-----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, SoyC/LxSx8wYdR6mnHp7rxNpsjc3J3XlcfAzmFN5PQro2WRkjo/5bY/PMsKpBGqJ HP4TA4HbGrfu975epD669Q== 0000893877-98-000403.txt : 19980518 0000893877-98-000403.hdr.sgml : 19980518 ACCESSION NUMBER: 0000893877-98-000403 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: REGENT ASSISTED LIVING INC CENTRAL INDEX KEY: 0001000693 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 931171049 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-27108 FILM NUMBER: 98623329 BUSINESS ADDRESS: STREET 1: 121 SW MORRISON ST STREET 2: STE 1000 CITY: PORTLAND STATE: OR ZIP: 97204 BUSINESS PHONE: 5032274000 MAIL ADDRESS: STREET 1: 121 SW MORRISON ST STREET 2: STE 1000 CITY: PORTLAND STATE: OR ZIP: 97204 10QSB 1 FORM 10-QSB ---------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20459 FORM 10-QSB X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) --- OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended March 31, 1998 ___ TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from ____ to ____ Commission file number 0-27108 REGENT ASSISTED LIVING, INC. (Exact name of registrant as specified in its charter) OREGON 93-1171049 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) Suite 1000 121 SW Morrison St. Portland, Oregon 97204 (Address of principle executive offices) 503-227-4000 (Registrant's telephone number, including area code) Indicated by check mark whether Registrant (1) has filed all reports 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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Shares of Registrant's Common Stock, No par value, outstanding at May 1, 1998 - 4,633,000 ---------------------------------------------------- REGENT ASSISTED LIVING, INC. FORM 10-QSB March 31, 1998 INDEX ----- Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997 . . . . . . . . . . . . . . . . . .. . . . . . . . . . 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . 5 Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis or Plan of Operation . . . . . 9 Page 2
PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS REGENT ASSISTED LIVING, INC. CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 1998 December 31, (Unaudited) 1998 -------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 3,508,628 $ 1,865,576 Accounts receivable 142,702 128,110 Prepaid expenses 438,787 249,708 Construction advances receivable 294,603 123,670 -------------- -------------- Total current assets 4,384,720 2,367,064 Property and equipment, net 58,474,243 69,820,324 Investment in joint venture 400,374 401,460 Restricted cash 2,347,856 2,361,993 Other assets 1,100,225 752,932 -------------- -------------- Total assets $ 66,707,418 $ 75,703,773 ============== ============== LIABILITIES Current liabilities: Current portion of long-term debt $ 237,252 $ 218,881 Short-term borrowings - 4,500,000 Construction accounts payable 489,153 583,043 Accounts payable and other accrued expenses 585,619 685,136 Accrued payroll 563,617 502,568 Accrued interest 111,128 179,963 -------------- -------------- Total current liabilities 1,986,769 6,669,591 Long-term debt 41,911,202 51,450,545 Convertible subordinated notes 4,500,000 - Deferred development fees, net 4,281,348 898,802 Other liabilities 656,417 517,578 -------------- -------------- Total liabilities 53,335,736 59,536,516 -------------- -------------- Minority Interest - 250,000 -------------- -------------- SHAREHOLDERS' EQUITY Preferred stock, no par value, 5,000,000 shares authorized; 1,666,667 shares issued and outstanding 9,349,841 9,349,841 Common stock, no par value, 25,000,000 shares authorized; 4,633,000 shares issued and outstanding 10,808,703 10,808,703 Accumulated deficit (6,786,862) (4,241,287) -------------- -------------- Total shareholders' equity 13,371,682 15,917,257 -------------- -------------- Total liabilities and shareholders' equity $ 66,707,418 $ 75,703,773 ============== ============== The accompanying notes are an integral part of these condensed consolidated financial statements.
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REGENT ASSISTED LIVING, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Three Months Ended March 31, 1998 March 31, 1997 -------------- --------------- Revenues: Rental and service $ 4,216,580 $ 3,336,347 Management fee 71,625 43,922 -------------- --------------- Total revenues 4,288,205 3,380,269 -------------- --------------- Operating expenses: Residence operating expenses 4,190,136 2,136,277 General and administrative 967,621 712,204 Lease expense 1,414,718 706,200 Depreciation and amortization 114,083 68,785 -------------- --------------- Total operating expenses 6,686,558 3,623,466 -------------- --------------- Operating income (loss) (2,398,353) (243,197) Interest income 75,989 148,779 Interest expense, net (64,415) (101,228) Other income, net (8,796) 5,263 -------------- --------------- Income (loss) before income taxes (2,395,575) (190,383) Income tax benefit - 24,500 -------------- --------------- Net income (loss) $ (2,395,575) ($165,883) ============== =============== Basic earnings (loss) per common share $ (0.55) ($0.07) ============== =============== Diluted earnings (loss) per common share $ (0.55) ($0.07) ============== =============== Weighted average common shares outstanding: Basic 4,633,000 4,633,000 ============== =============== Diluted 4,633,000 4,633,000 ============== =============== The accompanying notes are an integral part of these condensed consolidated financial statements.
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REGENT ASSISTED LIVING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended Three Months Ended March 31, 1998 March 31, 1997 -------------- -------------- Cash flows from operating activities: Net income (loss) $ (2,395,575) $ (165,883) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 114,083 68,785 Amortization of deferred gains and development fees (55,596) - Changes in other assets and liabilities: Accounts receivable (14,592) 17,315 Prepaid expenses (137,579) 3,961 Deferred income taxes - 33,100 Other assets (135,253) 51,301 Accounts payable and other accrued expenses (107,303) (152,928) Other liabilities 138,839 (52,354) -------------- -------------- Net cash used in operating activities (2,592,976) (196,703) -------------- -------------- Cash flows from investing activities: Maturity (purchases) of investments, net - 2,939,448 Purchases of property and equipment (12,626,575) (6,188,076) Increase (decrease) in construction related accounts payable (93,890) 1,072,803 Investment in joint venture - (20,162) Deposits to replacement reserve account, net (16,567) (16,200) -------------- -------------- Net cash used in investing activities (12,737,032) (2,212,187) -------------- -------------- Cash flows from financing activities: Repayment of Short-term borrowings (4,500,000) - Proceeds from issuance of long-term debt 8,836,356 784,018 Payments on long-term debt (18,607,328) (36,127) Construction advances (170,933) 883,621 Prepayments and deposits for financing arrangements, net (266,880) - Restricted cash for financing arrangements 30,704 (615,835) Deferred fee from financing arrangements 190,000 - Proceeds from financing arrangements 27,111,141 - Proceeds from issuance of convertible subordinated notes 4,500,000 - Preferred stock issuance costs - (600,159) Preferred stock dividends (150,000) (176,230) -------------- -------------- Net cash provided by financing activities 16,973,060 239,288 -------------- -------------- Net increase (decrease) in cash and cash equivalents 1,643,052 (2,169,602) Cash and cash equivalents, beginning of period 1,865,576 8,650,817 -------------- -------------- Cash and cash equivalents, end of period $ 3,508,628 $ 6,481,215 ============== ============== Supplemental disclosure of cash flow information: Cash paid for interest $ 1,140,150 $ 92,216 ============== ============== Supplemental disclosure of non-cash investing and financing activities: Long-term debt incurred to acquire minority interest $ 250,000 - ============== ============== The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 5 REGENT ASSISTED LIVING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Operations and Summary of Significant Accounting Policies: The Company Regent Assisted Living, Inc. ("the Company") is an owner, operator, and developer of private-pay assisted living communities. Assisted living is part of a spectrum of long-term care services that provide a combination of housing, personal services and health care designed to respond to elderly individuals who require assistance with activities of daily living in a manner that promotes maximum independence. On March 30, 1998, the Company completed a private placement pursuant to which parties agreed to purchase up to $10.5 million of convertible subordinated notes due 2008. The notes bear interest at 7.5 percent per annum and are convertible into the Company's Common Stock at an effective price of $7.50 per share. The results of operations for the three months ended March 31, 1998 and 1997 reflect the operations of three assisted living communities and property management services provided to one community. The results of operations for the three months ended March 31, 1998, additionally reflect the operations of nine new assisted living communities and property management services provided to one additional community. As of May 14, 1998, the Company had also commenced operations at its new assisted living communities in Tucson, Arizona, and Vacaville and Roseville, California and had an additional 19 assisted living and Alzheimer's care communities in various stages of development. The Company is also in the final stages of completing a long-term lease-acquisition of Park Place which is currently operated under a property management agreement. The Company also provides management and administrative services for Bowen Property Management Co., Bowen Financial Services Corp., Bowen Development Company and Bowen Condominium Marketing, Inc. (collectively, the Bowen Companies), all of which are Oregon corporations and are wholly owned by Mr. Bowen. These services are provided pursuant to the terms of an Administrative Services Agreement described in Note 3. Basis of Presentation The condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiary. All significant inter-company accounts and transactions have been eliminated in consolidation. Page 6 REGENT ASSISTED LIVING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued 1. Operations and Summary of Significant Accounting Policies, Continued: The accompanying unaudited condensed consolidated financial statements as of March 31, 1998, and for the three month periods ended March 31, 1998 and 1997 have been prepared in conformity with generally accepted accounting principles. The financial information as of December 31, 1997, is derived from the Company's Form 10-KSB for the year ended December 31, 1997. Certain information or disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 1997, included in the Company's Form 10-KSB for the year ended December 31, 1997. Operating results for the three months ended March 31, 1998, are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 1998, or any portion thereof. 2. Property and Equipment: Property and equipment are stated at cost and consist of the following:
March 31, December 31, 1998 1997 ----------- ------------- Land $ 1,100,000 $ 1,730,810 Buildings and improvements 6,808,088 12,713,346 Furniture and equipment 1,323,624 1,512,868 Construction in progress 49,903,345 54,429,419 ----------- ------------- 59,135,057 70,386,443 Less accumulated depreciation 660,814 566,119 ----------- ------------- Total property and equipment, net $58,474,243 $ 69,820,324 =========== =============
Land, buildings and certain furniture and equipment serve as collateral for long-term debt. Page 7 REGENT ASSISTED LIVING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued 3. Administrative Services Agreement: The Company has entered into an agreement with the Bowen Companies, all of which are Oregon corporations controlled by Mr. Bowen, whereby the Company will provide each of the Bowen Companies executive assistance, accounting and financial management services, legal and administrative assistance, insurance, management information services, and other management services as required by the Bowen Companies. Under the terms of the agreement, the Company will be reimbursed at its cost on a monthly basis for all services provided. 4. Earnings (Loss) Per Common Share: Basic earnings per share (EPS) and diluted EPS are computed using the methods prescribed by Statement of Financial Accounting Standard No. 128, Earnings Per share (SFAS 128). Basic EPS is calculated using income (loss) attributable to common shares (after deducting preferred dividends) divided by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated using income (loss) attributable to common shares (after deducting preferred dividends and considering the effects of dilutive common equivalent shares) divided by the weighted average number of common shares and dilutive common shares outstanding for the period. Basic and Diluted earnings (loss) per common share includes a deduction of preferred stock dividends declared, which totaled $150,000 for each three month period ended March 31, 1998 and 1997. 5. Accounting Pronouncements: On April 3, 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position 98-5, Reporting on the Costs of Start-up Activities (SOP 98-5). This statement requires that the costs of start-up activities, including organization costs, be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. The adoption of this statement will have no impact on the Company's current reporting practices as the Company expenses all start-up costs. ITEM 2. Management's Discussion and Analysis or Plan of Operation. Overview The Company The Company reported a net loss of $2,395,575, or $.55 per share, on revenue of $4,288,205 for the quarter ended March 31, 1998. Page 8 Current Communities. The table below sets forth certain information regarding the Company's communities as at March 31, 1998.
Regent Operations Community Location Commenced Units(1) Beds(2) Interest - --------- -------- --------- -------- ------- -------- Oregon Park Place Portland 1986 112 112 Manage Regency Park Portland 1987 122 142 Lease Sheldon Park Eugene 1998 108 124 Lease Washington Sterling Park Redmond 1990 162 192 Lease California Laurel Springs Bakersfield 1998 113 130 Own Orchard Park Clovis 1998 112 128 Lease Sun Oak Citrus Heights 1997 40 50 Manage Sunnyside Court Fremont 1998 40 80 Lease (3) Sunshine Villa Santa Cruz 1990 106 126 Lease Willow Creek Folsom 1997 104 119 Lease Idaho Willow Park Boise 1997 117 134 Lease West Wind Boise 1997 48 52 Lease New Mexico Sandia Springs Rio Rancho 1998 109 126 Lease Texas Hamilton House San Antonio 1997 116 136 Lease ----- ----- Totals: 1,409 1,651 ===== =====
Communities completed during the first quarter of 1998:
Community Location Units(1) Beds(2) Interest - --------- -------- -------- ------- -------- California Summerfield House Vacaville 109 126 Own The Palms Roseville 93 108 Own Arizona Canyon Crest Tucson 117 137 Own --- --- Totals: 319 371 === ===
(1) A "unit" is a single- or double-occupancy studio or one or two bedroom apartment. Page 9 (2) "Beds" reflects the actual number of beds used by the Company for census purposes, which in no event is a number greater than the maximum number of licensed beds permitted under the community's license. (3) The Company began providing property management services to Sunnyside Court in January 1998 and completed a lease-acquisition of the community in March 1998. As of May 14, 1998, the Company had also commenced operations of its new 137-bed community in Tucson, Arizona, its new 126-bed community in Vacaville, California, and its new 108-bed community in Roseville, California. The Company is in the final stages of completing a long-term lease-acquisition of the 112-bed Park Place community in Portland, Oregon which previously had been operated by Regent under a property management contract. The Company has three pending long-term lease-acquisitions located in Cheyenne, Laramie and Casper, Wyoming which will add 183 beds to the Company's operations. Also as of May 14, 1998, the Company has commenced construction on the following five new communities:
Expected Projected Quarter Location No. of Beds Opening Interest -------- ----------- ------- -------- Henderson, Nevada 133 3rd-98 Owned Austin, Texas 137 3rd-98 Owned Kenmore, Washington 98 3rd-98 Owned* Scottsdale, Arizona 48 4th-98 Leased Scottsdale, Arizona 115 2nd-99 Owned * A limited liability company in which the Company owns a 50 percent interest will own the Company's community in Kenmore. The Company will manage the community.
Fourteen additional new communities were under varying stages of development as of May 14, 1998. If all fourteen communities are developed and the Wyoming communities are acquired, total operations of the Company will increase by approximately 1,500 beds to a total of 4,000 beds. The Company continues to pursue its primary strategy of developing new communities and is therefore engaged in negotiations to acquire several additional sites and is pursuing joint venture opportunities with parties who control parcels of land in strategic markets. All costs associated with the development of these communities have been capitalized as "Construction in Progress" as disclosed in Note 2 to the condensed consolidated financial statements. Operating results for the three month period ended March 31, 1998, are not necessarily indicative of future financial performance as the Company intends to continue expanding its operating base of communities. Page 10 Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997 Revenues. For the three month period ended March 31, 1998, revenues were $4,288,205 compared to $3,380,269 in the three month period ended March 31, 1997. The Company operated twelve and managed two communities in the first quarter of 1998 and operated three communities and managed a fourth in the first quarter of 1997. The increase in revenue of $907,936 or 26.9 percent includes $1,049,160 of revenue from newly opened and acquired communities and a decrease in revenue of $168,927 at the Company's three stabilized communities. Overall average occupancy at the three stabilized communities declined to 89.9 percent for the three month period ended March 31, 1998, whereas occupancy was 96.2 percent for the same period in 1997. However, this represents an increase in occupancy from 89.4 percent reported for the previous quarter ended December 31, 1997. The Company continues to face increasing competition and this has had the greatest impact in the market in which the Company operates its largest community, thereby having a greater impact on the Company's overall occupancy rate. Residence Operating Expenses. Residence operating expenses were $4,190,136 for the three month period ended March 31, 1998, and $2,136,277 for the same period in 1997, an increase of $2,053,859. The current period includes $1,975,597 of start-up and pre-opening costs related to thirteen of the Company's newly developed communities. Residence operating expenses, excluding the effect of the new communities, totaled 64.9 percent and 63.1 percent of rental and service revenues for the three month periods ended March 31, 1998 and 1997, respectively. General and Administrative Expenses. General and administrative expenses were $967,621 for the three month period ended March 31, 1998, compared to $712,204 for the three month period ended March 31, 1997. The increase of $255,417 is due primarily to the increase in development activities by the Company, including payroll and related costs primarily resulting from staffing increases related to the implementation of the Company's strategy for rapid growth. Lease Expense. Lease expense for the Company's leased communities was $1,414,718 for the three month period ended March 31, 1998, and was $706,200 for the same period for 1997. This is due to the opening of seven and the acquisition of two new communities since the end of the first quarter of 1997. Depreciation and Amortization. Depreciation and amortization expense was $114,083 for the three month period ended March 31, 1998, compared to $68,785 for the three month period ended March 31, 1997. The increase of $45,298 relates primarily to the purchase of vans for the Company's newly developed communities and the purchase of furniture and equipment for the Company's headquarters, both in connection with the implementation of the Company's growth plan. Interest Income. Interest income decreased in the three month period ended March 31, 1998, to $75,989, from $148,779 for the same period in 1997. The 1997 amount reflects the interest earned from the investment of net proceeds from the sale of Preferred Stock in December 1996. All investments of cash and cash equivalents are in high quality, short term securities placed with institutions with high credit ratings. Page 11 Interest Expense. Interest expense decreased in the three month period ended March 31, 1998, to $64,415, from $101,228 for the three month period ended March 31, 1997. The Company capitalized $309,683 and $113,421 of interest charges incurred during the three months ended March 31, 1998 and 1997, respectively. The capitalized interest offset substantially higher interest costs incurred by the Company in the current period arising from increased borrowing for construction purposes. Net Income (loss). Net operating results decreased to a loss of $2,395,575 during the three month period ended March 31, 1998, from a loss of $165,883 for the same period in 1997. The decrease in net results is primarily due to an increase in general and administrative expenses (as discussed above), an increase in lease expense (as discussed above), and a decrease in residence operating profits (rental and service revenue less residence operating expenses) of $1,173,779, offset by a decrease in interest expense of $36,813. Liquidity and Capital Resources At March 31, 1998, the Company had approximately $2.4 million of working capital compared to a working capital deficit of approximately $4.3 million at December 31, 1997, an increase of $6.7 million, of which $4.5 million resulted from the utilization of proceeds from the issuance by the Company of convertible subordinated notes, as described below, to repay short-term borrowings. The balance was due primarily to the excess cash provided by financing activities. Net cash used in operating activities totaled $2,592,976 for the three month period ended March 31, 1998, which resulted primarily from a net loss of $2,395,575. Net cash used in investing activities totaled $12,737,032 for the three month period ended March 31, 1998, comprised primarily of $12,720,465 used for land acquisition, development, and construction costs. At March 31, 1998, the aggregate purchase price for the Company's options related to ten parcels of land was approximately $8,483,000. The Company has paid initial deposits relating to these sites and has also completed the demographic analysis and other preliminary due diligence for purposes of developing assisted living communities at these sites. Net cash provided by financing activities totaled $16,973,060 during the three month period ended March 31, 1998, consisting of construction and equipment financing proceeds totaling $8,836,356, net proceeds from three sale/leaseback financings totaled $27,111,141, proceeds from issuance of convertible subordinated notes of $4,500,000, offset by repayment of short-term borrowings of $4,500,000, repayment of long-term debt of $18,607,328, prepayments and deposits for financing arrangements of $266,880, and payment of preferred stock dividends of $150,000. In the first quarter of 1998, the Company completed two additional transactions with two real estate investment trusts ("REIT") in the amounts of $4.3 million for construction of the Company's Scottsdale, Arizona Regent Court community and $3.2 million for the lease-acquisition of the Sunnyside Court community in Fremont, California. Page 12 On March 30, 1998, the Company completed a private placement pursuant to which parties purchased an aggregate of $4.5 million of convertible subordinated notes of the Company and agreed to purchase up to an additional aggregate amount of $6.0 million of convertible subordinated notes. The notes bear interest at 7.5 percent per annum and are convertible into the Company's common stock at an effective price of $7.50 per share. Interest on the notes is payable quarterly and all principal and unpaid interest under the notes is due March 31, 2008. The Company intends to utilize the proceeds to finance the Company's continued rapid expansion of internally developed communities, to repay short-term borrowings, and for general working capital purposes. As of March 31, 1998, the Company had the following construction loans in place:
Amount Community Lender - ------ --------- ------ $ 6,480,000 Kenmore, Washington US National Bank of Oregon $ 7,600,000 Vacaville, California US National Bank of Oregon $ 7,200,000 Bakersfield, California Guaranty Federal Bank, FSB $ 7,700,000 Austin, Texas Guaranty Federal Bank, FSB $ 6,450,000 Roseville, California Key Bank $ 7,115,000 Tucson, Arizona Bank United of Texas, FSB $ 7,000,000 Henderson, Nevada Bank United of Texas, FSB
The Company has also received an expression of intent from a commercial lending institution to provide $15,000,000 of construction financing with which to build up to five Regent Court stand-alone Alzheimer's care communities. As of May 14, 1998, the Company has a commitment from a REIT to provide approximately $46.2 million in lease financing with which to acquire the three Wyoming communities and enter into sale/leaseback transactions on four newly completed communities. Page 13 Each of the pending financing transactions is subject to a number of conditions, including the negotiation and execution of definitive documents and the satisfactory completion of due diligence on the related properties, and there is no assurance that any of these financing transactions will be completed on the terms proposed, or at all. The Company anticipates capital expenditures for 1998 will include additional land acquisition costs, architectural fees, and other development costs related to at least fourteen assisted living communities and construction costs related to at least five new assisted living communities. The Company's current growth plan anticipates the completion of construction and opening of three new internally developed Regent communities and one new Regent Court community by the end of 1998, the lease-acquisition of three additional communities by the end of 1998, and the completion of an additional nine Regent and five Regent Court communities by the end of 1999. The Company has obtained all financing necessary to complete its development plan for 1998 and has obtained a $12.8 million commitment from a REIT to provide all financing necessary to acquire the three identified communities during 1998. The total cost to develop and construct the fourteen communities planned for 1999, including the estimated initial operating deficits, will likely be between $80-90 million. A substantial portion of these costs will be incurred during 1998. The Company anticipates that it will be able to obtain the financing, upon acceptable terms, necessary to complete the fourteen communities planned for 1999 although it has not obtained any commitments in that regard at this time. Provided that the Company can obtain financing upon acceptable terms, the Company estimates that it has the necessary equity capital to complete construction and to fund the initial operating deficits of the fourteen communities planned for 1999. The Company may enter into additional arrangements with one or more unrelated parties regarding the joint development and ownership of one or more of the Company's communities currently under construction or development in order to further leverage the Company's growth. Furthermore, the Company may utilize various forms of financing that would permit a community to be sold to or initially be developed by a third party who would incur the initial operating deficits and permit the Company to manage the community for a customary fee. The Company, under such financing methods, would likely have the option to either purchase the community or enter into a long-term lease at such time as the Company deems appropriate. The Company has not obtained any commitments for this form of financing. If the Company were unable to obtain additional required financing, or if such financing is not available on acceptable terms, the Company expects that its plan to develop an additional nine Regent Communities and five Regent Court communities by the end of 1999 would likely be delayed or curtailed. Furthermore, if the Company expands its growth plan, development activities do not result in the construction of a community on the site, the Company experiences a decline in the operations of its current communities or the Company does not achieve and sustain anticipated occupancy levels at its new communities, then the Company may require additional financing to complete its growth plan. Page 14 Forward-Looking Statements The information set forth in this report in the sections entitled "Overview" and "Liquidity and Capital Resources" regarding the Company's acquisition of sites for development, the Company's development, construction, financing and opening of new assisted living communities, and the Company's plans to develop, construct and operate new Regent Court communities constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and is subject to the safe harbor created by that section. The development of additional assisted living communities will involve a number of risks including, without limitation, the risk that the Company will be unable to locate suitable sites, risks relating to the inability to obtain, or delays in obtaining, necessary zoning, land use, building, occupancy and other required governmental permits and authorizations, risks that financing may not be available on satisfactory terms, environmental risks, risks that construction costs may exceed original estimates, risks that construction and lease-up may not be completed on schedule, and risks relating to the competitive environment for development. The foregoing risks could cause the Company to significantly delay or curtail its planned growth and could cause one or more of the Company's new communities to not be profitable. Additional factors that could cause results to differ materially from those projected in the forward-looking statements include, without limitation, the ability of the Company to raise additional financing upon terms acceptable to the Company, increases in the costs associated with new construction, competition, and acceptance of the Company's prototype community in new geographic markets. The Company's growth strategy is subject to the risk that occupancy rates at newly-developed communities may not be achieved or sustained at expected levels, in which case, the Company will experience greater than anticipated operating losses in connection with the opening of new communities and the Company's need for additional financing to meet its growth plans will likely increase. Furthermore, the Company's growth will place increasing pressure on the Company's management controls and require the Company to locate, train, assimilate, and retain additional community managers and support staff. There is no assurance that the Company will be able to manage this growth successfully. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. Exhibits: 4.1 Letter of Commitment, dated March 30, 1998, by and among LTC Properties, Inc., LTC West, Inc. and the Registrant relating to the agreement to purchase and lease assisted living residences. 4.2 Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Registrant and LTC Equity Holding Company, Inc. 4.3 Note No. 1998-1 issued to LTC Equity Holding Company, Inc. in the principal amount of $4,000,000, due March 31, 2008. 4.4 Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Registrant and Andre C. Dimitriadis. 4.5 Note No. 1998-2 issued to Andre C. Dimitriadis in the principal amount of $160,000, due March 31, 2008. Page 15 4.6 Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Registrant and James J. Pieczynski. 4.7 Note No. 1998-3 issued to James J. Pieczynski in the principal amount of $160,000, due March 31, 2008. 4.8 Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Registrant and Christopher T. Ishikawa. 4.9 Note No. 1998-4 issued to Christopher T. Ishikawa in the principal amount of $90,000, due March 31, 2008. 4.10 Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Registrant and Pamela J. Privett. 4.11 Note No. 1998-5 issued to Pamela J. Privett in the principal amount of $90,000, due March 31, 2008. 4.12 Registration Rights Agreement, dated as of March 30, 1998, by and between LTC Equity Holding Company, Inc. and the Registrant. 4.13 Registration Rights Agreement, dated as of March 30, 1998, by and between Andre C. Dimitriadis and the Registrant. 4.14 Registration Rights Agreement, dated as of March 30, 1998, by and between James J. Pieczynski and the Registrant. 4.15 Registration Rights Agreement, dated as of March 30, 1998, by and between Christopher T. Ishikawa and the Registrant. 4.16 Registration Rights Agreement, dated as of March 30, 1998, by and between Pamela J. Privett and the Registrant. 27 Financial Data Schedule. Reports on Form 8-K None SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGENT ASSISTED LIVING, INC. By: STEVEN L. GISH Date: May 14, 1998 -------------------------------- Steven L. Gish Chief Financial Officer Page 16 EXHIBIT INDEX Exhibits No. Description Page - -------- ----------- ---- 4.1 Letter of Commitment, dated March 30, 1998, by and among LTC Properties, Inc., LTC West, Inc. and the Registrant relating to the agreement to purchase and lease assisted living residences. 4.2 Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Registrant and LTC Equity Holding Company, Inc. 4.3 Note No. 1998-1 issued to LTC Equity Holding Company, Inc. in the principal amount of $4,000,000, due March 31, 2008. 4.4 Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Registrant and Andre C. Dimitriadis. 4.5 Note No. 1998-2 issued to Andre C. Dimitriadis in the principal amount of $160,000, due March 31, 2008. Page 15 4.6 Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Registrant and James J. Pieczynski. 4.7 Note No. 1998-3 issued to James J. Pieczynski in the principal amount of $160,000, due March 31, 2008. 4.8 Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Registrant and Christopher T. Ishikawa. 4.9 Note No. 1998-4 issued to Christopher T. Ishikawa in the principal amount of $90,000, due March 31, 2008. 4.10 Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Registrant and Pamela J. Privett. 4.11 Note No. 1998-5 issued to Pamela J. Privett in the principal amount of $90,000, due March 31, 2008. 4.12 Registration Rights Agreement, dated as of March 30, 1998, by and between LTC Equity Holding Company, Inc. and the Registrant. 4.13 Registration Rights Agreement, dated as of March 30, 1998, by and between Andre C. Dimitriadis and the Registrant. 4.14 Registration Rights Agreement, dated as of March 30, 1998, by and between James J. Pieczynski and the Registrant. 4.15 Registration Rights Agreement, dated as of March 30, 1998, by and between Christopher T. Ishikawa and the Registrant. 4.16 Registration Rights Agreement, dated as of March 30, 1998, by and between Pamela J. Privett and the Registrant. 27 Financial Data Schedule. EX-4.1 2 LETTER OF COMMITMENT LTC Properties, Inc. 300 Esplanade Drive Suite 1860 Oxnard, California 93030 805.981.8655 FAX: 805.981.8663 March 30, 1998 Regent Assisted Living, Inc. Bank of America Financial Center 121 S.W. Morrison, Suite 1000 Portland, Oregon 97204 Attention: Mr. Walter C. Bowen, President, CEO and Chairman Re: Agreement to Purchase and Lease Assisted Living Residences Dear Mr. Bowen: LTC Properties, Inc. ("LTC") is pleased to advise you that LTC agrees, through its wholly-owned subsidiary LTC West, Inc., a Nevada corporation ("LTC West"), and subject to the parameters outlined in this letter and approval of LTC's Board of Directors, to enter into a group of sale/leaseback transactions with Regent Assisted Living, Inc., an Oregon corporation ("Regent"), with respect to those certain properties described below (each a "Property" and collectively, the "Properties"), and each of which Properties shall be improved with an assisted living facility having that number of units indicated below. The total cumulative purchase price to be paid by LTC West to Regent for the Properties shall be Fifty-Four Million Six Hundred Ten Thousand Dollars ($54,610,000) (the "Total Purchase Price), and the purchase price with respect to each Property (the "Specific Property Purchase Price") will be as follows: Location Units Purchase Price - -------- ----- -------------- Tucson, AZ 117 $9,000,000 Roseville, CA 93 7,200,000 Rio Rancho, NM 109 8,400,000 Henderson, NV 116 8,700,000 Austin, TX 117 8,500,000 Casper, WY 53 3,710,000 Cheyenne, WY 77 5,390,000 Laramie, WY 53 3,710,000 TOTALS 735 $54,610,000 As we have previously discussed, Regent will sell and assign all of its right, title and interest in and to all real estate, tangible and intangible personal property and fixtures comprising the Properties to LTC West, and LTC West will purchase the Properties from Mr. Walter C. Bowen, President, CEO and Chairman Regent Assisted Living, Inc. March 30, 1998 Page 2 Regent and will lease the Properties to Regent or a wholly-owned subsidiary of Regent ("Regent Sub"), all upon the following terms and conditions: 1. Purchase Price. LTC West shall pay Regent the Total Purchase Price in connection with the purchase of all of the Properties. With respect to the purchase of each individual Property, LTC West shall pay Regent the Specific Property Purchase Price in the table set forth above. The Specific Property Purchase Price shall be paid in all cash at closing with respect to LTC West's purchase of each Property. 2. Determination of Properties; Property Application Materials. Regent and LTC West anticipate that the Properties specifically listed in the table above are the Properties that will be the subject of the transaction contemplated in this commitment letter. In the event, however, that it becomes impossible or impracticable for Regent to enter into the transactions contemplated in this commitment letter with respect to one or more of the Properties listed in the table above, including but not limited to as a result of the failure of a contingency to LTC West's obligations hereunder as set forth in Paragraph 3, hereof, then Regent shall have the right and the obligation to provide an acceptable substitute property to LTC West in accordance with this Paragraph 2. The determination of whether a proposed substitute property shall become a Property subject to this commitment letter shall be made by LTC West in its sole discretion based upon materials supplied by Regent. LTC West shall commence its evaluation of each proposed substitute property submitted for approval by Regent at such time as LTC West has received all of the following (collectively, the "Property Application Materials") from Regent: (i) a copy of the market and feasibility study for the applicable proposed substitute property prepared by a consultant entirely acceptable to LTC West; (ii) Regent's proposed Specific Property Purchase Price for the applicable proposed substitute property, including a detailed breakdown of the hard and soft construction costs comprising the Specific Property Purchase Price; (iii) a copy of the geotechnical report with respect to the proposed substitute property; (iv) a copy of a Phase I environmental site inspection report with respect to the proposed substitute property dated not earlier than three (3) months prior to the date of submission to LTC West and prepared by an environmental consultant entirely acceptable to LTC West; (v) a budget for operation of the assisted living facility on the proposed substitute property for the first twenty-four (24) full months of operation; (vi) a copy of Regent's final, unconditional certificate of occupancy (or other similar license or permit) with respect to the assisted living facility located on the proposed substitute property; and (vii) a copy of Regent's unconditional license to operate the assisted living facility located on the proposed substitute property. Once all Property Application Materials have been received by LTC West, LTC West shall determine within five (5) business days whether LTC West will accept the applicable proposed substitute property as one of the Properties subject to this commitment letter. Mr. Walter C. Bowen, President, CEO and Chairman Regent Assisted Living, Inc. March 30, 1998 Page 3 3. Contingencies. (a) LTC West's obligation to purchase the Properties and to consummate the transactions contemplated in this commitment letter shall be expressly contingent upon each of the following: (i) the state of title to each of the Properties must be acceptable to LTC West in LTC West's reasonable discretion, and LTC West (at such time as LTC West acquires title to the Property) shall have received an ALTA Owner's Policy of Title Insurance-Extended Coverage - for each Property issued by Chicago Title Insurance Company showing the fee interest in each Property vested in LTC West subject only to those exceptions specifically agreed to in writing by LTC West, and containing those endorsements reasonably required by LTC West. In each case, the title commitment shall be ordered through Ms. Sherry Strazz at Chicago Title Insurance Company's office in Portland, Oregon, with copies of all correspondence and title documents in connection with such order to be routed through Ms. Laine Cheng at Chicago Title Insurance Company's National Office in Los Angeles, California; (ii) LTC West shall have received an ALTA/ACSM Land Title Survey of each Property and the improvements located thereon prepared by a professional land surveyor entirely satisfactory to LTC West and dated after substantial completion of the construction of the assisted living facility on each Property, which survey shall be certified to LTC, LTC West, Chicago Title Insurance Company and to any other party which LTC West may reasonably require with the following language: "This is to certify that this map or plat and the survey on which it is based were made (i) in accordance with "Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys," jointly established and adopted by ALTA and ACSM in 1992, and includes items 1, 2, 3, 6 (as to set back restrictions only), 8, 9, 10, and 11 in Table A thereof; and (ii) pursuant to the Accuracy Standards (as adopted by ALTA and ACSM and in effect on the date of this certification) of an Urban Survey." In addition, the record legal description of each Property must appear on the survey of that Property, and any record easements or Mr. Walter C. Bowen, President, CEO and Chairman Regent Assisted Living, Inc. March 30, 1998 Page 4 servitudes and covenants affecting each Property must be plotted thereon; (iii) LTC West shall have received a Phase I environmental site assessment of each of the Properties addressed to LTC and LTC West in form and content, and performed by an environmental consultant, entirely acceptable to LTC West, and LTC West shall have approved such Phase I environmental site assessment or otherwise be satisfied that any recommendations set forth therein will be satisfied by Regent prior to closing; (iv) LTC West shall have received a UCC lien, judgment lien and tax lien search dated after the date of substantial completion of the assisted living facility on each Property evidencing that no liens exist as to the personal property located on each Property other than those liens previously approved in writing by LTC West; (v) LTC West shall be satisfied with the physical condition of the assisted living facilities located on the Properties based on a physical inspection of each Property by LTC West; (vi) LTC West shall have received evidence acceptable to LTC West that each of the Properties is properly zoned for use as an assisted living facility without variance or conditional use permit; (vii) LTC West shall have received a corporate resolution of Regent's Board of Directors authorizing Regent to enter into, deliver and perform all of the documents and instruments necessary to effect each of the sale/leaseback transactions contemplated in this commitment letter, which corporate resolution may cover multiple Properties; and to the extent Regent Sub is the lessee under the applicable Lease, LTC West shall have received a corporate resolution of Regent Sub's Board of Directors authorizing Regent Sub to enter into, deliver and perform all of the documents and instruments necessary to effect each of the sale/leaseback transactions contemplated in this commitment letter, which corporate resolution may cover multiple Properties; (viii) LTC West shall have received a Certificate of Good Standing from the State of Oregon for Regent and from the state of incorporation for Regent Sub and Certificates of Qualification to Mr. Walter C. Bowen, President, CEO and Chairman Regent Assisted Living, Inc. March 30, 1998 Page 5 Do Business from the state in which each Property is located from Regent and/or Regent Sub (as applicable); (ix) LTC West shall have received a copy of the final and unconditional certificate of occupancy with respect to each Property and a copy of Regent's final and unconditional license to operate the assisted living facility located on each Property as a fully-licensed assisted living facility in the state in which the applicable Property is located, and having not less than the number of units specified for each Property in the table above (or in the Property Application Materials (defined above) submitted to LTC West in connection with a proposed substitute property which becomes a Property); (x) LTC West shall have received a copy of the market and feasibility study with respect to the Property, and LTC West shall have approved the market and feasibility study; and (xi) LTC West, at its option, shall have conducted with respect to each Property, and be satisfied with the results of, such other standard due diligence as is customarily performed by LTC West in connection with the acquisition of a fee interest in a property improved with an assisted living facility. 4. Lease Term. LTC West will acquire each of the Properties and lease them to Regent (or Regent Sub, as the case may be), at such time as the construction of the assisted living facility on each Property is completed, the final and unconditional certificate of occupancy and final and unconditional operator's license with respect thereto issued and all other pre-conditions to closing have been met with respect to said Property, but in no event shall any of said purchase and sale transactions close later than June 30, 1998; provided, however, that the outside closing date for the Property located in Austin, Texas only shall be July 31, 1998. As a result, the parties anticipate that the Properties will not all be acquired by LTC West at one time, and Regent's obligation to pay Minimum Rent and other charges under each Lease will commence concurrently with LTC West's acquisition of the Property to which the Lease relates. For purposes of (i) cross-defaulting, (ii) the exercise of options to extend the term of each Lease or (iii) other leasehold purposes, each of the Leases shall be "packaged" with other Leases (each a "Package") as set forth below between Regent (or Regent Sub) and LTC West, and the Leases in each such Package shall, for certain purposes, be related to and dependent upon the other Leases in said Package. On or before June 30, 1998, LTC West and Regent will have entered into sale/leaseback transactions with respect to assisted living facilities in: Fremont, California; Eugene, Oregon; and Portland, Oregon (the "Other Properties"), Mr. Walter C. Bowen, President, CEO and Chairman Regent Assisted Living, Inc. March 30, 1998 Page 6 which Other Properties are not covered by this commitment letter. The Leases for the Properties located in Fremont, California, Portland, Oregon, Casper, Wyoming, Cheyenne, Wyoming and Laramie, Wyoming shall constitute a Package (the "First Lease Package"), and the Leases for the Properties located in Eugene, Oregon, Tucson, Arizona, Roseville, California, Rio Rancho, New Mexico, Henderson, Nevada and Austin, Texas shall constitute a Package (the "Second Lease Package"). Notwithstanding the foregoing, in the event that LTC West and Regent consummate at least two (2) more sale/leaseback transactions with respect to assisted living facilities in at least two (2) additional locations (the "Additional Properties") (i.e., in addition to the sale/leaseback transactions for the Properties and the Other Properties), then two (2) of the Properties in the Second Lease Package (which two (2) Properties shall be determined by LTC West in its sole and absolute discretion) shall be released from the Second Lease Package and packaged together with the Additional Properties to constitute a Package (the "Third Lease Package"). Notwithstanding the fact that Regent's rental obligations under the Leases of the Properties and the Other Properties may commence on different dates, it is LTC's specific intention that the initial term of all of the Leases in the First Lease Package will terminate on February 28, 2013, and it is LTC's specific intention that the initial term of all of the Leases in the Second Lease Package will terminate on that date which is fifteen (15) years following the commencement date of the third (3rd) Lease to commence in the Second Lease Package. Regent shall have two (2) consecutive ten-year options to extend the term of all of the Leases in each Lease Package; that is, Regent shall only have the option to extend the term of any one of the Leases in the First Lease Package so long as Regent exercises its option to extend the term of all of the Leases in the First Lease Package. Similarly, Regent shall only have the option to extend the term of any one of the Leases in the Second Lease Package so long as Regent exercises its option to extend the term of all of the Leases in the Second Lease Package. In the event that LTC West and Regent consummate sale/leaseback transactions for the Additional Properties, the Leases for the two (2) Properties released from the Second Lease Package shall be amended to provide that said Leases are co-terminus with the Leases for the Additional Properties and that the options to extend the term of said Leases may only be exercised together with the options to extend the term of the Leases of the Additional Properties. 5. Minimum Rent. The initial annual Minimum Rent for the first year of each Lease for the Properties located in Casper, Wyoming, Cheyenne, Wyoming and Laramie, Wyoming shall be an amount equal to the Specific Property Purchase Price paid by LTC West for each such Property multiplied by the sum of three hundred twenty-five (325) basis points plus the average interest rate on the ten-year Treasury Security for the five (5) business days prior to the third (3rd) business day prior to closing. The initial annual Minimum Rent for the first year of each Lease for the Properties in the locations set forth in the table below shall be as follows: Mr. Walter C. Bowen, President, CEO and Chairman Regent Assisted Living, Inc. March 30, 1998 Page 7 Location Lease Rate Initial Annual Minimum Rent - -------- ---------- --------------------------- Tucson, AZ 8.87% $798,300 Roseville, CA 8.87% $638,640 Rio Rancho, NM 8.87% $745,080 Henderson, NV 8.91% $775,170 Austin, TX 8.91% $757,350 Regent shall pay an amount equal to one-twelfth (1/12) of the annual Minimum Rent owing under each Lease on the first day of each and every month during the term of the Lease without demand, abatement, set-off or notice. Commencing on the first anniversary of the commencement date of each Lease (each an "Anniversary Date"), and continuing thereafter on each subsequent Anniversary Date for each of the Leases during the initial term and each option term of said Leases, the Minimum Rent applicable to each of the Leases shall be increased in an amount equal to the annual Minimum Rent payable under the applicable Lease for the immediately preceding twelve (12) month period increased by one hundred fifty percent (150%) of the cumulative increase in the CONSUMER PRICE INDEX, U.S. CITIES AVERAGE, ALL ITEMS (1982 - 84 = 100) published by the United States Department of Labor, Bureau of Labor Statistics (the "CPI") from the date of the immediately preceding adjustment of Minimum Rent (or, in the case of the first adjustment to Minimum Rent from the commencement date of the applicable Lease), to the date on which the Minimum Rent adjustment will take effect, but in no event shall any adjustment result in a new Minimum Rent which is more than two (2%) percent greater than the Minimum Rent for the immediately preceding twelve (12) month period. 6. Rent During Option Periods. The initial Minimum Rent for the first option term of each Lease shall be the higher of: (i) Minimum Rent in the last twelve (12) months of the initial term of the Lease increased by two percent (2%); or (ii) an amount equal to the initial Minimum Rent payable in the first twelve (12) months of the initial term of the Lease adjusted by the cumulative increase in the CONSUMER PRICE INDEX, U.S. CITIES AVERAGE, ALL ITEMS (1982-84=100) published by the United States Department of Labor, Bureau of Labor Statistics (the "CPI") from the commencement date of the applicable Lease to the first day of the first option term of said Lease. The initial Minimum Rent for the second of the option terms for each Lease shall be the higher of: (i) Minimum Rent in the last twelve (12) months of the first option term of the Lease increased by two percent (2%); (ii) an amount equal to the Minimum Rent payable in the first twelve (12) months of the first option term of the Lease adjusted by the cumulative increase in the CPI from the first day of the first option term of the Lease to the first day of the second option term thereof; or (iii) the fair market value rent for the Property which is the subject of the Lease as determined by an independent appraisal process. Mr. Walter C. Bowen, President, CEO and Chairman Regent Assisted Living, Inc. March 30, 1998 Page 8 7. Triple Net Lease. Regent shall be responsible for all costs associated with the operation of the assisted living facilities located on the Properties, including, but not limited to, all property and other taxes, utilities, insurance premiums and costs to maintain the assisted living residences in good condition and repair, reasonable wear and tear excepted (collectively "Additional Charges"). Taxes shall include any and all taxes of any kind associated with the real or personal property constituting the assisted living facilities, including, but not limited to, taxes attributable to any period prior to acquisition of the Properties by LTC West. 8. Repair and Maintenance. Regent shall be responsible for completing any and all work, of every kind and nature whatsoever, necessary to maintain each assisted living facility located on the Properties as an assisted living residence in good condition and repair, reasonable wear and tear excepted. In addition, at Regent's sole cost and expense, Regent shall complete all applications, give all notices and obtain and maintain all licenses, permits and approvals necessary or desirable to allow Regent to operate the assisted living facilities located on the Properties in accordance with all legal and regulatory requirements. 9. Cross-Default. Each Lease with respect to each Property in the First Lease Package shall be cross-defaulted with each of the other Leases in the First Lease Package such that any default under any one Lease in the First Lease Package shall constitute a default under each other Lease in the First Lease Package. Similarly, each Lease with respect to each Property in the Second Lease Package shall be cross-defaulted with each of the other Leases in the Second Lease Package such that any default under any one Lease in the Second Lease Package shall constitute a default under each other Lease in the Second Lease Package. 10. Indemnity. Each Lease shall provide that Regent shall fully indemnify, defend, protect and hold LTC West harmless from and against any and all costs, losses, expenses, judgments, claims, fees (including reasonable attorneys' fees and costs) or damages of any kind or nature whatsoever arising from or relating to the assisted living facilities located on the Properties and the operation thereof, including, without limitation, all matters relating to (i) the presence of hazardous substances located on the Properties, (ii) compliance with or failure to comply with the provisions of the federal Americans with Disabilities Act, (iii) compliance with or failure to comply with the provisions of the Fair Housing Amendments Act of 1988; (iv) compliance with or failure to comply with the provisions of Section 8 of the United States Housing Act of 1937, as amended, and any and all other matters whatsoever relating to the Properties, the assisted living facilities located thereon and the operation thereof. Regent's indemnification obligations described in this paragraph shall survive the expiration or termination for any reason of the Leases. Mr. Walter C. Bowen, President, CEO and Chairman Regent Assisted Living, Inc. March 30, 1998 Page 9 11. Assignment and Subletting. Regent shall not be entitled to sublet or assign any one or more of the Leases without the prior written consent of LTC West which consent may be given or withheld in LTC West's sole discretion; provided, however, that to the extent that Regent Sub is the lessee under a Lease, Regent Sub shall be entitled, at any time without first obtaining the consent of LTC West, to sell and convey either the Property which is the subject of the Lease or all of the issued and outstanding stock of Regent Sub to Regent so long as LTC is notified of such conveyance in writing within five (5) business days thereafter. 12. Lease Guaranty. To the extent LTC West leases a Property to Regent Sub, Regent shall execute and deliver to LTC West an absolute and unconditional guaranty of the payment and performance of all of Regent Sub's obligations under the Lease for the Property, including, but not limited to, any indemnification obligations of Regent Sub to LTC West. Said lease guaranty shall be on LTC West's standard form. 13. Closing Costs. Concurrently with the closing of LTC West's acquisition of each of the Properties, Regent shall be responsible to pay any and all closing costs in connection with the closing of the acquisitions and the leases to Regent, including but not limited to all of LTC West's attorneys' fees (which shall be $7,500.00 for each complete transaction with respect to each Property contemplated in this commitment letter), recording fees, escrow fees, title fees, state and local transfer, mortgage or excise taxes in connection with the transfer of title, LTC West's out-of-pocket costs in connection with the transaction and any and all other fees and costs in any way associated with the overall transaction with respect to each Property. 14. Commitment Fee. Concurrently with the closing of the sale/leaseback transaction with respect to each of the Properties, Regent shall pay a commitment fee to LTC West in the sum of one percent (1%) of the applicable Specific Property Purchase Price (the "Commitment Fee"), said Commitment Fee amount to be offset against the Specific Property Purchase Price to be paid by LTC West with respect to each such transaction. 15. Physical Inspection. As a precondition to the obligations of LTC West under this commitment letter, LTC West shall have the right to conduct a physical inspection of each assisted living facility on each Property, and LTC West must be satisfied with the physical condition of each of the Properties after completion of the construction of the assisted living facilities thereon, in the reasonable exercise of LTC West's discretion. 16. Governing Law. This commitment letter shall be governed by and interpreted under the internal laws of the State of California without resort to choice of law principles. Mr. Walter C. Bowen, President, CEO and Chairman Regent Assisted Living, Inc. March 30, 1998 Page 10 17. Regent's Acceptance. Regent must indicate its acceptance of the terms and conditions of this commitment by affixing its signature below. Unless LTC West receives this accepted commitment in its Oxnard, California office on or prior to the fifth (5th) business day following the date of this letter, the terms hereof shall be null and void, and LTC West shall not have any obligations or liabilities to Regent of any kind or nature whatsoever. This commitment shall become effective only upon acceptance by LTC and LTC West evidenced by the affixation of their signatures hereto. 18. Facsimile Execution Binding. The parties hereto specifically agree that this commitment letter may be executed by facsimile, and that facsimile signatures hereon shall be binding on the parties hereto as though they were original signatures. 19. Survival. This commitment letter shall survive, and the covenants, conditions and terms set forth herein shall continue, until the earlier of (i) June 30, 1998, at which time this commitment letter shall expire, except with respect to the Property located in Austin, Texas, for which Property this commitment shall expire on July 31, 1998, or (ii) the date on which the sale of all of the Properties to LTC West and the Leases of all of the Properties from LTC West to Regent have been consummated. Please understand that, subject to the contingencies set forth above, this letter constitutes the commitment of Regent and LTC West to enter into the transactions described herein with respect to which LTC West shall invest a total of Fifty-Four Million Six Hundred Ten Thousand Dollars ($54,610,000) and otherwise on the terms set forth above. Upon receipt of your original signature on this letter, LTC West will immediately instruct counsel to prepare draft documents to evidence the transactions contemplated in this commitment letter. Very truly yours, LTC PROPERTIES, INC., a Maryland corporation CHRISTOPHER T. ISHIKAWA CHRISTOPHER T. ISHIKAWA, Sr. Vice President & Chief Investment Officer Mr. Walter C. Bowen, President, CEO and Chairman Regent Assisted Living, Inc. March 30, 1998 Page 11 LTC WEST, INC., a Nevada corporation PAMELA J. PRIVETT PAMELA J. PRIVETT, Sr. Vice President & General Counsel READ AND AGREED: REGENT ASSISTED LIVING, INC., an Oregon corporation By: STEVEN L. GISH ---------------------------------- Its: Chief Financial Officer EX-4.2 3 CONVERTIBLE SUB. NOTE PURCH. AGT (LTC) - -------------------------------------------------------------------------------- REGENT ASSISTED LIVING, INC. and LTC EQUITY HOLDING COMPANY, INC. $10,000,000 Principal Amount of 7.5% Convertible Subordinated Notes Due March 31, 2008 CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT - -------------------------------------------------------------------------------- Dated as of March 30, 1998 TABLE OF CONTENTS Page SECTION 1. PURCHASE AND SALE OF NOTES..........................................1 1.1. Issue of Notes...................................................1 1.2. Purchase and Sale of Notes.......................................1 1.3. Maintenance of Note Register.....................................3 1.4. Issue Taxes......................................................3 1.5. Direct Payment...................................................4 1.6. Lost, Etc. Notes.................................................4 SECTION 2. CLOSING CONDITIONS..................................................4 2.1. Delivery of Documents............................................5 2.2. Delivery of Other Agreements.....................................6 2.3. Representations and Warranties, Agreements and Covenants.........6 2.4. No Event of Default..............................................6 2.5. Proceedings Satisfactory.........................................6 2.6. Consents and Permits.............................................7 2.7. No Material Adverse Change.......................................7 SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................7 3.1. Organization; Power and Authority................................7 3.2. Authorization....................................................7 3.3. Capital Stock....................................................8 3.4. No Other Registration Rights.....................................8 3.5. No Violation or Conflict; No Default.............................9 3.6. Margin Regulations...............................................9 3.7. Private Offering.................................................9 3.8. Due Authorization of Material Contracts.........................10 3.9. Financial Statements............................................10 3.10. Litigation; Judgments..........................................11 3.11. Taxes..........................................................11 i 3.12. Investment Company Act.........................................11 3.13. Environmental Matters..........................................11 3.14. Labor Relations................................................12 3.15. Real Property; Leases..........................................12 3.16. Intellectual Property; Licenses................................12 3.17. Defaults.......................................................13 3.18. Brokers........................................................13 3.19. Existing Indebtedness..........................................13 3.20. Compliance with Law; Permits...................................13 3.21. Insurance......................................................14 3.22. Material Events................................................14 3.23. SEC Documents; Undisclosed Liabilities.........................15 3.24. Material Misstatements or Omissions............................16 3.25. Survival of Representations and Warranties.....................16 SECTION 4. REPRESENTATIONS AND WARRANTIES OF EACH PURCHASER...................16 4.1. Purchase for Own Account........................................16 4.2. Accredited Investor.............................................16 4.3. Authorization...................................................17 4.4. Brokers.........................................................17 SECTION 5. COVENANTS..........................................................17 5.1. Payment of Notes; Satisfaction of Obligations...................17 5.2. Notice of Default...............................................17 5.3. Limitation on Additional Indebtedness...........................18 5.4. Change of Control...............................................18 5.5. Stay, Extension and Usury Laws..................................20 5.6. Indemnification.................................................20 5.7. Corporate Existence; Merger; Successor Corporation..............22 5.8. Taxes...........................................................23 5.9. Investment Company Act..........................................23 5.10. Insurance......................................................23 ii 5.11. Inconsistent Agreements........................................23 5.12. Compliance with Laws...........................................24 5.13. Inspection of Properties and Records...........................24 SECTION 6. CONVERSION OF NOTES................................................24 6.1. Conversion......................................................24 6.2. Conversion Rate.................................................25 6.3. Fractional Shares...............................................25 6.4. Adjustments for Stock Splits, Combinations and Dividends........26 6.5. Reorganization, Mergers, Consolidations or Sales of Assets......26 6.6. Sale of Shares Below Market or Conversion Price.................27 6.7. Adjustment for Failure to Quote on Nasdaq National Market.......28 6.8. Accountants' Certificate of Adjustment..........................28 6.9. Reservation of Shares Issuable Upon Conversion..................29 6.10. No Impairment..................................................29 SECTION 7. DEFAULTS AND REMEDIES..............................................29 7.1. Events of Default...............................................29 7.2. Acceleration of Notes...........................................31 7.3. Other Remedies..................................................31 SECTION 8. SUBORDINATION......................................................31 8.1. Notes Subordinated to Senior Indebtedness.......................31 8.2. Company Not to Make Payments with Respect to Notes in Certain Circumstances...................................................32 8.3. Subrogation of Notes............................................33 8.4. No Impairment of Subordination..................................34 8.5. Section 8 Not to Prevent Events of Default......................34 8.6. Securities Senior to Subordinated Indebtedness..................34 8.7. Assignment of Junior Claims.....................................34 SECTION 9. AMENDMENTS AND WAIVERS.............................................35 9.1. With Consent of Holders.........................................35 9.2. Revocation and Effect of Consents...............................36 iii 9.3. Notation on or Exchange of Notes................................37 SECTION 10. DEFINITIONS.......................................................37 10.1. Definitions....................................................37 10.2. Rules of Construction..........................................46 SECTION 11. MISCELLANEOUS.....................................................47 11.1. Notices........................................................47 11.2. Undertaking for Costs..........................................47 11.3. Successors and Assigns.........................................47 11.4. Counterparts...................................................47 11.5. Headings.......................................................48 11.6. Governing Law..................................................48 11.7. Entire Agreement...............................................48 11.8. Severability...................................................48 11.9. Transfer.......................................................48 iv CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT This CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT, is dated as of March 30, 1998 (this "Agreement"), and entered into by and between REGENT ASSISTED LIVING, INC., an Oregon corporation (the "Company") and LTC EQUITY HOLDING COMPANY, INC., a Nevada corporation (the "Purchaser"). Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in Section 10.1 hereof. In consideration of the premises, mutual covenants and agreements hereinafter contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company agrees as follows: SECTION 1. PURCHASE AND SALE OF NOTES 1.1. Issue of Notes On or before the Closing, (a) The Company will have authorized the issue and sale of $10,000,000 aggregate principal amount of its 7.5% Convertible Subordinated Notes due March 31, 2008 (the "Notes") to the Purchaser, to be substantially in the form attached hereto as Annex A. (b) The Notes shall be substantially in the form attached hereto as Annex A, including such other notations, legends or endorsements set forth therefor or required by law. The Notes shall be dated the date of their issuance. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Agreement and, to the extent applicable, the Company and the Purchaser, by their execution and delivery of this Agreement, expressly agree to such terms and provisions and to be bound thereby. 1.2. Purchase and Sale of Notes (a) Purchase and Sale. The Company agrees to sell and, subject to the terms and conditions set forth herein and in the Registration Rights Agreement and in reliance on the representations and warranties of the Company contained or incorporated herein, the Purchaser agrees to purchase the Notes for an aggregate purchase price of $10,000,000 as follows: (1) $4,000,000 principal amount of Notes will be issued and sold to the Purchaser on the Closing Date, and (2) the remaining $6,000,000 principal amount of Notes shall be issued in increments of at least $1,000,000 (except that if more than $9,000,000 but less than $10,000,000 principal amount of Notes have been issued to the Purchaser, the last increment of Notes shall be issued in a principal amount so that an aggregate of $10,000,000 principal amount of Notes shall have been issued to the Purchaser) on or prior to March 31, 2000 upon the receipt of the following: (a) five (5) Business Days written notice by the Company to the Purchaser; (b) a Certificate executed by any two executive officers of the Company, dated the date such additional principal amount of Notes is delivered to the Purchaser (i) certifying and attaching a Disclosure Schedule scheduling all Indebtedness of the Company and its Subsidiaries as of such date, showing as to each item of such Indebtedness the creditor, the aggregate principal amount outstanding, the agreement or instrument governing such Indebtedness and a brief description of any security therefor; (ii) certifying that the Company is not in default in the performance or observance in any material respect of any of the terms, covenants or conditions contained in any instrument evidencing Indebtedness listed on the Disclosure Schedule pursuant to which such Indebtedness was issued or secured or has requested any waiver in respect of any default and no event has occurred and is continuing which, with notice or the lapse of time or both, would constitute such a default; and (iii) certifying that all of the representations and warranties of the Company contained or incorporated by reference herein that (A) are qualified as to materiality are true and correct on and as of such date as though made on and as of such date and that (B) are not qualified as to materiality are true and correct in all material respects on and as of such date as though made on and as of such date, and no event has occurred and is continuing, or would result from the issuance of the Notes or the extension of borrowings under the Commitment Letter, which constitutes or would constitute a Default or an Event of Default; and (c) If the date such additional principal amount of Notes is delivered to the Purchaser is on or after March 31, 1999, an opinion, dated as of such date, from David R. Gibson, counsel for the Company, as to the matters set forth on Annex B; provided, however, any further issuance of Notes after such date shall not require an opinion of counsel pursuant to this clause (c). (b) Closing. The purchase and sale of the Notes referred to in Section 1.2(a)(1) shall take place at a closing (the "Closing") at the offices of Latham & Watkins, 633 West Fifth Street, Suite 4000, Los Angeles, California at 2:00 p.m. on March 30, 1998 (the "Closing Date"). At the Closing, the Company will deliver to the Purchaser the Notes to be purchased by the Purchaser (in such permitted denomination or denominations and registered in the Purchaser's name or the name of such nominee or nominees as the Purchaser may request) on the Closing Date, dated the Closing Date, against payment of the purchase price therefor by intra-bank or federal funds bank wire transfer of same day funds to such bank account as the Company shall designate at least two Business Days prior to the Closing. (c) Fees and Expenses. Whether or not the Notes are sold, the Company agrees to pay or reimburse all expenses relating to this Agreement, including but not limited to: (1) the reasonable fees and other expenses of the Purchaser's counsel, Latham & Watkins, in connection herewith (not to exceed $50,000 in the aggregate, relating to this Agreement and similar agreements dated on or about the date of this Agreement); 2 (2) any reasonable out-of-pocket fees and expenses (including the reasonable fees and expenses of counsel) in connection with any registration or qualification of the Notes required in connection with the offer and sale of the Notes at the Closing pursuant to this Agreement under the securities or "blue sky" laws of any jurisdiction requiring such registration or qualification or in connection with obtaining any exemptions from such requirements; and (3) the Purchaser's reasonable out-of-pocket expenses (including the reasonable fees and expenses of counsel) relating to any amendment, or modification of, or any waiver, or consent or preservation of rights under this Agreement, the Notes, the Registration Rights Agreement and any other documents contemplated hereby or thereby. Purchaser may deduct such expenses from the purchase price of the Notes; provided that the Purchaser agrees to provide the Company with a statement describing any amounts to be so paid at least one Business Day prior to the Closing. 1.3. Maintenance of Note Register The Company shall cause to be kept at its principal office a register for the registration and transfer of the Notes (the "Note Register"). The names and addresses of the Holders of Notes, the transfer of Notes, and the names and addresses of the transferees of the Notes shall be registered in the Note Register. The Person in whose name any registered Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes of this Agreement and the Company shall not be affected by any notice to the contrary, until due presentment of such Note for registration of transfer so provided in this Section 1.3. Payment of or on account of the principal and interest on any registered Notes shall be made to or upon the written order of such registered holder. 1.4. Issue Taxes The Company agrees to pay all taxes owed by or on behalf of the Company in connection with the issuance, sale, delivery or transfer by the Company to the Purchaser of the Notes and the execution and delivery of the agreements and instruments contemplated hereby and any modification of any of such Notes, agreements and instruments and will save the Purchaser harmless without limitation as to time against any and all liabilities with respect to all such taxes. The Purchaser agrees to pay all taxes owed by or on behalf of the Purchaser in connection with the issuance, sale, delivery or transfer by the Company to the Purchaser of the Notes and the execution and delivery of the agreements and instruments contemplated hereby and any modification of any of such Notes, agreements and instruments and will save the Company harmless without limitation as to time against any and all liabilities with respect to all such taxes. The obligations of the Company and the Purchaser under this Section 1.4 shall survive the payment or prepayment of the Notes and the termination of this Agreement. 3 1.5. Direct Payment (a) The Company will pay or cause to be paid all amounts payable with respect to any Note (without any presentment of such Note and without any notation of such payment being made thereon) by crediting (before 11:00 a.m., Pacific time), by federal funds bank wire transfer to each Holder's account in any bank in the United States as may be designated and specified in writing by such Holder at least two Business Days prior thereto. (b) Notwithstanding anything to the contrary contained in the Notes, if any principal amount payable with respect to a Note is payable on a Legal Holiday, then the Company shall pay such amount on the next succeeding Business Day, and interest shall accrue on such amount until the date on which such amount is paid and payment of such accrued interest shall be made concurrently with the payment of such amount, provided that the Company may elect to pay in full (but not in part) any such amount on the last Business Day prior to the date such payment otherwise would be due, and no such additional interest shall accrue on such amount. Notwithstanding anything to the contrary contained in the Notes, if any interest payable with respect to a Note is payable on a Legal Holiday, then the Company shall pay such interest on the next succeeding Business Day, and such extension of time shall be included in the computation of the interest payment, provided that the Company may elect to pay in full (but not in part) any such interest on the last Business Day prior to the date such payment otherwise would be due, and such diminution in time may, at the Company's option, be included in the computation of the interest payment. 1.6. Lost, Etc. Notes Notwithstanding any provision to the contrary, if any Note of which the Purchaser or any other Holder (or nominee thereof) which is a transferee is the owner is mutilated, destroyed, lost or stolen, then the affidavit of the Purchaser or such Holder, if an individual, or of the Purchaser's or such Holder's treasurer or assistant treasurer (or other authorized officer), if a Person other than an individual, briefly setting forth the circumstances with respect to such mutilation, destruction, loss or theft, shall be accepted as satisfactory evidence thereof, and no indemnity, note or payment of charges or expenses shall be required as a condition to the execution and delivery by the Company or the transfer agent with respect to such Note, of new Notes for a like aggregate principal amount or number of shares, as applicable, in substitution therefor, other than such Purchaser's or such Holder's unsecured written agreement reasonably satisfactory to indemnify the Company or the transfer agent, as the case may be, which written agreement may be required by the Company. SECTION 2. CLOSING CONDITIONS The obligations of the Purchaser to purchase and pay for the Notes to be delivered to such Purchaser at the Closing shall be subject to the satisfaction of the following conditions on or before the Closing Date: 4 2.1. Delivery of Documents The Company shall have delivered to the Purchaser, in form and substance reasonably satisfactory to the Purchaser, the following: (a) The Notes being purchased by the Purchaser pursuant to Section 1.2(a)(1), duly executed by the Company, in the aggregate principal amount of $4,000,000. (b) An opinion, dated the Closing Date and addressed to the Purchaser, from David R. Gibson, counsel for the Company, as to the matters set forth on Annex B. In rendering such opinion, such counsel may rely as to factual matters upon certificates or other documents furnished by officers and directors of the Company (copies of which shall be delivered to the Purchaser) and by government officials, and upon such other documents as such counsel reasonably deems appropriate as a basis for its opinion. Such counsel shall opine as to the federal laws of the United States, the laws of the State of Oregon. (c) Resolutions of the Board of Directors of the Company, certified by the Secretary or Assistant Secretary, to be duly adopted and in full force and effect on the Closing Date, authorizing (i) the execution, delivery and performance of this Agreement, the Registration Rights Agreement and the Commitment Letter and the consummation of transactions contemplated hereby and thereby, (ii) the issuance of the Notes to be purchased by the Purchaser and (iii) specific officers to execute and deliver this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter. (d) Certificates executed by any two executive officers of the Company, dated the Closing Date, certifying (i) that all of the conditions set forth in Section 2 of this Agreement are satisfied on and as of such date, (ii) that all of the representations and warranties of the Company contained or incorporated by reference herein that (A) are qualified as to materiality are true and correct on and as of such date as though made on and as of such date and that (B) are not qualified as to materiality are true and correct in all material respects on and as of such date as though made on and as of such date, and no event has occurred and is continuing, or would result from the issuance of the Notes or the extension of borrowings under the Commitment Letter, which constitutes or would constitute a Default or an Event of Default and (iii) as to such other matters as the Purchaser may request in the exercise of its reasonable discretion. (e) Governmental certificates, dated the most recent practicable date but in no event more than thirty (30) calendar days prior to the Closing Date showing that the Company was incorporated under the Oregon Business Corporation Act, is active on the records of the Corporation Division and is qualified as a foreign corporation and in good standing in all other jurisdictions in which it is qualified to transact business, except where the failure to be so qualified would not have a Material Adverse Effect. (f) Copies of each consent, license and approval required in connection with the execution, delivery and performance by the Company of this Agreement, the Notes, the 5 Registration Rights Agreement and the Commitment Letter and the consummation of the transactions contemplated hereby and thereby. (g) Copies of the Charter Documents of the Company, certified as of a recent date but in no event more than thirty (30) calendar days prior to the Closing Date by the Secretary of State of the State of Oregon and certified by the Secretary or Assistant Secretary of the Company (or person possessing comparable authority of the Company), as true and correct on and as of the Closing Date. (h) Certificates of the Secretary or an Assistant Secretary of the Company as to the incumbency and signatures of the officers or representatives of such entity executing this Agreement, the Notes, the Registration Rights Agreement, the Commitment Letter and any other certificate or other document to be delivered pursuant hereto or thereto on the Closing Date, together with evidence of the incumbency of such Secretary or Assistant Secretary; (i) Copies of all agreements associated with or entered into in connection with the investment of Prudential Private Equity Investors III, L.P. in the Company's Preferred Stock and if requested by the Purchaser prior to the Closing Date, copies of all lease agreements to which the Company is a party. 2.2. Delivery of Other Agreements The Company shall have executed and delivered the Registration Rights Agreement and the Commitment Letter. 2.3. Representations and Warranties, Agreements and Covenants All of the representations and warranties of the Company contained herein that (A) are qualified as to materiality shall be true and correct on and as of the Closing Date, except to the extent any representation or warranty expressly relates to an earlier date and that (B) are not qualified as to materiality are true and correct in all material respects on and as of the Closing Date, except to the extent any representation or warranty expressly relates to an earlier date. The Company shall have performed or complied with all agreements, covenants and conditions contained herein and in the Registration Rights Agreement and the Commitment Letter which are required to be performed or complied with by the Company on or before the Closing Date. 2.4. No Event of Default No event shall have occurred and be continuing, or would result from the purchase of the Notes or the extension of borrowings pursuant to the Commitment Letter, which constitutes or would constitute a Default or an Event of Default. 2.5. Proceedings Satisfactory All proceedings taken in connection with the sale of the Notes, the transactions contemplated hereby, and all documents and papers relating thereto, shall be reasonably 6 satisfactory to the Purchaser. The Purchaser and its counsel shall have received copies of such documents and papers as they may reasonably request in connection therewith, all in form and substance satisfactory to the Purchaser. Any document annexed to this Agreement or any other document contemplated by this Agreement not approved by the Purchaser in writing as to form and substance on the date this Agreement is executed shall be satisfactory in form and substance to the Purchaser. 2.6. Consents and Permits The Company shall have received all consents, approvals, and authorizations and sent or made all notices, filings, registrations and qualifications required for the issuance of the Notes, all of which are disclosed on the Disclosure Schedule. 2.7. No Material Adverse Change Since the date of this Agreement, neither the Company nor any of its Subsidiaries shall have suffered any material adverse change in its properties, business, prospects, operations, earnings, assets, liabilities or condition (financial or otherwise) which would reasonably likely to result in a Material Adverse Effect. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth in the Disclosure Schedule attached to this Agreement (each scheduled item contained therein referencing the Section of this Agreement that it qualifies), the Company represents and warrants as follows: 3.1. Organization; Power and Authority The Company and each of its Subsidiaries are corporations duly organized and validly existing in good standing under the laws of their respective jurisdictions of incorporation. The Company and each of its Subsidiaries have all requisite power and authority to own or hold under lease the properties it purports so to own or hold except where the failure so to own or hold could not have a Material Adverse Effect and to transact their respective businesses as now transacted. The Company and each of its Subsidiaries are duly qualified as foreign corporations and are in good standing in each jurisdiction in which the character of the properties owned or held under lease by them or the nature of the business transacted by them requires such qualification, except where the failure so to be qualified or be in good standing could not have a Material Adverse Effect. 3.2. Authorization The Company has taken all actions necessary to authorize it (i) to execute, deliver and perform all of its obligations under this Agreement, the Registration Rights Agreement and the Commitment Letter, (ii) to issue and perform all of its obligations under the Notes and (iii) to consummate the transactions contemplated hereby and thereby. Each of this Agreement, the Notes, the Registration Rights Agreement, and the Commitment Letter is a legally valid and 7 binding obligation of the Company, enforceable against it in accordance with its terms, except for (a) the effect thereon of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting the rights of creditors generally and (b) limitations imposed by federal or state law or equitable principles upon the specific enforceability of any of the remedies, covenants or other provisions thereof and upon the availability of injunctive relief or other equitable remedies. 3.3. Capital Stock The total number of shares of Capital Stock which the Company has authority to issue is 30,000,000 shares, consisting of 25,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. The Company has the power and authority and has taken all actions (corporate or other) necessary to authorize it to enter into and perform its obligations and undertakings under this Agreement. As of March 30, 1998, there were 4,633,000 shares of Common Stock issued and outstanding, and 1,666,667 shares of Preferred Stock issued and outstanding. Such shares of Common Stock and Preferred Stock have been duly authorized and were validly issued, are fully paid and nonassessable, were issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities of the Company. Neither the Company nor any of its Subsidiaries has outstanding any securities convertible into or exchangeable for any shares of Capital Stock nor does it have outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, any Capital Stock or securities convertible into or exchangeable for any Capital Stock other than (i) the Notes to be issued pursuant to this Agreement or pursuant to other similar agreements dated on or about the date of this Agreement, (ii) 1,666,667 shares of Preferred Stock convertible into Common Stock, and (iii) options and warrants to purchase shares of Common Stock as set forth and for the numbers of shares set forth on the Disclosure Schedule. The Company has duly authorized and reserved for issuance the Conversion Shares, and the Conversion Shares will, when issued, be duly and validly issued, fully paid and nonassessable and free from all Liens. 3.4. No Other Registration Rights Except for the Notes to be issued in connection with the transactions contemplated by this Agreement or pursuant to other similar agreements dated on or about the date of this Agreement, there are no contracts, agreements or understandings between the Company and any other Person granting such Person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to any other registration statement filed by the Company under the Securities Act. 8 3.5. No Violation or Conflict; No Default Neither the execution or delivery of this Agreement, the Registration Rights Agreement or the Commitment Letter by the Company nor the issuance, sale or delivery of the Notes nor the performance of its respective obligations hereunder or thereunder will: (a) violate any provision of the Charter Documents of the Company; (b) violate any statute, law, rule or regulation or any judgment, decree, order, regulation or rule of any court or governmental authority to which the Company, any of its Subsidiaries, or any of their respective properties may be subject; (c) permit or cause the acceleration of the maturity of any debt or obligation of the Company or any of its Subsidiaries; (d) violate, or be in conflict with, or constitute a default under, or permit the termination of, or require the consent of any Person under, or result in the creation of any Lien upon any property of the Company or any of its Subsidiaries under, any mortgage, indenture, loan agreement, note, debenture or other agreement for borrowed money or any other material agreement to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries (or their respective properties) may be bound, other than such violations, conflicts, defaults, terminations and Liens, or such failures to obtain consents, which could not reasonably be expected to result in a Material Adverse Effect. 3.6. Margin Regulations No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any "margin stock" within the meaning of Regulation G of the Board of Governors of the Federal Reserve System (12 C.F.R. ss. 207), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 C.F.R. ss. 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 C.F.R. ss. 220). The assets of the Company and its Subsidiaries do not include any margin stock, and the Company does not have any present intention of acquiring margin stock. 3.7. Private Offering The sale of the Notes hereunder is exempt from the registration and prospectus delivery requirements of the Securities Act. In the case of each offer or sale of the Notes, no form of general solicitation or general advertising was used by the Company or its respective representatives. The Company agrees that neither it, nor anyone acting on its behalf, will offer or sell the Notes, or any portion of them, if such offer or sale might bring the issuance and sale of the Notes to the Purchaser within the provisions of Section 5 of the Securities Act nor offer any similar Notes for issuance or sale to, or solicit any offer to acquire any of the same from, or 9 otherwise approach or negotiate with respect thereto with, anyone if the sale of the Notes and any such Notes could be integrated as a single offering for the purposes of the Securities Act, including without limitation Regulation D. 3.8. Due Authorization of Material Contracts The descriptions in the Incorporated Documents of statutes, legal and governmental proceedings or contracts or other documents are accurate in all material respects and fairly present the information required to be shown at the time shown; and there are no statutes or legal or governmental proceedings required to be described in the Incorporated Documents that are not described as required and there is no document or contract of a character required to be described in the Incorporated Documents or to be filed as an exhibit to the Incorporated Documents which is not described or filed as required. All contracts described in the Incorporated Documents or filed as an exhibit to the Incorporated Documents to which the Company or any of its Subsidiaries is a party have been duly authorized, executed and delivered by the Company or such Subsidiary, constitute valid and binding agreements of the Company or such Subsidiary and are enforceable against and by the Company or such Subsidiary in accordance with the terms thereof, except as the enforcement thereof may be limited by bankruptcy and laws relating to the rights and remedies of the creditors generally or by the availability of general equitable remedies. 3.9. Financial Statements The financial statements and schedules of the Company and its consolidated subsidiaries included in the Incorporated Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, present fairly the financial condition of the Company and its consolidated subsidiaries, as of the respective dates thereof and the results of operations and cash flows of the Company and its consolidated subsidiaries, for the respective periods covered thereby, all in conformity with GAAP (except in the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto) and fairly present the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other financial statements or schedules of the Company and its consolidated subsidiaries or any other company or entity are required by the Securities Act, the Exchange Act or the rules and regulations of the SEC to be included in the Incorporated Documents. The Independent Auditors, who have reported on certain of such financial statements and schedules, are, and were during the periods covered by their reports included in the Incorporated Documents, independent accountants with respect to the Company and its consolidated subsidiaries, as required by the Securities Act, the Exchange Act and the rules and regulations of the SEC. The summary financial and statistical data included in the Incorporated Documents present fairly the information shown therein and have been compiled on a basis consistent with the financial statements presented therein. The unaudited consolidated financial statements included in the Incorporated Documents comply as to form in all material 10 respects with the applicable accounting requirements of the Securities Act, the Exchange Act and the rules and regulations of the SEC, and such statements fairly present the consolidated financial position and results of operations and the other information purported to be shown therein at the respective dates or for the respective periods therein specified. 3.10. Litigation; Judgments Except as described in the Incorporated Documents, there are no actions, suits or proceedings (formal or informal) pending or, to the Knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective properties, assets, or directors or officers, in their capacity as such, before or by any Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding might reasonably be expected to, individually or in the aggregate, and after giving effect to the sale and issuance of the Notes, result in a Material Adverse Effect. 3.11. Taxes Each of the Company and its Subsidiaries has filed all federal, state, local and foreign income tax returns which have been required to be filed and has paid all taxes and assessments received by it to the extent that such taxes have become due. None of the Company nor its Subsidiaries has any tax deficiency which has been or might be asserted or threatened against it which could reasonably be expected to result in a Material Adverse Effect. 3.12. Investment Company Act Neither the Company nor any of its Subsidiaries is an "investment company" or a Person directly or indirectly "controlled" by or acting on behalf of an "investment company" within the meaning of the United States Investment Company Act of 1940, as amended. 3.13. Environmental Matters The operations of the Company and its Subsidiaries with respect to any real property currently leased, owned, controlled or managed by the Company or any of its Subsidiaries are, and with respect to any real property previously leased, owned, managed or controlled were, when such real property was leased, owned, managed or controlled by the Company or any of its Subsidiaries, in compliance in all material respects with all applicable federal, state, and local laws, ordinances, rules, and regulations relating to occupational health and safety and the environment (collectively, "Environmental Laws"), and the Company and its Subsidiaries have all material licenses, permits and authorizations required under all Environmental Laws; neither the Company nor any of its Subsidiaries has authorized or conducted or has knowledge of the generation, transportation, storage, use, treatment, disposal or release of any hazardous substance, hazardous waste, hazardous material, hazardous constituent, toxic substance, pollutant, contaminant, petroleum product, natural gas, liquefied gas or synthetic gas defined or regulated under any Environmental Law on, in or under any real property currently leased, owned, controlled or managed by the Company or any of its Subsidiaries or previously leased, owned, controlled or managed by the Company or any of its Subsidiaries when such real property was owned, leased, controlled or managed by the Company or any of its Subsidiaries, except in compliance with applicable Environmental Laws; and there is not pending or, to the Knowledge of the Company, any threatened claim, litigation or any administrative agency proceeding, nor has the Company or any of its Subsidiaries received any written or oral notice from any governmental entity or third party, that: (i) alleges a violation of any Environmental Laws by the Company or any of its Subsidiaries; (ii) alleges the Company or any of its Subsidiaries is a liable party under CERCLA or any state superfund law; (iii) alleges possible contamination of the environment by the Company or any of its Subsidiaries; or (iv) alleges possible contamination of real property currently leased, owned, controlled or managed by the Company or any of its Subsidiaries or 11 previously leased, owned, controlled or managed by the Company or any of its Subsidiaries when such real property was owned, leased, controlled or managed by the Company or any of its Subsidiaries. 3.14. Labor Relations No labor dispute with the employees of the Company or any of its Subsidiaries exists or is threatened that could reasonably be expected to result in a Material Adverse Effect; and the Company is not aware of any existing or threatened labor disturbance by the employees of any other entity that could reasonably be expected to result in a Material Adverse Effect. 3.15. Real Property; Leases Each of the Company and its Subsidiaries has good and indefeasible title to all properties and assets described in the Incorporated Documents as owned by it, free and clear of all Liens except such as are described in the Incorporated Documents or are not material, singly or in the aggregate, to the Company. Each of the Company and its Subsidiaries has valid, subsisting and enforceable leases for the properties described in the Incorporated Documents as leased by it, except such as are described in the Incorporated Documents. 3.16. Intellectual Property; Licenses Each of the Company and its Subsidiaries owns or has the right to use all patents, patent applications, trademarks, trademark applications, tradenames, copyrights, franchises, trade secrets, proprietary or other confidential information and intangible properties and assets (collectively, "Intangibles") reasonably necessary to conduct its business as now conducted; and none of the Company or its Subsidiaries has any knowledge of any infringement by it of Intangibles of others, and there is no claim being made against the Company or any of its Subsidiaries, or to the Knowledge of the Company, any employee of the Company or its Subsidiaries, regarding infringement of any Intangibles of others which could reasonably be expected to have a Material Adverse Effect and, to the Knowledge of the Company, there is no infringement by others of Intangibles of the Company or any of its Subsidiaries. 12 3.17. Defaults The continuation, validity and effectiveness of each contract, agreement, arrangement or other instrument related to borrowed money (of any amount) or involving payments in excess of $100,000 or that is material to the Company or its Subsidiaries (each a "Material Contract") will not be adversely affected by the execution, delivery and performance of this Agreement, the Registration Rights Agreement, or the Commitment Letter, the issuance or sale of the Notes, or the consummation of the transactions contemplated hereby or thereby. The Company and its Subsidiaries are not in default in any respect, and will not, with the giving of notice or the lapse of time, or both, be in default in any respect, under any Material Contract upon or as a result of the consummation of the transactions contemplated by this Agreement, the Registration Rights Agreement or the Commitment Letter. To the Knowledge of the Company, there is no default or claimed or purported or alleged default or state of facts that with the giving of notice or the lapse of time, or both, would constitute a default on the part of any party other than the Company or any of its Subsidiaries under any Material Contract. 3.18. Brokers The Company has not dealt with any broker, finder, commission agent or other Person in connection with the sale of the Notes and the transactions contemplated by this Agreement, and the Company is not under any obligation to pay any broker's or finder's fee or commission or similar payment in connection with such transactions. 3.19. Existing Indebtedness The Disclosure Schedule sets forth a complete and correct list of all Indebtedness of the Company and its Subsidiaries as of the date hereof, showing as to each item of such Indebtedness the creditor, the aggregate principal amount outstanding, the agreement or instrument governing such Indebtedness and a brief description of any security therefor. With respect to each item of Indebtedness listed on the Disclosure Schedule, the Company will deliver to the Purchaser or its representatives, upon request, a true and complete copy of each instrument evidencing such Indebtedness or pursuant to which such Indebtedness was issued or secured (including each amendment, consent, waiver or similar instrument in respect thereof), as the same is in effect on the date hereof. The Company and its Subsidiaries are not in default in the performance or observance in any material respect of any of the terms, covenants or conditions contained in any instrument evidencing Indebtedness listed on the Disclosure Schedule or pursuant to which such Indebtedness was issued or secured or has requested any waiver in respect of any default and no event has occurred and is continuing which, with notice or the lapse of time or both, would constitute such a default. 3.20. Compliance with Law; Permits (a) The Company and its Subsidiaries own or possess all authorizations, approvals, orders, licenses, registrations, other certificates and permits of and from all governmental regulatory officials and bodies, necessary to conduct their respective businesses except where the failure to own or possess all such authorizations, approvals, orders, licenses, 13 registrations, other certificates and permits would not have a Material Adverse Effect. There is no proceeding pending or, to the Knowledge of the Company, threatened (or any basis therefor known to the Company) which may cause any such authorization, approval, order, license, registration, certificate or permit to be revoked, withdrawn, canceled, suspended or not renewed; and the Company and its Subsidiaries are conducting their respective business in compliance with all laws, rules and regulations applicable thereto except where such noncompliance could not reasonably be expected to result in a Material Adverse Effect. (b) Neither the nature of the Company nor of any of its businesses or properties, nor any relationship between the Company and any other Person, nor any circumstance in connection with the offer, issuance, sale or delivery of the Notes at the Closing, nor the performance by the Company of its other obligations hereunder or under the Notes, the Registration Rights Agreement or the Commitment Letter, as the case may be, is such as to require a consent, approval or authorization of, or notice to, or filing, registration or qualification with, any governmental authority or other Person on the part of the Company as a condition to the execution and delivery of this Agreement, the Registration Rights Agreement, the Commitment Letter or the offer, issuance, sale or delivery of the Notes at the Closing, other than the filings, registrations, qualifications or consents which shall have been made or obtained on the Closing Date (and copies of which shall have been delivered to the Purchaser). All required consents, approvals or authorizations of, or notices to or filings, registrations or qualifications with, any governmental authority or other Person required in connection with the transactions contemplated by this Agreement, the Notes, the Registration Rights Agreement or the Commitment Letter have been obtained or made. 3.21. Insurance The Company maintains, and will maintain after giving effect to the issuance and the sale of the Notes, insurance of the types and in the amounts generally deemed adequate for its business, including, but not limited to, insurance covering director and officer liability, workers compensation liability, malpractice liability respecting the provision of assisted living services, real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is and will be in full force and effect. 3.22. Material Events Since December 31, 1997, there has not been with respect to the Company or any of its Subsidiaries: (a) any material adverse change in their properties, business, prospects, operations, earnings, assets, liabilities or condition (financial or otherwise) which could reasonably be expected to result in a Material Adverse Effect; or (b) any damage, destruction or loss to the properties or assets of the Company or any of its Subsidiaries, whether or not covered by insurance, that has or could reasonably be expected to have a Material Adverse Effect or that in the aggregate exceed $100,000; or 14 (c) any loss or waiver by the Company or any of its Subsidiaries of any right, not in the ordinary course of business, or any material debt owed to it; or (d) other than the sales of assets in the ordinary course of business (including pursuant to sale leaseback transactions), any sale, transfer or other disposition of, or agreement to sell, transfer or otherwise dispose of, any assets by the Company or any of its Subsidiaries in excess of $100,000 in the aggregate, or any cancellation or agreement to cancel any debts or claims of the Company or any of its Subsidiaries; or (e) other than dividends payable on the currently outstanding Preferred Stock, any declaration or setting aside or payment of any dividend (whether in cash, property or stock) or any distribution (whether in cash, property or stock) or other payment with respect to any of the Capital Stock of the Company or any of its Subsidiaries, or any repurchase, purchase or other acquisition of, or agreement to repurchase, purchase or otherwise acquire, any of the Company's or any of its Subsidiaries' capital stock; or (f) any amendment or termination of any contract, agreement or license to which the Company or any of its Subsidiaries is a party or by which it is bound, except where such amendment or termination could not be reasonably expected to have a Material Adverse Effect; or (g) any resignation or termination of employment of any Key Employee, and there is no impending or threatened resignation or resignations or termination or terminations of employment of any Key Employee; or (h) any labor dispute (including, without limitation, any negotiation, or request for negotiation, for any labor representation or any labor contract) affecting the Company or any of its Subsidiaries; or (i) any application of any existing (or the enactment of any new) Environmental Law or personnel, product safety law or other governmental regulation that has or which could reasonably be expected to have a Material Adverse Effect. 3.23. SEC Documents; Undisclosed Liabilities The Company has been subject to the reporting requirements of Section 13 of the Exchange Act since at least January 1, 1996 and, except as set forth in any Company SEC Document, has timely filed all required reports, schedules, forms, statements and other documents required to be filed by the Company under the Securities Act and the Exchange Act with the SEC since January 1, 1996 (the "Company SEC Documents"). As of their respective dates, the Company SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such Company SEC Documents, and none of the Company SEC Documents at the time filed with the SEC contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not 15 misleading. Except to the extent that information contained in any Company SEC Document has been revised or superseded by a later filed Company SEC Document, none of the Company SEC Documents contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.24. Material Misstatements or Omissions No representation or warranty by the Company contained in this Agreement (including the schedules and exhibits attached hereto), the Registration Rights Agreement, the Commitment Letter or in any document, exhibit, statement, certificate or schedule dated the Closing Date, signed by the Company and furnished to the Purchaser pursuant hereto, or in connection with the transactions contemplated hereunder, contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact necessary to make the statements or facts contained herein and therein not misleading. 3.25. Survival of Representations and Warranties All of the Company's representations and warranties hereunder and under the Registration Rights Agreement and the Commitment Letter shall survive the execution and delivery of the same, any investigation by the Purchaser and the issuance of the Notes. SECTION 4. REPRESENTATIONS AND WARRANTIES OF EACH PURCHASER The Purchaser represents and warrants to the Company that: 4.1. Purchase for Own Account The Purchaser is purchasing the Notes to be purchased by it solely for its own account and not as nominee or agent for any other person and not with a view to, or for offer or sale in connection with, any distribution thereof (within the meaning of the Securities Act) that would be in violation of the securities laws of the United States of America or any state thereof, without prejudice, however, to its right at all times to sell or otherwise dispose of all or any part of said Notes pursuant to a registration statement under the Securities Act or pursuant to an exemption from the registration requirements of the Securities Act. 4.2. Accredited Investor The Purchaser is knowledgeable, sophisticated and experienced in business and financial matters; it acknowledges that the Notes have not been registered under the Securities Act and understands that the Notes must be held indefinitely unless they are subsequently registered under the Securities Act or such sale is permitted pursuant to an available exemption from such registration requirement; it is able to bear the economic risk of its investment in the Notes; it is an "accredited investor" as defined in Regulation D promulgated under the Securities Act; and it has been afforded access to information about the Company and the Company's financial condition, results of operations, business, property, management and prospects 16 sufficient to enable it to evaluate its investment in the Notes. The Purchaser acknowledges that it has conducted its own analysis of the Company's financial condition and other foregoing factors. 4.3. Authorization The Purchaser has taken all actions necessary to authorize it (i) to execute, deliver and perform all of its obligations under this Agreement (ii) to issue and perform all of its obligations under the Notes, as the case may be, and (iii) to consummate the transactions contemplated hereby and thereby. This Agreement is a legally valid and binding obligation of the Purchaser enforceable against it in accordance with its terms, except for (a) the effect thereon of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting the rights of creditors generally and (b) limitations imposed by federal or state law or equitable principles upon the specific enforceability of any of the remedies, covenants or other provisions thereof and upon the availability of injunctive relief or other equitable remedies. 4.4. Brokers The Purchaser has not dealt with any broker, finder, commission agent or other Person in connection with the sale of the Notes and the transactions contemplated by this Agreement, and the Purchaser is not under any obligation to pay any broker's or finder's fee or commission or similar payment in connection with such transactions. SECTION 5. COVENANTS So long as any of the Notes remain unpaid and outstanding, the Company covenants to the Holders of outstanding Notes as follows: 5.1. Payment of Notes; Satisfaction of Obligations The Company shall pay the principal of and interest on the Notes on the dates and in the manner provided in the Notes. To the extent lawful, the Company shall pay interest (including interest accruing after the commencement of any proceeding under any Bankruptcy Law) on all unpaid amounts outstanding under the Notes (including overdue installments of principal or interest) at a rate equal to 7.5% per annum, payable quarterly on each January 1, April 1, July 1 and October 1, beginning July 1, 1998. Such interest rate is subject to adjustment as set forth in Section 3(b) to the Registration Rights Agreement. 5.2. Notice of Default The Company will deliver to the Holders, forthwith upon (i) becoming aware of any Default or Event of Default, (ii) becoming aware of any payment default under any other loan agreement, mortgage, indenture or instrument referred to in Sections 7.1(d) or (iii) the receipt by the Company of any notice of any non-monetary default under any such loan agreement, mortgage, indenture or instrument, an Officers' Certificate specifying in reasonable detail such Default, Event of Default or default and the nature of any remedial or corrective action the Company proposes to take with respect thereto. 17 5.3. Limitation on Additional Indebtedness None of the Company, nor any of its Subsidiaries (including without limitation, upon the creation or acquisition of such Subsidiary) shall, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to (collectively, "incur") any Indebtedness after the date of this Agreement, if a Default or an Event of Default shall have occurred and be continuing at the time or would occur as a consequence of the incurrence of such Indebtedness. 5.4. Change of Control (a) Change of Control. Prior to the consummation of a Change of Control (the date of such consummation being referred to herein as the "Change of Control Date"), the Company shall give each Holder notice describing in reasonable detail the nature of the Change of Control and offering to each Approved Holder and Approved Purchaser the following rights, as applicable (such written notice, the "Change of Control Notice"): (1) to require the Company, with respect to any entity whose executive officer is Andre Dimitriadis or Jim Pieczynski (an "Approved Holder"), to repurchase all or any part of each Approved Holder's Notes pursuant to the offer (the "Change of Control Repurchase Offer") at a purchase price equal to 100% of the aggregate principal amount thereof, together with unpaid interest to the date of repurchase (the "Change of Control Price"). The obligation of the Company to repurchase Notes pursuant to the Change of Control Repurchase Offer is subject to the subordination provisions of Section 8 hereof; or (2) to require the Company, in the event that (x) less than $10,000,000 aggregate principal amount of Notes have been issued and sold to the Purchaser pursuant to Section 1.2(a) and (y) either Andre Dimitriadis or Jim Pieczynski serve as an executive officer of the party that has the obligation to purchase Notes hereunder (the "Approved Purchaser"), to issue and sell additional Notes to the Approved Purchaser at a purchase price of 100% of the principal amount thereof in such amount designated in writing by the Approved Purchaser (but in no event shall more than $10,000,000 aggregate principal amount of Notes be issued to the Approved Purchaser pursuant to Section 1.2(a) and pursuant to this Section 5.4). The foregoing is referred to herein as the "Change of Control Issuance of Additional Notes." (b) Timing of Notice. The Change of Control Notice shall be mailed by the Company to all Holders at their last registered address no later than fifteen (15) Business Days prior to the Change of Control Date. (c) Procedure. The Change of Control Notice shall state a date not later than five (5) Business Days following the Change of Control Date for repurchase of the Notes pursuant to the Change of Control Repurchase Offer (such date, the "Change of Control Repurchase Date") and shall state a date not later than five (5) Business Days prior to the Change 18 of Control Date for issuance of additional Notes pursuant to the Change of Control Issuance of Additional Notes (such date, the "Change of Control Issuance Date"). The Change of Control Notice, which shall govern the terms of the Change of Control Repurchase Offer and the Change of Control Issuance of Additional Notes, shall state: (1) that the Change of Control Repurchase Offer and the Change of Control Issuance of Additional Notes is being made pursuant to this Section 5.4; (2) the Change of Control Price, the Change of Control Repurchase Date and the Change of Control Issuance Date; (3) that, unless the Company defaults in the payment of the Change of Control Price, all Notes accepted for payment shall cease to accrue interest on and after the Change of Control Repurchase Date; (4) that Approved Holders electing to require the Company to repurchase any Notes will be required to surrender the Note to the address specified in the Change of Control Notice prior to the close of business on the Business Day preceding the Change of Control Repurchase Date; (5) that the Approved Purchaser electing to require the Company to issue additional Notes will be required to make payment for such Notes by wire transfer of immediately available funds to an account designated by the Company in such Change of Control Notice on or prior to the close of business on the Change of Control Issuance Date; (6) that the Approved Holders will be entitled to withdraw their election to require the Company to repurchase any Notes on the terms and conditions set forth in such Change of Control Notice by written notice to the Company prior to the Change of Control Repurchase Date and the Approved Purchaser will be entitled to withdraw its election to require the Company to issue additional Notes on the terms and conditions set forth in such Change of Control Notice by written notice to the Company prior to the Change of Control Issuance Date; and (7) that the Approved Holders electing to require the Company to repurchase any Notes in part will be issued a new Note in a principal amount equal to the unpurchased portion of the Notes surrendered. Any such Change of Control Repurchase Offer shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations to the extent applicable in connection with any Change of Control Repurchase Offer. (d) Acceptance of Notes/Issuance of Additional Notes.: 19 (1) On the Change of Control Repurchase Date, the Company shall accept for payment all Notes or portions thereof validly tendered pursuant to the Change of Control Repurchase Offer and promptly thereafter mail or deliver to the Holders of Notes accepted for repurchase payment in the amount equal to the aggregate Change of Control Price for such Notes, and the Company shall execute and mail or deliver to such Holders a new Note equal in principal amount to any unpurchased portion of the Notes surrendered; and (2) On the Change of Control Issuance Date, the Company shall issue additional Notes in the amount set forth in writing by the Approved Purchaser, pursuant to this Section 5.4; deliver a Certificate of the Chief Executive Officer and the Chief Financial Officer of the Company, dated the date such additional principal amount of Notes is delivered to the Approved Purchaser, certifying (x) that all of the representations and warranties of the Company contained or incorporated by reference in this Agreement are true and correct on and as of such date as though made on and as of such date, and no event has occurred and is continuing, or would result from the issuance of the Notes or the extension of borrowings under the Commitment Letter, which constitutes or would constitute a Default or an Event of Default and (y) as to such other matters as the Approved Purchaser may request in the exercise of its reasonable discretion and (z) an opinion, dated the date such additional principal amount of Notes is delivered to the Approved Purchaser and addressed to the Approved Purchaser, from David R. Gibson, counsel for the Company, as to the matters set forth on Annex B. The Company will notify the Holders of the results of the Change of Control Repurchase Offer and the Change of Control Issuance of Additional Notes on the Change of Control Repurchase Date and Change of Control Issuance Date, respectively. 5.5. Stay, Extension and Usury Laws The Company covenants and agrees (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, and will use its best efforts to resist any attempts to claim or take the benefit of any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of its obligations under this Agreement or the Notes; and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holders, but will suffer and permit the execution of every such power as though no such law has been enacted. 5.6. Indemnification The Company agrees to indemnify the Purchaser and each director, officer, employee, counsel, Agent and Affiliate of such Purchaser (collectively, the "Indemnified Parties") against, and hold it and them harmless from, all losses, claims, damages, liabilities, taxes, deficiencies, expenses and costs (including diminution in value and costs of preparation 20 and reasonable attorneys' fees and expenses) (collectively, "Losses") incurred by it or them (A) arising from any breach of any representation or warranty or the inaccuracy of any representation made by the Company in or pursuant to the Agreement, the Registration Rights Agreement or the Commitment Letter (including without limitation any breach or inaccuracy of any representation or warranty relating to CERCLA, any equivalent state statute or any other Environmental Law); and (B) arising from any breach of any covenant or agreement made by the Company in or pursuant to the Agreement, the Registration Rights Agreement or the Commitment Letter; provided, however, that the Company shall not be required to indemnify any Indemnified Party for any Loss that results from (x) the action of any Indemnified Party which is finally judicially determined to have resulted from such Indemnified Party's negligence, intentionally wrongful acts or intentionally wrongful omissions or (y) the Purchaser's failure to purchase additional Notes from the Company pursuant to Section 1.2(a)(2) hereof; provided, further, that no Indemnified Party shall be entitled to assert a claim on account of the indemnity provided in this Section 5.6, unless and until the aggregate amount of Losses with respect to all claims asserted under this Section and under Section 5.6 of the purchase agreements for the Notes executed on the date hereof by other purchasers exceeds $100,000 (in which case the Company shall be liable for Losses in excess of such $100,000 that have accrued). The Company agrees to reimburse any Indemnified Party promptly for all such Losses as they are incurred by such Indemnified Party. The Company's liability to any such Indemnified Party hereunder shall not be extinguished solely because any other Indemnified Party is not entitled to indemnity hereunder. The obligations of the Company under this Section 5.6 shall survive the payment or prepayment of the Notes, at maturity, upon acceleration, repurchase or otherwise, any transfer of the Notes by any Purchaser to any subsequent Holder and the termination of this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter. The indemnity provided in this Section 5.6 will be in addition to any liability which the Company may otherwise have, including, without limitation, under this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter. In case any action shall be brought against any Indemnified Party with respect to which indemnity may be sought against the Company, such Indemnified Party shall promptly notify the Company in writing and the Company shall, if it so desires, assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party and payment of all reasonable fees and expenses. The failure to so notify the Company shall not affect any obligation it may have to any Indemnified Party under this Section 5.6 or otherwise unless the Company is materially adversely affected by such failure. Each Indemnified Party shall have the right to employ separate counsel in such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless: (i) the Company has agreed in writing to pay such expenses; (ii) the Company has failed to assume the defense and employ counsel; or (iii) the named parties to any such action (including any impleaded parties) include any Indemnified Party and the Company, and such Indemnified Party shall have been advised by outside counsel that there may be one or more legal defenses available to it which are inconsistent with those available to the Company; provided that, if such Indemnified Party notifies the Company in 21 writing that it elects to employ separate counsel in the circumstances described in clauses (i), (ii) or (iii) above, the Company shall not have the right to assume the defense of such action or proceeding; provided, however, that the Company shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be responsible hereunder for the fees and expenses of more than one such firm of separate counsel (in addition to any necessary local counsel), which counsel shall be designated by such Indemnified Party. The Company shall not be liable for any settlement of any such action effected without its written consent (which shall not be unreasonably withheld). The Company agrees that it will not, without the Indemnified Party's prior consent, which shall not be unreasonably withheld, settle or compromise any pending or threatened claim, action or suit in respect of which indemnification may be sought hereunder unless the foregoing contains an unconditional release of the Indemnified Parties from all liability and obligation arising therefrom. 5.7. Corporate Existence; Merger; Successor Corporation (a) The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence in accordance with its organizational documents and the corporate rights (charter and statutory), licenses and franchises of the Company; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or corporate existence if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not adverse in any material respect to any Holder. (b) The Company shall not in a single transaction or through a series of related transactions, (i) consolidate with or merge with or into any other person, or transfer (by lease, assignment, sale or otherwise) all or substantially all of its properties and assets as an entirety or substantially as an entirety to another person or group of affiliated persons or (ii) adopt a Plan of Liquidation, unless, in either case: (1) the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or to which all or substantially all of the properties and assets of the Company as an entirety or substantially as an entirety are transferred (or, in the case of a Plan of Liquidation, any Person to which assets are transferred) (the Company or such other Person being hereinafter referred to as the "Surviving Person") shall be a corporation organized and validly existing under the laws of the United States, any State thereof or the District of Columbia, and shall expressly assume, by an amendment to this Agreement, all the obligations of the Company under the Notes and this Agreement; (2) immediately after and giving effect to such transaction and the assumption contemplated by clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, (ii) the Surviving Person shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction; 22 (3) immediately before and immediately after and giving effect to such transaction and the assumption of the obligations as set forth in clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, no Default or Event of Default shall have occurred and be continuing; and (4) The Company shall have delivered to the Purchaser an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, transfer or adoption and such amendment to this Agreement comply with this Section 5.7, that the Surviving Person agrees to be bound hereby, and that all conditions precedent herein provided relating to such transaction have been satisfied. (c) Upon any consolidation or merger, or any transfer of assets (including pursuant to a Plan of Liquidation) in accordance with this Section 5.7, the successor person formed by such consolidation or into which the Company is merged or to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Agreement with the same effect as if such successor person had been named as the Company herein; provided, however, that the Company shall not be released from the obligations and covenants under this Agreement or under the Notes. 5.8. Taxes The Company shall, and shall cause its Subsidiaries to, pay prior to delinquency all material taxes, assessments and governmental levies except as contested in good faith and by appropriate proceedings. 5.9. Investment Company Act Neither the Company nor any of its Subsidiaries shall become an investment company subject to registration under the Investment Company Act of 1940, as amended. 5.10. Insurance The Company and its Subsidiaries shall maintain liability, casualty and other insurance with a reputable insurer or insurers in such amounts and against such risks as is carried by responsible companies engaged in similar businesses and owning similar assets. 5.11. Inconsistent Agreements The Company shall not, and shall not permit any of its Subsidiaries to, (i) enter into any agreement or arrangement which is inconsistent with, or would impair the ability of the Company to fulfill, its obligations under this Agreement, the Notes, the Registration Rights Agreement or the Commitment Letter or (ii) supplement, amend or otherwise modify the terms of their respective Charter Documents, if the effect thereof would be materially adverse to the Holders, including without limitation to increase the liquidation preference of, or the rate of dividends payable on, any series of preferred stock. 23 5.12. Compliance with Laws The Company shall, and shall cause its Subsidiaries to, comply with all statutes, ordinances, governmental rules and regulations, judgments, orders and decrees (including all Environmental Laws) to which any of them is subject, and obtain and keep in effect all licenses, permits, franchises and other governmental authorizations necessary to the ownership or operation of their respective properties or the conduct of their respective businesses, except to the extent that the failure to so comply or obtain and keep in effect would not have a Material Adverse Effect. 5.13. Inspection of Properties and Records The Company agrees to allow, and to cause each of their respective Subsidiaries to allow, the Purchaser and each subsequent Holder (or such Persons as the Purchaser or subsequent Holder may designate) (individually and collectively, "Inspectors") upon reasonable prior notice to visit and inspect any of the properties of the Company or its Subsidiaries, to examine all their books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers, and independent public accountants with representatives of the Company or its Subsidiaries present (and by this provision the Company authorizes said accountants to discuss with such Inspectors the finances and affairs of the Company and its Subsidiaries) all at such reasonable times and as often as may be reasonably requested but not more than twice in any twelve-month period for all Holders in the aggregate unless a Default or an Event of Default shall have occurred; provided, however, that the Purchaser shall not be so limited in the number of such inspections prior to March 31, 2000 where such inspections are made in connection with the issuance and sale by the Company of any additional Notes. If a Default or an Event of Default shall have occurred and be continuing, the Company shall pay or reimburse all Inspectors for expenses which such Inspectors may reasonably incur in connection with any such visitations or inspections. SECTION 6. CONVERSION OF NOTES 6.1. Conversion (a) Each Note shall be convertible, in whole or in part, at the option of the Holder thereof, at any time prior to the Maturity Date, at the office of the Company or any transfer agent for the Notes, into that number of fully paid and nonassessable shares of Common Stock determined in accordance with the provisions of Section 6.2. In order to convert Notes into Conversion Shares, the Holder thereof shall surrender the Notes therefor, duly endorsed, at the office of the Company or to the transfer agent for the Notes, together with written notice to the Company stating that it elects to convert the same and setting forth the name or names in which it wishes the certificate or certificates for Conversion Shares to be issued, and the principal amount of the Notes being converted. The Company shall, as soon as practicable after the surrender of the Notes for conversion at the office of the Company or the transfer agent for the Notes, issue to each holder of such Notes, or its nominee or nominees, a certificate or certificates evidencing the number of Conversion Shares (and any other securities and property) to which it 24 shall be entitled, cash representing payment in full for all accrued but unpaid interest on the Note (or portion thereof) surrendered for conversion, and, in the event that only a part of the Notes presented are converted, a Note evidencing the principal amount not so converted. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the Notes to be converted, and the person or persons entitled to receive the Conversion Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock at such date and shall, with respect to such shares, thereafter have only those rights of a holder of Common Stock of the Company. (b) In the event that the average trading price of the Common Stock over thirty (30) consecutive trading days is equal to or exceeds $12 per share, the Company shall have the right, but not the obligation, to force a conversion of all then outstanding Notes, in whole but not in part, within the fifteen (15) day period immediately following such thirty (30) consecutive trading days. Any such forced conversion shall in all other respects be in accordance with this Section 6, and, if the Company shall elect to force conversion of Notes, it shall promptly provide notice of such forced conversion to all Holders of Notes. The Company shall, as soon as practicable following the notice of such forced conversion (and in no event later than sixty (60) calendar days after the date of such notice) issue to each holder of such Notes, or its nominee or nominees, a certificate or certificates evidencing the number of Conversion Shares (and any other securities and property) to which it shall be entitled and cash representing payment in full for all accrued but unpaid interest on the Note surrendered for conversion. Such conversion shall be deemed to have been made at the close of business on the date specified in such notice, and the person or persons entitled to receive the Conversion Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock at such date and shall, with respect to such shares, thereafter have only those rights of a holder of Common Stock of the Company. (c) The Company shall use its best efforts to quote and maintain quotation of the Conversion Shares on the Nasdaq National Market or such other principal national securities exchange on which the Common Stock is then listed or quoted. 6.2. Conversion Rate The number of shares of Common Stock issuable upon conversion of the Notes shall be one (1) share for every $7.50 of principal amount of Notes being converted (the "Conversion Rate"), and shall be subject to adjustment from time to time as provided herein and as provided in Section 3(b) of the Registration Rights Agreement. 6.3. Fractional Shares No fractional shares of Common Stock shall be issued upon conversion of Notes. Instead, the Company shall deliver cash in the form of its check for the Fair Market Value of the fractional share. 25 6.4. Adjustments for Stock Splits, Combinations and Dividends If the outstanding shares of the Common Stock shall be subdivided into a greater number of shares or combined into a lesser number of shares, the Conversion Rate in effect immediately prior to such subdivision shall, simultaneously with the effectiveness of such subdivision, be proportionately increased or decreased, as the case may be. If the Company pays a dividend or otherwise makes a distribution with respect to its Common Stock (whether in cash, additional shares of Common Stock or other property) on or prior to March 31, 2003, then the Conversion Rate shall be increased by a fraction, the numerator of which is the aggregate amount of the fair market value of such dividend or distribution and the denominator of which is the number of shares of Common Stock entitled to such dividend or other distribution. If the Company pays a dividend or otherwise makes a distribution with respect to its Common Stock (whether in cash, additional shares of Common Stock or other property) after March 31, 2003 (the effective date of such dividend or other distribution, the "Determination Date") and if the fair market value of such dividend or other distribution, together with the fair market value of all other dividends and distributions with respect to its Common Stock during the 12-month period immediately preceding the Determination Date exceeds 2% of the Average Closing Sales Price during such 12-month period, then the Conversion Rate shall be increased by a fraction, the numerator of which is the aggregate amount of the fair market value of the dividend or other distribution to be effected on the Determination Date plus the aggregate amount of the fair market value of all dividends and distributions effected during such 12-month period for which no adjustment in the Conversion Rate was effected pursuant to this Section 6.4, and the denominator of which is the number of shares of Common Stock entitled to such dividend or other distribution on the Determination Date. Any adjustment to the Conversion Rate under this Section 6.4 shall become effective at the close of business on the date the subdivision, combination, dividend or other distribution referred to herein becomes effective. For purposes of the calculations made in this Section 6.4, the fair market value of any dividend or other distribution that is in the form of property other than Common Stock or cash shall be determined in good faith by the Board. 6.5. Reorganization, Mergers, Consolidations or Sales of Assets In the event of any capital reorganization, any reclassification of the Common Stock (other than a change in par value or as a result of a stock dividend, subdivision, split-up or combination of shares), the consolidation or merger of the Company with or into another person, or the sale or other disposition of all or substantially all of the properties of the Company as an entirety to another person (collectively referred to hereinafter as "Reorganizations"), the Holders of the Notes shall thereafter be entitled to receive, and provision shall be made therefor in any agreement relating to a Reorganization, upon conversion of the Notes the kind and number of shares of Common Stock or other securities or property (including cash) of the Company, or the other corporation resulting from such consolidation or surviving such merger, which would have been distributed to a holder of the number of shares of Common Stock which the Notes entitled the holders thereof to convert to immediately prior to such Reorganization; and in any such case appropriate adjustment shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the Holders of the Notes, to the end that the 26 provisions set forth herein (including the specified changes and other adjustments to the Conversion Rate) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares, other securities or property thereafter receivable upon conversion of the Notes. 6.6. Sale of Shares Below Market or Conversion Price (a) If at any time or from time to time the Company shall issue or sell Additional Shares of Common Stock other than in a transaction which falls within Section 6.1, Section 6.4 or Section 6.5, for an Effective Price less than the greater of (x) the Fair Market Value of the Common Stock or (y) the then effective conversion price calculated by dividing $7.50 by the then existing Conversion Rate (the "Adjusted Conversion Price"), then, and in each such case, the then existing Conversion Rate shall be adjusted to a rate per $7.50 principal amount of Notes determined by multiplying that Conversion Rate by a fraction (i) the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the date of such issue after giving effect to such issue of Additional Shares of Common Stock, and (ii) the denominator of which shall be (A) the number of shares of Common Stock outstanding at the close of business on the day next preceding the date of such issue or sale, plus (B) the number of shares of Common Stock which the aggregate consideration received (or by the express provisions hereof deemed to have been received) by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Adjusted Conversion Price. (b) For the purpose of making any adjustment required in this Section 6.6, the consideration received by the Company for any issue or sale of securities shall: (i) to the extent it consists of cash, the consideration received by the Company therefor shall be deemed to be the net amount of cash actually received by the Company, after deducting therefrom any compensation, discounts, fees or expenses paid to (but not on behalf of) any purchaser of such securities and any compensation, discounts, fees or expenses that are not reasonable or are not customary (it being understood that underwriters' discounts and compensation in public offerings and brokers' commissions in private placements of such securities shall be deemed reasonable and customary); (ii) to the extent it consists of property other than cash, the consideration other than cash shall be computed at the fair market value thereof as determined in good faith by the Board of Directors of the Company; and (iii) if Additional Shares of Common Stock, Convertible Securities or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Company for consideration which covers both, the consideration received for the Common Stock, Convertible Securities or rights or options shall be computed as that portion of the consideration so received which is reasonably determined in good faith by the Board of Directors of the Company to 27 be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. (c) For the purpose of making any adjustment in the Conversion Rate provided in this Section 6.6, if at any time, or from time to time, the Company issues any stock convertible into Additional Shares of Common Stock (such convertible stock being hereinafter referred to as "Convertible Securities") or issues any rights or options, other than options pursuant to the Stock Option Plan, to purchase Additional Shares of Common Stock for Convertible Securities (such rights or options being hereinafter referred to as "Rights"), then, and in each such case, the Company shall be deemed to have issued at the time of the issuance of such Rights or Convertible Securities the maximum number of shares of Additional Shares of Common Stock issuable upon exercise (other than options pursuant to the Stock Option Plan) or conversion thereof and to have received in consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Company for the issuance of such Rights or Convertible Securities, plus in the case of such Rights, the amount of consideration, if any, payable to the Company upon exercise of such Rights, plus, in the case of Convertible Securities, the amount of consideration, if any, payable to the Company upon the conversion thereof. No further adjustment of the Conversion Rate, adjusted upon the issuance of such Rights or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such Rights or the conversion of any such convertible Securities. If any such Rights or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Conversion Rate adjusted upon the issuance of such rights, options or convertible securities shall be readjusted to the conversion rate which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such Rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for granting of all such Rights, whether or not exercised, plus consideration received for issuing or selling the Convertible Securities actually converted, plus the consideration, if any, actually received by the Company on the conversion of such Convertible Securities. 6.7. Adjustment for Failure to Quote on Nasdaq National Market In event that, from the time of effectiveness of the registration statement to be filed pursuant to Section 3(a) of the Registration Rights Agreement and until all Notes have been converted into Conversion Shares, immediately prior to the conversion of any Notes into Conversion Shares pursuant to this Section 6, such Conversion Shares have not been approved for quotation on Nasdaq National Market (or any other national securities exchange where the Common Stock is then listed or quoted), then the Conversion Rate with respect to such Conversion Shares shall be increased by 10% immediately prior to the conversion of any Notes into such Conversion Shares. 6.8. Accountants' Certificate of Adjustment 28 In each case of an adjustment or readjustment of the Conversion Rate or the number of shares of Common Stock or other securities issuable upon conversion of the Notes, the Company shall as soon as reasonably practicable (and in no event less than thirty (30) days following the event causing such adjustment or readjustment) compute such adjustment or readjustment in accordance with this Agreement and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first-class mail, postage prepaid, to each Holder of the Notes at the Holder's address as shown on the Company's note register. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (i) the Conversion Rate at the time in effect for the Notes, and (ii) the number of shares of Common Stock and the type and amount, if any, of other property which at the time would be received upon conversion of the Notes. At the written request of the Requisite Noteholders, the Company shall cause its Independent Auditors to verify the computations contained in the certificate prepared by the Company. 6.9. Reservation of Shares Issuable Upon Conversion The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Notes, such number and class of its shares of Common Stock as shall from time to time be sufficient to effect a conversion of all outstanding Notes, and if at any time the number and class of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding Notes, the Company shall promptly seek such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number and class of shares as shall be sufficient for such purpose. In the event of the consolidation or merger of the Company with another corporation where the Company is not the surviving corporation, effective provision shall be made in the certificate or articles of incorporation, documents of merger or consolidation, or otherwise, of the surviving corporation so that such corporation will at all times reserve and keep available a sufficient number of shares of Common Stock or other securities or property to provide for the conversion of the Notes in accordance with the provisions of this Section 6. 6.10. No Impairment The Company shall not amend its Charter Documents or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, for the principal purpose of avoiding or attempting to avoid the observance or performance of any of the terms to be observed or performed by the Company pursuant to this Section 6. SECTION 7. DEFAULTS AND REMEDIES 7.1. Events of Default An "Event of Default" occurs if: 29 (a) the Company defaults in the payment of the principal of any Note when the same becomes due and payable at maturity, upon repurchase or otherwise; (b) the Company defaults in the payment of interest on any Note when the same becomes due and payable and the Default continues for the period and after the notice specified below; (c) the Company fails to comply with any of the agreements, covenants, or provisions of this Agreement or the Notes and the Default continues for the period and after the notice specified below; (d) a default occurs under any mortgage, indenture or instrument (other than a mortgage, indenture or instrument to which the Purchaser or its Subsidiaries is a party) under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries), whether such Indebtedness or guaranteed Indebtedness now exists or shall be created hereafter, which default (i) is caused by a failure to pay principal of or premium, if any, on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness, or (ii) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of such Indebtedness, together with the principal amount of any other Indebtedness as to which there has been a payment default or the maturity of which has been so accelerated, aggregates $1,000,000 or more; (e) a final judgment for the payment of money is entered by a court or courts of competent jurisdiction against the Company or any Subsidiary of the Company and such remains undischarged for a period (during which execution shall not be effectively stayed) of (1) ninety (90) days, if the aggregate of all such judgments exceeds $1,000,000 but is less than $5,000,000 or (2) thirty (30) days if the aggregate of all such judgments exceeds $5,000,000; (f) the Company or any of its Subsidiaries pursuant to or within the meaning of any Bankruptcy Law: (1) commences a voluntary case, (2) consents to the entry of an order for relief against it in an involuntary case, (3) consents to the appointment of a Custodian of it or for all or substantially all of its property, (4) makes a general assignment for the benefit of its creditors, (5) generally is unable to pay its debts as the same become due; or (6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company or any of its Subsidiaries in an involuntary case, (ii) appoints a Custodian of the Company or any of its Subsidiaries or for all or substantially all of its property, or (iii) orders the liquidation of the Company or any of its Subsidiaries, and the order or decree remains unstayed and in effect for 60 days. A Default under clause (b) is not an Event of Default until a Holder notifies the Company of such Default and the Company does not cure such Default within two (2) Business Days after receipt of such notice. A Default under clause (c) (other than a Default under Sections 5.3, 5.4, 5.6 or 5.7 of this Agreement, which Default shall be an Event of Default without the notice or passage of time specified in this paragraph) or (d) (other than a Default resulting from the acceleration of any Indebtedness described therein, which Default shall be an Event of 30 Default without the notice or passage of time specified in this paragraph) or (e) is not an Event of Default until the Requisite Noteholders notify the Company of the Default and the Company does not cure the Default within ten (10) days after receipt of the notice. Any such notices must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." 7.2. Acceleration of Notes If an Event of Default (other than an Event of Default specified in clauses (e) and (f) of Section 7.1) occurs and is continuing, the Requisite Noteholders, by notice to the Company, may declare the unpaid principal of and any accrued interest on all the Notes to be due and payable. Immediately upon such declaration, the principal and interest shall be due and payable. If an Event of Default specified in clause (e) or (f) of Section 7.1 occurs, such an amount shall become and be immediately due and payable without any declaration or other act on the part of any Holder. The Requisite Noteholders by notice to the Company may rescind an acceleration of and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration. 7.3. Other Remedies If an Event of Default occurs and is continuing, Holders of the Notes may pursue any available remedy to collect the payment of principal or interest on the Notes or to enforce the performance of any provision of the Notes or this Agreement. A delay or omission by any Holder of any Notes in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. SECTION 8. SUBORDINATION 8.1. Notes Subordinated to Senior Indebtedness (a) The Notes are subordinated and junior in right of payment of the principal of and interest and all other obligations (all of the foregoing, a "Payment or Distribution") on such Notes to the prior payment in full of any Senior Indebtedness whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed, the Notes shall comply with the provisions of this Section 8, and each Holder by his acceptance thereof likewise agrees. A Payment or Distribution shall include any asset of any kind or character, and may consist of cash, securities or other property, by set-off or otherwise, except that Holders may receive (i) securities that are subordinated to at least the same extent as the Notes to (A) Senior Indebtedness and (B) any securities issued in exchange for Senior Indebtedness. (b) The Senior Indebtedness of the Company shall continue to be Senior Indebtedness and entitled to the benefit of these subordination provisions irrespective of any 31 amendment, modification or waiver of any term of any instrument relating to refinancing of the Senior Indebtedness, whether with or without notice to Holders. (c) No right of any holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time or in any way be affected or impaired by any act or failure to act on the part of the Company, the Holders or the holders of the Senior Indebtedness, including without limitation any non-compliance by the holders of the Senior Indebtedness with any of the terms, provisions and covenants of the documents evidencing or securing the Senior Indebtedness, or by any noncompliance by the Company or the Holders with any of the terms, provisions and covenants of the Notes, regardless of any knowledge thereof that any such holder of Senior Indebtedness may have or otherwise be charged with. 8.2. Company Not to Make Payments with Respect to Notes in Certain Circumstances No Payment or Distribution shall be made by the Company on account of principal of or interest on the Notes, whether upon the Maturity Date, upon repurchase or acceleration, or otherwise, if there shall have occurred and be continuing a default with respect to any Senior Indebtedness and notice of such default in writing or by telegram has been given to the Company by any holder or holders of Senior Indebtedness, unless and until the Company shall have received written notice from such holder or holders that such default or event of default shall have been cured or waived or shall have ceased to exist or, unless in the event of a default that does not result in the acceleration of any Senior Indebtedness or that does not involve a payment default with respect to any Senior Indebtedness, upon the expiration of the 60-day period following the date of such notice of default. Following such 60-day period, the Company shall be obligated to make any and all outstanding Payments or Distributions with respect to the Notes. Upon acceleration of the principal of the Notes or any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding up or liquidation or reorganization of the Company, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or such other proceedings, all amounts due or to become due upon all Senior Indebtedness shall first be paid in full in cash, or payment thereof provided for to the satisfaction of the holders thereof, before any Payment or Distribution is made on account of the repurchase price or principal of or interest on the Notes; and (subject to the power of a court of competent jurisdiction to make other equitable provision, which shall have been determined by such court to give effect to the rights conferred in this Section 8 upon the Senior Indebtedness and the holders thereof with respect to the Notes or the Holders, by a lawful plan of reorganization or readjustment under applicable law) upon any such dissolution or winding up or liquidation or reorganization, any Payment or Distribution by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Holders would be entitled except for the provisions of this Section 8, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such Payment or Distribution directly to the holders of Senior Indebtedness of the Company or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any 32 instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay all Senior Indebtedness in full in cash, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any Payment or Distribution is made to the Holders. In the event that, notwithstanding the foregoing, any Payment or Distribution by the Company of any kind or character, whether such payment shall be in cash, property or securities is prohibited by the foregoing, and the Company shall have made payment to the Holders before all Senior Indebtedness is paid in full in cash, or provision is made for such payment to the satisfaction of the holders thereof, such Holder, then and in such event such Payment or Distribution shall be paid over by such Holder or delivered to the holders of Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in cash, after giving effect to any concurrent Payment or Distribution to or for the holders of such Senior Indebtedness, and, until so delivered, the same shall be held in trust by any Holder as the property of the holders of Senior Indebtedness. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided in Section 5.7 shall not be deemed a dissolution, winding up, liquidation or reorganization for the purpose of this Section if such other Person shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Section 5.7. The holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Holders without incurring responsibility to the Holders and without impairing or releasing the obligations of the Holders to the holders of the Senior Indebtedness: (i) change the manner, place or terms of payment or change or extend the time of payment of, or renew or alter, Senior Indebtedness, or otherwise amend in any manner Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Senior Indebtedness; and/or (iv) exercise or refrain from exercising any rights against the Company and any other Person. 8.3. Subrogation of Notes After all Senior Indebtedness is paid in full and until the Notes are paid in full, the Holders shall be subrogated (equally and ratably with all other Indebtedness pari passu with the Notes) to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the Holders have been applied to the payment of Senior Indebtedness. 33 If any Payment or Distribution to which the Holders would otherwise have been entitled but for the provisions of this Section 8 shall have been applied pursuant to the provisions of this Section 8 to the payment of all amounts payable in respect of the Senior Indebtedness, then and in such case, the Holders, as with respect to the Company, shall be entitled to receive from the holders of such Senior Indebtedness at the time outstanding any Payments or Distributions received by such holders of Senior Indebtedness in excess of the amount sufficient to pay all amounts payable in respect of the Senior Indebtedness in full in cash or, at the option of the holders of Senior Indebtedness, cash equivalents. 8.4. No Impairment of Subordination No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, any Holder, or by any act, or failure to act, in good faith, by any such holder of Senior Indebtedness, or by any noncompliance by the Company or any Holder with the terms, provisions and covenants of this Agreement regardless of any knowledge thereof which any such holder may have or otherwise be charged with. 8.5. Section 8 Not to Prevent Events of Default The failure to make a payment on account of principal of or interest on the Notes by reason of any provision in this Section 8 shall not be construed as preventing the occurrence of an Event of Default with respect to such series under Section 7.1. 8.6. Securities Senior to Subordinated Indebtedness The indebtedness represented by the Notes will be senior and prior in right of payment to all Subordinated Indebtedness, to the extent and in the manner provided in such Subordinated Indebtedness. 8.7. Assignment of Junior Claims (a) So long as the Purchaser holds a sufficient amount of Notes such that the Purchaser constitutes a Requisite Noteholder, paragraphs (b) and (c) of this Section 8.7 shall have no force and effect. In the event the Purchaser shall cease to hold a sufficient amount of Notes such that the Purchaser is no longer a Requisite Noteholder, paragraphs (b) and (c) of this Section 8.7 shall be in effect. (b) In the event of an insolvency proceeding with respect to the Company, each Holder will assign to a representative of the holders of Senior Indebtedness (as identified in writing to each Holder by the holders of Senior Indebtedness) (the "Senior Representative") each Holder's right, title and interest in and to any claims such Holder has against the Company with respect to the Notes (the "Junior Claims") and any security held therefor, and will deliver to the Senior Representative from time to time any and all instruments and documents evidencing such Junior Claims, or will have entered on such instruments and documents such subordination legend as the Senior Representative may reasonably request, and each Holder will execute such 34 other instruments and documents as the Senior Representative may from time to time reasonably require in connection therewith. In the event that any Junior Claim is not evidenced by a negotiable instrument, each Holder hereby agrees that he will use all commercially reasonably efforts to obtain an instrument or document from the Company evidencing such Junior Claim. In the event that such debt is not evidenced by a document, it shall nevertheless be deemed subordinated and assigned by virtue of this Section 8.7. (c) In the event of an insolvency proceeding with respect to the Company, each Holder will grant to the Senior Representative irrevocable authority in the place and stead of such Holder and in the name of such Holder or in the Senior Representative's name but for the Senior Representative's use and benefit, at any time or times, after any default under the terms of any Senior Indebtedness, in the Senior Representative's discretion to demand, collect file proofs of claim with respect to, receive (by way of dividends or otherwise) and take any and all legal proceedings for the recovery of any and all moneys due or to become due on account of the Junior Claims or any thereof, and to vote, give consents and take any other steps with regard thereto. Any and all moneys so collected or received by the Senior Representative shall be retained indefeasibly by the Senior Representative for application to the payment in full of any amounts owing with respect to the Senior Indebtedness then outstanding (the "Senior Claims"). If the Senior Representative receives notice of any claim adverse to the rights or interests of each Holder in and to either the Junior Claims or the Senior Claims, or any moneys held by the Senior Representative in respect thereof, the Senior Representative shall be entitled to retain any and all such moneys, documents and instruments evidencing such Junior Claims and Senior Claims. SECTION 9. AMENDMENTS AND WAIVERS 9.1. With Consent of Holders The Company, when authorized by a resolution of the Board of Directors of the Company and with the written consent of the Requisite Noteholders, may amend this Agreement or the Notes, without notice to any other Holders. The Requisite Noteholders may waive compliance by the Company with any provision of this Agreement or the Notes without notice to any other Holder. Without the consent of each Holder affected, however, no amendment or waiver may (with respect to any Notes held by a non-consenting Holder of Notes): (a) reduce the principal amount of Notes whose Holders must consent to an amendment or waiver of any provision of this Agreement or the Notes; (b) reduce the principal of or change the fixed maturity of any Note; (c) reduce the rate of or change the time for payment of interest on any Note; (d) waive a Default or Event of Default in the payment of principal of or interest on the Notes (except a rescission of acceleration of the Notes by the Requisite Noteholders and a waiver of the payment default that resulted from such acceleration); 35 (e) make the principal of or the interest on, any Note payable in any manner other than that stated in this Agreement and the Notes; (f) make any change in the provisions of this Agreement relating to waivers of past Defaults or the rights of Holders of Notes to receive payments of principal of or interest on the Notes; (g) make any change to the subordination provisions of this Agreement that adversely affect any Holder; or (h) make any change in the foregoing amendment and waiver provisions. It shall not be necessary for the consent of the Holders under this Section 9 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment or waiver under this Section 9 becomes effective, the Company shall mail to the Holders affected thereby a notice briefly describing the amendment or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment or waiver. In connection with any amendment to this Section 9, the Company may offer, but shall not be obligated to offer, to any Holder who consents to such amendment or waiver, consideration for such Holder's consent. 9.2. Revocation and Effect of Consents Until an amendment or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent as to his Note or portion of his Note by notice to the Company received before the date on which the Requisite Noteholders have consented (and not theretofore revoked such consent) to the amendment or waiver. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment or waiver, which record date shall be at least ten (10) Business Days prior to the first solicitation of such consent. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those persons who were Holders at such record date (or their duly designated proxies), and only those persons, shall be entitled to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. After an amendment or waiver becomes effective, it shall bind every Holder, unless it makes a change described in any of clauses (a) through (g) of Section 9.1, in which case, 36 the amendment or waiver shall bind only each Holder of a Note who has consented to it and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note; provided that any such waiver shall not impair or affect the right of any Holder to receive payment of principal of and interest on a Note, on or after the respective due dates expressed in such Note, or to bring suit for the enforcement of any such payment on or after such respective dates without the consent of such Holder. 9.3. Notation on or Exchange of Notes If an amendment or waiver changes the terms of a Note, the Company may require the Holder of the Note to deliver it to the Company. The Company may place an appropriate notation on the Note about the changed terms and return it to the Holder. SECTION 10. DEFINITIONS 10.1. Definitions As used in this Agreement, the following terms shall have the following meanings: "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Company after the Closing Date, whether or not subsequently reacquired or retired by the Company, other than the Conversion Shares; provided that such term shall exclude shares of Common Stock issued under the Stock Option Plan and shares of Common Stock issued or issuable upon the conversion of Notes issued pursuant to agreements dated on or about the date of this Agreement and the warrants scheduled on the Disclosure Schedule. "Adjusted Conversion Price" shall have the meaning assigned to such term in Section 6.6(a). "Affiliate" means, with respect to any referenced Person, a Person (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such referenced Person, (ii) which directly or indirectly through one or more intermediaries beneficially owns or holds 10% or more of the combined voting power of the total Voting Securities of such referenced Person or (iii) of which 10% or more of the combined voting power of the total Voting Securities directly or indirectly through one or more intermediaries is beneficially owned or held by such referenced Person, or a Subsidiary of such referenced Person. When used herein without reference to any Person, Affiliate means an Affiliate of the Company. For purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of Voting Securities, by contract or otherwise; and the terms "affiliated," controlling" and "controlled" have meanings correlative to the foregoing. "Agent" means any Person authorized to act and who acts on behalf of the Purchasers with respect to the transactions contemplated by this Agreement, the Registration Rights Agreement or the Commitment Letter. 37 "Agreement" means this Convertible Subordinated Note Purchase Agreement dated as of March 30, 1998 by and between the Company and the Purchaser. "Approved Holder" shall have the meaning assigned to such term in Section 5.4(a)(1). "Approved Purchaser" shall have the meaning assigned to such term in Section 5.4(a)(2). "Average Closing Sales Price" as of a particular 12-month period means the average closing sales price of the Common Stock for each Business Day during such 12-month period. Such average shall be calculated as follows: (i) the average of the closing sales prices of the Common Stock quoted on the Nasdaq National Market for each Business Day during such 12-month period, or (ii) if no such quotations are available, the average of the closing sales prices for each Business Day during such 12-month period on the principal national securities exchange on which the Common Stock is listed, or (iii) if not listed on any national securities exchange, the average closing sales price for each Business Day during such 12-month period in the over-the-counter market as reported by the National Quotation Bureau, Incorporated or similar organization, or (iv) if no of such sales prices are available for each Business Day in such 12-month period, the average of the high bid and low asked quotations in the over-the-counter market as so reported for such Business Days, or (v) if no such quotations are available, the fair market value per share on such unreported Business Days as determined by an independent investment banker or appraiser, nationally recognized to be expert in making such valuations, selected by a majority of the directors of the Company. In the event "Average Closing Sales Price" is determined by an independent investment banker or appraiser pursuant to clause (v) of the foregoing sentence, such determination shall be provided to each Holder in writing together with a fair and accurate description of the basis for making such determination. The Requisite Holders shall be permitted to dispute such determination by written notice to the Company within ten (10) Business Days of receipt of such determination. In the event of such dispute, the Requisite Holders and the Company shall work together in good faith to mutually agree upon a second independent investment banker or appraiser to make a determination of "Average Closing Sales Price" whose fees and expenses shall be paid by the Company. "Average Closing Sales Price" shall be the average of the per share fair market values determined by both independent investment bankers or appraisers. "Bankruptcy Law" means title 11, U.S. Code or any similar federal or state law for the relief of debtors. "Business Day" means any day which is not a Legal Holiday. "Capital Lease" means any lease of any property which would in accordance with GAAP be required to be classified and accounted for on the balance sheet of the lessee as a capital lease. "Capitalized Lease Obligation" means, with respect to any Person for any period, any obligation of such Person to pay rent or other amounts under a Capital Lease; the amount of 38 such obligation shall be the capitalized amount thereof determined in accordance with such principles. "Capital Stock" means any and all shares, interests, participation or other equivalents (however designated) of corporate stock, including without limitation all common stock and preferred stock. "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. ss. 9601 et. seq.). "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any Person or group (as such term is used in Section 13(d)(3) of the Exchange Act); (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any Person or group (as defined above), other than Walter C. Bowen or a Related Party, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of more than 50% of the Fully Diluted Voting Securities of the Company (measured by voting power rather than number of shares) and (iv) the date on which a majority of the Board of Directors of the Company shall cease to be Continuing Directors. "Change of Control Date" shall have the meaning set forth in Section 5.4. "Change of Control Issuance Date" shall have the meaning set forth in Section 5.4. "Change of Control Issuance of Additional Shares" shall have the meaning set forth in Section 5.4. "Change of Control Notice" shall have the meaning set forth in Section 5.4. "Change of Control Price" shall have the meaning set forth in Section 5.4. "Change of Control Repurchase Date" shall have the meaning set forth in Section 5.4. "Change of Control Repurchase Offer" shall have the meaning set forth in Section 5.4. "Charter Documents" means the Articles of Organization, Articles of Incorporation or Certificate of Incorporation and Bylaws, as amended or restated (or both) to date, of the Company or a Subsidiary, as applicable. 39 "Closing" shall have the meaning set forth in Section 1.2(b). "Closing Date" shall have the meaning set forth in Section 1.2(b). "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute or law thereto. "Commitment Letter" means that certain Commitment Letter dated as of the Closing Date by and between the Company, LTC Properties and LTC West, executed concurrently herewith. "Common Stock" means the Common Stock, no par value, of the Company. "Company" means Regent Assisted Living, Inc., an Oregon corporation. "Company SEC Documents" shall have the meaning set forth in Section 3.23. "Conversion Rate" shall have the meaning set forth in Section 6.2. "Conversion Shares" means the shares of Common Stock issuable upon conversion of the Notes. "Convertible Securities" shall have the meaning set forth in Section 6.6(c). "Consolidated " or "consolidated," when used with reference to any accounting term, means the amount described by such accounting term, determined on a consolidated basis in accordance with GAAP, after elimination of intercompany items. "Consolidated Net Worth" means, with respect to any Person as of any date, the sum of (i) the consolidated equity of the common stockholders of such Person and its consolidated Subsidiaries as of such date plus (ii) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of preferred stock that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such preferred stock, less (x) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made within 12 months after the acquisition of such business) subsequent to the Closing Date in the book value of any asset owned by such Person or a consolidated Subsidiary of such Person, (y) all investments as of such date in unconsolidated Subsidiaries and in Persons that are not Subsidiaries, and (z) all unamortized debt discount and expense and unamortized deferred charges as of such date, all of the foregoing determined in accordance with GAAP. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on March 30, 1998 or (ii) was nominated for election or elected to such Board with the approval of a 40 majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. "Default" means any event which is, or after notice or passage of time would be, an Event of Default. "Determination Date" shall have the meaning set forth in Section 6.4. "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by the Company under Section 6.6, into the aggregate consideration received, or deemed to have been received by the Company for such issue under Section 6.6, for such Additional Shares of Common Stock. "Environmental Laws" shall have the meaning set forth in Section 3.13. "Equity Interest" means Capital Stock or warrants, options or other rights to acquire Capital Stock (but excluding any debt note which is convertible into, or exchangeable for, Capital Stock). "Event of Default" shall have the meaning set forth in Section 7.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended, from time to time, and any successor statute or law thereto. "Fair Market Value" of Common Stock as of a particular date means the Weighted Average trading price of the Common Stock for the ten (10) consecutive Business Day period immediately preceding such date. Such Weighted Average shall be calculated as follows: (i) the Weighted Average of the sales price of the Common Stock quoted on the Nasdaq National Market for each of such ten (10) Business Days, or (ii) if no such quotations are available, the Weighted Average sales price for such ten (10) Business Days on the principal national securities exchange on which the Common Stock is listed, or (iii) if not listed on any national securities exchange, the Weighted Average sales price for such ten (10) Business Days in the over-the-counter market as reported by the National Quotation Bureau, Incorporated or similar organization, or (iv) if no of such sales prices are available for each Business Day in such ten (10) Business Day period, the Weighted Average of the high bid and low asked quotations in the over-the-counter market as so reported for such ten (10) Business Days, or (v) if no such quotations are available, the fair market value per share on such date as determined by an independent investment banker or appraiser, nationally recognized to be expert in making such valuations, selected by a majority of the directors of the Company; provided, however, that in the event of an underwritten public offering of Common Stock, "Fair Market Value" shall mean the price to the public of such Common Stock in such underwritten public offering. In the event "Fair Market Value" is determined by an independent investment banker or appraiser pursuant to 41 clause (v) of the foregoing sentence, such determination shall be provided to each Holder in writing together with a fair and accurate description of the basis for making such determination. The Requisite Holders shall be permitted to dispute such determination by written notice to the Company within ten (10) Business Days of receipt of such determination. In the event of such dispute, the Requisite Holders and the Company shall work together in good faith to mutually agree upon a second independent investment banker or appraiser to make a determination of "Fair Market Value" whose fees and expenses shall be paid by the Company. "Fair Market Value" shall be the average of the per share fair market values determined by both independent investment bankers or appraisers. "Fully Diluted Voting Securities" means each class of Voting Securities of a Person and each class of securities of a Person that, at the time of determination, can immediately subscribe for and/or convert to Voting Securities. "GAAP" means generally accepted accounting principles as used in the United States of America and applied in a manner consistent with past practices. "Holder" or "Holders" means the Purchaser (so long as it holds any Notes) and any other holder of any of the Notes. "Incorporated Documents" means the following of the Company's documents, each as filed with the SEC: (1) Form 10-K for the year ended December 31, 1997, (2) 1997 Proxy Statement dated April 10, 1997; and (3) Form 8-K dated December 29, 1997. "Indebtedness" means, with respect to any Person, the aggregate amount of, without duplication, the following: (a) all obligations for borrowed money; (b) all obligations evidenced by bonds, debentures, notes or other similar instruments; (c) all obligations to pay the deferred purchase price of property or services, except Trade Payables and obligations that do not exceed $300,000 in the aggregate, accrued commissions and other similar accrued current liabilities in respect of such obligations, in any case, not overdue and arising in the ordinary course of business; (d) all Capitalized Lease Obligations; (e) all obligations or liabilities of others secured by a lien on any asset owned by such Person or Persons whether or not such obligation or liability is assumed; (f) all obligations of such Person or Persons, contingent or otherwise, in respect of any letters of credit or bankers' acceptances; and (g) all guaranties. 42 "Indemnified Parties" shall have the meaning set forth in Section 5.6. "Independent Auditors" shall mean the independent certified public accountants of the Company. Until December 29, 1997, the Independent Auditors were Coopers & Lybrand, L.L.P. After such date and as of the date of the Agreement, the Independent Auditors are KPMG Peat Marwick LLP. "Inspectors" shall have the meaning set forth in Section 5.13. "Intangibles" shall have the meaning set forth in Section 3.16. "Junior Claims" shall have the meaning set forth in Section 8.7. "Key Employee" means Walter C. Bowen. "Knowledge of the Company" means to the actual knowledge of each of the Chairman, Chief Executive Officer, Chief Financial Officer, General Counsel, President, Treasurer and any Senior or Executive Vice President of the Company, after due inquiry and investigation. "Legal Holiday" means a Saturday, Sunday or day on which banks and trust companies in the principal place of business of the Company or in California are not required to be open. If a payment date is a Legal Holiday, payment may be made on the next succeeding day that is not a Legal Holiday, and interest shall accrue for the intervening period. "Lien" means any mortgage, pledge, lien, taxes, encumbrance, charge or adverse claim affecting title or resulting in a charge against real or personal property, or note interest of any kind (including, without limitation, any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Losses" shall have the meaning set forth in Section 5.6. "LTC Properties" means LTC Properties, Inc., a Maryland corporation. "LTC West" means LTC West, Inc., a Nevada corporation. "Material Adverse Effect" means (i) any adverse effect upon the issuance, validity or enforceability of a Note, this Agreement, the Registration Rights Agreement or the Commitment Letter, (ii) any material adverse effect on the results of operations, financial condition, properties, assets, business or prospects of the Company and its Subsidiaries, taken as a whole, or (iii) any adverse effect on the ability of the Company to fulfill its obligations under the Notes, this Agreement, the Registration Rights Agreement or the Commitment Letter or any document contemplated hereby or thereby. "Material Contract" shall have the meaning set forth in Section 3.17. 43 "Maturity Date" means March 31, 2008. "Note Register" shall have the meaning set forth in Section 1.3. "Note" or "Notes" shall have the meaning set forth in Section 1.1. "Officers' Certificate" means a certificate signed by any two officers, one of whom must be the Chairman of the Board, the President, the Treasurer or a Vice President of the Company. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Purchaser. "Payment" or "Distribution" shall have the meaning set forth in Section 8.1. "Person" means an individual, partnership, corporation, limited liability company, trust or unincorporated organization or a government or agency or political subdivision thereof. "Plan of Liquidation" means, with respect to any Person, a plan that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously, in phases or otherwise) (i) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such person otherwise than as an entirety or substantially as an entirety and (ii) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition and all or substantially all of the remaining assets of such Person to holders of Capital Stock of such Person. "Preferred Stock" means the Series A Preferred Stock, no par value, and the Series B Preferred Stock, no par value, of the Company. "Property" or "property" means any assets or property of any kind or nature whatsoever, real, personal or mixed (including fixtures), whether tangible or intangible, provided that the terms "Property" or "property", when used with respect to any Person, shall not include Notes issued by such. "Purchaser" means the purchaser on the signature pages hereto. "Registration Rights Agreement" means that certain Registration Rights Agreement dated as of the Closing Date by and among the Company and the Purchaser, executed concurrently herewith. "Related Party" with respect to Walter C. Bowen means (A) any spouse or immediate family member of such Person or (B) or trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of Walter C. Bowen and/or such other Persons referred to in the immediately preceding clause (A). "Reorganizations" shall have the meaning set forth in Section 6.5. 44 "Requisite Noteholders" shall mean the holders of Notes whenever issued to the Purchaser pursuant to this Agreement and the Notes issued to all other purchasers pursuant to similar agreements dated on or about the date of this Agreement with an aggregate principal amount equal to or greater than 50% of the aggregate principal amount of all then outstanding Notes whenever issued to the Purchaser pursuant to this Agreement and the Notes issued to all other purchasers pursuant to similar agreements dated on or about the date of this Agreement. "Rights" shall have the meaning assigned to such term in Section 6.6(c). "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended from time to time, and any successor statute or law thereto. "Senior Claims" shall have the meaning set forth in Section 8.7. "Senior Indebtedness" means the principal of, premium, if any, and accrued interest on any other Indebtedness of the Company and all fees, expenses, reimbursements, indemnities and other amounts payable with respect to such Indebtedness, whether such Indebtedness is outstanding on the date of this Agreement or thereafter created, incurred, assumed, or guaranteed by the Company unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such Indebtedness shall not be senior, or is pari passu or subordinate, in right or payment to the Notes; provided that Senior Indebtedness shall not include (i) in the case of each Note the other Notes (ii) Indebtedness of the Company to a Subsidiary of the Company, (iii) Indebtedness of or amounts owed by the Company for compensation to directors or members of senior management that has not been approved by the Compensation Committee of the Board; (iv) Indebtedness guaranteed by the Company on behalf of any equityholder, director, officer or employee of the Company or of any equityholder, director, officer or employee of any of the Company's Subsidiaries, (v) any Trade Payables (including without limitation Indebtedness incurred for the purchase of goods or materials or for services obtained in the ordinary course of business), (vi) Indebtedness of the Company that is subordinated by its terms in right of payment to any other Indebtedness of the Company, and (vii) Indebtedness incurred in violation of this Agreement. "Senior Representative" shall have the meaning set forth in Section 8.7. "Subordinated Indebtedness" means the principal, premium, if any, and interest on any Indebtedness of the Company which by its terms is expressly subordinated in right of payment to the Notes. "Subsidiary" means, with respect to any Person (the "parent"), any corporation, association or other business entity of which Notes or other ownership interests representing more than 50% of the ordinary voting power are, at the time as of which any determination is being made, owned or controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. 45 "Stock Option Plan" shall mean the Company's 1995 Stock Incentive Plan as in effect on the Closing Date. "Surviving Person" shall have the meaning set forth in Section 5.7(b)(1). "Total Price" means, with respect to the Common Stock on any Business Day, the product of: (x) the closing sales price of the Common Stock quoted on the Nasdaq National Market on such Business Day, or if no such quotations are available, on the principal national securities exchange on which the Common Stock is listed on such Business Day, or if not listed on any national securities exchange, in the over-the-counter market as reported by the National Quotation Bureau, Incorporated or similar organization on such Business Day, or if no such sales prices are available, the high bid and low asked quotations in the over-the-counter market on such Business Day multiplied by (y) the number of shares of Common Stock traded on such market or exchange, as applicable, on such Business Day. "Trade Payables" means, with respect to any Person, accounts payable and other similar accrued current liabilities in respect of obligations or indebtedness to trade creditors created, assumed or guaranteed by such Person or any of its Subsidiaries in the ordinary course of business in connection with the obtaining of property or services. "Voting Securities" means any class of Equity Interests of a Person pursuant to which the holders thereof have, at the time of determination, the general voting power under ordinary circumstances to vote for the election of directors, managers, trustees or general partners of any Person (irrespective of whether or not at the time any other class or classes will have or might have voting power by reason of the happening of any contingency). "Weighted Average" means, with respect to the Common Stock during any ten (10) consecutive Business Day period, the sum of the Total Price of such Common Stock for each Business Day during such ten (10) consecutive Business Day period divided by ten (10). 10.2. Rules of Construction Unless the context otherwise requires (a) a term has the meaning assigned to it; (b) "or" is not exclusive; (c) words in the singular include the plural, and words in the plural include the singular; (d) provisions apply to successive events and transactions; (e) "herein," "hereof" and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision; and 46 (f) the masculine shall include the feminine and neuter genders as appropriate. SECTION 11. MISCELLANEOUS 11.1. Notices All notices and other communications provided for or permitted hereunder shall be made by hand-delivery, first-class mail, telex, telecopier, or overnight air courier guaranteeing next day delivery: (a) if to any Purchaser at address set forth on the signature pages hereto, with a copy to Latham & Watkins, 633 W. Fifth Street, Suite 4000, Los Angeles, California 90071, Attention: Eva Herbst Davis, Esq.; and (b) if to the Company, to Regent Assisted Living, Inc., 121 SW Morrison, Suite 1000, Attention: General Counsel with a copy to Stoel Rives LLP, 900 SW Fifth Avenue, Suite 2300, Portland, Oregon 97204, Attention: Todd Bauman, Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. The parties may change the addresses to which notices are to be given by giving five days' prior notice of such change in accordance herewith. 11.2. Undertaking for Costs In any suit for the enforcement of any right or remedy under this Agreement, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. 11.3. Successors and Assigns This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties. 11.4. Counterparts This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 47 11.5. Headings The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 11.6. Governing Law This Agreement shall be governed by and construed in accordance with the internal laws of the State of California. 11.7. Entire Agreement This Agreement, together with the Notes, the Registration Rights Agreement and the Commitment Letter is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, together with the Notes, the Registration Rights Agreement and the Commitment Letter supersedes all prior agreements and understandings between the parties with respect to such subject matter. 11.8. Severability In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected, it being intended that the Purchaser's rights and privileges shall be enforceable to the fullest extent permitted by law. 11.9. Transfer The Notes may not be transferred, sold, assigned, pledged, hypothecated or otherwise disposed of unless (a) such transfer is pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or (b) the Company has been furnished with a satisfactory opinion of counsel for the Holder, at such Holder's expense, that such transfer is exempt from the provisions of Section 5 of the Securities Act, the rules and regulations in effect thereunder and any applicable state securities laws. 48 IN WITNESS WHEREOF, this Agreement has been duly executed by the parties set forth below as of the date first written above. REGENT ASSISTED LIVING, INC., an Oregon corporation By: WALTER C. BOWEN ------------------------------------------------- Name: Walter C. Bowen Title: President LTC EQUITY HOLDING COMPANY, INC., a Nevada corporation By: JAMES J. PIECZYNSKI -------------------------------------------------- Name: James J. Pieczynski Title: President and Chief Financial Officer Address: 300 Esplanade Drive, Suite 1860 Oxnard, California 93030 49 ANNEX A THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (A) SUCH TRANSFER IS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (B) THE COMPANY HAS BEEN FURNISHED WITH A SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER THAT SUCH TRANSFER IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF THE ACT, THE RULES AND REGULATIONS IN EFFECT THEREUNDER AND ANY APPLICABLE STATE SECURITIES LAWS. REGENT ASSISTED LIVING, INC. CONVERTIBLE SUBORDINATED NOTE DUE MARCH 31, 2008 Note No. ________ $_______________________ FOR VALUE RECEIVED, the undersigned, REGENT ASSISTED LIVING, INC., a corporation organized and existing under the laws of Oregon (herein called the "Company"), hereby promises to pay to the order of ____________________________ or registered assigns ("Holder"), the principal sum of ___________________________ DOLLARS (or so much thereof as shall remain outstanding) on March 31, 2008. Payments are to be made as provided in the Agreement (as defined herein). This Note is one of the Notes issued pursuant to the Convertible Subordinated Note Purchase Agreement dated as of March 30, 1998 (the "Agreement"), by and between the Company and LTC Equity Holding Company, Inc., a Nevada corporation, and is also entitled to the benefits thereof to the extent provided in the Agreement. This Note is subject to (i) conversion, in whole or in part, at the option of the Holder, pursuant to Section 6.1(a) of the Agreement, (ii) conversion, in whole but not in part, at the option of the Company upon the satisfaction of certain conditions pursuant to Section 6.1(b) of the Agreement and (iii) repurchase, in whole or in part, upon a Change of Control pursuant to Section 5.4 of the Agreement. Upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. The Company may deem and treat the person in whose name this Note is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary. If an Event of Default shall occur and be continuing, this Note may, under certain circumstances, become or be declared due and payable in the manner and with the effect provided in the Agreement. Certain terms and provisions of this Note may be amended or compliance herewith waived on the terms and provisions provided for in the Agreement. The Note is subordinated in both right of payment and time of payment to certain Senior Indebtedness, as defined and described in Section 8 of the Agreement. Capitalized terms used herein without definition shall have the meaning set forth for such terms in the Agreement. REGENT ASSISTED LIVING, INC., an Oregon corporation By:__________________________________ Name: Title: 2 ANNEX B FORM OF OPINION OF COMPANY COUNSEL 1. The Company and each of its Subsidiaries are corporations duly organized and validly existing in good standing under the laws of their respective jurisdictions of incorporation. 2. The Company and each of its Subsidiaries have all requisite power and authority to own or hold under lease the properties it purports so to own or hold except where the failure so to own or hold could not have a Material Adverse Effect and to transact their respective businesses as now transacted and proposed to be transacted. 3. The Company and each of its Subsidiaries are duly qualified as foreign corporations and are in good standing in each jurisdiction in which the character of the properties owned or held under lease by them or the nature of the business transacted by them requires such qualification, except where the failure so to be qualified or be in good standing could not have a Material Adverse Effect. 4. The Company has taken all actions necessary to authorize it (i) to execute, deliver and perform all of its obligations under the Agreement, the Registration Rights Agreement and the Commitment Letter, (ii) to issue and perform all of its obligations under the Notes and (iii) to consummate the transactions contemplated hereby and thereby. 5. The total number of shares of Capital Stock which the Company has authority to issue is 30,000,000 shares, consisting of 25,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. 6. As of March 30, 1998, there were 4,633,000 shares of Common Stock issued and outstanding, and 1,666,667 shares of Preferred Stock issued and outstanding. Such shares of Common Stock and Preferred Stock have been duly authorized and were validly issued, are fully paid and nonassessable, were issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities of the Company. 7. Neither the Company nor any of its Subsidiaries has outstanding any securities convertible into or exchangeable for any shares of Capital Stock nor does it have outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, any Capital Stock or securities convertible into or exchangeable for any Capital Stock other than (i) the Notes to be issued pursuant to the Agreement or pursuant to other similar agreements dated on or about the date of this Agreement, (ii) 1,666,667 shares of Preferred Stock convertible into Common Stock, and (iii) options and warrants to purchase shares of Common Stock as set forth and for the numbers of shares set forth in the Disclosure Schedule to the Agreement. 8. The Company has duly authorized and reserved for issuance the Conversion Shares, and the Conversion Shares will, when issued, be duly and validly issued, fully paid and nonassessable and free from all Liens. 9. Neither the execution or delivery of the Agreement, the Registration Rights Agreement or the Commitment Letter by the Company nor the issuance, sale or delivery of the Notes nor the performance of its respective obligations hereunder or thereunder will: (a) violate any provision of the Charter Documents of the Company; (b) violate any statute, law, rule or regulation or any judgment, decree, order, regulation or rule of any court or governmental authority to which the Company, any of its Subsidiaries, or any of their respective properties may be subject; (c) permit or cause the acceleration of the maturity of any debt or obligation of the Company or any of its Subsidiaries; (d) violate, or be in conflict with, or constitute a default under, or permit the termination of, or require the consent of any Person under, or result in the creation of any Lien upon any property of the Company or any of its Subsidiaries under, any mortgage, indenture, loan agreement, note, debenture or other agreement for borrowed money or any other material agreement to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries (or their respective properties) may be bound, other than such violations, conflicts, defaults, terminations and Liens, or such failures to obtain consents, which could not reasonably be expected to result in a Material Adverse Effect. 10. The sale of the Notes hereunder is exempt from the registration and prospectus delivery requirements of the Securities Act. 11. Neither the Company nor any of its Subsidiaries is an "investment company" or a Person directly or indirectly "controlled" by or acting on behalf of an "investment company" within the meaning of the United States Investment Company Act of 1940, as amended. 2 EX-4.3 4 CONVERTIBLE SUBORDINATED NOTE THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (A) SUCH TRANSFER IS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (B) THE COMPANY HAS BEEN FURNISHED WITH A SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER THAT SUCH TRANSFER IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF THE ACT, THE RULES AND REGULATIONS IN EFFECT THEREUNDER AND ANY APPLICABLE STATE SECURITIES LAWS. REGENT ASSISTED LIVING, INC. CONVERTIBLE SUBORDINATED NOTE DUE MARCH 31, 2008 Issue Date: March 31, 1998 Note No. 1998-1 $4,000,000 FOR VALUE RECEIVED, the undersigned, REGENT ASSISTED LIVING, INC., a corporation organized and existing under the laws of Oregon (herein called the "Company"), hereby promises to pay to the order of LTC EQUITY HOLDING COMPANY, INC. or registered assigns ("Holder"), the principal sum of FOUR MILLION DOLLARS (or so much thereof as shall remain outstanding) on March 31, 2008. Payments are to be made as provided in the Agreement (as defined herein). This Note is one of the Notes issued pursuant to the Convertible Subordinated Note Purchase Agreement dated as of March 30, 1998 (the "Agreement"), by and between the Company and LTC Equity Holding Company, Inc., a Nevada corporation, and is also entitled to the benefits thereof to the extent provided in the Agreement. This Note is subject to (i) conversion, in whole or in part, at the option of the Holder, pursuant to Section 6.1(a) of the Agreement, (ii) conversion, in whole but not in part, at the option of the Company upon the satisfaction of certain conditions pursuant to Section 6.1(b) of the Agreement and (iii) repurchase, in whole or in part, upon a Change of Control pursuant to Section 5.4 of the Agreement. Upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. The Company may deem and treat the person in whose name this Note is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary. If an Event of Default shall occur and be continuing, this Note may, under certain circumstances, become or be declared due and payable in the manner and with the effect provided in the Agreement. Certain terms and provisions of this Note may be amended or compliance herewith waived on the terms and provisions provided for in the Agreement. The Note is subordinated in both right of payment and time of payment to certain Senior Indebtedness, as defined and described in Section 8 of the Agreement. Capitalized terms used herein without definition shall have the meaning set forth for such terms in the Agreement. REGENT ASSISTED LIVING, INC., an Oregon corporation By: WALTER C. BOWEN ------------------------------------- Walter C. Bowen President EX-4.4 5 CONVERTIBLE SUB. NOTE PUR. AGT. (DIMITRIADIS) ------------------------------------------------------------------- REGENT ASSISTED LIVING, INC. and ANDRE C. DIMITRIADIS $160,000 Principal Amount of 7.5% Convertible Subordinated Notes Due March 31, 2008 CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT ------------------------------------------------------------------ Dated as of March 30, 1998 TABLE OF CONTENTS Page SECTION 1. PURCHASE AND SALE OF NOTES..... ....................................1 1.1. Issue of Notes...................................................1 1.2. Purchase and Sale of Notes.......................................1 1.3. Maintenance of Note Register.....................................2 1.4. Issue Taxes......................................................2 1.5. Direct Payment...................................................3 1.6. Lost, Etc. Notes.................................................3 SECTION 2. CLOSING CONDITIONS..................................................4 2.1. Delivery of Documents............................................4 2.2. Delivery of Other Agreements.....................................5 2.3. Representations and Warranties, Agreements and Covenants.........5 2.4. No Event of Default..............................................6 2.5. Proceedings Satisfactory.........................................6 2.6. Consents and Permits.............................................6 2.7. No Material Adverse Change.......................................6 SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................6 3.1. Organization; Power and Authority................................6 3.2. Authorization....................................................7 3.3. Capital Stock....................................................7 3.4. No Other Registration Rights.....................................7 3.5. No Violation or Conflict; No Default.............................8 3.6. Margin Regulations...............................................8 3.7. Private Offering.................................................8 3.8. Due Authorization of Material Contracts..........................9 3.9. Financial Statements.............................................9 3.10. Litigation; Judgments..........................................10 3.11. Taxes..........................................................10 i 3.12. Investment Company Act.........................................10 3.13. Environmental Matters..........................................10 3.14. Labor Relations................................................11 3.15. Real Property; Leases..........................................11 3.16. Intellectual Property; Licenses................................11 3.17. Defaults.......................................................12 3.18. Brokers........................................................12 3.19. Existing Indebtedness..........................................12 3.20. Compliance with Law; Permits...................................13 3.21. Insurance......................................................13 3.22. Material Events................................................13 3.23. SEC Documents; Undisclosed Liabilities.........................14 3.24. Material Misstatements or Omissions............................15 3.25. Survival of Representations and Warranties.....................15 SECTION 4. REPRESENTATIONS AND WARRANTIES OF EACH PURCHASER...................15 4.1. Purchase for Own Account........................................15 4.2. Accredited Investor.............................................16 4.3. Authorization...................................................16 4.4. Brokers.........................................................16 SECTION 5. COVENANTS..........................................................16 5.1. Payment of Notes; Satisfaction of Obligations...................16 5.2. Notice of Default...............................................17 5.3. Limitation on Additional Indebtedness...........................17 5.4. Change of Control...............................................17 5.5. Stay, Extension and Usury Laws..................................18 5.6. Indemnification.................................................19 5.7. Corporate Existence; Merger; Successor Corporation..............20 5.8. Taxes...........................................................21 5.9. Investment Company Act..........................................21 5.10. Insurance......................................................22 ii 5.11. Inconsistent Agreements........................................22 5.12. Compliance with Laws...........................................22 5.13. Inspection of Properties and Records...........................22 SECTION 6. CONVERSION OF NOTES................................................23 6.1. Conversion......................................................23 6.2. Conversion Rate.................................................24 6.3. Fractional Shares...............................................24 6.4. Adjustments for Stock Splits, Combinations and Dividends........24 6.5. Reorganization, Mergers, Consolidations or Sales of Assets......25 6.6. Sale of Shares Below Market or Conversion Price.................25 6.7. Adjustment for Failure to Quote on Nasdaq National Market.......27 6.8. Accountants' Certificate of Adjustment..........................27 6.9. Reservation of Shares Issuable Upon Conversion..................27 6.10. No Impairment..................................................28 SECTION 7. DEFAULTS AND REMEDIES..............................................28 7.1. Events of Default...............................................28 7.2. Acceleration of Notes...........................................29 7.3. Other Remedies..................................................29 SECTION 8. SUBORDINATION......................................................30 8.1. Notes Subordinated to Senior Indebtedness.......................30 8.2. Company Not to Make Payments with Respect to Notes in Certain Circumstances...........................................30 8.3. Subrogation of Notes............................................32 8.4. No Impairment of Subordination..................................32 8.5. Section 8 Not to Prevent Events of Default......................32 8.6. Securities Senior to Subordinated Indebtedness..................32 8.7. Assignment of Junior Claims.....................................33 SECTION 9. AMENDMENTS AND WAIVERS.............................................33 9.1. With Consent of Holders.........................................33 9.2. Revocation and Effect of Consents...............................34 iii 9.3. Notation on or Exchange of Notes................................35 SECTION 10. DEFINITIONS.......................................................35 10.1. Definitions....................................................35 10.2. Rules of Construction..........................................44 SECTION 11. MISCELLANEOUS.....................................................45 11.1. Notices........................................................45 11.2. Undertaking for Costs..........................................45 11.3. Successors and Assigns.........................................46 11.4. Counterparts...................................................46 11.5. Headings.......................................................46 11.6. Governing Law..................................................46 11.7. Entire Agreement...............................................46 11.8. Severability...................................................46 11.9. Transfer.......................................................46 iv CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT This CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT, is dated as of March 30, 1998 (this "Agreement"), and entered into by and between REGENT ASSISTED LIVING, INC., an Oregon corporation (the "Company") and ANDRE C. DIMITRIADIS, an individual (the "Purchaser"). Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in Section 10.1 hereof. In consideration of the premises, mutual covenants and agreements hereinafter contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company agrees as follows: SECTION 1. PURCHASE AND SALE OF NOTES 1.1. Issue of Notes On or before the Closing, (a) The Company will have authorized the issue and sale of $160,000 aggregate principal amount of its 7.5% Convertible Subordinated Notes due March 31, 2008 (the "Notes") to the Purchaser, to be substantially in the form attached hereto as Annex A. (b) The Notes shall be substantially in the form attached hereto as Annex A, including such other notations, legends or endorsements set forth therefor or required by law. The Notes shall be dated the date of their issuance. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Agreement and, to the extent applicable, the Company and the Purchaser, by their execution and delivery of this Agreement, expressly agree to such terms and provisions and to be bound thereby. 1.2. Purchase and Sale of Notes (a) Purchase and Sale. The Company agrees to sell and, subject to the terms and conditions set forth herein and in the Registration Rights Agreement and in reliance on the representations and warranties of the Company contained or incorporated herein, the Purchaser agrees to purchase the Notes for an aggregate purchase price of $160,000. (b) Closing. The purchase and sale of the Notes referred to in Section 1.2(a)(1) shall take place at a closing (the "Closing") at the offices of Latham & Watkins, 633 West Fifth Street, Suite 4000, Los Angeles, California at 2:00 p.m. on March 30, 1998 (the "Closing Date"). At the Closing, the Company will deliver to the Purchaser the Notes to be purchased by the Purchaser (in such permitted denomination or denominations and registered in the Purchaser's name or the name of such nominee or nominees as the Purchaser may request) on the Closing Date, dated the Closing Date, against payment of the purchase price therefor by intra-bank or federal funds bank wire transfer of same day funds to such bank account as the Company shall designate at least two Business Days prior to the Closing. (c) Fees and Expenses. Whether or not the Notes are sold, the Company agrees to pay or reimburse all expenses relating to this Agreement, including but not limited to: (1) the reasonable fees and other expenses of the Purchaser's counsel, Latham & Watkins, in connection herewith (not to exceed $50,000 in the aggregate, relating to this Agreement and similar agreements dated on or about the date of this Agreement); (2) any reasonable out-of-pocket fees and expenses (including the reasonable fees and expenses of counsel) in connection with any registration or qualification of the Notes required in connection with the offer and sale of the Notes at the Closing pursuant to this Agreement under the securities or "blue sky" laws of any jurisdiction requiring such registration or qualification or in connection with obtaining any exemptions from such requirements; and (3) the Purchaser's reasonable out-of-pocket expenses (including the reasonable fees and expenses of counsel) relating to any amendment, or modification of, or any waiver, or consent or preservation of rights under this Agreement, the Notes, the Registration Rights Agreement and any other documents contemplated hereby or thereby. Purchaser may deduct such expenses from the purchase price of the Notes; provided that the Purchaser agrees to provide the Company with a statement describing any amounts to be so paid at least one Business Day prior to the Closing. 1.3. Maintenance of Note Register The Company shall cause to be kept at its principal office a register for the registration and transfer of the Notes (the "Note Register"). The names and addresses of the Holders of Notes, the transfer of Notes, and the names and addresses of the transferees of the Notes shall be registered in the Note Register. The Person in whose name any registered Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes of this Agreement and the Company shall not be affected by any notice to the contrary, until due presentment of such Note for registration of transfer so provided in this Section 1.3. Payment of or on account of the principal and interest on any registered Notes shall be made to or upon the written order of such registered holder. 1.4. Issue Taxes The Company agrees to pay all taxes owed by or on behalf of the Company in connection with the issuance, sale, delivery or transfer by the Company to the Purchaser of the Notes and the execution and delivery of the agreements and instruments contemplated hereby and any modification of any of such Notes, agreements and instruments and will save the 2 Purchaser harmless without limitation as to time against any and all liabilities with respect to all such taxes. The Purchaser agrees to pay all taxes owed by or on behalf of the Purchaser in connection with the issuance, sale, delivery or transfer by the Company to the Purchaser of the Notes and the execution and delivery of the agreements and instruments contemplated hereby and any modification of any of such Notes, agreements and instruments and will save the Company harmless without limitation as to time against any and all liabilities with respect to all such taxes. The obligations of the Company and the Purchaser under this Section 1.4 shall survive the payment or prepayment of the Notes and the termination of this Agreement. 1.5. Direct Payment (a) The Company will pay or cause to be paid all amounts payable with respect to any Note (without any presentment of such Note and without any notation of such payment being made thereon) by crediting (before 11:00 a.m., Pacific time), by federal funds bank wire transfer to each Holder's account in any bank in the United States as may be designated and specified in writing by such Holder at least two Business Days prior thereto. (b) Notwithstanding anything to the contrary contained in the Notes, if any principal amount payable with respect to a Note is payable on a Legal Holiday, then the Company shall pay such amount on the next succeeding Business Day, and interest shall accrue on such amount until the date on which such amount is paid and payment of such accrued interest shall be made concurrently with the payment of such amount, provided that the Company may elect to pay in full (but not in part) any such amount on the last Business Day prior to the date such payment otherwise would be due, and no such additional interest shall accrue on such amount. Notwithstanding anything to the contrary contained in the Notes, if any interest payable with respect to a Note is payable on a Legal Holiday, then the Company shall pay such interest on the next succeeding Business Day, and such extension of time shall be included in the computation of the interest payment, provided that the Company may elect to pay in full (but not in part) any such interest on the last Business Day prior to the date such payment otherwise would be due, and such diminution in time may, at the Company's option, be included in the computation of the interest payment. 1.6. Lost, Etc. Notes Notwithstanding any provision to the contrary, if any Note of which the Purchaser or any other Holder (or nominee thereof) which is a transferee is the owner is mutilated, destroyed, lost or stolen, then the affidavit of the Purchaser or such Holder, if an individual, or of the Purchaser's or such Holder's treasurer or assistant treasurer (or other authorized officer), if a Person other than an individual, briefly setting forth the circumstances with respect to such mutilation, destruction, loss or theft, shall be accepted as satisfactory evidence thereof, and no indemnity, note or payment of charges or expenses shall be required as a condition to the execution and delivery by the Company or the transfer agent with respect to such Note, of new Notes for a like aggregate principal amount or number of shares, as applicable, in substitution therefor, other than such Purchaser's or such Holder's unsecured written agreement reasonably 3 satisfactory to indemnify the Company or the transfer agent, as the case may be, which written agreement may be required by the Company. SECTION 2. CLOSING CONDITIONS The obligations of the Purchaser to purchase and pay for the Notes to be delivered to such Purchaser at the Closing shall be subject to the satisfaction of the following conditions on or before the Closing Date: 2.1. Delivery of Documents The Company shall have delivered to the Purchaser, in form and substance reasonably satisfactory to the Purchaser, the following: (a) The Notes being purchased by the Purchaser pursuant to Section 1.2(a)(1), duly executed by the Company, in the aggregate principal amount of $160,000. (b) An opinion, dated the Closing Date and addressed to the Purchaser, from David R. Gibson, counsel for the Company, as to the matters set forth on Annex B. In rendering such opinion, such counsel may rely as to factual matters upon certificates or other documents furnished by officers and directors of the Company (copies of which shall be delivered to the Purchaser) and by government officials, and upon such other documents as such counsel reasonably deems appropriate as a basis for its opinion. Such counsel shall opine as to the federal laws of the United States, the laws of the State of Oregon. (c) Resolutions of the Board of Directors of the Company, certified by the Secretary or Assistant Secretary, to be duly adopted and in full force and effect on the Closing Date, authorizing (i) the execution, delivery and performance of this Agreement, the Registration Rights Agreement and the Commitment Letter and the consummation of transactions contemplated hereby and thereby, (ii) the issuance of the Notes to be purchased by the Purchaser and (iii) specific officers to execute and deliver this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter. (d) Certificates executed by any two executive officers of the Company, dated the Closing Date, certifying (i) that all of the conditions set forth in Section 2 of this Agreement are satisfied on and as of such date, (ii) that all of the representations and warranties of the Company contained or incorporated by reference herein that (A) are qualified as to materiality are true and correct on and as of such date as though made on and as of such date and that (B) are not qualified as to materiality are true and correct in all material respects on and as of such date as though made on and as of such date, and no event has occurred and is continuing, or would result from the issuance of the Notes or the extension of borrowings under the Commitment Letter, which constitutes or would constitute a Default or an Event of Default and (iii) as to such other matters as the Purchaser may request in the exercise of its reasonable discretion. 4 (e) Governmental certificates, dated the most recent practicable date but in no event more than thirty (30) calendar days prior to the Closing Date showing that the Company was incorporated under the Oregon Business Corporation Act, is active on the records of the Corporation Division and is qualified as a foreign corporation and in good standing in all other jurisdictions in which it is qualified to transact business, except where the failure to be so qualified would not have a Material Adverse Effect. (f) Copies of each consent, license and approval required in connection with the execution, delivery and performance by the Company of this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter and the consummation of the transactions contemplated hereby and thereby. (g) Copies of the Charter Documents of the Company, certified as of a recent date but in no event more than thirty (30) calendar days prior to the Closing Date by the Secretary of State of the State of Oregon and certified by the Secretary or Assistant Secretary of the Company (or person possessing comparable authority of the Company), as true and correct on and as of the Closing Date. (h) Certificates of the Secretary or an Assistant Secretary of the Company as to the incumbency and signatures of the officers or representatives of such entity executing this Agreement, the Notes, the Registration Rights Agreement, the Commitment Letter and any other certificate or other document to be delivered pursuant hereto or thereto on the Closing Date, together with evidence of the incumbency of such Secretary or Assistant Secretary; (i) Copies of all agreements associated with or entered into in connection with the investment of Prudential Private Equity Investors III, L.P. in the Company's Preferred Stock and if requested by the Purchaser prior to the Closing Date, copies of all lease agreements to which the Company is a party. 2.2. Delivery of Other Agreements The Company shall have executed and delivered the Registration Rights Agreement and the Commitment Letter. 2.3. Representations and Warranties, Agreements and Covenants All of the representations and warranties of the Company contained herein that (A) are qualified as to materiality shall be true and correct on and as of the Closing Date, except to the extent any representation or warranty expressly relates to an earlier date and that (B) are not qualified as to materiality are true and correct in all material respects on and as of the Closing Date, except to the extent any representation or warranty expressly relates to an earlier date. The Company shall have performed or complied with all agreements, covenants and conditions contained herein and in the Registration Rights Agreement and the Commitment Letter which are required to be performed or complied with by the Company on or before the Closing Date. 5 2.4. No Event of Default No event shall have occurred and be continuing, or would result from the purchase of the Notes or the extension of borrowings pursuant to the Commitment Letter, which constitutes or would constitute a Default or an Event of Default. 2.5. Proceedings Satisfactory All proceedings taken in connection with the sale of the Notes, the transactions contemplated hereby, and all documents and papers relating thereto, shall be reasonably satisfactory to the Purchaser. The Purchaser and its counsel shall have received copies of such documents and papers as they may reasonably request in connection therewith, all in form and substance satisfactory to the Purchaser. Any document annexed to this Agreement or any other document contemplated by this Agreement not approved by the Purchaser in writing as to form and substance on the date this Agreement is executed shall be satisfactory in form and substance to the Purchaser. 2.6. Consents and Permits The Company shall have received all consents, approvals, and authorizations and sent or made all notices, filings, registrations and qualifications required for the issuance of the Notes, all of which are disclosed on the Disclosure Schedule. 2.7. No Material Adverse Change Since the date of this Agreement, neither the Company nor any of its Subsidiaries shall have suffered any material adverse change in its properties, business, prospects, operations, earnings, assets, liabilities or condition (financial or otherwise) which would reasonably likely to result in a Material Adverse Effect. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth in the Disclosure Schedule attached to this Agreement (each scheduled item contained therein referencing the Section of this Agreement that it qualifies), the Company represents and warrants as follows: 3.1. Organization; Power and Authority The Company and each of its Subsidiaries are corporations duly organized and validly existing in good standing under the laws of their respective jurisdictions of incorporation. The Company and each of its Subsidiaries have all requisite power and authority to own or hold under lease the properties it purports so to own or hold except where the failure so to own or hold could not have a Material Adverse Effect and to transact their respective businesses as now transacted. The Company and each of its Subsidiaries are duly qualified as foreign corporations and are in good standing in each jurisdiction in which the character of the properties owned or held under lease by them or the nature of the business transacted by them requires such 6 qualification, except where the failure so to be qualified or be in good standing could not have a Material Adverse Effect. 3.2. Authorization The Company has taken all actions necessary to authorize it (i) to execute, deliver and perform all of its obligations under this Agreement, the Registration Rights Agreement and the Commitment Letter, (ii) to issue and perform all of its obligations under the Notes and (iii) to consummate the transactions contemplated hereby and thereby. Each of this Agreement, the Notes, the Registration Rights Agreement, and the Commitment Letter is a legally valid and binding obligation of the Company, enforceable against it in accordance with its terms, except for (a) the effect thereon of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting the rights of creditors generally and (b) limitations imposed by federal or state law or equitable principles upon the specific enforceability of any of the remedies, covenants or other provisions thereof and upon the availability of injunctive relief or other equitable remedies. 3.3. Capital Stock The total number of shares of Capital Stock which the Company has authority to issue is 30,000,000 shares, consisting of 25,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. The Company has the power and authority and has taken all actions (corporate or other) necessary to authorize it to enter into and perform its obligations and undertakings under this Agreement. As of March 30, 1998, there were 4,633,000 shares of Common Stock issued and outstanding, and 1,666,667 shares of Preferred Stock issued and outstanding. Such shares of Common Stock and Preferred Stock have been duly authorized and were validly issued, are fully paid and nonassessable, were issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities of the Company. Neither the Company nor any of its Subsidiaries has outstanding any securities convertible into or exchangeable for any shares of Capital Stock nor does it have outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, any Capital Stock or securities convertible into or exchangeable for any Capital Stock other than (i) the Notes to be issued pursuant to this Agreement or pursuant to other similar agreements dated on or about the date of this Agreement, (ii) 1,666,667 shares of Preferred Stock convertible into Common Stock, and (iii) options and warrants to purchase shares of Common Stock as set forth and for the numbers of shares set forth on the Disclosure Schedule. The Company has duly authorized and reserved for issuance the Conversion Shares, and the Conversion Shares will, when issued, be duly and validly issued, fully paid and nonassessable and free from all Liens. 3.4. No Other Registration Rights Except for the Notes to be issued in connection with the transactions contemplated by this Agreement or pursuant to other similar agreements dated on or about the date of this Agreement, there are no contracts, agreements or understandings between the 7 Company and any other Person granting such Person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to any other registration statement filed by the Company under the Securities Act. 3.5. No Violation or Conflict; No Default Neither the execution or delivery of this Agreement, the Registration Rights Agreement or the Commitment Letter by the Company nor the issuance, sale or delivery of the Notes nor the performance of its respective obligations hereunder or thereunder will: (a) violate any provision of the Charter Documents of the Company; (b) violate any statute, law, rule or regulation or any judgment, decree, order, regulation or rule of any court or governmental authority to which the Company, any of its Subsidiaries, or any of their respective properties may be subject; (c) permit or cause the acceleration of the maturity of any debt or obligation of the Company or any of its Subsidiaries; (d) violate, or be in conflict with, or constitute a default under, or permit the termination of, or require the consent of any Person under, or result in the creation of any Lien upon any property of the Company or any of its Subsidiaries under, any mortgage, indenture, loan agreement, note, debenture or other agreement for borrowed money or any other material agreement to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries (or their respective properties) may be bound, other than such violations, conflicts, defaults, terminations and Liens, or such failures to obtain consents, which could not reasonably be expected to result in a Material Adverse Effect. 3.6. Margin Regulations No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any "margin stock" within the meaning of Regulation G of the Board of Governors of the Federal Reserve System (12 C.F.R. ss. 207), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 C.F.R. ss. 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 C.F.R. ss. 220). The assets of the Company and its Subsidiaries do not include any margin stock, and the Company does not have any present intention of acquiring margin stock. 3.7. Private Offering The sale of the Notes hereunder is exempt from the registration and prospectus delivery requirements of the Securities Act. In the case of each offer or sale of the Notes, no 8 form of general solicitation or general advertising was used by the Company or its respective representatives. The Company agrees that neither it, nor anyone acting on its behalf, will offer or sell the Notes, or any portion of them, if such offer or sale might bring the issuance and sale of the Notes to the Purchaser within the provisions of Section 5 of the Securities Act nor offer any similar Notes for issuance or sale to, or solicit any offer to acquire any of the same from, or otherwise approach or negotiate with respect thereto with, anyone if the sale of the Notes and any such Notes could be integrated as a single offering for the purposes of the Securities Act, including without limitation Regulation D. 3.8. Due Authorization of Material Contracts The descriptions in the Incorporated Documents of statutes, legal and governmental proceedings or contracts or other documents are accurate in all material respects and fairly present the information required to be shown at the time shown; and there are no statutes or legal or governmental proceedings required to be described in the Incorporated Documents that are not described as required and there is no document or contract of a character required to be described in the Incorporated Documents or to be filed as an exhibit to the Incorporated Documents which is not described or filed as required. All contracts described in the Incorporated Documents or filed as an exhibit to the Incorporated Documents to which the Company or any of its Subsidiaries is a party have been duly authorized, executed and delivered by the Company or such Subsidiary, constitute valid and binding agreements of the Company or such Subsidiary and are enforceable against and by the Company or such Subsidiary in accordance with the terms thereof, except as the enforcement thereof may be limited by bankruptcy and laws relating to the rights and remedies of the creditors generally or by the availability of general equitable remedies. 3.9. Financial Statements The financial statements and schedules of the Company and its consolidated subsidiaries included in the Incorporated Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, present fairly the financial condition of the Company and its consolidated subsidiaries, as of the respective dates thereof and the results of operations and cash flows of the Company and its consolidated subsidiaries, for the respective periods covered thereby, all in conformity with GAAP (except in the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto) and fairly present the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other financial statements or schedules of the Company and its consolidated subsidiaries or any other company or entity are required by the Securities Act, the Exchange Act or the rules and regulations of the SEC to be included in the Incorporated Documents. The Independent Auditors, who have reported on certain of such 9 financial statements and schedules, are, and were during the periods covered by their reports included in the Incorporated Documents, independent accountants with respect to the Company and its consolidated subsidiaries, as required by the Securities Act, the Exchange Act and the rules and regulations of the SEC. The summary financial and statistical data included in the Incorporated Documents present fairly the information shown therein and have been compiled on a basis consistent with the financial statements presented therein. The unaudited consolidated financial statements included in the Incorporated Documents comply as to form in all material respects with the applicable accounting requirements of the Securities Act, the Exchange Act and the rules and regulations of the SEC, and such statements fairly present the consolidated financial position and results of operations and the other information purported to be shown therein at the respective dates or for the respective periods therein specified. 3.10. Litigation; Judgments Except as described in the Incorporated Documents, there are no actions, suits or proceedings (formal or informal) pending or, to the Knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective properties, assets, or directors or officers, in their capacity as such, before or by any Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding might reasonably be expected to, individually or in the aggregate, and after giving effect to the sale and issuance of the Notes, result in a Material Adverse Effect. 3.11. Taxes Each of the Company and its Subsidiaries has filed all federal, state, local and foreign income tax returns which have been required to be filed and has paid all taxes and assessments received by it to the extent that such taxes have become due. None of the Company nor its Subsidiaries has any tax deficiency which has been or might be asserted or threatened against it which could reasonably be expected to result in a Material Adverse Effect. 3.12. Investment Company Act Neither the Company nor any of its Subsidiaries is an "investment company" or a Person directly or indirectly "controlled" by or acting on behalf of an "investment company" within the meaning of the United States Investment Company Act of 1940, as amended. 3.13. Environmental Matters The operations of the Company and its Subsidiaries with respect to any real property currently leased, owned, controlled or managed by the Company or any of its Subsidiaries are, and with respect to any real property previously leased, owned, managed or controlled were, when such real property was leased, owned, managed or controlled by the Company or any of its Subsidiaries, in compliance in all material respects with all applicable federal, state, and local laws, ordinances, rules, and regulations relating to occupational health and safety and the environment (collectively, "Environmental Laws"), and the Company and its 10 Subsidiaries have all material licenses, permits and authorizations required under all Environmental Laws; neither the Company nor any of its Subsidiaries has authorized or conducted or has knowledge of the generation, transportation, storage, use, treatment, disposal or release of any hazardous substance, hazardous waste, hazardous material, hazardous constituent, toxic substance, pollutant, contaminant, petroleum product, natural gas, liquefied gas or synthetic gas defined or regulated under any Environmental Law on, in or under any real property currently leased, owned, controlled or managed by the Company or any of its Subsidiaries or previously leased, owned, controlled or managed by the Company or any of its Subsidiaries when such real property was owned, leased, controlled or managed by the Company or any of its Subsidiaries, except in compliance with applicable Environmental Laws; and there is not pending or, to the Knowledge of the Company, any threatened claim, litigation or any administrative agency proceeding, nor has the Company or any of its Subsidiaries received any written or oral notice from any governmental entity or third party, that: (i) alleges a violation of any Environmental Laws by the Company or any of its Subsidiaries; (ii) alleges the Company or any of its Subsidiaries is a liable party under CERCLA or any state superfund law; (iii) alleges possible contamination of the environment by the Company or any of its Subsidiaries; or (iv) alleges possible contamination of real property currently leased, owned, controlled or managed by the Company or any of its Subsidiaries or previously leased, owned, controlled or managed by the Company or any of its Subsidiaries when such real property was owned, leased, controlled or managed by the Company or any of its Subsidiaries. 3.14. Labor Relations No labor dispute with the employees of the Company or any of its Subsidiaries exists or is threatened that could reasonably be expected to result in a Material Adverse Effect; and the Company is not aware of any existing or threatened labor disturbance by the employees of any other entity that could reasonably be expected to result in a Material Adverse Effect. 3.15. Real Property; Leases Each of the Company and its Subsidiaries has good and indefeasible title to all properties and assets described in the Incorporated Documents as owned by it, free and clear of all Liens except such as are described in the Incorporated Documents or are not material, singly or in the aggregate, to the Company. Each of the Company and its Subsidiaries has valid, subsisting and enforceable leases for the properties described in the Incorporated Documents as leased by it, except such as are described in the Incorporated Documents. 3.16. Intellectual Property; Licenses Each of the Company and its Subsidiaries owns or has the right to use all patents, patent applications, trademarks, trademark applications, tradenames, copyrights, franchises, trade secrets, proprietary or other confidential information and intangible properties and assets (collectively, "Intangibles") reasonably necessary to conduct its business as now conducted; and none of the Company or its Subsidiaries has any knowledge of any infringement by it of Intangibles of others, and there is no claim being made against the Company or any of its Subsidiaries, or to the Knowledge of the Company, any employee of the Company or its 11 Subsidiaries, regarding infringement of any Intangibles of others which could reasonably be expected to have a Material Adverse Effect and, to the Knowledge of the Company, there is no infringement by others of Intangibles of the Company or any of its Subsidiaries. 3.17. Defaults The continuation, validity and effectiveness of each contract, agreement, arrangement or other instrument related to borrowed money (of any amount) or involving payments in excess of $100,000 or that is material to the Company or its Subsidiaries (each a "Material Contract") will not be adversely affected by the execution, delivery and performance of this Agreement, the Registration Rights Agreement, or the Commitment Letter, the issuance or sale of the Notes, or the consummation of the transactions contemplated hereby or thereby. The Company and its Subsidiaries are not in default in any respect, and will not, with the giving of notice or the lapse of time, or both, be in default in any respect, under any Material Contract upon or as a result of the consummation of the transactions contemplated by this Agreement, the Registration Rights Agreement or the Commitment Letter. To the Knowledge of the Company, there is no default or claimed or purported or alleged default or state of facts that with the giving of notice or the lapse of time, or both, would constitute a default on the part of any party other than the Company or any of its Subsidiaries under any Material Contract. 3.18. Brokers The Company has not dealt with any broker, finder, commission agent or other Person in connection with the sale of the Notes and the transactions contemplated by this Agreement, and the Company is not under any obligation to pay any broker's or finder's fee or commission or similar payment in connection with such transactions. 3.19. Existing Indebtedness The Disclosure Schedule sets forth a complete and correct list of all Indebtedness of the Company and its Subsidiaries as of the date hereof, showing as to each item of such Indebtedness the creditor, the aggregate principal amount outstanding, the agreement or instrument governing such Indebtedness and a brief description of any security therefor. With respect to each item of Indebtedness listed on the Disclosure Schedule, the Company will deliver to the Purchaser or its representatives, upon request, a true and complete copy of each instrument evidencing such Indebtedness or pursuant to which such Indebtedness was issued or secured (including each amendment, consent, waiver or similar instrument in respect thereof), as the same is in effect on the date hereof. The Company and its Subsidiaries are not in default in the performance or observance in any material respect of any of the terms, covenants or conditions contained in any instrument evidencing Indebtedness listed on the Disclosure Schedule or pursuant to which such Indebtedness was issued or secured or has requested any waiver in respect of any default and no event has occurred and is continuing which, with notice or the lapse of time or both, would constitute such a default. 12 3.20. Compliance with Law; Permits (a) The Company and its Subsidiaries own or possess all authorizations, approvals, orders, licenses, registrations, other certificates and permits of and from all governmental regulatory officials and bodies, necessary to conduct their respective businesses except where the failure to own or possess all such authorizations, approvals, orders, licenses, registrations, other certificates and permits would not have a Material Adverse Effect. There is no proceeding pending or, to the Knowledge of the Company, threatened (or any basis therefor known to the Company) which may cause any such authorization, approval, order, license, registration, certificate or permit to be revoked, withdrawn, canceled, suspended or not renewed; and the Company and its Subsidiaries are conducting their respective business in compliance with all laws, rules and regulations applicable thereto except where such noncompliance could not reasonably be expected to result in a Material Adverse Effect. (b) Neither the nature of the Company nor of any of its businesses or properties, nor any relationship between the Company and any other Person, nor any circumstance in connection with the offer, issuance, sale or delivery of the Notes at the Closing, nor the performance by the Company of its other obligations hereunder or under the Notes, the Registration Rights Agreement or the Commitment Letter, as the case may be, is such as to require a consent, approval or authorization of, or notice to, or filing, registration or qualification with, any governmental authority or other Person on the part of the Company as a condition to the execution and delivery of this Agreement, the Registration Rights Agreement, the Commitment Letter or the offer, issuance, sale or delivery of the Notes at the Closing, other than the filings, registrations, qualifications or consents which shall have been made or obtained on the Closing Date (and copies of which shall have been delivered to the Purchaser). All required consents, approvals or authorizations of, or notices to or filings, registrations or qualifications with, any governmental authority or other Person required in connection with the transactions contemplated by this Agreement, the Notes, the Registration Rights Agreement or the Commitment Letter have been obtained or made. 3.21. Insurance The Company maintains, and will maintain after giving effect to the issuance and the sale of the Notes, insurance of the types and in the amounts generally deemed adequate for its business, including, but not limited to, insurance covering director and officer liability, workers compensation liability, malpractice liability respecting the provision of assisted living services, real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is and will be in full force and effect. 3.22. Material Events Since December 31, 1997, there has not been with respect to the Company or any of its Subsidiaries: 13 (a) any material adverse change in their properties, business, prospects, operations, earnings, assets, liabilities or condition (financial or otherwise) which could reasonably be expected to result in a Material Adverse Effect; or (b) any damage, destruction or loss to the properties or assets of the Company or any of its Subsidiaries, whether or not covered by insurance, that has or could reasonably be expected to have a Material Adverse Effect or that in the aggregate exceed $100,000; or (c) any loss or waiver by the Company or any of its Subsidiaries of any right, not in the ordinary course of business, or any material debt owed to it; or (d) other than the sales of assets in the ordinary course of business (including pursuant to sale leaseback transactions), any sale, transfer or other disposition of, or agreement to sell, transfer or otherwise dispose of, any assets by the Company or any of its Subsidiaries in excess of $100,000 in the aggregate, or any cancellation or agreement to cancel any debts or claims of the Company or any of its Subsidiaries; or (e) other than dividends payable on the currently outstanding Preferred Stock, any declaration or setting aside or payment of any dividend (whether in cash, property or stock) or any distribution (whether in cash, property or stock) or other payment with respect to any of the Capital Stock of the Company or any of its Subsidiaries, or any repurchase, purchase or other acquisition of, or agreement to repurchase, purchase or otherwise acquire, any of the Company's or any of its Subsidiaries' capital stock; or (f) any amendment or termination of any contract, agreement or license to which the Company or any of its Subsidiaries is a party or by which it is bound, except where such amendment or termination could not be reasonably expected to have a Material Adverse Effect; or (g) any resignation or termination of employment of any Key Employee, and there is no impending or threatened resignation or resignations or termination or terminations of employment of any Key Employee; or (h) any labor dispute (including, without limitation, any negotiation, or request for negotiation, for any labor representation or any labor contract) affecting the Company or any of its Subsidiaries; or (i) any application of any existing (or the enactment of any new) Environmental Law or personnel, product safety law or other governmental regulation that has or which could reasonably be expected to have a Material Adverse Effect. 3.23. SEC Documents; Undisclosed Liabilities The Company has been subject to the reporting requirements of Section 13 of the Exchange Act since at least January 1, 1996 and, except as set forth in any Company SEC Document, has timely filed all required reports, schedules, forms, statements and other 14 documents required to be filed by the Company under the Securities Act and the Exchange Act with the SEC since January 1, 1996 (the "Company SEC Documents"). As of their respective dates, the Company SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such Company SEC Documents, and none of the Company SEC Documents at the time filed with the SEC contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Except to the extent that information contained in any Company SEC Document has been revised or superseded by a later filed Company SEC Document, none of the Company SEC Documents contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.24. Material Misstatements or Omissions No representation or warranty by the Company contained in this Agreement (including the schedules and exhibits attached hereto), the Registration Rights Agreement, the Commitment Letter or in any document, exhibit, statement, certificate or schedule dated the Closing Date, signed by the Company and furnished to the Purchaser pursuant hereto, or in connection with the transactions contemplated hereunder, contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact necessary to make the statements or facts contained herein and therein not misleading. 3.25. Survival of Representations and Warranties All of the Company's representations and warranties hereunder and under the Registration Rights Agreement and the Commitment Letter shall survive the execution and delivery of the same, any investigation by the Purchaser and the issuance of the Notes. SECTION 4. REPRESENTATIONS AND WARRANTIES OF EACH PURCHASER The Purchaser represents and warrants to the Company that: 4.1. Purchase for Own Account The Purchaser is purchasing the Notes to be purchased by it solely for its own account and not as nominee or agent for any other person and not with a view to, or for offer or sale in connection with, any distribution thereof (within the meaning of the Securities Act) that would be in violation of the securities laws of the United States of America or any state thereof, without prejudice, however, to its right at all times to sell or otherwise dispose of all or any part of said Notes pursuant to a registration statement under the Securities Act or pursuant to an exemption from the registration requirements of the Securities Act. 15 4.2. Accredited Investor The Purchaser is knowledgeable, sophisticated and experienced in business and financial matters; it acknowledges that the Notes have not been registered under the Securities Act and understands that the Notes must be held indefinitely unless they are subsequently registered under the Securities Act or such sale is permitted pursuant to an available exemption from such registration requirement; it is able to bear the economic risk of its investment in the Notes; it is an "accredited investor" as defined in Regulation D promulgated under the Securities Act; and it has been afforded access to information about the Company and the Company's financial condition, results of operations, business, property, management and prospects sufficient to enable it to evaluate its investment in the Notes. The Purchaser acknowledges that it has conducted its own analysis of the Company's financial condition and other foregoing factors. 4.3. Authorization This Agreement is a legally valid and binding obligation of the Purchaser enforceable against it in accordance with its terms, except for (a) the effect thereon of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting the rights of creditors generally and (b) limitations imposed by federal or state law or equitable principles upon the specific enforceability of any of the remedies, covenants or other provisions thereof and upon the availability of injunctive relief or other equitable remedies. 4.4. Brokers The Purchaser has not dealt with any broker, finder, commission agent or other Person in connection with the sale of the Notes and the transactions contemplated by this Agreement, and the Purchaser is not under any obligation to pay any broker's or finder's fee or commission or similar payment in connection with such transactions. SECTION 5. COVENANTS So long as any of the Notes remain unpaid and outstanding, the Company covenants to the Holders of outstanding Notes as follows: 5.1. Payment of Notes; Satisfaction of Obligations The Company shall pay the principal of and interest on the Notes on the dates and in the manner provided in the Notes. To the extent lawful, the Company shall pay interest (including interest accruing after the commencement of any proceeding under any Bankruptcy Law) on all unpaid amounts outstanding under the Notes (including overdue installments of principal or interest) at a rate equal to 7.5% per annum, payable quarterly on each January 1, April 1, July 1 and October 1, beginning July 1, 1998. Such interest rate is subject to adjustment as set forth in Section 3(b) to the Registration Rights Agreement. 16 5.2. Notice of Default The Company will deliver to the Holders, forthwith upon (i) becoming aware of any Default or Event of Default, (ii) becoming aware of any payment default under any other loan agreement, mortgage, indenture or instrument referred to in Sections 7.1(d) or (iii) the receipt by the Company of any notice of any non-monetary default under any such loan agreement, mortgage, indenture or instrument, an Officers' Certificate specifying in reasonable detail such Default, Event of Default or default and the nature of any remedial or corrective action the Company proposes to take with respect thereto. 5.3. Limitation on Additional Indebtedness None of the Company, nor any of its Subsidiaries (including without limitation, upon the creation or acquisition of such Subsidiary) shall, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to (collectively, "incur") any Indebtedness after the date of this Agreement, if a Default or an Event of Default shall have occurred and be continuing at the time or would occur as a consequence of the incurrence of such Indebtedness. 5.4. Change of Control (a) Change of Control. Prior to the consummation of a Change of Control (the date of such consummation being referred to herein as the "Change of Control Date"), the Company shall give each Holder notice describing in reasonable detail the nature of the Change of Control (such written notice, the "Change of Control Notice") and offering to the Purchaser the right to require the Company to repurchase all or any part of the Notes held by the Purchaser pursuant to the offer (the "Change of Control Repurchase Offer") at a purchase price equal to 100% of the aggregate principal amount thereof, together with unpaid interest to the date of repurchase (the "Change of Control Price"). The obligation of the Company to repurchase Notes pursuant to the Change of Control Repurchase Offer is subject to the subordination provisions of Section 8 hereof. (b) Timing of Notice. The Change of Control Notice shall be mailed by the Company to all Holders at their last registered address no later than fifteen (15) Business Days prior to the Change of Control Date. (c) Procedure. The Change of Control Notice shall state a date not later than five (5) Business Days following the Change of Control Date for repurchase of the Notes pursuant to the Change of Control Repurchase Offer (such date, the "Change of Control Repurchase Date"). The Change of Control Notice, which shall govern the terms of the Change of Control Repurchase Offer, shall state: (1) that the Change of Control Repurchase Offer is being made pursuant to this Section 5.4; 17 (2) the Change of Control Price and the Change of Control Repurchase Date; (3) that, unless the Company defaults in the payment of the Change of Control Price, all Notes accepted for payment shall cease to accrue interest on and after the Change of Control Repurchase Date; (4) that the Purchaser electing to require the Company to repurchase any Notes will be required to surrender the Note to the address specified in the Change of Control Notice prior to the close of business on the Business Day preceding the Change of Control Repurchase Date; (5) that the Purchaser will be entitled to withdraw his or her election to require the Company to repurchase any Notes on the terms and conditions set forth in such Change of Control Notice by written notice to the Company prior to the Change of Control Repurchase Date; and (6) that the Purchaser electing to require the Company to repurchase any Notes in part will be issued a new Note in a principal amount equal to the unpurchased portion of the Notes surrendered. Any such Change of Control Repurchase Offer shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations to the extent applicable in connection with any Change of Control Repurchase Offer. (d) Acceptance of Notes. (1) On the Change of Control Repurchase Date, the Company shall accept for payment all Notes or portions thereof validly tendered pursuant to the Change of Control Repurchase Offer and promptly thereafter mail or deliver to Holder of Notes accepted for repurchase payment in the amount equal to the aggregate Change of Control Price for such Notes, and the Company shall execute and mail or deliver to such Holders a new Note equal in principal amount to any unpurchased portion of the Notes surrendered. The Company will notify the Holders of the results of the Change of Control Repurchase Offer on the Change of Control Repurchase Date. 5.5. Stay, Extension and Usury Laws The Company covenants and agrees (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, and will use its best efforts to resist any attempts to claim or take the benefit of any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of its obligations under this Agreement or the Notes; and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or 18 advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holders, but will suffer and permit the execution of every such power as though no such law has been enacted. 5.6. Indemnification The Company agrees to indemnify the Purchaser and each director, officer, employee, counsel, Agent and Affiliate of such Purchaser (collectively, the "Indemnified Parties") against, and hold it and them harmless from, all losses, claims, damages, liabilities, taxes, deficiencies, expenses and costs (including diminution in value and costs of preparation and reasonable attorneys' fees and expenses) (collectively, "Losses") incurred by it or them (A) arising from any breach of any representation or warranty or the inaccuracy of any representation made by the Company in or pursuant to the Agreement, the Registration Rights Agreement or the Commitment Letter (including without limitation any breach or inaccuracy of any representation or warranty relating to CERCLA, any equivalent state statute or any other Environmental Law); and (B) arising from any breach of any covenant or agreement made by the Company in or pursuant to the Agreement, the Registration Rights Agreement or the Commitment Letter; provided, however, that the Company shall not be required to indemnify any Indemnified Party for any Loss that results from (x) the action of any Indemnified Party which is finally judicially determined to have resulted from such Indemnified Party's negligence, intentionally wrongful acts or intentionally wrongful omissions or (y) the failure of LTC Equity Holding Company to purchase additional Notes from the Company pursuant to Section 1.2(a)(2) hereof; provided, further, that no Indemnified Party shall be entitled to assert a claim on account of the indemnity provided in this Section 5.6, unless and until the aggregate amount of Losses with respect to all claims asserted under this Section and under Section 5.6 of the purchase agreements for the Notes executed on the date hereof by other purchasers exceeds $100,000 (in which case the Company shall be liable for Losses in excess of such $100,000 that have accrued). The Company agrees to reimburse any Indemnified Party promptly for all such Losses as they are incurred by such Indemnified Party. The Company's liability to any such Indemnified Party hereunder shall not be extinguished solely because any other Indemnified Party is not entitled to indemnity hereunder. The obligations of the Company under this Section 5.6 shall survive the payment or prepayment of the Notes, at maturity, upon acceleration, repurchase or otherwise, any transfer of the Notes by any Purchaser to any subsequent Holder and the termination of this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter. The indemnity provided in this Section 5.6 will be in addition to any liability which the Company may otherwise have, including, without limitation, under this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter. In case any action shall be brought against any Indemnified Party with respect to which indemnity may be sought against the Company, such Indemnified Party shall promptly notify the Company in writing and the Company shall, if it so desires, assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party and payment of all reasonable fees and expenses. The failure to so notify the Company shall not 19 affect any obligation it may have to any Indemnified Party under this Section 5.6 or otherwise unless the Company is materially adversely affected by such failure. Each Indemnified Party shall have the right to employ separate counsel in such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless: (i) the Company has agreed in writing to pay such expenses; (ii) the Company has failed to assume the defense and employ counsel; or (iii) the named parties to any such action (including any impleaded parties) include any Indemnified Party and the Company, and such Indemnified Party shall have been advised by outside counsel that there may be one or more legal defenses available to it which are inconsistent with those available to the Company; provided that, if such Indemnified Party notifies the Company in writing that it elects to employ separate counsel in the circumstances described in clauses (i), (ii) or (iii) above, the Company shall not have the right to assume the defense of such action or proceeding; provided, however, that the Company shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be responsible hereunder for the fees and expenses of more than one such firm of separate counsel (in addition to any necessary local counsel), which counsel shall be designated by such Indemnified Party. The Company shall not be liable for any settlement of any such action effected without its written consent (which shall not be unreasonably withheld). The Company agrees that it will not, without the Indemnified Party's prior consent, which shall not be unreasonably withheld, settle or compromise any pending or threatened claim, action or suit in respect of which indemnification may be sought hereunder unless the foregoing contains an unconditional release of the Indemnified Parties from all liability and obligation arising therefrom. 5.7. Corporate Existence; Merger; Successor Corporation (a) The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence in accordance with its organizational documents and the corporate rights (charter and statutory), licenses and franchises of the Company; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or corporate existence if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not adverse in any material respect to any Holder. (b) The Company shall not in a single transaction or through a series of related transactions, (i) consolidate with or merge with or into any other person, or transfer (by lease, assignment, sale or otherwise) all or substantially all of its properties and assets as an entirety or substantially as an entirety to another person or group of affiliated persons or (ii) adopt a Plan of Liquidation, unless, in either case: (1) the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or to which all or substantially all of the properties and assets of the Company as an entirety or substantially as an entirety are transferred (or, in the case of a Plan of Liquidation, any Person to 20 which assets are transferred) (the Company or such other Person being hereinafter referred to as the "Surviving Person") shall be a corporation organized and validly existing under the laws of the United States, any State thereof or the District of Columbia, and shall expressly assume, by an amendment to this Agreement, all the obligations of the Company under the Notes and this Agreement; (2) immediately after and giving effect to such transaction and the assumption contemplated by clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, (ii) the Surviving Person shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction; (3) immediately before and immediately after and giving effect to such transaction and the assumption of the obligations as set forth in clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, no Default or Event of Default shall have occurred and be continuing; and (4) The Company shall have delivered to the Purchaser an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, transfer or adoption and such amendment to this Agreement comply with this Section 5.7, that the Surviving Person agrees to be bound hereby, and that all conditions precedent herein provided relating to such transaction have been satisfied. (c) Upon any consolidation or merger, or any transfer of assets (including pursuant to a Plan of Liquidation) in accordance with this Section 5.7, the successor person formed by such consolidation or into which the Company is merged or to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Agreement with the same effect as if such successor person had been named as the Company herein; provided, however, that the Company shall not be released from the obligations and covenants under this Agreement or under the Notes. 5.8. Taxes The Company shall, and shall cause its Subsidiaries to, pay prior to delinquency all material taxes, assessments and governmental levies except as contested in good faith and by appropriate proceedings. 5.9. Investment Company Act Neither the Company nor any of its Subsidiaries shall become an investment company subject to registration under the Investment Company Act of 1940, as amended. 21 5.10. Insurance The Company and its Subsidiaries shall maintain liability, casualty and other insurance with a reputable insurer or insurers in such amounts and against such risks as is carried by responsible companies engaged in similar businesses and owning similar assets. 5.11. Inconsistent Agreements The Company shall not, and shall not permit any of its Subsidiaries to, (i) enter into any agreement or arrangement which is inconsistent with, or would impair the ability of the Company to fulfill, its obligations under this Agreement, the Notes, the Registration Rights Agreement or the Commitment Letter or (ii) supplement, amend or otherwise modify the terms of their respective Charter Documents, if the effect thereof would be materially adverse to the Holders, including without limitation to increase the liquidation preference of, or the rate of dividends payable on, any series of preferred stock. 5.12. Compliance with Laws The Company shall, and shall cause its Subsidiaries to, comply with all statutes, ordinances, governmental rules and regulations, judgments, orders and decrees (including all Environmental Laws) to which any of them is subject, and obtain and keep in effect all licenses, permits, franchises and other governmental authorizations necessary to the ownership or operation of their respective properties or the conduct of their respective businesses, except to the extent that the failure to so comply or obtain and keep in effect would not have a Material Adverse Effect. 5.13. Inspection of Properties and Records The Company agrees to allow, and to cause each of their respective Subsidiaries to allow, the Purchaser and each subsequent Holder (or such Persons as the Purchaser or subsequent Holder may designate) (individually and collectively, "Inspectors") upon reasonable prior notice to visit and inspect any of the properties of the Company or its Subsidiaries, to examine all their books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers, and independent public accountants with representatives of the Company or its Subsidiaries present (and by this provision the Company authorizes said accountants to discuss with such Inspectors the finances and affairs of the Company and its Subsidiaries) all at such reasonable times and as often as may be reasonably requested but not more than twice in any twelve-month period for all Holders in the aggregate unless a Default or an Event of Default shall have occurred. If a Default or an Event of Default shall have occurred and be continuing, the Company shall pay or reimburse all Inspectors for expenses which such Inspectors may reasonably incur in connection with any such visitations or inspections. 22 SECTION 6. CONVERSION OF NOTES 6.1. Conversion (a) Each Note shall be convertible, in whole or in part, at the option of the Holder thereof, at any time prior to the Maturity Date, at the office of the Company or any transfer agent for the Notes, into that number of fully paid and nonassessable shares of Common Stock determined in accordance with the provisions of Section 6.2. In order to convert Notes into Conversion Shares, the Holder thereof shall surrender the Notes therefor, duly endorsed, at the office of the Company or to the transfer agent for the Notes, together with written notice to the Company stating that it elects to convert the same and setting forth the name or names in which it wishes the certificate or certificates for Conversion Shares to be issued, and the principal amount of the Notes being converted. The Company shall, as soon as practicable after the surrender of the Notes for conversion at the office of the Company or the transfer agent for the Notes, issue to each holder of such Notes, or its nominee or nominees, a certificate or certificates evidencing the number of Conversion Shares (and any other securities and property) to which it shall be entitled, cash representing payment in full for all accrued but unpaid interest on the Note (or portion thereof) surrendered for conversion, and, in the event that only a part of the Notes presented are converted, a Note evidencing the principal amount not so converted. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the Notes to be converted, and the person or persons entitled to receive the Conversion Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock at such date and shall, with respect to such shares, thereafter have only those rights of a holder of Common Stock of the Company. (b) In the event that the average trading price of the Common Stock over thirty (30) consecutive trading days is equal to or exceeds $12 per share, the Company shall have the right, but not the obligation, to force a conversion of all then outstanding Notes, in whole but not in part, within the fifteen (15) day period immediately following such thirty (30) consecutive trading days. Any such forced conversion shall in all other respects be in accordance with this Section 6, and, if the Company shall elect to force conversion of Notes, it shall promptly provide notice of such forced conversion to all Holders of Notes. The Company shall, as soon as practicable following the notice of such forced conversion (and in no event later than sixty (60) calendar days after the date of such notice) issue to each holder of such Notes, or its nominee or nominees, a certificate or certificates evidencing the number of Conversion Shares (and any other securities and property) to which it shall be entitled and cash representing payment in full for all accrued but unpaid interest on the Note surrendered for conversion. Such conversion shall be deemed to have been made at the close of business on the date specified in such notice, and the person or persons entitled to receive the Conversion Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock at such date and shall, with respect to such shares, thereafter have only those rights of a holder of Common Stock of the Company. 23 (c) The Company shall use its best efforts to quote and maintain quotation of the Conversion Shares on the Nasdaq National Market or such other principal national securities exchange on which the Common Stock is then listed or quoted. 6.2. Conversion Rate The number of shares of Common Stock issuable upon conversion of the Notes shall be one (1) share for every $7.50 of principal amount of Notes being converted (the "Conversion Rate"), and shall be subject to adjustment from time to time as provided herein and as provided in Section 3(b) of the Registration Rights Agreement. 6.3. Fractional Shares No fractional shares of Common Stock shall be issued upon conversion of Notes. Instead, the Company shall deliver cash in the form of its check for the Fair Market Value of the fractional share. 6.4. Adjustments for Stock Splits, Combinations and Dividends If the outstanding shares of the Common Stock shall be subdivided into a greater number of shares or combined into a lesser number of shares, the Conversion Rate in effect immediately prior to such subdivision shall, simultaneously with the effectiveness of such subdivision, be proportionately increased or decreased, as the case may be. If the Company pays a dividend or otherwise makes a distribution with respect to its Common Stock (whether in cash, additional shares of Common Stock or other property) on or prior to March 31, 2003, then the Conversion Rate shall be increased by a fraction, the numerator of which is the aggregate amount of the fair market value of such dividend or distribution and the denominator of which is the number of shares of Common Stock entitled to such dividend or other distribution. If the Company pays a dividend or otherwise makes a distribution with respect to its Common Stock (whether in cash, additional shares of Common Stock or other property) after March 31, 2003 (the effective date of such dividend or other distribution, the "Determination Date") and if the fair market value of such dividend or other distribution, together with the fair market value of all other dividends and distributions with respect to its Common Stock during the 12-month period immediately preceding the Determination Date exceeds 2% of the Average Closing Sales Price during such 12-month period, then the Conversion Rate shall be increased by a fraction, the numerator of which is the aggregate amount of the fair market value of the dividend or other distribution to be effected on the Determination Date plus the aggregate amount of the fair market value of all dividends and distributions effected during such 12-month period for which no adjustment in the Conversion Rate was effected pursuant to this Section 6.4, and the denominator of which is the number of shares of Common Stock entitled to such dividend or other distribution on the Determination Date. Any adjustment to the Conversion Rate under this Section 6.4 shall become effective at the close of business on the date the subdivision, combination, dividend or other distribution referred to herein becomes effective. For purposes of the calculations made in this Section 6.4, the fair market value of any dividend or other distribution that is in the form of property other than Common Stock or cash shall be determined in good faith by the Board. 24 6.5. Reorganization, Mergers, Consolidations or Sales of Assets In the event of any capital reorganization, any reclassification of the Common Stock (other than a change in par value or as a result of a stock dividend, subdivision, split-up or combination of shares), the consolidation or merger of the Company with or into another person, or the sale or other disposition of all or substantially all of the properties of the Company as an entirety to another person (collectively referred to hereinafter as "Reorganizations"), the Holders of the Notes shall thereafter be entitled to receive, and provision shall be made therefor in any agreement relating to a Reorganization, upon conversion of the Notes the kind and number of shares of Common Stock or other securities or property (including cash) of the Company, or the other corporation resulting from such consolidation or surviving such merger, which would have been distributed to a holder of the number of shares of Common Stock which the Notes entitled the holders thereof to convert to immediately prior to such Reorganization; and in any such case appropriate adjustment shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the Holders of the Notes, to the end that the provisions set forth herein (including the specified changes and other adjustments to the Conversion Rate) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares, other securities or property thereafter receivable upon conversion of the Notes. 6.6. Sale of Shares Below Market or Conversion Price (a) If at any time or from time to time the Company shall issue or sell Additional Shares of Common Stock other than in a transaction which falls within Section 6.1, Section 6.4 or Section 6.5, for an Effective Price less than the greater of (x) the Fair Market Value of the Common Stock or (y) the then effective conversion price calculated by dividing $7.50 by the then existing Conversion Rate (the "Adjusted Conversion Price"), then, and in each such case, the then existing Conversion Rate shall be adjusted to a rate per $7.50 principal amount of Notes determined by multiplying that Conversion Rate by a fraction (i) the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the date of such issue after giving effect to such issue of Additional Shares of Common Stock, and (ii) the denominator of which shall be (A) the number of shares of Common Stock outstanding at the close of business on the day next preceding the date of such issue or sale, plus (B) the number of shares of Common Stock which the aggregate consideration received (or by the express provisions hereof deemed to have been received) by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Adjusted Conversion Price. (b) For the purpose of making any adjustment required in this Section 6.6, the consideration received by the Company for any issue or sale of securities shall: (i) to the extent it consists of cash, the consideration received by the Company therefor shall be deemed to be the net amount of cash actually received by the Company, after deducting therefrom any compensation, discounts, fees or expenses paid to (but not on behalf of) any purchaser of such securities and any compensation, discounts, fees or expenses that are not reasonable or are not 25 customary (it being understood that underwriters' discounts and compensation in public offerings and brokers' commissions in private placements of such securities shall be deemed reasonable and customary); (ii) to the extent it consists of property other than cash, the consideration other than cash shall be computed at the fair market value thereof as determined in good faith by the Board of Directors of the Company; and (iii) if Additional Shares of Common Stock, Convertible Securities or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Company for consideration which covers both, the consideration received for the Common Stock, Convertible Securities or rights or options shall be computed as that portion of the consideration so received which is reasonably determined in good faith by the Board of Directors of the Company to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. (c) For the purpose of making any adjustment in the Conversion Rate provided in this Section 6.6, if at any time, or from time to time, the Company issues any stock convertible into Additional Shares of Common Stock (such convertible stock being hereinafter referred to as "Convertible Securities") or issues any rights or options, other than options pursuant to the Stock Option Plan, to purchase Additional Shares of Common Stock for Convertible Securities (such rights or options being hereinafter referred to as "Rights"), then, and in each such case, the Company shall be deemed to have issued at the time of the issuance of such Rights or Convertible Securities the maximum number of shares of Additional Shares of Common Stock issuable upon exercise (other than options pursuant to the Stock Option Plan) or conversion thereof and to have received in consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Company for the issuance of such Rights or Convertible Securities, plus in the case of such Rights, the amount of consideration, if any, payable to the Company upon exercise of such Rights, plus, in the case of Convertible Securities, the amount of consideration, if any, payable to the Company upon the conversion thereof. No further adjustment of the Conversion Rate, adjusted upon the issuance of such Rights or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such Rights or the conversion of any such convertible Securities. If any such Rights or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Conversion Rate adjusted upon the issuance of such rights, options or convertible securities shall be readjusted to the conversion rate which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such Rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for granting of all such Rights, whether or not exercised, plus consideration received for issuing or selling the Convertible Securities 26 actually converted, plus the consideration, if any, actually received by the Company on the conversion of such Convertible Securities. 6.7. Adjustment for Failure to Quote on Nasdaq National Market In event that, from the time of effectiveness of the registration statement to be filed pursuant to Section 3(a) of the Registration Rights Agreement and until all Notes have been converted into Conversion Shares, immediately prior to the conversion of any Notes into Conversion Shares pursuant to this Section 6, such Conversion Shares have not been approved for quotation on Nasdaq National Market (or any other national securities exchange where the Common Stock is then listed or quoted), then the Conversion Rate with respect to such Conversion Shares shall be increased by 10% immediately prior to the conversion of any Notes into such Conversion Shares. 6.8. Accountants' Certificate of Adjustment In each case of an adjustment or readjustment of the Conversion Rate or the number of shares of Common Stock or other securities issuable upon conversion of the Notes, the Company shall as soon as reasonably practicable (and in no event less than thirty (30) days following the event causing such adjustment or readjustment) compute such adjustment or readjustment in accordance with this Agreement and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first-class mail, postage prepaid, to each Holder of the Notes at the Holder's address as shown on the Company's note register. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (i) the Conversion Rate at the time in effect for the Notes, and (ii) the number of shares of Common Stock and the type and amount, if any, of other property which at the time would be received upon conversion of the Notes. At the written request of the Requisite Noteholders, the Company shall cause its Independent Auditors to verify the computations contained in the certificate prepared by the Company. 6.9. Reservation of Shares Issuable Upon Conversion The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Notes, such number and class of its shares of Common Stock as shall from time to time be sufficient to effect a conversion of all outstanding Notes, and if at any time the number and class of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding Notes, the Company shall promptly seek such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number and class of shares as shall be sufficient for such purpose. In the event of the consolidation or merger of the Company with another corporation where the Company is not the surviving corporation, effective provision shall be made in the certificate or articles of incorporation, documents of merger or consolidation, or otherwise, of the surviving corporation so that such corporation will at all times reserve and keep available a sufficient 27 number of shares of Common Stock or other securities or property to provide for the conversion of the Notes in accordance with the provisions of this Section 6. 6.10. No Impairment The Company shall not amend its Charter Documents or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, for the principal purpose of avoiding or attempting to avoid the observance or performance of any of the terms to be observed or performed by the Company pursuant to this Section 6. SECTION 7. DEFAULTS AND REMEDIES 7.1. Events of Default An "Event of Default" occurs if: (a) the Company defaults in the payment of the principal of any Note when the same becomes due and payable at maturity, upon repurchase or otherwise; (b) the Company defaults in the payment of interest on any Note when the same becomes due and payable and the Default continues for the period and after the notice specified below; (c) the Company fails to comply with any of the agreements, covenants, or provisions of this Agreement or the Notes and the Default continues for the period and after the notice specified below; (d) a default occurs under any mortgage, indenture or instrument (other than a mortgage, indenture or instrument to which the Purchaser or its Subsidiaries is a party) under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries), whether such Indebtedness or guaranteed Indebtedness now exists or shall be created hereafter, which default (i) is caused by a failure to pay principal of or premium, if any, on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness, or (ii) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of such Indebtedness, together with the principal amount of any other Indebtedness as to which there has been a payment default or the maturity of which has been so accelerated, aggregates $1,000,000 or more; (e) a final judgment for the payment of money is entered by a court or courts of competent jurisdiction against the Company or any Subsidiary of the Company and such remains undischarged for a period (during which execution shall not be effectively stayed) of (1) ninety (90) days, if the aggregate of all such judgments exceeds $1,000,000 but is less than $5,000,000 or (2) thirty (30) days if the aggregate of all such judgments exceeds $5,000,000; 28 (f) the Company or any of its Subsidiaries pursuant to or within the meaning of any Bankruptcy Law: (1) commences a voluntary case, (2) consents to the entry of an order for relief against it in an involuntary case, (3) consents to the appointment of a Custodian of it or for all or substantially all of its property, (4) makes a general assignment for the benefit of its creditors, (5) generally is unable to pay its debts as the same become due; or (6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company or any of its Subsidiaries in an involuntary case, (ii) appoints a Custodian of the Company or any of its Subsidiaries or for all or substantially all of its property, or (iii) orders the liquidation of the Company or any of its Subsidiaries, and the order or decree remains unstayed and in effect for 60 days. A Default under clause (b) is not an Event of Default until a Holder notifies the Company of such Default and the Company does not cure such Default within two (2) Business Days after receipt of such notice. A Default under clause (c) (other than a Default under Sections 5.3, 5.4, 5.6 or 5.7 of this Agreement, which Default shall be an Event of Default without the notice or passage of time specified in this paragraph) or (d) (other than a Default resulting from the acceleration of any Indebtedness described therein, which Default shall be an Event of Default without the notice or passage of time specified in this paragraph) or (e) is not an Event of Default until the Requisite Noteholders notify the Company of the Default and the Company does not cure the Default within ten (10) days after receipt of the notice. Any such notices must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." 7.2. Acceleration of Notes If an Event of Default (other than an Event of Default specified in clauses (e) and (f) of Section 7.1) occurs and is continuing, the Requisite Noteholders, by notice to the Company, may declare the unpaid principal of and any accrued interest on all the Notes to be due and payable. Immediately upon such declaration, the principal and interest shall be due and payable. If an Event of Default specified in clause (e) or (f) of Section 7.1 occurs, such an amount shall become and be immediately due and payable without any declaration or other act on the part of any Holder. The Requisite Noteholders by notice to the Company may rescind an acceleration of and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration. 7.3. Other Remedies If an Event of Default occurs and is continuing, Holders of the Notes may pursue any available remedy to collect the payment of principal or interest on the Notes or to enforce the performance of any provision of the Notes or this Agreement. A delay or omission by any Holder of any Notes in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. 29 SECTION 8. SUBORDINATION 8.1. Notes Subordinated to Senior Indebtedness (a) The Notes are subordinated and junior in right of payment of the principal of and interest and all other obligations (all of the foregoing, a "Payment or Distribution") on such Notes to the prior payment in full of any Senior Indebtedness whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed, the Notes shall comply with the provisions of this Section 8, and each Holder by his acceptance thereof likewise agrees. A Payment or Distribution shall include any asset of any kind or character, and may consist of cash, securities or other property, by set-off or otherwise, except that Holders may receive (i) securities that are subordinated to at least the same extent as the Notes to (A) Senior Indebtedness and (B) any securities issued in exchange for Senior Indebtedness. (b) The Senior Indebtedness of the Company shall continue to be Senior Indebtedness and entitled to the benefit of these subordination provisions irrespective of any amendment, modification or waiver of any term of any instrument relating to refinancing of the Senior Indebtedness, whether with or without notice to Holders. (c) No right of any holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time or in any way be affected or impaired by any act or failure to act on the part of the Company, the Holders or the holders of the Senior Indebtedness, including without limitation any non-compliance by the holders of the Senior Indebtedness with any of the terms, provisions and covenants of the documents evidencing or securing the Senior Indebtedness, or by any noncompliance by the Company or the Holders with any of the terms, provisions and covenants of the Notes, regardless of any knowledge thereof that any such holder of Senior Indebtedness may have or otherwise be charged with. 8.2. Company Not to Make Payments with Respect to Notes in Certain Circumstances No Payment or Distribution shall be made by the Company on account of principal of or interest on the Notes, whether upon the Maturity Date, upon repurchase or acceleration, or otherwise, if there shall have occurred and be continuing a default with respect to any Senior Indebtedness and notice of such default in writing or by telegram has been given to the Company by any holder or holders of Senior Indebtedness, unless and until the Company shall have received written notice from such holder or holders that such default or event of default shall have been cured or waived or shall have ceased to exist or, unless in the event of a default that does not result in the acceleration of any Senior Indebtedness or that does not involve a payment default with respect to any Senior Indebtedness, upon the expiration of the 60-day period following the date of such notice of default. Following such 60-day period, the Company shall be obligated to make any and all outstanding Payments or Distributions with respect to the Notes. Upon acceleration of the principal of the Notes or any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or 30 securities, to creditors upon any dissolution or winding up or liquidation or reorganization of the Company, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or such other proceedings, all amounts due or to become due upon all Senior Indebtedness shall first be paid in full in cash, or payment thereof provided for to the satisfaction of the holders thereof, before any Payment or Distribution is made on account of the repurchase price or principal of or interest on the Notes; and (subject to the power of a court of competent jurisdiction to make other equitable provision, which shall have been determined by such court to give effect to the rights conferred in this Section 8 upon the Senior Indebtedness and the holders thereof with respect to the Notes or the Holders, by a lawful plan of reorganization or readjustment under applicable law) upon any such dissolution or winding up or liquidation or reorganization, any Payment or Distribution by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Holders would be entitled except for the provisions of this Section 8, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such Payment or Distribution directly to the holders of Senior Indebtedness of the Company or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay all Senior Indebtedness in full in cash, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any Payment or Distribution is made to the Holders. In the event that, notwithstanding the foregoing, any Payment or Distribution by the Company of any kind or character, whether such payment shall be in cash, property or securities is prohibited by the foregoing, and the Company shall have made payment to the Holders before all Senior Indebtedness is paid in full in cash, or provision is made for such payment to the satisfaction of the holders thereof, such Holder, then and in such event such Payment or Distribution shall be paid over by such Holder or delivered to the holders of Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in cash, after giving effect to any concurrent Payment or Distribution to or for the holders of such Senior Indebtedness, and, until so delivered, the same shall be held in trust by any Holder as the property of the holders of Senior Indebtedness. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided in Section 5.7 shall not be deemed a dissolution, winding up, liquidation or reorganization for the purpose of this Section if such other Person shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Section 5.7. The holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Holders without incurring responsibility to the Holders 31 and without impairing or releasing the obligations of the Holders to the holders of the Senior Indebtedness: (i) change the manner, place or terms of payment or change or extend the time of payment of, or renew or alter, Senior Indebtedness, or otherwise amend in any manner Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Senior Indebtedness; and/or (iv) exercise or refrain from exercising any rights against the Company and any other Person. 8.3. Subrogation of Notes After all Senior Indebtedness is paid in full and until the Notes are paid in full, the Holders shall be subrogated (equally and ratably with all other Indebtedness pari passu with the Notes) to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the Holders have been applied to the payment of Senior Indebtedness. If any Payment or Distribution to which the Holders would otherwise have been entitled but for the provisions of this Section 8 shall have been applied pursuant to the provisions of this Section 8 to the payment of all amounts payable in respect of the Senior Indebtedness, then and in such case, the Holders, as with respect to the Company, shall be entitled to receive from the holders of such Senior Indebtedness at the time outstanding any Payments or Distributions received by such holders of Senior Indebtedness in excess of the amount sufficient to pay all amounts payable in respect of the Senior Indebtedness in full in cash or, at the option of the holders of Senior Indebtedness, cash equivalents. 8.4. No Impairment of Subordination No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, any Holder, or by any act, or failure to act, in good faith, by any such holder of Senior Indebtedness, or by any noncompliance by the Company or any Holder with the terms, provisions and covenants of this Agreement regardless of any knowledge thereof which any such holder may have or otherwise be charged with. 8.5. Section 8 Not to Prevent Events of Default The failure to make a payment on account of principal of or interest on the Notes by reason of any provision in this Section 8 shall not be construed as preventing the occurrence of an Event of Default with respect to such series under Section 7.1. 8.6. Securities Senior to Subordinated Indebtedness The indebtedness represented by the Notes will be senior and prior in right of payment to all Subordinated Indebtedness, to the extent and in the manner provided in such Subordinated Indebtedness. 32 8.7. Assignment of Junior Claims (a) So long as LTC Equity Holding Company holds a sufficient amount of Notes such that LTC Equity Holding Company constitutes a Requisite Noteholder, paragraphs (b) and (c) of this Section 8.7 shall have no force and effect. In the event LTC Equity Holding Company shall cease to hold a sufficient amount of Notes such that LTC Equity Holding Company is no longer a Requisite Noteholder, paragraphs (b) and (c) of this Section 8.7 shall be in effect. (b) In the event of an insolvency proceeding with respect to the Company, each Holder will assign to a representative of the holders of Senior Indebtedness (as identified in writing to each Holder by the holders of Senior Indebtedness) (the "Senior Representative") each Holder's right, title and interest in and to any claims such Holder has against the Company with respect to the Notes (the "Junior Claims") and any security held therefor, and will deliver to the Senior Representative from time to time any and all instruments and documents evidencing such Junior Claims, or will have entered on such instruments and documents such subordination legend as the Senior Representative may reasonably request, and each Holder will execute such other instruments and documents as the Senior Representative may from time to time reasonably require in connection therewith. In the event that any Junior Claim is not evidenced by a negotiable instrument, each Holder hereby agrees that he will use all commercially reasonably efforts to obtain an instrument or document from the Company evidencing such Junior Claim. In the event that such debt is not evidenced by a document, it shall nevertheless be deemed subordinated and assigned by virtue of this Section 8.7. (c) In the event of an insolvency proceeding with respect to the Company, each Holder will grant to the Senior Representative irrevocable authority in the place and stead of such Holder and in the name of such Holder or in the Senior Representative's name but for the Senior Representative's use and benefit, at any time or times, after any default under the terms of any Senior Indebtedness, in the Senior Representative's discretion to demand, collect file proofs of claim with respect to, receive (by way of dividends or otherwise) and take any and all legal proceedings for the recovery of any and all moneys due or to become due on account of the Junior Claims or any thereof, and to vote, give consents and take any other steps with regard thereto. Any and all moneys so collected or received by the Senior Representative shall be retained indefeasibly by the Senior Representative for application to the payment in full of any amounts owing with respect to the Senior Indebtedness then outstanding (the "Senior Claims"). If the Senior Representative receives notice of any claim adverse to the rights or interests of each Holder in and to either the Junior Claims or the Senior Claims, or any moneys held by the Senior Representative in respect thereof, the Senior Representative shall be entitled to retain any and all such moneys, documents and instruments evidencing such Junior Claims and Senior Claims. SECTION 9. AMENDMENTS AND WAIVERS 9.1. With Consent of Holders The Company, when authorized by a resolution of the Board of Directors of the Company and with the written consent of the Requisite Noteholders, may amend this Agreement 33 or the Notes, without notice to any other Holders. The Requisite Noteholders may waive compliance by the Company with any provision of this Agreement or the Notes without notice to any other Holder. Without the consent of each Holder affected, however, no amendment or waiver may (with respect to any Notes held by a non-consenting Holder of Notes): (a) reduce the principal amount of Notes whose Holders must consent to an amendment or waiver of any provision of this Agreement or the Notes; (b) reduce the principal of or change the fixed maturity of any Note; (c) reduce the rate of or change the time for payment of interest on any Note; (d) waive a Default or Event of Default in the payment of principal of or interest on the Notes (except a rescission of acceleration of the Notes by the Requisite Noteholders and a waiver of the payment default that resulted from such acceleration); (e) make the principal of or the interest on, any Note payable in any manner other than that stated in this Agreement and the Notes; (f) make any change in the provisions of this Agreement relating to waivers of past Defaults or the rights of Holders of Notes to receive payments of principal of or interest on the Notes; (g) make any change to the subordination provisions of this Agreement that adversely affect any Holder; or (h) make any change in the foregoing amendment and waiver provisions. It shall not be necessary for the consent of the Holders under this Section 9 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment or waiver under this Section 9 becomes effective, the Company shall mail to the Holders affected thereby a notice briefly describing the amendment or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment or waiver. In connection with any amendment to this Section 9, the Company may offer, but shall not be obligated to offer, to any Holder who consents to such amendment or waiver, consideration for such Holder's consent. 9.2. Revocation and Effect of Consents Until an amendment or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent 34 as to his Note or portion of his Note by notice to the Company received before the date on which the Requisite Noteholders have consented (and not theretofore revoked such consent) to the amendment or waiver. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment or waiver, which record date shall be at least ten (10) Business Days prior to the first solicitation of such consent. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those persons who were Holders at such record date (or their duly designated proxies), and only those persons, shall be entitled to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. After an amendment or waiver becomes effective, it shall bind every Holder, unless it makes a change described in any of clauses (a) through (g) of Section 9.1, in which case, the amendment or waiver shall bind only each Holder of a Note who has consented to it and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note; provided that any such waiver shall not impair or affect the right of any Holder to receive payment of principal of and interest on a Note, on or after the respective due dates expressed in such Note, or to bring suit for the enforcement of any such payment on or after such respective dates without the consent of such Holder. 9.3. Notation on or Exchange of Notes If an amendment or waiver changes the terms of a Note, the Company may require the Holder of the Note to deliver it to the Company. The Company may place an appropriate notation on the Note about the changed terms and return it to the Holder. SECTION 10. DEFINITIONS 10.1. Definitions As used in this Agreement, the following terms shall have the following meanings: "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Company after the Closing Date, whether or not subsequently reacquired or retired by the Company, other than the Conversion Shares; provided that such term shall exclude shares of Common Stock issued under the Stock Option Plan and shares of Common Stock issued or issuable upon the conversion of Notes issued pursuant to agreements dated on or about the date of this Agreement and the warrants scheduled on the Disclosure Schedule. "Adjusted Conversion Price" shall have the meaning assigned to such term in Section 6.6(a). 35 "Affiliate" means, with respect to any referenced Person, a Person (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such referenced Person, (ii) which directly or indirectly through one or more intermediaries beneficially owns or holds 10% or more of the combined voting power of the total Voting Securities of such referenced Person or (iii) of which 10% or more of the combined voting power of the total Voting Securities directly or indirectly through one or more intermediaries is beneficially owned or held by such referenced Person, or a Subsidiary of such referenced Person. When used herein without reference to any Person, Affiliate means an Affiliate of the Company. For purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of Voting Securities, by contract or otherwise; and the terms "affiliated," controlling" and "controlled" have meanings correlative to the foregoing. "Agent" means any Person authorized to act and who acts on behalf of the Purchasers with respect to the transactions contemplated by this Agreement, the Registration Rights Agreement or the Commitment Letter. "Agreement" means this Convertible Subordinated Note Purchase Agreement dated as of March 30, 1998 by and between the Company and the Purchaser. "Average Closing Sales Price" as of a particular 12-month period means the average closing sales price of the Common Stock for each Business Day during such 12-month period. Such average shall be calculated as follows: (i) the average of the closing sales prices of the Common Stock quoted on the Nasdaq National Market for each Business Day during such 12-month period, or (ii) if no such quotations are available, the average of the closing sales prices for each Business Day during such 12-month period on the principal national securities exchange on which the Common Stock is listed, or (iii) if not listed on any national securities exchange, the average closing sales price for each Business Day during such 12-month period in the over-the-counter market as reported by the National Quotation Bureau, Incorporated or similar organization, or (iv) if no of such sales prices are available for each Business Day in such 12-month period, the average of the high bid and low asked quotations in the over-the-counter market as so reported for such Business Days, or (v) if no such quotations are available, the fair market value per share on such unreported Business Days as determined by an independent investment banker or appraiser, nationally recognized to be expert in making such valuations, selected by a majority of the directors of the Company. In the event "Average Closing Sales Price" is determined by an independent investment banker or appraiser pursuant to clause (v) of the foregoing sentence, such determination shall be provided to each Holder in writing together with a fair and accurate description of the basis for making such determination. The Requisite Holders shall be permitted to dispute such determination by written notice to the Company within ten (10) Business Days of receipt of such determination. In the event of such dispute, the Requisite Holders and the Company shall work together in good faith to mutually agree upon a second independent investment banker or appraiser to make a determination of "Average Closing Sales Price" whose fees and expenses shall be paid by the Company. "Average Closing Sales Price" shall be the average of the per share fair market values determined by both independent investment bankers or appraisers. 36 "Bankruptcy Law" means title 11, U.S. Code or any similar federal or state law for the relief of debtors. "Business Day" means any day which is not a Legal Holiday. "Capital Lease" means any lease of any property which would in accordance with GAAP be required to be classified and accounted for on the balance sheet of the lessee as a capital lease. "Capitalized Lease Obligation" means, with respect to any Person for any period, any obligation of such Person to pay rent or other amounts under a Capital Lease; the amount of such obligation shall be the capitalized amount thereof determined in accordance with such principles. "Capital Stock" means any and all shares, interests, participation or other equivalents (however designated) of corporate stock, including without limitation all common stock and preferred stock. "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. ss. 9601 et. seq.). "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any Person or group (as such term is used in Section 13(d)(3) of the Exchange Act); (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any Person or group (as defined above), other than Walter C. Bowen or a Related Party, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of more than 50% of the Fully Diluted Voting Securities of the Company (measured by voting power rather than number of shares) and (iv) the date on which a majority of the Board of Directors of the Company shall cease to be Continuing Directors. "Change of Control Date" shall have the meaning set forth in Section 5.4. "Change of Control Notice" shall have the meaning set forth in Section 5.4. "Change of Control Price" shall have the meaning set forth in Section 5.4. "Change of Control Repurchase Date" shall have the meaning set forth in Section 5.4. 37 "Change of Control Repurchase Offer" shall have the meaning set forth in Section 5.4. "Charter Documents" means the Articles of Organization, Articles of Incorporation or Certificate of Incorporation and Bylaws, as amended or restated (or both) to date, of the Company or a Subsidiary, as applicable. "Closing" shall have the meaning set forth in Section 1.2(b). "Closing Date" shall have the meaning set forth in Section 1.2(b). "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute or law thereto. "Commitment Letter" means that certain Commitment Letter dated as of the Closing Date by and between the Company, LTC Properties and LTC West, executed concurrently herewith. "Common Stock" means the Common Stock, no par value, of the Company. "Company" means Regent Assisted Living, Inc., an Oregon corporation. "Company SEC Documents" shall have the meaning set forth in Section 3.23. "Conversion Rate" shall have the meaning set forth in Section 6.2. "Conversion Shares" means the shares of Common Stock issuable upon conversion of the Notes. "Convertible Securities" shall have the meaning set forth in Section 6.6(c). "Consolidated " or "consolidated," when used with reference to any accounting term, means the amount described by such accounting term, determined on a consolidated basis in accordance with GAAP, after elimination of intercompany items. "Consolidated Net Worth" means, with respect to any Person as of any date, the sum of (i) the consolidated equity of the common stockholders of such Person and its consolidated Subsidiaries as of such date plus (ii) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of preferred stock that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such preferred stock, less (x) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made within 12 months after the acquisition of such business) subsequent to the Closing Date in the book value of any asset owned by such Person or a consolidated Subsidiary of such Person, (y) all investments as of such date in unconsolidated Subsidiaries and in Persons that are not Subsidiaries, and (z) all unamortized debt discount and 38 expense and unamortized deferred charges as of such date, all of the foregoing determined in accordance with GAAP. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on March 30, 1998 or (ii) was nominated for election or elected to such Board with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. "Default" means any event which is, or after notice or passage of time would be, an Event of Default. "Determination Date" shall have the meaning set forth in Section 6.4. "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by the Company under Section 6.6, into the aggregate consideration received, or deemed to have been received by the Company for such issue under Section 6.6, for such Additional Shares of Common Stock. "Environmental Laws" shall have the meaning set forth in Section 3.13. "Equity Interest" means Capital Stock or warrants, options or other rights to acquire Capital Stock (but excluding any debt note which is convertible into, or exchangeable for, Capital Stock). "Event of Default" shall have the meaning set forth in Section 7.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended, from time to time, and any successor statute or law thereto. "Fair Market Value" of Common Stock as of a particular date means the Weighted Average trading price of the Common Stock for the ten (10) consecutive Business Day period immediately preceding such date. Such Weighted Average shall be calculated as follows: (i) the Weighted Average of the sales price of the Common Stock quoted on the Nasdaq National Market for each of such ten (10) Business Days, or (ii) if no such quotations are available, the Weighted Average sales price for such ten (10) Business Days on the principal national securities exchange on which the Common Stock is listed, or (iii) if not listed on any national securities exchange, the Weighted Average sales price for such ten (10) Business Days in the over-the-counter market as reported by the National Quotation Bureau, Incorporated or similar organization, or (iv) if no of such sales prices are available for each Business Day in such ten (10) Business Day period, the Weighted Average of the high bid and low asked quotations in the over-the-counter market as so reported for such ten (10) Business Days, or (v) if no such 39 quotations are available, the fair market value per share on such date as determined by an independent investment banker or appraiser, nationally recognized to be expert in making such valuations, selected by a majority of the directors of the Company; provided, however, that in the event of an underwritten public offering of Common Stock, "Fair Market Value" shall mean the price to the public of such Common Stock in such underwritten public offering. In the event "Fair Market Value" is determined by an independent investment banker or appraiser pursuant to clause (v) of the foregoing sentence, such determination shall be provided to each Holder in writing together with a fair and accurate description of the basis for making such determination. The Requisite Holders shall be permitted to dispute such determination by written notice to the Company within ten (10) Business Days of receipt of such determination. In the event of such dispute, the Requisite Holders and the Company shall work together in good faith to mutually agree upon a second independent investment banker or appraiser to make a determination of "Fair Market Value" whose fees and expenses shall be paid by the Company. "Fair Market Value" shall be the average of the per share fair market values determined by both independent investment bankers or appraisers. "Fully Diluted Voting Securities" means each class of Voting Securities of a Person and each class of securities of a Person that, at the time of determination, can immediately subscribe for and/or convert to Voting Securities. "GAAP" means generally accepted accounting principles as used in the United States of America and applied in a manner consistent with past practices. "Holder" or "Holders" means the Purchaser (so long as it holds any Notes) and any other holder of any of the Notes. "Incorporated Documents" means the following of the Company's documents, each as filed with the SEC: (1) Form 10-K for the year ended December 31, 1997, (2) 1997 Proxy Statement dated April 10, 1997; and (3) Form 8-K dated December 29, 1997. "Indebtedness" means, with respect to any Person, the aggregate amount of, without duplication, the following: (a) all obligations for borrowed money; (b) all obligations evidenced by bonds, debentures, notes or other similar instruments; (c) all obligations to pay the deferred purchase price of property or services, except Trade Payables and obligations that do not exceed $300,000 in the aggregate, accrued commissions and other similar accrued current liabilities in respect of such obligations, in any case, not overdue and arising in the ordinary course of business; (d) all Capitalized Lease Obligations; 40 (e) all obligations or liabilities of others secured by a lien on any asset owned by such Person or Persons whether or not such obligation or liability is assumed; (f) all obligations of such Person or Persons, contingent or otherwise, in respect of any letters of credit or bankers' acceptances; and (g) all guaranties. "Indemnified Parties" shall have the meaning set forth in Section 5.6. "Independent Auditors" shall mean the independent certified public accountants of the Company. Until December 29, 1997, the Independent Auditors were Coopers & Lybrand, L.L.P. After such date and as of the date of the Agreement, the Independent Auditors are KPMG Peat Marwick LLP. "Inspectors" shall have the meaning set forth in Section 5.13. "Intangibles" shall have the meaning set forth in Section 3.16. "Junior Claims" shall have the meaning set forth in Section 8.7. "Key Employee" means Walter C. Bowen. "Knowledge of the Company" means to the actual knowledge of each of the Chairman, Chief Executive Officer, Chief Financial Officer, General Counsel, President, Treasurer and any Senior or Executive Vice President of the Company, after due inquiry and investigation. "Legal Holiday" means a Saturday, Sunday or day on which banks and trust companies in the principal place of business of the Company or in California are not required to be open. If a payment date is a Legal Holiday, payment may be made on the next succeeding day that is not a Legal Holiday, and interest shall accrue for the intervening period. "Lien" means any mortgage, pledge, lien, taxes, encumbrance, charge or adverse claim affecting title or resulting in a charge against real or personal property, or note interest of any kind (including, without limitation, any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Losses" shall have the meaning set forth in Section 5.6. "LTC Equity Holding Company" means LTC Equity Holding Company, Inc., a Nevada corporation. "LTC Properties" means LTC Properties, Inc., a Maryland corporation. 41 "LTC West" means LTC West, Inc., a Nevada corporation. "Material Adverse Effect" means (i) any adverse effect upon the issuance, validity or enforceability of a Note, this Agreement, the Registration Rights Agreement or the Commitment Letter, (ii) any material adverse effect on the results of operations, financial condition, properties, assets, business or prospects of the Company and its Subsidiaries, taken as a whole, or (iii) any adverse effect on the ability of the Company to fulfill its obligations under the Notes, this Agreement, the Registration Rights Agreement or the Commitment Letter or any document contemplated hereby or thereby. "Material Contract" shall have the meaning set forth in Section 3.17. "Maturity Date" means March 31, 2008. "Note Register" shall have the meaning set forth in Section 1.3. "Note" or "Notes" shall have the meaning set forth in Section 1.1. "Officers' Certificate" means a certificate signed by any two officers, one of whom must be the Chairman of the Board, the President, the Treasurer or a Vice President of the Company. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Purchaser. "Payment" or "Distribution" shall have the meaning set forth in Section 8.1. "Person" means an individual, partnership, corporation, limited liability company, trust or unincorporated organization or a government or agency or political subdivision thereof. "Plan of Liquidation" means, with respect to any Person, a plan that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously, in phases or otherwise) (i) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such person otherwise than as an entirety or substantially as an entirety and (ii) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition and all or substantially all of the remaining assets of such Person to holders of Capital Stock of such Person. "Preferred Stock" means the Series A Preferred Stock, no par value, and the Series B Preferred Stock, no par value, of the Company. "Property" or "property" means any assets or property of any kind or nature whatsoever, real, personal or mixed (including fixtures), whether tangible or intangible, provided that the terms "Property" or "property", when used with respect to any Person, shall not include Notes issued by such. "Purchaser" means the purchaser on the signature pages hereto. 42 "Registration Rights Agreement" means that certain Registration Rights Agreement dated as of the Closing Date by and among the Company and the Purchaser, executed concurrently herewith. "Related Party" with respect to Walter C. Bowen means (A) any spouse or immediate family member of such Person or (B) or trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of Walter C. Bowen and/or such other Persons referred to in the immediately preceding clause (A). "Reorganizations" shall have the meaning set forth in Section 6.5. "Requisite Noteholders" shall mean the holders of Notes issued to the Purchaser pursuant to this Agreement and the Notes whenever issued to all other purchasers pursuant to similar agreements dated on or about the date of this Agreement with an aggregate principal amount equal to or greater than 50% of the aggregate principal amount of all then outstanding Notes issued to the Purchaser pursuant to this Agreement and the Notes whenever issued to all other purchasers pursuant to similar agreements dated on or about the date of this Agreement. "Rights" shall have the meaning assigned to such term in Section 6.6(c). "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended from time to time, and any successor statute or law thereto. "Senior Claims" shall have the meaning set forth in Section 8.7. "Senior Indebtedness" means the principal of, premium, if any, and accrued interest on any other Indebtedness of the Company and all fees, expenses, reimbursements, indemnities and other amounts payable with respect to such Indebtedness, whether such Indebtedness is outstanding on the date of this Agreement or thereafter created, incurred, assumed, or guaranteed by the Company unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such Indebtedness shall not be senior, or is pari passu or subordinate, in right or payment to the Notes; provided that Senior Indebtedness shall not include (i) in the case of each Note the other Notes (ii) Indebtedness of the Company to a Subsidiary of the Company, (iii) Indebtedness of or amounts owed by the Company for compensation to directors or members of senior management that has not been approved by the Compensation Committee of the Board; (iv) Indebtedness guaranteed by the Company on behalf of any equityholder, director, officer or employee of the Company or of any equityholder, director, officer or employee of any of the Company's Subsidiaries, (v) any Trade Payables (including without limitation Indebtedness incurred for the purchase of goods or materials or for services obtained in the ordinary course of business), (vi) Indebtedness of the Company that is subordinated by its terms in right of payment to any other Indebtedness of the Company, and (vii) Indebtedness incurred in violation of this Agreement. 43 "Senior Representative" shall have the meaning set forth in Section 8.7. "Subordinated Indebtedness" means the principal, premium, if any, and interest on any Indebtedness of the Company which by its terms is expressly subordinated in right of payment to the Notes. "Subsidiary" means, with respect to any Person (the "parent"), any corporation, association or other business entity of which Notes or other ownership interests representing more than 50% of the ordinary voting power are, at the time as of which any determination is being made, owned or controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Stock Option Plan" shall mean the Company's 1995 Stock Incentive Plan as in effect on the Closing Date. "Surviving Person" shall have the meaning set forth in Section 5.7(b)(1). "Total Price" means, with respect to the Common Stock on any Business Day, the product of: (x) the closing sales price of the Common Stock quoted on the Nasdaq National Market on such Business Day, or if no such quotations are available, on the principal national securities exchange on which the Common Stock is listed on such Business Day, or if not listed on any national securities exchange, in the over-the-counter market as reported by the National Quotation Bureau, Incorporated or similar organization on such Business Day, or if no such sales prices are available, the high bid and low asked quotations in the over-the-counter market on such Business Day multiplied by (y) the number of shares of Common Stock traded on such market or exchange, as applicable, on such Business Day. "Trade Payables" means, with respect to any Person, accounts payable and other similar accrued current liabilities in respect of obligations or indebtedness to trade creditors created, assumed or guaranteed by such Person or any of its Subsidiaries in the ordinary course of business in connection with the obtaining of property or services. "Voting Securities" means any class of Equity Interests of a Person pursuant to which the holders thereof have, at the time of determination, the general voting power under ordinary circumstances to vote for the election of directors, managers, trustees or general partners of any Person (irrespective of whether or not at the time any other class or classes will have or might have voting power by reason of the happening of any contingency). "Weighted Average" means, with respect to the Common Stock during any ten (10) consecutive Business Day period, the sum of the Total Price of such Common Stock for each Business Day during such ten (10) consecutive Business Day period divided by ten (10). 10.2. Rules of Construction Unless the context otherwise requires 44 (a) a term has the meaning assigned to it; (b) "or" is not exclusive; (c) words in the singular include the plural, and words in the plural include the singular; (d) provisions apply to successive events and transactions; (e) "herein," "hereof" and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision; and (f) the masculine shall include the feminine and neuter genders as appropriate. SECTION 11. MISCELLANEOUS 11.1. Notices All notices and other communications provided for or permitted hereunder shall be made by hand-delivery, first-class mail, telex, telecopier, or overnight air courier guaranteeing next day delivery: (a) if to any Purchaser at address set forth on the signature pages hereto, with a copy to Latham & Watkins, 633 W. Fifth Street, Suite 4000, Los Angeles, California 90071, Attention: Eva Herbst Davis, Esq.; and (b) if to the Company, to Regent Assisted Living, Inc., 121 SW Morrison, Suite 1000, Attention: General Counsel with a copy to Stoel Rives LLP, 900 SW Fifth Avenue, Suite 2300, Portland, Oregon 97204, Attention: Todd Bauman, Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. The parties may change the addresses to which notices are to be given by giving five days' prior notice of such change in accordance herewith. 11.2. Undertaking for Costs In any suit for the enforcement of any right or remedy under this Agreement, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. 45 11.3. Successors and Assigns This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties. 11.4. Counterparts This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 11.5. Headings The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 11.6. Governing Law This Agreement shall be governed by and construed in accordance with the internal laws of the State of California. 11.7. Entire Agreement This Agreement, together with the Notes, the Registration Rights Agreement and the Commitment Letter is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, together with the Notes, the Registration Rights Agreement and the Commitment Letter supersedes all prior agreements and understandings between the parties with respect to such subject matter. 11.8. Severability In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected, it being intended that the Purchaser's rights and privileges shall be enforceable to the fullest extent permitted by law. 11.9. Transfer The Notes may not be transferred, sold, assigned, pledged, hypothecated or otherwise disposed of unless (a) such transfer is pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or (b) the Company has been furnished with a satisfactory opinion of counsel for the Holder, at such Holder's expense, that 46 such transfer is exempt from the provisions of Section 5 of the Securities Act, the rules and regulations in effect thereunder and any applicable state securities laws. 47 IN WITNESS WHEREOF, this Agreement has been duly executed by the parties set forth below as of the date first written above. REGENT ASSISTED LIVING, INC., an Oregon corporation BY: WALTER C. BOWEN ---------------------------------- Name: Walter C. Bowen Title: President ANDRE C. DIMITRIADIS, an individual ANDRE C. DIMITRIADIS - --------------------------------------- Andre C. Dimitriadis Address: 4470 Vista Del Preseas Malibu, California 90265 48 ANNEX A THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (A) SUCH TRANSFER IS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (B) THE COMPANY HAS BEEN FURNISHED WITH A SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER THAT SUCH TRANSFER IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF THE ACT, THE RULES AND REGULATIONS IN EFFECT THEREUNDER AND ANY APPLICABLE STATE SECURITIES LAWS. REGENT ASSISTED LIVING, INC. CONVERTIBLE SUBORDINATED NOTE DUE MARCH 31, 2008 Note No. ________ $_______________________ FOR VALUE RECEIVED, the undersigned, REGENT ASSISTED LIVING, INC., a corporation organized and existing under the laws of Oregon (herein called the "Company"), hereby promises to pay to the order of ____________________________ or registered assigns ("Holder"), the principal sum of ___________________________ DOLLARS (or so much thereof as shall remain outstanding) on March 31, 2008. Payments are to be made as provided in the Agreement (as defined herein). This Note is one of the Notes issued pursuant to the Convertible Subordinated Note Purchase Agreement dated as of March 30, 1998 (the "Agreement"), by and between the Company and Andre C. Dimitriadis, an individual, and is also entitled to the benefits thereof to the extent provided in the Agreement. This Note is subject to (i) conversion, in whole or in part, at the option of the Holder, pursuant to Section 6.1(a) of the Agreement, (ii) conversion, in whole but not in part, at the option of the Company upon the satisfaction of certain conditions pursuant to Section 6.1(b) of the Agreement and (iii) repurchase, in whole or in part, upon a Change of Control pursuant to Section 5.4 of the Agreement. Upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. The Company may deem and treat the person in whose name this Note is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary. If an Event of Default shall occur and be continuing, this Note may, under certain circumstances, become or be declared due and payable in the manner and with the effect provided in the Agreement. Certain terms and provisions of this Note may be amended or compliance herewith waived on the terms and provisions provided for in the Agreement. The Note is subordinated in both right of payment and time of payment to certain Senior Indebtedness, as defined and described in Section 8 of the Agreement. Capitalized terms used herein without definition shall have the meaning set forth for such terms in the Agreement. REGENT ASSISTED LIVING, INC., an Oregon corporation By:-------------------------------------- Name: Title: 2 ANNEX B FORM OF OPINION OF COMPANY COUNSEL 1. The Company and each of its Subsidiaries are corporations duly organized and validly existing in good standing under the laws of their respective jurisdictions of incorporation. 2. The Company and each of its Subsidiaries have all requisite power and authority to own or hold under lease the properties it purports so to own or hold except where the failure so to own or hold could not have a Material Adverse Effect and to transact their respective businesses as now transacted and proposed to be transacted. 3. The Company and each of its Subsidiaries are duly qualified as foreign corporations and are in good standing in each jurisdiction in which the character of the properties owned or held under lease by them or the nature of the business transacted by them requires such qualification, except where the failure so to be qualified or be in good standing could not have a Material Adverse Effect. 4. The Company has taken all actions necessary to authorize it (i) to execute, deliver and perform all of its obligations under the Agreement, the Registration Rights Agreement and the Commitment Letter, (ii) to issue and perform all of its obligations under the Notes and (iii) to consummate the transactions contemplated hereby and thereby. 5. The total number of shares of Capital Stock which the Company has authority to issue is 30,000,000 shares, consisting of 25,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. 6. As of March 30, 1998, there were 4,633,000 shares of Common Stock issued and outstanding, and 1,666,667 shares of Preferred Stock issued and outstanding. Such shares of Common Stock and Preferred Stock have been duly authorized and were validly issued, are fully paid and nonassessable, were issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities of the Company. 7. Neither the Company nor any of its Subsidiaries has outstanding any securities convertible into or exchangeable for any shares of Capital Stock nor does it have outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, any Capital Stock or securities convertible into or exchangeable for any Capital Stock other than (i) the Notes to be issued pursuant to the Agreement or pursuant to other similar agreements dated on or about the date of this Agreement, (ii) 1,666,667 shares of Preferred Stock convertible into Common Stock, and (iii) options and warrants to purchase shares of Common Stock as set forth and for the numbers of shares set forth in the Disclosure Schedule to the Agreement. 8. The Company has duly authorized and reserved for issuance the Conversion Shares, and the Conversion Shares will, when issued, be duly and validly issued, fully paid and nonassessable and free from all Liens. 9. Neither the execution or delivery of the Agreement, the Registration Rights Agreement or the Commitment Letter by the Company nor the issuance, sale or delivery of the Notes nor the performance of its respective obligations hereunder or thereunder will: (a) violate any provision of the Charter Documents of the Company; (b) violate any statute, law, rule or regulation or any judgment, decree, order, regulation or rule of any court or governmental authority to which the Company, any of its Subsidiaries, or any of their respective properties may be subject; (c) permit or cause the acceleration of the maturity of any debt or obligation of the Company or any of its Subsidiaries; (d) violate, or be in conflict with, or constitute a default under, or permit the termination of, or require the consent of any Person under, or result in the creation of any Lien upon any property of the Company or any of its Subsidiaries under, any mortgage, indenture, loan agreement, note, debenture or other agreement for borrowed money or any other material agreement to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries (or their respective properties) may be bound, other than such violations, conflicts, defaults, terminations and Liens, or such failures to obtain consents, which could not reasonably be expected to result in a Material Adverse Effect. 10. The sale of the Notes hereunder is exempt from the registration and prospectus delivery requirements of the Securities Act. 11. Neither the Company nor any of its Subsidiaries is an "investment company" or a Person directly or indirectly "controlled" by or acting on behalf of an "investment company" within the meaning of the United States Investment Company Act of 1940, as amended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ssue Date: March 31, 1998 Note No. 1998-2 $160,000 FOR VALUE RECEIVED, the undersigned, REGENT ASSISTED LIVING, INC., a corporation organized and existing under the laws of Oregon (herein called the "Company"), hereby promises to pay to the order of ANDRE C. DIMITRIADIS or registered assigns ("Holder"), the principal sum of ONE HUNDRED SIXTY THOUSAND DOLLARS (or so much thereof as shall remain outstanding) on March 31, 2008. Payments are to be made as provided in the Agreement (as defined herein). This Note is one of the Notes issued pursuant to the Convertible Subordinated Note Purchase Agreement dated as of March 30, 1998 (the "Agreement"), by and between the Company and Andre C. Dimitriadis, an individual, and is also entitled to the benefits thereof to the extent provided in the Agreement. This Note is subject to (i) conversion, in whole or in part, at the option of the Holder, pursuant to Section 6.1(a) of the Agreement, (ii) conversion, in whole but not in part, at the option of the Company upon the satisfaction of certain conditions pursuant to Section 6.1(b) of the Agreement and (iii) repurchase, in whole or in part, upon a Change of Control pursuant to Section 5.4 of the Agreement. Upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. The Company may deem and treat the person in whose name this Note is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary. If an Event of Default shall occur and be continuing, this Note may, under certain circumstances, become or be declared due and payable in the manner and with the effect provided in the Agreement. Certain terms and provisions of this Note may be amended or compliance herewith waived on the terms and provisions provided for in the Agreement. The Note is subordinated in both right of payment and time of payment to certain Senior Indebtedness, as defined and described in Section 8 of the Agreement. Capitalized terms used herein without definition shall have the meaning set forth for such terms in the Agreement. REGENT ASSISTED LIVING, INC., an Oregon corporation By: WALTER C. BOWEN ------------------------------------ Walter C. Bowen President EX-4.6 7 CONVERTIBLE SUB. NOTE PURCHASE AGT. (PIECZYNSKI) ------------------------------------------------------------------- REGENT ASSISTED LIVING, INC. and JAMES J. PIECZYNSKI $160,000 Principal Amount of 7.5% Convertible Subordinated Notes Due March 31, 2008 CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT ------------------------------------------------------------------ Dated as of March 30, 1998 TABLE OF CONTENTS Page SECTION 1. PURCHASE AND SALE OF NOTES..........................................1 1.1. Issue of Notes...................................................1 1.2. Purchase and Sale of Notes.......................................1 1.3. Maintenance of Note Register.....................................2 1.4. Issue Taxes......................................................2 1.5. Direct Payment...................................................3 1.6. Lost, Etc. Notes.................................................3 SECTION 2. CLOSING CONDITIONS..................................................4 2.1. Delivery of Documents............................................4 2.2. Delivery of Other Agreements.....................................5 2.3. Representations and Warranties, Agreements and Covenants.........5 2.4. No Event of Default..............................................6 2.5. Proceedings Satisfactory.........................................6 2.6. Consents and Permits.............................................6 2.7. No Material Adverse Change.......................................6 SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................6 3.1. Organization; Power and Authority................................6 3.2. Authorization....................................................7 3.3. Capital Stock....................................................7 3.4. No Other Registration Rights.....................................7 3.5. No Violation or Conflict; No Default.............................8 3.6. Margin Regulations...............................................8 3.7. Private Offering.................................................8 3.8. Due Authorization of Material Contracts..........................9 3.9. Financial Statements.............................................9 3.10. Litigation; Judgments..........................................10 3.11. Taxes..........................................................10 i 3.12. Investment Company Act.........................................10 3.13. Environmental Matters..........................................10 3.14. Labor Relations................................................11 3.15. Real Property; Leases..........................................11 3.16. Intellectual Property; Licenses................................11 3.17. Defaults.......................................................12 3.18. Brokers........................................................12 3.19. Existing Indebtedness..........................................12 3.20. Compliance with Law; Permits...................................13 3.21. Insurance......................................................13 3.22. Material Events................................................13 3.23. SEC Documents; Undisclosed Liabilities.........................14 3.24. Material Misstatements or Omissions............................15 3.25. Survival of Representations and Warranties.....................15 SECTION 4. REPRESENTATIONS AND WARRANTIES OF EACH PURCHASER...................15 4.1. Purchase for Own Account........................................15 4.2. Accredited Investor.............................................16 4.3. Authorization...................................................16 4.4. Brokers.........................................................16 SECTION 5. COVENANTS..........................................................16 5.1. Payment of Notes; Satisfaction of Obligations...................16 5.2. Notice of Default...............................................17 5.3. Limitation on Additional Indebtedness...........................17 5.4. Change of Control...............................................17 5.5. Stay, Extension and Usury Laws..................................18 5.6. Indemnification.................................................19 5.7. Corporate Existence; Merger; Successor Corporation..............20 5.8. Taxes...........................................................21 5.9. Investment Company Act..........................................21 5.10. Insurance......................................................22 ii 5.11. Inconsistent Agreements........................................22 5.12. Compliance with Laws...........................................22 5.13. Inspection of Properties and Records...........................22 SECTION 6. CONVERSION OF NOTES................................................23 6.1. Conversion......................................................23 6.2. Conversion Rate.................................................24 6.3. Fractional Shares...............................................24 6.4. Adjustments for Stock Splits, Combinations and Dividends........24 6.5. Reorganization, Mergers, Consolidations or Sales of Assets......25 6.6. Sale of Shares Below Market or Conversion Price.................25 6.7. Adjustment for Failure to Quote on Nasdaq National Market.......27 6.8. Accountants' Certificate of Adjustment..........................27 6.9. Reservation of Shares Issuable Upon Conversion..................27 6.10. No Impairment..................................................28 SECTION 7. DEFAULTS AND REMEDIES..............................................28 7.1. Events of Default...............................................28 7.2. Acceleration of Notes...........................................29 7.3. Other Remedies..................................................29 SECTION 8. SUBORDINATION......................................................30 8.1. Notes Subordinated to Senior Indebtedness.......................30 8.2. Company Not to Make Payments with Respect to Notes in Certain Circumstances...........................................30 8.3. Subrogation of Notes............................................32 8.4. No Impairment of Subordination..................................32 8.5. Section 8 Not to Prevent Events of Default......................32 8.6. Securities Senior to Subordinated Indebtedness..................32 8.7. Assignment of Junior Claims.....................................33 SECTION 9. AMENDMENTS AND WAIVERS.............................................33 9.1. With Consent of Holders.........................................33 9.2. Revocation and Effect of Consents...............................34 iii 9.3. Notation on or Exchange of Notes................................35 SECTION 10. DEFINITIONS.......................................................35 10.1. Definitions....................................................35 10.2. Rules of Construction..........................................44 SECTION 11. MISCELLANEOUS.....................................................45 11.1. Notices........................................................45 11.2. Undertaking for Costs..........................................45 11.3. Successors and Assigns.........................................46 11.4. Counterparts...................................................46 11.5. Headings.......................................................46 11.6. Governing Law..................................................46 11.7. Entire Agreement...............................................46 11.8. Severability...................................................46 11.9. Transfer.......................................................46 iv CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT This CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT, is dated as of March 30, 1998 (this "Agreement"), and entered into by and between REGENT ASSISTED LIVING, INC., an Oregon corporation (the "Company") and JAMES J. PIECZYNSKI, an individual (the "Purchaser"). Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in Section 10.1 hereof. In consideration of the premises, mutual covenants and agreements hereinafter contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company agrees as follows: SECTION 1. PURCHASE AND SALE OF NOTES 1.1. Issue of Notes On or before the Closing, (a) The Company will have authorized the issue and sale of $160,000 aggregate principal amount of its 7.5% Convertible Subordinated Notes due March 31, 2008 (the "Notes") to the Purchaser, to be substantially in the form attached hereto as Annex A. (b) The Notes shall be substantially in the form attached hereto as Annex A, including such other notations, legends or endorsements set forth therefor or required by law. The Notes shall be dated the date of their issuance. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Agreement and, to the extent applicable, the Company and the Purchaser, by their execution and delivery of this Agreement, expressly agree to such terms and provisions and to be bound thereby. 1.2. Purchase and Sale of Notes (a) Purchase and Sale. The Company agrees to sell and, subject to the terms and conditions set forth herein and in the Registration Rights Agreement and in reliance on the representations and warranties of the Company contained or incorporated herein, the Purchaser agrees to purchase the Notes for an aggregate purchase price of $160,000. (b) Closing. The purchase and sale of the Notes referred to in Section 1.2(a)(1) shall take place at a closing (the "Closing") at the offices of Latham & Watkins, 633 West Fifth Street, Suite 4000, Los Angeles, California at 2:00 p.m. on March 30, 1998 (the "Closing Date"). At the Closing, the Company will deliver to the Purchaser the Notes to be purchased by the Purchaser (in such permitted denomination or denominations and registered in the Purchaser's name or the name of such nominee or nominees as the Purchaser may request) on the Closing Date, dated the Closing Date, against payment of the purchase price therefor by intra-bank or federal funds bank wire transfer of same day funds to such bank account as the Company shall designate at least two Business Days prior to the Closing. (c) Fees and Expenses. Whether or not the Notes are sold, the Company agrees to pay or reimburse all expenses relating to this Agreement, including but not limited to: (1) the reasonable fees and other expenses of the Purchaser's counsel, Latham & Watkins, in connection herewith (not to exceed $50,000 in the aggregate, relating to this Agreement and similar agreements dated on or about the date of this Agreement); (2) any reasonable out-of-pocket fees and expenses (including the reasonable fees and expenses of counsel) in connection with any registration or qualification of the Notes required in connection with the offer and sale of the Notes at the Closing pursuant to this Agreement under the securities or "blue sky" laws of any jurisdiction requiring such registration or qualification or in connection with obtaining any exemptions from such requirements; and (3) the Purchaser's reasonable out-of-pocket expenses (including the reasonable fees and expenses of counsel) relating to any amendment, or modification of, or any waiver, or consent or preservation of rights under this Agreement, the Notes, the Registration Rights Agreement and any other documents contemplated hereby or thereby. Purchaser may deduct such expenses from the purchase price of the Notes; provided that the Purchaser agrees to provide the Company with a statement describing any amounts to be so paid at least one Business Day prior to the Closing. 1.3. Maintenance of Note Register The Company shall cause to be kept at its principal office a register for the registration and transfer of the Notes (the "Note Register"). The names and addresses of the Holders of Notes, the transfer of Notes, and the names and addresses of the transferees of the Notes shall be registered in the Note Register. The Person in whose name any registered Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes of this Agreement and the Company shall not be affected by any notice to the contrary, until due presentment of such Note for registration of transfer so provided in this Section 1.3. Payment of or on account of the principal and interest on any registered Notes shall be made to or upon the written order of such registered holder. 1.4. Issue Taxes The Company agrees to pay all taxes owed by or on behalf of the Company in connection with the issuance, sale, delivery or transfer by the Company to the Purchaser of the Notes and the execution and delivery of the agreements and instruments contemplated hereby and any modification of any of such Notes, agreements and instruments and will save the 2 Purchaser harmless without limitation as to time against any and all liabilities with respect to all such taxes. The Purchaser agrees to pay all taxes owed by or on behalf of the Purchaser in connection with the issuance, sale, delivery or transfer by the Company to the Purchaser of the Notes and the execution and delivery of the agreements and instruments contemplated hereby and any modification of any of such Notes, agreements and instruments and will save the Company harmless without limitation as to time against any and all liabilities with respect to all such taxes. The obligations of the Company and the Purchaser under this Section 1.4 shall survive the payment or prepayment of the Notes and the termination of this Agreement. 1.5. Direct Payment (a) The Company will pay or cause to be paid all amounts payable with respect to any Note (without any presentment of such Note and without any notation of such payment being made thereon) by crediting (before 11:00 a.m., Pacific time), by federal funds bank wire transfer to each Holder's account in any bank in the United States as may be designated and specified in writing by such Holder at least two Business Days prior thereto. (b) Notwithstanding anything to the contrary contained in the Notes, if any principal amount payable with respect to a Note is payable on a Legal Holiday, then the Company shall pay such amount on the next succeeding Business Day, and interest shall accrue on such amount until the date on which such amount is paid and payment of such accrued interest shall be made concurrently with the payment of such amount, provided that the Company may elect to pay in full (but not in part) any such amount on the last Business Day prior to the date such payment otherwise would be due, and no such additional interest shall accrue on such amount. Notwithstanding anything to the contrary contained in the Notes, if any interest payable with respect to a Note is payable on a Legal Holiday, then the Company shall pay such interest on the next succeeding Business Day, and such extension of time shall be included in the computation of the interest payment, provided that the Company may elect to pay in full (but not in part) any such interest on the last Business Day prior to the date such payment otherwise would be due, and such diminution in time may, at the Company's option, be included in the computation of the interest payment. 1.6. Lost, Etc. Notes Notwithstanding any provision to the contrary, if any Note of which the Purchaser or any other Holder (or nominee thereof) which is a transferee is the owner is mutilated, destroyed, lost or stolen, then the affidavit of the Purchaser or such Holder, if an individual, or of the Purchaser's or such Holder's treasurer or assistant treasurer (or other authorized officer), if a Person other than an individual, briefly setting forth the circumstances with respect to such mutilation, destruction, loss or theft, shall be accepted as satisfactory evidence thereof, and no indemnity, note or payment of charges or expenses shall be required as a condition to the execution and delivery by the Company or the transfer agent with respect to such Note, of new Notes for a like aggregate principal amount or number of shares, as applicable, in substitution therefor, other than such Purchaser's or such Holder's unsecured written agreement reasonably 3 satisfactory to indemnify the Company or the transfer agent, as the case may be, which written agreement may be required by the Company. SECTION 2. CLOSING CONDITIONS The obligations of the Purchaser to purchase and pay for the Notes to be delivered to such Purchaser at the Closing shall be subject to the satisfaction of the following conditions on or before the Closing Date: 2.1. Delivery of Documents The Company shall have delivered to the Purchaser, in form and substance reasonably satisfactory to the Purchaser, the following: (a) The Notes being purchased by the Purchaser pursuant to Section 1.2(a)(1), duly executed by the Company, in the aggregate principal amount of $160,000. (b) An opinion, dated the Closing Date and addressed to the Purchaser, from David R. Gibson, counsel for the Company, as to the matters set forth on Annex B. In rendering such opinion, such counsel may rely as to factual matters upon certificates or other documents furnished by officers and directors of the Company (copies of which shall be delivered to the Purchaser) and by government officials, and upon such other documents as such counsel reasonably deems appropriate as a basis for its opinion. Such counsel shall opine as to the federal laws of the United States, the laws of the State of Oregon. (c) Resolutions of the Board of Directors of the Company, certified by the Secretary or Assistant Secretary, to be duly adopted and in full force and effect on the Closing Date, authorizing (i) the execution, delivery and performance of this Agreement, the Registration Rights Agreement and the Commitment Letter and the consummation of transactions contemplated hereby and thereby, (ii) the issuance of the Notes to be purchased by the Purchaser and (iii) specific officers to execute and deliver this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter. (d) Certificates executed by any two executive officers of the Company, dated the Closing Date, certifying (i) that all of the conditions set forth in Section 2 of this Agreement are satisfied on and as of such date, (ii) that all of the representations and warranties of the Company contained or incorporated by reference herein that (A) are qualified as to materiality are true and correct on and as of such date as though made on and as of such date and that (B) are not qualified as to materiality are true and correct in all material respects on and as of such date as though made on and as of such date, and no event has occurred and is continuing, or would result from the issuance of the Notes or the extension of borrowings under the Commitment Letter, which constitutes or would constitute a Default or an Event of Default and (iii) as to such other matters as the Purchaser may request in the exercise of its reasonable discretion. 4 (e) Governmental certificates, dated the most recent practicable date but in no event more than thirty (30) calendar days prior to the Closing Date showing that the Company was incorporated under the Oregon Business Corporation Act, is active on the records of the Corporation Division and is qualified as a foreign corporation and in good standing in all other jurisdictions in which it is qualified to transact business, except where the failure to be so qualified would not have a Material Adverse Effect. (f) Copies of each consent, license and approval required in connection with the execution, delivery and performance by the Company of this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter and the consummation of the transactions contemplated hereby and thereby. (g) Copies of the Charter Documents of the Company, certified as of a recent date but in no event more than thirty (30) calendar days prior to the Closing Date by the Secretary of State of the State of Oregon and certified by the Secretary or Assistant Secretary of the Company (or person possessing comparable authority of the Company), as true and correct on and as of the Closing Date. (h) Certificates of the Secretary or an Assistant Secretary of the Company as to the incumbency and signatures of the officers or representatives of such entity executing this Agreement, the Notes, the Registration Rights Agreement, the Commitment Letter and any other certificate or other document to be delivered pursuant hereto or thereto on the Closing Date, together with evidence of the incumbency of such Secretary or Assistant Secretary; (i) Copies of all agreements associated with or entered into in connection with the investment of Prudential Private Equity Investors III, L.P. in the Company's Preferred Stock and if requested by the Purchaser prior to the Closing Date, copies of all lease agreements to which the Company is a party. 2.2. Delivery of Other Agreements The Company shall have executed and delivered the Registration Rights Agreement and the Commitment Letter. 2.3. Representations and Warranties, Agreements and Covenants All of the representations and warranties of the Company contained herein that (A) are qualified as to materiality shall be true and correct on and as of the Closing Date, except to the extent any representation or warranty expressly relates to an earlier date and that (B) are not qualified as to materiality are true and correct in all material respects on and as of the Closing Date, except to the extent any representation or warranty expressly relates to an earlier date. The Company shall have performed or complied with all agreements, covenants and conditions contained herein and in the Registration Rights Agreement and the Commitment Letter which are required to be performed or complied with by the Company on or before the Closing Date. 5 2.4. No Event of Default No event shall have occurred and be continuing, or would result from the purchase of the Notes or the extension of borrowings pursuant to the Commitment Letter, which constitutes or would constitute a Default or an Event of Default. 2.5. Proceedings Satisfactory All proceedings taken in connection with the sale of the Notes, the transactions contemplated hereby, and all documents and papers relating thereto, shall be reasonably satisfactory to the Purchaser. The Purchaser and its counsel shall have received copies of such documents and papers as they may reasonably request in connection therewith, all in form and substance satisfactory to the Purchaser. Any document annexed to this Agreement or any other document contemplated by this Agreement not approved by the Purchaser in writing as to form and substance on the date this Agreement is executed shall be satisfactory in form and substance to the Purchaser. 2.6. Consents and Permits The Company shall have received all consents, approvals, and authorizations and sent or made all notices, filings, registrations and qualifications required for the issuance of the Notes, all of which are disclosed on the Disclosure Schedule. 2.7. No Material Adverse Change Since the date of this Agreement, neither the Company nor any of its Subsidiaries shall have suffered any material adverse change in its properties, business, prospects, operations, earnings, assets, liabilities or condition (financial or otherwise) which would reasonably likely to result in a Material Adverse Effect. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth in the Disclosure Schedule attached to this Agreement (each scheduled item contained therein referencing the Section of this Agreement that it qualifies), the Company represents and warrants as follows: 3.1. Organization; Power and Authority The Company and each of its Subsidiaries are corporations duly organized and validly existing in good standing under the laws of their respective jurisdictions of incorporation. The Company and each of its Subsidiaries have all requisite power and authority to own or hold under lease the properties it purports so to own or hold except where the failure so to own or hold could not have a Material Adverse Effect and to transact their respective businesses as now transacted. The Company and each of its Subsidiaries are duly qualified as foreign corporations and are in good standing in each jurisdiction in which the character of the properties owned or held under lease by them or the nature of the business transacted by them requires such 6 qualification, except where the failure so to be qualified or be in good standing could not have a Material Adverse Effect. 3.2. Authorization The Company has taken all actions necessary to authorize it (i) to execute, deliver and perform all of its obligations under this Agreement, the Registration Rights Agreement and the Commitment Letter, (ii) to issue and perform all of its obligations under the Notes and (iii) to consummate the transactions contemplated hereby and thereby. Each of this Agreement, the Notes, the Registration Rights Agreement, and the Commitment Letter is a legally valid and binding obligation of the Company, enforceable against it in accordance with its terms, except for (a) the effect thereon of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting the rights of creditors generally and (b) limitations imposed by federal or state law or equitable principles upon the specific enforceability of any of the remedies, covenants or other provisions thereof and upon the availability of injunctive relief or other equitable remedies. 3.3. Capital Stock The total number of shares of Capital Stock which the Company has authority to issue is 30,000,000 shares, consisting of 25,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. The Company has the power and authority and has taken all actions (corporate or other) necessary to authorize it to enter into and perform its obligations and undertakings under this Agreement. As of March 30, 1998, there were 4,633,000 shares of Common Stock issued and outstanding, and 1,666,667 shares of Preferred Stock issued and outstanding. Such shares of Common Stock and Preferred Stock have been duly authorized and were validly issued, are fully paid and nonassessable, were issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities of the Company. Neither the Company nor any of its Subsidiaries has outstanding any securities convertible into or exchangeable for any shares of Capital Stock nor does it have outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, any Capital Stock or securities convertible into or exchangeable for any Capital Stock other than (i) the Notes to be issued pursuant to this Agreement or pursuant to other similar agreements dated on or about the date of this Agreement, (ii) 1,666,667 shares of Preferred Stock convertible into Common Stock, and (iii) options and warrants to purchase shares of Common Stock as set forth and for the numbers of shares set forth on the Disclosure Schedule. The Company has duly authorized and reserved for issuance the Conversion Shares, and the Conversion Shares will, when issued, be duly and validly issued, fully paid and nonassessable and free from all Liens. 3.4. No Other Registration Rights Except for the Notes to be issued in connection with the transactions contemplated by this Agreement or pursuant to other similar agreements dated on or about the date of this Agreement, there are no contracts, agreements or understandings between the 7 Company and any other Person granting such Person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to any other registration statement filed by the Company under the Securities Act. 3.5. No Violation or Conflict; No Default Neither the execution or delivery of this Agreement, the Registration Rights Agreement or the Commitment Letter by the Company nor the issuance, sale or delivery of the Notes nor the performance of its respective obligations hereunder or thereunder will: (a) violate any provision of the Charter Documents of the Company; (b) violate any statute, law, rule or regulation or any judgment, decree, order, regulation or rule of any court or governmental authority to which the Company, any of its Subsidiaries, or any of their respective properties may be subject; (c) permit or cause the acceleration of the maturity of any debt or obligation of the Company or any of its Subsidiaries; (d) violate, or be in conflict with, or constitute a default under, or permit the termination of, or require the consent of any Person under, or result in the creation of any Lien upon any property of the Company or any of its Subsidiaries under, any mortgage, indenture, loan agreement, note, debenture or other agreement for borrowed money or any other material agreement to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries (or their respective properties) may be bound, other than such violations, conflicts, defaults, terminations and Liens, or such failures to obtain consents, which could not reasonably be expected to result in a Material Adverse Effect. 3.6. Margin Regulations No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any "margin stock" within the meaning of Regulation G of the Board of Governors of the Federal Reserve System (12 C.F.R. ss. 207), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 C.F.R. ss. 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 C.F.R. ss. 220). The assets of the Company and its Subsidiaries do not include any margin stock, and the Company does not have any present intention of acquiring margin stock. 3.7. Private Offering The sale of the Notes hereunder is exempt from the registration and prospectus delivery requirements of the Securities Act. In the case of each offer or sale of the Notes, no 8 form of general solicitation or general advertising was used by the Company or its respective representatives. The Company agrees that neither it, nor anyone acting on its behalf, will offer or sell the Notes, or any portion of them, if such offer or sale might bring the issuance and sale of the Notes to the Purchaser within the provisions of Section 5 of the Securities Act nor offer any similar Notes for issuance or sale to, or solicit any offer to acquire any of the same from, or otherwise approach or negotiate with respect thereto with, anyone if the sale of the Notes and any such Notes could be integrated as a single offering for the purposes of the Securities Act, including without limitation Regulation D. 3.8. Due Authorization of Material Contracts The descriptions in the Incorporated Documents of statutes, legal and governmental proceedings or contracts or other documents are accurate in all material respects and fairly present the information required to be shown at the time shown; and there are no statutes or legal or governmental proceedings required to be described in the Incorporated Documents that are not described as required and there is no document or contract of a character required to be described in the Incorporated Documents or to be filed as an exhibit to the Incorporated Documents which is not described or filed as required. All contracts described in the Incorporated Documents or filed as an exhibit to the Incorporated Documents to which the Company or any of its Subsidiaries is a party have been duly authorized, executed and delivered by the Company or such Subsidiary, constitute valid and binding agreements of the Company or such Subsidiary and are enforceable against and by the Company or such Subsidiary in accordance with the terms thereof, except as the enforcement thereof may be limited by bankruptcy and laws relating to the rights and remedies of the creditors generally or by the availability of general equitable remedies. 3.9. Financial Statements The financial statements and schedules of the Company and its consolidated subsidiaries included in the Incorporated Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, present fairly the financial condition of the Company and its consolidated subsidiaries, as of the respective dates thereof and the results of operations and cash flows of the Company and its consolidated subsidiaries, for the respective periods covered thereby, all in conformity with GAAP (except in the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto) and fairly present the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other financial statements or schedules of the Company and its consolidated subsidiaries or any other company or entity are required by the Securities Act, the Exchange Act or the rules and regulations of the SEC to be included in the Incorporated Documents. The Independent Auditors, who have reported on certain of such 9 financial statements and schedules, are, and were during the periods covered by their reports included in the Incorporated Documents, independent accountants with respect to the Company and its consolidated subsidiaries, as required by the Securities Act, the Exchange Act and the rules and regulations of the SEC. The summary financial and statistical data included in the Incorporated Documents present fairly the information shown therein and have been compiled on a basis consistent with the financial statements presented therein. The unaudited consolidated financial statements included in the Incorporated Documents comply as to form in all material respects with the applicable accounting requirements of the Securities Act, the Exchange Act and the rules and regulations of the SEC, and such statements fairly present the consolidated financial position and results of operations and the other information purported to be shown therein at the respective dates or for the respective periods therein specified. 3.10. Litigation; Judgments Except as described in the Incorporated Documents, there are no actions, suits or proceedings (formal or informal) pending or, to the Knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective properties, assets, or directors or officers, in their capacity as such, before or by any Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding might reasonably be expected to, individually or in the aggregate, and after giving effect to the sale and issuance of the Notes, result in a Material Adverse Effect. 3.11. Taxes Each of the Company and its Subsidiaries has filed all federal, state, local and foreign income tax returns which have been required to be filed and has paid all taxes and assessments received by it to the extent that such taxes have become due. None of the Company nor its Subsidiaries has any tax deficiency which has been or might be asserted or threatened against it which could reasonably be expected to result in a Material Adverse Effect. 3.12. Investment Company Act Neither the Company nor any of its Subsidiaries is an "investment company" or a Person directly or indirectly "controlled" by or acting on behalf of an "investment company" within the meaning of the United States Investment Company Act of 1940, as amended. 3.13. Environmental Matters The operations of the Company and its Subsidiaries with respect to any real property currently leased, owned, controlled or managed by the Company or any of its Subsidiaries are, and with respect to any real property previously leased, owned, managed or controlled were, when such real property was leased, owned, managed or controlled by the Company or any of its Subsidiaries, in compliance in all material respects with all applicable federal, state, and local laws, ordinances, rules, and regulations relating to occupational health and safety and the environment (collectively, "Environmental Laws"), and the Company and its 10 Subsidiaries have all material licenses, permits and authorizations required under all Environmental Laws; neither the Company nor any of its Subsidiaries has authorized or conducted or has knowledge of the generation, transportation, storage, use, treatment, disposal or release of any hazardous substance, hazardous waste, hazardous material, hazardous constituent, toxic substance, pollutant, contaminant, petroleum product, natural gas, liquefied gas or synthetic gas defined or regulated under any Environmental Law on, in or under any real property currently leased, owned, controlled or managed by the Company or any of its Subsidiaries or previously leased, owned, controlled or managed by the Company or any of its Subsidiaries when such real property was owned, leased, controlled or managed by the Company or any of its Subsidiaries, except in compliance with applicable Environmental Laws; and there is not pending or, to the Knowledge of the Company, any threatened claim, litigation or any administrative agency proceeding, nor has the Company or any of its Subsidiaries received any written or oral notice from any governmental entity or third party, that: (i) alleges a violation of any Environmental Laws by the Company or any of its Subsidiaries; (ii) alleges the Company or any of its Subsidiaries is a liable party under CERCLA or any state superfund law; (iii) alleges possible contamination of the environment by the Company or any of its Subsidiaries; or (iv) alleges possible contamination of real property currently leased, owned, controlled or managed by the Company or any of its Subsidiaries or previously leased, owned, controlled or managed by the Company or any of its Subsidiaries when such real property was owned, leased, controlled or managed by the Company or any of its Subsidiaries. 3.14. Labor Relations No labor dispute with the employees of the Company or any of its Subsidiaries exists or is threatened that could reasonably be expected to result in a Material Adverse Effect; and the Company is not aware of any existing or threatened labor disturbance by the employees of any other entity that could reasonably be expected to result in a Material Adverse Effect. 3.15. Real Property; Leases Each of the Company and its Subsidiaries has good and indefeasible title to all properties and assets described in the Incorporated Documents as owned by it, free and clear of all Liens except such as are described in the Incorporated Documents or are not material, singly or in the aggregate, to the Company. Each of the Company and its Subsidiaries has valid, subsisting and enforceable leases for the properties described in the Incorporated Documents as leased by it, except such as are described in the Incorporated Documents. 3.16. Intellectual Property; Licenses Each of the Company and its Subsidiaries owns or has the right to use all patents, patent applications, trademarks, trademark applications, tradenames, copyrights, franchises, trade secrets, proprietary or other confidential information and intangible properties and assets (collectively, "Intangibles") reasonably necessary to conduct its business as now conducted; and none of the Company or its Subsidiaries has any knowledge of any infringement by it of Intangibles of others, and there is no claim being made against the Company or any of its Subsidiaries, or to the Knowledge of the Company, any employee of the Company or its 11 Subsidiaries, regarding infringement of any Intangibles of others which could reasonably be expected to have a Material Adverse Effect and, to the Knowledge of the Company, there is no infringement by others of Intangibles of the Company or any of its Subsidiaries. 3.17. Defaults The continuation, validity and effectiveness of each contract, agreement, arrangement or other instrument related to borrowed money (of any amount) or involving payments in excess of $100,000 or that is material to the Company or its Subsidiaries (each a "Material Contract") will not be adversely affected by the execution, delivery and performance of this Agreement, the Registration Rights Agreement, or the Commitment Letter, the issuance or sale of the Notes, or the consummation of the transactions contemplated hereby or thereby. The Company and its Subsidiaries are not in default in any respect, and will not, with the giving of notice or the lapse of time, or both, be in default in any respect, under any Material Contract upon or as a result of the consummation of the transactions contemplated by this Agreement, the Registration Rights Agreement or the Commitment Letter. To the Knowledge of the Company, there is no default or claimed or purported or alleged default or state of facts that with the giving of notice or the lapse of time, or both, would constitute a default on the part of any party other than the Company or any of its Subsidiaries under any Material Contract. 3.18. Brokers The Company has not dealt with any broker, finder, commission agent or other Person in connection with the sale of the Notes and the transactions contemplated by this Agreement, and the Company is not under any obligation to pay any broker's or finder's fee or commission or similar payment in connection with such transactions. 3.19. Existing Indebtedness The Disclosure Schedule sets forth a complete and correct list of all Indebtedness of the Company and its Subsidiaries as of the date hereof, showing as to each item of such Indebtedness the creditor, the aggregate principal amount outstanding, the agreement or instrument governing such Indebtedness and a brief description of any security therefor. With respect to each item of Indebtedness listed on the Disclosure Schedule, the Company will deliver to the Purchaser or its representatives, upon request, a true and complete copy of each instrument evidencing such Indebtedness or pursuant to which such Indebtedness was issued or secured (including each amendment, consent, waiver or similar instrument in respect thereof), as the same is in effect on the date hereof. The Company and its Subsidiaries are not in default in the performance or observance in any material respect of any of the terms, covenants or conditions contained in any instrument evidencing Indebtedness listed on the Disclosure Schedule or pursuant to which such Indebtedness was issued or secured or has requested any waiver in respect of any default and no event has occurred and is continuing which, with notice or the lapse of time or both, would constitute such a default. 12 3.20. Compliance with Law; Permits (a) The Company and its Subsidiaries own or possess all authorizations, approvals, orders, licenses, registrations, other certificates and permits of and from all governmental regulatory officials and bodies, necessary to conduct their respective businesses except where the failure to own or possess all such authorizations, approvals, orders, licenses, registrations, other certificates and permits would not have a Material Adverse Effect. There is no proceeding pending or, to the Knowledge of the Company, threatened (or any basis therefor known to the Company) which may cause any such authorization, approval, order, license, registration, certificate or permit to be revoked, withdrawn, canceled, suspended or not renewed; and the Company and its Subsidiaries are conducting their respective business in compliance with all laws, rules and regulations applicable thereto except where such noncompliance could not reasonably be expected to result in a Material Adverse Effect. (b) Neither the nature of the Company nor of any of its businesses or properties, nor any relationship between the Company and any other Person, nor any circumstance in connection with the offer, issuance, sale or delivery of the Notes at the Closing, nor the performance by the Company of its other obligations hereunder or under the Notes, the Registration Rights Agreement or the Commitment Letter, as the case may be, is such as to require a consent, approval or authorization of, or notice to, or filing, registration or qualification with, any governmental authority or other Person on the part of the Company as a condition to the execution and delivery of this Agreement, the Registration Rights Agreement, the Commitment Letter or the offer, issuance, sale or delivery of the Notes at the Closing, other than the filings, registrations, qualifications or consents which shall have been made or obtained on the Closing Date (and copies of which shall have been delivered to the Purchaser). All required consents, approvals or authorizations of, or notices to or filings, registrations or qualifications with, any governmental authority or other Person required in connection with the transactions contemplated by this Agreement, the Notes, the Registration Rights Agreement or the Commitment Letter have been obtained or made. 3.21. Insurance The Company maintains, and will maintain after giving effect to the issuance and the sale of the Notes, insurance of the types and in the amounts generally deemed adequate for its business, including, but not limited to, insurance covering director and officer liability, workers compensation liability, malpractice liability respecting the provision of assisted living services, real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is and will be in full force and effect. 3.22. Material Events Since December 31, 1997, there has not been with respect to the Company or any of its Subsidiaries: 13 (a) any material adverse change in their properties, business, prospects, operations, earnings, assets, liabilities or condition (financial or otherwise) which could reasonably be expected to result in a Material Adverse Effect; or (b) any damage, destruction or loss to the properties or assets of the Company or any of its Subsidiaries, whether or not covered by insurance, that has or could reasonably be expected to have a Material Adverse Effect or that in the aggregate exceed $100,000; or (c) any loss or waiver by the Company or any of its Subsidiaries of any right, not in the ordinary course of business, or any material debt owed to it; or (d) other than the sales of assets in the ordinary course of business (including pursuant to sale leaseback transactions), any sale, transfer or other disposition of, or agreement to sell, transfer or otherwise dispose of, any assets by the Company or any of its Subsidiaries in excess of $100,000 in the aggregate, or any cancellation or agreement to cancel any debts or claims of the Company or any of its Subsidiaries; or (e) other than dividends payable on the currently outstanding Preferred Stock, any declaration or setting aside or payment of any dividend (whether in cash, property or stock) or any distribution (whether in cash, property or stock) or other payment with respect to any of the Capital Stock of the Company or any of its Subsidiaries, or any repurchase, purchase or other acquisition of, or agreement to repurchase, purchase or otherwise acquire, any of the Company's or any of its Subsidiaries' capital stock; or (f) any amendment or termination of any contract, agreement or license to which the Company or any of its Subsidiaries is a party or by which it is bound, except where such amendment or termination could not be reasonably expected to have a Material Adverse Effect; or (g) any resignation or termination of employment of any Key Employee, and there is no impending or threatened resignation or resignations or termination or terminations of employment of any Key Employee; or (h) any labor dispute (including, without limitation, any negotiation, or request for negotiation, for any labor representation or any labor contract) affecting the Company or any of its Subsidiaries; or (i) any application of any existing (or the enactment of any new) Environmental Law or personnel, product safety law or other governmental regulation that has or which could reasonably be expected to have a Material Adverse Effect. 3.23. SEC Documents; Undisclosed Liabilities The Company has been subject to the reporting requirements of Section 13 of the Exchange Act since at least January 1, 1996 and, except as set forth in any Company SEC Document, has timely filed all required reports, schedules, forms, statements and other 14 documents required to be filed by the Company under the Securities Act and the Exchange Act with the SEC since January 1, 1996 (the "Company SEC Documents"). As of their respective dates, the Company SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such Company SEC Documents, and none of the Company SEC Documents at the time filed with the SEC contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Except to the extent that information contained in any Company SEC Document has been revised or superseded by a later filed Company SEC Document, none of the Company SEC Documents contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.24. Material Misstatements or Omissions No representation or warranty by the Company contained in this Agreement (including the schedules and exhibits attached hereto), the Registration Rights Agreement, the Commitment Letter or in any document, exhibit, statement, certificate or schedule dated the Closing Date, signed by the Company and furnished to the Purchaser pursuant hereto, or in connection with the transactions contemplated hereunder, contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact necessary to make the statements or facts contained herein and therein not misleading. 3.25. Survival of Representations and Warranties All of the Company's representations and warranties hereunder and under the Registration Rights Agreement and the Commitment Letter shall survive the execution and delivery of the same, any investigation by the Purchaser and the issuance of the Notes. SECTION 4. REPRESENTATIONS AND WARRANTIES OF EACH PURCHASER The Purchaser represents and warrants to the Company that: 4.1. Purchase for Own Account The Purchaser is purchasing the Notes to be purchased by it solely for its own account and not as nominee or agent for any other person and not with a view to, or for offer or sale in connection with, any distribution thereof (within the meaning of the Securities Act) that would be in violation of the securities laws of the United States of America or any state thereof, without prejudice, however, to its right at all times to sell or otherwise dispose of all or any part of said Notes pursuant to a registration statement under the Securities Act or pursuant to an exemption from the registration requirements of the Securities Act. 15 4.2. Accredited Investor The Purchaser is knowledgeable, sophisticated and experienced in business and financial matters; it acknowledges that the Notes have not been registered under the Securities Act and understands that the Notes must be held indefinitely unless they are subsequently registered under the Securities Act or such sale is permitted pursuant to an available exemption from such registration requirement; it is able to bear the economic risk of its investment in the Notes; it is an "accredited investor" as defined in Regulation D promulgated under the Securities Act; and it has been afforded access to information about the Company and the Company's financial condition, results of operations, business, property, management and prospects sufficient to enable it to evaluate its investment in the Notes. The Purchaser acknowledges that it has conducted its own analysis of the Company's financial condition and other foregoing factors. 4.3. Authorization This Agreement is a legally valid and binding obligation of the Purchaser enforceable against it in accordance with its terms, except for (a) the effect thereon of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting the rights of creditors generally and (b) limitations imposed by federal or state law or equitable principles upon the specific enforceability of any of the remedies, covenants or other provisions thereof and upon the availability of injunctive relief or other equitable remedies. 4.4. Brokers The Purchaser has not dealt with any broker, finder, commission agent or other Person in connection with the sale of the Notes and the transactions contemplated by this Agreement, and the Purchaser is not under any obligation to pay any broker's or finder's fee or commission or similar payment in connection with such transactions. SECTION 5. COVENANTS So long as any of the Notes remain unpaid and outstanding, the Company covenants to the Holders of outstanding Notes as follows: 5.1. Payment of Notes; Satisfaction of Obligations The Company shall pay the principal of and interest on the Notes on the dates and in the manner provided in the Notes. To the extent lawful, the Company shall pay interest (including interest accruing after the commencement of any proceeding under any Bankruptcy Law) on all unpaid amounts outstanding under the Notes (including overdue installments of principal or interest) at a rate equal to 7.5% per annum, payable quarterly on each January 1, April 1, July 1 and October 1, beginning July 1, 1998. Such interest rate is subject to adjustment as set forth in Section 3(b) to the Registration Rights Agreement. 16 5.2. Notice of Default The Company will deliver to the Holders, forthwith upon (i) becoming aware of any Default or Event of Default, (ii) becoming aware of any payment default under any other loan agreement, mortgage, indenture or instrument referred to in Sections 7.1(d) or (iii) the receipt by the Company of any notice of any non-monetary default under any such loan agreement, mortgage, indenture or instrument, an Officers' Certificate specifying in reasonable detail such Default, Event of Default or default and the nature of any remedial or corrective action the Company proposes to take with respect thereto. 5.3. Limitation on Additional Indebtedness None of the Company, nor any of its Subsidiaries (including without limitation, upon the creation or acquisition of such Subsidiary) shall, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to (collectively, "incur") any Indebtedness after the date of this Agreement, if a Default or an Event of Default shall have occurred and be continuing at the time or would occur as a consequence of the incurrence of such Indebtedness. 5.4. Change of Control (a) Change of Control. Prior to the consummation of a Change of Control (the date of such consummation being referred to herein as the "Change of Control Date"), the Company shall give each Holder notice describing in reasonable detail the nature of the Change of Control (such written notice, the "Change of Control Notice") and offering to the Purchaser the right to require the Company to repurchase all or any part of the Notes held by the Purchaser pursuant to the offer (the "Change of Control Repurchase Offer") at a purchase price equal to 100% of the aggregate principal amount thereof, together with unpaid interest to the date of repurchase (the "Change of Control Price"). The obligation of the Company to repurchase Notes pursuant to the Change of Control Repurchase Offer is subject to the subordination provisions of Section 8 hereof. (b) Timing of Notice. The Change of Control Notice shall be mailed by the Company to all Holders at their last registered address no later than fifteen (15) Business Days prior to the Change of Control Date. (c) Procedure. The Change of Control Notice shall state a date not later than five (5) Business Days following the Change of Control Date for repurchase of the Notes pursuant to the Change of Control Repurchase Offer (such date, the "Change of Control Repurchase Date"). The Change of Control Notice, which shall govern the terms of the Change of Control Repurchase Offer, shall state: (1) that the Change of Control Repurchase Offer is being made pursuant to this Section 5.4; 17 (2) the Change of Control Price and the Change of Control Repurchase Date; (3) that, unless the Company defaults in the payment of the Change of Control Price, all Notes accepted for payment shall cease to accrue interest on and after the Change of Control Repurchase Date; (4) that the Purchaser electing to require the Company to repurchase any Notes will be required to surrender the Note to the address specified in the Change of Control Notice prior to the close of business on the Business Day preceding the Change of Control Repurchase Date; (5) that the Purchaser will be entitled to withdraw his or her election to require the Company to repurchase any Notes on the terms and conditions set forth in such Change of Control Notice by written notice to the Company prior to the Change of Control Repurchase Date; and (6) that the Purchaser electing to require the Company to repurchase any Notes in part will be issued a new Note in a principal amount equal to the unpurchased portion of the Notes surrendered. Any such Change of Control Repurchase Offer shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations to the extent applicable in connection with any Change of Control Repurchase Offer. (d) Acceptance of Notes. (1) On the Change of Control Repurchase Date, the Company shall accept for payment all Notes or portions thereof validly tendered pursuant to the Change of Control Repurchase Offer and promptly thereafter mail or deliver to Holder of Notes accepted for repurchase payment in the amount equal to the aggregate Change of Control Price for such Notes, and the Company shall execute and mail or deliver to such Holders a new Note equal in principal amount to any unpurchased portion of the Notes surrendered. The Company will notify the Holders of the results of the Change of Control Repurchase Offer on the Change of Control Repurchase Date. 5.5. Stay, Extension and Usury Laws The Company covenants and agrees (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, and will use its best efforts to resist any attempts to claim or take the benefit of any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of its obligations under this Agreement or the Notes; and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or 18 advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holders, but will suffer and permit the execution of every such power as though no such law has been enacted. 5.6. Indemnification The Company agrees to indemnify the Purchaser and each director, officer, employee, counsel, Agent and Affiliate of such Purchaser (collectively, the "Indemnified Parties") against, and hold it and them harmless from, all losses, claims, damages, liabilities, taxes, deficiencies, expenses and costs (including diminution in value and costs of preparation and reasonable attorneys' fees and expenses) (collectively, "Losses") incurred by it or them (A) arising from any breach of any representation or warranty or the inaccuracy of any representation made by the Company in or pursuant to the Agreement, the Registration Rights Agreement or the Commitment Letter (including without limitation any breach or inaccuracy of any representation or warranty relating to CERCLA, any equivalent state statute or any other Environmental Law); and (B) arising from any breach of any covenant or agreement made by the Company in or pursuant to the Agreement, the Registration Rights Agreement or the Commitment Letter; provided, however, that the Company shall not be required to indemnify any Indemnified Party for any Loss that results from (x) the action of any Indemnified Party which is finally judicially determined to have resulted from such Indemnified Party's negligence, intentionally wrongful acts or intentionally wrongful omissions or (y) the failure of LTC Equity Holding Company to purchase additional Notes from the Company pursuant to Section 1.2(a)(2) hereof; provided, further, that no Indemnified Party shall be entitled to assert a claim on account of the indemnity provided in this Section 5.6, unless and until the aggregate amount of Losses with respect to all claims asserted under this Section and under Section 5.6 of the purchase agreements for the Notes executed on the date hereof by other purchasers exceeds $100,000 (in which case the Company shall be liable for Losses in excess of such $100,000 that have accrued). The Company agrees to reimburse any Indemnified Party promptly for all such Losses as they are incurred by such Indemnified Party. The Company's liability to any such Indemnified Party hereunder shall not be extinguished solely because any other Indemnified Party is not entitled to indemnity hereunder. The obligations of the Company under this Section 5.6 shall survive the payment or prepayment of the Notes, at maturity, upon acceleration, repurchase or otherwise, any transfer of the Notes by any Purchaser to any subsequent Holder and the termination of this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter. The indemnity provided in this Section 5.6 will be in addition to any liability which the Company may otherwise have, including, without limitation, under this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter. In case any action shall be brought against any Indemnified Party with respect to which indemnity may be sought against the Company, such Indemnified Party shall promptly notify the Company in writing and the Company shall, if it so desires, assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party and payment of all reasonable fees and expenses. The failure to so notify the Company shall not 19 affect any obligation it may have to any Indemnified Party under this Section 5.6 or otherwise unless the Company is materially adversely affected by such failure. Each Indemnified Party shall have the right to employ separate counsel in such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless: (i) the Company has agreed in writing to pay such expenses; (ii) the Company has failed to assume the defense and employ counsel; or (iii) the named parties to any such action (including any impleaded parties) include any Indemnified Party and the Company, and such Indemnified Party shall have been advised by outside counsel that there may be one or more legal defenses available to it which are inconsistent with those available to the Company; provided that, if such Indemnified Party notifies the Company in writing that it elects to employ separate counsel in the circumstances described in clauses (i), (ii) or (iii) above, the Company shall not have the right to assume the defense of such action or proceeding; provided, however, that the Company shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be responsible hereunder for the fees and expenses of more than one such firm of separate counsel (in addition to any necessary local counsel), which counsel shall be designated by such Indemnified Party. The Company shall not be liable for any settlement of any such action effected without its written consent (which shall not be unreasonably withheld). The Company agrees that it will not, without the Indemnified Party's prior consent, which shall not be unreasonably withheld, settle or compromise any pending or threatened claim, action or suit in respect of which indemnification may be sought hereunder unless the foregoing contains an unconditional release of the Indemnified Parties from all liability and obligation arising therefrom. 5.7. Corporate Existence; Merger; Successor Corporation (a) The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence in accordance with its organizational documents and the corporate rights (charter and statutory), licenses and franchises of the Company; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or corporate existence if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not adverse in any material respect to any Holder. (b) The Company shall not in a single transaction or through a series of related transactions, (i) consolidate with or merge with or into any other person, or transfer (by lease, assignment, sale or otherwise) all or substantially all of its properties and assets as an entirety or substantially as an entirety to another person or group of affiliated persons or (ii) adopt a Plan of Liquidation, unless, in either case: (1) the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or to which all or substantially all of the properties and assets of the Company as an entirety or substantially as an entirety are transferred (or, in the case of a Plan of Liquidation, any Person to 20 which assets are transferred) (the Company or such other Person being hereinafter referred to as the "Surviving Person") shall be a corporation organized and validly existing under the laws of the United States, any State thereof or the District of Columbia, and shall expressly assume, by an amendment to this Agreement, all the obligations of the Company under the Notes and this Agreement; (2) immediately after and giving effect to such transaction and the assumption contemplated by clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, (ii) the Surviving Person shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction; (3) immediately before and immediately after and giving effect to such transaction and the assumption of the obligations as set forth in clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, no Default or Event of Default shall have occurred and be continuing; and (4) The Company shall have delivered to the Purchaser an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, transfer or adoption and such amendment to this Agreement comply with this Section 5.7, that the Surviving Person agrees to be bound hereby, and that all conditions precedent herein provided relating to such transaction have been satisfied. (c) Upon any consolidation or merger, or any transfer of assets (including pursuant to a Plan of Liquidation) in accordance with this Section 5.7, the successor person formed by such consolidation or into which the Company is merged or to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Agreement with the same effect as if such successor person had been named as the Company herein; provided, however, that the Company shall not be released from the obligations and covenants under this Agreement or under the Notes. 5.8. Taxes The Company shall, and shall cause its Subsidiaries to, pay prior to delinquency all material taxes, assessments and governmental levies except as contested in good faith and by appropriate proceedings. 5.9. Investment Company Act Neither the Company nor any of its Subsidiaries shall become an investment company subject to registration under the Investment Company Act of 1940, as amended. 21 5.10. Insurance The Company and its Subsidiaries shall maintain liability, casualty and other insurance with a reputable insurer or insurers in such amounts and against such risks as is carried by responsible companies engaged in similar businesses and owning similar assets. 5.11. Inconsistent Agreements The Company shall not, and shall not permit any of its Subsidiaries to, (i) enter into any agreement or arrangement which is inconsistent with, or would impair the ability of the Company to fulfill, its obligations under this Agreement, the Notes, the Registration Rights Agreement or the Commitment Letter or (ii) supplement, amend or otherwise modify the terms of their respective Charter Documents, if the effect thereof would be materially adverse to the Holders, including without limitation to increase the liquidation preference of, or the rate of dividends payable on, any series of preferred stock. 5.12. Compliance with Laws The Company shall, and shall cause its Subsidiaries to, comply with all statutes, ordinances, governmental rules and regulations, judgments, orders and decrees (including all Environmental Laws) to which any of them is subject, and obtain and keep in effect all licenses, permits, franchises and other governmental authorizations necessary to the ownership or operation of their respective properties or the conduct of their respective businesses, except to the extent that the failure to so comply or obtain and keep in effect would not have a Material Adverse Effect. 5.13. Inspection of Properties and Records The Company agrees to allow, and to cause each of their respective Subsidiaries to allow, the Purchaser and each subsequent Holder (or such Persons as the Purchaser or subsequent Holder may designate) (individually and collectively, "Inspectors") upon reasonable prior notice to visit and inspect any of the properties of the Company or its Subsidiaries, to examine all their books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers, and independent public accountants with representatives of the Company or its Subsidiaries present (and by this provision the Company authorizes said accountants to discuss with such Inspectors the finances and affairs of the Company and its Subsidiaries) all at such reasonable times and as often as may be reasonably requested but not more than twice in any twelve-month period for all Holders in the aggregate unless a Default or an Event of Default shall have occurred. If a Default or an Event of Default shall have occurred and be continuing, the Company shall pay or reimburse all Inspectors for expenses which such Inspectors may reasonably incur in connection with any such visitations or inspections. 22 SECTION 6. CONVERSION OF NOTES 6.1. Conversion (a) Each Note shall be convertible, in whole or in part, at the option of the Holder thereof, at any time prior to the Maturity Date, at the office of the Company or any transfer agent for the Notes, into that number of fully paid and nonassessable shares of Common Stock determined in accordance with the provisions of Section 6.2. In order to convert Notes into Conversion Shares, the Holder thereof shall surrender the Notes therefor, duly endorsed, at the office of the Company or to the transfer agent for the Notes, together with written notice to the Company stating that it elects to convert the same and setting forth the name or names in which it wishes the certificate or certificates for Conversion Shares to be issued, and the principal amount of the Notes being converted. The Company shall, as soon as practicable after the surrender of the Notes for conversion at the office of the Company or the transfer agent for the Notes, issue to each holder of such Notes, or its nominee or nominees, a certificate or certificates evidencing the number of Conversion Shares (and any other securities and property) to which it shall be entitled, cash representing payment in full for all accrued but unpaid interest on the Note (or portion thereof) surrendered for conversion, and, in the event that only a part of the Notes presented are converted, a Note evidencing the principal amount not so converted. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the Notes to be converted, and the person or persons entitled to receive the Conversion Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock at such date and shall, with respect to such shares, thereafter have only those rights of a holder of Common Stock of the Company. (b) In the event that the average trading price of the Common Stock over thirty (30) consecutive trading days is equal to or exceeds $12 per share, the Company shall have the right, but not the obligation, to force a conversion of all then outstanding Notes, in whole but not in part, within the fifteen (15) day period immediately following such thirty (30) consecutive trading days. Any such forced conversion shall in all other respects be in accordance with this Section 6, and, if the Company shall elect to force conversion of Notes, it shall promptly provide notice of such forced conversion to all Holders of Notes. The Company shall, as soon as practicable following the notice of such forced conversion (and in no event later than sixty (60) calendar days after the date of such notice) issue to each holder of such Notes, or its nominee or nominees, a certificate or certificates evidencing the number of Conversion Shares (and any other securities and property) to which it shall be entitled and cash representing payment in full for all accrued but unpaid interest on the Note surrendered for conversion. Such conversion shall be deemed to have been made at the close of business on the date specified in such notice, and the person or persons entitled to receive the Conversion Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock at such date and shall, with respect to such shares, thereafter have only those rights of a holder of Common Stock of the Company. 23 (c) The Company shall use its best efforts to quote and maintain quotation of the Conversion Shares on the Nasdaq National Market or such other principal national securities exchange on which the Common Stock is then listed or quoted. 6.2. Conversion Rate The number of shares of Common Stock issuable upon conversion of the Notes shall be one (1) share for every $7.50 of principal amount of Notes being converted (the "Conversion Rate"), and shall be subject to adjustment from time to time as provided herein and as provided in Section 3(b) of the Registration Rights Agreement. 6.3. Fractional Shares No fractional shares of Common Stock shall be issued upon conversion of Notes. Instead, the Company shall deliver cash in the form of its check for the Fair Market Value of the fractional share. 6.4. Adjustments for Stock Splits, Combinations and Dividends If the outstanding shares of the Common Stock shall be subdivided into a greater number of shares or combined into a lesser number of shares, the Conversion Rate in effect immediately prior to such subdivision shall, simultaneously with the effectiveness of such subdivision, be proportionately increased or decreased, as the case may be. If the Company pays a dividend or otherwise makes a distribution with respect to its Common Stock (whether in cash, additional shares of Common Stock or other property) on or prior to March 31, 2003, then the Conversion Rate shall be increased by a fraction, the numerator of which is the aggregate amount of the fair market value of such dividend or distribution and the denominator of which is the number of shares of Common Stock entitled to such dividend or other distribution. If the Company pays a dividend or otherwise makes a distribution with respect to its Common Stock (whether in cash, additional shares of Common Stock or other property) after March 31, 2003 (the effective date of such dividend or other distribution, the "Determination Date") and if the fair market value of such dividend or other distribution, together with the fair market value of all other dividends and distributions with respect to its Common Stock during the 12-month period immediately preceding the Determination Date exceeds 2% of the Average Closing Sales Price during such 12-month period, then the Conversion Rate shall be increased by a fraction, the numerator of which is the aggregate amount of the fair market value of the dividend or other distribution to be effected on the Determination Date plus the aggregate amount of the fair market value of all dividends and distributions effected during such 12-month period for which no adjustment in the Conversion Rate was effected pursuant to this Section 6.4, and the denominator of which is the number of shares of Common Stock entitled to such dividend or other distribution on the Determination Date. Any adjustment to the Conversion Rate under this Section 6.4 shall become effective at the close of business on the date the subdivision, combination, dividend or other distribution referred to herein becomes effective. For purposes of the calculations made in this Section 6.4, the fair market value of any dividend or other distribution that is in the form of property other than Common Stock or cash shall be determined in good faith by the Board. 24 6.5. Reorganization, Mergers, Consolidations or Sales of Assets In the event of any capital reorganization, any reclassification of the Common Stock (other than a change in par value or as a result of a stock dividend, subdivision, split-up or combination of shares), the consolidation or merger of the Company with or into another person, or the sale or other disposition of all or substantially all of the properties of the Company as an entirety to another person (collectively referred to hereinafter as "Reorganizations"), the Holders of the Notes shall thereafter be entitled to receive, and provision shall be made therefor in any agreement relating to a Reorganization, upon conversion of the Notes the kind and number of shares of Common Stock or other securities or property (including cash) of the Company, or the other corporation resulting from such consolidation or surviving such merger, which would have been distributed to a holder of the number of shares of Common Stock which the Notes entitled the holders thereof to convert to immediately prior to such Reorganization; and in any such case appropriate adjustment shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the Holders of the Notes, to the end that the provisions set forth herein (including the specified changes and other adjustments to the Conversion Rate) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares, other securities or property thereafter receivable upon conversion of the Notes. 6.6. Sale of Shares Below Market or Conversion Price (a) If at any time or from time to time the Company shall issue or sell Additional Shares of Common Stock other than in a transaction which falls within Section 6.1, Section 6.4 or Section 6.5, for an Effective Price less than the greater of (x) the Fair Market Value of the Common Stock or (y) the then effective conversion price calculated by dividing $7.50 by the then existing Conversion Rate (the "Adjusted Conversion Price"), then, and in each such case, the then existing Conversion Rate shall be adjusted to a rate per $7.50 principal amount of Notes determined by multiplying that Conversion Rate by a fraction (i) the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the date of such issue after giving effect to such issue of Additional Shares of Common Stock, and (ii) the denominator of which shall be (A) the number of shares of Common Stock outstanding at the close of business on the day next preceding the date of such issue or sale, plus (B) the number of shares of Common Stock which the aggregate consideration received (or by the express provisions hereof deemed to have been received) by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Adjusted Conversion Price. (b) For the purpose of making any adjustment required in this Section 6.6, the consideration received by the Company for any issue or sale of securities shall: (i) to the extent it consists of cash, the consideration received by the Company therefor shall be deemed to be the net amount of cash actually received by the Company, after deducting therefrom any compensation, discounts, fees or expenses paid to (but not on behalf of) any purchaser of such securities and any compensation, discounts, fees or expenses that are not reasonable or are not 25 customary (it being understood that underwriters' discounts and compensation in public offerings and brokers' commissions in private placements of such securities shall be deemed reasonable and customary); (ii) to the extent it consists of property other than cash, the consideration other than cash shall be computed at the fair market value thereof as determined in good faith by the Board of Directors of the Company; and (iii) if Additional Shares of Common Stock, Convertible Securities or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Company for consideration which covers both, the consideration received for the Common Stock, Convertible Securities or rights or options shall be computed as that portion of the consideration so received which is reasonably determined in good faith by the Board of Directors of the Company to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. (c) For the purpose of making any adjustment in the Conversion Rate provided in this Section 6.6, if at any time, or from time to time, the Company issues any stock convertible into Additional Shares of Common Stock (such convertible stock being hereinafter referred to as "Convertible Securities") or issues any rights or options, other than options pursuant to the Stock Option Plan, to purchase Additional Shares of Common Stock for Convertible Securities (such rights or options being hereinafter referred to as "Rights"), then, and in each such case, the Company shall be deemed to have issued at the time of the issuance of such Rights or Convertible Securities the maximum number of shares of Additional Shares of Common Stock issuable upon exercise (other than options pursuant to the Stock Option Plan) or conversion thereof and to have received in consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Company for the issuance of such Rights or Convertible Securities, plus in the case of such Rights, the amount of consideration, if any, payable to the Company upon exercise of such Rights, plus, in the case of Convertible Securities, the amount of consideration, if any, payable to the Company upon the conversion thereof. No further adjustment of the Conversion Rate, adjusted upon the issuance of such Rights or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such Rights or the conversion of any such convertible Securities. If any such Rights or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Conversion Rate adjusted upon the issuance of such rights, options or convertible securities shall be readjusted to the conversion rate which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such Rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for granting of all such Rights, whether or not exercised, plus consideration received for issuing or selling the Convertible Securities 26 actually converted, plus the consideration, if any, actually received by the Company on the conversion of such Convertible Securities. 6.7. Adjustment for Failure to Quote on Nasdaq National Market In event that, from the time of effectiveness of the registration statement to be filed pursuant to Section 3(a) of the Registration Rights Agreement and until all Notes have been converted into Conversion Shares, immediately prior to the conversion of any Notes into Conversion Shares pursuant to this Section 6, such Conversion Shares have not been approved for quotation on Nasdaq National Market (or any other national securities exchange where the Common Stock is then listed or quoted), then the Conversion Rate with respect to such Conversion Shares shall be increased by 10% immediately prior to the conversion of any Notes into such Conversion Shares. 6.8. Accountants' Certificate of Adjustment In each case of an adjustment or readjustment of the Conversion Rate or the number of shares of Common Stock or other securities issuable upon conversion of the Notes, the Company shall as soon as reasonably practicable (and in no event less than thirty (30) days following the event causing such adjustment or readjustment) compute such adjustment or readjustment in accordance with this Agreement and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first-class mail, postage prepaid, to each Holder of the Notes at the Holder's address as shown on the Company's note register. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (i) the Conversion Rate at the time in effect for the Notes, and (ii) the number of shares of Common Stock and the type and amount, if any, of other property which at the time would be received upon conversion of the Notes. At the written request of the Requisite Noteholders, the Company shall cause its Independent Auditors to verify the computations contained in the certificate prepared by the Company. 6.9. Reservation of Shares Issuable Upon Conversion The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Notes, such number and class of its shares of Common Stock as shall from time to time be sufficient to effect a conversion of all outstanding Notes, and if at any time the number and class of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding Notes, the Company shall promptly seek such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number and class of shares as shall be sufficient for such purpose. In the event of the consolidation or merger of the Company with another corporation where the Company is not the surviving corporation, effective provision shall be made in the certificate or articles of incorporation, documents of merger or consolidation, or otherwise, of the surviving corporation so that such corporation will at all times reserve and keep available a sufficient 27 number of shares of Common Stock or other securities or property to provide for the conversion of the Notes in accordance with the provisions of this Section 6. 6.10. No Impairment The Company shall not amend its Charter Documents or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, for the principal purpose of avoiding or attempting to avoid the observance or performance of any of the terms to be observed or performed by the Company pursuant to this Section 6. SECTION 7. DEFAULTS AND REMEDIES 7.1. Events of Default An "Event of Default" occurs if: (a) the Company defaults in the payment of the principal of any Note when the same becomes due and payable at maturity, upon repurchase or otherwise; (b) the Company defaults in the payment of interest on any Note when the same becomes due and payable and the Default continues for the period and after the notice specified below; (c) the Company fails to comply with any of the agreements, covenants, or provisions of this Agreement or the Notes and the Default continues for the period and after the notice specified below; (d) a default occurs under any mortgage, indenture or instrument (other than a mortgage, indenture or instrument to which the Purchaser or its Subsidiaries is a party) under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries), whether such Indebtedness or guaranteed Indebtedness now exists or shall be created hereafter, which default (i) is caused by a failure to pay principal of or premium, if any, on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness, or (ii) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of such Indebtedness, together with the principal amount of any other Indebtedness as to which there has been a payment default or the maturity of which has been so accelerated, aggregates $1,000,000 or more; (e) a final judgment for the payment of money is entered by a court or courts of competent jurisdiction against the Company or any Subsidiary of the Company and such remains undischarged for a period (during which execution shall not be effectively stayed) of (1) ninety (90) days, if the aggregate of all such judgments exceeds $1,000,000 but is less than $5,000,000 or (2) thirty (30) days if the aggregate of all such judgments exceeds $5,000,000; 28 (f) the Company or any of its Subsidiaries pursuant to or within the meaning of any Bankruptcy Law: (1) commences a voluntary case, (2) consents to the entry of an order for relief against it in an involuntary case, (3) consents to the appointment of a Custodian of it or for all or substantially all of its property, (4) makes a general assignment for the benefit of its creditors, (5) generally is unable to pay its debts as the same become due; or (6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company or any of its Subsidiaries in an involuntary case, (ii) appoints a Custodian of the Company or any of its Subsidiaries or for all or substantially all of its property, or (iii) orders the liquidation of the Company or any of its Subsidiaries, and the order or decree remains unstayed and in effect for 60 days. A Default under clause (b) is not an Event of Default until a Holder notifies the Company of such Default and the Company does not cure such Default within two (2) Business Days after receipt of such notice. A Default under clause (c) (other than a Default under Sections 5.3, 5.4, 5.6 or 5.7 of this Agreement, which Default shall be an Event of Default without the notice or passage of time specified in this paragraph) or (d) (other than a Default resulting from the acceleration of any Indebtedness described therein, which Default shall be an Event of Default without the notice or passage of time specified in this paragraph) or (e) is not an Event of Default until the Requisite Noteholders notify the Company of the Default and the Company does not cure the Default within ten (10) days after receipt of the notice. Any such notices must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." 7.2. Acceleration of Notes If an Event of Default (other than an Event of Default specified in clauses (e) and (f) of Section 7.1) occurs and is continuing, the Requisite Noteholders, by notice to the Company, may declare the unpaid principal of and any accrued interest on all the Notes to be due and payable. Immediately upon such declaration, the principal and interest shall be due and payable. If an Event of Default specified in clause (e) or (f) of Section 7.1 occurs, such an amount shall become and be immediately due and payable without any declaration or other act on the part of any Holder. The Requisite Noteholders by notice to the Company may rescind an acceleration of and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration. 7.3. Other Remedies If an Event of Default occurs and is continuing, Holders of the Notes may pursue any available remedy to collect the payment of principal or interest on the Notes or to enforce the performance of any provision of the Notes or this Agreement. A delay or omission by any Holder of any Notes in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. 29 SECTION 8. SUBORDINATION 8.1. Notes Subordinated to Senior Indebtedness (a) The Notes are subordinated and junior in right of payment of the principal of and interest and all other obligations (all of the foregoing, a "Payment or Distribution") on such Notes to the prior payment in full of any Senior Indebtedness whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed, the Notes shall comply with the provisions of this Section 8, and each Holder by his acceptance thereof likewise agrees. A Payment or Distribution shall include any asset of any kind or character, and may consist of cash, securities or other property, by set-off or otherwise, except that Holders may receive (i) securities that are subordinated to at least the same extent as the Notes to (A) Senior Indebtedness and (B) any securities issued in exchange for Senior Indebtedness. (b) The Senior Indebtedness of the Company shall continue to be Senior Indebtedness and entitled to the benefit of these subordination provisions irrespective of any amendment, modification or waiver of any term of any instrument relating to refinancing of the Senior Indebtedness, whether with or without notice to Holders. (c) No right of any holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time or in any way be affected or impaired by any act or failure to act on the part of the Company, the Holders or the holders of the Senior Indebtedness, including without limitation any non-compliance by the holders of the Senior Indebtedness with any of the terms, provisions and covenants of the documents evidencing or securing the Senior Indebtedness, or by any noncompliance by the Company or the Holders with any of the terms, provisions and covenants of the Notes, regardless of any knowledge thereof that any such holder of Senior Indebtedness may have or otherwise be charged with. 8.2. Company Not to Make Payments with Respect to Notes in Certain Circumstances No Payment or Distribution shall be made by the Company on account of principal of or interest on the Notes, whether upon the Maturity Date, upon repurchase or acceleration, or otherwise, if there shall have occurred and be continuing a default with respect to any Senior Indebtedness and notice of such default in writing or by telegram has been given to the Company by any holder or holders of Senior Indebtedness, unless and until the Company shall have received written notice from such holder or holders that such default or event of default shall have been cured or waived or shall have ceased to exist or, unless in the event of a default that does not result in the acceleration of any Senior Indebtedness or that does not involve a payment default with respect to any Senior Indebtedness, upon the expiration of the 60-day period following the date of such notice of default. Following such 60-day period, the Company shall be obligated to make any and all outstanding Payments or Distributions with respect to the Notes. Upon acceleration of the principal of the Notes or any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or 30 securities, to creditors upon any dissolution or winding up or liquidation or reorganization of the Company, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or such other proceedings, all amounts due or to become due upon all Senior Indebtedness shall first be paid in full in cash, or payment thereof provided for to the satisfaction of the holders thereof, before any Payment or Distribution is made on account of the repurchase price or principal of or interest on the Notes; and (subject to the power of a court of competent jurisdiction to make other equitable provision, which shall have been determined by such court to give effect to the rights conferred in this Section 8 upon the Senior Indebtedness and the holders thereof with respect to the Notes or the Holders, by a lawful plan of reorganization or readjustment under applicable law) upon any such dissolution or winding up or liquidation or reorganization, any Payment or Distribution by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Holders would be entitled except for the provisions of this Section 8, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such Payment or Distribution directly to the holders of Senior Indebtedness of the Company or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay all Senior Indebtedness in full in cash, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any Payment or Distribution is made to the Holders. In the event that, notwithstanding the foregoing, any Payment or Distribution by the Company of any kind or character, whether such payment shall be in cash, property or securities is prohibited by the foregoing, and the Company shall have made payment to the Holders before all Senior Indebtedness is paid in full in cash, or provision is made for such payment to the satisfaction of the holders thereof, such Holder, then and in such event such Payment or Distribution shall be paid over by such Holder or delivered to the holders of Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in cash, after giving effect to any concurrent Payment or Distribution to or for the holders of such Senior Indebtedness, and, until so delivered, the same shall be held in trust by any Holder as the property of the holders of Senior Indebtedness. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided in Section 5.7 shall not be deemed a dissolution, winding up, liquidation or reorganization for the purpose of this Section if such other Person shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Section 5.7. The holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Holders without incurring responsibility to the Holders 31 and without impairing or releasing the obligations of the Holders to the holders of the Senior Indebtedness: (i) change the manner, place or terms of payment or change or extend the time of payment of, or renew or alter, Senior Indebtedness, or otherwise amend in any manner Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Senior Indebtedness; and/or (iv) exercise or refrain from exercising any rights against the Company and any other Person. 8.3. Subrogation of Notes After all Senior Indebtedness is paid in full and until the Notes are paid in full, the Holders shall be subrogated (equally and ratably with all other Indebtedness pari passu with the Notes) to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the Holders have been applied to the payment of Senior Indebtedness. If any Payment or Distribution to which the Holders would otherwise have been entitled but for the provisions of this Section 8 shall have been applied pursuant to the provisions of this Section 8 to the payment of all amounts payable in respect of the Senior Indebtedness, then and in such case, the Holders, as with respect to the Company, shall be entitled to receive from the holders of such Senior Indebtedness at the time outstanding any Payments or Distributions received by such holders of Senior Indebtedness in excess of the amount sufficient to pay all amounts payable in respect of the Senior Indebtedness in full in cash or, at the option of the holders of Senior Indebtedness, cash equivalents. 8.4. No Impairment of Subordination No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, any Holder, or by any act, or failure to act, in good faith, by any such holder of Senior Indebtedness, or by any noncompliance by the Company or any Holder with the terms, provisions and covenants of this Agreement regardless of any knowledge thereof which any such holder may have or otherwise be charged with. 8.5. Section 8 Not to Prevent Events of Default The failure to make a payment on account of principal of or interest on the Notes by reason of any provision in this Section 8 shall not be construed as preventing the occurrence of an Event of Default with respect to such series under Section 7.1. 8.6. Securities Senior to Subordinated Indebtedness The indebtedness represented by the Notes will be senior and prior in right of payment to all Subordinated Indebtedness, to the extent and in the manner provided in such Subordinated Indebtedness. 32 8.7. Assignment of Junior Claims (a) So long as LTC Equity Holding Company holds a sufficient amount of Notes such that LTC Equity Holding Company constitutes a Requisite Noteholder, paragraphs (b) and (c) of this Section 8.7 shall have no force and effect. In the event LTC Equity Holding Company shall cease to hold a sufficient amount of Notes such that LTC Equity Holding Company is no longer a Requisite Noteholder, paragraphs (b) and (c) of this Section 8.7 shall be in effect. (b) In the event of an insolvency proceeding with respect to the Company, each Holder will assign to a representative of the holders of Senior Indebtedness (as identified in writing to each Holder by the holders of Senior Indebtedness) (the "Senior Representative") each Holder's right, title and interest in and to any claims such Holder has against the Company with respect to the Notes (the "Junior Claims") and any security held therefor, and will deliver to the Senior Representative from time to time any and all instruments and documents evidencing such Junior Claims, or will have entered on such instruments and documents such subordination legend as the Senior Representative may reasonably request, and each Holder will execute such other instruments and documents as the Senior Representative may from time to time reasonably require in connection therewith. In the event that any Junior Claim is not evidenced by a negotiable instrument, each Holder hereby agrees that he will use all commercially reasonably efforts to obtain an instrument or document from the Company evidencing such Junior Claim. In the event that such debt is not evidenced by a document, it shall nevertheless be deemed subordinated and assigned by virtue of this Section 8.7. (c) In the event of an insolvency proceeding with respect to the Company, each Holder will grant to the Senior Representative irrevocable authority in the place and stead of such Holder and in the name of such Holder or in the Senior Representative's name but for the Senior Representative's use and benefit, at any time or times, after any default under the terms of any Senior Indebtedness, in the Senior Representative's discretion to demand, collect file proofs of claim with respect to, receive (by way of dividends or otherwise) and take any and all legal proceedings for the recovery of any and all moneys due or to become due on account of the Junior Claims or any thereof, and to vote, give consents and take any other steps with regard thereto. Any and all moneys so collected or received by the Senior Representative shall be retained indefeasibly by the Senior Representative for application to the payment in full of any amounts owing with respect to the Senior Indebtedness then outstanding (the "Senior Claims"). If the Senior Representative receives notice of any claim adverse to the rights or interests of each Holder in and to either the Junior Claims or the Senior Claims, or any moneys held by the Senior Representative in respect thereof, the Senior Representative shall be entitled to retain any and all such moneys, documents and instruments evidencing such Junior Claims and Senior Claims. SECTION 9. AMENDMENTS AND WAIVERS 9.1. With Consent of Holders The Company, when authorized by a resolution of the Board of Directors of the Company and with the written consent of the Requisite Noteholders, may amend this Agreement 33 or the Notes, without notice to any other Holders. The Requisite Noteholders may waive compliance by the Company with any provision of this Agreement or the Notes without notice to any other Holder. Without the consent of each Holder affected, however, no amendment or waiver may (with respect to any Notes held by a non-consenting Holder of Notes): (a) reduce the principal amount of Notes whose Holders must consent to an amendment or waiver of any provision of this Agreement or the Notes; (b) reduce the principal of or change the fixed maturity of any Note; (c) reduce the rate of or change the time for payment of interest on any Note; (d) waive a Default or Event of Default in the payment of principal of or interest on the Notes (except a rescission of acceleration of the Notes by the Requisite Noteholders and a waiver of the payment default that resulted from such acceleration); (e) make the principal of or the interest on, any Note payable in any manner other than that stated in this Agreement and the Notes; (f) make any change in the provisions of this Agreement relating to waivers of past Defaults or the rights of Holders of Notes to receive payments of principal of or interest on the Notes; (g) make any change to the subordination provisions of this Agreement that adversely affect any Holder; or (h) make any change in the foregoing amendment and waiver provisions. It shall not be necessary for the consent of the Holders under this Section 9 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment or waiver under this Section 9 becomes effective, the Company shall mail to the Holders affected thereby a notice briefly describing the amendment or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment or waiver. In connection with any amendment to this Section 9, the Company may offer, but shall not be obligated to offer, to any Holder who consents to such amendment or waiver, consideration for such Holder's consent. 9.2. Revocation and Effect of Consents Until an amendment or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent 34 as to his Note or portion of his Note by notice to the Company received before the date on which the Requisite Noteholders have consented (and not theretofore revoked such consent) to the amendment or waiver. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment or waiver, which record date shall be at least ten (10) Business Days prior to the first solicitation of such consent. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those persons who were Holders at such record date (or their duly designated proxies), and only those persons, shall be entitled to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. After an amendment or waiver becomes effective, it shall bind every Holder, unless it makes a change described in any of clauses (a) through (g) of Section 9.1, in which case, the amendment or waiver shall bind only each Holder of a Note who has consented to it and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note; provided that any such waiver shall not impair or affect the right of any Holder to receive payment of principal of and interest on a Note, on or after the respective due dates expressed in such Note, or to bring suit for the enforcement of any such payment on or after such respective dates without the consent of such Holder. 9.3. Notation on or Exchange of Notes If an amendment or waiver changes the terms of a Note, the Company may require the Holder of the Note to deliver it to the Company. The Company may place an appropriate notation on the Note about the changed terms and return it to the Holder. SECTION 10. DEFINITIONS 10.1. Definitions As used in this Agreement, the following terms shall have the following meanings: "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Company after the Closing Date, whether or not subsequently reacquired or retired by the Company, other than the Conversion Shares; provided that such term shall exclude shares of Common Stock issued under the Stock Option Plan and shares of Common Stock issued or issuable upon the conversion of Notes issued pursuant to agreements dated on or about the date of this Agreement and the warrants scheduled on the Disclosure Schedule. "Adjusted Conversion Price" shall have the meaning assigned to such term in Section 6.6(a). 35 "Affiliate" means, with respect to any referenced Person, a Person (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such referenced Person, (ii) which directly or indirectly through one or more intermediaries beneficially owns or holds 10% or more of the combined voting power of the total Voting Securities of such referenced Person or (iii) of which 10% or more of the combined voting power of the total Voting Securities directly or indirectly through one or more intermediaries is beneficially owned or held by such referenced Person, or a Subsidiary of such referenced Person. When used herein without reference to any Person, Affiliate means an Affiliate of the Company. For purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of Voting Securities, by contract or otherwise; and the terms "affiliated," controlling" and "controlled" have meanings correlative to the foregoing. "Agent" means any Person authorized to act and who acts on behalf of the Purchasers with respect to the transactions contemplated by this Agreement, the Registration Rights Agreement or the Commitment Letter. "Agreement" means this Convertible Subordinated Note Purchase Agreement dated as of March 30, 1998 by and between the Company and the Purchaser. "Average Closing Sales Price" as of a particular 12-month period means the average closing sales price of the Common Stock for each Business Day during such 12-month period. Such average shall be calculated as follows: (i) the average of the closing sales prices of the Common Stock quoted on the Nasdaq National Market for each Business Day during such 12-month period, or (ii) if no such quotations are available, the average of the closing sales prices for each Business Day during such 12-month period on the principal national securities exchange on which the Common Stock is listed, or (iii) if not listed on any national securities exchange, the average closing sales price for each Business Day during such 12-month period in the over-the-counter market as reported by the National Quotation Bureau, Incorporated or similar organization, or (iv) if no of such sales prices are available for each Business Day in such 12-month period, the average of the high bid and low asked quotations in the over-the-counter market as so reported for such Business Days, or (v) if no such quotations are available, the fair market value per share on such unreported Business Days as determined by an independent investment banker or appraiser, nationally recognized to be expert in making such valuations, selected by a majority of the directors of the Company. In the event "Average Closing Sales Price" is determined by an independent investment banker or appraiser pursuant to clause (v) of the foregoing sentence, such determination shall be provided to each Holder in writing together with a fair and accurate description of the basis for making such determination. The Requisite Holders shall be permitted to dispute such determination by written notice to the Company within ten (10) Business Days of receipt of such determination. In the event of such dispute, the Requisite Holders and the Company shall work together in good faith to mutually agree upon a second independent investment banker or appraiser to make a determination of "Average Closing Sales Price" whose fees and expenses shall be paid by the Company. "Average Closing Sales Price" shall be the average of the per share fair market values determined by both independent investment bankers or appraisers. 36 "Bankruptcy Law" means title 11, U.S. Code or any similar federal or state law for the relief of debtors. "Business Day" means any day which is not a Legal Holiday. "Capital Lease" means any lease of any property which would in accordance with GAAP be required to be classified and accounted for on the balance sheet of the lessee as a capital lease. "Capitalized Lease Obligation" means, with respect to any Person for any period, any obligation of such Person to pay rent or other amounts under a Capital Lease; the amount of such obligation shall be the capitalized amount thereof determined in accordance with such principles. "Capital Stock" means any and all shares, interests, participation or other equivalents (however designated) of corporate stock, including without limitation all common stock and preferred stock. "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. ss. 9601 et. seq.). "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any Person or group (as such term is used in Section 13(d)(3) of the Exchange Act); (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any Person or group (as defined above), other than Walter C. Bowen or a Related Party, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of more than 50% of the Fully Diluted Voting Securities of the Company (measured by voting power rather than number of shares) and (iv) the date on which a majority of the Board of Directors of the Company shall cease to be Continuing Directors. "Change of Control Date" shall have the meaning set forth in Section 5.4. "Change of Control Notice" shall have the meaning set forth in Section 5.4. "Change of Control Price" shall have the meaning set forth in Section 5.4. "Change of Control Repurchase Date" shall have the meaning set forth in Section 5.4. 37 "Change of Control Repurchase Offer" shall have the meaning set forth in Section 5.4. "Charter Documents" means the Articles of Organization, Articles of Incorporation or Certificate of Incorporation and Bylaws, as amended or restated (or both) to date, of the Company or a Subsidiary, as applicable. "Closing" shall have the meaning set forth in Section 1.2(b). "Closing Date" shall have the meaning set forth in Section 1.2(b). "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute or law thereto. "Commitment Letter" means that certain Commitment Letter dated as of the Closing Date by and between the Company, LTC Properties and LTC West, executed concurrently herewith. "Common Stock" means the Common Stock, no par value, of the Company. "Company" means Regent Assisted Living, Inc., an Oregon corporation. "Company SEC Documents" shall have the meaning set forth in Section 3.23. "Conversion Rate" shall have the meaning set forth in Section 6.2. "Conversion Shares" means the shares of Common Stock issuable upon conversion of the Notes. "Convertible Securities" shall have the meaning set forth in Section 6.6(c). "Consolidated " or "consolidated," when used with reference to any accounting term, means the amount described by such accounting term, determined on a consolidated basis in accordance with GAAP, after elimination of intercompany items. "Consolidated Net Worth" means, with respect to any Person as of any date, the sum of (i) the consolidated equity of the common stockholders of such Person and its consolidated Subsidiaries as of such date plus (ii) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of preferred stock that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such preferred stock, less (x) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made within 12 months after the acquisition of such business) subsequent to the Closing Date in the book value of any asset owned by such Person or a consolidated Subsidiary of such Person, (y) all investments as of such date in unconsolidated Subsidiaries and in Persons that are not Subsidiaries, and (z) all unamortized debt discount and 38 expense and unamortized deferred charges as of such date, all of the foregoing determined in accordance with GAAP. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on March 30, 1998 or (ii) was nominated for election or elected to such Board with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. "Default" means any event which is, or after notice or passage of time would be, an Event of Default. "Determination Date" shall have the meaning set forth in Section 6.4. "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by the Company under Section 6.6, into the aggregate consideration received, or deemed to have been received by the Company for such issue under Section 6.6, for such Additional Shares of Common Stock. "Environmental Laws" shall have the meaning set forth in Section 3.13. "Equity Interest" means Capital Stock or warrants, options or other rights to acquire Capital Stock (but excluding any debt note which is convertible into, or exchangeable for, Capital Stock). "Event of Default" shall have the meaning set forth in Section 7.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended, from time to time, and any successor statute or law thereto. "Fair Market Value" of Common Stock as of a particular date means the Weighted Average trading price of the Common Stock for the ten (10) consecutive Business Day period immediately preceding such date. Such Weighted Average shall be calculated as follows: (i) the Weighted Average of the sales price of the Common Stock quoted on the Nasdaq National Market for each of such ten (10) Business Days, or (ii) if no such quotations are available, the Weighted Average sales price for such ten (10) Business Days on the principal national securities exchange on which the Common Stock is listed, or (iii) if not listed on any national securities exchange, the Weighted Average sales price for such ten (10) Business Days in the over-the-counter market as reported by the National Quotation Bureau, Incorporated or similar organization, or (iv) if no of such sales prices are available for each Business Day in such ten (10) Business Day period, the Weighted Average of the high bid and low asked quotations in the over-the-counter market as so reported for such ten (10) Business Days, or (v) if no such 39 quotations are available, the fair market value per share on such date as determined by an independent investment banker or appraiser, nationally recognized to be expert in making such valuations, selected by a majority of the directors of the Company; provided, however, that in the event of an underwritten public offering of Common Stock, "Fair Market Value" shall mean the price to the public of such Common Stock in such underwritten public offering. In the event "Fair Market Value" is determined by an independent investment banker or appraiser pursuant to clause (v) of the foregoing sentence, such determination shall be provided to each Holder in writing together with a fair and accurate description of the basis for making such determination. The Requisite Holders shall be permitted to dispute such determination by written notice to the Company within ten (10) Business Days of receipt of such determination. In the event of such dispute, the Requisite Holders and the Company shall work together in good faith to mutually agree upon a second independent investment banker or appraiser to make a determination of "Fair Market Value" whose fees and expenses shall be paid by the Company. "Fair Market Value" shall be the average of the per share fair market values determined by both independent investment bankers or appraisers. "Fully Diluted Voting Securities" means each class of Voting Securities of a Person and each class of securities of a Person that, at the time of determination, can immediately subscribe for and/or convert to Voting Securities. "GAAP" means generally accepted accounting principles as used in the United States of America and applied in a manner consistent with past practices. "Holder" or "Holders" means the Purchaser (so long as it holds any Notes) and any other holder of any of the Notes. "Incorporated Documents" means the following of the Company's documents, each as filed with the SEC: (1) Form 10-K for the year ended December 31, 1997, (2) 1997 Proxy Statement dated April 10, 1997; and (3) Form 8-K dated December 29, 1997. "Indebtedness" means, with respect to any Person, the aggregate amount of, without duplication, the following: (a) all obligations for borrowed money; (b) all obligations evidenced by bonds, debentures, notes or other similar instruments; (c) all obligations to pay the deferred purchase price of property or services, except Trade Payables and obligations that do not exceed $300,000 in the aggregate, accrued commissions and other similar accrued current liabilities in respect of such obligations, in any case, not overdue and arising in the ordinary course of business; (d) all Capitalized Lease Obligations; 40 (e) all obligations or liabilities of others secured by a lien on any asset owned by such Person or Persons whether or not such obligation or liability is assumed; (f) all obligations of such Person or Persons, contingent or otherwise, in respect of any letters of credit or bankers' acceptances; and (g) all guaranties. "Indemnified Parties" shall have the meaning set forth in Section 5.6. "Independent Auditors" shall mean the independent certified public accountants of the Company. Until December 29, 1997, the Independent Auditors were Coopers & Lybrand, L.L.P. After such date and as of the date of the Agreement, the Independent Auditors are KPMG Peat Marwick LLP. "Inspectors" shall have the meaning set forth in Section 5.13. "Intangibles" shall have the meaning set forth in Section 3.16. "Junior Claims" shall have the meaning set forth in Section 8.7. "Key Employee" means Walter C. Bowen. "Knowledge of the Company" means to the actual knowledge of each of the Chairman, Chief Executive Officer, Chief Financial Officer, General Counsel, President, Treasurer and any Senior or Executive Vice President of the Company, after due inquiry and investigation. "Legal Holiday" means a Saturday, Sunday or day on which banks and trust companies in the principal place of business of the Company or in California are not required to be open. If a payment date is a Legal Holiday, payment may be made on the next succeeding day that is not a Legal Holiday, and interest shall accrue for the intervening period. "Lien" means any mortgage, pledge, lien, taxes, encumbrance, charge or adverse claim affecting title or resulting in a charge against real or personal property, or note interest of any kind (including, without limitation, any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Losses" shall have the meaning set forth in Section 5.6. "LTC Equity Holding Company" means LTC Equity Holding Company, Inc., a Nevada corporation. "LTC Properties" means LTC Properties, Inc., a Maryland corporation. 41 "LTC West" means LTC West, Inc., a Nevada corporation. "Material Adverse Effect" means (i) any adverse effect upon the issuance, validity or enforceability of a Note, this Agreement, the Registration Rights Agreement or the Commitment Letter, (ii) any material adverse effect on the results of operations, financial condition, properties, assets, business or prospects of the Company and its Subsidiaries, taken as a whole, or (iii) any adverse effect on the ability of the Company to fulfill its obligations under the Notes, this Agreement, the Registration Rights Agreement or the Commitment Letter or any document contemplated hereby or thereby. "Material Contract" shall have the meaning set forth in Section 3.17. "Maturity Date" means March 31, 2008. "Note Register" shall have the meaning set forth in Section 1.3. "Note" or "Notes" shall have the meaning set forth in Section 1.1. "Officers' Certificate" means a certificate signed by any two officers, one of whom must be the Chairman of the Board, the President, the Treasurer or a Vice President of the Company. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Purchaser. "Payment" or "Distribution" shall have the meaning set forth in Section 8.1. "Person" means an individual, partnership, corporation, limited liability company, trust or unincorporated organization or a government or agency or political subdivision thereof. "Plan of Liquidation" means, with respect to any Person, a plan that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously, in phases or otherwise) (i) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such person otherwise than as an entirety or substantially as an entirety and (ii) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition and all or substantially all of the remaining assets of such Person to holders of Capital Stock of such Person. "Preferred Stock" means the Series A Preferred Stock, no par value, and the Series B Preferred Stock, no par value, of the Company. "Property" or "property" means any assets or property of any kind or nature whatsoever, real, personal or mixed (including fixtures), whether tangible or intangible, provided that the terms "Property" or "property", when used with respect to any Person, shall not include Notes issued by such. "Purchaser" means the purchaser on the signature pages hereto. 42 "Registration Rights Agreement" means that certain Registration Rights Agreement dated as of the Closing Date by and among the Company and the Purchaser, executed concurrently herewith. "Related Party" with respect to Walter C. Bowen means (A) any spouse or immediate family member of such Person or (B) or trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of Walter C. Bowen and/or such other Persons referred to in the immediately preceding clause (A). "Reorganizations" shall have the meaning set forth in Section 6.5. "Requisite Noteholders" shall mean the holders of Notes issued to the Purchaser pursuant to this Agreement and the Notes whenever issued to all other purchasers pursuant to similar agreements dated on or about the date of this Agreement with an aggregate principal amount equal to or greater than 50% of the aggregate principal amount of all then outstanding Notes issued to the Purchaser pursuant to this Agreement and the Notes whenever issued to all other purchasers pursuant to similar agreements dated on or about the date of this Agreement. "Rights" shall have the meaning assigned to such term in Section 6.6(c). "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended from time to time, and any successor statute or law thereto. "Senior Claims" shall have the meaning set forth in Section 8.7. "Senior Indebtedness" means the principal of, premium, if any, and accrued interest on any other Indebtedness of the Company and all fees, expenses, reimbursements, indemnities and other amounts payable with respect to such Indebtedness, whether such Indebtedness is outstanding on the date of this Agreement or thereafter created, incurred, assumed, or guaranteed by the Company unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such Indebtedness shall not be senior, or is pari passu or subordinate, in right or payment to the Notes; provided that Senior Indebtedness shall not include (i) in the case of each Note the other Notes (ii) Indebtedness of the Company to a Subsidiary of the Company, (iii) Indebtedness of or amounts owed by the Company for compensation to directors or members of senior management that has not been approved by the Compensation Committee of the Board; (iv) Indebtedness guaranteed by the Company on behalf of any equityholder, director, officer or employee of the Company or of any equityholder, director, officer or employee of any of the Company's Subsidiaries, (v) any Trade Payables (including without limitation Indebtedness incurred for the purchase of goods or materials or for services obtained in the ordinary course of business), (vi) Indebtedness of the Company that is subordinated by its terms in right of payment to any other Indebtedness of the Company, and (vii) Indebtedness incurred in violation of this Agreement. 43 "Senior Representative" shall have the meaning set forth in Section 8.7. "Subordinated Indebtedness" means the principal, premium, if any, and interest on any Indebtedness of the Company which by its terms is expressly subordinated in right of payment to the Notes. "Subsidiary" means, with respect to any Person (the "parent"), any corporation, association or other business entity of which Notes or other ownership interests representing more than 50% of the ordinary voting power are, at the time as of which any determination is being made, owned or controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Stock Option Plan" shall mean the Company's 1995 Stock Incentive Plan as in effect on the Closing Date. "Surviving Person" shall have the meaning set forth in Section 5.7(b)(1). "Total Price" means, with respect to the Common Stock on any Business Day, the product of: (x) the closing sales price of the Common Stock quoted on the Nasdaq National Market on such Business Day, or if no such quotations are available, on the principal national securities exchange on which the Common Stock is listed on such Business Day, or if not listed on any national securities exchange, in the over-the-counter market as reported by the National Quotation Bureau, Incorporated or similar organization on such Business Day, or if no such sales prices are available, the high bid and low asked quotations in the over-the-counter market on such Business Day multiplied by (y) the number of shares of Common Stock traded on such market or exchange, as applicable, on such Business Day. "Trade Payables" means, with respect to any Person, accounts payable and other similar accrued current liabilities in respect of obligations or indebtedness to trade creditors created, assumed or guaranteed by such Person or any of its Subsidiaries in the ordinary course of business in connection with the obtaining of property or services. "Voting Securities" means any class of Equity Interests of a Person pursuant to which the holders thereof have, at the time of determination, the general voting power under ordinary circumstances to vote for the election of directors, managers, trustees or general partners of any Person (irrespective of whether or not at the time any other class or classes will have or might have voting power by reason of the happening of any contingency). "Weighted Average" means, with respect to the Common Stock during any ten (10) consecutive Business Day period, the sum of the Total Price of such Common Stock for each Business Day during such ten (10) consecutive Business Day period divided by ten (10). 10.2. Rules of Construction Unless the context otherwise requires 44 (a) a term has the meaning assigned to it; (b) "or" is not exclusive; (c) words in the singular include the plural, and words in the plural include the singular; (d) provisions apply to successive events and transactions; (e) "herein," "hereof" and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision; and (f) the masculine shall include the feminine and neuter genders as appropriate. SECTION 11. MISCELLANEOUS 11.1. Notices All notices and other communications provided for or permitted hereunder shall be made by hand-delivery, first-class mail, telex, telecopier, or overnight air courier guaranteeing next day delivery: (a) if to any Purchaser at address set forth on the signature pages hereto, with a copy to Latham & Watkins, 633 W. Fifth Street, Suite 4000, Los Angeles, California 90071, Attention: Eva Herbst Davis, Esq.; and (b) if to the Company, to Regent Assisted Living, Inc., 121 SW Morrison, Suite 1000, Attention: General Counsel with a copy to Stoel Rives LLP, 900 SW Fifth Avenue, Suite 2300, Portland, Oregon 97204, Attention: Todd Bauman, Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. The parties may change the addresses to which notices are to be given by giving five days' prior notice of such change in accordance herewith. 11.2. Undertaking for Costs In any suit for the enforcement of any right or remedy under this Agreement, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. 45 11.3. Successors and Assigns This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties. 11.4. Counterparts This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 11.5. Headings The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 11.6. Governing Law This Agreement shall be governed by and construed in accordance with the internal laws of the State of California. 11.7. Entire Agreement This Agreement, together with the Notes, the Registration Rights Agreement and the Commitment Letter is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, together with the Notes, the Registration Rights Agreement and the Commitment Letter supersedes all prior agreements and understandings between the parties with respect to such subject matter. 11.8. Severability In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected, it being intended that the Purchaser's rights and privileges shall be enforceable to the fullest extent permitted by law. 11.9. Transfer The Notes may not be transferred, sold, assigned, pledged, hypothecated or otherwise disposed of unless (a) such transfer is pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or (b) the Company has been furnished with a satisfactory opinion of counsel for the Holder, at such Holder's expense, that 46 such transfer is exempt from the provisions of Section 5 of the Securities Act, the rules and regulations in effect thereunder and any applicable state securities laws. 47 IN WITNESS WHEREOF, this Agreement has been duly executed by the parties set forth below as of the date first written above. REGENT ASSISTED LIVING, INC., an Oregon corporation By: WALTER C. BOWEN ---------------------------------- Walter C. Bowen President JAMES J. PIECZYNSKI, an individual JAMES J. PIECZYNSKI - --------------------------------------- James J. Pieczynski Address: 1544 Falling Star Avenue Thousand Oaks, California 91362 48 ANNEX A THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (A) SUCH TRANSFER IS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (B) THE COMPANY HAS BEEN FURNISHED WITH A SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER THAT SUCH TRANSFER IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF THE ACT, THE RULES AND REGULATIONS IN EFFECT THEREUNDER AND ANY APPLICABLE STATE SECURITIES LAWS. REGENT ASSISTED LIVING, INC. CONVERTIBLE SUBORDINATED NOTE DUE MARCH 31, 2008 Note No. ---------- $-------------------- FOR VALUE RECEIVED, the undersigned, REGENT ASSISTED LIVING, INC., a corporation organized and existing under the laws of Oregon (herein called the "Company"), hereby promises to pay to the order of ----------------------------- or registered assigns ("Holder"), the principal sum of ------------------------- DOLLARS (or so much thereof as shall remain outstanding) on March 31, 2008. Payments are to be made as provided in the Agreement (as defined herein). This Note is one of the Notes issued pursuant to the Convertible Subordinated Note Purchase Agreement dated as of March 30, 1998 (the "Agreement"), by and between the Company and James J. Pieczynski, an individual, and is also entitled to the benefits thereof to the extent provided in the Agreement. This Note is subject to (i) conversion, in whole or in part, at the option of the Holder, pursuant to Section 6.1(a) of the Agreement, (ii) conversion, in whole but not in part, at the option of the Company upon the satisfaction of certain conditions pursuant to Section 6.1(b) of the Agreement and (iii) repurchase, in whole or in part, upon a Change of Control pursuant to Section 5.4 of the Agreement. Upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. The Company may deem and treat the person in whose name this Note is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary. If an Event of Default shall occur and be continuing, this Note may, under certain circumstances, become or be declared due and payable in the manner and with the effect provided in the Agreement. Certain terms and provisions of this Note may be amended or compliance herewith waived on the terms and provisions provided for in the Agreement. The Note is subordinated in both right of payment and time of payment to certain Senior Indebtedness, as defined and described in Section 8 of the Agreement. Capitalized terms used herein without definition shall have the meaning set forth for such terms in the Agreement. REGENT ASSISTED LIVING, INC., an Oregon corporation By:-------------------------------------- Name: Title: 2 ANNEX B FORM OF OPINION OF COMPANY COUNSEL 1. The Company and each of its Subsidiaries are corporations duly organized and validly existing in good standing under the laws of their respective jurisdictions of incorporation. 2. The Company and each of its Subsidiaries have all requisite power and authority to own or hold under lease the properties it purports so to own or hold except where the failure so to own or hold could not have a Material Adverse Effect and to transact their respective businesses as now transacted and proposed to be transacted. 3. The Company and each of its Subsidiaries are duly qualified as foreign corporations and are in good standing in each jurisdiction in which the character of the properties owned or held under lease by them or the nature of the business transacted by them requires such qualification, except where the failure so to be qualified or be in good standing could not have a Material Adverse Effect. 4. The Company has taken all actions necessary to authorize it (i) to execute, deliver and perform all of its obligations under the Agreement, the Registration Rights Agreement and the Commitment Letter, (ii) to issue and perform all of its obligations under the Notes and (iii) to consummate the transactions contemplated hereby and thereby. 5. The total number of shares of Capital Stock which the Company has authority to issue is 30,000,000 shares, consisting of 25,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. 6. As of March 30, 1998, there were 4,633,000 shares of Common Stock issued and outstanding, and 1,666,667 shares of Preferred Stock issued and outstanding. Such shares of Common Stock and Preferred Stock have been duly authorized and were validly issued, are fully paid and nonassessable, were issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities of the Company. 7. Neither the Company nor any of its Subsidiaries has outstanding any securities convertible into or exchangeable for any shares of Capital Stock nor does it have outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, any Capital Stock or securities convertible into or exchangeable for any Capital Stock other than (i) the Notes to be issued pursuant to the Agreement or pursuant to other similar agreements dated on or about the date of this Agreement, (ii) 1,666,667 shares of Preferred Stock convertible into Common Stock, and (iii) options and warrants to purchase shares of Common Stock as set forth and for the numbers of shares set forth in the Disclosure Schedule to the Agreement. 8. The Company has duly authorized and reserved for issuance the Conversion Shares, and the Conversion Shares will, when issued, be duly and validly issued, fully paid and nonassessable and free from all Liens. 9. Neither the execution or delivery of the Agreement, the Registration Rights Agreement or the Commitment Letter by the Company nor the issuance, sale or delivery of the Notes nor the performance of its respective obligations hereunder or thereunder will: (a) violate any provision of the Charter Documents of the Company; (b) violate any statute, law, rule or regulation or any judgment, decree, order, regulation or rule of any court or governmental authority to which the Company, any of its Subsidiaries, or any of their respective properties may be subject; (c) permit or cause the acceleration of the maturity of any debt or obligation of the Company or any of its Subsidiaries; (d) violate, or be in conflict with, or constitute a default under, or permit the termination of, or require the consent of any Person under, or result in the creation of any Lien upon any property of the Company or any of its Subsidiaries under, any mortgage, indenture, loan agreement, note, debenture or other agreement for borrowed money or any other material agreement to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries (or their respective properties) may be bound, other than such violations, conflicts, defaults, terminations and Liens, or such failures to obtain consents, which could not reasonably be expected to result in a Material Adverse Effect. 10. The sale of the Notes hereunder is exempt from the registration and prospectus delivery requirements of the Securities Act. 11. Neither the Company nor any of its Subsidiaries is an "investment company" or a Person directly or indirectly "controlled" by or acting on behalf of an "investment company" within the meaning of the United States Investment Company Act of 1940, as amended. 2 EX-4.7 8 CONVERTIBLE SUBORDINATED NOTE THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (A) SUCH TRANSFER IS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (B) THE COMPANY HAS BEEN FURNISHED WITH A SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER THAT SUCH TRANSFER IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF THE ACT, THE RULES AND REGULATIONS IN EFFECT THEREUNDER AND ANY APPLICABLE STATE SECURITIES LAWS. REGENT ASSISTED LIVING, INC. CONVERTIBLE SUBORDINATED NOTE DUE MARCH 31, 2008 Issue Date: March 31, 1998 Note No. 1998-3 $160,000 FOR VALUE RECEIVED, the undersigned, REGENT ASSISTED LIVING, INC., a corporation organized and existing under the laws of Oregon (herein called the "Company"), hereby promises to pay to the order of JAMES J. PIECZYNSKI or registered assigns ("Holder"), the principal sum of ONE HUNDRED SIXTY THOUSAND DOLLARS (or so much thereof as shall remain outstanding) on March 31, 2008. Payments are to be made as provided in the Agreement (as defined herein). This Note is one of the Notes issued pursuant to the Convertible Subordinated Note Purchase Agreement dated as of March 30, 1998 (the "Agreement"), by and between the Company and James J. Pieczynski, an individual, and is also entitled to the benefits thereof to the extent provided in the Agreement. This Note is subject to (i) conversion, in whole or in part, at the option of the Holder, pursuant to Section 6.1(a) of the Agreement, (ii) conversion, in whole but not in part, at the option of the Company upon the satisfaction of certain conditions pursuant to Section 6.1(b) of the Agreement and (iii) repurchase, in whole or in part, upon a Change of Control pursuant to Section 5.4 of the Agreement. Upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. The Company may deem and treat the person in whose name this Note is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary. If an Event of Default shall occur and be continuing, this Note may, under certain circumstances, become or be declared due and payable in the manner and with the effect provided in the Agreement. Certain terms and provisions of this Note may be amended or compliance herewith waived on the terms and provisions provided for in the Agreement. The Note is subordinated in both right of payment and time of payment to certain Senior Indebtedness, as defined and described in Section 8 of the Agreement. Capitalized terms used herein without definition shall have the meaning set forth for such terms in the Agreement. REGENT ASSISTED LIVING, INC., an Oregon corporation By: WALTER C. BOWEN ------------------------------------ Walter C. Bowen President EX-4.8 9 CONV. SUB. NOTE PURCH. AGT (C.T. ISHIKAWA) ------------------------------------------------------------------- REGENT ASSISTED LIVING, INC. and CHRISTOPHER T. ISHIKAWA $90,000 Principal Amount of 7.5% Convertible Subordinated Notes Due March 31, 2008 CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT ------------------------------------------------------------------ Dated as of March 30, 1998 TABLE OF CONTENTS Page SECTION 1. PURCHASE AND SALE OF NOTES..........................................1 1.1. Issue of Notes...................................................1 1.2. Purchase and Sale of Notes.......................................1 1.3. Maintenance of Note Register.....................................2 1.4. Issue Taxes......................................................2 1.5. Direct Payment...................................................3 1.6. Lost, Etc. Notes.................................................3 SECTION 2. CLOSING CONDITIONS..................................................4 2.1. Delivery of Documents............................................4 2.2. Delivery of Other Agreements.....................................5 2.3. Representations and Warranties, Agreements and Covenants.........5 2.4. No Event of Default..............................................6 2.5. Proceedings Satisfactory.........................................6 2.6. Consents and Permits.............................................6 2.7. No Material Adverse Change.......................................6 SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................6 3.1. Organization; Power and Authority................................6 3.2. Authorization....................................................7 3.3. Capital Stock....................................................7 3.4. No Other Registration Rights.....................................7 3.5. No Violation or Conflict; No Default.............................8 3.6. Margin Regulations...............................................8 3.7. Private Offering.................................................8 3.8. Due Authorization of Material Contracts..........................9 3.9. Financial Statements.............................................9 3.10. Litigation; Judgments..........................................10 i 3.11. Taxes..........................................................10 3.12. Investment Company Act.........................................10 3.13. Environmental Matters..........................................10 3.14. Labor Relations................................................11 3.15. Real Property; Leases..........................................11 3.16. Intellectual Property; Licenses................................11 3.17. Defaults.......................................................12 3.18. Brokers........................................................12 3.19. Existing Indebtedness..........................................12 3.20. Compliance with Law; Permits...................................13 3.21. Insurance......................................................13 3.22. Material Events................................................13 3.23. SEC Documents; Undisclosed Liabilities.........................14 3.24. Material Misstatements or Omissions............................15 3.25. Survival of Representations and Warranties.....................15 SECTION 4. REPRESENTATIONS AND WARRANTIES OF EACH PURCHASER...................15 4.1. Purchase for Own Account........................................15 4.2. Accredited Investor.............................................16 4.3. Authorization...................................................16 4.4. Brokers.........................................................16 SECTION 5. COVENANTS..........................................................16 5.1. Payment of Notes; Satisfaction of Obligations...................16 5.2. Notice of Default...............................................17 5.3. Limitation on Additional Indebtedness...........................17 5.4. Change of Control...............................................17 5.5. Stay, Extension and Usury Laws..................................18 5.6. Indemnification.................................................19 5.7. Corporate Existence; Merger; Successor Corporation..............20 5.8. Taxes...........................................................21 5.9. Investment Company Act..........................................21 ii 5.10. Insurance......................................................22 5.11. Inconsistent Agreements........................................22 5.12. Compliance with Laws...........................................22 5.13. Inspection of Properties and Records...........................22 SECTION 6. CONVERSION OF NOTES................................................23 6.1. Conversion......................................................23 6.2. Conversion Rate.................................................24 6.3. Fractional Shares...............................................24 6.4. Adjustments for Stock Splits, Combinations and Dividends........24 6.5. Reorganization, Mergers, Consolidations or Sales of Assets......25 6.6. Sale of Shares Below Market or Conversion Price.................25 6.7. Adjustment for Failure to Quote on Nasdaq National Market.......27 6.8. Accountants' Certificate of Adjustment..........................27 6.9. Reservation of Shares Issuable Upon Conversion..................27 6.10. No Impairment..................................................28 SECTION 7. DEFAULTS AND REMEDIES..............................................28 7.1. Events of Default...............................................28 7.2. Acceleration of Notes...........................................29 7.3. Other Remedies..................................................29 SECTION 8. SUBORDINATION......................................................30 8.1. Notes Subordinated to Senior Indebtedness.......................30 8.2. Company Not to Make Payments with Respect to Notes in Certain Circumstances........................................30 8.3. Subrogation of Notes............................................32 8.4. No Impairment of Subordination..................................32 8.5. Section 8 Not to Prevent Events of Default......................33 8.6. Securities Senior to Subordinated Indebtedness..................33 8.7. Assignment of Junior Claims.....................................33 SECTION 9. AMENDMENTS AND WAIVERS.............................................34 9.1. With Consent of Holders.........................................34 iii 9.2. Revocation and Effect of Consents...............................35 9.3. Notation on or Exchange of Notes................................35 SECTION 10. DEFINITIONS.......................................................36 10.1. Definitions....................................................36 10.2. Rules of Construction..........................................45 SECTION 11. MISCELLANEOUS.....................................................46 11.1. Notices........................................................46 11.2. Undertaking for Costs..........................................46 11.3. Successors and Assigns.........................................46 11.4. Counterparts...................................................46 11.5. Headings.......................................................46 11.6. Governing Law..................................................47 11.7. Entire Agreement...............................................47 11.8. Severability...................................................47 11.9. Transfer.......................................................47 iv CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT This CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT, is dated as of March 30, 1998 (this "Agreement"), and entered into by and between REGENT ASSISTED LIVING, INC., an Oregon corporation (the "Company") and CHRISTOPHER T. ISHIKAWA, an individual (the "Purchaser"). Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in Section 10.1 hereof. In consideration of the premises, mutual covenants and agreements hereinafter contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company agrees as follows: SECTION 1. PURCHASE AND SALE OF NOTES 1.1. Issue of Notes On or before the Closing, (a) The Company will have authorized the issue and sale of $90,000 aggregate principal amount of its 7.5% Convertible Subordinated Notes due March 31, 2008 (the "Notes") to the Purchaser, to be substantially in the form attached hereto as Annex A. (b) The Notes shall be substantially in the form attached hereto as Annex A, including such other notations, legends or endorsements set forth therefor or required by law. The Notes shall be dated the date of their issuance. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Agreement and, to the extent applicable, the Company and the Purchaser, by their execution and delivery of this Agreement, expressly agree to such terms and provisions and to be bound thereby. 1.2. Purchase and Sale of Notes (a) Purchase and Sale. The Company agrees to sell and, subject to the terms and conditions set forth herein and in the Registration Rights Agreement and in reliance on the representations and warranties of the Company contained or incorporated herein, the Purchaser agrees to purchase the Notes for an aggregate purchase price of $90,000. (b) Closing. The purchase and sale of the Notes referred to in Section 1.2(a)(1) shall take place at a closing (the "Closing") at the offices of Latham & Watkins, 633 West Fifth Street, Suite 4000, Los Angeles, California at 2:00 p.m. on March 30, 1998 (the "Closing Date"). At the Closing, the Company will deliver to the Purchaser the Notes to be purchased by the Purchaser (in such permitted denomination or denominations and registered in the Purchaser's name or the name of such nominee or nominees as the Purchaser may request) on the Closing Date, dated the Closing Date, against payment of the purchase price therefor by intra-bank or federal funds bank wire transfer of same day funds to such bank account as the Company shall designate at least two Business Days prior to the Closing. (c) Fees and Expenses. Whether or not the Notes are sold, the Company agrees to pay or reimburse all expenses relating to this Agreement, including but not limited to: (1) the reasonable fees and other expenses of the Purchaser's counsel, Latham & Watkins, in connection herewith (not to exceed $50,000 in the aggregate, relating to this Agreement and similar agreements dated on or about the date of this Agreement); (2) any reasonable out-of-pocket fees and expenses (including the reasonable fees and expenses of counsel) in connection with any registration or qualification of the Notes required in connection with the offer and sale of the Notes at the Closing pursuant to this Agreement under the securities or "blue sky" laws of any jurisdiction requiring such registration or qualification or in connection with obtaining any exemptions from such requirements; and (3) the Purchaser's reasonable out-of-pocket expenses (including the reasonable fees and expenses of counsel) relating to any amendment, or modification of, or any waiver, or consent or preservation of rights under this Agreement, the Notes, the Registration Rights Agreement and any other documents contemplated hereby or thereby. Purchaser may deduct such expenses from the purchase price of the Notes; provided that the Purchaser agrees to provide the Company with a statement describing any amounts to be so paid at least one Business Day prior to the Closing. 1.3. Maintenance of Note Register The Company shall cause to be kept at its principal office a register for the registration and transfer of the Notes (the "Note Register"). The names and addresses of the Holders of Notes, the transfer of Notes, and the names and addresses of the transferees of the Notes shall be registered in the Note Register. The Person in whose name any registered Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes of this Agreement and the Company shall not be affected by any notice to the contrary, until due presentment of such Note for registration of transfer so provided in this Section 1.3. Payment of or on account of the principal and interest on any registered Notes shall be made to or upon the written order of such registered holder. 1.4. Issue Taxes The Company agrees to pay all taxes owed by or on behalf of the Company in connection with the issuance, sale, delivery or transfer by the Company to the Purchaser of the Notes and the execution and delivery of the agreements and instruments contemplated hereby and any modification of any of such Notes, agreements and instruments and will save the 2 Purchaser harmless without limitation as to time against any and all liabilities with respect to all such taxes. The Purchaser agrees to pay all taxes owed by or on behalf of the Purchaser in connection with the issuance, sale, delivery or transfer by the Company to the Purchaser of the Notes and the execution and delivery of the agreements and instruments contemplated hereby and any modification of any of such Notes, agreements and instruments and will save the Company harmless without limitation as to time against any and all liabilities with respect to all such taxes. The obligations of the Company and the Purchaser under this Section 1.4 shall survive the payment or prepayment of the Notes and the termination of this Agreement. 1.5. Direct Payment (a) The Company will pay or cause to be paid all amounts payable with respect to any Note (without any presentment of such Note and without any notation of such payment being made thereon) by crediting (before 11:00 a.m., Pacific time), by federal funds bank wire transfer to each Holder's account in any bank in the United States as may be designated and specified in writing by such Holder at least two Business Days prior thereto. (b) Notwithstanding anything to the contrary contained in the Notes, if any principal amount payable with respect to a Note is payable on a Legal Holiday, then the Company shall pay such amount on the next succeeding Business Day, and interest shall accrue on such amount until the date on which such amount is paid and payment of such accrued interest shall be made concurrently with the payment of such amount, provided that the Company may elect to pay in full (but not in part) any such amount on the last Business Day prior to the date such payment otherwise would be due, and no such additional interest shall accrue on such amount. Notwithstanding anything to the contrary contained in the Notes, if any interest payable with respect to a Note is payable on a Legal Holiday, then the Company shall pay such interest on the next succeeding Business Day, and such extension of time shall be included in the computation of the interest payment, provided that the Company may elect to pay in full (but not in part) any such interest on the last Business Day prior to the date such payment otherwise would be due, and such diminution in time may, at the Company's option, be included in the computation of the interest payment. 1.6. Lost, Etc. Notes Notwithstanding any provision to the contrary, if any Note of which the Purchaser or any other Holder (or nominee thereof) which is a transferee is the owner is mutilated, destroyed, lost or stolen, then the affidavit of the Purchaser or such Holder, if an individual, or of the Purchaser's or such Holder's treasurer or assistant treasurer (or other authorized officer), if a Person other than an individual, briefly setting forth the circumstances with respect to such mutilation, destruction, loss or theft, shall be accepted as satisfactory evidence thereof, and no indemnity, note or payment of charges or expenses shall be required as a condition to the execution and delivery by the Company or the transfer agent with respect to such Note, of new Notes for a like aggregate principal amount or number of shares, as applicable, in substitution therefor, other than such Purchaser's or such Holder's unsecured written agreement reasonably 3 satisfactory to indemnify the Company or the transfer agent, as the case may be, which written agreement may be required by the Company. SECTION 2. CLOSING CONDITIONS The obligations of the Purchaser to purchase and pay for the Notes to be delivered to such Purchaser at the Closing shall be subject to the satisfaction of the following conditions on or before the Closing Date: 2.1. Delivery of Documents The Company shall have delivered to the Purchaser, in form and substance reasonably satisfactory to the Purchaser, the following: (a) The Notes being purchased by the Purchaser pursuant to Section 1.2(a)(1), duly executed by the Company, in the aggregate principal amount of $90,000. (b) An opinion, dated the Closing Date and addressed to the Purchaser, from David R. Gibson, counsel for the Company, as to the matters set forth on Annex B. In rendering such opinion, such counsel may rely as to factual matters upon certificates or other documents furnished by officers and directors of the Company (copies of which shall be delivered to the Purchaser) and by government officials, and upon such other documents as such counsel reasonably deems appropriate as a basis for its opinion. Such counsel shall opine as to the federal laws of the United States, the laws of the State of Oregon. (c) Resolutions of the Board of Directors of the Company, certified by the Secretary or Assistant Secretary, to be duly adopted and in full force and effect on the Closing Date, authorizing (i) the execution, delivery and performance of this Agreement, the Registration Rights Agreement and the Commitment Letter and the consummation of transactions contemplated hereby and thereby, (ii) the issuance of the Notes to be purchased by the Purchaser and (iii) specific officers to execute and deliver this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter. (d) Certificates executed by any two executive officers of the Company, dated the Closing Date, certifying (i) that all of the conditions set forth in Section 2 of this Agreement are satisfied on and as of such date, (ii) that all of the representations and warranties of the Company contained or incorporated by reference herein that (A) are qualified as to materiality are true and correct on and as of such date as though made on and as of such date and that (B) are not qualified as to materiality are true and correct in all material respects on and as of such date as though made on and as of such date, and no event has occurred and is continuing, or would result from the issuance of the Notes or the extension of borrowings under the Commitment Letter, which constitutes or would constitute a Default or an Event of Default and (iii) as to such other matters as the Purchaser may request in the exercise of its reasonable discretion. 4 (e) Governmental certificates, dated the most recent practicable date but in no event more than thirty (30) calendar days prior to the Closing Date showing that the Company was incorporated under the Oregon Business Corporation Act, is active on the records of the Corporation Division and is qualified as a foreign corporation and in good standing in all other jurisdictions in which it is qualified to transact business, except where the failure to be so qualified would not have a Material Adverse Effect. (f) Copies of each consent, license and approval required in connection with the execution, delivery and performance by the Company of this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter and the consummation of the transactions contemplated hereby and thereby. (g) Copies of the Charter Documents of the Company, certified as of a recent date but in no event more than thirty (30) calendar days prior to the Closing Date by the Secretary of State of the State of Oregon and certified by the Secretary or Assistant Secretary of the Company (or person possessing comparable authority of the Company), as true and correct on and as of the Closing Date. (h) Certificates of the Secretary or an Assistant Secretary of the Company as to the incumbency and signatures of the officers or representatives of such entity executing this Agreement, the Notes, the Registration Rights Agreement, the Commitment Letter and any other certificate or other document to be delivered pursuant hereto or thereto on the Closing Date, together with evidence of the incumbency of such Secretary or Assistant Secretary; (i) Copies of all agreements associated with or entered into in connection with the investment of Prudential Private Equity Investors III, L.P. in the Company's Preferred Stock and if requested by the Purchaser prior to the Closing Date, copies of all lease agreements to which the Company is a party. 2.2. Delivery of Other Agreements The Company shall have executed and delivered the Registration Rights Agreement and the Commitment Letter. 2.3. Representations and Warranties, Agreements and Covenants All of the representations and warranties of the Company contained herein that (A) are qualified as to materiality shall be true and correct on and as of the Closing Date, except to the extent any representation or warranty expressly relates to an earlier date and that (B) are not qualified as to materiality are true and correct in all material respects on and as of the Closing Date, except to the extent any representation or warranty expressly relates to an earlier date. The Company shall have performed or complied with all agreements, covenants and conditions contained herein and in the Registration Rights Agreement and the Commitment Letter which are required to be performed or complied with by the Company on or before the Closing Date. 5 2.4. No Event of Default No event shall have occurred and be continuing, or would result from the purchase of the Notes or the extension of borrowings pursuant to the Commitment Letter, which constitutes or would constitute a Default or an Event of Default. 2.5. Proceedings Satisfactory All proceedings taken in connection with the sale of the Notes, the transactions contemplated hereby, and all documents and papers relating thereto, shall be reasonably satisfactory to the Purchaser. The Purchaser and its counsel shall have received copies of such documents and papers as they may reasonably request in connection therewith, all in form and substance satisfactory to the Purchaser. Any document annexed to this Agreement or any other document contemplated by this Agreement not approved by the Purchaser in writing as to form and substance on the date this Agreement is executed shall be satisfactory in form and substance to the Purchaser. 2.6. Consents and Permits The Company shall have received all consents, approvals, and authorizations and sent or made all notices, filings, registrations and qualifications required for the issuance of the Notes, all of which are disclosed on the Disclosure Schedule. 2.7. No Material Adverse Change Since the date of this Agreement, neither the Company nor any of its Subsidiaries shall have suffered any material adverse change in its properties, business, prospects, operations, earnings, assets, liabilities or condition (financial or otherwise) which would reasonably likely to result in a Material Adverse Effect. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth in the Disclosure Schedule attached to this Agreement (each scheduled item contained therein referencing the Section of this Agreement that it qualifies), the Company represents and warrants as follows: 3.1. Organization; Power and Authority The Company and each of its Subsidiaries are corporations duly organized and validly existing in good standing under the laws of their respective jurisdictions of incorporation. The Company and each of its Subsidiaries have all requisite power and authority to own or hold under lease the properties it purports so to own or hold except where the failure so to own or hold could not have a Material Adverse Effect and to transact their respective businesses as now transacted. The Company and each of its Subsidiaries are duly qualified as foreign corporations and are in good standing in each jurisdiction in which the character of the properties owned or held under lease by them or the nature of the business transacted by them requires such 6 qualification, except where the failure so to be qualified or be in good standing could not have a Material Adverse Effect. 3.2. Authorization The Company has taken all actions necessary to authorize it (i) to execute, deliver and perform all of its obligations under this Agreement, the Registration Rights Agreement and the Commitment Letter, (ii) to issue and perform all of its obligations under the Notes and (iii) to consummate the transactions contemplated hereby and thereby. Each of this Agreement, the Notes, the Registration Rights Agreement, and the Commitment Letter is a legally valid and binding obligation of the Company, enforceable against it in accordance with its terms, except for (a) the effect thereon of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting the rights of creditors generally and (b) limitations imposed by federal or state law or equitable principles upon the specific enforceability of any of the remedies, covenants or other provisions thereof and upon the availability of injunctive relief or other equitable remedies. 3.3. Capital Stock The total number of shares of Capital Stock which the Company has authority to issue is 30,000,000 shares, consisting of 25,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. The Company has the power and authority and has taken all actions (corporate or other) necessary to authorize it to enter into and perform its obligations and undertakings under this Agreement. As of March 30, 1998, there were 4,633,000 shares of Common Stock issued and outstanding, and 1,666,667 shares of Preferred Stock issued and outstanding. Such shares of Common Stock and Preferred Stock have been duly authorized and were validly issued, are fully paid and nonassessable, were issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities of the Company. Neither the Company nor any of its Subsidiaries has outstanding any securities convertible into or exchangeable for any shares of Capital Stock nor does it have outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, any Capital Stock or securities convertible into or exchangeable for any Capital Stock other than (i) the Notes to be issued pursuant to this Agreement or pursuant to other similar agreements dated on or about the date of this Agreement, (ii) 1,666,667 shares of Preferred Stock convertible into Common Stock, and (iii) options and warrants to purchase shares of Common Stock as set forth and for the numbers of shares set forth on the Disclosure Schedule. The Company has duly authorized and reserved for issuance the Conversion Shares, and the Conversion Shares will, when issued, be duly and validly issued, fully paid and nonassessable and free from all Liens. 3.4. No Other Registration Rights Except for the Notes to be issued in connection with the transactions contemplated by this Agreement or pursuant to other similar agreements dated on or about the 7 date of this Agreement, there are no contracts, agreements or understandings between the Company and any other Person granting such Person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to any other registration statement filed by the Company under the Securities Act. 3.5. No Violation or Conflict; No Default Neither the execution or delivery of this Agreement, the Registration Rights Agreement or the Commitment Letter by the Company nor the issuance, sale or delivery of the Notes nor the performance of its respective obligations hereunder or thereunder will: (a) violate any provision of the Charter Documents of the Company; (b) violate any statute, law, rule or regulation or any judgment, decree, order, regulation or rule of any court or governmental authority to which the Company, any of its Subsidiaries, or any of their respective properties may be subject; (c) permit or cause the acceleration of the maturity of any debt or obligation of the Company or any of its Subsidiaries; (d) violate, or be in conflict with, or constitute a default under, or permit the termination of, or require the consent of any Person under, or result in the creation of any Lien upon any property of the Company or any of its Subsidiaries under, any mortgage, indenture, loan agreement, note, debenture or other agreement for borrowed money or any other material agreement to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries (or their respective properties) may be bound, other than such violations, conflicts, defaults, terminations and Liens, or such failures to obtain consents, which could not reasonably be expected to result in a Material Adverse Effect. 3.6. Margin Regulations No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any "margin stock" within the meaning of Regulation G of the Board of Governors of the Federal Reserve System (12 C.F.R. ss. 207), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 C.F.R. ss. 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 C.F.R. ss. 220). The assets of the Company and its Subsidiaries do not include any margin stock, and the Company does not have any present intention of acquiring margin stock. 3.7. Private Offering The sale of the Notes hereunder is exempt from the registration and prospectus delivery requirements of the Securities Act. In the case of each offer or sale of the Notes, no 8 form of general solicitation or general advertising was used by the Company or its respective representatives. The Company agrees that neither it, nor anyone acting on its behalf, will offer or sell the Notes, or any portion of them, if such offer or sale might bring the issuance and sale of the Notes to the Purchaser within the provisions of Section 5 of the Securities Act nor offer any similar Notes for issuance or sale to, or solicit any offer to acquire any of the same from, or otherwise approach or negotiate with respect thereto with, anyone if the sale of the Notes and any such Notes could be integrated as a single offering for the purposes of the Securities Act, including without limitation Regulation D. 3.8. Due Authorization of Material Contracts The descriptions in the Incorporated Documents of statutes, legal and governmental proceedings or contracts or other documents are accurate in all material respects and fairly present the information required to be shown at the time shown; and there are no statutes or legal or governmental proceedings required to be described in the Incorporated Documents that are not described as required and there is no document or contract of a character required to be described in the Incorporated Documents or to be filed as an exhibit to the Incorporated Documents which is not described or filed as required. All contracts described in the Incorporated Documents or filed as an exhibit to the Incorporated Documents to which the Company or any of its Subsidiaries is a party have been duly authorized, executed and delivered by the Company or such Subsidiary, constitute valid and binding agreements of the Company or such Subsidiary and are enforceable against and by the Company or such Subsidiary in accordance with the terms thereof, except as the enforcement thereof may be limited by bankruptcy and laws relating to the rights and remedies of the creditors generally or by the availability of general equitable remedies. 3.9. Financial Statements The financial statements and schedules of the Company and its consolidated subsidiaries included in the Incorporated Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, present fairly the financial condition of the Company and its consolidated subsidiaries, as of the respective dates thereof and the results of operations and cash flows of the Company and its consolidated subsidiaries, for the respective periods covered thereby, all in conformity with GAAP (except in the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto) and fairly present the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other financial statements or schedules of the Company and its consolidated subsidiaries or any other company or entity are required by the Securities Act, the Exchange Act or the rules and regulations of the SEC to be included in the Incorporated Documents. The Independent Auditors, who have reported on certain of such 9 financial statements and schedules, are, and were during the periods covered by their reports included in the Incorporated Documents, independent accountants with respect to the Company and its consolidated subsidiaries, as required by the Securities Act, the Exchange Act and the rules and regulations of the SEC. The summary financial and statistical data included in the Incorporated Documents present fairly the information shown therein and have been compiled on a basis consistent with the financial statements presented therein. The unaudited consolidated financial statements included in the Incorporated Documents comply as to form in all material respects with the applicable accounting requirements of the Securities Act, the Exchange Act and the rules and regulations of the SEC, and such statements fairly present the consolidated financial position and results of operations and the other information purported to be shown therein at the respective dates or for the respective periods therein specified. 3.10. Litigation; Judgments Except as described in the Incorporated Documents, there are no actions, suits or proceedings (formal or informal) pending or, to the Knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective properties, assets, or directors or officers, in their capacity as such, before or by any Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding might reasonably be expected to, individually or in the aggregate, and after giving effect to the sale and issuance of the Notes, result in a Material Adverse Effect. 3.11. Taxes Each of the Company and its Subsidiaries has filed all federal, state, local and foreign income tax returns which have been required to be filed and has paid all taxes and assessments received by it to the extent that such taxes have become due. None of the Company nor its Subsidiaries has any tax deficiency which has been or might be asserted or threatened against it which could reasonably be expected to result in a Material Adverse Effect. 3.12. Investment Company Act Neither the Company nor any of its Subsidiaries is an "investment company" or a Person directly or indirectly "controlled" by or acting on behalf of an "investment company" within the meaning of the United States Investment Company Act of 1940, as amended. 3.13. Environmental Matters The operations of the Company and its Subsidiaries with respect to any real property currently leased, owned, controlled or managed by the Company or any of its Subsidiaries are, and with respect to any real property previously leased, owned, managed or controlled were, when such real property was leased, owned, managed or controlled by the Company or any of its Subsidiaries, in compliance in all material respects with all applicable federal, state, and local laws, ordinances, rules, and regulations relating to occupational health 10 and safety and the environment (collectively, "Environmental Laws"), and the Company and its Subsidiaries have all material licenses, permits and authorizations required under all Environmental Laws; neither the Company nor any of its Subsidiaries has authorized or conducted or has knowledge of the generation, transportation, storage, use, treatment, disposal or release of any hazardous substance, hazardous waste, hazardous material, hazardous constituent, toxic substance, pollutant, contaminant, petroleum product, natural gas, liquefied gas or synthetic gas defined or regulated under any Environmental Law on, in or under any real property currently leased, owned, controlled or managed by the Company or any of its Subsidiaries or previously leased, owned, controlled or managed by the Company or any of its Subsidiaries when such real property was owned, leased, controlled or managed by the Company or any of its Subsidiaries, except in compliance with applicable Environmental Laws; and there is not pending or, to the Knowledge of the Company, any threatened claim, litigation or any administrative agency proceeding, nor has the Company or any of its Subsidiaries received any written or oral notice from any governmental entity or third party, that: (i) alleges a violation of any Environmental Laws by the Company or any of its Subsidiaries; (ii) alleges the Company or any of its Subsidiaries is a liable party under CERCLA or any state superfund law; (iii) alleges possible contamination of the environment by the Company or any of its Subsidiaries; or (iv) alleges possible contamination of real property currently leased, owned, controlled or managed by the Company or any of its Subsidiaries or previously leased, owned, controlled or managed by the Company or any of its Subsidiaries when such real property was owned, leased, controlled or managed by the Company or any of its Subsidiaries. 3.14. Labor Relations No labor dispute with the employees of the Company or any of its Subsidiaries exists or is threatened that could reasonably be expected to result in a Material Adverse Effect; and the Company is not aware of any existing or threatened labor disturbance by the employees of any other entity that could reasonably be expected to result in a Material Adverse Effect. 3.15. Real Property; Leases Each of the Company and its Subsidiaries has good and indefeasible title to all properties and assets described in the Incorporated Documents as owned by it, free and clear of all Liens except such as are described in the Incorporated Documents or are not material, singly or in the aggregate, to the Company. Each of the Company and its Subsidiaries has valid, subsisting and enforceable leases for the properties described in the Incorporated Documents as leased by it, except such as are described in the Incorporated Documents. 3.16. Intellectual Property; Licenses Each of the Company and its Subsidiaries owns or has the right to use all patents, patent applications, trademarks, trademark applications, tradenames, copyrights, franchises, trade secrets, proprietary or other confidential information and intangible properties and assets (collectively, "Intangibles") reasonably necessary to conduct its business as now conducted; and none of the Company or its Subsidiaries has any knowledge of any infringement by it of 11 Intangibles of others, and there is no claim being made against the Company or any of its Subsidiaries, or to the Knowledge of the Company, any employee of the Company or its Subsidiaries, regarding infringement of any Intangibles of others which could reasonably be expected to have a Material Adverse Effect and, to the Knowledge of the Company, there is no infringement by others of Intangibles of the Company or any of its Subsidiaries. 3.17. Defaults The continuation, validity and effectiveness of each contract, agreement, arrangement or other instrument related to borrowed money (of any amount) or involving payments in excess of $100,000 or that is material to the Company or its Subsidiaries (each a "Material Contract") will not be adversely affected by the execution, delivery and performance of this Agreement, the Registration Rights Agreement, or the Commitment Letter, the issuance or sale of the Notes, or the consummation of the transactions contemplated hereby or thereby. The Company and its Subsidiaries are not in default in any respect, and will not, with the giving of notice or the lapse of time, or both, be in default in any respect, under any Material Contract upon or as a result of the consummation of the transactions contemplated by this Agreement, the Registration Rights Agreement or the Commitment Letter. To the Knowledge of the Company, there is no default or claimed or purported or alleged default or state of facts that with the giving of notice or the lapse of time, or both, would constitute a default on the part of any party other than the Company or any of its Subsidiaries under any Material Contract. 3.18. Brokers The Company has not dealt with any broker, finder, commission agent or other Person in connection with the sale of the Notes and the transactions contemplated by this Agreement, and the Company is not under any obligation to pay any broker's or finder's fee or commission or similar payment in connection with such transactions. 3.19. Existing Indebtedness The Disclosure Schedule sets forth a complete and correct list of all Indebtedness of the Company and its Subsidiaries as of the date hereof, showing as to each item of such Indebtedness the creditor, the aggregate principal amount outstanding, the agreement or instrument governing such Indebtedness and a brief description of any security therefor. With respect to each item of Indebtedness listed on the Disclosure Schedule, the Company will deliver to the Purchaser or its representatives, upon request, a true and complete copy of each instrument evidencing such Indebtedness or pursuant to which such Indebtedness was issued or secured (including each amendment, consent, waiver or similar instrument in respect thereof), as the same is in effect on the date hereof. The Company and its Subsidiaries are not in default in the performance or observance in any material respect of any of the terms, covenants or conditions contained in any instrument evidencing Indebtedness listed on the Disclosure Schedule or pursuant to which such Indebtedness was issued or secured or has requested any waiver in respect of any default and no event has occurred and is continuing which, with notice or the lapse of time or both, would constitute such a default. 12 3.20. Compliance with Law; Permits (a) The Company and its Subsidiaries own or possess all authorizations, approvals, orders, licenses, registrations, other certificates and permits of and from all governmental regulatory officials and bodies, necessary to conduct their respective businesses except where the failure to own or possess all such authorizations, approvals, orders, licenses, registrations, other certificates and permits would not have a Material Adverse Effect. There is no proceeding pending or, to the Knowledge of the Company, threatened (or any basis therefor known to the Company) which may cause any such authorization, approval, order, license, registration, certificate or permit to be revoked, withdrawn, canceled, suspended or not renewed; and the Company and its Subsidiaries are conducting their respective business in compliance with all laws, rules and regulations applicable thereto except where such noncompliance could not reasonably be expected to result in a Material Adverse Effect. (b) Neither the nature of the Company nor of any of its businesses or properties, nor any relationship between the Company and any other Person, nor any circumstance in connection with the offer, issuance, sale or delivery of the Notes at the Closing, nor the performance by the Company of its other obligations hereunder or under the Notes, the Registration Rights Agreement or the Commitment Letter, as the case may be, is such as to require a consent, approval or authorization of, or notice to, or filing, registration or qualification with, any governmental authority or other Person on the part of the Company as a condition to the execution and delivery of this Agreement, the Registration Rights Agreement, the Commitment Letter or the offer, issuance, sale or delivery of the Notes at the Closing, other than the filings, registrations, qualifications or consents which shall have been made or obtained on the Closing Date (and copies of which shall have been delivered to the Purchaser). All required consents, approvals or authorizations of, or notices to or filings, registrations or qualifications with, any governmental authority or other Person required in connection with the transactions contemplated by this Agreement, the Notes, the Registration Rights Agreement or the Commitment Letter have been obtained or made. 3.21. Insurance The Company maintains, and will maintain after giving effect to the issuance and the sale of the Notes, insurance of the types and in the amounts generally deemed adequate for its business, including, but not limited to, insurance covering director and officer liability, workers compensation liability, malpractice liability respecting the provision of assisted living services, real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is and will be in full force and effect. 3.22. Material Events Since December 31, 1997, there has not been with respect to the Company or any of its Subsidiaries: 13 (a) any material adverse change in their properties, business, prospects, operations, earnings, assets, liabilities or condition (financial or otherwise) which could reasonably be expected to result in a Material Adverse Effect; or (b) any damage, destruction or loss to the properties or assets of the Company or any of its Subsidiaries, whether or not covered by insurance, that has or could reasonably be expected to have a Material Adverse Effect or that in the aggregate exceed $100,000; or (c) any loss or waiver by the Company or any of its Subsidiaries of any right, not in the ordinary course of business, or any material debt owed to it; or (d) other than the sales of assets in the ordinary course of business (including pursuant to sale leaseback transactions), any sale, transfer or other disposition of, or agreement to sell, transfer or otherwise dispose of, any assets by the Company or any of its Subsidiaries in excess of $100,000 in the aggregate, or any cancellation or agreement to cancel any debts or claims of the Company or any of its Subsidiaries; or (e) other than dividends payable on the currently outstanding Preferred Stock, any declaration or setting aside or payment of any dividend (whether in cash, property or stock) or any distribution (whether in cash, property or stock) or other payment with respect to any of the Capital Stock of the Company or any of its Subsidiaries, or any repurchase, purchase or other acquisition of, or agreement to repurchase, purchase or otherwise acquire, any of the Company's or any of its Subsidiaries' capital stock; or (f) any amendment or termination of any contract, agreement or license to which the Company or any of its Subsidiaries is a party or by which it is bound, except where such amendment or termination could not be reasonably expected to have a Material Adverse Effect; or (g) any resignation or termination of employment of any Key Employee, and there is no impending or threatened resignation or resignations or termination or terminations of employment of any Key Employee; or (h) any labor dispute (including, without limitation, any negotiation, or request for negotiation, for any labor representation or any labor contract) affecting the Company or any of its Subsidiaries; or (i) any application of any existing (or the enactment of any new) Environmental Law or personnel, product safety law or other governmental regulation that has or which could reasonably be expected to have a Material Adverse Effect. 3.23. SEC Documents; Undisclosed Liabilities The Company has been subject to the reporting requirements of Section 13 of the Exchange Act since at least January 1, 1996 and, except as set forth in any Company SEC Document, has timely filed all required reports, schedules, forms, statements and other 14 documents required to be filed by the Company under the Securities Act and the Exchange Act with the SEC since January 1, 1996 (the "Company SEC Documents"). As of their respective dates, the Company SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such Company SEC Documents, and none of the Company SEC Documents at the time filed with the SEC contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Except to the extent that information contained in any Company SEC Document has been revised or superseded by a later filed Company SEC Document, none of the Company SEC Documents contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.24. Material Misstatements or Omissions No representation or warranty by the Company contained in this Agreement (including the schedules and exhibits attached hereto), the Registration Rights Agreement, the Commitment Letter or in any document, exhibit, statement, certificate or schedule dated the Closing Date, signed by the Company and furnished to the Purchaser pursuant hereto, or in connection with the transactions contemplated hereunder, contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact necessary to make the statements or facts contained herein and therein not misleading. 3.25. Survival of Representations and Warranties All of the Company's representations and warranties hereunder and under the Registration Rights Agreement and the Commitment Letter shall survive the execution and delivery of the same, any investigation by the Purchaser and the issuance of the Notes. SECTION 4. REPRESENTATIONS AND WARRANTIES OF EACH PURCHASER The Purchaser represents and warrants to the Company that: 4.1. Purchase for Own Account The Purchaser is purchasing the Notes to be purchased by it solely for its own account and not as nominee or agent for any other person and not with a view to, or for offer or sale in connection with, any distribution thereof (within the meaning of the Securities Act) that would be in violation of the securities laws of the United States of America or any state thereof, without prejudice, however, to its right at all times to sell or otherwise dispose of all or any part of said Notes pursuant to a registration statement under the Securities Act or pursuant to an exemption from the registration requirements of the Securities Act. 15 4.2. Accredited Investor The Purchaser is knowledgeable, sophisticated and experienced in business and financial matters; it acknowledges that the Notes have not been registered under the Securities Act and understands that the Notes must be held indefinitely unless they are subsequently registered under the Securities Act or such sale is permitted pursuant to an available exemption from such registration requirement; it is able to bear the economic risk of its investment in the Notes; it is an "accredited investor" as defined in Regulation D promulgated under the Securities Act; and it has been afforded access to information about the Company and the Company's financial condition, results of operations, business, property, management and prospects sufficient to enable it to evaluate its investment in the Notes. The Purchaser acknowledges that it has conducted its own analysis of the Company's financial condition and other foregoing factors. 4.3. Authorization This Agreement is a legally valid and binding obligation of the Purchaser enforceable against it in accordance with its terms, except for (a) the effect thereon of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting the rights of creditors generally and (b) limitations imposed by federal or state law or equitable principles upon the specific enforceability of any of the remedies, covenants or other provisions thereof and upon the availability of injunctive relief or other equitable remedies. 4.4. Brokers The Purchaser has not dealt with any broker, finder, commission agent or other Person in connection with the sale of the Notes and the transactions contemplated by this Agreement, and the Purchaser is not under any obligation to pay any broker's or finder's fee or commission or similar payment in connection with such transactions. SECTION 5. COVENANTS So long as any of the Notes remain unpaid and outstanding, the Company covenants to the Holders of outstanding Notes as follows: 5.1. Payment of Notes; Satisfaction of Obligations The Company shall pay the principal of and interest on the Notes on the dates and in the manner provided in the Notes. To the extent lawful, the Company shall pay interest (including interest accruing after the commencement of any proceeding under any Bankruptcy Law) on all unpaid amounts outstanding under the Notes (including overdue installments of principal or interest) at a rate equal to 7.5% per annum, payable quarterly on each January 1, April 1, July 1 and October 1, beginning July 1, 1998. Such interest rate is subject to adjustment as set forth in Section 3(b) to the Registration Rights Agreement. 16 5.2. Notice of Default The Company will deliver to the Holders, forthwith upon (i) becoming aware of any Default or Event of Default, (ii) becoming aware of any payment default under any other loan agreement, mortgage, indenture or instrument referred to in Sections 7.1(d) or (iii) the receipt by the Company of any notice of any non-monetary default under any such loan agreement, mortgage, indenture or instrument, an Officers' Certificate specifying in reasonable detail such Default, Event of Default or default and the nature of any remedial or corrective action the Company proposes to take with respect thereto. 5.3. Limitation on Additional Indebtedness None of the Company, nor any of its Subsidiaries (including without limitation, upon the creation or acquisition of such Subsidiary) shall, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to (collectively, "incur") any Indebtedness after the date of this Agreement, if a Default or an Event of Default shall have occurred and be continuing at the time or would occur as a consequence of the incurrence of such Indebtedness. 5.4. Change of Control (a) Change of Control. Prior to the consummation of a Change of Control (the date of such consummation being referred to herein as the "Change of Control Date"), the Company shall give each Holder notice describing in reasonable detail the nature of the Change of Control (such written notice, the "Change of Control Notice") and offering to the Purchaser the right to require the Company to repurchase all or any part of the Notes held by the Purchaser pursuant to the offer (the "Change of Control Repurchase Offer") at a purchase price equal to 100% of the aggregate principal amount thereof, together with unpaid interest to the date of repurchase (the "Change of Control Price"). The obligation of the Company to repurchase Notes pursuant to the Change of Control Repurchase Offer is subject to the subordination provisions of Section 8 hereof. (b) Timing of Notice. The Change of Control Notice shall be mailed by the Company to all Holders at their last registered address no later than fifteen (15) Business Days prior to the Change of Control Date. (c) Procedure. The Change of Control Notice shall state a date not later than five (5) Business Days following the Change of Control Date for repurchase of the Notes pursuant to the Change of Control Repurchase Offer (such date, the "Change of Control Repurchase Date"). The Change of Control Notice, which shall govern the terms of the Change of Control Repurchase Offer, shall state: (1) that the Change of Control Repurchase Offer is being made pursuant to this Section 5.4; 17 (2) the Change of Control Price and the Change of Control Repurchase Date; (3) that, unless the Company defaults in the payment of the Change of Control Price, all Notes accepted for payment shall cease to accrue interest on and after the Change of Control Repurchase Date; (4) that the Purchaser electing to require the Company to repurchase any Notes will be required to surrender the Note to the address specified in the Change of Control Notice prior to the close of business on the Business Day preceding the Change of Control Repurchase Date; (5) that the Purchaser will be entitled to withdraw his or her election to require the Company to repurchase any Notes on the terms and conditions set forth in such Change of Control Notice by written notice to the Company prior to the Change of Control Repurchase Date; and (6) that the Purchaser electing to require the Company to repurchase any Notes in part will be issued a new Note in a principal amount equal to the unpurchased portion of the Notes surrendered. Any such Change of Control Repurchase Offer shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations to the extent applicable in connection with any Change of Control Repurchase Offer. (d) Acceptance of Notes. (1) On the Change of Control Repurchase Date, the Company shall accept for payment all Notes or portions thereof validly tendered pursuant to the Change of Control Repurchase Offer and promptly thereafter mail or deliver to Holder of Notes accepted for repurchase payment in the amount equal to the aggregate Change of Control Price for such Notes, and the Company shall execute and mail or deliver to such Holders a new Note equal in principal amount to any unpurchased portion of the Notes surrendered. The Company will notify the Holders of the results of the Change of Control Repurchase Offer on the Change of Control Repurchase Date. 5.5. Stay, Extension and Usury Laws The Company covenants and agrees (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, and will use its best efforts to resist any attempts to claim or take the benefit of any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of its obligations under this Agreement or the Notes; and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or 18 advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holders, but will suffer and permit the execution of every such power as though no such law has been enacted. 5.6. Indemnification The Company agrees to indemnify the Purchaser and each director, officer, employee, counsel, Agent and Affiliate of such Purchaser (collectively, the "Indemnified Parties") against, and hold it and them harmless from, all losses, claims, damages, liabilities, taxes, deficiencies, expenses and costs (including diminution in value and costs of preparation and reasonable attorneys' fees and expenses) (collectively, "Losses") incurred by it or them (A) arising from any breach of any representation or warranty or the inaccuracy of any representation made by the Company in or pursuant to the Agreement, the Registration Rights Agreement or the Commitment Letter (including without limitation any breach or inaccuracy of any representation or warranty relating to CERCLA, any equivalent state statute or any other Environmental Law); and (B) arising from any breach of any covenant or agreement made by the Company in or pursuant to the Agreement, the Registration Rights Agreement or the Commitment Letter; provided, however, that the Company shall not be required to indemnify any Indemnified Party for any Loss that results from (x) the action of any Indemnified Party which is finally judicially determined to have resulted from such Indemnified Party's negligence, intentionally wrongful acts or intentionally wrongful omissions or (y) the failure of LTC Equity Holding Company to purchase additional Notes from the Company pursuant to Section 1.2(a)(2) hereof; provided, further, that no Indemnified Party shall be entitled to assert a claim on account of the indemnity provided in this Section 5.6, unless and until the aggregate amount of Losses with respect to all claims asserted under this Section and under Section 5.6 of the purchase agreements for the Notes executed on the date hereof by other purchasers exceeds $100,000 (in which case the Company shall be liable for Losses in excess of such $100,000 that have accrued). The Company agrees to reimburse any Indemnified Party promptly for all such Losses as they are incurred by such Indemnified Party. The Company's liability to any such Indemnified Party hereunder shall not be extinguished solely because any other Indemnified Party is not entitled to indemnity hereunder. The obligations of the Company under this Section 5.6 shall survive the payment or prepayment of the Notes, at maturity, upon acceleration, repurchase or otherwise, any transfer of the Notes by any Purchaser to any subsequent Holder and the termination of this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter. The indemnity provided in this Section 5.6 will be in addition to any liability which the Company may otherwise have, including, without limitation, under this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter. In case any action shall be brought against any Indemnified Party with respect to which indemnity may be sought against the Company, such Indemnified Party shall promptly notify the Company in writing and the Company shall, if it so desires, assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party and payment of all reasonable fees and expenses. The failure to so notify the Company shall not 19 affect any obligation it may have to any Indemnified Party under this Section 5.6 or otherwise unless the Company is materially adversely affected by such failure. Each Indemnified Party shall have the right to employ separate counsel in such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless: (i) the Company has agreed in writing to pay such expenses; (ii) the Company has failed to assume the defense and employ counsel; or (iii) the named parties to any such action (including any impleaded parties) include any Indemnified Party and the Company, and such Indemnified Party shall have been advised by outside counsel that there may be one or more legal defenses available to it which are inconsistent with those available to the Company; provided that, if such Indemnified Party notifies the Company in writing that it elects to employ separate counsel in the circumstances described in clauses (i), (ii) or (iii) above, the Company shall not have the right to assume the defense of such action or proceeding; provided, however, that the Company shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be responsible hereunder for the fees and expenses of more than one such firm of separate counsel (in addition to any necessary local counsel), which counsel shall be designated by such Indemnified Party. The Company shall not be liable for any settlement of any such action effected without its written consent (which shall not be unreasonably withheld). The Company agrees that it will not, without the Indemnified Party's prior consent, which shall not be unreasonably withheld, settle or compromise any pending or threatened claim, action or suit in respect of which indemnification may be sought hereunder unless the foregoing contains an unconditional release of the Indemnified Parties from all liability and obligation arising therefrom. 5.7. Corporate Existence; Merger; Successor Corporation (a) The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence in accordance with its organizational documents and the corporate rights (charter and statutory), licenses and franchises of the Company; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or corporate existence if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not adverse in any material respect to any Holder. (b) The Company shall not in a single transaction or through a series of related transactions, (i) consolidate with or merge with or into any other person, or transfer (by lease, assignment, sale or otherwise) all or substantially all of its properties and assets as an entirety or substantially as an entirety to another person or group of affiliated persons or (ii) adopt a Plan of Liquidation, unless, in either case: (1) the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or to which all or substantially all of the properties and assets of the Company as an entirety or substantially as an entirety are transferred (or, in the case of a Plan of Liquidation, any Person to 20 which assets are transferred) (the Company or such other Person being hereinafter referred to as the "Surviving Person") shall be a corporation organized and validly existing under the laws of the United States, any State thereof or the District of Columbia, and shall expressly assume, by an amendment to this Agreement, all the obligations of the Company under the Notes and this Agreement; (2) immediately after and giving effect to such transaction and the assumption contemplated by clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, (ii) the Surviving Person shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction; (3) immediately before and immediately after and giving effect to such transaction and the assumption of the obligations as set forth in clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, no Default or Event of Default shall have occurred and be continuing; and (4) The Company shall have delivered to the Purchaser an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, transfer or adoption and such amendment to this Agreement comply with this Section 5.7, that the Surviving Person agrees to be bound hereby, and that all conditions precedent herein provided relating to such transaction have been satisfied. (c) Upon any consolidation or merger, or any transfer of assets (including pursuant to a Plan of Liquidation) in accordance with this Section 5.7, the successor person formed by such consolidation or into which the Company is merged or to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Agreement with the same effect as if such successor person had been named as the Company herein; provided, however, that the Company shall not be released from the obligations and covenants under this Agreement or under the Notes. 5.8. Taxes The Company shall, and shall cause its Subsidiaries to, pay prior to delinquency all material taxes, assessments and governmental levies except as contested in good faith and by appropriate proceedings. 5.9. Investment Company Act Neither the Company nor any of its Subsidiaries shall become an investment company subject to registration under the Investment Company Act of 1940, as amended. 21 5.10. Insurance The Company and its Subsidiaries shall maintain liability, casualty and other insurance with a reputable insurer or insurers in such amounts and against such risks as is carried by responsible companies engaged in similar businesses and owning similar assets. 5.11. Inconsistent Agreements The Company shall not, and shall not permit any of its Subsidiaries to, (i) enter into any agreement or arrangement which is inconsistent with, or would impair the ability of the Company to fulfill, its obligations under this Agreement, the Notes, the Registration Rights Agreement or the Commitment Letter or (ii) supplement, amend or otherwise modify the terms of their respective Charter Documents, if the effect thereof would be materially adverse to the Holders, including without limitation to increase the liquidation preference of, or the rate of dividends payable on, any series of preferred stock. 5.12. Compliance with Laws The Company shall, and shall cause its Subsidiaries to, comply with all statutes, ordinances, governmental rules and regulations, judgments, orders and decrees (including all Environmental Laws) to which any of them is subject, and obtain and keep in effect all licenses, permits, franchises and other governmental authorizations necessary to the ownership or operation of their respective properties or the conduct of their respective businesses, except to the extent that the failure to so comply or obtain and keep in effect would not have a Material Adverse Effect. 5.13. Inspection of Properties and Records The Company agrees to allow, and to cause each of their respective Subsidiaries to allow, the Purchaser and each subsequent Holder (or such Persons as the Purchaser or subsequent Holder may designate) (individually and collectively, "Inspectors") upon reasonable prior notice to visit and inspect any of the properties of the Company or its Subsidiaries, to examine all their books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers, and independent public accountants with representatives of the Company or its Subsidiaries present (and by this provision the Company authorizes said accountants to discuss with such Inspectors the finances and affairs of the Company and its Subsidiaries) all at such reasonable times and as often as may be reasonably requested but not more than twice in any twelve-month period for all Holders in the aggregate unless a Default or an Event of Default shall have occurred. If a Default or an Event of Default shall have occurred and be continuing, the Company shall pay or reimburse all Inspectors for expenses which such Inspectors may reasonably incur in connection with any such visitations or inspections. 22 SECTION 6. CONVERSION OF NOTES 6.1. Conversion (a) Each Note shall be convertible, in whole or in part, at the option of the Holder thereof, at any time prior to the Maturity Date, at the office of the Company or any transfer agent for the Notes, into that number of fully paid and nonassessable shares of Common Stock determined in accordance with the provisions of Section 6.2. In order to convert Notes into Conversion Shares, the Holder thereof shall surrender the Notes therefor, duly endorsed, at the office of the Company or to the transfer agent for the Notes, together with written notice to the Company stating that it elects to convert the same and setting forth the name or names in which it wishes the certificate or certificates for Conversion Shares to be issued, and the principal amount of the Notes being converted. The Company shall, as soon as practicable after the surrender of the Notes for conversion at the office of the Company or the transfer agent for the Notes, issue to each holder of such Notes, or its nominee or nominees, a certificate or certificates evidencing the number of Conversion Shares (and any other securities and property) to which it shall be entitled, cash representing payment in full for all accrued but unpaid interest on the Note (or portion thereof) surrendered for conversion, and, in the event that only a part of the Notes presented are converted, a Note evidencing the principal amount not so converted. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the Notes to be converted, and the person or persons entitled to receive the Conversion Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock at such date and shall, with respect to such shares, thereafter have only those rights of a holder of Common Stock of the Company. (b) In the event that the average trading price of the Common Stock over thirty (30) consecutive trading days is equal to or exceeds $12 per share, the Company shall have the right, but not the obligation, to force a conversion of all then outstanding Notes, in whole but not in part, within the fifteen (15) day period immediately following such thirty (30) consecutive trading days. Any such forced conversion shall in all other respects be in accordance with this Section 6, and, if the Company shall elect to force conversion of Notes, it shall promptly provide notice of such forced conversion to all Holders of Notes. The Company shall, as soon as practicable following the notice of such forced conversion (and in no event later than sixty (60) calendar days after the date of such notice) issue to each holder of such Notes, or its nominee or nominees, a certificate or certificates evidencing the number of Conversion Shares (and any other securities and property) to which it shall be entitled and cash representing payment in full for all accrued but unpaid interest on the Note surrendered for conversion. Such conversion shall be deemed to have been made at the close of business on the date specified in such notice, and the person or persons entitled to receive the Conversion Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock at such date and shall, with respect to such shares, thereafter have only those rights of a holder of Common Stock of the Company. 23 (c) The Company shall use its best efforts to quote and maintain quotation of the Conversion Shares on the Nasdaq National Market or such other principal national securities exchange on which the Common Stock is then listed or quoted. 6.2. Conversion Rate The number of shares of Common Stock issuable upon conversion of the Notes shall be one (1) share for every $7.50 of principal amount of Notes being converted (the "Conversion Rate"), and shall be subject to adjustment from time to time as provided herein and as provided in Section 3(b) of the Registration Rights Agreement. 6.3. Fractional Shares No fractional shares of Common Stock shall be issued upon conversion of Notes. Instead, the Company shall deliver cash in the form of its check for the Fair Market Value of the fractional share. 6.4. Adjustments for Stock Splits, Combinations and Dividends If the outstanding shares of the Common Stock shall be subdivided into a greater number of shares or combined into a lesser number of shares, the Conversion Rate in effect immediately prior to such subdivision shall, simultaneously with the effectiveness of such subdivision, be proportionately increased or decreased, as the case may be. If the Company pays a dividend or otherwise makes a distribution with respect to its Common Stock (whether in cash, additional shares of Common Stock or other property) on or prior to March 31, 2003, then the Conversion Rate shall be increased by a fraction, the numerator of which is the aggregate amount of the fair market value of such dividend or distribution and the denominator of which is the number of shares of Common Stock entitled to such dividend or other distribution. If the Company pays a dividend or otherwise makes a distribution with respect to its Common Stock (whether in cash, additional shares of Common Stock or other property) after March 31, 2003 (the effective date of such dividend or other distribution, the "Determination Date") and if the fair market value of such dividend or other distribution, together with the fair market value of all other dividends and distributions with respect to its Common Stock during the 12-month period immediately preceding the Determination Date exceeds 2% of the Average Closing Sales Price during such 12-month period, then the Conversion Rate shall be increased by a fraction, the numerator of which is the aggregate amount of the fair market value of the dividend or other distribution to be effected on the Determination Date plus the aggregate amount of the fair market value of all dividends and distributions effected during such 12-month period for which no adjustment in the Conversion Rate was effected pursuant to this Section 6.4, and the denominator of which is the number of shares of Common Stock entitled to such dividend or other distribution on the Determination Date. Any adjustment to the Conversion Rate under this Section 6.4 shall become effective at the close of business on the date the subdivision, combination, dividend or other distribution referred to herein becomes effective. For purposes of the calculations made in this Section 6.4, the fair market value of any dividend or other 24 distribution that is in the form of property other than Common Stock or cash shall be determined in good faith by the Board. 6.5. Reorganization, Mergers, Consolidations or Sales of Assets In the event of any capital reorganization, any reclassification of the Common Stock (other than a change in par value or as a result of a stock dividend, subdivision, split-up or combination of shares), the consolidation or merger of the Company with or into another person, or the sale or other disposition of all or substantially all of the properties of the Company as an entirety to another person (collectively referred to hereinafter as "Reorganizations"), the Holders of the Notes shall thereafter be entitled to receive, and provision shall be made therefor in any agreement relating to a Reorganization, upon conversion of the Notes the kind and number of shares of Common Stock or other securities or property (including cash) of the Company, or the other corporation resulting from such consolidation or surviving such merger, which would have been distributed to a holder of the number of shares of Common Stock which the Notes entitled the holders thereof to convert to immediately prior to such Reorganization; and in any such case appropriate adjustment shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the Holders of the Notes, to the end that the provisions set forth herein (including the specified changes and other adjustments to the Conversion Rate) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares, other securities or property thereafter receivable upon conversion of the Notes. 6.6. Sale of Shares Below Market or Conversion Price (a) If at any time or from time to time the Company shall issue or sell Additional Shares of Common Stock other than in a transaction which falls within Section 6.1, Section 6.4 or Section 6.5, for an Effective Price less than the greater of (x) the Fair Market Value of the Common Stock or (y) the then effective conversion price calculated by dividing $7.50 by the then existing Conversion Rate (the "Adjusted Conversion Price"), then, and in each such case, the then existing Conversion Rate shall be adjusted to a rate per $7.50 principal amount of Notes determined by multiplying that Conversion Rate by a fraction (i) the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the date of such issue after giving effect to such issue of Additional Shares of Common Stock, and (ii) the denominator of which shall be (A) the number of shares of Common Stock outstanding at the close of business on the day next preceding the date of such issue or sale, plus (B) the number of shares of Common Stock which the aggregate consideration received (or by the express provisions hereof deemed to have been received) by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Adjusted Conversion Price. (b) For the purpose of making any adjustment required in this Section 6.6, the consideration received by the Company for any issue or sale of securities shall: (i) to the extent it consists of cash, the consideration received by the Company therefor shall be deemed to be the net amount of cash actually received 25 by the Company, after deducting therefrom any compensation, discounts, fees or expenses paid to (but not on behalf of) any purchaser of such securities and any compensation, discounts, fees or expenses that are not reasonable or are not customary (it being understood that underwriters' discounts and compensation in public offerings and brokers' commissions in private placements of such securities shall be deemed reasonable and customary); (ii) to the extent it consists of property other than cash, the consideration other than cash shall be computed at the fair market value thereof as determined in good faith by the Board of Directors of the Company; and (iii) if Additional Shares of Common Stock, Convertible Securities or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Company for consideration which covers both, the consideration received for the Common Stock, Convertible Securities or rights or options shall be computed as that portion of the consideration so received which is reasonably determined in good faith by the Board of Directors of the Company to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. (c) For the purpose of making any adjustment in the Conversion Rate provided in this Section 6.6, if at any time, or from time to time, the Company issues any stock convertible into Additional Shares of Common Stock (such convertible stock being hereinafter referred to as "Convertible Securities") or issues any rights or options, other than options pursuant to the Stock Option Plan, to purchase Additional Shares of Common Stock for Convertible Securities (such rights or options being hereinafter referred to as "Rights"), then, and in each such case, the Company shall be deemed to have issued at the time of the issuance of such Rights or Convertible Securities the maximum number of shares of Additional Shares of Common Stock issuable upon exercise (other than options pursuant to the Stock Option Plan) or conversion thereof and to have received in consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Company for the issuance of such Rights or Convertible Securities, plus in the case of such Rights, the amount of consideration, if any, payable to the Company upon exercise of such Rights, plus, in the case of Convertible Securities, the amount of consideration, if any, payable to the Company upon the conversion thereof. No further adjustment of the Conversion Rate, adjusted upon the issuance of such Rights or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such Rights or the conversion of any such convertible Securities. If any such Rights or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Conversion Rate adjusted upon the issuance of such rights, options or convertible securities shall be readjusted to the conversion rate which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such Rights of conversion of 26 such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for granting of all such Rights, whether or not exercised, plus consideration received for issuing or selling the Convertible Securities actually converted, plus the consideration, if any, actually received by the Company on the conversion of such Convertible Securities. 6.7. Adjustment for Failure to Quote on Nasdaq National Market In event that, from the time of effectiveness of the registration statement to be filed pursuant to Section 3(a) of the Registration Rights Agreement and until all Notes have been converted into Conversion Shares, immediately prior to the conversion of any Notes into Conversion Shares pursuant to this Section 6, such Conversion Shares have not been approved for quotation on Nasdaq National Market (or any other national securities exchange where the Common Stock is then listed or quoted), then the Conversion Rate with respect to such Conversion Shares shall be increased by 10% immediately prior to the conversion of any Notes into such Conversion Shares. 6.8. Accountants' Certificate of Adjustment In each case of an adjustment or readjustment of the Conversion Rate or the number of shares of Common Stock or other securities issuable upon conversion of the Notes, the Company shall as soon as reasonably practicable (and in no event less than thirty (30) days following the event causing such adjustment or readjustment) compute such adjustment or readjustment in accordance with this Agreement and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first-class mail, postage prepaid, to each Holder of the Notes at the Holder's address as shown on the Company's note register. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (i) the Conversion Rate at the time in effect for the Notes, and (ii) the number of shares of Common Stock and the type and amount, if any, of other property which at the time would be received upon conversion of the Notes. At the written request of the Requisite Noteholders, the Company shall cause its Independent Auditors to verify the computations contained in the certificate prepared by the Company. 6.9. Reservation of Shares Issuable Upon Conversion The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Notes, such number and class of its shares of Common Stock as shall from time to time be sufficient to effect a conversion of all outstanding Notes, and if at any time the number and class of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding Notes, the Company shall promptly seek such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number and class of shares as shall be sufficient for such purpose. In 27 the event of the consolidation or merger of the Company with another corporation where the Company is not the surviving corporation, effective provision shall be made in the certificate or articles of incorporation, documents of merger or consolidation, or otherwise, of the surviving corporation so that such corporation will at all times reserve and keep available a sufficient number of shares of Common Stock or other securities or property to provide for the conversion of the Notes in accordance with the provisions of this Section 6. 6.10. No Impairment The Company shall not amend its Charter Documents or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, for the principal purpose of avoiding or attempting to avoid the observance or performance of any of the terms to be observed or performed by the Company pursuant to this Section 6. SECTION 7. DEFAULTS AND REMEDIES 7.1. Events of Default An "Event of Default" occurs if: (a) the Company defaults in the payment of the principal of any Note when the same becomes due and payable at maturity, upon repurchase or otherwise; (b) the Company defaults in the payment of interest on any Note when the same becomes due and payable and the Default continues for the period and after the notice specified below; (c) the Company fails to comply with any of the agreements, covenants, or provisions of this Agreement or the Notes and the Default continues for the period and after the notice specified below; (d) a default occurs under any mortgage, indenture or instrument (other than a mortgage, indenture or instrument to which the Purchaser or its Subsidiaries is a party) under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries), whether such Indebtedness or guaranteed Indebtedness now exists or shall be created hereafter, which default (i) is caused by a failure to pay principal of or premium, if any, on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness, or (ii) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of such Indebtedness, together with the principal amount of any other Indebtedness as to which there has been a payment default or the maturity of which has been so accelerated, aggregates $1,000,000 or more; (e) a final judgment for the payment of money is entered by a court or courts of competent jurisdiction against the Company or any Subsidiary of the Company and such 28 remains undischarged for a period (during which execution shall not be effectively stayed) of (1) ninety (90) days, if the aggregate of all such judgments exceeds $1,000,000 but is less than $5,000,000 or (2) thirty (30) days if the aggregate of all such judgments exceeds $5,000,000; (f) the Company or any of its Subsidiaries pursuant to or within the meaning of any Bankruptcy Law: (1) commences a voluntary case, (2) consents to the entry of an order for relief against it in an involuntary case, (3) consents to the appointment of a Custodian of it or for all or substantially all of its property, (4) makes a general assignment for the benefit of its creditors, (5) generally is unable to pay its debts as the same become due; or (6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company or any of its Subsidiaries in an involuntary case, (ii) appoints a Custodian of the Company or any of its Subsidiaries or for all or substantially all of its property, or (iii) orders the liquidation of the Company or any of its Subsidiaries, and the order or decree remains unstayed and in effect for 60 days. A Default under clause (b) is not an Event of Default until a Holder notifies the Company of such Default and the Company does not cure such Default within two (2) Business Days after receipt of such notice. A Default under clause (c) (other than a Default under Sections 5.3, 5.4, 5.6 or 5.7 of this Agreement, which Default shall be an Event of Default without the notice or passage of time specified in this paragraph) or (d) (other than a Default resulting from the acceleration of any Indebtedness described therein, which Default shall be an Event of Default without the notice or passage of time specified in this paragraph) or (e) is not an Event of Default until the Requisite Noteholders notify the Company of the Default and the Company does not cure the Default within ten (10) days after receipt of the notice. Any such notices must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." 7.2. Acceleration of Notes If an Event of Default (other than an Event of Default specified in clauses (e) and (f) of Section 7.1) occurs and is continuing, the Requisite Noteholders, by notice to the Company, may declare the unpaid principal of and any accrued interest on all the Notes to be due and payable. Immediately upon such declaration, the principal and interest shall be due and payable. If an Event of Default specified in clause (e) or (f) of Section 7.1 occurs, such an amount shall become and be immediately due and payable without any declaration or other act on the part of any Holder. The Requisite Noteholders by notice to the Company may rescind an acceleration of and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration. 7.3. Other Remedies If an Event of Default occurs and is continuing, Holders of the Notes may pursue any available remedy to collect the payment of principal or interest on the Notes or to enforce the performance of any provision of the Notes or this Agreement. 29 A delay or omission by any Holder of any Notes in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. SECTION 8. SUBORDINATION 8.1. Notes Subordinated to Senior Indebtedness (a) The Notes are subordinated and junior in right of payment of the principal of and interest and all other obligations (all of the foregoing, a "Payment or Distribution") on such Notes to the prior payment in full of any Senior Indebtedness whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed, the Notes shall comply with the provisions of this Section 8, and each Holder by his acceptance thereof likewise agrees. A Payment or Distribution shall include any asset of any kind or character, and may consist of cash, securities or other property, by set-off or otherwise, except that Holders may receive (i) securities that are subordinated to at least the same extent as the Notes to (A) Senior Indebtedness and (B) any securities issued in exchange for Senior Indebtedness. (b) The Senior Indebtedness of the Company shall continue to be Senior Indebtedness and entitled to the benefit of these subordination provisions irrespective of any amendment, modification or waiver of any term of any instrument relating to refinancing of the Senior Indebtedness, whether with or without notice to Holders. (c) No right of any holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time or in any way be affected or impaired by any act or failure to act on the part of the Company, the Holders or the holders of the Senior Indebtedness, including without limitation any non-compliance by the holders of the Senior Indebtedness with any of the terms, provisions and covenants of the documents evidencing or securing the Senior Indebtedness, or by any noncompliance by the Company or the Holders with any of the terms, provisions and covenants of the Notes, regardless of any knowledge thereof that any such holder of Senior Indebtedness may have or otherwise be charged with. 8.2. Company Not to Make Payments with Respect to Notes in Certain Circumstances No Payment or Distribution shall be made by the Company on account of principal of or interest on the Notes, whether upon the Maturity Date, upon repurchase or acceleration, or otherwise, if there shall have occurred and be continuing a default with respect to any Senior Indebtedness and notice of such default in writing or by telegram has been given to the Company by any holder or holders of Senior Indebtedness, unless and until the Company shall have received written notice from such holder or holders that such default or event of default shall have been cured or waived or shall have ceased to exist or, unless in the event of a default that does not result in the acceleration of any Senior Indebtedness or that does not involve a payment default with respect to any Senior Indebtedness, upon the expiration of the 60-day 30 period following the date of such notice of default. Following such 60-day period, the Company shall be obligated to make any and all outstanding Payments or Distributions with respect to the Notes. Upon acceleration of the principal of the Notes or any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding up or liquidation or reorganization of the Company, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or such other proceedings, all amounts due or to become due upon all Senior Indebtedness shall first be paid in full in cash, or payment thereof provided for to the satisfaction of the holders thereof, before any Payment or Distribution is made on account of the repurchase price or principal of or interest on the Notes; and (subject to the power of a court of competent jurisdiction to make other equitable provision, which shall have been determined by such court to give effect to the rights conferred in this Section 8 upon the Senior Indebtedness and the holders thereof with respect to the Notes or the Holders, by a lawful plan of reorganization or readjustment under applicable law) upon any such dissolution or winding up or liquidation or reorganization, any Payment or Distribution by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Holders would be entitled except for the provisions of this Section 8, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such Payment or Distribution directly to the holders of Senior Indebtedness of the Company or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay all Senior Indebtedness in full in cash, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any Payment or Distribution is made to the Holders. In the event that, notwithstanding the foregoing, any Payment or Distribution by the Company of any kind or character, whether such payment shall be in cash, property or securities is prohibited by the foregoing, and the Company shall have made payment to the Holders before all Senior Indebtedness is paid in full in cash, or provision is made for such payment to the satisfaction of the holders thereof, such Holder, then and in such event such Payment or Distribution shall be paid over by such Holder or delivered to the holders of Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in cash, after giving effect to any concurrent Payment or Distribution to or for the holders of such Senior Indebtedness, and, until so delivered, the same shall be held in trust by any Holder as the property of the holders of Senior Indebtedness. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon 31 the terms and conditions provided in Section 5.7 shall not be deemed a dissolution, winding up, liquidation or reorganization for the purpose of this Section if such other Person shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Section 5.7. The holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Holders without incurring responsibility to the Holders and without impairing or releasing the obligations of the Holders to the holders of the Senior Indebtedness: (i) change the manner, place or terms of payment or change or extend the time of payment of, or renew or alter, Senior Indebtedness, or otherwise amend in any manner Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Senior Indebtedness; and/or (iv) exercise or refrain from exercising any rights against the Company and any other Person. 8.3. Subrogation of Notes After all Senior Indebtedness is paid in full and until the Notes are paid in full, the Holders shall be subrogated (equally and ratably with all other Indebtedness pari passu with the Notes) to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the Holders have been applied to the payment of Senior Indebtedness. If any Payment or Distribution to which the Holders would otherwise have been entitled but for the provisions of this Section 8 shall have been applied pursuant to the provisions of this Section 8 to the payment of all amounts payable in respect of the Senior Indebtedness, then and in such case, the Holders, as with respect to the Company, shall be entitled to receive from the holders of such Senior Indebtedness at the time outstanding any Payments or Distributions received by such holders of Senior Indebtedness in excess of the amount sufficient to pay all amounts payable in respect of the Senior Indebtedness in full in cash or, at the option of the holders of Senior Indebtedness, cash equivalents. 8.4. No Impairment of Subordination No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, any Holder, or by any act, or failure to act, in good faith, by any such holder of Senior Indebtedness, or by any noncompliance by the Company or any Holder with the terms, provisions and covenants of this Agreement regardless of any knowledge thereof which any such holder may have or otherwise be charged with. 32 8.5. Section 8 Not to Prevent Events of Default The failure to make a payment on account of principal of or interest on the Notes by reason of any provision in this Section 8 shall not be construed as preventing the occurrence of an Event of Default with respect to such series under Section 7.1. 8.6. Securities Senior to Subordinated Indebtedness The indebtedness represented by the Notes will be senior and prior in right of payment to all Subordinated Indebtedness, to the extent and in the manner provided in such Subordinated Indebtedness. 8.7. Assignment of Junior Claims (a) So long as LTC Equity Holding Company holds a sufficient amount of Notes such that LTC Equity Holding Company constitutes a Requisite Noteholder, paragraphs (b) and (c) of this Section 8.7 shall have no force and effect. In the event LTC Equity Holding Company shall cease to hold a sufficient amount of Notes such that LTC Equity Holding Company is no longer a Requisite Noteholder, paragraphs (b) and (c) of this Section 8.7 shall be in effect. (b) In the event of an insolvency proceeding with respect to the Company, each Holder will assign to a representative of the holders of Senior Indebtedness (as identified in writing to each Holder by the holders of Senior Indebtedness) (the "Senior Representative") each Holder's right, title and interest in and to any claims such Holder has against the Company with respect to the Notes (the "Junior Claims") and any security held therefor, and will deliver to the Senior Representative from time to time any and all instruments and documents evidencing such Junior Claims, or will have entered on such instruments and documents such subordination legend as the Senior Representative may reasonably request, and each Holder will execute such other instruments and documents as the Senior Representative may from time to time reasonably require in connection therewith. In the event that any Junior Claim is not evidenced by a negotiable instrument, each Holder hereby agrees that he will use all commercially reasonably efforts to obtain an instrument or document from the Company evidencing such Junior Claim. In the event that such debt is not evidenced by a document, it shall nevertheless be deemed subordinated and assigned by virtue of this Section 8.7. (c) In the event of an insolvency proceeding with respect to the Company, each Holder will grant to the Senior Representative irrevocable authority in the place and stead of such Holder and in the name of such Holder or in the Senior Representative's name but for the Senior Representative's use and benefit, at any time or times, after any default under the terms of any Senior Indebtedness, in the Senior Representative's discretion to demand, collect file proofs of claim with respect to, receive (by way of dividends or otherwise) and take any and all legal proceedings for the recovery of any and all moneys due or to become due on account of the Junior Claims or any thereof, and to vote, give consents and take any other steps with regard thereto. Any and all moneys so collected or received by the Senior Representative shall be 33 retained indefeasibly by the Senior Representative for application to the payment in full of any amounts owing with respect to the Senior Indebtedness then outstanding (the "Senior Claims"). If the Senior Representative receives notice of any claim adverse to the rights or interests of each Holder in and to either the Junior Claims or the Senior Claims, or any moneys held by the Senior Representative in respect thereof, the Senior Representative shall be entitled to retain any and all such moneys, documents and instruments evidencing such Junior Claims and Senior Claims. SECTION 9. AMENDMENTS AND WAIVERS 9.1. With Consent of Holders The Company, when authorized by a resolution of the Board of Directors of the Company and with the written consent of the Requisite Noteholders, may amend this Agreement or the Notes, without notice to any other Holders. The Requisite Noteholders may waive compliance by the Company with any provision of this Agreement or the Notes without notice to any other Holder. Without the consent of each Holder affected, however, no amendment or waiver may (with respect to any Notes held by a non-consenting Holder of Notes): (a) reduce the principal amount of Notes whose Holders must consent to an amendment or waiver of any provision of this Agreement or the Notes; (b) reduce the principal of or change the fixed maturity of any Note; (c) reduce the rate of or change the time for payment of interest on any Note; (d) waive a Default or Event of Default in the payment of principal of or interest on the Notes (except a rescission of acceleration of the Notes by the Requisite Noteholders and a waiver of the payment default that resulted from such acceleration); (e) make the principal of or the interest on, any Note payable in any manner other than that stated in this Agreement and the Notes; (f) make any change in the provisions of this Agreement relating to waivers of past Defaults or the rights of Holders of Notes to receive payments of principal of or interest on the Notes; (g) make any change to the subordination provisions of this Agreement that adversely affect any Holder; or (h) make any change in the foregoing amendment and waiver provisions. It shall not be necessary for the consent of the Holders under this Section 9 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. 34 After an amendment or waiver under this Section 9 becomes effective, the Company shall mail to the Holders affected thereby a notice briefly describing the amendment or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment or waiver. In connection with any amendment to this Section 9, the Company may offer, but shall not be obligated to offer, to any Holder who consents to such amendment or waiver, consideration for such Holder's consent. 9.2. Revocation and Effect of Consents Until an amendment or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent as to his Note or portion of his Note by notice to the Company received before the date on which the Requisite Noteholders have consented (and not theretofore revoked such consent) to the amendment or waiver. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment or waiver, which record date shall be at least ten (10) Business Days prior to the first solicitation of such consent. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those persons who were Holders at such record date (or their duly designated proxies), and only those persons, shall be entitled to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. After an amendment or waiver becomes effective, it shall bind every Holder, unless it makes a change described in any of clauses (a) through (g) of Section 9.1, in which case, the amendment or waiver shall bind only each Holder of a Note who has consented to it and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note; provided that any such waiver shall not impair or affect the right of any Holder to receive payment of principal of and interest on a Note, on or after the respective due dates expressed in such Note, or to bring suit for the enforcement of any such payment on or after such respective dates without the consent of such Holder. 9.3. Notation on or Exchange of Notes If an amendment or waiver changes the terms of a Note, the Company may require the Holder of the Note to deliver it to the Company. The Company may place an appropriate notation on the Note about the changed terms and return it to the Holder. 35 SECTION 10. DEFINITIONS 10.1. Definitions As used in this Agreement, the following terms shall have the following meanings: "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Company after the Closing Date, whether or not subsequently reacquired or retired by the Company, other than the Conversion Shares; provided that such term shall exclude shares of Common Stock issued under the Stock Option Plan and shares of Common Stock issued or issuable upon the conversion of Notes issued pursuant to agreements dated on or about the date of this Agreement and the warrants scheduled on the Disclosure Schedule. "Adjusted Conversion Price" shall have the meaning assigned to such term in Section 6.6(a). "Affiliate" means, with respect to any referenced Person, a Person (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such referenced Person, (ii) which directly or indirectly through one or more intermediaries beneficially owns or holds 10% or more of the combined voting power of the total Voting Securities of such referenced Person or (iii) of which 10% or more of the combined voting power of the total Voting Securities directly or indirectly through one or more intermediaries is beneficially owned or held by such referenced Person, or a Subsidiary of such referenced Person. When used herein without reference to any Person, Affiliate means an Affiliate of the Company. For purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of Voting Securities, by contract or otherwise; and the terms "affiliated," controlling" and "controlled" have meanings correlative to the foregoing. "Agent" means any Person authorized to act and who acts on behalf of the Purchasers with respect to the transactions contemplated by this Agreement, the Registration Rights Agreement or the Commitment Letter. "Agreement" means this Convertible Subordinated Note Purchase Agreement dated as of March 30, 1998 by and between the Company and the Purchaser. "Average Closing Sales Price" as of a particular 12-month period means the average closing sales price of the Common Stock for each Business Day during such 12-month period. Such average shall be calculated as follows: (i) the average of the closing sales prices of the Common Stock quoted on the Nasdaq National Market for each Business Day during such 12-month period, or (ii) if no such quotations are available, the average of the closing sales prices for each Business Day during such 12-month period on the principal national securities exchange on which the Common Stock is listed, or (iii) if not listed on any national securities exchange, the average closing sales price for each Business Day during such 12-month period in the over- 36 the-counter market as reported by the National Quotation Bureau, Incorporated or similar organization, or (iv) if no of such sales prices are available for each Business Day in such 12-month period, the average of the high bid and low asked quotations in the over-the-counter market as so reported for such Business Days, or (v) if no such quotations are available, the fair market value per share on such unreported Business Days as determined by an independent investment banker or appraiser, nationally recognized to be expert in making such valuations, selected by a majority of the directors of the Company. In the event "Average Closing Sales Price" is determined by an independent investment banker or appraiser pursuant to clause (v) of the foregoing sentence, such determination shall be provided to each Holder in writing together with a fair and accurate description of the basis for making such determination. The Requisite Holders shall be permitted to dispute such determination by written notice to the Company within ten (10) Business Days of receipt of such determination. In the event of such dispute, the Requisite Holders and the Company shall work together in good faith to mutually agree upon a second independent investment banker or appraiser to make a determination of "Average Closing Sales Price" whose fees and expenses shall be paid by the Company. "Average Closing Sales Price" shall be the average of the per share fair market values determined by both independent investment bankers or appraisers. "Bankruptcy Law" means title 11, U.S. Code or any similar federal or state law for the relief of debtors. "Business Day" means any day which is not a Legal Holiday. "Capital Lease" means any lease of any property which would in accordance with GAAP be required to be classified and accounted for on the balance sheet of the lessee as a capital lease. "Capitalized Lease Obligation" means, with respect to any Person for any period, any obligation of such Person to pay rent or other amounts under a Capital Lease; the amount of such obligation shall be the capitalized amount thereof determined in accordance with such principles. "Capital Stock" means any and all shares, interests, participation or other equivalents (however designated) of corporate stock, including without limitation all common stock and preferred stock. "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. ss. 9601 et. seq.). "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any Person or group (as such term is used in Section 13(d)(3) of the Exchange Act); (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger 37 or consolidation) the result of which is that any Person or group (as defined above), other than Walter C. Bowen or a Related Party, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of more than 50% of the Fully Diluted Voting Securities of the Company (measured by voting power rather than number of shares) and (iv) the date on which a majority of the Board of Directors of the Company shall cease to be Continuing Directors. "Change of Control Date" shall have the meaning set forth in Section 5.4. "Change of Control Notice" shall have the meaning set forth in Section 5.4. "Change of Control Price" shall have the meaning set forth in Section 5.4. "Change of Control Repurchase Date" shall have the meaning set forth in Section 5.4. "Change of Control Repurchase Offer" shall have the meaning set forth in Section 5.4. "Charter Documents" means the Articles of Organization, Articles of Incorporation or Certificate of Incorporation and Bylaws, as amended or restated (or both) to date, of the Company or a Subsidiary, as applicable. "Closing" shall have the meaning set forth in Section 1.2(b). "Closing Date" shall have the meaning set forth in Section 1.2(b). "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute or law thereto. "Commitment Letter" means that certain Commitment Letter dated as of the Closing Date by and between the Company, LTC Properties and LTC West, executed concurrently herewith. "Common Stock" means the Common Stock, no par value, of the Company. "Company" means Regent Assisted Living, Inc., an Oregon corporation. "Company SEC Documents" shall have the meaning set forth in Section 3.23. "Conversion Rate" shall have the meaning set forth in Section 6.2. "Conversion Shares" means the shares of Common Stock issuable upon conversion of the Notes. 38 "Convertible Securities" shall have the meaning set forth in Section 6.6(c). "Consolidated " or "consolidated," when used with reference to any accounting term, means the amount described by such accounting term, determined on a consolidated basis in accordance with GAAP, after elimination of intercompany items. "Consolidated Net Worth" means, with respect to any Person as of any date, the sum of (i) the consolidated equity of the common stockholders of such Person and its consolidated Subsidiaries as of such date plus (ii) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of preferred stock that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such preferred stock, less (x) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made within 12 months after the acquisition of such business) subsequent to the Closing Date in the book value of any asset owned by such Person or a consolidated Subsidiary of such Person, (y) all investments as of such date in unconsolidated Subsidiaries and in Persons that are not Subsidiaries, and (z) all unamortized debt discount and expense and unamortized deferred charges as of such date, all of the foregoing determined in accordance with GAAP. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on March 30, 1998 or (ii) was nominated for election or elected to such Board with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. "Default" means any event which is, or after notice or passage of time would be, an Event of Default. "Determination Date" shall have the meaning set forth in Section 6.4. "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by the Company under Section 6.6, into the aggregate consideration received, or deemed to have been received by the Company for such issue under Section 6.6, for such Additional Shares of Common Stock. "Environmental Laws" shall have the meaning set forth in Section 3.13. 39 "Equity Interest" means Capital Stock or warrants, options or other rights to acquire Capital Stock (but excluding any debt note which is convertible into, or exchangeable for, Capital Stock). "Event of Default" shall have the meaning set forth in Section 7.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended, from time to time, and any successor statute or law thereto. "Fair Market Value" of Common Stock as of a particular date means the Weighted Average trading price of the Common Stock for the ten (10) consecutive Business Day period immediately preceding such date. Such Weighted Average shall be calculated as follows: (i) the Weighted Average of the sales price of the Common Stock quoted on the Nasdaq National Market for each of such ten (10) Business Days, or (ii) if no such quotations are available, the Weighted Average sales price for such ten (10) Business Days on the principal national securities exchange on which the Common Stock is listed, or (iii) if not listed on any national securities exchange, the Weighted Average sales price for such ten (10) Business Days in the over-the-counter market as reported by the National Quotation Bureau, Incorporated or similar organization, or (iv) if no of such sales prices are available for each Business Day in such ten (10) Business Day period, the Weighted Average of the high bid and low asked quotations in the over-the-counter market as so reported for such ten (10) Business Days, or (v) if no such quotations are available, the fair market value per share on such date as determined by an independent investment banker or appraiser, nationally recognized to be expert in making such valuations, selected by a majority of the directors of the Company; provided, however, that in the event of an underwritten public offering of Common Stock, "Fair Market Value" shall mean the price to the public of such Common Stock in such underwritten public offering. In the event "Fair Market Value" is determined by an independent investment banker or appraiser pursuant to clause (v) of the foregoing sentence, such determination shall be provided to each Holder in writing together with a fair and accurate description of the basis for making such determination. The Requisite Holders shall be permitted to dispute such determination by written notice to the Company within ten (10) Business Days of receipt of such determination. In the event of such dispute, the Requisite Holders and the Company shall work together in good faith to mutually agree upon a second independent investment banker or appraiser to make a determination of "Fair Market Value" whose fees and expenses shall be paid by the Company. "Fair Market Value" shall be the average of the per share fair market values determined by both independent investment bankers or appraisers. "Fully Diluted Voting Securities" means each class of Voting Securities of a Person and each class of securities of a Person that, at the time of determination, can immediately subscribe for and/or convert to Voting Securities. "GAAP" means generally accepted accounting principles as used in the United States of America and applied in a manner consistent with past practices. 40 "Holder" or "Holders" means the Purchaser (so long as it holds any Notes) and any other holder of any of the Notes. "Incorporated Documents" means the following of the Company's documents, each as filed with the SEC: (1) Form 10-K for the year ended December 31, 1997, (2) 1997 Proxy Statement dated April 10, 1997; and (3) Form 8-K dated December 29, 1997. "Indebtedness" means, with respect to any Person, the aggregate amount of, without duplication, the following: (a) all obligations for borrowed money; (b) all obligations evidenced by bonds, debentures, notes or other similar instruments; (c) all obligations to pay the deferred purchase price of property or services, except Trade Payables and obligations that do not exceed $300,000 in the aggregate, accrued commissions and other similar accrued current liabilities in respect of such obligations, in any case, not overdue and arising in the ordinary course of business; (d) all Capitalized Lease Obligations; (e) all obligations or liabilities of others secured by a lien on any asset owned by such Person or Persons whether or not such obligation or liability is assumed; (f) all obligations of such Person or Persons, contingent or otherwise, in respect of any letters of credit or bankers' acceptances; and (g) all guaranties. "Indemnified Parties" shall have the meaning set forth in Section 5.6. "Independent Auditors" shall mean the independent certified public accountants of the Company. Until December 29, 1997, the Independent Auditors were Coopers & Lybrand, L.L.P. After such date and as of the date of the Agreement, the Independent Auditors are KPMG Peat Marwick LLP. "Inspectors" shall have the meaning set forth in Section 5.13. "Intangibles" shall have the meaning set forth in Section 3.16. "Junior Claims" shall have the meaning set forth in Section 8.7. "Key Employee" means Walter C. Bowen. "Knowledge of the Company" means to the actual knowledge of each of the Chairman, Chief Executive Officer, Chief Financial Officer, General Counsel, President, 41 Treasurer and any Senior or Executive Vice President of the Company, after due inquiry and investigation. "Legal Holiday" means a Saturday, Sunday or day on which banks and trust companies in the principal place of business of the Company or in California are not required to be open. If a payment date is a Legal Holiday, payment may be made on the next succeeding day that is not a Legal Holiday, and interest shall accrue for the intervening period. "Lien" means any mortgage, pledge, lien, taxes, encumbrance, charge or adverse claim affecting title or resulting in a charge against real or personal property, or note interest of any kind (including, without limitation, any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Losses" shall have the meaning set forth in Section 5.6. "LTC Equity Holding Company" means LTC Equity Holding Company, Inc., a Nevada corporation. "LTC Properties" means LTC Properties, Inc., a Maryland corporation. "LTC West" means LTC West, Inc., a Nevada corporation. "Material Adverse Effect" means (i) any adverse effect upon the issuance, validity or enforceability of a Note, this Agreement, the Registration Rights Agreement or the Commitment Letter, (ii) any material adverse effect on the results of operations, financial condition, properties, assets, business or prospects of the Company and its Subsidiaries, taken as a whole, or (iii) any adverse effect on the ability of the Company to fulfill its obligations under the Notes, this Agreement, the Registration Rights Agreement or the Commitment Letter or any document contemplated hereby or thereby. "Material Contract" shall have the meaning set forth in Section 3.17. "Maturity Date" means March 31, 2008. "Note Register" shall have the meaning set forth in Section 1.3. "Note" or "Notes" shall have the meaning set forth in Section 1.1. "Officers' Certificate" means a certificate signed by any two officers, one of whom must be the Chairman of the Board, the President, the Treasurer or a Vice President of the Company. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Purchaser. 42 "Payment" or "Distribution" shall have the meaning set forth in Section 8.1. "Person" means an individual, partnership, corporation, limited liability company, trust or unincorporated organization or a government or agency or political subdivision thereof. "Plan of Liquidation" means, with respect to any Person, a plan that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously, in phases or otherwise) (i) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such person otherwise than as an entirety or substantially as an entirety and (ii) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition and all or substantially all of the remaining assets of such Person to holders of Capital Stock of such Person. "Preferred Stock" means the Series A Preferred Stock, no par value, and the Series B Preferred Stock, no par value, of the Company. "Property" or "property" means any assets or property of any kind or nature whatsoever, real, personal or mixed (including fixtures), whether tangible or intangible, provided that the terms "Property" or "property", when used with respect to any Person, shall not include Notes issued by such. "Purchaser" means the purchaser on the signature pages hereto. "Registration Rights Agreement" means that certain Registration Rights Agreement dated as of the Closing Date by and among the Company and the Purchaser, executed concurrently herewith. "Related Party" with respect to Walter C. Bowen means (A) any spouse or immediate family member of such Person or (B) or trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of Walter C. Bowen and/or such other Persons referred to in the immediately preceding clause (A). "Reorganizations" shall have the meaning set forth in Section 6.5. "Requisite Noteholders" shall mean the holders of Notes issued to the Purchaser pursuant to this Agreement and the Notes whenever issued to all other purchasers pursuant to similar agreements dated on or about the date of this Agreement with an aggregate principal amount equal to or greater than 50% of the aggregate principal amount of all then outstanding Notes issued to the Purchaser pursuant to this Agreement and the Notes whenever issued to all other purchasers pursuant to similar agreements dated on or about the date of this Agreement. "Rights" shall have the meaning assigned to such term in Section 6.6(c). "SEC" means the Securities and Exchange Commission. 43 "Securities Act" means the Securities Act of 1933, as amended from time to time, and any successor statute or law thereto. "Senior Claims" shall have the meaning set forth in Section 8.7. "Senior Indebtedness" means the principal of, premium, if any, and accrued interest on any other Indebtedness of the Company and all fees, expenses, reimbursements, indemnities and other amounts payable with respect to such Indebtedness, whether such Indebtedness is outstanding on the date of this Agreement or thereafter created, incurred, assumed, or guaranteed by the Company unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such Indebtedness shall not be senior, or is pari passu or subordinate, in right or payment to the Notes; provided that Senior Indebtedness shall not include (i) in the case of each Note the other Notes (ii) Indebtedness of the Company to a Subsidiary of the Company, (iii) Indebtedness of or amounts owed by the Company for compensation to directors or members of senior management that has not been approved by the Compensation Committee of the Board; (iv) Indebtedness guaranteed by the Company on behalf of any equityholder, director, officer or employee of the Company or of any equityholder, director, officer or employee of any of the Company's Subsidiaries, (v) any Trade Payables (including without limitation Indebtedness incurred for the purchase of goods or materials or for services obtained in the ordinary course of business), (vi) Indebtedness of the Company that is subordinated by its terms in right of payment to any other Indebtedness of the Company, and (vii) Indebtedness incurred in violation of this Agreement. "Senior Representative" shall have the meaning set forth in Section 8.7. "Subordinated Indebtedness" means the principal, premium, if any, and interest on any Indebtedness of the Company which by its terms is expressly subordinated in right of payment to the Notes. "Subsidiary" means, with respect to any Person (the "parent"), any corporation, association or other business entity of which Notes or other ownership interests representing more than 50% of the ordinary voting power are, at the time as of which any determination is being made, owned or controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Stock Option Plan" shall mean the Company's 1995 Stock Incentive Plan as in effect on the Closing Date. "Surviving Person" shall have the meaning set forth in Section 5.7(b)(1). "Total Price" means, with respect to the Common Stock on any Business Day, the product of: (x) the closing sales price of the Common Stock quoted on the Nasdaq National Market on such Business Day, or if no such quotations are available, on the principal national securities exchange on which the Common Stock is listed on such Business Day, or if not listed 44 on any national securities exchange, in the over-the-counter market as reported by the National Quotation Bureau, Incorporated or similar organization on such Business Day, or if no such sales prices are available, the high bid and low asked quotations in the over-the-counter market on such Business Day multiplied by (y) the number of shares of Common Stock traded on such market or exchange, as applicable, on such Business Day. "Trade Payables" means, with respect to any Person, accounts payable and other similar accrued current liabilities in respect of obligations or indebtedness to trade creditors created, assumed or guaranteed by such Person or any of its Subsidiaries in the ordinary course of business in connection with the obtaining of property or services. "Voting Securities" means any class of Equity Interests of a Person pursuant to which the holders thereof have, at the time of determination, the general voting power under ordinary circumstances to vote for the election of directors, managers, trustees or general partners of any Person (irrespective of whether or not at the time any other class or classes will have or might have voting power by reason of the happening of any contingency). "Weighted Average" means, with respect to the Common Stock during any ten (10) consecutive Business Day period, the sum of the Total Price of such Common Stock for each Business Day during such ten (10) consecutive Business Day period divided by ten (10). 10.2. Rules of Construction Unless the context otherwise requires (a) a term has the meaning assigned to it; (b) "or" is not exclusive; (c) words in the singular include the plural, and words in the plural include the singular; (d) provisions apply to successive events and transactions; (e) "herein," "hereof" and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision; and (f) the masculine shall include the feminine and neuter genders as appropriate. 45 SECTION 11. MISCELLANEOUS 11.1. Notices All notices and other communications provided for or permitted hereunder shall be made by hand-delivery, first-class mail, telex, telecopier, or overnight air courier guaranteeing next day delivery: (a) if to any Purchaser at address set forth on the signature pages hereto, with a copy to Latham & Watkins, 633 W. Fifth Street, Suite 4000, Los Angeles, California 90071, Attention: Eva Herbst Davis, Esq.; and (b) if to the Company, to Regent Assisted Living, Inc., 121 SW Morrison, Suite 1000, Attention: General Counsel with a copy to Stoel Rives LLP, 900 SW Fifth Avenue, Suite 2300, Portland, Oregon 97204, Attention: Todd Bauman, Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. The parties may change the addresses to which notices are to be given by giving five days' prior notice of such change in accordance herewith. 11.2. Undertaking for Costs In any suit for the enforcement of any right or remedy under this Agreement, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. 11.3. Successors and Assigns This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties. 11.4. Counterparts This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 11.5. Headings The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 46 11.6. Governing Law This Agreement shall be governed by and construed in accordance with the internal laws of the State of California. 11.7. Entire Agreement This Agreement, together with the Notes, the Registration Rights Agreement and the Commitment Letter is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, together with the Notes, the Registration Rights Agreement and the Commitment Letter supersedes all prior agreements and understandings between the parties with respect to such subject matter. 11.8. Severability In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected, it being intended that the Purchaser's rights and privileges shall be enforceable to the fullest extent permitted by law. 11.9. Transfer The Notes may not be transferred, sold, assigned, pledged, hypothecated or otherwise disposed of unless (a) such transfer is pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or (b) the Company has been furnished with a satisfactory opinion of counsel for the Holder, at such Holder's expense, that such transfer is exempt from the provisions of Section 5 of the Securities Act, the rules and regulations in effect thereunder and any applicable state securities laws. 47 IN WITNESS WHEREOF, this Agreement has been duly executed by the parties set forth below as of the date first written above. REGENT ASSISTED LIVING, INC., an Oregon corporation By: WALTER C. BOWEN ----------------------------------- Name: Walter C. Bowen Title: President CHRISTOPHER T. ISHIKAWA, an individual CHRISTOPHER T. ISHIKAWA - --------------------------------------- Christopher T. Ishikawa Address: 1673 East Brentford Avenue Westlake Village, California 91361 48 ANNEX A ------- THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (A) SUCH TRANSFER IS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (B) THE COMPANY HAS BEEN FURNISHED WITH A SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER THAT SUCH TRANSFER IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF THE ACT, THE RULES AND REGULATIONS IN EFFECT THEREUNDER AND ANY APPLICABLE STATE SECURITIES LAWS. REGENT ASSISTED LIVING, INC. CONVERTIBLE SUBORDINATED NOTE DUE MARCH 31, 2008 Note No. ________ $_______________________ FOR VALUE RECEIVED, the undersigned, REGENT ASSISTED LIVING, INC., a corporation organized and existing under the laws of Oregon (herein called the "Company"), hereby promises to pay to the order of ____________________________ or registered assigns ("Holder"), the principal sum of ___________________________ DOLLARS (or so much thereof as shall remain outstanding) on March 31, 2008. Payments are to be made as provided in the Agreement (as defined herein). This Note is one of the Notes issued pursuant to the Convertible Subordinated Note Purchase Agreement dated as of March 30, 1998 (the "Agreement"), by and between the Company and Christopher T. Ishikawa, an individual, and is also entitled to the benefits thereof to the extent provided in the Agreement. This Note is subject to (i) conversion, in whole or in part, at the option of the Holder, pursuant to Section 6.1(a) of the Agreement, (ii) conversion, in whole but not in part, at the option of the Company upon the satisfaction of certain conditions pursuant to Section 6.1(b) of the Agreement and (iii) repurchase, in whole or in part, upon a Change of Control pursuant to Section 5.4 of the Agreement. Upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. The Company may deem and treat the person in whose name this Note is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary. If an Event of Default shall occur and be continuing, this Note may, under certain circumstances, become or be declared due and payable in the manner and with the effect provided in the Agreement. Certain terms and provisions of this Note may be amended or compliance herewith waived on the terms and provisions provided for in the Agreement. The Note is subordinated in both right of payment and time of payment to certain Senior Indebtedness, as defined and described in Section 8 of the Agreement. Capitalized terms used herein without definition shall have the meaning set forth for such terms in the Agreement. REGENT ASSISTED LIVING, INC., an Oregon corporation By:__________________________________ Name: Title: 2 ANNEX B ------- FORM OF OPINION OF COMPANY COUNSEL 1. The Company and each of its Subsidiaries are corporations duly organized and validly existing in good standing under the laws of their respective jurisdictions of incorporation. 2. The Company and each of its Subsidiaries have all requisite power and authority to own or hold under lease the properties it purports so to own or hold except where the failure so to own or hold could not have a Material Adverse Effect and to transact their respective businesses as now transacted and proposed to be transacted. 3. The Company and each of its Subsidiaries are duly qualified as foreign corporations and are in good standing in each jurisdiction in which the character of the properties owned or held under lease by them or the nature of the business transacted by them requires such qualification, except where the failure so to be qualified or be in good standing could not have a Material Adverse Effect. 4. The Company has taken all actions necessary to authorize it (i) to execute, deliver and perform all of its obligations under the Agreement, the Registration Rights Agreement and the Commitment Letter, (ii) to issue and perform all of its obligations under the Notes and (iii) to consummate the transactions contemplated hereby and thereby. 5. The total number of shares of Capital Stock which the Company has authority to issue is 30,000,000 shares, consisting of 25,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. 6. As of March 30, 1998, there were 4,633,000 shares of Common Stock issued and outstanding, and 1,666,667 shares of Preferred Stock issued and outstanding. Such shares of Common Stock and Preferred Stock have been duly authorized and were validly issued, are fully paid and nonassessable, were issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities of the Company. 7. Neither the Company nor any of its Subsidiaries has outstanding any securities convertible into or exchangeable for any shares of Capital Stock nor does it have outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, any Capital Stock or securities convertible into or exchangeable for any Capital Stock other than (i) the Notes to be issued pursuant to the Agreement or pursuant to other similar agreements dated on or about the date of this Agreement, (ii) 1,666,667 shares of Preferred Stock convertible into Common Stock, and (iii) options and warrants to purchase shares of Common Stock as set forth and for the numbers of shares set forth in the Disclosure Schedule to the Agreement. 8. The Company has duly authorized and reserved for issuance the Conversion Shares, and the Conversion Shares will, when issued, be duly and validly issued, fully paid and nonassessable and free from all Liens. 9. Neither the execution or delivery of the Agreement, the Registration Rights Agreement or the Commitment Letter by the Company nor the issuance, sale or delivery of the Notes nor the performance of its respective obligations hereunder or thereunder will: (a) violate any provision of the Charter Documents of the Company; (b) violate any statute, law, rule or regulation or any judgment, decree, order, regulation or rule of any court or governmental authority to which the Company, any of its Subsidiaries, or any of their respective properties may be subject; (c) permit or cause the acceleration of the maturity of any debt or obligation of the Company or any of its Subsidiaries; (d) violate, or be in conflict with, or constitute a default under, or permit the termination of, or require the consent of any Person under, or result in the creation of any Lien upon any property of the Company or any of its Subsidiaries under, any mortgage, indenture, loan agreement, note, debenture or other agreement for borrowed money or any other material agreement to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries (or their respective properties) may be bound, other than such violations, conflicts, defaults, terminations and Liens, or such failures to obtain consents, which could not reasonably be expected to result in a Material Adverse Effect. 10. The sale of the Notes hereunder is exempt from the registration and prospectus delivery requirements of the Securities Act. 11. Neither the Company nor any of its Subsidiaries is an "investment company" or a Person directly or indirectly "controlled" by or acting on behalf of an "investment company" within the meaning of the United States Investment Company Act of 1940, as amended. 2 EX-4.9 10 NOTE NO. 1998-4 (C.T. ISHIKAWA) THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (A) SUCH TRANSFER IS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (B) THE COMPANY HAS BEEN FURNISHED WITH A SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER THAT SUCH TRANSFER IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF THE ACT, THE RULES AND REGULATIONS IN EFFECT THEREUNDER AND ANY APPLICABLE STATE SECURITIES LAWS. REGENT ASSISTED LIVING, INC. CONVERTIBLE SUBORDINATED NOTE DUE MARCH 31, 2008 Issue Date: March 31, 1998 Note No. 1998-4 $90,000 FOR VALUE RECEIVED, the undersigned, REGENT ASSISTED LIVING, INC., a corporation organized and existing under the laws of Oregon (herein called the "Company"), hereby promises to pay to the order of CHRISTOPHER T. ISHIKAWA or registered assigns ("Holder"), the principal sum of NINETY THOUSAND DOLLARS (or so much thereof as shall remain outstanding) on March 31, 2008. Payments are to be made as provided in the Agreement (as defined herein). This Note is one of the Notes issued pursuant to the Convertible Subordinated Note Purchase Agreement dated as of March 30, 1998 (the "Agreement"), by and between the Company and Christopher T. Ishikawa, an individual, and is also entitled to the benefits thereof to the extent provided in the Agreement. This Note is subject to (i) conversion, in whole or in part, at the option of the Holder, pursuant to Section 6.1(a) of the Agreement, (ii) conversion, in whole but not in part, at the option of the Company upon the satisfaction of certain conditions pursuant to Section 6.1(b) of the Agreement and (iii) repurchase, in whole or in part, upon a Change of Control pursuant to Section 5.4 of the Agreement. Upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. The Company may deem and treat the person in whose name this Note is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary. If an Event of Default shall occur and be continuing, this Note may, under certain circumstances, become or be declared due and payable in the manner and with the effect provided in the Agreement. Certain terms and provisions of this Note may be amended or compliance herewith waived on the terms and provisions provided for in the Agreement. The Note is subordinated in both right of payment and time of payment to certain Senior Indebtedness, as defined and described in Section 8 of the Agreement. Capitalized terms used herein without definition shall have the meaning set forth for such terms in the Agreement. REGENT ASSISTED LIVING, INC., an Oregon corporation By: WALTER C. BOWEN ------------------------------------- Walter C. Bowen President EX-4.10 11 CONV. SUB. NOTE PURCH. AGT (P.J. PRIVETT) ------------------------------------------------------------------- REGENT ASSISTED LIVING, INC. and PAMELA J. PRIVETT $90,000 Principal Amount of 7.5% Convertible Subordinated Notes Due March 31, 2008 CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT ------------------------------------------------------------------ Dated as of March 30, 1998 TABLE OF CONTENTS Page SECTION 1. PURCHASE AND SALE OF NOTES........................................ 1 1.1. Issue of Notes................................................. 1 1.2. Purchase and Sale of Notes..................................... 1 1.3. Maintenance of Note Register................................... 2 1.4. Issue Taxes.................................................... 2 1.5. Direct Payment................................................. 3 1.6. Lost, Etc. Notes............................................... 3 SECTION 2. CLOSING CONDITIONS................................................ 4 2.1. Delivery of Documents.......................................... 4 2.2. Delivery of Other Agreements................................... 5 2.3. Representations and Warranties, Agreements and Covenants....... 5 2.4. No Event of Default............................................ 6 2.5. Proceedings Satisfactory....................................... 6 2.6. Consents and Permits........................................... 6 2.7. No Material Adverse Change..................................... 6 SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................... 6 3.1. Organization; Power and Authority.............................. 6 3.2. Authorization.................................................. 7 3.3. Capital Stock.................................................. 7 3.4. No Other Registration Rights................................... 7 3.5. No Violation or Conflict; No Default........................... 8 3.6. Margin Regulations............................................. 8 3.7. Private Offering............................................... 8 3.8. Due Authorization of Material Contracts........................ 9 3.9. Financial Statements........................................... 9 3.10. Litigation; Judgments.........................................10 3.11. Taxes.........................................................10 i 3.12. Investment Company Act........................................10 3.13. Environmental Matters.........................................10 3.14. Labor Relations...............................................11 3.15. Real Property; Leases.........................................11 3.16. Intellectual Property; Licenses...............................11 3.17. Defaults......................................................12 3.18. Brokers.......................................................12 3.19. Existing Indebtedness.........................................12 3.20. Compliance with Law; Permits..................................13 3.21. Insurance.....................................................13 3.22. Material Events...............................................13 3.23. SEC Documents; Undisclosed Liabilities........................14 3.24. Material Misstatements or Omissions...........................15 3.25. Survival of Representations and Warranties....................15 SECTION 4. REPRESENTATIONS AND WARRANTIES OF EACH PURCHASER..................15 4.1. Purchase for Own Account.......................................15 4.2. Accredited Investor............................................16 4.3. Authorization..................................................16 4.4. Brokers........................................................16 SECTION 5. COVENANTS.........................................................16 5.1. Payment of Notes; Satisfaction of Obligations..................16 5.2. Notice of Default..............................................17 5.3. Limitation on Additional Indebtedness..........................17 5.4. Change of Control..............................................17 5.5. Stay, Extension and Usury Laws.................................18 5.6. Indemnification................................................19 5.7. Corporate Existence; Merger; Successor Corporation.............20 5.8. Taxes..........................................................21 5.9. Investment Company Act.........................................21 5.10. Insurance.....................................................22 ii 5.11. Inconsistent Agreements.......................................22 5.12. Compliance with Laws..........................................22 5.13. Inspection of Properties and Records..........................22 SECTION 6. CONVERSION OF NOTES...............................................23 6.1. Conversion.....................................................23 6.2. Conversion Rate................................................24 6.3. Fractional Shares..............................................24 6.4. Adjustments for Stock Splits, Combinations and Dividends.......24 6.5. Reorganization, Mergers, Consolidations or Sales of Assets.....25 6.6. Sale of Shares Below Market or Conversion Price................25 6.7. Adjustment for Failure to Quote on Nasdaq National Market......27 6.8. Accountants' Certificate of Adjustment.........................27 6.9. Reservation of Shares Issuable Upon Conversion.................27 6.10. No Impairment.................................................28 SECTION 7. DEFAULTS AND REMEDIES.............................................28 7.1. Events of Default..............................................28 7.2. Acceleration of Notes..........................................29 7.3. Other Remedies.................................................29 SECTION 8. SUBORDINATION.....................................................30 8.1. Notes Subordinated to Senior Indebtedness......................30 8.2. Company Not to Make Payments with Respect to Notes in Certain Circumstances..........................................30 8.3. Subrogation of Notes...........................................32 8.4. No Impairment of Subordination.................................32 8.5. Section 8 Not to Prevent Events of Default.....................32 8.6. Securities Senior to Subordinated Indebtedness.................32 8.7. Assignment of Junior Claims....................................33 SECTION 9. AMENDMENTS AND WAIVERS............................................33 9.1. With Consent of Holders........................................33 9.2. Revocation and Effect of Consents..............................34 iii 9.3. Notation on or Exchange of Notes...............................35 SECTION 10. DEFINITIONS......................................................35 10.1. Definitions...................................................35 10.2. Rules of Construction.........................................44 SECTION 11. MISCELLANEOUS....................................................45 11.1. Notices.......................................................45 11.2. Undertaking for Costs.........................................45 11.3. Successors and Assigns........................................46 11.4. Counterparts..................................................46 11.5. Headings......................................................46 11.6. Governing Law.................................................46 11.7. Entire Agreement..............................................46 11.8. Severability..................................................46 11.9. Transfer......................................................46 iv CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT This CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT, is dated as of March 30, 1998 (this "Agreement"), and entered into by and between REGENT ASSISTED LIVING, INC., an Oregon corporation (the "Company") and PAMELA J. PRIVETT, an individual (the "Purchaser"). Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in Section 10.1 hereof. In consideration of the premises, mutual covenants and agreements hereinafter contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company agrees as follows: SECTION 1. PURCHASE AND SALE OF NOTES 1.1. Issue of Notes On or before the Closing, (a) The Company will have authorized the issue and sale of $90,000 aggregate principal amount of its 7.5% Convertible Subordinated Notes due March 31, 2008 (the "Notes") to the Purchaser, to be substantially in the form attached hereto as Annex A. (b) The Notes shall be substantially in the form attached hereto as Annex A, including such other notations, legends or endorsements set forth therefor or required by law. The Notes shall be dated the date of their issuance. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Agreement and, to the extent applicable, the Company and the Purchaser, by their execution and delivery of this Agreement, expressly agree to such terms and provisions and to be bound thereby. 1.2. Purchase and Sale of Notes (a) Purchase and Sale. The Company agrees to sell and, subject to the terms and conditions set forth herein and in the Registration Rights Agreement and in reliance on the representations and warranties of the Company contained or incorporated herein, the Purchaser agrees to purchase the Notes for an aggregate purchase price of $90,000. (b) Closing. The purchase and sale of the Notes referred to in Section 1.2(a)(1) shall take place at a closing (the "Closing") at the offices of Latham & Watkins, 633 West Fifth Street, Suite 4000, Los Angeles, California at 2:00 p.m. on March 30, 1998 (the "Closing Date"). At the Closing, the Company will deliver to the Purchaser the Notes to be purchased by the Purchaser (in such permitted denomination or denominations and registered in the Purchaser's name or the name of such nominee or nominees as the Purchaser may request) on the Closing Date, dated the Closing Date, against payment of the purchase price therefor by intra-bank or federal funds bank wire transfer of same day funds to such bank account as the Company shall designate at least two Business Days prior to the Closing. (c) Fees and Expenses. Whether or not the Notes are sold, the Company agrees to pay or reimburse all expenses relating to this Agreement, including but not limited to: (1) the reasonable fees and other expenses of the Purchaser's counsel, Latham & Watkins, in connection herewith (not to exceed $50,000 in the aggregate, relating to this Agreement and similar agreements dated on or about the date of this Agreement); (2) any reasonable out-of-pocket fees and expenses (including the reasonable fees and expenses of counsel) in connection with any registration or qualification of the Notes required in connection with the offer and sale of the Notes at the Closing pursuant to this Agreement under the securities or "blue sky" laws of any jurisdiction requiring such registration or qualification or in connection with obtaining any exemptions from such requirements; and (3) the Purchaser's reasonable out-of-pocket expenses (including the reasonable fees and expenses of counsel) relating to any amendment, or modification of, or any waiver, or consent or preservation of rights under this Agreement, the Notes, the Registration Rights Agreement and any other documents contemplated hereby or thereby. Purchaser may deduct such expenses from the purchase price of the Notes; provided that the Purchaser agrees to provide the Company with a statement describing any amounts to be so paid at least one Business Day prior to the Closing. 1.3. Maintenance of Note Register The Company shall cause to be kept at its principal office a register for the registration and transfer of the Notes (the "Note Register"). The names and addresses of the Holders of Notes, the transfer of Notes, and the names and addresses of the transferees of the Notes shall be registered in the Note Register. The Person in whose name any registered Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes of this Agreement and the Company shall not be affected by any notice to the contrary, until due presentment of such Note for registration of transfer so provided in this Section 1.3. Payment of or on account of the principal and interest on any registered Notes shall be made to or upon the written order of such registered holder. 1.4. Issue Taxes The Company agrees to pay all taxes owed by or on behalf of the Company in connection with the issuance, sale, delivery or transfer by the Company to the Purchaser of the Notes and the execution and delivery of the agreements and instruments contemplated hereby and any modification of any of such Notes, agreements and instruments and will save the 2 Purchaser harmless without limitation as to time against any and all liabilities with respect to all such taxes. The Purchaser agrees to pay all taxes owed by or on behalf of the Purchaser in connection with the issuance, sale, delivery or transfer by the Company to the Purchaser of the Notes and the execution and delivery of the agreements and instruments contemplated hereby and any modification of any of such Notes, agreements and instruments and will save the Company harmless without limitation as to time against any and all liabilities with respect to all such taxes. The obligations of the Company and the Purchaser under this Section 1.4 shall survive the payment or prepayment of the Notes and the termination of this Agreement. 1.5. Direct Payment (a) The Company will pay or cause to be paid all amounts payable with respect to any Note (without any presentment of such Note and without any notation of such payment being made thereon) by crediting (before 11:00 a.m., Pacific time), by federal funds bank wire transfer to each Holder's account in any bank in the United States as may be designated and specified in writing by such Holder at least two Business Days prior thereto. (b) Notwithstanding anything to the contrary contained in the Notes, if any principal amount payable with respect to a Note is payable on a Legal Holiday, then the Company shall pay such amount on the next succeeding Business Day, and interest shall accrue on such amount until the date on which such amount is paid and payment of such accrued interest shall be made concurrently with the payment of such amount, provided that the Company may elect to pay in full (but not in part) any such amount on the last Business Day prior to the date such payment otherwise would be due, and no such additional interest shall accrue on such amount. Notwithstanding anything to the contrary contained in the Notes, if any interest payable with respect to a Note is payable on a Legal Holiday, then the Company shall pay such interest on the next succeeding Business Day, and such extension of time shall be included in the computation of the interest payment, provided that the Company may elect to pay in full (but not in part) any such interest on the last Business Day prior to the date such payment otherwise would be due, and such diminution in time may, at the Company's option, be included in the computation of the interest payment. 1.6. Lost, Etc. Notes Notwithstanding any provision to the contrary, if any Note of which the Purchaser or any other Holder (or nominee thereof) which is a transferee is the owner is mutilated, destroyed, lost or stolen, then the affidavit of the Purchaser or such Holder, if an individual, or of the Purchaser's or such Holder's treasurer or assistant treasurer (or other authorized officer), if a Person other than an individual, briefly setting forth the circumstances with respect to such mutilation, destruction, loss or theft, shall be accepted as satisfactory evidence thereof, and no indemnity, note or payment of charges or expenses shall be required as a condition to the execution and delivery by the Company or the transfer agent with respect to such Note, of new Notes for a like aggregate principal amount or number of shares, as applicable, in substitution therefor, other than such Purchaser's or such Holder's unsecured written agreement reasonably 3 satisfactory to indemnify the Company or the transfer agent, as the case may be, which written agreement may be required by the Company. SECTION 2. CLOSING CONDITIONS The obligations of the Purchaser to purchase and pay for the Notes to be delivered to such Purchaser at the Closing shall be subject to the satisfaction of the following conditions on or before the Closing Date: 2.1. Delivery of Documents The Company shall have delivered to the Purchaser, in form and substance reasonably satisfactory to the Purchaser, the following: (a) The Notes being purchased by the Purchaser pursuant to Section 1.2(a)(1), duly executed by the Company, in the aggregate principal amount of $90,000. (b) An opinion, dated the Closing Date and addressed to the Purchaser, from David R. Gibson, counsel for the Company, as to the matters set forth on Annex B. In rendering such opinion, such counsel may rely as to factual matters upon certificates or other documents furnished by officers and directors of the Company (copies of which shall be delivered to the Purchaser) and by government officials, and upon such other documents as such counsel reasonably deems appropriate as a basis for its opinion. Such counsel shall opine as to the federal laws of the United States, the laws of the State of Oregon. (c) Resolutions of the Board of Directors of the Company, certified by the Secretary or Assistant Secretary, to be duly adopted and in full force and effect on the Closing Date, authorizing (i) the execution, delivery and performance of this Agreement, the Registration Rights Agreement and the Commitment Letter and the consummation of transactions contemplated hereby and thereby, (ii) the issuance of the Notes to be purchased by the Purchaser and (iii) specific officers to execute and deliver this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter. (d) Certificates executed by any two executive officers of the Company, dated the Closing Date, certifying (i) that all of the conditions set forth in Section 2 of this Agreement are satisfied on and as of such date, (ii) that all of the representations and warranties of the Company contained or incorporated by reference herein that (A) are qualified as to materiality are true and correct on and as of such date as though made on and as of such date and that (B) are not qualified as to materiality are true and correct in all material respects on and as of such date as though made on and as of such date, and no event has occurred and is continuing, or would result from the issuance of the Notes or the extension of borrowings under the Commitment Letter, which constitutes or would constitute a Default or an Event of Default and (iii) as to such other matters as the Purchaser may request in the exercise of its reasonable discretion. 4 (e) Governmental certificates, dated the most recent practicable date but in no event more than thirty (30) calendar days prior to the Closing Date showing that the Company was incorporated under the Oregon Business Corporation Act, is active on the records of the Corporation Division and is qualified as a foreign corporation and in good standing in all other jurisdictions in which it is qualified to transact business, except where the failure to be so qualified would not have a Material Adverse Effect. (f) Copies of each consent, license and approval required in connection with the execution, delivery and performance by the Company of this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter and the consummation of the transactions contemplated hereby and thereby. (g) Copies of the Charter Documents of the Company, certified as of a recent date but in no event more than thirty (30) calendar days prior to the Closing Date by the Secretary of State of the State of Oregon and certified by the Secretary or Assistant Secretary of the Company (or person possessing comparable authority of the Company), as true and correct on and as of the Closing Date. (h) Certificates of the Secretary or an Assistant Secretary of the Company as to the incumbency and signatures of the officers or representatives of such entity executing this Agreement, the Notes, the Registration Rights Agreement, the Commitment Letter and any other certificate or other document to be delivered pursuant hereto or thereto on the Closing Date, together with evidence of the incumbency of such Secretary or Assistant Secretary; (i) Copies of all agreements associated with or entered into in connection with the investment of Prudential Private Equity Investors III, L.P. in the Company's Preferred Stock and if requested by the Purchaser prior to the Closing Date, copies of all lease agreements to which the Company is a party. 2.2. Delivery of Other Agreements The Company shall have executed and delivered the Registration Rights Agreement and the Commitment Letter. 2.3. Representations and Warranties, Agreements and Covenants All of the representations and warranties of the Company contained herein that (A) are qualified as to materiality shall be true and correct on and as of the Closing Date, except to the extent any representation or warranty expressly relates to an earlier date and that (B) are not qualified as to materiality are true and correct in all material respects on and as of the Closing Date, except to the extent any representation or warranty expressly relates to an earlier date. The Company shall have performed or complied with all agreements, covenants and conditions contained herein and in the Registration Rights Agreement and the Commitment Letter which are required to be performed or complied with by the Company on or before the Closing Date. 5 2.4. No Event of Default No event shall have occurred and be continuing, or would result from the purchase of the Notes or the extension of borrowings pursuant to the Commitment Letter, which constitutes or would constitute a Default or an Event of Default. 2.5. Proceedings Satisfactory All proceedings taken in connection with the sale of the Notes, the transactions contemplated hereby, and all documents and papers relating thereto, shall be reasonably satisfactory to the Purchaser. The Purchaser and its counsel shall have received copies of such documents and papers as they may reasonably request in connection therewith, all in form and substance satisfactory to the Purchaser. Any document annexed to this Agreement or any other document contemplated by this Agreement not approved by the Purchaser in writing as to form and substance on the date this Agreement is executed shall be satisfactory in form and substance to the Purchaser. 2.6. Consents and Permits The Company shall have received all consents, approvals, and authorizations and sent or made all notices, filings, registrations and qualifications required for the issuance of the Notes, all of which are disclosed on the Disclosure Schedule. 2.7. No Material Adverse Change Since the date of this Agreement, neither the Company nor any of its Subsidiaries shall have suffered any material adverse change in its properties, business, prospects, operations, earnings, assets, liabilities or condition (financial or otherwise) which would reasonably likely to result in a Material Adverse Effect. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth in the Disclosure Schedule attached to this Agreement (each scheduled item contained therein referencing the Section of this Agreement that it qualifies), the Company represents and warrants as follows: 3.1. Organization; Power and Authority The Company and each of its Subsidiaries are corporations duly organized and validly existing in good standing under the laws of their respective jurisdictions of incorporation. The Company and each of its Subsidiaries have all requisite power and authority to own or hold under lease the properties it purports so to own or hold except where the failure so to own or hold could not have a Material Adverse Effect and to transact their respective businesses as now transacted. The Company and each of its Subsidiaries are duly qualified as foreign corporations and are in good standing in each jurisdiction in which the character of the properties owned or held under lease by them or the nature of the business transacted by them requires such 6 qualification, except where the failure so to be qualified or be in good standing could not have a Material Adverse Effect. 3.2. Authorization The Company has taken all actions necessary to authorize it (i) to execute, deliver and perform all of its obligations under this Agreement, the Registration Rights Agreement and the Commitment Letter, (ii) to issue and perform all of its obligations under the Notes and (iii) to consummate the transactions contemplated hereby and thereby. Each of this Agreement, the Notes, the Registration Rights Agreement, and the Commitment Letter is a legally valid and binding obligation of the Company, enforceable against it in accordance with its terms, except for (a) the effect thereon of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting the rights of creditors generally and (b) limitations imposed by federal or state law or equitable principles upon the specific enforceability of any of the remedies, covenants or other provisions thereof and upon the availability of injunctive relief or other equitable remedies. 3.3. Capital Stock The total number of shares of Capital Stock which the Company has authority to issue is 30,000,000 shares, consisting of 25,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. The Company has the power and authority and has taken all actions (corporate or other) necessary to authorize it to enter into and perform its obligations and undertakings under this Agreement. As of March 30, 1998, there were 4,633,000 shares of Common Stock issued and outstanding, and 1,666,667 shares of Preferred Stock issued and outstanding. Such shares of Common Stock and Preferred Stock have been duly authorized and were validly issued, are fully paid and nonassessable, were issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities of the Company. Neither the Company nor any of its Subsidiaries has outstanding any securities convertible into or exchangeable for any shares of Capital Stock nor does it have outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, any Capital Stock or securities convertible into or exchangeable for any Capital Stock other than (i) the Notes to be issued pursuant to this Agreement or pursuant to other similar agreements dated on or about the date of this Agreement, (ii) 1,666,667 shares of Preferred Stock convertible into Common Stock, and (iii) options and warrants to purchase shares of Common Stock as set forth and for the numbers of shares set forth on the Disclosure Schedule. The Company has duly authorized and reserved for issuance the Conversion Shares, and the Conversion Shares will, when issued, be duly and validly issued, fully paid and nonassessable and free from all Liens. 3.4. No Other Registration Rights Except for the Notes to be issued in connection with the transactions contemplated by this Agreement or pursuant to other similar agreements dated on or about the date of this Agreement, there are no contracts, agreements or understandings between the 7 Company and any other Person granting such Person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to any other registration statement filed by the Company under the Securities Act. 3.5. No Violation or Conflict; No Default Neither the execution or delivery of this Agreement, the Registration Rights Agreement or the Commitment Letter by the Company nor the issuance, sale or delivery of the Notes nor the performance of its respective obligations hereunder or thereunder will: (a) violate any provision of the Charter Documents of the Company; (b) violate any statute, law, rule or regulation or any judgment, decree, order, regulation or rule of any court or governmental authority to which the Company, any of its Subsidiaries, or any of their respective properties may be subject; (c) permit or cause the acceleration of the maturity of any debt or obligation of the Company or any of its Subsidiaries; (d) violate, or be in conflict with, or constitute a default under, or permit the termination of, or require the consent of any Person under, or result in the creation of any Lien upon any property of the Company or any of its Subsidiaries under, any mortgage, indenture, loan agreement, note, debenture or other agreement for borrowed money or any other material agreement to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries (or their respective properties) may be bound, other than such violations, conflicts, defaults, terminations and Liens, or such failures to obtain consents, which could not reasonably be expected to result in a Material Adverse Effect. 3.6. Margin Regulations No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any "margin stock" within the meaning of Regulation G of the Board of Governors of the Federal Reserve System (12 C.F.R. ss. 207), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 C.F.R. ss. 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 C.F.R. ss. 220). The assets of the Company and its Subsidiaries do not include any margin stock, and the Company does not have any present intention of acquiring margin stock. 3.7. Private Offering The sale of the Notes hereunder is exempt from the registration and prospectus delivery requirements of the Securities Act. In the case of each offer or sale of the Notes, no 8 form of general solicitation or general advertising was used by the Company or its respective representatives. The Company agrees that neither it, nor anyone acting on its behalf, will offer or sell the Notes, or any portion of them, if such offer or sale might bring the issuance and sale of the Notes to the Purchaser within the provisions of Section 5 of the Securities Act nor offer any similar Notes for issuance or sale to, or solicit any offer to acquire any of the same from, or otherwise approach or negotiate with respect thereto with, anyone if the sale of the Notes and any such Notes could be integrated as a single offering for the purposes of the Securities Act, including without limitation Regulation D. 3.8. Due Authorization of Material Contracts The descriptions in the Incorporated Documents of statutes, legal and governmental proceedings or contracts or other documents are accurate in all material respects and fairly present the information required to be shown at the time shown; and there are no statutes or legal or governmental proceedings required to be described in the Incorporated Documents that are not described as required and there is no document or contract of a character required to be described in the Incorporated Documents or to be filed as an exhibit to the Incorporated Documents which is not described or filed as required. All contracts described in the Incorporated Documents or filed as an exhibit to the Incorporated Documents to which the Company or any of its Subsidiaries is a party have been duly authorized, executed and delivered by the Company or such Subsidiary, constitute valid and binding agreements of the Company or such Subsidiary and are enforceable against and by the Company or such Subsidiary in accordance with the terms thereof, except as the enforcement thereof may be limited by bankruptcy and laws relating to the rights and remedies of the creditors generally or by the availability of general equitable remedies. 3.9. Financial Statements The financial statements and schedules of the Company and its consolidated subsidiaries included in the Incorporated Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, present fairly the financial condition of the Company and its consolidated subsidiaries, as of the respective dates thereof and the results of operations and cash flows of the Company and its consolidated subsidiaries, for the respective periods covered thereby, all in conformity with GAAP (except in the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto) and fairly present the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other financial statements or schedules of the Company and its consolidated subsidiaries or any other company or entity are required by the Securities Act, the Exchange Act or the rules and regulations of the SEC to be included in the Incorporated Documents. The Independent Auditors, who have reported on certain of such 9 financial statements and schedules, are, and were during the periods covered by their reports included in the Incorporated Documents, independent accountants with respect to the Company and its consolidated subsidiaries, as required by the Securities Act, the Exchange Act and the rules and regulations of the SEC. The summary financial and statistical data included in the Incorporated Documents present fairly the information shown therein and have been compiled on a basis consistent with the financial statements presented therein. The unaudited consolidated financial statements included in the Incorporated Documents comply as to form in all material respects with the applicable accounting requirements of the Securities Act, the Exchange Act and the rules and regulations of the SEC, and such statements fairly present the consolidated financial position and results of operations and the other information purported to be shown therein at the respective dates or for the respective periods therein specified. 3.10. Litigation; Judgments Except as described in the Incorporated Documents, there are no actions, suits or proceedings (formal or informal) pending or, to the Knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective properties, assets, or directors or officers, in their capacity as such, before or by any Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding might reasonably be expected to, individually or in the aggregate, and after giving effect to the sale and issuance of the Notes, result in a Material Adverse Effect. 3.11. Taxes Each of the Company and its Subsidiaries has filed all federal, state, local and foreign income tax returns which have been required to be filed and has paid all taxes and assessments received by it to the extent that such taxes have become due. None of the Company nor its Subsidiaries has any tax deficiency which has been or might be asserted or threatened against it which could reasonably be expected to result in a Material Adverse Effect. 3.12. Investment Company Act Neither the Company nor any of its Subsidiaries is an "investment company" or a Person directly or indirectly "controlled" by or acting on behalf of an "investment company" within the meaning of the United States Investment Company Act of 1940, as amended. 3.13. Environmental Matters The operations of the Company and its Subsidiaries with respect to any real property currently leased, owned, controlled or managed by the Company or any of its Subsidiaries are, and with respect to any real property previously leased, owned, managed or controlled were, when such real property was leased, owned, managed or controlled by the Company or any of its Subsidiaries, in compliance in all material respects with all applicable federal, state, and local laws, ordinances, rules, and regulations relating to occupational health and safety and the environment (collectively, "Environmental Laws"), and the Company and its 10 Subsidiaries have all material licenses, permits and authorizations required under all Environmental Laws; neither the Company nor any of its Subsidiaries has authorized or conducted or has knowledge of the generation, transportation, storage, use, treatment, disposal or release of any hazardous substance, hazardous waste, hazardous material, hazardous constituent, toxic substance, pollutant, contaminant, petroleum product, natural gas, liquefied gas or synthetic gas defined or regulated under any Environmental Law on, in or under any real property currently leased, owned, controlled or managed by the Company or any of its Subsidiaries or previously leased, owned, controlled or managed by the Company or any of its Subsidiaries when such real property was owned, leased, controlled or managed by the Company or any of its Subsidiaries, except in compliance with applicable Environmental Laws; and there is not pending or, to the Knowledge of the Company, any threatened claim, litigation or any administrative agency proceeding, nor has the Company or any of its Subsidiaries received any written or oral notice from any governmental entity or third party, that: (i) alleges a violation of any Environmental Laws by the Company or any of its Subsidiaries; (ii) alleges the Company or any of its Subsidiaries is a liable party under CERCLA or any state superfund law; (iii) alleges possible contamination of the environment by the Company or any of its Subsidiaries; or (iv) alleges possible contamination of real property currently leased, owned, controlled or managed by the Company or any of its Subsidiaries or previously leased, owned, controlled or managed by the Company or any of its Subsidiaries when such real property was owned, leased, controlled or managed by the Company or any of its Subsidiaries. 3.14. Labor Relations No labor dispute with the employees of the Company or any of its Subsidiaries exists or is threatened that could reasonably be expected to result in a Material Adverse Effect; and the Company is not aware of any existing or threatened labor disturbance by the employees of any other entity that could reasonably be expected to result in a Material Adverse Effect. 3.15. Real Property; Leases Each of the Company and its Subsidiaries has good and indefeasible title to all properties and assets described in the Incorporated Documents as owned by it, free and clear of all Liens except such as are described in the Incorporated Documents or are not material, singly or in the aggregate, to the Company. Each of the Company and its Subsidiaries has valid, subsisting and enforceable leases for the properties described in the Incorporated Documents as leased by it, except such as are described in the Incorporated Documents. 3.16. Intellectual Property; Licenses Each of the Company and its Subsidiaries owns or has the right to use all patents, patent applications, trademarks, trademark applications, tradenames, copyrights, franchises, trade secrets, proprietary or other confidential information and intangible properties and assets (collectively, "Intangibles") reasonably necessary to conduct its business as now conducted; and none of the Company or its Subsidiaries has any knowledge of any infringement by it of Intangibles of others, and there is no claim being made against the Company or any of its Subsidiaries, or to the Knowledge of the Company, any employee of the Company or its 11 Subsidiaries, regarding infringement of any Intangibles of others which could reasonably be expected to have a Material Adverse Effect and, to the Knowledge of the Company, there is no infringement by others of Intangibles of the Company or any of its Subsidiaries. 3.17. Defaults The continuation, validity and effectiveness of each contract, agreement, arrangement or other instrument related to borrowed money (of any amount) or involving payments in excess of $100,000 or that is material to the Company or its Subsidiaries (each a "Material Contract") will not be adversely affected by the execution, delivery and performance of this Agreement, the Registration Rights Agreement, or the Commitment Letter, the issuance or sale of the Notes, or the consummation of the transactions contemplated hereby or thereby. The Company and its Subsidiaries are not in default in any respect, and will not, with the giving of notice or the lapse of time, or both, be in default in any respect, under any Material Contract upon or as a result of the consummation of the transactions contemplated by this Agreement, the Registration Rights Agreement or the Commitment Letter. To the Knowledge of the Company, there is no default or claimed or purported or alleged default or state of facts that with the giving of notice or the lapse of time, or both, would constitute a default on the part of any party other than the Company or any of its Subsidiaries under any Material Contract. 3.18. Brokers The Company has not dealt with any broker, finder, commission agent or other Person in connection with the sale of the Notes and the transactions contemplated by this Agreement, and the Company is not under any obligation to pay any broker's or finder's fee or commission or similar payment in connection with such transactions. 3.19. Existing Indebtedness The Disclosure Schedule sets forth a complete and correct list of all Indebtedness of the Company and its Subsidiaries as of the date hereof, showing as to each item of such Indebtedness the creditor, the aggregate principal amount outstanding, the agreement or instrument governing such Indebtedness and a brief description of any security therefor. With respect to each item of Indebtedness listed on the Disclosure Schedule, the Company will deliver to the Purchaser or its representatives, upon request, a true and complete copy of each instrument evidencing such Indebtedness or pursuant to which such Indebtedness was issued or secured (including each amendment, consent, waiver or similar instrument in respect thereof), as the same is in effect on the date hereof. The Company and its Subsidiaries are not in default in the performance or observance in any material respect of any of the terms, covenants or conditions contained in any instrument evidencing Indebtedness listed on the Disclosure Schedule or pursuant to which such Indebtedness was issued or secured or has requested any waiver in respect of any default and no event has occurred and is continuing which, with notice or the lapse of time or both, would constitute such a default. 12 3.20. Compliance with Law; Permits (a) The Company and its Subsidiaries own or possess all authorizations, approvals, orders, licenses, registrations, other certificates and permits of and from all governmental regulatory officials and bodies, necessary to conduct their respective businesses except where the failure to own or possess all such authorizations, approvals, orders, licenses, registrations, other certificates and permits would not have a Material Adverse Effect. There is no proceeding pending or, to the Knowledge of the Company, threatened (or any basis therefor known to the Company) which may cause any such authorization, approval, order, license, registration, certificate or permit to be revoked, withdrawn, canceled, suspended or not renewed; and the Company and its Subsidiaries are conducting their respective business in compliance with all laws, rules and regulations applicable thereto except where such noncompliance could not reasonably be expected to result in a Material Adverse Effect. (b) Neither the nature of the Company nor of any of its businesses or properties, nor any relationship between the Company and any other Person, nor any circumstance in connection with the offer, issuance, sale or delivery of the Notes at the Closing, nor the performance by the Company of its other obligations hereunder or under the Notes, the Registration Rights Agreement or the Commitment Letter, as the case may be, is such as to require a consent, approval or authorization of, or notice to, or filing, registration or qualification with, any governmental authority or other Person on the part of the Company as a condition to the execution and delivery of this Agreement, the Registration Rights Agreement, the Commitment Letter or the offer, issuance, sale or delivery of the Notes at the Closing, other than the filings, registrations, qualifications or consents which shall have been made or obtained on the Closing Date (and copies of which shall have been delivered to the Purchaser). All required consents, approvals or authorizations of, or notices to or filings, registrations or qualifications with, any governmental authority or other Person required in connection with the transactions contemplated by this Agreement, the Notes, the Registration Rights Agreement or the Commitment Letter have been obtained or made. 3.21. Insurance The Company maintains, and will maintain after giving effect to the issuance and the sale of the Notes, insurance of the types and in the amounts generally deemed adequate for its business, including, but not limited to, insurance covering director and officer liability, workers compensation liability, malpractice liability respecting the provision of assisted living services, real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is and will be in full force and effect. 3.22. Material Events Since December 31, 1997, there has not been with respect to the Company or any of its Subsidiaries: 13 (a) any material adverse change in their properties, business, prospects, operations, earnings, assets, liabilities or condition (financial or otherwise) which could reasonably be expected to result in a Material Adverse Effect; or (b) any damage, destruction or loss to the properties or assets of the Company or any of its Subsidiaries, whether or not covered by insurance, that has or could reasonably be expected to have a Material Adverse Effect or that in the aggregate exceed $100,000; or (c) any loss or waiver by the Company or any of its Subsidiaries of any right, not in the ordinary course of business, or any material debt owed to it; or (d) other than the sales of assets in the ordinary course of business (including pursuant to sale leaseback transactions), any sale, transfer or other disposition of, or agreement to sell, transfer or otherwise dispose of, any assets by the Company or any of its Subsidiaries in excess of $100,000 in the aggregate, or any cancellation or agreement to cancel any debts or claims of the Company or any of its Subsidiaries; or (e) other than dividends payable on the currently outstanding Preferred Stock, any declaration or setting aside or payment of any dividend (whether in cash, property or stock) or any distribution (whether in cash, property or stock) or other payment with respect to any of the Capital Stock of the Company or any of its Subsidiaries, or any repurchase, purchase or other acquisition of, or agreement to repurchase, purchase or otherwise acquire, any of the Company's or any of its Subsidiaries' capital stock; or (f) any amendment or termination of any contract, agreement or license to which the Company or any of its Subsidiaries is a party or by which it is bound, except where such amendment or termination could not be reasonably expected to have a Material Adverse Effect; or (g) any resignation or termination of employment of any Key Employee, and there is no impending or threatened resignation or resignations or termination or terminations of employment of any Key Employee; or (h) any labor dispute (including, without limitation, any negotiation, or request for negotiation, for any labor representation or any labor contract) affecting the Company or any of its Subsidiaries; or (i) any application of any existing (or the enactment of any new) Environmental Law or personnel, product safety law or other governmental regulation that has or which could reasonably be expected to have a Material Adverse Effect. 3.23. SEC Documents; Undisclosed Liabilities The Company has been subject to the reporting requirements of Section 13 of the Exchange Act since at least January 1, 1996 and, except as set forth in any Company SEC Document, has timely filed all required reports, schedules, forms, statements and other 14 documents required to be filed by the Company under the Securities Act and the Exchange Act with the SEC since January 1, 1996 (the "Company SEC Documents"). As of their respective dates, the Company SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such Company SEC Documents, and none of the Company SEC Documents at the time filed with the SEC contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Except to the extent that information contained in any Company SEC Document has been revised or superseded by a later filed Company SEC Document, none of the Company SEC Documents contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.24. Material Misstatements or Omissions No representation or warranty by the Company contained in this Agreement (including the schedules and exhibits attached hereto), the Registration Rights Agreement, the Commitment Letter or in any document, exhibit, statement, certificate or schedule dated the Closing Date, signed by the Company and furnished to the Purchaser pursuant hereto, or in connection with the transactions contemplated hereunder, contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact necessary to make the statements or facts contained herein and therein not misleading. 3.25. Survival of Representations and Warranties All of the Company's representations and warranties hereunder and under the Registration Rights Agreement and the Commitment Letter shall survive the execution and delivery of the same, any investigation by the Purchaser and the issuance of the Notes. SECTION 4. REPRESENTATIONS AND WARRANTIES OF EACH PURCHASER The Purchaser represents and warrants to the Company that: 4.1. Purchase for Own Account The Purchaser is purchasing the Notes to be purchased by it solely for its own account and not as nominee or agent for any other person and not with a view to, or for offer or sale in connection with, any distribution thereof (within the meaning of the Securities Act) that would be in violation of the securities laws of the United States of America or any state thereof, without prejudice, however, to its right at all times to sell or otherwise dispose of all or any part of said Notes pursuant to a registration statement under the Securities Act or pursuant to an exemption from the registration requirements of the Securities Act. 15 4.2. Accredited Investor The Purchaser is knowledgeable, sophisticated and experienced in business and financial matters; it acknowledges that the Notes have not been registered under the Securities Act and understands that the Notes must be held indefinitely unless they are subsequently registered under the Securities Act or such sale is permitted pursuant to an available exemption from such registration requirement; it is able to bear the economic risk of its investment in the Notes; it is an "accredited investor" as defined in Regulation D promulgated under the Securities Act; and it has been afforded access to information about the Company and the Company's financial condition, results of operations, business, property, management and prospects sufficient to enable it to evaluate its investment in the Notes. The Purchaser acknowledges that it has conducted its own analysis of the Company's financial condition and other foregoing factors. 4.3. Authorization This Agreement is a legally valid and binding obligation of the Purchaser enforceable against it in accordance with its terms, except for (a) the effect thereon of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting the rights of creditors generally and (b) limitations imposed by federal or state law or equitable principles upon the specific enforceability of any of the remedies, covenants or other provisions thereof and upon the availability of injunctive relief or other equitable remedies. 4.4. Brokers The Purchaser has not dealt with any broker, finder, commission agent or other Person in connection with the sale of the Notes and the transactions contemplated by this Agreement, and the Purchaser is not under any obligation to pay any broker's or finder's fee or commission or similar payment in connection with such transactions. SECTION 5. COVENANTS So long as any of the Notes remain unpaid and outstanding, the Company covenants to the Holders of outstanding Notes as follows: 5.1. Payment of Notes; Satisfaction of Obligations The Company shall pay the principal of and interest on the Notes on the dates and in the manner provided in the Notes. To the extent lawful, the Company shall pay interest (including interest accruing after the commencement of any proceeding under any Bankruptcy Law) on all unpaid amounts outstanding under the Notes (including overdue installments of principal or interest) at a rate equal to 7.5% per annum, payable quarterly on each January 1, April 1, July 1 and October 1, beginning July 1, 1998. Such interest rate is subject to adjustment as set forth in Section 3(b) to the Registration Rights Agreement. 16 5.2. Notice of Default The Company will deliver to the Holders, forthwith upon (i) becoming aware of any Default or Event of Default, (ii) becoming aware of any payment default under any other loan agreement, mortgage, indenture or instrument referred to in Sections 7.1(d) or (iii) the receipt by the Company of any notice of any non-monetary default under any such loan agreement, mortgage, indenture or instrument, an Officers' Certificate specifying in reasonable detail such Default, Event of Default or default and the nature of any remedial or corrective action the Company proposes to take with respect thereto. 5.3. Limitation on Additional Indebtedness None of the Company, nor any of its Subsidiaries (including without limitation, upon the creation or acquisition of such Subsidiary) shall, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to (collectively, "incur") any Indebtedness after the date of this Agreement, if a Default or an Event of Default shall have occurred and be continuing at the time or would occur as a consequence of the incurrence of such Indebtedness. 5.4. Change of Control (a) Change of Control. Prior to the consummation of a Change of Control (the date of such consummation being referred to herein as the "Change of Control Date"), the Company shall give each Holder notice describing in reasonable detail the nature of the Change of Control (such written notice, the "Change of Control Notice") and offering to the Purchaser the right to require the Company to repurchase all or any part of the Notes held by the Purchaser pursuant to the offer (the "Change of Control Repurchase Offer") at a purchase price equal to 100% of the aggregate principal amount thereof, together with unpaid interest to the date of repurchase (the "Change of Control Price"). The obligation of the Company to repurchase Notes pursuant to the Change of Control Repurchase Offer is subject to the subordination provisions of Section 8 hereof. (b) Timing of Notice. The Change of Control Notice shall be mailed by the Company to all Holders at their last registered address no later than fifteen (15) Business Days prior to the Change of Control Date. (c) Procedure. The Change of Control Notice shall state a date not later than five (5) Business Days following the Change of Control Date for repurchase of the Notes pursuant to the Change of Control Repurchase Offer (such date, the "Change of Control Repurchase Date"). The Change of Control Notice, which shall govern the terms of the Change of Control Repurchase Offer, shall state: (1) that the Change of Control Repurchase Offer is being made pursuant to this Section 5.4; 17 (2) the Change of Control Price and the Change of Control Repurchase Date; (3) that, unless the Company defaults in the payment of the Change of Control Price, all Notes accepted for payment shall cease to accrue interest on and after the Change of Control Repurchase Date; (4) that the Purchaser electing to require the Company to repurchase any Notes will be required to surrender the Note to the address specified in the Change of Control Notice prior to the close of business on the Business Day preceding the Change of Control Repurchase Date; (5) that the Purchaser will be entitled to withdraw his or her election to require the Company to repurchase any Notes on the terms and conditions set forth in such Change of Control Notice by written notice to the Company prior to the Change of Control Repurchase Date; and (6) that the Purchaser electing to require the Company to repurchase any Notes in part will be issued a new Note in a principal amount equal to the unpurchased portion of the Notes surrendered. Any such Change of Control Repurchase Offer shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations to the extent applicable in connection with any Change of Control Repurchase Offer. (a) Acceptance of Notes. (1) On the Change of Control Repurchase Date, the Company shall accept for payment all Notes or portions thereof validly tendered pursuant to the Change of Control Repurchase Offer and promptly thereafter mail or deliver to Holder of Notes accepted for repurchase payment in the amount equal to the aggregate Change of Control Price for such Notes, and the Company shall execute and mail or deliver to such Holders a new Note equal in principal amount to any unpurchased portion of the Notes surrendered. The Company will notify the Holders of the results of the Change of Control Repurchase Offer on the Change of Control Repurchase Date. 5.5. Stay, Extension and Usury Laws The Company covenants and agrees (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, and will use its best efforts to resist any attempts to claim or take the benefit of any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of its obligations under this Agreement or the Notes; and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or 18 advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holders, but will suffer and permit the execution of every such power as though no such law has been enacted. 5.6. Indemnification The Company agrees to indemnify the Purchaser and each director, officer, employee, counsel, Agent and Affiliate of such Purchaser (collectively, the "Indemnified Parties") against, and hold it and them harmless from, all losses, claims, damages, liabilities, taxes, deficiencies, expenses and costs (including diminution in value and costs of preparation and reasonable attorneys' fees and expenses) (collectively, "Losses") incurred by it or them (A) arising from any breach of any representation or warranty or the inaccuracy of any representation made by the Company in or pursuant to the Agreement, the Registration Rights Agreement or the Commitment Letter (including without limitation any breach or inaccuracy of any representation or warranty relating to CERCLA, any equivalent state statute or any other Environmental Law); and (B) arising from any breach of any covenant or agreement made by the Company in or pursuant to the Agreement, the Registration Rights Agreement or the Commitment Letter; provided, however, that the Company shall not be required to indemnify any Indemnified Party for any Loss that results from (x) the action of any Indemnified Party which is finally judicially determined to have resulted from such Indemnified Party's negligence, intentionally wrongful acts or intentionally wrongful omissions or (y) the failure of LTC Equity Holding Company to purchase additional Notes from the Company pursuant to Section 1.2(a)(2) hereof; provided, further, that no Indemnified Party shall be entitled to assert a claim on account of the indemnity provided in this Section 5.6, unless and until the aggregate amount of Losses with respect to all claims asserted under this Section and under Section 5.6 of the purchase agreements for the Notes executed on the date hereof by other purchasers exceeds $100,000 (in which case the Company shall be liable for Losses in excess of such $100,000 that have accrued). The Company agrees to reimburse any Indemnified Party promptly for all such Losses as they are incurred by such Indemnified Party. The Company's liability to any such Indemnified Party hereunder shall not be extinguished solely because any other Indemnified Party is not entitled to indemnity hereunder. The obligations of the Company under this Section 5.6 shall survive the payment or prepayment of the Notes, at maturity, upon acceleration, repurchase or otherwise, any transfer of the Notes by any Purchaser to any subsequent Holder and the termination of this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter. The indemnity provided in this Section 5.6 will be in addition to any liability which the Company may otherwise have, including, without limitation, under this Agreement, the Notes, the Registration Rights Agreement and the Commitment Letter. In case any action shall be brought against any Indemnified Party with respect to which indemnity may be sought against the Company, such Indemnified Party shall promptly notify the Company in writing and the Company shall, if it so desires, assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party and payment of all reasonable fees and expenses. The failure to so notify the Company shall not 19 affect any obligation it may have to any Indemnified Party under this Section 5.6 or otherwise unless the Company is materially adversely affected by such failure. Each Indemnified Party shall have the right to employ separate counsel in such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless: (i) the Company has agreed in writing to pay such expenses; (ii) the Company has failed to assume the defense and employ counsel; or (iii) the named parties to any such action (including any impleaded parties) include any Indemnified Party and the Company, and such Indemnified Party shall have been advised by outside counsel that there may be one or more legal defenses available to it which are inconsistent with those available to the Company; provided that, if such Indemnified Party notifies the Company in writing that it elects to employ separate counsel in the circumstances described in clauses (i), (ii) or (iii) above, the Company shall not have the right to assume the defense of such action or proceeding; provided, however, that the Company shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be responsible hereunder for the fees and expenses of more than one such firm of separate counsel (in addition to any necessary local counsel), which counsel shall be designated by such Indemnified Party. The Company shall not be liable for any settlement of any such action effected without its written consent (which shall not be unreasonably withheld). The Company agrees that it will not, without the Indemnified Party's prior consent, which shall not be unreasonably withheld, settle or compromise any pending or threatened claim, action or suit in respect of which indemnification may be sought hereunder unless the foregoing contains an unconditional release of the Indemnified Parties from all liability and obligation arising therefrom. 5.7. Corporate Existence; Merger; Successor Corporation (a) The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence in accordance with its organizational documents and the corporate rights (charter and statutory), licenses and franchises of the Company; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or corporate existence if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not adverse in any material respect to any Holder. (b) The Company shall not in a single transaction or through a series of related transactions, (i) consolidate with or merge with or into any other person, or transfer (by lease, assignment, sale or otherwise) all or substantially all of its properties and assets as an entirety or substantially as an entirety to another person or group of affiliated persons or (ii) adopt a Plan of Liquidation, unless, in either case: (1) the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or to which all or substantially all of the properties and assets of the Company as an entirety or substantially as an entirety are transferred (or, in the case of a Plan of Liquidation, any Person to 20 which assets are transferred) (the Company or such other Person being hereinafter referred to as the "Surviving Person") shall be a corporation organized and validly existing under the laws of the United States, any State thereof or the District of Columbia, and shall expressly assume, by an amendment to this Agreement, all the obligations of the Company under the Notes and this Agreement; (2) immediately after and giving effect to such transaction and the assumption contemplated by clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, (ii) the Surviving Person shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction; (3) immediately before and immediately after and giving effect to such transaction and the assumption of the obligations as set forth in clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, no Default or Event of Default shall have occurred and be continuing; and (4) The Company shall have delivered to the Purchaser an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, transfer or adoption and such amendment to this Agreement comply with this Section 5.7, that the Surviving Person agrees to be bound hereby, and that all conditions precedent herein provided relating to such transaction have been satisfied. (c) Upon any consolidation or merger, or any transfer of assets (including pursuant to a Plan of Liquidation) in accordance with this Section 5.7, the successor person formed by such consolidation or into which the Company is merged or to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Agreement with the same effect as if such successor person had been named as the Company herein; provided, however, that the Company shall not be released from the obligations and covenants under this Agreement or under the Notes. 5.8. Taxes The Company shall, and shall cause its Subsidiaries to, pay prior to delinquency all material taxes, assessments and governmental levies except as contested in good faith and by appropriate proceedings. 5.9. Investment Company Act Neither the Company nor any of its Subsidiaries shall become an investment company subject to registration under the Investment Company Act of 1940, as amended. 21 5.10. Insurance The Company and its Subsidiaries shall maintain liability, casualty and other insurance with a reputable insurer or insurers in such amounts and against such risks as is carried by responsible companies engaged in similar businesses and owning similar assets. 5.11. Inconsistent Agreements The Company shall not, and shall not permit any of its Subsidiaries to, (i) enter into any agreement or arrangement which is inconsistent with, or would impair the ability of the Company to fulfill, its obligations under this Agreement, the Notes, the Registration Rights Agreement or the Commitment Letter or (ii) supplement, amend or otherwise modify the terms of their respective Charter Documents, if the effect thereof would be materially adverse to the Holders, including without limitation to increase the liquidation preference of, or the rate of dividends payable on, any series of preferred stock. 5.12. Compliance with Laws The Company shall, and shall cause its Subsidiaries to, comply with all statutes, ordinances, governmental rules and regulations, judgments, orders and decrees (including all Environmental Laws) to which any of them is subject, and obtain and keep in effect all licenses, permits, franchises and other governmental authorizations necessary to the ownership or operation of their respective properties or the conduct of their respective businesses, except to the extent that the failure to so comply or obtain and keep in effect would not have a Material Adverse Effect. 5.13. Inspection of Properties and Records The Company agrees to allow, and to cause each of their respective Subsidiaries to allow, the Purchaser and each subsequent Holder (or such Persons as the Purchaser or subsequent Holder may designate) (individually and collectively, "Inspectors") upon reasonable prior notice to visit and inspect any of the properties of the Company or its Subsidiaries, to examine all their books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers, and independent public accountants with representatives of the Company or its Subsidiaries present (and by this provision the Company authorizes said accountants to discuss with such Inspectors the finances and affairs of the Company and its Subsidiaries) all at such reasonable times and as often as may be reasonably requested but not more than twice in any twelve-month period for all Holders in the aggregate unless a Default or an Event of Default shall have occurred. If a Default or an Event of Default shall have occurred and be continuing, the Company shall pay or reimburse all Inspectors for expenses which such Inspectors may reasonably incur in connection with any such visitations or inspections. 22 SECTION 6. CONVERSION OF NOTES 6.1. Conversion (a) Each Note shall be convertible, in whole or in part, at the option of the Holder thereof, at any time prior to the Maturity Date, at the office of the Company or any transfer agent for the Notes, into that number of fully paid and nonassessable shares of Common Stock determined in accordance with the provisions of Section 6.2. In order to convert Notes into Conversion Shares, the Holder thereof shall surrender the Notes therefor, duly endorsed, at the office of the Company or to the transfer agent for the Notes, together with written notice to the Company stating that it elects to convert the same and setting forth the name or names in which it wishes the certificate or certificates for Conversion Shares to be issued, and the principal amount of the Notes being converted. The Company shall, as soon as practicable after the surrender of the Notes for conversion at the office of the Company or the transfer agent for the Notes, issue to each holder of such Notes, or its nominee or nominees, a certificate or certificates evidencing the number of Conversion Shares (and any other securities and property) to which it shall be entitled, cash representing payment in full for all accrued but unpaid interest on the Note (or portion thereof) surrendered for conversion, and, in the event that only a part of the Notes presented are converted, a Note evidencing the principal amount not so converted. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the Notes to be converted, and the person or persons entitled to receive the Conversion Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock at such date and shall, with respect to such shares, thereafter have only those rights of a holder of Common Stock of the Company. (b) In the event that the average trading price of the Common Stock over thirty (30) consecutive trading days is equal to or exceeds $12 per share, the Company shall have the right, but not the obligation, to force a conversion of all then outstanding Notes, in whole but not in part, within the fifteen (15) day period immediately following such thirty (30) consecutive trading days. Any such forced conversion shall in all other respects be in accordance with this Section 6, and, if the Company shall elect to force conversion of Notes, it shall promptly provide notice of such forced conversion to all Holders of Notes. The Company shall, as soon as practicable following the notice of such forced conversion (and in no event later than sixty (60) calendar days after the date of such notice) issue to each holder of such Notes, or its nominee or nominees, a certificate or certificates evidencing the number of Conversion Shares (and any other securities and property) to which it shall be entitled and cash representing payment in full for all accrued but unpaid interest on the Note surrendered for conversion. Such conversion shall be deemed to have been made at the close of business on the date specified in such notice, and the person or persons entitled to receive the Conversion Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock at such date and shall, with respect to such shares, thereafter have only those rights of a holder of Common Stock of the Company. 23 (c) The Company shall use its best efforts to quote and maintain quotation of the Conversion Shares on the Nasdaq National Market or such other principal national securities exchange on which the Common Stock is then listed or quoted. 6.2. Conversion Rate The number of shares of Common Stock issuable upon conversion of the Notes shall be one (1) share for every $7.50 of principal amount of Notes being converted (the "Conversion Rate"), and shall be subject to adjustment from time to time as provided herein and as provided in Section 3(b) of the Registration Rights Agreement. 6.3. Fractional Shares No fractional shares of Common Stock shall be issued upon conversion of Notes. Instead, the Company shall deliver cash in the form of its check for the Fair Market Value of the fractional share. 6.4. Adjustments for Stock Splits, Combinations and Dividends If the outstanding shares of the Common Stock shall be subdivided into a greater number of shares or combined into a lesser number of shares, the Conversion Rate in effect immediately prior to such subdivision shall, simultaneously with the effectiveness of such subdivision, be proportionately increased or decreased, as the case may be. If the Company pays a dividend or otherwise makes a distribution with respect to its Common Stock (whether in cash, additional shares of Common Stock or other property) on or prior to March 31, 2003, then the Conversion Rate shall be increased by a fraction, the numerator of which is the aggregate amount of the fair market value of such dividend or distribution and the denominator of which is the number of shares of Common Stock entitled to such dividend or other distribution. If the Company pays a dividend or otherwise makes a distribution with respect to its Common Stock (whether in cash, additional shares of Common Stock or other property) after March 31, 2003 (the effective date of such dividend or other distribution, the "Determination Date") and if the fair market value of such dividend or other distribution, together with the fair market value of all other dividends and distributions with respect to its Common Stock during the 12-month period immediately preceding the Determination Date exceeds 2% of the Average Closing Sales Price during such 12-month period, then the Conversion Rate shall be increased by a fraction, the numerator of which is the aggregate amount of the fair market value of the dividend or other distribution to be effected on the Determination Date plus the aggregate amount of the fair market value of all dividends and distributions effected during such 12-month period for which no adjustment in the Conversion Rate was effected pursuant to this Section 6.4, and the denominator of which is the number of shares of Common Stock entitled to such dividend or other distribution on the Determination Date. Any adjustment to the Conversion Rate under this Section 6.4 shall become effective at the close of business on the date the subdivision, combination, dividend or other distribution referred to herein becomes effective. For purposes of the calculations made in this Section 6.4, the fair market value of any dividend or other distribution that is in the form of property other than Common Stock or cash shall be determined in good faith by the Board. 24 6.5. Reorganization, Mergers, Consolidations or Sales of Assets In the event of any capital reorganization, any reclassification of the Common Stock (other than a change in par value or as a result of a stock dividend, subdivision, split-up or combination of shares), the consolidation or merger of the Company with or into another person, or the sale or other disposition of all or substantially all of the properties of the Company as an entirety to another person (collectively referred to hereinafter as "Reorganizations"), the Holders of the Notes shall thereafter be entitled to receive, and provision shall be made therefor in any agreement relating to a Reorganization, upon conversion of the Notes the kind and number of shares of Common Stock or other securities or property (including cash) of the Company, or the other corporation resulting from such consolidation or surviving such merger, which would have been distributed to a holder of the number of shares of Common Stock which the Notes entitled the holders thereof to convert to immediately prior to such Reorganization; and in any such case appropriate adjustment shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the Holders of the Notes, to the end that the provisions set forth herein (including the specified changes and other adjustments to the Conversion Rate) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares, other securities or property thereafter receivable upon conversion of the Notes. 6.6. Sale of Shares Below Market or Conversion Price (a) If at any time or from time to time the Company shall issue or sell Additional Shares of Common Stock other than in a transaction which falls within Section 6.1, Section 6.4 or Section 6.5, for an Effective Price less than the greater of (x) the Fair Market Value of the Common Stock or (y) the then effective conversion price calculated by dividing $7.50 by the then existing Conversion Rate (the "Adjusted Conversion Price"), then, and in each such case, the then existing Conversion Rate shall be adjusted to a rate per $7.50 principal amount of Notes determined by multiplying that Conversion Rate by a fraction (i) the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the date of such issue after giving effect to such issue of Additional Shares of Common Stock, and (ii) the denominator of which shall be (A) the number of shares of Common Stock outstanding at the close of business on the day next preceding the date of such issue or sale, plus (B) the number of shares of Common Stock which the aggregate consideration received (or by the express provisions hereof deemed to have been received) by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Adjusted Conversion Price. (b) For the purpose of making any adjustment required in this Section 6.6, the consideration received by the Company for any issue or sale of securities shall: (i) to the extent it consists of cash, the consideration received by the Company therefor shall be deemed to be the net amount of cash actually received by the Company, after deducting therefrom any compensation, discounts, fees or expenses paid to (but not on behalf of) any purchaser of such securities and any compensation, discounts, fees or expenses that are not reasonable or are not 25 customary (it being understood that underwriters' discounts and compensation in public offerings and brokers' commissions in private placements of such securities shall be deemed reasonable and customary); (ii) to the extent it consists of property other than cash, the consideration other than cash shall be computed at the fair market value thereof as determined in good faith by the Board of Directors of the Company; and (iii) if Additional Shares of Common Stock, Convertible Securities or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Company for consideration which covers both, the consideration received for the Common Stock, Convertible Securities or rights or options shall be computed as that portion of the consideration so received which is reasonably determined in good faith by the Board of Directors of the Company to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. (c) For the purpose of making any adjustment in the Conversion Rate provided in this Section 6.6, if at any time, or from time to time, the Company issues any stock convertible into Additional Shares of Common Stock (such convertible stock being hereinafter referred to as "Convertible Securities") or issues any rights or options, other than options pursuant to the Stock Option Plan, to purchase Additional Shares of Common Stock for Convertible Securities (such rights or options being hereinafter referred to as "Rights"), then, and in each such case, the Company shall be deemed to have issued at the time of the issuance of such Rights or Convertible Securities the maximum number of shares of Additional Shares of Common Stock issuable upon exercise (other than options pursuant to the Stock Option Plan) or conversion thereof and to have received in consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Company for the issuance of such Rights or Convertible Securities, plus in the case of such Rights, the amount of consideration, if any, payable to the Company upon exercise of such Rights, plus, in the case of Convertible Securities, the amount of consideration, if any, payable to the Company upon the conversion thereof. No further adjustment of the Conversion Rate, adjusted upon the issuance of such Rights or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such Rights or the conversion of any such convertible Securities. If any such Rights or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Conversion Rate adjusted upon the issuance of such rights, options or convertible securities shall be readjusted to the conversion rate which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such Rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for granting of all such Rights, whether or not exercised, plus consideration received for issuing or selling the Convertible Securities 26 actually converted, plus the consideration, if any, actually received by the Company on the conversion of such Convertible Securities. 6.7. Adjustment for Failure to Quote on Nasdaq National Market In event that, from the time of effectiveness of the registration statement to be filed pursuant to Section 3(a) of the Registration Rights Agreement and until all Notes have been converted into Conversion Shares, immediately prior to the conversion of any Notes into Conversion Shares pursuant to this Section 6, such Conversion Shares have not been approved for quotation on Nasdaq National Market (or any other national securities exchange where the Common Stock is then listed or quoted), then the Conversion Rate with respect to such Conversion Shares shall be increased by 10% immediately prior to the conversion of any Notes into such Conversion Shares. 6.8. Accountants' Certificate of Adjustment In each case of an adjustment or readjustment of the Conversion Rate or the number of shares of Common Stock or other securities issuable upon conversion of the Notes, the Company shall as soon as reasonably practicable (and in no event less than thirty (30) days following the event causing such adjustment or readjustment) compute such adjustment or readjustment in accordance with this Agreement and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first-class mail, postage prepaid, to each Holder of the Notes at the Holder's address as shown on the Company's note register. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (i) the Conversion Rate at the time in effect for the Notes, and (ii) the number of shares of Common Stock and the type and amount, if any, of other property which at the time would be received upon conversion of the Notes. At the written request of the Requisite Noteholders, the Company shall cause its Independent Auditors to verify the computations contained in the certificate prepared by the Company. 6.9. Reservation of Shares Issuable Upon Conversion The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Notes, such number and class of its shares of Common Stock as shall from time to time be sufficient to effect a conversion of all outstanding Notes, and if at any time the number and class of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding Notes, the Company shall promptly seek such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number and class of shares as shall be sufficient for such purpose. In the event of the consolidation or merger of the Company with another corporation where the Company is not the surviving corporation, effective provision shall be made in the certificate or articles of incorporation, documents of merger or consolidation, or otherwise, of the surviving corporation so that such corporation will at all times reserve and keep available a sufficient 27 number of shares of Common Stock or other securities or property to provide for the conversion of the Notes in accordance with the provisions of this Section 6. 6.10. No Impairment The Company shall not amend its Charter Documents or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, for the principal purpose of avoiding or attempting to avoid the observance or performance of any of the terms to be observed or performed by the Company pursuant to this Section 6. SECTION 7. DEFAULTS AND REMEDIES 7.1. Events of Default An "Event of Default" occurs if: (a) the Company defaults in the payment of the principal of any Note when the same becomes due and payable at maturity, upon repurchase or otherwise; (b) the Company defaults in the payment of interest on any Note when the same becomes due and payable and the Default continues for the period and after the notice specified below; (c) the Company fails to comply with any of the agreements, covenants, or provisions of this Agreement or the Notes and the Default continues for the period and after the notice specified below; (d) a default occurs under any mortgage, indenture or instrument (other than a mortgage, indenture or instrument to which the Purchaser or its Subsidiaries is a party) under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries), whether such Indebtedness or guaranteed Indebtedness now exists or shall be created hereafter, which default (i) is caused by a failure to pay principal of or premium, if any, on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness, or (ii) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of such Indebtedness, together with the principal amount of any other Indebtedness as to which there has been a payment default or the maturity of which has been so accelerated, aggregates $1,000,000 or more; (e) a final judgment for the payment of money is entered by a court or courts of competent jurisdiction against the Company or any Subsidiary of the Company and such remains undischarged for a period (during which execution shall not be effectively stayed) of (1) ninety (90) days, if the aggregate of all such judgments exceeds $1,000,000 but is less than $5,000,000 or (2) thirty (30) days if the aggregate of all such judgments exceeds $5,000,000; 28 (f) the Company or any of its Subsidiaries pursuant to or within the meaning of any Bankruptcy Law: (1) commences a voluntary case, (2) consents to the entry of an order for relief against it in an involuntary case, (3) consents to the appointment of a Custodian of it or for all or substantially all of its property, (4) makes a general assignment for the benefit of its creditors, (5) generally is unable to pay its debts as the same become due; or (6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company or any of its Subsidiaries in an involuntary case, (ii) appoints a Custodian of the Company or any of its Subsidiaries or for all or substantially all of its property, or (iii) orders the liquidation of the Company or any of its Subsidiaries, and the order or decree remains unstayed and in effect for 60 days. A Default under clause (b) is not an Event of Default until a Holder notifies the Company of such Default and the Company does not cure such Default within two (2) Business Days after receipt of such notice. A Default under clause (c) (other than a Default under Sections 5.3, 5.4, 5.6 or 5.7 of this Agreement, which Default shall be an Event of Default without the notice or passage of time specified in this paragraph) or (d) (other than a Default resulting from the acceleration of any Indebtedness described therein, which Default shall be an Event of Default without the notice or passage of time specified in this paragraph) or (e) is not an Event of Default until the Requisite Noteholders notify the Company of the Default and the Company does not cure the Default within ten (10) days after receipt of the notice. Any such notices must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." 7.2. Acceleration of Notes If an Event of Default (other than an Event of Default specified in clauses (e) and (f) of Section 7.1) occurs and is continuing, the Requisite Noteholders, by notice to the Company, may declare the unpaid principal of and any accrued interest on all the Notes to be due and payable. Immediately upon such declaration, the principal and interest shall be due and payable. If an Event of Default specified in clause (e) or (f) of Section 7.1 occurs, such an amount shall become and be immediately due and payable without any declaration or other act on the part of any Holder. The Requisite Noteholders by notice to the Company may rescind an acceleration of and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration. 7.3. Other Remedies If an Event of Default occurs and is continuing, Holders of the Notes may pursue any available remedy to collect the payment of principal or interest on the Notes or to enforce the performance of any provision of the Notes or this Agreement. A delay or omission by any Holder of any Notes in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. 29 SECTION 8. SUBORDINATION 8.1. Notes Subordinated to Senior Indebtedness (a) The Notes are subordinated and junior in right of payment of the principal of and interest and all other obligations (all of the foregoing, a "Payment or Distribution") on such Notes to the prior payment in full of any Senior Indebtedness whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed, the Notes shall comply with the provisions of this Section 8, and each Holder by his acceptance thereof likewise agrees. A Payment or Distribution shall include any asset of any kind or character, and may consist of cash, securities or other property, by set-off or otherwise, except that Holders may receive (i) securities that are subordinated to at least the same extent as the Notes to (A) Senior Indebtedness and (B) any securities issued in exchange for Senior Indebtedness. (b) The Senior Indebtedness of the Company shall continue to be Senior Indebtedness and entitled to the benefit of these subordination provisions irrespective of any amendment, modification or waiver of any term of any instrument relating to refinancing of the Senior Indebtedness, whether with or without notice to Holders. (c) No right of any holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time or in any way be affected or impaired by any act or failure to act on the part of the Company, the Holders or the holders of the Senior Indebtedness, including without limitation any non-compliance by the holders of the Senior Indebtedness with any of the terms, provisions and covenants of the documents evidencing or securing the Senior Indebtedness, or by any noncompliance by the Company or the Holders with any of the terms, provisions and covenants of the Notes, regardless of any knowledge thereof that any such holder of Senior Indebtedness may have or otherwise be charged with. 8.2. Company Not to Make Payments with Respect to Notes in Certain Circumstances No Payment or Distribution shall be made by the Company on account of principal of or interest on the Notes, whether upon the Maturity Date, upon repurchase or acceleration, or otherwise, if there shall have occurred and be continuing a default with respect to any Senior Indebtedness and notice of such default in writing or by telegram has been given to the Company by any holder or holders of Senior Indebtedness, unless and until the Company shall have received written notice from such holder or holders that such default or event of default shall have been cured or waived or shall have ceased to exist or, unless in the event of a default that does not result in the acceleration of any Senior Indebtedness or that does not involve a payment default with respect to any Senior Indebtedness, upon the expiration of the 60-day period following the date of such notice of default. Following such 60-day period, the Company shall be obligated to make any and all outstanding Payments or Distributions with respect to the Notes. Upon acceleration of the principal of the Notes or any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or 30 securities, to creditors upon any dissolution or winding up or liquidation or reorganization of the Company, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or such other proceedings, all amounts due or to become due upon all Senior Indebtedness shall first be paid in full in cash, or payment thereof provided for to the satisfaction of the holders thereof, before any Payment or Distribution is made on account of the repurchase price or principal of or interest on the Notes; and (subject to the power of a court of competent jurisdiction to make other equitable provision, which shall have been determined by such court to give effect to the rights conferred in this Section 8 upon the Senior Indebtedness and the holders thereof with respect to the Notes or the Holders, by a lawful plan of reorganization or readjustment under applicable law) upon any such dissolution or winding up or liquidation or reorganization, any Payment or Distribution by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Holders would be entitled except for the provisions of this Section 8, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such Payment or Distribution directly to the holders of Senior Indebtedness of the Company or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay all Senior Indebtedness in full in cash, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any Payment or Distribution is made to the Holders. In the event that, notwithstanding the foregoing, any Payment or Distribution by the Company of any kind or character, whether such payment shall be in cash, property or securities is prohibited by the foregoing, and the Company shall have made payment to the Holders before all Senior Indebtedness is paid in full in cash, or provision is made for such payment to the satisfaction of the holders thereof, such Holder, then and in such event such Payment or Distribution shall be paid over by such Holder or delivered to the holders of Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in cash, after giving effect to any concurrent Payment or Distribution to or for the holders of such Senior Indebtedness, and, until so delivered, the same shall be held in trust by any Holder as the property of the holders of Senior Indebtedness. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided in Section 5.7 shall not be deemed a dissolution, winding up, liquidation or reorganization for the purpose of this Section if such other Person shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Section 5.7. The holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Holders without incurring responsibility to the Holders 31 and without impairing or releasing the obligations of the Holders to the holders of the Senior Indebtedness: (i) change the manner, place or terms of payment or change or extend the time of payment of, or renew or alter, Senior Indebtedness, or otherwise amend in any manner Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Senior Indebtedness; and/or (iv) exercise or refrain from exercising any rights against the Company and any other Person. 8.3. Subrogation of Notes After all Senior Indebtedness is paid in full and until the Notes are paid in full, the Holders shall be subrogated (equally and ratably with all other Indebtedness pari passu with the Notes) to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the Holders have been applied to the payment of Senior Indebtedness. If any Payment or Distribution to which the Holders would otherwise have been entitled but for the provisions of this Section 8 shall have been applied pursuant to the provisions of this Section 8 to the payment of all amounts payable in respect of the Senior Indebtedness, then and in such case, the Holders, as with respect to the Company, shall be entitled to receive from the holders of such Senior Indebtedness at the time outstanding any Payments or Distributions received by such holders of Senior Indebtedness in excess of the amount sufficient to pay all amounts payable in respect of the Senior Indebtedness in full in cash or, at the option of the holders of Senior Indebtedness, cash equivalents. 8.4. No Impairment of Subordination No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, any Holder, or by any act, or failure to act, in good faith, by any such holder of Senior Indebtedness, or by any noncompliance by the Company or any Holder with the terms, provisions and covenants of this Agreement regardless of any knowledge thereof which any such holder may have or otherwise be charged with. 8.5. Section 8 Not to Prevent Events of Default The failure to make a payment on account of principal of or interest on the Notes by reason of any provision in this Section 8 shall not be construed as preventing the occurrence of an Event of Default with respect to such series under Section 7.1. 8.6. Securities Senior to Subordinated Indebtedness The indebtedness represented by the Notes will be senior and prior in right of payment to all Subordinated Indebtedness, to the extent and in the manner provided in such Subordinated Indebtedness. 32 8.7. Assignment of Junior Claims (a) So long as LTC Equity Holding Company holds a sufficient amount of Notes such that LTC Equity Holding Company constitutes a Requisite Noteholder, paragraphs (b) and (c) of this Section 8.7 shall have no force and effect. In the event LTC Equity Holding Company shall cease to hold a sufficient amount of Notes such that LTC Equity Holding Company is no longer a Requisite Noteholder, paragraphs (b) and (c) of this Section 8.7 shall be in effect. (b) In the event of an insolvency proceeding with respect to the Company, each Holder will assign to a representative of the holders of Senior Indebtedness (as identified in writing to each Holder by the holders of Senior Indebtedness) (the "Senior Representative") each Holder's right, title and interest in and to any claims such Holder has against the Company with respect to the Notes (the "Junior Claims") and any security held therefor, and will deliver to the Senior Representative from time to time any and all instruments and documents evidencing such Junior Claims, or will have entered on such instruments and documents such subordination legend as the Senior Representative may reasonably request, and each Holder will execute such other instruments and documents as the Senior Representative may from time to time reasonably require in connection therewith. In the event that any Junior Claim is not evidenced by a negotiable instrument, each Holder hereby agrees that he will use all commercially reasonably efforts to obtain an instrument or document from the Company evidencing such Junior Claim. In the event that such debt is not evidenced by a document, it shall nevertheless be deemed subordinated and assigned by virtue of this Section 8.7. (c) In the event of an insolvency proceeding with respect to the Company, each Holder will grant to the Senior Representative irrevocable authority in the place and stead of such Holder and in the name of such Holder or in the Senior Representative's name but for the Senior Representative's use and benefit, at any time or times, after any default under the terms of any Senior Indebtedness, in the Senior Representative's discretion to demand, collect file proofs of claim with respect to, receive (by way of dividends or otherwise) and take any and all legal proceedings for the recovery of any and all moneys due or to become due on account of the Junior Claims or any thereof, and to vote, give consents and take any other steps with regard thereto. Any and all moneys so collected or received by the Senior Representative shall be retained indefeasibly by the Senior Representative for application to the payment in full of any amounts owing with respect to the Senior Indebtedness then outstanding (the "Senior Claims"). If the Senior Representative receives notice of any claim adverse to the rights or interests of each Holder in and to either the Junior Claims or the Senior Claims, or any moneys held by the Senior Representative in respect thereof, the Senior Representative shall be entitled to retain any and all such moneys, documents and instruments evidencing such Junior Claims and Senior Claims. SECTION 9. AMENDMENTS AND WAIVERS 9.1. With Consent of Holders The Company, when authorized by a resolution of the Board of Directors of the Company and with the written consent of the Requisite Noteholders, may amend this Agreement 33 or the Notes, without notice to any other Holders. The Requisite Noteholders may waive compliance by the Company with any provision of this Agreement or the Notes without notice to any other Holder. Without the consent of each Holder affected, however, no amendment or waiver may (with respect to any Notes held by a non-consenting Holder of Notes): (a) reduce the principal amount of Notes whose Holders must consent to an amendment or waiver of any provision of this Agreement or the Notes; (b) reduce the principal of or change the fixed maturity of any Note; (c) reduce the rate of or change the time for payment of interest on any Note; (d) waive a Default or Event of Default in the payment of principal of or interest on the Notes (except a rescission of acceleration of the Notes by the Requisite Noteholders and a waiver of the payment default that resulted from such acceleration); (e) make the principal of or the interest on, any Note payable in any manner other than that stated in this Agreement and the Notes; (f) make any change in the provisions of this Agreement relating to waivers of past Defaults or the rights of Holders of Notes to receive payments of principal of or interest on the Notes; (g) make any change to the subordination provisions of this Agreement that adversely affect any Holder; or (h) make any change in the foregoing amendment and waiver provisions. It shall not be necessary for the consent of the Holders under this Section 9 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment or waiver under this Section 9 becomes effective, the Company shall mail to the Holders affected thereby a notice briefly describing the amendment or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment or waiver. In connection with any amendment to this Section 9, the Company may offer, but shall not be obligated to offer, to any Holder who consents to such amendment or waiver, consideration for such Holder's consent. 9.2. Revocation and Effect of Consents Until an amendment or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent 34 as to his Note or portion of his Note by notice to the Company received before the date on which the Requisite Noteholders have consented (and not theretofore revoked such consent) to the amendment or waiver. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment or waiver, which record date shall be at least ten (10) Business Days prior to the first solicitation of such consent. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those persons who were Holders at such record date (or their duly designated proxies), and only those persons, shall be entitled to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. After an amendment or waiver becomes effective, it shall bind every Holder, unless it makes a change described in any of clauses (a) through (g) of Section 9.1, in which case, the amendment or waiver shall bind only each Holder of a Note who has consented to it and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note; provided that any such waiver shall not impair or affect the right of any Holder to receive payment of principal of and interest on a Note, on or after the respective due dates expressed in such Note, or to bring suit for the enforcement of any such payment on or after such respective dates without the consent of such Holder. 9.3. Notation on or Exchange of Notes If an amendment or waiver changes the terms of a Note, the Company may require the Holder of the Note to deliver it to the Company. The Company may place an appropriate notation on the Note about the changed terms and return it to the Holder. SECTION 10. DEFINITIONS 10.1. Definitions As used in this Agreement, the following terms shall have the following meanings: "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Company after the Closing Date, whether or not subsequently reacquired or retired by the Company, other than the Conversion Shares; provided that such term shall exclude shares of Common Stock issued under the Stock Option Plan and shares of Common Stock issued or issuable upon the conversion of Notes issued pursuant to agreements dated on or about the date of this Agreement and the warrants scheduled on the Disclosure Schedule. "Adjusted Conversion Price" shall have the meaning assigned to such term in Section 6.6(a). 35 "Affiliate" means, with respect to any referenced Person, a Person (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such referenced Person, (ii) which directly or indirectly through one or more intermediaries beneficially owns or holds 10% or more of the combined voting power of the total Voting Securities of such referenced Person or (iii) of which 10% or more of the combined voting power of the total Voting Securities directly or indirectly through one or more intermediaries is beneficially owned or held by such referenced Person, or a Subsidiary of such referenced Person. When used herein without reference to any Person, Affiliate means an Affiliate of the Company. For purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of Voting Securities, by contract or otherwise; and the terms "affiliated," controlling" and "controlled" have meanings correlative to the foregoing. "Agent" means any Person authorized to act and who acts on behalf of the Purchasers with respect to the transactions contemplated by this Agreement, the Registration Rights Agreement or the Commitment Letter. "Agreement" means this Convertible Subordinated Note Purchase Agreement dated as of March 30, 1998 by and between the Company and the Purchaser. "Average Closing Sales Price" as of a particular 12-month period means the average closing sales price of the Common Stock for each Business Day during such 12-month period. Such average shall be calculated as follows: (i) the average of the closing sales prices of the Common Stock quoted on the Nasdaq National Market for each Business Day during such 12-month period, or (ii) if no such quotations are available, the average of the closing sales prices for each Business Day during such 12-month period on the principal national securities exchange on which the Common Stock is listed, or (iii) if not listed on any national securities exchange, the average closing sales price for each Business Day during such 12-month period in the over-the-counter market as reported by the National Quotation Bureau, Incorporated or similar organization, or (iv) if no of such sales prices are available for each Business Day in such 12-month period, the average of the high bid and low asked quotations in the over-the-counter market as so reported for such Business Days, or (v) if no such quotations are available, the fair market value per share on such unreported Business Days as determined by an independent investment banker or appraiser, nationally recognized to be expert in making such valuations, selected by a majority of the directors of the Company. In the event "Average Closing Sales Price" is determined by an independent investment banker or appraiser pursuant to clause (v) of the foregoing sentence, such determination shall be provided to each Holder in writing together with a fair and accurate description of the basis for making such determination. The Requisite Holders shall be permitted to dispute such determination by written notice to the Company within ten (10) Business Days of receipt of such determination. In the event of such dispute, the Requisite Holders and the Company shall work together in good faith to mutually agree upon a second independent investment banker or appraiser to make a determination of "Average Closing Sales Price" whose fees and expenses shall be paid by the Company. "Average Closing Sales Price" shall be the average of the per share fair market values determined by both independent investment bankers or appraisers. 36 "Bankruptcy Law" means title 11, U.S. Code or any similar federal or state law for the relief of debtors. "Business Day" means any day which is not a Legal Holiday. "Capital Lease" means any lease of any property which would in accordance with GAAP be required to be classified and accounted for on the balance sheet of the lessee as a capital lease. "Capitalized Lease Obligation" means, with respect to any Person for any period, any obligation of such Person to pay rent or other amounts under a Capital Lease; the amount of such obligation shall be the capitalized amount thereof determined in accordance with such principles. "Capital Stock" means any and all shares, interests, participation or other equivalents (however designated) of corporate stock, including without limitation all common stock and preferred stock. "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. ss. 9601 et. seq.). "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any Person or group (as such term is used in Section 13(d)(3) of the Exchange Act); (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any Person or group (as defined above), other than Walter C. Bowen or a Related Party, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of more than 50% of the Fully Diluted Voting Securities of the Company (measured by voting power rather than number of shares) and (iv) the date on which a majority of the Board of Directors of the Company shall cease to be Continuing Directors. "Change of Control Date" shall have the meaning set forth in Section 5.4. "Change of Control Notice" shall have the meaning set forth in Section 5.4. "Change of Control Price" shall have the meaning set forth in Section 5.4. "Change of Control Repurchase Date" shall have the meaning set forth in Section 5.4. 37 "Change of Control Repurchase Offer" shall have the meaning set forth in Section 5.4. "Charter Documents" means the Articles of Organization, Articles of Incorporation or Certificate of Incorporation and Bylaws, as amended or restated (or both) to date, of the Company or a Subsidiary, as applicable. "Closing" shall have the meaning set forth in Section 1.2(b). "Closing Date" shall have the meaning set forth in Section 1.2(b). "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute or law thereto. "Commitment Letter" means that certain Commitment Letter dated as of the Closing Date by and between the Company, LTC Properties and LTC West, executed concurrently herewith. "Common Stock" means the Common Stock, no par value, of the Company. "Company" means Regent Assisted Living, Inc., an Oregon corporation. "Company SEC Documents" shall have the meaning set forth in Section 3.23. "Conversion Rate" shall have the meaning set forth in Section 6.2. "Conversion Shares" means the shares of Common Stock issuable upon conversion of the Notes. "Convertible Securities" shall have the meaning set forth in Section 6.6(c). "Consolidated " or "consolidated," when used with reference to any accounting term, means the amount described by such accounting term, determined on a consolidated basis in accordance with GAAP, after elimination of intercompany items. "Consolidated Net Worth" means, with respect to any Person as of any date, the sum of (i) the consolidated equity of the common stockholders of such Person and its consolidated Subsidiaries as of such date plus (ii) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of preferred stock that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such preferred stock, less (x) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made within 12 months after the acquisition of such business) subsequent to the Closing Date in the book value of any asset owned by such Person or a consolidated Subsidiary of such Person, (y) all investments as of such date in unconsolidated Subsidiaries and in Persons that are not Subsidiaries, and (z) all unamortized debt discount and 38 expense and unamortized deferred charges as of such date, all of the foregoing determined in accordance with GAAP. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on March 30, 1998 or (ii) was nominated for election or elected to such Board with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. "Default" means any event which is, or after notice or passage of time would be, an Event of Default. "Determination Date" shall have the meaning set forth in Section 6.4. "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by the Company under Section 6.6, into the aggregate consideration received, or deemed to have been received by the Company for such issue under Section 6.6, for such Additional Shares of Common Stock. "Environmental Laws" shall have the meaning set forth in Section 3.13. "Equity Interest" means Capital Stock or warrants, options or other rights to acquire Capital Stock (but excluding any debt note which is convertible into, or exchangeable for, Capital Stock). "Event of Default" shall have the meaning set forth in Section 7.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended, from time to time, and any successor statute or law thereto. "Fair Market Value" of Common Stock as of a particular date means the Weighted Average trading price of the Common Stock for the ten (10) consecutive Business Day period immediately preceding such date. Such Weighted Average shall be calculated as follows: (i) the Weighted Average of the sales price of the Common Stock quoted on the Nasdaq National Market for each of such ten (10) Business Days, or (ii) if no such quotations are available, the Weighted Average sales price for such ten (10) Business Days on the principal national securities exchange on which the Common Stock is listed, or (iii) if not listed on any national securities exchange, the Weighted Average sales price for such ten (10) Business Days in the over-the-counter market as reported by the National Quotation Bureau, Incorporated or similar organization, or (iv) if no of such sales prices are available for each Business Day in such ten (10) Business Day period, the Weighted Average of the high bid and low asked quotations in the over-the-counter market as so reported for such ten (10) Business Days, or (v) if no such 39 quotations are available, the fair market value per share on such date as determined by an independent investment banker or appraiser, nationally recognized to be expert in making such valuations, selected by a majority of the directors of the Company; provided, however, that in the event of an underwritten public offering of Common Stock, "Fair Market Value" shall mean the price to the public of such Common Stock in such underwritten public offering. In the event "Fair Market Value" is determined by an independent investment banker or appraiser pursuant to clause (v) of the foregoing sentence, such determination shall be provided to each Holder in writing together with a fair and accurate description of the basis for making such determination. The Requisite Holders shall be permitted to dispute such determination by written notice to the Company within ten (10) Business Days of receipt of such determination. In the event of such dispute, the Requisite Holders and the Company shall work together in good faith to mutually agree upon a second independent investment banker or appraiser to make a determination of "Fair Market Value" whose fees and expenses shall be paid by the Company. "Fair Market Value" shall be the average of the per share fair market values determined by both independent investment bankers or appraisers. "Fully Diluted Voting Securities" means each class of Voting Securities of a Person and each class of securities of a Person that, at the time of determination, can immediately subscribe for and/or convert to Voting Securities. "GAAP" means generally accepted accounting principles as used in the United States of America and applied in a manner consistent with past practices. "Holder" or "Holders" means the Purchaser (so long as it holds any Notes) and any other holder of any of the Notes. "Incorporated Documents" means the following of the Company's documents, each as filed with the SEC: (1) Form 10-K for the year ended December 31, 1997, (2) 1997 Proxy Statement dated April 10, 1997; and (3) Form 8-K dated December 29, 1997. "Indebtedness" means, with respect to any Person, the aggregate amount of, without duplication, the following: (a) all obligations for borrowed money; (b) all obligations evidenced by bonds, debentures, notes or other similar instruments; (c) all obligations to pay the deferred purchase price of property or services, except Trade Payables and obligations that do not exceed $300,000 in the aggregate, accrued commissions and other similar accrued current liabilities in respect of such obligations, in any case, not overdue and arising in the ordinary course of business; (d) all Capitalized Lease Obligations; 40 (e) all obligations or liabilities of others secured by a lien on any asset owned by such Person or Persons whether or not such obligation or liability is assumed; (f) all obligations of such Person or Persons, contingent or otherwise, in respect of any letters of credit or bankers' acceptances; and (g) all guaranties. "Indemnified Parties" shall have the meaning set forth in Section 5.6. "Independent Auditors" shall mean the independent certified public accountants of the Company. Until December 29, 1997, the Independent Auditors were Coopers & Lybrand, L.L.P. After such date and as of the date of the Agreement, the Independent Auditors are KPMG Peat Marwick LLP. "Inspectors" shall have the meaning set forth in Section 5.13. "Intangibles" shall have the meaning set forth in Section 3.16. "Junior Claims" shall have the meaning set forth in Section 8.7. "Key Employee" means Walter C. Bowen. "Knowledge of the Company" means to the actual knowledge of each of the Chairman, Chief Executive Officer, Chief Financial Officer, General Counsel, President, Treasurer and any Senior or Executive Vice President of the Company, after due inquiry and investigation. "Legal Holiday" means a Saturday, Sunday or day on which banks and trust companies in the principal place of business of the Company or in California are not required to be open. If a payment date is a Legal Holiday, payment may be made on the next succeeding day that is not a Legal Holiday, and interest shall accrue for the intervening period. "Lien" means any mortgage, pledge, lien, taxes, encumbrance, charge or adverse claim affecting title or resulting in a charge against real or personal property, or note interest of any kind (including, without limitation, any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Losses" shall have the meaning set forth in Section 5.6. "LTC Equity Holding Company" means LTC Equity Holding Company, Inc., a Nevada corporation. "LTC Properties" means LTC Properties, Inc., a Maryland corporation. 41 "LTC West" means LTC West, Inc., a Nevada corporation. "Material Adverse Effect" means (i) any adverse effect upon the issuance, validity or enforceability of a Note, this Agreement, the Registration Rights Agreement or the Commitment Letter, (ii) any material adverse effect on the results of operations, financial condition, properties, assets, business or prospects of the Company and its Subsidiaries, taken as a whole, or (iii) any adverse effect on the ability of the Company to fulfill its obligations under the Notes, this Agreement, the Registration Rights Agreement or the Commitment Letter or any document contemplated hereby or thereby. "Material Contract" shall have the meaning set forth in Section 3.17. "Maturity Date" means March 31, 2008. "Note Register" shall have the meaning set forth in Section 1.3. "Note" or "Notes" shall have the meaning set forth in Section 1.1. "Officers' Certificate" means a certificate signed by any two officers, one of whom must be the Chairman of the Board, the President, the Treasurer or a Vice President of the Company. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Purchaser. "Payment" or "Distribution" shall have the meaning set forth in Section 8.1. "Person" means an individual, partnership, corporation, limited liability company, trust or unincorporated organization or a government or agency or political subdivision thereof. "Plan of Liquidation" means, with respect to any Person, a plan that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously, in phases or otherwise) (i) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such person otherwise than as an entirety or substantially as an entirety and (ii) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition and all or substantially all of the remaining assets of such Person to holders of Capital Stock of such Person. "Preferred Stock" means the Series A Preferred Stock, no par value, and the Series B Preferred Stock, no par value, of the Company. "Property" or "property" means any assets or property of any kind or nature whatsoever, real, personal or mixed (including fixtures), whether tangible or intangible, provided that the terms "Property" or "property", when used with respect to any Person, shall not include Notes issued by such. "Purchaser" means the purchaser on the signature pages hereto. 42 "Registration Rights Agreement" means that certain Registration Rights Agreement dated as of the Closing Date by and among the Company and the Purchaser, executed concurrently herewith. "Related Party" with respect to Walter C. Bowen means (A) any spouse or immediate family member of such Person or (B) or trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of Walter C. Bowen and/or such other Persons referred to in the immediately preceding clause (A). "Reorganizations" shall have the meaning set forth in Section 6.5. "Requisite Noteholders" shall mean the holders of Notes issued to the Purchaser pursuant to this Agreement and the Notes whenever issued to all other purchasers pursuant to similar agreements dated on or about the date of this Agreement with an aggregate principal amount equal to or greater than 50% of the aggregate principal amount of all then outstanding Notes issued to the Purchaser pursuant to this Agreement and the Notes whenever issued to all other purchasers pursuant to similar agreements dated on or about the date of this Agreement. "Rights" shall have the meaning assigned to such term in Section 6.6(c). "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended from time to time, and any successor statute or law thereto. "Senior Claims" shall have the meaning set forth in Section 8.7. "Senior Indebtedness" means the principal of, premium, if any, and accrued interest on any other Indebtedness of the Company and all fees, expenses, reimbursements, indemnities and other amounts payable with respect to such Indebtedness, whether such Indebtedness is outstanding on the date of this Agreement or thereafter created, incurred, assumed, or guaranteed by the Company unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such Indebtedness shall not be senior, or is pari passu or subordinate, in right or payment to the Notes; provided that Senior Indebtedness shall not include (i) in the case of each Note the other Notes (ii) Indebtedness of the Company to a Subsidiary of the Company, (iii) Indebtedness of or amounts owed by the Company for compensation to directors or members of senior management that has not been approved by the Compensation Committee of the Board; (iv) Indebtedness guaranteed by the Company on behalf of any equityholder, director, officer or employee of the Company or of any equityholder, director, officer or employee of any of the Company's Subsidiaries, (v) any Trade Payables (including without limitation Indebtedness incurred for the purchase of goods or materials or for services obtained in the ordinary course of business), (vi) Indebtedness of the Company that is subordinated by its terms in right of payment to any other Indebtedness of the Company, and (vii) Indebtedness incurred in violation of this Agreement. 43 "Senior Representative" shall have the meaning set forth in Section 8.7. "Subordinated Indebtedness" means the principal, premium, if any, and interest on any Indebtedness of the Company which by its terms is expressly subordinated in right of payment to the Notes. "Subsidiary" means, with respect to any Person (the "parent"), any corporation, association or other business entity of which Notes or other ownership interests representing more than 50% of the ordinary voting power are, at the time as of which any determination is being made, owned or controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Stock Option Plan" shall mean the Company's 1995 Stock Incentive Plan as in effect on the Closing Date. "Surviving Person" shall have the meaning set forth in Section 5.7(b)(1). "Total Price" means, with respect to the Common Stock on any Business Day, the product of: (x) the closing sales price of the Common Stock quoted on the Nasdaq National Market on such Business Day, or if no such quotations are available, on the principal national securities exchange on which the Common Stock is listed on such Business Day, or if not listed on any national securities exchange, in the over-the-counter market as reported by the National Quotation Bureau, Incorporated or similar organization on such Business Day, or if no such sales prices are available, the high bid and low asked quotations in the over-the-counter market on such Business Day multiplied by (y) the number of shares of Common Stock traded on such market or exchange, as applicable, on such Business Day. "Trade Payables" means, with respect to any Person, accounts payable and other similar accrued current liabilities in respect of obligations or indebtedness to trade creditors created, assumed or guaranteed by such Person or any of its Subsidiaries in the ordinary course of business in connection with the obtaining of property or services. "Voting Securities" means any class of Equity Interests of a Person pursuant to which the holders thereof have, at the time of determination, the general voting power under ordinary circumstances to vote for the election of directors, managers, trustees or general partners of any Person (irrespective of whether or not at the time any other class or classes will have or might have voting power by reason of the happening of any contingency). "Weighted Average" means, with respect to the Common Stock during any ten (10) consecutive Business Day period, the sum of the Total Price of such Common Stock for each Business Day during such ten (10) consecutive Business Day period divided by ten (10). 10.2. Rules of Construction Unless the context otherwise requires 44 (a) a term has the meaning assigned to it; (b) "or" is not exclusive; (c) words in the singular include the plural, and words in the plural include the singular; (d) provisions apply to successive events and transactions; (e) "herein," "hereof" and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision; and (f) the masculine shall include the feminine and neuter genders as appropriate. SECTION 11. MISCELLANEOUS 11.1. Notices All notices and other communications provided for or permitted hereunder shall be made by hand-delivery, first-class mail, telex, telecopier, or overnight air courier guaranteeing next day delivery: (a) if to any Purchaser at address set forth on the signature pages hereto, with a copy to Latham & Watkins, 633 W. Fifth Street, Suite 4000, Los Angeles, California 90071, Attention: Eva Herbst Davis, Esq.; and (b) if to the Company, to Regent Assisted Living, Inc., 121 SW Morrison, Suite 1000, Attention: General Counsel with a copy to Stoel Rives LLP, 900 SW Fifth Avenue, Suite 2300, Portland, Oregon 97204, Attention: Todd Bauman, Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. The parties may change the addresses to which notices are to be given by giving five days' prior notice of such change in accordance herewith. 11.2. Undertaking for Costs In any suit for the enforcement of any right or remedy under this Agreement, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. 45 11.3. Successors and Assigns This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties. 11.4. Counterparts This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 11.5. Headings The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 11.6. Governing Law This Agreement shall be governed by and construed in accordance with the internal laws of the State of California. 11.7. Entire Agreement This Agreement, together with the Notes, the Registration Rights Agreement and the Commitment Letter is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, together with the Notes, the Registration Rights Agreement and the Commitment Letter supersedes all prior agreements and understandings between the parties with respect to such subject matter. 11.8. Severability In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected, it being intended that the Purchaser's rights and privileges shall be enforceable to the fullest extent permitted by law. 11.9. Transfer The Notes may not be transferred, sold, assigned, pledged, hypothecated or otherwise disposed of unless (a) such transfer is pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or (b) the Company has been furnished with a satisfactory opinion of counsel for the Holder, at such Holder's expense, that 46 such transfer is exempt from the provisions of Section 5 of the Securities Act, the rules and regulations in effect thereunder and any applicable state securities laws. 47 IN WITNESS WHEREOF, this Agreement has been duly executed by the parties set forth below as of the date first written above. REGENT ASSISTED LIVING, INC., an Oregon corporation By: WALTER C. BOWEN ----------------------------------- Name: Walter C. Bowen Title: President PAMELA J. PRIVETT, an individual PAMELA J. PRIVETT - --------------------------------------- Pamela J. Privett Address: 10680 Ranch Road Culver City, California 90230 48 ANNEX A ------- THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (A) SUCH TRANSFER IS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (B) THE COMPANY HAS BEEN FURNISHED WITH A SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER THAT SUCH TRANSFER IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF THE ACT, THE RULES AND REGULATIONS IN EFFECT THEREUNDER AND ANY APPLICABLE STATE SECURITIES LAWS. REGENT ASSISTED LIVING, INC. CONVERTIBLE SUBORDINATED NOTE DUE MARCH 31, 2008 Note No. ________ $_______________________ FOR VALUE RECEIVED, the undersigned, REGENT ASSISTED LIVING, INC., a corporation organized and existing under the laws of Oregon (herein called the "Company"), hereby promises to pay to the order of ____________________________ or registered assigns ("Holder"), the principal sum of ___________________________ DOLLARS (or so much thereof as shall remain outstanding) on March 31, 2008. Payments are to be made as provided in the Agreement (as defined herein). This Note is one of the Notes issued pursuant to the Convertible Subordinated Note Purchase Agreement dated as of March 30, 1998 (the "Agreement"), by and between the Company and Pamela J. Privett, an individual, and is also entitled to the benefits thereof to the extent provided in the Agreement. This Note is subject to (i) conversion, in whole or in part, at the option of the Holder, pursuant to Section 6.1(a) of the Agreement, (ii) conversion, in whole but not in part, at the option of the Company upon the satisfaction of certain conditions pursuant to Section 6.1(b) of the Agreement and (iii) repurchase, in whole or in part, upon a Change of Control pursuant to Section 5.4 of the Agreement. Upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. The Company may deem and treat the person in whose name this Note is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary. If an Event of Default shall occur and be continuing, this Note may, under certain circumstances, become or be declared due and payable in the manner and with the effect provided in the Agreement. Certain terms and provisions of this Note may be amended or compliance herewith waived on the terms and provisions provided for in the Agreement. The Note is subordinated in both right of payment and time of payment to certain Senior Indebtedness, as defined and described in Section 8 of the Agreement. Capitalized terms used herein without definition shall have the meaning set forth for such terms in the Agreement. REGENT ASSISTED LIVING, INC., an Oregon corporation By:__________________________________ Name: Title: 2 ANNEX B ------- FORM OF OPINION OF COMPANY COUNSEL 1. The Company and each of its Subsidiaries are corporations duly organized and validly existing in good standing under the laws of their respective jurisdictions of incorporation. 2. The Company and each of its Subsidiaries have all requisite power and authority to own or hold under lease the properties it purports so to own or hold except where the failure so to own or hold could not have a Material Adverse Effect and to transact their respective businesses as now transacted and proposed to be transacted. 3. The Company and each of its Subsidiaries are duly qualified as foreign corporations and are in good standing in each jurisdiction in which the character of the properties owned or held under lease by them or the nature of the business transacted by them requires such qualification, except where the failure so to be qualified or be in good standing could not have a Material Adverse Effect. 4. The Company has taken all actions necessary to authorize it (i) to execute, deliver and perform all of its obligations under the Agreement, the Registration Rights Agreement and the Commitment Letter, (ii) to issue and perform all of its obligations under the Notes and (iii) to consummate the transactions contemplated hereby and thereby. 5. The total number of shares of Capital Stock which the Company has authority to issue is 30,000,000 shares, consisting of 25,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. 6. As of March 30, 1998, there were 4,633,000 shares of Common Stock issued and outstanding, and 1,666,667 shares of Preferred Stock issued and outstanding. Such shares of Common Stock and Preferred Stock have been duly authorized and were validly issued, are fully paid and nonassessable, were issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities of the Company. 7. Neither the Company nor any of its Subsidiaries has outstanding any securities convertible into or exchangeable for any shares of Capital Stock nor does it have outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, any Capital Stock or securities convertible into or exchangeable for any Capital Stock other than (i) the Notes to be issued pursuant to the Agreement or pursuant to other similar agreements dated on or about the date of this Agreement, (ii) 1,666,667 shares of Preferred Stock convertible into Common Stock, and (iii) options and warrants to purchase shares of Common Stock as set forth and for the numbers of shares set forth in the Disclosure Schedule to the Agreement. 8. The Company has duly authorized and reserved for issuance the Conversion Shares, and the Conversion Shares will, when issued, be duly and validly issued, fully paid and nonassessable and free from all Liens. 9. Neither the execution or delivery of the Agreement, the Registration Rights Agreement or the Commitment Letter by the Company nor the issuance, sale or delivery of the Notes nor the performance of its respective obligations hereunder or thereunder will: (a) violate any provision of the Charter Documents of the Company; (b) violate any statute, law, rule or regulation or any judgment, decree, order, regulation or rule of any court or governmental authority to which the Company, any of its Subsidiaries, or any of their respective properties may be subject; (c) permit or cause the acceleration of the maturity of any debt or obligation of the Company or any of its Subsidiaries; (d) violate, or be in conflict with, or constitute a default under, or permit the termination of, or require the consent of any Person under, or result in the creation of any Lien upon any property of the Company or any of its Subsidiaries under, any mortgage, indenture, loan agreement, note, debenture or other agreement for borrowed money or any other material agreement to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries (or their respective properties) may be bound, other than such violations, conflicts, defaults, terminations and Liens, or such failures to obtain consents, which could not reasonably be expected to result in a Material Adverse Effect. 10. The sale of the Notes hereunder is exempt from the registration and prospectus delivery requirements of the Securities Act. 11. Neither the Company nor any of its Subsidiaries is an "investment company" or a Person directly or indirectly "controlled" by or acting on behalf of an "investment company" within the meaning of the United States Investment Company Act of 1940, as amended. 2 EX-4.11 12 CONVERTIBLE SUB. NOTE (PRIVETT) THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (A) SUCH TRANSFER IS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (B) THE COMPANY HAS BEEN FURNISHED WITH A SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER THAT SUCH TRANSFER IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF THE ACT, THE RULES AND REGULATIONS IN EFFECT THEREUNDER AND ANY APPLICABLE STATE SECURITIES LAWS. REGENT ASSISTED LIVING, INC. CONVERTIBLE SUBORDINATED NOTE DUE MARCH 31, 2008 Issue Date: March 31, 1998 Note No. 1998-5 $90,000 FOR VALUE RECEIVED, the undersigned, REGENT ASSISTED LIVING, INC., a corporation organized and existing under the laws of Oregon (herein called the "Company"), hereby promises to pay to the order of PAMELA J. PRIVETT or registered assigns ("Holder"), the principal sum of NINETY THOUSAND DOLLARS (or so much thereof as shall remain outstanding) on March 31, 2008. Payments are to be made as provided in the Agreement (as defined herein). This Note is one of the Notes issued pursuant to the Convertible Subordinated Note Purchase Agreement dated as of March 30, 1998 (the "Agreement"), by and between the Company and Pamela J. Privett, an individual, and is also entitled to the benefits thereof to the extent provided in the Agreement. This Note is subject to (i) conversion, in whole or in part, at the option of the Holder, pursuant to Section 6.1(a) of the Agreement, (ii) conversion, in whole but not in part, at the option of the Company upon the satisfaction of certain conditions pursuant to Section 6.1(b) of the Agreement and (iii) repurchase, in whole or in part, upon a Change of Control pursuant to Section 5.4 of the Agreement. Upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. The Company may deem and treat the person in whose name this Note is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary. If an Event of Default shall occur and be continuing, this Note may, under certain circumstances, become or be declared due and payable in the manner and with the effect provided in the Agreement. Certain terms and provisions of this Note may be amended or compliance herewith waived on the terms and provisions provided for in the Agreement. The Note is subordinated in both right of payment and time of payment to certain Senior Indebtedness, as defined and described in Section 8 of the Agreement. Capitalized terms used herein without definition shall have the meaning set forth for such terms in the Agreement. REGENT ASSISTED LIVING, INC., an Oregon corporation By: WALTER C. BOWEN --------------------------------------- Walter C. Bowen President EX-4.12 13 REGISTRATION RIGHTS AGREEMENT REGENT ASSISTED LIVING, INC. ----------- REGISTRATION RIGHTS AGREEMENT ----------- Dated as of March 30, 1998 TABLE OF CONTENTS Page 1. Definitions.................................................................1 2. Securities Subject to this Agreement........................................3 3. Shelf Registration; Demand Registration and Piggyback Registration..........3 4. Grant of Registration Rights to Others......................................6 5. Hold-Back Agreements........................................................6 6. Registration Procedures.....................................................6 7. Registration Expenses......................................................11 8. Indemnification............................................................12 9. Rule 144...................................................................14 10. Participation in Underwritten Registrations...............................14 11. Miscellaneous.............................................................15 i REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is made and entered into as of March 30, 1998, by and between REGENT ASSISTED LIVING, INC., an Oregon corporation (the "Company"), and LTC EQUITY HOLDING COMPANY, INC., a Nevada corporation (the "Purchaser"). Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in Section 1 hereof. This Agreement is made pursuant to the Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Company and the Purchaser (the "Purchase Agreement"). In order to induce the Purchaser to enter into the Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Purchase Agreement. The parties hereby agree as follows: 1. Definitions As used in this Agreement, the following capitalized terms shall have the following meanings: Common Stock: The Common Stock, no par value, of the Company. Demand Registration: See Section 3(c) hereof. Exchange Act: The Securities Exchange Act of 1934, as amended from time to time. NASD: National Association of Securities Dealers, Inc. Notes: The Company's 7.5% Convertible Subordinated Notes due March 31, 2008. Other Registrable Securities: All shares of Common Stock issuable upon conversion of Notes issued to the other purchasers pursuant to similar agreements dated on or about the date of this Agreement. Person: An individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. Piggyback Registration: See Section 3(d) hereof. Preferred Purchase Agreement: Purchase Agreement dated as of December 16, 1996, between the Company and Prudential Private Equity Investors III, L.P., a Delaware limited partnership. Preferred Registrable Securities: (i) Any Common Stock issued upon the conversion of the Company's Series A Preferred Stock issued pursuant to the Preferred Purchase Agreement or issued upon conversion of the Company's Series B Preferred Stock issued pursuant to the Preferred Purchase Agreement, (ii) any Common Stock issued upon conversion of any of the Company's Series B Preferred Stock issued pursuant to the Preferred Purchase Agreement, (iii) any Common Stock issued upon exercise of the warrant issued pursuant to the Preferred Purchase Agreement and (iv) any Common Stock issued or issuable with respect to the securities referred to in clauses (i), (ii) and (iii) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Preferred Registrable Security, such securities shall cease to be Preferred Registrable Securities when they have been distributed to the public through a broker, dealer of market maker in compliance with Rule 144 under the Securities Act (or any similar rule then in force) or repurchased by the Company or any subsidiary. Prospectus: The prospectus included in any Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement and by all other amendments and supplements to the prospectus, including post-effective amendments and all material incorporated by reference in such prospectus. Registrable Securities: All shares of Common Stock issuable upon conversion of Notes originally issued to the Purchaser; provided that a share ceases to be a Registrable Security when it is no longer a Transfer Restricted Security. Registration Expenses: See Section 7 hereof. Registration Statement: Any registration statement of the Company which covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such Registration Statement, including post-effective amendments, all exhibits and all material incorporated by reference in such Registration Statement. SEC: The Securities and Exchange Commission. Securities Act: The Securities Act of 1933, as amended from time to time. Shelf Registration: See Section 3(a) hereof. Transfer Restricted Securities: The Registrable Securities upon original issuance thereof, and with respect to any particular such security, so long as such security was acquired by the holder thereof other than pursuant to an effective registration under Section 5 of the 2 Securities Act or pursuant to Rule 144; provided that a security that has ceased to be a Transfer Restricted Security cannot thereafter become a Transfer Restricted Security. underwritten registration or underwritten offering: A registration in which securities of the Company are sold to an underwriter for reoffering to the public. 2. Securities Subject to this Agreement (a) Registrable Securities. The securities entitled to the benefits of this Agreement are the Registrable Securities. (b) Holders of Registrable Securities. A Person is deemed to be a holder of Registrable Securities whenever such Person owns Registrable Securities or has the right to acquire such Registrable Securities, whether or not such acquisition has actually been effected and disregarding any legal restrictions upon the exercise of such right. 3. Shelf Registration; Demand Registration and Piggyback Registration (a) Shelf Registration. The Company shall file a "shelf" registration statement on any appropriate form pursuant to Rule 415 (or similar rule that may be adopted by the SEC) under the Securities Act (a "Shelf Registration"), as promptly as practicable and in no event later than June 1, 1998, for the Registrable Securities (the "Shelf Registration"). The Company agrees to use its best efforts to cause such Shelf Registration to become effective and thereafter to keep it continuously effective, and to prevent the happening of any event of the kind described in Section 6(k) hereof that requires the Company to give notice pursuant to the last paragraph of Section 6 hereof, for a period of two years from the date on which the SEC declares the Shelf Registration effective or such shorter period which will terminate when all the Registrable Securities covered by the Shelf Registration have been sold pursuant to such Shelf Registration. (b) Additional Interest and Reduction of Conversion Rate Under Certain Circumstances. If the Shelf Registration is not filed with the SEC by June 1, 1998, or if the Shelf Registration is not declared effective by the SEC by September 1, 1998, (i) the interest rates on the Notes affected by such failure shall increase (effective June 1, 1998, with respect to a failure to file the Shelf Registration, or September 1, 1998 with respect to the failure of the Shelf Registration to be declared effective) by 50 basis points (1/2%) over the annual interest rates then in effect and (ii) the Conversion Rate on the Notes affected by such failure shall decrease (effective June 1, 1998, with respect to a failure to file the Shelf Registration, or September 1, 1998 with respect to the failure of the Shelf Registration to be declared effective) by five percent (5%). If the Shelf Registration is not filed and declared effective by December 1, 1998, then (i) the annual rate at which the Company shall pay interest on the Notes shall further increase with respect to the Notes, effective on December 1, 1998, by 50 basis points (1/2%) over the annual interest rate then in effect and (ii) the Conversion Rate on the Notes shall further decrease with respect to the Notes, effective on December 1, 1998, by five percent (5%). The annual rate at which the Company shall pay interest shall continue to increase by 50 basis points (1/2%) and the Conversion Rate shall continue to decrease by five percent (5%) at the end of each 180-day 3 period thereafter, effective on the 181st day, until the Shelf Registration is filed and declared effective by the SEC. The interest rates and the Conversion Rate on the Notes shall return to the rates otherwise in effect on the Notes but for the application of the preceding provisions on the date the Shelf Registration is filed with or declared effective by the SEC, as applicable. The Company shall notify holders of the affected Notes immediately after the occurrence of each and every event which pursuant to this paragraph (b) results in any increase or decrease in the interest rates payable and the Conversion Rate on such Notes. (c) Demand Registration. (i) At any time on or after the two-year period for which the Shelf Registration referred to in paragraph (a) of this Section 3 is terminated, any holder of Registrable Securities holding Registrable Securities which represent at least 50% of the aggregate of all of the Registrable Securities (assuming conversion of all of the Notes held by such holders of Registrable Securities) may give written notice to the Company (x) of their intention to transfer all or part of the Registrable Securities held by them or obtained by conversion of Notes held by them and (y) requesting the registration of said Registrable Securities (a "Demand Registration"), and thereupon, the Company shall on no more than one occasion, as expeditiously as possible, (A) provide written notice to all holders of Registrable Securities who have not so requested registration, and allow such holders the opportunity to participate in such registration, and (B) use its best efforts to effect the registration of all such Registrable Securities under the Securities Act, such Registration Statement to become effective not later than three months from the date of such request under this paragraph (c)(i). Such Registration Statement shall remain effective until the first to occur of (A) the sale of all of the Registrable Securities registered under such Registration Statement or (B) the date one year following the date such Registration Statement was declared effective by the SEC. (ii) If, at any time prior to the effectiveness of the Registration Statement referred to in Section 3(a)(i), the holders of Registrable Securities holding in the aggregate a majority of the Registrable Securities subject to such registration, the Company shall promptly withdraw such Registration Statement prior to its effectiveness. Any holders of Registrable Securities holding Registrable Securities which represent at least 50% of the aggregate of all of the Registrable Securities (assuming conversion of all of the Notes held by such holders of Registrable Securities) shall have the opportunity to again request registration pursuant to Section 3(a)(i) upon reimbursement to the Company of all of the Company's out-of-pocket expenses incurred in connection with the preparation of such withdrawn Registration Statement, and, upon such reimbursement, the Company shall comply with any such request in accordance with Section 3(a)(i). (d) Piggyback Registration. (i) Right to Piggyback. Whenever the Company proposes to register any of its securities under the Securities Act (other than pursuant to a Demand Registration in accordance with Section 3(c) or a Shelf Registration in accordance with Section 3(a)) and the registration form to be used may be used for the registration of the Registrable Securities (a 4 "Piggyback Registration"), the Company shall give prompt written notice to all holders of Registrable Securities of its intention to effect such registration and shall include in such registration (other than registrations only of shares issued (A) for the purpose of acquiring another company or companies or (B) pursuant to an employee benefit plan) all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 20 days after the receipt of the Company's notice. (ii) Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the Company, the Company shall include in the registration (A) first, the securities the Company proposes to sell, (B) second, the Preferred Registrable Securities requested to be included in such registration, pro rata among the holders of such Preferred Registrable Securities on the basis of the number of shares owned by each such holder, (C) third, the Registrable Securities and the Other Registrable Securities requested to be included in such registration, pro rata among the holders of all Registrable Securities and all Other Registrable Securities on the basis of the number of shares requested to be included in such registration by each such holder, and (D) fourth, other securities requested to be included in such registration. (iii) Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Company's securities, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the holders initially requesting such registration, the Company shall include in the registration (A) first, the securities requested to be included therein by the holders requesting such registration and the Preferred Registrable Securities requested to be included in such registration, pro rata among the holders of such securities on the basis of the number of shares owned by each such holder, (B) second, the Registrable Securities and the Other Registrable Securities requested to be included in such registration, pro rata among the holders of all Registrable Securities and all Other Registrable Securities on the basis of the number of shares requested to be included in such registration by each such holder, and (C) third, other securities requested to be included in such registration. (e) Other Registrations. If the Company has previously filed a Registration Statement with respect to the Registrable Securities pursuant to this Section 3, and if such previous Registration Statement has not been withdrawn or abandoned, the Company shall not file or cause to be effected any other registration of any of its equity securities under the Securities Act (except on Form S-8 or any successor form), whether on its own behalf or at the request of any holder or holders of such securities, until a period of at least 90 days has elapsed from the effective date of such previous registration. 5 4. Grant of Registration Rights to Others If registration rights are granted to any holder of shares of any class of capital stock or debt of the Company, other than a holder of Registrable Securities or Other Registrable Securities ("Additional Registration Rights"), then the Company shall promptly notify the holders of Registrable Securities upon the grant of such registration rights and offer to the holders of Registrable Securities such additional registration rights granted to such other holders so that the terms and conditions of all registration rights granted to the holders of Registrable Securities by this Agreement and any subsequent agreement are at least as favorable as the registration rights granted to such other holders in all terms and conditions. Upon receipt of such notice and offer, the holders of Registrable Securities shall have 30 days to provide notice to the Company that any such holder of Registrable Securities accepts such additional registration rights. If any such other holder exercises any Additional Registration Rights during such 30-day period, the holders of Registrable Securities shall have the right within such 30-day period to accept the offer, and to provide notice of the intent of any such holder of Registrable Securities to join in any such registration, subject to the terms and conditions of the Additional Registration Rights and this Agreement, as applicable. 5. Hold-Back Agreements (a) Restrictions on Public Sale by Holder of Registrable Securities. Each holder of Registrable Securities whose Registrable Securities are covered by a Registration Statement filed pursuant to Section 3 hereof agrees, if requested by the managing underwriters in an underwritten offering, not to effect any public sale or distribution of securities of the Company of the same class as the securities included in such Registration Statement, including a sale pursuant to Rule 144 under the Securities Act (except as part of such underwritten registration), during the 10-day period prior to, and during the 90-day period beginning on, the closing date of each underwritten offering made pursuant to such Registration Statement, to the extent timely notified in writing by the Company or the managing underwriters; provided, however, that each holder of Registrable Securities shall be subject to the hold-back restrictions of this Section 5(a) only once during each 12-month period of this Agreement. (b) Restrictions on Sale of Common Stock by the Company and Others. In the event a holder of Registrable Securities notifies the Company in writing of its intent to effect an underwritten offering of any Registrable Securities, the Company agrees (1) not to effect any public or private offer, sale or distribution of its Common Stock, including a sale pursuant to Regulation D under the Securities Act, during the 10-day period prior to, and during the 45-day period beginning with, the effective date of a Registration Statement filed under Section 3 to the extent timely notified in writing by a holder of Registrable Securities or the managing underwriters (except as part of such registration, if permitted, or pursuant to registrations on Forms S-4 or S-8 or any successor form to such Forms). 6. Registration Procedures In connection with the Company's registration obligations pursuant to Section 3 hereof, the Company will use its best efforts to effect such registration to permit the sale of such 6 Registrable Securities in accordance with the intended method or methods of distribution thereof, and pursuant thereto the Company will as expeditiously as possible: (a) prepare and file with the SEC, as soon as practicable, a Registration Statement or Registration Statements on any appropriate form under the Securities Act, which form shall be available for the sale of the Registrable Securities in accordance with the intended method or methods of distribution thereof and shall include all financial statements required by the SEC to be filed therewith, cooperate and assist in any filings required to be made with the NASD, and use best efforts to cause such Registration Statement to become effective; provided that before filing a Registration Statement or Prospectus or any amendments or supplements thereto, the Company will furnish to the holders of the Registrable Securities covered by such Registration Statement and the underwriters, if any, copies of all such documents proposed to be filed, which documents will be subject to the reasonable review of such holders and underwriters, and the Company will not file any Registration Statement or amendment thereto or any Prospectus or any supplement thereto to which the holders of a majority of the Registrable Securities covered by such Registration Statement or the underwriters, if any, shall reasonably object; (b) prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for the applicable period, or such shorter period which will terminate when all Registrable Securities covered by such Registration Statement have been sold; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; the Company shall not be deemed to have used its best efforts to keep a Registration Statement effective during the applicable period if it voluntarily takes any action that would result in selling holders of the Registrable Securities covered thereby not being able to sell such Registrable Securities during that period unless such action is required under applicable law, provided that the foregoing shall not apply to actions taken by the Company in good faith and for valid business reasons, including without limitation the acquisition or divestiture of assets, so long as the Company promptly thereafter complies with the requirements of Section 6(k), if applicable; (c) notify the selling holders of Registrable Securities and the managing underwriters, if any, promptly, and (if requested by any such Person) confirm such advice in writing, (1) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, (2) of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (3) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, (4) if at any time the representations and warranties of the Company contemplated by paragraph (o) below cease to be 7 true and correct, (5) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (6) of the happening of any event which makes any statement made in the Registration Statement, the Prospectus or any document incorporated therein by reference untrue or which requires the making of any changes in the Registration Statement, the Prospectus or any document incorporated therein by reference in order to make the statements therein not misleading; (d) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment; (e) if requested by the managing underwriter or underwriters or a holder of Registrable Securities being sold in connection with an underwritten offering, promptly incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriters and the holders of a majority of the Registrable Securities being sold agree should be included therein relating to the plan of distribution with respect to such Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment; (f) furnish to each selling holder of Registrable Securities and each managing underwriter, without charge, at least one signed copy of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference); (g) deliver to each selling holder of Registrable Securities and the underwriters, if any, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons may reasonably request; the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling holders of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto; (h) prior to any public offering of Registrable Securities, register or qualify or cooperate with the selling holders of Registrable Securities, the underwriters, if any, and their respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any seller or underwriter reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the Registration Statement; provided that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action 8 which would subject it to general service of process in any such jurisdiction where it is not then so subject; (i) cooperate with the selling holders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of Registrable Securities to the underwriters; (j) use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities; (k) upon the occurrence of any event contemplated by paragraph (c)(6) above, prepare a supplement or posteffective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (l) cause all Registrable Securities covered by the Registration Statement to be listed on each securities exchange on which similar securities issued by the Company are then listed if requested by the holders of a majority of such Registrable Securities or the managing underwriters, if any; (m) not later than the effective date of the Registration Statement, provide a CUSIP number for all Registrable Securities and provide the applicable trustee(s) or transfer agent(s) with printed certificates for the Registrable Securities which are in a form eligible for deposit with Depositary Trust Company; (n) enter into such agreements (including an underwriting agreement) and take all such other actions in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration (1) make such representations and warranties to the holders of such Registrable Securities and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Purchase Agreement; (2) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the holders of a majority of the Registrable Securities being sold) addressed to each selling holder and the underwriters, if any, covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such holders and underwriters; (3) obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to 9 the selling holders of Registrable Securities and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by underwriters in connection with primary underwritten offerings; (4) if an underwriting agreement is entered into, the same shall set forth in full the indemnification provisions and procedures of Section 8 hereof with respect to all parties to be indemnified pursuant to said Section; and (5) the Company shall deliver such documents and certificates as may be requested by the holders of a majority of the Registrable Securities being sold and the managing underwriters, if any, to evidence compliance with clause (k) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The above shall be done at each closing under such underwriting or similar agreement or as and to the extent required thereunder; (o) make available for inspection by a representative of the holders of a majority of the Registrable Securities, any underwriter participating in any disposition pursuant to such registration, and any attorney or accountant retained by the sellers or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such registration; provided that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such Persons unless disclosure of such records, information or documents is required by court or administrative order; (p) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make generally available to its security holders, earnings statements satisfying the provisions of Section 11(a) of the Securities Act, no later than 45 days after the end of any 12-month period (or 90 days, if such period is a fiscal year) (1) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm or best efforts underwritten offering, or (2) if not sold to underwriters in such an offering, beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the Registration Statement, which statements shall cover said 12-month periods; and (q) promptly prior to the filing of any document which is to be incorporated by reference into the Registration Statement or the Prospectus (after initial filing of the Registration Statement), provide copies of such document to counsel to the selling holders of Registrable Securities and to the managing underwriters, if any, make the Company's representatives available for discussion of such document and make such changes in such document prior to the filing thereof as counsel for such selling holders or underwriters may reasonably request. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding the distribution of such securities as the Company may from time to time reasonably request in writing. 10 Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 6(k) hereof, such holder will forthwith discontinue disposition of Registrable Securities until such holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6(k) hereof, or until it is advised in writing (the "Advice") by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the Prospectus, and, if so directed by the Company, such holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the time periods regarding the maintenance of such Registration Statement shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 6(c)(6) hereof to and including the date when each seller of Registrable Securities covered by such Registration Statement shall have received the copies of the supplemented or amended prospectus contemplated by Section 6(k) hereof or the Advice. 7. Registration Expenses (a) All expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all registration and filing fees, fees and expenses associated with filings required to be made with the NASD (including, if applicable, the fees and expenses of any "qualified independent underwriter" and its counsel as may be required by the rules and regulations of the NASD), fees and expenses of compliance with securities or blue sky laws (including fees and disbursements of counsel for the underwriters or selling holders in connection with blue sky qualifications of the Registrable Securities and determination of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or holders of a majority of the Registrable Securities being sold may designate), printing expenses (including expenses of printing certificates for the Registrable Securities in a form eligible for deposit with Depositary Trust Company and of printing prospectuses), messenger, telephone and delivery expenses, and fees and disbursements of counsel for the Company and for the sellers of the Registrable Securities (subject to the provisions of Section 7(b) hereof) and of all independent certified public accountants of the Company (including the expenses of any special audit and "cold comfort" letters required by or incident to such performance), underwriters (excluding discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals relating to the distribution of the Registrable Securities or legal expenses of any Person other than the Company and the selling holders), "road show" fees and expenses of the Company and its management, securities acts liability insurance if the Company so desires and fees and expenses of other Persons retained by the Company (all such expenses being herein called "Registration Expenses") will be borne by the Company, regardless whether the Registration Statement becomes effective. The Company will, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which similar 11 securities issued by the Company are then listed, rating agency fees and the fees and expenses of any Person, including special experts, retained by the Company. (b) In connection with the Shelf Registration, a Demand Registration or a Piggyback Registration hereunder, the Company will reimburse the holders of Registrable Securities being registered in such registration for the reasonable fees and disbursements of not more than one counsel (or more than one counsel if a conflict exists among such selling holders in the exercise of the reasonable judgment of counsel for the selling holders and counsel for the Company) chosen by the holders of a majority of such Registrable Securities. 8. Indemnification (a) Indemnification by Company. The Company agrees to indemnify and hold harmless, to the full extent permitted by law, each holder of Registrable Securities, its officers, directors and employees and each Person who controls such holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of a material fact contained in any Registration Statement, Prospectus or preliminary Prospectus or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such holder expressly for use therein; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any such preliminary Prospectus if (i) such holder failed to deliver a copy of the Prospectus to the person asserting such loss, claim, damage, liability or expense after the Company had furnished such holder with a sufficient number of copies of the same and (ii) the Prospectus completely corrected such untrue statement or omission; and provided, further, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission in the Prospectus, if such untrue statement or alleged untrue statement, omission or alleged omission is completely corrected in an amendment or supplement to the Prospectus and the holder of Registrable Securities thereafter fails to deliver such Prospectus as so amended or supplemented prior to or concurrently with the sale of the Registrable Securities to the person asserting such loss, claim, damage, liability or expense after the Company had furnished such holder with a sufficient number of copies of the same. The Company will also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers and directors and each Person who controls such Persons (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities, if requested. (b) Indemnification by Holder of Registrable Securities. In connection with the Shelf Registration, a Demand Registration or a Piggyback Registration, each holder of Registrable Securities will furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any Registration Statement or 12 Prospectus and agrees to indemnify and hold harmless, to the full extent permitted by law, the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue statement of a material fact or any omission of a material fact required to be stated in the Registration Statement or Prospectus or preliminary Prospectus or necessary to make the statements therein not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such holder to the Company specifically for inclusion in such Registration Statement or Prospectus. In no event shall the liability of any selling holder of Registrable Securities hereunder be greater in amount than the dollar amount of the proceeds received by such holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such Persons specifically for inclusion in any Prospectus or Registration Statement. (c) Conduct of Indemnification Proceedings. Any Person entitled to indemnification hereunder will (i) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party; provided, however, that any Person entitled to indemnification hereunder shall have the right to employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such Person unless (a) the indemnifying party has agreed to pay such fees or expenses, or (b) the indemnifying party shall have failed to assure the defense of such claim and employ counsel reasonably satisfactory to such Person or (c) in the reasonable judgment of any such Person, based upon advice of its counsel, a conflict of interest may exist between such Person and the indemnifying party with respect to such claims (in which case, if the Person notifies the indemnifying party in writing that such Person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such Person). If such defense is not assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). No indemnifying party will be required to consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or counsels. (d) Contribution. If for any reason the indemnification provided for in the preceding clauses (a) and (b) is unavailable to an indemnified party or insufficient to hold it 13 harmless as contemplated by the preceding clauses (a) and (b), then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations, provided that no Purchaser shall be required to contribute in an amount greater than the dollar amount of the proceeds received by such Purchaser with respect to the sale of any securities. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 9. Rule 144 The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder (or, if the Company is not required to file such reports, it will, upon the request of any holder of Registrable Securities made after March 30, 2000, make publicly available other information so long as necessary to permit sales pursuant to Rule 144 under the Securities Act), and it will take such further action as any holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with such information and requirements. 10. Participation in Underwritten Registrations If any of the Registrable Securities covered by the Shelf Registration, a Demand Registration or a Piggyback Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the holders of a majority of such Registrable Securities included in such offering; provided that such investment bankers and managers must be reasonably satisfactory to the Company. If requested by the holders of a majority of such Registrable Securities, the Company shall use its best efforts to make available its senior management to participate in any "road shows" reasonably requested by such holders. No Person may participate in any underwritten registration hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. Nothing in this Section 10 shall be construed to create any additional rights regarding the registration of Registrable Securities in any Person otherwise than as set forth herein. 14 11. Miscellaneous (a) Remedies. Remedies for breach by the Company of its obligations to register the Registrable Securities shall be as set forth herein. Each holder of Registrable Securities, in addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company will not on or after the date of this Agreement enter into any agreement with respect to its securities which is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. Other than as disclosed on Schedule 11(b) hereto, the Company has not previously entered into any agreement with respect to its securities granting any registration rights to any Person. The rights granted to the holders of Registrable Securities hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's securities under any such agreements. (c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of holders of at least 50% of the outstanding Registrable Securities. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a holder of Registrable Securities, at the most current address given by such holder to the Company in accordance with the provisions of this Section 11(d), which address initially is, with respect to the Purchaser, the address set forth next to the Purchaser's name on the signature page of the Purchase Agreement, with a copy to Latham & Watkins, 633 West 5th Street, Suite 4000, Los Angeles, California 90071, Attention: Eva Herbst Davis, Esq.; and (ii) if to the Company, initially to Regent Assisted Living, Inc., 121 SW Morrison, Suite 1000, Attention: General Counsel and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 11(d), with a copy to Stoel Rives LLP, 900 SW Fifth Avenue, Suite 2300, Portland, Oregon 97204, Attention: Todd Bauman, Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt 15 acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent holders of Registrable Securities. (f) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (g) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (h) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California. (i) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (j) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by the Company with respect to the securities sold pursuant to the Purchase Agreement. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. (k) Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement, the successful party shall be entitled to recover reasonable attorneys' fees in addition to its costs and expenses and any other available remedy. 16 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. The Company: REGENT ASSISTED LIVING, INC., an Oregon corporation By: WALTER C. BOWEN ------------------------------------- Walter C. Bowen ------------------------------------- Title: President Purchaser: LTC EQUITY HOLDING COMPANY, INC., a Nevada corporation By: JAMES J. PIECZYNSKI ------------------------------------- Title: President and Chief Financial Officer ------------------------------------- 17 EX-4.13 14 REGISTRATION RIGHTS AGREEMENT REGENT ASSISTED LIVING, INC. ----------- REGISTRATION RIGHTS AGREEMENT ----------- Dated as of March 30, 1998 TABLE OF CONTENTS Page 1. Definitions........................................................1 2. Securities Subject to this Agreement...............................3 3. Shelf Registration and Piggyback Registration......................3 4. Grant of Registration Rights to Others.............................5 5. Hold-Back Agreements...............................................5 6. Registration Procedures............................................6 7. Registration Expenses.............................................10 8. Indemnification...................................................11 9. Rule 144..........................................................13 10. Participation in Underwritten Registrations......................13 11. Miscellaneous....................................................14 i REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is made and entered into as of March 30, 1998, by and between REGENT ASSISTED LIVING, INC., an Oregon corporation (the "Company"), and ANDRE C. DIMITRIADIS, an individual (the "Purchaser"). Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in Section 1 hereof. This Agreement is made pursuant to the Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Company and the Purchaser (the "Purchase Agreement"). In order to induce the Purchaser to enter into the Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Purchase Agreement. The parties hereby agree as follows: 1. Definitions As used in this Agreement, the following capitalized terms shall have the following meanings: Common Stock: The Common Stock, no par value, of the Company. Exchange Act: The Securities Exchange Act of 1934, as amended from time to time. NASD: National Association of Securities Dealers, Inc. Notes: The Company's 7.5% Convertible Subordinated Notes due March 31, 2008. Other Registrable Securities: All shares of Common Stock issuable upon conversion of Notes issued to the other purchasers pursuant to similar agreements dated on or about the date of this Agreement. Person: An individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. Piggyback Registration: See Section 3(c) hereof. Preferred Purchase Agreement: Purchase Agreement dated as of December 16, 1996, between the Company and Prudential Private Equity Investors III, L.P., a Delaware limited partnership. Preferred Registrable Securities: (i) Any Common Stock issued upon the conversion of the Company's Series A Preferred Stock issued pursuant to the Preferred Purchase Agreement or issued upon conversion of the Company's Series B Preferred Stock issued pursuant to the Preferred Purchase Agreement, (ii) any Common Stock issued upon conversion of any of the Company's Series B Preferred Stock issued pursuant to the Preferred Purchase Agreement, (iii) any Common Stock issued upon exercise of the warrant issued pursuant to the Preferred Purchase Agreement and (iv) any Common Stock issued or issuable with respect to the securities referred to in clauses (i), (ii) and (iii) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Preferred Registrable Security, such securities shall cease to be Preferred Registrable Securities when they have been distributed to the public through a broker, dealer of market maker in compliance with Rule 144 under the Securities Act (or any similar rule then in force) or repurchased by the Company or any subsidiary. Prospectus: The prospectus included in any Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement and by all other amendments and supplements to the prospectus, including post-effective amendments and all material incorporated by reference in such prospectus. Registrable Securities: All shares of Common Stock issuable upon conversion of Notes originally issued to the Purchaser; provided that a share ceases to be a Registrable Security when it is no longer a Transfer Restricted Security. Registration Expenses: See Section 7 hereof. Registration Statement: Any registration statement of the Company which covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such Registration Statement, including post-effective amendments, all exhibits and all material incorporated by reference in such Registration Statement. SEC: The Securities and Exchange Commission. Securities Act: The Securities Act of 1933, as amended from time to time. Shelf Registration: See Section 3(a) hereof. Transfer Restricted Securities: The Registrable Securities upon original issuance thereof, and with respect to any particular such security, so long as such security was acquired by the holder thereof other than pursuant to an effective registration under Section 5 of the Securities Act or pursuant to Rule 144; provided that a security that has ceased to be a Transfer Restricted Security cannot thereafter become a Transfer Restricted Security. underwritten registration or underwritten offering: A registration in which securities of the Company are sold to an underwriter for reoffering to the public. 2 2. Securities Subject to this Agreement (a) Registrable Securities. The securities entitled to the benefits of this Agreement are the Registrable Securities. (b) Holders of Registrable Securities. A Person is deemed to be a holder of Registrable Securities whenever such Person owns Registrable Securities or has the right to acquire such Registrable Securities, whether or not such acquisition has actually been effected and disregarding any legal restrictions upon the exercise of such right. 3. Shelf Registration and Piggyback Registration (a) Shelf Registration. The Company shall file a "shelf" registration statement on any appropriate form pursuant to Rule 415 (or similar rule that may be adopted by the SEC) under the Securities Act (a "Shelf Registration"), as promptly as practicable and in no event later than June 1, 1998, for the Registrable Securities (the "Shelf Registration"). The Company agrees to use its best efforts to cause such Shelf Registration to become effective and thereafter to keep it continuously effective, and to prevent the happening of any event of the kind described in Section 6(k) hereof that requires the Company to give notice pursuant to the last paragraph of Section 6 hereof, for a period of two years from the date on which the SEC declares the Shelf Registration effective or such shorter period which will terminate when all the Registrable Securities covered by the Shelf Registration have been sold pursuant to such Shelf Registration. (b) Additional Interest and Reduction of Conversion Rate Under Certain Circumstances. If the Shelf Registration is not filed with the SEC by June 1, 1998, or if the Shelf Registration is not declared effective by the SEC by September 1, 1998, (i) the interest rates on the Notes affected by such failure shall increase (effective June 1, 1998, with respect to a failure to file the Shelf Registration, or September 1, 1998 with respect to the failure of the Shelf Registration to be declared effective) by 50 basis points (1/2%) over the annual interest rates then in effect and (ii) the Conversion Rate on the Notes affected by such failure shall decrease (effective June 1, 1998, with respect to a failure to file the Shelf Registration, or September 1, 1998 with respect to the failure of the Shelf Registration to be declared effective) by five percent (5%). If the Shelf Registration is not filed and declared effective by December 1, 1998, then (i) the annual rate at which the Company shall pay interest on the Notes shall further increase with respect to the Notes, effective on December 1, 1998, by 50 basis points (1/2%) over the annual interest rate then in effect and (ii) the Conversion Rate on the Notes shall further decrease with respect to the Notes, effective on December 1, 1998, by five percent (5%). The annual rate at which the Company shall pay interest shall continue to increase by 50 basis points (1/2%) and the Conversion Rate shall continue to decrease by five percent (5%) at the end of each 180-day period thereafter, effective on the 181st day, until the Shelf Registration is filed and declared effective by the SEC. The interest rates and the Conversion Rate on the Notes shall return to the rates otherwise in effect on the Notes but for the application of the preceding provisions on the date the Shelf Registration is filed with or declared effective by the SEC, as applicable. The Company shall notify holders of the affected Notes immediately after the occurrence of each and 3 every event which pursuant to this paragraph (b) results in any increase or decrease in the interest rates payable and the Conversion Rate on such Notes. (c) Piggyback Registration. (i) Right to Piggyback. Whenever the Company proposes to register any of its securities under the Securities Act (other than pursuant to a Shelf Registration in accordance with Section 3(a)) and the registration form to be used may be used for the registration of the Registrable Securities (a "Piggyback Registration"), the Company shall give prompt written notice to all holders of Registrable Securities of its intention to effect such registration and shall include in such registration (other than registrations only of shares issued (A) for the purpose of acquiring another company or companies or (B) pursuant to an employee benefit plan) all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 20 days after the receipt of the Company's notice. (ii) Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the Company, the Company shall include in the registration (A) first, the securities the Company proposes to sell, (B) second, the Preferred Registrable Securities requested to be included in such registration, pro rata among the holders of such Preferred Registrable Securities on the basis of the number of shares owned by each such holder, (C) third, the Registrable Securities and the Other Registrable Securities requested to be included in such registration, pro rata among the holders of all Registrable Securities and all Other Registrable Securities on the basis of the number of shares requested to be included in such registration by each such holder, and (D) fourth, other securities requested to be included in such registration. (iii) Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Company's securities, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the holders initially requesting such registration, the Company shall include in the registration (A) first, the securities requested to be included therein by the holders requesting such registration and the Preferred Registrable Securities requested to be included in such registration, pro rata among the holders of such securities on the basis of the number of shares owned by each such holder, (B) second, the Registrable Securities and the Other Registrable Securities requested to be included in such registration, pro rata among the holders of all Registrable Securities and all Other Registrable Securities on the basis of the number of shares requested to be included in such registration by each such holder, and (C) third, other securities requested to be included in such registration. (d) Other Registrations. If the Company has previously filed a Registration Statement with respect to the Registrable Securities pursuant to this Section 3, and if such 4 previous Registration Statement has not been withdrawn or abandoned, the Company shall not file or cause to be effected any other registration of any of its equity securities under the Securities Act (except on Form S-8 or any successor form), whether on its own behalf or at the request of any holder or holders of such securities, until a period of at least 90 days has elapsed from the effective date of such previous registration. 4. Grant of Registration Rights to Others If registration rights are granted to any holder of shares of any class of capital stock or debt of the Company, other than a holder of Registrable Securities or Other Registrable Securities ("Additional Registration Rights"), then the Company shall promptly notify the holders of Registrable Securities upon the grant of such registration rights and offer to the holders of Registrable Securities such additional registration rights granted to such other holders so that the terms and conditions of all registration rights granted to the holders of Registrable Securities by this Agreement and any subsequent agreement are at least as favorable as the registration rights granted to such other holders in all terms and conditions. Upon receipt of such notice and offer, the holders of Registrable Securities shall have 30 days to provide notice to the Company that any such holder of Registrable Securities accepts such additional registration rights. If any such other holder exercises any Additional Registration Rights during such 30-day period, the holders of Registrable Securities shall have the right within such 30-day period to accept the offer, and to provide notice of the intent of any such holder of Registrable Securities to join in any such registration, subject to the terms and conditions of the Additional Registration Rights and this Agreement, as applicable. 5. Hold-Back Agreements (a) Restrictions on Public Sale by Holder of Registrable Securities. Each holder of Registrable Securities whose Registrable Securities are covered by a Registration Statement filed pursuant to Section 3 hereof agrees, if requested by the managing underwriters in an underwritten offering, not to effect any public sale or distribution of securities of the Company of the same class as the securities included in such Registration Statement, including a sale pursuant to Rule 144 under the Securities Act (except as part of such underwritten registration), during the 10-day period prior to, and during the 90-day period beginning on, the closing date of each underwritten offering made pursuant to such Registration Statement, to the extent timely notified in writing by the Company or the managing underwriters; provided, however, that each holder of Registrable Securities shall be subject to the hold-back restrictions of this Section 5(a) only once during each 12-month period of this Agreement. (b) Restrictions on Sale of Common Stock by the Company and Others. In the event a holder of Registrable Securities notifies the Company in writing of its intent to effect an underwritten offering of any Registrable Securities, the Company agrees (1) not to effect any public or private offer, sale or distribution of its Common Stock, including a sale pursuant to Regulation D under the Securities Act, during the 10-day period prior to, and during the 45-day period beginning with, the effective date of a Registration Statement filed under Section 3 to the extent timely notified in writing by a holder of Registrable Securities or the managing 5 underwriters (except as part of such registration, if permitted, or pursuant to registrations on Forms S-4 or S-8 or any successor form to such Forms). 6. Registration Procedures In connection with the Company's registration obligations pursuant to Section 3 hereof, the Company will use its best efforts to effect such registration to permit the sale of such Registrable Securities in accordance with the intended method or methods of distribution thereof, and pursuant thereto the Company will as expeditiously as possible: (a) prepare and file with the SEC, as soon as practicable, a Registration Statement or Registration Statements on any appropriate form under the Securities Act, which form shall be available for the sale of the Registrable Securities in accordance with the intended method or methods of distribution thereof and shall include all financial statements required by the SEC to be filed therewith, cooperate and assist in any filings required to be made with the NASD, and use best efforts to cause such Registration Statement to become effective; provided that before filing a Registration Statement or Prospectus or any amendments or supplements thereto, the Company will furnish to the holders of the Registrable Securities covered by such Registration Statement and the underwriters, if any, copies of all such documents proposed to be filed, which documents will be subject to the reasonable review of such holders and underwriters, and the Company will not file any Registration Statement or amendment thereto or any Prospectus or any supplement thereto to which the holders of a majority of the Registrable Securities covered by such Registration Statement or the underwriters, if any, shall reasonably object; (b) prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for the applicable period, or such shorter period which will terminate when all Registrable Securities covered by such Registration Statement have been sold; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; the Company shall not be deemed to have used its best efforts to keep a Registration Statement effective during the applicable period if it voluntarily takes any action that would result in selling holders of the Registrable Securities covered thereby not being able to sell such Registrable Securities during that period unless such action is required under applicable law, provided that the foregoing shall not apply to actions taken by the Company in good faith and for valid business reasons, including without limitation the acquisition or divestiture of assets, so long as the Company promptly thereafter complies with the requirements of Section 6(k), if applicable; (c) notify the selling holders of Registrable Securities and the managing underwriters, if any, promptly, and (if requested by any such Person) confirm such advice in 6 writing, (1) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, (2) of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (3) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, (4) if at any time the representations and warranties of the Company contemplated by paragraph (o) below cease to be true and correct, (5) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (6) of the happening of any event which makes any statement made in the Registration Statement, the Prospectus or any document incorporated therein by reference untrue or which requires the making of any changes in the Registration Statement, the Prospectus or any document incorporated therein by reference in order to make the statements therein not misleading; (d) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment; (e) if requested by the managing underwriter or underwriters or a holder of Registrable Securities being sold in connection with an underwritten offering, promptly incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriters and the holders of a majority of the Registrable Securities being sold agree should be included therein relating to the plan of distribution with respect to such Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment; (f) furnish to each selling holder of Registrable Securities and each managing underwriter, without charge, at least one signed copy of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference); (g) deliver to each selling holder of Registrable Securities and the underwriters, if any, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons may reasonably request; the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling holders of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto; (h) prior to any public offering of Registrable Securities, register or qualify or cooperate with the selling holders of Registrable Securities, the underwriters, if any, and their 7 respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any seller or underwriter reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the Registration Statement; provided that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process in any such jurisdiction where it is not then so subject; (i) cooperate with the selling holders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of Registrable Securities to the underwriters; (j) use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities; (k) upon the occurrence of any event contemplated by paragraph (c)(6) above, prepare a supplement or posteffective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (l) cause all Registrable Securities covered by the Registration Statement to be listed on each securities exchange on which similar securities issued by the Company are then listed if requested by the holders of a majority of such Registrable Securities or the managing underwriters, if any; (m) not later than the effective date of the Registration Statement, provide a CUSIP number for all Registrable Securities and provide the applicable trustee(s) or transfer agent(s) with printed certificates for the Registrable Securities which are in a form eligible for deposit with Depositary Trust Company; (n) enter into such agreements (including an underwriting agreement) and take all such other actions in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration (1) make such representations and warranties to the holders of such Registrable Securities and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Purchase Agreement; (2) obtain opinions of counsel to the Company and updates thereof 8 (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the holders of a majority of the Registrable Securities being sold) addressed to each selling holder and the underwriters, if any, covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such holders and underwriters; (3) obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to the selling holders of Registrable Securities and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by underwriters in connection with primary underwritten offerings; (4) if an underwriting agreement is entered into, the same shall set forth in full the indemnification provisions and procedures of Section 8 hereof with respect to all parties to be indemnified pursuant to said Section; and (5) the Company shall deliver such documents and certificates as may be requested by the holders of a majority of the Registrable Securities being sold and the managing underwriters, if any, to evidence compliance with clause (k) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The above shall be done at each closing under such underwriting or similar agreement or as and to the extent required thereunder; (o) make available for inspection by a representative of the holders of a majority of the Registrable Securities, any underwriter participating in any disposition pursuant to such registration, and any attorney or accountant retained by the sellers or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such registration; provided that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such Persons unless disclosure of such records, information or documents is required by court or administrative order; (p) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make generally available to its security holders, earnings statements satisfying the provisions of Section 11(a) of the Securities Act, no later than 45 days after the end of any 12-month period (or 90 days, if such period is a fiscal year) (1) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm or best efforts underwritten offering, or (2) if not sold to underwriters in such an offering, beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the Registration Statement, which statements shall cover said 12-month periods; and (q) promptly prior to the filing of any document which is to be incorporated by reference into the Registration Statement or the Prospectus (after initial filing of the Registration Statement), provide copies of such document to counsel to the selling holders of Registrable Securities and to the managing underwriters, if any, make the Company's representatives available for discussion of such document and make such changes in such document prior to the filing thereof as counsel for such selling holders or underwriters may reasonably request. 9 The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding the distribution of such securities as the Company may from time to time reasonably request in writing. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 6(k) hereof, such holder will forthwith discontinue disposition of Registrable Securities until such holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6(k) hereof, or until it is advised in writing (the "Advice") by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the Prospectus, and, if so directed by the Company, such holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the time periods regarding the maintenance of such Registration Statement shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 6(c)(6) hereof to and including the date when each seller of Registrable Securities covered by such Registration Statement shall have received the copies of the supplemented or amended prospectus contemplated by Section 6(k) hereof or the Advice. 7. Registration Expenses (a) All expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all registration and filing fees, fees and expenses associated with filings required to be made with the NASD (including, if applicable, the fees and expenses of any "qualified independent underwriter" and its counsel as may be required by the rules and regulations of the NASD), fees and expenses of compliance with securities or blue sky laws (including fees and disbursements of counsel for the underwriters or selling holders in connection with blue sky qualifications of the Registrable Securities and determination of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or holders of a majority of the Registrable Securities being sold may designate), printing expenses (including expenses of printing certificates for the Registrable Securities in a form eligible for deposit with Depositary Trust Company and of printing prospectuses), messenger, telephone and delivery expenses, and fees and disbursements of counsel for the Company and for the sellers of the Registrable Securities (subject to the provisions of Section 7(b) hereof) and of all independent certified public accountants of the Company (including the expenses of any special audit and "cold comfort" letters required by or incident to such performance), underwriters (excluding discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals relating to the distribution of the Registrable Securities or legal expenses of any Person other than the Company and the selling holders), "road show" fees and expenses of the Company and its management, securities acts liability insurance if the Company so desires and fees and expenses of other Persons retained by the Company (all such expenses being herein called "Registration 10 Expenses") will be borne by the Company, regardless whether the Registration Statement becomes effective. The Company will, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed, rating agency fees and the fees and expenses of any Person, including special experts, retained by the Company. (b) In connection with the Shelf Registration or a Piggyback Registration hereunder, the Company will reimburse the holders of Registrable Securities being registered in such registration for the reasonable fees and disbursements of not more than one counsel (or more than one counsel if a conflict exists among such selling holders in the exercise of the reasonable judgment of counsel for the selling holders and counsel for the Company) chosen by the holders of a majority of such Registrable Securities. 8. Indemnification (a) Indemnification by Company. The Company agrees to indemnify and hold harmless, to the full extent permitted by law, each holder of Registrable Securities, its officers, directors and employees and each Person who controls such holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of a material fact contained in any Registration Statement, Prospectus or preliminary Prospectus or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such holder expressly for use therein; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any such preliminary Prospectus if (i) such holder failed to deliver a copy of the Prospectus to the person asserting such loss, claim, damage, liability or expense after the Company had furnished such holder with a sufficient number of copies of the same and (ii) the Prospectus completely corrected such untrue statement or omission; and provided, further, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission in the Prospectus, if such untrue statement or alleged untrue statement, omission or alleged omission is completely corrected in an amendment or supplement to the Prospectus and the holder of Registrable Securities thereafter fails to deliver such Prospectus as so amended or supplemented prior to or concurrently with the sale of the Registrable Securities to the person asserting such loss, claim, damage, liability or expense after the Company had furnished such holder with a sufficient number of copies of the same. The Company will also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers and directors and each Person who controls such Persons (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities, if requested. 11 (b) Indemnification by Holder of Registrable Securities. In connection with the Shelf Registration or a Piggyback Registration, each holder of Registrable Securities will furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any Registration Statement or Prospectus and agrees to indemnify and hold harmless, to the full extent permitted by law, the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue statement of a material fact or any omission of a material fact required to be stated in the Registration Statement or Prospectus or preliminary Prospectus or necessary to make the statements therein not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such holder to the Company specifically for inclusion in such Registration Statement or Prospectus. In no event shall the liability of any selling holder of Registrable Securities hereunder be greater in amount than the dollar amount of the proceeds received by such holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such Persons specifically for inclusion in any Prospectus or Registration Statement. (c) Conduct of Indemnification Proceedings. Any Person entitled to indemnification hereunder will (i) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party; provided, however, that any Person entitled to indemnification hereunder shall have the right to employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such Person unless (a) the indemnifying party has agreed to pay such fees or expenses, or (b) the indemnifying party shall have failed to assure the defense of such claim and employ counsel reasonably satisfactory to such Person or (c) in the reasonable judgment of any such Person, based upon advice of its counsel, a conflict of interest may exist between such Person and the indemnifying party with respect to such claims (in which case, if the Person notifies the indemnifying party in writing that such Person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such Person). If such defense is not assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). No indemnifying party will be required to consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim, in which event the 12 indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or counsels. (d) Contribution. If for any reason the indemnification provided for in the preceding clauses (a) and (b) is unavailable to an indemnified party or insufficient to hold it harmless as contemplated by the preceding clauses (a) and (b), then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations, provided that no Purchaser shall be required to contribute in an amount greater than the dollar amount of the proceeds received by such Purchaser with respect to the sale of any securities. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 9. Rule 144 The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder (or, if the Company is not required to file such reports, it will, upon the request of any holder of Registrable Securities made after March 30, 2000, make publicly available other information so long as necessary to permit sales pursuant to Rule 144 under the Securities Act), and it will take such further action as any holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with such information and requirements. 10. Participation in Underwritten Registrations If any of the Registrable Securities covered by the Shelf Registration or a Piggyback Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the holders of a majority of such Registrable Securities included in such offering; provided that such investment bankers and managers must be reasonably satisfactory to the Company. If requested by the holders of a majority of such Registrable Securities, the Company shall use its best efforts to make available its senior management to participate in any "road shows" reasonably requested by such holders. No Person may participate in any underwritten registration hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting 13 arrangements. Nothing in this Section 10 shall be construed to create any additional rights regarding the registration of Registrable Securities in any Person otherwise than as set forth herein. 11. Miscellaneous (a) Remedies. Remedies for breach by the Company of its obligations to register the Registrable Securities shall be as set forth herein. Each holder of Registrable Securities, in addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company will not on or after the date of this Agreement enter into any agreement with respect to its securities which is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. Other than as disclosed on Schedule 11(b) hereto, the Company has not previously entered into any agreement with respect to its securities granting any registration rights to any Person. The rights granted to the holders of Registrable Securities hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's securities under any such agreements. (c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of holders of at least 50% of the outstanding Registrable Securities. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a holder of Registrable Securities, at the most current address given by such holder to the Company in accordance with the provisions of this Section 11(d), which address initially is, with respect to the Purchaser, the address set forth next to the Purchaser's name on the signature page of the Purchase Agreement, with a copy to Latham & Watkins, 633 West 5th Street, Suite 4000, Los Angeles, California 90071, Attention: Eva Herbst Davis, Esq.; and (ii) if to the Company, initially to Regent Assisted Living, Inc., 121 SW Morrison, Suite 1000, Attention: General Counsel and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 11(d), with a copy to Stoel Rives LLP, 900 SW Fifth Avenue, Suite 2300, Portland, Oregon 97204, Attention: Todd Bauman, Esq. 14 All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent holders of Registrable Securities. (f) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (g) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (h) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California. (i) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (j) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by the Company with respect to the securities sold pursuant to the Purchase Agreement. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. (k) Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement, the successful party shall be entitled to recover reasonable attorneys' fees in addition to its costs and expenses and any other available remedy. 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. The Company: REGENT ASSISTED LIVING, INC., an Oregon corporation By: WALTER C. BOWEN --------------------------------- Walter C. Bowen --------------------------------- Title: President Purchaser: ANDRE C. DIMITRIADIS, an individual ANDRE C. DIMITRIADIS ----------------------------------------- Andre C. Dimitriadis 16 EX-4.14 15 REGISTRATION RIGHTS AGREEMENT (J.J. PIECZYNSKI) REGENT ASSISTED LIVING, INC. ----------- REGISTRATION RIGHTS AGREEMENT ----------- Dated as of March 30, 1998 TABLE OF CONTENTS Page 1. Definitions.................................................................1 2. Securities Subject to this Agreement........................................3 3. Shelf Registration and Piggyback Registration...............................3 4. Grant of Registration Rights to Others......................................5 5. Hold-Back Agreements........................................................5 6. Registration Procedures.....................................................6 7. Registration Expenses......................................................10 8. Indemnification............................................................11 9. Rule 144...................................................................13 10. Participation in Underwritten Registrations...............................13 11. Miscellaneous.............................................................14 i REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is made and entered into as of March 30, 1998, by and between REGENT ASSISTED LIVING, INC., an Oregon corporation (the "Company"), and JAMES J. PIECZYNSKI, an individual (the "Purchaser"). Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in Section 1 hereof. This Agreement is made pursuant to the Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Company and the Purchaser (the "Purchase Agreement"). In order to induce the Purchaser to enter into the Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Purchase Agreement. The parties hereby agree as follows: 1. Definitions As used in this Agreement, the following capitalized terms shall have the following meanings: Common Stock: The Common Stock, no par value, of the Company. Exchange Act: The Securities Exchange Act of 1934, as amended from time to time. NASD: National Association of Securities Dealers, Inc. Notes: The Company's 7.5% Convertible Subordinated Notes due March 31, 2008. Other Registrable Securities: All shares of Common Stock issuable upon conversion of Notes issued to the other purchasers pursuant to similar agreements dated on or about the date of this Agreement. Person: An individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. Piggyback Registration: See Section 3(c) hereof. Preferred Purchase Agreement: Purchase Agreement dated as of December 16, 1996, between the Company and Prudential Private Equity Investors III, L.P., a Delaware limited partnership. Preferred Registrable Securities: (i) Any Common Stock issued upon the conversion of the Company's Series A Preferred Stock issued pursuant to the Preferred Purchase Agreement or issued upon conversion of the Company's Series B Preferred Stock issued pursuant to the Preferred Purchase Agreement, (ii) any Common Stock issued upon conversion of any of the Company's Series B Preferred Stock issued pursuant to the Preferred Purchase Agreement, (iii) any Common Stock issued upon exercise of the warrant issued pursuant to the Preferred Purchase Agreement and (iv) any Common Stock issued or issuable with respect to the securities referred to in clauses (i), (ii) and (iii) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Preferred Registrable Security, such securities shall cease to be Preferred Registrable Securities when they have been distributed to the public through a broker, dealer of market maker in compliance with Rule 144 under the Securities Act (or any similar rule then in force) or repurchased by the Company or any subsidiary. Prospectus: The prospectus included in any Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement and by all other amendments and supplements to the prospectus, including post-effective amendments and all material incorporated by reference in such prospectus. Registrable Securities: All shares of Common Stock issuable upon conversion of Notes originally issued to the Purchaser; provided that a share ceases to be a Registrable Security when it is no longer a Transfer Restricted Security. Registration Expenses: See Section 7 hereof. Registration Statement: Any registration statement of the Company which covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such Registration Statement, including post-effective amendments, all exhibits and all material incorporated by reference in such Registration Statement. SEC: The Securities and Exchange Commission. Securities Act: The Securities Act of 1933, as amended from time to time. Shelf Registration: See Section 3(a) hereof. Transfer Restricted Securities: The Registrable Securities upon original issuance thereof, and with respect to any particular such security, so long as such security was acquired by the holder thereof other than pursuant to an effective registration under Section 5 of the Securities Act or pursuant to Rule 144; provided that a security that has ceased to be a Transfer Restricted Security cannot thereafter become a Transfer Restricted Security. 2 underwritten registration or underwritten offering: A registration in which securities of the Company are sold to an underwriter for reoffering to the public. 2. Securities Subject to this Agreement (a) Registrable Securities. The securities entitled to the benefits of this Agreement are the Registrable Securities. (b) Holders of Registrable Securities. A Person is deemed to be a holder of Registrable Securities whenever such Person owns Registrable Securities or has the right to acquire such Registrable Securities, whether or not such acquisition has actually been effected and disregarding any legal restrictions upon the exercise of such right. 3. Shelf Registration and Piggyback Registration (a) Shelf Registration. The Company shall file a "shelf" registration statement on any appropriate form pursuant to Rule 415 (or similar rule that may be adopted by the SEC) under the Securities Act (a "Shelf Registration"), as promptly as practicable and in no event later than June 1, 1998, for the Registrable Securities (the "Shelf Registration"). The Company agrees to use its best efforts to cause such Shelf Registration to become effective and thereafter to keep it continuously effective, and to prevent the happening of any event of the kind described in Section 6(k) hereof that requires the Company to give notice pursuant to the last paragraph of Section 6 hereof, for a period of two years from the date on which the SEC declares the Shelf Registration effective or such shorter period which will terminate when all the Registrable Securities covered by the Shelf Registration have been sold pursuant to such Shelf Registration. (b) Additional Interest and Reduction of Conversion Rate Under Certain Circumstances. If the Shelf Registration is not filed with the SEC by June 1, 1998, or if the Shelf Registration is not declared effective by the SEC by September 1, 1998, (i) the interest rates on the Notes affected by such failure shall increase (effective June 1, 1998, with respect to a failure to file the Shelf Registration, or September 1, 1998 with respect to the failure of the Shelf Registration to be declared effective) by 50 basis points (1/2%) over the annual interest rates then in effect and (ii) the Conversion Rate on the Notes affected by such failure shall decrease (effective June 1, 1998, with respect to a failure to file the Shelf Registration, or September 1, 1998 with respect to the failure of the Shelf Registration to be declared effective) by five percent (5%). If the Shelf Registration is not filed and declared effective by December 1, 1998, then (i) the annual rate at which the Company shall pay interest on the Notes shall further increase with respect to the Notes, effective on December 1, 1998, by 50 basis points (1/2%) over the annual interest rate then in effect and (ii) the Conversion Rate on the Notes shall further decrease with respect to the Notes, effective on December 1, 1998, by five percent (5%). The annual rate at which the Company shall pay interest shall continue to increase by 50 basis points (1/2%) and the Conversion Rate shall continue to decrease by five percent (5%) at the end of each 180-day period thereafter, effective on the 181st day, until the Shelf Registration is filed and declared effective by the SEC. The interest rates and the Conversion Rate on the Notes shall return to the 3 rates otherwise in effect on the Notes but for the application of the preceding provisions on the date the Shelf Registration is filed with or declared effective by the SEC, as applicable. The Company shall notify holders of the affected Notes immediately after the occurrence of each and every event which pursuant to this paragraph (b) results in any increase or decrease in the interest rates payable and the Conversion Rate on such Notes. (c) Piggyback Registration. (i) Right to Piggyback. Whenever the Company proposes to register any of its securities under the Securities Act (other than pursuant to a Shelf Registration in accordance with Section 3(a)) and the registration form to be used may be used for the registration of the Registrable Securities (a "Piggyback Registration"), the Company shall give prompt written notice to all holders of Registrable Securities of its intention to effect such registration and shall include in such registration (other than registrations only of shares issued (A) for the purpose of acquiring another company or companies or (B) pursuant to an employee benefit plan) all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 20 days after the receipt of the Company's notice. (ii) Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the Company, the Company shall include in the registration (A) first, the securities the Company proposes to sell, (B) second, the Preferred Registrable Securities requested to be included in such registration, pro rata among the holders of such Preferred Registrable Securities on the basis of the number of shares owned by each such holder, (C) third, the Registrable Securities and the Other Registrable Securities requested to be included in such registration, pro rata among the holders of all Registrable Securities and all Other Registrable Securities on the basis of the number of shares requested to be included in such registration by each such holder, and (D) fourth, other securities requested to be included in such registration. (iii) Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Company's securities, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the holders initially requesting such registration, the Company shall include in the registration (A) first, the securities requested to be included therein by the holders requesting such registration and the Preferred Registrable Securities requested to be included in such registration, pro rata among the holders of such securities on the basis of the number of shares owned by each such holder, (B) second, the Registrable Securities and the Other Registrable Securities requested to be included in such registration, pro rata among the holders of all Registrable Securities and all Other Registrable Securities on the basis of the number of shares requested to be included in such registration by each such holder, and (C) third, other securities requested to be included in such registration. 4 (d) Other Registrations. If the Company has previously filed a Registration Statement with respect to the Registrable Securities pursuant to this Section 3, and if such previous Registration Statement has not been withdrawn or abandoned, the Company shall not file or cause to be effected any other registration of any of its equity securities under the Securities Act (except on Form S-8 or any successor form), whether on its own behalf or at the request of any holder or holders of such securities, until a period of at least 90 days has elapsed from the effective date of such previous registration. 4. Grant of Registration Rights to Others If registration rights are granted to any holder of shares of any class of capital stock or debt of the Company, other than a holder of Registrable Securities or Other Registrable Securities ("Additional Registration Rights"), then the Company shall promptly notify the holders of Registrable Securities upon the grant of such registration rights and offer to the holders of Registrable Securities such additional registration rights granted to such other holders so that the terms and conditions of all registration rights granted to the holders of Registrable Securities by this Agreement and any subsequent agreement are at least as favorable as the registration rights granted to such other holders in all terms and conditions. Upon receipt of such notice and offer, the holders of Registrable Securities shall have 30 days to provide notice to the Company that any such holder of Registrable Securities accepts such additional registration rights. If any such other holder exercises any Additional Registration Rights during such 30-day period, the holders of Registrable Securities shall have the right within such 30-day period to accept the offer, and to provide notice of the intent of any such holder of Registrable Securities to join in any such registration, subject to the terms and conditions of the Additional Registration Rights and this Agreement, as applicable. 5. Hold-Back Agreements (a) Restrictions on Public Sale by Holder of Registrable Securities. Each holder of Registrable Securities whose Registrable Securities are covered by a Registration Statement filed pursuant to Section 3 hereof agrees, if requested by the managing underwriters in an underwritten offering, not to effect any public sale or distribution of securities of the Company of the same class as the securities included in such Registration Statement, including a sale pursuant to Rule 144 under the Securities Act (except as part of such underwritten registration), during the 10-day period prior to, and during the 90-day period beginning on, the closing date of each underwritten offering made pursuant to such Registration Statement, to the extent timely notified in writing by the Company or the managing underwriters; provided, however, that each holder of Registrable Securities shall be subject to the hold-back restrictions of this Section 5(a) only once during each 12-month period of this Agreement. (b) Restrictions on Sale of Common Stock by the Company and Others. In the event a holder of Registrable Securities notifies the Company in writing of its intent to effect an underwritten offering of any Registrable Securities, the Company agrees (1) not to effect any public or private offer, sale or distribution of its Common Stock, including a sale pursuant to Regulation D under the Securities Act, during the 10-day period prior to, and during the 45-day 5 period beginning with, the effective date of a Registration Statement filed under Section 3 to the extent timely notified in writing by a holder of Registrable Securities or the managing underwriters (except as part of such registration, if permitted, or pursuant to registrations on Forms S-4 or S-8 or any successor form to such Forms). 6. Registration Procedures In connection with the Company's registration obligations pursuant to Section 3 hereof, the Company will use its best efforts to effect such registration to permit the sale of such Registrable Securities in accordance with the intended method or methods of distribution thereof, and pursuant thereto the Company will as expeditiously as possible: (a) prepare and file with the SEC, as soon as practicable, a Registration Statement or Registration Statements on any appropriate form under the Securities Act, which form shall be available for the sale of the Registrable Securities in accordance with the intended method or methods of distribution thereof and shall include all financial statements required by the SEC to be filed therewith, cooperate and assist in any filings required to be made with the NASD, and use best efforts to cause such Registration Statement to become effective; provided that before filing a Registration Statement or Prospectus or any amendments or supplements thereto, the Company will furnish to the holders of the Registrable Securities covered by such Registration Statement and the underwriters, if any, copies of all such documents proposed to be filed, which documents will be subject to the reasonable review of such holders and underwriters, and the Company will not file any Registration Statement or amendment thereto or any Prospectus or any supplement thereto to which the holders of a majority of the Registrable Securities covered by such Registration Statement or the underwriters, if any, shall reasonably object; (b) prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for the applicable period, or such shorter period which will terminate when all Registrable Securities covered by such Registration Statement have been sold; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; the Company shall not be deemed to have used its best efforts to keep a Registration Statement effective during the applicable period if it voluntarily takes any action that would result in selling holders of the Registrable Securities covered thereby not being able to sell such Registrable Securities during that period unless such action is required under applicable law, provided that the foregoing shall not apply to actions taken by the Company in good faith and for valid business reasons, including without limitation the acquisition or divestiture of assets, so long as the Company promptly thereafter complies with the requirements of Section 6(k), if applicable; 6 (c) notify the selling holders of Registrable Securities and the managing underwriters, if any, promptly, and (if requested by any such Person) confirm such advice in writing, (1) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, (2) of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (3) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, (4) if at any time the representations and warranties of the Company contemplated by paragraph (o) below cease to be true and correct, (5) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (6) of the happening of any event which makes any statement made in the Registration Statement, the Prospectus or any document incorporated therein by reference untrue or which requires the making of any changes in the Registration Statement, the Prospectus or any document incorporated therein by reference in order to make the statements therein not misleading; (d) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment; (e) if requested by the managing underwriter or underwriters or a holder of Registrable Securities being sold in connection with an underwritten offering, promptly incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriters and the holders of a majority of the Registrable Securities being sold agree should be included therein relating to the plan of distribution with respect to such Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment; (f) furnish to each selling holder of Registrable Securities and each managing underwriter, without charge, at least one signed copy of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference); (g) deliver to each selling holder of Registrable Securities and the underwriters, if any, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons may reasonably request; the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling holders of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto; 7 (h) prior to any public offering of Registrable Securities, register or qualify or cooperate with the selling holders of Registrable Securities, the underwriters, if any, and their respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any seller or underwriter reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the Registration Statement; provided that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process in any such jurisdiction where it is not then so subject; (i) cooperate with the selling holders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of Registrable Securities to the underwriters; (j) use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities; (k) upon the occurrence of any event contemplated by paragraph (c)(6) above, prepare a supplement or posteffective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (l) cause all Registrable Securities covered by the Registration Statement to be listed on each securities exchange on which similar securities issued by the Company are then listed if requested by the holders of a majority of such Registrable Securities or the managing underwriters, if any; (m) not later than the effective date of the Registration Statement, provide a CUSIP number for all Registrable Securities and provide the applicable trustee(s) or transfer agent(s) with printed certificates for the Registrable Securities which are in a form eligible for deposit with Depositary Trust Company; (n) enter into such agreements (including an underwriting agreement) and take all such other actions in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration (1) make such representations and warranties to the holders of such Registrable Securities and the underwriters, 8 if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Purchase Agreement; (2) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the holders of a majority of the Registrable Securities being sold) addressed to each selling holder and the underwriters, if any, covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such holders and underwriters; (3) obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to the selling holders of Registrable Securities and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by underwriters in connection with primary underwritten offerings; (4) if an underwriting agreement is entered into, the same shall set forth in full the indemnification provisions and procedures of Section 8 hereof with respect to all parties to be indemnified pursuant to said Section; and (5) the Company shall deliver such documents and certificates as may be requested by the holders of a majority of the Registrable Securities being sold and the managing underwriters, if any, to evidence compliance with clause (k) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The above shall be done at each closing under such underwriting or similar agreement or as and to the extent required thereunder; (o) make available for inspection by a representative of the holders of a majority of the Registrable Securities, any underwriter participating in any disposition pursuant to such registration, and any attorney or accountant retained by the sellers or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such registration; provided that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such Persons unless disclosure of such records, information or documents is required by court or administrative order; (p) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make generally available to its security holders, earnings statements satisfying the provisions of Section 11(a) of the Securities Act, no later than 45 days after the end of any 12-month period (or 90 days, if such period is a fiscal year) (1) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm or best efforts underwritten offering, or (2) if not sold to underwriters in such an offering, beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the Registration Statement, which statements shall cover said 12-month periods; and (q) promptly prior to the filing of any document which is to be incorporated by reference into the Registration Statement or the Prospectus (after initial filing of the Registration Statement), provide copies of such document to counsel to the selling holders of Registrable Securities and to the managing underwriters, if any, make the Company's 9 representatives available for discussion of such document and make such changes in such document prior to the filing thereof as counsel for such selling holders or underwriters may reasonably request. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding the distribution of such securities as the Company may from time to time reasonably request in writing. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 6(k) hereof, such holder will forthwith discontinue disposition of Registrable Securities until such holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6(k) hereof, or until it is advised in writing (the "Advice") by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the Prospectus, and, if so directed by the Company, such holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the time periods regarding the maintenance of such Registration Statement shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 6(c)(6) hereof to and including the date when each seller of Registrable Securities covered by such Registration Statement shall have received the copies of the supplemented or amended prospectus contemplated by Section 6(k) hereof or the Advice. 7. Registration Expenses (a) All expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all registration and filing fees, fees and expenses associated with filings required to be made with the NASD (including, if applicable, the fees and expenses of any "qualified independent underwriter" and its counsel as may be required by the rules and regulations of the NASD), fees and expenses of compliance with securities or blue sky laws (including fees and disbursements of counsel for the underwriters or selling holders in connection with blue sky qualifications of the Registrable Securities and determination of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or holders of a majority of the Registrable Securities being sold may designate), printing expenses (including expenses of printing certificates for the Registrable Securities in a form eligible for deposit with Depositary Trust Company and of printing prospectuses), messenger, telephone and delivery expenses, and fees and disbursements of counsel for the Company and for the sellers of the Registrable Securities (subject to the provisions of Section 7(b) hereof) and of all independent certified public accountants of the Company (including the expenses of any special audit and "cold comfort" letters required by or incident to such performance), underwriters (excluding discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals relating to the 10 distribution of the Registrable Securities or legal expenses of any Person other than the Company and the selling holders), "road show" fees and expenses of the Company and its management, securities acts liability insurance if the Company so desires and fees and expenses of other Persons retained by the Company (all such expenses being herein called "Registration Expenses") will be borne by the Company, regardless whether the Registration Statement becomes effective. The Company will, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed, rating agency fees and the fees and expenses of any Person, including special experts, retained by the Company. (b) In connection with the Shelf Registration or a Piggyback Registration hereunder, the Company will reimburse the holders of Registrable Securities being registered in such registration for the reasonable fees and disbursements of not more than one counsel (or more than one counsel if a conflict exists among such selling holders in the exercise of the reasonable judgment of counsel for the selling holders and counsel for the Company) chosen by the holders of a majority of such Registrable Securities. 8. Indemnification (a) Indemnification by Company. The Company agrees to indemnify and hold harmless, to the full extent permitted by law, each holder of Registrable Securities, its officers, directors and employees and each Person who controls such holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of a material fact contained in any Registration Statement, Prospectus or preliminary Prospectus or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such holder expressly for use therein; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any such preliminary Prospectus if (i) such holder failed to deliver a copy of the Prospectus to the person asserting such loss, claim, damage, liability or expense after the Company had furnished such holder with a sufficient number of copies of the same and (ii) the Prospectus completely corrected such untrue statement or omission; and provided, further, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission in the Prospectus, if such untrue statement or alleged untrue statement, omission or alleged omission is completely corrected in an amendment or supplement to the Prospectus and the holder of Registrable Securities thereafter fails to deliver such Prospectus as so amended or supplemented prior to or concurrently with the sale of the Registrable Securities to the person asserting such loss, claim, damage, liability or expense after the Company had furnished such holder with a sufficient number of copies of the 11 same. The Company will also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers and directors and each Person who controls such Persons (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities, if requested. (b) Indemnification by Holder of Registrable Securities. In connection with the Shelf Registration or a Piggyback Registration, each holder of Registrable Securities will furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any Registration Statement or Prospectus and agrees to indemnify and hold harmless, to the full extent permitted by law, the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue statement of a material fact or any omission of a material fact required to be stated in the Registration Statement or Prospectus or preliminary Prospectus or necessary to make the statements therein not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such holder to the Company specifically for inclusion in such Registration Statement or Prospectus. In no event shall the liability of any selling holder of Registrable Securities hereunder be greater in amount than the dollar amount of the proceeds received by such holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such Persons specifically for inclusion in any Prospectus or Registration Statement. (c) Conduct of Indemnification Proceedings. Any Person entitled to indemnification hereunder will (i) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party; provided, however, that any Person entitled to indemnification hereunder shall have the right to employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such Person unless (a) the indemnifying party has agreed to pay such fees or expenses, or (b) the indemnifying party shall have failed to assure the defense of such claim and employ counsel reasonably satisfactory to such Person or (c) in the reasonable judgment of any such Person, based upon advice of its counsel, a conflict of interest may exist between such Person and the indemnifying party with respect to such claims (in which case, if the Person notifies the indemnifying party in writing that such Person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such Person). If such defense is not assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). No indemnifying party will be required to consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or 12 plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or counsels. (d) Contribution. If for any reason the indemnification provided for in the preceding clauses (a) and (b) is unavailable to an indemnified party or insufficient to hold it harmless as contemplated by the preceding clauses (a) and (b), then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations, provided that no Purchaser shall be required to contribute in an amount greater than the dollar amount of the proceeds received by such Purchaser with respect to the sale of any securities. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 9. Rule 144 The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder (or, if the Company is not required to file such reports, it will, upon the request of any holder of Registrable Securities made after March 30, 2000, make publicly available other information so long as necessary to permit sales pursuant to Rule 144 under the Securities Act), and it will take such further action as any holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with such information and requirements. 10. Participation in Underwritten Registrations If any of the Registrable Securities covered by the Shelf Registration or a Piggyback Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the holders of a majority of such Registrable Securities included in such offering; provided that such investment bankers and managers must be reasonably satisfactory to the Company. If requested by the holders of a majority of such Registrable Securities, the Company shall use its 13 best efforts to make available its senior management to participate in any "road shows" reasonably requested by such holders. No Person may participate in any underwritten registration hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. Nothing in this Section 10 shall be construed to create any additional rights regarding the registration of Registrable Securities in any Person otherwise than as set forth herein. 11. Miscellaneous (a) Remedies. Remedies for breach by the Company of its obligations to register the Registrable Securities shall be as set forth herein. Each holder of Registrable Securities, in addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company will not on or after the date of this Agreement enter into any agreement with respect to its securities which is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. Other than as disclosed on Schedule 11(b) hereto, the Company has not previously entered into any agreement with respect to its securities granting any registration rights to any Person. The rights granted to the holders of Registrable Securities hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's securities under any such agreements. (c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of holders of at least 50% of the outstanding Registrable Securities. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a holder of Registrable Securities, at the most current address given by such holder to the Company in accordance with the provisions of this Section 11(d), which address initially is, with respect to the Purchaser, the address set forth next to the Purchaser's name on the signature page of the Purchase Agreement, with a copy to 14 Latham & Watkins, 633 West 5th Street, Suite 4000, Los Angeles, California 90071, Attention: Eva Herbst Davis, Esq.; and (ii) if to the Company, initially to Regent Assisted Living, Inc., 121 SW Morrison, Suite 1000, Attention: General Counsel and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 11(d), with a copy to Stoel Rives LLP, 900 SW Fifth Avenue, Suite 2300, Portland, Oregon 97204, Attention: Todd Bauman, Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent holders of Registrable Securities. (f) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (g) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (h) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California. (i) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (j) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by the Company with respect to the securities sold pursuant to the Purchase Agreement. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 15 (k) Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement, the successful party shall be entitled to recover reasonable attorneys' fees in addition to its costs and expenses and any other available remedy. 16 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. The Company: REGENT ASSISTED LIVING, INC., an Oregon corporation By: WALTER C. BOWEN ------------------------------------- Walter C. Bowen ------------------------------------- Title: President Purchaser: JAMES J. PIECZYNSKI, an individual JAMES J. PIECZYNSKI --------------------------------------------- James J. Pieczynski 17 EX-4.15 16 REGISTRATION RIGHTS AGREEMENT (C.T. ISHIKAWA) REGENT ASSISTED LIVING, INC. ----------- REGISTRATION RIGHTS AGREEMENT ----------- Dated as of March 30, 1998 TABLE OF CONTENTS Page 1. Definitions.................................................................1 2. Securities Subject to this Agreement........................................3 3. Shelf Registration and Piggyback Registration...............................3 4. Grant of Registration Rights to Others......................................5 5. Hold-Back Agreements........................................................5 6. Registration Procedures.....................................................6 7. Registration Expenses......................................................10 8. Indemnification............................................................11 9. Rule 144...................................................................13 10. Participation in Underwritten Registrations...............................13 11. Miscellaneous.............................................................14 i REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is made and entered into as of March 30, 1998, by and between REGENT ASSISTED LIVING, INC., an Oregon corporation (the "Company"), and CHRISTOPHER T. ISHIKAWA, an individual (the "Purchaser"). Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in Section 1 hereof. This Agreement is made pursuant to the Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Company and the Purchaser (the "Purchase Agreement"). In order to induce the Purchaser to enter into the Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Purchase Agreement. The parties hereby agree as follows: 1. Definitions As used in this Agreement, the following capitalized terms shall have the following meanings: Common Stock: The Common Stock, no par value, of the Company. Exchange Act: The Securities Exchange Act of 1934, as amended from time to time. NASD: National Association of Securities Dealers, Inc. Notes: The Company's 7.5% Convertible Subordinated Notes due March 31, 2008. Other Registrable Securities: All shares of Common Stock issuable upon conversion of Notes issued to the other purchasers pursuant to similar agreements dated on or about the date of this Agreement. Person: An individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. Piggyback Registration: See Section 3(c) hereof. Preferred Purchase Agreement: Purchase Agreement dated as of December 16, 1996, between the Company and Prudential Private Equity Investors III, L.P., a Delaware limited partnership. Preferred Registrable Securities: (i) Any Common Stock issued upon the conversion of the Company's Series A Preferred Stock issued pursuant to the Preferred Purchase Agreement or issued upon conversion of the Company's Series B Preferred Stock issued pursuant to the Preferred Purchase Agreement, (ii) any Common Stock issued upon conversion of any of the Company's Series B Preferred Stock issued pursuant to the Preferred Purchase Agreement, (iii) any Common Stock issued upon exercise of the warrant issued pursuant to the Preferred Purchase Agreement and (iv) any Common Stock issued or issuable with respect to the securities referred to in clauses (i), (ii) and (iii) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Preferred Registrable Security, such securities shall cease to be Preferred Registrable Securities when they have been distributed to the public through a broker, dealer of market maker in compliance with Rule 144 under the Securities Act (or any similar rule then in force) or repurchased by the Company or any subsidiary. Prospectus: The prospectus included in any Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement and by all other amendments and supplements to the prospectus, including post-effective amendments and all material incorporated by reference in such prospectus. Registrable Securities: All shares of Common Stock issuable upon conversion of Notes originally issued to the Purchaser; provided that a share ceases to be a Registrable Security when it is no longer a Transfer Restricted Security. Registration Expenses: See Section 7 hereof. Registration Statement: Any registration statement of the Company which covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such Registration Statement, including post-effective amendments, all exhibits and all material incorporated by reference in such Registration Statement. SEC: The Securities and Exchange Commission. Securities Act: The Securities Act of 1933, as amended from time to time. Shelf Registration: See Section 3(a) hereof. Transfer Restricted Securities: The Registrable Securities upon original issuance thereof, and with respect to any particular such security, so long as such security was acquired by the holder thereof other than pursuant to an effective registration under Section 5 of the Securities Act or pursuant to Rule 144; provided that a security that has ceased to be a Transfer Restricted Security cannot thereafter become a Transfer Restricted Security. underwritten registration or underwritten offering: A registration in which securities of the Company are sold to an underwriter for reoffering to the public. 2 2. Securities Subject to this Agreement (a) Registrable Securities. The securities entitled to the benefits of this Agreement are the Registrable Securities. (b) Holders of Registrable Securities. A Person is deemed to be a holder of Registrable Securities whenever such Person owns Registrable Securities or has the right to acquire such Registrable Securities, whether or not such acquisition has actually been effected and disregarding any legal restrictions upon the exercise of such right. 3. Shelf Registration and Piggyback Registration (a) Shelf Registration. The Company shall file a "shelf" registration statement on any appropriate form pursuant to Rule 415 (or similar rule that may be adopted by the SEC) under the Securities Act (a "Shelf Registration"), as promptly as practicable and in no event later than June 1, 1998, for the Registrable Securities (the "Shelf Registration"). The Company agrees to use its best efforts to cause such Shelf Registration to become effective and thereafter to keep it continuously effective, and to prevent the happening of any event of the kind described in Section 6(k) hereof that requires the Company to give notice pursuant to the last paragraph of Section 6 hereof, for a period of two years from the date on which the SEC declares the Shelf Registration effective or such shorter period which will terminate when all the Registrable Securities covered by the Shelf Registration have been sold pursuant to such Shelf Registration. (b) Additional Interest and Reduction of Conversion Rate Under Certain Circumstances. If the Shelf Registration is not filed with the SEC by June 1, 1998, or if the Shelf Registration is not declared effective by the SEC by September 1, 1998, (i) the interest rates on the Notes affected by such failure shall increase (effective June 1, 1998, with respect to a failure to file the Shelf Registration, or September 1, 1998 with respect to the failure of the Shelf Registration to be declared effective) by 50 basis points (1/2%) over the annual interest rates then in effect and (ii) the Conversion Rate on the Notes affected by such failure shall decrease (effective June 1, 1998, with respect to a failure to file the Shelf Registration, or September 1, 1998 with respect to the failure of the Shelf Registration to be declared effective) by five percent (5%). If the Shelf Registration is not filed and declared effective by December 1, 1998, then (i) the annual rate at which the Company shall pay interest on the Notes shall further increase with respect to the Notes, effective on December 1, 1998, by 50 basis points (1/2%) over the annual interest rate then in effect and (ii) the Conversion Rate on the Notes shall further decrease with respect to the Notes, effective on December 1, 1998, by five percent (5%). The annual rate at which the Company shall pay interest shall continue to increase by 50 basis points (1/2%) and the Conversion Rate shall continue to decrease by five percent (5%) at the end of each 180-day period thereafter, effective on the 181st day, until the Shelf Registration is filed and declared effective by the SEC. The interest rates and the Conversion Rate on the Notes shall return to the rates otherwise in effect on the Notes but for the application of the preceding provisions on the date the Shelf Registration is filed with or declared effective by the SEC, as applicable. The Company shall notify holders of the affected Notes immediately after the occurrence of each and 3 every event which pursuant to this paragraph (b) results in any increase or decrease in the interest rates payable and the Conversion Rate on such Notes. (c) Piggyback Registration. (i) Right to Piggyback. Whenever the Company proposes to register any of its securities under the Securities Act (other than pursuant to a Shelf Registration in accordance with Section 3(a)) and the registration form to be used may be used for the registration of the Registrable Securities (a "Piggyback Registration"), the Company shall give prompt written notice to all holders of Registrable Securities of its intention to effect such registration and shall include in such registration (other than registrations only of shares issued (A) for the purpose of acquiring another company or companies or (B) pursuant to an employee benefit plan) all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 20 days after the receipt of the Company's notice. (ii) Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the Company, the Company shall include in the registration (A) first, the securities the Company proposes to sell, (B) second, the Preferred Registrable Securities requested to be included in such registration, pro rata among the holders of such Preferred Registrable Securities on the basis of the number of shares owned by each such holder, (C) third, the Registrable Securities and the Other Registrable Securities requested to be included in such registration, pro rata among the holders of all Registrable Securities and all Other Registrable Securities on the basis of the number of shares requested to be included in such registration by each such holder, and (D) fourth, other securities requested to be included in such registration. (iii) Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Company's securities, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the holders initially requesting such registration, the Company shall include in the registration (A) first, the securities requested to be included therein by the holders requesting such registration and the Preferred Registrable Securities requested to be included in such registration, pro rata among the holders of such securities on the basis of the number of shares owned by each such holder, (B) second, the Registrable Securities and the Other Registrable Securities requested to be included in such registration, pro rata among the holders of all Registrable Securities and all Other Registrable Securities on the basis of the number of shares requested to be included in such registration by each such holder, and (C) third, other securities requested to be included in such registration. (d) Other Registrations. If the Company has previously filed a Registration Statement with respect to the Registrable Securities pursuant to this Section 3, and if such 4 previous Registration Statement has not been withdrawn or abandoned, the Company shall not file or cause to be effected any other registration of any of its equity securities under the Securities Act (except on Form S-8 or any successor form), whether on its own behalf or at the request of any holder or holders of such securities, until a period of at least 90 days has elapsed from the effective date of such previous registration. 4. Grant of Registration Rights to Others If registration rights are granted to any holder of shares of any class of capital stock or debt of the Company, other than a holder of Registrable Securities or Other Registrable Securities ("Additional Registration Rights"), then the Company shall promptly notify the holders of Registrable Securities upon the grant of such registration rights and offer to the holders of Registrable Securities such additional registration rights granted to such other holders so that the terms and conditions of all registration rights granted to the holders of Registrable Securities by this Agreement and any subsequent agreement are at least as favorable as the registration rights granted to such other holders in all terms and conditions. Upon receipt of such notice and offer, the holders of Registrable Securities shall have 30 days to provide notice to the Company that any such holder of Registrable Securities accepts such additional registration rights. If any such other holder exercises any Additional Registration Rights during such 30-day period, the holders of Registrable Securities shall have the right within such 30-day period to accept the offer, and to provide notice of the intent of any such holder of Registrable Securities to join in any such registration, subject to the terms and conditions of the Additional Registration Rights and this Agreement, as applicable. 5. Hold-Back Agreements (a) Restrictions on Public Sale by Holder of Registrable Securities. Each holder of Registrable Securities whose Registrable Securities are covered by a Registration Statement filed pursuant to Section 3 hereof agrees, if requested by the managing underwriters in an underwritten offering, not to effect any public sale or distribution of securities of the Company of the same class as the securities included in such Registration Statement, including a sale pursuant to Rule 144 under the Securities Act (except as part of such underwritten registration), during the 10-day period prior to, and during the 90-day period beginning on, the closing date of each underwritten offering made pursuant to such Registration Statement, to the extent timely notified in writing by the Company or the managing underwriters; provided, however, that each holder of Registrable Securities shall be subject to the hold-back restrictions of this Section 5(a) only once during each 12-month period of this Agreement. (b) Restrictions on Sale of Common Stock by the Company and Others. In the event a holder of Registrable Securities notifies the Company in writing of its intent to effect an underwritten offering of any Registrable Securities, the Company agrees (1) not to effect any public or private offer, sale or distribution of its Common Stock, including a sale pursuant to Regulation D under the Securities Act, during the 10-day period prior to, and during the 45-day period beginning with, the effective date of a Registration Statement filed under Section 3 to the extent timely notified in writing by a holder of Registrable Securities or the managing 5 underwriters (except as part of such registration, if permitted, or pursuant to registrations on Forms S-4 or S-8 or any successor form to such Forms). 6. Registration Procedures In connection with the Company's registration obligations pursuant to Section 3 hereof, the Company will use its best efforts to effect such registration to permit the sale of such Registrable Securities in accordance with the intended method or methods of distribution thereof, and pursuant thereto the Company will as expeditiously as possible: (a) prepare and file with the SEC, as soon as practicable, a Registration Statement or Registration Statements on any appropriate form under the Securities Act, which form shall be available for the sale of the Registrable Securities in accordance with the intended method or methods of distribution thereof and shall include all financial statements required by the SEC to be filed therewith, cooperate and assist in any filings required to be made with the NASD, and use best efforts to cause such Registration Statement to become effective; provided that before filing a Registration Statement or Prospectus or any amendments or supplements thereto, the Company will furnish to the holders of the Registrable Securities covered by such Registration Statement and the underwriters, if any, copies of all such documents proposed to be filed, which documents will be subject to the reasonable review of such holders and underwriters, and the Company will not file any Registration Statement or amendment thereto or any Prospectus or any supplement thereto to which the holders of a majority of the Registrable Securities covered by such Registration Statement or the underwriters, if any, shall reasonably object; (b) prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for the applicable period, or such shorter period which will terminate when all Registrable Securities covered by such Registration Statement have been sold; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; the Company shall not be deemed to have used its best efforts to keep a Registration Statement effective during the applicable period if it voluntarily takes any action that would result in selling holders of the Registrable Securities covered thereby not being able to sell such Registrable Securities during that period unless such action is required under applicable law, provided that the foregoing shall not apply to actions taken by the Company in good faith and for valid business reasons, including without limitation the acquisition or divestiture of assets, so long as the Company promptly thereafter complies with the requirements of Section 6(k), if applicable; (c) notify the selling holders of Registrable Securities and the managing underwriters, if any, promptly, and (if requested by any such Person) confirm such advice in 6 writing, (1) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, (2) of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (3) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, (4) if at any time the representations and warranties of the Company contemplated by paragraph (o) below cease to be true and correct, (5) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (6) of the happening of any event which makes any statement made in the Registration Statement, the Prospectus or any document incorporated therein by reference untrue or which requires the making of any changes in the Registration Statement, the Prospectus or any document incorporated therein by reference in order to make the statements therein not misleading; (d) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment; (e) if requested by the managing underwriter or underwriters or a holder of Registrable Securities being sold in connection with an underwritten offering, promptly incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriters and the holders of a majority of the Registrable Securities being sold agree should be included therein relating to the plan of distribution with respect to such Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment; (f) furnish to each selling holder of Registrable Securities and each managing underwriter, without charge, at least one signed copy of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference); (g) deliver to each selling holder of Registrable Securities and the underwriters, if any, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons may reasonably request; the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling holders of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto; (h) prior to any public offering of Registrable Securities, register or qualify or cooperate with the selling holders of Registrable Securities, the underwriters, if any, and their 7 respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any seller or underwriter reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the Registration Statement; provided that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process in any such jurisdiction where it is not then so subject; (i) cooperate with the selling holders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of Registrable Securities to the underwriters; (j) use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities; (k) upon the occurrence of any event contemplated by paragraph (c)(6) above, prepare a supplement or posteffective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (l) cause all Registrable Securities covered by the Registration Statement to be listed on each securities exchange on which similar securities issued by the Company are then listed if requested by the holders of a majority of such Registrable Securities or the managing underwriters, if any; (m) not later than the effective date of the Registration Statement, provide a CUSIP number for all Registrable Securities and provide the applicable trustee(s) or transfer agent(s) with printed certificates for the Registrable Securities which are in a form eligible for deposit with Depositary Trust Company; (n) enter into such agreements (including an underwriting agreement) and take all such other actions in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration (1) make such representations and warranties to the holders of such Registrable Securities and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Purchase Agreement; (2) obtain opinions of counsel to the Company and updates thereof 8 (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the holders of a majority of the Registrable Securities being sold) addressed to each selling holder and the underwriters, if any, covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such holders and underwriters; (3) obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to the selling holders of Registrable Securities and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by underwriters in connection with primary underwritten offerings; (4) if an underwriting agreement is entered into, the same shall set forth in full the indemnification provisions and procedures of Section 8 hereof with respect to all parties to be indemnified pursuant to said Section; and (5) the Company shall deliver such documents and certificates as may be requested by the holders of a majority of the Registrable Securities being sold and the managing underwriters, if any, to evidence compliance with clause (k) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The above shall be done at each closing under such underwriting or similar agreement or as and to the extent required thereunder; (o) make available for inspection by a representative of the holders of a majority of the Registrable Securities, any underwriter participating in any disposition pursuant to such registration, and any attorney or accountant retained by the sellers or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such registration; provided that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such Persons unless disclosure of such records, information or documents is required by court or administrative order; (p) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make generally available to its security holders, earnings statements satisfying the provisions of Section 11(a) of the Securities Act, no later than 45 days after the end of any 12-month period (or 90 days, if such period is a fiscal year) (1) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm or best efforts underwritten offering, or (2) if not sold to underwriters in such an offering, beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the Registration Statement, which statements shall cover said 12-month periods; and (q) promptly prior to the filing of any document which is to be incorporated by reference into the Registration Statement or the Prospectus (after initial filing of the Registration Statement), provide copies of such document to counsel to the selling holders of Registrable Securities and to the managing underwriters, if any, make the Company's representatives available for discussion of such document and make such changes in such document prior to the filing thereof as counsel for such selling holders or underwriters may reasonably request. 9 The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding the distribution of such securities as the Company may from time to time reasonably request in writing. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 6(k) hereof, such holder will forthwith discontinue disposition of Registrable Securities until such holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6(k) hereof, or until it is advised in writing (the "Advice") by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the Prospectus, and, if so directed by the Company, such holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the time periods regarding the maintenance of such Registration Statement shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 6(c)(6) hereof to and including the date when each seller of Registrable Securities covered by such Registration Statement shall have received the copies of the supplemented or amended prospectus contemplated by Section 6(k) hereof or the Advice. 7. Registration Expenses (a) All expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all registration and filing fees, fees and expenses associated with filings required to be made with the NASD (including, if applicable, the fees and expenses of any "qualified independent underwriter" and its counsel as may be required by the rules and regulations of the NASD), fees and expenses of compliance with securities or blue sky laws (including fees and disbursements of counsel for the underwriters or selling holders in connection with blue sky qualifications of the Registrable Securities and determination of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or holders of a majority of the Registrable Securities being sold may designate), printing expenses (including expenses of printing certificates for the Registrable Securities in a form eligible for deposit with Depositary Trust Company and of printing prospectuses), messenger, telephone and delivery expenses, and fees and disbursements of counsel for the Company and for the sellers of the Registrable Securities (subject to the provisions of Section 7(b) hereof) and of all independent certified public accountants of the Company (including the expenses of any special audit and "cold comfort" letters required by or incident to such performance), underwriters (excluding discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals relating to the distribution of the Registrable Securities or legal expenses of any Person other than the Company and the selling holders), "road show" fees and expenses of the Company and its management, securities acts liability insurance if the Company so desires and fees and expenses of other Persons retained by the Company (all such expenses being herein called "Registration 10 Expenses") will be borne by the Company, regardless whether the Registration Statement becomes effective. The Company will, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed, rating agency fees and the fees and expenses of any Person, including special experts, retained by the Company. (b) In connection with the Shelf Registration or a Piggyback Registration hereunder, the Company will reimburse the holders of Registrable Securities being registered in such registration for the reasonable fees and disbursements of not more than one counsel (or more than one counsel if a conflict exists among such selling holders in the exercise of the reasonable judgment of counsel for the selling holders and counsel for the Company) chosen by the holders of a majority of such Registrable Securities. 8. Indemnification (a) Indemnification by Company. The Company agrees to indemnify and hold harmless, to the full extent permitted by law, each holder of Registrable Securities, its officers, directors and employees and each Person who controls such holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of a material fact contained in any Registration Statement, Prospectus or preliminary Prospectus or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such holder expressly for use therein; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any such preliminary Prospectus if (i) such holder failed to deliver a copy of the Prospectus to the person asserting such loss, claim, damage, liability or expense after the Company had furnished such holder with a sufficient number of copies of the same and (ii) the Prospectus completely corrected such untrue statement or omission; and provided, further, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission in the Prospectus, if such untrue statement or alleged untrue statement, omission or alleged omission is completely corrected in an amendment or supplement to the Prospectus and the holder of Registrable Securities thereafter fails to deliver such Prospectus as so amended or supplemented prior to or concurrently with the sale of the Registrable Securities to the person asserting such loss, claim, damage, liability or expense after the Company had furnished such holder with a sufficient number of copies of the same. The Company will also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers and directors and each Person who controls such Persons (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities, if requested. 11 (b) Indemnification by Holder of Registrable Securities. In connection with the Shelf Registration or a Piggyback Registration, each holder of Registrable Securities will furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any Registration Statement or Prospectus and agrees to indemnify and hold harmless, to the full extent permitted by law, the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue statement of a material fact or any omission of a material fact required to be stated in the Registration Statement or Prospectus or preliminary Prospectus or necessary to make the statements therein not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such holder to the Company specifically for inclusion in such Registration Statement or Prospectus. In no event shall the liability of any selling holder of Registrable Securities hereunder be greater in amount than the dollar amount of the proceeds received by such holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such Persons specifically for inclusion in any Prospectus or Registration Statement. (c) Conduct of Indemnification Proceedings. Any Person entitled to indemnification hereunder will (i) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party; provided, however, that any Person entitled to indemnification hereunder shall have the right to employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such Person unless (a) the indemnifying party has agreed to pay such fees or expenses, or (b) the indemnifying party shall have failed to assure the defense of such claim and employ counsel reasonably satisfactory to such Person or (c) in the reasonable judgment of any such Person, based upon advice of its counsel, a conflict of interest may exist between such Person and the indemnifying party with respect to such claims (in which case, if the Person notifies the indemnifying party in writing that such Person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such Person). If such defense is not assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). No indemnifying party will be required to consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim, in which event the 12 indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or counsels. (d) Contribution. If for any reason the indemnification provided for in the preceding clauses (a) and (b) is unavailable to an indemnified party or insufficient to hold it harmless as contemplated by the preceding clauses (a) and (b), then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations, provided that no Purchaser shall be required to contribute in an amount greater than the dollar amount of the proceeds received by such Purchaser with respect to the sale of any securities. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 9. Rule 144 The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder (or, if the Company is not required to file such reports, it will, upon the request of any holder of Registrable Securities made after March 30, 2000, make publicly available other information so long as necessary to permit sales pursuant to Rule 144 under the Securities Act), and it will take such further action as any holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with such information and requirements. 10. Participation in Underwritten Registrations If any of the Registrable Securities covered by the Shelf Registration or a Piggyback Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the holders of a majority of such Registrable Securities included in such offering; provided that such investment bankers and managers must be reasonably satisfactory to the Company. If requested by the holders of a majority of such Registrable Securities, the Company shall use its best efforts to make available its senior management to participate in any "road shows" reasonably requested by such holders. No Person may participate in any underwritten registration hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting 13 agreements and other documents required under the terms of such underwriting arrangements. Nothing in this Section 10 shall be construed to create any additional rights regarding the registration of Registrable Securities in any Person otherwise than as set forth herein. 11. Miscellaneous (a) Remedies. Remedies for breach by the Company of its obligations to register the Registrable Securities shall be as set forth herein. Each holder of Registrable Securities, in addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company will not on or after the date of this Agreement enter into any agreement with respect to its securities which is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. Other than as disclosed on Schedule 11(b) hereto, the Company has not previously entered into any agreement with respect to its securities granting any registration rights to any Person. The rights granted to the holders of Registrable Securities hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's securities under any such agreements. (c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of holders of at least 50% of the outstanding Registrable Securities. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a holder of Registrable Securities, at the most current address given by such holder to the Company in accordance with the provisions of this Section 11(d), which address initially is, with respect to the Purchaser, the address set forth next to the Purchaser's name on the signature page of the Purchase Agreement, with a copy to Latham & Watkins, 633 West 5th Street, Suite 4000, Los Angeles, California 90071, Attention: Eva Herbst Davis, Esq.; and (ii) if to the Company, initially to Regent Assisted Living, Inc., 121 SW Morrison, Suite 1000, Attention: General Counsel and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 11(d), with a copy to Stoel Rives LLP, 900 SW Fifth Avenue, Suite 2300, Portland, Oregon 97204, Attention: Todd Bauman, Esq. 14 All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent holders of Registrable Securities. (f) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (g) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (h) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California. (i) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (j) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by the Company with respect to the securities sold pursuant to the Purchase Agreement. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. (k) Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement, the successful party shall be entitled to recover reasonable attorneys' fees in addition to its costs and expenses and any other available remedy. 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. The Company: REGENT ASSISTED LIVING, INC., an Oregon corporation By: WALTER C. BOWEN ------------------------------------- Walter C. Bowen ------------------------------------- Title: President Purchaser: CHRISTOPHER T. ISHIKAWA, an individual CHRISTOPHER T. ISHIKAWA --------------------------------------------- Christopher T. Ishikawa 16 EX-4.16 17 REGISTRATION RIGHTS AGREEMENT (P.J. PRIVETT) REGENT ASSISTED LIVING, INC. ----------- REGISTRATION RIGHTS AGREEMENT ----------- Dated as of March 30, 1998 TABLE OF CONTENTS Page 1. Definitions.................................................................1 2. Securities Subject to this Agreement........................................3 3. Shelf Registration and Piggyback Registration...............................3 4. Grant of Registration Rights to Others......................................5 5. Hold-Back Agreements........................................................5 6. Registration Procedures.....................................................6 7. Registration Expenses......................................................10 8. Indemnification............................................................11 9. Rule 144...................................................................13 10. Participation in Underwritten Registrations...............................13 11. Miscellaneous.............................................................14 i REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is made and entered into as of March 30, 1998, by and between REGENT ASSISTED LIVING, INC., an Oregon corporation (the "Company"), and PAMELA J. PRIVETT, an individual (the "Purchaser"). Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in Section 1 hereof. This Agreement is made pursuant to the Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Company and the Purchaser (the "Purchase Agreement"). In order to induce the Purchaser to enter into the Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Purchase Agreement. The parties hereby agree as follows: 1. Definitions As used in this Agreement, the following capitalized terms shall have the following meanings: Common Stock: The Common Stock, no par value, of the Company. Exchange Act: The Securities Exchange Act of 1934, as amended from time to time. NASD: National Association of Securities Dealers, Inc. Notes: The Company's 7.5% Convertible Subordinated Notes due March 31, 2008. Other Registrable Securities: All shares of Common Stock issuable upon conversion of Notes issued to the other purchasers pursuant to similar agreements dated on or about the date of this Agreement. Person: An individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. Piggyback Registration: See Section 3(c) hereof. Preferred Purchase Agreement: Purchase Agreement dated as of December 16, 1996, between the Company and Prudential Private Equity Investors III, L.P., a Delaware limited partnership. Preferred Registrable Securities: (i) Any Common Stock issued upon the conversion of the Company's Series A Preferred Stock issued pursuant to the Preferred Purchase Agreement or issued upon conversion of the Company's Series B Preferred Stock issued pursuant to the Preferred Purchase Agreement, (ii) any Common Stock issued upon conversion of any of the Company's Series B Preferred Stock issued pursuant to the Preferred Purchase Agreement, (iii) any Common Stock issued upon exercise of the warrant issued pursuant to the Preferred Purchase Agreement and (iv) any Common Stock issued or issuable with respect to the securities referred to in clauses (i), (ii) and (iii) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Preferred Registrable Security, such securities shall cease to be Preferred Registrable Securities when they have been distributed to the public through a broker, dealer of market maker in compliance with Rule 144 under the Securities Act (or any similar rule then in force) or repurchased by the Company or any subsidiary. Prospectus: The prospectus included in any Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement and by all other amendments and supplements to the prospectus, including post-effective amendments and all material incorporated by reference in such prospectus. Registrable Securities: All shares of Common Stock issuable upon conversion of Notes originally issued to the Purchaser; provided that a share ceases to be a Registrable Security when it is no longer a Transfer Restricted Security. Registration Expenses: See Section 7 hereof. Registration Statement: Any registration statement of the Company which covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such Registration Statement, including post-effective amendments, all exhibits and all material incorporated by reference in such Registration Statement. SEC: The Securities and Exchange Commission. Securities Act: The Securities Act of 1933, as amended from time to time. Shelf Registration: See Section 3(a) hereof. Transfer Restricted Securities: The Registrable Securities upon original issuance thereof, and with respect to any particular such security, so long as such security was acquired by the holder thereof other than pursuant to an effective registration under Section 5 of the Securities Act or pursuant to Rule 144; provided that a security that has ceased to be a Transfer Restricted Security cannot thereafter become a Transfer Restricted Security. underwritten registration or underwritten offering: A registration in which securities of the Company are sold to an underwriter for reoffering to the public. 2 2. Securities Subject to this Agreement (a) Registrable Securities. The securities entitled to the benefits of this Agreement are the Registrable Securities. (b) Holders of Registrable Securities. A Person is deemed to be a holder of Registrable Securities whenever such Person owns Registrable Securities or has the right to acquire such Registrable Securities, whether or not such acquisition has actually been effected and disregarding any legal restrictions upon the exercise of such right. 3. Shelf Registration and Piggyback Registration (a) Shelf Registration. The Company shall file a "shelf" registration statement on any appropriate form pursuant to Rule 415 (or similar rule that may be adopted by the SEC) under the Securities Act (a "Shelf Registration"), as promptly as practicable and in no event later than June 1, 1998, for the Registrable Securities (the "Shelf Registration"). The Company agrees to use its best efforts to cause such Shelf Registration to become effective and thereafter to keep it continuously effective, and to prevent the happening of any event of the kind described in Section 6(k) hereof that requires the Company to give notice pursuant to the last paragraph of Section 6 hereof, for a period of two years from the date on which the SEC declares the Shelf Registration effective or such shorter period which will terminate when all the Registrable Securities covered by the Shelf Registration have been sold pursuant to such Shelf Registration. (b) Additional Interest and Reduction of Conversion Rate Under Certain Circumstances. If the Shelf Registration is not filed with the SEC by June 1, 1998, or if the Shelf Registration is not declared effective by the SEC by September 1, 1998, (i) the interest rates on the Notes affected by such failure shall increase (effective June 1, 1998, with respect to a failure to file the Shelf Registration, or September 1, 1998 with respect to the failure of the Shelf Registration to be declared effective) by 50 basis points (1/2%) over the annual interest rates then in effect and (ii) the Conversion Rate on the Notes affected by such failure shall decrease (effective June 1, 1998, with respect to a failure to file the Shelf Registration, or September 1, 1998 with respect to the failure of the Shelf Registration to be declared effective) by five percent (5%). If the Shelf Registration is not filed and declared effective by December 1, 1998, then (i) the annual rate at which the Company shall pay interest on the Notes shall further increase with respect to the Notes, effective on December 1, 1998, by 50 basis points (1/2%) over the annual interest rate then in effect and (ii) the Conversion Rate on the Notes shall further decrease with respect to the Notes, effective on December 1, 1998, by five percent (5%). The annual rate at which the Company shall pay interest shall continue to increase by 50 basis points (1/2%) and the Conversion Rate shall continue to decrease by five percent (5%) at the end of each 180-day period thereafter, effective on the 181st day, until the Shelf Registration is filed and declared effective by the SEC. The interest rates and the Conversion Rate on the Notes shall return to the rates otherwise in effect on the Notes but for the application of the preceding provisions on the date the Shelf Registration is filed with or declared effective by the SEC, as applicable. The Company shall notify holders of the affected Notes immediately after the occurrence of each and 3 every event which pursuant to this paragraph (b) results in any increase or decrease in the interest rates payable and the Conversion Rate on such Notes. (c) Piggyback Registration. (i) Right to Piggyback. Whenever the Company proposes to register any of its securities under the Securities Act (other than pursuant to a Shelf Registration in accordance with Section 3(a)) and the registration form to be used may be used for the registration of the Registrable Securities (a "Piggyback Registration"), the Company shall give prompt written notice to all holders of Registrable Securities of its intention to effect such registration and shall include in such registration (other than registrations only of shares issued (A) for the purpose of acquiring another company or companies or (B) pursuant to an employee benefit plan) all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 20 days after the receipt of the Company's notice. (ii) Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the Company, the Company shall include in the registration (A) first, the securities the Company proposes to sell, (B) second, the Preferred Registrable Securities requested to be included in such registration, pro rata among the holders of such Preferred Registrable Securities on the basis of the number of shares owned by each such holder, (C) third, the Registrable Securities and the Other Registrable Securities requested to be included in such registration, pro rata among the holders of all Registrable Securities and all Other Registrable Securities on the basis of the number of shares requested to be included in such registration by each such holder, and (D) fourth, other securities requested to be included in such registration. (iii) Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Company's securities, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the holders initially requesting such registration, the Company shall include in the registration (A) first, the securities requested to be included therein by the holders requesting such registration and the Preferred Registrable Securities requested to be included in such registration, pro rata among the holders of such securities on the basis of the number of shares owned by each such holder, (B) second, the Registrable Securities and the Other Registrable Securities requested to be included in such registration, pro rata among the holders of all Registrable Securities and all Other Registrable Securities on the basis of the number of shares requested to be included in such registration by each such holder, and (C) third, other securities requested to be included in such registration. (d) Other Registrations. If the Company has previously filed a Registration Statement with respect to the Registrable Securities pursuant to this Section 3, and if such 4 previous Registration Statement has not been withdrawn or abandoned, the Company shall not file or cause to be effected any other registration of any of its equity securities under the Securities Act (except on Form S-8 or any successor form), whether on its own behalf or at the request of any holder or holders of such securities, until a period of at least 90 days has elapsed from the effective date of such previous registration. 4. Grant of Registration Rights to Others If registration rights are granted to any holder of shares of any class of capital stock or debt of the Company, other than a holder of Registrable Securities or Other Registrable Securities ("Additional Registration Rights"), then the Company shall promptly notify the holders of Registrable Securities upon the grant of such registration rights and offer to the holders of Registrable Securities such additional registration rights granted to such other holders so that the terms and conditions of all registration rights granted to the holders of Registrable Securities by this Agreement and any subsequent agreement are at least as favorable as the registration rights granted to such other holders in all terms and conditions. Upon receipt of such notice and offer, the holders of Registrable Securities shall have 30 days to provide notice to the Company that any such holder of Registrable Securities accepts such additional registration rights. If any such other holder exercises any Additional Registration Rights during such 30-day period, the holders of Registrable Securities shall have the right within such 30-day period to accept the offer, and to provide notice of the intent of any such holder of Registrable Securities to join in any such registration, subject to the terms and conditions of the Additional Registration Rights and this Agreement, as applicable. 5. Hold-Back Agreements (a) Restrictions on Public Sale by Holder of Registrable Securities. Each holder of Registrable Securities whose Registrable Securities are covered by a Registration Statement filed pursuant to Section 3 hereof agrees, if requested by the managing underwriters in an underwritten offering, not to effect any public sale or distribution of securities of the Company of the same class as the securities included in such Registration Statement, including a sale pursuant to Rule 144 under the Securities Act (except as part of such underwritten registration), during the 10-day period prior to, and during the 90-day period beginning on, the closing date of each underwritten offering made pursuant to such Registration Statement, to the extent timely notified in writing by the Company or the managing underwriters; provided, however, that each holder of Registrable Securities shall be subject to the hold-back restrictions of this Section 5(a) only once during each 12-month period of this Agreement. (b) Restrictions on Sale of Common Stock by the Company and Others. In the event a holder of Registrable Securities notifies the Company in writing of its intent to effect an underwritten offering of any Registrable Securities, the Company agrees (1) not to effect any public or private offer, sale or distribution of its Common Stock, including a sale pursuant to Regulation D under the Securities Act, during the 10-day period prior to, and during the 45-day period beginning with, the effective date of a Registration Statement filed under Section 3 to the extent timely notified in writing by a holder of Registrable Securities or the managing 5 underwriters (except as part of such registration, if permitted, or pursuant to registrations on Forms S-4 or S-8 or any successor form to such Forms). 6. Registration Procedures In connection with the Company's registration obligations pursuant to Section 3 hereof, the Company will use its best efforts to effect such registration to permit the sale of such Registrable Securities in accordance with the intended method or methods of distribution thereof, and pursuant thereto the Company will as expeditiously as possible: (a) prepare and file with the SEC, as soon as practicable, a Registration Statement or Registration Statements on any appropriate form under the Securities Act, which form shall be available for the sale of the Registrable Securities in accordance with the intended method or methods of distribution thereof and shall include all financial statements required by the SEC to be filed therewith, cooperate and assist in any filings required to be made with the NASD, and use best efforts to cause such Registration Statement to become effective; provided that before filing a Registration Statement or Prospectus or any amendments or supplements thereto, the Company will furnish to the holders of the Registrable Securities covered by such Registration Statement and the underwriters, if any, copies of all such documents proposed to be filed, which documents will be subject to the reasonable review of such holders and underwriters, and the Company will not file any Registration Statement or amendment thereto or any Prospectus or any supplement thereto to which the holders of a majority of the Registrable Securities covered by such Registration Statement or the underwriters, if any, shall reasonably object; (b) prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for the applicable period, or such shorter period which will terminate when all Registrable Securities covered by such Registration Statement have been sold; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; the Company shall not be deemed to have used its best efforts to keep a Registration Statement effective during the applicable period if it voluntarily takes any action that would result in selling holders of the Registrable Securities covered thereby not being able to sell such Registrable Securities during that period unless such action is required under applicable law, provided that the foregoing shall not apply to actions taken by the Company in good faith and for valid business reasons, including without limitation the acquisition or divestiture of assets, so long as the Company promptly thereafter complies with the requirements of Section 6(k), if applicable; (c) notify the selling holders of Registrable Securities and the managing underwriters, if any, promptly, and (if requested by any such Person) confirm such advice in 6 writing, (1) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, (2) of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (3) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, (4) if at any time the representations and warranties of the Company contemplated by paragraph (o) below cease to be true and correct, (5) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (6) of the happening of any event which makes any statement made in the Registration Statement, the Prospectus or any document incorporated therein by reference untrue or which requires the making of any changes in the Registration Statement, the Prospectus or any document incorporated therein by reference in order to make the statements therein not misleading; (d) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment; (e) if requested by the managing underwriter or underwriters or a holder of Registrable Securities being sold in connection with an underwritten offering, promptly incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriters and the holders of a majority of the Registrable Securities being sold agree should be included therein relating to the plan of distribution with respect to such Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment; (f) furnish to each selling holder of Registrable Securities and each managing underwriter, without charge, at least one signed copy of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference); (g) deliver to each selling holder of Registrable Securities and the underwriters, if any, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons may reasonably request; the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling holders of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto; (h) prior to any public offering of Registrable Securities, register or qualify or cooperate with the selling holders of Registrable Securities, the underwriters, if any, and their 7 respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any seller or underwriter reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the Registration Statement; provided that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process in any such jurisdiction where it is not then so subject; (i) cooperate with the selling holders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of Registrable Securities to the underwriters; (j) use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities; (k) upon the occurrence of any event contemplated by paragraph (c)(6) above, prepare a supplement or posteffective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (l) cause all Registrable Securities covered by the Registration Statement to be listed on each securities exchange on which similar securities issued by the Company are then listed if requested by the holders of a majority of such Registrable Securities or the managing underwriters, if any; (m) not later than the effective date of the Registration Statement, provide a CUSIP number for all Registrable Securities and provide the applicable trustee(s) or transfer agent(s) with printed certificates for the Registrable Securities which are in a form eligible for deposit with Depositary Trust Company; (n) enter into such agreements (including an underwriting agreement) and take all such other actions in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration (1) make such representations and warranties to the holders of such Registrable Securities and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Purchase Agreement; (2) obtain opinions of counsel to the Company and updates thereof 8 (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the holders of a majority of the Registrable Securities being sold) addressed to each selling holder and the underwriters, if any, covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such holders and underwriters; (3) obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to the selling holders of Registrable Securities and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by underwriters in connection with primary underwritten offerings; (4) if an underwriting agreement is entered into, the same shall set forth in full the indemnification provisions and procedures of Section 8 hereof with respect to all parties to be indemnified pursuant to said Section; and (5) the Company shall deliver such documents and certificates as may be requested by the holders of a majority of the Registrable Securities being sold and the managing underwriters, if any, to evidence compliance with clause (k) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The above shall be done at each closing under such underwriting or similar agreement or as and to the extent required thereunder; (o) make available for inspection by a representative of the holders of a majority of the Registrable Securities, any underwriter participating in any disposition pursuant to such registration, and any attorney or accountant retained by the sellers or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such registration; provided that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such Persons unless disclosure of such records, information or documents is required by court or administrative order; (p) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make generally available to its security holders, earnings statements satisfying the provisions of Section 11(a) of the Securities Act, no later than 45 days after the end of any 12-month period (or 90 days, if such period is a fiscal year) (1) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm or best efforts underwritten offering, or (2) if not sold to underwriters in such an offering, beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the Registration Statement, which statements shall cover said 12-month periods; and (q) promptly prior to the filing of any document which is to be incorporated by reference into the Registration Statement or the Prospectus (after initial filing of the Registration Statement), provide copies of such document to counsel to the selling holders of Registrable Securities and to the managing underwriters, if any, make the Company's representatives available for discussion of such document and make such changes in such document prior to the filing thereof as counsel for such selling holders or underwriters may reasonably request. 9 The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding the distribution of such securities as the Company may from time to time reasonably request in writing. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 6(k) hereof, such holder will forthwith discontinue disposition of Registrable Securities until such holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6(k) hereof, or until it is advised in writing (the "Advice") by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the Prospectus, and, if so directed by the Company, such holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the time periods regarding the maintenance of such Registration Statement shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 6(c)(6) hereof to and including the date when each seller of Registrable Securities covered by such Registration Statement shall have received the copies of the supplemented or amended prospectus contemplated by Section 6(k) hereof or the Advice. 7. Registration Expenses (a) All expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all registration and filing fees, fees and expenses associated with filings required to be made with the NASD (including, if applicable, the fees and expenses of any "qualified independent underwriter" and its counsel as may be required by the rules and regulations of the NASD), fees and expenses of compliance with securities or blue sky laws (including fees and disbursements of counsel for the underwriters or selling holders in connection with blue sky qualifications of the Registrable Securities and determination of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or holders of a majority of the Registrable Securities being sold may designate), printing expenses (including expenses of printing certificates for the Registrable Securities in a form eligible for deposit with Depositary Trust Company and of printing prospectuses), messenger, telephone and delivery expenses, and fees and disbursements of counsel for the Company and for the sellers of the Registrable Securities (subject to the provisions of Section 7(b) hereof) and of all independent certified public accountants of the Company (including the expenses of any special audit and "cold comfort" letters required by or incident to such performance), underwriters (excluding discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals relating to the distribution of the Registrable Securities or legal expenses of any Person other than the Company and the selling holders), "road show" fees and expenses of the Company and its management, securities acts liability insurance if the Company so desires and fees and expenses of other Persons retained by the Company (all such expenses being herein called "Registration 10 Expenses") will be borne by the Company, regardless whether the Registration Statement becomes effective. The Company will, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed, rating agency fees and the fees and expenses of any Person, including special experts, retained by the Company. (b) In connection with the Shelf Registration or a Piggyback Registration hereunder, the Company will reimburse the holders of Registrable Securities being registered in such registration for the reasonable fees and disbursements of not more than one counsel (or more than one counsel if a conflict exists among such selling holders in the exercise of the reasonable judgment of counsel for the selling holders and counsel for the Company) chosen by the holders of a majority of such Registrable Securities. 8. Indemnification (a) Indemnification by Company. The Company agrees to indemnify and hold harmless, to the full extent permitted by law, each holder of Registrable Securities, its officers, directors and employees and each Person who controls such holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of a material fact contained in any Registration Statement, Prospectus or preliminary Prospectus or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such holder expressly for use therein; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any such preliminary Prospectus if (i) such holder failed to deliver a copy of the Prospectus to the person asserting such loss, claim, damage, liability or expense after the Company had furnished such holder with a sufficient number of copies of the same and (ii) the Prospectus completely corrected such untrue statement or omission; and provided, further, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission in the Prospectus, if such untrue statement or alleged untrue statement, omission or alleged omission is completely corrected in an amendment or supplement to the Prospectus and the holder of Registrable Securities thereafter fails to deliver such Prospectus as so amended or supplemented prior to or concurrently with the sale of the Registrable Securities to the person asserting such loss, claim, damage, liability or expense after the Company had furnished such holder with a sufficient number of copies of the same. The Company will also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers and directors and each Person who controls such Persons (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities, if requested. 11 (b) Indemnification by Holder of Registrable Securities. In connection with the Shelf Registration or a Piggyback Registration, each holder of Registrable Securities will furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any Registration Statement or Prospectus and agrees to indemnify and hold harmless, to the full extent permitted by law, the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue statement of a material fact or any omission of a material fact required to be stated in the Registration Statement or Prospectus or preliminary Prospectus or necessary to make the statements therein not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such holder to the Company specifically for inclusion in such Registration Statement or Prospectus. In no event shall the liability of any selling holder of Registrable Securities hereunder be greater in amount than the dollar amount of the proceeds received by such holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such Persons specifically for inclusion in any Prospectus or Registration Statement. (c) Conduct of Indemnification Proceedings. Any Person entitled to indemnification hereunder will (i) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party; provided, however, that any Person entitled to indemnification hereunder shall have the right to employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such Person unless (a) the indemnifying party has agreed to pay such fees or expenses, or (b) the indemnifying party shall have failed to assure the defense of such claim and employ counsel reasonably satisfactory to such Person or (c) in the reasonable judgment of any such Person, based upon advice of its counsel, a conflict of interest may exist between such Person and the indemnifying party with respect to such claims (in which case, if the Person notifies the indemnifying party in writing that such Person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such Person). If such defense is not assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). No indemnifying party will be required to consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim, in which event the 12 indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or counsels. (d) Contribution. If for any reason the indemnification provided for in the preceding clauses (a) and (b) is unavailable to an indemnified party or insufficient to hold it harmless as contemplated by the preceding clauses (a) and (b), then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations, provided that no Purchaser shall be required to contribute in an amount greater than the dollar amount of the proceeds received by such Purchaser with respect to the sale of any securities. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 9. Rule 144 The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder (or, if the Company is not required to file such reports, it will, upon the request of any holder of Registrable Securities made after March 30, 2000, make publicly available other information so long as necessary to permit sales pursuant to Rule 144 under the Securities Act), and it will take such further action as any holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with such information and requirements. 10. Participation in Underwritten Registrations If any of the Registrable Securities covered by the Shelf Registration or a Piggyback Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the holders of a majority of such Registrable Securities included in such offering; provided that such investment bankers and managers must be reasonably satisfactory to the Company. If requested by the holders of a majority of such Registrable Securities, the Company shall use its best efforts to make available its senior management to participate in any "road shows" reasonably requested by such holders. No Person may participate in any underwritten registration hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting 13 agreements and other documents required under the terms of such underwriting arrangements. Nothing in this Section 10 shall be construed to create any additional rights regarding the registration of Registrable Securities in any Person otherwise than as set forth herein. 11. Miscellaneous (a) Remedies. Remedies for breach by the Company of its obligations to register the Registrable Securities shall be as set forth herein. Each holder of Registrable Securities, in addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company will not on or after the date of this Agreement enter into any agreement with respect to its securities which is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. Other than as disclosed on Schedule 11(b) hereto, the Company has not previously entered into any agreement with respect to its securities granting any registration rights to any Person. The rights granted to the holders of Registrable Securities hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's securities under any such agreements. (c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of holders of at least 50% of the outstanding Registrable Securities. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a holder of Registrable Securities, at the most current address given by such holder to the Company in accordance with the provisions of this Section 11(d), which address initially is, with respect to the Purchaser, the address set forth next to the Purchaser's name on the signature page of the Purchase Agreement, with a copy to Latham & Watkins, 633 West 5th Street, Suite 4000, Los Angeles, California 90071, Attention: Eva Herbst Davis, Esq.; and (ii) if to the Company, initially to Regent Assisted Living, Inc., 121 SW Morrison, Suite 1000, Attention: General Counsel and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 11(d), with a copy to Stoel Rives LLP, 900 SW Fifth Avenue, Suite 2300, Portland, Oregon 97204, Attention: Todd Bauman, Esq. 14 All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent holders of Registrable Securities. (f) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (g) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (h) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California. (i) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (j) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by the Company with respect to the securities sold pursuant to the Purchase Agreement. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. (k) Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement, the successful party shall be entitled to recover reasonable attorneys' fees in addition to its costs and expenses and any other available remedy. 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. The Company: REGENT ASSISTED LIVING, INC., an Oregon corporation By: WALTER C. BOWEN ------------------------------------ Walter C. Bowen ------------------------------------ Title: President Purchaser: PAMELA J. PRIVETT, an individual PAMELA J. PRIVETT -------------------------------------------- Pamela J. Privett 16 EX-27 18 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED BALANCE SHEET OF REGENT ASSISTED LIVING, INC. AS OF MARCH 31, 1998, AND THE RELATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS IN THE PERIOD ENDED MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 3,508,629 0 464,305 27,000 0 4,384,720 59,135,057 660,814 66,707,418 1,986,769 46,411,202 10,808,703 0 9,349,841 (6,786,862) 66,707,418 4,216,580 4,288,205 4,190,136 6,686,558 0 0 64,415 (2,395,575) 0 (2,395,575) 0 0 0 (2,395,575) (.55) (.55)
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