Offering in June 1996, the Company made a $1.0 million cash payment to the third-party limited partner in these two facilities in exchange for the transfer to the Company by the third party of additional 1% partnership interests in each facility (with a total book value of $18,700) and the elimination of any requirement for the Founders to maintain a specified ownership interest in the Company. This was reflected as an unusual charge during 1996. Net Loss. The Company incurred a net loss of $4.8 million in 1996, compared to a net loss of $10.1 million in 1995. The reduction in the net loss for 1996 resulted primarily from a $10.1 million increase in operating revenue coupled with a $6.8 million decrease in interest expense and a $2.0 million increase in interest income offset , in part, by a $12.8 million increase in operating expenses and a $1.0 million unusual charge. The Company did not recognize any Federal income tax expense in 1996 because of such net loss. At December 31, 1996, the Company had net operating loss carryforwards for income tax purposes of approximately $15.7 million which expire in years 2010 and 2011. LIQUIDITY AND CAPITAL RESOURCES To date, the Company has financed its operations from long-term borrowings, equity offerings and cash generated from operations. At December 31, 1997, the Company had $341.0 million of outstanding debt at a weighted average interest rate of 6.72%. Of such amount, the Company had $260.8 million of fixed-rate debt (excluding a $1.4 million loan discount) at a weighted average interest rate of 6.5%, and $81.6 million of variable-rate debt at a weighted average interest rate of 7.4%. Increases in prevailing interest rates could increase the Company's interest payment obligations relating to variable-rate debt. See Note 6 of Notes to Consolidated Financial Statements. A subsidiary of the Company has obtained a syndicated revolving credit facility for $250.0 million to be used for general corporate purposes, including the continued construction and development of assisted living facilities. The Company guarantees the repayment of all amounts outstanding under this credit facility. The credit facility is for a term of three years with the right to extend, and is secured by cross-collateralized first mortgages on the real property and improvements and first liens on all assets of the subsidiary. Advances under the facility bear interest at rates from LIBOR plus 1.0% to LIBOR plus 1.5%. At December 31, 1997, there were $51.0 million of advances outstanding under this facility and available credit remaining of $199.0 million. Financials 21 6 On June 6, 1997, the Company issued and sold $150.0 million aggregate principal amount of 51/2% convertible subordinated notes due 2002. The Notes bear interest at 51/2% per annum payable semiannually on June 15 and December 15 of each year, beginning December 15, 1997. The conversion price is $37.1875 (equivalent to a conversion rate of 26.89 shares per $1,000 principal amount of the Notes). The Notes are redeemable at the option of the Company commencing June 15, 2000, at specified premiums. The holders of the Notes may require the Company to repurchase the Notes upon a Change of Control (as defined) of the Company. The net proceeds to the Company from the sale of the Notes, after deducting underwriting discounts and offering expenses, were approximately $145.6 million. On June 10, 1997, the Company used $57.7 million of the net proceeds to pay down floating rate indebtedness from four financial institutions with a combined weighted average interest rate of 8.4%. The Company expects to use the balance of the net proceeds and the recent expansion of an existing syndicated revolving credit facility to fund continued development of new Sunrise model facilities and for possible acquisitions as well as for working capital and general corporate purposes. A subsidiary of the Company has received a commitment for a $51.0 million revolving construction credit facility. The credit facility provides for construction and interim loans to finance the development of up to seven assisted living facilities. As of December 31, 1997, the Company had closed $32.1 million of the total commitment. The Company has agreed to guarantee the repayment of all amounts outstanding under this credit facility. The credit facility is for a term of five years and is secured by cross-collateralized first mortgages on the real property and liens on receivables. Advances under the credit facility bear variable interest rates based upon LIBOR plus 2.25% to LIBOR plus 2.60%. As of December 31, 1997, there were $4.7 million of advances outstanding under this facility. The Company has received a commitment for a $15.7 million revolving construction credit facility. As of December 31, 1997, the Company has closed on the total commitment amount. The credit facility provides for construction and interim loans to finance the development of up to two assisted living facilities. The Company guarantees the repayment of all amounts outstanding under this credit facility. The credit facility is for a term of three years and is secured by cross-collateralized first mortgages on the real property and improvements and first liens on all other assets of the subsidiary. Advances under the credit facility bear variable interest rates based upon LIBOR plus 1.25% to LIBOR plus 1.75%. There were no advances outstanding under this facility as of December 31, 1997. Effective March 4, 1997, a lender agreed to reduce the interest rate applicable to the $22.0 million outstanding portion of variable rate indebtedness from LIBOR plus 3.75% to LIBOR plus 1.75%. The Company also has renegotiated interest rate reductions from LIBOR plus 2.75% to corresponding U.S. Treasuries plus 1.00% on $15.7 million of credit facilities. In addition, the Company has renegotiated an interest rate reduction from LIBOR plus 2.95% to U.S. Treasuries plus 1.10% on a $7.4 million credit facility. The Company has entered into a swap transaction whereby effective during the period June 18, 1998, through June 18, 2001, outstanding advances of up to $19.0 million under LIBOR floating rate debt bear interest at a fixed rate based on a fixed LIBOR base rate of 7.3%. The Company has entered into another swap transaction whereby, effective during the period August 20, 1997 through April 1, 2003, outstanding advances of up to $7.0 million under LIBOR floating rate debt bear interest at a fixed LIBOR base rate of 7.14%. During 1997, the Company paid $17,000 pursuant to the swap transaction applicable to $7.0 million of outstanding advances under LIBOR floating rate. Pursuant to an acquisition in 1994 of certain assets, the Company had unconditionally guaranteed any amounts required by three related limited partnerships (the "LPs") to honor the LP's commitments in 1997, to provide a guaranteed 9% return to the limited partners and to repurchase the limited partnership interests of the limited partners. During 1997, the Company paid $2.6 million to satisfy and complete its guarantee. The guarantees were considered to be contingent acquisition costs. As such, the carrying value of the assets acquired in the exchange were increased by the amount. Working capital decreased to $70.3 million at December 31, 1997, compared to $102.8 million as of December 31, 1996, primarily due to the Company's continued investment in the development of Sunrise model facilities. Cash provided by operating activities increased to $8.3 million for 1997 as compared to $0.8 million for 1996, including a $1.0 million payment to a third-party limited partner which was charged to expense, and $0.9 million for 1995. The continued increase reflects the operational stabilization of new Sunrise facilities and the additional operations of acquired facilities. Unrestricted cash balances were $82.6 million and $101.8 million at December 31, 1997 and 1996, respectively. Net cash used in investing activities totaled $221.8 million, $112.5 million and $17.9 million in 1997, 1996 and 1995, respectively. The Company's investing activities included $213.6 million, $103.7 million and $12.6 million in 1997, 1996 and 1995, respectively, related to the Company's development activities. Investing activities in 1997 include net purchases of investments and notes receivable of $16.9 million and proceeds from maturities of marketable securities of $8.3 million. Investing activities in 1996 included the purchase of $8.1 million of marketable securities. Investing activities in 1995 included the purchase of $5.4 million of tax exempt mortgage revenue bonds. During 1997, the Company's financing activities provided net cash of $194.4 million compared to $207.3 million and $15.1 million provided in 1996 and 1995, respectively. Cash was provided by additional borrowings of $255.6 million which includes the Notes. Financials 22 7 During 1997, the Company made repayments of debt amounting to $59.4 million, including $57.7 million used from net proceeds received from the Notes. Additionally, $1.4 million was used to repay notes payable to affiliated partnerships. The Company also paid $6.5 million in financing costs during 1997 related to additional borrowings and available credit facilities. In 1996, cash was provided by the Company's Initial and Second Offerings, as well as, $28.9 million provided by additional borrowings. Also during 1996, the Company paid $8.6 million as payment in full of the 25% participating interest in cash flow and appreciation in the value of certain properties. In addition, in 1996, the Company prepaid $8.0 million of its variable rate debt, paid $0.3 million in dividends to holders of Series B Exchangeable Preferred Stock and $1.4 million in various financing costs. In 1995, $9.3 million was provided by additional borrowings relating primarily to the construction of facilities, and $20.2 million in net proceeds was provided by the issuance of Series A Convertible Preferred Stock. In addition, $9.6 million in cash distributions were made in 1995. The Company's previously announced three-year growth objectives include developing at least 55 new Sunrise model assisted living facilities with an additional resident capacity of more than 4,500 by the end of 1999. To date, the Company has completed development of 27 such facilities with a resident capacity of 2,400 (East Cobb, GA, Fresno, CA, Haverford, PA, Decatur, GA, Walnut Creek, CA, Glen Cove, NY, Ivey Ridge, GA, Cohasset, MA, Denver, CO, Alexandria, VA, Norwood, MA, Wayne, NJ, Wayland, MA, Westfield, NJ, Rockville, MD, Philadelphia, PA (3), Old Tappan, NJ, Morris Plains, NJ, Severna Park, MD (2), Springfield, VA, Oakton, VA, Petaluma, CA, Blue Bell, PA, and Columbia, MD) and has 16 facilities currently under construction with a resident capacity of 1,490. The Company has also entered into contracts to purchase 33 additional sites and to lease two additional sites. The Company is pursuing additional development opportunities and also plans to acquire additional facilities as market conditions warrant. The Company currently estimates that the net proceeds to the Company from the sale of the Notes, the recent expansion of an existing credit facility, together with existing working capital, financing commitments and financing expected to be available, will be sufficient to fund its development and acquisition programs for at least the next 18 months. The estimated cost to complete and lease up the 28 remaining new Sunrise model facilities targeted for completion by the end of 1999 is between $238 million and $336 million. Additional financing will be required to complete the Company's growth plans and to refinance existing indebtedness if cash flows from operations do not increase as a result of planned growth. There can be no assurance that such financing will be available on acceptable terms. The Company's ability to achieve its development plans will depend upon a variety of factors, many of which are beyond the Company's control. There can be no assurance that the Company will not suffer delays in its development program, which could slow the Company's growth. The successful development of additional assisted living facilities will involve a number of risks, including the possibility that the Company may be unable to locate suitable sites at acceptable prices or may be unable to obtain, or may experience delays in obtaining, necessary zoning, land use, building, occupancy, licensing and other required governmental permits and authorizations. The Company may also incur construction costs that exceed original estimates, may not complete construction projects on schedule and may experience competition in the search for suitable development sites. The Company relies on third-party general contractors to construct its new assisted living facilities. There can be no assurance that the Company will not experience difficulties in working with general contractors and subcontractors, which could result in increased construction costs and delays. Further, facility development is subject to a number of contingencies over which the Company will have little control and that may adversely affect project cost and completion time, including shortages of, or the inability to obtain, labor or materials, the inability of the general contractor or subcontractor to perform under their contracts, strikes, adverse weather conditions and changes in applicable laws or regulations or in the method of applying such laws and regulations. Accordingly, if the Company is unable to achieve its development plans, its business, financial condition and results of operations could be adversely affected. The Company's previously announced growth plan included the acquisition of up to 15 facilities by the end of 1999, of which nine have been acquired. There can be no assurance that the Company will be able to complete the acquisition of additional assisted living facilities. The success of the Company's acquisitions will be determined by numerous factors, including the Company's ability to identify suitable acquisition candidates, competition for such acquisitions, the purchase price, the financial performance of the facilities after acquisition and the ability of the Company to integrate or operate acquired facilities effectively may have a material adverse effect on the Company's business, financial condition and results of operations. The Company's financing documents contain financial covenants and other restrictions that (i) require the Company to meet certain financial tests and maintain certain escrows of funds, (ii) require that one of the Company's Founders serve as Chairman of the Board and Chief Executive Officer of the Company, (iii) require consent for changes in management or control of the Company, (iv) limit, among other things, the ability of the Company and certain of its subsidiaries to borrow additional funds, dispose of assets and engage in mergers or other business combinations, and (v) prohibit the Company from operating competing facilities within certain distances from mortgaged facilities. At December 31, 1997, the Company had stockholders' equity of $195.3 million compared to a stockholders' equity of $185.8 million at December 31, 1996. The change resulted from adding the receipt of $5.5 million from the exercise of employee options for common stock and net income for 1997 of $4.0 million. Financials 23 8 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("Statement 131"), which is effective for fiscal years beginning after December 15, 1997. Statement 131 establishes standards for the way that a public company reports information about operating segments in annual financial statements and requires that those companies report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company will adopt the new requirements in 1998. Management has not completed its review of Statement 131; however, the adoption of Statement 131 is not anticipated to affect results of operations or financial position, but could add to the Company's current operating disclosures. IMPACT OF INFLATION Resident fees from Company-owned assisted living facilities and management services income from facilities operated by the Company for third parties are the primary sources of revenue for the Company. These revenues are affected by daily resident fee rates and facility occupancy rates. The rates charged for the delivery of assisted living services are highly dependent upon local market conditions and the competitive environment in which the facilities operate. In addition, employee compensation expense is the principal cost element of property operations. Employee compensation, including salary increases and the hiring of additional staff to support the Company's growth initiatives, have previously had a negative impact on operating margins and may again do so in the foreseeable future. Substantially all of the Company's resident agreements are for terms of one year (but are terminable by the resident at any time upon 30 days' notice) and allow, at the time of renewal, for adjustments in the daily fees payable thereunder, and thus may enable the Company to seek increases in daily fees due to inflation or other factors. Any such increase would be subject to market and competitive conditions and could result in a decrease in occupancy of the Company's facilities. The Company believes, however, that the short-term nature of its resident agreements generally serves to reduce the risk to the Company of the adverse effect of inflation. There can be no assurance that resident fees will increase or that costs will not increase due to inflation or other causes. IMPACT OF YEAR 2000 Some of the older computer programs utilized by the Company were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000 ("Year 2000 Issue"). This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. During the past year, the Company has continued to invest resources developing the needed infrastructure to support current and anticipated growth. In most cases, the Company has implemented financial and accounting systems that will support its development plans, which includes year 2000 compliant software. To date, financial and accounting systems implemented or updated that are year 2000 compliant include the accounting general ledger system, the resident billing system, the cash disbursement or accounts payable system, the development or project cost system, the fixed asset system, the employee stock option system and substantially all software residing on the Company's home office and facility desk-top and lap-top computers. The Company recently selected for implementation during 1998 a payroll system with expanded functionality. Included among the requirements for selection is that the payroll system be year 2000 compliant. The project is estimated to be completed not later than December 31, 1998, which is prior to any anticipated impact of the Year 2000 Issue on its operations. The Company will continue to assess its software to determine whether additional portions will have to be modified or replaced so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Company believes that with modifications to existing software and conversions to new software, planned and completed, the Year 2000 Issue will not pose significant operational problems or costs. However, if such modifications and conversions are not made or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. The costs of the payroll system conversion and the date on which the Company believes it will complete the year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties Financials 24 9 REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Sunrise Assisted Living, Inc. We have audited the accompanying consolidated balance sheets of Sunrise Assisted Living, Inc. (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sunrise Assisted Living, Inc. as of December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Washington, D.C. March 4, 1998 Financials 25 10 Sunrise Assisted Living, Inc. CONSOLIDATED BALANCE SHEETS
December 31, - ---------------------------------------------------------------------------------------------------------- (dollars in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 82,643 $ 101,811 Accounts receivable, net 5,849 1,522 Marketable securities -- 8,322 Prepaid expenses and other current assets 6,081 2,394 - ---------------------------------------------------------------------------------------------------------- Total current assets 94,573 114,049 Property and equipment, net 423,615 216,711 Investment and notes receivable 22,998 5,750 Restricted cash and cash equivalents 1,573 1,720 Deferred financing costs, net 7,459 3,100 Other assets 6,042 1,509 - ---------------------------------------------------------------------------------------------------------- Total assets $556,260 $342,839 ========================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,303 $ 6,321 Accrued expenses 8,317 2,010 Deferred revenue 1,482 2,021 Other current liabilities 669 103 Current maturities of long-term debt 5,462 772 - ---------------------------------------------------------------------------------------------------------- Total current liabilities 24,233 11,227 Long-term debt, less current maturities 335,485 143,318 Notes payable to affiliated partnerships 40 1,421 Interests in unconsolidated partnerships 445 822 Other long-term liabilities 319 -- - ---------------------------------------------------------------------------------------------------------- Total liabilities 360,522 156,788 Minority interests 398 227 Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding -- -- Common stock, $0.01 par value, 60,000,000 shares authorized, 19,028,040 and 18,529,869 shares issued and outstanding 1997 and 1996 190 185 Additional paid-in capital 206,784 201,274 Accumulated deficit (11,634) (15,635) - ---------------------------------------------------------------------------------------------------------- Total stockholders' equity 195,340 185,824 - ---------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $556,260 $342,839 ==========================================================================================================
See accompanying notes. Financials 26 11 Sunrise Assisted Living, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, - ---------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Operating revenue $89,884 $47,345 $ 37,258 Operating expenses: Facility operating 53,286 28,274 20,882 Facility development and pre-rental 5,586 2,420 1,172 General and administrative 10,454 10,042 6,875 Depreciation and amortization 10,592 4,048 3,009 Facility lease 1,532 130 128 - ---------------------------------------------------------------------------------------------------------------- Total operating expenses 81,450 44,914 32,066 Income from operations 8,434 2,431 5,192 Other income (expense): Interest income 6,862 3,297 1,229 Interest expense (11,475) (9,722) (16,556) - ----------------------------------------------------------------------------------------------------------------- Total other expense (4,613) (6,425) (15,327) Equity in earnings (losses) of unconsolidated partnerships 88 (12) (9) Minority interests 92 227 7 Unusual charge -- (981) -- - ---------------------------------------------------------------------------------------------------------------- Net income (loss) $ 4,001 $ (4,760) $(10,137) - ---------------------------------------------------------------------------------------------------------------- Net income (loss) per common share data: Basic net income (loss) per common share $0.21 $(0.52) - ---------------------------------------------------------------------------------------------------------------- Diluted net income (loss) per common share $0.20 $(0.51) ================================================================================================================
See accompanying notes. Financials 27 12 Sunrise Assisted Living, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Accumulated Common Paid-in Owners' Stock of Capital of Deficit of Shares of Common Additional Sunrise Sunrise Sunrise Common Stock Paid-in Capital (in thousands) Entities Entities Entities Stock Amount (Deficiency) - ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 $ 11 $ 852 $(17,063) -- $ -- $-- Issuance of common stock for the net assets of Sunrise Entities (11) (852) 17,063 6,019 60 (16,451) Liability of stockholder assumed at formation (1,448) Cost of issuance of Series A convertible preferred stock (1,834) Net loss Preferred return on Series A convertible preferred stock - ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 -- -- -- 6,019 60 (19,733) Issuance of common stock warrants 135 Preferred return on Series A convertible preferred stock Distributions to stockholders Issuance of common stock--Initial Offering 5,700 57 104,237 Conversion of Series A convertible preferred stock to common stock 2,444 24 24,798 Forfeiture of preferred return on Series A convertible preferred stock (2,822) Dividends paid on Series B exchangeable preferred stock Issuance of common stock to acquire interest in facility 53 945 Exercise of employee options for common stock 259 3 1,964 Issuance of common stock-- Second Offering 4,055 41 91,750 Net loss - ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 -- -- -- 18,530 185 201,274 Exercise of employee options for common stock 498 5 5,510 Net income - ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 $-- $ -- $ -- 19,028 $190 $206,784 ===============================================================================================================================
Accumulated (in thousands) Deficit Total - ---------------------------------------------------------------------------- Balance at December 31, 1994 $ (191) $ (16,391) Issuance of common stock for the net assets of Sunrise Entities 191 -- Liability of stockholder assumed at formation (1,448) Cost of issuance of Series A convertible preferred stock (1,834) Net loss (10,137) (10,137) Preferred return on Series A convertible preferred stock (1,964) (1,964) - ---------------------------------------------------------------------------- Balance at December 31, 1995 (12,101) (31,774) Issuance of common stock warrants 135 Preferred return on Series A convertible preferred stock (858) (858) Distributions to stockholders (390) (390) Issuance of common stock--Initial Offering 104,294 Conversion of Series A convertible preferred stock to common stock 24,822 Forfeiture of preferred return on Series A convertible preferred stock 2,822 -- Dividends paid on Series B exchangeable preferred stock (348) (348) Issuance of common stock to acquire interest in facility 945 Exercise of employee options for common stock 1,967 Issuance of common stock-- Second Offering 91,791 Net loss (4,760) (4,760) - ---------------------------------------------------------------------------- Balance at December 31, 1996 (15,635) 185,824 Exercise of employee options for common stock 5,515 Net income 4,001 4,001 - ---------------------------------------------------------------------------- Balance at December 31, 1997 $(11,634) $195,340 ============================================================================
See accompanying notes. Financials 28 13 Sunrise Assisted Living, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, - --------------------------------------------------------------------------------------------------------------------------- (in thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income (loss) $ 4,001 $ (4,760) $(10,137) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Equity in (earnings) losses of unconsolidated partnerships (88) 12 9 Minority interests (92) (227) (7) Provision for bad debts 871 734 185 Accretion of interest on marketable securities -- (215) -- Depreciation and amortization 10,592 4,048 3,009 Amortization of financing costs and discount on long-term debt 1,268 714 457 Accrual of participation mortgage interest -- -- 5,400 Changes in assets and liabilities: (Increase) decrease: Accounts receivable (5,198) (1,250) (407) Prepaid expenses and other current assets (3,687) 249 (238) Other assets (8,146) (1,420) (855) Increase (decrease): Accounts payable and accrued expenses 8,289 1,784 3,539 Deferred revenue (539) 1,117 (47) Other liabilities 993 (28) 36 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 8,264 758 944 INVESTING ACTIVITIES Decrease (increase) in restricted cash and cash equivalents 147 (459) (85) Investment in property and equipment (213,560) (103,667) (12,570) Disposition of property and equipment -- -- 25 Increase in investment and notes receivable (16,856) (375) (5,375) Net purchases of marketable securities -- (8,107) -- Proceeds from maturities of marketable securities 8,322 -- -- Distributions from investment in unconsolidated partnerships 101 113 98 - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (221,846) (112,495) (17,907) FINANCING ACTIVITIES Net proceeds from sale of Series A convertible preferred stock -- -- 20,166 Net proceeds from sale of Series B exchangeable preferred stock -- 10,000 -- Redemption of Series B exchangeable preferred stock -- (10,000) -- Dividends paid on Series B exchangeable preferred stock -- (348) -- Net proceeds from Initial Offering of common stock -- 104,294 -- Net proceeds from Second Offering of common stock -- 91,791 Net proceeds from exercised options 5,515 1,967 -- Distributions to stockholders/partners -- (390) (9,646) Net investment of minority interests 525 (41) (35) Additional borrowings under long-term debt 255,643 28,870 9,326 Repayment of long-term debt (59,403) (17,165) (4,296) Financing costs paid (6,485) (1,369) (313) Repayment of notes payable to affiliated partnerships (1,381) (314) (75) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 194,414 207,295 15,127 - --------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (19,168) 95,558 (1,836) Cash and cash equivalents at beginning of year 101,811 6,253 8,089 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 82,643 $ 101,811 $ 6,253 ===========================================================================================================================
See accompanying notes. Financials 29 14 Sunrise Assisted Living, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 1. ORGANIZATION AND PRESENTATION Sunrise Assisted Living, Inc. (the "Company") is a leading provider of assisted living services for seniors. Assisted living services provide a residence, meals and non-medical assistance to elderly residents for a monthly fee. The Company's services are generally not covered by health insurance and therefore monthly fees are generally payable by the residents, their family, or another responsible party. The Company was incorporated in Delaware on December 14, 1994. The consolidated financial statements include the Company's wholly owned subsidiaries that manage, own and develop assisted living facilities. The consolidated financial statements also include subsidiaries that own facilities in which the Company has equity interests ranging from 50% to 100%. It is the Company's policy to consolidate non-wholly owned interests when, through its managing partnership or operating agreements, status as manager of the facility and sole general partner, the Company holds unilateral ability to conduct the ordinary course of business of the facility. All significant intercompany transactions and accounts have been eliminated. The Company accounts for other significant interests on the equity method, because the Company is able to influence significantly both operating and financial decisions. 2. SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION Operating revenue consists of resident fee revenue and management services revenue. Resident fee revenue is recognized when services are rendered. Generally, resident community fees approximating sixty times the daily residence fee are received from potential residents upon occupancy. Resident community fees are recognized as income over the first ninety days of the resident's stay and are ratably refundable if the prospective resident does not move into the facility or moves out of the facility within ninety days. Agreements with residents are for a term of one year and are cancelable by residents with thirty days' notice. Management services revenue is comprised of revenue from management contracts and revenue from development contracts. Revenue from management contracts is recognized in the month in which it is earned in accordance with the terms of the management contract. Revenue from development contracts is recognized over the term of the respective development contracts using the percentage-of-completion method. ALLOWANCES FOR DOUBTFUL ACCOUNTS Details of the allowance for doubtful accounts receivable are as follows:
(in thousands) 1997 1996 - ---------------------------------------------------------------------------- Beginning balance $ 927 $ 235 Provision for bad debts 893 734 Accounts written off (22) (42) - ---------------------------------------------------------------------------- Ending balance $1,798 $ 927 ============================================================================
PRE-RENTAL COSTS Costs incurred to initially rent facilities are capitalized and amortized over 12 months. All other pre-rental costs are expensed as incurred. Pre-rental costs and accumulated amortization included in other assets are as follows:
December 31, (in thousands) 1997 1996 - ---------------------------------------------------------------------------- Pre-rental costs $ 9,393 $1,674 Accumulated amortization (3,973) (345) - ---------------------------------------------------------------------------- $ 5,420 $1,329 ============================================================================
PROPERTY AND EQUIPMENT Property and equipment are recorded at the lower of cost or fair value and include interest and property taxes capitalized on long-term construction projects during the construction period, as well as other costs directly related to the development and construction of facilities. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Property and equipment of the Company are reviewed for impairment whenever events or circumstances indicate that the asset's undiscounted expected cash flows are not sufficient to recover its carrying amount. The Company measures an impairment loss by comparing the fair value of the asset to its carrying amount. Fair value of an asset is calculated as the present value of expected future cash flows. Construction in progress includes pre-acquisition costs and other direct costs related to acquisition, development and construction of facilities including certain direct costs of the Company's development subsidiary. If a project is abandoned, any costs previously capitalized are expensed. DEFERRED FINANCING COSTS Costs incurred in connection with obtaining permanent financing for Company-owned facilities have been deferred and are amortized over the term of the financing using the effective interest method. Deferred financing fees and accumulated amortization are as follows:
December 31, (in thousands) 1997 1996 - ---------------------------------------------------------------------------- Deferred financing fees $ 9,394 $3,915 Accumulated amortization (1,935) (815) - ---------------------------------------------------------------------------- $ 7,459 $3,100 ============================================================================
INCOME TAXES Income taxes are provided using the liability method. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis (temporary differences). CASH AND CASH EQUIVALENTS The Company considers cash and cash equivalents to include currency on hand, demand deposits, and all highly liquid investments with a maturity of three months or less at the date of purchase. MARKETABLE SECURITIES At December 31, 1996, marketable securities consisted of high- quality commercial paper with maturities not greater than 182 days at date of purchase. These securities were classified as available-for-sale. The carrying amount of these investments approximated their market value at December 31, 1996. Financials 30 15 STOCK-BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees and accordingly recognizes no compensation expense for the stock option grants. INTERESTS IN UNCONSOLIDATED PARTNERSHIPS The Company's interest in accumulated losses of unconsolidated partnerships are recorded below the Company's cost basis, which reflects the Company's obligations as the general partner. The Company has no liability for any other material commitments or contingencies of partnerships in which it is a general partner. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("Statement 131"), which is effective for fiscal years beginning after December 15, 1997. Statement 131 establishes standards for the way that a public company reports information about operating segments in annual financial statements and requires that those companies report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company will adopt the new requirements in 1998. Management has not completed its review of Statement 131; however, the adoption of Statement 131 is not anticipated to affect results of operations or financial position, but could add to the Company's current operating disclosures. RECLASSIFICATIONS Certain 1996 and 1995 balances have been reclassified to conform with the 1997 presentation. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
December 31, (in thousands) Asset Lives 1997 1996 - ---------------------------------------------------------------------------- Land and land improvements 10-15 yrs. $ 56,624 $ 25,362 Building and building improvements 40 yrs. 268,533 137,369 Furniture and equipment 3-10 yrs. 34,459 14,996 - ---------------------------------------------------------------------------- 359,616 177,727 Less accumulated depreciation and amortization (26,452) (18,609) - ---------------------------------------------------------------------------- 333,164 159,118 Construction in progress 90,451 57,593 - ---------------------------------------------------------------------------- $423,615 $216,711 ============================================================================
4. INVESTMENT AND NOTES RECEIVABLE On March 1, 1995, the Company purchased all of the outstanding mortgage revenue bonds used to finance a facility managed by the Company. The 10% Bucks County Industrial Development Authority, First Mortgage Revenue Bonds, July 1, 2019, having a face value of $12.5 million, were purchased for $5,000,000. The bonds were in financial default when purchased. On June 30, 1995, the bonds were restructured, at no gain or loss to the Company, to reduce their face amount to $5,750,000 (Series A and C) and provide the facility managed by the Company additional funding up to $750,000 for renovations (Series B). Interest only is payable until maturity. The balances outstanding are as follows:
Face Amount (in thousands) December 31, - --------------------------------------------------------------------------- Description 1997 1996 Interest Rate Maturity Date - --------------------------------------------------------------------------- Series A $5,000 $5,000 11% July 1, 2025 Series B 750 750 11% July 1, 2015 Series C 750 750 20% subject to July 1, 2010 available cash Bond discount (750) (750) - --------------------------------------------------------------------------- $5,750 $5,750 ===========================================================================
Subsequent to June 30, 1995, all interest payments on these bonds are current. The Company recognized $783,000, $752,000 and $443,000 in interest income during 1997, 1996 and 1995, respectively, on this investment. The bond discount will be recognized as income over the life of the loan commencing when realizable. These bonds are classified as available-for-sale. Management believes the net carrying cost of the bonds approximates market value at December 31, 1997 and 1996. In October 1997, a wholly owned subsidiary of the Company jointly formed a limited liability company ("LLC") with an unrelated third party in which the Company's subsidiary owns a 9% minority interest. The purpose of the LLC is to develop, construct and own assisted living facilities. The Company loaned the LLC $15 million (the "note") to help finance initial development and construction of six properties. The note is subordinated to other lenders of the LLC. In September 1997, a wholly owned subsidiary of the Company loaned $1.9 million ("promissory note") to owners of certain property ("owners") on which the Company plans to develop an assisted living facility. The proceeds of the promissory note were used by the owners to retire a note previously outstanding and secured by the same property. Immediately following issuance of the promissory note, the wholly owned subsidiary of the Company extended an existing purchase agreement with the owners to acquire this property. The entire sum of principal and unpaid accrued interest of the promissory note is due on the earliest to occur of: (i) 270 days following the termination of the purchase and sale agreement by either the owners or the wholly owned subsidiary of the Company; (ii) any breach of the purchase agreement by the owners; or (iii) the closing date as defined in the purchase agreement. Notes receivable plus accrued interest consist of the following:
December 31, (in thousands) 1997 1996 - ---------------------------------------------------------------------------- Promissory note, interest accrues at prime (8.50% at December 31, 1997) $ 1,905 $ -- Note with an unconsolidated affiliate, interest accrues at LIBOR (5.72% at December 31, 1997) plus 5% principal and interest due October 16, 2003 15,343 -- - ---------------------------------------------------------------------------- $17,248 $ -- ============================================================================
Management believes the net carrying cost of the notes approximates market value at December 31, 1997. 5. TRANSACTIONS WITH AFFILIATES Included in prepaid expenses and other current assets are net receivables from unconsolidated partnerships or limited liability companies of $4.1 million and $1.0 million as of December 31, 1997 and 1996, respectively. Included in other current liabilities are payables to unconsolidated partnerships or limited liability companies of $600,000 and $-0-as of December 31, 1997 and 1996, respectively. Net receivables Financials 31 16 from and payables to unconsolidated partnerships or limited liability companies relate primarily to development activities. Notes payable to affiliated partnerships consist of the following:
December 31, (in thousands) 1997 1996 - --------------------------------------------------------------------------- Notes to related limited partnerships, principal and interest due December 31, 1999. Interest accrues at 8% annually $-- $1,381 Notes due to an employee and an entity related to that employee. Interest accrues at 18% annually, principal due June 5, 1999 40 40 - --------------------------------------------------------------------------- $40 $1,421 ===========================================================================
6. LONG-TERM DEBT Long-term debt consists of the following:
December 31, (in thousands) 1997 1996 - ---------------------------------------------------------------------------- 51/2% Convertible Subordinated Notes due 2002 $150,000 $-- Multi-property/participating blanket first mortgage (the "Multi- Property Mortgage") 86,718 87,000 Other mortgages and notes 54,660 26,125 Outstanding draws on construction notes -- 32,815 Syndicated revolving credit facility 51,000 -- Discount on the Multi-Property Mortgage long-term debt less amortization of $1,769 and $1,350 (1,431) (1,850) - ---------------------------------------------------------------------------- 340,947 144,090 Current maturities (5,462) (772) - ---------------------------------------------------------------------------- $335,485 $143,318 ============================================================================
On June 6, 1997, the Company issued and sold $150 million aggregate principal amount of 51/2% convertible subordinated notes due 2002 (the "Notes"). The Notes bear interest at 51/2% per annum payable semiannually on June 15 and December 15 of each year, beginning on December 15, 1997. The conversion price is $37.1875 (equivalent to a conversion rate of 26.89 shares per $1,000 principal amount of the Notes). The Notes are redeemable at the option of the Company commencing June 15, 2000, at specified premiums. The holders of the Notes may require the Company to repurchase the Notes upon a Change of Control (as defined) of the Company. The net proceeds to the Company from the sale of the Notes, after deducting underwriting discounts and offering expenses, were approximately $145.6 million. The Multi-Property Mortgage is collateralized by a blanket first mortgage on all assets of a subsidiary of the Company, consisting of 15 facilities which had a book value of approximately $81.3 million as of December 31, 1997. The Multi-Property Mortgage consists of two separate debt classes. Class (A) in the amount of $65.0 million bears a fixed interest rate of 8.56% and is interest only until the maturity date of May 31, 2001. Class (B) in the amount of $21.7 million bears a variable interest rate. Class (B) was interest only until July 1, 1997, at which time principal and interest payments were due using a twenty-year amortization schedule. In June 1996, the Company paid the lender $8.6 million as payment in full of the lender's 25% participating interest in cash flow and appreciation in the value of certain properties. The interest rate applicable to the remaining balance of the floating rate debt was reduced from LIBOR plus 5.75% to LIBOR plus 3.75% and effective March 4, 1997, was further reduced to LIBOR plus 1.75%. The lender received additional interest based on 25% of net cash flows as specified in the loan documents, which amounted to $10,000 in 1996 and $347,000 in 1995. A participation interest of $3.2 million payable in connection with the Multi-Property Mortgage was recorded at the loan date. A corresponding amount recorded as a loan discount is being amortized over the life of the loan. Amortization of the discount of $419,000, $626,000 and $457,000 has been included as interest expense in 1997, 1996 and 1995, respectively. The other mortgages and notes payable relate primarily to 13 facilities whereby outstanding balances are collateralized by the total assets of the respective facility. The book value of such assets was $109.5 million as of December 31, 1997. Payments of principal and interest are paid monthly. Interest rates range from 6.87% to 9.0% with remaining maturities ranging from less than one to thirty-five years. These other mortgages and notes payable have total available borrowings of $73.2 million as of December 31, 1997. A subsidiary of the Company has received a commitment for a $51.0 million revolving construction credit facility. The credit facility provides for construction and interim loans to finance the development of up to seven assisted living facilities. As of December 31, 1997, the Company had closed $32.1 million of the total commitment. The Company guarantees the repayment of all amounts outstanding under this credit facility. The credit facility is for a term of five years and is secured by cross-collateralized first mortgages on the real property and liens on receivables. Advances under the credit facility bear variable interest rates based upon LIBOR plus 2.25% to LIBOR plus 2.60%. There were $4.7 million of advances outstanding under this facility as of December 31, 1997, which were included in other mortgages and notes. The Company has received a commitment for a $15.7 million revolving construction credit facility. As of December 31, 1997, the Company had closed on the total commitment amount. The credit facility provides for construction and interim loans to finance the development of up to two assisted living facilities. The Company guarantees the repayment of all amounts outstanding under this credit facility. The credit facility is for a term of three years and is secured by cross-collateralized first mortgages on the real property and improvements and first liens on all other assets of the subsidiary. Advances under the credit facility bear variable interest rates based upon LIBOR plus 1.25% to LIBOR plus 1.75%. There were no advances outstanding under this facility as of December 31, 1997. A subsidiary of the Company has obtained a syndicated revolving credit facility for $250.0 million to be used for general corporate purposes, including the continued construction and development of assisted living facilities. The Company guarantees the repayment of all amounts outstanding under this credit facility. The credit facility is for a term of three years with the right to extend, and is secured by cross-collateralized first mortgages on the real property and improvements and first liens on all assets of the subsidiary. Advances under the facility bear interest at rates from LIBOR plus 1.0% to LIBOR plus 1.5%. There were $51.0 million of advances outstanding under this credit facility as of December 31, 1997. The Company has entered into a swap transaction whereby, effective during the period June 18, 1998, through June 18, 2001, outstanding advances of up to $19.0 million under LIBOR floating rate debt bear interest at a fixed rate based on a fixed LIBOR base rate of 7.30%. The Company has entered into another swap transaction whereby, effective during the period August 20, 1997, through April 1, 2003, outstanding advances of up to $7.0 million under LIBOR floating rate debt bear interest at a fixed LIBOR base rate of 7.14%. Financials 32 17 The Company's financing documents contain financial covenants and other restrictions that (i) require the Company to meet certain financial tests and maintain certain escrows of funds, (ii) require that one of the Company's founders, Paul Klaassen and Teresa Klaassen (the "Founders"), serve as Chairman of the Board and Chief Executive Officer of the Company, (iii) require consent for changes in management or control of the Company, (iv) limit, among other things , the ability of the Company and certain of its subsidiaries to borrow additional funds, dispose of assets and engage in mergers or other business combinations, and (v) prohibit the Company from operating competing facilities within certain distances from mortgaged facilities. Principal maturities of long-term debt as of December 31, 1997, are as follows:
(in thousands) - --------------------------------------------------------------------------- 1998 $ 5,462 1999 1,788 2000 52,645 2001 84,827 2002 163,279 Thereafter 32,946 - --------------------------------------------------------------------------- $340,947 ===========================================================================
Interest paid totaled $16.9 million, $10.6 million and $10.2 million in 1997, 1996 and 1995, respectively, of which $7,200, $13,000 and $18,000 in 1997, 1996 and 1995, respectively, are related to notes payable to affiliated partnerships. Interest capitalized was $7.0 million, $2.0 million, and $167,000 in 1997, 1996 and 1995, respectively. Restricted cash and cash equivalents consist of the following:
December 31, (in thousands) 1997 1996 - --------------------------------------------------------------------------- Under the Multi-Property Mortgage, real estate tax escrows, operating and capital reserves $ 934 $ 769 Other mortgage related real estate tax escrows and resident security deposits 639 951 - --------------------------------------------------------------------------- $1,573 $1,720 ===========================================================================
7. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK On January 4, 1995, the Company issued 6,019,375 shares of Common Stock to the majority stockholders in exchange for all of the equity interests in predecessor entities (the "Sunrise Entities"). The equity interests were recorded at the historical cost of the majority stockholders (i.e., a reorganization of entities under common control). Simultaneously, the Company issued 2,444,444 shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock") at $9.00 per share net of issuance costs of $1.8 million. The Series A Preferred Stock had a 9% preferred return, compounded annually, payable, together with the stated value of $9.00 per share, upon redemption. The holders of Series A Preferred Stock were entitled to vote on all matters submitted to a vote of the stockholders of the Company and had the number of votes equal to the number of whole shares of common stock into which each share of Series A Preferred Stock was Convertible. Each Series A Preferred stockholder was obligated to purchase, upon call by the Company, its pro rata portion of 1,000,000 shares of Series B Exchangeable Preferred Stock for $10 per share, or $10,000,000. The Series B Exchangeable Preferred Stock was nonvoting and had a 9% cumulative dividend payable quarterly and no conversion rights. On January 19, 1996, the Company exercised the call. Concurrent with the January 4, 1995, transaction, the Company assumed notes payable of $2.1 million and the Sunrise Entities distributed an aggregate $9.6 million in cash to the majority stockholders, which was recognized as a distribution payable in Sunrise Entities' December 31, 1994, combined financial statements. The Company effected a three-for-one stock split of the Company's Common Stock and increased the number of authorized shares of Common Stock from 20,000,000 to 60,000,000, effective July 11, 1995. Pursuant to the authorization of the Board of Directors and stockholders, the Company effected on March 20, 1996, a one-for-three reverse stock split. All share amounts reflected herein reflect the one-for-three reverse stock split. Authorized shares of Common Stock remain 60,000,000. In May of 1996, the Company issued to one of its lenders warrants to purchase a total of 50,000 shares of common stock. The per share exercise price of the warrants is $17.00. The warrants expire March 19, 2006. On June 5, 1996, the Company successfully completed an initial public offering (the "Initial Offering") of its Common Stock. A total of 5,700,000 shares were sold by the Company in the Initial Offering at a price of $20 per share for gross proceeds of $114.0 million. The net proceeds to the Company from the Initial Offering, after deducting underwriting discount and offering expenses, were approximately $104.3 million. Concurrently, all of the 2,444,444 outstanding shares of Series A Convertible Preferred Stock of the Company were converted into an equal number of shares of Common Stock. Preferred return of $2,821,500 through the conversion date was forfeited upon conversion. Additionally, the Company redeemed all 1,000,000 shares of Series B Exchangeable Preferred Stock at a redemption price of $10 per share plus accrued dividends of $165,000. On October 30, 1996, the Company successfully completed a second public offering (the "Second Offering") of its Common Stock. A total of 4,055,241 shares were sold by the Company in the Second Offering at a price of $24 per share for gross proceeds of approximately $97.3 million. The net proceeds to the Company from the Second Offering, after deducting underwriting discount and offering expenses, were approximately $91.8 million. The Company has authorized 10,000,000 shares of $0.01 par value of preferred stock. 8. STOCK OPTION PLANS AND STOCKHOLDER RIGHTS AGREEMENT The Company has stock option plans providing for the grant of incentive and nonqualified stock options to employees, directors, consultants and advisors. These plans provide for the grant of options to purchase up to 4,748,065 shares of Common Stock. The option exercise price and vesting provisions of such options are fixed when the option is granted. The options expire ten years from the date of grant and generally vest over a four-year period. The option exercise price is not less than the fair market value of a share of Common Stock on the date the option is granted. The Company has a stock option agreement with one of its senior executives. The agreement, as amended, is effective as of January 4, 1995, and covers 450,000 shares of Common Stock that have been reserved for issuance at an exercise price of $8.00. At December 31, 1997, 90,000 options were outstanding, all of which are exercisable and will expire in seven years. Financials 33 18 A summary of the Company's stock option activity, and related information for the years ended December 31 are presented below:
1997 1996 1995 ---------------------------------------------------------------------------------------- Weighted- Weighted- Weighted- Shares Average Shares Average Shares Average Options (000) Exercise Price (000) Exercise Price (000) Exercise Price - -------------------------------------------------------------------------------------------------------------------------------- Outstanding--beginning of year 2,557 $ 17.79 952 $ 6.50 -- -- Granted 1,384 27.84 1,911 21.74 958 $ 6.50 Exercised (498) 11.16 (258) 7.64 -- -- Forfeited (287) 23.29 (48) 5.82 (6) 6.30 Expired -- -- -- -- - -------------------------------------------------------------------------------------------------------------------------------- Outstanding--end of year 3,156 $ 22.76 2,557 $17.79 952 $ 6.50 ================================================================================================================================ Options exercisable at year-end 667 527 -- Weighted-average fair value of options granted during the year $14.65 $13.36 $1.78
The following table summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable ------------------------------------------------------------------------------------- Weighted- Weighted- Weighted- Range of Number Average Average Number Average Exercise Outstanding Remaining Exercise Exercisable Exercise Prices (000) Contractual Life Price (000) Price - ---------------------------------------------------------------------------------------------------------------- $ 3.00 to 8.00 361 7.6 $ 5.92 183 $ 6.45 10.50 to 20.00 513 8.3 16.36 168 17.54 21.50 to 25.63 1,832 9.1 25.00 298 25.44 29.94 to 36.63 450 9.8 34.48 18 34.66 - ---------------------------------------------------------------------------------------------------------------- 3,156 667 ================================================================================================================
On April 25, 1996, the Board of Directors adopted the 1996 Directors' Stock Option Plan (the "Directors' Plan"). Any director who is a member of the Board of Directors but not an officer or employee of the Company or any of its subsidiaries (other than the persons elected as director representatives of the holders of Series A Preferred Stock) is eligible to receive options under the Directors' Plan. An aggregate of 100,000 shares of Common Stock are reserved for issuance to participants under the Directors' Plan. The option exercise price will not be less than the fair market value of a share of Common Stock on the date the option is granted. The period for exercising an option begins six months after the option is granted and generally ends ten years from the date the option is granted. Options granted under the Directors' Plan vest immediately. All options to be granted under the Directors' Plan will be non-incentive stock options. As of December 31, 1997, 20,000 options have been granted. Pro forma information regarding net income and earnings (loss) per share is required by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensations and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1997, 1996 and 1995: risk-free interest rate of 5.8 to 6.5 percent; dividend yield of 0 percent; expected lives of 7 to 10 years; and volatility of 36.8 percent. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
December 31, (in thousands, except per share data) 1997 1996 1995 - ---------------------------------------------------------------------------- Net Income (Loss): As reported $4,001 $(4,760) $(10,137) Pro forma $4,019 $(9,551) $(10,377) Diluted Net Income (Loss) per share: As reported $ 0.20 $ (0.51) -- Pro forma $ 0.21 $ (0.92) --
The Board of Directors has adopted a Stockholders Rights Agreement ("Rights Agreement") effective April 25, 1996. All shares of Common Stock issued by the Company between the date of adoption of the Rights Agreement and the Distribution Date (as defined below) have rights attached to them. The Rights expire ten years after adoption of the Rights Agreement. Each right, when exercisable, entitles the holder to purchase one one-thousandth of a share of Series C Junior Participating Preferred Stock at a price of $85.00 (the "Purchase Price"). Until a right is exercised, the holder thereof will have no rights as a stockholder of the Company. The rights initially attach to the Common Stock. The rights will separate from the Common Stock and a distribution of rights certificates will occur (a "Distribution Date") upon the earlier to occur of (i) 10 days following a public announcement that a person or group (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding shares of Common Stock (the "Stock Acquisition Date") or (ii) 10 business days (or such later date as the Board of Directors Financials 34 19 may determine) following the commencement of a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person of 20% or more of the outstanding shares of Common Stock. However, neither Paul J. Klaassen nor Teresa M. Klaassen (nor their affiliates associates and estates) each of whom, as of the date of adoption of the Rights Agreement, beneficially owned in excess of 20% of the outstanding shares of Common Stock will be deemed an "Acquiring Person," unless they acquire an additional 2% of the Common Stock outstanding at the time of completion of the Company's Initial Offering. In general, if a person becomes the beneficial owner of 20% or more of the then outstanding shares of Common Stock, each holder of a right may exercise the right by purchasing Common Stock having a value equal to two times the Purchase Price. If at any time following the stock acquisition date (i) the Company is acquired in a merger or other business combination transaction in which it is not the surviving corporation (other than a merger which follows an offer described in the preceding paragraph), or (ii) 50% or more of the Company's assets or earning power is sold or transferred, each holder of a right shall have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the Purchase Price. The Board of Directors of the Company generally may redeem the rights at a price of $.005 per right at any time until ten days after an acquiring person has been identified as such. 9. NET INCOME (LOSS) PER COMMON SHARE The Company adopted Statement of Financial Accounting Standards No. 128 Earnings Per Share (Statement 128). Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all applicable periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. Pursuant to the requirements of the Securities and Exchange Commission Staff Accounting Bulletin No. 83, as amended by No. 98, options to purchase Common Stock issued at prices below the initial public offering price during the twelve months immediately preceding filing of the registration statement relating to the Initial Offering, have been included in the computation of net income (loss) per share as if they were outstanding through the date of the Initial Offering (using the treasury method assuming repurchase of common stock at the estimated Initial Offering price). Other shares issuable upon the exercise of stock options or conversion of redeemable convertible preferred stock or convertible subordinated notes have been excluded from the computation because the effect of their inclusion would be anti-dilutive. Subsequent to the Company's Initial Offering, options are included under the treasury stock method to the extent they are dilutive. The following table summarizes the computation of basic and diluted net income (loss) per share amounts presented in the accompanying consolidated statements of operations:
(in thousands, except per share data) 1997 1996 - ---------------------------------------------------------------------------- Numerator Net income (loss) $ 4,001 $ (4,760) Dividend preference attributable to Series A Preferred Stock -- (858) Dividends attributable to Series B Exchangeable Preferred Stock -- (348) - ---------------------------------------------------------------------------- Numerator for basic and diluted net income (loss) per share $ 4,001 $ (5,966) ============================================================================ Denominator Denominator for basic net income (loss) per common share- weighted average shares 18,722 11,474 Effect of dilutive securities: Employee stock options issued within one year of Initial Offering -- 215 Employee stock options 1,138 -- Warrants 23 -- - ---------------------------------------------------------------------------- Denominator for diluted net income (loss) per common share-weighted average shares plus assumed conversions 19,883 11,689 ============================================================================ Basic net income (loss) per common share $ 0.21 $ (0.52) ============================================================================ Diluted net income (loss) per common share $ 0.20 $ (0.51) ============================================================================
10. ACQUISITIONS On February 5, 1997, the Company acquired a 120-unit assisted and independent living facility in Valencia, California and on August 19, 1997, the Company purchased a 76-unit assisted living facility in Napa, California. The Company had initially leased the Napa facility on April 1, 1997. On December 24, 1997, the Company acquired a 30-unit assisted and independent living facility in Dunwoody, Georgia and on December 31, 1997, the Company purchased a 29-unit assisted living facility located in Weston, Massachusetts. The combined acquisition price for all four facilities totaled $27.1 million. On May 1, 1997, the Company purchased the minority 50% interest held by an unrelated third party in a facility located in Raleigh, North Carolina. The purchase price of approximately $1.0 million was based on a buy-out schedule specified in the operating agreement of the limited liability company that holds title to the property. On October 1, 1997, the Company purchased each of the remaining 49% interests held by an unrelated third party in facilities located in Annapolis and Pikesville, Maryland for a purchase price of $3.1 million and $2.9 million, respectively. Each of these facilities is currently 100% owned by the Company. The pro forma unaudited results of operation assuming consummation of each purchase as of January 1, are as follows:
Year Ended December 31, (in thousands, except per share data) 1997 1996 - --------------------------------------------------------------------------- Operating revenue $97,190 $ 58,931 Net income (loss) $ 4,117 $ (3,587) Diluted net income (loss) per common share $ 0.21 $ (0.41)
Financials 35 20 11. COMMITMENTS The Company leases its corporate office, regional offices, and warehouse space under various leases. The corporate lease has a term of five years. It has an option to terminate after twelve months from the most recent expansion commencement, or January 1, 1997. The initial annual lease payments amount to $258,000, and the base rent is subject to annual increases based on the Consumer Price Index ("CPI") from a minimum of 2% to a maximum cap of 3% per year. The warehouse lease has a term of seven years. The initial annual base rent payments amount to $148,000, subject to annual increases of 3%. Various other leases expire during 1998 and 1999. The Company has also entered into operating leases relating to five newly developed facilities. Three facilities commenced operations during 1997 and the remaining two are currently under development. The operating lease terms are generally for fifteen years, with extension options. The Company has also entered into three ground leases related to two facilities in operation and one under construction. Lease terms range from seventy-five to ninety-nine years and are subject to annual increases based on the Consumer Price Index. Future minimum lease payments under office, equipment, ground and other operating leases as of December 31, 1997, are as follows:
(in thousands) - --------------------------------------------------------------------------- 1998 $ 4,420 1999 5,731 2000 5,671 2001 5,275 2002 4,926 - --------------------------------------------------------------------------- $26,023 ===========================================================================
The Company has entered into contracts to purchase and lease additional sites. Total contracted purchase price of these sites amounts to $42.6 million. The Company is pursuing additional development opportunities and also plans to acquire additional facilities as market conditions warrant. 12. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Prior to formation of the Company on January 4, 1995, (see Note 7) Sunrise Entities were held in partnerships, limited liability companies, and subchapter S corporations, all of which passed through tax liabilities and benefits to the owners. The transfer of assets at the formation of the Company was taxable, in part to the owners. Accordingly, the tax basis of a majority of the property and equipment of the Company exceeds its respective book basis for financial reporting purposes. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities recognized are presented below:
December 31, (in thousands) 1997 1996 - ---------------------------------------------------------------------------- Deferred tax assets: Property and equipment $ 8,636 $ 6,409 Operating loss carryforward 7,921 6,452 Deferred revenue 379 1,485 Other 1,988 1,654 - ---------------------------------------------------------------------------- Total gross deferred tax assets 18,924 16,000 Less valuation allowance (18,334) (15,236) Deferred tax liabilities (590) (764) - ---------------------------------------------------------------------------- Net deferred tax amount $ -- $ -- ============================================================================
At December 31, 1997, the Company had net operating loss carryforwards for income tax purposes of approximately $19.2 million which expire from 2010 through 2012. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company is in a cumulative pretax loss for the latest three years for financial reporting purposes. Recognition of deferred tax assets will require generation of future taxable income. There can be no assurance that the Company will generate any earnings or any specific level of earnings in future years. Therefore, the Company established a valuation allowance on deferred tax assets of approximately $18.3 million as of December 31, 1997. Significant components of the provision for income taxes are as follows:
Year Ended December 31, (in thousands) 1997 1996 1995 - ---------------------------------------------------------------------------- Current: Federal $ -- $ -- $ -- State -- -- -- - ---------------------------------------------------------------------------- Total current $ -- $ -- $ -- - ---------------------------------------------------------------------------- Deferred: Federal $(2,553) $(3,348) $(3,524) State (545) (722) (674) Increase in valuation allowance 3,098 4,070 4,198 - ---------------------------------------------------------------------------- Total deferred $ -- $ -- $ -- ============================================================================
The effective tax rate on income before income taxes varies from the statutory federal income tax rate as follows:
Year Ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------- Statutory rate 34% (34)% (34)% State taxes 7 (7) (6) Tax exempt interest (7) -- -- Stock options (96) -- -- Other 5 -- -- Valuation allowance 57 41 40 - --------------------------------------------------------------------------- 0% 0% 0% ===========================================================================
Financials 36 21 13. RELATED-PARTY TRANSACTIONS SUNRISE FOUNDATION, INC. The Company's Founders operate a school and a day care center through a not-for-profit organization, Sunrise Foundation, Inc. ("SFI"). SFI reimbursed the Company monthly for use of office facilities and support services in the amounts of $68,000 in 1997 and $60,000 for 1996 and 1995. Such amounts are included in operating revenue. GROUND LEASE The Company has a ninety-nine year ground lease with one of the Company's Founders. The ground lease expires in May 2085. The basic monthly rent is adjusted annually based on the CPI. Rent expense under this lease was $262,000, $262,000 and $255,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The Company subleases one-half of this ground lease to SFI. The sublease expires in May 2085 and requires payments equal to 50% of all payments made by the Company under the ground lease. Sublease rental income was $131,000, $132,000 and $127,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Lease expense is recorded net of the sublease income. OTHER The Founders lease certain real property located in Fairfax County, Virginia for use as a residence pursuant to a ninety-nine year ground lease with the Company dated June 7, 1994. The rent is $1.00 per month. This property is part of a parcel, which includes a facility owned and operated by the Company. A director of the Company made a capital contribution of $500,000 in exchange for a 30% membership interest in a limited liability company which operates one of the Company's facilities. On May 28, 1996, the Company purchased the 30% interest in exchange for 52,500 shares of Common Stock. Distributions made by the Company to the director in 1996 and 1995 aggregated $41,000 and $40,000, respectively. 14. PROFIT-SHARING PLAN The Company has a profit-sharing plan (the "Plan") under Internal Revenue Code Section 401(k). All employees of the Company are covered by the Plan. The Plan contains three elements--employee salary contributions, regular matching employer contributions, and special discretionary employer contributions. All full-time employees who have twelve months of employment are eligible to participate in the Plan. Deferred salary contributions are made through pre-tax salary deferrals of between 1% and 16%. The Plan provides that the employer will contribute $0.25 for every dollar the employee contributes, up to 7% of the employee's annual compensation. On April 1, 1997, the Company amended the regular matching contributions to discretionary matching contributions. Matching contributions made by the Company totaled $121,000, $88,000 and $80,000 during 1997, 1996 and 1995, respectively. No discretionary profit-sharing contributions were made during these same periods. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosures of estimated fair value were determined by management, using available market information and valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have an effect on the estimated fair value amounts. The fair values of the investment and notes receivable are discussed in Note 4. Cash equivalents, accounts receivable, accounts payable and accrued expenses, marketable securities, investments and other current assets and liabilities are carried at amounts which reasonably approximate their fair values. Fixed rate debt with an aggregate carrying value of $260.8 million (excluding a $1.4 million loan discount) has an estimated aggregate fair value of $289.7 million at December 31, 1997. Estimated fair value of fixed rate debt is based on interest rates currently available to the Company for issuance of debt with similar terms and remaining maturities. The estimated fair value of the Company's variable rate debt is estimated to be approximately equal to its carrying value of $81.6 million at December 31, 1997. The interest rate swaps related to floating rate debt (see Note 6) has an estimated fair value of $368,000 at December 31, 1997. Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 1997. Although management is not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 1997 and current estimates of fair value may differ from the amounts presented herein. 16. UNUSUAL CHARGE To avoid a possible change in the Company's ability to continue to manage two facilities resulting from the reduction in the ownership interest in the Company of Paul J. Klaassen, the Company's Chairman of the Board, Chief Executive Officer and co-founder, and Teresa M. Klaassen, the Company's Executive Vice President and co-founder following the Initial Offering, the Company made a $1,000,000 cash payment to the third-party limited partner in these two facilities in June 1996. The payment was made in exchange for the transfer to the Company by the third-party of additional 1% partnership interests in each facility with a total book value of $18,700 and the elimination of any requirement for the Founders to maintain a specified ownership interest in the Company. 17. QUARTERLY RESULT OF OPERATIONS (UNAUDITED) The following is a summary of quarterly results of operations for the fiscal quarters since the consummation of the Initial Offering on June 5, 1996:
Quarter Ended 1997 - ---------------------------------------------------------------------------- (in thousands, except per share amounts) March 31, June 30, Sept. 30, Dec. 31, - ---------------------------------------------------------------------------- Operating revenues $16,544 $18,655 $24,264 $30,421 Net income $ 134 $ 376 $ 1,318 $ 2,173 Diluted net income per share $ 0.01 $ 0.02 $ 0.07 $ 0.11 Quarter Ended 1996 - ---------------------------------------------------------------------------- (in thousands, except per share amounts) June 30, Sept. 30, Dec. 31, - ---------------------------------------------------------------------------- Operating revenues $11,262 $11,567 $14,778 Net loss $(2,379) $ (490) $ (182) Diluted net loss per share $ (0.33) $ (0.03) $ (.01)
Financials 37 22 Sunrise Assisted Living Communities [MAP] - - 66 communities currently operated - - 16 communities under construction - - 35 other communities in various stages of development (1) Assisted Living Residence (2) An Independent & Assisted Living Residence (3) Opening in 1998 (4) Managed Facility (5) Opening in 1999 CALIFORNIA Sunrise at the Chanate (1) 3250 Chanate Road Santa Rosa, California 95404 707.575.7503 Sunrise of Danville (1)(3) 1027 Diablo Road Danville, California 94526 510.831.1740 Sunrise of Fresno (1) 7444 N. Cedar Avenue Fresno, California 93720 209.325.8170 Sunrise of Mission Viejo (1)(3) 26151 Country Club Drive Mission Viejo, California 92691 714.582.2010 Sunrise of Napa (1) 3700 Valle Verde Drive Napa, California 94558 707.255.1100 Sunrise of Petaluma (1) 815 Wodd Sorrel Drive Petaluma, California 91355 707.776.2885 Sunrise at Sterling Canyon (2) 25815 McBean Parkway Valencia, California 91355 805.253.3551 Sunrise of Walnut Creek (1)(3) 2175 Ygnacio Valley Road Walnut Creek, California 94598 510.932.3500 COLORADO Sunrise at Orchard (1) 5975 South Holly Street Littleton, Colorado 80121 303.773.1609 Sunrise at Pinehurst (1)(3) 5195 West Quincy Avenue Denver, Colorado 80236 303.984.1431 FLORIDA Sunrise Atrium of Boca Raton (1) 1080 Northwest 15th Street Boca Raton, Florida 33486 407.750.7555 Sunrise at North Shore (2) A Senior Living Community 939 Beach Drive N.E. St. Petersburg, Florida 33701 813.823.1571 GEORGIA Sunrise of Augusta (1) 366 Boy Scout Road Augusta, Georgia 30909 706.738.6003 Sunrise at Brookside Glen (1) 400 Bradley Columbus, Georgia 31909 706.322.3040 Sunrise of Decatur1 920 Clairemont Avenue Decatur, Georgia 30030 404.377.6111 Sunrise of Dunwoody (1) 4821 N. Peachtree Road Dunwoody, Georgia 30338 770.452.9558 Sunrise at East Cobb (1) 1551 Johnson Ferry Road Marietta, Georgia 30062 770.509.0919 Huntcliff Summit (2) A Senior Living Facility 8592 Roswell Road Atlanta, Georgia 30350 770.552.3000 Sunrise at Huntcliff Summitt (1)(3) 8480 Roswell Road Atlanta, Georgia 30350 770.649.1499 Sunrise at Ivey Ridge (1)(3) 2950 Old Alabama Road Alpharetta, Georgia 30022 770.475.6622 ILLINOIS Sunrise of Naperville (1) 960 East Chicago Avenue Naperville, Illinois 60540 630.579.1400 Sunrise of Buffalo Grove (1) 180 West Half Day Road Buffalo Grove, Illinois 60089 847.478.8484 MARYLAND Sunrise of Annapolis (1) 800 Bestgate Road Annapolis, Maryland 21401 410.266.1400 Sunrise of Columbia (1) 6500 Freetown Road Columbia, Maryland 21094 410.531.1444 Sunrise of Frederick (1) 990 Waterford Drive Frederick, Maryland 21702 301.663.9500 Sunrise at Montgomery Village (2) 19310 Club House Road Gaithersburg, Maryland 20879 301.921.0445 Sunrise of Pikesville (1) 3800 Old Court Road Pikesville, Maryland 21208 410.602.0033 Sunrise of Rockville (1) 8 Baltimore Road Rockville, Maryland 21208 301.309.0500 Sunrise of Severna Park (2) 43 West McKinsey Road Severna Park, Maryland 22146 Assisted Living 410.544.7200 Independent Living 410.544.7200 x122 Sunrise of Towson (1) 7925 York Road Towson, Maryland 21264 410.296.8900 MASSACHUSETTS Sunrise of Cohasset (1)(3) 125 King Street Cohasset, Massachusetts 02025 781.383.6300 Sunrise at Gardner Park (1) 73 Margin Street Peabody, Massachusetts 01960 508.532.3200 John Bertram House (1) 29 Washington Street Salem, Massachusetts 01970 508.744.1002 John Bertram House of Swampscott (1) 565 Humphrey Street Swampscott, Massachusetts 01907 781.595.1991 Sunrise Of Norwood (1) 86 Saunders Road Norwood, Massachusetts 02062 617.762.1333 Ruth's House (1)(3) 29 Longmeadow Drive Longmeadow, Massachusetts 01106 413.567.6212 Springhouse Inc. (2) A Non-profit Continuing Care Retirement Community 44 Allandale Street Boston, Massachusetts 02130 617.522.0043 Sunrise of Wayland (1) 285 Commonwealth Road Wayland, Massachusetts 01778 508.652.6300 Sunrise of Weston (1) 135 N. Avenue Weston, Massachusetts 02193 781.893.2936 Financials 38 23 [MAP] MICHIGAN Sunrise of Rochester (2) University Drive Rochester, Michigan 48307 NEW JERSEY Sunrise of Fairfield (1)(3) 115 Greenbrook Blvd. Caldwell, New Jersey 07006 973.228.7890 Sunrise of Morris Plains (1) 209 Littleton Road Morris Plains, New Jersey 07950 973.538.7878 Sunrise of Mount Laurel (1) 400 Fernbrooke Lane Mount Laurel, New Jersey 08054 609.222.1213 Sunrise of Old Tappan (1) 195 Old Tappan Road Old Tappan, New Jersey 07675 201.750.1110 Sunrise of Paramus (1)(3) 571 Paramus Road Paramus, New Jersey 06745 201.493.9889 Sunrise of Wayne (1) 184 Berdan Avenue Wayne, New Jersey 07470 973.628.4900 Sunrise of Westfield (1) 240 Springfield Avenue Westfield, New Jersey 07090 908.317.3030 Sunrise at Woodbury Lake (1) 752 Cooper Street Woodbury, New Jersey 08096 609.848.8777 NEW YORK Sunrise of Glen Cove (1) 39 Forest Avenue Glen Cove, New York 11542 516.656.0575 Sunrise of Smithtown (1)(5) 30 Hauppauge, Route 111 Smithtown, New York 11787 NORTH CAROLINA Sunrise of Raleigh (1) 4801 Edwards Mill Road Raleigh, North Carolina 27612 919.787.0777 PENNSYLVANIA Sunrise of Abington (2) 1801 Susquehanna Road Abington, Pennsylvania 19001 Assisted Living 215.576.8899 Independent Living 215.576.8899 x101 Sunrise of Blue Bell (1) 795 Penllyn Pike Blue Bell, Pennsylvania 19422 215.619.2777 Sunrise at Granite Run (1) 247 N. Middletown Road Media, Pennsylvania 19063 610.566.3535 Sunrise of Haverford (1) 217 West Montgomery Avenue Haverford, Pennsylvania 19041 610.896.9777 Sunrise of Lafayette Hill (1)(3) 429 Ridge Pike Lafayette Hill, Pa 19444 610.940.3888 Mill Run (1)(4) 1201 Wilson Avenue Bristol, Pennsylvania 19007 215.788.3310 Sunrise of Paoli (1)(3) 324 Lancaster Avenue Malvern, Pennsylvania 19355 610.251.9994 SOUTH CAROLINA Sunrise of Greenville (1) 1101 Garlington Road Greenville, South Carolina 29615 864.627.8700 VIRGINIA Sunrise of Alexandria (1) 3520 Duke Street Alexandria, Virginia 22304 703.212.9192 Sunrise of Arlington (1) 2000 North Glebe Road Arlington, Virginia 22207 703.524.5300 Sunrise at Bluemont Park (2) Arlington, Virginia 22205 The James 703.536.1050 5920 Wilson Blvd. The Shenandoah 703.536.1060 5910 Wilson Blvd. The Potomac 703.536.1070 5900 Wilson Blvd. Sunrise at Countryside (2) 45800 Jona Drive Sterling, Virginia 20165 703.430.0681 Sunrise of Fairfax (1) 9207 Arlington Blvd. Fairfax, Virginia 22031 703.691.0046 Sunrise of Falls Church (1) 330 North Washington Street Falls Church, Virginia 22046 703.534.2700 Sunrise of Gunston (1) 7665 Lorton Road Lorton, Virginia 22079 703.550.2400 Sunrise at Hunter Mill (1) 2863 Hunter Mill Road Oakton, Virginia 22124 703.255.1006 Sunrise of Springfield (1) 6541 Franconia Road Springfield, Virginia 22150 703.922.6800 Sunrise of Leesburg (1) 246 West Market Street Leesburg, Virginia 20175 703.777.1971 Sunrise of Oakton (1) 10322 Blake Lane Oakton, Virginia 22124 703.255.2050 Sunrise of Warrenton (1) 194 East Lee Street Warrenton, Virginia 22186 540.349.9001 The Lincolnian (2) 4710 North Chamblis Street Alexandria, Virginia 22312 703.914.0330 WASHINGTON Sunrise of Bellevue (1)(3) 1 60th Street Bellevue, Washington 98008 425.401.5152 Sunrise of Mercer Island (1) 2959 76th Avenue SE Mercer Island, Washington 98040 206.232.6565 Sunrise of Queen Anne An Independent Living Residence 2450 Aurora Avenue Seattle, Washington 98109 206.282.5777 Financials 39 24 BOARD OF DIRECTORS PAUL J. KLAASSEN Mr. Klaassen, 40, is chairman of the board and chief executive officer. TERESA M. KLAASSEN Ms. Klaassen, 42, is executive vice president and secretary. DAVID W. FAEDER Mr. Faeder, 41, is president and chief financial officer. RONALD V. APRAHAMIAN Mr. Aprahamian, 51, is an independent investor and business consultant and a director of Metrocall, Inc., a paging company. He was chairman of the board and chief executive officer of the Compucare Company, a Reston, Va.-based health care information technology company. DAVID G. BRADLEY Mr. Bradley, 45, is chairman and owner of the Advisory Board Company, a 750-person think tank and for-profit membership association in Washington, D.C., and owner of the National Journal, a Washington, D.C.-based public policy magazine. He serves on the boards of Georgetown University, MD Anderson Cancer Center, City of Hope National Medical Center and The Wolf Trap Foundation. Mr. Bradley previously worked for the White House, the White House Conference on Children and Youth and the Wall Street firm of Cravath, Swaine & Moore. THOMAS J. DONOHUE Mr. Donohue, 59, is president and chief executive officer of the U.S. Chamber of Commerce.From 1984 to September 1997, he was president and chief executive officer of the American Trucking Association, the national trade organization of the trucking industry. He is a director of Marymount University; IPAC, an international consulting firm; Newmyer Associates, a Washington, D.C. public policy firm; and the Hudson Institute, a public policy think tank. RICHARD A. DOPPELT Mr. Doppelt, 42, is a director of Allstate Private Equity, a division of Allstate Insurance Company, Factory Card Outlet and several private companies. He was previously a corporate attorney with the law firm of Morrison & Foerster. SCOTT F. MEADOW Mr. Meadow, 44, is a general partner of Sprout Group, the venture capital affiliate of Donaldson, Lufkin, Jenrette, an investment banking firm. He previously served as a general partner with the venture capital firms of Frontenac Company and William Blair & Company. CORPORATE INFORMATION CORPORATE HEADQUARTERS Sunrise Assisted Living, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 703.273.7500 TRANSFER AGENT AND REGISTRAR First Union National Bank of North Carolina 1525 West W.T. Harris Boulevard 363 Charlotte, NC 28288 ANNUAL MEETING DATE The Company will hold its annual meeting of stockholders on Monday, April 27, 1998 at 9:00 a.m. at: Ritz-Carlton, Tysons Corner 1700 Tysons Boulevard McLean, Virginia 22102 703.506.4300 FORM 10-K AND ANNUAL REPORTS AVAILABLE Copies of the Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, are available at no charge by calling (703) 273-7500 or writing: Sunrise Assisted Living, Inc. Investor Relations 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 STOCK INFORMATION The Company's common stock is listed and traded publicly on the Nasdaq National Market under the symbol SNRZ. Trading of the common stock commenced May 31, 1996. As of March 10, 1998, there were 102 stockholders of record. No cash dividends have been paid in the past, and none are expected in the foreseeable future. QUARTERLY MARKET PRICE RANGE OF COMMON STOCK
Quarter Ended High Low - ------------------------------------------------------- June 30, 1996 $25.75 $23.00 September 30, 1996 30.00 21.50 December 31, 1996 28.75 23.00 Quarter Ended High Low - ------------------------------------------------------- March 31, 1997 $30.00 $25.75 June 30, 1997 35.63 24.00 September 30, 1997 39.50 30.00 December 31, 1997 43.25 34.75
INTERNET WEB SITE To learn more about Sunrise Assisted Living, visit the Company's site on the World Wide Web. The Sunrise address is: http://www.Sunrise-al.com Financials 40 25 [PHOTO] The depth, experience and commitment of the Sunrise management team, pictured above, helped the Company achieve record results in 1997. OFFICERS PAUL J. KLAASSEN, Founder, Chairman of the Board and Chief Executive Officer Mr. Klaassen, 40, was founding chairman of the Assisted Living Federation of America (ALFA), the largest assisted living industry trade association. He is a director of Acsys, Inc., an accounting and finance staffing firm; the Advisory Board Company, a think tank and for-profit membership association in Washington, D.C.; the U.S. Chamber of Commerce; and The National Chamber Foundation, an independent, nonprofit, public policy research organization affiliated with the U.S. Chamber of Commerce. He is also on the Board of Trustees of Marymount University and The Hudson Institute, a public policy think tank, and the Advisory Committee for the Department of Health Care Policy at Harvard University Medical School. Mr. Klaassen also serves on the editorial advisory boards of several long-term care publications. TERESA M. KLAASSEN, Founder, Executive Vice President and Secretary Ms. Klaassen, 42, was a founding member of ALFA. She is a member of the Board of Trustees of the University of Maryland School of Nursing and a member of the Washington, D.C.-based Women's Forum, and the Committee of 200. DAVID W. FAEDER, President and Chief Financial Officer Mr. Faeder, 41, was a vice president of CS First Boston Corporation from 1991 to 1993, serving in both the investment banking and fixed income departments. He also was a vice president in the investment banking division of Morgan Stanley. TIFFANY L. TOMASSO, Executive Vice President of Operations Ms. Tomasso, 35, was vice president of operations for assisted living and healthcare at Presbyterian Homes of New Jersey. She previously served in a variety of long-term care administrator positions with facilities owned by HBA Management, Inc. THOMAS B. NEWELL, Executive Vice President, General Counsel and President of Sunrise Development, Inc. Mr. Newell, 40, was a partner with the law firm of Watt, Tieder & Hoffar from 1989 to January 1996. His practice concentrated on all aspects of commercial and real estate development transactions. He represented Sunrise Assisted Living in this capacity for more than five years. BRIAN C. SWINTON, Executive Vice President Mr. Swinton, 53, was a senior vice president of Forum Group, Inc., a developer and operator of retirement and assisted living communities from 1994 to April 1996. He served as vice president of sales, marketing and product development in the senior living division of Marriott International from 1986 to 1994. OTHER SENIOR MANAGEMENT OF COMPANY OR SUBSIDIARIES WILLIAM F. CARNEY Senior Vice President of Operations/Northeast Region MARTHA L. CHILD President, Martha Child Interiors, Inc. HARLEY D. COOK Senior Vice President of Development KATHLEEN M. DEZIO Senior Vice President of Corporate Communications and Public Affairs DANIEL B. GORHAM Senior Vice President of Acquisitions LARRY E. HULSE Senior Vice President and Chief Accounting Officer JAMES S. POPE Senior Vice President of Finance RICHARD W. SLOSSON Senior Vice President of Construction Design: Financial Communications, Inc. Bethesda, MD www.fincominc.com Photography: Craig Thompson, Jerry Staley, David Galen, Jonathan Hillyer, Nicole Bengiveno, Michael Powell and Don Rank. (C)Sunrise Assisted Living, Inc., 1998 EX-21 16 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 Sunrise Assisted Living, Inc. List of Subsidiaries
Direct or Indirect Jurisdiction Subsidiaries Ownership of Incorporation - --------------- ------------------- -------------------- Sunrise Assisted Living Management, Inc. 100% Virginia Sunrise Development, Inc. 100% Virginia Sunrise Assisted Living Investments, Inc. 100% Virginia Sunrise Assisted Living Limited Partnership 100% Virginia Martha Child, Inc. 100% Virginia Sunrise Assisted Limited Partnership 100% Virginia Sunrise at Gardner Park Limited Partnership 50% Massachusetts Sunrise of Raleigh, LLC 100% North Carolina Sunrise Village House, LLC 100% Maryland Sunrise Assisted Living Limited Partnership II 100% Virginia Sunrise Assisted Living Limited Partnership III 100% Pennsylvania Sunrise Assisted Living Limited Partnership IV 100% New Jersey Sunrise Assisted Living Limited Partnership V 100% New Jersey Sunrise Assisted Living Limited Partnership VI 100% New Jersey Sunrise Assisted Living Limited Partnership VII 100% Maryland Sunrise Assisted Living Limited Partnership VIII 100% California Sunrise Assisted Living of Abington, L.P. 100% Pennsylvania Sunrise Assisted Living of Granite Run, L.P. 100% Pennsylvania Sunrise Assisted Living of Franconia, L.P. 100% Virginia Independence Home Care Agency, Inc. 100% Washington Sunrise Homes of Towson, LLC 100% Maryland Sunrise East Assisted Living Limited Partnership 100% Virginia Sunrise of Alexandria Assisted Living, L.P. 100% Virginia Sunrise of Rockville Assisted Living Limited Partnership 100% Maryland Sunrise Huntcliff Assisted Living Limited Partnership 100% Georgia Sunrise Augusta Assisted Living Limited Partnership 100% Georgia Sunrise Columbus Assisted Living Limited Partnership 100% Georgia Sunrise Greenville Assisted Living Limited Partnership 100% South Carolina Sunrise Northshore Assisted Living Limited Partnership 100% Florida Sunrise of Westfield Assisted Living, L.P. 100% Maryland NAH/ Sunrise Severna Park, LLC 50% Maryland
-28- 2 Sunrise Wayland Assisted Living Limited Partnership 100% Massachusetts Sunrise Norwood Assisted Living Limited Partnership 100% Massachusetts Sunrise Napa Assisted Living Limited Partnership 100% California Sunrise Walnut Creek Assisted Living Limited Partnership 100% California Sunrise West Assisted Living Limited Partnership 100% California Sunrise Sterling Canyon Assisted Living Limited Partnership 100% California Sunrise Decatur Assisted Living Limited Partnership 100% Georgia Sunrise Ivey Ridge Assisted Living Limited Partnership 100% Georgia Sunrise East Cobb Assisted Living Limited Partnership 100% Georgia Sunrise Glen Cove Assisted Living Limited Partnership 100% New York Sunrise Pinehurst Assisted Living Limited Partnership 100% Colorado Sunrise Holly Assisted Living Limited Partnership 100% Colorado Sunrise Cohasset Assisted Living Limited Partnership 100% Pennsylvania Sunrise Oakland Assisted Living Limited Partnership 100% California Sunrise Scotch Plains Assisted Living, L.P. 100% New Jersey Sunrise Bellevue Assisted Living Limited Partnership 100% Washington Sunrise Chanate Assisted Living, L.P. 100% California Sunrise Dunwoody Assisted Living, L.P. 100% Georgia Sunrise Fairfield Assisted Living, L.P. 100% New Jersey Sunrise Weston Assisted Living, L.P. 100% Massachusetts Sunrise Charlotte Assisted Living Limited Partnership 100% North Carolina AL Investments, L.L.C. 9% Virginia Sunrise Rochester Assisted Living Limited Partnership 100% Illinois Sunrise Smithtown Assisted Living Limited Partnership 100% New York Sunrise Mission Viejo Assisted Living Limited Partnership 100% California Sunrise Paramus Assisted Living Limited Partnership 100% New Jersey
-29- 3 Sunrise Naperville Assisted Living, L.P. 100% Illinois Sunrise Arlington Heights Assisted Living Limited Partnership 100% Illinois
-30- EX-23 17 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Sunrise Assisted Living, Inc. of our report dated March 4, 1998, included in the 1997 Annual Report to Stockholders of Sunrise Assisted Living, Inc. We also consent to the incorporation by reference in the Registration Statements pertaining to the 1995 Stock Option Plan, as amended; 1996 Directors' Stock Option Plan; and the Stock Option Agreement entered into, effective January 4, 1995, by and between Sunrise Assisted Living, Inc. and Dave Faeder, (Form S-8, No. 333-05257); Sunrise Assisted Living, Inc. 1996 Non-Incentive Stock Option Plan (Form S-8, No. 333-21817); 1997 Stock Option Plan (Form S-8, No. 333-26837); and the Registration Statement pertaining to the $150 million of 5 1/2% Convertible Subordinated Notes due 2002 (Form S-3, No. 333-34365), respectively, of our report dated March 4, 1998 with respect to the consolidated financial statements of Sunrise Assisted Living, Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1997. /s/ Ernst & Young LLP Washington, D.C. March 25, 1998 EX-27.1 18 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Company's consolidated financial statements as of and for the year ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 82,643 0 7,647 1,798 0 94,573 450,067 26,452 556,260 24,233 335,485 0 0 190 195,150 556,260 0 89,884 0 81,450 0 871 11,475 4,001 0 4,001 0 0 0 4,001 0.21 0.20
EX-27.2 19 RESTATED FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Company's unaudited consolidated financial statements, as restated, as of and for the nine months ended September 30, 1997, as of and for the six months ended June 30, 1997, and as of and for the three months ended March 31, 1997, and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS 6-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997 112,582 150,231 80,664 0 0 5,058 5,020 3,448 2,273 1,300 1,169 1,043 0 0 0 118,710 156,070 88,937 377,037 323,204 282,147 23,380 21,385 19,902 493,860 477,197 366,037 14,215 18,449 11,362 288,416 270,032 166,418 0 0 0 0 0 0 188 187 187 190,389 187,782 186,841 493,860 447,197 366,037 0 0 0 59,463 35,199 16,544 0 0 0 55,467 33,437 16,260 0 0 0 373 242 116 7,346 4,266 1,601 1,828 510 134 0 0 0 1,828 510 134 0 0 0 0 0 0 0 0 0 1,828 510 134 0.10 0.03 0.01 0.09 0.03 0.01
EX-27.3 20 RESTATED FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Company's consolidated financial statements, as restated, as of and for the year ended December 31, 1996 and the Company's unaudited financial statements, as restated, as of and for the nine months ended September 30, 1996, and as of and for the six months ended June 30, 1996, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR 9-MOS 6-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 DEC-31-1996 SEP-30-1996 JUN-30-1996 101,811 26,527 22,713 8,322 32,599 50,000 2,449 3,003 2,074 927 604 502 0 0 0 114,049 64,044 76,012 235,320 173,155 154,244 18,609 17,626 16,773 342,839 230,803 223,967 11,227 8,368 9,651 143,318 127,302 118,696 0 0 0 0 0 0 185 143 143 185,639 92,248 92,741 342,839 230,803 223,967 0 0 0 47,345 32,567 21,000 0 0 0 44,914 30,733 19,474 0 0 0 727 369 267 9,722 7,537 5,422 (4,760) (4,578) (4,088) 0 0 0 (4,760) (4,578) (4,088) 0 0 0 0 0 0 0 0 0 (4,760) (4,578) (4,088) (0.41) (0.49) (0.57) (0.51) (0.59) (0.69)
-----END PRIVACY-ENHANCED MESSAGE-----