-----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, EWRtIxCxQKJ6G5Z5ec5Cpdx0xMpVpUmUaLZpdiK9rB5MYIC0KK1cWP1CDtUBjCTo 8akuJwz+yyHcsShnNCa4mw== 0000950133-99-001073.txt : 19990402 0000950133-99-001073.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950133-99-001073 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99579920 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 FORM 10-K DATED DECEMBER 31, 1999 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, 1998 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 15, 1999 was $600,755,652. */ ---- 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 15, 1999: 19,510,726 shares. - ---------- */ 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.................................................................... 30 Item 3. Legal Proceedings............................................................. 31 Item 4. Submission of Matters to a Vote of Security Holders........................... 31 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters........ 32 Item 6. Selected Financial Data....................................................... 33 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................. 34 Item 7A. Quantitative and Qualitative Disclosure About Market Risk..................... 54 Item 8. Financial Statements and Supplementary Data................................... 55 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................................... 55 PART III Item 10. Directors and Executive Officers of the Registrant............................ 55 Item 11. Executive Compensation........................................................ 59 Item 12. Security Ownership of Certain Beneficial Owners and Management................ 63 Item 13. Certain Relationships and Related Transactions................................ 66 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............. 68 SIGNATURES.................................................................................................. 70
-2- 3 This Form 10-K contains certain forward-looking statements that involve risks and uncertainties. Sunrise's actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including development and construction risks, acquisition risks, licensing risks, business conditions, risks of downturns in economic conditions generally, satisfaction of closing conditions and availability of financing for development and acquisitions. Some of these factors are discussed elsewhere in this Form 10-K. Unless the context suggests otherwise, references in this Form 10-K to "Sunrise" mean Sunrise Assisted Living, Inc. and its subsidiaries and predecessor entities. PART I ITEM 1. BUSINESS. GENERAL Sunrise Assisted Living, Inc. is a provider of assisted living services to the elderly. Sunrise was incorporated in Delaware on December 14, 1994 to combine various activities relating to the development, ownership and operation of the Sunrise assisted living facilities held by predecessor entities. Sunrise currently operates 79 facilities in 14 states with a capacity of over 6,800 residents, including 68 facilities owned by Sunrise or in which it has ownership interests and 11 facilities managed for third parties. Sunrise had revenues of $170.7 million and net income of $22.3 million in 1998. Approximately 99% of Sunrise's revenues were derived from private pay sources. Sunrise'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, Sunrise has completed development of 40 such facilities with a resident capacity of over 3,500 and has 24 facilities currently under construction with a resident capacity of approximately 2,200. Sunrise also has entered into contracts to purchase 46 additional sites and to lease two additional sites. Sunrise is pursuing additional development opportunities and also plans to acquire additional facilities as market conditions warrant. See "--Facility Development" and "--Facility Acquisitions." On October 18, 1998, Sunrise entered into a merger agreement to acquire Karrington Health, Inc., a Columbus-based assisted living provider. The merger agreement was amended on March 4, 1999. Sunrise plans to purchase Karrington -3- 4 in a tax-free, stock-for-stock transaction valued at approximately $94.9 million. The transaction will be accounted for using the purchase method of accounting. Under the merger agreement, Karrington would become a wholly owned subsidiary of Sunrise, and each issued and outstanding Karrington common shares, other than shares for which dissenters' rights are exercised, would be automatically converted into the right to receive 0.3333 of a share of Sunrise common stock. Subject to satisfaction of the conditions set forth in the merger agreement, including approval of the merger agreement by Karrington shareholders, Sunrise expects to consummate its acquisition of Karrington during the second quarter of 1999. Karrington owns or has ownership interests in 42 facilities, has an additional eight facilities under construction and has an additional eight development sites owned or under contract. Sunrise intends to sell 17 Karrington facilities within 12 months following the merger. Most of these facilities are Karrington Cottage prototype models, which consist of 20 units or less. A subsidiary of Sunrise 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 expires in December 2000 and includes two twelve month extension options subject to the lender's approval. The credit facility 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 1.00% to LIBOR plus 1.50%. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." On June 6, 1997, Sunrise issued and sold $150.0 million aggregate principal amount of 5 1/2% convertible subordinated notes due 2002. These notes bear interest at 5 1/2% per annum payable semiannually on June 15 and December 15 of each year, and are convertible, at the option of the holder, into shares of Sunrise common stock at a conversion rate of $37.1875 per share, or 26.89 shares per $1,000 principal amount of the notes. The conversion rate is subject to customary anti-dilution adjustments. The notes rank junior in payment to substantially all indebtedness of Sunrise existing at the time of the issuance of the notes and subsequently incurred by it. The notes are redeemable at the option of Sunrise commencing June 15, 2000, at specified premiums. The holders of the notes may require Sunrise to repurchase the notes upon a change of control of Sunrise, as defined in the notes. -4- 5 On June 5, 1996, Sunrise completed its initial public offering. On October 31, 1996 Sunrise completed a follow-on public offering. Net proceeds to Sunrise from these two offerings totaled approximately $196.1 million. THE ASSISTED LIVING INDUSTRY Sunrise 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, such as bathing, eating, personal hygiene, grooming and dressing. Some 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. Unlike assisted living facilities, skilled nursing facilities provide 24 hour skilled nursing care, supervised by a registered nurse. 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 Sunrise. Sunrise believes that consumer preference and demographic trends should 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. Sunrise 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. -5- 6 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, Sunrise'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." Sunrise believes that its operating philosophy is one of its strengths. Furthermore, in implementing its philosophy, Sunrise continuously seeks to refine and improve the care and services it offers. The elements of the operating philosophy focus on: o the involvement of the resident and the resident's family in important care giving decisions; o Sunrise's proprietary training programs for its management, executive directors and care managers; o Sunrise's quality assurance programs; o the full range of assisted living services offered by Sunrise; and o the architecture and purpose-built design of Sunrise's "Victorian" model facilities. SERVICES Sunrise offers a full range of assisted living services based upon individual resident needs. Upon admission, Sunrise, 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 Sunrise, the resident and the resident's family. The range of services offered by Sunrise includes: basic care, consisting of assistance with activities of daily living and other personalized support services; plus care, consisting of more frequent and intensive assistance or increased care; and reminiscence care, consisting of care programs and services to help cognitively impaired residents, including residents with Alzheimer's disease. By offering a full range of services, Sunrise can accommodate residents with a broad range of service needs and enable residents to age in place. In addition, upon admission Sunrise generally charges each new resident a one-time community fee typically equal to two months of daily resident -6- 7 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 opened or operated by Sunrise for at least 12 months, or that have achieved occupancy percentages of 95% or above excluding temporary vacancies and resident relocations generally of between three to six months due to renovations, was approximately $86 for 1998, $78 for 1997 and $80 for 1996. BASIC CARE Sunrise's basic care program provided to all residents includes: o assistance with activities of daily living, such as eating, bathing, dressing, personal hygiene, and grooming; o three meals per day served in a common dining room, including two seating times per meal; o coordination of special diets; o 24-hour security; emergency call systems in each unit; o transportation to stores and community services; o assistance with coordination of physician care, physical therapy and other medical services; o health promotion and related programs; o personal laundry services; o housekeeping services; and o social and recreational activities. -7- 8 ASSISTED LIVING PLUS CARE Through Sunrise's plus care program, residents who require more frequent or intensive assistance or increased care or supervision are provided extra care and supervision. Sunrise charges an additional daily fee based on additional staff hours of care and services provided. The plus care program allows Sunrise, 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, 1998, approximately 26% of Sunrise's assisted living residents participated in the plus care program. MEDICATION MANAGEMENT Many of Sunrise'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. Sunrise charges an additional fixed daily fee for this service. At December 31, 1998, approximately 41% of Sunrise's assisted living residents participated in the medication management program. REMINISCENCE CARE Sunrise believes its reminiscence care program distinguishes it from many other assisted living providers who do not provide such specialized care. Sunrise's reminiscence program provides the attention, care programs and services needed to help cognitively impaired residents, including residents with Alzheimer's disease, maintain a higher quality of life. Specially trained staff provide basic care and other specifically designed care and services to cognitively impaired residents, in separate areas of facilities. Sunrise charges each cognitively impaired resident a daily fee that includes one hour of additional staff time per resident 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, 1998, approximately 23% of Sunrise's assisted living residents participated in the reminiscence program. -8- 9 THE SUNRISE "VICTORIAN" MODEL FACILITY Sunrise's signature Victorian model facility, first designed in 1985, is a freestanding, residential-style facility generally with a capacity of 65 to 110 residents. The building ranges in size from approximately 37,000 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. Sunrise has five 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. Sunrise believes its model facility meets the desire of many individuals to move to a new residence at least as comfortable as their former home. Sunrise believes that its residential environments also accomplish several other objectives, including: (1) lessening the trauma of change for elderly residents and their families; (2) achieving operational efficiencies through proven designs; (3) facilitating resident mobility and ease of access by care givers; and (4) differentiating Sunrise from other assisted living and long-term care operators. -9- 10 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, OPENED ACQUIRED SUNRISE BY OR CONSTR. MODEL RESIDENT OWNERSHIP FACILITY LOCATION SUNRISE 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 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 Frederick Frederick, MD 1992 Developed X 86 100.0 Sunrise of Countryside Sterling, VA 1992 100.0 East Building Developed(4) X 66 West Building Developed(4) X 64 Sunrise of Gunston Lorton, VA 1992 Developed(4) 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(5) 100.0 Sunrise of Towson Towson, MD 1994 Developed X 66 13.9(6) Sunrise of Gardner Park Peabody, MA 1994 Developed X 59 50.0(6)(7) Chanate Lodge Santa Rosa, CA 1996 Acquired 120 100.0 Sunrise of Raleigh Raleigh, NC 1996 Developed X 93 100.0 Huntcliff Summitt Atlanta, GA 1996 Acquired 248 100.0(8) Sunrise of Northshore St. Petersburg, FL 1996 Acquired 157 100.0(9)
-10- 11 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 90 100.0 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(10) Sunrise of Springfield Springfield, VA 1997 Developed X 95 100.0 Sunrise of Severna Park Severna Park, MD 1997 Developed X 93 50.0(3)(6) Building I Sunrise of Severna Park Severna Park, MD 1997 Developed X 66 50.0(3)(6) Building II Sunrise of Morris Plains Morris Plains, NJ 1997 Developed X 92 100.0 Sunrise of Old Tappan Old Tappan, NJ 1997 Developed X 92 100.0 Sunrise of Granite Run Granite Run, PA 1997 Developed X 104 100.0 Sunrise of Abington Abington, PA 1997 Developed X 95 100.0 Building I Sunrise of Abington Abington, PA 1997 Developed X 66 100.0 Building II Sunrise of Rockville Rockville, MD 1997 Developed X 84 100.0 Sunrise of Alexandria Alexandria, VA 1997 Developed X 91 100.0(3) Sunrise of Wayne Wayne, NJ 1997 Developed X 92 100.0 Sunrise of Norwood Norwood, MA 1997 Developed X 86 100.0 Sunrise of Wayland Wayland, MA 1997 Developed X 71 100.0 Sunrise of Westfield Westfield, NJ 1997 Developed X 92 100.0 Sunrise of East Cobb East Cobb, GA 1997 Developed X 94 100.0 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(10) Sunrise of Haverford Haverford, PA 1998 Developed X 72 100.0
-11- 12 Sunrise of Decatur Decatur, GA 1998 Developed X 92 100.0 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 102 100.0 Sunrise of Cohasset Cohasset, MA 1998 Developed X 74 100.0 Sunrise of Holly Orchard Denver, CO 1998 Developed X 94 100.0 Sunrise of Pinehurst Denver, CO 1998 Developed X 102 100.0 Sunrise of Huntcliff II Atlanta, GA 1998 Developed X 91 100.0 (Assisted Living Expansion) Sunrise of Danville Danville, CA 1998 Developed X 86 100.0 Sunrise of Lafayette Hill Lafayette Hill, PA 1998 Developed X 84 100.0 Sunrise of Bellvue Bellvue, WA 1998 Developed X 84 100.0 Sunrise of Paramus Paramus, NJ 1998 Developed X 76 100.0 Sunrise of West Essex Fairfield, NJ 1998 Developed X 94 100.0 Sunrise of Paoli Malvern, PA 1998 Developed X 98 100.0 Sunrise of Mission Viejo Mission Viejo, CA 1998 Developed X 102 9.0 Sunrise of Oakland Hills Oakland, CA 1998 Developed X 102 100.0 Sunrise of Rochester Detroit, MI 1999 Developed X 101 9.0 Sunrise of East Brunswick East Brunswick, NJ 1999 Developed X 94 9.0 -------- 5,812 -------- Sunrise of Smithtown Long Island, NY 1st half Construction X 91 100.0 1999 Sunrise of Buffalo Grove Buffalo Grove, IL 1st half Construction X 94 100.0 1999 Sunrise at La Costa Carlsbad, CA 1st half Construction X 102 9.0 1999 Sunrise of Naperville Naperville, IL 1st half Construction X 91 9.0 1999 Sunrise of Richmond Richmond, VA 1st half Construction X 84 9.0 1999 Sunrise of Northville Northville, MI 2nd half Construction X 84 100.0 1999
-12- 13 Sunrise at Canyon Crest Riverside, CA 2nd half Construction X 77 100.0 1999 Sunrise of San Mateo San Mateo, CA 2nd half Construction X 76 100.0 1999 Sunrise of Mt. Vernon Mt. Vernon, NY 2nd half Construction X 102 100.0 1999 Sunrise of Flossmoor Flossmoor, IL 2nd half Construction X 74 100.0 1999 Sunrise of Bloomingdale Bloomingdale, IL 2nd half Construction X 98 100.0 1999 Sunrise of Willowbrook Willowbrook, IL 2nd half Construction X 91 100.0 1999 Sunrise of Wilton Wilton, CT 2nd half Construction X 78 100.0 1999 Sunrise of Stamford Stamford, CT 2nd half Construction X 98 9.0 1999 Sunrise of Lynbrook North Lynbrook, NY 2nd half Construction X 98 9.0 1999 Sunrise of Frognal House Sidcup, London 2nd half Construction X 140 14.5 1999 Sunrise of New City New City, NY 2nd half Construction X 91 100.0 1999 Sunrise of Wall Wall Township, NJ 1st half Construction X 74 100.0 2000 Sunrise of Exton Exton, PA 1st half Construction X 76 100.0 2000 Sunrise of Westtown Westtown, PA 1st half Construction X 94 100.0 2000 Sunrise of Glen Ellyn Glen Ellyn, IL 1st half Construction X 102 100.0 2000 Sunrise of Sheepshead Bay Sheepshead Bay, NY 1st half Construction X 125 70.0 2000 Sunrise of Hermosa Beach Hermosa Beach, CA 1st half Construction X 96 100.0 2000 Sunrise of Ann Arbor Ann Arbor, MI 1st half Construction X 84 9.0 2000 Sunrise of Farmington Hills Farmington Hills, Zoned X 91 100.0 MI Sunrise of Woodcliff Lake Woodcliff Lake, NJ Zoned X 102 100.0 Sunrise of Pittsburgh Pittsburgh, PA Zoned X 91 100.0 Sunrise of Randolph Randolph, NJ Zoned X 88 100.0 Sunrise of West Bloomfield West Bloomfield, Zoned X 60 100.0 MI
-13- 14 Sunrise of Sunnyvale Sunnyvale, CA Zoned X 102 100.0 Sunrise of Cherry Creek Denver, CO Zoned X 95 100.0 Sunrise of Colorado Springs Colorado Springs, Zoned X 60 100.0 CO ------------ 2,909(11) Total 8,721 ============
- ---------- (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 $86.2 million mortgage loan. Nineteen other wholly owned facilities (Springfield, Morris Plains, Old Tappan, Granite Run, Abington (two facilities), Wayne, Westfield, 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. Ten other owned facilities are subject to one or more mortgages or deeds of trust that mature between 2001 and 2033 and bear interest at rates ranging from 6.87% to 7.90% annually as of December 31, 1998. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and note 8 of notes to consolidated financial statements. All facilities that are wholly owned by Sunrise are consolidated in the consolidated financial statements. The Gardner Park, Severna Park and Sheepshead Bay facilities are held by limited liability companies or limited partnerships in which Sunrise holds the ownership interests indicated in the table. Sunrise is the general partner or managing member of such entities and through the partnership or operating agreements and the management agreements for the facilities Sunrise controls their ordinary course business operations. Therefore, the Gardner Park, Severna Park and Sheepshead Bay facilities are also consolidated in the consolidated financial statements. The ordinary course business operations of the Towson, Mission Viejo, Rochester and East Brunswick facilities are not currently controlled by Sunrise 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. -14- 15 (3) Subject to long-term ground lease. (4) These facilities were initially developed by Sunrise for third parties and were subsequently acquired by Sunrise in 1992. (5) This facility is licensed for 40 assisted living residents. The remainder of the resident capacity is for independent living residents. (6) The remaining ownership interests are owned by third parties. Sunrise manages each of these facilities. (7) A current officer and a former employee of Sunrise 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. (8) Excludes 11 units owned by the occupants of the units. The occupants can require Sunrise to repurchase the units for their original purchase prices, aggregating approximately $1.6 million, under specified circumstances. Sunrise has a right to purchase the units at fair market value upon the occurrence of specified events and has a right of first refusal on sales of the units. (9) This facility is licensed for 26 skilled nursing residents. The remainder of the resident capacity is for assisted living residents. (10) 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. (11) There can be no assurance that construction delays will not be experienced. FACILITY DEVELOPMENT Sunrise targets sites for development located in major metropolitan areas and their surrounding suburban communities. In evaluating a prospective market, Sunrise considers a number of factors, including: o population; o income and age demographics; -15- 16 o target site visibility; o probability of obtaining zoning approvals; o estimated level of market demand; and o the ability to maximize management resources in a specific market by clustering its development and operating activities. Sunrise continues to develop its Victorian model facilities in major metropolitan markets. Sunrise'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, Sunrise has completed development of 40 such new model facilities with a resident capacity of more than 3,500 and has 24 facilities under construction with resident capacity of more than 2,200. Sunrise has also entered into contracts to purchase 46 additional sites and to lease two additional sites. These sites are located in Pennsylvania, Massachusetts, New Jersey, Connecticut, New York, Illinois, California, Missouri, Michigan and Virginia. Sunrise is pursuing additional development opportunities as market conditions warrant. Sunrise 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 Sunrise to control development costs, maintain facility consistency and improve operational efficiency. Use of the Sunrise model also creates "brand" awareness in Sunrise's markets. The primary milestones in the development process are: o site selection and contract signing; o feasibility; o zoning, site plan approval and building permits; and o completion of construction. Once a market has been identified, site selection and contract signing typically take approximately three to nine 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 Sunrise's selection of sites in mature communities which usually -16- 17 require site rezoning. Facility construction normally takes 10 to 12 months. Sunrise 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 $13.0 million. The cost of any particular facility may vary considerably based on a variety of site-specific factors. Sunrise's development activities are coordinated by its experienced 32-person development staff, which has extensive real estate acquisition, engineering, general construction and project management experience. Architectural design and hands-on construction functions are contracted to experienced outside architects and contractors. The ability of Sunrise to achieve its development plans will depend upon a variety of factors, many of which will be outside the control of Sunrise. These factors include: o obtaining zoning, land use, building, occupancy, licensing and other required governmental permits for the construction of new facilities without experiencing significant delays; o completing construction of new facilities on budget and on schedule; o the ability to work with third-party contractors and subcontractors who construct the facilities; o shortages of labor or materials that could delay projects or make them more expensive; o adverse weather conditions that could delay projects; o finding suitable sites for future development activities at acceptable prices; and o addressing changes in laws and regulations or how existing laws and regulations are applied. -17- 18 Sunrise cannot assure that it will not experience delays in completing facilities under construction or in development or that it will be able to identify suitable sites at acceptable prices for future development activities. If it fails to achieve its development plans, its growth could slow, which would adversely impact its revenues and results of operations. FACILITY ACQUISITIONS Sunrise's previously announced growth plan included the acquisition of up to 15 facilities by the end of 1999, of which nine have been acquired excluding the announced proposed acquisition of Karrington. See "Item 7 Management Discussion and Analysis of Financial Condition and Results of Operation." In evaluating possible acquisitions, Sunrise considers various factors, including: o location, construction quality, condition and design of the facility; o current and projected facility cash flow; o the ability to increase revenue, occupancy and cash flow by providing a full range of assisted living services; o costs of facility repositioning, including any renovations; and o the extent to which the acquisition will complement Sunrise's development plans. There can be no assurance that Sunrise's acquisition of Karrington or additional assisted living facilities will be completed. The success of Sunrise's acquisitions will be determined by numerous factors, including Sunrise'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 Sunrise to integrate or operate acquired facilities. Any failure to do so could have a material adverse effect on Sunrise's business, financial condition, revenues and earnings. NEED FOR ADDITIONAL FINANCING AND MANAGEMENT OF GROWTH To achieve its growth objectives, Sunrise 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." Sunrise expects that the number of owned and operated facilities will increase substantially as it pursues its development and acquisition -18- 19 programs for new assisted living facilities. This rapid growth will place significant demands on Sunrise's management resources. Sunrise'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 Sunrise is unable to manage its growth effectively, its business, revenues, expenses and operating results could be adversely affected. MANAGED FACILITIES Sunrise also manages for third-party owners 11 operating facilities and two facilities under construction with total resident capacity of 1,208, including four in Massachusetts, two in New Jersey, one in Pennsylvania, two in Maryland, one in North Carolina, one in Georgia and two in Virginia. The facilities in New Jersey, Maryland and North Carolina are Sunrise model facilities. The management contract expiration dates range from April 1999 to November 2008. Sunrise owns $5.9 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. Under the management agreement for one of the New Jersey facilities, Sunrise 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. Sunrise does not provide financial or accounting services to one of the Virginia facilities. Sunrise 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. Sunrise received management fee revenues of approximately $0.4 million in 1998 for these two facilities. Sunrise is entitled to receive a deferred management fee of approximately $0.9 million as of December 31, 1998, upon expiration of the management agreement or if the owners terminate the management agreement or sell the properties. Sunrise does not provide financial or accounting services for these facilities. -19- 20 COMPANY OPERATIONS OPERATING STRUCTURE Sunrise 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 Sunrise's operating philosophy. Headquarters staff members in Fairfax, Virginia are responsible for: the establishment of Company-wide policies and procedures relating to resident care, facility design and facility operations; billing and collection; accounts payable; finance and accounting; management of Sunrise's development and acquisition activities; development of employee training materials and programs; and providing overall strategic direction to Sunrise. Regional staff are responsible for: overseeing all aspects of facility-based operations, including marketing and sales activities; resident care; the hiring of facility executives, care managers and other facility-based personnel; compliance with applicable local and state regulatory requirements; and implementation of Sunrise's development and acquisition plans within a given geographic region. Sunrise is currently organized into eight regions. Each of the regions is headed by a vice president of operations with extensive experience in the senior housing, health care and assisted living industries. The regional staff typically consists of a marketing specialist, a resident care specialist, a human resources specialist and a dining services specialist. Sunrise expects that all regions will create similar staff positions as the number of facilities in those regions increases. FACILITY STAFFING Each of Sunrise's facilities has an executive director responsible for the day-to-day operations of the facility, including quality of care, social services and financial performance. Each executive director receives specialized training from Sunrise. Sunrise believes that the quality and size of its facilities, coupled with its competitive compensation philosophy, have enabled it to attract high-quality, professional executive directors. The executive director is supported by (a) the department heads, who oversee the care and service of the facility's assisted living neighborhood and Alzheimer neighborhood, (b) a nurse, who oversees the care managers and is directly responsible for day-to-day care of the residents and (c) the director of community relations, who oversees marketing and outreach programs. Other key positions include the dining services coordinator, the program coordinator and, in some homes, the director of Alzheimer's care. -20- 21 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. Sunrise 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. STAFF EDUCATION AND TRAINING Sunrise has attracted, and continues to seek, highly dedicated, experienced personnel. Sunrise has developed a formal training program, the "five star training program", which focuses on providing every employee with the appropriate skills that are required to ensure the highest quality of resident care. All managers and direct care staff must complete a comprehensive orientation and the core curriculum, which consists of basic resident care procedures, Alzheimer's care, communication systems, and activities and dining programming. For the supervisors of direct care staff, additional program levels provide education in medical awareness and management skills. For department managers, Sunrise has developed the "mentor program," which partners each new manager with an experienced, successful manager. Under this program, new managers typically receive one-week of intensive on-the-job training using a detailed checklist which outlines every aspect of the position. Thereafter, the mentor maintains regular contact with the new manager to provide on-going support and guidance. Region-based classroom training also is provided monthly for department managers in specialized areas, including Sunrise's -21- 22 "reminiscence program," the social and volunteer programs, human resources, staffing and scheduling and medication management. Sunrise also has developed the "executive director development program," which offers a structured curriculum for internal department managers who have been selected based on their potential to become executive directors. Sunrise also has created the "executive director in training program" to increase the number of Sunrise-trained professionals who will be available to manage acquired and newly developed communities. This program recruits successful, strong leaders from outside Sunrise and provides them with an accelerated training curriculum to prepare them to be Sunrise leaders. QUALITY IMPROVEMENT PROCESSES Sunrise coordinates quality assurance programs at each of its facilities through its corporate headquarters staff and through its regional offices. Sunrise'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 Sunrise. In addition to ongoing training and performance reviews of care managers and other employees, Sunrise's quality control measures include: Family and Resident Feedback. Sunrise 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 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. -22- 23 Third-Party Reviews. To further evaluate customer service, Sunrise engages an independent service evaluation company to "mystery shop" Sunrise's facilities. These professionals assess Sunrise'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 Sunrise's marketing strategy is intended to create awareness of Sunrise 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 Sunrise throughout its markets and monitors the success of Sunrise'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 with prospective referral sources, Sunrise 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 Sunrise serves the vast majority of a resident's needs with its own staff, some 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, Sunrise entered into an affiliation agreement with Jefferson Health System, an integrated health care system located in Philadelphia, Pennsylvania. Under this agreement, Jefferson Health System provides residents of Sunrise facilities located in the Philadelphia metropolitan region, on a preferred but non-exclusive basis, with access to various health care services offered by Jefferson Health System. These health care services may include hospital services, physician services, rehabilitation services, home health services and products and mental health services. -23- 24 In mid-1997, Sunrise again began seeking to capitalize on its brand awareness by accepting third-party management and development contracts. Sunrise has renewed efforts to seek additional third-party management and development opportunities after a two year period during which Sunrise focused on building its infrastructure. In September 1998, Sunrise entered into an agreement with Inova Health System Services, Inc., the largest not-for-profit integrated health care system in the Washington, D.C. metropolitan area, to manage Inova's two assisted living communities and provide development and management services for an additional four to eight assisted living communities with a total resident capacity of up to 800. COMPETITION The long-term care industry is highly competitive and the assisted living segment is becoming increasingly competitive. Sunrise competes with numerous other companies that provide similar long-term care alternatives, such as home health care agencies, facility-based service programs, retirement communities, convalescent centers and other assisted living providers. Although some competitors are significantly larger, there are no one or more dominant companies in the assisted living segment. In a recent industry report, it is estimated that there are approximately 770,000 total assisted living beds currently available, and that the 25 largest owners of assisted living properties, which includes Sunrise, has 180,446 or only 23% of those currently available. The largest individual owner has only 3% of the total assisted living beds currently available. In general, regulatory and other barriers to competitive entry in the assisted living industry are not substantial. In pursuing its growth strategies, Sunrise has experienced and expects to continue to experience increased competition in their efforts to develop and acquire assisted living facilities. Some of the present and potential competitors of Sunrise are significantly larger and have, or may obtain, greater financial resources than Sunrise. Consequently, Sunrise cannot assure that it will not encounter increased competition that could limit its ability to attract residents or expand its business, which could have a material adverse effect on its revenues and earnings. -24- 25 OVERBUILDING IN THE ASSISTED LIVING INDUSTRY Sunrise believes that many assisted living markets have become or are on the verge of becoming overbuilt. As described above, regulation and other barriers to entry into the assisted living industry are not substantial. In addition, because the segment of the population that can afford to pay Sunrise's daily resident fee is finite, the development of new assisted living facilities could outpace demand. Overbuilding in the assisted living industry, or in particular market areas, could, therefore, cause Sunrise to experience decreased occupancy, depressed margins or lower operating results. Sunrise believes that each local market is different and Sunrise is and will continue to react in a variety of ways, including selective price discounting, to the specific competitive environment that exists in each market. STAFFING AND LABOR COSTS Sunrise competes with various health care services providers, including other elderly care providers, in attracting and retaining qualified and skilled personnel. A shortage of nurses or other trained personnel or general inflationary pressures may require that Sunrise enhance its pay and benefits package to compete effectively for such personnel. If there is an increase in these costs or if Sunrise fails to attract and retain qualified and skilled personnel, the business and financial results of Sunrise could be adversely affected. GOVERNMENT REGULATION Assisted living 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: o personnel education, training, and records; o facility services, including: -- administration of medication, -- assistance with self-administration of medication and -- limited nursing services; o monitoring of resident wellness; o physical plant specifications; -25- 26 o furnishing of resident units; o food and housekeeping services; o emergency evacuation plans; and o resident rights and responsibilities, including in some states the right to receive health care services from providers of a resident's choice. Some facilities are also licensed to provide independent living services, which generally involve lower levels of resident assistance. In several of the states in which Sunrise 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 licensing 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, Sunrise receives deficiency reports, which it reviews 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. This action may include imposition of fines, imposition of a provisional or conditional license or suspension or revocation of a license or other sanctions. If Sunrise fails to comply with applicable requirements, its business and revenues could be materially and adversely affected. To date, none of the deficiency reports received by Sunrise has resulted in a suspension, fine or other disposition that has had a material adverse effect on its revenues. Regulation of the assisted living industry is evolving. Sunrise's operations could suffer if future regulatory developments, such as mandatory increases in scope and quality of care given to residents, are enacted and licensing and certification standards are revised. For example, if more states seek and obtain Medicare waivers to authorize reimbursement for assisted living, the prospect of some federal regulation may become more likely. If the regulatory requirements increase, the costs of complying with those requirements could increase as well. -26- 27 Sunrise also is subject to federal and state anti-remuneration laws, such as the federal health care program anti-kickback law which governs various types of financial arrangements among health care providers and others who may be in a position to refer or recommend patients to these providers. This law prohibits direct and indirect payments that are intended to induce the referral of patients to, the arranging of services by, or the recommending of, a particular provider of health care items or services. The federal health care program anti-kickback law has been interpreted to apply to some contractual relationships between health care providers and sources of patient referral. Similar state laws vary from state to state, are sometimes vague and have rarely been interpreted by courts or regulatory agencies. Violation of these laws can result in loss of licensure, civil or criminal penalties and exclusion of health care providers or suppliers from furnishing covered items or services to beneficiaries of the federal health care program. Sunrise cannot be sure that these laws will be interpreted consistently with its practices. 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 costs of removal or remediation of hazardous or toxic substances, including asbestos-containing materials, that could be located on, in or under a property. These laws and regulations often impose liability without regard to whether or not the owner or operator knew of, or was responsible for, the presence or release of the hazardous or toxic substances. The costs of any required remediation or removal of these substances could be substantial. In addition, the liability of an owner or operator is generally not limited and could exceed the property's value and the aggregate assets of the owner or operator. An owner or operator or an entity that arranges for the disposal of hazardous or toxic substances at a disposal site also may be liable for the costs of any required remediation or removal of hazardous or toxic substances. Sunrise engages consultants to conduct Phase I environmental studies of development sites that are placed under contract. If the Phase I study indicates the existence hazardous or toxic substances on the property, a Phase II study is requested and performed. The Phase I and Phase II reports, as applicable, may not reveal all environmental liabilities. There could be, therefore, material environmental liabilities of which Sunrise is unaware. In connection with the ownership or operation of its properties, Sunrise could be liable for the costs of remediation or removal of hazardous or toxic substances. Sunrise also could be liable for other costs, including governmental fines and damages for injuries to -27- 28 persons or properties. As a result, the presence, with or without Sunrise's knowledge, of hazardous or toxic substances at any property owned or operated by it, or acquired or operated by it in the future, could have an adverse effect on Sunrise's financial condition or earnings. MEDICAL WASTE Some of Sunrise's facilities generate infectious waste due to the illness or physical condition of the residents, including, for example, blood soaked bandages, swabs and other medical waste products and incontinence products of those residents diagnosed with an infectious disease. The management of infectious medical waste, including handling, storage, transportation, treatment and disposal, is subject to regulation under various laws, including federal and state liability laws. These environmental laws set forth the management requirements, as well as permit, record keeping, notice and reporting obligations. Each of Sunrise's facilities has an agreement with a waste management company for the proper disposal of all infectious medical waste. Any finding that Sunrise is not in compliance with these environmental laws could adversely affect its business operations and financial condition. Because these environmental laws are amended from time to time, Sunrise cannot predict when and to what extent liability may arise. In addition, because these environmental laws vary from state to state, expansion of Sunrise's operations to states where Sunrise does not currently operate may subject Sunrise to additional restrictions on the manner in which it operates its facilities. -28- 29 LIABILITY AND INSURANCE The assisted living business entails an inherent risk of liability. In recent years, Sunrise, as well as other participants in our industry, 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. Sunrise maintains insurance policies in amounts and with the coverage and deductibles it believes are adequate, based on the nature and risks of our business, historical experience and industry standards. The insurance currently maintained by Sunrise has the following coverage limits:
TYPE OF COVERAGE COVERAGE LIMITS EXAMPLES OF INCIDENTS COVERED ---------------- --------------- ----------------------------- o General liability o $1,000,000 per occurrence/ o premises claims by third parties, per facility, with additional not including residents specific limitations for particular categories of o personal injury and advertising claims that fall under the injury general liability category o independent contractors o fire damage to other rented locations o Medical professional o $1,000,000 per occurrence/ o negligence claims by residents liability $3,000,000 total for all claims per policy year; coverage limits do not overlap with general liability coverage o Umbrella excess liability o $25,000,000 per policy year; o same as under general liability coverage is in excess of the and medical liability professional general liability and medical liability coverages liability limits
-29- 30 o Non-medical professional o $5,000,000 per wrongful act/ o claims against Sunrise's development liability $7,000,000 total; coverage or management company subsidiaries limits do not overlap with by third parties for whom Sunrise general liability, medical develops or manages properties liability or umbrella excess liability limits
Sunrise cannot be sure that claims will not arise that are in excess of its coverage or not covered by its policies. If a successful claim against Sunrise is made and it is not covered by insurance or exceeds the policy limits, Sunrise's financial condition and results of operations could be materially and adversely affected. Claims against Sunrise, regardless of their merit or eventual outcome, could also have a material adverse effect on its ability to attract residents or expand its business and could require Sunrise's management to devote time to matters unrelated to the operation of its business. Sunrise also has to renew its policies every year and it cannot be sure that it will be able to continue to obtain liability insurance coverage on acceptable terms. EMPLOYEES At December 31, 1998, Sunrise had 5,190 employees, including 2,948 full-time employees, of which 178 were employed at Sunrise's headquarters. Sunrise believes employee relations are good. ITEM 2. PROPERTIES. Sunrise leases its corporate office, regional operations and development 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 $311,000, 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 amounts to $148,000, subject to annual increases of 3%. Various other leases expire during 1999 and 2003. -30- 31 During 1998, Sunrise entered into an agreement to lease new office space for its corporate headquarters. The lease has a term of twelve years beginning when the building is completed. The lease has an initial annual base rent of $1.2 million. The base rent escalates approximately 2.5% per year in accordance with a base rent schedule. Sunrise has also entered into operating leases for six facilities and three long-term ground leases related to other facilities. The operating lease terms vary from 15 years, with two ten-year extension options, to 50 years and ground leases have terms of 75 to 99 years. For information regarding facilities owned by Sunrise or in which it holds interests, see " Item 1. Business - Owned Facilities" and "Facility Development." In December 1998, a subsidiary of Sunrise entered into a three year operating lease for six assisted living facilities. Sunrise has guaranteed the payment of all obligations of its subsidiary under the lease. There are no extension options. However, Sunrise has the option, 120 days prior to the expiration date of the lease, of either purchasing or selling all the leased properties. If Sunrise exercises its option to sell the properties and the proceeds from the sale exceed the obligation under the lease, Sunrise is entitled to the to excess. However, if the proceeds from the sale are less than the obligation under the lease, Sunrise is obligated to fund the difference. Sunrise is responsible for the payment of real estate taxes, insurance and other operating expenses. The lease requires Sunrise to maintain specified coverage ratios, liquidity and net worth. These six leased properties are currently subleased to Karrington under operating leases which expire in May 2010. ITEM 3. LEGAL PROCEEDINGS. Sunrise is involved in various lawsuits and claims arising in the normal course of business. In the opinion of management of Sunrise, although the outcomes of these suits and claims are uncertain, in the aggregate they should not have a material adverse effect on Sunrise's business, financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. -31- 32 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Sunrise's common stock is traded on the Nasdaq National Market under the symbol "SNRZ." Trading of the common stock commenced May 31, 1996. As of March 15, 1999, there were 174 stockholders of record. No cash dividends have been paid in the past, and none are expected to be paid in the foreseeable future. QUARTERLY MARKET PRICE RANGE OF COMMON STOCK
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 Quarter Ended High Low - ----------------------------------------------------------------- March 31, 1998 $ 45.13 $ 38.50 June 30, 1998 46.50 27.75 September 30, 1998 35.75 22.50 December 31, 1998 53.13 29.00
-32- 33 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with Sunrise's Consolidated Financial Statements and notes thereto included elsewhere herein.
December 31, -------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Operating revenue $170,712 $89,884 $47,345 $37,258 $33,969 Facility operating expenses 88,834 53,286 28,274 20,882 17,983 Facility development and pre-rental expenses 5,197 5,586 2,420 1,172 263 General and administrative expenses 12,726 10,454 10,042 6,875 4,183 Depreciation and amortization expenses 21,650 10,592 4,048 3,009 3,160 Interest expense, net 15,430 4,613 6,425 15,327 8,023 Income (loss) before extraordinary item 22,312 4,001 (4,760) (10,137) 562 Extraordinary item - - - - 850 Net income (loss) 22,312 4,001 (4,760) (10,137) 1,412 Net income (loss) per common share: Basic 1.16 0.21 (0.52) Diluted 1.11 0.20 (0.52) BALANCE SHEET DATA (at end of period): Cash and cash equivalents $54,197 $82,643 $101,811 $6,253 $8,089 Working capital (deficit) 69,573 70,340 102,822 2,051 (7,305) Total assets 683,411 556,260 342,839 123,321 109,003 Total debt 428,326 340,987 145,511 122,289 110,029 Series A convertible preferred stock - - - 23,964 - Common stockholders' equity (deficit) 227,655 195,340 185,824 (31,774) (16,391) OPERATING AND OTHER DATA: Earnings before interest, taxes, depreciation and amortization (1) $59,392 $19,206 $5,713 $8,199 $11,745 Net cash provided by operating activities 19,224 8,264 758 944 2,736 Net cash used in investing activities (138,557) (221,846) (112,495) (17,907) (17,037) Net cash provided by financing activities 90,887 194,414 207,295 15,127 19,122 Facilities (at end of period): Owned 66 54 30 20 19 Managed 11 7 5 8 9 -------------------------------------------------------------------------------------------------------------------------------- Total 77 61 35 28 28 -------------------------------------------------------------------------------------------------------------------------------- Resident capacity (at end of period): Owned 5,617 4,632 2,584 1,557 1,473 Managed 1,010 683 528 712 772 -------------------------------------------------------------------------------------------------------------------------------- Total 6,627 5,315 3,112 2,269 2,245 -------------------------------------------------------------------------------------------------------------------------------- Occupancy rate (2) 94% 94% 94% 92% 95% --------------------------------------------------------------------------------------------------------------------------------
(1) Earnings before interest, taxes, depreciation and amortization is presented because Sunrise believes this data is used by some investors to evaluate Sunrise's ability to meet debt service requirements. Sunrise considers earnings before interest, taxes, depreciation and amortization to be an indicative measure of its operating performance due to the significance of Sunrise's long-lived assets and because this data can be used to measure Sunrise's ability to service debt, fund capital expenditures and expand its business. However, this data should not be considered as an alternative to net income, operating profit, cash flows from operations or any other operating or liquidity performance measure prescribed by generally accepted accounting principles. In addition, earnings before interest, taxes, depreciation and amortization as calculated by Sunrise may not be comparable to similarly titled measures reported by other companies. Interest expense, taxes, depreciation and amortization, which are not reflected in the presentation of earnings before interest, taxes, depreciation and amortization, have been, and will be incurred by Sunrise. Investors are cautioned that these excluded items are significant components in understanding and assessing Sunrise's financial performance. (2) Based on monthly occupancy for owned facilities, opened or operated for at least 12 months, or that have achieved occupancy percentages of 95% or above. The occupancy rate excludes facilities with temporary vacancies and resident relocations generally of between three to six months due to renovations. - 33 - 34 ITEM 7. 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, and the other financial information appearing elsewhere in this Form 10-K. This Management's Discussion and Analysis contains certain forward-looking statements that involve risks and uncertainties. Sunrise's actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including development and construction risks, acquisition risks, licensing risks, business conditions, risks of downturns in economic conditions generally, satisfaction of closing conditions and availability of financing for development and acquisitions. Some of these factors are discussed elsewhere in this Form 10-K. Unless the context suggests otherwise, references to "Sunrise" mean Sunrise Assisted Living, Inc. and its subsidiaries. OVERVIEW Sunrise is a provider of assisted living services for seniors. Sunrise currently operates 79 facilities in 14 states with a capacity of approximately 6,800 residents, including 68 facilities owned by Sunrise or in which it has ownership interests and 11 facilities managed for third parties. Sunrise also operates two skilled nursing facilities owned by a third party. Sunrise provides assistance with the activities of daily living and other personalized support services 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. Sunrise also provides additional specialized care and services to residents with certain low acuity medical needs and residents with Alzheimer's disease or other forms of dementia. By offering this full range of services, Sunrise is able to accommodate the changing needs of residents as they age and develop further physical or cognitive frailties. Sunrise has continued to experience growth in operations over the 12 months ended December 31, 1998. During this period, Sunrise began operating an additional 18 facilities owned by it or in which it has an ownership interest and managing an additional four facilities for independent third parties. Sunrise also entered into several new development contracts during 1998. As a result, operating revenue increased substantially to $170.7 million for 1998 from $89.9 million for 1997. Net income increased by $18.3 million to $22.3 million for 1998, or $1.11 per share (diluted), from $4.0 million for 1997, or $0.20 per share (diluted). The increase in net income between 1998 and 1997 was attributable to the additional facilities operated in 1998, increases in development contracts with independent -34- 35 third parties and Sunrise's ability to control operating expenses during the expansion of operations. Operating expenses decreased as a percentage of operating revenue by 13.0% between the years ended December 31, 1998 and 1997. See "Results of Operations" for further discussion. Sunrise's growth objectives include developing new Sunrise model assisted living facilities and selectively acquiring existing facilities. Sunrise currently has 24 facilities under construction with a resident capacity of approximately 2,200. Sunrise also has entered into contracts to purchase 46 additional development sites, eight of which are zoned, and to lease two additional sites. Sunrise is pursuing additional development opportunities and also plans to acquire additional facilities as market conditions warrant. On October 18, 1998, Sunrise entered into a merger agreement to acquire Karrington Health, Inc., a Columbus-based assisted living provider, as amended on March 4, 1999. Sunrise plans to purchase Karrington in a tax-free, stock-for-stock transaction valued at approximately $94.9 million. The transaction will be accounted for using the purchase method of accounting. Karrington owns or has ownership interests in 42 facilities, has an additional eight facilities under construction and has an additional eight development sites under contract. Sunrise intends to sell 17 Karrington facilities within 12 months following the merger. Most of these facilities are Karrington Cottage prototype models, which consist of 20 units or less. Under the amended merger agreement, Karrington would become a wholly owned subsidiary of Sunrise and each issued and outstanding Karrington common share, other than shares for which dissenters' rights are exercised, would be automatically converted into the right to receive 0.3333 of a share of Sunrise common stock. Subject to satisfaction of the conditions set forth in the amended merger agreement, including approval of the amended merger agreement by Karrington shareholders, Sunrise expects to consummate its acquisition of Karrington during the second quarter of 1999. Sunrise previously agreed to make available to Karrington a fully secured line of credit in the principal amount of up to $10.0 million. Sunrise advanced $5.4 million to Karrington under this line of credit as of December 31, 1998. Interest accrues at 10.0%. The note was amended in March 1999 to provide up to $6.5 million of additional advances and to extend the maturity from November 1999 to January 2000. -35- 36 In December 1998, Sunrise acquired four separate first trust mortgages secured by Karrington properties for $22.4 million. In December 1998, Sunrise also assigned its right to purchase six properties owned by Meditrust Corporation and leased by Karrington to a trust owned and funded by financial institutions. The trust purchased the six properties from Meditrust Corporation for approximately $42.2 million. Simultaneously, Sunrise entered into a leasing arrangement with the trust to lease the six properties. Also in December 1998, Sunrise entered into development agreements with Karrington. Under the agreements, Sunrise will provide development and construction services relating to three facilities until each facility receives a certificate of occupancy. In January 1999, Sunrise and Karrington entered into a management consulting agreement and a management services agreement. Under the consulting agreement, Sunrise agreed to assist Karrington in the management of its assisted living facilities pending completion of the merger. Under the management services agreement, Sunrise will receive a management fee of 7% of the revenues from the facilities to manage five of Karrington's facilities pending completion of the merger. Both agreements are for a term of one year. Sunrise initiated a previously announced plan of selling selected real estate assets, subject to market conditions, as a normal part of its operations while retaining long-term management through operating agreements. This strategy of selling selected real estate assets as a normal part of operations should enable Sunrise to reduce debt, redeploy its capital into new development projects and recognize gains on appreciated real estate. In September 1998, Sunrise completed the sale of two assisted living facilities located in Annapolis and Pikesville, Maryland for an aggregate sales price of $29.3 million in cash. Sunrise will realize up to a $6.4 million gain from the transaction over a maximum of 15 quarters. Sunrise recognized a gain of $1.5 million on the sale in 1998. For tax purposes, the transaction is treated as a tax-free exchange. Sunrise will continue operating the facilities under long-term operating agreements. In mid-1997, Sunrise again began seeking to capitalize on its brand awareness by accepting third-party management and development contracts. Sunrise has renewed efforts to seek additional third-party management and development opportunities after a two year period during which Sunrise focused on building its infrastructure. In September 1998, Sunrise entered into an agreement -36- 37 with Inova Health System Services, Inc., the largest not-for-profit integrated health care system in the Washington, D.C. metropolitan area, to manage Inova's two assisted living communities and provide development and management services for an additional four to eight assisted living communities with a total resident capacity of up to 800. Sunrise has continued its efforts to explore international development and acquisition possibilities in the United Kingdom and Canada and has entered into a joint venture arrangement with a third party that is providing up to $55.3 million of the equity capital to develop up to 22 projects. A director of Sunrise is a general partner in the third party that is providing the equity capital. Currently, the joint venture has one property under development in the United Kingdom and purchase commitments for two properties in Canada. Sunrise provides management and development services to the joint venture on a contract-fee basis with rights to acquire the assets in the future and has agreed to invest up to $2.8 million of equity capital in the joint venture. As of December 31, 1998, the third party has provided approximately $5.1 million and Sunrise has provided $0.4 million of equity capital to the joint venture. Sunrise has also committed to providing a revolving credit arrangement of up to approximately $3.4 million to a subsidiary of the joint venture. Interest on the outstanding principal amount accrues at 12.0%. The arrangement expires on November 4, 2001. As of December 31, 1998, Sunrise has advanced approximately $3.4 million under this revolving credit arrangement. In connection with the implementation of its growth plans, Sunrise made significant investments in its infrastructure through the addition of information technology in 1998 and 1997, as well as additions to headquarters and regional staff. During 1999, Sunrise expects to continue to invest in these areas to support both the growth of Sunrise and to provide enhancement to some of its existing computer systems to make them year 2000 compliant. See "Year 2000 Issues" for further discussion. -37- 38 RESULTS OF OPERATIONS The following table sets forth operating data expressed as a percentage of operating revenue:
Year Ended December 31, -------------------------------------------------------------------------------- 1998 1997 1996 -------------------------------------------------------------------------------- Operating revenue 100.0% 100.0% 100.0% Operating expenses: Facility operating 52.0 59.3 59.7 Facility contract services 0.6 -- -- Facility development and pre-rental 3.0 6.2 5.1 General and administrative 7.5 11.6 21.2 Depreciation and amortization 12.7 11.8 8.6 Facility lease 1.8 1.7 0.3 -------------------------------------------------------------------------------- Total operating expenses 77.6 90.6 94.9 -------------------------------------------------------------------------------- Income from operations 22.4 9.4 5.1 Other income (expense): Interest income 3.9 7.6 7.0 Interest expense (13.0) (12.8) (20.6) Equity in earnings of unconsolidated assisted living facilities -- 0.1 -- Minority interests (0.3) 0.2 0.5 Unusual charge -- -- (2.1) -------------------------------------------------------------------------------- Net income (loss) 13.0% 4.5% (10.1)% ================================================================================
Sunrise derives its revenues from two primary sources: - - resident fees for the delivery of assisted living services; and - - management services income for management and development of facilities owned by third parties. Historically, most of Sunrise's operating revenue has come from resident fees, which in 1998, 1997 and 1996 comprised 89.0%, 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 1998, 1997 and 1996 approximately 99% of Sunrise's revenue was derived from private pay sources. Resident fees include revenue derived from: (a) basic care, consisting of assistance with activities of daily living and other personalized support services, (b) plus care, consisting of more frequent and intensive assistance or increased care, (c) reminiscence care, consisting of care programs and services to help cognitively impaired residents, including residents with Alzheimer's disease, and (d) community fees. Community fees are one-time fees generally equal to 60 times the daily resident fee payable by a resident upon -38- 39 admission. Plus care and reminiscence care fees are paid by residents who require personal care in excess of services provided under the basic care program. Management services income represents fees from long-term contracts for facilities owned by unconsolidated joint ventures and other third party owners and includes management fees, which are generally in the range of 5% to 7% of a managed facility's total operating revenue, for homes in operation and development fees for site acquisition, development services, facility design and construction management services. Management services income accounted for 9.1%, 4.7% and 6.7% of operating revenue in 1998, 1997 and 1996, respectively. Sunrise classifies its operating expenses into the following categories: o facility operating, which include labor, food, marketing and other direct facility expenses; o facility contract services, which include operating expenses reimbursable to Sunrise under operating agreements; o facility development and pre-rental, which include non-capitalized development expenses and pre-rental labor and marketing expenses; o general and administrative, which primarily include headquarters and regional staff expenses and other overhead costs; o depreciation and amortization; and o facility lease, which represent rental expenses for facilities not owned by Sunrise. YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 Operating Revenue. Operating revenue for 1998 increased 89.9% to $170.7 million from $89.9 million for 1997 due primarily to the growth in resident fees. Resident fees, including community fees, for 1998 increased $66.2 million, or 77.3%, to $151.9 million from $85.6 million for 1997. This increase was due primarily to the inclusion for the year ended December 31, 1998 of approximately $23.7 million of resident fees generated from the operations of additional facilities opened in 1998 and a $35.6 million increase in resident fees from facilities operated for a full year in 1998 that were initially opened in 1997. The remaining increase in resident fees -39- 40 was primarily due to an increase in the average daily resident fee, excluding community fees, for owned facilities operated by Sunrise for at least twelve months. Average resident occupancy for owned facilities, opened or operated for at least 12 months, or that have achieved occupancy percentages of 95% or above, remained unchanged at 94% for both 1998 and 1997. The occupancy rate excludes facilities with temporary vacancies and resident relocations generally of between three to six months due to renovations. The average daily resident fee, excluding community fees, for these stabilized facilities increased to $86 for 1998 from $78 for 1997. The increase is due to the inclusion of additional stabilized prototype facilities which have higher basic care rates, a general increase in the basic care rate at other facilities, and an increase in the number of residents receiving plus care and reminiscence care services. Average resident occupancy for owned facilities in initial resident lease-up increased to 70% for 1998 from 62% for 1997. The average daily resident fee, excluding community fees for these facilities increased to $107 for 1998 from $94 for 1997. Management services income for 1998 increased to $15.6 million from $4.2 million for 1997. The increase resulted primarily from a $11.2 million increase in development and management fees to $15.2 million for 1998 from $4.0 million for 1997 relating to the development and management of facilities for unconsolidated joint ventures and third party owners. This increase is primarily due to the increase in the number of development and management contracts entered into from the fourth quarter of 1997 through 1998. Sunrise had 24 development and management contracts as of December 31, 1998 and 18 development and management contracts as of December 31, 1997. In 1998, Sunrise recognized a gain of $1.5 million on the sale of two assisted living communities and a $0.5 million gain on the sale of its minority interest in a tenancy-in-common that owned one facility. Operating Expenses. Operating expenses for 1998 increased by 62.7% to $132.5 million from $81.5 million for 1997. The increase in operating expenses was attributable to increases in all of the following areas: facility operating, facility contract services, general and administrative, depreciation and amortization and facility lease expenses. Facility operating expense for 1998 increased 66.7% to $88.8 million from $53.3 million for 1997. As a percentage of resident fees, facility operating expense for 1998 decreased to 58.5% from 62.2% for 1997. Of the $35.5 million increase, $14.3 million was attributable to expenses from the operations of additional -40- 41 assisted living facilities operated by Sunrise in 1998 as compared to 1997 and $17.9 million was attributable to facilities operated for a full year in 1998 that were initially opened in 1997. The remaining balance of the increase was primarily due to an increase in labor and general and administrative expense at facilities that were operational for a full year in both periods. General and administrative expense for 1998 increased 21.7% to $12.7 million from $10.5 million for 1997. As a percentage of operating revenue, general and administrative expense for 1998 decreased to 7.5% from 11.6% for 1997, reflecting the higher operating revenue in the 1998 period. The $2.3 million increase in general and administrative expense for 1998 was primarily related to labor costs, consisting of hiring and training additional staff at the headquarters and regional offices. Depreciation and amortization expense for 1998 compared to 1997 increased $11.1 million, or 104.4%, to $21.7 million from $10.6 million. Of the increase, $6.4 million related to homes opened during 1998 and $4.7 million related to homes operated for a full year in 1998 that were initially opened in 1997. Facility lease expense increased $1.5 million primarily due to the opening of two facilities developed and leased by Sunrise in 1998 and two facilities operated for a full year in 1998 that were initially opened in 1997. Other Income (Expense). Interest income decreased to $6.7 million for 1998 compared to $6.9 million for 1997. This decrease was primarily due to decreased funds available for investment, offset, in part, by an increase in interest income from notes receivable. See note 4 of notes to consolidated financial statements. Interest expense increased for 1998 to $22.1 million from $11.5 million for 1997. Of this increase, $3.6 million was due to a full year of interest on Sunrise's $150.0 million aggregate principal amount of 5 1/2% convertible subordinated notes due 2002 issued in June 1997 and $5.6 million was due to interest on additional borrowings under one of Sunrise's credit facilities. The remaining increase was primarily due to a decrease in capitalized interest in 1998 versus 1997 due to a reduction in the average balance of funded project costs. Income Tax. Sunrise generated taxable income for the year ended December 31, 1998 for the first time since its formation. Income tax expense for the year was offset by a $9.8 million reduction in Sunrise's deferred tax asset valuation allowance. The change in the valuation allowance reflects the reduction of the combined net difference in net book and tax basis of property and equipment, the expected tax benefit of various timing differences and the anticipated utilization of -41- 42 net operating loss carryforwards. Of the remaining $8.6 million unrecognized deferred tax assets, approximately $2.6 million relates to the remaining difference between the net book and tax bases of property and equipment and approximately $6.0 million relates to the tax benefit of nonqualified stock options that have not been recognized for tax purposes. When the valuation allowance related to the nonqualified stock options is released, the tax benefit will be credited directly to equity. See note 15 of notes to consolidated financial statements. Realization of the tax benefits associated with the long-term deferred tax assets is dependent upon Sunrise generating sufficient taxable income prior to the expiration of the loss carryforward and reversals of the timing differences. Based on this uncertainty, Sunrise is maintaining a valuation allowance of $8.6 million on the deferred tax asset at December 31, 1998. 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 for 1996 due primarily to the growth in resident fees. Resident fees for 1997 increased 93.9% to $85.6 million from $44.2 million for 1996. This increase was due primarily to the inclusion, in 1997, of additional total revenue of $23.1 million generated from 19 Sunrise developed facilities opened in late 1996 and throughout 1997, and $16.1 million generated from the operations of nine 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, opened or operated for at least 12 months, or that have achieved occupancy percentages of 95% or above, but excluding temporary vacancies and resident relocations generally of between three to six months due to renovations, was 94% for both 1997 and 1996. The average daily resident fee, excluding community fees, for these stabilized facilities decreased to $78 for 1997 from $80 for 1996. Excluding acquired facilities, the average daily resident fee, excluding community fees, was $84 for 1997 and 1996. Average resident occupancy for owned facilities in initial resident lease-up remained unchanged at 62% for 1997 and 1996. The average daily resident fee, excluding community fees for these facilities increased to $94 for 1997 from $83 for 1996. Management services income for 1997 increased by $1.1 million, or 33.6%, to $4.2 million from $3.2 million for 1996 due to an increase in fees for management and development services relating to the development of facilities for unconsolidated joint ventures and third party owners. -42- 43 Operating Expenses. Operating expenses for 1997 increased 81.3% to $81.5 million from $44.9 million for 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 expense for 1997 increased 88.5% to $53.3 million from $28.3 million for 1996. As a percentage of operating revenue, facility operating expense for 1997 decreased to 59.3% from 59.7% for 1996 as revenue increased at a faster rate than facility operating expense. The $25.0 million increase was primarily related to expenses from the operations of nine acquired and 19 developed facilities during 1996 and 1997. Facility development and pre-rental expense for 1997 increased by 130.8% to $5.6 million from $2.4 million for 1996. As a percentage of operating revenue, facility development and pre-rental expense 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 expense for 1997 increased 4.1% to $10.5 million from $10.0 million for 1996. As a percentage of operating revenue, general and administrative expense decreased to 11.6% for 1997 from 21.2% for 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 for 1997 and $0.7 million for 1996, respectively. Of the 1997 provision, $0.4 million related to certain subordinated management fees, $0.1 million related to one-time consulting fees and the remainder related to resident services revenue. Depreciation and amortization expense for 1997 increased 161.7% to $10.6 million from $4.0 million for 1996 primarily due to the opening of 19 developed facilities and the acquisition of nine other facilities during 1996 and 1997. Other Income (Expense). Interest income for 1997 increased 108.1% to $6.9 million from $3.3 million for 1996. This increase was primarily due to the investment of funds received from Sunrise's initial public offering and follow-on offering completed during 1996, as well as net proceeds received from the issuance and sale of $150.0 million aggregate principal amount of 5 1/2 % convertible notes issued in June 1997. Interest expense for 1997 increased 18.0% to $11.5 million from $9.7 million for 1996. This increase was due to $4.7 million of interest on the -43- 44 convertible notes and an increase of $1.6 million of interest for other borrowings, net of interest reductions described below, offset, in part, by an increase in capitalized interest of $4.5 million. Interest rate reductions include the following: o 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%; o Sunrise renegotiating interest rate reductions from LIBOR plus 2.75% to corresponding U.S. Treasuries plus 1.00% on $15.7 million of credit facilities; o Sunrise 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 o Sunrise 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%. Unusual Charge. In order to avoid a possible change in Sunrise's ability to continue to manage two facilities resulting from the reduction in Paul Klaassen's or Teresa Klaassen's ownership interest in Sunrise following completion of Sunrise's initial public offering in June 1996, Sunrise made a $1.0 million cash payment to the third-party limited partner in these two facilities in exchange for the transfer to Sunrise 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 Klaassens to maintain a specified ownership interest in Sunrise. This was reflected as an unusual charge during 1996. Income Tax. As a result of tax losses incurred in prior periods, Sunrise, at December 31, 1997, had net operating loss carryforwards for income tax purposes of $23.6 million. In addition, as part of the formation of certain Sunrise entities, the tax bases of the property and equipment of Sunrise involved in the reorganization exceeds its respective book bases for financial reporting. Under Statement of Financial Accounting Standards No. 109, Sunrise is required to recognize the value of these tax loss carryforwards and differences in book and tax bases in property and equipment if it is more likely than not that they will be realized. Realization of the net deferred tax asset of $18.3 million at December 31, 1997 is dependent on generating sufficient taxable income prior to the expiration of -44- 45 the loss carryforwards. Based on historical net operating losses and no assurance that Sunrise will generate any earnings or any specific level of earnings in future years, Sunrise established a valuation allowance on the deferred tax asset at December 31, 1997. LIQUIDITY AND CAPITAL RESOURCES To date, Sunrise has financed its operations from long-term borrowings, equity offerings and cash generated from operations. At December 31, 1998, Sunrise had $428.3 million of outstanding debt, excluding $40,000 notes payable to an affiliate, at a weighted average interest rate of 6.8%. Of the amount of outstanding debt, Sunrise had $260.3 million of fixed rate debt, excluding a $1.0 million loan discount, at a weighted average interest rate of 6.5%, and $169.0 million of variable rate debt at a weighted average interest rate of 7.2%. Sunrise is exposed to market risks related to fluctuations in interest rates on its debt. Increases in prevailing interest rates could increase Sunrise's interest payment obligations relating to variable rate debt. For example, a one-eighth of one percent increase in interest rates would increase annual interest expense by approximately $211,250. At December 31, 1998, Sunrise had approximately $54.2 million in unrestricted cash and cash equivalents, including $21.2 million in high quality A1/P1 rated short-term investments and $175.0 million of unused lines of credit. A subsidiary of Sunrise has a syndicated revolving credit facility for $250.0 million. Sunrise guarantees the repayment of all amounts outstanding under this credit facility. The credit facility expires in December 2000 and includes two 12 month extension options, subject to the lender's approval. The credit facility 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 facility bear interest at LIBOR plus 1.00% to LIBOR plus 1.50%. There were $137.0 million of advances outstanding under this credit facility as of December 31, 1998. Other subsidiaries have revolving credit facilities totaling $66.7 million. The repayments of the amounts outstanding under these credit facilities are also guaranteed by Sunrise. The credit facilities are secured by real property and first liens on other assets. Advances under these facilities bear interest at rates ranging from LIBOR plus 1.25% to LIBOR plus 2.35% and totaled $4.7 million as of December 31, 1998. On June 6, 1997, Sunrise issued and sold $150.0 million aggregate principal amount of 5 1/2% convertible subordinated notes due 2002. The convertible notes bear interest at 5 1/2% per annum payable semiannually on June 15 and December 15 of each year. The conversion price is $37.1875, which is equivalent to a -45- 46 conversion rate of 26.89 shares per $1,000 principal amount of the notes. The convertible notes are redeemable at the option of Sunrise commencing June 15, 2000, at specified premiums. The holders of the convertible notes may require Sunrise to repurchase the notes upon a change of control of Sunrise, as defined in the convertible notes. Sunrise has an $86.2 million, excluding a $1.0 million discount, multi-property mortgage, collateralized by a blanket first mortgage on all assets of a subsidiary of Sunrise, consisting of 15 facilities. 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; and Class B in the amount of $21.2 million bears a variable interest rate of LIBOR plus 1.75% and is payable in installments through May 2001. As of December 31, 1998, Sunrise had various other debt outstanding totaling approximately $51.4 million with interest rates ranging from 6.9% to 8.5%. Sunrise 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 LIBOR floating rate debt bear interest at a fixed rate based on a fixed LIBOR base rate of 7.30%. Sunrise 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%. Sunrise recorded net interest expense in 1998 and 1997 in the amounts of $227,000 and $17,000, respectively, for swap transactions. There are various financial covenants and other restrictions in Sunrise's debt instruments, including provisions which: o require it to meet specified financial tests. For example, Sunrise's $86.2 million multi-property mortgage, which is secured by 15 of its 76 facilities, requires that these facilities maintain a cash flow to interest expense coverage ratio of at least 1.25 to 1. Sunrise's $250.0 million credit facility requires Sunrise to have a consolidated tangible net worth of at least $178.3 million and to maintain a consolidated minimum cash liquidity balance of at least $25.0 million. These tests are administered on a monthly or quarterly basis, depending on the covenant; -46- 47 o require consent for changes in management or control of Sunrise. For example, Sunrise's $250.0 million revolving credit facility requires the lender's consent for any merger where Paul Klaassen or Teresa Klaassen does not remain chairman of the board and chief executive officer of Sunrise; o restrict the ability of Sunrise subsidiaries to borrow additional funds, dispose of assets or engage in mergers or other business combinations without lender consent; and o require that Sunrise maintain minimum occupancy levels at its facilities. For example, Sunrise's $250.0 million credit facility requires that 85% occupancy be achieved after 12 months for a newly opened facility and, following this 12-month period, be maintained at or above that level. Working capital decreased to $69.6 million at December 31, 1998, from $70.3 million at December 31, 1997, primarily due to Sunrise's continued investment in the development and ownership of assisted living facilities. The decrease was offset, in part, by a net increase in working capital resulting from the sale of two facilities, net borrowings during the year ended December 31, 1998 and an increase in receivables related to management and development contracts from unrelated and related parties. Receivables from related parties are included in prepaid expenses and other current assets on the accompanying balance sheets. Net cash provided by operating activities for 1998 and 1997 was approximately $19.2 million and $8.3 million, respectively, corresponding to the increased number of facilities operated by Sunrise at December 31, 1998, compared to December 31, 1997. During 1998 and 1997, Sunrise used $138.6 million and $221.8 million, respectively, for investing activities. Investing activities included investment in property and equipment in the amounts of $126.2 million and $213.6 million, respectively, related to the construction of assisted living facilities. In 1998, Sunrise also invested $15.1 million in notes to facilitate the development of assisted living facilities with third parties and $22.4 million in first trust mortgages, offset by $28.6 million of proceeds from the disposition of facilities. See note 4 to consolidated financial statements. In 1997, Sunrise invested $16.9 million in notes receivable. Net cash provided by financing activities was $90.9 million and $194.4 million for 1998 and 1997, respectively. Financing activities in 1998 and 1997 included additional borrowings of $108.0 million and $255.6 million, respectively, -47- 48 offset, in part, by debt repayments of $23.4 million and $59.4 million, respectively. Additional borrowings during 1998 were from one of Sunrise's credit facilities and were used to fund Sunrise's continued development of assisted living facilities. Sunrise currently estimates that the existing credit facilities, together with existing working capital, financing commitments and financing expected to be available, will be sufficient to fund facilities currently under development. Additional financing will be required to complete additional development and to refinance existing indebtedness. If the acquisition of Karrington is completed, Sunrise estimates that it will cost between $420.5 million and $637.0 million to complete the 54 facilities the two companies have under development. Sunrise expects that the cash flow from the combined companies operations, together with borrowings under existing credit facilities, will be sufficient to fund the needs of the combined entity for at least six months following the merger. There can be no assurance that required financing and refinancing will be available on acceptable terms. The ability of Sunrise to achieve its development plans will depend upon a variety of factors, many of which will be outside the control of Sunrise. These factors include: o obtaining zoning, land use, building, occupancy, licensing and other required governmental permits for the construction of new facilities without experiencing significant delays; o completing construction of new facilities on budget and on schedule; o the ability to work with third-party contractors and subcontractors who construct the facilities; o shortages of labor or materials that could delay projects or make them more expensive; o adverse weather conditions that could delay projects; o finding suitable sites for future development activities at acceptable prices; and o addressing changes in laws and regulations or how existing laws and regulations are applied. -48- 49 Sunrise cannot assure that it will not experience delays in completing facilities under construction or in development or that it will be able to identify suitable sites at acceptable prices for future development activities. If it fails to achieve its development plans, its growth could slow, which would adversely impact its revenues and results of operations. Sunrise's growth plan includes the acquisition of assisted living facilities or the companies operating assisted living facilities, such as Karrington. The success of Sunrise's acquisitions will be determined by numerous factors, including Sunrise'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 Sunrise to integrate or operate acquired facilities effectively. Any failure to do so may have a material adverse effect on Sunrise's business, financial condition, revenues and earnings. The long-term care industry is highly competitive and the assisted living segment is becoming increasingly competitive. Sunrise competes with numerous other companies that provide similar long-term care alternatives, such as home health care agencies, facility-based service programs, retirement communities, convalescent centers and other assisted living providers. Although some competitors are significantly larger, there are no one or more dominant companies in the assisted living segment. In a recent industry report, it is estimated that there are approximately 770,000 total assisted living beds currently available, and that the 25 largest owners of assisted living properties, which includes Sunrise, has 180,446 or only 23% of those currently available. The largest individual owner has only 3% of the total assisted living beds currently available. In general, regulatory and other barriers to competitive entry in the assisted living industry are not substantial. In pursuing its growth strategies, Sunrise has experienced and expects to continue to experience increased competition in its efforts to develop and acquire assisted living facilities. Some of the present and potential competitors of Sunrise are significantly larger and have, or may obtain, greater financial resources than Sunrise. Consequently, Sunrise cannot assure that it will not encounter increased competition that could limit its ability to attract residents or expand its business, which could have a material adverse effect on its revenues and earnings. Sunrise believes that some assisted living markets have become or are on the verge of becoming overbuilt. As described above, regulation and other barriers to entry into the assisted living industry are not substantial. Consequently, the development of new assisted living facilities could outpace demand. Overbuilding in Sunrise market areas could, therefore, cause Sunrise to experience decreased occupancy, depressed margins or lower operating results. Sunrise believes that -49- 50 each local market is different and Sunrise is and will continue to react in a variety of ways, including selective price discounting, to the specific competitive environment that exists in each market. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, Reporting on the Costs of Start-up Activities, which is effective for fiscal years beginning after December 15, 1998. SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. It is Sunrise's policy to capitalize certain costs incurred to rent its facilities such as costs of model units, their furnishings and "grand openings" in accordance with Statement of Financial Accounting Standards No. 67, Accounting for Costs and Initial Rental Operation of Real Estate Projects. Additionally, initial direct costs associated with originating lease transactions are capitalized in accordance with Statement of Financial Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. Direct costs include employees' compensation and payroll-related fringe benefits directly related to acquiring leases. All costs of Sunrise's development and leasing activities which are not considered to be within the scope of Statement 67 or Statement 91 are expensed as incurred. SOP 98-5 states that the guidance provided by Statement 67 and Statement 91 is not affected by the provisions of SOP 98-5. Therefore, the adoption of SOP 98-5 is not anticipated to affect results of operations or the financial position of Sunrise. Effective December 31, 1998, Sunrise adopted the provisions of Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information. 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. See note 19 of notes to consolidated financial statements. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Statement 133 standardizes the accounting for derivative instruments. Sunrise participates in interest rate swap transactions, which would be considered derivatives under Statement 133. Sunrise has not entered into any other derivative -50- 51 transactions. For the three year period ended December 31, 1998, the net effect of the interest rate swaps to Sunrise's results of operations has not been material. Therefore, Statement 133 is not anticipated to affect results of operations or the financial position of Sunrise. IMPACT OF INFLATION Resident fees from Company-owned assisted living facilities and management services income from facilities operated by Sunrise for third parties are the primary sources of revenue for Sunrise. 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 Sunrise's growth initiatives, have previously had a negative impact on operating margins and may again do so in the foreseeable future. Substantially all of Sunrise'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, and thus may enable Sunrise to seek increases in daily fees due to inflation or other factors. Any increase would be subject to market and competitive conditions and could result in a decrease in occupancy of Sunrise's facilities. Sunrise believes, however, that the short-term nature of its resident agreements generally serves to reduce the risk to Sunrise 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. YEAR 2000 ISSUES Impact of Year 2000. Some of the older computer programs utilized by Sunrise 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. This could cause a system failure or miscalculations causing disruptions of operations, including a temporary inability to process transactions, send invoices or engage in similar normal business activities. -51- 52 State of Readiness. Sunrise started to formulate a plan to address the year 2000 issue in late 1996. Sunrise has given its vice president of information technology specific responsibility for managing its year 2000 plan. This vice president leads a multi-disciplinary team to make Sunrise's mission critical information technology systems and embedded systems year 2000 ready. Sunrise's plan for mission critical information technology systems consists of four phases: o inventory - identifying all mission critical information technology systems and risk rating each according to its potential business impact; o assessment - identifying mission critical information technology systems that use date functions and assessing them for year 2000 functionality; o remediation - reprogramming, or replacing where necessary, inventoried items to ensure they are year 2000 ready; and o testing - including date testing and performing quality assurance testing to ensure successful operation in the post-1999 environment. Sunrise completed the inventory and assessment phases for substantially all of its mission critical information technology systems by year-end 1997. Sunrise's mission critical information technology systems are currently in the remediation and testing phases. Mission critical information technology systems implemented or updated that are year 2000 compliant include: o the accounting general ledger system; o the resident billing system; o the cash disbursement or accounts payable system; o the development or project cost system; o the fixed asset system; o the employee stock option system; o payroll and human resource system; and o substantially all software residing on Sunrise's home office and facility desk-top and lap-top computers. -52- 53 Sunrise plans to complete the remediation of substantially all of its mission critical systems by mid-1999. Sunrise plans to complete the testing of all of its mission critical information technology systems by September 1999. Sunrise is approximately 75% complete in its assessment of embedded systems and expects to complete its assessment in March 1999. Sunrise's remaining steps will then include testing selected embedded systems and remediating and testing systems that exhibit year 2000 issues. Sunrise intends to focus its testing and remediation efforts on select embedded systems at Sunrise's facilities, such as telephone, elevator, security, HVAC and similar systems. Sunrise plans to complete the assessment, remediation and testing of these systems by year-end 1999. External Relationships. Sunrise also faces the risk that one or more of its critical vendors will not be able to interact with Sunrise due to the third party's inability to resolve its own year 2000 issues, including those associated with its own external relationships. Sunrise has completed its inventory of external relationships and is attempting to determine the overall year 2000 readiness of its external relationships. In the case of mission critical suppliers, such as banks, financial intermediaries, including stock exchanges, telecommunications providers and other utilities, Sunrise is engaged in discussions with the third parties and is attempting to obtain detailed information as to those parties' year 2000 plans and state of readiness. Sunrise, however, does not have sufficient information at the current time to predict whether its external relationships with mission critical suppliers will be year 2000 ready. Year 2000 Costs. Sunrise estimates on a preliminary basis that the cost of assessment, remediation, testing and certification of its internal systems will range from approximately $500,000 to $1,500,000. The major components of these costs are: consultants, new software and hardware, software upgrades and travel expenses. Sunrise expects that these costs will be funded through operating cash flows. This estimate is based on currently available information. Sunrise's year 2000 costs may increase once it has determined the year 2000 readiness of its vendors, customers and other third parties. In addition, the availability and cost of consultants and other personnel trained in this area and any future acquisitions may materially affect the estimated costs. No Assurance that Sunrise Can Fully Implement Its Year 2000 Plan. Sunrise's year 2000 issue involves significant risks. There can be no assurance that Sunrise will succeed in fully implementing its year 2000 plan. The following describes Sunrise's most reasonably likely worst-case scenario, given current -53- 54 uncertainties. If Sunrise's remediated internal mission critical information technology systems fail upon testing, or any software application or embedded microprocessors central to Sunrise's operations are overlooked in the assessment or implementation phases, Sunrise may incur significant problems, including delays in billing its residents. If Sunrise's vendors or suppliers fail to provide its facilities with necessary power, telecommunications, transportation and financial services, equipment and services, Sunrise will be unable to provide services to its residents. If any of these uncertainties were to occur, Sunrise's business, revenues and results of operations would be adversely affected. Sunrise is unable at this time to assess the likelihood of these events occurring or the extent of the effect on Sunrise. Year 2000 Forward-Looking Statements. The foregoing year 2000 discussion contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, including anticipated costs and the dates by which Sunrise expects to complete actions, are based on management's best current estimates, which were derived utilizing numerous assumptions about future events, including the continued availability of resources, representations received from third parties and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause material differences include the ability to identify and remediate all relevant mission critical information technology and non-mission critical information technology systems, results of year 2000 testing, adequate resolution of year 2000 issues by businesses and other third parties who are service providers and suppliers of Sunrise, unanticipated system costs, the adequacy of and ability to develop and implement contingency plans and similar uncertainties. The "forward-looking statements" made in the previous year 2000 discussion speak only as of the date on which the statements are made. Sunrise undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. Quantitative and qualitative disclosure about market risk appears in the liquidity and capital resources section of item 7. managements discussion and analysis of financial condition and results of operations. -54- 55 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements appear on pages F-1 through F-25. 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. Sunrise's certificate of incorporation provides for a minimum of two directors and a maximum of 11 directors. The board of directors of Sunrise currently consists of eight members. The directors are divided into three classes, each consisting of approximately one-third of the total number of directors. In general, the term of office of only one class expires in each year and their successors are elected for terms of three years and until their successors are elected and qualified. At the 1999 annual meeting, three directors will be elected, each for a three-year term. As described below, the board of directors' nominees are Ronald V. Aprahamian, David G. Bradley and Teresa M. Klaassen. INFORMATION AS TO NOMINEES AND OTHER DIRECTORS The following table sets forth certain information regarding the board of directors' three nominees for election as directors at the 1999 annual meeting and those directors who will continue to serve as directors after the annual meeting.
AGE AT MARCH 15, DIRECTOR FOR TERM POSITION(S) HELD 1999 SINCE (1) TO EXPIRE WITH SUNRISE -------- --------- --------- -------------- NOMINEES: - --------- Ronald V. Aprahamian..............................52.. 1995 2002 Director David G. Bradley..................................46.. 1997 2002 Director Teresa M. Klaassen (2)............................43.. 1981 2002 Executive Vice President, Secretary and Director
-55- 56
TERM CONTINUING DIRECTORS: EXPIRES - --------------------- ------- Richard A. Doppelt.............................................43... 1995 2001 Director Paul J. Klaassen (2)...........................................41... 1981 2001 Chairman of the Board and Chief Executive Officer Thomas J. Donohue..............................................60... 1995 2000 Director David W. Faeder................................................42... 1993 2000 President, Chief financial Officer and Director Scott F. Meadow................................................45... 1996 2000 Director
- ---------------------- (1) The dates shown, except for Mr. Meadow, reflect the year in which these persons were first elected as directors of Sunrise or its predecessors. Mr. Meadow previously served as a director of Sunrise from January 1995 to August 1995, and most recently has been a director since February 1996. (2) Paul J. Klaassen and Teresa M. Klaassen are related as husband and wife. The principal occupations for the past five years of each of the three nominees for director and the five directors whose terms of office will continue after the 1999 annual meeting are set forth below. RONALD V. APRAHAMIAN served as chairman of the board and chief executive officer of The Compucare Company, a health care information technology company, from 1988 until October 1996. From May 1997 to September 1998, he was a consultant to Sunrise. Mr. Aprahamian also is a director of Metrocall, Inc., a paging company. DAVID G. BRADLEY 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 also serves on the boards of directors of Georgetown University, MD Anderson Cancer Center, City of Hope National Medical Center and The Wolf Trap Foundation. Mr. Bradley previously worked at the White House, the White House Conference on Children and Youth and the Wall Street law firm of Cravath, Swaine & Moore. 57 TERESA M. KLAASSEN, a co-founder of Sunrise, has served as executive vice president and secretary of Sunrise and its predecessor entities since 1981. Ms. Klaassen is a founding member of the Assisted Living Federation of America, the largest assisted living trade association, and currently serves on the boards of directors of several long-term care organizations. RICHARD A. DOPPELT has been a member of the investment management firm of Brownson, Rehmus & Foxworth, Inc. since January 1999. From August 1987 through December 1998, he was a director with Allstate Private Equity, an investment division of Allstate Insurance. Before joining Allstate, he practiced as a corporate attorney with the law firm of Morrison & Foerster. Mr. Doppelt is a director of several privately held companies. PAUL J. KLAASSEN, a co-founder of Sunrise, has served as chairman of the board and chief executive officer of Sunrise and its predecessor entities since 1981. He also served as president of Sunrise and its predecessor entities from 1981 through July 1997. Mr. Klaassen is the founding chairman of the Assisted Living Federation of America. He is a director of: ACSYS, Inc., an accounting and staffing firm; the Advisory Board Company; 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 also is 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 Contemporary Long Term Care, Retirement Housing Report, Assisted Living Today and Assisted Living Briefing magazines. THOMAS J. DONOHUE 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. Mr. Donohue is a director of: Marymount University; the National Football League Alumni Association; IPAC, an international consulting firm; Newmyer Associates, a Washington, D.C. firm that tracks and analyzes public policy; and The Hudson Institute. In addition, Mr. Donohue served on the President's Commission on Intermodal Transportation. DAVID W. FAEDER has served as executive vice president and chief financial officer of Sunrise and its predecessor entities since 1993. He was named president of Sunrise in July 1997. From 1991 to 1993, Mr. Faeder was a vice president of CS First Boston Corporation, serving in both the investment banking and fixed income departments. From 1984 to 1991, Mr. Faeder served as a vice president of Morgan 58 Stanley, where he worked in the Real Estate Capital Markets Group. Mr. Faeder is a director of IBS Interactive, Inc., a technology company. SCOTT F. MEADOW has been a general partner of The Sprout Group, the venture capital division of DLJ Capital Corporation, since February 1996. From 1992 to 1995, Mr. Meadow was a general partner of Frontenac Company, a venture capital firm. From 1982 to 1992, he was a general partner of William Blair Venture Partners, a venture capital firm. Mr. Meadow is a director of several privately held companies. OTHER EXECUTIVE OFFICERS The principal occupation during the past five years of Sunrise's other executive officers follows: THOMAS B. NEWELL, 41, has served as general counsel of Sunrise and president of Sunrise Development, Inc., Sunrise's development subsidiary, since January 1996 and was named an executive vice president of Sunrise in May 1996. From 1989 to January 1996, Mr. Newell was a partner with the law firm of Watt Tieder & Hoffar, where his practice concentrated on all aspects of commercial and real estate development transactions and where he represented Sunrise for more than five years. BRIAN C. SWINTON, 53, joined Sunrise as executive vice president, sales and marketing, in May 1996. From January 1994 to April 1996, Mr. Swinton was a senior vice president of Forum Group, Inc., a developer and operator of retirement communities and assisted living facilities, where his responsibilities included marketing, sales and product development. From 1986 to 1994, Mr. Swinton served as vice president, sales, marketing and product development at Marriott International, where he was responsible for designing, developing, marketing and the initial operations of the Brighton Gardens assisted living concept. TIFFANY TOMASSO, 36, was promoted to executive vice president -- operations of Sunrise, in March 1998. She joined Sunrise in 1993 as regional vice president in charge of developing assisted living facilities in New Jersey, Pennsylvania and Delaware, and was promoted in 1994 to senior vice president. Before 1993, Ms. Tomasso was vice president of operations for assisted living and healthcare at Presbytarian Homes of New Jersey. She previously served in a variety of long-term care administrator positions in facilities owned by HBA Management, Inc. Executive officers are elected annually and serve at the discretion of the board of directors. 59 Sunrise has entered into a merger agreement with Karrington Health, Inc. Under the merger agreement, Karrington would become a wholly owned subsidiary of Sunrise. As part of the merger agreement, Sunrise agreed, following the acquisition, to appoint Richard R. Slager, Karrington's Chief Executive Officer, to Sunrise's board of directors as the representative of JMAC, Inc., Karrington's largest stockholder. As long as JMAC, Inc. continues to beneficially own at least 500,000 shares of Sunrise common stock, Sunrise also has agreed to re-nominate Mr. Slager, or another nominee of JMAC, Inc. reasonably acceptable to Sunrise's directors, and solicit proxies for his reelection as a director of Sunrise. Mr. Slager also would become an executive officer of Sunrise. Karrington's stockholders must approve the acquisition. If approved by Karrington's stockholders, Sunrise expects that its acquisition of Karrington will be completed in the second quarter of 1999, and that Mr. Slager will be appointed a director and executive officer of Sunrise promptly thereafter. Under Delaware law, the board of directors of Sunrise has the authority to increase the size of the board of directors and fill the vacancy resulting from an increase in the size of the board of directors for the remaining term of the newly created directorship. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires Sunrise's directors, officers and beneficial owners of more than 10% of Sunrise's outstanding equity securities to file with the SEC initial reports of ownership of Sunrise's equity securities and to file subsequent reports when there are changes in such ownership. Based on a review of reports submitted to Sunrise for 1998, Sunrise believes that all Section 16(a) filing requirements for that year applicable to such persons were complied with on a timely basis. ITEM 11. EXECUTIVE COMPENSATION. The following table sets forth, for the years ended December 31, 1998, 1997 and 1996, the cash compensation paid by Sunrise, as well as other compensation paid or accrued during those years, to Sunrise's chief executive officer and each of the other four most highly compensated executive officers whose total annual salary and bonus exceeded $100,000 in 1998. 60 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION/ AWARDS ---------------- SHARES OF ANNUAL COMPENSATION COMMON STOCK ALL OTHER ------------------- UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION(S) YEAR SALARY ($) OPTIONS (#) ($)(1) - ------------------------------ ---- ---------- ---------------- ----------- Paul J. Klaassen 1998 $200,000 N/A $ -0- Chairman of the Board 1997 200,000 N/A 942 and Chief Executive Officer 1996 200,000 N/A 2,375 David W. Faeder 1998 175,000 400,000(2) -0- President and 1997 175,000 100,000 838 Chief Financial Officer 1996 175,000 191,666 2,375 Thomas B. Newell(3) Executive Vice President and General Counsel of Sunrise 1998 175,000 400,000(2) -0- and President of Sunrise 1997 175,000 100,000 -0- Development, Inc. 1996 175,000 213,333 N/A Brian C. Swinton(4) 1998 165,000 200,000(2) -0- Executive Vice President, 1997 165,000 75,000 -0- Sales and Marketing 1996 165,000 195,000 N/A Tiffany Tomasso(5) 1998 165,000 430,000(2) -0- Executive Vice President, 1997 -- -- -- Operations 1996 -- -- --
- ---------------------- (1) Represents matching contributions made by Sunrise under its 401(k) plan. (2) Includes options repriced in 1998. See "Option Grants in Last Fiscal Year" below. (3) Mr. Newell joined Sunrise in January 1996. (4) Mr. Swinton joined Sunrise in May 1996. (5) Ms. Tomasso joined Sunrise in June 1993 and was promoted to executive vice president, operations in March 1998. OPTION GRANTS The following table contains certain information with respect to stock options granted in 1998 to each of the named executive officers of Sunrise, including 61 repriced options. All options granted in 1998, other than repriced options, were ten-year non-qualified options. OPTION GRANTS IN LAST FISCAL YEAR
% OF POTENTIAL REALIZABLE TOTAL VALUE AT ASSUMED SHARES OF OPTIONS ANNUAL RATES OF COMMON GRANTED STOCK PRICE STOCK TO EXERCISE APPRECIATION FOR UNDERLYING EMPLOYEES OR BASE OPTION TERM OPTIONS IN FISCAL PRICE EXPIRATION ------------ NAME GRANTED YEAR ($/SH) DATE 5% ($) 10% ($) ---- ------- ---------- ------ ------------ ---------- ----------- Paul J. Klaassen -0- -0-% $-0- -0- $-0- $-0- David W. Faeder 200,000(1) 6.0 43.50 3/3/08 5,512,106 13,930,403 200,000(2) 6.0 25.00 3/3/08 2,523,942 6,436,046 Thomas B. Newell 200,000(1) 6.0 43.50 3/3/08 5,512,106 13,930,403 200,000(2) 6.0 25.00 3/3/08 2,523,942 6,436,046 Brian C. Swinton 100,000(1) 3.0 43.50 3/3/08 2,756,053 6,965,201 100,000(2) 3.0 25.00 3/3/08 1,261,971 3,218,023 Tiffany Tomasso 100,000(1) 3.0 43.50 3/3/08 2,756,053 6,965,201 100,000(1) 3.0 44.00 1/19/08 2,767,136 7,012,467 100,000(2) 3.0 25.00 3/3/08 1,261,971 3,218,023 100,000(2) 3.0 25.00 1/19/08 1,261,971 3,218,023 30,000(2) 0.9 25.00 8/28/07 378,591 965,407
- ---------------------- (1) These options were canceled upon the regrant of a corresponding number of options in September 1998, as indicated in the table. The original vesting period of the options was four years. Vesting of options is accelerated if the options are not assumed in connection with any dissolution or liquidation of Sunrise, the sale of substantially all of Sunrise's assets, a merger, reorganization or consolidation in which Sunrise is not the surviving corporation or any other transaction approved by the board of directors which results in any person or entity owning 80% or more of the total combined voting power of all classes of stock of Sunrise. (2) Represents options regranted in September 1998. The regranted options vest over a five-year period, as follows: 15%, 15%, 20%, 20%, and 30%. OPTION EXERCISES AND HOLDINGS The following table sets forth information with respect to each of the named executive officers of Sunrise concerning the exercise of stock options during 1998, the number of securities underlying unexercised options at the 1998 year-end and the 1998 year-end value of all unexercised in-the-money options held by such individuals. 62 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS(#) IN-THE-MONEY OPTIONS($)(1) SHARES ACQUIRED ON --------------------------- -------------------------- NAME EXERCISE (#) VALUE REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------- ------------------ -------------------- ----------- ------------- ----------- ------------- Paul J. Klaassen -0- $-0- -0- -0- $-0- $-0- David W. Faeder 68,082 2,384,441 159,418 354,167 4,633,056 8,914,597 Thomas B. Newell 20,000 470,000 120,000 370,002 3,501,559 9,782,899 Brian C. Swinton 20,000 470,000 86,250 223,750 2,294,531 5,755,469 Tiffany Tomasso 38,834 892,276 36,000 266,001 1,063,189 6,835,732
- ---------------------- (1) Market values of underlying securities at exercise or year-end minus the exercise price. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee is composed entirely of non-employee directors. During 1998, Messrs. Aprahamian, Donohue and Meadow served on the Compensation Committee. Scott F. Meadow is a general partner of The Sprout Group, the venture capital division of DLJ Capital Corporation. In 1998, Sunrise entered into a joint venture with several affiliates of The Sprout Group and DLJ Capital Corporation for the purpose of constructing, developing, marketing and operating up to 22 assisted living facilities in the United Kingdom and Canada. Sunrise has agreed to provide up to $2.8 million, and the other investors have agreed to provide up to $55.3 million, of equity capital in the joint venture. In connection with the establishment of the joint venture, Sunrise sold to the joint venture its interest in an assisted living development site near London, England. The purchase price was $4.6 million representing the amount paid by Sunrise to purchase the property plus related organizational and development costs. In addition to its equity capital investment, Sunrise will provide management and development services to the joint venture on a contract-fee basis with rights to acquire the assets in the future. As of December 31, 1998, Sunrise has provided approximately $0.4 million, and the other investors have provided approximately $5.1 million, of equity capital to the joint venture. 63 COMPENSATION OF DIRECTORS Non-employee directors are reimbursed for expenses incurred in attending meetings of the board of directors. No fees are paid for attendance at board or committee meetings. Non-employee directors of Sunrise are eligible to receive options under Sunrise's 1996 directors' stock option plan, as amended. An aggregate of 75,000 shares of common stock are reserved for issuance under this plan. As of December 31, 1998, 35,000 shares remained available for grant. Under the plan, each non-employee director whose commencement of service is after April 25, 1996, the effective date of the plan, is entitled to receive (a) an initial non-qualifying option, as of the date of the director's commencement of service, to purchase 10,000 shares of common stock and (b) an additional non-qualifying option to purchase 5,000 shares of common stock as of each subsequent annual meeting of Sunrise's stockholders if the director is then serving on the board. The option exercise price may 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 is generally ten years from the date of grant. In 1998, Messrs. Aprahamian, Bradley and Donohue each received grants of ten-year non-qualified stock options for 5,000 shares of common stock at an exercise price of $44.56 per share under Sunrise's 1996 directors' stock option plan, as amended. Mr. Doppelt received an initial option grant in 1998 for 10,000 shares of common stock at an exercise price of $44.56. Messrs. Aprahamian, Bradley, Donohue and Doppelt will each receive additional option grants for 5,000 shares as of the date of the annual meeting. Directors also are eligible to receive option grants under the 1998 stock option plan. During the first nine months of 1998, Mr. Aprahamian was a consultant to Sunrise for which he received $63,405. ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. STOCK OWNED BY MANAGEMENT The following table sets forth certain information with respect to beneficial ownership of the Common Stock as of March 15, 1999 by (a) each director and nominee for director of Sunrise; (b) each named executive officer of Sunrise; and (c) all executive officers and directors of Sunrise as a group. 64
NAME AND POSITION(S) AMOUNT AND NATURE OF PERCENT OF COMMON WITH SUNRISE BENEFICIAL OWNERSHIP(1) STOCK OUTSTANDING ------------ ----------------------- ----------------- Paul J. Klaassen(2) Chairman of the Board and Chief Executive Officer 2,800,780 14.4% Teresa M. Klaassen(2) Executive Vice President and Secretary 2,800,780 14.4 David W. Faeder(3) President and Chief Financial Officer 159,418 * Thomas B. Newell(3) Executive Vice President and General Counsel of Sunrise and President of Sunrise Development, Inc. 120,000 * Brian C. Swinton(3) Executive Vice President, Sales and Marketing 86,250 * Tiffany Tomasso(3) Executive Vice President, Operations 36,000 * Ronald V. Aprahamian(4) Director 95,000 * David G. Bradley Director 15,000 * Thomas J. Donohue(5) Director 85,800 * Richard A. Doppelt Director 10,000 * Scott F. Meadow Director 369 * Executive officers and directors as a group (11 persons)(6) 3,408,617 17.0
- ---------------------- * Less than one percent. (1) Under Rule 13d-3 under the Securities Exchange Act, a person has beneficial ownership of any securities as to which such person, directly or indirectly, through any contract, arrangement, undertaking, relationship or otherwise has or shares voting power and/or 65 investment power and as to which such person has the right to acquire such voting and/or investment power within 60 days. Percentage of beneficial ownership as to any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person by the sum of the number of shares outstanding as of such date and the number of shares as to which such person has the right to acquire voting and/or investment power within 60 days. (2) Represents 2,800,780 shares held jointly by the Klaassens, as tenants by the entireties. See "Principal Holders of Voting Securities." (3) Represents shares issuable upon the exercise of stock options that are exercisable within 60 days of March 15, 1999. (4) Represents 55,000 shares issuable upon the exercise of stock options that are exercisable within 60 days of March 15, 1999 and 40,000 shares of common stock held directly. (5) Represents 40,000 shares issuable upon the exercise of stock options that are exercisable within 60 days of March 15, 1999 and 45,800 shares of common stock held directly. (6) Includes 516,668 shares issuable upon the exercise of stock options that are exercisable within 60 days of March 15, 1999, and the 2,800,780 shares beneficially owned jointly by Paul J. and Teresa M. Klaassen. PRINCIPAL HOLDERS OF VOTING SECURITIES The following table sets forth information as of March 15, 1999 with respect to the ownership of shares of Sunrise common stock by each person believed by management to be the beneficial owner of more than five percent of Sunrise's outstanding common stock. The information is based on the most recent Schedule 13D or 13G filed with the SEC on behalf of such persons or other information made available to Sunrise. Except as otherwise indicated, the reporting persons have stated that they possess sole voting and sole dispositive power over the entire number of shares reported.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF COMMON BENEFICIAL OWNER BENEFICIAL OWNERSHIP STOCK OUTSTANDING ---------------- -------------------- ----------------- Paul J. and Teresa M. Klaassen(1) 9401 Lee Highway, Suite 300 Fairfax, VA 22031 2,800,780 14.4% Putnum Investments, Inc.(2) One Post Office Square Boston, MA 02109 1,389,179 7.1 American Express Company(3) American Express Tower 200 Vesey Street New York, NY 10285 1,243,200 6.4
66 - ---------------------- (1) See "Stock Owned by Management." (2) The Schedule 13G dated January 26, 1999 of Putnam Investments, Inc., a wholly-owned subsidiary of Marsh & McLennan Companies, Inc., states that it wholly owns two registered investment advisers: Putnam Investment Management, Inc. and The Putnam Advisory Company, Inc. The Schedule 13G states that: (a) Putnam Investments has shared power to vote 183,900 shares and shared power to dispose of 1,389,179 shares; (b) Putnam Investment Management has shared power to dispose of 1,135,479 shares; and (c) Putnam Advisory Company has shared power to vote 183,900 shares and shared power to dispose of 253,700 shares. Both Putnam Investments and Marsh & McLennan declare in the Schedule 13G that the filing of the Schedule 13G shall not be deemed an admission by either or both of them that they are the beneficial owner of any securities covered by the Schedule 13G, and that neither of them have any power to vote or dispose of, or direct the voting or disposition of, any of the securities covered by the Schedule 13G. (3) The Schedule 13G dated December 31, 1998 of American Express Financial Corporation states that American Express Financial, a registered investment adviser, has shared power to vote 479,800 shares and shares power to dispose of 1,243,200 shares. The Schedule 13G also states that American Express Company, a parent holding company, has shared power to vote 479,800 shares and shares power to dispose of 1,243,200 shares. American Express Financial disclaims beneficial ownership of the securities referred to in the Schedule 13G. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Sunrise leases the real property on which the Fairfax facility is located from Teresa M. Klaassen and Paul J. Klaassen under a 99-year ground lease entered into in June 1986. The ground lease provides for monthly rent of $21,272, as adjusted annually based on the consumer price index. Annual rent expense for 1998 was $262,000. Sunrise has subleased approximately 50% of the property subject to the ground lease to Sunrise Assisted Living Foundation, a not-for-profit organization operated by the Klaassens. Sunrise Foundation operates a school and day care center on the property. The sublease terminates upon expiration of the ground lease and provides for monthly rent equal to 50% of all of the rent payable under the ground lease. Sunrise Foundation also reimburses Sunrise for use of office facilities and support services. Reimbursements for 1998 were $84,000. Sunrise believes that the terms of the lease and sublease were no less favorable to Sunrise than those which it could have obtained from an unaffiliated third party. The Klaassens also lease real property located in Fairfax County, Virginia from Sunrise for use as a residence under a 99-year ground lease entered into in June 1994. The rent is $1.00 per month. This property is part of a parcel, which includes Sunrise's Oakton facility, that was previously transferred by the Klaassens to Sunrise in connection with a financing transaction. Rather than attempting to 67 subdivide the parcel, which would have caused a significant delay in completing the financing transaction, Sunrise agreed to lease back the residence to the Klaassens as a condition to the transfer of the property. For a description of certain other transactions involving Sunrise and its directors, see the section entitled "Compensation Committee Interlocks and Insider Participation" included as part of Item 11. 68 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.
Page ---- (1) Financial Statements: Report of Independent Auditors. F-1 Consolidated Balance Sheets -- December 31, 1998 and 1997. F-2 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996. F-3 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996. F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996. F-5 Notes to Consolidated Financial Statements. F-6
(2) Financial Statements Schedules: All schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable or are included in the consolidated financial statements. (3) Exhibits: Sunrise files as part of this Annual Report on Form 10-K the exhibits listed in the Index to Exhibits. -56- 69 (b) Reports on Form 8-K. On October 28, 1998, Sunrise filed a Form 8-K with the SEC which announced the proposed acquisition of Karrington Health, Inc. On December 17, 1998, Sunrise filed a Form 8-K with the SEC which announced the closing of a transaction with Meditrust Corporation. That transaction involved the acquisition of four first trust mortgages secured by assisted living properties owned and operated by Karrington and the assignment of Sunrise's right to purchase six assisted living properties currently leased to Karrington to a third party. On December 21, 1998, Sunrise filed a Form 8-K with the SEC which announced Amendment No. 1 to the Rights Agreement with Sunrise's rights agent, First Union National Bank of North Carolina, dated as of December 17, 1998. (c) Exhibits. Sunrise 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. -57- 70 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 3/26/99 ------------------------- 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 3/26/99 ----------------------------- ------------------------- Paul J. Klaassen Date Chairman of the Board, and Chief Executive Officer (Principal Executive Officer) By: /s/ David W. Faeder 3/26/99 ----------------------------- ------------------------- David W. Faeder Date President, Chief Financial Officer and Director (Principal Financial Officer) -58- 71 By: /s/ Larry E. Hulse 3/26/99 ----------------------------- ------------------------- Larry E. Hulse Date Controller (Principal Accounting Officer) By: /s/ Ronald V. Aprahamian 3/26/99 ----------------------------- ------------------------- Ronald V. Aprahamian Date Director By: /s/ David G. Gradley 3/26/99 ----------------------------- ------------------------- David G. Bradley Date Director By: /s/ Thomas J. Donohue 3/26/99 ----------------------------- ------------------------- Thomas J. Donohue Date Director By: /s/ Richard A. Doppelt 3/26/99 ----------------------------- ------------------------- Richard A. Doppelt Date Director By: /s/ Teresa M. Klaassen 3/26/99 ----------------------------- ------------------------- Teresa M. Klaassen Date Executive Vice President, Secretary and Director By:/s/ Scott F. Meadow 3/26/99 ----------------------------- ------------------------- Scott F. Meadow Date Director -59- 72 INDEX TO EXHIBITS
Page (by Sequential Exhibit Numbering Number Identity of Exhibit System) - ------ ------------------- ------- 2.1 Agreement of Merger, dated as of October 18, 1998, among Sunrise, Buckeye Merger Corporation and Karrington (Exhibit 2.1 to Sunrise's Form 8-K dated October 28, 1998). 2.2 Amendment No. 1 to Agreement of Merger, dated as of March 4, 1999, among Sunrise, Buckeye Merger Corporation and Karrington (Exhibit 2.1 to Sunrise's From 8-K dated March 5, 1999). 2.3 Letter dated October 16, 1998 from Sunrise to Meditrust Mortgage Investments, Inc. setting forth terms and conditions under which Sunrise would acquire certain properties subject to leases and certain mortgage loans. (Exhibit 2.1 to Sunrise's Form 8-K dated December 17, 1998). 2.4 Trust Agreement, dated as of December 2, 1998, between the several holders from time to time parties thereto, as the holders, and First Security Bank, National Association, as the Owner Trustee (Sunrise Trust 1998-1) (Exhibit 2.2 to Sunrise's Form 8-K dated December 17, 1998). 2.5 Credit Agreement, dated as of December 2, 1998, among First Security Bank, National Association, not individually, except as expressly stated therein, but solely as the Owner Trustee under the Sunrise Trust
-1- 73 1998-1, as the Borrower, the several lenders from time to time parties thereto, and Nationsbank, N.A., as the Agent (Exhibit 2.3 to Sunrise's Form 8-K dated December 17, 1998). 2.6 Participation Agreement, dated as of December 2, 1998, among Sunrise Midwest Leasing, L.L.C., as the Construction Agent and as the Lessee, Sunrise, as the Guarantor, First Security Bank, National Association, not individually, except as expressly stated therein, but solely as the Owner Trustee under the Sunrise Trust 1998-1, the various banks and other lending institutions which are parties thereto from time to time, as the holders, the various banks and other lending institutions which are parties thereto from time to time, as the lenders, and Nationsbank, N.A., as the Agent for the Lenders and respecting the Security Documents, as the Agent for the Lenders and the Holders, to the extent of their interests (Exhibit 2.4 to Sunrise's Form 8-K dated December 17, 1998). 2.7 Security Agreement, dated as of December 2, 1998, between First Security Bank, National Association, not individually, but solely as the owner trustee under the Sunrise Trust 1998-1 and Nationsbank, N.A., as the agent for the lenders and the holders and accepted and agreed to by Sunrise Midwest Leasing, L.L.C. (Exhibit 2.5 to Sunrise's Form 8-K dated December 17, 1998). 2.8 Lease Agreement, dated as of December 2, 1998, between First Security Bank, National Association, not individually, but solely as the Owner Trustee under the Sunrise Trust
-2- 74 1998-1, as Lessor and Sunrise Midwest Leasing, L.L.C., as Lessee (Exhibit 2.6 to Sunrise's Form 8-K dated December 17, 1998). 3.1 Restated Certificate of Incorporation of Sunrise (Exhibit 3.1 to Sunrise's Form S-1 Registration Statement No. 333- 13731). 3.2 Amended and Restated Bylaws of Sunrise, as amended (Exhibit 3 to Sunrise's Form 10-Q for the quarter ended September 30, 1997). 4.1 Form of common stock certificate (Exhibit 4.1 to Sunrise's Form S-1 Registration Statement No. 333-13731). 4.2 Stockholder Rights Agreement (Exhibit 4.2 to Sunrise's Form S-1 Registration Statement No. 333-13731). 4.3 Amendment No. 1 to Rights Agreement, dated as of December 17, 1998, between Sunrise and First Union National Bank of North Carolina (Exhibit 99(a) to Sunrise's Form 8-K dated December 18, 1998). 10.1 Assignment and Contribution Agreement, effective as of January 4, 1995, by and between Paul and Teresa Klaassen and Sunrise (Exhibit 10.1.1 to Sunrise'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.
-3- 75 (Exhibit 10.1.2 to Sunrise'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 10.19 to Sunrise's Form S-1 Registration Statement No. 33-2852). 10.4 Registration Agreement, dated January 4, 1995, by and among Sunrise, the Investors (as defined therein) and Paul and Teresa Klaassen (Exhibit 10.3 to Sunrise'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 Sunrise'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 Sunrise'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 Sunrise's
-4- 76 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 Sunrise'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 Sunrise'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 Sunrise's 1996 Form 10-K). 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 (Exhibit 10.11 to Sunrise's 1997 Form 10-K). 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 Sunrise's Form S-1 Registration Statement No. 333-2582). 10.13 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and
-5- 77 Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Gunston and Oakton) (Exhibit 10.6 to Sunrise'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 Sunrise'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 Sunrise'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 Sunrise'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 Sunrise'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 Financing
-6- 78 Statement, dated as of June 8, 1994 (Frederick) (Exhibit 10.11 to Sunrise'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 Sunrise's Form S-1 Registration Statement No. 333-2582). 10.20 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 Sunrise's Form S-1 Registration Statement No. 333-2582). 10.21 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 Sunrise's Form S-1 Registration Statement No. 333-2582). 10.22 Amended and Restated Agreement of Sublease, Indemnification and Easements dated February 5, 1995 by and between Assisted Living Group -- Fairfax Associates and Sunrise Foundation, as amended (Exhibit 10.17 to Sunrise's Form S-1 Registration Statement No. 333-2582).
-7- 79 10.23 Indenture, dated as of June 5, 1997, between Sunrise and First Union National Bank of Virginia, as trustee (Exhibit 4.1 to Sunrise's Form 10-Q for the quarter ended June 30, 1997). 10.24 Registration Rights Agreement, dated as of June 6, 1997, among Sunrise, Donaldson, Lufkin & Jenrette Securities Corporation and Alex. Brown & Sons Incorporated (Exhibit 4.2 to Sunrise's Form 10-Q for the quarter ended June 30, 1997). 10.25 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 (Exhibit 10.31.1 to Sunrise's 1997 Form 10-K). 10.26 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 (Exhibit 10.31.2 to Sunrise's 1997 Form 10-K). 10.27 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 (Exhibit 10.31.3 to Sunrise's 1997 Form 10-K).
-8- 80 10.28 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 (Exhibit 10.31.4 to Sunrise's 1997 Form 10-K). 10.29 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 (Exhibit 10.31.5 to Sunrise's 1997 Form 10-K). 10.30 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 (Exhibit 10.31.6 to Sunrise's 1997 Form 10-K). 10.31 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 (Exhibit 10.31.7 to Sunrise's 1997 Form 10-K). 10.32 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
-9- 81 for certain additional lenders and Sunrise East Assisted Living Limited Partnership (Exhibit 10.31.8 to Sunrise's 1997 Form 10-K). 10.33 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 (Exhibit 10.31.9 to Sunrise's 1997 Form 10-K). 10.34 + Form of Indemnification Agreement (Exhibit 10.24 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.35 + 1995 Stock Option Plan, as amended (Exhibit 10.20 to Sunrise's 1997 Form 10-K). 10.36 + 1996 Directors' Stock Option Plan, as amended. 10.37 + Stock Option Agreement, entered into, effective as of January 4, 1995, by and between Sunrise and David W. Faeder (Exhibit 10.14 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.38 + Amendment No. 1 to Stock Option Agreement by and between Sunrise and David W. Faeder (Exhibit 10.14.1 to Sunrise's Form S-1 Registration Statement No. 333-13731). 10.39 + 1996 Non-Incentive Stock Option Plan, as amended (Exhibit 10.24 to Sunrise's 1997 Form 10-K).
-10- 82
10.40 + 1997 Stock Option Plan, as amended (Exhibit 10.25 to Sunrise's 1997 Form 10-K). 10.41 + 1998 Stock Option Plan, as amended. 10.42 + Separation Agreement and General Release between Sunrise and Timothy S. Smick dated March 6, 1998 (Exhibit 10.3 to Sunrise's Form 10-Q for the quarter ended March 31, 1998). 21 Subsidiaries of the Registrant. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule as of and for the year ended December 31, 1998. 99.1 Option Agreement dated October 18, 1998 between Sunrise and Karrington (Exhibit 99.1 to Sunrise's Form 8-K dated October 28, 1998). 99.2 Form of Shareholder Agreement with Karrington affiliates (Exhibit 99.2 to Sunrise's Form 8-K dated October 28, 1998). 99.3 Form of amendment to Shareholder Agreement with Karrington affiliates. 99.4 Revolving Loan Agreement dated November 6, 1998 between Sunrise and Karrington. 99.5 First Amendment to Revolving Loan Agreement dated February 26, 1999 between Sunrise and Karrington.
-11- 83 99.6 Letter dated March 23, 1999 from Sunrise to Karrington extending the maturity date of the Karrington line of credit. 99.7 Management Services Agreement for Certain Karrington Homes, dated January 1, 1999, by and between Sunrise Assisted Living Management, Inc. and Karrington 99.8 Management Consulting Agreement for Certain Karrington Homes, dated January 1, 1999, by and between Sunrise Assisted Living Management, Inc. and Karrington 99.9 Development Agreement (Edina, Minnesota), dated as of December 1, 1998, by and between Sunrise Development, Inc. and Karrington 99.10 Development Agreement (Farmington Hills, Michigan), dated as of December 1, 1998, by and between Sunrise Development, Inc. and Karrington 99.11 Development Agreement (Hamilton, Ohio), dated as of December 1, 1998, by and between Sunrise Development, Inc. and Karrington
-12- - ---------------- + Represents management contract or compensatory plan or arrangement. 84 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/Ernst & Young LLP Washington, D.C. March 3, 1999 F-1 85 SUNRISE ASSISTED LIVING, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands)
December 31, ------------------------ 1998 1997 ------------ ---------- ASSETS Current Assets: Cash and cash equivalents $54,197 $82,643 Accounts receivable, net 17,818 5,849 Notes receivable 754 - Deferred income taxes 3,978 - Prepaid expenses and other current assets 15,921 6,081 -------- -------- Total current assets 92,668 94,573 Property and equipment, net 512,708 423,615 Notes receivable 34,919 17,248 Investments 28,329 5,750 Other assets 14,787 15,074 -------- -------- Total assets $683,411 $556,260 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $3,556 $8,303 Accrued expenses and other current liabilities 14,049 8,986 Deferred revenue 3,722 1,482 Current maturities of long-term debt 1,768 5,462 -------- -------- Total current liabilities 23,095 24,233 Long-term debt, less current maturities 426,558 335,525 Investments in unconsolidated assisted living facilities 1,003 445 Other long-term liabilities 3,194 319 -------- -------- Total liabilities 453,850 360,522 Minority interests 1,906 398 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, 19,446,427 and 19,028,040 shares issued and outstanding in 1998 and 1997 194 190 Additional paid-in capital 216,783 206,784 Retained earnings (deficit) 10,678 (11,634) -------- -------- Total stockholders' equity 227,655 195,340 -------- -------- Total liabilities and stockholders' equity $683,411 $556,260 ======== ========
See accompanying notes. F-2 86 SUNRISE ASSISTED LIVING, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Year Ended December 31, ------------------------------------------------ 1998 1997 1996 ---------- ---------- --------- Operating revenue: Resident fees $151,878 $85,644 $44,171 Management services income 15,596 4,240 3,174 Facility contract services 1,202 - - Realized gain on assisted living facilities 2,036 - - -------- ------- ------- Total operating revenue 170,712 89,884 47,345 -------- ------- ------- Operating expenses: Facility operating 88,834 53,286 28,274 Facility contract services 1,095 - - Facility development and pre-rental 5,197 5,586 2,420 General and administrative 12,726 10,454 10,042 Depreciation and amortization 21,650 10,592 4,048 Facility lease 3,014 1,532 130 -------- ------- ------- Total operating expenses 132,516 81,450 44,914 -------- ------- ------- Income from operations 38,196 8,434 2,431 Other income (expense): Interest income 6,695 6,862 3,297 Interest expense (22,125) (11,475) (9,722) -------- ------- ------- Total other expense (15,430) (4,613) (6,425) Equity in earnings (losses) of unconsolidated assisted living facilities 54 88 (12) Minority interests (508) 92 227 Unusual charge - - (981) -------- ------- ------- Net income (loss) $22,312 $4,001 ($4,760) ======== ======= ======= Net income (loss) per common share: Basic $1.16 $0.21 ($0.52) ======== ======= ======= Diluted $1.11 $0.20 ($0.52) ======== ======= =======
See accompanying notes. F-3 87 SUNRISE ASSISTED LIVING, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands)
Shares of Common Additional Retained Common Stock Paid-in Capital Earnings Stock Amount (Deficiency) (Deficit) Total --------- ------- ---------------- --------- ---------- Balance at December 31, 1995 6,019 $60 ($19,733) ($12,101) ($31,774) Issuance of common stock warrants 135 135 Preferred return on Series A convertible preferred stock (858) (858) Distributions to stockholders (390) (390) Issuance of common stock - initial public offering 5,700 57 104,237 104,294 Conversion of Series A convertible preferred stock to common stock 2,444 24 24,798 24,822 Forfeiture of preferred return on Series A convertible preferred stock (2,822) 2,822 - Dividends paid on Series B exchangeable preferred stock (348) (348) Issuance of common stock to acquire interest in facility 53 945 945 Exercise of employee options for common stock 259 3 1,964 1,967 Issuance of common stock - follow-on offering 4,055 41 91,750 91,791 Net loss (4,760) (4,760) ------ ---- -------- -------- -------- Balance at December 31, 1996 18,530 185 201,274 (15,635) 185,824 Exercise of employee options for common stock 498 5 5,510 5,515 Net income 4,001 4,001 ------ ---- -------- -------- -------- Balance at December 31, 1997 19,028 190 206,784 (11,634) 195,340 Exercise of employee options and warrants for common stock 418 4 6,352 6,356 Tax effect from the exercise of non- qualified stock options 3,647 3,647 Net income 22,312 22,312 ------ ---- -------- -------- -------- Balance at December 31, 1998 19,446 $194 $216,783 $10,678 $227,655 ====== ==== ======== ======== ========
See accompanying notes. F-4 88 SUNRISE ASSISTED LIVING, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, ------------------------------------------- 1998 1997 1996 ------------- ------------ ----------- OPERATING ACTIVITIES Net income (loss) $22,312 $4,001 ($4,760) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Gain on sale of interest (551) - - Equity in (earnings) losses of unconsolidated assisted living facilities (54) (88) 12 Minority interests 508 (92) (227) Provision for bad debts 521 893 734 Depreciation and amortization 21,650 10,592 4,048 Amortization of financing costs and discount on long-term debt 2,084 1,268 714 Amortization of discount on marketable securities (175) - (215) Changes in assets and liabilities: (Increase) decrease: Accounts receivable (12,490) (5,220) (1,250) Prepaid expenses and other current assets (9,404) (3,687) 249 Other assets (5,778) (8,146) (1,420) Increase (decrease): Accounts payable and accrued expenses (49) 8,289 1,784 Deferred revenue (1,105) (539) 1,117 Other liabilities 1,755 993 (28) --------- --------- --------- Net cash provided by operating activities 19,224 8,264 758 --------- --------- --------- INVESTING ACTIVITIES Investment in property and equipment (126,167) (213,560) (103,667) Proceeds from disposition of assisted living facilities 28,552 - - Increase in investment and notes receivable (37,466) (16,856) (375) (Increase) decrease in restricted cash and cash equivalents (1,459) 147 (459) Contributions to investments in unconsolidated assisted living facilities (742) - - Distributions from investment in unconsolidated assisted living facilities 65 101 113 Net purchases of marketable securities - - (8,107) Proceeds from maturities of marketable securities - 8,322 - Acquisition of interests in facilities (1,340) - - --------- --------- --------- Net cash used in investing activities (138,557) (221,846) (112,495) --------- --------- --------- FINANCING ACTIVITIES Additional borrowings under long-term debt 108,000 255,643 28,870 Repayment of long-term debt (23,369) (59,403) (17,165) Net proceeds from exercised options 6,356 5,515 1,967 Net proceeds from initial public offering of common stock - - 104,294 Net proceeds from follow-on offering of common stock - - 91,791 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 investment of minority interests - 525 (41) Repayment of notes payable to affiliated partnerships - (1,381) (314) Distributions to stockholders/partners - - (390) Financing costs paid (100) (6,485) (1,369) --------- --------- --------- Net cash provided by financing activities 90,887 194,414 207,295 --------- --------- --------- Net (decrease) increase in cash and cash equivalents (28,446) (19,168) 95,558 Cash and cash equivalents at beginning of year 82,643 101,811 6,253 --------- --------- --------- Cash and cash equivalents at end of year $54,197 $82,643 $101,811 ========= ========= =========
See accompanying notes. F-5 89 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 1. ORGANIZATION AND PRESENTATION Sunrise Assisted Living, Inc. (the "Company") is a 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 one limited partnership which owns a facility (Sunrise of Gardner Park) in which the Company owns a 50% partnership interest and controls the limited partnership through its status as the manager of the facility and as the sole general partner with the unilateral ability under the partnership agreement to conduct the ordinary course of business of the partnership. In addition, the consolidated financial statements include two limited liability companies. One of the limited liability companies owns two facilities (Sunrise of Severna Park) in which the Company owns a 50% membership interest. The other limited liability company owns one facility (Sunrise of Sheepshead Bay) in which the Company owns a 70% membership interest. The Company controls the two limited liability companies through its status as the manager of the facilities and as sole managing member of the limited liability companies with unilateral ability under the operating agreements to conduct the ordinary course of business of the companies. 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 or managing member, the Company holds unilateral ability to conduct the ordinary course of business of the facility. 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. 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. ALLOWANCE FOR DOUBTFUL ACCOUNTS Details of the allowance for doubtful accounts receivable are as follows (in thousands):
DECEMBER 31, ------------------------------------- 1998 1997 1996 ----------- ---------- ---------- Beginning balance $1,798 $ 927 $ 235 Provision for bad debts 521 893 734 Accounts written off (239) (22) (42) ----------- ---------- ---------- Ending balance $2,080 $1,798 $ 927 =========== ========== ==========
F-6 90 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 and indirect costs of the Company's development subsidiary. If a project is abandoned, any costs previously capitalized are expensed. 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. 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. INVESTMENTS IN UNCONSOLIDATED ASSISTED LIVING FACILITIES The Company owns non-controlling interests in certain assisted living facilities, most of which are currently under development. These investments include one facility in which the Company has a 13.9% general and limited partnership ownership interest, one facility in which the Company has a 33% tenancy-in-common ownership interest (interest sold in March 1998), one facility in which the Company has a 14.5% interest in a United Kingdom limited company and eight facilities in which the Company has a 9% member interest in a limited liability company. The Company does not control these entities as major business decisions require approval by the other partners or members. Accordingly, the investments are accounted for under the equity method, where the investments are recorded at cost and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. The Company eliminates intercompany profits on sales of services that are capitalized by the ventures. The Company's interest in accumulated losses of unconsolidated assisted living facilities are recorded below the Company's cost basis, which reflects the Company's obligations as the general partner or managing member. The Company has no liability for any other material commitments or contingencies of partnerships or limited liability companies in which it is a general partner or managing member. INTEREST RATE SWAPS Interest rate swap transactions are designated with certain levels of outstanding debt. Amounts received or paid on the interest rate swaps are recorded on an accrual basis as an adjustment to the related interest expense of the outstanding debt based on the accrual method of accounting. The fair value of and changes in fair value as a result of changes in market interest rates for the interest rate swap agreements are not reflected in the financial statements. Gains and losses on terminations of interest rate swap agreements are deferred as an adjustment to the carrying amount of the outstanding debt and amortized into interest expense over the remaining term of the original contract life of the terminated swap agreement. In the event of early extinguishment of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in income coincident with the extinguishment gain or loss. There were no gains or losses on terminations of interest swap agreements recognized by the Company for the periods presented. F-7 91 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) REVENUE RECOGNITION Operating revenue consists of resident fee revenue, including resident community fees, management services revenue, facility contract services revenue and realized gain on assisted living facilities. 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. All other resident fee revenue is recognized when services are rendered. 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 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. Facility contract services revenue is comprised of fees plus reimbursable expenses of facilities operated with the Company's employees under long-term operating agreements. Revenue from development contracts is recognized over the term of the respective development contracts using the percentage-of-completion method. Realized gain on assisted living facilities is recognized upon consummation of the sale of assets unless a portion of the sale is contingent upon future events or performance. Deferred gains on assets are then recognized upon performance or resolution of the contingency. INCOME TAXES The Company accounts for income taxes under the asset and liability approach which requires recognition of deferred tax assets and liabilities for the differences between the financial reporting and tax bases of assets and liabilities. A valuation allowance reduces deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. 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. SEGMENTS Effective December 31, 1998, the Company adopted the provisions of Statement of Financial Accounting Standard No. 131, Disclosures about Segments of an Enterprise and Related Information. 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. See Note 19 for information on the Company's operating segments. F-8 92 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, Reporting on the Costs of Start-up Activities, which is effective for fiscal years beginning after December 15, 1998. SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. It is the Company's policy to capitalize certain costs incurred to rent its facilities such as costs of model units, their furnishings and "grand openings" in accordance with Statement of Financial Accounting Standards No. 67, Accounting for Costs and Initial Rental Operation of Real Estate Projects. Additionally, initial direct costs associated with originating lease transactions are capitalized in accordance with SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. Direct costs include employees' compensation and payroll-related fringe benefits directly related to acquiring leases. All costs of the Company's development and leasing activities which are not considered to be within the scope of Statement 67 or Statement 91 are expensed as incurred. SOP 98-5 states that the guidance provided by Statement 67 and Statement 91 is not affected by the provisions of SOP 98-5. Therefore, the adoption of SOP 98-5 is not anticipated to affect results of operations or the financial position of the Company. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Statement 133 standardizes the accounting for derivative instruments. The Company participates in interest rate swap transactions, which would be considered derivatives under Statement 133. The Company has not entered into any other derivative transactions. For the three year period ended December 31, 1998, the net effect of the interest rate swaps to the Company's results of operations has not been material. Therefore, Statement 133 is not anticipated to affect results of operations or the financial position of the Company. RECLASSIFICATIONS Certain 1997 and 1996 balances have been reclassified to conform with the 1998 presentation. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
DECEMBER 31, ------------------------- ASSET LIVES 1998 1997 --------------- ------------ ------------ Land and land improvements 10-15 yrs. $ 80,263 $ 56,624 Building and building improvements 40 yrs. 355,807 268,533 Furniture and equipment 3-10 yrs. 56,678 34,459 ------------ ------------ 492,748 359,616 Less accumulated depreciation and amortization (38,504) (26,452) ------------ ------------ 454,244 333,164 Construction in progress 58,464 90,451 ------------ ------------ $512,708 $423,615 ============ ============
Depreciation expense was $13.7 million, $7.4 million and $3.7 million for the years ended December 31, 1998, 1997 and 1996, respectively. F-9 93 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. NOTES RECEIVABLE Notes receivable plus accrued interest consist of the following (in thousands):
DECEMBER 31, ---------------------- 1998 1997 ----------- ---------- LLC Note, interest accrues at LIBOR plus 5.0% (10.1% at December 31, 1998) $23,795 $15,343 Promissory Note, interest accrued at prime through March 1998 2,185 1,905 Promissory note, interest accrues at 8.0% 754 - Note with Karrington, interest accrues at 10.0% 5,508 - Note with United Kingdom joint venture, interest accrues at 12.0% 3,431 - ----------- ---------- 35,673 17,248 Current maturities (754) - ----------- ---------- $34,919 $17,248 =========== ==========
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 $15.0 million (the "LLC Note") to partially finance the initial development and construction of six properties. The LLC Note to the Company's subsidiary is subordinated to other lenders of the LLC. In September 1998, the Company and the LLC amended the LLC Note to increase the loan by $6.0 million to a total of $21.0 million in order to partially finance the initial development and construction of two additional properties. Principal and interest are due October 2003. In September 1997, a wholly owned subsidiary of the Company loaned $1.9 million ("Promissory Note") to owners of certain property 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 entered into a 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: (1) 270 days following the termination of the purchase and sale agreement by either the owners or the wholly owned subsidiary of the Company; (2) any breach of the purchase agreement by the owners; or (3) the closing date as defined in the purchase agreement. In April 1998, the Promissory Note was amended to increase the loan by $250,000 and stop accruing interest. In connection with the sale of the Company's minority interest in a tenancy-in-common that owned one facility, a wholly owned subsidiary of the Company accepted a promissory note in the amount of $850,000 in March 1998. The promissory note accrues interest at 8.0% per annum and was due in September 1998. In October 1998, the promissory note was amended to extend the maturity date to August 1999 and modify the payment terms to include a payment due in October 1998, which has been received, followed by quarterly payments of principal and interest. In November 1998, the Company agreed to loan up to $10.0 million to Karrington Health, Inc., a Columbus-based leading assisted living provider, under a revolving line of credit. The proceeds of the line of credit are used by Karrington for use in operations. Interest on the outstanding principal balance of the line of credit is due and payable monthly. The note was amended in March 1999 to provide up to $6.5 million of additional advances and to extend the maturity to January 2000. The entire sum of principal and unpaid accrued interest is due at maturity. F-10 94 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In November 1998, the Company agreed to make available up to approximately $3.4 million to a subsidiary of a joint venture of the Company in the United Kingdom under a revolving credit arrangement. Interest on advances made under the credit arrangement accrues at 12.0%. The outstanding principal and unpaid accrued interest are due November 2001. Management believes the net carrying cost of the notes receivable approximates market value at December 31, 1998 and 1997. 5. INVESTMENTS The balances outstanding are as follows (in thousands):
FACE AMOUNT DECEMBER 31, -------------------- DESCRIPTION 1998 1997 INTEREST RATE MATURITY DATE ------------------------ ---------- --------- -------------------- ------------------------ Bonds: 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 ---------- --------- 6,500 6,500 Bond discount (575) (750) ---------- --------- 5,925 5,750 ---------- --------- Mortgages 22,154 - 9.46% - 10.00% September 30, 2006 to Mortgage premium 250 - September 30, 2010 ---------- --------- 22,404 - ---------- --------- $28,329 $ 5,750 ========== =========
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 $5.0 million. 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 $5.8 million (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. Subsequent to June 30, 1995, all interest payments on these bonds are current. The Company recognized $957,000, $783,000 and $752,000 in interest income during 1998, 1997 and 1996, respectively, on this investment. The bond discount is being recognized as interest income over the life of the loan commencing in 1998. During 1998, the Company amortized $175,000 of the bond discount. On December 2, 1998, the Company purchased four separate first trust mortgages, secured by Karrington properties for $22.4 million, which includes a $0.3 million premium. The premium is being amortized over the life of the mortgages. One of the mortgages matures on September 30, 2006 and the others mature on September 30, 2010. Management believes the net carrying cost of the investments approximates market value at December 31, 1998 and 1997. F-11 95 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. OTHER ASSETS Other assets consist of the following (in thousands):
DECEMBER 31, ---------------------- 1998 1997 ----------- ---------- Restricted cash $ 3,032 $ 1,573 Deferred financing costs less amortization of $3,670 and $1,935 5,761 7,459 Pre-rental costs less amortization of $11,393 and $3,973 4,297 5,420 Other 1,697 622 ----------- ---------- $14,787 $15,074 =========== ==========
Restricted cash consists of real estate tax escrows, operating reserves and capital reserves related to the Company's debt agreements and resident deposits. 7. TRANSACTIONS WITH AFFILIATES Included in prepaid expenses and other current assets are net receivables from unconsolidated partnerships or limited liability companies of $11.8 million and $4.1 million as of December 31, 1998 and 1997, respectively. Included in other current liabilities are payables to unconsolidated partnerships or limited liability companies of $0.6 million as of December 31, 1997. Net receivables from and payables to unconsolidated partnerships or limited liability companies relate primarily to development activities. 8. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
DECEMBER 31, ------------------------- 1998 1997 ------------- ----------- 5 1/2% Convertible Subordinated Notes due 2002 $150,000 $150,000 Syndicated revolving credit facility 137,000 51,000 Multi-property / participating blanket first mortgage 86,187 86,718 Other mortgages and notes payable 56,151 54,700 Discount on multi-property mortgages less amortization of $2,188 and $1,769 (1,012) (1,431) ------------- ----------- 428,326 340,987 Current maturities (1,768) (5,462) ------------- ----------- $426,558 $335,525 ============= ===========
Included in long-term debt is a note due to an employee and an entity related to that employee. Interest accrues at 18% annually and principal is due June 8, 1999. The balance of the note at December 31, 1998 and 1997 was $40,000. 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 convertible notes bear interest at 5 1/2% 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 convertible notes. The convertible notes are redeemable at the option of the Company commencing June 15, 2000, at specified premiums. The holders of the convertible notes may require the Company to repurchase the convertible notes upon a change of control of the Company, as defined in the convertible notes. The net proceeds to the Company from the sale of the convertible notes, after deducting underwriting discounts and offering expenses, were approximately $145.6 million. 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 F-12 96 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) facility. The credit facility expires in December 2000 and includes two 12 month extension options subject to the lender's approval. The credit facility 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 LIBOR plus 1.00% to LIBOR plus 1.50%. There were $137.0 million of advances outstanding under this credit facility as of December 31, 1998. The multi-property mortgage is collateralized by a blanket first mortgage on all assets of a subsidiary of the Company, consisting of 15 facilities. 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 $21.2 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 20-year amortization schedule. The interest rate applicable to 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%. 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, $419,000 and $626,000 has been included as interest expense in 1998, 1997 and 1996, respectively. The other mortgages and notes payable relate primarily to 14 facilities whereby outstanding balances are collateralized by the total assets of the respective facility. Payments of principal and interest are made monthly. Interest rates range from 6.9% to 7.9% with remaining maturities ranging from less than one to 35 years. These other mortgages and notes payable have total available borrowings of $43.6 million as of December 31, 1998. A subsidiary of the Company 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, 1998, 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 2.00% to LIBOR plus 2.35%. There were $4.7 million of advances outstanding under this facility as of December 31, 1998, which were included in other mortgages and notes. A subsidiary of the Company has a $15.7 million revolving construction credit facility. 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, 1998. 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%. The Company recorded net interest expense for 1998 and 1997 in the amounts of $227,000 and $17,000, respectively, for swap transactions. F-13 97 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) There are various financial covenants and other restrictions in the Company's debt instruments, including provisions which: (1) require it to meet specified financial tests. For example, the Company's $86.2 million multi-property mortgage, which is secured by 15 of its 76 facilities, requires that these facilities maintain a cash flow to interest expense coverage ratio of at least 1.25 to 1. The Company's $250.0 million credit facility requires the Company to have a consolidated tangible net worth of at least $178.3 million and to maintain a consolidated minimum cash liquidity balance of at least $25.0 million. These tests are administered on a monthly or quarterly basis, depending on the covenant; (2) require consent for changes in management or control of the Company. For example, the Company's $250.0 million revolving credit facility requires the lender's consent for any merger where Paul Klaassen or Teresa Klaassen does not remain chairman of the board and chief executive officer of the Company; (3) restrict the ability of the Company's subsidiaries to borrow additional funds, dispose of assets or engage in mergers or other business combinations without lender consent; and (4) require that the Company maintain minimum occupancy levels at its facilities. For example, the Company's $250.0 million credit facility requires that 85% occupancy be achieved after 12 months for a newly opened facility and, following this 12-month period, be maintained at or above that level. Principal maturities of long-term debt as of December 31, 1998, are as follows (in thousands): 1999 $ 1,768 2000 138,646 2001 88,881 2002 177,641 2003 2,707 Thereafter 18,683 ------------- $428,326 =============
Interest paid totaled $23.8 million, $16.9 million and $10.6 million in 1998, 1997 and 1996, respectively. Interest capitalized was $4.2 million, $7.0 million and $2.0 million in 1998, 1997 and 1996, respectively. 9. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK In 1995, 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. 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 $10.00 per share, or $10.0 million. On January 19, 1996, the Company exercised the call. 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 was $17.00. The warrants were exercised in March 1998. On June 5, 1996, the Company successfully completed an initial public offering of its common stock. A total of 5,700,000 shares were sold by the Company in the initial public offering at a price of $20.00 per share for gross proceeds of $114.0 million. The net proceeds to the Company from the initial public 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 issued in 1995 were converted into an equal number of shares of common stock. Preferred return of $2.8 million 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 $10.00 per share plus accrued dividends of $165,000. On October 30, 1996, the Company successfully completed a follow-on offering of its common stock. A total of 4,055,241 shares were sold by the Company in the follow-on offering at a price of $24.00 per share for gross proceeds of approximately $97.3 million. The net proceeds to the Company from the follow-on offering, after deducting underwriting discount and offering expenses, were approximately $91.8 million. F-14 98 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. STOCK OPTION PLANS 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 5,723,065 shares of common stock. The option exercise price and vesting provisions of the 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 also has a stock option agreement with one of its senior executives. The agreement, as amended, was 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, 1998, 22,000 options were outstanding, all of which are exercisable and will expire in six years. In September 1998, the Company canceled 1.6 million options granted to employees at exercise prices greater than $29.00 and granted an equal number of options with an exercise price of $25.00. In connection with the new grants certain vesting periods of the executive officers were extended. 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 75,000 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, 1998, 40,000 options had been granted. A summary of the Company's stock option activity and related information for the years ended December 31 are presented below:
1998 1997 1996 --------------------------- ------------------------- ------------------------- WEIGHTED- WEIGHTED- WEIGHTED- SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE OPTIONS (000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE - -------------------------------- ---------- ---------------- --------- --------------- --------- --------------- Outstanding-beginning of year 3,156 $22.76 2,557 $17.79 952 $ 6.50 Granted 3,417 32.81 1,384 27.84 1,911 21.74 Exercised (384) 16.39 (498) 11.16 (258) 7.64 Canceled (2,019) 36.51 (287) 23.29 (48) 5.82 ---------- --------- --------- Outstanding-end of year 4,170 24.93 3,156 22.76 2,557 17.79 ========== ========= ========= Options exercisable at year-end 1,055 667 527 Weighted-average fair value of options granted during the year $16.80 $14.65 $13.36
F-15 99 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------ -------------------------------- NUMBER WEIGHTED-AVERAGE NUMBER RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE EXERCISE PRICES (000) CONTRACTUAL LIFE EXERCISE PRICE (000) EXERCISE PRICE - --------------------- ---------------- -------------------- ---------------- --------------- ---------------- $ 3.00 - $ 8.00 228 6.7 $ 5.54 144 $ 5.63 8.01 - 20.00 362 7.3 17.04 214 16.81 20.01 - 25.63 3,107 8.6 24.96 657 25.11 25.64 - 44.56 473 9.9 40.18 40 39.02 ---------------- --------------- 4,170 1,055 ================ ===============
Pro forma information regarding net income (loss) and earnings (loss) per share is required by SFAS No. 123, Accounting for Stock-Based Compensation, 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 1998, 1997 and 1996: risk-free interest rate of 4.4% to 6.5%; dividend yield of 0%; expected lives of 7 to 10 years; and volatility of 36.8% to 45.0%. 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 below, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31, -------------------------------------- 1998 1997 1996 ------------- ------------ ----------- Net income (loss): As reported $22,312 $ 4,001 $(4,760) Pro forma $13,368 $(4,019) $(9,551) Diluted net income (loss) per share: As reported $ 1.11 $ 0.20 $ (0.52) Pro forma $ 0.67 $ (0.21) $ (0.94)
11. STOCKHOLDERS RIGHTS AGREEMENT The Board of Directors 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. F-16 100 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 (1) ten 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 (2) ten business days (or such later date as the Board of Directors 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 or 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 which was outstanding at the time of completion of the Company's initial public 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 (1) 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 (2) 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 $0.005 per right at any time until ten days after an Acquiring Person has been identified as such. 12. NET INCOME (LOSS) PER COMMON SHARE The following table summarizes the computation of basic and diluted net income (loss) per common share amounts presented in the accompanying consolidated statements of operations (in thousands, expect per share amounts):
YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1998 1997 1996 ----------------- ---------------- ---------------- Numerator: Net income (loss) $22,312 $ 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 $22,312 $ 4,001 $ (5,966) ================= =============== ================ Denominator: Denominator for basic net income (loss) per common share-weighted average shares 19,288 18,722 11,474 Effect of dilutive securities: Employee stock options and warrants 744 1,161 - ----------------- ---------------- ---------------- Denominator for diluted net income (loss) per common share-weighted average shares plus assumed conversions 20,032 19,883 11,474 ================= ================ ================ Basic net income (loss) per common share $ 1.16 $ 0.21 $ (0.52) ================= ================ ================ Diluted net income (loss) per common share $ 1.11 $ 0.20 $ (0.52) ================= ================ ================
F-17 101 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Certain shares issuable upon the exercise of stock options or conversion of redeemable convertible preferred stock or convertible notes have been excluded from the computation because the effect of their inclusion would be anti-dilutive. Subsequent to the Company's initial public offering, options are included under the treasury stock method to the extent they are dilutive. 13. ACQUISITIONS AND DISPOSITIONS 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. In September 1998, the Company completed the sale of these facilities for an aggregate purchase price of $29.3 million in cash. The Company will realize up to a $6.4 million gain from the transaction over a maximum of 15 quarters. The Company recognized a gain of $1.5 million on the sale in 1998. The remaining gain was deferred, the recognition of which is contingent upon future events. For tax purposes, the transaction is treated as a tax-free exchange. The Company will continue operating the facilities under long-term operating agreements. Each acquisition was accounted for using the purchase method with operations of the acquired facilities included in the Company's consolidated statement of operations beginning on their respective purchase dates. Purchase prices were allocated to assets acquired and liabilities assumed based upon estimated fair values at the time of purchase. No amounts were allocated to goodwill. In March 1998, the Company sold its minority interest in a tenancy-in- common that owned one facility resulting in a $0.5 million realized gain. The pro forma unaudited results of operation, assuming consummation of each purchase as of January 1, 1997, are as follows (in thousands, except per share amount):
YEAR ENDED DECEMBER 31, 1997 ----------------- Operating revenue $ 97,190 Net income $ 4,117 Diluted net income per common share $ 0.21
F-18 102 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On October 18, 1998, the Company entered into a merger agreement to acquire Karrington Health, Inc., a Columbus-based leading assisted living provider, as amended on March 4, 1999. The Company plans to purchase Karrington in a tax-free, stock-for-stock transaction valued at approximately $94.9 million. The transaction will be accounted for using the purchase method of accounting. Under the amended merger agreement, Karrington would become a wholly owned subsidiary of the Company and each issued and outstanding Karrington common share, other than shares for which dissenters' rights are exercised, would be automatically converted into the right to receive 0.3333 of a share of the Company's common stock. Subject to satisfaction of the conditions set forth in the amended merger agreement, including approval of the amended merger agreement by Karrington shareholders, the Company expects to consummate its acquisition of Karrington during the second quarter of 1999. 14. COMMITMENTS The Company leases its corporate office, regional offices, development offices and warehouse space under various leases. The corporate lease has a term of five years and expires in September 2001. The initial annual lease payments amount to $311,000, 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 warehouse lease has a term of seven years and expires in May 2004. The initial annual base rent payments amount to $148,000, subject to annual increases of 3%. Also required are an amortization rent of $88,000 and a portion of operating expenses. Various other leases expire between 1999 and 2003. During 1998, the Company entered into an agreement to lease new office space for its corporate headquarters. The lease has a term of 12 years beginning when the building is completed. The lease has an initial annual base rent of $1.2 million. The base rent escalates approximately 2.5% per year in accordance with a base rent schedule. The Company has also entered into operating leases for six facilities. Three commenced operations during 1997, two commenced operations in 1998, and the other is to commence operation in 1999. The operating lease terms vary from 15 years, with two ten-year extension options to 50 years. Also leased are three ground leases related to two facilities in operation and one under construction. In February 1999, the Company purchased one facility subject to an operating lease and which is currently under construction. Lease terms range from 75 to 99 years and are subject to annual increases based on the consumer price index and/or stated increases in the lease. In December 1998, a subsidiary of the Company entered into a three year operating lease for six assisted living facilities. The Company has guaranteed the payment of all obligations of its subsidiary under the lease. There are no extension options, however, the Company has the option, 120 days prior to the expiration date of the lease, of either purchasing or selling all the leased properties. If the Company exercises its option to sell the properties and the proceeds from the sale exceed the obligation under the lease, the Company is entitled to the excess. However, if the proceeds from the sale are less than the obligation under the lease, the Company is obligated to fund the difference. The Company is responsible for the payment of real estate taxes, insurance and other operating expenses. The lease requires the Company to maintain certain coverage ratios, liquidity and net worth. These six leased properties are currently subleased to Karrington under operating leases which expire in May 2010 through May 2011. F-19 103 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Future minimum lease payments under office, equipment, ground and other operating leases as of December 31, 1998 are as follows (in thousands): 1999 $ 8,418 2000 10,611 2001 51,038 2002 6,572 2003 6,404 Thereafter 85,154 -------------- $168,197 ==============
The Company has entered into contracts to purchase and lease additional sites. Total contracted purchase price of these sites is $73.7 million. The Company is pursing additional development opportunities and also plans to acquire additional facilities as market conditions warrant. 15. 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, equity interests in partnerships in predecessor 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 primary components of the Company's net deferred tax asset are as follows (in thousands):
DECEMBER 31, ----------- ----------- 1998 1997 ----------- ----------- Deferred tax assets: Property and equipment $ 2,116 $ 8,636 Operating loss carryforward 7,776 7,921 Deferred revenue - 379 Accrued expenses 1,719 888 Other 1,280 1,100 ----------- ----------- Total gross deferred tax assets 12,891 18,924 Less valuation allowance (8,569) (18,334) Deferred tax liabilities (344) (590) ----------- ----------- Net deferred tax amount $ 3,978 $ - =========== ===========
At December 31, 1998, the Company had net operating loss carryforwards available to offset future taxable income of approximately $19.7 million which expire from 2010 through 2012. At December 31, 1998, the Company had alternative minimum tax credits of approximately $79,000 available to offset future federal tax liabilities. These tax credits do not expire. Realization of the net deferred tax asset is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Based on historical net operating losses and no assurance that the Company will generate any earnings or any specific level of earnings in future years, the Company established a valuation allowance on the net deferred tax assets at December 31, 1998 and 1997. Approximately $6.0 million of the valuation allowance in 1998 and 1997 resulted from the tax benefit of non-qualified stock options that have not been recognized for tax purposes. When the valuation allowance is released, the tax benefit will be credited directly to equity. F-20 104 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Significant components of the provision for income taxes are as follows (in thousands):
YEAR ENDED DECEMBER 31, --------------- --------------- ---------------- 1998 1997 1996 --------------- --------------- ---------------- Current: Federal $ 3,521 $ - $ - State 457 - - --------------- --------------- ---------------- Total current $ 3,978 $ - $ - =============== =============== ================ Deferred: Federal $ 3,891 $ (2,553) $ (3,348) State 1,897 (545) (722) (Decrease) increase in valuation allowance (9,766) 3,098 4,070 --------------- --------------- ---------------- Total deferred $ (3,978) $ - $ - =============== =============== ================
In 1998, 1997 and 1996, the Company paid income taxes of $0.9 million, $0.1 million and $8,000, respectively. Current taxes payable for 1998 have been reduced by approximately $3.6 million reflecting the tax benefit to the Company of employee stock options exercised during the year. The tax benefit has been recognized as an increase to paid-in capital. The differences between the tax provision calculated at the statutory federal income tax rate and the actual tax provision recorded for each year are as follows:
YEAR ENDED DECEMBER 31, 1998 1997 1996 ------------- -------------- -------------- Statutory rate 35% 34% (34)% State taxes, net 6 7 (7) Tax exempt interest (4) (7) - Stock options - (96) - Other 7 5 - Valuation allowance (44) 57 41 -------------- ------------- -------------- 0% 0% 0% ============== ============= ==============
16. RELATED-PARTY TRANSACTIONS SUNRISE ASSISTED LIVING FOUNDATION Paul and Teresa Klaassen, the Company's founders, operate two schools, including day care centers, through a not-for-profit organization, Sunrise Assisted Living Foundation ("SALF"). SALF reimbursed the Company monthly for use of office facilities and support services in the amounts of $84,000 in 1998, $68,000 in 1997 and $60,000 in 1996. Such amounts are included in operating revenue. GROUND LEASE The Company has a 99 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 consumer price index. Rent expense under this lease was $262,000 for the years ended December 31, 1998, 1997 and 1996. The Company subleases one-half of this ground lease to SALF. 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, $131,000 and $132,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Lease expense is recorded net of the sublease income. F-21 105 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JOINT VENTURE The Company has entered into a joint venture arrangement with a third party that is providing up to $55.3 million of the equity capital to develop up to 22 projects in the United Kingdom and Canada. A director of the Company is a general partner in the third party that is providing the equity capital. The joint venture has acquired a property near London, England on which it is developing an independent living, an assisted living and an Alzheimer's care facility. The joint venture also has assumed purchase contracts for two properties in Canada, on which it intends to develop assisted living facilities. The Company will provide management and development services to the joint venture on a contract-fee basis with rights to acquire the assets in the future and has agreed to invest up to $2.8 million of equity capital in the joint venture. As of December 31, 1998, the third party has provided approximately $5.1 million and the Company has provided $0.4 million of equity capital to the joint venture. 17. 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 and are eligible to participate in the Plan after meeting certain eligibility requirements. The Plan contains three elements -- employee salary contributions, discretionary matching employer contributions and special discretionary employer contributions. Deferred salary contributions are made through pre-tax salary deferrals of between 1% and 16%. Prior to April 1, 1997, the Plan provided that the employer contribute $0.25 for every dollar the employee contributes, up to 7% of the employee's annual compensation. In April 1997, the Company amended the regular matching contributions to discretionary matching contributions. Matching contributions made by the Company totaled $177,000, $121,000 and $88,000 during 1998, 1997 and 1996, respectively. No discretionary profit-sharing contributions were made during these periods. 18. 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 investments and notes receivable are discussed in Notes 4 and 5. 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 $260.3 million, excluding a $1.0 million loan discount, has an estimated aggregate fair value of $269.8 million at December 31, 1998. 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 $169.0 million at December 31, 1998. The interest rate swaps related to floating rate debt (see Note 8) has an estimated fair value of $0.9 million at December 31, 1998. Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 1998. Although management is not aware of any factors that would significantly affect the reasonable fair value amounts, these amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 1998 and current estimates of fair value may differ from the amounts presented herein. F-22 106 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. INFORMATION ABOUT THE COMPANY'S SEGMENTS The Company primarily derives income from two types of services: (1) resident services and (2) management services. Resident services are further segmented into two stages of operations consisting of stabilized facilities and lease-up facilities. Stabilized facilities represent owned facilities opened or operated by the Company for at least 12 months, or that have achieved occupancy percentages of 95% or above. Lease-up facilities represent those facilities owned by the Company that are operating in their early stages but are not considered stabilized. Management services include fees from long-term management contracts or development contracts for facilities owned by unconsolidated joint ventures and other third party owners. The Company evaluates performance for stabilized and lease-up facilities based on a measure of segment operating income (defined as resident fees less facility operating expenses). The Company evaluates performance for management services based on the amount of revenues and expenses recognized versus forecasted revenues and expenses in a predetermined business plan. The Company's stabilized and lease-up segments offer the same products and services; however, the segments are managed separately because they have significantly different revenues, operating income and occupancy. The types of products and services these segments derive their revenues primarily include assistance with the activities of daily living and other personalized support services 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 (Basic Care); additional specialized care and services to residents with certain low acuity medical needs (Plus Care); and specialized services for residents with Alzheimer's disease or other forms of dementia (Reminiscence Care). Management services is a separate business unit of the Company and is managed separately because of different marketing strategies and revenue structures. Management services derive its revenues through fees associated with management, development and consulting services for third-parties and unconsolidated joint ventures that own and/or operate assisted living facilities and for facilities owned and consolidated by the Company. F-23 107 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Segment information is as follows (in thousands):
YEAR ENDED DECEMBER 31, 1998 1997 1996 ---------- ---------- ----------- Operating Revenue: Resident services: Stabilized $ 83,029 $54,888 $ 41,426 Lease-up 68,849 30,756 2,745 Management services: External 16,798 4,240 3,174 Internal 7,888 4,538 2,344 Other 2,036 - - Elimination of intersegment revenue (7,888) (4,538) (2,344) ----------- ---------- ----------- Total consolidated operating revenue 170,712 89,884 47,345 ----------- ---------- ----------- Operating Expenses: Resident services: Stabilized 53,663 36,802 28,374 Lease-up 43,059 21,022 2,244 Management services 13,746 11,814 11,209 Elimination of intersegment expenses (7,888) (4,538) (2,344) ----------- ---------- ----------- Total consolidated operating expenses 102,580 65,100 39,483 ----------- ---------- ----------- Segment operating income 68,132 24,784 7,862 Reconciliation to net income (loss): Facility pre-rental 3,194 3,126 837 General and administrative 2,078 1,100 416 Depreciation and amortization 21,650 10,592 4,048 Facility lease 3,014 1,532 130 ---------- ----------- ----------- Income from operations 38,196 8,434 2,431 Interest expense, net (15,430) (4,613) (6,425) Equity in earnings (losses) of unconsolidated assisted living facilities 54 88 (12) Minority interests (508) 92 227 Unusual charge - - (981) ----------- ---------- ----------- Total consolidated net income (loss) $ 22,312 $ 4,001 $ (4,760) =========== ========== ===========
AS OF DECEMBER 31, 1998 1997 Assets: --------------- ---------------- - ------- Stabilized facilities $ 219,794 $ 167,088 Lease-up facilities 89,552 125,964 Other segment assets 8,511 47,309 Corporate 365,554 215,899 --------------- ---------------- Total consolidated assets $ 683,411 $ 556,260 =============== ================
Other revenues for the year ended December 31, 1998 consist of realized gains on the sale of assisted living facilities (see Note 13 for further discussion). Management services revenue from operations in England was $703,000 for the year ended December 31, 1998. The remaining revenues and all long-lived assets are domestic. F-24 108 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 20. 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 Company's initial public offering, the Company made a $1.0 million 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 Klaassens to maintain a specified ownership interest in the Company. 21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of quarterly results of operations for the fiscal quarters indicated (in thousands, except per share amounts):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------------- ----------------- --------------- ------------- 1998 - ---- Operating revenue $ 34,912 $ 40,454 $ 46,152 $ 49,194 Net income $ 3,623 $ 4,586 $ 6,686 $ 7,417 Diluted net income per common share $ 0.18 $ 0.23 $ 0.33 $ 0.36 1997 - ---- Operating revenue $ 16,544 $ 18,655 $ 24,264 $ 30,421 Net income $ 134 $ 376 $ 1,318 $ 2,173 Diluted net income per common share $ 0.01 $ 0.02 $ 0.07 $ 0.11
The sum of diluted net income per common share for the four quarters in 1998 and 1997 may not equal diluted net income per common share for the year due to the changes in the number of weighted average shares outstanding and fluctuations in the market price of the Company's common stock during the year. F-25 EX-10.36 2 1996 DIRECTORS' STOCK OPTION PLAN 1 EXHIBIT 10.36 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; provided, however, that with respect to Richard A. Doppelt and Scott A. Meadow, "Commencement of Service" shall mean the date of each of their respective reelections to the Board of Directors (if so reelected) at the 1998 annual meeting of stockholders (in the case of Mr. Doppelt) and at the 2000 annual meeting of stockholders (in the case of Mr. Meadow). 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. 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. 1 2 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). 2.9 "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 75,000. 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 or entity owning 80 percent or more of the combined voting power of all classes of stock of the Company, the 3 4 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 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 4 5 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. 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. 5 6 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. 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. 6 7 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 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 7 8 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-10.41 3 1998 STOCK OPTION PLAN 1 EXHIBIT 10.41 SUNRISE ASSISTED LIVING, INC. 1998 STOCK OPTION PLAN SUNRISE ASSISTED LIVING, INC., a Delaware corporation (the "Corporation"), sets forth herein the terms of this 1998 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 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 2 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 (1,000,000) 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 director, officer or employee 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. 2 3 (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 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 3 4 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. 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 4 5 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. 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 5 6 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 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. 6 7 (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 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 7 8 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 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 8 9 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, 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 9 10 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 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. 10 11 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 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 11 12 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). * * * 12 EX-21 4 LIST OF SUBSIDIARIES 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 Partners, L.P. 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 VII 100% Maryland Sunrise Assisted Living Limited Partnership VIII 100% California 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 NAH/ Sunrise Severna Park, LLC 50% Maryland 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
2 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 Paramus Assisted Living Limited Partnership 100% New Jersey Sunrise Arlington Heights Assisted Living Limited Partnership 100% Illinois Sunrise SEAL, L.L.C. 100% Virginia Sunrise Riverside Assisted Living, L.P. 100% California Sunrise TFE Acquisitions, L.L.C. 100% Virginia Sunrise Midwest Mortgage, L.L.C. 100% Virginia Sunrise Midwest Leasing, L.L.C. 100% Virginia ADG on Sheepshead Bay, LLC 70% New York Sunrise Hermosa Beach Assisted Living, L.L.C. 100% California Sunrise Buffalo Grove Assisted Living, L.L.C. 100% Illinois Sunrise Westtown Assisted Living, L.L.C. 100% Pennsylvania Sunrise Exton Assisted Living, L.L.C. 100% Pennsylvania AL II Investments, L.L.C. 9% Virginia Sunrise Assisted Living Limited 100% United Kingdom Sunrise Assisted Living Holdings (Jersey) 14.5% States of Jersey, Limited Channel Islands Sunrise at Frognal House Limited 14.5% States of Jersey, Channel Islands
EX-23 5 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We 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); the $150 million of 5 1/2% Convertible Subordinated Notes due 2002 (Form S-3, No. 333-34365); the 1996 Directors' Stock Option Plan, as Amended (Form S-8, No. 333-57291); and the 1998 Stock Option Plan (Form S-8, No. 333-57293), respectively, of our report dated March 3, 1999 with respect to the consolidated financial statements of Sunrise Assisted Living, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1998. /s/Ernst & Young LLP Washington, D.C. March 25, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 DEC-31-1998 54,197 0 19,898 2,080 0 92,668 551,212 38,504 683,411 23,095 426,558 0 0 194 227,461 683,411 0 170,712 0 132,516 0 521 22,125 22,312 0 22,312 0 0 0 22,312 1.16 1.11
EX-99.3 7 FORM OF AMENDMENT TO SHAREHOLDER AGREEMENT 1 EXHIBIT 99.3 FORM OF LETTER AGREEMENT March __, 1999 Sunrise Assisted Living, Inc. 9401 Lee Highway, Suite 300 Fairfax, VA 22031 Ladies and Gentlemen: Reference hereby is made to the Agreement of Merger dated as of October 18, 1998 (the "Agreement") among Sunrise Assisted Living, Inc., a Delaware corporation ("Acquiror"), Buckeye Merger Corporation, an Ohio corporation and wholly owned subsidiary of Acquiror ("Merger Sub") and Karrington Health, Inc., an Ohio corporation (the "Company"), as amended by Amendment No 1. to Agreement of Merger dated as of March 4, 1999, a copy of which is attached to this Letter Agreement ("Amendment No. 1"). Capitalized terms used in this Letter Agreement without definition shall have the meanings assigned to them in the Agreement, as amended. In connection with the execution and delivery of the Agreement, the undersigned shareholder of the Company executed and delivered the following: - that certain Shareholder Agreement dated as of October 18, 1998 between Acquiror and the undersigned ("Shareholder Agreement"); and - a Company Affiliate Agreement, as contemplated in Section 5.12 of the Agreement. Having carefully read the attached copy of Amendment No. 1 and having had an opportunity to discuss Amendment No. 1 with counsel for the undersigned or counsel for the Company, the undersigned hereby: (i) confirms to, and agrees with, Acquiror that the term "Merger Agreement," as used in the Shareholder Agreement and the Company Affiliate Agreement, shall be deemed for all purposes to mean the Agreement as amended by Amendment No. 1; and (ii) reaffirms (a) all of the terms of the Shareholder Agreement, as amended hereby, and (b) all of the representations, warranties and covenants to Acquiror set forth in the Company Affiliate Agreement, as amended hereby. This Letter Agreement hereby amends the Shareholder Agreement and the Company Affiliate Agreement and may be referred to as Amendment No. 1 to Shareholder Agreement and Amendment No. 1 to Company Affiliate Agreement. 1 2 The validity and interpretation of this Letter Agreement shall be governed by, and construed in accordance with, the laws of the State of Ohio, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. Very truly yours, -------------------------------------------- By: AGREED AND ACCEPTED as of March __, 1999 by: SUNRISE ASSISTED LIVING, INC. ----------------------------------- Name: Title: 2 EX-99.4 8 REVOLVING LOAN AGREEMENT 1 EXHIBIT 99.4 REVOLVING LOAN AGREEMENT THIS REVOLVING LOAN AGREEMENT (this "Agreement") is made as of the 6th day of November, 1998, by and between KARRINGTON OPERATING COMPANY, INC., an Ohio corporation (together with its successors and assigns, the "Borrower"), and SUNRISE ASSISTED LIVING INC., a Delaware corporation (together with its successors and assigns, the "Lender"). R E C I T A L S: A. Borrower now owns or intends to acquire the Properties (defined below). B. Borrower proposes to construct or to have constructed upon the Properties Improvements (defined below) in accordance with Plans (defined below) which have been approved or are subject to approval by Lender. C. Borrower has applied to Lender for a loan for general corporate purposes and to finance the acquisition and development of the Properties and construction of Improvements, and Lender has agreed to make a loan to Borrower. The Loan shall be evidenced by this Agreement and by the Note (as defined below) and secured by the Mortgages (as defined below) covering the Properties and by such security instruments and additional documents as Lender may require, as hereinafter described. NOW, THEREFORE, it is hereby agreed as follows: ARTICLE I DEFINITIONS, ACCOUNTING PRINCIPLES, UCC TERMS 1.1 As used in this Agreement, the following terms shall have the following meanings unless the context hereof shall otherwise indicate: "Accounts" means any rights of Borrower arising from the operation of one or more of the Facilities for the payment of goods sold or leased or for services rendered, not evidenced by an Instrument, including, without limitation, (i) all accounts arising from the operation of any Facility and (ii) all rights to payment from state or federal programs, boards, bureaus or agencies, and rights to payment from patients, residents, private insurers, and others arising from the operation of any Facility, including rights to payment pursuant to Reimbursement Contracts. Accounts shall include the proceeds thereof (whether cash or noncash, moveable or immoveable, tangible or intangible) received from the sale, exchange, transfer, collection or other disposition or substitution thereof. 1 2 "Affiliate" shall mean, with respect to any Person, (i) each Person that controls, is controlled by or is under common control with such Person, (ii) each Person that, directly or indirectly, owns or controls, whether beneficially or as a trustee, guardian or other fiduciary, any of the Stock of such Person, and (iii) each of such Person's officers, directors, members, joint venturers and partners. "Applicable Environmental Laws" means any applicable federal, state or local laws, rules or regulations pertaining to health or the environment, or petroleum products, or radon radiation, or oil or hazardous substances, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended ("RCRA"), and the Federal Emergency Planning and Community Right to-Know Act of 1986, as amended. The terms "hazardous substance" and "release" shall have the meanings specified in CERCLA, and the terms "solid waste," "disposal," "dispose," and "disposed" shall have the meanings specified in RCRA, except that if such acts are amended to broaden the meanings thereof, the broader meaning shall apply herein prospectively from and after the date of such amendments; notwithstanding the forgoing, provided, to the extent that the laws of the states wherein any of the Properties is situated establish a meaning for "hazardous substance" or "release" which is broader than that specified in CERCLA, as CERCLA may be amended from time to time, or a meaning for "solid waste," "disposal," "dispose," and "disposed" which is broader than specified in RCRA, as RCRA may be amended from time to time, such broader meanings under said state law shall apply in all matters relating to the laws of such state. "Approved Budget" means that certain budget to be submitted by Borrower and approved by Lender, which identifies on a line item basis all uses of Loan proceeds, including working capital, costs of acquisition, costs to be incurred in connection with the development and construction of the Improvements, and all other costs for which proceeds of the Loan are to be disbursed, as the same may be amended from time to time by agreement of the parties. The initial Approved Budget is attached hereto as Exhibit A. "Architect" means, with respect to any of the Properties, the architectural and engineering firm retained in connection with the design of the Improvements. "Assignment of Contracts" means an Assignment of Contracts executed by Borrower for the benefit of Lender in connection with any Facility. "Business Day" means a day, other than Saturday, Sunday or legal holidays. "Closing Date" means the date of this Agreement. "Collateral" means, collectively, the Properties, Improvements, Equipment, Rents, Accounts, General Intangibles, Instruments, Inventory, Money, 2 3 Permits (to the full extent assignable), Reimbursement Contracts, and all Proceeds, all whether now owned or hereafter acquired, and including replacements, additions, accessions, substitutions, and products thereof and thereto, and all other property which is or hereafter may become subject to a Lien in favor of Lender as security for any of the Loan Obligations. "Commitment Letter" means the commitment letter by and between Lender and Borrower dated October 15, 1998. "Default" means the occurrence or existence of any event which, but for the giving of notice or expiration of time or both, would constitute an Event of Default. "Default Rate" means a per annum rate equal to fourteen percent (14%). "Environmental Permit" means any permit, license, or other authorization issued under any Hazardous Materials Law with respect to any activities or businesses conducted on or in relation to the Property and/or the Improvements. "Equipment" means all beds, linen, televisions, carpeting, telephones, cash registers, computers, lamps, glassware, rehabilitation equipment, restaurant and kitchen equipment, transportation vehicles, and other fixtures and equipment of Borrower located on, attached to or used or useful in connection with any of the Properties or the Facilities and all renewals and replacements thereof and substitutions therefor; provided, however, that with respect to any items which are leased for the benefit of the Facilities and not owned by Borrower, the Equipment shall include the leasehold interest only of Borrower together with any options to purchase any of said items and any additional or greater rights with respect to such items which Borrower may hereafter acquire, but the foregoing shall not be construed to mean that such leasing shall be permitted hereunder and under the other Loan Documents. "Event of Default" means any "Event of Default" as defined in Article VII hereof. "Extraordinary Income and Extraordinary Expenses" means material items of a character significantly different from the typical or customary business activities of Borrower which would not be expected to recur frequently and which would not be considered as recurring factors in any evaluation of the ordinary operating processes of Borrower's business, and which would be treated as extraordinary income or extraordinary expenses under GAAP. "Exhibit" means an Exhibit to this Agreement, unless the context refers to another document, and each such Exhibit shall be deemed a part of this Agreement to the same extent as if it were set forth in its entirety wherever reference is made thereto. "Facilities" means assisted living facilities existing or those certain to be constructed on the Properties, as they may now or hereafter exist, together with any other 3 4 general or specialized care facilities, if any (including any Alzheimer's care unit), now or hereafter operated on the Properties described on the Schedule of Facilities attached hereto as Exhibit, attached hereto and incorporated herein by this reference. "GAAP" means, as in effect from time to time, generally accepted accounting principles consistently applied as promulgated by the American Institute of Certified Public Accountants. "General Contractor" means, with respect to any of the Properties, the firm retained as general contractor in connection with the construction of any Improvements thereon. "General Intangibles" means all intangible personal property of Borrower arising out of or connected with the Properties or the Facilities and all renewals and replacements thereof and substitutions therefor (other than Accounts, Rents, Instruments, Inventory, Money, Permits, and Reimbursement Contracts). "Governmental Authority" means any board, commission, department or body of any municipal, county, state or federal governmental unit, or any subdivision of any of them, that has or acquires jurisdiction over the Property and/or the Improvements or the use, operation or improvement of the Property. "Guaranty" means that certain Agreement of Unconditional Guaranty of even date herewith made by Karrington Health, Inc. ("Guarantor") for the benefit of Lender. "Hazardous Materials" means petroleum and petroleum products and compounds containing them, including gasoline, diesel fuel and oil; explosives; flammable materials; radioactive materials; polychlorinated biphenyls ("PCBs") and compounds containing them; lead and lead-based paint; asbestos or asbestos containing materials in any form that is or-could become friable; underground storage tanks, whether empty or containing any substance; any substance the presence of which on the Property is prohibited by any federal, state or local authority; any substance that requires special handling; and any other material or substance now or in the future defined as a "hazardous substance," "hazardous material," "hazardous waste," "toxic substance," "toxic pollutant," "contaminant," or "pollutant" within the meaning of any Hazardous Materials Law. "Hazardous Materials Laws" means all federal, state, and local laws, ordinances and regulations and standards, rules, policies and other governmental requirements, administrative rulings and court judgments and decrees in effect now or in the future and including all amendments, that relate to Hazardous Materials and apply to Borrower or to the Property and/or the Improvements. Hazardous Materials Laws include, but are not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, and their state analogs. 4 5 "Improvements" means all buildings, structures and improvements of every nature whatsoever now or hereafter situated on any of the Properties, including, but not limited to, all gas and electric fixtures, radiators, heaters, engines and machinery, boilers, ranges, elevators and motors, plumbing and heating fixtures, carpeting and other floor coverings, water heaters, awnings and storm sashes, and cleaning apparatus which are or shall be attached to the Properties or said buildings, structures or improvements. "Indebtedness" means any (i) obligations for borrowed money, (ii) obligations, payment for which is being deferred by more than thirty (30) days, representing the deferred purchase price of property other than accounts payable arising in connection with the purchase of inventory customary in the trade and in the ordinary course of Borrower's business, (iii) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from the Accounts and/or property now or hereafter owned or acquired, and (iv) the amount of any other obligation (including obligations under financing leases) which would be shown as a liability on a balance sheet prepared in accordance with GAAP. "Inspector" means the person retained to review construction plans and progress at a particular Facility. "Instruments" means all instruments, chattel paper, documents or other writings obtained from or in connection with the operation of the Properties or the Facilities (including, without limitation, all ledger sheets, computer records and printouts, data bases, programs, books of account and files relating thereto). "Interest Reserve Account" means that certain estimated accrued interest on the disbursed principal of the Note during the term of the Loan as specified in Section 2.3 below. "Inventory" means all inventories of food, beverages and other comestibles held by Borrower for sale or use at or from the Properties or the Facilities, and soap, paper supplies, medical supplies, drugs and all other such goods, wares and merchandise held by Borrower for sale to or for consumption by guests or patients of the Properties or the Facilities and all such other goods returned to or repossessed by Borrower. "Lien" means any voluntary or involuntary mortgage, security deed, deed of trust, lien, pledge, assignment, security interest, title retention agreement, financing lease, levy, execution, seizure, judgment, attachment, garnishment, charge, lien or other encumbrance of any kind, including those contemplated by or permitted in this Agreement and the other Loan Documents. "Loan" means the Loan in the maximum principal amount outstanding at any time of $10,000,000.00 made by Lender to Borrower pursuant to this Agreement. 5 6 "Loan Documents" means, collectively, this Agreement, the Note, the Guaranty, and the Mortgages, together with any and all other documents executed by Borrower or others, evidencing, securing or otherwise relating to the Loan. "Loan Obligations" means the aggregate of all principal and interest owing from time to time under the Note and all expenses, charges and other amounts from time to time owing under the Note, this Agreement, or the other Loan Documents and all covenants, agreements and other obligations from time to time owing to, or for the benefit of, Lender pursuant to the Loan Documents. "Long Term Debt" means all obligations (including capital lease obligations) which are due more than one (1) year from the date as of which the computation thereof is made. "Maturity Date" means one (1) year from the date hereof. "Money" means all monies, cash, rights to deposit or savings accounts or other items of legal tender obtained from or for use in connection with the operation of the Facilities. "Mortgages" means those certain mortgages from the Borrower in favor of or for the benefit of Lender and covering the Properties. "Net Operating Cash Flow" means all of the Rents and any other cash proceeds received by Borrower from or in connection with the Improvements or the Properties less any reasonable operating expenses incurred by Borrower in connection with the maintenance of the Improvements and the Properties (including reasonable reserves), the payment of insurance premiums and real property taxes thereon, but excluding the payment of any debt service on the Loan, and excluding the payment of any debt service on any other loan unless consented to by Lender. "Note" means the Promissory Note of even date herewith in the principal amount of the Loan payable by Borrower to the order of Lender. "Person" means any person, firm, corporation, partnership, trust or other entity. "Permits" means all licenses, permits and certificates used or useful in connection with the ownership, operation, use or occupancy of the Properties or the Facilities, including, without limitation, business licenses, state health department licenses, food service licenses, licenses to conduct business, certificates of need and all such other permits, licenses and rights, obtained from any governmental, quasi-governmental or private person or entity whatsoever. "Plans" means the plans and specifications for the construction of the Facilities. 6 7 "Proceeds" means all proceeds (including proceeds of insurance and condemnation) from the sale, exchange, transfer, collection, loss, damage, disposition, substitution or replacement of any of the Collateral. "Properties" means those certain parcels of real estate more particularly described in the Schedule of Properties attached hereto as Exhibit C, upon which the Facilities are or shall be located. "Reimbursement Contracts" means all third party reimbursement contracts for the Facilities which are now or hereafter in effect with respect to residents or patients qualifying for coverage under the same, including private insurance agreements, and any successor program or other similar reimbursement program and/or private insurance agreements. "Rents" means all rent and other payments of whatever nature from time to time payable pursuant to leases of the Properties or the Facilities, or for retail space or other space at the Property (including, without limitation, rights to payment earned under leases for space in the Improvements for the operation of ongoing retail businesses such as newsstands, barbershops, beauty shops, physicians, offices, pharmacies and specialty shops). "Stock" shall mean all shares, options, warrants, general or limited partnership interests, membership interests, participations or other equivalents (regardless of how designated) in a corporation, limited liability company, partnership or any equivalent entity, whether voting or nonvoting, including, without limitation, common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended). 1.2 Singular terms shall include the plural forms and vice versa, as applicable, of the terms defined. 1.3 Terms contained in this Agreement shall, unless otherwise defined herein or unless the context otherwise indicates, have the meanings, if any, assigned to them by the Uniform Commercial Code in effect in the State of Ohio. 1.4 All accounting terms used in this Agreement shall be construed in accordance with GAAP, except as otherwise specified. 1.5 All references to other documents or instruments shall be deemed to refer to such documents or instruments as they may hereafter be extended, renewed, modified, or amended and all replacements and substitutions therefor. ARTICLE II TERMS OF THE LOAN AND CONDITIONS 7 8 PRECEDENT TO LOAN CLOSING 2.1 The Loan. Borrower has agreed to borrow the Loan on a revolving basis from Lender, and Lender has agreed to make the Loan on a revolving basis to Borrower, subject to Borrower's compliance with and observance of the terms, conditions, covenants, and provisions of this Agreement and the other Loan Documents, and Borrower has made the covenants, representations, and warranties herein and therein as a material inducement to Lender to make the Loan. In no event shall the principal amount outstanding at any one time exceed the loan-to-value ratio set forth in Section 2.5(i). Sums borrowed and repaid may be readvanced upon compliance with the terms and conditions of this Agreement. 2.2 Security for the Loan. The Loan will be evidenced, secured and guaranteed by the Loan Documents. 2.3 Interest Reserve Account. Subject to the conditions set forth in Article IV hereof, on the first day of each month, Lender will disburse a portion of the principal of the Note sufficient to pay accrued interest then due and payable on the Note, and the amount thereof shall reduce the balance of the Interest Reserve Account. Under no circumstances shall the undisbursed principal of the Note be disbursed to pay accrued interest thereon upon depletion of the balance of the Interest Reserve Account. Further, the depletion of the Interest Reserve Account shall not in any manner affect or impair the Borrower's obligation to continue to pay all interest accruing on the Loan. In lieu of disbursing principal of the Note to Borrower for payment of accrued interest thereon, Lender may handle such disbursement and payment by making appropriate entries on the books and records of Lender. 2.4 Fees. (a) Commitment Fee. Borrower shall pay or cause to be paid to Lender, on the earlier of the first advance of any Loan proceeds or the sixtieth (60th) calendar day after acceptance by the Borrower of the Lender's commitment to make the Loan, a non-refundable commitment fee equal to the sum of Two Hundred Thousand and No/100 Dollars ($200,000.00). (b) Usage Fees. At the time of each advance by Lender of Loan proceeds, Lender shall be entitled to receive a usage fee in the amount of two percent (2%) of the Loan advance made. (c) Repayment Fee. Lender shall be entitled to receive a fee equal to two percent (2%) of any principal amount repaid on the Loan, said repayment fee to be due upon repayment. 2.5 Documents and Due Diligence Items. Lender's obligation to make the Loan and perform its duties under this Agreement shall be subject to the Lender's receipt, 8 9 review and approval, in its sole discretion, of the following documents and due diligence items: (a) In connection with any advance for land acquisition, a complete set of the final Plans with respect to the specific Facility, which must have also been approved by all governmental authorities having jurisdiction therefor; (b) In connection with any advance of construction costs, an executed construction contract between Borrower and the General Contractor for construction of the Improvements on the specific property; (c) List of all awarded subcontracts in excess of $50,000.00, to the extent available; (d) Evidence satisfactory to Lender that Borrower and the persons signing on behalf of Borrower have the capacity and authority to execute and deliver the Loan Documents oft behalf of Borrower. Such documentation shall include, without limitation, copies of its Articles of Incorporation and Bylaws certified as true, complete and in full force and effect by the Secretary of the corporation, and a certified copy of a corporate resolution authorizing the corporation to enter into the Loan and the corporate officers to execute the Loan Documents and a certificate of good standing; (e) All taxes, fees and other charges in connection with the execution, delivery and recording of the Loan Documents shall have been paid, and all delinquent taxes, assessments or other governmental charges or liens affecting the Property, if any, shall have been paid; (f) At Borrower's expense, Lender shall be furnished with ALTA policies of title insurance (Form B-1970) covering the Properties, together with such endorsements thereto as Lender may require, containing no exceptions other than those Lender approves, issued in substance and in form by a company or companies acceptable to Lender. Lender may require satisfactory evidence that the Properties meet all applicable requirements of any applicable state or local law or regulation governing subdivision. Lender may require a legal opinion satisfactory to Lender from Borrower's counsel confirming that all of the documents and other matters relating to the Loan are valid, enforceable and binding in accordance with their terms and do not violate any applicable laws, including usury laws and such other and further matters as Lender, in its sole discretion may require regarding the Borrower, the Properties, and/or the Facilities. Lender may further require proof that all permits, consents and approvals required have been obtained, and any condition to such approvals must be acceptable to Lender in its commercially reasonable discretion; (g) A current ALTA survey of each Property acceptable to Lender and each title insurance company issuing the title insurance policies referred to above, and certified in a manner satisfactory to Lender by a licensed surveyor acceptable to Lender, showing the legal description, courses and distances of the Property lines, building 9 10 setback lines, rights of way, appurtenant and servient easements, and such other matters as Lender may require and showing no state of facts objectionable to Lender; (h) A current report regarding the possible presence of any hazardous substances on, in or around each Property. Such report shall be in form and substance acceptable to Lender, prepared by a registered certified engineer or geologist acceptable to Lender, and shall show no state of facts objectionable to Lender; (i) An appraisal of each Property prepared by Lender or by an appraiser satisfactory to Lender. The appraisals shall, among other things, reflect an overall loan to value ratios of not greater than seventy-five percent (75%). ARTICLE III BORROWER'S REPRESENTATIONS AND WARRANTIES To induce Lender to enter into this Agreement, and to make the Loan to Borrower, Borrower represents and warrants to Lender as follows: 3.1 Existence, Power and Qualification. Borrower is a duly organized and validly existing Ohio corporation, has the power to own its properties and to carry on its business as is now being conducted, and is duly qualified to do business and is in good standing in every jurisdiction in which the character of the properties owned by it or in which the transaction of its business makes its qualification necessary. 3.2 Power and Authority. Borrower has full power and authority to borrow the indebtedness evidenced by the Note and to incur the Loan Obligations provided for herein, all of which have been authorized by all proper and necessary action. 3.3 Due Execution and Enforcement. Each of the Loan Documents to which Borrower is a party constitutes a valid and legally binding obligation of Borrower, enforceable in accordance with its respective terms (except as such enforcement may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium, or other laws relating to the rights of creditors generally and by general principles of equity) and does not violate, conflict with, or constitute any default under any law, government regulation, decree, judgment, Borrower's articles of incorporation or bylaws or any other agreement or instrument binding upon Borrower. 3.4 Pending Matters. No action or investigation is pending or, to the best of Borrower's knowledge, threatened before or by any court or administrative agency which might result in any material adverse change in the financial condition, operations or prospects of Borrower. The Borrower is not in violation of any agreement, the violation of which might reasonably be expected to have a materially adverse effect on its business or assets, and the Borrower is not in violation of any order, judgment, or decree of any court, or any statute or governmental regulation to which it is subject. 10 11 3.5 Financial Statements Accurate. All financial statements heretofore or hereafter provided by Borrower are and will be true and complete in all material respects as of their respective dates and fairly present the respective financial conditions of Borrower, and there are no material liabilities, direct or indirect, fixed or contingent, as of the respective dates of such statements which are not reflected therein or in the notes thereto or in a written certificate delivered with such statements. The financial statements of the Borrower have been prepared in accordance with GAAP. There has been no material adverse change in the financial condition, operations, or prospects of Borrower since the dates of such statements except as fully disclosed in writing with the delivery of such statements. 3.6 Compliance with Licensure Laws. Upon the date of completion of construction of each Facility, such Facility shall be duly licensed as an assisted living facility under the applicable laws of the state where the Facility is located. Borrower is the lawful owner of all Permits for the Facilities, (to the extent the same are obtainable as of the date hereof) which are in full force and effect and constitute all of the permits, licenses and certificates required for the use and occupancy thereof. The Borrower and the operation of each Facility are in compliance in all material respects with the applicable assisted living facility laws, rules, regulations and published interpretations to which each Facility is subject. All Reimbursement Contracts, if any, are in full force and effect with respect to each Facility, and Borrower is in good standing with all the respective agencies governing such applicable licenses, program certification, and Reimbursement Contracts, if any. Borrower is current in the payment of all assessments respect to such Reimbursement Contracts, if any. 3.7 Payment of Taxes and Property Impositions. Borrower has filed all federal, state, and local tax returns which it is required to file and has paid, or made adequate provision for the payment of, all taxes which are shown pursuant to such returns or are required to be shown thereon or to assessments received by Borrower, including, without limitation, provider taxes. All such returns are complete and accurate in all respects. Borrower has paid or made adequate provision for the payment of all applicable water and sewer charges, ground rents (if applicable) and taxes. 3.8 Title to Collateral. Borrower has good and marketable title to all of the Collateral, subject to no lien, mortgage, pledge, encroachment, zoning violation, or encumbrance, except those Liens permitted by this Agreement, none of which Liens materially interfere with the security intended to be provided by the Mortgages or the current use of the Properties and the Improvements. All Improvements situated on the Properties are situated wholly within the boundaries of the Properties. 3.9 Priority of Mortgages. The Mortgages constitute valid first liens against the real and personal property described therein, prior to all other liens or encumbrances, including those which may hereafter accrue, excepting only those Liens permitted by this Agreement or those "Permitted Encumbrances" specifically set forth in the Mortgages, none of which Permitted Encumbrances materially interfere with the security intended to 11 12 be provided by the Mortgages or the current use of the Properties and the Improvements. 3.10 Location of Chief Executive Offices. The location of Borrower's principal place of business and chief executive office are set forth in Section 10.7 below. 3.11 Disclosure. All information furnished or to be furnished by Borrower to the Lender in connection with the Loan or any of the Loan Documents, is, or will be at the time the same is furnished, accurate and correct in all material respects and complete insofar as completeness may be necessary to provide the Lender with true and accurate knowledge of the subject matter. 3.12 ERISA. Borrower is in compliance with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). 3.13 Ownership. Borrower is a wholly-owned subsidiary of the Guarantor. 3.14 Proceedings Pending. There are no proceedings pending, or, to the best of Borrower's knowledge, threatened, to acquire through the exercise of any power of condemnation, eminent domain, or similar proceeding any part of any of the Properties, the Improvements or any interest therein, or to enjoin or similarly prevent or restrict the use of the Properties or the operation of the Facilities in any manner. 3.15 Compliance With Applicable Laws. The Facilities and their operations and the Properties shall comply in all material respects with all covenants and restrictions of record and applicable laws, ordinances, rules and regulations, including, without limitation, the Americans with Disabilities Act and the regulations thereunder, and all laws, ordinances, rules and regulations relating to zoning, setback requirements and building codes and there are no waivers of any building codes currently in existence for the Facilities. Construction of the Improvements and the intended use, occupancy and operation thereof will in all respects conform to and comply with all covenants, conditions, restrictions and reservations affecting the Properties and with all applicable zoning, environmental protection, use and building codes, laws, regulations and ordinances. 3.16 Solvency. Borrower is solvent for purposes of 11 U.S.C. Section 548, and the borrowing of the Loan will not render Borrower insolvent for purposes of 11 U.S.C. Section 548. 3.17 Access to the Properties. All roads, streets, traffic turn lanes and accessways necessary for the full utilization of the Improvements for their intended purposes have either been completed or the necessary rights of way therefor have either been acquired by the appropriate governmental authority or have been dedicated to public use and accepted by said governmental authority, and all necessary steps have been taken by Borrower and said governmental authority to assure the complete construction and installation thereof by the time needed for construction and/or occupancy and operation of the Improvements. 12 13 3.18 Utilities. All utility services and facilities necessary for the construction of the Improvements and the operation thereof for their intended purposes are either available at the boundaries of the Properties, or, if not, all necessary steps have been taken by Borrower and the local authorities or public utility companies which provides such services to assure the complete installation and availability thereof when needed for construction and/or occupancy and operation of the Improvements. 3.19 Approval of Plans and Budget. The Plans are a true and accurate reflection of the Improvements that Borrower intends to and shall construct on the Properties. The Plans are satisfactory to Borrower and have been approved by Borrower, and have also been approved as required by all governmental bodies or agencies having jurisdiction and by the beneficiary of any restrictive covenant affecting any Property. The Approved Budget attached as Exhibit A reflects Borrower's best true, accurate and complete estimate of the costs shown therein. 3.21 Incorporation of Representations and Warranties. The request by the Borrower for any advance of Loan proceeds under this Agreement shall constitute a certification by the Borrower that the aforesaid representations and warranties are true and correct as of the date of such request, except with respect to financial statements to the extent that such statements have been prepared with respect to an earlier date. 3.22 Continuing Accuracy. During the entire period of the term of the Loan, Borrower shall promptly notify Lender of any event which would render any of said misrepresentations and warranties untrue or misleading in any material respect. ARTICLE IV CONDITIONS PRECEDENT TO LOAN ADVANCES 4.1 Conditions Precedent to Initial Advance. Lender's obligation to make the initial advance of Loan proceeds with respect to one or more specific Properties pursuant to the terms hereof shall be subject to receipt of the following documents and satisfaction of the following conditions precedent: (a) Receipt of evidence satisfactory to Lender (such as "will serve" letters or copies of existing invoices from appropriate governmental entities) of the availability to the Property or Properties of all public utility services and facilities when needed for construction and/or use, occupancy and operation of the Improvements. (b) Receipt of evidence satisfactory to Lender that Borrower has complied with all covenants, conditions, restrictions and reservations affecting the Property or Properties, that each affected Property is duly and validly zoned for the intended use, and that Borrower has obtained all zoning, subdivision and environmental approvals, permits and maps required to be obtained in order to construct the Improvements. 13 14 (c) If requested by Lender, a soils and geological report prepared by a licensed engineer acceptable to Lender, certifying in a manner satisfactory to Lender the adequacy of subsoils and the foundation design of the Improvements. (d) Receipt and approval by Lender of all building and other permits required for construction of the Improvements in accordance with the Plans. (e) Receipt and approval by Lender of a site plan showing the location of any existing improvements, the proposed location of all Improvements to be constructed in accordance with the Plans, and the location of all parking areas, listing the number of parking spaces provided by such parking areas and the number of parking spaces required by applicable zoning ordinances and certified by the Architect to be true and correct based upon the Plans. (f) Evidence satisfactory to Lender that the Property or Properties are not located in areas identified as a flood prone areas as defined by the U.S. Department of Housing and Urban Development pursuant to the Flood Disaster Act of 1973. 4.2 Conditions Precedent to Advances for Working Capital. Lender's obligation to make an advance of Loan proceeds to be used by the Borrower as working capital for its day to day operations pursuant to the terms hereof shall be subject to satisfaction of the following conditions precedent: (a) Receipt of evidence satisfactory to Lender of the reasons necessitating Borrower's request for the advance and Borrower's projected use of the funds in its operations, including an estimated budget showing the various areas of the Borrower's operations where specified portions of the advance will be used, such as payroll or utilities expenses. All advances for working capital must be within the amounts reserved therefor in the Approved Budget. (b) Receipt of evidence satisfactory to Lender that Borrower's intended uses of the proceeds of the advance will not contravene any term of this Agreement or serve to reduce Lender's security under the Loan Documents. (c) At such time as Borrower requests additional advances of Loan proceeds for working capital after the first such advance has been made by Lender, Borrower shall provide Lender with the certified statement of its chief financial officer attaching and attesting to the accuracy of an itemized schedule of Borrower's application of all previous working capital advances. 4.3 Conditions Precedent to Subsequent Advances. In addition to compliance with the conditions precedent set forth in Section 4.1 hereof, Lender's obligation to make any advance of Loan funds after the initial advance shall be subject to satisfaction of the following conditions precedent: 14 15 (a) Borrower shall be in full compliance and shall not be in Default hereunder or under any of the Loan Documents; provided, however, that Lender may, in its discretion, elect to make advances notwithstanding the existence of a Default, and any advance so made shall be deemed to have been made pursuant to this Agreement and shall be secured by the Loan Documents. (b) Neither the Improvements, to the extent then constructed, nor the Properties nor any part thereof shall have been materially damaged, destroyed, condemned or threatened with condemnation, except to the extent Borrower has the right to repair, restore and replace the Improvements, Equipment and/or Inventory pursuant to Section 5.4 below. (c) No order or notice shall have been made by, or received from, any governmental agency having jurisdiction stating that the work of construction is or will be in violation of any law, ordinance, code or regulation affecting any Property which order or notice has not been cured, withdrawn or satisfied at the time of such subsequent advance. (d) Prior to each disbursement, Lender may, if it determines that such endorsements are necessary to protect its first lien, require such endorsements to its title insurance policy as Lender may, in its commercially reasonable discretion, determine are necessary. The form and substance of such endorsements must be satisfactory to Lender in its commercially reasonable discretion. (e) Any additional subcontracts in excess of $50,000.00 not previously approved by Lender must be submitted to and approved by Lender. (f) Receipt by Lender of a report from the Architect certifying the amount of such disbursement fairly reflects the value of the work and materials incorporated into the Improvements and that the work being paid for has been satisfactorily completed in accordance with the Plans. ARTICLE V AFFIRMATIVE COVENANTS OF BORROWER Borrower agrees with and covenants unto the Lender that until the Loan Obligations have been paid in full, Borrower shall: 5.1 Payment of Loan/Performance of Loan Obligations. Duly and punctually pay or cause to be paid the principal and interest of the Note in accordance with its terms and duly and punctually pay and perform or cause to be paid or performed all Loan obligations hereunder and under the other Loan Documents. 5.2 Maintenance of Existence. Maintain its existence as a corporation, and, in 15 16 each jurisdiction in which the character of the property owned by it or in which the transaction of its business makes qualification necessary, maintain good standing. 5.3 Accrual and Payment of Taxes. During each fiscal year, make accurate provision for the payment of all current tax liabilities of all kinds including, without limitation, federal and state income taxes, franchise taxes, payroll taxes, provider taxes (to the extent necessary to participate in and receive maximum funding pursuant to Reimbursement Contracts), taxes, all required withholding of income taxes of employees, all required old age and unemployment contributions, and all required payments to employee benefit plans, and pay the same when they become due. 5.4 Insurance. At all times while the Loan Obligations are outstanding, maintain (and provide satisfactory evidence thereof to Lender) the following insurance: (a) Professional liability insurance in at least the amount of $1,000,000.00 per occurrence, $2,000,000.00 in the aggregate, with a $10,000,000.00 umbrella policy which includes coverage for professional liability; (b) General liability insurance in an amount equal to at least $1,000,000.00 per occurrence, $3,000,000.00 aggregate, with a $10,000,000.00 umbrella policy; (c) Until completion of construction of Improvements, all risk course of construction insurance with Lender's loss payable endorsement attached to a Builder's Risk Completed Value non-reporting form of policy (provided that in no event may the amount of coverage to be maintained by Borrower be less than the amount of coverage necessary to eliminate any risk of co-insurance of loss). (d) Upon completion of the construction of any Improvements, "all-risk" coverage on such Improvements, Equipment and Inventory in an amount not less than the replacement cost thereof, insuring against such potential causes of loss as shall be required by Lender, including but not limited to loss or damage from wind, fire, ice, and subsidence, and, if customary for the geographic area and if requested by Lender, earthquake; (e) After completion of construction and occupancy of any proposed Improvements, business interruption insurance (including rental value if any such Property or Facility is leased in whole or part) equal to not less than twelve (12) months estimated gross revenues less expenses not ordinarily incurred during the period of business interruption; and (f) Worker's compensation insurance for all General Contractors and as required by the laws of the state where each Property is located. Each of the policies described in Section 5.4 (a) and (b) shall name the Lender as 16 17 an additional insured. Each of the policies described in Section 5.4(c) and 5.4(d) shall name Lender as mortgagee and loss payee under a standard noncontributory mortgagee and lender loss payable clause, and shall provide that Lender shall receive not less than thirty (30) days written notice prior to cancellation or modification. The proceeds of any of the policies described in Section 5.4(c) and 5.4(d) shall be payable by check and shall be payable to Borrower and Lender unless an Event of Default has occurred and is continuing in which event such proceeds shall be payable to Lender, delivered to Lender, and such proceeds shall be applied by Lender, at its sole option, either (i) to the full or partial payment or prepayment of the Loan obligations, or (ii) to the repair and/or restoration of the Improvements, Equipment and Inventory damaged or taken. Each of the policies described in Section 5.4(c) and 5.4(d) must be written by an insurer having a rating of A or better from Standard & Poors, and Fitch Investors Service and a Best rating acceptable to Lender. Notwithstanding the foregoing, Lender agrees that Lender shall make the net proceeds of insurance or condemnation (after payment of Lender's reasonable costs and expenses) available to Borrower for Borrower's repair, restoration and replacement of the Improvements, Equipment and Inventory damaged or taken on the following terms and subject to Borrower's satisfaction of the following conditions: (a) The aggregate amount of all such proceeds shall not exceed the aggregate amount of all such Loan Obligations; (b) At the time of such loss or damage and at all times thereafter while Lender is holding any portion of such proceeds, there shall exist no Default or Event of Default; (c) The Improvements, Equipment, and Inventory for which loss or damage has resulted shall be capable of being restored to its preexisting-condition and utility in all material respects with a value equal to or greater than that which existed prior to such loss or damage and such restoration shall be capable of being completed prior to the earlier to occur of (i) the expiration of business interruption insurance as determined by an independent inspector or (ii) the Maturity Date; (d) Within thirty (30) days from the date of such loss or damage Borrower shall have given Lender a written notice electing to have the proceeds applied for such purpose; (e) Within seventy-five (75) days following the date of notice under the preceding subparagraph (c) (unless Lender agrees to extend such time period based on evidence that Borrower is diligently proceeding to satisfy the requirements described below as determined by Lender in its commercially reasonable discretion) and prior to any proceeds being disbursed to Borrower, Borrower shall have provided to Lender all of the following: 17 18 i. complete plans and specifications for restoration, repair and replacement of the Improvements, Equipment and Inventory damaged to the condition, utility and value required by (c) above, ii. if loss or damage exceeds $50,000, fixed price or guaranteed maximum cost construction contracts for completion of the repair and restoration work in accordance with such plans and specifications, iii. builder's risk insurance for the full cost of construction with Lender named under a standard mortgagee loss-payable clause, iv. evidence that such additional funds, as in Lender's reasonable opinion are necessary, are available to complete such repair, restoration and replacement, and v. copies of all permits and licenses necessary to complete the work in accordance with the plans and specifications; (f) Lender may, at Borrower's expense, retain an independent inspector to review and approve plans and specifications and completed construction and to approve all requests for disbursement, which approvals shall be conditions precedent to release of proceeds as work progresses; (g) No portion of such proceeds shall be made available by Lender for architectural reviews or for any other purposes which are not directly attributable to the cost of repairing, restoring or replacing the Improvements, Equipment and Inventory for which a loss or damage has occurred unless the same are covered by such insurance; (h) Borrower shall diligently pursue such work and shall complete such work prior to the earlier to occur of the expiration of business interruption insurance or the Maturity Date; (i) Each disbursement by Lender of such proceeds and deposits shall be funded subject to the conditions hereof and in accordance with the terms hereof; (j) Lender shall have a first lien and security interest in all building materials and completed repair and restoration work and in all fixtures and equipment acquired with such proceeds, and Borrower shall execute and deliver such mortgages, deeds of trust, security agreements, financing statements and other instruments as Lender shall request to create, evidence, or perfect such lien and security interest; and (k) In the event and to the extent such proceeds are not required or used for the repair, restoration and replacement of the Improvements, Equipment and Inventory for which a loss or damage has occurred, or in the event Borrower fails to timely make the election to have insurance proceeds applied to the restoration of the Improvements, Equipment, or Inventory, or, having made such election, fails to timely 18 19 comply with the terms and conditions set forth herein, or, if the conditions set forth herein for such application are otherwise not satisfied, then Lender shall be entitled upon ten (10) days prior written notice to Borrower or upon prior consent from Borrower to apply such proceeds, or the balance thereof, at Lender's option either (i) to the full or partial payment or prepayment of the Loan obligations (without premium) in the manner aforesaid, or (ii) to the repair, restoration and/or replacement of all or any part of such Improvements, Equipment and Inventory for which a loss or damage has occurred. Borrower appoints Lender as Borrower's attorney-in-fact only upon an Event of Default to cause the issuance of or an endorsement of any insurance policy to bring Borrower into compliance herewith and, as limited above, at Lender's sole option, to make any claim for, receive payment for, and execute and endorse any documents, checks or other instruments in payment for loss, theft, or damage covered under any such insurance policy; however, in no event will Lender be liable for failure to collect any amounts payable under any insurance policy. 5.5 Financial and Other Information. Provide Lender the following financial statements and information on a continuing basis during the term of the Loan: (a) Within forty-five (45) days after the end of each calendar quarter, unaudited (internally prepared in accordance with GAAP) financial statements of Borrower, which statements shall include a balance sheet and a statement of income and expenses for the quarter then ended, certified by the chief financial officer of Borrower, to be true and correct. (b) Beginning with the calendar quarter ending on December 31, 1998, and continuing each successive calendar quarter thereafter, within forty-five (45) days of the end of each such calendar quarter, quarterly financial operating statements of the operations of each Facility, prepared in accordance with GAAP, which such statements shall include a balance sheet and statement of income and expenses for the quarter then ended, certified by a financial officer of the Borrower to be true and correct. (c) With respect to each Facility, within five (5) days of receipt, any and all written notices from any and all licensing and/or certifying agencies that the applicable Facility license and/or the Permits are being downgraded to a substandard category, revoked, or suspended or that any such action is pending. (d) Within forty-five (45) days of the end of each calendar quarter, a certificate of the chief financial officer of the Borrower confirming compliance with the covenants and requirements set forth above. The Lender further reserves the right to require such other financial information of Borrower, and/or each Facility, in such form and at such other times (including monthly or more frequently) as Lender shall deem necessary, and Borrower agrees promptly to provide or to cause to be provided, such information to Lender. Lender may from time to 19 20 time reasonably request such further financial information as Lender deems advisable for administration of the Loan. 5.6 Compliance Certificate. INTENTIONALLY OMITTED. 5.7 Books and Records. With respect to each Facility, keep and maintain at all times at the Facility, and upon Lender's request shall make available at the Facility, complete and accurate books of account and records (including copies of supporting bills and invoices) adequate to reflect correctly the results of the operation of the Facility, and copies of all written contracts, leases (if any), and other instruments which affect the Property where the Facility is located, which books, records, contracts, leases (if any) and other instruments shall be subject to examination and inspection at any reasonable time by Lender (upon reasonable advance notice, which for such purposes only may be given orally, except in the case of an emergency or following an Event of Default, in which case no advance notice shall be required), provided, however, if an Event of Default has occurred and is continuing, Borrower shall deliver to Lender upon written demand all books, records, contracts, leases (if any) and other instruments relating to the Facility or its operation and Borrower authorizes Lender to obtain a credit report on Borrower at any time. 5.8 Payment of Indebtedness. INTENTIONALLY OMITTED 5.9 Records of Accounts. Maintain all records, including records pertaining to the Accounts of Borrower, at the chief executive office of Borrower as set forth in this Agreement. 5.10 Conduct of Business. With respect to each Facility, conduct the operation of the Facility at all times in a manner consistent with the following: i. maintain the standard of care for the residents of the Facility at all times at a level necessary to ensure quality care for the residents of the Facility in accordance with customary and prudent industry standards; ii. operate the Facility in a prudent manner and in compliance with applicable laws and regulations relating thereto and cause to be obtained and maintained all Permits, Reimbursement Contracts, and any other agreements necessary for the use and operation of the Facility or as may be necessary for participation in applicable reimbursement programs; iii. maintain sufficient Inventory and Equipment of types and quantities at the Facility to enable Borrower adequately to perform operations of Facility; and iv. keep all Improvements and Equipment located on or used or useful in connection with the Facility in good repair, working order and condition, 20 21 reasonable wear and tear excepted, and from time to time make all needed and proper repairs, renewals, replacements, additions, and improvements thereto to keep the same in good operating condition. 5.11 Periodic Surveys. INTENTIONALLY OMITTED 5.12 Debt Service Coverage Requirements. INTENTIONALLY OMITTED 5.13 Capital Expenditures. INTENTIONALLY OMITTED 5.14 Management Agreement. INTENTIONALLY OMITTED 5.15 Updated Appraisals. INTENTIONALLY OMITTED 5.16 Comply with Covenants and Laws. Comply, in all material respects, with all applicable covenants and restrictions of record and all laws, ordinances, rules and regulations and keep the Facilities and the Properties in compliance with all applicable laws, ordinances, rules and regulations, including, without limitation, the Americans with Disabilities Act and regulations promulgated thereunder, and laws, ordinances, rules and regulations relating to zoning, health, building codes, setback requirements, Medicaid and Medicare laws and keep the Permits for the Facilities in full force and effect. 5.17 Taxes and Other Charges. Subject to any right the Borrower may have to contest the same as set forth in the Mortgages, pay all taxes, assessments, charges, claims for labor, supplies, rent, and other obligations which, if unpaid, might give rise to a Lien against the Properties, except Liens to the extent permitted by this Agreement. 5.18 Commitment Letter. If any term of the Commitment Letter shall conflict with the terms of this Agreement, this Agreement shall govern and control. 5.19 Certificate. Upon Lender's written request, furnish Lender with a certificate stating that Borrower has complied with and is in compliance with all terms, covenants and conditions of the Loan Documents to which Borrower is a party and that there exists no Default or Event of Default or, if such is not the case, that one or more specified events have occurred, and that the representations and warranties contained herein are true and correct with the same effect as though made on the date of such certificate. 5.20 Notice of Fees or Penalties. Immediately notify Lender, upon Borrower's receipt of written notice, of the assessment by any federal, state, or local health or licensing agency of any fines or penalties against Borrower or any Facility. 5.21 Inspector. Borrower shall pay all reasonable fees and expenses of any Inspector. 21 22 5.22 Construction Start and Completion. Once commenced, Borrower shall diligently proceed with construction of the Improvements, in a good and workmanlike manner in accordance with the Plans, and shall complete construction of the Improvements in accordance with the Plans. Borrower will, forthwith upon completion of the Improvements, cause the same to be inspected by each appropriate governmental body, shall correct any defects and deficiencies which may be disclosed by any such inspection and shall cause to be duly issued all occupancy certificates and other licenses, permits and authorizations necessary for the operation and occupancy of the Property. 5.23 Protection Against Liens. Borrower agrees to pay and discharge all claims for labor performed and material and services furnished in connection with construction of the Improvements, to diligently record or procure the recordation of a valid notice of completion, if applicable, upon completion of construction, to diligently record or procure for recordation of a notice of cessation, if applicable, in the event of a cessation of labor, on the work of the Improvements for a continuous period of thirty (30) days or more, and to take all other steps necessary to forestall the assertion of claims or liens either against any Property, or the Improvements, or any part thereof or right or interest appurtenant thereto, or of claims against Lender or the Loan proceeds. Nothing herein contained shall require Borrower to pay any claims for labor, materials or services which Borrower in good faith disputes and which Borrower, at its own expense, is currently and diligently contesting; provided, however, that not later than thirty (30) days after the notice of the filing of any claim or lien against the Property which is disputed or contested by Borrower, Borrower shall either (a) record a surety bond sufficient to release said claim or lien and promptly give notice of such recordation to the lienholder or claimant, or (b) make other arrangements therefor satisfactory to Lender. Lender shall not be required to extend the Maturity Date of the Loan by reason of Borrower's failure to pay such claims. 5.24 Construction Inspections. Lender and its representatives, including the Inspector, shall have the right at all reasonable times during regular business hours (and at any time in the event of an emergency) to enter upon the Properties and inspect the work of construction to determine that the same is in conformity with the Plans and all of the requirements hereof. If in Lender's judgment it is necessary, Lender shall have the further right, from time to time, to retain a consultant or consultants, at Borrower's expense, to inspect the work and verify compliance by Borrower with the provisions hereof. Borrower understands and agrees that said inspections are for the sole purpose of protecting Lender's Loan advances and security for the Loan and are made solely for the Lender's benefit; that such inspections may be superficial and general in nature, primarily to inform Lender of the progress of construction of the Improvements and that, in any event, Borrower shall not be entitled to rely on any such inspection(s) as constituting Lender's approval, satisfaction or acceptance with respect to materials, workmanship, conformance to Plans or otherwise. Borrower hereby agrees to make its own inspections of the construction to determine that the quality of the Improvements and all other requirements of the work of construction financed by the Loan are being performed in a manner satisfactory to Borrower, and Borrower agrees to immediately notify Lender in 22 23 writing should the same show any work to be unsatisfactory in any manner. without limiting the foregoing, Borrower shall permit Lender to examine and copy all books and account records and other papers relating to the Properties and the construction of the Improvements; and Borrower will use its best efforts to cause all contractors, subcontractors and materialmen to cooperate with Lender to enable it to do so. 5.25 Construction and Repairs. Borrower shall complete or restore promptly and in good workmanlike manner any Improvement which may be constructed, damaged, or destroyed and pay when due all costs incurred therefor. Borrower shall replace any work or materials which do not fully comply with the plans and specifications approved by Lender, or are in some other manner in violation of this Agreement within fifteen (15) days after written notice to Borrower of such fact. Work shall not cease on the construction of the Improvements for any reason whatsoever for a period of fifteen (15) consecutive days unless and to the extent that such delay is occasioned by causes beyond the control of Borrower. 5.26 Notify Lender of Litigation or Compliance. Borrower shall promptly notify Lender in writing of any litigation or litigation threatened in writing affecting Borrower, any Facility and/or Property or any part thereof, and of all complaints or charges made by any Governmental Authority affecting the Borrower or any Property or Facility. ARTICLE VI NEGATIVE COVENANTS OF BORROWER Until the Loan Obligations have been paid in full, Borrower shall not: 6.1 Assignment of Licenses and Permits. Assign or transfer any of its interest in any Permits or Reimbursement Contracts (including rights to payment thereunder) pertaining to the Facilities, or assign, transfer, or remove or permit any other person to assign, transfer, or remove any records pertaining to any Facility including, without limitation, resident records, medical and clinical records (except for removal of such resident records as directed by the residents owning such records), without Lender's prior written consent, which consent may be granted or refused in Lender's sole discretion. 6.2 No Liens; Exceptions. Create, incur, assume or suffer to exist any Lien upon or with respect to any Facility, any of its properties, rights, income or other assets relating thereto, including, without limitation, the Collateral whether now owned or hereafter acquired, other than the following permitted Liens: (a) Liens at any time existing in favor of the Lender; (b) Inchoate Liens arising by operation of law for the purchase of labor, services, materials, equipment or supplies, provided payment shall not be 23 24 delinquent and, if such Lien is a lien upon any of the Properties or Improvements, such Lien must be fully disclosed to Lender and bonded off and removed from such Property or Properties and Improvements in a manner satisfactory to Lender; (c) Liens incurred in the ordinary course of business in connection with workers' compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure performance of tenders, statutory obligations, leases and contracts (other than for money borrowed or for credit received with respect to property acquired) entered into in the ordinary course of business as presently conducted or to secure obligations for surety or appeal bonds; (d) Liens for current year's taxes, assessments or governmental charges or levies provided payment thereof shall not be delinquent; and (e) "Permitted Encumbrances" upon the Property, as defined in the Mortgages. 6.3 Merger, Consolidation, etc. Consummate any merger, consolidation or similar transaction, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions), all or substantially all of its assets (whether now or hereafter acquired), without the prior written consent of the Lender, which consent may be granted or refused in Lender's sole discretion. 6.4 Disposition of Assets. Sell, lease, transfer or otherwise dispose of any material portion of its assets without the prior written consent of the Lender, which consent may be granted or refused in Lender's commercially reasonable discretion. 6.5 Change of Business. Make any material change in the nature of its business as it is being conducted as of the date hereof. 6.6 Changes in Accounting. Change its methods of accounting, unless such change is permitted by GAAP, and provided such change does not have the effect of curing or preventing what would otherwise be an Event of Default or Default had such change not taken place. 6.7 ERISA Funding and Termination. Permit (a) the funding requirements of ERISA with respect to any employee plan to be less than the minimum required by ERISA at any time, or (b) any employee plan to be subject to involuntary termination proceedings at any time. 6.8 INTENTIONALLY OMITTED 6.9 Transfer of Ownership Interests. Permit a change in the ownership interests of the Persons comprising the Borrower unless the written consent of the Lender is first obtained, which consent may be granted or refused in Lender's sole discretion. 24 25 6.10 Change of Use. With respect to any Facility, alter or change the use of the Facility or permit any management agreement for the Facility or enter into any operating lease for the Facility, unless Borrower first notifies Lender and provides Lender a copy of the proposed lease agreement or management agreement, obtains Lender's written consent thereto, which consent may be withheld in Lender's sole discretion, and obtains and provides Lender with a subordination agreement in form satisfactory to Lender, as determined by Lender in its sole discretion, from such manager or lessee subordinating to all rights of Lender. 6.11 Place of Business. Change its chief executive office or its principal place of business without first giving Lender at least thirty (30) days prior written notice thereof and promptly providing Lender such information and amendatory financing statements as Lender may request in connection therewith. 6.12 INTENTIONALLY OMITTED 6.13 Changes to Plans. There shall be no material change of any of the Plans or working drawings, whether by change order or otherwise, without the prior written approval of Lender, and, to the extent that such approvals may be required, the prior written approval of all appropriate governmental authorities. As a condition to its approval of any change, Lender may require verification that the change will not "materially" increase the total cost of constructing the Improvements or increase the time required to complete their construction. If the proposed change may affect the Approved Budget, Borrower shall follow the procedure described in Section 7.1(d) hereof in requesting Lender to approve such change. For purposes herein, "materially" shall mean any single change order to any General Contractor's construction contract in excess of $50,000.00 or any change orders in excess of $250,000.00 in the aggregate. 6.14 Personal Property Incorporation. No materials, equipment or fixtures shall be purchased or installed in the Improvements under any security agreement, conditional sales contract or other agreement wherein the seller reserves a security interest in, or the right to remove or to repossess, such items or to consider them personal property after their incorporation into the work of construction without Lender's written consent. All personal property or construction material for which Lender advances Loan proceeds is to be stored on the Property and in Lender's judgment must be reasonably secure from damage and theft and fully insured at all times. ARTICLE VII DISBURSEMENT OF LOAN FUNDS 7.1 Advances of Loan Funds. Unless Lender elects otherwise in Lender's sole discretion, all advances of the Loan shall be made in accordance with the following: (a) At the time of the requested advance, Borrower must (i) not be in default under this Agreement, the Note or any other Loan Document; (ii) have cured any 25 26 non-performance of any event which, after notice thereof by Lender, with the passage of time could constitute a Default or an Event of Default; and (iii) have met all material requirements of any Governmental Authority pertaining to Borrower, the Properties, or the Facilities. (b) Subject to the provisions of this Agreement, advances will be made by Lender only for payment of those items shown in the Approved Budget. (c) Disbursements of Loan proceeds for construction items shall be made within seven (7) days after Borrower's compliance with the terms hereof. Construction disbursements will be made to Borrower upon receipt by Lender of: i. A schedule of estimated monthly disbursements, which must be updated each month and accompany each disbursement request; ii. Requisition forms approved by Lender (as may be changed by Lender from time to time), showing a complete and detailed breakdown, including, but not limited to, the total amount actually expended by Borrower and that portion of costs actually reimbursed to Borrower; iii. Satisfactory certification from Borrower and the General Contractor that all Loan proceeds previously received and currently requested have been or will be disbursed in a timely manner solely in payment of costs authorized by the Approved Budget and actually incurred; iv. Appropriate lien releases from the General Contractor paid with the Loan disbursements made during the prior month. (d) Prior to any advance of Loan proceeds for costs incurred in connection with the development or construction of the Improvements which are not within the Approved Budget, Borrower shall furnish Lender with a statement of additional expenses which covers all additional costs which are to be incurred in connection with the acquisition and development of the Property and the portions thereof to be financed by the Loan, with the dollar cost breakdown in such detail as Lender may require, including verification of any costs specified by Lender. (e) Advances of working capital shall be made upon five (5) business days notice after receipt of a disbursement request complying with the terms of this Agreement. 7.2 Payment to Lender or Third Parties. Notwithstanding anything to the contrary herein contained, at Lender's election, without further notice to or authorization by Borrower, Lender may use and disburse Loan proceeds to pay or provide, as and when due, any Loan or commitment fees owing to Lender as set forth in Section 2.4 above, 26 27 interest on the Loan and such other sums as may be owing to Lender or to any third parties with respect to the Loan. ARTICLE VIII ENVIRONMENTAL HAZARDS 8.1 Prohibited Activities and Conditions. Except for matters described in Section 8.2, Borrower shall not cause or permit any of the following: (a) The presence, use, generation, release, treatment, processing, storage (including storage in above ground and underground storage tanks), handling, or disposal of any Hazardous Materials in, on or under any Property or any Improvements; (b) The transportation of any Hazardous Materials to, from, or across any Property; (c) Any occurrence or condition on any Property or in the Improvements or any other property of Borrower that is adjacent to any Property, which occurrence or condition is or may be in violation of Hazardous Materials Laws; or (d) Any violation of or noncompliance with the terms of any Environmental Permit with respect to any Property, the Improvements or any property of Borrower that is adjacent to any Property. The matters described in clauses (a) through (d) above are referred to collectively in this Article VIII as "Prohibited Activities and Conditions" and individually as a "Prohibited Activity and Condition." 8.2 Exclusions. Notwithstanding any other provision of Article 8.1 to the contrary, "Prohibited Activities and Conditions" shall not include the safe and lawful use, transportation and storage of quantities of (1) pre-packaged supplies, medical waste, cleaning materials and petroleum products customarily used in the operation and maintenance of comparable Facilities, (2) cleaning materials, personal grooming items and other items sold in pre-packaged containers for consumer use and used by occupants of the Facilities; and (3) petroleum products used in the operation and maintenance of motor vehicles from time to time located on the parking areas of the Properties, so long as all of the foregoing are used, stored, handled, transported and disposed of in compliance with Hazardous Materials Laws. 8.3 Preventive Action. Borrower shall take all appropriate steps (including the inclusion of appropriate provisions in any Leases approved by Lender which are executed after the date of this Instrument) to prevent its employees, agents, contractors, tenants and occupants of the Facilities from causing or permitting any Prohibited Activities and Conditions. 27 28 8.4 0 & M Program Compliance. INTENTIONALLY OMITTED 8.5 Borrower's Environmental Representations and Warranties. Borrower represents and warrants to Lender that, except as previously disclosed by Borrower to Lender in writing: (a) Borrower has not at any time caused or permitted any Prohibited Activities and Conditions. (b) No Prohibited Activities and Conditions exist or have existed. (c) The Properties and the Improvements do not now contain any underground storage tanks, and, to the best of Borrower's knowledge after reasonable and diligent inquiry, the Properties and the Improvements have not contained any underground storage tanks in the past. If there is an underground storage tank located on any Property or the Improvements which has been previously disclosed by Borrower to Lender in writing, that tank complies with all requirements of Hazardous Materials Laws. (d) Borrower has complied with all Hazardous Materials Laws, including all requirements for notification regarding releases of Hazardous Materials. Without limiting the generality of the foregoing, Borrower has obtained all Environmental Permits required for the operation of the Properties and the Improvements in accordance with Hazardous Materials Laws now in effect and all such Environmental Permits are in full force and effect. No event has occurred with respect to the Properties and/or Improvements that constitutes, or with the passing of time or the giving of notice would constitute, noncompliance with the terms of any Environmental Permit. (e) There are no actions, suits, claims or proceedings pending or, to the best of Borrower's knowledge after reasonable and diligent inquiry, threatened that involve the Properties and/or the Improvements and allege, arise out of, or relate to any Prohibited Activity and Condition. (f) Borrower has not received any complaint, order, notice of violation or other communication from any Governmental Authority with regard to air emissions, water discharges, noise emissions or Hazardous Materials, or any other environmental, health or safety matters affecting the Properties, the Improvements or any other property of Borrower that is adjacent to the Properties. The representations and warranties in this Article VIII shall be continuing representations and warranties that shall be deemed to be made by Borrower throughout the term of the Loan evidenced by the Note, until the Loan Obligations have been paid in full. 8.6 Notice of Certain Events. Borrower shall promptly notify Lender in writing of any and all of the following that may occur: (a) Borrower's discovery of any Prohibited Activity and Condition. 28 29 (b) Borrower's receipt of or knowledge of any written complaint, order, notice of violation or other communication from any Governmental Authority or other person with regard to present, or future alleged Prohibited Activities and Conditions or any other environmental, health or safety matters affecting the Properties, the Improvements or any other property of Borrower that is adjacent to the Properties. (c) Any representation or warranty in this Article VI which becomes untrue at any time after the date of this Agreement. Any such notice given by Borrower shall not relieve Borrower of, or result in a waiver of, any obligation under this Agreement, the Note, or any of the other Loan Documents. 8.7 Costs of Inspection. Borrower shall pay promptly the costs of any environmental inspections, tests or audits required by Lender in connection with any foreclosure or deed in lieu of foreclosure, or, if required by Lender, as a condition of Lender's consent to any Transfer of any Property or portion thereof, or required by Lender following a reasonable determination by Lender that Prohibited Activities and Conditions may exist. Any such costs incurred by Lender (including the fees and out-of pocket costs of attorneys and technical consultants whether incurred in connection with any judicial or administrative process or otherwise) which Borrower fails to pay promptly shall become an additional part of the Loan Obligations. 8.8 Remedial Work. If any investigation, site monitoring, containment, clean-up, restoration or other remedial work ("Remedial Work") is necessary to comply with any Hazardous Materials Law or order of any Governmental Authority that has or acquires jurisdiction over the Properties, the Improvements or the use, operation or improvement of the Properties under any Hazardous Materials Law, Borrower shall, by the earlier of (1) the applicable deadline required by Hazardous Materials Law or (2) thirty (30) days after notice from Lender demanding such action, begin performing the Remedial Work, and thereafter diligently prosecute it to completion, and shall in any event complete such work by the time required by applicable Hazardous Materials Law. if Borrower fails to begin on a timely basis or diligently prosecute any required Remedial Work, Lender may, at its option, cause the Remedial Work to be completed, in which case Borrower shall reimburse Lender on demand for the cost of doing so. Any reimbursement due from Borrower to Lender shall become part of the Loan Obligations. 8.9 Cooperation with Governmental Authorities. Borrower shall cooperate with inquiry by any Governmental Authority and shall comply with any governmental or judicial order which arises from any alleged Prohibited Activity and Condition. 8.10 Indemnity. (a) Borrower shall hold harmless, defend and indemnify (i) Lender, (ii) 29 30 the officers, directors, partners, agents, shareholders, employees and trustees of any of the foregoing, and (iii) the heirs, legal representatives, successors and assigns of each of the foregoing (together, the "Indemnitees") against all proceedings, claims, damages, losses, expenses, penalties and costs (whether initiated or sought by any Governmental Authority or private parties), including commercially reasonable fees and out of pocket expenses of attorneys and expert witnesses, investigatory fees, and remediation costs, whether incurred in connection with any judicial or administrative process or otherwise, arising directly or indirectly from any of the following: 1. Any breach of any representation or warranty of Borrower in this Article VIII. 2. Any failure by Borrower to perform any of its obligations under this Article VIII. 3. The existence or alleged existence (by any applicable Governmental Authority) of any Prohibited Activity and Condition. 4. The presence or alleged presence of Hazardous Materials in, on, around or under any Property, the Improvements or any property of Borrower that is adjacent to any Property, or Materials Law. 5. Actual or alleged violation of any Hazardous (b) Counsel selected by Borrower to defend Indemnitees shall be subject to the approval of those Indemnitees. Notwithstanding anything contained herein, any Indemnitee may elect to defend any claim or legal or administrative proceeding at the Borrower's expense if such Indemnitee has reason to believe that its interests are not being adequately represented or diverge from other interests being represented by such counsel. Nothing contained herein shall prevent an Indemnitee from employing separate counsel in any such action at any time and participating in the defense thereof at its own expense. (c) Borrower shall not, without the prior written consent of those Indemnitees who are named as parties to a claim or legal or administrative proceeding (a "Claim") settle or compromise the Claim if the settlement W results in the entry of any judgment that does not include as an unconditional term the delivery by the claimant or plaintiff to Lender of a written release of those Indemnitees, satisfactory in form and substance to Lender; or (ii) may materially and adversely affect any Indemnitee, as determined by such Indemnitee in its sole discretion. (d) The liability of Borrower to indemnify the Indemnitees shall not be limited or impaired by any of the following, or by any failure of Borrower to receive notice of or consideration for any of the following: 1. Any amendment or modification of any Loan Document. 30 31 2. Any extensions of time for performance required by any of the Loan Documents. 3. The accuracy or inaccuracy of any representations and warranties made by Borrower under this Instrument or any other Loan Document. 4. The release of Borrower or any other person, by Lender or by operation of law, from performance of any obligation under any of the Loan Documents. 5. The release or substitution in whole or in part of any security for the Loan obligations. 6. Lender's failure to properly perfect any lien or security interest given as security for the Loan Obligations. (e) Borrower shall, at its own cost and expense, do all of the following: 1. Pay or satisfy any judgment or decree that may be entered against any Indemnitee or Indemnitees in any legal or administrative proceeding incident to any matters against which Indemnitees are entitled to be indemnified under this Article VIII. 2. Reimburse Indemnitees for any expenses paid or incurred in connection with any matters against which Indemnitees are entitled to be indemnified under this Article VIII. 3. Reimburse Indemnitees for any and all expenses, including commercially reasonable fees and costs of attorneys and expert witnesses, paid or incurred in connection with the enforcement by Indemnitees of their rights under this Article VIII, or in monitoring and participating in any legal or administrative proceeding. (f) in any circumstances in which the indemnity under this Article VIII applies, Lender may employ its own legal counsel and consultants to prosecute, defend or negotiate any claim or legal or administrative proceeding and Lender, with the prior written consent of Borrower (which shall not be unreasonably withheld, delayed or conditioned) may settle or compromise any action or legal or administrative proceeding. Borrower shall reimburse Lender upon demand for all costs and expenses incurred by Lender, including all costs of settlements entered into in good faith, and the commercially reasonable fees and out of pocket expenses of such attorneys and consultants. (g) The provisions of this Article VIII shall be in addition to any and all other obligations and liabilities that Borrower may have under the applicable law or under the other Loan Documents, and each Indemnitee shall be entitled to indemnification under this Article VIII without regard to whether Lender or that Indemnitee has exercised any rights against the Property and/or the Improvements or any other security, pursued 31 32 any rights against any guarantor, or pursued any other rights available under the Loan Documents or applicable law. If Borrower consists of more than one person or entity, the obligation of those persons or entities to indemnify the Indemnitees under this Article VIII shall be joint and several. The obligations of Borrower to indemnify the Indemnitees under this Article VIII shall survive any repayment or discharge of the Loan obligations, any foreclosure proceeding, any foreclosure sale, any delivery of any deed in lieu of foreclosure, and any release of record of the lien of the Mortgage. ARTICLE IX EVENTS OF DEFAULT AND REMEDIES 9.1 Events of Default. The occurrence of any one or more of the following shall constitute an "Event of Default" hereunder: (a) The failure by Borrower to pay any installment of principal, interest, or other charges required under the Note, within ten (10) days after notice from Lender that the same has become due (provided, however, that Lender shall not be obligated to provide such notice more than once during the term of the Loan in which event such cure period for failure to pay shall be within ten (10) days after the same becomes due); or (b) Borrower's violation of any covenant set forth in Article VI hereof; or (c) Borrower's failure to deliver or cause to be delivered the financial statements and information set forth in Section 5.5 above within the times required and such failure is not cured within thirty (30) days following Lender's written notice to Borrower thereof; or (d) The failure of Borrower properly and timely to perform or observe any covenant or condition set forth in this Agreement (other than those specified in (a) and (b) of this Section) or any other Loan Documents which is susceptible of being cured and is not cured within any applicable cure period as set forth herein or, if no cure period is specified therefor, is not cured within thirty (30) days of Lender's notice to Borrower of such Default; or (e) The filing by Borrower or Guarantor of a voluntary petition, or the adjudication the Borrower or Guarantor, or the filing by the Borrower or Guarantor of any petition or answer seeking or acquiescing, in any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief for itself under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency or other relief for debtors, or if the Borrower or Guarantor should seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator for itself or of all or any substantial part of its property or of any or all of the rents, revenues, issues, earnings, profits or income thereof, or the mailing of any general assignment for the benefit of creditors or the admission in writing by the Borrower of its inability to pay its debts generally as they become due; or 32 33 (f) The entry by a court of competent jurisdiction of an order, judgment, or decree approving a petition filed against Borrower or Guarantor which such petition seeks any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency, or other relief for debtors, which order, judgment or decree remains unvacated and unstayed for an aggregate of sixty (60) days (whether or not consecutive) from the date of entry thereof, or the appointment of any trustee, receiver or liquidator of the Borrower or Guarantor or of all or any substantial part of its properties or of any or all of the rents, revenues, issues, earnings, profits or income thereof which appointment shall remain unvacated and unstayed for an aggregate of sixty (60) days (whether or not consecutive); or (g) Any change in the ownership interests of the Borrower, unless the written consent of the Lender is first obtained, which consent may be granted or refused in Lender's sole discretion; or (h) Unless otherwise permitted hereunder or under any other Loan Documents, the sale, transfer, lease, assignment, or other disposition, voluntarily or involuntarily, of the Collateral, or any part thereof, or except for permitted Liens as described in Section 6.2 above, any further encumbrance of the Collateral, unless the prior written consent of Lender is obtained which consent will not be unreasonably withheld; or (i) Any breach by Borrower or Guarantor under that certain merger agreement dated October 18, 1998, between Guarantor and Lender (the "Merger Agreement"); or (j) Any certificate, statement, representation, warranty or audit heretofore or hereafter furnished by or on behalf of Borrower or Guarantor pursuant to or in connection with this Agreement (including, without limitation, representations and warranties contained herein or in any Loan Documents) or as an inducement to Lender to make the Loan to Borrower, proves to have been false in any material respect at the time when the facts therein set forth were stated or certified, or proves to have omitted any substantial contingent or unliquidated liability or claim against Borrower or Guarantor or on the date of execution of this Agreement there shall have been any materially adverse change in any of the acts previously disclosed by any such certificate, statement, representation, warranty or audit, which change shall not have been disclosed to Lender in writing at or prior to the time of such execution; or (k) The failure of Borrower to correct, within the time deadlines set by any applicable licensing agency, any deficiency which would result in the following actions by such agency with respect to any Facility: (1) a termination of any Reimbursement Contract or any Permit; or 33 34 (2) a ban on new admissions generally; or (1) The Borrower or any Facility should be assessed fines or penalties by any state health or licensing agency having jurisdiction over such Persons or any Facility in excess of $25,000; or (m) A final judgment shall be rendered by a court of law or equity against Borrower or Guarantor, and the same shall remain undischarged for a period of thirty (30) days, unless such judgment is either (i) fully covered by collectible insurance and such insurer has within such period acknowledged such coverage in writing, or (ii) although not fully covered by insurance, enforcement of such judgment has been effectively stayed, such judgment is being contested or appealed by appropriate proceedings and Borrower or Guarantor, has established reserves adequate for payment in the event the Borrower or Guarantor is ultimately unsuccessful in such contest or appeal and evidence thereof is provided to Lender; or (n) The occurrence of any materially adverse change in the financial condition or prospects of Borrower or Guarantor, or the existence of any other condition which, in Lender's reasonable determination, in either case constitutes a material impairment of Borrower's or Guarantor's ability to operate the Facilities or of such Borrower's or Guarantor's ability to perform its obligations under the Loan Documents, and if such condition is capable of being cured, is not remedied within thirty (30) days after written notice; or (o) The filing of any claim or lien against the Properties or any part thereof provided, however, that no default shall exist hereunder as long as Borrower has fully complied with Section 5.23 of this Agreement; or (p) Any material deviation in the work of construction from the Plans without the approval of Lender, or the appearance of defective workmanship or materials, which deviations or defects are not corrected or substantially corrected within twenty (20) days after receipt of written notice thereof from Lender to Borrower; or (q) With respect to any Property, any of the Improvements encroach over the Property or setback lines or upon an easement, or any structure upon an adjoining Property encroaches upon the Property; or (r) The work of construction is delayed or suspended for a period of twenty (20) consecutive calendar days or more for any reason except those which Lender determines to be beyond the reasonable control of Borrower, or the work of construction does not proceed with due diligence, or is not completed by the Completion Date or such later date as Lender may elect; or (s) The expenditure by Borrower of any portion of the Loan proceeds on any item, other than the items listed on the then-current Approved Budget; or 34 35 (t) Borrower's failure to timely comply with the conditions and obligations contained in Article IV; or (u) Borrower fails to diligently continue construction of the Improvements once commenced or fails to satisfy all of the conditions of this Loan Agreement with respect to disbursement of Loan proceeds for costs of such construction, on or before the expiration of thirty (30) days after the date of this Agreement; or (v) There occurs a default under the terms of a construction contract by Borrower not cured within thirty (30) days from the occurrence thereof. Notwithstanding anything in this Section, all requirements of notice shall be deemed eliminated if Lender is prevented from declaring an Event of Default by bankruptcy or other applicable law. The cure period, if any, shall then run from the occurrence of the event or condition of Default rather than from the date of notice. 9.2 Remedies. Upon the occurrence of any one or more of the foregoing Events of Default, the Lender may, at its option: (a) Immediately terminate any further advance of Loan proceeds hereunder, and from time to time apply all or any part of the undisbursed Loan proceeds, to payment of accrued interest under the Note and/or upon any other obligations of Borrower hereunder or under the Loan Documents. (b) Declare the entire unpaid principal of the Loan obligations to be, and the same shall thereupon become, immediately due and payable, without presentment, protest or further demand or notice of any kind, all of which are hereby expressly waived. (c) Enter upon one or more Properties and complete construction of the Improvements in accordance with the Plans with such changes therein as Lender may from time to time and in its judgment deem appropriate, all at the risk and expense of Borrower. Lender shall have the right at any time to discontinue any work commenced by it with respect to the Improvements or to change any course of action undertaken by it and not be bound by any limitations or requirements of time whether set forth herein or otherwise. Lender shall have the right and power (but shall not be obligated) to assume any construction contract made by or on behalf of Borrower in any way relating to the Improvements and to take over and use all or any part of the labor, materials, supplies, and equipment contracted for by or on behalf of Borrower whether or not previously incorporated into the Improvements, all in the discretion of Lender. In connection with any work of construction undertaken by Lender pursuant to the provisions of this Section 9.2(c), Lender may (i) engage builders, contractors, architects, engineers and others for the purpose of furnishing labor, materials and equipment in connection with the construction of the Improvements, (ii) pay, settle or compromise all bills or claims which may become liens against the Properties or which have been or may be incurred in any 35 36 manner in connection with completing construction of the Improvements or for the discharge of liens, encumbrances or defects in title of the Properties, (iii) take such other action, including the employment of watchmen to protect the Improvements, or refrain from taking action under this Agreement as Lender may in its discretion determine from time to time. Borrower shall be liable to Lender for reasonable sums paid or incurred for completing construction of the Improvements, whether the same shall be paid or incurred pursuant to the provisions of this Section 9.2(c) or otherwise, and all payments made or liabilities incurred by Lender hereunder of any kind whatsoever shall be paid by Borrower to Lender upon demand, with interest at the Default Rate set forth in the Note, and all of the foregoing shall be deemed and shall constitute advances under this Agreement and be secured by the Loan Documents. For the purpose of carrying out the provisions and exercising the rights, powers and privileges granted by this Section 9.2(c) hereof, Borrower hereby unconditionally and irrevocably constitutes and appoints Lender its true and lawful attorney-in-fact to enter into such contracts, perform such acts and incur such liabilities as are referred to in this Section 9.2(c) in the name and on behalf of Borrower. This power of attorney shall be deemed irrevocable and is coupled with an interest. (d) Where substantial deviations from the Plans appear which have not been approved as set forth herein, or defective or unworkmanlike labor or materials are being used in the construction of the Improvements, or upon receipt of knowledge of encroachments to which there has been no consent, Lender shall have the right immediately to order stoppage of the construction and demand that such condition(s) be corrected. After issuance of such an order in writing, no further work shall be done on the Improvements without the prior written consent of Lender unless and until said condition has been fully corrected. (e) Proceed to protect and enforce its rights by action at law (including, without limitation, bringing suit reduce any claim to judgment), suit in equity and other appropriate proceedings including, without limitation, for specific performance of any covenant or condition contained in this Agreement. (f) Exercise any and all rights and remedies afforded by the laws of the United States, the states in which any of the Properties or other Collateral are located or any other appropriate jurisdiction as may be available for the collection of debts and enforcement of covenants and conditions such as those contained in this Agreement and the Loan Documents. (g) Exercise the rights and remedies of setoff and/or banker's lien against the interest of Borrower in and to every account and other property of Borrower which is in the possession of the Lender or any person who then owns a participating interest in the Loan, to the extent of the full amount of the Loan. (h) Exercise its rights and remedies pursuant to any other Loan Documents. 36 37 ARTICLE X MISCELLANEOUS 10.1 Waiver. No remedy conferred upon, or reserved to, the Lender in this Agreement or any of the other Loan Documents is intended to be exclusive of any other remedy or remedies, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity. Exercise of or omission to exercise any right of the Lender shall not affect any subsequent right of Lender to exercise the same. No course of dealing between Borrower and Lender or any delay on the Lender's part in exercising any rights shall operate as a waiver of any of the Lender's rights. No waiver of any Default under this Agreement or any of the other Loan Documents shall extend to or shall affect any subsequent or other then existing Default shall impair any rights, remedies or powers of Lender. 10.2 Costs and Expenses. Borrower will bear all taxes, fees and expenses (including commercially reasonable attorneys' fees and expenses of counsel for Lender) in connection with the Loan, the Note, the preparation of this Agreement and the other Loan Documents (including any amendments hereafter made), and in connection with any modifications thereto and the recording of any of the Loan Documents. If, at any time, a Default occurs or Lender becomes a party to any suit or proceeding in order to protect its interests or priority in any collateral for any of the Loan Obligations or its rights under this Agreement or any of the Loan Documents, or if Lender is made a party to any suit or proceeding by virtue of the Loan, this Agreement or any Collateral and as a result of any of the foregoing, the Lender employs counsel to advise or provide other representation with respect to this Agreement, or to collect the balance of the Loan obligations, or to take any action in or with respect to any suit or proceeding relating to this Agreement, any of the other Loan Documents, any Collateral, or Borrower, or to protect, collect, or liquidate any of the security for the Loan obligations, or attempt to enforce any security interest or lien granted to the Lender by any of the Loan Documents, then in any such events, all of the attorney's fees services, including attorneys' fees for preparation of litigation and in any appellate or bankruptcy proceedings, and any expenses, costs and charges relating thereto shall constitute additional obligations of Borrower to the Lender payable on demand of the Lender. Without limiting the foregoing, Borrower has undertaken the obligation for payment of, and shall pay, all recording and arising from such filing fees, revenue or documentary stamps or taxes, intangibles taxes, and other taxes, expenses and charges payable in connection with this Agreement, any of the Loan Documents, the Loan Obligations, or the filing of any financing statements or other instruments required to effectuate the purposes of this Agreement, and should Borrower fail to do so, Borrower agrees to reimburse Lender for the amounts paid by Lender, together with penalties or interest, if any, incurred by Lender as a result of underpayment or nonpayment. Such amounts shall constitute a portion of the Loan Obligations, shall be secured by the Mortgages and shall bear interest at the Default Rate (as defined in the Note) from the date advanced until repaid. 37 38 10.3 Performance of Lender. At its option, upon Borrower's failure to do so, the Lender may make any payment or do any act on Borrower's behalf that Borrower or others are required to do to remain in compliance with this Agreement or any of the other Loan Documents, and Borrower agrees to reimburse the Lender, on demand, for any payment made or expense incurred by Lender pursuant to the foregoing authorization, including, without limitation, commercially reasonable attorneys' fees, and until so repaid any sums advanced by Lender shall constitute a portion of the Loan obligations, shall be secured by the Mortgages and shall bear interest at the Default Rate (as defined in the Note) from the date advanced until repaid. 10.4 Indemnification. Borrower shall, at its sole cost and expense, protect, defend, indemnify and hold harmless the Indemnified Parties from and against any and all claims, suits, liabilities (including, without limitation, strict liabilities), actions, proceedings, obligations, debts, damages, losses, costs, expenses, diminutions in value, fines, penalties, charges, fees, expenses, judgments, awards, amounts paid in settlement, punitive damages, foreseeable and unforeseeable consequential damages, of whatever kind or nature (including but not limited to reasonable attorneys' fees and other costs of defense) imposed upon or incurred by or asserted against Lender by reason of (a) ownership of the Note, the Mortgages, the Properties or any interest therein or receipt of any Rents; (b) any amendment to, or restructuring of, the Loan Obligations and/or any of the Loan Documents; (c) any and all lawful action that may be taken by Lender in connection with the enforcement of the provisions of the Mortgages or the Note or any of the other Loan Documents, whether or not suit is filed in connection with same, or in connection with Borrower, any partner, joint venturer, or shareholder thereof becoming a party to a voluntary or involuntary federal or state bankruptcy, insolvency or similar proceeding; (d) any accident, injury to or death of persons or loss of or damage to property occurring in, on or about the Properties, the Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways, except any of which arise solely from Lender's wilful misconduct or gross negligence; (e) any use, nonuse or condition in, on or about the Properties, the Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (f) any failure on the part of Borrower to perform or comply with any of the terms of this Agreement or any of the other Loan Documents; (g) any claims by any broker, person or entity claiming to have participated in arranging the making of the Loan evidenced by the Note; (h) any failure of the Properties to be in compliance with any applicable laws; (i) any and all claims and demands whatsoever which may be asserted against Lender by reason of any alleged obligations or undertakings on its part to perform or discharge any of the terms, covenants, or agreements contained in any lease or management agreement or any replacement or renewal thereof or substitution therefor; (j) performance of any labor or services or the furnishing of any materials or other property with respect to the Properties, the Improvements or any part thereof, (k) the failure of any person to file timely with the Internal Revenue Service an accurate Form 1099-b, statement for recipients of proceeds from real estate, broker and barter exchange transactions, which may be required in connection with one or more of the Mortgages, or to supply a copy thereof in a timely 38 39 fashion to the recipient of the proceeds of the transaction in connection with which the Loan is made; (1) any misrepresentation made to Lender in this Agreement or in any of the other Loan Documents; (m) any tax on the making and/or recording of the Mortgages, the Note or any of the other Loan Documents; (n) the violation of any requirements of the Employee Retirement Income Security Act of 1974, as amended; (o) any fines or penalties assessed or any corrective costs incurred by Lender if any Facility or any Property or any part thereof is determined to be in violation of any covenants, restrictions of record, or any applicable laws, ordinances, rules or regulations; or (p) the enforcement by any of the Indemnified Parties of the provisions of this Section 10.4. Any amounts payable to Lender by reason of the application of this Section 10.4, shall become immediately due and payable, and shall constitute a portion of the Loan obligations, shall be secured by the Mortgage and shall accrue interest at the Default Rate. The obligations and liabilities of Borrower under this Section 10.4 shall survive any termination, satisfaction, assignment, entry of a judgment of foreclosure or exercise of a power of sale or delivery of a deed in lieu of foreclosure of the Mortgage. For purposes of this Section 10.4, the term "Indemnified Parties" means Lender and any Person who is or will have been involved in the origination of the Loan, any Person who is or will have been involved in the servicing of the Loan, any Person in whose name any encumbrance created by one or more of the Mortgages is or will have been recorded, any Person who may hold or acquire or will have held a full or partial interest in the Loan (including, without limitation, any investor in any securities backed in whole or in part by the Loan) as well as the respective directors, officers, shareholders, partners, members, employees, agents, servants, representatives, contractors, subcontractors, affiliates, subsidiaries, participants, successors and assigns of any and all of the foregoing (including, without limitation, any other Person who holds or acquires or will have held a participation or other full or partial interest in the Loan or the Properties, whether during the term of the Mortgage or as a part of or following a foreclosure of the Loan and including, without limitation, any successors by merger, consolidation or acquisition of all or a substantial portion of Lender's assets and business). 10.5 Headings. The headings of the Sections of this Agreement are for convenience of reference only, are not to be considered a part hereof, and shall not limit or otherwise affect any of the terms hereof. 10.6 Survival of Covenants. All covenants, agreements, representations and warranties made herein and in certificates or reports delivered pursuant hereto shall be deemed to have been material and relied on by Lender, notwithstanding any investigation made by or on behalf of Lender, and shall survive the execution and delivery to Lender of the Note and this Agreement. 10.7 Notices, etc. Any notice or other communication required or permitted to be given by this Agreement or the other Loan Documents or by applicable law shall be in writing and shall be in writing and shall be deemed received (a) on the date delivered, if sent by hand delivery (to the person or department if one is specified below) with receipt acknowledged by the recipient thereof, (b) three (3) Business Days following the date 39 40 deposited in U.S. mail, certified or registered, with return receipt requested, or (c) one (1) Business Day following the date deposited, for overnight service, with Federal Express or other national overnight carrier, and in each case addressed as follows: If to Borrower: Karrington Health, Inc. 919 Old Henderson Road Columbus, Ohio 43220 Attention: Legal Department with a copy to: Charles H. McCreary, Esquire Bricker & Eckler, LLP 100 South Third Street Columbus, Ohio 43215-4291 40 41 If to Lender: Sunrise Assisted Living, Inc 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Attention: Thomas B. Newell, Esquire with a copy to: Wayne G. Tatusko, Esquire Watt, Tieder, Hoffar & Fitzgerald, L.L.P. 7929 Westpark Drive, Suite 400 McLean, Virginia 22102 Either party may change its address to another single address by notice given as herein provided, except any change of address notice must be actually received in order to be effective. 10.8 Benefits. All of the terms and provisions of this Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. No Person other than Borrower or Lender shall be entitled to rely upon this Agreement or be entitled to the benefits of this Agreement. 10.9 Supersedes Prior Agreements; Counterparts. This Agreement and the instruments referred to herein supersede and incorporate all representations, promises, and statements, oral or written, made by Lender in connection with the Loan. This Agreement may not be varied, altered, or amended except by a written instrument executed by an authorized officer of the Lender. This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be an original, but such counterparts shall together constitute one and the same instrument. 10.10 Loan Agreement Governs. The Loan is governed by terms and provisions set forth in this Loan Agreement and the other Loan Documents and in the event of any irreconcilable conflict between the terms of the other Loan Documents and the terms of this Loan Agreement, the terms of this Loan Agreement shall control; provided, however, in the event there is any apparent conflict between any particular term or provision which appears in both this Loan Agreement and the other Loan Documents and it is possible and reasonable for the terms of both this Loan Agreement and the Loan Documents to be performed or complied with then notwithstanding the foregoing both the terms of this Loan Agreement and the other Loan Documents shall be performed and complied with. 10.11 Incorporation of Exhibits. All Exhibits referenced herein and attached hereto are incorporated into this Agreement by reference as if fully set forth herein. 10.12 CONTROLLING LAW. THE PARTIES HERETO AGREE THAT THE 41 42 VALIDITY, INTERPRETATION, ENFORCEMENT AND EFFECT OF THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF VIRGINIA AND THE PARTIES HERETO SUBMIT (AND WAIVE ALL RIGHTS TO OBJECT) TO NON-EXCLUSIVE PERSONAL JURISDICTION IN THE COMMONWEALTH OF VIRGINIA, FOR THE ENFORCEMENT OF ANY AND ALL OBLIGATIONS UNDER THE LOAN DOCUMENTS EXCEPT THAT IF ANY SUCH ACTION OR PROCEEDING ARISES UNDER THE CONSTITUTION, LAWS OR TREATIES OF THE UNITED STATES OF AMERICA, OR IF THERE IS A DIVERSITY OF CITIZENSHIP BETWEEN THE PARTIES THERETO, SO THAT IT IS TO BE BROUGHT IN A UNITED STATES DISTRICT COURT, IT SHALL BE BROUGHT IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA OR ANY SUCCESSOR FEDERAL COURT HAVING ORIGINAL JURISDICTION. 10.13 WAIVER OF JURY TRIAL. BORROWER HEREBY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM, SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR THE LOAN, OR (B) IN ANY WAY CONNECTED WITH OR PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALINGS OF LENDER AND/OR BORROWER WITH RESPECT TO THE LOAN DOCUMENTS OR IN CONNECTION WITH THIS AGREEMENT OR THE EXERCISE OF EITHER PARTY'S RIGHTS AND REMEDIES UNDER THIS AGREEMENT OR OTHERWISE, OR THE CONDUCT OR THE RELATIONSHIP OF THE PARTIES HERETO, IN ALL OF THE FOREGOING CASES WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. BORROWER AGREES THAT LENDER MAY FILE A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT OF BORROWER IRREVOCABLY TO WAIVE ITS RIGHTS TO TRIAL BY JURY AS AN INDUCEMENT OF LENDER TO MAKE THE LOAN, AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN BORROWER AND LENDER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. 42 43 LATE EXHIBIT 99.4 IN WITNESS WHEREOF, the parties have caused this Agreement to be properly executed as of the date first above written. WITNESS: BORROWER: - -------- --------- KARRINGTON OPERATING COMPANY, INC., an Ohio corporation /s/ Stephen Lewis By: /s/ Richard R. Slager - ----------------- ------------------------------------ Name: Richard R. Slager ------------------------------------ Its: Chairman and Chief Executive Officer ------------------------------------ LENDER: ------- SUNRISE ASSISTED LIVING, INC., a Delaware corporation /s/ WILLIAM H. KENNEDY, JR. By: /s/ Thomas B. Newell --------------------------- -------------------------------------- Name: Thomas B. Newell ------------------------------------ Its: Executive Vice President ------------------------------------ STATE OF OHIO ) COUNTY OF FRANKLIN) The foregoing instrument was acknowledged before me this 5th day of November, 1998 by Richard R. Slager, the Chairman and Chief Executive Officer of Karrington Operating Company, Inc., an Ohio corporation, on behalf of the corporation. /s/ Amy S. Maxwell ------------------------------ Notary Public [Notarial Seal] My commission expires: 9/29/99 ------- 43 44 STATE OF VIRGINIA ) COUNTY OF FAIRFAX ) The foregoing instrument was acknowledged before me this 6th day of November, 1998 by Thomas B. Newell, the Executive Vice President of Sunrise Assisted Living, Inc., a Delaware corporation, on behalf of the corporation. /s/ SUSAN H. KEELS --------------------------------- Notary Public [Notarial Seal] My commission expires: 6/30/2000 --------- EXHIBIT LIST Exhibit A - Initial Approved Budget Exhibit B - Schedule of Facilities Exhibit C - Schedule of Properties 44 45 EXHIBIT A KARRINGTON HEALTH, INC. ESTIMATED USE OF A LINE OF CREDIT: OCT '98 - JAN '99 $ AMOUNTS IN (000)
(A) OCT NOV DEC JAN TOTALS --- --- --- --- ------ EXISTING PROJECTS ROCKY RIVER (RETAINAGE) - CLV $500 $0 $0 $0 $500 FINNEYTOWN (EQUITY) - CINN 0 150 150 0 300 EASTOVER (OVERRUN) - CHAR 0 400 300 0 700 CUY FALLS (DSI/ATC/REAL) - AKRON 50 30 0 0 80 MANSFIELD (JMM) 12 0 0 0 12 DALLAS (NBBJ) 0 12 0 0 12 PARMA (NBBJ) - CLV 26 0 0 0 26 ERIE (DSI/AOM) 4 0 0 0 4 ANN ARBOR (F,F&E) 0 37 0 0 37 LANCE BOGGIO (ARCH) 115 0 0 0 115 TIFFIN (OVERRUN) 0 0 0 125 125 MISCELLANEOUS 12 12 16 0 40 SUBTOTAL EXISTING PROJECTS 719 641 466 125 1,951 FUTURE PROJECT INVESTMENT NAPERVILLE (LAND ACQUISITION) 0 0 1,500 0 1,500 MOBILE 0 273 265 360 898 JACKSON 0 274 266 362 902 HAMILTON 0 148 144 200 492 SUBTOTAL FUTURE PROJECTS $0 $695 $2,175 $922 $3,792 ESTIMATE ERROR RESERVE @ 25% 180 334 660 262 1,436 TOTAL DEVELOPMENT/C-I-P $899 $1,670 $3,301 $1,309 $7,179 LESS: CURRENT CASH FORECAST (570) (220) (220) 0 (1,010) ADDITIONAL DEVELOPMENT/C-I-P $329 $1,450 $3,081 $1,309 $7,179 OPERATING SHORTFALL 0 0 0 0 0 OPERATING CONTINGENCY 250 250 250 250 1,000 DEVELOPMENT OPERATING CASH $579 $1,700 $3,331 $1,559 $7,169 CONTINGENT PUT OF NAVATO 0 0 2,300 0 2,300 TOTAL DEVELOPMENT/OPERATING $579 $1,700 $5,631 $1,559 $9,469 (INCLUDING CONTINGENT PUT) (A) DEVELOPMENT/CONSTRUCTION LINE OF $10 MILLION.
45 46 EXHIBIT B Schedule of Facilities
PROPERTY STATUS WOOSTER EXISTING ASSISTED Cleveland and Beall Avenues LIVING FACILITY Wooster, OH HAMILTON 903 NW Washington Blvd. TO BE CONSTRUCTED Hamilton, OH 45013 MOBILE TO BE CONSTRUCTED 8150-B Airport Blvd. Mobile, Alabama JACKSON TO BE CONSTRUCTED 6161 Old Canton Road Jackson, MS 39211 PARMA TO BE CONSTRUCTED 7742 Broadview Road 7748 Broadview Road 7760 Broadview Road 7766 Broadview Road Parma, OH FARMINGTON HILLS TO BE CONSTRUCTED 29901 Middlebelt Farmington Hills, MI DALLAS TO BE CONSTRUCTED City Block 7428 Dallas, TX EDINA TO BE CONSTRUCTED 7128 France Avenue South Medina, MN NAPERVILLE UNDER CONTRACT Ogden Ave. & Mill Street TO BE ACQUIRED Naperville, IL
46 47 EXHIBIT C Schedule of Properties
PROPERTY COUNTY ACREAGE (approximate) HAMILTON 903 NW Washington Blvd. Butler County 4.00 acres Hamilton, OH 45013 MOBILE Mobile County 2.500 acres 8150-B Airport Blvd. Mobile, Alabama JACKSON Hinds County 9.800 acres 6161 Old Canton Road Jackson, MS 39211 PARMA Cuyahoga County 1.837 acres 7742 Broadview Road 1.837 acres 7748 Broadview Road 7760 Broadview Road 7766 Broadview Road Parma, OH FARMINGTON HILLS Oakland County 4.18 acres 29901 Middlebelt Farmington Hills, MI DALLAS City of Dallas 3.5772 acres City Block 7428 Dallas, TX EDINA Hennepin County 4.179 acres 7128 France Avenue South Medina, MN WOOSTER Wayne County 7.20 acres Cleveland and Beall Avenues Wooster, OH NAPERVILLE DuPage County 4.14 acres Ogden Ave. & Mill Street Naperville, IL
47 EX-99.5 9 FIRST AMENDMENT TO REVOLVING LOAN AGREEMENT 1 EXHIBIT 99.5 FIRST AMENDMENT TO REVOLVING LOAN AGREEMENT This Amendment to Revolving Loan Agreement ("Amendment") is made this 26th day of February, 1999 by and between (i) KARRINGTON OPERATING COMPANY, INC., an Ohio corporation ("Borrower"), with an address at 919 Old Henderson Road, Columbus, Ohio 43220, (ii) KARRINGTON HEALTH, INC., an Ohio Corporation ("Guarantor"), with an address at 919 Old Henderson Road, Columbus, Ohio 43220, and (iii) SUNRISE ASSISTED LIVING, INC., a Delaware corporation ("Lender"), with an address of 9401 Lee Highway, Suite 300, Fairfax, Virginia 22031. RECITALS: A. Lender made a revolving line of credit loan ("Loan") to Borrower in the maximum amount of Ten Million Dollars ($10,000,000), pursuant to that certain Revolving Loan Agreement dated November 6, 1998 by and between Borrower and Lender (the "Loan Agreement"). The Loan is evidenced by that certain Promissory Note dated November 6, 1998, executed by Borrower and payable to Lender in the original principal amount of Ten Million Dollars ($10,000,000), or so much thereof as shall have been advanced or readvanced to or for the account of Borrower and remain unpaid pursuant to the Loan Agreement. Pursuant to that certain First Allonge and Modification to Promissory Note ("First Allonge") made of even date herewith by Borrower, Borrower increased the principal amount of the Promissory Note from Ten Million Dollars ($10,000,000) to Sixteen Million Five Hundred Thousand Dollars ($16,500,000). The Promissory Note, as amended and modified by the First Allonge, is referred to herein as the "Note." B. The Note is secured by, among other security, any and all mortgages, deeds of trust, security agreements, assignments and lien instruments (collectively, the "Security Instruments") executed by Borrower in favor of Lender pertaining to and securing the Note, including those executed of even date with the Note, and those executed prior to and after execution of the Note, encumbering Borrower's interest in those certain parcels of real property described in the Security Instruments (collectively, the "Original Collateral"). C. The Loan is further evidenced and secured by a certain Agreement of Unconditional Guaranty dated November 6, 1998, made by Karrington Health, Inc., an Ohio corporation, to Lender ("Guaranty"). The Note, Security Instruments, Guaranty, Loan Agreement and all other documents evidencing or pertaining to the Loan are referred to herein as the "Loan Documents." D. The Original Collateral is subject to the first priority liens of the Security Instruments and there exist no junior or other liens affecting the Original Collateral. 1 2 E. Borrower is the contract purchaser under that certain Real Estate Purchase Contract dated May 12, 1997 (the "Naperville Purchase Contract") between the Borrower and Central DuPage Health System, an Illinois not-for-profit corporation, as seller. Pursuant to the Naperville Purchase Contract, as amended and extended, the Borrower is required to close on the purchase (the "Naperville Purchase") of certain real estate located at Ogden Avenue and Mill Street, Naperville, Illinois, consisting of approximately 4.14 acres, more or less, as more particularly described in Exhibit A thereto (the "Naperville Property"), said closing to occur not later than Friday, February 26, 1999, for a total purchase price of One Million Five Hundred Thousand Dollars ($1,500,000). F. Borrower has applied to Lender for an increase in the Loan for general corporate purposes and to finance the acquisition of the Naperville Property; Lender has agreed to said increase in accordance with the terms and conditions of this Amendment and the Note. G. In conjunction with the Naperville Purchase, and in consideration of the Loan increase made hereby, Borrower has agreed to grant, and Lender has agreed to accept, a security interest in the Naperville Property as provided in that certain Mortgage of even date herewith, by and between Borrower, as Mortgagor, and Lender, as Mortgagee, covering and affecting the Naperville Property. H. All capitalized terms used but not defined herein shall have the meaning given to such terms in the Loan Agreement. NOW, THEREFORE, in consideration of the foregoing, the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree to amend the Loan Agreement and other Loan Documents as follows: 1. Representations Accurate. Borrower represents and warrants that the foregoing Recitals are true and accurate. 2. Principal Balance Verified. Borrower and Lender agree that as of February 25, 1999 (that is, immediately prior to Draw #6 intended to be disbursed on the date hereof) the total amount advanced under the Loan was Ten Million Three Thousand Two Hundred Forty-Seven and 00/100 Dollars ($10,003,247.00). Borrower confirms its absolute and unconditional obligation to make all payments and to perform its other obligations pursuant to the Note, the Loan Agreement, and the other Loan Documents, all as amended hereby, including its obligation to repay advances in excess of the stated principal amount of the Note prior to the First Allonge. 3. Continuance of Security Interest. The repayment of the Note and performance of all the Borrower's other obligations to the Lender under the Loan Agreement is secured and shall continue to be secured, inter alia, by the Loan Documents, as such documents are amended hereby. 2 3 4. Increase in Loan. Borrower and Lender agree that the maximum amount of the Loan shall be increased from $10,000,000 to $16,500,000. The definition of "Loan," as set forth on page 5 of the Loan Agreement and as used throughout the Loan Agreement shall be modified to mean "the Loan in the maximum principal amount outstanding at any time of $16,500,000 made by Lender to Borrower pursuant to this Agreement." 5. Commitment Fee. Borrower shall pay or cause to be paid to Lender, at the closing of the increase in the Loan contemplated hereby, a non-refundable commitment fee equal to the sum of One Hundred Thirty Thousand Dollars ($130,000). All other fees shall remain in effect and continue as set forth in Paragraph 2.4 of the Loan Agreement. 6. Reaffirmation of Guaranty. Karrington Health, Inc., an Ohio corporation ("Guarantor"), by signature below as such, for a valuable consideration, the receipt and adequacy of which are hereby acknowledged, hereby consents to and joins in this Amendment and hereby declares to and agrees with the Lender that the Agreement of Unconditional Guaranty dated November 6, 1998, made by Guarantor to Lender is and shall continue in full force and effect for the benefit of Lender with respect to all Loan Obligations, as amended by this Amendment; that there are no offsets, claims, counterclaims, crossclaims or defenses of Guarantor with respect to the Guaranty nor, to Guarantor's knowledge, with respect to the Loan Obligations; that the Guaranty is not released, diminished or impaired in any way by this Amendment or the transactions contemplated hereby, and that the Guaranty is hereby ratified and confirmed in all respects. Guarantor hereby reaffirms all the representations and warranties set forth in the Guaranty. Guarantor acknowledges that without its consent and reaffirmation as set forth in this Amendment, Lender would not execute this Amendment or otherwise consent to its terms. 7. Ratification. The Loan Documents are hereby modified to be consistent with this Amendment, and in the event of any inconsistency, the provisions of this Amendment shall prevail and control. Borrower and Guarantor hereby ratify and confirm the Loan Documents as hereby amended and all Borrower's and Guarantor's representations, warranties, covenants, negative covenants, duties and liabilities thereunder, and agree that as hereby modified, the Loan Agreement, the Note, the Security Instruments and the other Loan Documents are, and continue to be, in full force and effect and are enforceable in accordance with their respective terms. This Amendment is secured by the Security Instruments and other Loan Documents, as amended hereby. 8. Continuing Obligations. Borrower and Guarantor each acknowledge and stipulate that the Loan Agreement, the Note, the Guaranty, and all other Loan Documents executed in connection therewith by Borrower and Guarantor, together with any and all renewals, extensions and modifications thereof are and remain legal, valid and binding obligations of Borrower and Guarantor and are enforceable against Borrower and 3 4 Guarantor in accordance with the terms thereof, except as expressly modified herein; and that all the obligations evidenced thereby are owing and payable without defense, offset, or counterclaim. 9. No Waiver. Execution of this Amendment by Lender shall be without prejudice to Lender's rights at any time in the future to exercise any and all rights conferred upon it by any of the Loan Documents in accordance with their original terms as hereby amended. Neither this Amendment nor any provision hereof or of any other documents modifying the Loan Documents shall constitute, or shall be construed to constitute, a waiver of any default by Borrower or any right or remedy of Lender under the Note, the Loan Agreement, the Guaranty or any other Loan Documents subsequent to the date hereof. Any failure by Lender at any point in time during the term of the Loan Agreement, as amended hereby to insist upon strict and timely compliance with the terms and provisions of the Loan Agreement and the other Loan Documents, as amended hereby, shall not be deemed a waiver either expressly or impliedly by Lender of any of its rights under any such documents, nor shall the same excuse Borrower's or Guarantor's obligation to strictly and timely perform their obligations hereunder and thereunder. 10. Release. Borrower, by execution of this Amendment, hereby declares that as of the date hereof, it has no claim, set-off, counterclaim, defense, or other cause of action against Lender including, but not limited to, a defense of usury, any claim or cause of action at common law, in equity, statutory or otherwise, in contract or in tort. Further, to the extent that any such set-off, counterclaim, defense, or other cause of action may exist or might hereafter arise based on facts known or unknown which exist as of the date hereof, such set-off, counterclaim, defense and other cause of action is hereby expressly and knowingly waived and released by Borrower. 11. Condition to Further Funding. Immediately after the execution and delivery of this amendment, Lender will fund One Million Four Hundred Two Thousand Nine Hundred Thirty-Five and 00/100 Dollars ($1,402,935.00) in order to enable Borrower to close on the Naperville Purchase. Any further funding of the Loan shall be expressly conditioned upon the execution of an amendment to the merger agreement between Borrower and Lender which is acceptable to Lender. 12. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall together constitute one and the same instrument. 13. Applicable Law. The validity and effect of this Amendment shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. 4 5 14. Modifications; Severability. There are and were no oral or written representations, warranties, understandings, stipulations, agreements, or promises made by any party, or by any agent, employee, or other representative of any party, pertaining to the subject matter of this Amendment which have not been incorporated into this Amendment. This Amendment shall not be modified, changed, terminated, amended, superseded, waived, or extended except by a written instrument executed by the parties hereto. If any term, covenant, or condition of this Amendment is held to be invalid, illegal, or unenforceable as to a particular person, entity, or situation, this Amendment shall be construed and enforced without such provision, but will be otherwise enforced to the fullest extent permitted by law as to such person, entity, or situation, and this Amendment will also be enforced to the fullest extent permitted by law as to any other person, entity, or situation. 15. Binding Effect. This Amendment shall be binding on and inure to the benefit of the parties and their respective successors, and assigns. 16. Warranties and Representations of Borrower. Borrower and Guarantor hereby warrant and represent to the Lender that: (a) the person or persons executing this Amendment on behalf of Borrower and Guarantor have full authority to execute this Amendment on behalf of Borrower and Guarantor and to bind Borrower and Guarantor thereby; and (b) the execution, delivery and performance by Borrower and Guarantor of this Amendment, the Loan Agreement, the Note and the other Loan Documents, as amended as of the date hereof, have been duly and validly authorized and all consents and approvals which are necessary for authorization, binding effect, performance, and enforceability of this Amendment, the Loan Agreement, the Note, the Guaranty and the Loan Documents have been received. 5 6 IN WITNESS WHEREOF, the parties have executed this Amendment under seal on the date first written above. WITNESS: BORROWER: KARRINGTON OPERATING COMPANY, INC., an Ohio corporation /s/ Amy S. Maxwell By: /s/ Richard R. Slager - ------------------ -------------------------------------- Name: Richard R. Slager ------------------------------------ Title: Chief Executive Officer ----------------------------------- GUARANTOR: KARRINGTON HEALTH, INC., an Ohio corporation /s/ Amy S. Maxwell By: /s/ Richard R. Slager - ------------------ -------------------------------------- Name: Richard R. Slager ------------------------------------ Title: Chief Executive Officer ----------------------------------- LENDER: SUNRISE ASSISTED LIVING, INC., a Delaware Corporation /s/ Susan L. Timoner By: /s/ Thomas B. Newell - -------------------- -------------------------------------- Name: Thomas B. Newell ------------------------------------ Title: Executive Vice President ----------------------------------- 6 7 STATE OF OHIO ) ) ss: COUNTY OF FRANKLIN) I, Amy s. Maxwell, a notary public in and for the jurisdiction aforesaid, do hereby certify that Richard R. Slager, who is personally well known to me as the Chief Executive Officer of Borrower in the foregoing Amendment to Revolving Loan Agreement, bearing date on the 26th day of February, 1999, and hereto annexed, personally appeared before me in said jurisdiction and as the Chief Executive Officer of Borrower as aforesaid, and by virtue of the power vested in him by said Karrington Operating Company, Inc., acknowledged the same to be the act and deed of Karrington Operating Company, Inc., the Borrower herein, and delivered the same as such. Given under my hand and seal this 26th day of February, 1999. /s/ Amy S. Maxwell ----------------------- Notary Public [Notarial Seal] My commission expires: 9/29/99 ----------- STATE OF OHIO ) ) ss: COUNTY OF FRANKLIN ) I, Amy S. Maxwell, a notary public in and for the jurisdiction aforesaid, do hereby certify that Richard R. Slager, who is personally well known to me as the Chief Executive Officer of Guarantor in the foregoing Amendment to Revolving Loan Agreement, bearing date on the 26th day of February, 1999, and hereto annexed, personally appeared before me in said jurisdiction and as the Chief Executive Officer of Guarantor as aforesaid, and by virtue of the power vested in him by said Karrington Health, Inc., acknowledged the same to be the act and deed of Karrington Health, Inc., the Guarantor herein, and delivered the same as such. Given under my hand and seal this 26th day of February, 1999. /s/ Amy S. Maxwell ----------------------- Notary Public [Notarial Seal] My commission expires: 9/29/99 -------------- 7 8 COMMONWEALTH OF VIRGINIA ) ) ss: COUNTY OF FAIRFAX ) I, Susan L. Timoner, a notary public in and for the jurisdiction aforesaid, do hereby certify that Thomas B. Newell, who is personally well known to me as the Executive Vice President of Lender in the foregoing Amendment to Revolving Loan Agreement, bearing date on the 26th day of February, 1999, and hereto annexed, personally appeared before me in said jurisdiction and as the Executive Vice President of Lender as aforesaid, and by virtue of the power vested in him by said Sunrise Assisted Living, Inc., acknowledged the same to be the act and deed of Sunrise Assisted Living, Inc., the Lender herein, and delivered the same as such. Given under my hand and seal this 26th day of February, 1999. /s/ Susan L. Timoner ----------------------- Notary Public [Notarial Seal] My commission expires: 8/31/99 ----------------- 8 EX-99.6 10 LETTER DATED MARCH 23, 1999 1 EXHIBIT 99.6 VIA FACSIMILE March 23, 1999 Mr. Mark Mace Senior Vice President Karrington Senior Living 919 Old Henderson Road Columbus, OH 43220 RE: OPERATING CAPITAL Dear Mr. Mace: Pursuant to paragraph 6 of Amendment No. 1 to Agreement of Merger, dated March 4, 1999, Sunrise Assisted Living, Inc. ("Sunrise") agreed to make available to Karrington Health, Inc. ("Karrington") an additional fully secured line of credit in the principal amount of up to $6.5 million for working capital needs. Section 5.2(c)(ii) of the Agreement of Merger sets forth restrictions on Karrington's ability to incur indebtedness for borrowed money prior to the effective time of the merger. We have received a draft letter, attached hereto, stating commitments JMAC, Inc. ("JMAC") is prepared to make to Karrington when Sunrise delivers its extension of the maturity date of the line of credit to January 1, 2000 and extension of the waivers of the Meditrust loan and lease covenants. This letter confirms that if Karrington's cash requirements prior to the effective time of the merger exceed the funding available under the increased line of credit referred to above, Sunrise will cooperate with JMAC and Karrington to alleviate the shortage of funds. If Sunrise is limited or unable to or does not provide such additional funds to Karrington, Sunrise hereby consents to working with JMAC to allow JMAC to make additional loans to Karrington. This letter also confirms that the maturity date of the line of credit (totaling up to $16.5 million) from Sunrise to Karrington has been extended to January 1, 2000. Please call me should you have any questions. Sincerely, /s/ James S. Pope James S. Pope Senior Vice President of Finance cc: Dave Faeder Tom Newell Dan Gorham 1 EX-99.7 11 MANAGEMENT SERVICES AGREEMENT 1 EXHIBIT 99.7 MANAGEMENT SERVICES AGREEMENT FOR CERTAIN KARRINGTON HOMES JANUARY 1, 1999 OWNER: KARRINGTON HEALTH, INC. MANAGER: SUNRISE ASSISTED LIVING MANAGEMENT, INC. 2 INDEX
SECTION: CAPTION: PAGE: - ------- ------- ---- ARTICLE I DEFINITIONS................................................................. 1 ARTICLE II APPOINTMENT OF MANAGER AND PRIMARY GOAL OF AGREEMENT................................................................... 3 Section 2.01 Appointment of Manager...................................................... 4 Section 2.02 Goals....................................................................... 4 ARTICLE III MANAGEMENT FEES............................................................. 4 Section 3.01 Management Services Fees.................................................... 4 ARTICLE IV DUTIES AND RIGHTS OF MANAGER................................................ 4 Section 4.01 Authority of Manager; Right of Possession................................... 4 Section 4.02 Marketing Services.......................................................... 5 Section 4.03 Management Services......................................................... 5 Section 4.04 Manager's Home Office Employees............................................. 6 Section 4.05 Personnel Administration.................................................... 6 Section 4.06 Purchasing.................................................................. 6 Section 4.07 Leases...................................................................... 7 ARTICLE V REVENUE AND EXPENSES, CREDITS AND COLLECTIONS, AND DEPOSITORIES FOR FUNDS...................................................... 7 Section 5.01 Revenue and Expenses........................................................ 7 Section 5.03 Credits and Collections..................................................... 7 Section 5.04 Depositories for Funds...................................................... 7 ARTICLE VI FINANCIAL RECORDS........................................................... 7 Section 6.01 Accounting and Financial Records............................................ 7 Section 6.02 Access...................................................................... 7 ARTICLE VII APPROVED BUDGET............................................................. 8 ARTICLE VIII INTENTIONALLY LEFT BLANK
i 3 ARTICLE IX INTENTIONALLY LEFT BLANK ARTICLE X INTENTIONALLY LEFT BLANK ARTICLE XI INSURANCE....................................................................... 8 ARTICLE XII TERMINATION OF AGREEMENT........................................................ 8 Section 12.01 Termination..................................................................... 8 ARTICLE XIII DEFAULTS........................................................................ 9 Section 13.01 Default of Manager.............................................................. 9 Section 13.02 Default by Owner................................................................ 9 Section 13.03 Remedies of Owner............................................................... 9 Section 13.04 Remedies of Manager............................................................. 9 Section 13.05 No Waiver of Default............................................................ 10 ARTICLE XIV LEGAL ACTIONS, GOVERNING LAW, LIABILITY OF MANAGER AND INDEMNITY .................................................................. 10 Section 14.01 Legal Actions................................................................... 10 Section 14.02 Legal Fees and Costs............................................................ 10 Section 14.03 Choice of Law and Venue......................................................... 10 Section 14.04 Liability of Manager............................................................ 11 Section 14.05 Indemnity....................................................................... 11 ARTICLE XV REGULATORY AND CONTRACTUAL REQUIREMENTS......................................... 12 Section 15.01 Regulatory and Contractual Requirements......................................... 12 Section 15.02 Equal Employment Opportunity.................................................... 12 Section 15.03 Equal Housing Opportunity....................................................... 13 ARTICLE XVI PROPRIETARY MARKS; INTELLECTUAL PROPERTY........................................ 13 Section 16.01 Proprietary Marks............................................................... 13 Section 16.02 Ownership of Proprietary Marks.................................................. 13 Section 16.03 Intellectual Property........................................................... 13
ii 4 Section 16.04 Breach of Covenant............................................................... 13 ARTICLE XVII MISCELLANEOUS PROVISIONS......................................................... 13 Section 17.01 Additional Assurances............................................................ 13 Section 17.02 Consents, Approval and Discretion................................................ 13 Section 17.03 No Brokerage..................................................................... 14 Section 17.04 Notices.......................................................................... 14 Section 17.05 Severability..................................................................... 14 Section 17.06 Gender and Number................................................................ 15 Section 17.07 Division and Headings............................................................ 15 Section 17.08 Confidentiality of Information................................................... 15 Section 17.09 Right to Perform................................................................. 15 Section 17.10 Assignment by Manager............................................................ 15 Section 17.11 Entire Agreement/Amendment....................................................... 15
iii 5 LIST OF EXHIBITS Exhibit A Description of Real Property Exhibit B Approved Budget iv 6 MANAGEMENT SERVICES AGREEMENT THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is made as of this 1st day of January, 1999, between SUNRISE ASSISTED LIVING MANAGEMENT, INC., a Virginia corporation ("Manager"), and KARRINGTON HEALTH, INC., an Ohio corporation ("Owner"). WHEREAS, Owner is the owner of certain real property on which are being constructed the assisted living facilities described in Exhibit A, attached hereto and made a part hereof (collectively, the "Facilities"); and WHEREAS, Owner and Sunrise Assisted Living, Inc., the parent of Manager, in anticipation of their pending merger, have determined it is in their mutual best interest to prepare for the management transition that will occur as a result of the merger, particularly in the areas of marketing and operations, by entering into this Agreement; and WHEREAS, Owner wishes to engage Manager to manage the Facilities and Manager desires to perform such management duties as described herein with regard to the Facilities. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS The following terms shall have the following meanings when used in the Agreement: 1.01 Affiliate. The term "Affiliate" shall mean any one or more individuals or entities which control, are controlled by, or are under common control with the Manager. 1.02 Agreement. The terms "Agreement" and this "Agreement" shall mean this Management Services Agreement between Owner and Manager, and any amendments thereto as may be from time to time agreed to in writing by the parties. 1.03 Approved Budget. The term "Approved Budget" shall mean the budget approved for the operation of the Facilities as set forth in Section 7.01 hereof. 1.04 Commencement of Management Services. The term "Commencement of Management Services" shall mean that date when Owner requests such services to begin which in no event shall be later than January 1, 1999. 5 7 1.05 Facilities. The term "Facilities" shall mean the assisted living facilities described in Exhibit A which are the subject of this Agreement. 1.06 Facility Expenses. The term "Facility Expenses" shall mean those costs and expenses directly related to the operating costs of the Facilities, which expenses and payment of expenses shall be administered by the Owner from the Facilities' income derived as further set forth herein. Facility Expenses shall not include debt service and property taxes. 1.07 GAAP. The term "GAAP" shall mean generally accepted accounting principles, consistently applied. 1.08 Intellectual Property. The term "Intellectual Property" shall mean (i) all computer software developed and owned by Manager or an Affiliate of Manager; and (ii) all manuals, forms, instructions, policies, procedures and directives issued by Manager to the employees at the Facility regarding the procedures and techniques to be used in operation of the Facility. 1.09 Legal Requirements. The term "Legal Requirements" shall mean any law, code, rule, ordinance, regulation or order of any governmental authority having jurisdiction over the business or operation of the Facilities or the matters which are the subject of this Agreement, including any resident care or health care, building, zoning or use laws, ordinances regulations or orders, environmental protection laws and fire department rules. 1.10 Management Services. The term "Management Services" shall mean the services described in this Agreement, all as are authorized and approved by Owner. 1.11 Mortgage. The term "Mortgage" shall mean any mortgage or deed of trust recorded against the Facilities as security for a secured loan. 1.12 Proprietary Marks. The term "Proprietary Marks" shall mean all of Manager's trademarks, trade names, symbols, logos, slogans, designs, insignia, emblems, devices, service marks and distinctive designs of buildings and signs, or combinations thereof, which may be used to identify the Facility. The term "Proprietary Marks" shall also include all of Manager's trade names, trademarks, symbols, logos, designs, etc., which are used in connection with the operation of the Facility during the Term. The term "Proprietary Marks" shall include all present and future Proprietary Marks, whether they are now or hereafter owned by Manager or any of its Affiliates, and whether or not they are registered under the laws of the United States or any other country. 1.13 Revenues. The term "Revenues" shall mean all monies received by Owner from residents of the Facilities for occupancy fees and health care fees, including any community fees, with the exception of any pass-through fees and any escrow monies held for the residents by the Owner. Any community fees or deposits which are refunded 6 8 to a resident shall be credited against revenues during the month in which such refunds are made. It shall also mean proceeds from rental interruption insurance actually received and all applicable miscellaneous revenues, such as that from vending machines. 1.14 State. The term "State" shall mean the States in which the Facilities are located, as applicable, and any regulatory agencies within such States with overview authority or other authority over the Facilities, unless otherwise specifically indicated. 1.15 Term. The "Term" of this Agreement shall be the period beginning when this Agreement is executed and ending one year after the date of this Agreement. 1.16 Renewal. This Agreement shall automatically renew for one (1) year periods unless either party shall give the other party written notice of termination within sixty (60) days prior to the expiration of the initial Term or any renewal terms. ARTICLE II APPOINTMENT OF MANAGER AND PRIMARY GOAL OF AGREEMENT 2.01 Appointment of Manager. Owner hereby appoints Manager and Manager hereby accepts appointment, subject to the terms and conditions of this Agreement, as the sole and exclusive Manager of the Facilities for the daily operation and management of the Facilities. Except as otherwise provided herein, Manager shall have responsibility and complete and full control and discretion in the operation, direction, management and supervision of the Facility, subject only to the limitations expressed herein, in accordance with the methods and standards of operation that Manager has heretofore managed the Facility; provided, however, that Manager shall use its best efforts to take into account the methods and standards of operation that have heretofore been used by Owner in its other assisted living facilities and which Owner may have previously begun to implement in the Facilities. Manager accepts said appointment and agrees to manage the Facilities during the Term of this Agreement in accordance with the terms and conditions hereinafter set forth. 2.02 Goals. It is the joint goal of Owner and Manager to: a. Establish and maintain programs to promote the most effective utilization of the Facilities' services; b. Provide quality services to residents of the Facilities (the "Residents") in a manner consistent with the form of resident agreement to be used at the Facilities and the Approved Budget (as hereinafter defined); c. Maintain a public image of excellence for the Facilities; d. Maintain quality staffing of the Facilities; 7 9 e. Manage the Facilities on a sound financial basis; f. Maintain a sound financial accounting system for the Facilities; g. Maintain adequate internal fiscal controls through proper budgeting, accounting procedures, and timely financial reporting; h. Prevent loss of revenues from the Facilities and establish sound cash flow through sound billing and collection procedures and methods; and i. Take such other steps as are necessary to provide high quality care to the Residents. ARTICLE III MANAGEMENT FEES 3.01 Management Services Fees. a. Pre-Opening Services Fee. Commencing as of the later to occur of the date of this Agreement or the month which is eight (8) months prior to the projected Opening Date of the respective Facility, Owner shall pay to Manager a fee (the "Pre-Opening Services Fee") in the amount of Fourteen Thousand Dollars ($14,000.00) per month per applicable Facility as compensation for Manager performing the Pre-Opening Services. The Pre-Opening Services Fee shall be paid in full currently each month, but shall not in any event exceed the aggregate sum of One Hundred Forty Thousand Dollars ($140,000.00) per Facility. b. Management Fee. Upon opening of each Facility and as compensation for the services to be rendered by Manager in accordance with the terms of this Agreement, Owner shall pay to Manager on a monthly basis a management fee (the "Management Fee") equal to seven percent (7%) of the Revenues of such open Facility or such other amount as may be agreed to in writing by the parties from time to time. Manager shall also receive from Owner an additional monthly incidental expenses reimbursement which will pay for out of pocket expenses, including travel by visiting Home Office Employees, associated with running the Facilities. The Management Fee will cover the cost of Manager's supervision and general overall management of the Facilities, including Manager's overhead costs and its Home Office Employees' salaries and fringe benefits, and such services to be provided in accordance with this Agreement. 8 10 ARTICLE IV DUTIES AND RIGHTS OF MANAGER 4.01 Authority of Manager; Right of Possession. Facility management shall be under the exclusive supervision and control of Manager, who, except as otherwise specifically provided in this Agreement, shall be responsible for the proper and efficient operation of the Facilities. Manager shall have discretion and control over all matters relating to management and operation of the Facilities, including, without limitation, the following: fees and charges for providing accommodations, food services, care services, and related services to residents and their guests; supervision of resident care; credit policies; food and beverage services; environmental services; procurement of inventories, supplies and services; promotion and publicity; employment policies; and, generally, all activities necessary for the operation and management of the Facilities. Owner shall remain responsible for the receipt, holding and disbursement of funds and the maintenance of bank accounts pursuant to Article V hereinbelow. 4.02 Marketing Services. Manager shall provide the following services (the "Marketing Services"): a. Prepare marketing plan and marketing strategy for the Facilities, and a budget (the "Marketing Budget") for such plan and strategy. b. Direct the marketing efforts for the Facilities. c. Plan and implement community outreach, public relations and special events programs. 4.03 Management Services. Manager shall use its best efforts to implement all aspects of the operation of the Facilities in accordance with the terms of this Agreement, and shall have responsibility and commensurate authority for all such activities. In addition to any other duties set forth in this Agreement, Manager shall: a. Enter into all contracts, leases and agreements required in the ordinary course of business for the supply, operation, maintenance and service of the Facility (including but not limited to food procurement, trash removal, pest control and elevator maintenance). Manager shall obtain the written consent of Owner before entering into any contract, lease or agreement in excess of Fifty Thousand Dollars ($50,000.00) or one (1) year in duration, except those specifically set forth in the Approved Budget. b. Purchase such inventories, provisions, food, supplies and other expendable items as are necessary to maintain the Facilities in a proper manner. 9 11 c. Recruit, hire and train all new employees to be employed at the Facilities. d. Provide care to Residents of the Facilities as provided for in the resident agreement agreed to by Owner and Manager. e. Set all resident fees and consult with Owner regarding the best professional efforts to collect such fees. f. Oversee all day-to-day operations. 4.04 Manager's Home Office Employees. As part of the provision of the services provided by Manager, Manager shall from time to time make its employees who are not working directly at the Facilities (the "Home Office Employees") available to Owner for consultation and advice related to the Facilities. Home Office Employees include Manager's home office staff and staff at other facilities managed by Manager and its Affiliates with experience in areas such as accounting, budgeting, finance, human resources, construction, development, marketing, food service and purchasing. Owner may reasonably request such services, but the decision to provide Home Office Employees shall be at the sole discretion of Manager. The services of Home Office Employees shall be provided at no additional charge to Owner. Owner will reimburse Manager for all reasonable travel and related expenses of Home Office Employees visiting the Facilities or traveling elsewhere on behalf of the Facilities. 4.05 Personnel Administration. As soon as reasonably possible after the date of this Agreement , the current personnel at the Facilities shall be transitioned from being employees of Owner to being employees of Manager (i.e., terminated by Owner and immediately rehired by Manager). All new Facility employees shall be employees of Manager, and the salaries, costs and benefits of all Facility employees will be the responsibility of Manager and would be Facility Expenses. Manager shall invoice Owner on a monthly basis for the salaries, costs and benefits of the Facility employees. Manager shall be responsible for recruiting, hiring, training, promoting, assigning, supervising and discharging the personnel of the Facilities, as well as the formulation, implementation, modification and administration of wage scales, rates of compensation, employee insurance, employee taxes, and personnel policies with respect to the personnel of the Facilities. 4.06 Purchasing. Manager shall use, on behalf of the Facilities, such purchasing systems and procedures developed by or otherwise available to Manager for all items that are consistent with the Approved Budget. In furtherance thereof, Manager shall utilize, to the extent that they offer competitive prices, any national purchasing contracts that Manager may from time to time have in effect with suppliers of equipment and supplies. Manager shall not enter into any purchase or service contract not generally contained within the Approved Budget, without the prior consent of Owner. Any 10 12 purchase by Manager made pursuant to or otherwise ancillary to this Agreement shall be made with Manager acting as agent for and at the expense of the Facilities or Owner. Owner acknowledges that the Manager is not a merchant and thus is not making any representations or warranties with respect to the goods or services purchased by the Manager for use at the Facilities, implied or otherwise. Manager shall fully disclose to Owner any material interest of Manager and/or Affiliate in any vendor and Manager shall establish to Owner's reasonable satisfaction that the purchase or contract was made after a competitive selection process and at a fair market price. 4.07 Leases. Manager shall submit any forms of resident agreements, leases or other occupancy agreements used in the leasing of the Facility for Owner's approval before they are used by Manager. Manager shall act as agent for Owner in executing resident agreements, leases and occupancy agreements, but Manager shall not enter into such agreement or lease for a duration of more than one year without the prior consent of Owner. ARTICLE V REVENUE AND EXPENSES, CREDITS AND COLLECTIONS, AND DEPOSITORIES FOR FUNDS 5.01 Revenue and Expenses. Until April 1, 1999 or such other date as agreed to by Owner and Manager, Owner shall be responsible for collecting all Revenues and for paying Facility Expenses as agreed in the Approved Budget. All fees due to Manager under this Agreement and any incidental expense reimbursement will be deducted from the Revenues as Facility Expenses. 5.02 Credits and Collections. Manager shall assist Owner with its credit and collection policies and procedures, including instituting reasonable steps necessary to effectuate monthly billing by the Facilities, and the collection of accounts and monies owed to the Facilities. 5.03 Depositories for Funds. Owner shall maintain accounts and investments in banks, savings and loan associations, and/or other financial institutions in Owner's name. Owner shall maintain such balances therein as Owner shall deem appropriate, taking into account the cash flow operating needs of the Facilities and the disbursement from such accounts of such amounts of Facilities' funds as Owner shall from time to time reasonably determine to be appropriate, as well as remaining in accordance with the Approved Budget and taking into account Owner's desire to maintain as much of its funds in interest-bearing accounts as is reasonably feasible. It is expressly understood that it is Owner's responsibility to provide the funds needed to manage the Facilities in a manner designed to meet the mutual goals of Owner and Manager set forth in Section 2.02 above. 11 13 ARTICLE VI FINANCIAL RECORDS 6.01 Accounting and Financial Records. Until April 1, 1999 or such other date as agreed to by Owner and Manager, Owner shall, at its own expense, establish and administer accounting procedures, controls and systems for the development, preparation and safekeeping of records and books of account relating to the business and financial affairs of the Facilities, including payroll, accounts receivable and accounts payable. 6.02 Access. Manager shall have the right at all reasonable times during the usual business hours of the Facilities to audit, examine, and make copies of books of account maintained by Owner with respect to the Facilities. Such right may be exercised through any agent or employee designated by Manager or by an independent public accountant designated by Manager. ARTICLE VII APPROVED BUDGET 7.01 Manager shall prepare in advance and deliver to Owner for Owner's approval, a capital expenditure and operations budget for the Facilities' fiscal year (in which each proposed expenditure will be designated either as required or desirable) and set forth an estimate of operating revenues and expenses, together with an explanation of anticipated changes to resident charges, payroll rates and positions, non-wage cost increases, and all other factors differing from the current fiscal year. The budget, as proposed, shall be considered by Owner and, in consultation between Owner and Manager, the budget for the ensuing fiscal year will be prepared by the Manager with the final contents of the budget to be determined mutually by Manager and Owner (the "Approved Budget"). If there is a delay in the finalization of a new budget, or if Owner shall fail to approve the newly proposed budget, Manager shall continue to provide Management Services under the expired Approved Budget until a new budget is approved, or until the termination notice given above becomes effective. ARTICLE VIII Intentionally Left Blank ARTICLE IX Intentionally Left Blank ARTICLE X Intentionally Left Blank ARTICLE XI INSURANCE 12 14 11.01 Manager shall obtain and carry professional liability insurance in its name for its operation of the Facilities. Owner shall maintain its current policies of insurance for the Facilities. Owner shall consult with Manager prior to renewing any of its current policies of insurance or securing new insurance coverage. ARTICLE XII TERMINATION OF AGREEMENT 12.01 Termination. This Agreement shall automatically terminate at the end of the Term, unless renewed, as provided in Section 1.16 hereof. Manager may terminate, subject to the provisions of Section 13.04 and the notice and cure provisions set forth in Section 13.02, if Owner defaults under any material provision of this Agreement, subject to the notice and cure provisions set forth in Section 13.02. Owner may sooner terminate this Agreement if Manager defaults under any material provision of this Agreement, subject to the notice and cure provisions set forth in Section 13.01. Owner may terminate this Agreement as the result of the institution of bankruptcy proceedings against Manager. Either party may terminate this Agreement without notice in the event the pending merger between Owner and Sunrise Assisted Living, Inc. is not consummated by April 1, 1999. Such termination must be elected no later than May 1, 1999. If any of these events occur, Manager shall be compensated for its services only through the date of termination. ARTICLE XIII DEFAULTS 13.01 Default by Manager. Manager shall be deemed to be in default under this Agreement in the event Manager shall fail to keep, observe or perform any material covenant, agreement, term or provision of this Agreement to be kept, observed or performed by Manager, and such default shall continue (i) for a period of ten (10) days after Manager receives written notice from Owner specifying the default in case of monetary defaults or (ii) for a period of thirty (30) days after Manager receives written notice from Owner in the case of non-monetary defaults; provided, however, that if such non-monetary default cannot be cured within such thirty (30) day period, then Manager shall be entitled to such additional time as shall be reasonable, provided Manager is capable of curing same, has proceeded to commence cure of such default within said period, and thereafter diligently prosecutes the cure to completion. 13.02 Default by Owner. Owner shall be deemed to be in default hereunder in the event Owner shall fail to keep, observe or perform any material covenant, agreement, term or provision of this Agreement to be kept, observed or performed by Owner and such default shall continue (i) for a period of ten (10) days after written notice thereof by Manager to Owner in case of monetary defaults or (ii) for a period of thirty (30) days after written notice thereof by Manager to Owner in the case of non-monetary time defaults; provided, however, if such default cannot be cured within such thirty (30) day 13 15 period, then Owner shall be entitled to such additional time as shall be reasonable, provided that Owner is capable of curing same, has proceeding to commence cure of such default within said period, and thereafter diligently prosecutes the cure to completion. 13.03 Remedies of Owner. Upon the occurrence of an event of default by Manager as specified in Section 13.01 of this Agreement and expiration of any applicable cure period provided by this Agreement, Owner shall be entitled to terminate this Agreement, to remove Manager from the day-to-day management of the Facilities and replace Manager with a substitute Manager and otherwise to exercise all of its rights at law or in equity. 13.04 Remedies of Manager. Upon the occurrence of an event of default by Owner as specified in Section 13.02 of this Agreement and the expiration of any applicable cure period provided by this Agreement, Manager shall be entitled to terminate this Agreement and to exercise all of its rights at law or in equity. 13.05 No Waiver of Default. The failure of Owner or Manager to seek remedy for any violation of, or to insist upon the strict performance of, any term or condition of this Agreement shall not prevent a subsequent act by Owner or Manager which would have originally constituted a violation of this Agreement by Owner or Manager, from having all the force and effect of an original violation. Owner or Manager may waive any breach or threatened breach by Owner or Manager or any term or condition herein contained. The failure by Owner or Manager to insist upon the strict performance of any one of the terms or conditions of this Agreement or to exercise any right, remedy or election herein contained or permitted by law shall not constitute or be construed as a waiver or relinquishment for the future of such term, condition, right, remedy or election, but the same shall continue and remain in full force and effect. All rights and remedies that Owner or Manager may have at law, in equity or otherwise for any breach of any term or condition of this Agreement, shall be distinct, separate and cumulative rights and remedies and no one of them, whether or not exercised by Owner or Manager, shall be deemed to be in exclusion of any right or remedy of Owner or Manager. ARTICLE XIV LEGAL ACTIONS, GOVERNING LAW, LIABILITY OF MANAGER AND INDEMNITY 14.01 Legal Actions. Legal counsel for Manager and Owner shall cooperate in the defense or prosecution of any action affecting the Facilities. Manager shall not institute any legal action affecting the Facilities without Owner's consent. Owner shall immediately forward all legal notices to Manager which relate to the Facilities. Manager shall advise and assist Owner in instituting or defending, as the case may be, in the name of the Facility, Owner and/or Manager, but in any event as a Facility Expense, all actions arising out of the operation of the Facilities and not attributable to the gross negligence or willful misconduct of Manager, and any and all legal actions or proceedings to collect charges, third party payments, rents, or other incomes for Manager, Owner or the 14 16 Facilities, or to lawfully evict or dispossess residents of the Facilities, or to lawfully cancel, modify, or terminate any lease, license, or concession agreement in the event of breach or default thereof, or to defend any action brought against Owner. Manager shall assist Owner to take the acts necessary to protest or litigate to a final decision in any appropriate court or forum, as a Facility Expense, any violation, order, rule, or regulation affecting the Facilities. 14.02 Legal Fees and Costs. In the event either party elects to incur legal expenses to enforce or interpret any provision of this Agreement against the other party to this Agreement, the prevailing party shall be entitled to recover such legal expenses, including without limitation, reasonable attorney's fees, costs and necessary disbursements, in addition to any other relief to which such party shall be entitled. 14.03 Choice of Law and Venue. Whereas Manager's principal place of business is in the Commonwealth of Virginia, and the Facilities are located in various states, the parties agree that this Agreement shall be governed by and construed in accordance with the laws of Virginia, which shall be the exclusive courts of jurisdiction and venue for any litigation, special proceeding or other proceeding between the parties that may be brought, or arise out of, or in connection with, or by reason of this Agreement. 14.04 Liability of Manager. a. Standard of Care. Manager agrees to use its best efforts to exercise, with respect to all services provided by Manager under or pursuant to this Agreement, a high and qualified standard of care, skill, and diligence such as is at least comparable to that at other assisted living facilities owned by other parties and managed by Manager and Affiliates, and as is reasonably necessary for the maintenance of any license or permit required for the Facilities. b. Other Persons. Manager shall not be responsible for the acts or omissions of any of Owner's other contractors or any subcontractor, or any employees of Owner, or any persons representing Owner performing any services for or in connection with the Facilities, or any Managers or other persons engaged by Owner with respect thereto, unless and only to the extent Manager is supervising, or should be supervising the same, and Manager shall be responsible only for the performance of Manager's obligations hereunder in accordance with the terms hereof. c. Non-Recourse. In the event that Manager makes any claim against the Facilities and Owner, Manager's recourse shall be 15 17 limited to the provisions of this Agreement. Manager shall have no recourse to directors, officers, employees, and shareholders of the Owner. d. Notwithstanding any other provisions of this Agreement, the maximum liability of Manager to Owner for any breach of this Agreement or for any claims arising hereunder shall be limited to the amount of insurance carried by Manager pursuant to Article XIX hereinabove and the amount of the Management Fee paid as of the date of such breach or claim. 14.05 Indemnity. Manager will defend, indemnify and hold Owner harmless from and against any claims, losses, expenses, costs, suits, actions, proceedings, demands or liabilities that are asserted against, or sustained or incurred by Owner because of Manager's breach of this Agreement or because of legal actions or regulatory violations arising from Manager's gross negligence, fraud, or willful misconduct. Further, Manager will defend, at its own expense, any actions brought directly against Manager as a result of gross negligence in managing and/or operating the Facilities. The scope of the foregoing indemnities includes any and all costs and expenses properly incurred in connection with any proceedings to defend any indemnified claim, or to enforce the indemnity, or both, provided, however, that Manager's liability under that indemnity shall be limited as set forth in Section 14.04 (d). Owner will defend, indemnify, and hold Manager harmless, from and against any and all claims, expenses, losses, costs, suits, actions, proceedings, demands, or liabilities that are asserted against, or sustained or incurred by Manager in the proper performance of Manager's duties under this Agreement or otherwise within the scope of the agency established by the parties to this Agreement. Recovery upon an indemnity contained in this Agreement is shall be reduced dollar-for-dollar by any applicable insurance collected by either Owner or Manager. ARTICLE XV REGULATORY AND CONTRACTUAL REQUIREMENTS 15.01 Regulatory and Contractual Requirements. Manager shall use its best efforts to cause all things to be done in and about the Facilities reasonably necessary to comply with the requirements of any applicable constitution, statute, ordinance, law, rule, regulation, or order of any governmental or quasi-governmental regulatory body or agency, or board of fire underwriters respecting the use of the Facilities or the construction, maintenance, or operation thereof. Manager shall use its best efforts to assist Owner in obtaining and maintaining all Federal, State and county permits and licenses needed for the operation of licensed assisted living facilities providing personal care services. Owner agrees upon request by Manager to sign promptly and without charge applications for licenses, permits or other instruments necessary for operation of the Facilities and to provide such information and perform such acts relative to the ownership of the Facilities as are required by law, regulation or governmental practice in order for obtaining and/or 16 18 maintaining any license, permit, instrument, certificate, certification or approval with respect to the proper operation of the Facilities. The parties understand and agree that certain deficiencies or situations of non-compliance with various Legal Requirements (such as building codes, OSHA, ADA, health care regulations and the like) are likely to occur from time to time in the normal course of business operations. Such occurrences will not constitute a breach or default of Manager hereunder, provided that, (i) they are not materially beyond the general experience of similar Facilities operations located in the State in terms of scope, seriousness, or frequency, and (ii) Manager takes all reasonable actions in a timely manner to cure such deficiencies or situations of non-compliance. The costs (including any fines for non-compliance) of curing such deficiencies or circumstances of non-compliance shall constitute Operating Expenses unless incurred by reason of Manager's willful failure, gross negligence or default hereunder. 15.02 Equal Employment Opportunity. Without limitation of any provision set forth herein, Owner and Manager expressly agree to abide by any and all applicable Federal and/or State equal employment opportunity statutes, rules and regulations, including, without limitation, Title II of the Civil Rights Act of 1964, the Equal Pay Act of 1963, the National Labor Relations Act, the Fair Labor Standard Act, the Rehabilitation Act of 1983, and the Occupational Safety and Health Act of 1970, all as may be from time to time modified or amended. 15.03 Equal Housing Opportunity. Without limitation of any provision set forth herein, Owner and Manager expressly agree to abide by any and all applicable Federal and/or State equal housing opportunity statutes, rules and regulations, all as may be from time to time modified or amended. ARTICLE XVI PROPRIETARY MARKS; INTELLECTUAL PROPERTY 16.01 Proprietary Marks. During the Term of this Agreement, the Facility, upon agreement between Owner and Manager, may be known as a Sunrise Facility, with such additional identification as may be necessary and agreed to by Owner and Manager to provide local identification. 16.02 Ownership of Proprietary Marks. The Proprietary Marks shall in all events remain the exclusive property of Manager, and nothing contained herein shall confer on Owner the right to use the Proprietary Marks. Upon termination, any use of or right to use the Proprietary Marks by Owner shall cease forthwith and Owner shall promptly remove from the Facility any signs or similar items that contain the Proprietary Marks. If Owner has not removed such signs or similar items promptly upon termination, Manager shall have the right to remain at the Facility as long as is necessary for Owner to do so. The right to use such Proprietary Marks belongs exclusively to Manager, and the 17 19 use thereof inures to the benefit of Manager whether or not the same are registered and regardless of the source of the same. 16.03 Intellectual Property. All Intellectual Property shall at all times be proprietary to Manager or its Affiliates, and shall be the exclusive property of Manager or its Affiliates. During the Term of this Agreement, Manager shall be entitled to take all reasonable steps to ensure that the Intellectual Property remains confidential. Upon termination, all Intellectual Property shall be removed from the Facility by Manager, without compensation to Owner. 16.04 Breach of Covenant. Manager and/or its Affiliates shall be entitled, in case of any breach of the covenants of Article XVI by Owner or others claiming through it, to injunctive relief and to any other right or remedy available at law. Article XVI shall survive termination. ARTICLE XVII MISCELLANEOUS PROVISIONS 17.01 Additional Assurances. The provisions of this Agreement shall be self-operative and shall not require further agreement by the parties except as may be herein specifically provided to the contrary; provided, however, at the request of either party, the party requested shall execute such additional instruments and take such additional acts as the requesting party may deem necessary to effectuate this Agreement. 17.02 Consents, Approval and Discretion. Except as expressly provided herein to the contrary, whenever this Agreement requires any consent or approval to be given by either party or either party must or may exercise discretion, the parties agree that such consent or approval shall not be unreasonably withheld or delayed and such discretion shall be reasonably exercised, in good faith. 17.03 No Brokerage. Each party represents to the other that it has not engaged a broker in connection with this transaction, and agrees to defend, indemnify, and hold the other party harmless from any claim made by a broker through the indemnifying party. 17.04 Notices. All notices, demands, consents, approvals, and requests given by either party to the other hereunder shall be in writing and shall be sent by hand, by overnight courier, or by registered or certified mail, postage prepaid, to the parties at the following addresses: Owner: Karrington Health, Inc. 919 Old Henderson Rd. Columbus, Ohio 43220 Attn: Pete A. Klisares, President 18 20 Copy to: Stephen Lewis, Esquire Karrington Health, Inc. 919 Old Henderson Rd. Columbus, Ohio 43220 Manager: Sunrise Assisted Living Management, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Attn: Ms. Tiffany Tomasso Copy to: Thomas B. Newell, Esquire Sunrise Assisted Living, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 or to such other address and to the attention of such other person as either party may from time to time designate in writing. Notices shall be effective upon receipt. Refusal to accept delivery shall constitute receipt. 17.05 Severability. If any term or provision of this Agreement or the application thereof to any person or circumstance is held to be invalid or unenforceable for any reason, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and be enforced to the fullest extent permitted by law. 17.06 Gender and Number. Whenever the context of this Agreement requires, the gender of all words herein shall include the masculine, feminine, and neuter, and the number of all words herein shall include the singular and plural. 17.07 Division and Headings. The divisions of this Agreement into sections and subsections and the use of captions and headings in connection therewith are solely for convenience and shall have no legal effect whatsoever in construing the provisions of this Agreement. 17.08 Confidentiality of Information. Manager and Owner agree to keep confidential and not to use or to disclose to others, except as expressly consented to in writing by the other party or required by law, any and all of their respective secrets or confidential technology, proprietary information, customer lists, or trade secrets, or any matter or items ascertained through their association with each other. Manager and Owner further agree that should Manager leave the active service of Owner, Manager will return to Owner any Facility information of any kind pertaining to Residents of the Facilities, business, sales, financial condition or products and Owner will return to Manager any and all of Manager's confidential information obtained by Owner. All 19 21 funds related to and accounts opened on behalf of the Facilities also will be returned to Owner. 17.09 Right to Perform. In the event that Owner or Manager shall fail to perform any duty or fulfill any obligation hereunder to the material detriment of the other, Owner or Manager, in addition to any rights or remedies available to it under law, shall have the right, but not the obligation to perform any such duty or fulfill any such obligation, but in no way obligating the party beyond any termination period allowable hereunder. 17.10 Assignment by Manager. Manager shall have the right to assign this Agreement to an affiliate or subsidiary of Manager. 17.11 Entire Agreement/Amendment. With respect to the subject matter hereof, this Agreement supersedes all previous contracts and constitutes the entire Agreement between the parties, and no party shall be entitled to benefits other than those specified herein. As between the parties, no oral statements or prior written material not specifically incorporated herein shall be of any force and effect. The parties specifically acknowledge that in entering into and executing this Agreement, the parties rely solely upon the representations and agreements contained in this Agreement and no others. All prior representations or agreements not expressly incorporated herein, whether written or verbal, are superseded, and no changes in or additions to this Agreement shall be recognized unless and until made in writing and signed by both parties hereto. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. 20 22 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed under seal by their duly authorized offices, all as of the day and year first above written. WITNESS/ATTEST: OWNER: Karrington Health, Inc. /s/ Amy S.Maxwell By: /s/ Pete A. Klisares - ----------------- --------------------------------------- Name: Pete A. Klisares ------------------------------------- Title: President ------------------------------------ WITNESS/ATTEST: MANAGER: Sunrise Assisted Living Management, Inc., a Virginia corporation /s/ Susan L. Timoner By: /s/ Tiffany Tomasso - -------------------- --------------------------------------- Name: Tiffany Tomasso ------------------------------------- Title: Executive VP of Operations ------------------------------------ 21 23 EXHIBIT A TO MANAGEMENT SERVICES AGREEMENT Farmington Hills, Michigan Edina, Minnesota Eastover, North Carolina Hamilton, Ohio Tiffin, Ohio 22 EX-99.8 12 MANAGEMENT CONSULTING AGREEMENT 1 EXHIBIT 99.8 MANAGEMENT CONSULTING AGREEMENT FOR CERTAIN KARRINGTON HOMES JANUARY 1, 1999 OWNER: KARRINGTON HEALTH, INC. CONSULTANT: SUNRISE ASSISTED LIVING MANAGEMENT, INC. 2 INDEX
SECTION: CAPTION: PAGE: - -------- -------- ----- ARTICLE I DEFINITIONS........................................................... 1 ARTICLE II APPOINTMENT OF CONSULTANT AND PRIMARY GOAL OF AGREEMENT............................................................. 3 Section 2.01 Appointment of Consultant............................................. 3 Section 2.02 Goals................................................................. 3 ARTICLE III CONSULTING FEE........................................................ 4 Section 3.01 Consulting Fee........................................................ 4 ARTICLE IV DUTIES AND RIGHTS OF CONSULTANT....................................... 4 Section 4.01 Authority of Consultant; Right of Possession.......................... 4 Section 4.02 Marketing Services.................................................... 4 Section 4.03 Implementation of Consulting Services................................. 5 Section 4.04 Management Consulting Services........................................ 5 Section 4.05 Consultant's Home Office Employees.................................... 5 Section 4.06 Personnel Administration.............................................. 5 Section 4.07 Purchasing............................................................ 6 ARTICLE V REVENUE AND EXPENSES, CREDITS AND COLLECTIONS, AND DEPOSITORIES FOR FUNDS................................................ 6 Section 5.01 Revenue and Expenses.................................................. 6 Section 5.02 Credits and Collections............................................... 6 Section 5.03 Depositories for Funds................................................ 6 ARTICLE VI FINANCIAL RECORDS..................................................... 7 Section 6.01 Accounting and Financial Records...................................... 7 Section 6.02 Access................................................................ 7 ARTICLE VII APPROVED BUDGET....................................................... 7 ARTICLE VIII INTENTIONALLY LEFT BLANK
i 3 ARTICLE IX INTENTIONALLY LEFT BLANK ARTICLE X INTENTIONALLY LEFT BLANK ARTICLE XI INSURANCE............................................................. 8 ARTICLE XII TERMINATION OF AGREEMENT.............................................. 8 Section 12.01 Termination........................................................... 8 ARTICLE XIII DEFAULTS.............................................................. 8 Section 13.01 Default by Consultant................................................. 8 Section 13.02 Default by Owner...................................................... 8 Section 13.03 Remedies of Owner..................................................... 9 Section 13.04 Remedies of Consultant................................................ 9 Section 13.05 No Waiver of Default.................................................. 9 ARTICLE XIV LEGAL ACTIONS, GOVERNING LAW, LIABILITY OF CONSULTANT AND INDEMNITY ........................................................ 9 Section 14.01 Legal Actions......................................................... 9 Section 14.02 Legal Fees and Costs.................................................. 10 Section 14.03 Choice of Law and Venue............................................... 10 Section 14.04 Liability of Consultant............................................... 10 Section 14.05 Indemnity............................................................. 11 ARTICLE XV REGULATORY AND CONTRACTUAL REQUIREMENTS............................... 11 Section 15.01 Regulatory and Contractual Requirements............................... 11 Section 15.02 Equal Employment Opportunity.......................................... 12 Section 15.03 Equal Housing Opportunity............................................. 12 ARTICLE XVI INTENTIONALLY LEFT BLANK ARTICLE XVII MISCELLANEOUS PROVISIONS.............................................. 12 Section 17.01 Additional Assurances................................................. 12 Section 17.02 Consents, Approval and Discretion..................................... 12
ii 4 Section 17.03 No Brokerage.......................................................... 13 Section 17.04 Notices............................................................... 13 Section 17.05 Severability.......................................................... 13 Section 17.06 Gender and Number..................................................... 13 Section 17.07 Division and Headings................................................. 14 Section 17.08 Confidentiality of Information........................................ 14 Section 17.09 Right to Perform...................................................... 14 Section 17.10 Assignment by Consultant.............................................. 14 Section 17.11 Entire Agreement/Amendment............................................ 14
iii 5 LIST OF EXHIBITS Exhibit A Description of Facilities iv 6 MANAGEMENT CONSULTING AGREEMENT THIS MANAGEMENT CONSULTING AGREEMENT (the "Agreement") is made as of the 31st day of December, 1998, between SUNRISE ASSISTED LIVING MANAGEMENT, INC., a Virginia corporation ("Consultant"), and KARRINGTON HEALTH, INC., an Ohio corporation ("Owner"). WHEREAS, Owner is the owner and/or operator of certain assisted living facilities described in Exhibit A, attached hereto and made a part hereof (collectively, the "Facilities"); and WHEREAS, Owner, in anticipation of its pending merger with Sunrise Assisted Living, Inc., the parent of Consultant, has determined it is in Owner's best interest to implement certain of Consultant's best practices in order to achieve improved occupancy levels and improved financial results and to ensure an orderly transition upon the consummation of the merger; and WHEREAS, Owner and Sunrise Assisted Living, Inc. have determined it is in their mutual best interest to prepare for the management transition that will occur as a result of the merger, particularly in the areas of marketing and operations, by entering into this Agreement; and WHEREAS, Owner wishes to engage Consultant to assist Owner in the management of the Facilities and Consultant desires to perform such consulting duties as described herein with regard to the Facilities. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS The following terms shall have the following meanings when used in the Agreement: 1.01 Affiliate. The term "Affiliate" shall mean any one or more individuals or entities which control, are controlled by, or are under common control with the Consultant. 1.02 Agreement. The terms "Agreement" and this "Agreement" shall mean this Management Consulting Agreement between Owner and Consultant, and any amendments thereto as may be from time to time agreed to in writing by the parties. 5 7 1.03 Approved Budget. The term "Approved Budget" shall mean the budget approved for the operation of the Facilities as set forth in Section 7.01 hereof. 1.04 Commencement of Management Consulting Services. The term "Commencement of Management Consulting Services" shall mean that date when Owner requests such services to begin which in no event shall be later than January 1, 1999. 1.05 Facilities. The term "Facilities" shall mean the assisted living facilities described in Exhibit A which are the subject of this Agreement. 1.06 Facility Expenses. The term "Facility Expenses" shall mean those costs and expenses directly related to the operating costs of the Facilities, which expenses and payment of expenses shall be administered by the Owner from the Facilities' income derived as further set forth herein. Facility Expenses shall not include debt service and property taxes. 1.07 GAAP. The term "GAAP" shall mean generally accepted accounting principles, consistently applied. 1.08 Legal Requirements. The term "Legal Requirements" shall mean any law, code, rule, ordinance, regulation or order of any governmental authority having jurisdiction over the business or operation of the Facilities or the matters which are the subject of this Agreement, including any resident care or health care, building, zoning or use laws, ordinances regulations or orders, environmental protection laws and fire department rules. 1.09 Management Consulting Services. The term "Management Consulting Services" shall mean the consulting services described in this Agreement, all as are authorized and approved by Owner. 1.10 Mortgage. The term "Mortgage" shall mean any mortgage or deed of trust recorded against the Facilities as security for a secured loan. 1.11 Revenues. The term "Revenues" shall mean all monies received by Owner from residents of the Facilities for occupancy fees and health care fees, including any community fees, with the exception of any pass-through fees and any escrow monies held for the residents by the Owner. Any community fees or deposits which are refunded to a resident shall be credited against revenues during the month in which such refunds are made. It shall also mean proceeds from rental interruption insurance actually received and all applicable miscellaneous revenues, such as that from vending machines. 1.12 State. The term "State" shall mean the States in which the Facilities are located, as applicable, and any regulatory agencies within such States with overview authority or other authority over the Facilities, unless otherwise specifically indicated. 6 8 1.13 Term. The "Term" of this Agreement shall be the period beginning when this Agreement is executed and ending one year after the date of this Agreement. 1.14 Renewal. This Agreement shall automatically renew for one (1) year periods unless either party shall give the other party written notice of termination within sixty (60) days prior to the expiration of the initial Term or any renewal terms. ARTICLE II APPOINTMENT OF CONSULTANT AND PRIMARY GOAL OF AGREEMENT 2.01 Appointment of Consultant. Owner hereby appoints Consultant and Consultant hereby accepts appointment, subject to the terms and conditions of this Agreement, as the sole and exclusive consultant to the Owner for the daily operation and management of the Facilities. Consultant's advice to Owner in the operation, direction, management and supervision of the Facilities shall take into account the methods and standards of operation that have heretofore been in place in the Facilities, as well as Consultant's methods and standards. Consultant accepts said appointment and agrees to consult in the management of the Facilities during the Term of this Agreement in accordance with the terms and conditions hereinafter set forth. 2.02 Goals. It is the joint goal of Owner and Consultant to: a. Establish and maintain programs to promote the most effective utilization of the Facilities' services; b. Provide quality services to residents of the Facilities (the "Residents") in a manner consistent with the form of resident agreement in use at the Facilities and the Approved Budget (as hereinafter defined); c. Maintain a public image of excellence for the Facilities; d. Maintain quality staffing of the Facilities; e. Manage the Facilities on a sound financial basis; f. Maintain a sound financial accounting system for the Facilities; g. Maintain adequate internal fiscal controls through proper budgeting, accounting procedures, and timely financial reporting; h. Prevent loss of revenues from the Facilities and establish sound cash flow through sound billing and collection procedures and methods; and 7 9 i. Take such other steps as are necessary to provide high quality care to the Residents. ARTICLE III CONSULTING FEE 3.01 Consulting Fee. As compensation for the services to be rendered by Consultant in accordance with the terms of this Agreement, Owner shall pay to Consultant on a monthly basis a consulting fee (the "Consulting Fee") equal to seven percent (7%) of the Revenues or such other amount as may be agreed to in writing by the parties from time to time. Consultant shall also receive from Owner an additional monthly incidental expenses reimbursement which will pay for out of pocket expenses, including travel by visiting Home Office Employees, associated with running the Facilities. The Consulting Fee will cover the cost of Consultant's supervision and general overall consulting management services for the Facilities, including Consultant's overhead costs and its Home Office Employees' salaries and fringe benefits, and such services to be provided in accordance with this Agreement. ARTICLE IV DUTIES AND RIGHTS OF CONSULTANT 4.01 Authority of Consultant; Right of Possession. Facility management shall remain with Owner. Except as otherwise specifically provided in this Agreement, Consultant shall be responsible for the proper and efficient operation of the Facilities. Consultant shall advise Owner in matters relating to management and operation of the Facilities, including, without limitation, the following: fees and charges for providing accommodations, food services, care services, and related services to residents and their guests; supervision of resident care; credit policies; food and beverage services; environmental services; procurement of inventories, supplies and services; promotion and publicity; and, generally, all activities necessary for the operation and management of the Facilities. Owner shall remain responsible for employment policies; the receipt, holding and disbursement of funds; and the maintenance of bank accounts. 4.02 Marketing Services. Consultant shall provide the following services (the "Marketing Services"): a. Prepare marketing plan and marketing strategy for the Facilities, and a budget (the "Marketing Budget") for such plan and strategy. b. Direct the marketing efforts for the Facilities. 8 10 c. Plan and implement community outreach, public relations and special events programs. 4.03 Implementation of Consulting Services. Consultant, in performing its services hereunder, shall consult with and advise Owner's designated management staff regarding proposed changes in policies and procedures or other significant matters related to management and operation of the Facilities, and Consultant's proposed action may be implemented only upon Owner's consent and approval. On at least a weekly basis, Consultant and Owner shall discuss Consultant's services in order to ensure appropriate and effective communication between the parties. 4.04 Management Consulting Services. Consultant shall use its best efforts to implement all aspects of the operation of the Facilities in accordance with the terms of this Agreement, and shall have responsibility and commensurate authority for all such activities. In addition to any other duties set forth in this Agreement, Consultant shall: a. Assist Owner in purchasing such inventories, provisions, food, supplies and other expendable items as are necessary to maintain the Facilities in a proper manner. b. Assist Owner in recruiting, hiring and training all new employees to be employed at the Facilities. c. Consult with Owner regarding the care provided to Residents of the Facilities as provided for in the resident agreement. d. Advise Owner regarding resident fees and consult with Owner's manager regarding the best professional efforts to collect such fees. e. Oversee all day-to-day operations. 4.05 Consultant's Home Office Employees. As part of the provision of the services provided by Consultant, Consultant shall from time to time make its employees who are not working directly at the Facilities (the "Home Office Employees") available to Owner for consultation and advice related to the Facilities. Home Office Employees include Consultant's home office staff and staff at other facilities managed by Consultant and its Affiliates with experience in areas such as accounting, budgeting, finance, human resources, construction, development, marketing, food service and purchasing. Owner may reasonably request such services, but the decision to provide Home Office Employees shall be at the sole discretion of Consultant. The services of Home Office Employees shall be provided at no additional charge to Owner. Owner will reimburse Consultant for all reasonable travel and related expenses of Home Office Employees visiting the Facilities or traveling elsewhere on behalf of the Facilities. 9 11 4.06 Personnel Administration. The current personnel at the Facilities shall remain employees of Owner (unless terminated by Owner) and shall be paid by Owner. Upon agreement between Owner and Consultant, such employees and any new Facility employees may become employees of Consultant, and the salaries, costs and benefits of such employees would become the responsibility of Consultant and would be Facility Expenses. Consultant shall assist Owner in recruiting, hiring, training, promoting, assigning, supervising and discharging the personnel of the Facilities. Owner shall be responsible for the formulation, implementation, modification and administration of wage scales, rates of compensation, employee insurance, employee taxes, and personnel policies with respect to the current personnel of the Facilities and any new Facility employees who are employed by Owner in accordance with the Approved Budget. 4.07 Purchasing. Consultant shall use, on behalf of the Facilities, such purchasing systems and procedures developed by or otherwise available to Consultant for all items that are consistent with the Approved Budget. In furtherance thereof, Consultant shall utilize, to the extent that they offer competitive prices, any national purchasing contracts that Consultant may from time to time have in effect with suppliers of equipment and supplies. Consultant shall not enter into any purchase or service contract not generally contained within the Approved Budget, without the prior consent of Owner. Any purchase by Consultant made pursuant to or otherwise ancillary to this Agreement shall be made with Consultant acting as agent for and at the expense of the Facilities or Owner. Owner acknowledges that the Consultant is not a merchant and thus is not making any representations or warranties with respect to the goods or services purchased by the Consultant for use at the Facilities, implied or otherwise. Consultant shall fully disclose to Owner any material interest of Consultant and/or Affiliate in any vendor and Consultant shall establish to Owner's reasonable satisfaction that the purchase or contract was made after a competitive selection process and at a fair market price. ARTICLE V REVENUE AND EXPENSES, CREDITS AND COLLECTIONS, AND DEPOSITORIES FOR FUNDS 5.01 Revenue and Expenses. Until April 1, 1999 or such other date as agreed to by Owner and Consultant, Owner shall be responsible for collecting all Revenues and for paying Facility Expenses as agreed in the Approved Budget. All fees due to Consultant under this Agreement and any incidental expense reimbursement will be deducted from the Revenues as Facility Expenses. 5.02 Credits and Collections. Consultant shall assist Owner with its credit and collection policies and procedures, including instituting reasonable steps necessary to effectuate monthly billing by the Facilities, and the collection of accounts and monies owed to the Facilities. 5.03 Depositories for Funds. Owner shall maintain accounts and investments in banks, savings and loan associations, and/or other financial institutions in Owner's 10 12 name. Owner shall maintain such balances therein as Owner shall deem appropriate, taking into account the cash flow operating needs of the Facilities and the disbursement from such accounts of such amounts of Facilities' funds as Owner shall from time to time reasonably determine to be appropriate, as well as remaining in accordance with the Approved Budget and taking into account Owner's desire to maintain as much of its funds in interest-bearing accounts as is reasonably feasible. It is expressly understood that it is Owner's responsibility to provide the funds needed to manage the Facilities in a manner designed to meet the mutual goals of Owner and Consultant set forth in Section 2.02 above. ARTICLE VI FINANCIAL RECORDS 6.01 Accounting and Financial Records. Until April 1, 1999 or such other date as agreed to by Owner and Consultant, Owner shall, at its own expense, establish and administer accounting procedures, controls and systems for the development, preparation and safekeeping of records and books of account relating to the business and financial affairs of the Facilities, including payroll, accounts receivable and accounts payable. , 6.02 Access. Consultant shall have the right at all reasonable times during the usual business hours of the Facilities to audit, examine, and make copies of books of account maintained by Owner with respect to the Facilities. Such right may be exercised through any agent or employee designated by Consultant or by an independent public accountant designated by Consultant. ARTICLE VII APPROVED BUDGET 7.01 Consultant shall prepare in advance and deliver to Owner for Owner's approval, a capital expenditure and operations budget for the Facilities' fiscal year (in which each proposed expenditure will be designated either as required or desirable) and set forth an estimate of operating revenues and expenses, together with an explanation of anticipated changes to resident charges, payroll rates and positions, non-wage cost increases, and all other factors differing from the current fiscal year. The budget, as proposed, shall be considered by Owner and, in consultation between Owner and Consultant, the budget for the ensuing fiscal year will be prepared by the Consultant with the final contents of the budget to be determined mutually by Consultant and Owner (the "Approved Budget"). If there is a delay in the finalization of a new budget, or if Owner shall fail to approve the newly proposed budget, Consultant shall continue to provide Consulting Services under the expired Approved Budget until a new budget is approved, or until the termination notice given above becomes effective. ARTICLE VIII Intentionally Left Blank 11 13 ARTICLE IX Intentionally Left Blank ARTICLE X Intentionally Left Blank ARTICLE XI INSURANCE 11.01 Consultant shall obtain and carry professional liability insurance in its name for its operation of the Facilities. Owner shall maintain its current policies of insurance for the Facilities. Owner shall consult with Consultant prior to renewing any of its current policies of insurance. ARTICLE XII TERMINATION OF AGREEMENT 12.01 Termination. This Agreement shall automatically terminate at the end of the Term, unless renewed, as provided in Section 1.14 hereof. Consultant may terminate, subject to the provisions of Section 13.04 and the notice and cure provisions set forth in Section 13.02, if Owner defaults under any material provision of this Agreement, subject to the notice and cure provisions set forth in Section 13.02. Owner may sooner terminate this Agreement if Consultant defaults under any material provision of this Agreement, subject to the notice and cure provisions set forth in Section 13.01. Owner may terminate this Agreement as the result of the institution of bankruptcy proceedings against Consultant. Owner may terminate this Agreement without notice in the event the pending merger between Owner and Sunrise Assisted Living, Inc. is not consummated by April 1, 1999. If any of these events occur, Consultant shall be compensated for its services only through the date of termination. ARTICLE XIII DEFAULTS 13.01 Default by Consultant. Consultant shall be deemed to be in default under this Agreement in the event Consultant shall fail to keep, observe or perform any material covenant, agreement, term or provision of this Agreement to be kept, observed or performed by Consultant, and such default shall continue (i) for a period of ten (10) days after Consultant receives written notice from Owner specifying the default in case of monetary defaults or (ii) for a period of thirty (30) days after Consultant receives written notice from Owner in the case of non-monetary defaults; provided, however, that if such non-monetary default cannot be cured within such thirty (30) day period, then Consultant 12 14 shall be entitled to such additional time as shall be reasonable, provided Consultant is capable of curing same, has proceeded to commence cure of such default within said period, and thereafter diligently prosecutes the cure to completion. 13.02 Default by Owner. Owner shall be deemed to be in default hereunder in the event Owner shall fail to keep, observe or perform any material covenant, agreement, term or provision of this Agreement to be kept, observed or performed by Owner and such default shall continue (i) for a period of ten (10) days after written notice thereof by Consultant to Owner in case of monetary defaults or (ii) for a period of thirty (30) days after written notice thereof by Consultant to Owner in the case of non-monetary time defaults; provided, however, if such default cannot be cured within such thirty (30) day period, then Owner shall be entitled to such additional time as shall be reasonable, provided that Owner is capable of curing same, has proceeding to commence cure of such default within said period, and thereafter diligently prosecutes the cure to completion. 13.03 Remedies of Owner. Upon the occurrence of an event of default by Consultant as specified in Section 13.01 of this Agreement and expiration of any applicable cure period provided by this Agreement, Owner shall be entitled to terminate this Agreement, to remove Consultant from the day-to-day management of the Facilities and replace Consultant with a substitute Consultant and otherwise to exercise all of its rights at law or in equity. 13.04 Remedies of Consultant. Upon the occurrence of an event of default by Owner as specified in Section 13.02 of this Agreement and the expiration of any applicable cure period provided by this Agreement, Consultant shall be entitled to terminate this Agreement and to exercise all of its rights at law or in equity. 13.05 No Waiver of Default. The failure of Owner or Consultant to seek remedy for any violation of, or to insist upon the strict performance of, any term or condition of this Agreement shall not prevent a subsequent act by Owner or Consultant which would have originally constituted a violation of this Agreement by Owner or Consultant, from having all the force and effect of an original violation. Owner or Consultant may waive any breach or threatened breach by Owner or Consultant or any term or condition herein contained. The failure by Owner or Consultant to insist upon the strict performance of any one of the terms or conditions of this Agreement or to exercise any right, remedy or election herein contained or permitted by law shall not constitute or be construed as a waiver or relinquishment for the future of such term, condition, right, remedy or election, but the same shall continue and remain in full force and effect. All rights and remedies that Owner or Consultant may have at law, in equity or otherwise for any breach of any term or condition of this Agreement, shall be distinct, separate and cumulative rights and remedies and no one of them, whether or not exercised by Owner or Consultant, shall be deemed to be in exclusion of any right or remedy of Owner or Consultant. 13 15 ARTICLE XIV LEGAL ACTIONS, GOVERNING LAW, LIABILITY OF CONSULTANT AND INDEMNITY 14.01 Legal Actions. Legal counsel for Consultant and Owner shall cooperate in the defense or prosecution of any action affecting the Facilities. Consultant shall not institute any legal action affecting the Facilities without Owner's consent. Owner shall immediately forward all legal notices to Consultant which relate to the Facilities. Consultant shall advise and assist Owner in instituting or defending, as the case may be, in the name of the Facility, Owner and/or Consultant, but in any event as a Facility Expense, all actions arising out of the operation of the Facilities and not attributable to the gross negligence or willful misconduct of Consultant, and any and all legal actions or proceedings to collect charges, third party payments, rents, or other incomes for Consultant, Owner or the Facilities, or to lawfully evict or dispossess residents of the Facilities, or to lawfully cancel, modify, or terminate any lease, license, or concession agreement in the event of breach or default thereof, or to defend any action brought against Owner. Consultant shall assist Owner to take the acts necessary to protest or litigate to a final decision in any appropriate court or forum, as a Facility Expense, any violation, order, rule, or regulation affecting the Facilities. 14.02 Legal Fees and Costs. In the event either party elects to incur legal expenses to enforce or interpret any provision of this Agreement against the other party to this Agreement, the prevailing party shall be entitled to recover such legal expenses, including without limitation, reasonable attorney's fees, costs and necessary disbursements, in addition to any other relief to which such party shall be entitled. 14.03 Choice of Law and Venue. Whereas Consultant's principal place of business is in the Commonwealth of Virginia, and the Facilities are located in various states, the parties agree that this Agreement shall be governed by and construed in accordance with the laws of Virginia, which shall be the exclusive courts of jurisdiction and venue for any litigation, special proceeding or other proceeding between the parties that may be brought, or arise out of, or in connection with, or by reason of this Agreement. 14.04 Liability of Consultant. a. Standard of Care. Consultant agrees to use its best efforts to exercise, with respect to all services provided by Consultant under or pursuant to this Agreement, a high and qualified standard of care, skill, and diligence such as is at least comparable to that at other assisted living facilities owned by other parties and managed by Consultant and Affiliates, and as is reasonably necessary for the maintenance of any license or permit required for the Facilities. 14 16 b. Other Persons. Consultant shall not be responsible for the acts or omissions of any of Owner's other contractors or any subcontractor, or any employees of Owner, or any persons representing Owner performing any services for or in connection with the Facilities, or any consultants or other persons engaged by Owner with respect thereto, unless and only to the extent Consultant is supervising, or should be supervising the same, and Consultant shall be responsible only for the performance of Consultant's obligations hereunder in accordance with the terms hereof. c. Non-Recourse. In the event that Consultant makes any claim against the Facilities and Owner, Consultant's recourse shall be limited to the provisions of this Agreement. Consultant shall have no recourse to directors, officers, employees, and shareholders of the Owner. d. Notwithstanding any other provisions of this Agreement, the maximum liability of Consultant to Owner for any breach of this Agreement or for any claims arising hereunder shall be limited to the amount of insurance carried by Consultant pursuant to Article XIX hereinabove and the amount of the Consulting Fee paid as of the date of such breach or claim. 14.05 Indemnity. Consultant will defend, indemnify and hold Owner harmless from and against any claims, losses, expenses, costs, suits, actions, proceedings, demands or liabilities that are asserted against, or sustained or incurred by Owner because of Consultant's breach of this Agreement or because of legal actions or regulatory violations arising from Consultant's gross negligence, fraud, or willful misconduct. Further, Consultant will defend, at its own expense, any actions brought directly against Consultant as a result of gross negligence in managing and/or operating the Facilities. The scope of the foregoing indemnities includes any and all costs and expenses properly incurred in connection with any proceedings to defend any indemnified claim, or to enforce the indemnity, or both, provided, however, that Consultant's liability under that indemnity shall be limited as set forth in Section 14.04 (d). Owner will defend, indemnify, and hold Consultant harmless, from and against any and all claims, expenses, losses, costs, suits, actions, proceedings, demands, or liabilities that are asserted against, or sustained or incurred by Consultant in the proper performance of Consultant's duties under this Agreement or otherwise within the scope of the agency established by the parties to this Agreement. Recovery upon an indemnity contained in this Agreement is shall be reduced dollar-for-dollar by any applicable insurance collected by either Owner or Consultant. 15 17 ARTICLE XV REGULATORY AND CONTRACTUAL REQUIREMENTS 15.01 Regulatory and Contractual Requirements. Consultant shall use its best efforts to assist Owner to cause all things to be done in and about the Facilities reasonably necessary to comply with the requirements of any applicable constitution, statute, ordinance, law, rule, regulation, or order of any governmental or quasi-governmental regulatory body or agency, or board of fire underwriters respecting the use of the Facilities or the construction, maintenance, or operation thereof. Consultant shall use its best efforts to assist Owner in obtaining and maintaining all Federal, State and county permits and licenses needed for its operation of licensed assisted living facilities providing personal care services. Owner agrees upon request by Consultant to sign promptly and without charge applications for licenses, permits or other instruments necessary for operation of the Facilities and to provide such information and perform such acts relative to the ownership of the Facilities as are required by law, regulation or governmental practice in order for obtaining and/or maintaining any license, permit, instrument, certificate, certification or approval with respect to the proper operation of the Facilities. The parties understand and agree that certain deficiencies or situations of non-compliance with various Legal Requirements (such as building codes, OSHA, ADA, health care regulations and the like) are likely to occur from time to time in the normal course of business operations. Such occurrences will not constitute a breach or default of Consultant hereunder, provided that, (i) they are not materially beyond the general experience of similar Facilities operations located in the State in terms of scope, seriousness, or frequency, and (ii) Consultant takes all reasonable actions in a timely manner to cure such deficiencies or situations of non-compliance. The costs (including any fines for non-compliance) of curing such deficiencies or circumstances of non-compliance shall constitute Operating Expenses unless incurred by reason of Consultant's willful failure, gross negligence or default hereunder. 15.02 Equal Employment Opportunity. Without limitation of any provision set forth herein, Owner and Consultant expressly agree to abide by any and all applicable Federal and/or State equal employment opportunity statutes, rules and regulations, including, without limitation, Title II of the Civil Rights Act of 1964, the Equal Pay Act of 1963, the National Labor Relations Act, the Fair Labor Standard Act, the Rehabilitation Act of 1983, and the Occupational Safety and Health Act of 1970, all as may be from time to time modified or amended. 15.03 Equal Housing Opportunity. Without limitation of any provision set forth herein, Owner and Consultant expressly agree to abide by any and all applicable Federal and/or State equal housing opportunity statutes, rules and regulations, all as may be from time to time modified or amended. 16 18 ARTICLE XVI Intentionally Left Blank ARTICLE XVII MISCELLANEOUS PROVISIONS 17.01 Additional Assurances. The provisions of this Agreement shall be self-operative and shall not require further agreement by the parties except as may be herein specifically provided to the contrary; provided, however, at the request of either party, the party requested shall execute such additional instruments and take such additional acts as the requesting party may deem necessary to effectuate this Agreement. 17.02 Consents, Approval and Discretion. Except as expressly provided herein to the contrary, whenever this Agreement requires any consent or approval to be given by either party or either party must or may exercise discretion, the parties agree that such consent or approval shall not be unreasonably withheld or delayed and such discretion shall be reasonably exercised, in good faith. 17.03 No Brokerage. Each party represents to the other that it has not engaged a broker in connection with this transaction, and agrees to defend, indemnify, and hold the other party harmless from any claim made by a broker through the indemnifying party. 17.04 Notices. All notices, demands, consents, approvals, and requests given by either party to the other hereunder shall be in writing and shall be sent by hand, by overnight courier, or by registered or certified mail, postage prepaid, to the parties at the following addresses: Owner: Karrington Health, Inc. 919 Old Henderson Rd. Columbus, Ohio 43220 Attn: Pete A. Klisares, President Copy to: Stephen Lewis, Esquire Karrington Health, Inc. 919 Old Henderson Rd. Columbus, Ohio 43220 Consultant: Sunrise Assisted Living Management, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Attn: Ms. Tiffany Tomasso Copy to: Thomas B. Newell, Esquire 17 19 Sunrise Assisted Living, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 or to such other address and to the attention of such other person as either party may from time to time designate in writing. Notices shall be effective upon receipt. Refusal to accept delivery shall constitute receipt. 17.05 Severability. If any term or provision of this Agreement or the application thereof to any person or circumstance is held to be invalid or unenforceable for any reason, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and be enforced to the fullest extent permitted by law. 17.06 Gender and Number. Whenever the context of this Agreement requires, the gender of all words herein shall include the masculine, feminine, and neuter, and the number of all words herein shall include the singular and plural. 17.07 Division and Headings. The divisions of this Agreement into sections and subsections and the use of captions and headings in connection therewith are solely for convenience and shall have no legal effect whatsoever in construing the provisions of this Agreement. 17.08 Confidentiality of Information. Consultant and Owner agree to keep confidential and not to use or to disclose to others, except as expressly consented to in writing by the other party or required by law, any and all of their respective secrets or confidential technology, proprietary information, customer lists, or trade secrets, or any matter or items ascertained through their association with each other. Consultant and Owner further agree that should Consultant leave the active service of Owner, Consultant will return to Owner any Facility information of any kind pertaining to Residents of the Facilities, business, sales, financial condition or products and Owner will return to Consultant any and all of Consultant's confidential information obtained by Owner. All funds related to and accounts opened on behalf of the Facilities also will be returned to Owner. 17.09 Right to Perform. In the event that Owner or Consultant shall fail to perform any duty or fulfill any obligation hereunder to the material detriment of the other, Owner or Consultant, in addition to any rights or remedies available to it under law, shall have the right, but not the obligation to perform any such duty or fulfill any such obligation, but in no way obligating the party beyond any termination period allowable hereunder. 17.10 Assignment by Consultant. Consultant shall have the right to assign this Agreement to an affiliate or subsidiary of Consultant. 18 20 17.11 Entire Agreement/Amendment. With respect to the subject matter hereof, this Agreement supersedes all previous contracts and constitutes the entire Agreement between the parties, and no party shall be entitled to benefits other than those specified herein. As between the parties, no oral statements or prior written material not specifically incorporated herein shall be of any force and effect. The parties specifically acknowledge that in entering into and executing this Agreement, the parties rely solely upon the representations and agreements contained in this Agreement and no others. All prior representations or agreements not expressly incorporated herein, whether written or verbal, are superseded, and no changes in or additions to this Agreement shall be recognized unless and until made in writing and signed by both parties hereto. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed under seal by their duly authorized offices, all as of the day and year first above written. WITNESS/ATTEST: OWNER: Karrington Health, Inc. /s/ Amy S. Maxwell By: /s/ Pete A. Klisares - ------------------ ------------------------------------- Name: Pete A. Klisares ----------------------------------- Title: President ---------------------------------- WITNESS/ATTEST: CONSULTANT: Sunrise Assisted Living Management, Inc., a Virginia corporation Susan L. Timoner By: /s/ Tiffany Tomasso - ---------------- ------------------------------------- Name: Tiffany Tomasso ----------------------------------- Title: Executive VP of Operations ---------------------------------- 19 21 Exhibit A to Management Consulting Agreement Karrington of Bexley Karrington on the Scioto Karrington at Tucker Creek Karrington of Shaker Heights Karrington Place Karrington of South Hills Karrington at Fall Creek Karrington Commons of Buffalo Karrington Commons of Bismark Karrington Cottages of Bismark Karrington Cottages of Waterloo Karrington Cottages of Mankato Karrington Cottages of Rochester I Karrington Cottages of Rochester II Karrington Cottages of Rochester III Karrington Cottages of Rochester IV Karrington Cottages of Buffalo I Karrington Cottages of Buffalo II Karrington of Willow Lake Karrington of Fort Wayne Karrington of Fremont Karrington of Wooster Karrington of Bath Karrington of Gahanna Karrington of Carmel Karrington of Cottages of Rochester V Karrington of Rocky River Karrington of South Charlotte Karrington of Presque Isle Bay Karrington of Ann Arbor Karrington of Poland Karrington of Monroeville Karrington of Park Ridge Karrington of Findlay Karrington of Oakwood Karrington of Albuquerque St. Francis Place Karrington of Kenwood Karrington of Englewood Karrington of Colorado Springs 20 EX-99.9 13 DEVELOPMENT AGREEMENT (EDINA, MINNESOTA) 1 EXHIBIT 99.9 DEVELOPMENT AGREEMENT (Edina, Minnesota) This DEVELOPMENT AGREEMENT (the "Agreement") is made as of this 1st day of December, 1998, by and between SUNRISE DEVELOPMENT, INC., a Virginia corporation ("Developer") KARRINGTON HEALTH, INC. ("Owner"). WHEREAS, Owner desires to own and develop an assisted living project (the "Facility") to be located in Edina, Minnesota, as more particularly described on Exhibit A (the "Site"); WHEREAS, Owner, in anticipation of its pending merger with Sunrise Assisted Living, Inc., the parent of Developer, has determined it is in Owner's best interest to engage Developer in the development of Owner's projects currently under construction in order to ensure an orderly transition upon the consummation of the merger; and WHEREAS, Owner wishes to engage Developer for certain development and construction services with respect to the Facility and Developer desires to provide such services, pursuant to the terms set forth herein. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I APPOINTMENT OF DEVELOPER AND TERM 1.01 Appointment of Developer. Owner hereby appoints Developer and Developer hereby accepts appointment, subject to the terms and conditions of this Agreement, as development agent to provide certain development, design and construction management services with respect to the Facility. 1.02 Term. This Agreement shall begin upon execution by the parties and continue until the date that the Facility is issued a certificate of occupancy (the "Term"). ARTICLE II DUTIES AND RIGHTS OF DEVELOPER 2.01 Project Budget Services. Developer shall provide budgeting services as set forth in this Section 2.01. Developer shall prepare a pro forma budget for the development and construction of the Facility, setting forth all project costs, including all development, marketing, management, guaranty fees and other costs to be paid to 1 2 Developer and any affiliates thereof. The pro forma budget shall also include a line item for working capital/operating loss reserves. The pro forma shall be presented to Owner for Owner's review and approval, and once approved by Owner (with any revisions thereto accepted in writing by Developer), such pro forma shall constitute the "Development Budget" for all purposes hereof. The Development Budget shall be subject to the review and approval of the construction lender for the Facility. If the construction lender requires any revisions to the Development Budget, Owner and Developer shall cooperate in making such revisions and shall mutually approve the modification required. 2.02 Design and Construction Management Services. Developer shall provide the following construction management services to Owner: a. Assist Owner in coordinating with third-party architects and engineers all necessary architectural services for the Facility, including architectural, structural, mechanical, electrical and plumbing/fire protection engineering services. b. Coordinate preparation of all design development documents, including all architectural, structural, electrical, mechanical and plumbing plans and specifications necessary for the construction of the Facility. c. Prepare all construction bid documents, secure bids from the general contractor, and assist Owner in negotiating the terms of the construction contract. After Owner has approved the terms of the construction contract, Developer shall have the authority to execute the construction contract as agent for Owner. d. Develop and review critical path schedules and updates and assist the general contractor in developing the project schedule and updates. e. Discuss and review with the general contractor its means and methods of construction. f. Discuss and review with the general contractor permitting approval and licensing issues and requirements necessary to complete and open the Facility, and obtain (or cause the general contractor to obtain) all required permits. g. Assist Owner as requested with construction management and cost control services, including assisting Owner in obtaining the most favorable prices for construction, equipment, finishes and furnishings, and making recommendations to Owner when 2 3 requested regarding change orders, extensions of time and increases or decreases in the contract sum. h. Assist Owner as requested in monitoring and evaluating construction progress and make recommendations to the general contractor and Owner as deemed necessary. i. Assist in the resolution of critical issues impacting the progress of work, and monitor architectural supplemental instructions and requirements for information. j. Provide quality control and the early detection of defects in workmanship. k. Review punch list items and assist in the close-out of the project. l. Coordinate opening date for the Facility with Owner and the Facility's managing agent (the "Manager"). 2.03 Expenses. It is expressly understood that it is Owner's responsibility to provide any and all funds needed for Developer to perform the Development, Design and Construction Management Services, as set forth in the Development Budget. Owner shall also be solely responsible for payment to all third-parties (i.e. engineers, attorneys and consultants) as set forth in the Development Budget. 2.04 Reimbursement. Owner shall reimburse Developer for any and all costs incurred by Developer in connection with the Site prior hereto. Developer shall attach as Exhibit B hereto a list of such costs incurred to date. Owner and Developer agree to reconcile such reimbursement of costs thirty (30) days after the initial reimbursement, and any additional amounts determined to be owing shall be promptly forwarded to the Developer. ARTICLE III DEVELOPER'S COMPENSATION 3.01 Development Fee. For the Design and Construction Management Services provided pursuant to this Agreement, Developer shall be paid a fee equal to a total amount of Two Hundred Fifty Thousand Dollars ($250,000.00) (the "Development Fee"). Fifty Thousand Dollars ($50,00.00) of the Development Fee shall be due to Developer as of the date of this Agreement for payment of services performed by Developer at and prior to the date of this Agreement. Owner acknowledges that Developer has assisted Owner since Owner and Sunrise Assisted Living, Inc. entered into a Merger Agreement dated October 11, 1998. A schedule for the periodic payment of the remaining $200,000.00 of the Development Fee shall be agreed to by Owner and Manager 3 4 subsequent to the date of this Agreement, with the final payment of the Development Fee to be due no later than the issuance of a Certificate of Occupancy for the Facility. The Development Fee shall constitute full and complete payment to the Developer, for all guarantees and services furnished or performed by the Developer, in connection with this Agreement at any time prior to or following the execution of this Agreement. ARTICLE IV TERMINATION 4.01 Termination Upon Opening. This Agreement shall terminate upon the opening of the Facility, unless sooner terminated pursuant to the provisions of this Agreement provided that Owner's obligation to pay the Development Fee shall survive such termination. 4.02 Termination for Default. In the event that either the Owner or the Developer is in default under any material term or condition of this Agreement and fails either to cure or comply with such term or condition or to diligently pursue such cure within forty-five (45) days after the service of written notice of default, then the other of them may, at the expiration of such 45-day period or such longer period as may be reasonably necessary to cure such default, cancel and terminate this Agreement upon five (5) days' written notice. Upon any such termination by Developer due to Owner's default (which may include Owner's failure to proceed with the acquisition of title to the Site), the unpaid balance of the Development Fee shall be fully due and payable. 4.03 Bankruptcy of Either Party. If either Owner or Developer shall cease to exist, for any reason, during the term of this Agreement, or in the event a petition in bankruptcy, arrangement or reorganization is filed by or against either of them and such petition is not dismissed within sixty (60) days, or if either or them shall make an assignment for the benefit of creditors or take advantage of any insolvency law, the other of them may forthwith terminate this Agreement. 4.04 Suspension of Performance. If development of the Facility contemplated under this Agreement is suspended for any reason described in Section 5.04 below, including without limitation any cause beyond the reasonable control of the parties hereto, then upon written notice by the Owner to the Developer (the "Notice of Suspension"), the Owner may suspend the Developer's performance of its obligations under this Agreement for a period of ninety (90) days. The Owner may terminate such suspension and re-commence development of the project by written notice to the Developer whereupon the Developer shall re-commence performing its obligations under this Agreement within thirty (30) days of receipt of such notice. 4.05 Failure to Obtain Financing. If the closing of the financing has not occurred by April 1, 1999, then either party may terminate this Agreement upon ten (10) 4 5 days written notice to the other party. In the event of such termination, except for material default by Developer, Owner will immediately pay to Developer any outstanding Development Fee and shall immediately reimburse Developer for its direct out-of-pocket expenses on the project. ARTICLE V MISCELLANEOUS PROVISIONS 5.01 Standard of Performance. Developer will devote its best efforts to the development of the Facility as contemplated by this Agreement and will act in good faith to cause the completion of the Facility in accordance with the terms and conditions of this Agreement. 5.02 Proprietary Information. Any and all architectural, structural, engineering or other construction drawings furnished to Owner with regard to the Facilities are the property of Developer. Owner shall not use any such drawings or cause to have any such drawings disseminated to any third party without the written consent of Developer. Without prejudice to any rights and remedies otherwise available to Developer, Developer shall be entitled to equitable relief by way of injunction if Owner breaches this Section 5.02. No failure or delay by Developer in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. Owner agrees to indemnify Developer for any costs and expenses, including legal expenses, Developer may incur in connection with the enforcement of this Section 5.02. 5.03 Consent. Any consent, approval or other action required or requested under or in connection with this Agreement shall not unreasonably be withheld or delayed and any request made or direction given hereunder or in connection herewith shall be reasonable, it being the intention and expectation of the Owner and the Developer that neither shall be capricious or arbitrary under or in connection with this Agreement. Any determination of reasonableness under this Section shall be made in light of the objectives of the Owner, which objectives include, without limitation, the development of the Facility as a first class building and the operation of the Facility as a high quality assisted living community. 5.04 Force Majeure. With respect to any services to be furnished or obligations to be performed hereunder, no party shall ever be liable for failure to furnish or perform the same when prevented from doing so by Acts of God, contractor delays, strike, lockout or labor unrest, explosion, sabotage, breakdown, accident, order or regulation of or by any governmental authority, or failure of supply, or inability despite the exercise of reasonable diligence to obtain supplies, parts or employees or others necessary to furnish such services, or because of war, riot, civil commotion or other emergency, or for any cause beyond its reasonable control; provided, however, that the lack of financial resources shall never be excused. 5 6 5.05 Assignment and Subcontract. Except as specifically provided in this Agreement, neither Owner nor Developer may assign any of its rights or delegate any of the obligations specified in this Agreement without the prior written consent of the other party. Developer may not subcontract any of its obligations under this Agreement, except to its affiliates, without the prior written consent of Owner. Notwithstanding any such subcontracting permitted or approved hereunder, Developer will remain primarily liable for the performance of its obligations under this Agreement. 5.06 Benefits of Agreement. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, assigns, legal representatives and heirs, but nothing contained in this Section shall be deemed to constitute a consent to any assignment otherwise restricted by this Agreement. 5.07 Indemnification. a. Owner and Developer each agree that the other shall be and is indemnified, exonerated, and held harmless of, from and against any claim, loss, cost, damage, expense or other liability arising out of performance under this Agreement, excepting only liability attributable to negligence, willful misconduct or willful, wanton or reckless failure by a party, its agents, servants, employees or independent contractors to perform its or their respective obligations under this Agreement. b. A person entitled to indemnification under this Section shall give notice to the indemnitor of the claim or other circumstances giving rise to a request for indemnification, promptly after becoming aware of same. If the indemnitor does not notify the person to be indemnified that it has assumed the defense of such claim within a fifteen (15) day period after receipt of the notice of the request for indemnification, then the person entitled to indemnification may assume the defense of such claim on behalf and at the expense of the indemnitor. Any compromise or settlement of any such claim shall be made only with the prior consent of the indemnitor, provided that such consent shall not be delayed or unreasonably withheld. If the indemnitor notifies the person to be indemnified that it has assumed the defense of such claim, the indemnitor may compromise or settle any claim for which indemnification is available under this Section, and the party entitled to indemnification may participate in the defense of such claim with its own legal counsel at its own expense. c. In no event shall either party hereunder be liable to the other for consequential damages, lost profits or punitive damages on account of a default under this Agreement or otherwise. 5.08 Modification. Except as otherwise provided herein, neither this Agreement nor any provision hereof can be modified, changed, discharged, extended or 6 7 terminated except by an instrument in writing executed by the party against whom enforcement is sought. 5.09 Waiver. The failure to insist upon strict compliance with any of the terms, covenants or conditions herein on one or more occasions shall not be deemed a waiver of such terms, covenants or conditions nor shall such failure impose any obligation to provide notice that strict compliance will be expected in the future, nor shall nay waiver or relinquishment of any right at any one or more times be deemed a waiver or relinquishment of such right at any other time or times. 5.10 Notices. All notices, demands, consents, approvals, and requests given by either party to the other hereunder shall be in writing and shall be sent by hand, by overnight courier, or by registered or certified mail, return receipt requested, postage prepaid, to the parties at the following addresses: Owner: Karrington Health, Inc. 919 Old Henderson Rd. Columbus, Ohio 43220 Attn: Pete A. Klisares, President Copy to: Stephen Lewis, Esquire Karrington Health, Inc. 919 Old Henderson Rd. Columbus, Ohio 43220 Developer: Sunrise Development, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Attn: Thomas B. Newell, President or to such other address and to the attention of such other person as either party may from time to time designate in writing. Notices shall be effective upon receipt. Refusal to accept delivery shall constitute receipt. 5.11 Severability. If any term or provision of this Agreement or the application thereof to any person or circumstance is held to be invalid or unenforceable for any reason, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and be enforced to the fullest extent permitted by law, but only to the extent the same continues to reflect fairly the intent and understanding of the parties expressed by this Agreement taken as a whole. 7 8 5.12 Governing Law. To the maximum extent the parties hereto may lawfully agree, this Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Virginia without regard to conflict of laws principles, and shall be enforced in the state and federal courts located in the Commonwealth of Virginia. Each of the parties to this Agreement submits to the jurisdiction of the courts of that state and agrees that process may be served upon it by registered or certified mail addressed as provided in Section 5.10. 5.13 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same document. 5.14 Mediation. The parties agree that any disputes arising hereunder shall be submitted to non-binding mediation in accordance with the rules of the American Arbitration Association prior to the commencement of litigation by either party. Any applicable statute of limitation or repose shall be tolled from the date of filing of the request for mediation with the American Arbitration Association until ten (10) days after the mediation is concluded. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed under seal by their duly authorized officers, all as of the day and year first above written. WITNESS/ATTEST: OWNER: Karrington Health, Inc., an Ohio corporation /s/ Amy S. Maxwell By: /s/ Pete A. Klisares - ------------------- --------------------- Name: Pete A. Klisares ----------------- Title: President --------- DEVELOPER: Sunrise Development, Inc., a Virginia corporation /s/ Susan L. Timoner By: /s/ Thomas B. Newell - --------------------- -------------------- Thomas B. Newell, President 8 9 Exhibit A Lot 1, Block 8, Stow's Edgemoor Addition, except that part lying East of a line parallel with and 50 feet Westerly of the east line of Section 31, Township 28, Range 24, according to the plat thereof on file or of record in the Office of the Registrar of Titles in and for Hennepin county, Minnesota. 9 EX-99.10 14 DEVELOPMENT AGREEMENT (FARMINGTON HILLS, MICHIGAN) 1 EXHIBIT 99.10 DEVELOPMENT AGREEMENT (Farmington Hills, Michigan) This DEVELOPMENT AGREEMENT (the "Agreement") is made as of this 1st day of December, 1998, by and between SUNRISE DEVELOPMENT, INC., a Virginia corporation ("Developer") KARRINGTON HEALTH, INC. ("Owner"). WHEREAS, Owner desires to own and develop an assisted living project (the "Facility") to be located in Farmington Hills, Michigan, as more particularly described on Exhibit A (the "Site"); WHEREAS, Owner, in anticipation of its pending merger with Sunrise Assisted Living, Inc., the parent of Developer, has determined it is in Owner's best interest to engage Developer in the development of Owner's projects currently under construction in order to ensure an orderly transition upon the consummation of the merger; and WHEREAS, Owner wishes to engage Developer for certain development and construction services with respect to the Facility and Developer desires to provide such services, pursuant to the terms set forth herein. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I APPOINTMENT OF DEVELOPER AND TERM 1.01 Appointment of Developer. Owner hereby appoints Developer and Developer hereby accepts appointment, subject to the terms and conditions of this Agreement, as development agent to provide certain development, design and construction management services with respect to the Facility. 1.02 Term. This Agreement shall begin upon execution by the parties and continue until the date that the Facility is issued a certificate of occupancy (the "Term"). ARTICLE II DUTIES AND RIGHTS OF DEVELOPER 2.01 Project Budget Services. Developer shall provide budgeting services as set forth in this Section 2.01. Developer shall prepare a pro forma budget for the development and construction of the Facility, setting forth all project costs, including all development, marketing, management, guaranty fees and other costs to be paid to Developer and any affiliates thereof. The pro forma budget shall also include a line item 1 2 for working capital/operating loss reserves. The pro forma shall be presented to Owner for Owner's review and approval, and once approved by Owner (with any revisions thereto accepted in writing by Developer), such pro forma shall constitute the "Development Budget" for all purposes hereof. The Development Budget shall be subject to the review and approval of the construction lender for the Facility. If the construction lender requires any revisions to the Development Budget, Owner and Developer shall cooperate in making such revisions and shall mutually approve the modification required. 2.02 Design and Construction Management Services. Developer shall provide the following construction management services to Owner: a. Assist Owner in coordinating with third-party architects and engineers all necessary architectural services for the Facility, including architectural, structural, mechanical, electrical and plumbing/fire protection engineering services. b. Coordinate preparation of all design development documents, including all architectural, structural, electrical, mechanical and plumbing plans and specifications necessary for the construction of the Facility. c. Prepare all construction bid documents, secure bids from the general contractor, and assist Owner in negotiating the terms of the construction contract. After Owner has approved the terms of the construction contract, Developer shall have the authority to execute the construction contract as agent for Owner. d. Develop and review critical path schedules and updates and assist the general contractor in developing the project schedule and updates. e. Discuss and review with the general contractor its means and methods of construction. f. Discuss and review with the general contractor permitting approval and licensing issues and requirements necessary to complete and open the Facility, and obtain (or cause the general contractor to obtain) all required permits. g. Assist Owner as requested with construction management and cost control services, including assisting Owner in obtaining the most favorable prices for construction, equipment, finishes and furnishings, and making recommendations to Owner when 2 3 requested regarding change orders, extensions of time and increases or decreases in the contract sum. h. Assist Owner as requested in monitoring and evaluating construction progress and make recommendations to the general contractor and Owner as deemed necessary. i. Assist in the resolution of critical issues impacting the progress of work, and monitor architectural supplemental instructions and requirements for information. j. Provide quality control and the early detection of defects in workmanship. k. Review punch list items and assist in the close-out of the project. l. Coordinate opening date for the Facility with Owner and the Facility's managing agent (the "Manager"). 2.03 Expenses. It is expressly understood that it is Owner's responsibility to provide any and all funds needed for Developer to perform the Development, Design and Construction Management Services, as set forth in the Development Budget. Owner shall also be solely responsible for payment to all third-parties (i.e. engineers, attorneys and consultants) as set forth in the Development Budget. 2.04 Reimbursement. Owner shall reimburse Developer for any and all costs incurred by Developer in connection with the Site prior hereto. Developer shall attach as Exhibit B hereto a list of such costs incurred to date. Owner and Developer agree to reconcile such reimbursement of costs thirty (30) days after the initial reimbursement, and any additional amounts determined to be owing shall be promptly forwarded to the Developer. ARTICLE III DEVELOPER'S COMPENSATION 3.01 Development Fee. For the Design and Construction Management Services provided pursuant to this Agreement, Developer shall be paid a fee equal to a total amount of Two Hundred Fifty Thousand Dollars ($250,000.00) (the "Development Fee"). Fifty Thousand Dollars ($50,00.00) of the Development Fee shall be due to Developer as of the date of this Agreement for payment of services performed by Developer at and prior to the date of this Agreement. Owner acknowledges that Developer has assisted Owner since Owner and Sunrise Assisted Living, Inc. entered into a Merger Agreement dated October 11, 1998. A schedule for the periodic payment of the remaining $200,000.00 of the Development Fee shall be agreed to by Owner and Manager 3 4 subsequent to the date of this Agreement, with the final payment of the Development Fee to be due no later than the issuance of a Certificate of Occupancy for the Facility. The Development Fee shall constitute full and complete payment to the Developer, for all guarantees and services furnished or performed by the Developer, in connection with this Agreement at any time prior to or following the execution of this Agreement. ARTICLE IV TERMINATION 4.01 Termination Upon Opening. This Agreement shall terminate upon the opening of the Facility, unless sooner terminated pursuant to the provisions of this Agreement provided that Owner's obligation to pay the Development Fee shall survive such termination. 4.02 Termination for Default. In the event that either the Owner or the Developer is in default under any material term or condition of this Agreement and fails either to cure or comply with such term or condition or to diligently pursue such cure within forty-five (45) days after the service of written notice of default, then the other of them may, at the expiration of such 45-day period or such longer period as may be reasonably necessary to cure such default, cancel and terminate this Agreement upon five (5) days' written notice. Upon any such termination by Developer due to Owner's default (which may include Owner's failure to proceed with the acquisition of title to the Site), the unpaid balance of the Development Fee shall be fully due and payable. 4.03 Bankruptcy of Either Party. If either Owner or Developer shall cease to exist, for any reason, during the term of this Agreement, or in the event a petition in bankruptcy, arrangement or reorganization is filed by or against either of them and such petition is not dismissed within sixty (60) days, or if either or them shall make an assignment for the benefit of creditors or take advantage of any insolvency law, the other of them may forthwith terminate this Agreement. 4.04 Suspension of Performance. If development of the Facility contemplated under this Agreement is suspended for any reason described in Section 5.04 below, including without limitation any cause beyond the reasonable control of the parties hereto, then upon written notice by the Owner to the Developer (the "Notice of Suspension"), the Owner may suspend the Developer's performance of its obligations under this Agreement for a period of ninety (90) days. The Owner may terminate such suspension and re-commence development of the project by written notice to the Developer whereupon the Developer shall re-commence performing its obligations under this Agreement within thirty (30) days of receipt of such notice. 4.05 Failure to Obtain Financing. If the closing of the financing has not occurred by April 1, 1999, then either party may terminate this Agreement upon ten (10) 4 5 days written notice to the other party. In the event of such termination, except for material default by Developer, Owner will immediately pay to Developer any outstanding Development Fee and shall immediately reimburse Developer for its direct out-of-pocket expenses on the project. ARTICLE V MISCELLANEOUS PROVISIONS 5.01 Standard of Performance. Developer will devote its best efforts to the development of the Facility as contemplated by this Agreement and will act in good faith to cause the completion of the Facility in accordance with the terms and conditions of this Agreement. 5.02 Proprietary Information. Any and all architectural, structural, engineering or other construction drawings furnished to Owner with regard to the Facilities are the property of Developer. Owner shall not use any such drawings or cause to have any such drawings disseminated to any third party without the written consent of Developer. Without prejudice to any rights and remedies otherwise available to Developer, Developer shall be entitled to equitable relief by way of injunction if Owner breaches this Section 5.02. No failure or delay by Developer in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. Owner agrees to indemnify Developer for any costs and expenses, including legal expenses, Developer may incur in connection with the enforcement of this Section 5.02. 5.03 Consent. Any consent, approval or other action required or requested under or in connection with this Agreement shall not unreasonably be withheld or delayed and any request made or direction given hereunder or in connection herewith shall be reasonable, it being the intention and expectation of the Owner and the Developer that neither shall be capricious or arbitrary under or in connection with this Agreement. Any determination of reasonableness under this Section shall be made in light of the objectives of the Owner, which objectives include, without limitation, the development of the Facility as a first class building and the operation of the Facility as a high quality assisted living community. 5.04 Force Majeure. With respect to any services to be furnished or obligations to be performed hereunder, no party shall ever be liable for failure to furnish or perform the same when prevented from doing so by Acts of God, contractor delays, strike, lockout or labor unrest, explosion, sabotage, breakdown, accident, order or regulation of or by any governmental authority, or failure of supply, or inability despite the exercise of reasonable diligence to obtain supplies, parts or employees or others necessary to furnish such services, or because of war, riot, civil commotion or other emergency, or for any cause beyond its reasonable control; provided, however, that the lack of financial resources shall never be excused. 5 6 5.05 Assignment and Subcontract. Except as specifically provided in this Agreement, neither Owner nor Developer may assign any of its rights or delegate any of the obligations specified in this Agreement without the prior written consent of the other party. Developer may not subcontract any of its obligations under this Agreement, except to its affiliates, without the prior written consent of Owner. Notwithstanding any such subcontracting permitted or approved hereunder, Developer will remain primarily liable for the performance of its obligations under this Agreement. 5.06 Benefits of Agreement. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, assigns, legal representatives and heirs, but nothing contained in this Section shall be deemed to constitute a consent to any assignment otherwise restricted by this Agreement. 5.07 Indemnification. a. Owner and Developer each agree that the other shall be and is indemnified, exonerated, and held harmless of, from and against any claim, loss, cost, damage, expense or other liability arising out of performance under this Agreement, excepting only liability attributable to negligence, willful misconduct or willful, wanton or reckless failure by a party, its agents, servants, employees or independent contractors to perform its or their respective obligations under this Agreement. b. A person entitled to indemnification under this Section shall give notice to the indemnitor of the claim or other circumstances giving rise to a request for indemnification, promptly after becoming aware of same. If the indemnitor does not notify the person to be indemnified that it has assumed the defense of such claim within a fifteen (15) day period after receipt of the notice of the request for indemnification, then the person entitled to indemnification may assume the defense of such claim on behalf and at the expense of the indemnitor. Any compromise or settlement of any such claim shall be made only with the prior consent of the indemnitor, provided that such consent shall not be delayed or unreasonably withheld. If the indemnitor notifies the person to be indemnified that it has assumed the defense of such claim, the indemnitor may compromise or settle any claim for which indemnification is available under this Section, and the party entitled to indemnification may participate in the defense of such claim with its own legal counsel at its own expense. c. In no event shall either party hereunder be liable to the other for consequential damages, lost profits or punitive damages on account of a default under this Agreement or otherwise. 5.08 Modification. Except as otherwise provided herein, neither this Agreement nor any provision hereof can be modified, changed, discharged, extended or 6 7 terminated except by an instrument in writing executed by the party against whom enforcement is sought. 5.09 Waiver. The failure to insist upon strict compliance with any of the terms, covenants or conditions herein on one or more occasions shall not be deemed a waiver of such terms, covenants or conditions nor shall such failure impose any obligation to provide notice that strict compliance will be expected in the future, nor shall nay waiver or relinquishment of any right at any one or more times be deemed a waiver or relinquishment of such right at any other time or times. 5.10 Notices. All notices, demands, consents, approvals, and requests given by either party to the other hereunder shall be in writing and shall be sent by hand, by overnight courier, or by registered or certified mail, return receipt requested, postage prepaid, to the parties at the following addresses: Owner: Karrington Health, Inc. 919 Old Henderson Rd. Columbus, Ohio 43220 Attn: Pete A. Klisares, President Copy to: Stephen Lewis, Esquire Karrington Health, Inc. 919 Old Henderson Rd. Columbus, Ohio 43220 Developer: Sunrise Development, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Attn: Thomas B. Newell, President or to such other address and to the attention of such other person as either party may from time to time designate in writing. Notices shall be effective upon receipt. Refusal to accept delivery shall constitute receipt. 5.11 Severability. If any term or provision of this Agreement or the application thereof to any person or circumstance is held to be invalid or unenforceable for any reason, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and be enforced to the fullest extent permitted by law, but only to the extent the same continues to reflect fairly the intent and understanding of the parties expressed by this Agreement taken as a whole. 7 8 5.12 Governing Law. To the maximum extent the parties hereto may lawfully agree, this Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Virginia without regard to conflict of laws principles, and shall be enforced in the state and federal courts located in the Commonwealth of Virginia. Each of the parties to this Agreement submits to the jurisdiction of the courts of that state and agrees that process may be served upon it by registered or certified mail addressed as provided in Section 5.10. 5.13 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same document. 5.14 Mediation. The parties agree that any disputes arising hereunder shall be submitted to non-binding mediation in accordance with the rules of the American Arbitration Association prior to the commencement of litigation by either party. Any applicable statute of limitation or repose shall be tolled from the date of filing of the request for mediation with the American Arbitration Association until ten (10) days after the mediation is concluded. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed under seal by their duly authorized officers, all as of the day and year first above written. WITNESS/ATTEST: OWNER: Karrington Health, Inc., an Ohio corporation /s/ Amy S. Maxwell By: /s/ Pete A. Klisares - ------------------ ---------------------- Name: Pete A. Klisares ----------------- Title:President --------- DEVELOPER: Sunrise Development, Inc., a Virginia corporation /s/ Susan L. Timoner By: /s/ Thomas B. Newell - -------------------- ---------------------- Thomas B. Newell, President 8 9 Exhibit A Situated in the State of Michigan, in the County of Oakland and in the City of Farmington Hills: Part of the Southeast 1/4 of Section 2 Town 1 North, Range 9 East described as: Commencing at the East 1/4 corner of Section 2, Town 1 North, Range 9 East, City of Farmington Hills, Oakland County, Michigan; thence South 01 degrees 30 minutes 02 seconds West 1671.81 feet along the East line of said Section and the centerline of Middlebelt Road; thence North 87 degrees 40 minutes 18 seconds West 60.01 feet to a point on the Westerly right-of-way of Middlebelt Road, said point being the Point of Beginning; thence South 01 degrees 30 minutes 02 seconds West 314.23 feet along said right-of-way line; thence North 87 degrees 36 minutes 36 seconds West 452.24 feet; thence North 01 degrees 30 minutes 02 seconds East 472.02 feet; thence South 87 degrees 40 minutes 18 seconds East 254.40 feet; thence South 02 degrees 16 minutes 52 seconds West 158.26 feet; thence South 87 degrees 40 minutes 18 seconds East 199.99 feet to the point of beginning. SIDWELL NO. 23-02-476-010 AND SIDWELL NO. 23-02-476-007 9 EX-99.11 15 DEVELOPMENT AGREEMENT (HAMILTON, OHIO) 1 EXHIBIT 99.11 DEVELOPMENT AGREEMENT (Hamilton, Ohio) This DEVELOPMENT AGREEMENT (the "Agreement") is made as of this 1st day of December, 1998, by and between SUNRISE DEVELOPMENT, INC., a Virginia corporation ("Developer") KARRINGTON HEALTH, INC. ("Owner"). WHEREAS, Owner desires to own and develop an assisted living project (the "Facility") to be located in Hamilton, Ohio, as more particularly described on Exhibit A (the "Site"); WHEREAS, Owner, in anticipation of its pending merger with Sunrise Assisted Living, Inc., the parent of Developer, has determined it is in Owner's best interest to engage Developer in the development of Owner's projects currently under construction in order to ensure an orderly transition upon the consummation of the merger; and WHEREAS, Owner wishes to engage Developer for certain development and construction services with respect to the Facility and Developer desires to provide such services, pursuant to the terms set forth herein. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I APPOINTMENT OF DEVELOPER AND TERM 1.01 Appointment of Developer. Owner hereby appoints Developer and Developer hereby accepts appointment, subject to the terms and conditions of this Agreement, as development agent to provide certain development, design and construction management services with respect to the Facility. 1.02 Term. This Agreement shall begin upon execution by the parties and continue until the date that the Facility is issued a certificate of occupancy (the "Term"). ARTICLE II DUTIES AND RIGHTS OF DEVELOPER 2.01 Project Budget Services. Developer shall provide budgeting services as set forth in this Section 2.01. Developer shall prepare a pro forma budget for the development and construction of the Facility, setting forth all project costs, including all development, marketing, management, guaranty fees and other costs to be paid to Developer and any affiliates thereof. The pro forma budget shall also include a line item for working capital/operating loss reserves. The pro forma shall be presented to Owner for Owner's review and approval, and once approved by Owner (with any revisions thereto accepted in writing by Developer), such pro forma shall constitute the 1 2 "Development Budget" for all purposes hereof. The Development Budget shall be subject to the review and approval of the construction lender for the Facility. If the construction lender requires any revisions to the Development Budget, Owner and Developer shall cooperate in making such revisions and shall mutually approve the modification required. 2.02 Design and Construction Management Services. Developer shall provide the following construction management services to Owner: a. Prepare all construction bid documents, secure bids from the general contractor, and assist Owner in negotiating the terms of the construction contract. After Owner has approved the terms of the construction contract, Developer shall have the authority to execute the construction contract as agent for Owner. b. Develop and review critical path schedules and updates and assist the general contractor in developing the project schedule and updates. c. Discuss and review with the general contractor its means and methods of construction. d. Discuss and review with the general contractor permitting approval and licensing issues and requirements necessary to complete and open the Facility, and obtain (or cause the general contractor to obtain) all required permits. e. Assist Owner as requested with construction management and cost control services, including assisting Owner in obtaining the most favorable prices for construction, equipment, finishes and furnishings, and making recommendations to Owner when requested regarding change orders, extensions of time and increases or decreases in the contract sum. f. Assist Owner as requested in monitoring and evaluating construction progress and make recommendations to the general contractor and Owner as deemed necessary. g. Assist in the resolution of critical issues impacting the progress of work, and monitor architectural supplemental instructions and requirements for information. 2 3 h. Provide quality control and the early detection of defects in workmanship. i. Review punch list items and assist in the close-out of the project. j. Coordinate opening date for the Facility with Owner and the Facility's managing agent (the "Manager"). 2.03 Expenses. It is expressly understood that it is Owner's responsibility to provide any and all funds needed for Developer to perform the Development, Design and Construction Management Services, as set forth in the Development Budget. Owner shall also be solely responsible for payment to all third-parties (i.e. engineers, attorneys and consultants) as set forth in the Development Budget. 2.04 Reimbursement. Owner shall reimburse Developer for any and all costs incurred by Developer in connection with the Site prior hereto. Developer shall attach as Exhibit B hereto a list of such costs incurred to date. Owner and Developer agree to reconcile such reimbursement of costs thirty (30) days after the initial reimbursement, and any additional amounts determined to be owing shall be promptly forwarded to the Developer. ARTICLE III DEVELOPER'S COMPENSATION 3.01 Development Fee. For the Design and Construction Management Services provided pursuant to this Agreement, Developer shall be paid a fee equal to a total amount of Two Hundred Fifty Thousand Dollars ($250,000.00) (the "Development Fee"). Fifty Thousand Dollars ($50,00.00) of the Development Fee shall be due to Developer as of the date of this Agreement for payment of services performed by Developer at and prior to the date of this Agreement. Owner acknowledges that Developer has assisted Owner since Owner and Sunrise Assisted Living, Inc. entered into a Merger Agreement dated October 11, 1998. A schedule for the periodic payment of the remaining $200,000.00 of the Development Fee shall be agreed to by Owner and Manager subsequent to the date of this Agreement, with the final payment of the Development Fee to be due no later than the issuance of a Certificate of Occupancy for the Facility. The Development Fee shall constitute full and complete payment to the Developer, for all guarantees and services furnished or performed by the Developer, in connection with this Agreement at any time prior to or following the execution of this Agreement. 3 4 ARTICLE IV TERMINATION 4.01 Termination Upon Opening. This Agreement shall terminate upon the opening of the Facility, unless sooner terminated pursuant to the provisions of this Agreement provided that Owner's obligation to pay the Development Fee shall survive such termination. 4.02 Termination for Default. In the event that either the Owner or the Developer is in default under any material term or condition of this Agreement and fails either to cure or comply with such term or condition or to diligently pursue such cure within forty-five (45) days after the service of written notice of default, then the other of them may, at the expiration of such 45-day period or such longer period as may be reasonably necessary to cure such default, cancel and terminate this Agreement upon five (5) days' written notice. Upon any such termination by Developer due to Owner's default (which may include Owner's failure to proceed with the acquisition of title to the Site), the unpaid balance of the Development Fee shall be fully due and payable. 4.03 Bankruptcy of Either Party. If either Owner or Developer shall cease to exist, for any reason, during the term of this Agreement, or in the event a petition in bankruptcy, arrangement or reorganization is filed by or against either of them and such petition is not dismissed within sixty (60) days, or if either or them shall make an assignment for the benefit of creditors or take advantage of any insolvency law, the other of them may forthwith terminate this Agreement. 4.04 Suspension of Performance. If development of the Facility contemplated under this Agreement is suspended for any reason described in Section 5.04 below, including without limitation any cause beyond the reasonable control of the parties hereto, then upon written notice by the Owner to the Developer (the "Notice of Suspension"), the Owner may suspend the Developer's performance of its obligations under this Agreement for a period of ninety (90) days. The Owner may terminate such suspension and re-commence development of the project by written notice to the Developer whereupon the Developer shall re-commence performing its obligations under this Agreement within thirty (30) days of receipt of such notice. 4.05 Failure to Obtain Financing. If the closing of the financing has not occurred by April 1, 1999, then either party may terminate this Agreement upon ten (10) days written notice to the other party. In the event of such termination, except for material default by Developer, Owner will immediately pay to Developer any outstanding Development Fee and shall immediately reimburse Developer for its direct out-of-pocket expenses on the project. 4 5 ARTICLE V MISCELLANEOUS PROVISIONS 5.01 Standard of Performance. Developer will devote its best efforts to the development of the Facility as contemplated by this Agreement and will act in good faith to cause the completion of the Facility in accordance with the terms and conditions of this Agreement. 5.02 Proprietary Information. Any and all architectural, structural, engineering or other construction drawings furnished to Owner with regard to the Facilities are the property of Developer. Owner shall not use any such drawings or cause to have any such drawings disseminated to any third party without the written consent of Developer. Without prejudice to any rights and remedies otherwise available to Developer, Developer shall be entitled to equitable relief by way of injunction if Owner breaches this Section 5.02. No failure or delay by Developer in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. Owner agrees to indemnify Developer for any costs and expenses, including legal expenses, Developer may incur in connection with the enforcement of this Section 5.02. 5.03 Consent. Any consent, approval or other action required or requested under or in connection with this Agreement shall not unreasonably be withheld or delayed and any request made or direction given hereunder or in connection herewith shall be reasonable, it being the intention and expectation of the Owner and the Developer that neither shall be capricious or arbitrary under or in connection with this Agreement. Any determination of reasonableness under this Section shall be made in light of the objectives of the Owner, which objectives include, without limitation, the development of the Facility as a first class building and the operation of the Facility as a high quality assisted living community. 5.04 Force Majeure. With respect to any services to be furnished or obligations to be performed hereunder, no party shall ever be liable for failure to furnish or perform the same when prevented from doing so by Acts of God, contractor delays, strike, lockout or labor unrest, explosion, sabotage, breakdown, accident, order or regulation of or by any governmental authority, or failure of supply, or inability despite the exercise of reasonable diligence to obtain supplies, parts or employees or others necessary to furnish such services, or because of war, riot, civil commotion or other emergency, or for any cause beyond its reasonable control; provided, however, that the lack of financial resources shall never be excused. 5.05 Assignment and Subcontract. Except as specifically provided in this Agreement, neither Owner nor Developer may assign any of its rights or delegate any of the obligations specified in this Agreement without the prior written consent of the other party. Developer may not subcontract any of its obligations under this Agreement, except 5 6 to its affiliates, without the prior written consent of Owner. Notwithstanding any such subcontracting permitted or approved hereunder, Developer will remain primarily liable for the performance of its obligations under this Agreement. 5.06 Benefits of Agreement. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, assigns, legal representatives and heirs, but nothing contained in this Section shall be deemed to constitute a consent to any assignment otherwise restricted by this Agreement. 5.07 Indemnification. a. Owner and Developer each agree that the other shall be and is indemnified, exonerated, and held harmless of, from and against any claim, loss, cost, damage, expense or other liability arising out of performance under this Agreement, excepting only liability attributable to negligence, willful misconduct or willful, wanton or reckless failure by a party, its agents, servants, employees or independent contractors to perform its or their respective obligations under this Agreement. b. A person entitled to indemnification under this Section shall give notice to the indemnitor of the claim or other circumstances giving rise to a request for indemnification, promptly after becoming aware of same. If the indemnitor does not notify the person to be indemnified that it has assumed the defense of such claim within a fifteen (15) day period after receipt of the notice of the request for indemnification, then the person entitled to indemnification may assume the defense of such claim on behalf and at the expense of the indemnitor. Any compromise or settlement of any such claim shall be made only with the prior consent of the indemnitor, provided that such consent shall not be delayed or unreasonably withheld. If the indemnitor notifies the person to be indemnified that it has assumed the defense of such claim, the indemnitor may compromise or settle any claim for which indemnification is available under this Section, and the party entitled to indemnification may participate in the defense of such claim with its own legal counsel at its own expense. c. In no event shall either party hereunder be liable to the other for consequential damages, lost profits or punitive damages on account of a default under this Agreement or otherwise. 5.08 Modification. Except as otherwise provided herein, neither this Agreement nor any provision hereof can be modified, changed, discharged, extended or terminated except by an instrument in writing executed by the party against whom enforcement is sought. 5.09 Waiver. The failure to insist upon strict compliance with any of the terms, covenants or conditions herein on one or more occasions shall not be deemed a waiver of 6 7 such terms, covenants or conditions nor shall such failure impose any obligation to provide notice that strict compliance will be expected in the future, nor shall nay waiver or relinquishment of any right at any one or more times be deemed a waiver or relinquishment of such right at any other time or times. 5.10 Notices. All notices, demands, consents, approvals, and requests given by either party to the other hereunder shall be in writing and shall be sent by hand, by overnight courier, or by registered or certified mail, return receipt requested, postage prepaid, to the parties at the following addresses: Owner: Karrington Health, Inc. 919 Old Henderson Rd. Columbus, Ohio 43220 Attn: Pete A. Klisares, President Copy to: Stephen Lewis, Esquire Karrington Health, Inc. 919 Old Henderson Rd. Columbus, Ohio 43220 Developer: Sunrise Development, Inc. 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Attn: Thomas B. Newell, President or to such other address and to the attention of such other person as either party may from time to time designate in writing. Notices shall be effective upon receipt. Refusal to accept delivery shall constitute receipt. 5.11 Severability. If any term or provision of this Agreement or the application thereof to any person or circumstance is held to be invalid or unenforceable for any reason, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and be enforced to the fullest extent permitted by law, but only to the extent the same continues to reflect fairly the intent and understanding of the parties expressed by this Agreement taken as a whole. 5.12 Governing Law. To the maximum extent the parties hereto may lawfully agree, this Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Virginia without regard to conflict of laws principles, and shall be enforced in the state and federal courts located in the Commonwealth of Virginia. Each of the parties to this Agreement submits to the jurisdiction of the courts of that state and agrees that process may be served upon it by registered or certified mail addressed as provided in Section 5.10. 7 8 5.13 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same document. 5.14 Mediation. The parties agree that any disputes arising hereunder shall be submitted to non-binding mediation in accordance with the rules of the American Arbitration Association prior to the commencement of litigation by either party. Any applicable statute of limitation or repose shall be tolled from the date of filing of the request for mediation with the American Arbitration Association until ten (10) days after the mediation is concluded. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed under seal by their duly authorized officers, all as of the day and year first above written. WITNESS/ATTEST: OWNER: Karrington Health, Inc., an Ohio corporation /s/ Amy S. Maxwell By: /s/ Pete A. Klisares - ------------------ ---------------------- Name: Pete A. Klisares ------------------ Title: President ----------- DEVELOPER: Sunrise Development, Inc., a Virginia corporation /s/ Susan L. Timoner By: /s/ Thomas B. Newell - -------------------- --------------------- Thomas B. Newell, President 8 9 EXHIBIT A DESCRIPTION: Lot #30130 LOCATION: Old Pt. Lot #28803 and Old Pt. Lot. #28291 First Ward, North Side, City of Hamilton, Butler County, Ohio Situated in the first Ward, North Side, City of Hamilton, Butler County, Ohio and being part of Lot #28291 as known and designated on the list of lots in said City of Hamilton and being further described as follows: Beginning at a point found by measuring from the Southwest corner of said Lot #28291, said point being in the North right-of-way line of Washington Boulevard, along said right-of-way line North 89 12' 15" East 177.00 feet to the true point of beginning; thence from the point of beginning thus found leaving said right-of-way line North 00 47' 45" West, 351.83 feet to a point in the Southerly extended line of Lot #29705 as known and designated on the list of lots in said City of Hamilton; thence along said line North 88 48' 13" East, 491.35 feet to a pint in the Westerly right-of-way line of Stephanie Drive; thence along said right-of-way line South 01 11' 47" East, 106.00 feet; thence along a 570.00 foot radius curve to the right an arc length of 169.42 feet, a chord bearing of South 07 19' 07" West, a chord distance of 168.79 feet; thence South 15 48' 48" West, 114.82 feet; thence continuing along said Westerly right-of-way line along a 15.00 foot radius curve to the right an arc length of 23.01 feet, a chord bearing of South 59 45' 35" West, a chord distance for 20.82 feet to a point in the aforementioned North right-of-way line of Washington Boulevard thence leaving said Westerly right-of way line along said North right-of-way line along a 1195.92 foot radius curve to the left an arc length 302.68 feet, a chord bearing of North 83 32' 40" West, a chord distance of 301.87 feet; thence continuing along said North right-of-way line South 89 12' 15" West, 117.85 feet to the point of beginning containing 4,000 acres of land and being subject to all easements and rights-of-way of record. 9 -----END PRIVACY-ENHANCED MESSAGE-----