-----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, FJe4GXNHPK3xurLFKaDOh/XLChQYZqKqtVIQ1wOmDrOCF4JFuK5u9f9sy2j2KbcD 5B9KWtvFlR1TiJn7teuS6Q== 0000892569-96-001114.txt : 19960702 0000892569-96-001114.hdr.sgml : 19960702 ACCESSION NUMBER: 0000892569-96-001114 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960701 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARV ASSISTED LIVING INC CENTRAL INDEX KEY: 0000949322 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-NURSING & PERSONAL CARE FACILITIES [8050] IRS NUMBER: 330160968 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26980 FILM NUMBER: 96589490 BUSINESS ADDRESS: STREET 1: 245 FISCHER AVE CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7147517400 MAIL ADDRESS: STREET 2: 245 FISCHER AVE D-1 CITY: COSTA MESA STATE: CA ZIP: 92626 10-K 1 FORM 10-K FOR FISCAL YEAR ENDED MARCH 31, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1996 Commission File Number: 0-26980 ARV ASSISTED LIVING, INC. (Exact name of registrant as specified in its charter) California 33-0160968 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 245 Fischer Avenue, Suite D-1, Costa Mesa, California 92626 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714) 751-7400 Securities registered pursuant to Section 12(b) of the Act: TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, no par value NASDAQ National Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of June 25, 1996, the aggregate market value of the voting stock held by non-affiliates of registrant was $77,744,264 (for purposes of calculating the preceding amount only, all directors, executive officers and shareholders holding 5% or greater of the registrant's Common Stock are assumed to be affiliates). The number of shares of Common Stock of the registrant outstanding as of June 25, 1996 was 8,941,093. Part III incorporates by reference the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on August 13, 1996. The registrant intends to file such Proxy Statement no later than 120 days after the end of the fiscal year covered by this form 10-K. 2 ARV ASSISTED LIVING, INC. Index to Annual Report on Form 10-K For the fiscal year ended March 31, 1996
PAGE ---- PART I Item 1: Business 2 Item 2: Properties 13 Item 3: Legal Proceedings 14 Item 4: Submission of Matters to a Vote of Security Holders 14 PART II Item 5: Market for Registrant's Common Equity and Related Shareholder Matters 14 Item 6: Selected Financial Data Item 7: Managements Discussion and Analysis of Financial 16 Condition and Results of Operations 17 Item 8: Financial Statements and Supplementary Data 25 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 25 PART III Item 10: Directors and Executive Officers of the Registrant 25 Item 11: Executive Compensation 25 Item 12: Security Ownership of Certain Beneficial Owners and Management 25 Item 13: Certain Relationships and Related Transactions 26 PART IV Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K 26
1 3 PART I ITEM 1. BUSINESS GENERAL ARV Assisted Living, Inc. ("ARV" or the "Company") is one of the largest operators of licensed assisted living facilities in the United States. The Company is a fully integrated provider of assisted living accommodations and services that operates, acquires and develops assisted living facilities. The Company's operating objective is to provide high quality, personalized assisted living services to senior elderly residents in a cost effective manner, while maintaining residents' independence, dignity and quality of life. Assisted living facilities comprise a combination of housing, personalized support services and health care in a non-institutional setting designed to respond to the individual needs of the senior elderly who need assistance with certain activities of daily living, but who do not need the level of health care provided in a skilled nursing facility. Since the Company's initial public offering of its Common Stock completed in October 1995 (the "IPO Offering"), the Company has implemented its plan to expand its operations through the acquisition and development of new assisted living facilities. At the time of the IPO Offering, the Company operated or was developing facilities in Arizona, California, Colorado, Michigan, New Mexico, Ohio and Texas. Consistent with the Company's growth strategy, the Company has expanded its presence in California, Colorado, Ohio and Texas and entered the market in Florida, Massachusetts, Nevada, New Jersey and New York. At March 31, 1996, the Company operated 36 assisted living facilities containing 4,516 units. The Company currently operates 38 assisted living facilities containing 4,823 units, including 1,364 units, or 28.3% of its total units, added since the IPO Offering. Of the 38 assisted living facilities, the Company operates 25 assisted living facilities either directly for its own account or under long-term operating leases and manages 13 assisted living facilities which are owned by affiliated limited partnerships for which the Company serves as managing general partner and facility manager. In addition, the Company has 14 assisted living facilities expected to contain 1,899 units under development, including four facilities currently under construction that are expected to contain 515 units. The Company has utilized financing with health care real estate investment trusts ("Health Care REITs") to help facilitate its growth strategy. To date, the Company has entered into long-term operating leases with Nationwide Health Properties, Inc. ("Nationwide Health Properties") and Health Care Property Investors, Inc. ("Health Care Property Investors") and arranged financing for a facility owned by the Company as well as properties owned by affiliated limited partnerships with Health and Retirement Properties Trust, Inc. ("Health and Retirement Properties Trust") and Health Care REIT, Inc. The Company intends to continue to expand its existing portfolio through the acquisition and development of directly owned assisted living facilities as well as through the operation of facilities under long-term operating leases. This blend of ownership structures is anticipated by management to allow the Company to fund its growth in a balanced and efficient manner. The Company intends to continue to focus on "private-pay" residents, who pay for the Company's services from their own funds or through private insurance, rather than relying on potential residents who live in the few states that have enacted legislation enabling assisted living facilities to receive Medicaid funding similar to funding generally provided to skilled nursing facilities. Currently, approximately 93% of the Company's assisted living facilities revenue comes from private-pay residents, while the remaining 7% of such revenue comes from residents in the Supplemental Security Income ("SSI") program. The Company's assisted living facilities provide residents with a combination of living accommodations, basic care services and assisted living services. The residents of the Company's assisted living facilities average 84 years of age and often require assistance with certain activities of daily living. The Company provides its assisted living residents with private or semi-private rooms or suites, meals in a communal setting, housekeeping, 2 4 linen and laundry services, activities programs, security, utilities, and transportation in a Company van or minibus. The Company also provides a three-tier assisted living service structure to which residents can subscribe as they require assistance with other activities of daily living, including personal care, assistance with bathing, grooming, dressing, personal hygiene and escort services to meals and activities. Further, the Company has implemented a Wellness Program at 32 of its 38 facilities, pursuant to which the Company arranges for the provision of certain health care services to its residents. The Company is in the process of implementing the Wellness Program at the balance of its facilities, the majority of which have been recently acquired. In addition to operating and managing assisted living facilities, the Company has also acquired or developed market rate senior apartments, as well as affordable senior and multifamily apartment communities using the sale of tax credits under a federal low income housing tax credit program (the "Federal Tax Credit Program") to generate the equity funding for development. The Company does not intend to expand its apartment portfolio and will not grow this segment of the business in the future. Gary L. Davidson, the Company's Chairman of the Board, and John A. Booty, the Company's President, have each been continuously involved in the acquisition, development and operation of senior housing facilities for more than 20 years. In 1980, Mr. Davidson and Mr. Booty, with two other individuals who have since retired, formed the predecessor to the Company. Since that time, the Company has built an executive management team and assisted living operation with experience and expertise in the management, financing, acquisition, development and operation of assisted living facilities. THE ASSISTED LIVING MARKET Assisted Living. Assisted living can be viewed as falling near the middle of the elder care continuum, between home-based care at one end and long-term skilled nursing facilities and acute care hospitals at the other. Assisted living represents a combination of housing, personalized support services, and health care designed to respond to the individual needs of the senior elderly who need help in activities of daily living, but do not need the medical care provided in a skilled nursing facility. The Company believes its assisted living business benefits from significant trends affecting the long-term care industry. The first is an increase in the demand for elder care resulting from the continued aging of the U.S. population, with the average age of the Company's assisted living residents falling within the fastest growing segments of the U.S. population. While increasing numbers of Americans are living longer and healthier lives, many gradually require increasing assistance with activities of daily living, and are not able to continue to age in place at home. The second is the effort to contain health care costs by the government, private insurers and managed care organizations by limiting lengths of stay, services, and reimbursement amounts to persons in acute care hospitals and skilled nursing facilities. Assisted living offers a cost effective long-term care alternative while preserving a more independent lifestyle for those senior elderly who do not require the broader array of medical services that acute care hospitals and skilled nursing facilities are required to provide. As of March 31, 1996, monthly revenue from the Company's assisted living facilities on a "same store basis" (defined as those facilities which the Company owned, managed or leased for a period of 12 months or more as of March 31, 1996) averaged $1,400 per unit for residents on the basic service plan and $1,900 per unit for residents on the Company's assisted living plans, compared to averages of $1,370 and $1,870, respectively as of March 31, 1995. Other trends benefiting the Company include the increased financial net worth of the elderly population, the increase in the population of individuals living alone and the increasing number of women who work outside the home and are therefore less able to care for their elderly relatives. The Company believes that these trends will result in an increasing demand for assisted living services and facilities to fill the gap between aging at home and aging in more expensive skilled nursing facilities. Aging Population. The primary consumers of long-term health care services are persons over the age of 65. This group represents one of the fastest growing segments of the population. According to U.S. Bureau of the Census data, the number of people in the U.S. age 65 and older increased by more than 27% from 1981 to 1994, 3 5 growing from 26.2 million to 33.2 million. The segment of the population over 85 years of age, which comprises the largest percentage of residents at long-term care facilities, is projected to increase by more than 40% between the years 1990 and 2000. Other trends benefiting the Company include the increased financial net worth of the elderly population, the increasing number of women who work outside the home and are therefore unable to care for their elderly relatives and the increase in the population of individuals living alone. As the ratio of senior elderly in need of assistance has increased, so too has the number of senior elderly able to afford assisted living. According to U.S. Bureau of the Census data, the median net worth of householders age 75 or older increased from $55,178 in 1984 and $61,491 in 1988 to $76,541 in 1991. Furthermore, according to the same source, the percentage of people 65 years and older below the poverty line decreased from 27.3% in 1970 to 14.8% in 1980 to 12.8% in 1990. The increased number of women in the labor force has reduced the supply of care givers. Historically, unpaid women (mostly daughters or daughters-in-law) represented a large portion of the care givers of the non-institutionalized senior elderly. Since 1960, the population of individuals living alone has increased significantly as a percentage of the total elderly population. This increase has been the result of an aging population in which women outlive men by an average of 6.8 years, rising divorce rates, and an increase in the number of unmarried individuals. Limitation on the Supply of Long-Term Care Facilities. The majority of states in the U.S. have enacted Certificates of Need or similar legislation, which generally limits the construction of skilled nursing facilities and the addition of beds or services in existing skilled nursing facilities. High construction costs, limitations on government reimbursement for the full cost of construction, and start-up expenses also act to constrain growth in the supply of such facilities. Such legislation benefits the assisted living industry by limiting the supply of skilled nursing beds for the senior elderly. Cost factors are placing pressure on skilled nursing facilities to shift their focus toward higher acuity care which enables them to charge higher fees, thus creating a shortage of lower acuity care availability, and thereby increasing the pool of potential assisted living residents. While Certificates of Need generally are not required for assisted living facilities, except in a few states, most states do require assisted living providers to license their facilities and comply with various regulations regarding building requirements and operating procedures and regulations. States typically impose additional requirements on assisted living facilities over and above the standard congregate care requirements. Further, the limited pool of experienced assisted living staff and management, as well as the costs and start-up expenses to construct an assisted living facility, provide an additional barrier of entry to the assisted living business. Cost Containment Pressures of Health Reform. In response to rapidly rising health care costs, both government and private pay sources have adopted cost containment measures that have encouraged reduced length of stay in hospitals and skilled nursing facilities. The federal government has acted to curtail increases in health care costs under Medicare by limiting acute care hospital reimbursement for specific services to preestablished fixed amounts. Private insurers have also begun to limit reimbursement for medical services in general to predetermined "reasonable" charges. Managed care organizations, such as health maintenance organizations ("HMOs") and preferred provider organizations ("PPOs") are reducing hospitalization costs by negotiating for discounted rates for hospital services and by monitoring and decreasing hospitalization. The Company anticipates that both HMOs and PPOs increasingly may direct patients away from the more expensive nursing care facilities into less expensive assisted living facilities. These cost containment measures have produced a "push-down" effect. As the number of patients being "pushed down" from acute care hospitals to skilled nursing facilities increases, the demand for residential options such as assisted living facilities to serve patients who historically have been served by skilled nursing facilities will also increase. In addition, skilled nursing facility operators are continuing to focus on improving occupancy and expanding services (and fees) to subacute patients requiring very high levels of nursing care. As the level of skilled nursing facility patients increases, the supply of nursing facility space will be filled by patients with higher acuity needs paying higher fees, which again will provide opportunities for assisted living facilities to increase their occupancy and services to residents requiring lesser levels of care than generally can be expected for patients in 4 6 skilled nursing facilities. Cost Effectiveness of Assisted Living. Although there is a great similarity between the custodial services provided by a skilled nursing facility and the services available at an assisted living facility, according to the Marion Merrill Dow, Inc. Managed Care Digest Services, Institutional Digest 1995, the annual cost per patient for skilled nursing facility care throughout the U.S. during 1993 averaged approximately $35,000 while the annual cost of care per resident in the Company's assisted living facilities averaged less than $23,000 per resident. GROWTH STRATEGIES Overview. The Company's growth strategy focuses on acquisition and development of assisted living facilities, expansion of the level and depth of assisted living services, and continued intensive facilities management. The Company will seek to grow by increasing its portfolio of assisted living facilities through acquisition and development. The Company's strategic plan calls for the acquisition and development of assisted living facilities through direct ownership and the use of long-term operating leases with institutional investors such as Nationwide Health Properties, Health Care Property Investors and other Health Care REITs, as well as through direct ownership financed with secured debt from Health Care REITs or other lenders. The Company believes that this blend of ownership structures allows the Company to fund its growth in a balanced and cost effective manner. The Company and its predecessors have acquired and developed assisted living and senior housing facilities over the past 16 years. During this period, the Company and its predecessors have acquired 31 assisted living facilities, including one portfolio of eight facilities, and developed seven assisted living facilities. In addition, the Company's recent or current development of 18 apartment communities it operates throughout the U.S. has further increased its development experience. As the Company continues its expansion, it may become more difficult to manage geographically dispersed operations. Management believes the Company has developed and expanded its operational, financial and management information systems and procedures and has established an infrastructure to support development on a national basis. The Company's strategy is to expand by targeting areas where there is a need for assisted living facilities based on demographics and market studies. The Company intends to continue to expand its assisted living operations throughout the U.S., locating its facilities in clusters, that is, areas where it has other existing facilities or geographic areas where it intends to acquire or develop other assisted living facilities. In this way, the Company seeks to increase the efficiency of its management resources and to achieve broader economies of scale. A substantial portion of the business and operations of the Company are conducted in California, where 30 of the 52 assisted living facilities operated, managed or in development by the Company are located. Other regional concentrations of assisted living facilities are planned for Florida, Texas, Ohio and the Northeast. The market value of these properties and the income generated from properties managed or leased by the Company could be negatively affected by changes in local and regional economic conditions and by acts of nature. In particular, since 1990, the California economy has been influenced by the limited economic growth experienced by most of the United States. A continuation or worsening of current economic conditions in California, or a downturn in the economic conditions in its other regions, could have a negative effect on the Company's business. Acquisitions. The Company believes that the assisted living industry's fragmentation and ongoing consolidation provide attractive acquisition opportunities. Through its internal acquisition team, its network of real estate broker contacts and its regional partners and allies, the Company seeks to acquire groups of assisted living facilities from smaller owners and operators in its targeted markets. In evaluating possible acquisitions, the Company considers (i) the location, construction quality, condition and design of the facility, (ii) the current and projected cash flow of the facility and the anticipated ability to increase revenue through rent and occupancy increases, additional assisted living services and management and (iii) the ability to acquire the facility below 5 7 replacement cost. However, there can be no assurance that the Company will be able to find additional suitable facilities to continue its current growth rate. By developing and operating assisted living facilities and senior and multifamily apartment communities in 14 states, the Company has generated numerous contacts through which it is able to identify possible acquisitions in the early stage of the sale process. The Company's sources for prospective acquisitions range from limited partnerships for which the Company serves as managing general partner and facility manager ("Affiliated Partnerships") to management's contacts with potential assisted living facility sellers to the Company's local and regional personnel who monitor the assisted living market in their area. Management intends to pursue both individual and portfolio acquisitions and believes the Company will be able to achieve greater value from its acquisitions as the facilities manager. In certain instances, the Company may target existing assisted living facilities which may be redeveloped or repositioned as management believes a number of acquisition opportunities may reflect situations where existing owners are not operating, maintaining or leasing such facilities efficiently. Although the Company will focus its efforts primarily on the acquisition, directly or through long-term operating leases, of additional assisted living facilities, it may in certain cases also target additional third party management contracts as an interim step to facilities acquisition. The Company has acquired certain existing assisted living facilities from affiliated entities as well as third parties and is actively considering acquiring additional existing assisted living facilities from other Affiliated Partnerships. In addition, the Company may seek to acquire existing assisted living facilities or interests therein, by making offers, including tender offers, for the limited partnership units of unaffiliated partnerships that own assisted living properties. There can be no assurance that the Company will pursue any such transactions or that, if pursued, such transactions will be completed successfully by the Company. The Company's acquisitions of existing assisted living facilities are anticipated to be financed through long-term operating lease transactions with institutional investors such as Nationwide Health Properties, Health Care Property Investors and other Health Care REITs, as well as direct ownership acquisitions using equity and secured debt. In long-term operating lease transactions, the Company typically arranges the sale of the prospective assisted living facility to a Health Care REIT or other institutional investor while concurrently entering into a long-term operating lease for the facility. The Company's initial cost generally is limited to a security deposit. Thereafter, the Company is obligated to make certain rental payments (which may include an additional amount related to revenue of the facility) for the term of the lease. While the Company believes that it has been and will continue to be conservative in projecting lease-up costs and expenses as well as the achievement of rent stabilization, the failure of the Company to generate sufficient revenue could result in an inability to meet minimum rent obligations under the Company's long-term operating leases. Development. The Company also will seek to grow through the development of new assisted living facilities in its targeted markets. The Company's primary development strategy is to conduct its development activities in conjunction with developers and builders in clustered geographic areas throughout the U.S. Typically, the Company's regional developers receive development or construction fees in connection with the construction of the project and a profit participation as a further incentive. In all cases, the Company has the right to approve acquisitions and all aspects of development including site selection, design, plans and specifications, development budgets, choice of general contractor and major subcontractors, and other significant criteria. In long-term operating lease transactions, when the subject property is ready for construction, it typically is acquired by the Health Care REIT financing the project, with the development performed by the Company, or in conjunction with regional developers in certain cases, under a contractual arrangement with the Health Care REIT. Concurrently, the Company enters into a long-term operating lease which becomes effective when the facility is completed. The Health Care REIT typically bears 100% of the development costs which may also include 6 8 development or construction supervision fees for the Company. The Company typically incurs up-front development costs in connection with the due diligence and entitlement process and architectural and engineering fees incurred in connection with preparing the property for purchase by the Health Care REIT at the beginning of construction. The Company currently leases facilities from only two Health Care REITs. A third REIT has committed to provide financing, but has not yet done so. The lease agreements with each of the Health Care REITs are interconnected in that the Company will not be entitled to exercise its right to renew one lease with a particular Health Care REIT without exercising its right to renew all other leases with that Health Care REIT and that leases with each Health Care REIT contain certain cross default provisions. Therefore, in order to exercise all lease renewal terms, the Company will be required to maintain and rehabilitate the leased facilities on a long-term basis. As part of its growth strategy, the Company plans to develop new assisted living facilities. The Company's ability to achieve its development plans will depend upon a variety of factors, many of which are beyond the Company's control. The successful development of additional assisted living facilities would involve a number of risks, including the possibility that the Company may be unable to locate suitable sites at acceptable prices or may be unable to obtain, or may experience delays in obtaining, necessary zoning, land use, building, occupancy, licensing and other required governmental permits and authorizations. Certain construction risks are beyond the Company's control, including strikes, adverse weather, natural disasters, supply of materials and labor, and other unknown contingencies which could cause the cost of construction and the time required to complete construction to exceed estimates. In order to keep its internal costs to a minimum, the Company relies, and will continue to rely, on third party general contractors to construct its new assisted living facilities. If construction is not commenced or completed, or if there are unpaid subcontractors or suppliers, or if required occupancy permits are not issued in a timely manner, cash flow could be significantly reduced. In addition, any property in construction is subject to risks including construction defects, cost overruns, adverse weather conditions, the discovery of geological or environmental hazards on the property and changes in zoning restrictions or the method of applying such zoning restrictions. The nature of licenses and approvals necessary for development and construction, and the timing and likelihood for obtaining them vary widely from state to state, and from community to community within a state. Intensive Management. The Company's growth strategy also emphasizes continued intensive management at its existing assisted living facilities. This includes: marketing the Company's facilities to local hospitals, physicians, skilled nursing facilities and senior associations and groups; balancing increases in rental rates and assisted living fees with occupancy rates; and attracting and retaining administrators and staff who the Company seeks to motivate through financial and career enhancing incentives. A shortage of qualified personnel may require the Company to enhance its wage and benefits package in order to compete with other providers of assisted living and senior housing. No assurance can be given that the Company's labor costs will not increase, or that if they do increase, they can be matched by corresponding increases in rental or management revenue. The Company also seeks to control operating expenses by clustering its facilities in order to take advantage of volume purchases of supplies from vendors with whom it has an established relationship, and maintaining the facilities to attract and retain residents and to avoid more costly replacements and repairs. Increase Sales of Additional Assisted Living Services. The Company believes that many custodial services provided in skilled nursing facilities are available at approximately two-thirds of the cost in the Company's assisted living facilities. The Company believes that this differential will enable the Company to attract additional residents. By increasing the usage of these services by its residents, the Company believes it should enable residents to stay at the Company's assisted living facilities longer, rather than having to transfer to more expensive skilled nursing facilities. The Company has been a pioneer in providing these services, which allow its senior elderly residents to age in place at the facility without having to move to a more expensive alternative until that move becomes absolutely necessary. The Company seeks to enhance and increase the amount and diversity of assisted living services it provides through (i) the continued education of the senior community, and particularly the residents and their families, concerning the cost effectiveness of receiving additional services in an assisted living facility, (ii) the continued development and refinement of assisted living programs designed to meet the needs of its residents as they age in 7 9 place and (iii) the consistent delivery of quality services for residents. Government Regulation. Health care is an area subject to extensive regulation and frequent regulatory change. Currently, no federal rules explicitly define or regulate assisted living. While a number of states have not yet enacted specific assisted living regulation, the Company is and will continue to be subject to varying degrees of regulation and licensing by health or social service agencies and other regulatory authorities in the various states and localities in which it operates or intends to operate. Changes in, or the adoption of, such laws and regulations, or new interpretations of existing laws and regulations, could have a significant effect on methods of doing business, costs of doing business and amounts of reimbursement from governmental and other payors. In addition, the President and Congress have in the past, and may in future, propose health care reforms which could impose additional regulations on the Company or limit the amounts that the Company may charge for its services. The Company cannot make any assessment as to the ultimate timing and impact that any pending or future health care reform proposals may have on the assisted living, nursing facility and rehabilitation care industries, or on the health care industry in general. No assurance can be given that any such reform will not have a material adverse effect on the business, financial condition or results of operations of the Company. Additionally, a portion of the Company's revenue (approximately 7% of the Company's assisted living revenue) is derived from residents who are recipients of SSI payments. Revenue derived from these residents is generally lower than that received from the Company's other residents and could be subject to payment delay. There can be no assurance that the Company's proportionate percentage of revenue received from SSI receipts will not increase, or that the amounts paid under SSI programs will not be further limited. In addition, if the Company were to become a provider of services under the Medicaid program, the Company would be subject to Medicaid regulations designed to limit fraud and abuse, violations of which could result in civil and criminal penalties and exclusion from participation in the Medicaid program. Competition. The health care industry is highly competitive and the Company expects that the assisted living business in particular will become more competitive in the future. The Company continues to face competition from numerous local, regional and national providers of assisted living and long-term care whose facilities and services are on either end of the senior care continuum from skilled nursing facilities and acute care hospitals to companies providing home based health care, and even family members. In addition, the Company expects that as assisted living receives increased attention among the public and insurance companies, competition from new market entrants, including companies focused on assisted living, will grow. Some of the Company's competitors operate on a not-for-profit basis or as charitable organizations, while others have, or may obtain, greater financial resources than those of the Company. Moreover, in the implementation of the Company's growth program, the Company expects to face competition for the acquisition and development of assisted living facilities. Some of the Company's present and potential competitors are significantly larger or have, or may obtain, greater financial resources than those of the Company. Consequently, there can be no assurance that the Company will not encounter increased competition in the future which could limit its ability to attract residents or expand its business, or could increase the cost of future acquisitions, each of which could have a material adverse effect on the Company's financial condition, results of operations and prospects. THE COMPANY'S ASSISTED LIVING SERVICES The Company provides services and care which are designed to meet the individual needs of its residents. The services provided by the Company are designed to enhance both the physical and mental well-being of the 8 10 senior elderly in each of its facilities by promoting their independence and dignity in a homelike setting. The Company's assisted living program includes the following: Personalized Care Plan. A primary element of the Company's strategy is the concept of "personalized" care to meet each resident's specific needs. This concept of customizing services to meet the needs of the residents begins with the resident admissions process, where the facility's management staff, the resident, the resident's family, and the resident's physician discuss the resident's needs and develop a plan for the resident's care. If recommended by the resident's physician, additional health care or medical services may be provided at the facility by a third party home health care agency or other medical provider. The care plan is reviewed and modified on a regular basis. Basic Service and Care Package. The basic service and care package at the Company's assisted living facilities generally includes the following: meals in a communal, "home-like" setting, housekeeping, linen and laundry service, social and recreational programs, security, utilities and transportation in a Company van or minibus. Other care services can be provided under the basic package based upon the individual's personalized health care plan. While the amount of the fee for the basic service package varies from facility to facility, on a "same store basis" (defined as those facilities which the Company owned, managed or leased for a period of 12 months or more as of March 31, 1996) the average basic monthly rate per unit was approximately $1,400 per month as of March 31, 1995, compared to an average of $1,370 as of March 31, 1995. Additional Services. The Company has designed its additional assisted living services in a three-tier program available to residents on a personalized basis. Level One: Assistance to residents in the self-administration of medication. Where necessary, the assisted living staff will consult with the family, the physician or the insurance company of a resident to designate a home health care agency to administer the appropriate medication. Level Two: In addition to the services provided under Level One, assistance with bathing, dressing and grooming, escorting to and from meals and activities, reading mail, writing letters, shopping and other specialized activities. These services are provided on an as-needed basis and at the convenience of the resident within the overall operation of the facility. Level Three: All of the services provided under Level One and Level Two, and, in addition, provision of those services on a 24-hour basis. Further, this level provides appropriate services for individuals who need help with incontinence. As of March 31, 1996, approximately 60% of the Company's residents were on the basic plan, 22% on Level One, 14% on Level Two and 4% on Level Three. In addition to the base rent, the Company typically charges a $350 per month fee for Level One assisted living services, $675 per month for Level Two assisted living services and $1,050 per month for Level Three assisted living services, but the fee levels vary from facility to facility. At some facilities, the Company may charge additional fees for other specialized assisted living services. As the Company's residents age at the facilities, the Company expects that an increasing number of residents will utilize Level Two and Level Three services. The Company's internal growth plan is focused on increasing revenue by continuing to expand the number and diversity of its tiered additional assisted living services and the number of residents using these services. There can be no assurance that, at any time, any assisted living facility will be substantially occupied at assumed rents. In addition, lease-up and full occupancy may be achievable only at rental rates below those assumed. If operating expenses increase, local rental market conditions may limit the extent to which rents may be increased. Because rent increases generally can only be implemented at the time of expiration of leases, rental increases may lag behind increases in operating expenses. Wellness Program. The Company has implemented a Wellness Program for the residents of its facilities designed to identify and respond to changes in a resident's health or condition and then, together with the resident 9 11 and the resident's family and physician, as appropriate, design a solution to fit that resident's particular needs. The Company monitors the physical and mental well-being of its residents. This monitoring activity takes place at meals and other scheduled activities, and informally as the staff performs its services around the facility. Under the Wellness Program, the Company works with home health care agencies to provide services the facility cannot provide, with physical and occupational therapists to provide these services to residents in need of such therapy, and with a long-term care pharmacy to facilitate cost effective and reliable ordering and distribution of medication. The Company arranges for these services to be provided to residents as needed in consultation with their physicians and families. At the present time, 32 of Company's assisted living facilities have a comprehensive Wellness Program. The Company is in the process of implementing the Wellness Program at the balance of its facilities, the majority of which have been recently acquired. CAPITAL REQUIREMENTS In implementing its growth strategy by acquiring existing facilities and properties for development, and in funding development of acquired properties, as of March 31, 1996, the Company had expended, or was committed to expend, all of the $42.7 million net proceeds received from the IPO Offering. In April 1996, the Company closed a $57.5 million offering of 6 3/4% Convertible Subordinated Notes Due 2006 (the "2006 Convertible Notes") which netted approximately $55 million (the "Note Offering"). Recently, the Company entered into an agreement with Health Care REIT, Inc. for a $60 million credit facility to be used for the development of new assisted living facilities. The Company has also received commitments for a $35 million line of credit to be used for acquisition and development of assisted living facilities from Bank United of Texas, and a $10 million revolving credit facility for acquisition, development and general corporate purposes from Imperial Bank. The Company will be required from time to time to incur additional indebtedness or issue additional debt or equity securities to finance its growth strategy, including the acquisition and development of facilities as well as other capital expenditures and additional funds to meet increased working capital requirements. The Company may finance future acquisitions and development through a combination of its cash reserves, including the net proceeds of the Note Offering, its cash flows from operations, utilization of its current lines of credit, and additional indebtedness or public or private sales of debt securities or capital stock. There can be no assurance, however, that funds will be available on terms favorable to the Company, that such funds will be available when needed, or that the Company will have adequate cash flows from operations for such requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Indebtedness, Lease and Other Obligations of the Company. The Company has financed, and will continue to finance, the acquisition and development of assisted living facilities through a combination of loans, leases and other obligations. As of March 31, 1996, the Company had outstanding consolidated indebtedness of $28.1 million, including approximately $15.0 million of the Company's 10% Convertible Subordinated Notes due 1999 (the " 1999 Convertible Notes"), the holders of which have the right to convert such notes into the common stock of the Company on or before June 30, 1996. Following completion of the Note Offering in April 1996, the Company's outstanding consolidated indebtedness includes $57.5 million of the 2006 Convertible Notes. In addition, at March 31, 1996, the Company had $7.2 million in notes maturing within two years. Since March 31, 1996, the Company had incurred or committed to incur, subject to the completion of pending acquisitions, approximately $6.4 million of additional long-term debt in connection with the purchase of three assisted living facilities, the acquisition of land and for general corporate purposes. As a result, a portion of the Company's cash flow will be devoted to debt service. There is a risk that the Company will not be able to generate sufficient cash flow from operations to cover required interest and principal payments. At March 31, 1996, approximately $382,000 of the Company's indebtedness bore interest at floating rates. Indebtedness that the Company has incurred since that date and may incur in the future may also bear interest at a floating rate or be fixed at some time in the future. Therefore, increases in prevailing interest rates could increase the Company's interest payment obligations and could have an adverse effect on the Company's business, financial condition and results of operations. In addition, the Company has guaranteed mortgage and construction debt as well 10 12 as credit lines for the benefit of Affiliated Partnerships of up to approximately $45.1 million, including $30.4 million outstanding as of March 31, 1996, of which $18.6 million will become due and payable within the next two years. This effectively subjects the Company to risks normally associated with leverage, including the risk that Affiliated Partnerships will not be able to refinance this debt with permanent financing, an increased risk of partnership cash flow deficits, and the risk that if economic performance of any mortgaged asset declines, the obligation to make payments on the mortgage debt may be borne by the Company, which could adversely affect the Company's results of operations and financial condition. Because certain of the indebtedness which the Company has guaranteed bears interest at rates which fluctuate with certain prevailing interest rates, increases in such prevailing interest rates could increase the Company's interest payment obligations and could have an adverse effect on the Company's results of operations and financial condition. In addition, as of March 31, 1996, the Company is a party to long-term operating leases for certain of its assisted living facilities, which leases require minimum annual lease payments aggregating $10.9 million for fiscal year 1997, and intends to enter into additional long-term operating leases in the future. These leases typically have an initial term of 10 to 15 years, and in general are not cancelable by the Company. See notes 9 and 10 to the Company's consolidated financial statements included elsewhere in this document. The Company also has entered into guarantees (the "Tax Credit Guarantees"), which extend 15 years after project completion, relating to certain developments financed under the Federal Tax Credit Program with respect to (i) lien free construction, (ii) operating deficits and (iii) maintenance of tax credit benefits to certain corporate investors, the obligations under which, excluding potential penalties and interest factors, could amount to an approximate limit of $78.4 million as of March 31, 1996. There can be no assurance that the Company will be able to generate sufficient cash flow from operations to cover required interest, principal and lease payments, or to perform its obligations under the guaranties to which it is party were it called on to do so. The Company, directly or through its subsidiaries, is a general partner in 24 partnerships. As a general partner, it is liable for partnership obligations such as partnership indebtedness, which at March 31, 1996, was approximately $67.4 million, potential liability for construction defects, including those presently unknown or unobserved, and unknown or future environmental liabilities. The cost of any such obligations or claims, if partially or wholly borne by the Company, could materially adversely affect the Company's results of operations and financial condition. Each partnership property is managed by the Company pursuant to a written management contract, some of which are cancelable on 30 or 60 days notice at the election of the managing general partner of the partnership. Action can be taken in each partnership by a majority in interest of limited partners on such matters as the removal of the general partners, the request for or approval or disapproval of a sale of a property owned by a partnership, or other actions affecting the properties or the partnership. Where the Company is the general partner of the partnership, termination of the contracts generally would require removal of the Company as general partner by the vote of a majority of the holders of limited partner interests and would result in loss of the management fee income under those contracts. If the Company were unable to meet interest, principal, lease or guarantee payments in the future, there can be no assurance that sufficient financing would be available to cover the insufficiency or, if available, the financing would be on terms acceptable to the Company. In the absence of financing, the Company's ability to make scheduled principal and interest payments on its indebtedness to meet required minimum lease payments, to meet its obligations under the guaranties, if any, to respond to changing business and economic conditions, to fund scheduled investments, cash contributions and capital expenditures, to make future acquisitions and to absorb adverse operating results would be adversely affected. In addition, the terms of certain of the Company's indebtedness have imposed, and may in the future impose, constraints on the Company's operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Bond Financing. The Company has entered into a long-term lease of a facility the acquisition and construction of which are being financed by bonds. In order to meet the lease obligations and to allow the landlord to continue to qualify for favorable tax treatment of the interest payable on the bonds, the facility must comply with 11 13 certain federal income tax requirements, principally pertaining to the maximum income level of a specified portion of the residents. Insurance. The Company currently maintains insurance policies in amounts and with such coverage and deductibles as it believes are adequate, based on the nature and risks of its business, historical experience and industry standards. The Company's business entails an inherent risk of liability. In recent years, participants in the assisted living industry, including the Company, have become subject to an increasing number of lawsuits alleging negligence or related legal theories, many of which may involve large claims and significant legal costs. The Company is from time to time subject to such suits as a result of the nature of its business. There can be no assurance that claims will not arise which are in excess of the Company's insurance coverage or are not covered by the Company's insurance coverage. A successful claim against the Company not covered by, or in excess of, the Company's insurance, could have a material adverse effect on the Company's financial condition and results of operations. The Company's insurance policies must be renewed annually and there can be no assurance that the Company will be able to continue to obtain liability insurance coverage in the future or, if available, that such coverage will be available on acceptable terms. CONFLICTS OF INTEREST Certain of the Company's executive officers and Directors may, by virtue of their investment in or involvement with entities providing services, office space or guaranties to the Company or to Company-sponsored partnerships, have an actual or potential conflict of interest with the interests of the Company. See "Item 13: Certain Relationships and Related Transactions." In addition, the Company is the managing general partner and facilities manager for partnerships owning 13 assisted living facilities and various apartment communities. By serving in both capacities, the Company has conflicts of interest in that it has both a duty to act in the best interests of the limited partners of those partnerships and the desire to maximize earnings for the Company's shareholders in the operation of those assisted living facilities and apartment communities. TAX CREDIT PROPERTIES The Company's tax credit partnerships obtain equity capital to build apartments through the sale of tax credits under the Federal Tax Credit Program. In order to qualify for the Federal Tax Credit Program, the owner of the project must agree to restrict the use of the property for moderate-to low-income purposes for a period of 15 years. Some tax credit financed partnerships for which the Company serves as general partner have entered into agreements restricting use of their respective properties for moderate to low-income housing purposes for periods of up to 40 years beyond the base 15-year compliance period. All tax credit projects must be placed in service by the end of the second calendar year after the year in which the initial allocation of tax credits was made. Failure to do so is likely to cause the forfeiture of the tax credits allocated and would trigger the Company's obligations under the Tax Credit Guarantees. See "-- Capital Requirements --Indebtedness, Lease and Other Obligations of the Company." In addition, projects financed under the Federal Tax Credit Program are subject to detailed regulations concerning tenant income and other requirements. The Internal Revenue Service has identified these regulations as being the subject of increased scrutiny regarding compliance of applicable regulations under the Internal Revenue Code of 1986 (the "Code"). While the Company believes that it is currently in compliance with applicable regulations, no assurance can be given that the Company will not be challenged in this regard. These restrictions may limit the Company's management of and ability to sell properties developed under the Federal Tax Credit Program. 12 14 ITEM 2. PROPERTIES The following chart sets forth, as of June 25, 1996, the location, number of units, ownership, occupancy and date on which operations commenced or are expected to commence for the Company's facilities:
AVERAGE OCCUPANCY AVERAGE MONTHLY RENTAL * MONTH FOR THE YEAR ENDED MARCH 31, FOR THE YEAR ENDED MARCH 31, FACILITY STATE # UNITS ACQUIRED 1996 1995 1996 1995 - -------- ----- ------- -------- ---- ---- ---- ---- Owned Facilities: - ----------------- Villa at Palm Desert CA 77 Nov. 1995 87.99% --- 1,765 --- Acacia Villas CA 66 Dec. 1995 88.64% --- 1,288 --- Amber Park OH 127 Jan. 1996 83.33% --- 1,324 --- Collwood Knolls CA 117 Jan. 1996 73.43% --- 1,373 --- Woodside Village Bedford OH 217 Jan. 1996 70.74% --- 1,136 --- Wyndham Lakes FL 248 Mar. 1996 81.05% --- 1,232 --- Bella Vita FL 120 Apr. 1996 --- --- --- --- Amber Wood FL 187 Jun. 1996 --- --- --- --- ----- Subtotal Owned Facilities 1,159 ----- Leased Facilities: Hacienda de Monterey CA 180 Apr. 1994 94.68% 88.10% 1,759 1,792 Kinghaven Manor MI 144 Feb. 1995 97.40% 73.24% 1,035 818 Mallard Cove OH 121 Feb. 1995 83.88% 76.03% 1,057 1,018 Villa de Palma CA 111 May 1995 91.97% --- 1,363 --- Villa del Opisbo CA 96 May 1995 94.18% --- 1,513 --- Villa del Sol CA 91 Jun. 1995 94.05% --- 1,539 --- Villa Encinitas CA 117 Jun. 1995 96.65% --- 1,464 --- El Camino Gardens CA 282 Jun. 1995 71.47% --- 838 --- Villa del Rey CA 103 Jun. 1995 92.15% --- 1,426 --- Tamalpais Creek CA 120 Oct. 1995 97.43% --- 1,403 --- Villa Bonita CA 130 Oct. 1995 90.71% --- 1,403 --- Maria del Sol CA 124 Oct. 1995 88.71% --- 1,117 --- Rancho Park CA 163 Oct. 1995 75.15% --- 1,258 --- Chateau San Juan CA 114 Dec. 1995 91.45% --- 1,504 --- Woodside Village Columbus OH 156 Feb. 1996 97.12% --- 1,380 --- Buena Vista Knolls CA 91 Feb. 1996 91.85% --- 1,373 --- Baypoint Village FL 232 Mar. 1996 89.66% --- 1,234 --- ----- Subtotal Leased Facilities 2,375 ----- Total Owned and Leased Facilities 3,534 ===== Managed Facilities: Willow Glen CA 84 Villa Colima CA 94 Valley View Lodge CA 125 Retirement Inn of Sunnyvale CA 123 Montego Heights Lodge CA 170 Retirement Inn of Fullerton CA 68 Retirement Inn of Fremont CA 70 Retirement Inn of Daly City CA 95 Covina Villas CA 64 Retirement Inn of Campbell CA 72 Retirement Inn of Burlingame CA 68 Bradford Square CA 92 Chandler Villas AZ 164 ----- Total Managed Facilities 1,289 ----- Total Operating Facilities 4,823 =====
* Average monthly rental is calculated on the base monthly rental per occupied unit. Prior to its fiscal year ended March 31, 1995, the Company did not own for its own account, or operate subject to long-term operating leases, assisted living facilities. Prior to that time, the company managed facilities for Affiliated Partnerships. 13 15 At March 31, 1996, the Company had the following projects under development or construction:
ANTICIPATED ANTICIPATED CONSTRUCTION ANTICIPATED FACILITIES UNDER CONSTRUCTION LOCATION # OF UNITS COMMENCEMENT * OPENING * - ----------------------------- -------- ---------- -------------- ----------- Collier Park Beaumont, TX 162 Under construction 4th Quarter 1996 Inn at Summit Ridge Reno, NV 76 Under construction 1st Quarter 1997 Vista del Rio Albuquerque, NM 150 Under construction 2nd Quarter 1997 Prospect Park Brooklyn, NY 127 Under construction 1st Quarter 1997 ------ Total Facilities Under Construction 515 ------ FACILITIES UNDER DEVELOPMENT Bay Hill Park Plano, TX 147 3rd Quarter 1996 3rd Quarter 1997 Los Posas Camarillo, CA 123 3rd Quarter 1996 3rd Quarter 1997 Waterside Villas Jamesburg, NJ 138 3rd Quarter 1996 3rd Quarter 1997 Tiffany Park Houston, TX 165 3rd Quarter 1996 3rd Quarter 1997 The Lakes Ft. Myers, FL 136 3rd Quarter 1996 3rd Quarter 1997 The Inn at Attleboro Attleboro, MA 132 3rd Quarter 1996 3rd Quarter 1997 Lakewood Denver, CO 123 4th Quarter 1996 4th Quarter 1997 Park at Great Hills Austin, TX 160 4th Quarter 1996 4th Quarter 1997 Woodbridge II Irvine, CA 140 1st Quarter 1997 1st Quarter 1998 University Villas Highlands Ranch, CO 120 1st Quarter 1997 1st Quarter 1998 ------ Total Facilities Under Development 1,384 ------ Total Facilities Under Construction and Development 1,899 ======
* Denotes calendar quarters. ITEM 3. LEGAL PROCEEDINGS The Company is not currently a party to any material litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters to a vote of its security holders during the fourth quarter of its fiscal year ended March 31, 1996. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock is listed and traded on the NASDAQ National Market ("NASDAQ") under the symbol "ARVI." The Common Stock has been listed on the NASDAQ since October 17, 1995, the date of the Company's initial public offering. The following table sets forth, for the periods indicated, the high and low closing prices for the Common Stock as reported on NASDAQ.
HIGH LOW ------ ------ FISCAL YEAR 1996 Third Quarter (Commencing October 17, 1995) $15.25 $ 9.50 Fourth Quarter $17.75 $10.50 FISCAL YEAR 1997 First Quarter (Through June 25, 1996) $20.25 $15.25
14 16 The Company does not currently pay dividends on its Common Stock and does not anticipate paying dividends in the foreseeable future. It is the present policy of the Company's Board of Directors to retain earnings, if any, to finance the expansion of the Company's business. Shares Eligible for Future Sale As of March 31, 1996, the Company had outstanding 8,308,142 shares of Common Stock, assuming no conversion of the Company's convertible securities or exercise of outstanding warrants and options. Of these shares, 3,565,000 shares of Common Stock sold in the IPO Offering are tradeable without restriction or limitation under the Securities Act, except for 180,922 shares purchased by "affiliates" of the Company which are subject to the resale limitations under Rule 144 of the Securities Act. The remaining 4,743,142 outstanding shares of Common Stock are "restricted securities" within the meaning of Rule 144 (the "Restricted Shares"). The Restricted Shares may not be sold except in compliance with the registration requirements of the Securities Act or pursuant to an exemption, including that provided by Rule 144. On February 7, 1996, the Company exercised its right to redeem all outstanding shares of Series A Preferred Stock effective May 9, 1996. All of the holders of Series A Preferred Stock elected to exercise their option to convert their shares of Series A Preferred Stock into Common Stock rather than have their shares redeemed. As a result, the Company issued 657,895 new shares of Common Stock, of which 209,539 and 368,838 shares will be tradeable without registration by December 31, 1996 and 1997, respectively. On April 10, 1996, the Company exercised its right to redeem the 1999 Convertible Notes, and noteholders have until June 30, 1996 to exercise their option to convert their notes to Common Stock. Up to 1,222,286 shares of restricted Common Stock are issuable upon conversion of the 1999 Convertible Notes, of which approximately 57,000 and 1,165,000 shares of Common Stock issuable upon conversion of the 1999 Convertible Notes will become freely tradeable in 1996 and 1997, respectively. Options to purchase a total of 767,627 shares of Common Stock and warrants to purchase a total of 169,501 shares of Common Stock were outstanding as of March 31, 1996. As of June 25, 1996, warrants to purchase 3,143 shares of Common Stock have been exercised, all of which will be tradeable without registration by December 31, 1998. The Securities and Exchange Commission has proposed to amend the holding period required by Rule 144 to permit sales of "restricted securities" after one year rather than the current two years (and two years rather than three years for "non-affiliates" who desire to trade free of other Rule 144 restrictions). If such proposed amendment were enacted, the "restricted securities" described above would become freely tradeable (subject to any applicable contractual restrictions) at correspondingly earlier dates. Volatility of Stock Price Sales of substantial amounts of shares of Common Stock in the public market or the perception that those sales could occur could adversely affect the market price of the Common Stock and the Company's ability to raise additional funds in the future in the capital markets. The market price of the Common Stock could be subject to significant fluctuations in response to various factors and events, including the liquidity of the market for the shares of the Common Stock, variations in the Company's operating results, changes in earnings estimates by securities analysts, publicity regarding the industry or the Company and the adoption of new statutes or regulations (or changes int he interpretation of existing statutes or regulations) affecting the health care industry in general or the assisted living industry in particular. In addition, the stock market in recent years has experienced broad price and volume fluctuations that often have been unrelated to the operating performance of particular companies. These market fluctuations may adversely affect the market price of the shares of Common Stock. Control by Directors and Executive Officers; Anti-Takeover Measures As of March 31, 1996, the Company's Directors and executive officers and their affiliates beneficially own approximately 29.9% of the Company's outstanding shares of Common Stock. See "Security Ownership of Directors 15 17 and Named Executive Officers" in the Company's definitive Proxy Statement related to its 1996 annual meeting of Shareholders. As a result, these stockholders, acting together, would be able to significantly influence many matters requiring approval by the stockholders of the Company, including the election of Directors. The Company's articles of incorporation provides for authorized but unissued preferred stock, the terms of which may be fixed by the Board of Directors, and provides, among other things, that upon the satisfaction of certain conditions specified in the California General Corporation Law (the "CGCL") relating to the number of holders of Common Stock, the Board of Directors will be classified and the holders of Common Stock will not be permitted to cumulate votes. Such provisions could have the effect of delaying, deferring or preventing a change of control of the Company. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data has been derived from the audited consolidated financial statements of the Company and its subsidiaries as of and for each of the five fiscal years ended March 31, 1996. The data set forth below should be read in conjunction with the consolidated financial statements and related notes thereto included in Section 14 of this 10-K along with "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented in Section 7 of this same 10-K.
YEAR ENDED MARCH 31, ------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------ ----------- ----------- ------------ ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue: Assisted living facility revenue (1)......... $ 25,479 $ 4,838 --- --- --- Management fees.............................. 2,822 3,463 $ 3,492 $ 3,110 $ 2,778 Development fees............................. 1,500 702 --- --- --- Other income................................. 2,192 476 904 606 653 ------------ ----------- ----------- ------------ ----------- Total revenue................................... 31,993 9,479 4,396 3,716 3,431 ------------ ----------- ----------- ------------ ----------- Expenses: Assisted living facility operating expense (1)............................. 16,395 3,201 --- --- --- Assisted living facility lease expense....... 6,644 814 --- --- --- General and administrative................... 7,644 8,264 5,765 3,470 3,541 Depreciation and amortization................ 1,031 320 92 69 67 Discontinued projects and accounts receivable written off................. 395 1,465 441 345 --- Interest, net................................ 474 143 (1) (34) 70 ------------ ----------- ----------- ------------ ----------- Total expenses.................................. 32,583 14,207 6,297 3,850 3,678 ------------ ----------- ----------- ------------ ----------- Loss before income tax expense (benefit)........ (590) (4,728) (1,901) (134) (247) Income tax expense (benefit).................... 375 (1,729) (248) 2 (78) ------------ ----------- ----------- ------------ ----------- Net loss........................................ $ (965) $ (2,999) $ (1,653) $ (136) $ (169) ============ =========== =========== ============ =========== Preferred dividends declared.................... $ 351 $ 398 $ 40 --- --- ------------ ----------- ----------- ------------ ----------- Net loss available for common shares (1)........ $ (1,316) $ (3,397) $ (1,693) $ (136) $ (169) ============ =========== =========== ============ =========== Net loss per common share....................... $ (.21) $ (.69) $ (.34) $ (.03) $ (.11) ============ =========== =========== ============ =========== Weighted average common shares outstanding (1).............................. 6,246 4,903 5,113 5,059 1,496 ============ =========== =========== ============ ===========
16 18
YEAR ENDED MARCH 31, ------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------ ----------- ----------- ------------ ----------- (IN THOUSANDS, EXCEPT UNIT AND OCCUPANCY DATA) SELECTED OPERATING DATA: Assisted living units owned or leased (end of period) (2).......................... 3,277 445 --- --- --- Assisted living units managed (end of period)................................ 1,289 2,803 3,042 3,042 2,935 Weighted average occupancy of assisted living units (end of period)........... 90.0% 91.5% 88.4% 87.1% 83.5% BALANCE SHEET DATA: Working capital (deficit) (3)................ $ 10,014 $ (4,660) $ 1,363 --- --- Total assets................................. 77,403 15,399 8,054 $ 3,046 $ 2,009 Long-term notes payable, excluding current portion.............................. 24,814 3,213 --- 16 --- Series A Preferred Stock, convertible and redeemable.............................. 2,358 4,586 3,969 --- --- Total shareholders' equity (deficit)......... 39,947 (3,536) (1,316) (70) 587
(1) Net loss available for common shares reflects the effect of preferred stock dividends. Weighted average common shares outstanding give effect to the 1 for 3.04 reverse stock split which occurred upon the completion of the IPO Offering. (2) The Company began operating assisted living facilities under long-term operating leases during fiscal 1995. Prior to that year, the Company managed those facilities for affiliated partnerships for which it acted as the managing general partner and recognized management fees and other income with respect to those assisted living facilities but did not receive assisted living revenue from and did not incur assisted living facility operating or lease expenses in connection with its operations. (3) Prior to fiscal 1994, the Company did not classify its balance sheet. As a result, no working capital data is available at March 31, 1993 and 1992. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Historically, a substantial majority of the assisted living facilities operated by the Company were owned or leased by Affiliated Partnerships. Other Affiliated Partnerships also have acquired or developed senior and affordable senior and multifamily apartments primarily utilizing the sale of tax credits under the Federal Tax Credit Program for the equity funding of the development. Beginning in April 1994, the Company commenced operation for its own account of assisted living facilities that were sold by certain Affiliated Partnerships or third parties to the Company or an affiliate of the Company or to publicly-traded Health Care REITs such as Nationwide Health Properties and Health Care Property Investors, Inc., and simultaneously leased to the Company under long-term operating leases. As of March 31, 1996, the Company operated 36 assisted living facilities. Of these 36 assisted living facilities, the Company owned 6 facilities directly for its own account, operated 17 under long-term operating leases and managed 13 for Affiliated Partnerships for which the Company serves as managing general partner and facility manager. On October 23, 1995, the Company successfully completed the IPO Offering of its common stock and effected a 1-for-3.04 reverse common stock split. The effect of this stock split has been reflected in the consolidated financial statements. 17 19 EVENTS SUBSEQUENT TO MARCH 31, 1996 On April 2, 1996, the Company, through a wholly owned subsidiary, purchased Bella Vita, a 120 unit assisted living facility located in Venice, Florida for $10,200,000. A portion of the purchase price was financed by the Company's assumption of a HUD insured loan, secured by a first mortgage recorded against the property, with an outstanding principal balance of $6,345,709 at the time of purchase. On April 3, 1996, the Company successfully completed a $57.5 million private placement offering of the 2006 Convertible Notes. The 2006 Convertible Notes, which are non-callable by the Company for a period of three years, allow note holders to convert their 2006 Convertible Notes into common stock of the Company at a price equal to $18.57 per share. On April 10, 1996, the Company called for redemption all of its outstanding 1999 Convertible Notes. The Company will redeem all of the outstanding 1999 Convertible Notes as of 5:00 p.m. Pacific Daylight Time on July 10, 1996, unless the Notes are converted on or prior to June 30, 1996. The price to be paid for each $1,000 principal amount of 1999 Convertible Notes will be $1,067 plus accrued interest to the date of redemption. 1999 Convertible Note holders are given the alternative to convert their Notes into shares of common stock of the Company at any time up to and including June 30, 1996. Converting holders will receive one share of common stock for every $12.16 in principal amount of 1999 Convertible Notes surrendered for conversion. For those 1999 Convertible Notes surrendered for conversion into common stock, unpaid interest will be disregarded and note holders will not be entitled to interest accrued to the date of conversion. For those Notes converted to common stock, the Company will issue restricted stock pursuant to Rule 144 of the Securities Act of 1933. If all Notes are converted, the Company will issue up to 1,233,552 shares of common stock. As of June 25, 1996, holders of $8.1 million principal amount of the 1999 Convertible Notes had exercised their right to convert their notes into approximately 665,800 shares of common stock. On April 16, 1996, the Company obtained a $10 million commitment from Imperial Bank ("Imperial") to provide a revolving credit facility to be used for the issuance of letters of credit, acquisition, development and general corporate purposes. The commitment provides for interest on borrowings at rates between Imperial's prime lending rate plus 0.0% to 0.5% or LIBOR plus 2.0% to 2.5% based upon the achievement of certain financial ratios. The Company is currently negotiating documentation of the loan. As of April 26, 1996, all holders of the Company's 8% Convertible Redeemable Series A Preferred Stock ("Preferred Stock") had exercised their right to convert their Preferred Stock to Common Stock of the Company resulting in the issuance of an additional 338,141 shares of the Common Stock since March 31, 1996. On May 16, 1996, the Company initiated a tender offer (the "Offer") to purchase any and all of the 34,886 outstanding limited partnership units of American Retirement Villas Properties II, a California limited partnership, not owned by the Company at a net cash price of $720.00 per unit from unitholders who validly tendered their units prior to June 14, 1996 at 10:00 p.m. Central Daylight Time. Subsequently, the Company extended the Offer until June 21, 1996 at 10:00 p.m. Central Daylight Time. Upon expiration of the Offer, 1,426 unitholders validly tendered 15,488 units (approximately 44.6% of the outstanding limited partnership units) which the Company will purchase at a cost of $11.2 million. On June 6, 1996, the Company obtained a $60 million commitment from Health Care REIT, Inc. for financing the construction of new assisted living facilities. Pursuant to the terms of the commitment, Health Care REIT, Inc. will finance up to 100% of the approved costs, as defined, for the construction of new assisted living facilities. Upon completion of construction, the Company will lease the facilities from Health Care REIT, Inc. on an initial lease term of 15 years, with three options to renew, at the Company's option, for periods of ten years each. The initial lease rate will be based upon the yield of comparable term U.S. Treasury Notes plus 3.75%. On June 18, 1996, the Company purchased Amber Wood, a 187 unit assisted living facility located in Newport Richey, Florida for $6.0 million. The total purchase price was paid from available cash on hand. 18 20 On June 24, 1996, the Company obtained a $35 million commitment from Bank United of Texas, FSB ("Bank United") for the construction or acquisition of assisted living facilities. The terms of the commitment provide for interest at 2.75% over the thirty day LIBOR rate. Of the commitment, a $20 million sub-limit has been established for the construction of assisted living facilities. The Company is currently negotiating documentation of the loan. RESULTS OF OPERATIONS Revenue for the year ended March 31, 1996 increased to $33.1 million from $9.7 million for the year ended March 31, 1995 due primarily to an increase in assisted living facility revenue. Similarly, expenses increased to $33.7 million for the year ended March 31, 1996 from $14.4 million for the year ended March 31, 1995 primarily due to additional assisted living facility operating and lease expenses. For the year ended March 31, 1996, the Company reported a loss of ($965,000) compared to a loss of ($3.0 million) for the year ended March 31, 1995. The Company reported profits of $104,000 for its third fiscal quarter ended December 31, 1995 followed by a profit of $302,000 in the fourth fiscal quarter ended March 31, 1996. YEAR ENDED MARCH 31, 1996 COMPARED WITH YEAR ENDED MARCH 31, 1995. Consistent with the Company's growth strategy, revenue for the year ended March 31, 1996 increased to $33.1 million from $9.7 million for the year ended March 31, 1995 due primarily to an increase in assisted living facility revenue and other income as described below. During the year ended March 31, 1996, the Company purchased six Assisted Living Facilities (four from third-party owners and two in which the Company purchased controlling interests in Affiliated Partnerships) which contributed three months of revenue. In addition, the Company as operator, entered into long-term operating leases for 14 facilities, 12 of which the Company previously managed for Affiliated Partnerships. These leases, when averaged, contributed six months of revenue. Assisted living facility revenue increased to $25.5 million for the year ended March 31, 1996 from $4.8 million for the year ended March 31, 1995. Assisted living facility revenue increased due to an increase in the number of assisted living facilities owned and operated by the Company as well as facilities operated by the Company under long-term operating leases. As of March 31, 1996, the Company owned and operated six assisted living facilities for its own account while operating 17 assisted living facilities pursuant to long-term operating leases with Health Care REITs. For the year ended March 31, 1995, the Company operated three assisted living facilities pursuant to a long-term operating lease with Nationwide Health Properties. During the year ended March 31, 1996, management fees decreased by $641,000 from the year ended March 31, 1995. Management fees decreased due to the fact that the Company no longer provides management services to Affiliated Partnerships with respect to the 12 assisted living facilities sold by the Affiliated Partnerships to Health Care REITs. Instead, the Company now receives assisted living facility revenue from these 12 facilities operated under long-term operating leases. This decrease in management fee income derived from management services provided to Affiliated Partnerships is consistent with the Company's strategy of growth through leasing and operating assets it previously managed. Development fees earned in connection with properties which the Company developed on behalf of a Health Care REIT as well as those owned and operated by Affiliated Partnerships under the Federal Tax Credit Program increased to $1.5 million for the year ended March 31, 1996 from $702,000 for the year ended March 31, 1995. This increase is the result of a greater number of apartment projects completed during the year compared with the prior year along with provision of development services to the Health Care REIT. Other income increased to $2.2 million for the year ended March 31, 1996 from $476,000 for the year ended March 31, 1995. The primary reason for the increase was income earned as a result of the sale of assisted living facilities owned by Affiliated Partnerships. As a result of the growth experienced by the Company, expenses increased to $33.7 million for the year 19 21 ended March 31, 1996 from $14.4 million for the year ended March 31, 1995. The principal components of the increased expenses, higher assisted living facility operating and lease expenses, were incurred as additional properties were leased or purchased by the Company in the execution of its growth strategy. Assisted living facility operating and lease expenses increased to $16.4 million and $6.6 million, respectively, for the year ended March 31, 1996 from $3.2 million and $814,000 respectively, for the year ended March 31, 1995. The increases reflect the purchase of six assisted living facilities and the addition of sixteen long-term operating leases executed by the Company between February 1995 and March 1996. During the year ended March 31, 1995, the Company leased three assisted living facilities pursuant to a long-term operating leases, two of which were executed in February 1995, and owned one facility for its own account. General and administrative expenses increased to $7.6 million for the year ended March 31, 1996 from $7.5 million for the year ended March 31, 1995. The modest increase was primarily the result of inflationary increases offset by the Company's reduced emphasis on the development of apartment projects under the Federal Tax Credit Program. During the year ended March 31, 1996, the Company did not make an employee benefit plan contribution, whereas in the year ended March 31, 1995, the Company made a contribution of $811,000 to the ARV Housing Group, Inc. Employee Stock Option Plan (the "ESOP"). Depreciation and amortization expenses increased to $1.0 million for the year ended March 31, 1996 from $320,000 for the prior year ended March 31, 1995 due to an increase in depreciation expenses incurred as a result of the Company's ownership of assisted living facilities. The Company also incurred amortization of 1999 Convertible Notes issuance costs totaling $342,000 for the year ended March 31, 1996. Since nearly $12.0 million of the approximately $15.0 million principal amount of the 1999 Convertible Notes were issued subsequent to March 31, 1995, a comparable expense was not incurred during the year ended March 31, 1995. Discontinued project costs and receivables written-off decreased to $395,000 for the year ended March 31, 1996 from $1.5 million for the year ended March 31, 1995. Discontinued project costs were incurred during each of these years in connection with direct and indirect development costs related to the discontinuance of projects that did not meet the Company's criteria for continued development. The majority of these costs were associated with projects considered for inclusion in the Federal Tax Credit Program. Interest expense increased to $1.5 million for the year ended March 31, 1996 from $354,000 for the year ended March 31, 1995 due primarily to additional interest incurred on the 1999 Convertible Notes. Income tax expense for the year ended March 31, 1996 was $375,000 compared to an income tax benefit of $1.7 million for the year ended March 31, 1995. The $2.1 million increase in the income tax expense is primarily the result of development fees recognized for federal income tax purposes in conjunction with projects developed under the Federal Tax Credit Program. Primarily as a result of the foregoing, the net loss decreased to ($965,000) for the year ended March 31, 1996 from a net loss of ($3.0 million) for the year ended March 31, 1995. YEAR ENDED MARCH 31, 1995 COMPARED WITH YEAR ENDED MARCH 31, 1994. Revenue for the year ended March 31, 1995 increased to $9.7 million from $4.5 million for the year ended March 31, 1994 due primarily to an increase in assisted living facility revenue as described below. In the year ended March 31, 1995 the Company as operator, entered into long-term operating leases with Nationwide Health Properties to operate three assisted living facilities, and also acquired a 51% controlling interest in the Affiliated Partnership that owned the Villa de Palma assisted living facility (the "Villa de Palma Partnership"). One lease commenced in April 1994 and contributed to 11 months of revenue; two others commenced in February 20 22 1995 and contributed to less than two months of revenue. The 51% interest in the Villa de Palma Partnership was acquired in September 1994, thereby contributing to six months of revenue. No facilities were leased or owned by the Company in the year ended March 31, 1994. Management fees decreased by $29,000 for the year ended March 31, 1995 from the year ended March 31, 1994. The decrease in management fees was due to the discontinuation of the management of two facilities pursuant to the sale of one facility to Nationwide Health Properties in April 1994 and the Company's acquisition of a controlling interest in the Villa de Palma Partnership. The Company now receives assisted living facility revenue from these two facilities under long-term operating leases. This decrease was offset in part by the increase in management fees from affordable senior and multifamily apartments due to an increase in the number of units managed by the Company. The Company recognized development fees of $702,000 for the year ended March 31, 1995 earned in connection with properties owned and operated by Affiliated Partnerships under the Federal Tax Credit Program. The Company did not recognize development fees for the year ended March 31, 1994 because a majority of the partnerships under the Federal Tax Credit Program were in their start-up phase. The Company expects development fees to increase as amounts previously deferred are recognized. Other income decreased to $476,000 for the year ended March 31, 1995 from $904,000 for the year ended March 31, 1994. The primary reason for the decrease was that the Company did not receive any rent-up and staff training fees, wholesaling commissions, or real estate and consulting fees for the year ended March 31, 1995. Rent-up and staff training fees are earned by the Company for services performed in connection with preparing the facility and employees for the opening of facilities owned by Affiliated Partnerships. The Company does not anticipate receiving significant income from these fees or commissions in the future. Expenses increased to $14.4 million for the year ended March 31, 1995 from $6.4 million for the year ended March 31, 1994 due to the addition of assisted living facility operating expenses and lease expenses and an increase in general and administrative expenses. Assisted living facility operating expenses and lease expenses were $3.2 million and $814,000, respectively, for the year ended March 31, 1995 and are due to the three long-term operating leases entered by the Company in April 1994 and February 1995, and the acquisition of a 51% interest in the Villa de Palma Partnership in October 1994. The Company did not lease or own any assisted living facilities prior to fiscal 1995. General and administrative expenses increased to $7.5 million for the year ended March 31, 1995 from $5.7 million for the year ended March 31, 1994 primarily due to increased acquisition and development activity of apartment projects financed under the Federal Tax Credit Program. As a result of this increase, the Company has established the staffing and infrastructure in place to build both assisted living facilities and its remaining apartment projects on a national basis. Additionally, employee benefit plan contributions increased to $811,000 for the year ended March 31, 1995 from $76,000 for the year ended March 31, 1994 due to a contribution to the ESOP which reduced the Company's taxable income. Depreciation and amortization expenses increased to $320,000 for the year ended March 31, 1995 from $92,000 for the year ended March 31, 1994 primarily due to an increase in depreciation of fixed assets and depreciation of the assets of the Villa de Palma Partnership which the Company purchased during the period. Discontinued project costs increased to $652,000 for the year ended March 31, 1995. No similar costs were recorded for the year ended March 31, 1994. These costs were incurred in connection with direct and indirect development costs related to the discontinuance of projects that did not meet the Company's criteria for continued development. Provision for doubtful receivables written-off increased to $813,000 for the year ended March 31, 1995 from $441,000 for the year ended March 31, 1994 primarily due to a significant increase in partnership administrative fees and tax credit offering expenses deemed uncollectible. Partnership administrative fee receivables of approximately 21 23 $350,000 from an Affiliated Partnership were expected to be repaid from operations. The collectibility of recorded amounts were assessed in relation to operating results and the estimated value of the partnership's properties and whether these values would be sufficient to provide adequate proceeds to satisfy this obligation. Management's assessment made during the year ended March 31, 1995 was that the estimated proceeds would not be sufficient to recover these receivables and as a result they were written off. Interest expense for the year ended March 31, 1995 increased by $252,000 due to interest incurred on the 1999 Convertible Notes. The provision for income tax expense (benefit) consists of current tax expense of $47,000 and $9,000 for the years ended March 31, 1995 and 1994, respectively, and deferred tax benefit (net of valuation reserves) of $1.8 million and $257,000 as of March 31, 1995 and March 31, 1994, respectively. The increase in deferred tax benefit (net of valuation reserves) for the year ended March 31, 1995 is primarily a result of an increase in development and construction services fee income recognizable for federal income tax purposes but which is not yet recognizable for financial reporting purposes in the statement of operations. Such development and construction services fee income is generated in connection with the development of senior and multifamily apartment communities by Affiliated Partnerships under the Federal Tax Credit Program. Primarily as a result of the foregoing, the net loss increased to $3.0 million for the year ended March 31, 1995 from a net loss of $1.7 million for the year ended March 31, 1994. LIQUIDITY AND CAPITAL RESOURCES The Company's unrestricted cash and cash equivalents balances were $7.5 million and $775,000 at March 31, 1996 and March 31, 1995, respectively. On February 7, 1996, the Company exercised its right to redeem all outstanding shares of Series A Preferred Stock on May 9, 1996. Preferred shareholders have the option of converting their Series A Preferred Stock into Common Stock at any time prior to April 29, 1996. If all shares are fully converted, the Company will issue up to 657,805 new shares of Common Stock (after giving effect to the 1 for 3.04 reverse stock split of the Common Stock in connection with the IPO Offering). As of March 31, 1996, holders of 971,905 shares of the Series A Preferred Stock exercised their right to convert their Preferred Stock into 319,664 shares of Common Stock. Subsequent to March 31, 1996, the balance of the Series A Preferred Stock was converted into an additional 338,141 shares of Common Stock. In July 1995, the Company completed a private placement of approximately $15.0 million of 1999 Convertible Notes. The private placement generated net proceeds to the Company of $13.5 million, which were used to retire bank debt, acquire land, fund preconstruction development activities, finance expenditures in connection with the Federal Tax Credit Program, reduce short-term liabilities, purchase interests in Affiliated Partnerships or related companies, make security deposits on leased assisted living facilities, and provide for working capital. Each $1,000 principal amount of 1999 Convertible Notes outstanding is: (i) convertible at any time prior to maturity, unless previously redeemed, into approximately 82 shares of Common Stock (a conversion ratio equal to $12.16 per share), subject to adjustment, (ii) accrues interest from the date of issuance at 10% per annum, payable in arrears on the first business day of each month, (iii) is unsecured and subordinated to certain present and future Senior Indebtedness (as defined in the 1999 Convertible Notes) of the Company and is effectively subordinated to all indebtedness of subsidiaries of the Company, and (iv) is redeemable for cash at the option of the Company upon 90 days notice at premiums declining ratably from 110% prior to December 31, 1995 to 100% on and after January 1, 1998 plus accrued and unpaid interest, if any, to the date of redemption by the Company. The 1999 Convertible Notes are currently redeemable at the option of the Company at 106.7% of their principal amount, plus accrued and unpaid interest. Subsequent to March 31, 1996, the Company called for redemption all of the approximately $15.0 million of 1999 Convertible Notes. On October 23, 1995, the Company successfully completed the IPO Offering. The net proceeds to the 22 24 Company from the IPO Offering, after deducting underwriting discount and offering expenses payable by the Company, were approximately $42.7 million, which were used to acquire five existing assisted living facilities, to purchase and fund a portion of the costs for development of 14 assisted living facilities currently under development, to provide escrow deposits on assisted living facilities which the Company has entered into contracts to acquire, and to provide security deposits on assisted living facilities the Company leases pursuant to long-term operating leases. Working capital increased to $10.0 million as of March 31, 1996, compared to a working capital deficit $4.7 million at March 31, 1995 resulting primarily from the net proceeds from the sale of common stock in the IPO Offering. For the years ended March 31, 1996 and 1995, the Company used cash in operating activities of $544,000 and $2.5 million, respectively. The Company used cash in operating activities primarily because it incurred net losses of ($965,000) and ($3.0 million) for the years ended March 31, 1996 and 1995, respectively. The Company incurred non-cash charges of $936,000 and $491,000, consisting primarily of depreciation and amortization for the years ended March 31, 1996 and 1995, respectively. In addition, the Company received development fees from, and was required to make equity contributions to Affiliated Partnerships. The Company received development fees of $1.4 million and $4.4 million for the years ended March 31, 1996 and 1995. The Company made owner equity contributions of $1.7 million and $3.9 million during the years ended March 31, 1996 and 1995. Cash used in investing activities was $53.9 million for the year ended March 31, 1996. Purchases of facilities, fixtures and equipment totaling $45.7 million, investments in real estate of $6.8 million, increases in restricted cash of $4.9 million as collateral for letters of credit pledged as security deposits for leased facilities, increases in leased property security deposits of $559,000 and acquisition of limited partnership interests of $1.6 million were partially offset by proceeds of $5.1 million from the sale of the Villa de Palma to Nationwide Health Properties. For the year ended March 31, 1995, $2.3 million was used in investing activities consisting of primarily of a $1.3 million increase in leased property security deposits, an $806,000 increase in notes receivable, a $537,000 increase in furniture, fixtures and improvements offset by a $496,000 decrease in deferred project costs. Net cash provided by financing activities was $61.1 million and $3.5 million for the years ended March 31, 1996 and 1995, respectively. During the year ended March 31, 1996, $42.7 million (net of issuance cost) was provided by the issuance of common stock in the IPO Offering, $10.8 million (net of issuance costs) was provided from the issuance of the 1999 Convertible Notes, and $14.5 million was provided from mortgage and loan borrowings. These proceeds were offset by $6.1 million of debt repayments, $400,000 of preferred stock dividends paid and $351,000 paid to repurchase common stock. During the year ended March 31, 1995, the following amounts were provided by financing activities: $2.7 million from the issuance of the 1999 Convertible Notes, $1.2 million from the sale of common stock to the ESOP, $750,000 from increases in amounts owed to affiliates and $738,000 from bank borrowings. These amounts were offset by $1.6 million of debt repayment, $595,000 of amounts repaid to affiliates and $337,000 of preferred stock dividends paid. The Company used cash in operating activities of $2.6 million for the year ended March 31, 1995, as compared to cash provided by operating activities of $310,000 for 1994. The Company used cash in operating activities primarily because it has incurred net losses. The Company incurred net losses of $3.0 million and $1.7 million for the years ended March 31, 1995 and 1994, respectively. In addition, the Company received significant development fees and was required to make owner equity contributions to Affiliated Partnerships. The Company received development fees from Affiliated Partnerships of $4.4 million and $2.7 million for the years ended March 31, 1995 and 1994. The Company made owner equity contributions of $3.9 million and $215,000 during the years ended March 31, 1995 and 1994. 23 25 During the year ended March 31, 1995, the Company used net cash in investing activities of $2.3 million compared to $3.5 million for the year ending March 31, 1994. The Company's investing activities for the year ended March 31, 1995 included $1.3 million of lease security deposits made in connection with assisted living facility leases, an increase in notes receivable from affiliates of $806,000 and $537,000 in fixed asset additions. During the year ended March 31, 1994 the Company invested $2.8 million in deferred project costs related to certain Affiliated Partnerships financed under the Federal Tax Credit Program, advanced $439,000 in notes receivable from Affiliated Partnerships and invested $330,000 for fixed asset additions. The deferred project costs typically are reimbursed to the Company by the Affiliated Partnerships when the partnership has been funded by investor limited partners. The Company does not intend to focus on the development of these partnerships and, therefore, expects related capital requirements to be less in the future. During the year ended March 31, 1995, the Company's financing activities provided net cash of $3.5 million, compared to $5.1 million provided in the year ended March 31, 1994. The Company received net proceeds from the sale of Series A Preferred Stock of $617,000 and $4.0 million in 1995 and 1994, respectively. In fiscal 1995 the Company commenced the offering of $15.0 million principal amount of its 1999 Convertible Notes and had received net proceeds of $2.7 million by March 31, 1995. The Company's ESOP purchased $1.2 million and $446,000 in Common Stock in fiscal 1995and 1994, respectively. In fiscal 1995 and fiscal 1994 certain of the Company's shareholders made net advances to the Company of $155,000 and $588,000, respectively. The Company reduced its bank borrowings by $823,000 in fiscal 1995. The Company's capital requirements include acquisition and rehabilitation costs of assisted living facilities, escrow deposits on acquired properties, security deposits on leased properties, assisted living facility pre-development costs, and initial operating costs of newly developed assisted living facilities, payment of interest, preferred stock dividends, owner's equity contributions in connection with certain Affiliated Partnerships financed under the Federal Tax Credit Program, and working capital. The Company does not intend to focus on tax credit partnership developments and, accordingly, expects that its future outlays for these developments will diminish. The Company is contingently liable for (i) certain secured and unsecured indebtedness of affiliates which it has guaranteed and (ii) Tax Credit Guaranties. While the Company currently generates sufficient cash from operations to fund its recurring working capital requirements, the Company anticipates that it will be necessary to obtain additional financing in order to continue its aggressive growth strategy. Although the Company currently generates sufficient cash from operations to fund its working capital requirements, there can be no assurances that the Company will not need to obtain financing in the future in order to meet its working capital requirements. On April 16, 1996, the Company obtained a $10 million commitment from Imperial to provide a revolving credit facility to be used for the issuance of letters of credit, acquisition, development and general corporate purposes. The commitment provides for interest on borrowings at rates between Imperial's prime lending rate plus 0.0% to 0.5% or LIBOR plus 2.0% to 2.5% based upon the achievement of certain financial ratios. The Company is currently negotiating documentation of the loan. In April 1996, the Company successfully completed a $57.5 million private placement offering of the 2006 Convertible Notes. The 2006 Convertible Notes, which are non-callable by the Company for a period of three years, allow note holders to convert their 2006 Convertible Notes into common stock of the Company at a price equal to $18.57 per share. On June 6, 1996, the Company obtained a $60 million commitment from Health Care REIT, Inc. for financing the construction of new assisted living facilities. Pursuant to the terms of the commitment, Health Care REIT, Inc. will finance up to 100% of the approved costs, as defined, for the construction of new assisted living facilities. Upon completion of construction, the Company will lease the facilities from Health Care REIT, Inc. on an initial 24 26 lease term of 15 years, with three options to renew, at the Company's option, for periods of ten years each. The initial lease rate will be based upon the yield of comparable term U.S. Treasury Notes plus 3.75%. On June 24, 1996, the Company obtained a $35 million commitment from Bank United for the construction or acquisition of assisted living facilities. The terms of the commitment provide for interest at 2.75% over the thirty day LIBOR rate. Of the commitment, a $20 million sub-limit has been established for the construction of assisted living facilities. The Company is currently negotiating documentation of the loan. The Company believes that funds from the net proceeds of the 2006 Notes, its financing commitments and existing liquidity will provide adequate resources to meet its current operating and investing needs and support its current growth plans. The Company's plans for acquisition and development of assisted living facilities are likely to require substantial amounts of additional capital. The Company will be required to obtain additional capital through debt or equity financings. There can be no assurance that such capital will be available to the Company or, if available, such capital would be available on favorable terms. IMPACT OF INFLATION AND CHANGING PRICES Operating revenue from assisted living facilities operated by the Company is the primary sources of revenue earned by the Company. These properties are affected by rental rates which are highly dependent upon market conditions and the competitive environments where the facilities are located. Employee compensation is the principal cost element of property operations. Although there can be no assurance it will be able to continue to do so, the Company has been able historically to offset the effects of inflation on salaries and other operating expenses by increasing rental and assisted living rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and the Independent Auditors' Report are listed at Item 14 and are included beginning on Page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Information required by this Item 10 is contained under the captions "Election of Directors" and "Management" in the Company's definitive Proxy Statement relating to its 1996 annual meeting of Shareholders and is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item 11 is contained under the captions "Compensation of Executive Officers" and "Further Information Concerning the Board of Directors -- Compensation of Directors" and "Compensation Committee Report on Executive Compensation" in the Company's definitive Proxy Statement relating to its 1996 annual meeting of Shareholders and is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item 12 is contained under the caption "Security Ownership of Directors, 25 27 Executive Officers and Certain Beneficial Owners" in the Company's definitive Proxy Statement relating to its 1996 annual meeting of Shareholders and is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item 13 is contained under the caption "Certain Transactions" in the Company's definitive Proxy Statement relating to its 1996 annual meeting of Shareholders and is hereby incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of the report: (1) FINANCIAL STATEMENTS. The following financial statements of the Registrant and the Report of Independent Public Accountants therein are filed as part of this Report on Form 10-K: Page --------- Independent Auditors' Report............................... F-2 Consolidated Balance Sheets................................ F-3 Consolidated Statements of Operations...................... F-4 Consolidated Statements of Shareholders' Equity (Deficit).. F-5 Consolidated Statements of Cash Flows...................... F-6 Notes to Consolidated Financial Statements................. F-8 (2) FINANCIAL STATEMENT SCHEDULES. Financial Statement Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. (b) REPORTS ON FORM 8-K. The Registrant filed the following reports with the Securities and Exchange Commission on Form 8-K during the quarter ended March 31, 1996: The Company's current report on Form 8-K filed with the Securities and Exchange Commission on January 15, 1996 reported under Item 2, concerning the acquisition of controlling interests in two partnerships, Casa Bonita Fullerton - LTD (dba Acacia Villa), a California limited partnership and Collwood Knolls, a California limited partnership. The Company's current report on Form 8-K filed with the Securities and Exchange Commission on January 22, 1996 reported under Item 2, concerning the acquisition of Amber Park. The Company's current report on Form 8-K filed with the Securities and Exchange Commission on February 8, 1996 reported under Items 5 and 7, concerning the Company's call for redemption of all of the $5 million outstanding Series A Convertible Redeemable Preferred Stock and exhibits thereto. The Company's current report on Form 8-K filed with the Securities and Exchange Commission on February 14, 1996 reported under Item 2, concerning the acquisition of Cardinal Retirement Village of Bedford. The Company's current report on Form 8-K filed with the Securities and Exchange Commission on February 20, 1996 reported under Item 2, concerning the lease of Cardinal Retirement Village of Columbus. The Company's current report on Form 8-K filed with the Securities and Exchange Commission on 26 28 February 22, 1996 reported under Item 2, concerning the lease of Buena Vista Knolls. The Company's current report on Form 8-K/A filed with the Securities and Exchange Commission on March 1, 1996 reported under Item 7, concerning the Historical Summary of Gross Income and Direct Operating Expenses of Chateau San Juan for the years ended December 31, 1995, 1994 and 1993. The Company's current report on Form 8-K/A filed with the Securities and Exchange Commission on March 14, 1996 reported under Item 7, concerning the Audited balance sheets of Collwood Knolls, a California limited partnership, as of December 31, 1995 and 1994 and the related statements of operations, partners' deficit and cash flows for each of the years in the three year period ended December 31, 1995; the Audited balance sheets of Casa Bonita - Fullerton, LTD. (dba Acacia Villa), a California limited partnership, as of December 31, 1995 and 1994 and the related statements of operations, partners' deficit and cash flows for each of the years in the three year period ended December 31, 1995: and the Unaudited Proforma Combined Financial Statements of ARV Assisted Living, Inc. As of March 31, 1995 and the Unaudited Pro Forma Combined Statement of Operations for the year ended March 31, 1995 and the Unaudited Proforma Combined Statement of Operations for the nine months ended December 31, 1995 and the related notes thereon. The Company's current report on Form 8-K/A filed with the Securities and Exchange Commission on March 20, 1996 reported under Item 7, correcting the report filed on March 14, 1996 concerning the Audited balance sheets of Collwood Knolls, a California limited partnership, as of December 31, 1995 and 1994 and the related statements of operations, partners' deficit and cash flows for each of the years in the three year period ended December 31, 1995; the Audited balance sheets of Casa Bonita - Fullerton, LTD. (dba Acacia Villa), a California limited partnership, as of December 31, 1995 and 1994 and the related statements of operations, partners' deficit and cash flows for each of the years in the three year period ended December31, 1995: and the Unaudited Proforma Combined Financial Statements of ARV Assisted Living, Inc. as of March 31, 1995 and the Unaudited Pro Forma Combined Statement of Operations for the year ended March 31, 1995 and the Unaudited Proforma Combined Statement of Operations for the nine months ended December 31, 1995 and the related notes thereon. The Company's current report on Form 8-K/A filed with the Securities and Exchange Commission on March 20, 1996 reported under Item 7, concerning the Audited historical summary of gross income and direct operating expenses of Amber Park Retirement Community for the year ended December 31, 1995, a statement showing the estimated taxable operating results for Amber Park Retirement Community based on its most recent 12-month period and the Unaudited Pro Forma Combined Balance Sheet of ARV Assisted Living, Inc. as of December 31, 1995 Unaudited Pro Forma Combined Statement of Operations for the year ended March 31, 1995 and the Unaudited Proforma Combined Statement of Operations for the nine months ended December 31, 1995 and the related notes thereon. The Company's current report on Form 8-K filed with the Securities and Exchange Commission on March 20, 1996 reported under Items 2, 5 and 7, concerning the acquisition of Wyndham Lakes, the lease of Baypoint Village and the Company's announcement of its private placement offering of $50 million in Convertible Subordinated Notes due 2006. Exhibits to the report included an Audited historical summary of gross income and direct operating expenses of Wyndham Lakes for the year ended December 31, 1995, Audited historical summary of gross income and direct operating expenses of Baypoint Village for the year ended December 31, 1995, a statement showing the estimated taxable operating results for Wyndham Lakes and Baypoint Village based on their most recent 12-month period, the Unaudited Pro Forma Combined Balance Sheet of ARV Assisted Living, Inc. as of December 31, 1995 and the Unaudited Pro Forma Combined Statement of Operations for the year ended March 31, 1995 and the Unaudited Proforma Combined Statement of Operations for the nine months ended December 31, 1995 and the related notes thereon and a press release which discussed the Company's $50 million Convertible Subordinated Note Offering. 27 29 (C) EXHIBITS: The following exhibits are filed as a part of, or incorporated by reference into this report on Form 10-K:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Restated Articles of Incorporation of the Company, incorporated by reference to Exhibit 3.3 of the Company's Registration Statement on Form S-1(No. 33- 95712) 3.2 Restated Bylaws of the Company, incorporated by reference to Exhibit 3.4 of the Company's Registration Statement on Form S-1(No. 33-95712) 4.1.1+ Form of Subscription and Note Purchase Agreement between ARV Housing Group, Inc. and the holders of Notes pursuant to which the Notes were subscribed 4.1.2+ Form of Standby Trust Agreement between ARV between ARV Housing Group and the holders of Notes and such Trustee or Trustees as may be appointed by the holders of Notes pursuant to the terms thereof 4.1.3+ Form of Continuing Guarantee individually executed by each of Messrs. Davidson, Booty and Collins, relating to the rights of the holders of Notes 4.2 Form of Indenture Agreement between ARV Assisted Living, Inc. and the initial purchaser of the Company's $57.5 million, 6 3/4% Convertible Subordinated Notes due 2006 10.1* Employment Agreement between the Company and Gary L. Davidson dated October 1, 1995 10.2* Employment Agreement between the Company and John A. Booty dated October 1, 1995 10.3* Employment Agreement between the Company and David P. Collins dated October 1, 1995 10.4* Intentionally omitted 10.5* Employment Agreement between the Company and Graham P. Espley-Jones dated October 1, 1995 10.6* Indemnification Agreement between the Company and James M. Peters dated November 30, 1995 10.7* Indemnification Agreement between the Company and R. Bruce Andrews dated November 30, 1995 10.8* Indemnification Agreement between the Company and Maurice J. DeWald dated November 30, 1995 10.9* Indemnification Agreement between the Company and John J. Rydzewski dated November 30, 1995 10.10* Intentionally omitted 10.11* Indemnification Agreement between the Company and Graham P. Espley-Jones dated October 17, 1995
30 10.12* Indemnification Agreement between the Company and David P. Collins dated October 17, 1995 10.13* Indemnification Agreement between the Company and Gary L. Davidson dated October 17, 1995 10.14* Indemnification Agreement between the Company and John A. Booty dated October 17, 1995 10.15* Non-Qualified Stock Option Agreement between the Company and James M. Peters dated November 30, 1995 10.16* Non-Qualified Stock Option Agreement between the Company and R. Bruce Andrews dated November 30, 1995 10.17* Non-Qualified Stock Option Agreement between the Company and Maurice J. DeWald dated November 30, 1995 10.18* Non-Qualified Stock Option Agreement between the Company and John J. Rydzewski dated November 30, 1995 10.19* Standard Industrial/Commercial Single-Tenant Lease dated December 1, 1993 between the Company and 245 A-2 Partnership, L.P, incorporated by reference to Exhibit 10.7 of the Company's Registration Statement on Form S-1(No. 33- 95712) 10.20 Office Lease dated December 21, 1989 between the Company and C.F.G. Development Company, incorporated by reference to Exhibit 10.8 of the Company's Registration Statement on Form S-1(No. 33-95712) 10.21 Office Lease dated November 1, 1988 between the Company and Fischer Avenue Properties, incorporated by reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1(No. 33-95712) 10.22 Agreement of Purchase and Sale and Joint Escrow Instructions between Fischer Avenue Properties and ARV Housing Group, Inc. dated April 6, 1995, incorporated by reference to Exhibit 10.10 of the Company's Registration Statement on Form S-1(No. 33-95712) 10.23 Agreement of Purchase and Sale of Stock of LVP Services, Inc., dated June 30, 1995, incorporated by reference to Exhibit 10.11 of the Company's Registration Statement on Form S-1(No. 33-95712) 10.24 Agreement of Purchase and Sale of Stock of ARV Mortgage, Inc. To Red Hill Hunter Associates, Inc., incorporated by reference to Exhibit 10.12 of the Company's Registration Statement on Form S-1(No. 33-95712) 10.25 Agreement of Purchase and Sale of Stock of Pacific Demographics Corporation dated July 19, 1995 between the Company and the Shareholders of Pacific Demographics Corporation, incorporated by reference to Exhibit 10.13 of the Company's Registration Statement on Form S-1(No. 33-95712) 10.26 Limited Partnership Agreement of 245 A-2 Partnership L.P., dated November 29, 1993, incorporated by reference to Exhibit 10.28 of the Company's Registration Statement on Form S-1(No. 33-95712) 10.27 ARV Assisted Living, 1995 Incentive Stock Option Plan, effective October 15, 1995, incorporated by reference to Exhibit 10.114 of the Company's Registration Statement on Form S-1(No. 33-95712)
31 10.28 Form of Common Stock Purchase Warrant (Series A Preferred Stock Offering), incorporated by reference to Exhibit 10.115 of the Company's Registration Statement on Form S-1(No. 33-95712) 10.29 Form of Common Stock Purchase Warrant (1999 Convertible Subordinated Notes Offering), incorporated by reference to Exhibit 10.116 of the Company's Registration Statement on Form S-1(No. 33-95712) 10.30 La Veranda Promissory Note dated October 20, 1995 for $2 million secured by deed of trust. On March 5, 1996, promissory note was assigned to Gary L. Davidson, John A. Booty, David P. Collins and Graham P. Espley-Jones 10.31 Operating agreement of Villas at the Ponds LLC dated August 8, 1995 10.32 Operating agreement of Prospect Park Residence LLC dated February 1996 10.33 Imperial Bank commitment letter dated March 19, 1996 for $10 million 10.34 Health Care REIT commitment letter dated June 6, 1996 for $60 million 10.35 Bank United of Texas commitment letter dated June 24, 1996 for $35 million 11.1 Statement of the Company regarding computation of per share earnings 21 Subsidiaries of the Company as of June 25, 1996 23 Consent of KPMG Peat Marwick LLP 27 Financial Data Schedule
+ Included as an exhibit by the same number in the Company's Registration Statement on Form S-1 (No. 33-95712) declared effective on October 17, 1995 and incorporated herein by reference. * Included as an exhibit by the same number in the Company's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended December 31, 1995 and incorporated herein by reference. 32 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Index to Consolidated Financial Statements
Page ---- Independent Auditors' Report F-2 Consolidated Balance Sheets of ARV Assisted Living, Inc. and subsidiaries as of March 31, 1996 and 1995 F-3 Consolidated Statements of Operations of ARV Assisted Living, Inc. and subsidiaries for the years ended March 31, 1996, 1995 and 1994 F-4 Consolidated Statements of Shareholders' Equity (Deficit) of ARV Assisted Living, Inc. and subsidiaries for the three years ended March 31, 1996, 1995 and 1994 F-5 Consolidated Statements of Cash Flows of ARV Assisted Living, Inc. and subsidiaries for the years ended March 31, 1996, 1995 and 1994 F-6 Notes to Consolidated Financial Statements of ARV Assisted Living, Inc. and subsidiaries F-8
33 INDEPENDENT AUDITORS' REPORT The Board of Directors ARV Assisted Living, Inc.: We have audited the accompanying consolidated balance sheets of ARV Assisted Living, Inc. and subsidiaries as of March 31, 1996 and 1995 and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the years in the three-year period ended March 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ARV Assisted Living, Inc. and subsidiaries as of March 31, 1996 and 1995 and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Orange County, California May 25, 1996 F-2 34 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Consolidated Balance Sheets March 31, 1996 and 1995
MARCH 31 --------------------------- ASSETS 1996 1995 ------------ ----------- Cash and cash equivalents $ 7,454,238 774,568 Fees receivable and other amounts due from affiliates (note 6) 922,125 810,791 Deferred project costs 1,007,780 2,280,632 Investments in real estate held for sale (note 1) 6,807,141 -- Other assets 1,496,821 310,979 ------------ ----------- Total current assets 17,688,105 4,176,970 ------------ ----------- Restricted cash (note 1) 4,914,764 -- Property, furniture and equipment (note 1) 47,233,885 5,845,101 Notes receivable from affiliates, less allowance for doubtful accounts of $65,000 and $550,000 at March 31, 1996 and 1995, respectively (note 6) 274,566 1,290,911 Deferred tax asset (note 5) 2,043,521 2,044,088 Other noncurrent assets (notes 1, 2 and 9) 5,247,690 2,041,894 ------------ ----------- $ 77,402,531 15,398,964 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Accounts payable and accrued liabilities $ 4,199,780 2,087,759 Deferred revenue, current portion (note 11) 45,752 41,585 Owner equity contributions payable (note 11) 10,000 767,000 Notes payable, current portion (note 3) 3,306,592 4,863,216 Notes payable and other amounts due to affiliates (note 6) 111,809 1,076,970 ------------ ----------- Total current liabilities 7,673,933 8,836,530 ------------ ----------- Deferred revenue, less current portion (note 11) 1,327,288 2,102,937 Notes payable, less current portion (note 3) 24,813,661 3,212,700 Losses in excess of investments in partnerships (note 2) -- 197,233 ------------ ----------- 33,814,882 14,349,400 ------------ ----------- Minority interest in joint venture (note 1) 1,283,017 -- Series A Preferred stock, convertible and redeemable. Stated and liquidation value $2.50; authorized and outstanding 1,028,095 and 2,000,000 shares at March 31, 1996 and 1995, respectively (notes 8 and 14) 2,357,475 4,585,537 Shareholders' equity (deficit) (notes 7, 13 and 14): Common stock, no par value. Authorized 100,000,000 shares; issued and outstanding 8,308,142 and 5,097,892 shares at March 31, 1996 and 1995, respectively 47,547,798 3,009,384 Less receivable from ESOP -- (261,605) Accumulated deficit (7,600,641) (6,283,752) ------------ ----------- Total shareholders' equity (deficit) 39,947,157 (3,535,973) ------------ ----------- Commitments and contingent liabilities (notes 6, 9 and 10) Subsequent events (notes 8 and 14) ------------ ----------- $ 77,402,531 15,398,964 ============ ===========
See accompanying notes to consolidated financial statements. F-3 35 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended March 31, 1996, 1995 and 1994
YEARS ENDED MARCH 31 ------------------------------------------------- 1996 1995 1994 ------------ ------------ ----------- Revenue (note 6): Assisted living facility revenue $ 25,478,750 4,837,535 -- Management fees 2,822,275 3,463,226 3,491,671 Development fees 1,499,761 701,503 -- Interest income 1,070,384 211,330 103,897 Other income 2,191,780 476,443 904,310 ------------ ----------- ---------- Total revenue 33,062,950 9,690,037 4,499,878 Expenses: Assisted living facility operating expense 16,394,646 3,200,555 -- Assisted living facility lease expense 6,643,759 814,062 -- Employee benefit plan contributions -- 811,254 75,900 General and administrative 7,644,611 7,453,061 5,689,040 Depreciation and amortization 1,031,270 319,952 92,372 Discontinued project costs and accounts receivable written-off 394,627 1,464,685 441,012 Interest (notes 3 and 6) 1,544,308 354,135 102,856 ------------ ----------- ---------- Total expenses 33,653,221 14,417,704 6,401,180 ------------ ----------- ---------- Loss before income tax expense (590,271) (4,727,667) (1,901,302) Income tax expense (benefit) (note 5) 375,207 (1,729,139) (248,226) ------------ ----------- ---------- Net loss $ (965,478) (2,998,528) (1,653,076) ============ =========== ========== Net loss per common share (note 13) $ (.21) (.69) (.34) ============ =========== ==========
See accompanying notes to consolidated financial statements. F-4 36 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (Deficit) March 31, 1996, 1995 and 1994
COMMON STOCK RECEIVABLE ------------------------------- FROM (ACCUMULATED) SHARES AMOUNT ESOP (DEFICIT) TOTAL ----------- ------------ -------------- ------------- ----------- Balance at March 31, 1993 10,251,555 $ 1,409,384 (284,362) (1,194,966) (69,944) Reverse stock split, 1 for 2 (5,125,778) -- -- -- -- Retirement of stock (note 7) (328,947) -- -- -- -- Preferred stock dividends declared -- -- -- (39,613) (39,613) Common stock issued to ESOP 41,118 250,000 (88,105) -- 161,895 Collection of ESOP receivable -- -- 284,362 -- 284,362 Net loss -- -- -- (1,653,076) (1,653,076) ----------- ------------ -------- ---------- ----------- Balance at March 31, 1994 4,837,948 1,659,384 (88,105) (2,887,655) (1,316,376) Collection of ESOP receivable -- -- 88,105 -- 88,105 Preferred stock dividends declared -- -- -- (397,569) (397,569) Common stock issued to ESOP 259,944 1,350,000 (261,605) -- 1,088,395 Net loss -- -- -- (2,998,528) (2,998,528) ----------- ------------ -------- ---------- ----------- Balance at March 31, 1995 5,097,892 3,009,384 (261,605) (6,283,752) (3,535,973) Issuance of Common Stock (IPO), net of issuance costs of $4,893,061 3,384,078 42,661,335 -- -- 42,661,335 Collection of ESOP receivable -- -- 261,605 -- 261,605 Preferred stock dividends declared -- -- -- (351,411) (351,411) Repurchase and retirement of common stock (493,492) (350,983) -- -- (350,983) Preferred stock conversion (note 8) 319,664 2,228,062 -- -- 2,228,062 Net loss -- -- -- (965,478) (965,478) ----------- ------------ -------- ---------- ----------- Balance at March 31, 1996 8,308,142 $ 47,547,798 -- (7,600,641) 39,947,157 =========== ============ ======== ========== ===========
See accompanying notes to consolidated financial statements. F-5 37 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended March 31, 1996, 1995 and 1994
YEARS ENDED MARCH 31 ------------------------------------------------- 1996 1995 1994 -------------- -------------- ------------ Cash flows provided by (used in) operating activities: Net loss $ (965,478) (2,998,528) (1,653,076) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,031,270 319,952 92,372 Provision for doubtful accounts -- 200,000 200,000 Other (95,056) (28,474) -- Changes in assets and liabilities: (Increase) decrease in: Fees receivable and other amounts due from affiliates 904,855 (118,631) 822,006 Deferred tax asset 567 (1,776,517) (364,203) Other assets (1,087,439) 192,618 (451,469) Increase (decrease) in: Accounts payable and accrued liabilities 2,160,610 1,363,033 (17,829) Deferred revenue (771,482) 1,522,982 135,419 Owner equity contributions payable (757,000) (1,194,893) 1,961,893 Due to affiliates (965,161) (19,812) (415,491) ------------ ---------- ---------- Net cash provided by (used in) operating activities (544,314) (2,538,270) 309,622 ------------ ---------- ---------- Cash flows provided by (used in) investing activities: Increase in notes receivable -- (806,421) (439,109) (Increase) decrease in deferred project costs 1,272,852 495,895 (2,776,527) Increase in investments in real estate held for sale (6,807,141) -- -- Additions to property, furniture and equipment (45,746,500) (537,116) (330,336) Increase in leased property security deposits (559,396) (1,346,096) -- Increase in restricted cash (4,914,764) -- -- Purchase of California Retirement Inn - Placentia limited partnership interests, net of cash acquired -- (69,912) -- Proceeds from sale of California Retirement Inn - Placentia 5,082,795 -- -- Purchase of subsidiaries (155,728) -- -- Purchase of limited partnership interests (1,638,339) (26,918) -- Other (442,234) 21,654 8,603 ------------ ---------- ---------- Net cash provided by (used in) investing activities (53,908,455) (2,268,914) (3,537,369) ------------ ---------- ----------
(Continued) F-6 38 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued
YEARS ENDED MARCH 31 -------------------------------------------------- 1996 1995 1994 ------------ ------------ ----------- Cash flows from financing activities: Issuance of common stock, net of issuance costs $ 42,661,335 -- -- Common stock purchased by ESOP 261,605 1,176,500 446,257 Issuance of preferred stock, net of issuance costs -- 616,993 3,968,544 Borrowings under notes payable 14,475,167 737,888 655,000 Repayments of notes payable (6,139,830) (1,560,833) (606,745) Borrowings under notes payable to affiliates -- 750,000 648,000 Repayments of notes payable to affiliates -- (595,000) (60,000) Issuance of convertible subordinated notes, net of issuance costs 10,762,145 2,677,289 -- Repurchase of convertible subordinated notes (137,000) -- -- Repurchase of common stock (350,983) -- -- Preferred stock dividends paid (400,000) (337,183) -- ------------ ----------- ---------- Net cash provided by (used in) financing activities 61,132,439 3,465,654 5,051,056 ------------ ----------- ---------- Net increase (decrease) in cash and cash equivalents 6,679,670 (1,341,530) 1,823,309 Cash and cash equivalents at beginning of period 774,568 2,116,098 292,789 ------------ ----------- ---------- Cash and cash equivalents at end of period $ 7,454,238 774,568 2,116,098 ============ =========== ========== Supplemental schedule of cash flow information: Cash paid during the year for: Interest $ 1,183,203 314,135 91,275 Income taxes 128,223 68,312 6,500 ============ =========== ========== Supplemental schedule of noncash investing and financing activities: Minority interests in joint venture $ 1,283,017 -- -- Purchase of building 9,350,000 14,450,000 -- Sale of building, net of closing costs 9,400,000 14,945,000 -- Debt assumed in conjunction with purchase of building 350,000 -- -- Note receivable from ESOP for purchase of common stock -- 261,605 88,105 Preferred stock dividends declared 51,411 100,000 39,613 Conversion of preferred stock to common stock 2,228,062 -- -- Fair value of assets acquired in the purchase of California Retirement Inn - Placentia -- 5,100,000 -- Liabilities assumed in acquisitions -- 5,026,333 -- ============ =========== ==========
See accompanying notes to consolidated financial statements. F-7 39 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1996, 1995 and 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL ARV Assisted Living, Inc. (the Company) owns, operates, acquires and develops assisted living facilities that provide housing to senior citizens, some of whom require assistance with the activities of daily living such as bathing, dressing and grooming. The Company is also involved in the development and management of senior apartment communities and affordable senior and multifamily apartment communities that qualify for low income housing tax credits in its capacity as general partner in limited partnerships which operate such facilities. At March 31, 1996, the Company operated 36 assisted living facilities including six which are owned by the Company, 17 which the Company operates pursuant to long-term operating leases and 13 in which the Company serves as the general partner of the owner partnership (see note 6). The Company also managed 17 senior apartment communities and affordable senior and multifamily apartment communities and is developing five additional multifamily apartment communities for limited partnerships in which the Company serves as the general partner. F-8 40 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. Entities in which the Company has controlling interests have been consolidated into the financial statements including presentation of the minority interest not controlled by the Company. All significant intercompany balances and transactions have been eliminated in consolidation. On September 30, 1994, the Company acquired a 51% controlling interest in California Retirement Inn - Placentia, a California limited partnership, which owns and operates an assisted living facility. This acquisition was accounted for under the purchase method. The Company acquired its interest in the Partnership for its estimated fair market value of approximately $86,000 and recorded the assets and liabilities acquired at their fair market value. No goodwill was recognized. No income or loss was allocated to the minority partners because they had no obligation to fund accumulated losses. During May 1995, the Partnership sold its assisted living facility to a health care real estate investment trust and the Company then leased back the facility. On December 29, 1995, the Company acquired an 89.5% controlling interest in Casa Bonita Fullerton, a California limited partnership, which owns and operates an assisted living facility. This acquisition was accounted for under the purchase method. The Company acquired its interest in the Partnership in exchange for contributing $1,500,000 to the Partnership, of which $667,651 was paid at March 31, 1996. Furthermore, the Company committed to loan the Partnership additional sums up to $1,000,000 as necessary to restructure existing financing, to be repaid with interest at a rate of 9% per annum. The Company recorded the acquisition at cost and recorded the assets and liabilities of the Partnership at their fair market value. No goodwill was recognized. No loss is allocated to the minority partners because they had no obligation to fund accumulated losses. As of March 31, 1996, the Company owned 80.2% of the limited partnership interests of Collwood Knolls, a California Limited Partnership. This acquisition was accounted for under the purchase method. The Company recorded the acquisition at cost of $2,306,422 and recorded the assets and liabilities of the Partnership at their fair market value. No goodwill was recognized. No loss is allocated to the minority partners because they have no obligation to fund accumulated losses. During the year ended March 31, 1996, the company acquired 50% ownership interests in two limited liability companies known as Waterside Villas, LLC (formerly known as Villas at the Ponds, LLC) and Prospect Park Residences, LLC and these acquisitions were accounted for under the purchase method. Due to its control of these entities, the Company accounts for its investment in each of these entities on a consolidated basis and reflects that portion of the entities not owned by the Company as a minority interest. Pro forma results of operations have not been presented because the effects of the aforementioned acquisitions were not significant. F-9 41 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. INVESTMENT IN REAL ESTATE HELD FOR SALE Investment in real estate held for sale includes costs related to projects expected to be sold within one year, at the lower of cost or market. PROPERTY, FURNITURE AND EQUIPMENT Property, furniture and equipment are stated at cost less accumulated depreciation which is charged to expense on a straight-line basis over the estimated useful lives of the assets as follows: Buildings and improvements 27.5-35 years Furniture, fixtures and equipment 3-7 years Property, furniture and equipment consisted of the following:
MARCH 31 MARCH 31 1996 1995 -------------- ----------- Land $ 9,913,216 1,137,120 Construction in progress 243,186 -- Buildings and improvements 34,211,550 4,061,512 Furniture, fixtures and equipment 4,001,505 1,285,979 ------------ ---------- 48,369,457 6,484,611 Accumulated depreciation (1,135,572) (639,510) ------------ ---------- $ 47,233,885 5,485,101 ============ ==========
EARNINGS (LOSS) PER SHARE Net earnings (loss) per share is calculated using the weighted average number of common shares outstanding during the period, including the effect of common share equivalents unless antidilutive. Common share equivalents are comprised of the dilutive effect of outstanding stock options. The loss per common share is based upon the following weighted average shares outstanding, as adjusted for the authorized reverse stock split: 6,245,903, 4,903,065 and 5,113,273 for the years ending March 31, 1996, 1995 and 1994, respectively. The computation of loss per common share gives effect to the preferred stock dividends in the fiscal years ended March 31, 1996, 1995 and 1994. F-10 42 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued REVENUE RECOGNITION The Company recognizes rental and assisted living services revenue from owned and leased facilities. The Company receives fees for property management and partnership administration services from managed facilities. The Company also receives wholesaling commissions for the sale of limited partnership interests, acquisition fees for the selection, development and purchase of partnership properties, commissions on the sale of partnership properties and certain other fees as specified in the partnership agreements. Fees are recognized when earned. REVENUE RECOGNITION - TAX CREDIT PROGRAM PARTNERSHIPS The Company is the general partner in various tax credit partnerships. These partnerships are generally in the start-up phase and the Company provides services related to the purchase, development, construction and, later, management of the projects. Fees earned for services provided are reduced by amounts that the general partner is required to advance to the tax credit partnerships, such as Owner Equity Contributions (OEC), as defined in the partnership agreements, plus any presumed operating support requirements. Fees are recognized when there is reasonable assurance that future rent receipts will cover operating expenses and debt service, including payments due the Company under the terms of the transaction. ASSISTED LIVING FACILITY SALE-LEASEBACK TRANSACTIONS Gains are deferred and amortized into income over the life of the lease. DEFERRED PROJECT COSTS Deferred project costs include land acquisition, legal and architectural fees, feasibility study costs and other direct costs associated with new assisted living facility development or acquisition or formation of the tax credit partnerships. Deferred project costs are capitalized upon the successful acquisition of an assisted living facility or site. If a project is discontinued, any deferred project costs are expensed. Deferred project costs at March 31, 1996 are expected to be recovered by March 31, 1997 as the related projects are expected to be completed by then. OTHER NONCURRENT ASSETS Other noncurrent assets consist primarily of lease security deposits ($1,905,000 and $1,346,000 at March 31, 1996 and 1995, respectively) pursuant to assisted living facility leases and convertible subordinated notes issuance costs ($1,338,000 and $502,000 at March 31, 1996 and 1995, respectively). Convertible subordinated notes issuance costs are amortized over the life of the notes. INVESTMENTS IN PARTNERSHIPS The Company accounts for its investments in partnerships using the equity method. INCOME TAXES In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109 (Statement No. 109) , "Accounting for Income Taxes," effective for years beginning after December 15, 1992. Under the asset and liability method of Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets F-11 43 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company adopted Statement No. 109 as of April 1, 1993 on a prospective basis. RESTRICTED CASH Restricted cash represents cash held as collateral for letters of credit issued to the lessor in lieu of security deposits. NOTES RECEIVABLE VALUATION ALLOWANCE The Company has established a valuation allowance for three notes receivable from affiliates. In each case the property owned by each affiliate has sufficient value, based on appraisals, to satisfy all obligations of the affiliate including amounts owed to the Company. The valuation allowance reflects the uncertainty inherent in the appraisal process, the timing and amount of future principal payments and the related property's inability to generate sufficient cash flow to meet current operating needs and service the notes. NEW ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires the Company to adopt the provisions of the new statement no later that fiscal 1997. SFAS 121 requires an impairment loss to be recorded as a reduction to operating income if the sum of the expected undiscounted cash flows derived from an asset is less that the asset's carrying value. The Company plans to adopt SFAS 121 in fiscal 1997 without any material impact on the consolidated financial statements. In October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation." This pronouncement establishes the accounting and reporting standards for stock-based employee compensation plans, including stock purchase plans, stock options and stock appreciation rights. This new standard defines a fair value-based method of accounting for these equity instruments. This method measures compensation cost based on the value of the award and recognizes that cost over the service period. Companies may elect to adopt this standard or to continue accounting for these types of equity instruments under current guidance, APB Opinion No. 25, "Accounting for Stock Issued to Employees." Companies which elect to continue using the rules of APB Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if this new statement had been applied. This new standard is required for fiscal years beginning after December 15, 1995. The Company anticipates that it will continue to use the rules of APB Opinion No. 25 and make the pro forma disclosures required under the new standard. RECLASSIFICATIONS Certain 1995 and 1994 amounts have been reclassified to conform to 1996 presentation. F-12 44 (2) INVESTMENTS IN PARTNERSHIPS The Company is general partner in five limited partnerships which operate assisted living facilities (ownership interests range from less than 1% to 89.5% and in 17 tax credit partnerships that operate apartment facilities (ownership interests range up to 1%). The Company is also the general partner in five tax credit partnerships that are in various stages of development (ownership interests range up to 1%). Under the terms of the limited partnership agreements, profits and losses are allocated to the general and limited partners in specified ratios, and the Company generally has unlimited liability for obligations of partnerships in which it is the general partner. (3) NOTES PAYABLE
MARCH 31 ------------------------- 1996 1995 ----------- --------- Convertible subordinated notes due December 31, 1999 with interest at 10%. The notes require monthly payments of interest and are convertible to common stock at $12.16 per share (subsequent to the 3.04 to 1 reverse stock split) The notes, offered in a maximum amount of $15,000,000, may be called by the Company at declining premiums starting at 110% of the principal amount; and are guaranteed by certain majority shareholders of the Company (see note 14) $14,888,000 3,179,000 $375,000, non-revolving line of credit, unsecured, bearing interest at the bank's prime rate plus 2.5%; all unpaid interest and principal due March 31, 1997; guaranteed by certain majority shareholders of the Company; repaid October 1995 -- 342,539 Note payable to bank, bearing interest at the 11th district cost of funds plus 2.75%, adjusted in February and August, with the rate never less than 9.5% nor greater than 14.75%; repaid May 26, 1995 -- 4,219,351 Note payable to bank, bearing interest at the bank's prime rate plus 2.25%; repaid May 26, 1995 -- 243,000 Notes payable, bearing interest at fixed rates between 9.5% and 12%, payable in monthly installments of principal and interest totaling $95,056, secured by property, maturities ranging from October 1996 through March 2006 11,824,125 --
F-13 45 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
MARCH 31 ---------------------- 1996 1995 ----------- --------- Notes payable, bearing interest at floating rates between prime (8.25% at March 31, 1996) plus 1.5% and prime plus 2.25%, payable in monthly installments of principal and interest totaling $11,608, secured by an assisted living facility and the Company's corporate headquarters, maturities range from September 1996 to March 1997 $ 381,502 -- Note payable, bearing interest at fixed and floating rates between 8% and prime (8.25% at March 31, 1996) plus 1.5%, payable in monthly interest installments of $5,510, secured by assisted living facility sites, maturities in August and September 1996 735,197 -- Other-primarily capitalized equipment leases 291,429 92,026 ----------- --------- 28,120,253 8,075,916 Less amounts currently payable 3,306,592 4,863,216 ----------- --------- $24,813,661 3,212,700 =========== =========
The future annual principal payments of the notes payable at March 31, 1996 are as follows: 1997 $ 3,306,592 1998 3,935,514 1999 15,788,134 2000 72,943 2001 17,070 Thereafter 5,000,000 ----------- $28,120,253 ===========
(4) EMPLOYEE STOCK OWNERSHIP PLAN The Company has an Employee Stock Ownership Plan (ESOP) which covers all employees of the Company. Contributions to the ESOP are made at the discretion of the Company's Board of Directors. ESOP contributions of $1,350,000 and $250,000 during the years ended March 31, 1995 and 1994 respectively, were utilized by the ESOP to purchase 790,229 and 125,000 shares, respectively, of the Company's common stock. For the year ended March 31, 1996, no contributions were made to the ESOP by the Company. The Company's compensation expense related to these contributions for the years ended March 31, 1995 and 1994 amounted to $811,254 and $75,900, respectively. Retirement expense paid by affiliated partnerships for the years ended March 31, 1995 and 1994 were $471,000 and $202,500, respectively. F-14 46 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (5) INCOME TAXES The provision for income tax expense (benefit) consists of the following for the years ended March 31, 1996, 1995 and 1994:
YEARS ENDED MARCH 31 -------------------------------- 1996 1995 1994 -------------------------------- Current: Federal $293,453 36,401 6,882 State 81,187 10,978 2,150 -------- ---------- -------- Total 374,640 47,379 9,032 -------- ---------- -------- Deferred: Federal 553 (1,396,522) (195,104) State 14 (379,996) (62,154) -------- ---------- -------- 567 (1,776,518) (257,258) -------- ---------- -------- Total $375,207 (1,729,139) (248,226) ======== ========== ========
F-15 47 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued A reconciliation of income tax expense (benefit) at the federal statutory rate of 34% to the Company's provision for income taxes is as follows:
YEARS ENDED MARCH 31 ----------------------------------- 1996 1995 1994 -------- --------- --------- Income tax benefit at statutory rate $(200,692) (1,607,407) (646,443) State income tax expense (benefit), net of Federal income tax benefit 53,583 (438,751) (103,849) Elimination of pre-acquisition losses of acquired companies 25,729 -- 283,151 Change in valuation allowance 422,944 300,000 187,452 Other 73,643 17,019 31,463 --------- ---------- -------- Total income tax expense (benefit) $ 375,207 (1,729,139) (248,226) ========= ========== ========
Temporary differences giving rise to a significant amount of deferred tax assets and liabilities at March 31, 1996 and 1995 are as follows:
MARCH 31 ------------------------ 1996 1995 ----------- ---------- Deferred tax assets: Unamortized cumulative adjustment for change in tax accounting method $ -- 68,707 Deferred gain on sale 169,007 189,990 Allowance for doubtful accounts -- 233,200 Deferred tax credit partnership fees 1,145,031 1,066,330 Owner equity contributions 2,012,984 1,453,810 Other partnership income 164,094 -- Other 372,800 419,827 ----------- ---------- Gross deferred tax asset 3,863,916 3,431,864 Less valuation allowance (1,685,014) (1,262,070) Deferred tax liabilities-- Other (135,381) (125,706) ----------- ---------- Net deferred tax asset $ 2,043,521 2,044,088 =========== ==========
Based on the Company's current and expected pre-tax earnings, management believes it is more likely than not that the Company will realize certain of the benefits of the existing deferred tax assets as of March 31, 1996 and 1995. Approximately $2,000,000 and $1,500,000 of the F-16 48 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued deferred tax assets at March 31, 1996 and 1995, respectively, result from income that has been recognized for federal income tax purposes in advance of recognition for financial reporting purposes. Recognition of the remaining balances will require generation of future taxable income. There can be no assurance that the Company will generate any earnings or any specific level of earnings in future years. Certain tax planning or other strategies could be implemented, if necessary, to supplement income from operations to fully realize recorded net tax benefits. (6) RELATED PARTY TRANSACTIONS The results of the Company and its subsidiaries are substantially affected by transactions and agreements with related parties. Fees receivable from affiliates of $361,506 and $286,546 at March 31,1996 and 1995, respectively, consists of receivables related to management services rendered by the Company. Related management fees received from affiliates total $2,766,444, $3,273,202, and $3,012,718 during the periods ended March 31, 1996, 1995, and 1994, respectively. Notes receivable from affiliates of $339,566 and $1,840,911 at March 31, 1996 and 1995, respectively, bear interest at 10% and are due on demand. Amounts have been advanced to two partnerships, one for which the Company serves as the general partner and one for which the Company's principal shareholders serve as the general partner. Advances to partnerships include amounts to fund operating cash deficiencies. Other amounts due from affiliates of $560,619 and $524,245 at March 31, 1996 and 1995, respectively, consist of non-interest bearing expense advances and working capital loans made to various partnerships. Amounts due from affiliates are generally expected to be repaid in subsequent years with cash from operations or from bank financing obtained by the affiliates. At March 31, 1996, and 1995, the Company had demand notes payable bearing interest at 10% to various shareholders and their affiliates aggregating $0 and $743,000, respectively. Other amounts due to affiliates are non-interest bearing. During the years ended March 31, 1996, 1995 and 1994, $0, $621,000 and $655,000 in consulting fees, respectively were earned by certain shareholders of the Company, who are also general partners in several limited partnerships. Additionally, approximately $0, $53,000 and $90,000 of legal fees incurred during the periods ending March 31, 1996, 1995 and 1994, respectively, were paid to certain shareholders of the Company. The Company pays certain expenses such as repair and maintenance, supplies, payroll and retirement benefit expenses on behalf of affiliated Partnerships and is subsequently reimbursed by the Partnerships. During the periods ended March 31, 1996, 1995 and 1994, respectively, the expenses incurred on behalf of affiliates and the related reimbursements from these affiliates amounted to approximately $19,994,000, $16,129,000 and $14,595,000, respectively. The Company accounts for these reimbursements as a reduction of the related expenses. The Company leases office space under operating leases from affiliated entities. During the year ended March 31, 1996, the leases were amended to provide for a three year term. Previously, the leases were on a month-to-month basis. Total rental expense for the years ended March 31, 1996, 1995 and 1994 was $161,000, $215,000 and $209,000, respectively. F-17 49 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued In May 1995, the Company purchased from an affiliated entity one of the offices that it occupies for $610,545. Debt assumed in the transaction was $530,545, prior to a principal payment of $180,545. The balance of the purchase price was paid in cash. The remaining $350,000 obligation is due in two years and requires monthly principal and interest payments based on a ten year amortization schedule. In June 1995, the Company's principal shareholders sold LVP Inc. to the Company for $54,720. LVP, formed in 1993, provides laundry and vending equipment leasing services to apartment projects. In July 1995, the Company's principal shareholders sold Pacific Demographics Inc. to the Company for $100,000 in cash and 20% of deferred development fees to the extent received by Pacific Demographics up to a maximum amount of $850,000. Pacific Demographics provided, since its formation in August 1994, certain development services for tax credit partnerships. As a result of its acquisition of Pacific Demographics, the Company recognized approximately $9 million of development fees for federal and state income tax purposes in its current fiscal year which would have otherwise been taxable in future years. Although the Company will receive cash payments for some of these fees, a substantial portion of the fees will not be received until future years. Consistent with the Company's strategy to de-emphasize the federal tax credit program, and in order to mitigate the tax and cash flow implications of the foregoing, the Company has developed and implemented certain tax planning strategies to reduce the current year tax liability to a minimal amount. The current tax provision reflects the effective implementation of these strategies. These strategies included the disposition of the future receivables which resulted from the income recognized. The receivables were sold for a combination of cash and a participation in future collections, if any, of the receivables being sold. These strategies will result in revenue being recognized in future years when and if cash payments are received. During March 1996, $5.2 million of future receivables, were sold to former employees of the Company, at their estimated future realizable value in exchange for $191,000 in cash and notes receivable of $1.4 million. In June 1995, the Company purchased an aggregate 18.6% limited partner interests in a limited partnership for which it serves as the general partner for $469,000. Subsequently, the Company purchased an additional 19.0% for $953,833. In September 1995, a partnership, for which the Company is the General Partner, obtained the limited partners' approval to sell its assisted living facilities to an unrelated third party. The sales were consummated on October 15, 1995, and the Company simultaneously entered into leases for these facilities. In December 1995, a partnership, for which the Company is the General Partner, obtained the limited partners' approval to sell is assisted living facility to an unrelated third party. The sale was consummated on December 18, 1995, and the Company simultaneously entered into a lease for the facility. In February 1996, a partnership, for which the Company is the General Partner, obtained the limited partners' approval to sell is assisted living facility to an unrelated third party. The sale was consummated on February 8, 1996, and the Company simultaneously entered into a lease for the facility. F-18 50 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The Company is the general partner of Fullerton Equities, Limited, a California limited partnership (Fullerton). The Company had loaned Fullerton in excess of $1.1 million, $1.0 million of which was secured by a deed of trust. On January 3, 1996, Fullerton sold its sole physical asset, an assisted living and Alzheimer facility, to an unrelated third party and took back a $2.0 million note secured by a deed of trust which wrapped the Company's deed of trust. Gary L. Davidson, John A. Booty, David P. Collins and Graham P. Espley-Jones (Executive Officers of the Company), as tenants-in-common, purchased the $2.0 million note from Fullerton for full value on March 6, 1996, which enabled Fullerton to pay off all of its secured indebtedness and a portion of the unsecured debt to the Company. It is anticipated that Fullerton will be dissolved in calendar 1996. (7) SHAREHOLDERS' EQUITY COMMON STOCK In February 1994, the Company entered into a separation agreement with an employee shareholder whereby he relinquished any and all rights to the 328,947 shares of the Company's common stock he owned. The Company paid no money to the former employee for the common stock and retired the shares. During the year ended March 31, 1996, the Company repurchased and retired 493,492 shares of its common stock from certain shareholders and three former employee shareholders for approximately $351,000. WARRANTS At March 31, 1996 and 1995, the Company had outstanding warrants issued in connection with its Series A Preferred Stock which give the holders the option to purchase approximately 54,197 shares of common stock at $7.60 per share. These warrants are exercisable at any time at the option of the holder within three years of the date of issuance, the latest of which was August 1, 1994. At March 31, 1996, the Company had outstanding warrants issued to selling brokerage firms in connection with its convertible subordinated notes which give the holders the option to purchase an aggregate maximum of 115,304 shares of common stock at $12.16 per share. These warrants are exercisable at any time at the option of the holder within three years of the date of issuance, the latest of which was July 31, 1995. None of the warrants have been exercised. STOCK OPTIONS Effective October 1, 1995, the Company adopted the 1995 Stock Option and Incentive Plan of ARV Assisted Living, Inc. (the Plan) for the benefit of its eligible employees, consultants and directors. The Plan consists of two plans, one for the benefit of key employees and consultants and one for the benefit of non-employee directors. The Company has reserved 1,155,666 shares for issuance under the Plan. As of March 31, 1996, a total of 847,245 options had been granted by the Company with exercise prices ranging from $10.00 to $15.40 per share. Options granted under the Plan vest over periods ranging from three to five years from the date of the grant. During the year ended March 31, 1996, none of the options were eligible for exercise. A summary of stock options at March 31, 1996 is as follows:
SHARES SHARES UNDER AVAILABLE FOR OUTSTANDING PRICE PER GRANT OPTIONS SHARE ------------- ----------- --------- Authorization of shares 1,155,666 -- -- Options granted (790,782) 790,782 $10.00-15.40 Options canceled 78,618 (78,618) 14.00 --------- -------- ------------ Balances at March 31, 1996 443,503 712,164 $10.00-15.40 ========= ======== ============
(8) REDEEMABLE PREFERRED STOCK The Series A 8% cumulative, convertible and redeemable preferred stock is: convertible at any time, unless previously redeemed, at the option of the holder, in whole or in part, into one share of common stock; redeemable, at the option of the holder, any time after December 31, 1998 for $7.60 per share, as adjusted for the 3.04 to 1 reverse stock split (see note 13) plus accrued dividends. As of February 7, 1996, the Company exercised its right to redeem all outstanding shares of the Series A 8% Convertible Redeemable Preferred Stock on May 9, 1996. Preferred shareholders have the option of converting their Preferred Stock into Common Stock at any time prior to F-19 51 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued April 29, 1996. At March 31, 1996, approximately 48.6% of the shareholders converted their Preferred Stock into 319,664 shares of Common Stock. Subsequent to March 31, 1996, the balance of the shareholders converted their Preferred Stock into 338,141 shares of Common Stock. (9) ASSISTED LIVING FACILITY LEASES At March 31, 1996 the Company leased 17 assisted living facilities. On February 23, 1995, the Company acquired the leasehold interest to an assisted living facility. The initial lease term ends February 28, 2007 and has three renewal options of ten years each. The Company purchased, sold and leased-back two assisted living facilities during the year ended March 31, 1995. The sales agreement for one of these facilities permits the Company to receive additional sales proceeds of $750,000 on or before April 27, 2001 if that facility's net income meets certain specified levels for two consecutive years. If the Company receives additional proceeds, annual rents for the initial lease term will increase by an additional $74,064. The initial lease term of each these leases is 12 years and have three renewal options of 10 years each. Renewal of each lease is dependent on renewal of all other leases between the Company and the lessor. During the year ended March 31, 1996 the Company entered into 14 leases to operate assisted living facilities. Twelve of the facilities were purchased by the lessor from partnerships for which the Company served as general partner. The other two facilities were purchased by the lessors and subsequently leased back to the Company following the Company's negotiation of the purchase of the facilities from the sellers. Each of these leases has an initial term ranging from 12 to 15 years and contains three renewal options of 10 years each. Renewal of each lease is dependent on renewal of all other leases between the Company and the individual lessors. Minimum lease payments required under assisted living facility operating leases in effect at March 31, 1996 are as follows: Year ended March 31: 1997 $ 10,859,414 1998 10,859,414 1999 10,859,414 2000 10,859,414 2001 10,859,414 Thereafter 71,503,492 ------------ $125,800,562 ============
The leases require the payment of additional rent based on a percentage of gross revenues. No percentage rents were earned by the lessors. F-20 52 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (10) COMMITMENTS AND CONTINGENT LIABILITIES The Company and its majority shareholders have guaranteed indebtedness of certain affiliated partnerships as follows:
MAJORITY COMPANY SHAREHOLDERS ----------- ------------ Notes secured by real estate $ 9,539,740 122,000 Land and construction loans associated with the development and construction of affordable housing apartments 20,690,927 9,715,331
The maximum aggregate amounts of guaranteed land and construction loans is $34,852,000 at March 31, 1996. The maximum aggregate amounts of guaranteed unsecured revolving lines of credit was $400,000 at March 31, 1996. The Company has guaranteed tax credits for certain partnerships in the aggregate amount of $78,387,056, excluding interest, penalties or other charges which might be assessed against the partners. In management's opinion, no claims may be currently asserted under any of the aforementioned guarantees based on the terms of the respective agreements. Noncancelable operating lease commitments for office space at March 31, 1996 are: Year ended March 31: 1997 $ 150,550 1998 155,067 1999 159,719 2000 164,511 2001 169,446 Thereafter 492,131 ---------- Total $1,291,424 ==========
F-21 53 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (11) DEFERRED REVENUE AND OWNER EQUITY CONTRIBUTIONS PAYABLE An analysis of tax credit program deferred revenues and owner equity contributions payable activity follows:
TAX CREDIT PROGRAM OWNER EQUITY DEFERRED CONTRIBUTIONS REVENUE PAYABLE ----------- ------------- Development fees received $ 2,669,747 -- Owner Equity Contribution Accrued (2,177,001) 2,177,001 Owner Equity Contribution Paid -- (215,108) ----------- ---------- Balance at March 31, 1994 492,746 1,961,893 Development fees received 4,418,821 -- Owner Equity Contribution Accrued (2,680,480) 2,680,480 Owner Equity Contribution Paid -- (3,875,373) Fees recognized (701,503) -- ----------- ---------- Balance at March 31, 1995 1,529,584 767,000 Development fees received 1,476,607 -- Owner Equity Contribution Accrued (915,735) 915,735 Owner Equity Contribution Paid -- (1,672,735) Fees recognized (1,499,761) -- ----------- ---------- Balance at March 31, 1996 $ 590,695 10,000 =========== ==========
Deferred revenues also include amounts unrelated to the tax credit programs. These amounts result from deferred fees related to a proposed facility to be developed by a partnership for which the Company is the general partner and include the gain deferred on the sale-leaseback of an assisted living facility. (12) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments," which was adopted by the Company in 1995. The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material impact on the estimated fair value amounts. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, management fees, deferred project costs, investments in real estate held for sale, other assets, accounts payable and accrued liabilities and owner equity contributions payable approximate fair value F-22 54 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued due to the short-term nature of these instruments. The notes receivable from affiliates, notes payable and other amounts due to affiliates and notes payable bear interest at rates which approximate current market rates. (13) INITIAL PUBLIC OFFERING In July 1995 the Board of Directors authorized, contingent upon the completion of the Company's IPO offering, a 1-for-3.04 reverse stock split. The public offering was completed on October 23, 1995 (see below). The results of the reverse common stock split, therefore, have been reflected in the financial statements. On October 23, 1995, the Company successfully completed an initial public offering (the Offering) of its stock. The net proceeds to the Company from the Offering, after deducting the underwriting discount and offering expenses payable by the Company, were approximately $42.7 million. A total of 3,384,078 new shares were sold at a price of $14.00 per share. Of the shares subject to over-allotment, 156,922 were sold by the officers and inside directors of the Company. (14) SUBSEQUENT EVENTS On April 2, 1996, the Company acquired Bella Vita, a 120-unit assisted living facility located in Venice, Florida for $10.2 million. A portion of the purchase price was financed through the Company's assumption of a HUD insured loan secured by a first mortgage recorded against the property, with an outstanding balance of $6,345,709 at the time of purchase. On April 3, 1996, the Company successfully completed a $50 million private placement offering of 6.75% Convertible Subordinated Notes due 2006 (the 2006 Notes). Subsequently, on April 12, 1996, the initial purchaser of the 2006 Notes exercised its over allotment right to purchase an additional $7.5 million of the 2006 Notes. The 2006 Notes, which are non-callable by the Company for a period of three years, allow noteholders to convert their 2006 Notes into common stock of the Company at a rate of $18.57 per share. On April 10, 1996, the Company called for redemption all of its outstanding 1999 Convertible Notes. The Company will redeem all of the outstanding 1999 Convertible Notes as of 5:00 p.m. Pacific Daylight Time on July 10, 1996, unless the Notes are converted on or prior to June 30, 1996. The price to be paid for each $1,000 principal amount of 1999 Convertible Notes will be $1,067 plus accrued interest to the date of redemption. 1999 Convertible Note holders are given the alternative to convert their Notes into shares of common stock of the Company at any time up to and including June 30, 1996. Converting holders will receive one share of common stock for every $12.16 in principal amount of 1999 Convertible Notes surrendered for conversion. For those 1999 Convertible Notes surrendered for conversion into common stock, unpaid interest will be disregarded and note holders will not be entitled to interest accrued to the date of conversion. For those Notes converted to common stock, the Company will issue restricted stock pursuant to Rule 144 of the Securities Act of 1933. If all Notes are converted, the Company will issue up to 1,233,552 shares of common stock. As of June 25, 1996, holders of $8.1 million principal amount of the 1999 Convertible Notes had exercised their right to convert their notes into approximately 665,800 shares of common stock. On April 16, 1996, the Company obtained a $10 million commitment from Imperial Bank (Imperial) to provide a revolving credit facility to be used for the issuance of letters of credit, acquisition, development and general corporate purposes. The commitment provides for interest on borrowings at rates between Imperial's prime lending rate plus 0.0% to 0.5% or LIBOR plus 2.0% to 2.5% based upon the achievement of certain financial ratios. The Company is currently negotiating documentation of the loan. On May 16, 1996, the Company initiated a tender offer (the "Offer") to purchase any and all of the 34,886 outstanding limited partnership units of American Retirement Villas Properties II, a California limited partnership, not owned by the Company at a net cash price of $720.00 per unit from unitholders who validly tendered their units prior to June 14, 1996 at 10:00 p.m. Central Daylight Time. Subsequently, the Company extended the Offer until June 21, 1996 at 10:00 p.m. Central Daylight Time. Upon expiration of the Offer, 1,426 unitholders validly tendered 15,488 units (approximately 44.6% of the outstanding limited partnership units) which the Company will purchase at a cost of $11.2 million. On June 6, 1996, the Company obtained a $60 million commitment from Health Care REIT, Inc. for financing the construction of new assisted living facilities. Pursuant to the terms of the commitment, Health Care will finance up to 100% of the approved costs, as defined, for the construction of new assisted living facilities. Upon completion of construction, the Company will lease the facilities from Health Care on an initial lease term of 15 years, with three options to renew, at the Company's option, for periods of 10 years each. The initial lease rate will be based upon the yield of comparable term U.S. Treasury Notes plus 3.75%. F-23 55 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued On June 24, 1996, the Company obtained a $35 million commitment from Bank United of Texas, FSB ("Bank United") for the construction or acquisition of assisted living facilities. The terms of the commitment provide for interest at 2.75% over the 30-day LIBOR rate. Of the commitment, a $20 million sub-limit has been established for the construction of assisted living facilities. The Company is currently negotiating documentation of the loan. On June 18, 1996 the Company purchased Amber Wood, a 187-unit assisted living facility located in Newport Richey, Florida for $6.0 million. F-24 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARV ASSISTED LIVING, INC. By: /s/ Gary L. Davidson ------------------------- Gary L. Davidson Chairman of the Board Date: June 27, 1996 Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE /s/ Gary L. Davidson Chairman of the Board - ----------------------------- Gary L. Davidson Date: June 27, 1996 /s/ John A. Booty President - ----------------------------- and Director John A. Booty Date: June 27, 1996 /s/ David P. Collins Senior Executive Vice President - ----------------------------- and Director David P. Collins Date: June 27, 1996 /s/ Graham P. Espley-Jones Chief Financial Officer - ----------------------------- and Secretary Graham P. Espley-Jones Date: June 27, 1996 /s/ James M. Peters Director - ----------------------------- James M. Peters Date: June 27, 1996 /s/ R. Bruce Andrews Director - ----------------------------- R. Bruce Andrews Date: June 27, 1996 /s/ Maurice J. DeWald Director - ----------------------------- Maurice J. DeWald Date: June 27, 1996 /s/ John J. Rydzewski Director - ----------------------------- John J. Rydzewski Date: June 27, 1996 37 EX-4.2 2 FORM OF INDENTURE AGREEMENT 1 Exhibit 4.2 Execution Copy - ------------------------------------------------------------------------------- ARV ASSISTED LIVING, INC. -------------------------------------------------------------- 6 3/4% Convertible Subordinated Notes Due 2006 -------------------------------------------------------------- INDENTURE Dated as of April 3, 1996 -------------------------------------------------------------- THE CHASE MANHATTAN BANK, N.A., as Trustee - ------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Page ---- ARTICLE I Definitions and Incorporation by Reference SECTION 1.01. Definitions.......................................................................... 1 SECTION 1.02. Other Definitions.................................................................... 6 SECTION 1.03. Incorporation by Reference of Trust Indenture Act.................................... 7 SECTION 1.04. Rules of Construction................................................................ 7 ARTICLE II The Convertible Notes SECTION 2.01. Form and Dating...................................................................... 8 SECTION 2.02. Execution and Authentication......................................................... 9 SECTION 2.03. Registrar, Paying Agent and Conversion Agent......................................... 10 SECTION 2.04. Paying Agent to Hold Money in Trust.................................................. 10 SECTION 2.05. Noteholder Lists..................................................................... 10 SECTION 2.06. Transfer and Exchange................................................................ 10 SECTION 2.07. Replacement Convertible Notes........................................................ 13 SECTION 2.08. Outstanding Convertible Notes........................................................ 14 SECTION 2.09. Treasury Convertible Notes........................................................... 14 SECTION 2.10. Temporary Convertible Notes.......................................................... 14 SECTION 2.11. Cancellation......................................................................... 15 SECTION 2.12. Defaulted Interest................................................................... 15 ARTICLE III Redemption SECTION 3.01. Notices to Trustee................................................................... 15 SECTION 3.02. Selection of Convertible Notes to be Redeemed........................................ 15 SECTION 3.03. Notice of Redemption................................................................. 16 SECTION 3.04. Effect of Notice of Redemption....................................................... 17 SECTION 3.05. Deposit of Redemption Price.......................................................... 17 SECTION 3.06. Convertible Notes Redeemed in Part................................................... 17 SECTION 3.07. Optional Redemption.................................................................. 17 SECTION 3.08. Designated Event Offer............................................................... 17
-i- 3 ARTICLE IV Covenants SECTION 4.01. Payment of Convertible Notes.......................................................... 19 SECTION 4.02. SEC Reports........................................................................... 20 SECTION 4.03. Compliance Certificate................................................................ 20 SECTION 4.04. Stay, Extension and Usury ............................................................ 21 SECTION 4.05. Corporate Existence................................................................... 21 SECTION 4.06. Taxes................................................................................. 21 SECTION 4.07. Designated Event...................................................................... 21 SECTION 4.08. Shareholder Rights Plan............................................................... 21 ARTICLE V Conversion SECTION 5.01. Conversion Privilege.................................................................. 22 SECTION 5.02. Conversion Procedure.................................................................. 22 SECTION 5.03. Fractional Shares..................................................................... 23 SECTION 5.04. Taxes on Conversion................................................................... 23 SECTION 5.05. Company to Provide Stock.............................................................. 23 SECTION 5.06. Adjustment of Conversion Price........................................................ 24 SECTION 5.07. No Adjustment......................................................................... 27 SECTION 5.08. Other Adjustments..................................................................... 27 SECTION 5.09. Adjustments for Tax Purposes.......................................................... 27 SECTION 5.10. Adjustments by the Company............................................................ 27 SECTION 5.11. Notice of Adjustment.................................................................. 27 SECTION 5.12. Notice of Certain Transactions........................................................ 28 SECTION 5.13. Effect of Reclassifications, Consolidations, Mergers or Sales on Conversion Privilege......................................................... 28 SECTION 5.14. Trustee's Disclaimer.................................................................. 29 ARTICLE VI Subordination SECTION 6.01. Agreement to Subordinate.............................................................. 29 SECTION 6.02. No Payment on Convertible Notes if Senior Debt in Default............................. 29 SECTION 6.03. Distribution on Acceleration of Convertible Notes; Dissolution and Reorganization; Subrogation of Convertible Notes..................................................................... 30 SECTION 6.04. Reliance by Senior Debt on Subordination Provisions................................... 33 SECTION 6.05. No Waiver of Subordination Provisions................................................. 33 SECTION 6.06. Trustee's Relation to Senior Debt..................................................... 34 SECTION 6.07. Other Provisions Subject Hereto....................................................... 35
-ii- 4 ARTICLE VII Successors SECTION 7.01. Merger, Consolidation or Sale of Assets.............................................. 35 SECTION 7.02. Successor Corporation Substituted.................................................... 35 ARTICLE VIII Defaults and Remedies SECTION 8.01. Events of Default.................................................................... 36 SECTION 8.02. Acceleration......................................................................... 37 SECTION 8.03. Other Remedies....................................................................... 37 SECTION 8.04. Waiver of Past Defaults.............................................................. 38 SECTION 8.05. Control by Majority.................................................................. 38 SECTION 8.06. Limitation on Suits.................................................................. 38 SECTION 8.07. Rights of Noteholders to Receive Payment............................................. 38 SECTION 8.08. Collection Suit by Trustee........................................................... 39 SECTION 8.09. Trustee May File Proofs of Claim..................................................... 39 SECTION 8.10. Priorities........................................................................... 39 SECTION 8.11. Undertaking for Costs................................................................ 39 ARTICLE IX Trustee SECTION 9.01. Duties of Trustee.................................................................... 40 SECTION 9.03. Individual Rights of Trustee......................................................... 41 SECTION 9.04. Trustee's Disclaimer................................................................. 41 SECTION 9.05. Notice of Defaults................................................................... 41 SECTION 9.06. Reports by Trustee to Noteholders.................................................... 41 SECTION 9.07. Compensation and Indemnity........................................................... 42 SECTION 9.08. Replacement of Trustee............................................................... 42 SECTION 9.09. Successor Trustee by Merger, Etc..................................................... 43 SECTION 9.10. Eligibility; Disqualification........................................................ 43 SECTION 9.11. Preferential Collection of Claims Against Company.................................... 44 SECTION 9.12. Sections Applicable to Registrar, Paying Agent and Conversion Agent.................................................... 44 ARTICLE X Discharge of Indenture SECTION 10.01. Termination of Company's Obligations................................................ 44 SECTION 10.02. Repayment to Company................................................................ 44
-iii- 5 ARTICLE XI Amendments, Supplements and Waivers SECTION 11.01. Without Consent of Noteholders..................................................... 44 SECTION 11.02. With Consent of Noteholders........................................................ 45 SECTION 11.03. Compliance with Trust Indenture Act................................................ 46 SECTION 11.04. Revocation and Effect of Consents.................................................. 46 SECTION 11.05. Notation on or Exchange of Convertible Notes....................................... 47 SECTION 11.06. Trustee Protected.................................................................. 47 ARTICLE XII Miscellaneous SECTION 12.01. Trust Indenture Act Controls....................................................... 47 SECTION 12.02. Notices............................................................................ 47 SECTION 12.03. Communication by Noteholders with Other Noteholders................................ 48 SECTION 12.04. Certificate and Opinion as to Conditions Precedent................................. 48 SECTION 12.05. Statements Required in Certificate or Opinion...................................... 48 SECTION 12.06. Rules by Trustee and Agents........................................................ 48 SECTION 12.07. Legal Holidays..................................................................... 49 SECTION 12.08. No Recourse Against Others......................................................... 49 SECTION 12.09. Counterparts....................................................................... 49 SECTION 12.10. Variable Provisions................................................................ 49 SECTION 12.11. Governing Law...................................................................... 50 SECTION 12.12. No Adverse Interpretation of Other Agreements...................................... 50 SECTION 12.13. Successors......................................................................... 50 SECTION 12.14. Severability....................................................................... 50 SECTION 12.15. Table of Contents, Headings, Etc................................................... 50
EXHIBIT A FORM OF CONVERTIBLE SUBORDINATED NOTES EXHIBIT B FORMS OF TRANSFER CERTIFICATES -iv- 6 CROSS-REFERENCE TABLE*
TRUST INDENTURE INDENTURE ACT SECTION SECTION 310(a)(1) ........................................................................ 7.10 (a)(2) ........................................................................ 7.10 (a)(3) ........................................................................ N.A (a)(4) ........................................................................ N.A (b) ........................................................................ 7.08; 7.10 (c) ........................................................................ N.A. 311(a) ........................................................................ 7.11 (b) ........................................................................ 7.11 (c) ........................................................................ N.A. 312(a) ........................................................................ 2.05 (b) ........................................................................ 10.03 (c) ........................................................................ 10.03 313(a) ........................................................................ 7.06 (b)(1) ........................................................................ N.A. (b)(2) ........................................................................ 7.06 (c) ........................................................................ 7.06 (d) ........................................................................ 7.06 314(a) ........................................................................ 7.06 (b) ........................................................................ 4.02, 4.03 (c)(1) ........................................................................ N.A. (c)(2) ........................................................................ 10.04 (c)(3) ........................................................................ 10.04 (d) ........................................................................ N.A. (e) ........................................................................ N.A. (f) ........................................................................ N.A. 315(a) ........................................................................ N.A. (b) ........................................................................ 7.01(b) (c) ........................................................................ 7.05 (d) ........................................................................ 7.01(a) (e) ........................................................................ 7.01(c) 316 (a) (last sentence)................................................................... 6.11 (a) (1) (A) ........................................................................ 2.09 (a) (1) (B) ........................................................................ 6.05 (a) (2) ........................................................................ N.A. (b) ........................................................................ 6.07 (c) ........................................................................ 9.04 317(a) (1) ........................................................................ 6.08 (a) (2) ........................................................................ 6.09 (b) ........................................................................ 2.04 318(a) ........................................................................ N.A. N.A. means not applicable.
_____________________ * This Cross-Reference Table is not part of the Indenture. -v- 7 INDENTURE dated as of April 3, 1996 between ARV Assisted Living, Inc., a California corporation (the "Company") and The Chase Manhattan Bank, N.A., a national banking association, as trustee (the "Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Noteholders of the Company's 6 3/4% Convertible Subordinated Notes due 2006 (the "Convertible Notes"): ARTICLE I Definitions and Incorporation by Reference SECTION 1.01. Definitions. "Affiliate" of any specified person means any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such person, whether through the ownership of voting securities or by agreement or otherwise; provided, however, that beneficial ownership of 10% or more of the voting securities of a person shall be deemed to be control. "Agent" means any Registrar, Paying Agent, Conversion Agent or co-registrar. "Board of Directors" means the Board of Directors of the Company or any authorized committee of the Board. "Board Resolution" means a duly authorized resolution of the Board of Directors. "Business Day" means any day that is not a Legal Holiday. "Capital Stock" means any and all shares, interests, participations, rights or other equivalents (however designated) of equity interests in any entity, including, without limitation, corporate stock and partnership interests. "Change of Control" means any event where: (i) any "person" or "group" (as such terms are used in Section 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of shares representing more than 50% of the combined voting power of the then outstanding securities entitled to vote generally in elections of directors of the Company ("Voting Stock"), (ii) the Company consolidates with or merges into any other corporation, or conveys, transfers or leases all or substantially all of its assets (other than to a wholly-owned subsidiary of the Company) or any other corporation merges into the Company, and, in the case of any such transaction, the outstanding Common Stock of the Company is reclassified into or exchanged for any other property or security, unless the shareholders of the Company immediately before such transaction own, directly or indirectly immediately following such transaction, at least a majority of the combined voting 8 power of the outstanding voting securities of the corporation resulting from, or to which its assets were conveyed, transferred or leased in connection with, such transaction in substantially the same proportion as their ownership of the Voting Stock immediately before such transaction or (iii) any time the Continuing Directors do not constitute a majority of the Board of Directors of the Company (or, if applicable, a successor corporation to the Company); provided, that a Change of Control shall not be deemed to have occurred if either (x) the last sale price of the Common Stock for any five trading days during the ten trading days immediately preceding the Change of Control is at least equal to 105% of the Conversion Price in effect on the date of such Change in Control or (y) at least 90% of the consideration (excluding cash payments for fractional shares) in the transaction or transactions constituting the Change of Control consists of shares of common stock that are, or upon issuance will be, traded on a United States national securities exchange or approved for trading on an established automated over-the-counter trading market in the United States. "Common Stock" means the common stock of the Company as the same exists at the date of the execution of this Indenture or as such stock may be constituted from time to time. "Company" means the party named as such above until a successor replaces it in accordance with Article VII and thereafter means the successor. "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 the date of this Indenture or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such board at the time of such nomination or election. "Convertible Notes" means the Convertible Notes described above issued, authenticated and delivered under this Indenture. "Daily Market Price" means the price of a share of Common Stock on the relevant date, determined (a) on the basis of the last reported sale price regular way of the Common Stock as reported on the Nasdaq National Market, or if the Common Stock is not then listed on the Nasdaq National Market, as reported on such national securities exchange upon which the Common Stock is listed, or (b) if there is no such reported sale on the day in question, on the basis of the average of the closing bid and asked quotations regular way as so reported, or (c) if the Common Stock is not listed on the Nasdaq National Market or on any national securities exchange, on the basis of the average of the high bid and low asked quotations regular way on the day in question in the over-the-counter market as reported by the National Association of Securities Dealers Automated Quotation System, or if not so quoted, as reported by National Quotation Bureau, Incorporated, or a similar organization. "Default" means any event that is, or with the passage of time or the giving of notice or both, would be an Event of Default. -2- 9 "Depositary" means The Depository Trust Company, its nominees and their respective successors. "Designated Event" means the occurrence of a Change of Control or a Termination of Trading. "Designated Senior Debt" means any Senior Debt which, at the date of determination, has an aggregate principal amount outstanding of, or commitments to lend up to, at least $2 million and is specifically designated in the instrument evidencing or governing such Senior Debt as "Designated Senior Debt" for purposes of this Indenture (provided, that such instrument may place limitations and conditions on the right of such Senior Debt to exercise the rights of Designated Senior Debt). "Excess Payment" means the excess of (a) the aggregate of the cash and fair market value of other consideration paid by the Company or any of its subsidiaries with respect to the shares acquired in a tender offer or other negotiated transaction over (b) the Daily Market Price of such acquired shares on the Trading Day immediately after giving effect to the completion of such tender offer or other negotiated transaction. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession, which are in effect from time to time. "Global Notes" means, individually and collectively, the Regulation S Temporary Global Note, the Regulation S Permanent Global Note and the Rule 144A Global Note. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Indebtedness" means, with respect to any person, all Obligations, whether or not contingent, of such person (i) (a) for borrowed money (including, but not limited to, any indebtedness secured by a security interest, mortgage or other lien on the assets of such person which is (1) given to secure all or part of the purchase price of property subject thereto, whether given to the vendor of such property or to another, or (2) existing on property at the time of acquisition thereof), (b) evidenced by a note, debenture, bond or other written instrument, (c) under a lease required to be capitalized on the balance sheet of the lessee under GAAP or under any lease or related document (including a purchase agreement) which provides that such person is contractually obligated to purchase or to cause a third party to purchase such leased property, (d) in respect of -3- 10 letters of credit, bank guarantees, bankers' acceptances or guarantees related to the Tax Credit Partnerships, (e) with respect to indebtedness secured by a mortgage, pledge, lien, encumbrance, charge or adverse claim affecting title or resulting in an encumbrance to which the property or assets of such person are subject, whether or not the obligation secured thereby shall have been assumed or Guaranteed by or shall otherwise be such person's legal liability, (f) in respect of the balance of deferred and unpaid purchase price of any property or assets, and (g) under interest rate or currency swap agreements, cap, floor and collar agreements, spot and forward contracts and similar agreements and arrangements; (ii) with respect to any obligation of others of the type described in the preceding clause (i) or under clause (iii) below, assumed by or Guaranteed in any manner by such person or in effect Guaranteed by such person through an agreement to purchase (including, without limitation, "take or pay" and similar arrangements), contingent or otherwise (and the obligations of such person under any such assumptions, Guarantees or other such arrangements); and (iii) any and all deferrals, renewals, extensions, refinancings and refundings of, or amendments, modifications or supplements to, any of the foregoing. "Indenture" means this Indenture, as amended from time to time. "Initial Purchaser" means Salomon Brothers Inc. "Issuance Date" means the date on which the Convertible Notes are first authenticated and issued. "Liquidated Damages" means all liquidated damages, without duplication, then owing pursuant to Section 11 of the Notes. "Material Subsidiary" means any Subsidiary of the Company which is a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the Securities Act and the Exchange Act (as such Regulation is in effect on the date hereof). "Noteholder" or "holder" means a person in whose name a Convertible Note is registered. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Offering Memorandum" means the offering memorandum relating to the Convertible Notes dated March 28, 1996. "Officers' Certificate" means a certificate signed by two Officers, one of whom must be the Chairman of the Board, the President, the Treasurer or a Vice-President of the Company. See Sections 12.04 and 12.05 hereof. -4- 11 "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. See Sections 12.04 and 12.05 hereof. "person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "principal" of a debt security means the principal of the security plus the premium, if any, on the security. "Registration Agreement" means the Registration Agreement relating to the Convertible Notes dated March 28, 1996, between the Company and the Initial Purchaser. "Regulation S" means Regulation S promulgated under the Securities Act. "Regulation S Global Note" means a Regulation S Temporary Global Note or Regulation S Permanent Global Note, as appropriate. "Regulation S Permanent Global Note" means a permanent global note that contains the paragraph referred to in footnote 1 and the additional schedule referred to in footnote 2 to the form of the Convertible Note attached hereto as Exhibit A-1, and that is deposited with and registered in the name of the Depositary, representing the Convertible Notes sold in reliance on Regulation S. "Regulation S Temporary Global Note" means a single temporary global note in the form of the Note attached hereto as Exhibit A-2 that is deposited with and registered in the name of the Depositary, representing a series of Notes sold in reliance on Regulation S. "Representative" means the trustee, agent or representative (if any) for an issue of Senior Debt. "Rule 144A" means Rule 144A promulgated under the Securities Act. "Rule 144A Global Note" means a permanent global note that contains the paragraph referred to in footnote 1 and the additional schedule referred to in footnote 2 to the form of the Note attached hereto as Exhibit A-1, and that is deposited with and registered in the name of the Depositary, representing the Convertible Notes sold in reliance on Rule 144A. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Senior Debt" means the principal of, interest on and other amounts due on Indebtedness of the Company, whether outstanding on the date of the Indenture or thereafter created, incurred, assumed or Guaranteed by the Company; unless, in the instrument creating or evidencing -5- 12 or pursuant to which Indebtedness is outstanding, it is expressly provided that such Indebtedness is not senior in right of payment to the Convertible Notes. Senior Debt includes, with respect to the obligations described above, interest accruing, pursuant to the terms of such Senior Debt, on or after the filing of any petition in bankruptcy or for reorganization relating to the Company, whether or not post-filing interest is allowed in such proceeding, at the rate specified in the instrument governing the relevant obligation. Notwithstanding anything to the contrary in the foregoing, Senior Debt shall not include: (a) Indebtedness of or amounts owed by the Company for compensation to employees, or for goods, services or materials purchased in the ordinary course of business; (b) Indebtedness of the Company to a Subsidiary of the Company or any officer, director or employee of the Company or any Subsidiary thereof; (c) any liability for Federal, state, local or other taxes owed or owing by the Company, or (d) Indebtedness evidenced by the Company's 10% Convertible Subordinated Notes Due 1999. "Shelf Registration Statement" shall have the meaning set forth in the Registration Agreement. "Subsidiary" means any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by any person or one or more of the other Subsidiaries of that person or a combination thereof. "Tax Credit Partnership's" means all partnerships formed or to be formed by the Company for the purpose of acquiring or developing affordable apartments and to accrue related tax benefits under the Federal Low Income Housing Tax Credit program as described in the Offering Memorandum. "Termination of Trading" means an event where the Common Stock (or other common stock into which the Convertible Notes are then convertible) is neither listed for trading on a United States national securities exchange nor approved for trading on an established automated over-the-counter trading market in the United States. "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Sections77aaa-77bbbb) as in effect on the date of execution of this Indenture. "Trading Day" shall mean (A) if the applicable security is listed or admitted for trading on the New York Stock Exchange or another national securities exchange, a day on which the New York Stock Exchange or another national securities exchange is open for business, (B) if the applicable security is quoted on The Nasdaq National Market, a day on which trades may be made thereon or (c) if the applicable security is not so listed, admitted for trading or quoted, any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. -6- 13 "Trustee" means the party named as such above until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor. "Trust Officer" when used with respect to the Trustee, means the chairman or any vice chairman of the board of directors, the chairman or any vice chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any senior vice president, any vice president, any assistant vice president, the secretary the treasurer, any assistant treasurer, the cashier, any assistant cashier, any senior trust officer, any trust officer, the controller, any assistant controller, or any other officer of the Trustee customarily performing functions similar to those performed by the persons who at the time are such officers, respectively, and also means, with respect to a particular corporate trust matter, any officer to whom such corporate trust matter is referred because of his knowledge of and familiarity with the particular subject. "U.S. Person" has the meaning specified in Regulation S. SECTION 1.02. Other Definitions.
Defined in Term Section - ---- ---------- "Agent Members"......................................................................................... 2.01 "Bankruptcy Law"........................................................................................ 8.01 "Cedel"................................................................................................. 2.01 "Commencement Date"..................................................................................... 3.08 "Conversion Agent"..................................................................................... 2.03 "Conversion Date"...................................................................................... 5.02 "Conversion Price"..................................................................................... 5.01 "Conversion Shares".................................................................................... 5.06 "Custodian"............................................................................................. 8.01 "Designated Event Offer"............................................................................... 4.07 "Designated Event Payment"............................................................................. 4.07 "Designated Event Payment Date"........................................................................ 3.08 "Distribution Date"..................................................................................... 5.06 "Distribution Record Date".............................................................................. 5.06 "Euroclear"............................................................................................. 2.01 "Event of Default"...................................................................................... 8.01 "Institutional Accredited Investors".................................................................... 2.01 "Legal Holiday"......................................................................................... 12.07 "Offer Amount".......................................................................................... 3.08 "Officer"............................................................................................... 12.10 "Paying Agent".......................................................................................... 2.03 "Payment Blockage Notice"............................................................................... 6.02 "Payment Blockage Period"............................................................................... 6.02
-7- 14 "Payment Default"....................................................................................... 8.01 "Purchase Agreement".................................................................................... 2.01 "Purchase Date"......................................................................................... 5.06 "QIBs".................................................................................................. 2.01 "Registrar"............................................................................................. 2.03 "Restricted Convertible Notes"......................................................................... 2.01 "Rights"................................................................................................ 5.06 "Tender Period"......................................................................................... 3.08
SECTION 1.03. Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Convertible Notes; "indenture security holder" means a Noteholder; "indenture qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the Convertible Notes means the Company or any other obligor on the Convertible Notes. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. SECTION 1.04. Rules of Construction. Unless the context otherwise requires: (a) a term has the meaning assigned to it; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP consistently applied; (c) references to "GAAP" shall mean GAAP in effect as of the time when and for the period as to which such accounting principles are to be applied; (d) "or" is not exclusive; (e) words in the singular include the plural, and words in the plural include the singular; and -8- 15 (f) provisions apply to successive events and transactions. ARTICLE II The Convertible Notes SECTION 2.01. Form and Dating. The Convertible Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A-1 attached hereto. The Convertible Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Convertible Note shall be dated the date of its authentication. The Convertible Notes shall be issued in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof. The terms and provisions contained in the Convertible Notes shall constitute, and are hereby expressly made, a part of this Indenture and the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. (a) Global Notes. The Convertible Notes being offered and sold by the Company pursuant to a purchase agreement relating to the Convertible Notes dated March 28, 1996, between the Company and the Initial Purchaser (the "Purchase Agreement"). Convertible Notes offered and sold to qualified institutional buyers as defined in Rule 144A ("QIBs") in reliance on Rule 144A shall be issued initially in the form of Rule 144A Global Notes, which shall be deposited on behalf of the purchasers of the Convertible Notes represented thereby with the Depositary at its office in The City of New York, and registered in the name of the Depositary or a nominee of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Rule 144A Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee as hereinafter provided. The Trustee shall not be liable for any error or omission by the Depositary in making such record adjustments and the records of the Trustee shall be controlling with regard to outstanding principal amount of Convertible Notes hereunder. Convertible Notes offered and sold in reliance on Regulation S shall be issued initially in the form of the Regulation S Temporary Global Note, which shall be deposited on behalf of the purchasers of the Notes represented thereby with the Trustee, at its office in The City of New York, as custodian for the Depositary, and registered in the name of the Depositary or the nominee of the Depositary for the investors' respective accounts at Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System ("Euroclear") or Cedel Bank Societe Anonyme ("Cedel") duly executed by the Company and authenticated by the Trustee as hereinafter provided. The "40-day restricted period" (as defined in Regulation S) shall be terminated upon the receipt by the Trustee of (i) a written certificate from the Depositary, together with copies of certificates from Euroclear and Cedel certifying that they have received certification of non-United States beneficial ownership of 100% of the aggregate principal amount of the Regulation S Temporary Global Note (except to the extent of any beneficial owners thereof who acquired an interest therein pursuant to another exemption from registration under the Securities Act and who -9- 16 will take delivery of a beneficial ownership interest in a Rule 144A Global Note, all as contemplated by Section 2.06(a)(ii) hereof), and (ii) an Officers' Certificate from the Company. Following the termination of the 40-day restricted period, beneficial interests in the Regulation S Temporary Global Note shall be exchanged for beneficial interests in Regulation S Permanent Global Notes which will be deposited with a custodian and registered in the name of a nominee of the Depositary. Simultaneously with the authentication of Regulation S Permanent Global Notes, the Trustee shall cancel the Regulation S Temporary Global Note. The aggregate principal amount of the Regulation S Temporary Global Note and the Regulation S Permanent Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee, as the case may be, in connection with transfers of interest as hereinafter provided. The trustee shall incur no liability for any error or omission of the Depositary in making such record adjustments and the records of the Trustee shall be controlling with regard to outstanding principal amount of Regulation S Global Notes hereunder. Each Global Note shall represent such of the outstanding Convertible Notes as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Convertible Notes from time to time endorsed thereon and that the aggregate amount of outstanding Convertible Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the amount of outstanding Convertible Notes represented thereby shall be made by the Trustee or the custodian, at the direction of the Trustee, in accordance with instructions given by the holder thereof as required by Section 2.06 hereof. The provisions of the "Operating Procedures of the Euroclear System" and "Terms and Conditions Governing Use of Euroclear" and the "Management Regulations" and "Instructions to Participants" of Cedel shall be applicable to interests in the Regulation S Temporary Global Note and the Regulation S Permanent Global Notes that are held by the Agent Member through Euroclear or Cedel. Except as set forth in Section 2.06 hereof, the Global Notes may be transferred, in whole and not in part, only to another nominee of the Depositary or to a successor of the Depositary or its nominee. (b) Book-Entry Provisions. This Section 2.01(b) shall apply only to Rule 144A Global Notes and the Regulation S Permanent Global Notes deposited with or on behalf of the Depositary. The Company shall execute and the Trustee shall, in accordance with this Section 2.01(b), authenticate and deliver the Global Notes that (i) shall be registered in the name of the Depositary or the nominee of the Depositary and (ii) shall be delivered by the Trustee to the Depositary or pursuant to the Depositary's instructions or held by the Trustee as custodian for the Depositary. -10- 17 Members of, or participants in, the Depositary ("Agent Members") shall have no rights either under this Indenture with respect to any Global Note held on their behalf by the Depositary or by the Trustee as custodian for the Depositary or under such Global Note, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices of such Depositary governing the exercise of the rights of an owner of a beneficial interest in any Global Note. (c) Certificated Convertible Notes. Except as provided in Sections 2.06(f) and 2.10, owners of beneficial interests in Global Convertible Notes will not be entitled to receive physical delivery of certificated Convertible Notes. Purchasers of Notes who are institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act and referred to as "Institutional Accredited Investors") who are not QIBs will receive certificated Convertible Notes bearing the Restricted Convertible Notes Legend set forth in Exhibit A-1 hereto ("Restricted Convertible Notes"). Restricted Convertible Notes will bear the Restricted Convertible Notes Legend set forth on Exhibit A-1 unless removed in accordance with Section 2.06(b) hereof and may not be exchanged for a Global Note, or interest therein, at any time. After a transfer of any Convertible Notes during the period of the effectiveness of a Shelf Registration Statement with respect to the Convertible Notes, all requirements pertaining to legends on such Convertible Note will cease to apply, the requirements requiring any such Convertible Note issued to certain holders be issued in global form will cease to apply, and a certificated Convertible Note without legends will be available to the holder of such Convertible Notes. SECTION 2.02. Execution and Authentication. Two officers shall sign the Convertible Notes for the Company by manual or facsimile signature. The Company's seal shall be reproduced, either manually or by facsimile, on the Convertible Notes. If an officer whose signature is on a Convertible Note no longer holds that office at the time the Convertible Note is authenticated, the Convertible Note shall nevertheless be valid. A Convertible Note shall not be valid until authenticated by the manual signature of an authorized officer of the Trustee. The signature shall be conclusive evidence that the Convertible Note has been authenticated under this Indenture. Upon a written order of the Company signed by two Officers, the Trustee shall authenticate the Convertible Notes for original issue up to an aggregate principal amount of $50,000,000 (plus up to $7,500,000 aggregate principal amount of Convertible Notes that may be sold by the Company pursuant to the over-allotment option granted pursuant to the Purchase -11- 18 Agreement). The aggregate principal amount of Convertible Notes outstanding at any time shall not exceed such amount except as provided in Section 2.07. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Convertible Notes. An authenticating agent may authenticate Convertible Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate. SECTION 2.03. Registrar, Paying Agent and Conversion Agent. The Company shall maintain in the Borough of Manhattan in The City of New York (i) an office or agency where Convertible Notes may be presented for registration of transfer or for exchange ("Registrar"), (ii) an office or agency where Convertible Notes may be presented for payment ("Paying Agent") and (iii) an office or agency where Convertible Notes may be presented for conversion ("Conversion Agent"). The Registrar shall keep a register of the Convertible Notes and of their transfer and exchange. The Company may appoint the Registrar, the Paying Agent and the Conversion Agent and may appoint one or more co-registrars, one or more additional paying agents and one or more additional conversion agents in such other locations as it shall determine. The term "Paying Agent" includes any additional paying agent and the term "Conversion Agent" includes any additional conversion agent. The Company may change any Paying Agent, Registrar, co-registrar or Conversion Agent without prior notice to any Noteholder. The Company shall notify the Trustee of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar, Paying Agent or Conversion Agent, the Trustee shall act as such. The Company or any of its Affiliates may act as Paying Agent, Registrar, co-registrar or Conversion Agent. SECTION 2.04. Paying Agent to Hold Money in Trust. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Noteholders or the Trustee all money held by the Paying Agent for the payment of principal or interest on the Convertible Notes, and will notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and to account for any money disbursed by it. Upon payment over to the Trustee, the Paying Agent (if other than the Company or an Affiliate Of the Company) shall have no further liability for the money. If the Company or an Affiliate of the Company acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Noteholders all money held by it as Paying Agent. SECTION 2.05. Noteholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Noteholders. If the Trustee is not the Registrar, the Company shall furnish to the Trustee on or before each interest payment date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Noteholders. -12- 19 SECTION 2.06. Transfer and Exchange. (a) Transfer and Exchange of Global Notes. The transfer and exchange of Global Notes or beneficial interests therein shall be effected through the Depositary, in accordance with this Indenture and the procedures of the Depositary therefor, which shall include restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Beneficial interests in a Global Note may be transferred to persons who take delivery thereof in the form of a beneficial interest in the same Global Note in accordance with the transfer restrictions set forth in the legend in subsection (g) of this Section 2.06. Transfers of beneficial interests in the Global Notes to persons required to take delivery thereof in the form of an interest in another Global Note shall be permitted as follows: (i) Rule 144A Global Note to Regulation S Global Note. If, at any time, an owner of a beneficial interest in a Rule 144A Global Note deposited with the Depositary (or the Trustee as custodian for the Depositary) wishes to transfer its interest in such Rule 144A Global Note to a person who is required or permitted to take delivery thereof in the form of an interest in a Regulation S Global Note, such owner shall, subject to compliance with the applicable procedures described herein (the "Applicable Procedures"), exchange or cause the exchange of such interest for an equivalent beneficial interest in a Regulation S Global Note as provided in this Section 2.06(a)(i). Upon receipt by the Trustee of (1) instructions given in accordance with the Applicable Procedures from an Agent Member directing the Trustee to credit or cause to be credited a beneficial interest in the Regulation S Global Note in an amount equal to the beneficial interest in the Rule 144A Global Note to be exchanged, (2) a written order given in accordance with the Applicable Procedures containing information regarding the participant account of the Depositary and the Euroclear or Cedel account to be credited with such increase, and (3) a certificate in the form of Exhibit B-1 hereto given by the owner of such beneficial interest stating that the transfer of such interest has been made in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with Rule 903 or Rule 904 of Regulation S, then the Trustee, as Registrar, shall instruct the Depositary to reduce or cause to be reduced the aggregate principal amount at maturity of the applicable Rule 144A Global Note and to increase or cause to be increased the aggregate principal amount at maturity of the applicable Regulation S Global Note by the principal amount at maturity of the beneficial interest in the Rule 144A Global Note to be exchanged, to credit or cause to be credited to the account of the person specified in such instructions a beneficial interest in the Regulation S Global Note equal to the reduction in the -13- 20 aggregate principal amount at maturity of the Rule 144A Global Note, and to debit, or cause to be debited, from the account of the person making such exchange or transfer the beneficial interest in the Rule 144A Global Note that is being exchanged or transferred. (ii) Regulation S Global Note to Rule 144A Global Note. If, at any time, an owner of a beneficial interest in a Regulation S Global Note deposited with the Depositary or with the Trustee as custodian for the Depositary wishes to transfer its interest in such Regulation S Global Note to a person who is required or permitted to take delivery thereof in the form of an interest in a Rule 144A Global Note, such owner shall, subject to the Applicable Procedures, exchange or cause the exchange of such interest for an equivalent beneficial interest in a Rule 144A Global Note as provided in this Section 2.06(a)(ii). Upon receipt by the Trustee of (1) instructions from Euroclear or Cedel, if applicable, and the Depositary, directing the Trustee, as Registrar, to credit or cause to be credited a beneficial interest in the Rule 144A Global Note equal to the beneficial interest in the Regulation S Global Note to be exchanged, such instructions to contain information regarding the participant account with the Depositary to be credited with such increase, (2) a written order given in accordance with the Applicable Procedures containing information regarding the participant account of the Depositary and (3) if such transfer is being effected prior to the expiration of the "40 day restricted period" (as defined by Regulation S under the Securities Act), a certificate in the form of Exhibit B-2 attached hereto given by the owner of such beneficial interest stating (A) if the transfer is pursuant to Rule 144A, that the person transferring such interest in a Regulation S Global Note reasonably believes that the person acquiring such interest in a Rule 144A Global Note is a QIB and is obtaining such beneficial interest in a transaction meeting the requirements of Rule 144A and any applicable blue sky or securities laws of any state of the United States, (B) that the transfer complies with the requirements of Rule 144A under the Securities Act and any applicable blue sky or securities laws of any state of the United States or (C) if the transfer is pursuant to any other exemption from the registration requirements of the Securities Act, that the transfer of such interest has been made in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with the requirements of the exemption claimed, such statement to be supported by an Opinion of Counsel from the transferee or the transferor in form reasonably acceptable to the Company and to the Registrar then the Trustee, as Registrar, shall instruct the Depositary to reduce or cause to be reduced the aggregate principal amount at maturity of such -14- 21 Regulation S Global Note and to increase or cause to be increased the aggregate principal amount at maturity of the applicable Rule 144A Global Note by the principal amount at maturity of the beneficial interest in the Regulation S Global Note to be exchanged, and the Trustee, as Registrar, shall instruct the Depositary, concurrently with such reduction, to credit or cause to be credited to the account of the person specified in such instructions a beneficial interest in the applicable Rule 144A Global Note equal to the reduction in the aggregate principal amount at maturity of such Regulation S Global Note and to debit or cause to be debited from the account of the person making such transfer the beneficial interest in the Regulation S Global Note that is being transferred. (b) Transfer and Exchange of Certificated Convertible Notes. When Certificated Convertible Notes are presented by a holder to the Registrar with a request: (x) to register the transfer of the Certificated Notes; or (y) to exchange such certificated Convertible Notes for an equal principal amount of certificated Convertible Notes of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested; provided, however, that the certificated Convertible Notes presented or surrendered for register of transfer or exchange: (i) shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such holder or by his attorney, duly authorized in writing; and (ii) in the case of a certificated Convertible Note that is a Restricted Convertible Note, such request shall be accompanied by the following additional information and documents, as applicable: (A) if such Restricted Convertible Note is being delivered to the Registrar by a holder for registration in the name of such holder, without transfer, or such Restricted Convertible Note is being transferred to the Company, no certification is required; (B) if such Restricted Convertible Note is being transferred to a QIB in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act, a -15- 22 certification to that effect from such holder (in substantially the form of Exhibit B-3 hereto); or (C) if such Restricted Convertible Note is being transferred in reliance on any other exemption from the registration requirements of the Securities Act, a certification to that effect from such holder (in substantially the form of Exhibit B-3 hereto) and an Opinion of Counsel from such holder or the transferee reasonably acceptable to the Company and to the Registrar to the effect that such transfer is in compliance with the Securities Act. (c) Transfer of a Beneficial Interest in a Rule 144A Global Note or Regulation S Permanent Global Note for a certificated Convertible Note. (i) Any person having a beneficial interest in a Rule 144A Global Note or Regulation S Permanent Global Note may upon request, subject to the Applicable Procedures, exchange such beneficial interest for a certificated Convertible Note. Upon receipt by the Trustee of written instructions or such other form of instructions as is customary for the Depositary (or Euroclear or Cedel, if applicable), from the Depositary or its nominee on behalf of any person having a beneficial interest in a Rule 144A Global Note or Regulation S Permanent Global Note, and, in the case of a Restricted Convertible Note, the following additional information and documents (all of which may be submitted by facsimile): (A) if such beneficial interest is being transferred to the person designated by the Depositary as being the beneficial owner, a certification to that effect from such person (in substantially the form of Exhibit B-4 hereto); (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act, a certification to that effect from the transferor (in substantially the form of Exhibit B-4 hereto); or (C) if such beneficial interest is being transferred in reliance on any other exemption from the registration requirements of the Securities Act, a certification to that effect from the transferor (in substantially the form of Exhibit B-4 hereto) and an -16- 23 Opinion of Counsel from the transferee or the transferor reasonably acceptable to the Company and to the Registrar to the effect that such transfer is in compliance with the Securities Act, in which case the Trustee or the custodian, at the direction of the Trustee, shall, in accordance with the standing instructions and procedures existing between the Depositary and the custodian, cause the aggregate principal amount of Rule 144A Global Notes or Regulation S Permanent Global Notes, as applicable, to be reduced accordingly and, following such reduction, the Company shall execute and, the Trustee shall authenticate and deliver to the transferee a certificated Convertible Note in the appropriate principal amount. (ii) Certificated Convertible Notes issued in exchange for a beneficial interest in a Rule 144A Global Note or Regulation S Permanent Global Note, as applicable, pursuant to this Section 2.06(c) shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such certificated Convertible Notes to the persons in whose names such Convertible Notes are so registered. Following any such issuance of certificated Convertible Notes, the Trustee, as Registrar, shall instruct the Depositary to reduce or cause to be reduced the aggregate principal amount at maturity of the applicable Global Note to reflect the transfer. (d) Restrictions on Transfer and Exchange of Global Notes. Notwithstanding any other provision of this Indenture (other than the provisions set forth in subsection (f) of this Section 2.06 or Section 2.10), a Global Note may not be transferred as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. (e) Transfer and Exchange of a Certificated Convertible Note for a Beneficial Interest in a Global Note. A certificated Convertible Note may not be transferred or exchanged for a beneficial interest in a Global Note. (f) Authentication of Certificated Convertible Note in Absence of Depositary. If at any time: (i) the Depositary for the Convertible Notes notifies the Company that the Depositary is unwilling or unable to continue as Depositary for -17- 24 the Global Notes and a successor Depositary for the Global Notes is not appointed by the Company within 90 days after delivery of such notice; or (ii) the Company, at its sole discretion, notifies the Trustee in writing that it elects to cause the issuance of certificated Convertible Notes under this Indenture, then the Company shall execute, and the Trustee shall, upon receipt of an authentication order in accordance with Section 2.02 hereof, authenticate and deliver, certificated Convertible Notes in an aggregate principal amount equal to the principal amount of the Global Notes in exchange for such Global Notes. (g) Legends. (i) Except as permitted by the following paragraphs (ii) and (iii), each Convertible Note certificate evidencing certificated Convertible Notes (and all Convertible Notes issued in exchange therefor or substitution thereof) shall bear legends in substantially the following form: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS SECURITY MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE THIRD ANNIVERSARY (OR SUCH SHORTER PERIOD AS MAY THEN BE APPLICABLE UNDER THE SECURITIES ACT REGARDING THE HOLDING PERIOD FOR SECURITIES UNDER RULE 144(k) OF THE SECURITIES ACT OR ANY SUCCESSOR RULE) OF THE ISSUANCE HEREOF (OR ANY PREDECESSOR SECURITY HERETO) OR (Y) BY ANY HOLDER THAT WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN (1) TO THE COMPANY, (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY) AND A -18- 25 CERTIFICATE WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE, (3) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), AND, IF SUCH TRANSFER IS BEING EFFECTED BY CERTAIN TRANSFERORS SPECIFIED IN THE INDENTURE (AS DEFINED BELOW) PRIOR TO THE EXPIRATION OF THE "40 DAY RESTRICTED PERIOD" (WITHIN THE MEANING OF RULE 903(c)(3) OF REGULATION S UNDER THE SECURITIES ACT), A CERTIFICATE WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a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c)(3) OF REGULATION S UNDER THE SECURITIES ACT), (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, AND A CERTIFICATE WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, AND A CERTIFICATE WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTION. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS SECURITY AGREES IT WILL FURNISH TO THE COMPANY AND THE TRUSTEE SUCH CERTIFICATES AND OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF THIS SECURITY COMPLIES WITH THE FOREGOING -19- 26 RESTRICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2) AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT AND THAT IT IS HOLDING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (o)(2) OF RULE 902 UNDER) REGULATION S UNDER THE SECURITIES ACT." (ii) Upon any sale or transfer of a Restricted Convertible Note (including any Restricted Convertible Note represented by a Global Note) pursuant to Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act: (A) in the case of any Restricted Convertible Note that is a certificated Convertible Note, the Registrar shall permit the holder thereof to exchange such Restricted Convertible Note for a certificated Convertible Note that does not bear the legend set forth in (i) above and rescind any restriction on the transfer of such Restricted Convertible Note upon receipt of a certification from the transferring holder substantially in the form of Exhibit B-4 hereto; and (B) in the case of any Restricted Convertible Note represented by a Global Note, such Restricted Convertible Note shall not be required to bear the legend set forth in (i) above, but shall continue to be subject to the provisions of Section 2.06(a) and (b) hereof; provided, however, that with respect to any request for an exchange of a Restricted Convertible Note that is represented by a Global Note for a certificated Convertible Note that does not bear the legend set forth in (i) above, which request is made in reliance upon Rule 144 under the Securities Act, the holder thereof shall certify in writing to the Registrar that such request is being made pursuant to Rule 144 under the Securities Act (such certification to be substantially in the form of Exhibit B-4 hereto). (iii) Upon any sale or transfer of a Restricted Convertible Note (including any Restricted Convertible Note represented by a Global Note) in reliance on any exemption from the registration requirements of the Securities Act (other than exemptions pursuant to Rule 144A or Rule -20- 27 144 under the Securities Act) in which the holder or the transferee provides an Opinion of Counsel to the Company and the Registrar in form and substance reasonably acceptable to the Company and the Registrar (which Opinion of Counsel shall also state that the transfer restrictions contained in the legend are no longer applicable): (A) in the case of any Restricted Convertible Note that is a certificated Convertible Note, the Registrar shall permit the holder thereof to exchange such Restricted Convertible Note for a certificated Convertible Note that does not bear the legend set forth in (i) above and rescind any restriction on the transfer of such Restricted Convertible Note; and (B) in the case of any Restricted Convertible Note represented by a Global Note, such Restricted Convertible Note shall not be required to bear the legend set forth in (i) above, but shall continue to be subject to the provisions of Section 2.06(a) and (b) hereof. (h) The Initial Purchaser shall not be required to deliver, and neither the Company nor the Trustee shall demand therefrom, any of the certifications or opinions described in this Section 2.06 in connection with the initial issuance and delivery by the Company of the Convertible Notes on the effective date hereof or on the date of any settlement in connection with the exercise of the over-allotment option granted to the Initial Purchaser in the Purchase Agreement, including with respect to the issuance and delivery of Convertible Notes that are Restricted Convertible Notes. SECTION 2.07. Replacement Convertible Notes. If the holder of a Convertible Note claims that the Convertible Note has been lost, destroyed or wrongfully taken or if such Convertible Note is mutilated and is surrendered to the Trustee, the Company shall issue and the Trustee shall authenticate a replacement Convertible Note if the Trustee's and the Company's requirements are met. If required by the Trustee or the Company, an indemnity bond must be sufficient in the judgment of both to protect the Company, the Trustee, any Agent or any authenticating agent from any loss which any of them may suffer if a Convertible Note is replaced. The Company may charge for its expenses in replacing a Convertible Note. In case any such mutilated, destroyed, lost or stolen Convertible Note has become or is about to become due and payable, or is about to be purchased by the Company pursuant to Article III hereof, the Company in its discretion may, instead of issuing a new Convertible Note, pay or purchase such Convertible Note, as the case may be. Every replacement Convertible Note is an additional obligation of the Company. -21- 28 SECTION 2.08. Outstanding Convertible Notes. The Convertible Notes outstanding at any time are all the Convertible Notes authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, and those described in this Section as not outstanding. If a Convertible Note is replaced, paid or purchased pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced, paid or purchased Convertible Note is held by a bona fide purchaser. If Convertible Notes are considered paid under Section 4.01 hereof, they cease to be outstanding and interest on them ceases to accrue. A Convertible Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Convertible Note. SECTION 2.09. Treasury Convertible Notes. In determining whether the Noteholders of the required principal amount of Convertible Notes have concurred in any direction, waiver or consent, Convertible Notes owned by the company or an Affiliate of the Company shall be considered as though they are not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Convertible Notes which a Trust Officer of the Trustee actually knows are so owned shall be so disregarded. SECTION 2.10. Temporary Convertible Notes. (a) Until definitive Convertible Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Convertible Notes. Temporary Convertible Notes shall be substantially in the form of definitive Convertible Notes but may have variations that the Company considers appropriate for temporary Convertible Notes. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Convertible Notes in exchange for temporary Convertible Notes. (b) A Global Note deposited with the Depositary or with the Trustee as custodian for the Depositary pursuant to Section 2.01 shall be transferred to the beneficial owners thereof in the form of certificated Convertible Notes only if such transfer complies with Section 2.06 and (i) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for such Global Note or if at any time such Depositary ceases to be a "clearing agency" registered under the Exchange Act and a successor depositary is not appointed by the Company within 90 days of such notice, or (ii) an Event of Default has occurred and is continuing. (c) Any Global Note that is transferable to the beneficial owners thereof in the form of certificated Convertible Notes pursuant to this Section 2.10 shall be surrendered by the Depositary to the Trustee located in The City of New York, to be so transferred, in whole or from time to time in part, without charge, and the Trustee shall authenticate and deliver, upon such transfer of each portion of such Global Note, an equal aggregate principal amount at maturity of -22- 29 SECTION 2.08. Outstanding Convertible Notes. The Convertible Notes outstanding at any time are all the Convertible Notes authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, and those described in this Section as not outstanding. If a Convertible Note is replaced, paid or purchased pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced, paid or purchased Convertible Note is held by a bona fide purchaser. If Convertible Notes are considered paid under Section 4.01 hereof, they cease to be outstanding and interest on them ceases to accrue. A Convertible Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Convertible Note. SECTION 2.09. Treasury Convertible Notes. In determining whether the Noteholders of the required principal amount of Convertible Notes have concurred in any direction, waiver or consent, Convertible Notes owned by the company or an Affiliate of the Company shall be considered as though they are not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Convertible Notes which a Trust Officer of the Trustee actually knows are so owned shall be so disregarded. SECTION 2.10. Temporary Convertible Notes. (a) Until definitive Convertible Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Convertible Notes. Temporary Convertible Notes shall be substantially in the form of definitive Convertible Notes but may have variations that the Company payable on it, to the persons who are Noteholders on a subsequent special record date. The Company shall fix any such record date and payment date. At least 15 days before any such record date, the Company shall mail to Noteholders a notice that states the record date, payment date, and amount of such interest to be paid. ARTICLE III Redemption SECTION 3.01. Notices to Trustee. If the Company elects to redeem Convertible Notes pursuant to the Optional Redemption provision of Section 3.07 hereof, it shall notify the Trustee of the redemption date and the principal amount of Convertible Notes to be redeemed. The Trustee shall give notice to DTC and each other registered holder of Convertible Notes of the redemption date not less than 30 days prior to such redemption date and shall give such notice to the Trustee of any event or determination that obligates the Trustee to take any action or give any notice -23- 30 under this Article III not less than ten business days prior to the first day in any period of time specified for the Trustee to take such action or give such notice (unless a shorter notice period shall be satisfactory to the Trustee). SECTION 3.02. Selection of Convertible Notes to be Redeemed. If less than all the Convertible Notes are to be redeemed, the Trustee shall select the Convertible Notes to be redeemed as directed by the Company (which direction will include compliance with the requirements of the principal national securities exchange, if any, on which the Convertible Notes are listed), on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate. The Trustee shall make the selection not more than 60 days and not less than 30 days before the redemption date from Convertible Notes outstanding not previously called for redemption. The Trustee may select for redemption portions of the principal of Convertible Notes that have denominations larger than $1,000. Convertible Notes and portions of them it selects shall be in amounts of $1,000 or integral multiples of $1,000. Provisions of this Indenture that apply to Convertible Notes called for redemption also apply to portions of Convertible Notes called for redemption. The Trustee shall notify the Company promptly of the Convertible Notes or portions of Convertible Notes to be called for redemption. If any Convertible Note selected for partial redemption is converted in part after such selection, the converted portion of such Convertible Note shall be deemed (so far as may be) to be the portion to be selected for redemption. The Convertible Notes (or portions thereof) so selected shall be deemed duly selected for redemption for all purposes hereof, notwithstanding that any such Convertible Note is converted in whole or in part before the mailing of the notice of redemption. Upon any redemption of less than all the Convertible Notes, the Company and the Trustee may treat as outstanding any Convertible Notes surrendered for conversion during the period 15 days next preceding the mailing of a notice of redemption and need not treat as outstanding any Convertible Note authenticated and delivered during such period in exchange for the unconverted portion of any Convertible Note converted in part during such period. SECTION 3.03. Notice of Redemption. At least 20 days but not more than 60 days before a redemption date, the Company shall mail a notice of redemption to each holder (other than DTC or any nominee thereof, who shall receive notice from the Company at least 30 days before a redemption date) whose Convertible Notes are to be redeemed at such holder's registered address. The notice shall identify the Convertible Notes to be redeemed and shall state: (a) the redemption date; (b) the redemption price; (c) if any Convertible Note is being redeemed in part, the portion of the principal amount of such Convertible Note to be redeemed and that, after the redemption date, upon cancellation of such Convertible Note, a new Convertible Note or Convertible Notes in -24- 31 principal amount equal to the unredeemed portion will be issued in the name of the holder thereof; (d) the name and address of the Paying Agent; (e) that Convertible Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price plus accrued interest; (f) that, unless the Company defaults in making such redemption payment or the Paying Agent is prohibited from making such payment pursuant to the terms of this Indenture, interest on Convertible Notes called for redemption ceases to accrue on and after the redemption date; and (g) the paragraph of the Convertible Notes pursuant to which the Convertible Notes called for redemption are being redeemed. Such notice shall also state the current Conversion Price and the date on which the right to convert such Convertible Notes or portions thereof into Common Stock of the Company will expire. At the Company's request, the Trustee shall give notice of redemption in the Company's name and at its expense. SECTION 3.04. Effect of Notice of Redemption. Once notice of redemption is mailed, Convertible Notes called for redemption become due and payable on the redemption date at the price set forth in the Convertible Note. SECTION 3.05. Deposit of Redemption Price. On or before 12:00 noon, New York City time, of the redemption date, the Company shall deposit with the Trustee or with the Paying Agent money sufficient to pay the redemption price of and accrued interest up to but not including the redemption date on all Convertible Notes to be redeemed on that date (subject to the right of holders of record on the relevant record date to receive interest due on an interest payment date) unless theretofore converted into Common Stock pursuant to the provisions hereof. The Trustee or the Paying Agent shall return to the Company any money not required for that purpose. SECTION 3.06. Convertible Notes Redeemed in Part. Upon cancellation of a Convertible Note that is redeemed in part, the Company shall issue and the Trustee shall authenticate for the holder at the expense of the Company a new Convertible Note equal in principal amount to the unredeemed portion of the Convertible Note surrendered. SECTION 3.07. Optional Redemption. The Company may redeem all or any portion of the Convertible Notes, upon the terms and at the redemption prices set forth in each of the Convertible Notes. Any redemption pursuant to this Section 3.07 shall be made pursuant to the provisions of Section 3.01 through 3.06 hereof. -25- 32 SECTION 3.08. Designated Event Offer. (a) In the event that, pursuant to Section 4.07 hereof, the Company shall commence a Designated Event Offer, the Company shall follow the procedures in this Section 3.08. (b) The Designated Event Offer shall remain open for a period specified by the Company which shall be no less than 30 calendar days and no more than 40 calendar days following its commencement on the date of the mailing of notice in accordance with Section 4.07(b) hereof (the "Commencement Date"), except to the extent that a longer period is required by applicable law (the "Tender Period"). Upon the expiration of the Tender Period (the "Designated Event Payment Date"), the Company shall purchase the principal amount of Convertible Notes required to be purchased pursuant to Section 4.07 hereof (the "Offer Amount"). (c) If the Designated Event Payment Date is on or after an interest payment record date and on or before the related interest payment date, any accrued interest will be paid to the person in whose name a Convertible Note is registered at the close of business on such record date, and no additional interest will be payable to Noteholders who tender Convertible Notes pursuant to the Designated Event Offer. (d) The Company shall provide the Trustee with notice of the Designated Event Offer at least 10 Business Days before the Commencement Date. (e) On or before the Commencement Date, the Company or the Trustee (at the expense of the Company) shall send, by first class mail, a notice to each of the Noteholders, which shall govern the terms of the Designated Event Offer and shall state: (i) that the Designated Event Offer is being made pursuant to this Section 3.08 and Section 4.07 hereof and that all Convertible Notes tendered will be accepted for payment; (ii) the Offer Amount, the purchase price (as determined in accordance with Section 4.07 hereof), the length of time the Designated Event Offer will remain open and the Designated Event Payment Date; (ii) that any Convertible Note or portion thereof not tendered or accepted for payment will continue to accrue interest; (iv) that, unless the Company defaults in the payment of the Designated Event Payment, any Convertible Note or portion thereof accepted for payment pursuant to the Designated Event Offer shall cease to accrue interest after the Designated Event Payment Date; (v) that Noteholders electing to have a Convertible Note or portion thereof purchased pursuant to any Designated Event offer will be required to surrender the -26- 33 Convertible Note, with the form entitled "Option of Noteholder To Elect Purchase" on the reverse of the Convertible Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third Business Day preceding the Designated Event Payment Date; (vi) that Noteholders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the second Business Day preceding the Designated Event Payment Date, or such longer period as may be required by law, a letter or a telegram, telex or facsimile transmission (receipt of which is confirmed and promptly followed by a letter) setting forth the name of the Noteholder, the principal amount of the Convertible Note or portion thereof the Noteholder delivered for purchase and a statement that such Noteholder is withdrawing his election to have the Convertible Note or portion thereof purchased; and (vii) that Noteholders whose Convertible Notes are being purchased only in part will be issued new Convertible Notes equal in principal amount to the unpurchased portion of the Convertible Notes surrendered, which unpurchased portion must be equal to $1,000 in principal amount or an integral multiple thereof. In addition, the notice shall contain all instructions and materials that the Company shall reasonably deem necessary to enable such Noteholders to tender Convertible Notes pursuant to the Designated Event Offer. (f) At least one Business Day prior to the Designated Event Payment Date, the Company shall irrevocably deposit with the Trustee or a Paying Agent in immediately available funds an amount equal to the Offer Amount to be held for payment in accordance with the terms of this Section 3.08. On the Designated Event Payment Date, the Company shall, to the extent lawful, (i) accept for payment the Convertible Notes or portions thereof tendered pursuant to the Designated Event Offer, (ii) deliver or cause to be delivered to the Trustee Convertible Notes so accepted and (iii) deliver to the Trustee an Officers' Certificate stating such Convertible Notes or portions thereof have been accepted for payment by the Company in accordance with the terms of this Section 3.08. The Paying Agent shall promptly (but in any case not later than ten (10) calendar days after the Designated Event Payment Date) mail or deliver to each tendering Noteholder an amount equal to the purchase price of the Convertible Notes tendered by such Noteholder, and the Trustee shall promptly authenticate and mail or deliver to such Noteholders a new Convertible Note equal in principal amount to any unpurchased portion of the Convertible Note surrendered, if any; provided, that each new Convertible Note shall be in a principal amount of $1,000 or an integral multiple thereof. Any Convertible Notes not so accepted shall be promptly mailed or delivered by or on behalf of the Company to the holder thereof. The Company will publicly announce the results of the Designated Event Offer on, or as soon as practicable after, the Designated Event Payment Date. (g) The Designated Event Offer shall be made by the Company in compliance with all applicable provisions of the Exchange Act, and all applicable tender offer rules promulgated -27- 34 thereunder, and shall include all instructions and materials that the Company shall reasonably deem necessary to enable such Noteholders to tender their Convertible Notes. ARTICLE IV Covenants SECTION 4.01. Payment of Convertible Notes. The Company shall pay the principal of and interest on the Convertible Notes on the dates and in the manner provided in the Convertible Notes. Principal and interest shall be considered paid on the date due if the Paying Agent (other than the Company or an Affiliate of the Company) holds on that date money designated for and sufficient to pay all principal and interest then due and such Paying Agent is not prohibited from paying such money to the Noteholders on that date pursuant to the terms of this Indenture. To the extent lawful, the Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace period) at the rate borne by the Convertible Notes, compounded semiannually. If the Paying Agent pays out any amount due under the terms of the Convertible Notes on or after the due date therefor on the assumption that the corresponding payment for such amount has been or will be made by the Company and such payment has in fact not been so made by the Company prior to the time that the Paying Agent makes such payment, then the company shall on demand reimburse the Paying Agent for the relevant amount, and pay interest to the Paying Agent on such amount from the date on which it is paid out to the date of reimbursement at a rate per annum equal to the cost to the Paying Agent of funding the amount paid out, as certified by the Paying Agent and expressed as a rate per annum. SECTION 4.02. SEC Reports. Whether or not required by the rules and regulations of the SEC, so long as any Convertible Notes are outstanding, the Company will file with the SEC and, if requested, furnish to the Trustee and to the holders of Convertible Notes all quarterly and annual financial information required to be contained in a filing with the SEC on Forms 10-Q and 10-K, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to annual information only, a report thereon by the Company's certified independent accountants. SECTION 4.03. Compliance Certificate. The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year of the Company, an Officers' Certificate stating that a review of the activities of the Company and its subsidiaries during the preceding fiscal year has been made under the supervision of the signing officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under, and complied with the covenants and conditions contained in, this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his knowledge the Company has kept, observed, performed and fulfilled each and every covenant, and complied with the covenants and conditions contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a Default or Event of Default shall have occurred, describing -28- 35 all such Defaults or Events of Default of which he may have knowledge) and that to the best of his knowledge no event has occurred and remains in existence by reason of which payments on account of the principal or of interest, if any, on the Convertible Notes are prohibited. One of the Officers signing such Officers' Certificate shall be either the Company's principal executive officer, principal financial officer or principal accounting officer. The Company will, so long as any of the Convertible Notes are outstanding, deliver to the Trustee, forthwith upon becoming aware of: (a) any Default, Event of Default or default in the performance of any covenant, agreement or condition contained in this Indenture; or (b) any event of default under any other mortgage, indenture or instrument as that term is used in Section 8.01(e), an Officers' Certificate specifying such Default, Event of Default or default. Immediately upon the occurrence of any event giving rise to Liquidated Damages in respect of the Convertible Notes in accordance with Section 11 of the form thereof or the termination of such Liquidated Damages, the Company shall give the Trustee notice of such Liquidated Damages or termination thereof and of the event giving rise to such Liquidated Damages or termination thereof (such notice to be contained in an Officers' Certificate), and prior to receipt of such Officers' Certificate the Trustee shall be entitled to assume that no such Liquidated Damages are owing or that no termination thereof has occurred, as the case may be. SECTION 4.04. Stay, Extension and Usury Laws. The Company covenants (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, 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 this Indenture; 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 Trustee, but will suffer and permit the execution of every such power as though no such law has been enacted. SECTION 4.05. Corporate Existence. Subject to Article VII hereof, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each subsidiary of the Company in accordance with the respective organizational documents of each subsidiary and the rights (charter and statutory), licenses and franchises of the Company and its subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any subsidiary, if the Board of Directors (as evidenced by a Board Resolution certified by the Secretary of the Company) shall determine in good faith that the preservation thereof is no longer desirable in the conduct of the business of the -29- 36 Company and its subsidiaries taken as a whole and that the loss thereof is not adverse in any material respect to the Noteholders. Notwithstanding the foregoing, the corporate existence of any Subsidiary may be terminated in connection with any Board-approved corporate restructuring or reorganization. SECTION 4.06. Taxes. The Company shall, and shall cause each of its subsidiaries to, pay prior to delinquency all taxes, assessments and governmental levies, except as contested in good faith and by appropriate proceedings. SECTION 4.07. Designated Event. (a) Upon the occurrence of a Designated Event, each holder of Convertible Notes shall have the right, in accordance with this Section 4.07 and Section 3.08 hereof, to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Convertible Notes pursuant to the terms of Section 3.08 (the "Designated Event Offer") at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest thereon to the Designated Event Payment Date (the "Designated Event Payment"). (b) Within 30 days following any Designated Event, the Company shall mail to each holder the notice provided by Section 3.08(e). SECTION 4.08. Shareholder Rights Plan. The Company shall take any and all action with respect to any shareholder rights plan or agreement of the Company in existence from time to time required to provide the holders of Common Stock issuable upon conversion of the Convertible Notes with the rights and other benefits such holder would have received if such holder's Common Stock were issued and outstanding on the date of the Indenture up to and including the date of determination. ARTICLE V Conversion SECTION 5.01. Conversion Privilege. A holder of a Convertible Note may convert the principal amount thereof (or any portion thereof that is an integral multiple of $1,000) into fully paid and nonassessable shares of Common Stock of the Company at any time after 90 days following the date of original issuance thereof and prior to the close of business (New York City time) on the date of the Convertible Note's maturity at the Conversion Price then in effect, except that, with respect to any Convertible Note called for redemption, such conversion right shall terminate at the close of business on the third Business Day immediately preceding the redemption date (unless the Company shall default in making the redemption payment when it becomes due, in which case the conversion right shall terminate on the date such default is cured). The number of shares of Common Stock issuable upon conversion of a Convertible Note is determined by dividing the principal amount of the Convertible Note converted by the conversion price in effect on the Conversion Date (the "Conversion Price"). -30- 37 The initial Conversion Price is stated in paragraph 10 of the Convertible Notes and is subject to adjustment as provided in this Article V. Provisions of this Indenture that apply to conversion of all of a Convertible Note also apply to conversion of a portion of it. A holder of Convertible Notes is not entitled to any rights of a holder of Common Stock (other than as provided in Section 4.08 hereof) until such holder of Convertible Notes has converted such Convertible Notes into Common Stock, and only to the extent that such Convertible Notes are deemed to have been converted into Common Stock under this Article V. SECTION 5.02. Conversion Procedure. To convert a Convertible Note, a holder must satisfy the requirements in paragraph 10 of the Convertible Notes. The date on which the holder satisfies all of those requirements is the conversion date (the "Conversion Date"). As soon as practicable after the Conversion Date, the Company shall deliver to the holder through the Conversion Agent a certificate for the number of whole shares of Common Stock issuable upon the conversion and a check for any fractional share determined pursuant to Section 5.03. The person in whose name the certificate is registered shall become the shareholder of record on the Conversion Date and, as of such date, such person's rights as a Noteholder shall cease; provided, however, that no surrender of a Convertible Note on any date when the stock transfer books of the Company shall be closed shall be effective to constitute the person entitled to receive the shares of Common Stock upon such conversion as the shareholder of record of such shares of Common Stock on such date, but such surrender shall be effective to constitute the person entitled to receive such shares of Common Stock as the shareholder of record thereof for all purposes at the close of business on the next succeeding day on which such stock transfer books are open; provided further, however, that such conversion shall be at the Conversion Price in effect on the date that such Convertible Note shall have been surrendered for conversion, as if the stock transfer books of the Company had not been closed. No payment or adjustment will be made for accrued and unpaid interest on a converted Convertible Note or for dividends or distributions on shares of Common Stock issued upon conversion of a Convertible Note, but if any holder surrenders a Convertible Note for conversion after the close of business on the record date for the payment of an installment of interest and prior to the opening of business on the next interest payment date, then, notwithstanding such conversion, the interest payable on such interest payment date shall be paid to the holder of such Convertible Note on such record date. In such event, any such Convertible Note not called for redemption, when surrendered for conversion, must be accompanied by payment in funds acceptable to the Company of an amount equal to the interest payable on such interest payment date on the portion so converted. If a holder converts more than one Convertible Note at the same time, the number of whole shares of Common Stock issuable upon the conversion shall be based on the total principal amount of Convertible Notes converted. -31- 38 Upon surrender of a Convertible Note that is converted in part, the Trustee shall authenticate for the holder a new Convertible Note equal in principal amount to the unconverted portion of the Convertible Note surrendered. SECTION 5.03. Fractional Shares. The Company will not issue fractional shares of Common Stock upon conversion of a Convertible Note. In lieu thereof, the Company will pay an amount in cash based upon the Daily Market Price of the Common Stock on the trading day prior to the date of conversion. SECTION 5.04. Taxes on Conversion. The issuance of certificates for shares of Common Stock upon the conversion of any Convertible Note shall be made without charge to the converting Noteholder for such certificates or for any tax in respect of the issuance of such certificates, and such certificates shall be issued in the respective names of, or in such names as may be directed by, the holder or holders of the converted Convertible Note; provided, however, that in the event that certificates for shares of Common Stock are to be issued in a name other than the name of the holder of the Convertible Note converted, such Convertible Note, when surrendered for conversion, shall be accompanied by an instrument of transfer, in form satisfactory to the Company, duly executed by the registered holder thereof or his duly authorized attorney; and provided further, however, that the Company and Conversion Agent shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the holder of the converted Convertible Note, and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid or is not applicable. SECTION 5.05. Company to Provide Stock. The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, solely for the purpose of issuance upon conversion of Convertible Notes as herein provided, a sufficient number of shares of Common Stock to permit the conversion of all outstanding Convertible Notes for shares of Common Stock. All shares of Common Stock which may be issued upon conversion of the Convertible Notes shall be duly authorized, validly issued, fully paid and nonassessable when so issued. SECTION 5.06. Adjustment of Conversion Price. The Conversion Price shall be subject to adjustment from time to time as follows: (a) In case the Company shall (1) pay a dividend in shares of Common Stock to holders of Common Stock, (2) make a distribution in shares of Common Stock to holders of Common Stock, (3) subdivide its outstanding shares of Common Stock into a greater number of shares of Common Stock or (4) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, the Conversion Price in effect immediately prior to such action shall be adjusted so that the holder of any Convertible Note thereafter surrendered for conversion -32- 39 shall be entitled to receive the number of shares of Common Stock which he would have owned immediately following such action had such Convertible Notes been converted immediately prior thereto. Any adjustment made pursuant to this subsection (a) shall become effective immediately after the record date in the case of a dividend, or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination. (b) In case the Company shall issue rights or warrants to substantially all holders of Common Stock entitling them (for a period commencing no earlier than the record date for the determination of holders of Common Stock entitled to receive such rights or warrants and expiring not more than 45 days after such record date) to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock) at a price per share less than the current market price (as determined pursuant to subsection (f) below) of the Common Stock on such record date, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to such record date by a fraction of which the numerator shall be the number of shares of Common Stock outstanding on such record date, plus the number of shares of Common Stock which the aggregate offering price of the offered shares of Common Stock (or the aggregate conversion price of the convertible securities so offered) would purchase at such current market price, and of which the denominator shall be the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock offered (or into which the convertible securities so offered are convertible). Such adjustments shall become effective immediately after such record date. (c) In case the Company shall distribute to all holders of Common Stock shares of any class of Capital Stock of the Company (other than Common Stock), evidences of indebtedness or other assets (including securities, but excluding those rights, warrants, dividends and distributions referred to in the preceding clauses (a) and (b) and dividends and distributions in connection with the liquidation, dissolution or winding up of the Company or paid exclusively in cash out of current or retained earnings), or shall distribute to substantially all holders of Common Stock rights or warrants to subscribe for securities (other than those securities referred to in subsection (b) above), then in each such case the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date of such distribution by a fraction of which the numerator shall be the current market price (determined as provided in subsection (f) below) of the Common Stock on the record date mentioned below less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive evidence of such fair market value and described in a Board Resolution) of the portion of the assets so distributed or of such subscription rights or warrants applicable to one share of Common Stock, and of which the denominator shall be such current market price of the Common Stock. Such adjustment shall become effective immediately after the record date for the determination of the holders of Common Stock entitled to receive such distribution. Notwithstanding the foregoing, in the event that the Company shall distribute rights or warrants to subscribe for additional shares of the Company's Capital Stock (other than the Common Stock referred to in subsection (b) above) ("Rights") pro rata to holders of Common Stock, the Company may, in lieu of making any adjustment pursuant to this Section 5.06, make proper provision so that each holder of a Convertible Note who converts such Convertible Note (or any portion thereof) after -33- 40 the record date for such distribution and prior to the expiration or redemption of the Rights shall be entitled to receive upon such conversion, in addition to the shares of Common Stock issuable upon such conversion (the "Conversion Shares"), a number of Rights to be determined as follows: (i) if such conversion occurs on or prior to the date for the distribution to the holders of Rights of separate certificates evidencing such Rights (the "Distribution Date"), the same number of Rights to which a holder of a number of shares of Common Stock equal to the number of Conversion Shares is entitled at the time of such conversion in accordance with the terms and provisions of and applicable to the Rights; and (ii) if such conversion occurs after the Distribution Date, the same number of Rights to which a holder of the number of shares of Common Stock into which the principal amount of the Convertible Note so converted was convertible immediately prior to the Distribution Date would have been entitled on the Distribution Date in accordance with the terms and provisions of and applicable to the Rights. (d) In case the Company shall, by dividend or otherwise, at any time distribute to all holders of its Common Stock cash (including any distributions of cash out of current or retained earnings of the Company but excluding any cash that is distributed as part of a distribution requiring a Conversion Price adjustment pursuant to paragraph (c) of this Section) in an aggregate amount that, together with the sum of (x) the aggregate amount of any other distributions to all holders of its Common Stock made in cash plus (y) all Excess Payments, in each case made within the 12 months preceding the date fixed for determining the shareholders entitled to such distribution (the "Distribution Record Date") and in respect of which no Conversion Price adjustment pursuant to paragraphs (c) or (e) of this Section or this paragraph (d) has been made, exceeds 15% of the product of the current market price per share (determined as provided in paragraph (f) of this Section) of the Common Stock on the Distribution Record Date times the number of shares of Common Stock outstanding on the Distribution Record Date (excluding shares held in the treasury of the Company), the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying such Conversion Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by this paragraph (d) by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (f) of this Section) of the Common Stock on the Distribution Record Date less the amount of such cash and other consideration (including any Excess Payments) so distributed applicable to one share (based on the pro rata portion of the aggregate amount of such cash and other consideration (including any Excess Payments), divided by the shares of Common Stock outstanding on the Distribution Record Date) of Common Stock and the denominator shall be such current market price per share (determined as provided in paragraph (f) of this Section) of the Common Stock on the Distribution Record Date, such reduction to become effective immediately prior to the opening of business on the day following the Distribution Record Date. (e) In case a tender offer or other negotiated transaction made by the Company or any Subsidiary of the Company for all or any portion of the Common Stock shall be consummated, if an Excess Payment is made in respect of such tender offer or other negotiated transaction and the amount of such Excess Payment, together with the sum of (x) the aggregate amount of all Excess Payments plus (y) the aggregate amount of all distributions to all holders of the Common Stock made in cash (specifically including distributions of cash out of retained -34- 41 earnings), in each case made within the 12 months preceding the date of payment of such current negotiated transaction consideration or expiration of such current tender offer, as the case may be (the "Purchase Date"), and as to which no adjustment pursuant to paragraph (c) or paragraph (d) of this Section or this paragraph (e) has been made, exceeds 15% of the product of the current market price per share (determined as provided in paragraph (f) of this Section) of the Common Stock on the Purchase Date times the number of shares of Common Stock outstanding (including any tendered shares but excluding any shares held in the treasury of the Company) on the Purchase Date, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying such Conversion Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by this paragraph (e) by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (f) of this Section) of the Common Stock on the Purchase Date less the amount of such Excess Payments and such cash distributions, if any, applicable to one share (based on the pro rata portion of the aggregate amount of such Excess Payments and such cash distributions, divided by the shares of Common Stock outstanding on the Purchase Date) of Common Stock and the denominator shall be such current market price per share (determined as provided in paragraph (f) of this Section) of the Common Stock on the Purchase Date, such reduction to become effective immediately prior to the opening of business on the day following the Purchase Date. (f) The current market price per share of Common Stock on any date shall be deemed to be the average of the Daily Market Prices for the shorter of (i) 30 consecutive Business Days ending on the last full trading day on the exchange or market referred to in determining such Daily Market Prices prior to the time of determination or (ii) the period commencing on the date next succeeding the first public announcement of the issuance of such rights or such warrants or such other distribution or such negotiated transaction through such last full trading day on the exchange or market referred to in determining such Daily Market Prices prior to the time of determination. (g) In any case in which this Section 5.06 shall require that an adjustment be made immediately following a record date for an event, the Company may elect to defer, until such event, issuing to the holder of any Convertible Note converted after such record date the shares of Common Stock and other Capital Stock of the Company issuable upon such conversion over and above the shares of Common Stock and other Capital Stock of the Company issuable upon such conversion only on the basis of the Conversion Price prior to adjustment; and, in lieu of the shares the issuance of which is so deferred, the Company shall issue or cause its transfer agents to issue due bills or other appropriate evidence of the right to receive such shares. SECTION 5.07. No Adjustment. No adjustment in the Conversion Price shall be required until cumulative adjustments amount to 1% or more of the Conversion Price as last adjusted; provided, however, that any adjustments which by reason of this Section 5.07 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article V shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. No adjustment need be made for rights to purchase Common Stock pursuant to a Company plan for reinvestment of dividends or interest. No adjustment need be made for a change in the par value or no par value of the Common Stock. -35- 42 SECTION 5.08. Other Adjustments. (a) In the event that, as a result of an adjustment made pursuant to Section 5.06 above, the holder of any Convertible Note thereafter surrendered for conversion shall become entitled to receive any shares of Capital Stock of the Company other than shares of its Common Stock, thereafter the Conversion Price of such other shares so receivable upon conversion of any Convertible Notes shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this Article V. (b) In the event that shares of Common Stock are not delivered after the expiration of any of the rights or warrants referred to in Section 5.06(b) and Section 5.06(c) hereof, the Conversion Price shall be readjusted to the Conversion Price which would otherwise be in effect had the adjustment made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. SECTION 5.09. Adjustments for Tax Purposes. The Company may, at its option, make such reductions in the Conversion Price, in addition to those required by Section 5.06 above, as it determines to be advisable in order that any stock dividend, subdivision of shares, distribution of rights to purchase stock or securities or distribution of securities convertible into or exchangeable for stock made by the Company to its shareholders will not be taxable to the recipients thereof. SECTION 5.10. Adjustments by the Company. The Company from time to time may, to the extent permitted by law, reduce the Conversion Price by any amount for any period of at least 20 days, in which case the Company shall give at least 15 days' notice of such reduction in accordance with Section 5.11, if the Board of Directors has made a determination that such reduction would be in the best interests of the Company, which determination shall be conclusive. SECTION 5.11. Notice of Adjustment. Whenever the Conversion Price is adjusted, the Company shall promptly mail to Noteholders at the addresses appearing on the Registrar's books and the Conversion Agent a notice of the adjustment and file with the Trustee an Officers Certificate briefly stating the facts requiring the adjustment and the manner of computing it. The certificate shall be conclusive evidence of the correctness of such adjustment. SECTION 5.12. Notice of Certain Transactions. In the event that: (1) the Company takes any action which would require an adjustment in the Conversion Price; (2) the Company takes any action that would require a supplemental indenture pursuant to Section 5.13; or (3) there is a dissolution or liquidation of the Company; a holder of a Convertible Note may wish to convert such Convertible Note into shares of Common Stock prior to the record date for or the effective date of the transaction so that he may receive the -36- 43 rights, warrants, securities or assets which a holder of shares of Common Stock on that date may receive. Therefore, the Company shall mail to Noteholders at the addresses appearing on the Registrar's books and the Conversion Agent and the Trustee a notice stating the proposed record or effective date, as the case may be. The Company shall mail the notice at least 15 days before such date; however, failure to mail such notice or any defect therein shall not affect the validity of any transaction referred to in clause (1), (2) or (3) of this Section 5.12. SECTION 5.13. Effect of Reclassifications, Consolidations, Mergers or Sales on Conversion Privilege. If any of the following shall occur, namely: (i) any reclassification or change of outstanding shares of Common Stock issuable upon conversion of Convertible Notes (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (ii) any consolidation or merger to which the Company is a party other than a merger in which the Company is the continuing corporation and which does not result in any reclassification of, or change (other than a change in name, or par value, or from par value to no par value, or from no par value to par value or as a result of a subdivision or combination) in, outstanding shares of Common Stock or (iii) any sale or conveyance of all or substantially all of the property or business of the Company as an entirety, then the Company, or such successor or purchasing corporation, as the case may be, shall, as a condition precedent to such reclassification, change, consolidation, merger, sale or conveyance, execute and deliver to the Trustee a supplemental indenture in form satisfactory to the Trustee providing that the holder of each Convertible Note then outstanding shall have the right to convert such Convertible Note into the kind and amount of shares of stock and other securities and property (including cash) receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock deliverable upon conversion of such Convertible Note immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. Such supplemental indenture shall provide for adjustments of the Conversion Price which shall be as nearly equivalent as may be practicable to the adjustments of the Conversion Price provided for in this Article V. The foregoing, however, shall not in any way affect the right a holder of a Convertible Note may otherwise have, pursuant to clause (ii) of the last sentence of subsection (c) of Section 5.06, to receive Rights upon conversion of a Convertible Note. If, in the case of any such consolidation, merger, sale or conveyance, the stock or other securities and property (including cash) receivable thereupon by a holder of Common Stock includes shares of stock or other securities and property of a corporation other than the successor or purchasing corporation, as the case may be, in such consolidation, merger, sale or conveyance, then such supplemental indenture shall also be executed by such other corporation and shall contain such additional provisions to protect the interests of the holders of the Convertible Notes as the Board of Directors of the Company shall reasonably consider necessary by reason of the foregoing. The provision of this Section 5.13 shall similarly apply to successive consolidations, mergers, sales or conveyances. In the event the Company shall execute a supplemental indenture pursuant to this Section 5.13, the Company shall promptly file with the Trustee an Officers' Certificate briefly stating the reasons therefor, the kind or amount of shares of stock or securities or property (including cash) receivable by holders of the Convertible Notes upon the conversion of their Convertible Notes -37- 44 after any such reclassification, change, consolidation, merger, sale or conveyance and any adjustment to be made with respect thereto. SECTION 5.14. Trustee's Disclaimer. The Trustee has no duty to determine when an adjustment under this Article V should be made, how it should be made or what such adjustment should be, but may accept as conclusive evidence of the correctness of any such adjustment, and shall be protected in relying upon the Officers' Certificate with respect thereto which the Company is obligated to file with the Trustee pursuant to Section 5.11. The Trustee makes no representation as to the validity or value of any securities or assets issued upon conversion of Convertible Notes, and the Trustee shall not be responsible for the Company's failure to comply with any provisions of this Article V. The Trustee shall not be under any responsibility to determine the correctness of any provisions contained in any supplemental indenture executed pursuant to Section 5.13, but may accept as conclusive evidence of the correctness thereof, and shall be protected in relying upon, the Officers' Certificate with respect thereto which the Company is obligated to file with the Trustee pursuant to Section 5.13. ARTICLE VI Subordination SECTION 6.01. Agreement to Subordinate. The Company, for itself and its successors, and each Noteholder, by his acceptance of Convertible Notes, agree that the payment of the principal of or interest on or any other amounts due on the Convertible Notes is subordinated in right of payment, to the extent and in the manner stated in this Article VI, to the prior payment in full of all existing and future Senior Debt. SECTION 6.02. No Payment on Convertible Notes if Senior Debt in Default. Anything in this Indenture to the contrary notwithstanding, no payment on account of principal of or redemption of, interest on or other amounts due on the Convertible Notes (including the making of a deposit pursuant to Section 8.01), and no redemption, purchase, or other acquisition of the Convertible Notes, shall be made by or on behalf of the Company (i) unless full payment of amounts then due for principal and interest and of all other amounts then due on all Senior Debt has been made or duly provided for pursuant to the terms of the instrument governing such Senior Debt, (ii) if, at the time of such payment, redemption, purchase or other acquisition, or immediately after giving effect thereto, there shall exist under any Senior Debt, or any agreement pursuant to which any Senior Debt is issued, any default, which default shall not have been cured or waived and which default shall have resulted in the full amount of such Senior Debt being declared due and payable or (iii) if, at the time of such payment, redemption, purchase or other acquisition, the Trustee shall have received written notice from the Representative of the holders of Designated Senior Debt (a "Payment Blockage Notice") that there exists under such Designated Senior Debt, or any agreement pursuant to which such Designated Senior Debt is issued, any default, which default shall not have been cured or waived, permitting the holders thereof to declare any amounts of such Designated -38- 45 Senior Debt due and payable, but only for the period (the "Payment Blockage Period") commencing on the date of receipt of the Payment Blockage Notice and ending (unless earlier terminated by notice given to the Trustee by the Representative of the holders of such Designated Senior Debt) on the earlier of (a) the date on which such event of default shall have been cured or waived or (b) 179 days from the receipt of the Payment Blockage Notice (unless the event of default relates to the failure to pay when due, the principal, premium, if any or interest on such Designated Senior Debt). Notwithstanding the provisions described in the immediately preceding sentence (other than in clauses (i) and (ii)), unless the holders of such Designated Senior Debt or the Representative of such holders shall have accelerated the maturity of such Designated Senior Debt (unless the event of default relates to the failure to pay when due, the principal, premium, if any or interest on such Designated Senior Debt), the Company may resume payments on the Convertible Notes after the end of such Payment Blockage Period. Not more than one Payment Blockage Notice may be given in any consecutive 360-day period, irrespective of the number of defaults with respect to Senior Debt during such period. In the event that, notwithstanding the provisions of this Section 6.02, payments are made by or on behalf of the Company in contravention of the provisions of this Section 6.02, such payments shall be held by the Trustee, any Paying Agent or the holders, as applicable, in trust for the benefit of, and shall be paid over to and delivered to, the Representative of the holders of Senior Debt or the trustee under the indenture or other agreement (if any), pursuant to which any instruments evidencing any Senior Debt may have been issued for application to the payment of all Senior Debt ratably according to the aggregate amounts remaining unpaid to the extent necessary to pay all Senior Debt in full in accordance with the terms of such Senior Debt, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. The Company shall give prompt written notice to the Trustee and any Paying Agent of any default or event of default under any Senior Debt or under any agreement pursuant to which any Senior Debt may have been issued. SECTION 6.03. Distribution on Acceleration of Convertible Notes; Dissolution and Reorganization; Subrogation of Convertible Notes. (a) If the Convertible Notes are declared due and payable because of the occurrence of an Event of Default, the Company shall give prompt written notice to the holders of all Senior Debt or to the trustee(s) for such Senior Debt of such acceleration. The Company may not pay the principal of or interest on or any other amounts due on the Convertible Notes until five days after such holders or trustee(s) of Senior Debt receive such notice and, thereafter, the Company may pay the principal of or interest on or any other amounts due on the Convertible Notes only if the provisions of this Article VI permit such payment. (b) Upon (i) any acceleration of the principal amount due on the Convertible Notes because of an Event of Default or (ii) any distribution of assets of the Company upon any dissolution, winding up, liquidation or reorganization of the Company (whether in bankruptcy, -39- 46 insolvency or receivership proceedings or upon an assignment for the benefit of creditors or any other dissolution, winding up, liquidation or reorganization of the Company): (1) the holders of all Senior Debt shall first be entitled to receive payment in full of the principal thereof, the interest thereon and any other amounts due thereon before the holders are entitled to receive payment on account of the principal of or interest on or any other amounts due on the Convertible Notes; (2) any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than securities of the Company as reorganized or readjusted or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in this Article with respect to the Convertible Notes, to the payment in full without diminution or modification by such plan of all Senior Debt), to which the holders or the Trustee would be entitled except for the provisions of this Article, shall be paid by the liquidating trustee or agent or other person making such a payment or distribution, directly to the holders of Senior Debt (or their representatives(s) or trustee(s) acting on their behalf), ratably according to the aggregate amounts remaining unpaid on account of the principal of or interest on and other amounts due on the Senior Debt held or represented by each, to the extent necessary to make payment in full of all Senior Debt remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Senior Debt; and (3) in the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than securities of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in this Article with respect to the Convertible Notes, to the payment in full without diminution or modification by such plan of Senior Debt), shall be received by the Trustee or the holders before all Senior Debt is paid in full, such payment or distribution shall be held in trust for the benefit of, and be paid over to upon request by a holder of the Senior Debt, the holders of the Senior Debt remaining unpaid (or their representatives) or trustee(s) acting on their behalf, ratably as aforesaid, for application to the payment of such Senior Debt until all such Senior Debt shall have been paid in full, after giving effect to any concurrent payment or distribution to the holders of such Senior Debt. Subject to the payment in full of all Senior Debt, the holders shall be subrogated to the rights of the holders of Senior Debt to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Debt until the principal of and interest on the Convertible Notes shall be paid in full and, for purposes of such subrogation, no such payments or distributions to the holders of Senior Debt of cash, property or securities which otherwise would have been payable or distributable to holders shall, as between the Company, its creditors other than the holders of Senior Debt, and the holders, be deemed to be a payment by the Company to or on -40- 47 account of the Senior Debt, it being understood that the provisions of this Article are and are intended solely for the purpose of defining the relative rights of the holders, on the one hand, and the holders of Senior Debt, on the other hand. Nothing contained in this Article or elsewhere in this Indenture or in the Convertible Notes is intended to or shall (i) impair, as between the Company and its creditors other than the holders of Senior Debt, the obligation of the Company, which is absolute and unconditional, to pay to the holders the principal of and interest on the Convertible Notes as and when the same shall become due and payable in accordance with the terms of the Convertible Notes, (ii) affect the relative rights of the holders and creditors of the Company other than holders of Senior Debt or, as between the Company and the Trustee, the obligations of the Company to the Trustee, or (iii) prevent the Trustee or the holders from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Debt in respect of cash, property and securities of the Company received upon the exercise of any such remedy. Upon distribution of assets of the Company referred to in this Article, the Trustee, subject to the provisions of Section 9.01 hereof, and the holders shall be entitled to rely upon a certificate of the liquidating trustee or agent or other person making any distribution to the Trustee or to the holders for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Senior Debt and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article. The Trustee, however, shall not be deemed to owe any fiduciary duty to the holders of Senior Debt. Nothing contained in this Article or elsewhere in this Indenture, or in any of the Convertible Notes, shall prevent the good faith application by the Trustee of any moneys which were deposited with it hereunder, prior to its receipt of written notice of facts which would prohibit such application, for the purpose of the payment of or on account of the principal of or interest on, the Convertible Notes unless, prior to the date on which such application is made by the Trustee, the Trustee shall be charged with actual notice under Section 6.03(d) hereof of the facts which would prohibit the making of such application. (c) The provisions of this Article shall not be applicable to any cash, properties or securities received by the Trustee or by any holder when received as a holder of Senior Debt and nothing in Section 9.11 hereof or elsewhere in this Indenture shall deprive the Trustee or such holder of any of its rights as such holder. (d) The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment of money to or by the Trustee in respect of the Convertible Notes pursuant to the provisions of this Article. The Trustee, subject to the provisions of Section 9.01 hereof, shall be entitled to assume that no such fact exists unless the Company or any holder of Senior Debt or any trustee therefor has given written notice thereof to the Trustee. Notwithstanding the provisions of this Article or any other provisions of this Indenture, the Trustee shall not be charged with knowledge of the existence of any fact which would prohibit the making of any payment of moneys to or by the Trustee in respect of the Convertible -41- 48 Notes pursuant to the provisions in this Article, unless, and until three Business Days after the Trustee shall have received written notice thereof from the Company or any holder or holders of Senior Debt or from any trustee therefor; and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of Section 9.01 hereof, shall be entitled in all respects conclusively to assume that no such facts exist; provided that if on a date not less than three Business Days immediately preceding the date upon which, by the terms hereof, any such moneys may become payable for any purpose (including, without limitation, the principal of or interest on any Convertible Note), the Trustee shall not have received with respect to such moneys the written notice provided for in this Section 6.03(d), then anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such moneys and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after such prior date. The Trustee shall be entitled to conclusively rely on the delivery to it of a written notice by a person representing himself to be a holder of Senior Debt (or a trustee on behalf of such holder) to establish that such notice has been given by a holder of Senior Debt (or a trustee on behalf of any such holder or holders). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any person as a holder of Senior Debt to participate in any payment or distribution pursuant to this Article, the Trustee may request such person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Debt held by such person, the extent to which such person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such person under this Article, and, if such evidence is not furnished, the Trustee may defer any payment to such person pending judicial determination as to the right of such person to receive such payment; nor shall the Trustee be charged with knowledge of the curing or waiving of any default of the character specified in Section 6.02 hereof or that any event or any condition preventing any payment in respect of the Convertible Notes shall have ceased to exist, unless and until the Trustee shall have received written notice to such effect. (e) The provisions of this Section 6.03 applicable to the Trustee shall (unless the context requires otherwise) also apply to any Paying Agent for the Company. SECTION 6.04. Reliance by Senior Debt on Subordination Provisions. Each holder of any Convertible Note by his acceptance thereof acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration for each holder of any Senior Debt, whether such Senior Debt was created or acquired before or after the issuance of the Convertible Notes, to acquire and continue to hold, or to continue to hold, such Senior Debt, and such holder of Senior Debt shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Debt. Notice of any default in the payment of any Senior Debt, except as expressly stated in this Article, and notice of acceptance of the provisions hereof are hereby expressly waived. Except as otherwise expressly provided herein, no waiver, forbearance or release by any holder of Senior Debt under such Senior Debt or under this Article shall constitute a release of any of the obligations or liabilities of the Trustee or holders of the Convertible Notes provided in this Article. -42- 49 SECTION 6.05. No Waiver of Subordination Provisions. Except as otherwise expressly provided herein, no right of any present or future holder of any Senior Debt 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 or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Debt may, at any time and from time to time, without the consent of, or notice to, the Trustee or the holders of the Convertible Notes, without incurring responsibility to the holders of the Convertible Notes and without impairing or releasing the subordination provided in this Article VI or the obligations hereunder of the holders of the Convertible Notes to the holders of Senior Debt, do any one or more of the following: (i) change the manner, place or terms of payment of, or renew or alter, Senior Debt, or otherwise amend or supplement in any manner Senior Debt or any instrument evidencing the same or any agreement under which Senior Debt is outstanding; (ii) sell, exchange, release or otherwise dispose of any property pledged, mortgaged or otherwise securing Senior Debt; (iii) release any person liable in any manner for the collection of Senior Debt; and (iv) exercise or refrain from exercising any rights against the Company or any other person. SECTION 6.06. Trustee's Relation to Senior Debt. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article in respect of any Senior Debt at any time held by it, to the same extent as any holder of Senior Debt, and nothing in Section 9.11 hereof or elsewhere in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Debt, the Trustee undertakes to perform or to observe only such of its covenants and obligations, as are specifically set forth in this Article, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not owe any fiduciary duty to the holders of Senior Debt but shall have only such obligations to such holders as are expressly set forth in this Article. Each holder of a Convertible Note by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Trustee his attorney-in-fact for any and all such purposes, including, in the event of any dissolution, winding up or liquidation or reorganization under any applicable bankruptcy law of the Company (whether in bankruptcy, insolvency or receivership proceedings or otherwise), the timely filing of a claim for the unpaid balance of such holder's Convertible Notes in the form required in such proceedings and the causing of such claim to be approved. If the Trustee does not file a claim or proof of debt in the form required in such proceedings prior to 30 days before the expiration of the time to file such claims or proofs, then any holder or holders of Senior Debt or their representative or representatives shall have the right to demand, sue for, collect, receive and receipt for the payments and distributions in respect of the Convertible Notes which are required to be paid or delivered to the holders of Senior Debt as provided in this Article and to file and prove all claims therefor and to take all such other action in -43- 50 the name of the holders or otherwise, as such holders of Senior Debt or representative thereof may determine to be necessary or appropriate for the enforcement of the provisions of this Article. SECTION 6.07. Other Provisions Subject Hereto. Expect as expressly stated in this Article, notwithstanding anything contained in this Indenture to the contrary, all the provisions of this Indenture and the Convertible Notes are subject to the provisions of this Article. However, nothing in this Article shall apply to or adversely affect the claims of, or payment to, the Trustee pursuant to Section 9.07. Notwithstanding the foregoing, the failure to make a payment on account of principal of or interest on the Convertible Notes by reason of any provision of this Article VI shall not be construed as preventing the occurrence of an Event of Default under Section 8.01. ARTICLE VII Successors SECTION 7.01. Merger, Consolidation or Sale of Assets. The Company may not consolidate or merge with or into any person (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets unless: (a) the Company is the surviving corporation or the entity or the person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (b) the entity or person formed by or surviving any such consolidation or merger (if other than the Company) assumes all the Obligations of the Company, pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee, under the Convertible Notes and the Indenture; (c) such sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the Company's properties or assets shall be as an entirety or virtually as an entirety to one person and such person shall have assumed all the Obligations of the Company, pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee, under the Convertible Notes and the Indenture; (d) immediately after such transaction no Default or Event of Default exists; and (e) the Company or such person shall have delivered to the Trustee an Officers', Certificate and an Opinion of Counsel, each stating that such transaction and the supplemental indenture comply with the Indenture and that all conditions precedent in the Indenture relating to such transaction have been satisfied. -44- 51 SECTION 7.02. Successor Corporation Substituted. Upon any consolidation or merger, or any sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the assets of the Company in accordance with Section 7.01 hereof, the successor corporation formed by such consolidation or into or with which the Company is merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor person has been named as the Company herein; provided, however, that the predecessor Company in the case of a sale, assignment, transfer, lease, conveyance or other disposition shall not be released from the obligation to pay the principal of and interest on the Convertible Notes. ARTICLE VIII Defaults and Remedies SECTION 8.01. Events of Default. An "Event of Default" occurs if: (a) the Company defaults in the payment of interest on any Convertible Note when the same becomes due and payable, whether or not such payments shall be prohibited by Article VI, and the Default continues for a period of 30 days after the date due and payable; (b) the Company defaults in the payment of the principal of any Convertible Note when the same becomes due and payable at maturity, upon redemption or otherwise, whether or not such payment shall be prohibited by Article VI; (c) the Company fails to observe or perform any covenant or agreement contained in Section 4.07 hereof, whether or not such purchase shall be prohibited by Article VI; (d) the Company fails to observe or perform any other covenant or agreement contained in this Indenture or the Convertible Notes, required by it to be performed and the Default continues for a period of 60 days after the receipt of written notice from the Trustee to the Company or from the holders of 25% in aggregate principal amount of the then outstanding Convertible Notes to the Company and the Trustee stating that such notice is a "Notice of Default"; (e) there is a default under any mortgage, indenture or instrument 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 Material Subsidiary of the Company (or the payment of which is guaranteed by the Company or any Material Subsidiary of the Company), whether such Indebtedness or guarantee now exists or is created after the Issuance Date, which default (i) is caused by a failure to pay when due principal of or interest -45- 52 on such Indebtedness within the grace period provided for in such Indebtedness (which failure continues beyond any applicable grace period) (a "Payment Default") or (ii) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there is a Payment Default or the maturity of which has been so accelerated, aggregates $7 million or more; (f) a final, non-appealable judgment or final, non-appealable judgments (other than any judgment as to which a reputable insurance company has accepted full liability) for the payment of money are entered by a court or courts of competent jurisdiction against the Company or any Material Subsidiary of the Company and remain undischarged for a period (during which execution shall not be effectively stayed) of 60 days, provided that the aggregate of all such judgments exceeds $5 million; (g) the Company or any Material Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (i) commences a voluntary case, (ii) consents to the entry of an order for relief against it in an involuntary case in which it is the debtor, (iii) consents to the appointment of a Custodian of it or for all or substantially all of its property, (iv) makes a general assignment for the benefit of its creditors, or (v) makes the admission in writing that it generally is unable to pay its debts as the same become due; or (h) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company or any Material Subsidiary of the Company in an involuntary case, (ii) appoints a Custodian of the Company or any Material Subsidiary of the Company or for all or substantially all of its property, and the order or decree remains unstayed and in effect for 60 days, or (iii) orders the liquidation of the Company or any Material Subsidiary of the Company, and the order or decree remains unstayed and in effect for 60 days. The term "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. SECTION 8.02. Acceleration. If an Event of Default (other than an Event of Default specified in clauses (g) and (h) of Section 8.01 hereof) occurs and is continuing, the Trustee by written notice to the Company, or the Noteholders of at least 25% in principal amount of the then outstanding Convertible Notes by notice to the Company and the Trustee, may declare all the Convertible Notes to be due and payable. Upon such declaration, the principal of, premium, if any, and accrued and unpaid interest on the Convertible Notes shall be due and payable immediately. If an Event of Default specified in clause (g) or (h) of Section 8.01 hereof occurs, such an amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Noteholder. The Noteholders of a majority in aggregate principal amount of the then outstanding Convertible Notes by written notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree -46- 53 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. SECTION 8.03. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal or interest on the Convertible Notes or to enforce the performance of any provision of the Convertible Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Convertible Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Noteholder 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 8.04. Waiver of Past Defaults. The Noteholders of a majority in aggregate principal amount of the then outstanding Convertible Notes by notice to the Trustee may waive an existing Default or Event of Default and its consequences except a continuing Default or Event of Default in the payment of the Designated Event Payment or the principal of, or interest on, any Convertible Note. When a Default or Event of Default is waived, it is cured and ceases; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 8.05. Control by Majority. The Noteholders of a majority in principal amount of the then outstanding Convertible Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, is unduly prejudicial to the rights of other Noteholders, or would involve the Trustee in personal liability. SECTION 8.06. Limitation on Suits. A Noteholder may pursue a remedy with respect to this Indenture or the Convertible Notes only if: (a) the Noteholder gives to the Trustee written notice of a continuing Event of Default; (b) the Noteholders of at least 25% in principal amount of the then outstanding Convertible Notes make a request to the Trustee to pursue the remedy; (c) such Noteholder or Noteholders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and -47- 54 (e) during such 60-day period the Noteholders of a majority in principal amount of the then outstanding Convertible Notes do not give the Trustee a direction inconsistent with the request. A Noteholder may not use this Indenture to prejudice the rights of another Noteholder or to obtain a preference or priority over another Noteholder. SECTION 8.07. Rights of Noteholders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Noteholder of a Convertible Note to receive payment of principal and interest on the Convertible Note, on or after the respective due dates expressed in the Convertible Note, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Noteholder made pursuant to this Section. SECTION 8.08. Collection Suit by Trustee. If an Event of Default specified in Section 8.01(a) or (b) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal and interest remaining unpaid on the Convertible Notes and interest on overdue principal and interest and such further amount as shall be sufficient to cover the costs and, to the extent lawful, expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 8.09. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Noteholders allowed in any judicial proceedings relative to the Company, its creditors or its property. Nothing contained herein shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Noteholder any plan of reorganization, arrangement, adjustment or composition affecting the Convertible Notes or the rights of any Noteholder thereof, or to authorize the Trustee to vote in respect of the claim of any Noteholder in any such proceeding. SECTION 8.10. Priorities. If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 9.07 hereof; Second: to the holders of Senior Debt to the extent required by Article VI; Third: to Noteholders for amounts due and unpaid on the Convertible Notes for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Convertible Notes for principal and interest, respectively; and Fourth: to the Company. -48- 55 Except as otherwise provided in Section 2.12 hereof, the Trustee may fix a record date and payment date for any payment to Noteholders made pursuant to this Section. SECTION 8.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, 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. This Section does not apply to a suit by the Trustee, a suit by a holder pursuant to Section 8.07 hereof, or a suit by Noteholders of more than 10% in principal amount of the then outstanding Convertible Notes. ARTICLE IX Trustee SECTION 9.01. Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) the Trustee need perform only those duties that are specifically set forth in this Indenture and no others and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own wilful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section 9.01; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 8.05 hereof. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section 9.01. No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. -49- 56 (e) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 9.02. Rights of Trustee. (a) The Trustee may rely on any document reasonably believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it (unless other evidence be herein specifically prescribed) may require an Officers' Certificate or an Opinion of Counsel, or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. (c) The Trustee may act through agents and nominees and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action that it takes or omits to take in good faith, without negligence or wilful misconduct, and that it reasonably believes to be authorized or within its rights or powers. (e) The Trustee shall not be charged with knowledge of any Event of Default under subsection (c), (d), (e) or (f) of Section 8.01 or of the identity of any Material Subsidiary unless either (1) a Trust Officer assigned to its Institutional Trust Administration shall have actual knowledge thereof, or (2) the Trustee shall have received notice thereof in accordance with Section 12.02 hereof from the Company or any holder. SECTION 9.03. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Convertible Notes and may otherwise deal with the Company or an Affiliate with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to Sections 9.10 and 9.11 hereof. SECTION 9.04. Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Convertible Notes, it shall not be accountable for the Company's use of the proceeds from any Convertible Notes authenticated and delivered by the Trustee in conformity with the provisions of this Indenture, and it shall not be responsible for any statement of the Company in the Indenture or any statement in the Convertible Notes other than its authentication. SECTION 9.05. Notice of Defaults. If a Default or Event of Default occurs and is continuing and if it is actually known to the Trustee, the Trustee shall mail to Noteholders a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or -50- 57 Event of Default in payment on any Convertible Note, the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of Noteholders. SECTION 9.06. Reports by Trustee to Noteholders. Within 60 days after the reporting date stated in Section 12.10, the Trustee shall mail to Noteholders a brief report dated as of such reporting date that complies with TIA Section 313(a) if and to the extent required by such Section 313(a). The Trustee also shall comply with TIA Section 313(b)(2). The Trustee shall also transmit by mail all reports as required by TIA Section 313(c). A copy of each report at the time of its mailing to Noteholders shall be filed with the SEC and each stock exchange on which the Convertible Notes are listed. The Company shall notify the Trustee when the Convertible Notes are listed on any stock exchange. SECTION 9.07. Compensation and Indemnity. The Company shall pay to the Trustee from time to time reasonable compensation for its services hereunder. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable and duly documented disbursements, expenses and advances incurred or made by it including amounts payable to the Paying Agent pursuant to the second paragraph of Section 4.01 hereunder. Such disbursements and expenses may include the reasonable and duly documented disbursements, compensation and expenses of the Trustee's agents and counsel but shall not include amounts to be paid to any co- agents appointed by the Company. The Company shall indemnify the Trustee and its officers, directors, employees and all other agents against any loss or liability incurred by it except as set forth in the next paragraph. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable and duly documented fees, disbursements and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through negligence or bad faith. To secure the Company's payment obligations in this Section, the Trustee shall have a lien prior to the Convertible Notes on all money or property held or collected by the Trustee, except money or property held in trust to pay principal and interest on particular Convertible Notes. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 8.01(g) or (h) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. -51- 58 The provisions of this Section 9.07 shall survive the termination of this Indenture, and removal or resignation of the Trustee, as provided by Section 10.01 hereof. SECTION 9.08. Replacement of Trustee. A resignation or removal of the Trustee and appointment of a Successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign by so notifying the Company. The Noteholders of a majority in principal amount of the then outstanding Convertible Notes may remove the Trustee by so notifying the Trustee and the Company. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 9.10 hereof, unless the Trustee's duty to resign is stayed as provided in TIA Section 310(b); (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a Custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Noteholders of a majority in principal amount of the then outstanding Convertible Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Noteholders of at least 10% in principal amount of the then outstanding Convertible Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 9.10 hereof, unless the Trustee's duty to resign is stayed as provided in TIA Section 310(b), any Noteholder who has been a bona fide holder of a Convertible Note for at least six months may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, the Company shall promptly pay all amounts due and payable to the retiring Trustee pursuant to Section 9.07 hereof and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Noteholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 9.07 hereof. -52- 59 Notwithstanding replacement of the Trustee pursuant to this Section 9.08, the Company's obligations under Section 9.07 hereof shall continue for the benefit of the retiring trustee with respect to expenses and liabilities incurred by it prior to such replacement. SECTION 9.09. Successor Trustee by Merger, Etc. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. SECTION 9.10. Eligibility; Disqualification. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1) and (5). The Trustee shall always have a combined capital and surplus as stated in Section 12.10 hereof. The Trustee is subject to TIA Section 310(b). SECTION 9.11. Preferential Collection of Claims Against Company. The Trustee is subject to TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. SECTION 9.12. Sections Applicable to Registrar, Paying Agent and Conversion Agent. The term "Trustee" as used in Sections 9.01, 9.02, 9.03, 9.04 and 9.07 hereof shall (unless the context requires otherwise) be construed as extending to and including the Trustee acting in its capacity, if any, as Registrar, Paying Agent and Conversion Agent. ARTICLE X Discharge of Indenture SECTION 10.01. Termination of Company's Obligations. This Indenture shall cease to be of further effect (except that the Company's obligations under Sections 9.07 and 10.02 hereof shall survive) when all outstanding Convertible Notes theretofore authenticated and issued have been delivered to the Trustee for cancellation and the Company has paid all sums payable hereunder. Thereupon, the Trustee upon written request of the Company, shall acknowledge in writing the discharge of the Company's obligations under this Indenture, except for those surviving obligations specified above. SECTION 10.02. Repayment to Company. The Trustee and the Paying Agent shall promptly pay to the Company upon written request any excess money or securities held by them at any time. The Trustee and the Paying Agent shall pay to the Company upon written request any money held by them for the payment of principal or interest that remains unclaimed for two years after the date upon which such payment shall have become due; provided, however, that the Company shall have first caused notice of such payment to the Company of such unclaimed money to be mailed to each Noteholder entitled thereto no less than 30 days prior to such payment. After -53- 60 payment to the Company, the Trustee and the Paying Agent shall have no further liability with respect to such money and Noteholders entitled to the money must look to the Company for payment as general creditors unless any applicable abandoned property law designates another person. ARTICLE XI Amendments, Supplements and Waivers SECTION 11.01. Without Consent of Noteholders. The Company and the Trustee may amend or supplement this Indenture or the Convertible Notes without the consent of any Noteholder: (a) to cure any ambiguity, defect or inconsistency; (b) to comply with Sections 5.13 and 7.01 hereof; (c) to provide for uncertificated Convertible Notes in addition to certificated Convertible Notes; (d) to make any change that does not adversely affect the legal rights hereunder of any Noteholder; (e) to qualify this Indenture under the TIA or to comply with the requirements of the SEC in order to maintain the qualification of the Indenture under the TIA; or (f) to make any change that provides any additional rights or benefits to the holders of Convertible Notes or to reduce the Conversion Price. An amendment under this Section may not make any change that adversely affects the rights under Article VI of any holder of Senior Debt then outstanding unless the holders of such Senior Debt (or any group or representative thereof authorized to give a consent) consent to such change. SECTION 11.02. With Consent of Noteholders. Subject to Section 8.07 hereof, the Company and the Trustee may amend or supplement this Indenture or the Convertible Notes with the written consent (including consents obtained in connection with any tender offer or exchange offer for Convertible Notes) of the Noteholders of at least a majority in principal amount of the then outstanding Convertible Notes. Subject to Sections 8.04 and 8.07 hereof, the Noteholders of a majority in principal amount of the Convertible Notes then outstanding may also by their written consent (including consents obtained in connection with any tender offer or exchange offer for Convertible Notes) waive any existing Default as provided in Section 8.04 or waive compliance in a particular instance by the Company with any provision of this Indenture or the Convertible Notes. However, without the consent of each Noteholder affected, an amendment, supplement or waiver -54- 61 under this Section may not (with respect to any Convertible Notes held by a nonconsenting Noteholder): (a) reduce the amount of Convertible Notes whose Noteholders must consent to an amendment, supplement or waiver; (b) reduce the rate of or change the time for payment of interest on any Convertible Note; (c) reduce the principal of or change the fixed maturity of any Convertible Note or alter the redemption provisions with respect thereto; (d) make any Convertible Note payable in money other than that stated in the Convertible Note; (e) make any change in Section 8.04, 8.07 or 11.02 hereof (this sentence); (f) waive a default in the payment of the Designated Event Payment or the principal of, or interest on, any Convertible Note (other than as provided in Section 8.04); (g) waive a redemption payment payable on any Convertible Note; (h) make any change that adversely affects the right of Noteholders to convert Convertible Notes into Common Stock of the Company; or (i) make any change in Articles V or VI hereof that adversely affects the interests of the Noteholders. To secure a consent of the Noteholders under this Section 11.02, it shall not be necessary for the Noteholders to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. An amendment under this Section may not make any change that adversely affects the rights under Article VI of any holder of Senior Debt then outstanding unless the holders of such Senior Debt (or any group or representative thereof authorized to give a consent) consent to such change. Neither the Company nor any of its Subsidiaries shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any holder of Convertible Notes or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Convertible Notes unless such consideration is offered to be paid or agreed to be paid to all holders of the Convertible Notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. -55- 62 After an amendment, supplement or waiver under this Section becomes effective, the Company shall mail to Noteholders a notice briefly describing the amendment or waiver. SECTION 11.03. Compliance with Trust Indenture Act. Every amendment to this Indenture or the Convertible Notes shall be set forth in a supplemental indenture that complies with the TIA as then in effect. SECTION 11.04. Revocation and Effect of Consents. Until an amendment, supplement or waiver becomes effective, a consent to it by a Noteholder of a Convertible Note is a continuing consent by the Noteholder and every subsequent Noteholder of a Convertible Note or portion of a Convertible Note that evidences the same debt as the consenting Noteholder's Convertible Note, even if notation of the consent is not made on any Convertible Note. However, any such Noteholder or subsequent Noteholder may revoke the consent as to such Noteholder's Convertible Note or portion of a Convertible Note if the Trustee receives the notice of revocation before the date on which the Trustee receives an Officer's Certificate certifying that the Noteholders of the requisite principal amount of Convertible Notes have consented to the amendment, supplement or waiver. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Noteholders entitled to consent to any amendment, supplement or waiver. If a record date is fixed, then notwithstanding the provisions of the immediately preceding paragraph, those persons who were Noteholders at such record date (or their duly designated proxies), and only those persons, shall be entitled to consent to such amendment, supplement or waiver or to revoke any consent previously given, whether or not such persons continue to be Noteholders after such record date. No consent shall be valid or effective for more than 90 days after such record date unless consents from Noteholders of the principal amount of Convertible Notes required hereunder for such amendment or waiver to be effective shall have also been given and not revoked within such 90-day period. After an amendment, supplement or waiver becomes effective it shall bind every Noteholder, unless it is of the type described in any of clauses (a) through (i) of Section 11.02 hereof. In such case, the amendment or waiver shall bind each Noteholder who has consented to it and every subsequent Noteholder that evidences the same debt as the consenting Noteholder's Convertible Note. SECTION 11.05. Notation on or Exchange of Convertible Notes. The Trustee may place an appropriate notation about an amendment or waiver on any Convertible Note thereafter authenticated. The Company in exchange for all Convertible Notes may issue and the Trustee shall authenticate new Convertible Notes that reflect the amendment or waiver. SECTION 11.06. Trustee Protected. The Trustee shall sign all supplemental indentures, except that the Trustee may, but need not, sign any supplemental indenture that adversely affects its rights. -56- 63 ARTICLE XII Miscellaneous SECTION 12.01. Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies, or conflicts with another provision which is automatically deemed to be incorporated in this Indenture by the TIA, the incorporated provision shall control. SECTION 12.02. Notices. Any notice or communication by the Company or the Trustee to the other is duly given if in writing and delivered in person or mailed by first-class mail to the other's address stated in Section 12.10 hereof. The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication to a Noteholder shall be mailed by first-class mail to his address shown on the register kept by the Registrar. Failure to mail a notice or communication to a Noteholder or any defect in it shall not affect its sufficiency with respect to other Noteholders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Noteholders, it shall mail a copy to the Trustee and each Agent at the same time. All other notices or communications shall be in writing. In case by reason of the suspension of regular mail service, or by reason of any other cause, it shall be impossible to mail any notice as required by the Indenture, then such method of notification as shall be made with the approval of the Trustee shall constitute a sufficient mailing of such notice. SECTION 12.03. Communication by Noteholders with Other Noteholders. Noteholders may communicate pursuant to TIA Section 312(b) with other Noteholders with respect to their rights under this Indenture or the Convertible Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 12.04. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and -57- 64 (b) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 12.05. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than pursuant to Section 4.03) shall include: (a) a statement that the person signing such certificate or rendering such opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such person, such person has made such examination or investigation as is necessary to enable such person to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 12.06. Rules by Trustee and Agents. The Trustee may make reasonable rules for action by, or a meeting of, Noteholders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. SECTION 12.07. Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions in the State of New York are not required to be open. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. If any other operative date for purposes of this Indenture shall occur on a Legal Holiday then for all purposes the next succeeding day that is not a Legal Holiday shall be such operative date. SECTION 12.08. No Recourse Against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Convertible Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Noteholder by accepting a Convertible Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Convertible Notes. SECTION 12.09. Counterparts. This Indenture 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. -58- 65 SECTION 12.10. Variable Provisions. "Officer" means the Chairman of the Board, the President, any Vice-President, the Treasurer, the Secretary, any Assistant Treasurer or any Assistant Secretary of the Company. The Company initially appoints the Trustee as Paying Agent, Registrar, Conversion Agent and authenticating agent and the Trustee hereby accepts such appointments. The first certificate pursuant to Section 4.03 hereof shall be for the fiscal year ending on March 31, 1997. The reporting date for Section 9.06 hereof is April 1 of each year. The first reporting date is April 1, 1997. The Trustee shall always have a combined capital and surplus of at least $100,000,000 as set forth in its most recent published annual report of condition. The Company's address is: ARV Assisted Living, Inc. 245 Fischer Avenue, Suite D-1 Costa Mesa, California 92626 Telephone number: (714) 751-7400 Telefax number: (714) 751-1743 The Trustee's address is: The Chase Manhattan Bank, N.A. 4 Chase MetroTech Center, 3rd Floor Brooklyn, NY 11245 Attention: Corporate Trust Administration Telephone number: (718) 242-2743 Telefax number: (718) 242-5885 SECTION 12.11. GOVERNING LAW. THE INTERNAL LAWS OF THE STATE OF NEW YORK SHALL GOVERN THIS INDENTURE AND THE SECURITIES, WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF. SECTION 12.12. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or an Affiliate. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 12.13. Successors. All agreements of the Company in this Indenture and the Convertible Notes shall bind its successor. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 12.14. Severability. In case any provision in this Indenture or in the Convertible Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. -59- 66 67 SECTION 12.15. Table of Contents, Headings, Etc. The Table of Contents, Cross- Reference Table, and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the date first written above. ARV ASSISTED LIVING, INC. as Company, By /s/ Gary L. Davidson ----------------------------- Name: Gary L. Davidson Title: Chairman of the Board THE CHASE MANHATTAN BANK, N.A., as Trustee, By /s/ Rossana E. Abueva ----------------------------- Name: Rossana E. Abueva Title: Vice President -60- 68 STATE OF CALIFORNIA, ) ) ss.: COUNTY OF ORANGE ) On APRIL 2, 1996, before me, SININE KIM, NOTARY PUBLIC, personally appeared GARY L. DAVIDSON, personally known to me (or proved to me on the basis of satisfactory evidence) to be person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. SININE KIM /s/ SININE KIM COMM. #1059405 - ------------------------ [SEAL] NOTARY PUBLIC -CALIFORNIA Sinine Kim ORANGE COUNTY MY COMM. EXPIRES MAY 21, 1999 -61- 69 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) Personally appeared before me, the undersigned authority in and for the said county and state, on this 3rd day of April, 1996, within my jurisdiction, the within named Rossana E. Abuera who acknowledged that she is Vice President of The Chase Manhattan Bank, N.A., and that for and on behalf of the said corporation, and as its act and deed she executed the above and foregoing instrument, after first haying duly authorized by said corporation so to do. /s/ MARGARET M. PRICE --------------------------------- NOTARY PUBLIC Margaret M. Price Notary Public, State of New York No. 24-4980599 Qualified in Kings County Commission Expires April 22, 1997 -62- 70 EXHIBIT A-1 [FORM OF FACE OF NOTE] [Global Notes Legend](1) UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. [Restricted Convertible Notes Legend](2) "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS SECURITY MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE THIRD ANNIVERSARY (OR SUCH SHORTER PERIOD AS MAY THEN BE APPLICABLE UNDER THE THE SECURITIES ACT REGARDING THE HOLDING PERIOD FOR SECURITIES UNDER RULE 144(k) OF THE SECURITIES ACT OR ANY SUCCESSOR RULE) OF THE ISSUANCE HEREOF (OR ANY PREDECESSOR SECURITY HERETO) OR (Y) BY ANY HOLDER THAT WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN (1) TO THE COMPANY, (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY) AND A CERTIFICATE WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE, (3) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), AND, IF SUCH TRANSFER IS BEING EFFECTED BY CERTAIN TRANSFERORS SPECIFIED IN THE INDENTURE (AS DEFINED BELOW) PRIOR TO THE EXPIRATION OF THE "40 DAY RESTRICTED PERIOD" (WITHIN THE MEANING OF RULE 903(c)(3) OF REGULATION S UNDER THE SECURITIES ACT), A CERTIFICATE WHICH MAY BE OBTAINED 71 FROM THE COMPANY OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a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c)(3) OF REGULATION S UNDER THE SECURITIES ACT), (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, AND A CERTIFICATE WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND A CERTIFICATE WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTION. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS SECURITY AGREES IT WILL FURNISH TO THE COMPANY AND THE TRUSTEE SUCH CERTIFICATES AND OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF THIS SECURITY COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2) AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT A1-2 72 AND THAT IT IS HOLDING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (o)(2) OF RULE 902 UNDER) REGULATION S UNDER THE SECURITIES ACT." - ------------------------------------ 1 Applicable to Global Notes only 2 Applicable to certificated Restricted Convertible Notes only A1-3 73 No. ________ CUSIP No. ________ ARV ASSISTED LIVING, INC. 6 3/4% CONVERTIBLE SUBORDINATED NOTES DUE 2006 ARV ASSISTED LIVING, INC. ARV Assisted Living, Inc., a California corporation (the "Company") promises to pay to ____________________________________ or registered assigns, the principal sum [indicated on Schedule A hereof] * [of _________ Dollars] ** on April 1, 2006, and to pay interest thereon beginning October 1, 1996 at the rate of 6 3/4% per annum. Interest Payment Dates: April 1 and October 1, commencing October 1, 1996 Record Dates: March 15 and September 15 Reference is hereby made to the further provisions of this Convertible Note set forth on the reverse hereof which further provisions shall for all purposes have the same effect as if set forth at this place. - --------------------- * Applicable to Global Notes only. ** Applicable to certificated Convertible Notes only. A1-4 74 IN WITNESS WHEREOF, ARV Assisted Living, Inc. has caused this Convertible Note to be signed manually or by facsimile by its duly authorized officers and a facsimile of its corporate seal to be affixed hereto or imprinted hereon. Dated: _________________ ARV ASSISTED LIVING, INC. By________________________ By________________________ [Seal] TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 6 3/4% Convertible Subordinated Notes due 2006 described in the within-mentioned Indenture. The Chase Manhattan Bank, N.A., as Trustee, By_________________________________ Authorized Officer A1-5 75 ARV ASSISTED LIVING, INC. 6 3/4% Convertible Subordinated Note Due 2006 1. Interest. ARV ASSISTED LIVING, INC., a California corporation (the "Company"), is the issuer of this 6 3/4% Convertible Subordinated Note due 2006 (the "Convertible Note"). The Company promises to pay interest on the Convertible Notes in cash semiannually on each April 1 and October 1, commencing on October 1, 1996, to holders of record on the immediately preceding March 15 and September 15. Interest on the Convertible Notes will accrue from the most recent date to which interest has been paid, or if no interest has been paid, from April 3, 1996. Interest will be computed on the basis of a 360-day year of twelve 30-day months. To the extent lawful, the Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace period) at the rate borne by the Convertible Notes, compounded annually. 2. Method of Payment. The Company will pay interest on the Convertible Notes (except defaulted interest) to the persons who are registered holders of the Convertible Notes at the close of business on the record date for the next interest payment date even though Convertible Notes are canceled after the record date and on or before the interest payment date. The Noteholder hereof must surrender Convertible Notes to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay principal and interest by check payable in such money. It may mail by first class mail an interest check to a holder's registered address. 3. Paying Agent and Registrar. The Trustee will initially act as Paying Agent, Registrar and Conversion Agent. The Company may change any Paying Agent, Registrar, co- registrar or Conversion Agent without prior notice. The Company or any of its Affiliates may act in any such capacity. 4. Indenture. The Company issued the Convertible Notes under an indenture, dated as of April 3, 1996 (the "Indenture"), between the Company and The Chase Manhattan Bank, N.A., as Trustee. The terms of the Convertible Notes include those stated in the Indenture and those made part of the Indenture by the Trust Indenture Act of 1939 (15 U.S. Code SectionSection77aaa-77bbbb) as in effect on the date of the Indenture. The Convertible Notes are subject to, and qualified by, all such terms, certain of which are summarized hereon, and Noteholders are referred to the Indenture and such Act for a statement of such terms. The Convertible Notes are unsecured obligations of the Company limited to (except as otherwise provided in the Indenture) up to an aggregate principal amount of $50,000,000 (plus up to $7,500,000 aggregate principal amount of Convertible Notes that may be sold by the Company pursuant to the over allotment option granted pursuant to the Purchase A1-6 76 Agreement), and are subordinated in right of payment to all existing and future Senior Debt of the Company as provided in the Indenture. Any holder of this Convertible Note shall be deemed to have agreed to and be bound by all the terms and conditions contained in the Indenture applicable to a holder of a Convertible Note. 5. Optional Redemption. The Convertible Notes are not subject to redemption at the Company's option prior to April 1, 1999. On such date and thereafter, the Convertible Notes will be subject to redemption at the option of the Company, in whole or in part (in any integral multiple of $1,000), upon not less than 20 nor more than 60 days' prior notice by first class mail at the following redemption prices (expressed as percentages of the principal amount set forth below), together with accrued interest up to but not including the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on an interest payment date), if redeemed during the 12-month period beginning April 1 of the years indicated:
Redemption Year Price ---- ----------- 1999...........................104.725% 2000...........................104.050% 2001...........................103.375% 2002...........................102.700% 2003...........................102.025% 2004...........................101.350% 2005...........................100.675%
On or after the redemption date, interest will cease to accrue on the Convertible Notes, or portion thereof, called for redemption. 6. Notice of Redemption. Notice of redemption will be mailed by first class mail at least 20 days but not more than 60 days before the redemption date to each holder of the Convertible Notes to be redeemed at his address of record. The Convertible Notes in denominations larger than $1,000 may be redeemed in part but only in integral multiples of $1,000. In the event of a redemption of less than all of the Convertible Notes, the Convertible Notes will be chosen for redemption by the Trustee in accordance with the Indenture. Unless the Company defaults in making such redemption payment, or the Paying Agent is prohibited from making such payment pursuant to the Indenture, interest ceases to accrue on the Convertible Notes or portions of them called for redemption on and after the redemption date. If this Convertible Note is redeemed subsequent to a record date with respect to any interest payment date specified above and on or prior to such interest payment date, then any accrued interest will be paid to the person in whose name this Convertible Note is registered at the close of business on such record date. A1-7 77 7. Mandatory Redemption. The Company will not be required to make mandatory redemption payments with respect to the Convertible Notes. There are no sinking fund payments with respect to the Convertible Notes. 8. Repurchase at Option of Holder. If there is a Designated Event, the Company shall be required to offer to purchase on the Designated Event Payment Date all outstanding Convertible Notes at a purchase price equal to 101% of the principal amount thereof on the date of purchase, plus accrued and unpaid interest to the Designated Event Payment Date. Holders of Convertible Notes that are subject to an offer to purchase will receive a Designated Event Offer from the Company prior to any related Designated Event Payment Date and may elect to have such Convertible Notes or portions thereof in authorized denominations purchased by completing the form entitled "Option of Noteholder To Elect Purchase" appearing below. Noteholders have the right to withdraw their election by delivering a written notice of withdrawal or the Paying Agent in accordance with the terms of the Indenture. 9. Subordination. The payment of the principal of, interest on or any other amounts due on the Convertible Notes is subordinated in right of payment to all existing and future Senior Debt of the Company, as described in the Indenture. Each Noteholder, by accepting a Convertible Note, agrees to such subordination and authorizes and directs the Trustee on its behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided and appoints the Trustee as its attorney-in-fact for such purpose. 10. Conversion. The holder of any Convertible Note has the right, exercisable at any time after 90 days following the date of original issuance thereof and prior to the close of business (New York City time) on the date of the Convertible Note's maturity, to convert the principal amount thereof (or any portion thereof that is an integral multiple of $1,000) into shares of Common Stock at the initial Conversion Price of $18.570 per share, subject to adjustment under certain circumstances, except that if a Convertible Note is called for redemption, the conversion right will terminate at the close of business on the third Business Day immediately preceding the date fixed for redemption. To convert a Convertible Note, a holder must (1) complete and sign a notice of election to convert substantially in the form set forth below, (2) surrender the Convertible Note to a Conversion Agent, (3) furnish appropriate endorsements or transfer documents if required by the Registrar or Conversion Agent and (4) pay any transfer or similar tax, if required. Upon conversion, no adjustment or payment will be made for interest or dividends, but if any Noteholder surrenders a Convertible Note for conversion after the close of business on the record date for the payment of an installment of interest and prior to the opening of business on the next interest payment date, then, notwithstanding such conversion, the interest payable on such interest payment date will be paid to the registered holder of such Convertible Note on such record date. In such event, such Convertible Note not called for redemption when surrendered for conversion, must be accompanied by payment in funds acceptable to the Company of an amount equal to the interest payable on such interest payment date on the portion so converted. The number of shares of Common Stock issuable upon conversion of a Convertible Note is determined by dividing the principal amount of the Convertible A1-8 78 Note converted by the Conversion Price in effect on the Conversion Date. No fractional shares will be issued upon conversion but a cash adjustment will be made for any fractional interest. A Note in respect of which a holder has delivered an "Option of Noteholder to Elect Purchase" form appearing below exercising the option of such holder to require the Company to purchase such Note may be converted only if the notice of exercise is withdrawn as provided above and in accordance with the terms of the Indenture. The above description of conversion of the Convertible Notes is qualified by reference to, and is subject in its entirety by, the more complete description thereof contained in the Indenture. 11. Registration Rights. The holder of this Convertible Note is entitled to the benefits of a Registration Agreement, dated March 28, 1996, between the Company and the Initial Purchaser (the "Registration Agreement"). Pursuant to the Registration Agreement the Company has agreed for the benefit of the holders of the Convertible Notes, that (i) it will, at its cost, no later than November 15, 1996, file a shelf registration statement (the "Shelf Registration Statement") with the Securities and Exchange Commission (the "Commission") with respect to resales of the Convertible Notes and the Common Stock issuable upon conversion thereof, (ii) within 60 days after the date such Shelf Registration Statement is filed with the Commission, such Shelf Registration Statement shall be declared effective by the Commission and (iii) the Company will maintain such Shelf Registration Statement continuously effective under the Securities Act until the third anniversary (or such shorter period as may then be applicable under the the Securities Act regarding the holding period for securities under Rule 144(k) of the Securities Act or any successor rule) of the date of the closing of the sale of the Convertible Notes (the "Closing"), or such earlier date as of which all the Convertible Notes or the Common Stock issuable upon conversion thereof have been sold pursuant to such Shelf Registration Statement. If the Company fails to comply with clause (i) above then, at such time, the Company will become obligated to pay liquidated damages ("Liquidated Damages") to the holder of this Convertible Note in an amount equal to $.05 per week per $1,000 in principal amount until the date on which such Shelf Registration Statement is filed. If the Shelf Registration Statement is not declared effective as provided in clause (ii) above, then, at such time and on each date that would have been the successive 30th day following such time, the Company will become obligated to pay Liquidated Damages to the holder of this Convertible Note in an amount equal to an additional $.05 per week per $1,000 in principal amount until the date on which such Shelf Registration Statement is declared effective; provided that the Company shall not become obligated to pay Liquidated Damages in an amount exceeding $.15 per week per $1,000 in principal amount pursuant to this sentence and the preceding sentence. Pursuant to clause (iii) above, however, if the Company fails to keep the Shelf Registration Statement continuously effective for the period specified above, then at such time as the Shelf Registration Statement is no longer effective and on each date thereafter that is the successive 30th day subsequent to such time and until the earlier of (i) the date that the Shelf Registration Statement is again deemed effective or (ii) the date that is the third anniversary (or such shorter period as may then be applicable under the the Securities Act regarding the holding period for securities under Rule 144(k) of the Securities Act or any successor rule) of the Closing or (iii) the date as of which all of the Convertible Notes and/or the Common Stock issuable upon conversion thereof are sold pursuant to the Shelf Registration Statement, the Company will become obligated to pay Liquidated Damages to the A1-9 79 holder of this Convertible Note in an amount equal to an additional $.05 per week per $1,000 in principal amount; provided that the Company shall not pay Liquidated Damages in an amount exceeding $.10 per week per $1,000 in principal amount pursuant to this sentence. The Company shall become obligated to pay any such weekly Liquidated Damages on the first day of any such week and any such Liquidated Damages will be paid on each Interest Payment Date related to the period during which such Liquidated Damages accrued, and shall be paid to the registered holder of the Convertible Notes on the related record date. Pursuant to the Registration Agreement, the Company may suspend the use of the prospectus which is a part of the Shelf Registration Statement for a period not to exceed 45 days in any three month period or two periods not to exceed an aggregate of 75 days in any twelve month period under certain circumstances. The holders of Convertible Notes will not be entitled to Liquidated Damages as set forth in the preceding paragraph solely because of such permitted suspensions. 12. Denominations, Transfer, Exchange. The Convertible Notes are in registered form, without coupons, in denominations of $1,000 and integral multiples of $1,000. The transfer of Convertible Notes may be registered, and Convertible Notes may be exchanged, as provided in the Indenture. The Registrar may require a Noteholder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Convertible Note or portion of a Convertible Note selected for redemption (except the unredeemed portion of any Convertible Note being redeemed in part). Also, it need not exchange or register the transfer of any Convertible Note for a period of 15 days before a selection of Convertible Notes to be redeemed. 13. Persons Deemed Owners. Except as provided in paragraph 2 of this Convertible Note, the registered Noteholder of a Convertible Note may be treated as its owner for all purposes. 14. Unclaimed Money. If money for the payment of principal or interest remains unclaimed for two years, the Trustee and the Paying Agent shall pay the money back to the Company. After that, Noteholders of Convertible Notes entitled to the money must look to the Company for payment unless an abandoned property law designates another person and all liability of the Trustee and such Paying Agent with respect to such money shall cease. 15. Defaults and Remedies. The Convertible Notes shall have the Events of Default as set forth in Section 8.01 of the Indenture. Subject to certain limitations in the Indenture, if an Event of Default occurs and is continuing, the Trustee by notice to the Company or the Noteholders of at least 25% in aggregate principal amount of the then outstanding Convertible Notes by notice to the Company and the Trustee may declare all the Convertible Notes to be due and payable immediately, except that in the case of an Event of Default arising from certain events of bankruptcy or insolvency, all unpaid principal and interest accrued on the Convertible Notes shall become due and payable immediately without further action or notice. Upon acceleration as described in either of the preceding sentences, the subordination provisions of the Indenture preclude A1-10 80 any payment being made to Noteholders for at least 5 days except as otherwise provided in the Indenture. The Noteholders of a majority in principal amount of the Convertible Notes then outstanding by written notice to the Trustee may rescind an acceleration 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. Noteholders may not enforce the Indenture or the Convertible Notes except as provided in the Indenture. Subject to certain limitations, Noteholders of a majority in principal amount of the then outstanding Convertible Notes issued under the Indenture may direct the Trustee in its exercise of any trust or power. The Company must furnish compliance certificates to the Trustee annually. The above description of Events of Default and remedies is qualified by reference to, and subject in its entirety by, the more complete description thereof contained in the Indenture. 16. Amendments, Supplements and Waivers. Subject to certain exceptions, the Indenture or the Convertible Notes may be amended or supplemented with the consent of the Noteholders of at least a majority in principal amount of the then outstanding Convertible Notes (including consents obtained in connection with a tender offer or exchange offer for Convertible Notes), and any existing default may be waived with the consent of the Noteholders of a majority in principal amount of the then outstanding Convertible Notes including consents obtained in connection with a tender offer or exchange offer for Convertible Notes. Without the consent of any Noteholder, the Indenture or the Convertible Notes may be amended, among other things, to cure any ambiguity, defect or inconsistency, to provide for assumption of the Company's obligations to Noteholders, to make any change that does not adversely affect the rights of any Noteholder, to qualify the Indenture under the TIA, and to comply with the requirements of the SEC in order to maintain the qualification of the Indenture under the TIA. 17. Trustee Dealings with the Company. The Trustee, in its individual or any other capacity, may become the owner or pledgee of Convertible Notes and may otherwise deal with the Company or an Affiliate with the same rights it would have if it were not Trustee, subject to certain limitations provided for in the Indenture and in the TIA. Any Agent may do the same with like rights. 18. No Recourse Against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Convertible Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Noteholder, by accepting a Convertible Note, waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Convertible Notes. 19. Governing Law. THE INTERNAL LAWS OF THE STATE OF NEW YORK SHALL GOVERN THE INDENTURE AND THE CONVERTIBLE NOTES WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS THEREOF. A1-11 81 20. Authentication. The Convertible Notes shall not be valid until authenticated by the manual signature of an authorized officer of the Trustee or an authenticating agent. 21. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or an assignee, such as: TEN COM (for tenants in common), TEN ENT (for tenants by the entireties), JT TEN (for joint tenants with right of survivorship and not as tenants in common), CUST (for Custodian), and U/G/M/A (for Uniform Gifts to Minors Act). 22. Definitions. Capitalized terms not defined in this Convertible Note have the meaning given to them in the Indenture. A1-12 82 The Company will furnish to any Noteholder of the Convertible Notes upon written request and without charge a copy of the Indenture. Request may be made to: ARV Assisted Living, Inc. 245 Fischer Avenue, Suite D-1 Costa Mesa, California 92626 Attention of: Investor Relations Department A1-13 83 ASSIGNMENT FORM To assign this Convertible Note, fill in the form below: (I) or (we) assign and transfer this Convertible Note to - -------------------------------------------------------------------------------- (Insert assignee's social security or tax I.D. no.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint agent to ------------------------------------------------ transfer this Convertible Note on the books of the Company. The agent may substitute another to act for him. Your Signature: ------------------------------------------ (Sign exactly as your name appears on the other side of this Convertible Note) Date: Signature Guarantee: *** ------------------------ -------------------- In connection with any transfer of any of the Convertible Notes evidenced by this certificate occurring prior to the date that is three years (or such shorter period as may then be applicable under the Securities Act) after the later of the date of original issuance of such Convertible Notes and the last date, if any, on which such Convertible Notes were owned by the Company or any Affiliate of the Company, the undersigned confirms that such Convertible Notes are being transferred: - --------------------- *** Signature must be guaranteed by a commercial bank, trust company or member firm of the New York Stock Exchange. A1-14 84 CHECK ONE BOX BELOW (1) / / to the Company; or (2) / / pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or (3) / / pursuant to and in compliance with Regulation S under the Securities Act of 1933; or (4) / / to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933 that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter can be obtained from the Trustee); or (5) / / pursuant to another available exemption from the registration requirements of the Securities Act of 1933. Unless one of the boxes is checked, the Trustee will refuse to register any of the Convertible Notes evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (3), (4) or (5) is checked, the Trustee may require, prior to registering any such transfer of the Convertible Notes such legal opinions, certifications and other information as the Company has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act. --------------------------------- Signature Signature Guarantee: * - --------------------------------- --------------------------------- Signature must be guaranteed Signature - ------------------------------------------------------------------------------- TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Convertible Note for its own account or an account with respect to which it exercises sole investment discretion and that it - ----------------------- * Signature must be guaranteed by a commercial bank, trust company or member firm of the New York Stock Exchange. A1-15 85 and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: -------------- --------------------------------------------- NOTICE:To be executed by an executive officer A1-16 86 [TO BE ATTACHED TO GLOBAL NOTES] SCHEDULE A The initial principal amount at maturity of this Global Note shall be $__________. The following increases or decreases in the principal amount of this Global Note have been made:
========================================================================================================== Amount of increase in Principal Amount of this Global Note Principal Amount of including upon Amount of decrease this Global Note Signature of exercise of the over in Principal Amount following such authorized officer of Date Made allotment option of this Global Note decrease or increase Trustee or Custodian ========================================================================================================== - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
A1-17 87 OPTION OF NOTEHOLDER TO ELECT PURCHASE If you want to elect to have this Convertible Note or a portion thereof repurchased by the Company pursuant to Section 3.08 or 4.07 of the Indenture, check the box: [ ] If the purchase is in part, indicate the portion (in denominations of $1,000 or any integral multiple thereof) to be purchased: ________________ Your Signature: ----------------------------------------------- (Sign exactly as your name appears on the other side of this Convertible Note) Date: --------------------- Signature Guarantee: * -------------------------------- - ----------------------- * Signature must be guaranteed by a commercial bank, trust company or member firm of the New York Stock Exchange. A1-18 88 ELECTION TO CONVERT To ARV Assisted Living, Inc.: The undersigned owner of this Convertible Note hereby irrevocably exercises the option to convert this Convertible Note, or the portion below designated, into Common Stock of ARV ASSISTED LIVING, INC. in accordance with the terms of the Indenture referred to in this Convertible Note, and directs that the shares issuable and deliverable upon conversion, together with any check in payment for fractional shares, be issued in the name of and delivered to the undersigned, unless a different name has been indicated in the assignment below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Any Noteholder, upon the exercise of its conversion rights in accordance with the terms of the Indenture and the Convertible Note, agrees to be bound by the terms of the Registration Agreement relating to the Common Stock issuable upon conversion of the Convertible Note. Date: in whole / / Portions of Convertible Note to be converted ($1,000 or integral multiples thereof): $ ------------------------------------------ ------------------------------------------ Signature (for conversion only) Please Print or Typewrite Name and Address, Including Zip Code, and Social Security or Other Identifying Number Signature Guarantee: * ------------------------------- - ------------------- * Signature must be guaranteed by a commercial bank, trust company or member firm of the New York Stock Exchange. A1-19 89 A1-20 90 EXHIBIT A-2 [FACE OF REGULATION S TEMPORARY GLOBAL NOTE] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No. ________ CUSIP No. ________ ARV ASSISTED LIVING, INC. 6 3/4% CONVERTIBLE SUBORDINATED NOTES DUE 2006 ARV ASSISTED LIVING, INC. Subject to the provisions hereof, ARV Assisted Living, Inc., a California corporation (the "Company") promises to pay to _________________________________________________________________ or registered assigns, the principal sum indicated on Schedule A hereof on April 1, 2006, and to pay interest thereon beginning October 1, 1996 at the rate of 6 3/4% per annum. Interest Payment Dates: April 1 and October 1, commencing October 1, 1996 Record Dates: March 15 and September 15 Reference is hereby made to the further provisions of this Convertible Note set forth on the reverse hereof which further provisions shall for all purposes have the same effect as if set forth at this place. A2-1 91 IN WITNESS WHEREOF, ARV Assisted Living, Inc. has caused this Convertible Note to be signed manually or by facsimile by its duly authorized officers and a facsimile of its corporate seal to be affixed hereto or imprinted hereon. Dated: _________________ ARV ASSISTED LIVING, INC. By ------------------------ By ------------------------ [Seal] TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 6 3/4% Convertible Subordinated Notes due 2006 described in the within-mentioned Indenture. The Chase Manhattan Bank, N.A., as Trustee, By ------------------------------- Authorized Officer - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- A2-2 92 [Back of Regulation S Temporary Global Note] 6 3/4% Convertible Note due 2006 UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS SECURITY MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE THIRD ANNIVERSARY (OR SUCH SHORTER PERIOD AS MAY THEN BE APPLICABLE UNDER THE THE SECURITIES ACT REGARDING THE HOLDING PERIOD FOR SECURITIES UNDER RULE 144(K) OF THE SECURITIES ACT OR ANY SUCCESSOR RULE) OF THE ISSUANCE HEREOF (OR ANY PREDECESSOR SECURITY HERETO) OR (Y) BY ANY HOLDER THAT WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN (1) TO THE COMPANY, (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY) AND A CERTIFICATE WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE, (3) IN AN OFFSHORE A2-3 93 TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), AND, IF SUCH TRANSFER IS BEING EFFECTED BY CERTAIN TRANSFERORS SPECIFIED IN THE INDENTURE (AS DEFINED BELOW) PRIOR TO THE EXPIRATION OF THE "40 DAY RESTRICTED PERIOD" (WITHIN THE MEANING OF RULE 903(C)(3) OF REGULATION S UNDER THE SECURITIES ACT), A CERTIFICATE WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY) THAT IS ACQUIRING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND A CERTIFICATE IN THE FORM ATTACHED TO THIS SECURITY IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE (PROVIDED THAT CERTAIN HOLDERS SPECIFIED IN THE INDENTURE MAY NOT TRANSFER THIS SECURITY PURSUANT TO THIS CLAUSE (4) PRIOR TO THE EXPIRATION OF THE "40 DAY RESTRICTED PERIOD" (WITHIN THE MEANING OF RULE 903(C)(3) OF REGULATION S UNDER THE SECURITIES ACT), (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT AND A CERTIFICATE WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE, OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND A CERTIFICATE WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTION. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS SECURITY AGREES IT WILL FURNISH TO THE COMPANY AND THE TRUSTEE SUCH CERTIFICATES AND OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF THIS SECURITY COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2) AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT AND THAT IT IS HOLDING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (O)(2) OF RULE 902 UNDER) REGULATION S UNDER THE SECURITIES ACT." A2-4 94 THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON. Interest on the Convertible Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance in accordance with the terms hereof. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. This Regulation S Temporary Global Note is issued in respect of an issue of 6 3/4% Convertible Subordinated Notes due 2006 (the "Convertible Notes") of the Company, limited to the aggregate principal amount of U.S. $50,000,000 (plus $7,500,000 aggregate principal amount of Convertible Notes that may be sold by the Company pursuant to the over allotment option granted pursuant to the Purchase Agreement) issued pursuant to an Indenture (the "Indenture") dated as of April 3, 1996, between the Company and The Chase Manhattan Bank, N.A., as trustee (the "Trustee"), and is governed by the terms and conditions of the Indenture governing the Convertible Notes, which terms and conditions are incorporated herein by reference and, except as otherwise provided herein, shall be binding on the Company and the holder hereof as if fully set forth herein. Unless the context otherwise requires, the terms used herein shall have the meanings specified in the Indenture. Until this Regulation S Temporary Global Note is exchanged for Regulation S Permanent Global Notes, the holder hereof shall not be entitled to receive payments of interest hereon; until so exchanged in full, this Regulation S Temporary Global Note shall in all other respects be entitled to the same benefits as other Convertible Notes under the Indenture. This Regulation S Temporary Global Note is exchangeable in whole or in part for one or more Regulation S Permanent Global Notes or Rule 144A Global Notes only (i) on or after the termination of the 40-day restricted period (as defined in Regulation S) and (ii) upon presentation of certificates (accompanied by an Opinion of Counsel, if applicable) required by Article 2 of the Indenture. Upon exchange of this Regulation S Temporary Global Note for one or more Regulation S Permanent Global Notes or Rule 144A Global Notes, the Trustee shall cancel this Regulation S Temporary Global Note. This Regulation S Temporary Global Note shall not become valid or obligatory until the certificate of authentication hereon shall have been duly manually signed by the Trustee in accordance with the Indenture. This Regulation S Temporary Global Note shall be governed by and construed in accordance with the laws of the State of the New York. All references to "$," "Dollars," "dollars" or "U.S. $" are to such coin or currency of the United States of America as at the time shall be legal tender for the payment of public and private debts therein. A2-5 95 EXHIBIT B-1 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER FROM RULE 144A GLOBAL NOTE TO REGULATION S GLOBAL NOTE (Pursuant to Section 2.06(a)(i) of the Indenture) The Chase Manhattan Bank, N.A. 4 Chase MetroTech Center 3rd Floor, Institutional Trust Brooklyn, New York 111245 Attention: Corporate Trust Division Re: 6 3/4% Convertible Subordinated Notes due 2006 of ARV Assisted Living, Inc. (the "Convertible Notes") Reference is hereby made to the Indenture, dated as of April 3, 1996 (the "Indenture"), between ARV Assisted Living, Inc., as issuer (the "Company") and The Chase Manhattan Bank, N.A., as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to the Convertible Notes which are evidenced by one or more Rule 144A Global Notes (CUSIP No. 00204C AA5) and held with the Depositary in the name of Cede & Co. (the "Transferor"). The Transferor has requested a transfer of such beneficial interest in the Convertible Notes to a Person who will take delivery thereof in the form of an equal principal amount of Convertible Notes evidenced by one or more Regulation S Global Notes (SINS No. U04279 AA0), which amount, immediately after such transfer, is to be held with the Depositary through Euroclear or Cedel or both (Common Code - -----------------). In connection with such request and in respect of such Convertible Notes, the Transferor hereby certifies that such transfer has been effected in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with Rule 903 or Rule 904 under the United States Securities Act of 1933, as amended (the "Securities Act"), and accordingly the Transferor hereby further certifies that: (1) The offer of the Convertible Notes was not made to a person in the United States; (2) either: (a) at the time the buy order was originated, the transferee was outside the United States or the Transferor and any person acting on its behalf reasonably believed and believes that the transferee was outside the United States; or (b) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither the Transferor nor any person acting on its behalf knows that the transaction was prearranged with a buyer in the United States; B1-1 96 (3) no directed selling efforts have been made in contravention of the requirements of Rule 904(b) of Regulation S; (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; and (5) upon completion of the transaction, the beneficial interest being transferred as described above is to be held with the Depositary through Euroclear or Cedel or both (Common Code ______________). Upon giving effect to this request to exchange a beneficial interest in a Rule 144A Global Note for a beneficial interest in a Regulation S Global Note, the resulting beneficial interest shall be subject to the restrictions on transfer applicable to Regulation S Global Notes pursuant to the Indenture and the Securities Act and, if such transfer occurs prior to the end of the 40-day restricted period associated with the initial offering of Convertible Notes, the additional restrictions applicable to transfers of interest in the Regulation S Temporary Global Note. This certificate and the statements contained herein are made for your benefit and the benefit of the Company and Salomon Brothers Inc, Seven World Trade Center, New York, New York, the initial purchaser of such Convertible Notes being transferred. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. -------------------------------- [Insert Name of Transferor] By: ---------------------------- Name: Title: Dated: , ---------------------- ----- cc: ARV Assisted Living, Inc. Salomon Brothers Inc B1-2 97 EXHIBIT B-2 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER FROM REGULATION S GLOBAL NOTE TO RULE 144A GLOBAL NOTE (Pursuant to Section 2.06(a)(ii) of the Indenture) The Chase Manhattan Bank, N.A. 4 Chase MetroTech Center 3rd Floor, Institutional Trust Brooklyn, New York 11245 Attention: Corporate Trust Division Re: 6 3/4% Convertible Subordinated Notes due 2006 of ARV Assisted Living, Inc. (the "Convertible Notes") Reference is hereby made to the Indenture, dated as of April 3, 1996 (the "Indenture"), between ARV Assisted Living, Inc., as issuer (the "Company") and The Chase Manhattan Bank, N.A., as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to the Convertible Notes which are evidenced by one or more Regulation S Global Notes (SINS No. U04279 AA0) and held with the Depositary through [Euroclear] [Cedel] (Common Code ___________________) in the name of ____________________ (the "Transferor"). The Transferor has requested a transfer of such beneficial interest in the Notes to a Person who will take delivery thereof in the form of an equal principal amount of Notes evidenced by one or more Rule 144A Global Notes (CUSIP No. 00204C AA5), to be held with the Depositary. In connection with such request and in respect of such Notes, the Transferor hereby certifies that: [CHECK ONE] / / such transfer is being effected pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the Notes are being transferred to a Person that the Transferor reasonably believes is purchasing the Notes for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A; or / / such transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act; or B2-1 98 / / such transfer is being effected pursuant to an effective registration statement under the Securities Act; or / / such transfer is being effected pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A or Rule 144, and the Transferor hereby further certifies that the Convertible Notes are being transferred in compliance with the transfer restrictions applicable to the Global Notes and in accordance with the requirements of the exemption claimed, which certification is supported by an Opinion of Counsel, provided by the Transferor or the transferee (a copy of which the Transferor has attached to this certification) in form reasonably acceptable to the Company and to the Registrar, to the effect that such transfer is in compliance with the Securities Act; and such Convertible Notes are being transferred in compliance with any applicable blue sky securities laws of any state of the United States. Upon giving effect to this request to exchange a beneficial interest in Regulation S Global Notes for a beneficial interest in Rule 144A Global Notes, the resulting beneficial interest shall be subject to the restrictions on transfer applicable to Rule 144A Global Notes pursuant to the Indenture and the Securities Act. This certificate and the statements contained herein are made for your benefit and the benefit of the Company and Salomon Brothers Inc, Seven World Trade Center, New York, New York, the initial purchaser of such Convertible Notes being transferred. ----------------------------- [Insert Name of Transferor] By: ------------------------- Name: Title: Dated: , ------------------ ------- cc: ARV Assisted Living, Inc. Salomon Brothers Inc B2-2 99 EXHIBIT B-3 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER OF CERTIFICATED CONVERTIBLE NOTES (Pursuant to Section 2.06(b) of the Indenture) The Chase Manhattan Bank, N.A. 4 Chase MetroTech Center 3rd Floor, Institutional Trust Brooklyn, New York 11245 Attention: Corporate Trust Division Re: 6 3/4% Convertible Subordinated Notes due 2006 of ARV Assisted Living, Inc. (the "Convertible Notes") Reference is hereby made to the Indenture, dated as of April 3, 1996 (the "Indenture"), between ARV Assisted Living, Inc., as issuer (the "Company") and The Chase Manhattan Bank, N.A., as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. In connection with such request and in respect of the Convertible Notes surrendered to the Trustee herewith for exchange (the "Surrendered Notes"), the holder of such Surrendered Notes hereby certifies that: [CHECK ONE] / / the Surrendered Notes are being transferred pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the Surrendered Notes are being transferred to a Person that the Transferor reasonably believes is purchasing the Surrendered Notes for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A; or / / the Surrendered Notes are being transferred in a transaction permitted by Rule 144 under the Securities Act; or / / the Surrendered Notes are being transferred pursuant to an effective registration statement under the Securities Act; or B3-1 100 / / such transfer is being effected pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A or Rule 144, and the Transferor hereby further certifies that the Notes are being transferred in compliance with the transfer restrictions applicable to the Global Notes and in accordance with the requirements of the exemption claimed, which certification is supported by an Opinion of Counsel, provided by the transferor or the transferee (a copy of which the Transferor has attached to this certification) in form reasonably acceptable to the Company and to the Registrar, to the effect that such transfer is in compliance with the Securities Act; and the Surrendered Notes are being transferred in compliance with any applicable blue sky securities laws of any state of the United States. This certificate and the statements contained herein are made for your benefit and the benefit of the Company and Salomon Brothers Inc, Seven World Trade Center, New York, New York, the initial purchaser of such Notes being transferred. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. -------------------------- [Insert Name of Transferor] By: -------------------------- Name: Title: Dated: , ---------------- ------- cc: ARV Assisted Living, Inc. Salomon Brothers Inc B3-2 101 EXHIBIT B-4 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER FROM RULE 144A GLOBAL NOTE OR REGULATION S PERMANENT GLOBAL NOTE TO CERTIFICATED CONVERTIBLE NOTE (Pursuant to Section 2.06(c) of the Indenture) The Chase Manhattan Bank, N.A. 4 Chase MetroTech Center 3rd Floor, Institutional Trust Brooklyn, New York 11245 Attention: Corporate Trust Division Re: 6 3/4% Convertible Subordinated Notes due 2006 of ARV Assisted Living, Inc. (the "Convertible Notes") Reference is hereby made to the Indenture, dated as of April 3, 1996 (the "Indenture"), between ARV Assisted Living, Inc., as issuer (the "Company") and The Chase Manhattan Bank, N.A., as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. In connection with such request and in respect of the Notes surrendered to the Trustee herewith for exchange (the "Surrendered Notes"), the holder of such Surrendered Notes hereby certifies that: [CHECK ONE] / / the Surrendered Notes are being transferred to the beneficial owner of such Notes; or / / the Surrendered Notes are being transferred pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the Surrendered Notes are being transferred to a Person that the Transferor reasonably believes is purchasing the Surrendered Notes for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A; or / / the Surrendered Notes are being transferred in a transaction permitted by Rule 144 under the Securities Act; or B4-1 102 / / the Surrendered Notes are being transferred pursuant to an effective registration statement under the Securities Act; or such transfer is being effected pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A or Rule 144, and the Transferor hereby further certifies that the Notes are being transferred in compliance with the transfer restrictions applicable to the Global Notes and in accordance with the requirements of the exemption claimed, which certification is supported by an Opinion of Counsel, provided by the transferor or the transferee (a copy of which the Transferor has attached to this certification) in form reasonably acceptable to the Company and to the Registrar, to the effect that such transfer is in compliance with the Securities Act; and the Surrendered Notes are being transferred in compliance with any applicable blue sky securities laws of any state of the United States. This certificate and the statements contained herein are made for your benefit and the benefit of the Company and Salomon Brothers Inc, Seven World Trade Center, New York, New York, the initial purchaser of such Notes being transferred. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. -------------------------- [Insert Name of Transferor] By: ---------------------------- Name: Title: Dated: , ------------------ -------- cc: ARV Assisted Living, Inc. Salomon Brothers Inc B4-2 EX-10.30 3 LA VERANDA PROMISSORY NOTE DATED OCTOBER 20, 1995 1 EXHIBIT 10.30 NOTE SECURED BY DEED OF TRUST ALL-INCLUSIVE STRAIGHT NOTE ESCROW NO: 01-17845-GL/BC $2,000,000.00, VICTORVILLE, CALIFORNIA, OCTOBER 20, 1995 ON OR BEFORE: January 4, 1997 for value received, I promise to pay to FULLERTON EQUITIES LIMITED, A CALIFORNIA LIMITED PARTNERSHIP, or order, at place designated by the holder(s) hereof, the sum of **TWO MILLION AND NO/100 DOLLARS**, with interest from January 4, 1996 until paid, at the rate of 12.00% percent per annum, payable in monthly installments of INTEREST ONLY, ($20,000.00) or more, beginning February 4, 1996 and continuing monthly thereafter until the due date specified above, or until the undersigned obtains the funding of a permanent loan, whichever is earlier, at which time the entire unpaid principal balance, together with the interest due thereon, shall become immediately due and payable. The undersigned, however, is entitled to a $50,000.00 credit for initial payments due under this Note. In the event this Note is paid off prior to the above credit being used, the undersigned shall not be entitled to benefit from such credit, and specifically shall not be entitled to a reduction of the principal balance due under this Note. Should interest not be so paid, it shall thereafter bear like interest as the principal, provided that the total interest payable to maturity shall in no event exceed simply interest on the unpaid balance at the maximum rate permitted by law. Should default be made in payment of interest when due, the whole sum of principal and interest shall become immediately due, at the option of the holder of this note. Principal and interest payable in lawful money of the United States. If action be instituted on this note, I promise to pay such sum as the Court may fix as attorney's fees. This note is secured by a Deed of Trust to SLL Services, Inc., as Trustee. LEONARD M. CRITES AND MARCELINE R. CRITES, TRUSTEES OF THE LEONARD M. CRITES AND MARCELINE R. CRITES REVOCABLE LIVING TRUST DATED MAY 3, 1995 /s/ Leonard M. Crites /s/ Marceline R. Crites - --------------------------------- -------------------------------- Leonard M. Crites, Trustee Marceline R. Crites, Trustee 2 March 5 , 1996 Costa Mesa, California - ---------------------- For adequate consideration, receipt of which is hereby acknowledged, this Note Secured by Deed of Trust is hereby assigned to: GARY L. DAVIDSON, a married man, as to an undivided 34.23%; JOHN A. BOOTY, a married man, as to an undivided 34.23%; DAVID P. COLLINS, a married man, as to an undivided 20.16%; and GRAHAM ESPLEY-JONES, a married man, as to an undivided 11.38%, all as TENANTS IN COMMON. Fullerton Equities Limited, a California limited partnership By: ARV Assisted Living, Inc., a California corporation, General Partner /s/ Gary L. Davidson ------------------------------------------- Gary L. Davidson, Chairman of the Board EX-10.31 4 OPERATING AGREEMENT OF VILLAS AT THE PONDS LLC 1 EXHIBIT 10.31 OPERATING AGREEMENT OF VILLAS AT THE PONDS, LLC A NEW JERSEY LIMITED LIABILITY COMPANY 2 TABLE OF CONTENTS OF VILLAS AT THE PONDS, LLC A NEW JERSEY LIMITED LIABILITY COMPANY
DESCRIPTION PAGE NO. 1. Formation................................................................... 1 1.1. Definitions. .................................................... 1 1.2. Formation........................................................ 1 1.3. Name and Place of Business....................................... 1 1.4. Purpose. ........................................................ 1 1.5. Conflicts of Interest. .......................................... 1 1.6. Agent for Service of Process. ................................... 1 1.7. Term. ........................................................... 1 2. Membership.................................................................. 2 2.1. Initial Members. ................................................ 2 2.2. General Representations and Warranties. ......................... 2 2.2.1. Authorization. ........................................... 2 2.2.2. Compliance with Other Instruments. ....................... 2 2.2.3. Purchase Entirely for Own Account. ....................... 2 2.2.4. Investment Sophistication................................. 2 2.2.5. Access to Information. ................................... 2 2.2.6. Federal and State Securities Laws. ....................... 3 2.2.7. Legends. ................................................. 3 2.3. Property Representations......................................... 3 2.3.1. Surrounding Land Uses..................................... 3 2.3.2. Condition and Developability.............................. 3 2.3.3. Property Documents........................................ 3 2.3.4. Finder's Fee.............................................. 4 2.3.5. Property Deed and Title Insurance......................... 4 2.3.6. Property Taxes............................................ 4 2.4. LLC Shares. ..................................................... 4 2.5. Additional Members. ............................................. 5 2.6. Admission of Substitute Members. ................................ 5 2.7. Resignation or Withdrawal of a Member. .......................... 5
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DESCRIPTION PAGE NO. 2.8. Compensation of Members. ........................................ 5 2.9. Dissociation of a Member......................................... 5 2.10. Rights of Dissociating Member. .................................. 5 3. Capital Contributions....................................................... 6 3.1. Initial Contributions. .......................................... 6 3.2. Issuance of Shares. ............................................. 6 3.3. Loans or Additional Contributions................................ 6 3.3.1. Loans..................................................... 6 3.3.2. Additional Contributions.................................. 6 3.4. Default in Making Contributions.................................. 7 3.4.1. Remedies.................................................. 7 3.4.2. Contribution Loan......................................... 7 3.4.3. Other Remedies............................................ 7 3.5. Interest. ....................................................... 8 3.6. Individual Capital Accounts. .................................... 8 3.6.1. Additions to Capital Account. ............................ 8 3.6.2. Subtractions from Capital Account. ....................... 8 3.6.3. Compliance with Regulations. ............................. 9 3.6.4. Capital Account Adjustment. .............................. 9 4. Management and Restrictions................................................. 9 4.1. Management Committee............................................. 9 4.2. Management Committee Responsibilities............................ 9 4.2.1. By ARV.................................................... 9 4.2.2. By the Clearbrook Group................................... 9 4.2.3. By Management Committee................................... 10 4.2.4. Cooperation............................................... 11 4.3. Power of Attorney. .............................................. 11 4.4. Impasses......................................................... 12 4.5. Authority of Members............................................. 12 4.6. Cost Reimbursement............................................... 12
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DESCRIPTION PAGE NO. 4.7. Amendment of Certificate or Agreement. .......................... 13 4.8. Liability of Members to the Other Members and the LLC; Indemnity of Members............................................. 13 4.8.1. Liability. ............................................... 13 4.8.2. Indemnification. ......................................... 13 5. Officers.................................................................... 14 5.1. Appointment of Officers. ........................................ 14 5.2. Compensation of Officers. ....................................... 14 5.3. Term of Office. ................................................. 14 5.4. Duties of Chairman. ............................................. 15 5.5. Duties of Vice-Chairman. ........................................ 15 5.6. Duties of President. ............................................ 15 5.7. Duties of Vice President. ....................................... 15 5.8. Duties of Secretary. ............................................ 15 5.9. Duties of Assistant Secretary. .................................. 15 5.10. Duties of Treasurer. ............................................ 15 5.11. Duties of Assistant Treasurer. .................................. 16 6. Share Certificates.......................................................... 16 6.1. Certificates. ................................................... 16 6.2. Replacement Certificates. ....................................... 16 6.3. Rights of Registered Owner. ..................................... 16 7. Allocations of Profit and Loss. ............................................ 16 7.1. Loss. ........................................................... 16 7.2. Profit. ......................................................... 16 7.3. Allocations for Tax Purposes. ................................... 17 7.3.1. Tax Allocations. ......................................... 17 7.3.2. Partnership Tax Treatment. ............................... 17 7.3.3. Allocations upon Transfers of LLC Interests............... 17 8. Distributions............................................................... 17 8.1. Distributions to Clearbrook...................................... 17 8.2. Distributions of Cash Flow. ..................................... 17
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DESCRIPTION PAGE NO. 8.3. Return of Distributions in Certain Circumstances. ............... 18 8.4. Withholding Taxes. .............................................. 18 9. Members..................................................................... 18 9.1. Liability of Members. ........................................... 18 9.2. No Distributions in Kind......................................... 18 9.3. Bankruptcy of a Member. ......................................... 18 10. Transfer of LLC Interests................................................... 18 10.1. Transfer. ....................................................... 18 10.2. Transfer Void.................................................... 19 10.3. Rights of Assignees.............................................. 19 10.4. Admission of Permitted Transferees............................... 19 10.5. Right of First Refusal........................................... 19 10.5.1. Grant............................................ 19 10.5.2. Notice of Intended Disposition................... 19 10.5.3. Clearbrook Right to Litt Shares.................. 19 10.5.4. Exercise of Right................................ 19 10.5.5. Secondary Right of Other Members................. 20 10.5.6. Valuation........................................ 20 10.5.7. Full Exercise of Rights.......................... 20 10.5.8. Partial Exercise of Right........................ 20 10.5.9. Non-Exercise of Right............................ 21 10.5.10. Recapitalization/Merger.......................... 21 10.6. Marital Dissolution or Legal Separation.......................... 22 10.6.1. Grant............................................ 22 10.6.2. Notice of Decree or Agreement.................... 22 10.6.3. Exercise of Special Purchase Right............... 22 10.7. Effect of Charging Order. ....................................... 22 10.8. Assignee's Tax Liability. ....................................... 23 11. LLC Accounting.............................................................. 23 11.1. Method of Accounting. ........................................... 23 11.2. Fiscal Year. .................................................... 23
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DESCRIPTION PAGE NO. 11.3. Financial and Business Records................................... 23 11.3.1. Maintenance of Records and Accounts.............. 23 11.3.2. Required Records. ............................... 23 11.3.3. Supervision; Inspection of Books................. 24 11.3.4. Income Tax Data and Reports. .................... 24 12. Bank Accounts. ............................................................. 24 13. Dispute Resolution.......................................................... 24 13.1. By Agreement or Arbitration. ................................... 24 13.2. Procedural Guidelines............................................ 24 13.3. Prevailing Party. .............................................. 25 14. Buy-Sell Provisions......................................................... 25 14.1. Offer............................................................ 25 14.2. Reply Notice..................................................... 25 14.3. Closing.......................................................... 25 14.4. Payment of Purchase Price........................................ 26 14.5. Default.......................................................... 26 14.6. Conditions to Invoking Buy-Sell Procedure........................ 26 15. Dissolution, Liquidation and Termination of the LLC......................... 26 15.1. Limitations. .................................................... 26 15.2. Cause of Dissolution. ........................................... 26 15.3. Continuation of the LLC. ........................................ 27 15.4. Authority to Wind Up............................................. 27 15.5. Liquidation of the LLC. ......................................... 27 15.5.1. Cash Distributions and Profit and Loss Allocations During Liquidation. ............................. 27 15.5.2. Distributions. .................................. 28 15.6. Filing Certificate of Cancellation............................... 28 16. Meetings of Members. ....................................................... 28 16.1. Call and Place of Meetings. ..................................... 28
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DESCRIPTION PAGE NO. 16.2. Notice of Meeting. .............................................. 29 16.3. Quorum. ......................................................... 29 16.4. Adjournment of Meetings. ........................................ 29 16.5. Meetings Not Duly Called, Notice or Held. ....................... 29 16.6. Waiver of Notice. ............................................... 29 16.7. Consent to Action Without Meeting. .............................. 30 16.8. Proxies. ........................................................ 30 17. Miscellaneous............................................................... 30 17.1. Notices and Consents. ........................................... 30 17.2. Waiver of Notice. ............................................... 30 17.3. Severability. ................................................... 30 17.4. Captions. ....................................................... 30 17.5. Gender, Etc. .................................................... 31 17.6. Binding Agreement. .............................................. 31 17.7. Applicable Law. ................................................. 31 17.8. Entire Agreement. ............................................... 31 17.9. Agreement in Counterparts. ...................................... 31 17.10. No Third-Party Beneficiary....................................... 31
EXHIBIT A - MEMBERS APPENDIX 1 - DEFINITIONS APPENDIX 2 - SPECIAL ALLOCATIONS APPENDIX 3 - ARV RESPONSIBILITIES APPENDIX 4 - CLEARBROOK GROUP RESPONSIBILITIES APPENDIX 5 - PROMISSORY NOTE -vi- 8 OPERATING AGREEMENT OF VILLAS AT THE PONDS, LLC A NEW JERSEY LIMITED LIABILITY COMPANY THIS OPERATING AGREEMENT, effective as of August 8, 1995, is entered into among those Persons listed on Exhibit A as the Members. In consideration of the mutual promises contained herein, the parties agree as follows: 1. FORMATION. 1.1. DEFINITIONS. Capitalized terms used herein shall have the meanings set forth on Appendix 1 . 1.2. FORMATION. The Members hereby form a limited liability company pursuant to the LLC Act and other applicable laws of New Jersey. The Formation Certificate was filed on July 14, 1995. 1.3. NAME AND PLACE OF BUSINESS. The name of the LLC is Villas at the Ponds, LLC. The initial principal place of business for the LLC shall be 270 Sylvan Avenue, Englewood Cliffs, New Jersey until changed by the Members. 1.4. PURPOSE. The primary purpose of the LLC is to develop an assisted living project on the Property and thereafter hold, manage and otherwise operate that project, and do all things reasonably incidental to or in furtherance of that business. 1.5. CONFLICTS OF INTEREST. Any Member or any officer, director, employee, shareholder or other person holding a legal or beneficial interest in any entity which is a Member, may engage in or possess an interest in other business ventures of every kind, independently or with others, some of which may be competitive with the LLC, and neither the LLC nor any of the Members shall have any right by virtue of this Agreement in or to such other business ventures or to the income or profits derived therefrom. 1.6. AGENT FOR SERVICE OF PROCESS. Until such time as the Members have appointed a different person to act in the State of New Jersey as the agent of the LLC for service of process, the LLC's agent for service of process in the State of New Jersey shall be Stanley Diamond, whose address is 270 Sylvan Avenue, Englewood Cliffs, New Jersey. 1.7. TERM. The LLC commenced upon the filing of the Formation Certificate with the New Jersey Secretary of State, and shall continue until July 1, 2045, -1- 9 unless its existence is sooner terminated in accordance with the provisions of this Agreement or as otherwise provided by law. A Certificate of Correction was filed on July 31, 1995, to increase the stated term from thirty (30) years to fifty (50) years, expiring on the date specified in the preceding sentence. 2. MEMBERSHIP. 2.1. INITIAL MEMBERS. The initial Members of the LLC are set forth on Exhibit A, each of whom is admitted to the LLC as a Member as of the date this Agreement becomes effective. 2.2. GENERAL REPRESENTATIONS AND WARRANTIES. Each Member hereby represents and warrants to the LLC and each other Member as follows: 2.2.1. AUTHORIZATION. If the Member is an organization, that it is duly organized, validly existing, and in good standing under the law of its state of organization and that it has full power and authority to execute and enter into this Agreement and to perform its obligations hereunder and that all actions necessary for the due authorization, execution, delivery and performance by that Member of this Agreement have been duly taken. In addition, each individual executing this Agreement on behalf of a Member represents and warrants that he or she is duly authorized to execute and deliver it on behalf of that Member. 2.2.2. COMPLIANCE WITH OTHER INSTRUMENTS. The Member's authorization, execution, delivery, and performance of this Agreement do not conflict with any other agreement or arrangement to which the Member is a party or by which the Member is bound. 2.2.3. PURCHASE ENTIRELY FOR OWN ACCOUNT. The Member is acquiring the Member's interest in the LLC for the Member's own account for investment purposes only and not with a view to or for the resale or distribution thereof and has no obligation or agreement of any kind with any Person to sell, transfer or pledge to any Person the Member's interest or any part thereof nor does the Member have any plans to enter into any such obligation or agreement. 2.2.4. INVESTMENT SOPHISTICATION. By reason of the Member's business or financial experience, the Member has the capacity to protect the Member's own interests in connection with the transactions contemplated hereunder. In addition, the Member is able to bear the risks of an investment in the LLC, and at the present time could afford a complete loss of such investment. 2.2.5. ACCESS TO INFORMATION. The Member is aware of the LLC's business affairs and financial condition and has acquired sufficient information about the LLC to reach an informed and knowledgeable decision to acquire an interest in the LLC. -2- 10 2.2.6. FEDERAL AND STATE SECURITIES LAWS. The Member acknowledges that the Shares have not been registered under the Securities Act of 1933 or any state securities laws, inasmuch as they are being acquired in a transaction not involving a public offering, and, under such laws, may not be resold or transferred by the Member without appropriate registration or the availability of an exemption from such requirements. The Member is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act of 1933. 2.2.7. LEGENDS. The Member acknowledges that any certificates issued evidencing Shares in the LLC shall bear a legend to the effect that the Shares have not been registered under the Securities Act of 1933 and are subject to the restrictions on transferability and sale set forth in this Agreement and under the Securities Act of 1933. 2.3. PROPERTY REPRESENTATIONS. Clearbrook hereby represents and warrants to ARV as follows: 2.3.1. SURROUNDING LAND USES. The Property is located adjacent to a large retirement oriented community known as "Clearbrook" (the "Master Community") and is a part of a 142-acre site known and designated as Lot 9, Block 27 as shown on the Tax Map of the Township of Monroe (the "Subdivision"). The Subdivision, which is to be developed separately from the Master Community, includes the Property as well as two parcels presently approved for development with approximately 578 units of age-restricted residential housing and one parcel presently approved for development with 30,000 square feet of commercial improvements. Clearbrook has owned the Property for several years and participated in creation and approval of the Subdivision. The Property is approved for development of an assisted care facility containing up to 300 units; however, final approval from the Planning Board has not yet been received for building and engineering plans. 2.3.2. CONDITION AND DEVELOPABILITY. Clearbrook is familiar with all aspects of the Property, including without limitation (a) all aspects of the physical condition of the Property, including without limitation the condition of the soil and the presence or absence of any hazardous materials in, on or in the vicinity of the Property, (b) the availability of utilities and other infrastructure improvements, (c) the condition of title to the Property, (d) the Property's compliance with all applicable statutes, ordinances and regulations (federal, state, county and municipal), including, without limitation, all zoning, subdivision and "lot split" regulations, (e) the current use and occupancy of the Property and (f) the adequacy of the Property for the development of the Project thereon. Based on the foregoing, Clearbrook is not aware of any matter or information which would have a material adverse impact on the development or operation of the Project on the Property. 2.3.3. PROPERTY DOCUMENTS. Clearbrook has provided ARV with copies of all Property Documents. -3- 11 3.3.4. FINDER'S FEE. Jordan Metzger ("Metzger") is entitled to receive a finder's fee in the amount of $37,500 (the "Finder's Fee") as consideration for introducing ARV and Clearbrook. The Finder's Fee shall be paid upon closing of the construction loan for the Project as an expense of the LLC. Except for the Finder's Fee, no brokerage commission, finder's fee or other compensation of any kind is due or owing in connection with the transactions covered by this Agreement. Each Member shall indemnify, hold harmless and defend the other Members from and against any and all costs (including without limitation attorneys' fees), liabilities, losses, damages, claims, causes of action or proceedings which may result from any broker, agent or finder licensed or otherwise, claiming through, under or by reason of the indemnifying Member's conduct in connection with the transactions covered by this Agreement. 3.3.5. PROPERTY DEED AND TITLE INSURANCE. Clearbrook shall deed the Property to the LLC as a portion of its initial Capital Contribution and shall cause the title company which issued a title insurance policy on the Subdivision to issue a new policy which insures title to the Property in the name of the LLC in the amount of $1,500,000, free and clear of all monetary liens or encumbrances except current nondelinquent property taxes. The transfer taxes incurred as a result of the transfer of the Property to the LLC and any cost of obtaining the title insurance endorsement shall be paid as expenses of the LLC. 3.3.6. PROPERTY TAXES. The Property has to date been taxed as a part of the Subdivision. Therefore, no separate ad valorem property tax bill exists for the Property. The Subdivision taxes have been paid by the owner of other parcels in the Subdivision (the "Other Owner"). At such time as the Property becomes separately taxed, the Other Owner will be entitled to a reimbursement of the appropriate portion of the Subdivision taxes that the Other Owner has paid or for which it has incurred liability. Clearbrook shall, at its sole expense, be responsible for causing the Property to be separately assessed as soon as reasonably possible and for preparing and submitting to the Management Committee for approval a proration statement (the "Proration Statement") which identifies the Property taxes paid or incurred by the Other Owner and the portions thereof applicable to the periods before and after the date on which the LLC became the owner of the Property. Clearbrook shall promptly pay to the Other Owner and/or the appropriate taxing authority, as applicable, all Property taxes assessed up to the date on which the LLC became the owner of the Property. Clearbrook shall indenify and hold the LLC and the other Members harmless from and against any and all liability for the Property taxes applicable to the period before the date on which the LLC became the owner. 3.4. LLC SHARES. Ownership of the LLC shall be divided into and represented by Shares of the LLC. The LLC shall issue a single class of Shares. The total number of Shares which the LLC is authorized to issue shall be 100. -4- 12 2.5. ADDITIONAL MEMBERS. Additional Persons may be issued Shares of the LLC and admitted to the LLC as Members upon such terms and conditions as the Members may determine. 2.6. ADMISSION OF SUBSTITUTE MEMBERS. No Assignee of Shares of the LLC shall be admitted as a Substitute Member and admitted to all the rights of the Member who assigned the Shares of the LLC without the approval of the Members. If so admitted, the Substitute Member shall have all the rights and powers and will be subject to all the restrictions and liabilities of the Member who assigned the Shares of the LLC. Admission of a Substitute Member shall not release an assigning Member from any liability to the LLC which the assigning Member incurred prior to the assignment. 2.7. RESIGNATION OR WITHDRAWAL OF A MEMBER. Except as specifically provided below, and subject to the provisions for transfer contained in Section 10, no Member shall have the right to resign or withdraw from membership in the LLC or withdraw the Member's interest in the capital. 2.8. COMPENSATION OF MEMBERS. Unless otherwise expressly approved by the Management Committee, no Member shall be entitled to any compensation for services or activities undertaken in his capacity as a Member of the LLC. 2.9. DISSOCIATION OF A MEMBER. The death, expulsion, Bankruptcy or dissolution of a Member (i) will cause such Member to be a Dissociated Member, (ii) will terminate the continued membership of such Member in the LLC, and (iii) may or may not cause a dissolution of this LLC. 2.10. RIGHTS OF DISSOCIATING MEMBER. If any Member becomes a Dissociated Member: 2.10.1. If the dissociation causes a dissolution and winding up of the LLC, the Dissociated Member shall be entitled to participate in the winding up of the LLC to the same extent as any other Member. 2.10.2. If the dissociation does not cause a dissolution and winding up of the LLC, the LLC shall have the right to repurchase the Shares of the Dissociated Member from the legal representative of the Dissociated Member. The LLC shall exercise this right by delivery to the legal representative of notice of its election to purchase the Shares within ninety (90) days of the date on which the LLC learns of the event causing the dissociation. The repurchase price shall be an amount equal to the Fair Market Value of the Shares of the Dissociated Member on the Valuation Date and shall be paid within one year of the date of the LLC's notice of election to purchase. 2.10.3. If the dissociation does not cause a dissolution and winding up of the LLC and the LLC does not elect to repurchase the Shares, the legal -5- 13 representative of the Dissociated Member may request admission to the LLC as a Substitute Member. If the legal representative requests that it be admitted as a Substitute Member within ninety (90) days of the expiration of the LLC's right to repurchase and is denied Substitute Member status, the legal representative shall be entitled to (i) demand, within thirty (30) days from the date of such denial, that the LLC repurchase the Dissociated Member's Shares for an amount equal to the Fair Market Value of the Shares as of the date of such demand, the full amount of which shall be paid within one year of the date of demand; or (ii) to continue as an Assignee. If no request for Substitute Member status in made within the ninety (90) day period referred to above, the legal representative of the Dissociated Member shall thereafter have only the rights of an Assignee under this Agreement. 2.10.4. If the Shares of a Dissociated Member are purchased under this Section, interest on the Fair Market Value shall accrue from the Valuation Date until the full Fair Market Value is paid. The interest rate shall be the short-term applicable federal rate published by the Internal Revenue Service for the month in which the Valuation Date occurs. 3. CAPITAL CONTRIBUTIONS. 3.1. INITIAL CONTRIBUTIONS. Contemporaneously with the execution of this Agreement, each Member shall contribute cash, the Note or the Property to the capital of the LLC as set forth opposite the Member's name on Exhibit A as the Member's initial Capital Contribution. 3.2. ISSUANCE OF SHARES. In exchange for the initial Capital Contributions of the Members, the Members shall be issued that number of Shares set forth opposite their names on Exhibit A. 3.3. LOANS OR ADDITIONAL CONTRIBUTIONS. Whenever the Management Committee determines that the capital of the LLC is or is presently likely to become insufficient for the conduct of its business, the Membership Committee shall raise the additional funds needed from one or both of the following sources: 3.3.1. LOANS. To the extent approved by the Management Committee, any Member may lend money to the LLC in addition to that Member's Capital Contribution. Any such loan shall be a debt of the LLC to that Member, shall bear interest at such rate and be payable on such terms as approved by the Management Committee. Any such loan shall not increase the lending Member's Capital Contribution. 3.3.2. ADDITIONAL CONTRIBUTIONS. To the extent that the necessary amounts are not raised from Member loans or any third party loans approved by the Management Committee, the Members shall make additional Capital Contributions in cash no later than thirty (30) days after the determination is made as to the need for, and -6- 14 amount of, such additional Capital Contributions. Each Member's share of the total additional Capital Contributions required shall be in the proportion that such Member's Shares bears to the Total Shares Outstanding, as the same may from time to time change in accordance with the provisions of Section 3.4. 3.4. DEFAULT IN MAKING CONTRIBUTIONS. 3.4.1. REMEDIES. If, at any time, any Member (the "Defaulting Member") fails to make an additional Capital Contribution required of it under Section 3.3 within the appropriate period, that failure shall constitute conclusive evidence that the Defaulting Member has granted to the Members making the required contributions (the "Nondefaulting Members") the option to exercise any of the remedies provided under Sections 3.4.2 and 3.4.3. These remedies are in addition to any other rights or remedies granted by law or in equity, including, without limitation, filing suit seeking consequential and incidental damages arising from the Defaulting Member's default. The Management Committee shall notify each Member in writing of the total amount of the Capital Contributions not made. 3.4.2. CONTRIBUTION LOAN. The Nondefaulting Members, or a portion of them, on a pro rata basis based on their respective number of Shares or as they may otherwise determine, may elect, by written notice to the Defaulting Member, to advance the Defaulting Member's contribution to the LLC. If an advance is made, that advance shall constitute a loan ("Contribution Loan") from those Nondefaulting Members to the Defaulting Member and a Capital Contribution to the LLC by the Defaulting Member. The Contribution Loan shall bear interest equal to the lesser of (a) three percentage points over the prime commercial lending rate published from time to time in The Wall Street Journal or (b) the maximum rate allowed by law. Until such time as the Contribution Loan, together with accrued interest, has been fully repaid, those Nondefaulting Members shall be deemed to have a lien on the Defaulting Member's Shares and shall be entitled to repayment of the Contribution Loan from any cash distributions by the LLC which would otherwise be made to the Defaulting Member. If capital is distributed to the Members before liquidation, or if this LLC is dissolved and the assets liquidated before the Contribution Loan is repaid, any distribution of capital or profits otherwise allocable to the Defaulting Member shall be first applied toward the repayment of the Contribution Loan plus accrued interest, and any remaining balance shall then be distributed to the Defaulting Member. If, however, the Defaulting Member delivers to those Nondefaulting Partners within ninety (90) days after the date of receipt of notice under Section 3.4.1, an amount equal to the Contribution Loan made by those Nondefaulting Members to the Partnership together with the accrued interest, the Defaulting Member shall then not be considered to be in default under this Agreement. 3.4.3. OTHER REMEDIES. If the Nondefaulting Members make the Contribution Loan on behalf of the Defaulting Member under Section 3.4.2, and the Defaulting Member has not repaid the Contribution Loan within the 90-day time period -7- 15 provided under Section 3.4.2, then those Nondefaulting Members may, at any time after the expiration of that 90-day period, while the Contribution Loan is outstanding, elect by written notice to all Members to do one of the following: 3.4.3.1. SHARE REDUCTION. Treat the Contribution Loan as a Capital Contribution by those Nondefaulting Members so that the number of Shares held by the Nondefaulting Members shall be increased, pro rata, and the number of Shares held by the Defaulting Member shall be decreased, by a number equal to the Defaulting Member's Shares at the time multiplied by a fraction, the numerator of which is the amount of the unpaid balance of the Contribution Loan plus accrued and unpaid interest and the denominator of which is the sum of (i) the balance at such time of capital contributed by the Defaulting Member less capital distributions to such Defaulting Member, (ii) all recourse LLC debts times ratio that the Member's Shares bears to the Total Shares Outstanding (before adjustment under this Section), plus (iii) the amount of the unpaid balance of the Contribution Loan plus accrued and unpaid interest. If the Members' Shares are adjusted as provided above, the Defaulting Member shall no longer be in default under this Agreement and shall not be required to repay the Contribution Loan from that Nondefaulting Member. 3.4.3.2. PURCHASE OF SHARES. The Nondefaulting Members, on a pro rata basis, may purchase the Defaulting Member's Shares for their Fair Market Value. In such event, the Defaulting Member shall continue to be liable for payment of the Contribution Loan plus accrued interest, the Defaulting Member's accrued distributions to the time its interest in the LLC is acquired shall continue to be assigned, all as provided in Section 3.4.2., and the amount payable by the Nondefaulting Members to the Defaulting Member in payment for the Defaulting Member's interest in the LLC shall be offset against the unpaid Contribution Loan and accrued and unpaid interest thereon. 3.5. INTEREST. No Member shall earn any interest on his Capital Contributions to or share of the capital of the LLC. 3.6. INDIVIDUAL CAPITAL ACCOUNTS. A Capital Account shall be established and maintained on the LLC's books for each Member. The balance of each Member's Capital Account shall be calculated in accordance with the following provisions: 3.6.1. ADDITIONS TO CAPITAL ACCOUNT. Each Member's Capital Account shall be increased by: (a) the amount of cash and the agreed upon value of property contributed to the LLC by the Member; and (b) the Member's distributive share of the items of income or gain comprising the LLC's Profit for each taxable year. 3.6.2. SUBTRACTIONS FROM CAPITAL ACCOUNT. Each Member's Capital Account shall be decreased by: (a) the amount of cash and the Gross Asset Value of any LLC property distributed to such Member pursuant to any provision of this Agreement (net of liabilities encumbering such distributed property that the recipient Member is considered -8- 16 to assume pursuant to Code Section 752); and (b) such Member's distributive share of items of deduction or loss comprising the LLC's Loss for each taxable year. 3.6.3. COMPLIANCE WITH REGULATIONS. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Sections 1.704-1(b) and 1.704-2 of the Regulations, and shall be interpreted and applied in a manner consistent with the Regulations. If the Members determine that it is prudent to modify the manner in which the Capital Accounts are computed in order to comply with the Regulations, the Members may make such modification, provided that it is not likely to have a material effect on the amounts distributed to any Member upon dissolution of the LLC. 3.6.4. CAPITAL ACCOUNT ADJUSTMENT. If the Gross Asset Values of LLC assets are adjusted as described in the definition of Gross Asset Value in Appendix 1, the Capital Accounts of all Members shall be adjusted simultaneously to reflect the aggregate net adjustment as if the LLC recognized gain or loss equal to the amount of such net adjustment. 4. MANAGEMENT AND RESTRICTIONS. 4.1. MANAGEMENT COMMITTEE. Except for situations in which the approval of the Members is required by statute, the Certificate or this Agreement, the LLC shall be managed and controlled by the Management Committee. 4.2. MANAGEMENT COMMITTEE RESPONSIBILITIES. The business of the LLC shall be managed by and under the direction of the Management Committee who may do all such lawful acts and things as are not by statute or by the Certificate or this Agreement required to be done by the Members. The Management Committee's responsibilities shall be carried out as follows: 4.2.1. BY ARV. ARV shall, on behalf of the LLC and the Management Committee, have the power, authority and responsibility to perform the ARV Responsibilities. Any action taken by any ARV Committee Member in the performance of any of the ARV Responsibilities shall be an action taken on behalf of the Management Committee and the LLC for all purposes. No separate Management Committee approval shall be required. 4.2.2. BY THE CLEARBROOK GROUP. The Clearbrook Group shall, on behalf of the LLC and the Management Committee, have the power, authority and responsibility to perform the Clearbrook Group Responsibilities. An action taken by any Clearbrook Group Committee Member in the performance of any of the Clearbrook Group Responsibilities shall be an action taken on behalf of the Management Committee and LLC for all purposes. No separate Management Committee approval shall be required. -9- 17 4.2.3. BY MANAGEMENT COMMITTEE. The Management Committee shall, on behalf of the LLC, have the power, authority and responsibility to perform all other duties and responsibilities not included in the ARV Responsibilities and the Clearbrook Responsibilities. The Committee Members shall devote such time and attention to the performance of the Management Committee's responsibilities as is reasonably necessary or appropriate. Each Committee Member shall be entitled to one vote and Management Committee decisions shall be made by majority vote. Any Committee Member shall be entitled to vote by proxy in the same manner as Members may vote by proxy under Section 16.8. The Management Committee's responsibilities shall include, without limitation, the following: 4.2.3.1. The adoption and/or modification of a development and operating budget and plan for the LLC; 4.2.3.2. Consummation of any financing or refinancing required for the development and operation of the Project; 4.2.3.3. Any partnership, joint venture or other business arrangement with any other person or entity; 4.2.3.4. Filing any application to any governmental agency that binds the LLC; 4.2.3.5. Approval of (i) the construction contract, the owner/architect contract and other contract of material significance to the development of the Project and (ii) any contract or subcontract involving an Affiliate of a Member; 4.2.3.6. The expenditure of, or commitment to spend, more than $15,000 on any single LLC expense or group of related expenses, except for any expenditures and spending commitment within either the ARV Responsibilities or the Clearbrook Group Responsibilities, or that is authorized in the approved development and operating budget; 4.2.3.7. The transfer, compromise or release of any LLC claim exceeding $15,000; 4.2.3.8. Retaining accountants, attorneys and other professionals for the LLC; 4.2.3.9. The selection and hiring of the LLC's officers; 4.2.3.10. Any loan from a Member to the LLC; or -10- 18 4.2.3.11. Any other decision or action which the Management Committee is authorized or required to take under this Agreement, or which, by its nature, may reasonably be expected to have a material affect on the LLC or any of its assets or operations. 4.2.4. COOPERATION. Notwithstanding the allocation of the ARV Responsibilities to ARV and the Clearbrook Group Responsibilities to the Clearbrook Group, each Member agrees to cooperate with the other Members in connection with the performance of their respective responsibilities hereunder and shall sign such documents and take such actions as may be reasonably required in connection therewith. 4.3. POWER OF ATTORNEY. By executing this Agreement, the Members hereby appoint the Management Committee their attorney-in-fact to act in their names to: 4.3.1. Execute and acknowledge and, to the extent necessary, to file and record: 4.3.1.1. The Certificate and all instruments amending or canceling the Certificate; and 4.3.1.2. Amendments to this Agreement for the purpose of correcting an error or omission or satisfying the requirements or conditions imposed by any federal or state governmental agency, and for the purpose of admitting persons or entities as additional or substituted Members of the LLC as provided for in this Agreement. 4.3.2. Take any further action which such attorney-in-fact deems necessary or advisable in connection with any of the foregoing. The foregoing appointment is a special power of attorney coupled with an interest, is irrevocable and shall survive the Bankruptcy of a Member; may be exercised by the Management by the signature of an authorized member of the Management Committee as attorney-in-fact for all the Members. This special power of attorney does not supersede any other part of this Agreement nor is it to be used to deprive the other Members of any of their rights. -11- 19 4.4. IMPASSES. If the Management Committee reaches an impasse concerning any decision which it has the responsibility to make and that impasse cannot be resolved within a reasonable time under the circumstances but in any event not longer than thirty (30) days, either ARV or the Clearbrook Group shall have the right to (a) submit the matter for resolution by binding arbitration under Section 13 below; or (b) exercise the buy-sell provisions as provided in Section 14 below. 4.5. AUTHORITY OF MEMBERS. Notwithstanding anything to the contrary in this Agreement, the Management Committee may not do or permit to be done any of the following without the express approval of all Members: 4.5.1. Voluntarily cause the dissolution of the LLC; 4.5.2. Transfer all or a significant part of the LLC's assets except in the ordinary course of business, or engage in any material recapitalization or merger; 4.5.3. The admission of additional Members; or 4.5.4. Take any action which would make it impossible to carry on the business of the LLC. 4.6. COST REIMBURSEMENT. Neither ARV nor the Clearbrook Group shall be entitled to receive any fees for the performance of their respective responsibilities hereunder; however, each of them shall be entitled to be reimbursed for expenses reasonably related to the performance of such responsibilities as follows: 4.6.1. Each month after the issuance of a certificate of occupancy for the Project, ARV shall be entitled to receive the amount equal to the greater of $8,000 or 2 1/2% of the gross revenue of the Project from all sources. 4.6.2. After the LLC enters into a construction contract for the construction of the Project at cost without overhead or profit, the Clearbrook Group shall be entitled to receive each month during the construction of the Project (estimated to take 12-15 months), an amount equal to 4% of the Project construction costs. These amounts shall be payable upon each construction loan draw. 4.6.3. An appropriate adjustment shall be made at least semiannually to conform the actual expenses ARV or Clearbrook incurs to the amounts paid to each of them pursuant to this provision. -12- 20 4.7. AMENDMENT OF CERTIFICATE OR AGREEMENT. The Management Committee shall amend the Formation Certificate or this Agreement as necessary to reflect any changes as a result of any action taken by the Members. 4.8. LIABILITY OF MEMBERS TO THE OTHER MEMBERS AND THE LLC; INDEMNITY OF MEMBERS. 4.8.1. LIABILITY. Except as otherwise specifically set forth herein, no Member or any Affiliates, employees or agents shall be liable to the other Members because any taxing authorities disallow or adjust income, deductions or credits in the LLC income tax returns. Furthermore, no Member or any Affiliates, employees or agents shall have any personal liability for the repayment of the Capital Contributions of the Members except as provided in this Agreement. In addition, the doing of any act or the omission to do any act by any Member, the effect of which may cause or result in loss or damage to the LLC, if done in good faith and in accordance with sound business practices and otherwise in accordance with the terms of this Agreement, shall not subject the Member or the Member's successors or assigns to any liability. 4.8.2. INDEMNIFICATION. 4.8.2.1. The LLC shall indemnify and hold the Management Committee and the Members harmless from and against any loss, claims, damages, liabilities, expenses, judgments, fines or settlements arising from any claims (including reasonable legal expenses and other costs of defense), demands, actions, suits or proceedings (civil, criminal, administrative or investigative) in which they may be involved, as a party or otherwise, by reason of their management of, or involvement in, the affairs of the LLC, or rendering of advice or consultation with respect thereto, or which relate to the LLC, its properties, business or affairs, if the indemnitee acted in good faith and in a manner the indemnitee reasonably believed to be in, or not opposed to, the best interests of the LLC, and, with respect to any criminal proceeding, had no reasonable cause to believe the conduct of the indemnitee was unlawful. The termination of a proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not, of itself, create a presumption that the indemnitee did not act in good faith and in a manner which the indemnitee reasonably believed to be in, or not opposed to, the best interests of the LLC or that the indemnitee had reasonable cause to believe that the indemnitee's conduct was unlawful (unless there has been a final adjudication in the proceeding that the indemnitee did not act in good faith and in a manner which the indemnitee reasonably believed to be in or not opposed to the best interests of the LLC; or that the indemnitee did have reasonable cause to believe that the indemnitee's conduct was unlawful). 4.8.2.2. The LLC may also indemnify any Person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action by or in the right of the LLC by reason of the fact that such Person is or was an -13- 21 officer, employee or agent of the LLC. However, no Person shall be entitled to indemnification hereunder for any conduct arising from the gross negligence or willful misconduct of that Person or reckless disregard in the performance of that Person's duties hereunder. 4.8.2.3. Expenses (including attorneys' fees) incurred in defending any proceeding under Section 4.8.2.1 or 4.8.2.2 may be paid by the LLC in advance of the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the indemnitee to repay such amount if it is ultimately determined that the indemnitee is not entitled to indemnity. 4.8.2.4. The indemnification provided by this Section shall not be deemed to be exclusive of any other rights to which any Person may be entitled under any agreement, or as a matter of law, or otherwise, both as to action in a Person's official capacity and to action in another capacity. 4.8.2.5. The Management Committee shall have power to purchase and maintain insurance for the benefit of the LLC, the Members, officers, employees or agents of the LLC and any other indemnitees at the expense of the LLC whether or not the LLC would be permitted to indemnify such Persons against such liability under the provisions of this Agreement. 5. OFFICERS. 5.1. APPOINTMENT OF OFFICERS. The officers of the LLC shall be appointed by the Management Committee and shall include a President and a Secretary. The Management Committee may appoint one person to be Chairman and one to be Vice Chairman. The Management Committee may also appoint a Treasurer and/or one or more Vice Presidents, Assistant Secretaries and Assistant Treasurers. Any number of offices may be held by the same person. The Management Committee may appoint such other officers and agents as they deem appropriate who shall hold their offices for such terms and shall exercise such powers and perform such duties as are determined by the Management Committee. 5.2. COMPENSATION OF OFFICERS. Members, their Affiliates, or their respective employees who serve as officers, shall serve without compensation. The compensation of any other officers and agents of the LLC shall be fixed by the Management Committee. 5.3. TERM OF OFFICE. The officers of the LLC shall hold office until their successors are chosen and qualified. Any officer elected or appointed by the Management Committee may be removed at any time by the Management Committee. Any vacancy occurring in any office of the LLC shall be filled by the Management Committee. -14- 22 5.4. DUTIES OF CHAIRMAN. The Chairman, if any, shall preside at all meetings of the Members at which the Chairman is present. The Chairman shall have and may exercise such powers as are, from time to time, assigned to the Chairman by the Management Committee and as may be provided by law. 5.5. DUTIES OF VICE-CHAIRMAN. In the absence of the Chairman, the Vice Chairman, if any, shall preside at all meetings of the Members at which the Vice Chairman is present. The Vice Chairman shall have and may exercise such powers as are, from time to time, assigned to the Vice Chairman by the Management Committee and as may be provided by law. 5.6. DUTIES OF PRESIDENT. The President shall be the chief executive officer of the LLC, and in the absence of the Chairman and Vice Chairman shall preside at all meetings of the Members. The President shall have general and active management of the day-to-day business and affairs of the LLC and shall see that all orders and resolutions of the Members are carried into effect. The President shall execute all contracts except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Management Committee to some other officer or agent of the LLC. 5.7. DUTIES OF VICE PRESIDENT. In the absence of the President, the Vice President, if any (or if there is more than one Vice President, the Vice Presidents in the order designated by the Management Committee, or in the absence of any designation, then in the order of their election), shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Vice Presidents shall perform such other duties and have such other powers as the President or the Management Committee may prescribe. 5.8. DUTIES OF SECRETARY. The Secretary shall attend all meetings of the Members and record all the proceedings of the meetings of the Members in a book to be kept for that purpose. The Secretary shall give, or cause to be given, notice of all meetings of the Members and shall perform such other duties and have such other powers as the Management Committee or the President may prescribe. 5.9. DUTIES OF ASSISTANT SECRETARY. The Assistant Secretary, or, if there is more than one, the Assistant Secretaries in the order designated by the Members (or in the absence of any designation, then in the order of their election) shall, in the absence of the Secretary or in the event of the Secretary's inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Management Committee, President or Secretary may prescribe. 5.10. DUTIES OF TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the LLC and shall deposit all money and other -15- 23 valuables in the name and to the credit of the LLC in such depositories as may be designated by the Members. The Treasurer shall disburse the funds of the LLC as may be ordered by the Members, taking proper vouchers for such disbursements, and shall render to the President and the Management Committee, at regular meetings, or when the Management Committee so require, an account of all transactions as Treasurer and of the financial condition of the LLC. 5.11. DUTIES OF ASSISTANT TREASURER. The Assistant Treasurer, or if there is more than one, the Assistant Treasurers in the order designated by the Management Committee (or in the absence of any designation, then in the order of their election) shall, in the absence of the Treasurer or in the event of the Treasurer's refusal or inability to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Management Committee may prescribe. 6. SHARE CERTIFICATES. 6.1. CERTIFICATES. Every Member of the LLC shall be entitled to have a certificate confirming the number of Shares the Member owns. 6.2. REPLACEMENT CERTIFICATES. Except as provided in this Section, no new certificates for Shares shall be issued to replace a previously issued certificate unless that certificate is surrendered to the LLC and cancelled at the same time. The Management Committee may, if any Share certificate is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the Management Committee may require. The Management Committee may require indemnification of the LLC secured by a bond or other adequate security sufficient to protect the LLC against any claim that may be made against it on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 6.3. RIGHTS OF REGISTERED OWNER. The LLC shall be entitled to recognize the exclusive right of a Person registered on its books as the owner of Shares to receive dividends, and to vote as the owner, and to hold liable for calls and assessments a Person registered on its books as the owner of Shares. The LLC shall not be bound to recognize any Person as the owner of Shares, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of New Jersey. 7. ALLOCATIONS OF PROFIT AND LOSS. 7.1. LOSS. After giving effect to the special allocations described in Appendix 2, Loss shall be allocated among the Members in accordance with their respective Capital Account balances. 7.2. PROFIT. After giving effect to the special allocations described in Appendix 2, Profit shall be allocated among the Members as follows: -16- 24 7.2.1. First, among the Members proportionately in accordance with any Loss previously allocated to them, less any Profit previously allocated; and 7.2.2. Second, in proportion to their ownership of Shares. 7.3. ALLOCATIONS FOR TAX PURPOSES. 7.3.1. TAX ALLOCATIONS. For income tax purposes each item of income, gain, loss or deduction of the LLC shall be allocated among the Members in accordance with the method in which equivalent items of Profit or Loss are allocated pursuant to this Section. 7.3.2. PARTNERSHIP TAX TREATMENT. The Members intend the LLC to be treated as a partnership for all federal income tax purposes. No Member shall assert, on any tax return or elsewhere, anything inconsistent with this intent, or do anything which could deny the LLC the intended partnership tax treatment. 7.3.3. ALLOCATIONS UPON TRANSFERS OF LLC INTERESTS. Profit and Loss, together with corresponding tax items, shall be allocated between the transferring Member and the Substitute Member using any method selected by the Management Committee which is permitted by Section 706 of the Code. 8. DISTRIBUTIONS. 8.1. DISTRIBUTIONS TO CLEARBROOK. In addition to any other Distributions to which Clearbrook is entitled hereunder, Clearbrook shall receive the following: 8.1.1. Upon receipt of the initial Capital Contributions, the LLC shall distribute $400,000 in cash to Clearbrook. 8.1.2. Upon receipt of that certain Security and Pledge Agreement of even date herewith between ARV and the LLC (the "Security Agreement") and the Note and ARV Shares from ARV, the LLC shall assign the Security Agreement, the Note and the ARV Shares to Clearbrook. 8.2. DISTRIBUTIONS OF CASH FLOW. Distributions shall be made to the Members at times determined by the Management Committee, but no less frequently than quarterly once the LLC generates positive cash flow. All Distributions shall be made as follows: 8.2.1. First, among the Members proportionately in accordance with their relative Capital Contributions until their Adjusted Capital Contributions are zero; and -17- 25 8.2.2. Second, in proportion to their ownership of Shares. 8.3. RETURN OF DISTRIBUTIONS IN CERTAIN CIRCUMSTANCES. Under Section 42 of the LLC Act, a member is obligated to return a distribution from a limited liability company to the extent that immediately after giving effect to the distribution all limited liability company unsecured liabilities to its creditors exceed the fair value of limited liability company assets (i.e. the limited liability company is insolvent). The Management Committee will endeavor to refrain from making any Distributions in such circumstances; however, a court may hold that, notwithstanding these provisions of this Agreement, the fair market value of the LLC assets is other than that determined by the Management Committee, and, accordingly, the Members may be liable to return to the LLC all or a portion of the Distributions received under such circumstances. 8.4. WITHHOLDING TAXES. If the LLC is obligated to withhold and pay any taxes with respect to any Member, any tax required to be withheld may be withheld from any Distribution otherwise payable to that Member, or in lieu thereof upon remittance to the appropriate tax authority may be charged to that Member's Capital Account as if the amount of such tax had been distributed to that Member. 9. MEMBERS. 9.1. LIABILITY OF MEMBERS. The Members shall not be personally liable for any obligation of the LLC. 9.2. NO DISTRIBUTIONS IN KIND. Except as otherwise specifically set forth herein, the Members shall not have the right to demand or receive property other than cash in return of Capital Contributions or as to Distributions. 9.3. BANKRUPTCY OF A MEMBER. Upon the insolvency or bankruptcy of a Member, the LLC shall not dissolve or terminate and the representative of that Member shall have such rights of that Member as are necessary for the purpose of settling or managing the affairs and the same power as that Member had to constitute an Assignee of that Member's interest as a Substitute Member, but the representative shall not become a Substitute Member without complying with the requirements of Section 10. 10. TRANSFER OF LLC INTERESTS. 10.1. TRANSFER. Any Member may Transfer any portion of the Member's Shares only if (i) the Transferring Member has complied with the Right of First Refusal imposed by Section 10.5; (ii) the Assignee has agreed in writing to assume all of the obligations of the Transferring Member with respect to the Shares Transferred (including the obligations imposed hereunder as a condition to any Transfer), and (iii) the Management Committee shall have concluded (which conclusion may be based upon an opinion of counsel satisfactory to them) that such assignment or disposition would not (A) -18- 26 result in a violation of the Securities Act of 1933 as amended, or any other applicable statute of any jurisdiction; (B) result in a termination of the LLC for Federal or state income tax purposes or result in the LLC being taxed as a corporation for Federal income tax purposes; or (C) result in a violation of any law, rule or regulation by the Member, the Assignee, the LLC or the other Members. 10.2. TRANSFER VOID. Any purported Transfer of Shares in contravention of this Section shall be void and of no effect. 10.3. RIGHTS OF ASSIGNEES. An Assignee of Shares has no right to vote or to participate in the management of the business and affairs of the LLC or to become a Member. The Assignee is only entitled to receive Distributions and to be allocated the Profit and Loss attributable to the Shares Transferred to the Assignee. 10.4. ADMISSION OF PERMITTED TRANSFEREES. The Shares of any Member shall be Transferable free from any Right of First Refusal if (i) the Transfer occurs by reason of or incident to the death, dissolution, liquidation, merger or termination of the transferor Member, (ii) the transferee is a Permitted Transferee, and (iii) the Permitted Transferee agrees in writing to be bound by the terms and conditions of this Agreement as fully as if the Permitted Transferee were an original signatory hereto. A Permitted Transferee will be admitted as a Substitute Member only in accordance with Section 2.6. 10.5. RIGHT OF FIRST REFUSAL. 10.5.1. GRANT. The LLC is hereby granted the Right of First Refusal exercisable in connection with any proposed Transfer of Shares other than permitted Transfers under Section 10.4 or a Transfer of the Litt Shares to Clearbrook under Section 10.5.3. 10.5.2. NOTICE OF INTENDED DISPOSITION. If a Member desires to accept a bona fide third-party offer for the Transfer of any or all of the Member's Shares, Member shall promptly (i) deliver to the Secretary of the LLC the Disposition Notice, and (ii) provide satisfactory proof that the disposition of the Target Shares to such third-party offeror would not be in contravention of the provisions set forth in Section 10.1. 10.5.3. CLEARBROOK RIGHT TO LITT SHARES. If Litt is the Member who delivers the Disposition Notice concerning his Shares, Clearbrook shall have the right, for a period of twenty-five (25) days after receipt of the Disposition Notice, to purchase all of the Litt Target Shares specified therein upon substantially the same terms as specified therein. Such right shall be exercisable by delivery of the Member Exercise Notice to Litt before the end of the twenty-five (25)-day exercise period. 10.5.4. EXERCISE OF RIGHT. The LLC shall, for a period of twenty-five (25) days following (i) receipt of the Disposition Notice, or (ii) in the case of Transfer -19- 27 of the Litt Shares, expiration of Clearbrook's exercise period under Section 10.5.3, have the right to repurchase any or all of the Target Shares specified in the Disposition Notice upon substantially the same terms as specified therein. Such right shall be exercisable by delivery of the Exercise Notice to the Transferring Member before the end of the twenty-five (25)-day exercise period. 10.5.5. SECONDARY RIGHT OF OTHER MEMBERS. If the LLC does not exercise its Right of First Refusal with respect to all of the Target Shares within the twenty-five (25)-day period set forth in the previous Section, the other Members shall, for a period of fifteen (15) days following the expiration of the LLC's Right of First Refusal, have the right to purchase any or all of the Target Shares specified in the Disposition Notice upon substantially the same terms as specified therein. Such right shall be exercisable by delivery of the Member Exercise Notice to the Transferring Member prior to the expiration of the fifteen (15)-day exercise period. The Member Exercise Notice shall set forth the number of Target Shares which the exercising Member desires to purchase. If the Members delivering Member Exercise Notices desire to purchase more than the total number of Target Shares, then each exercising Member shall be permitted to purchase a pro rata amount of the Target Shares based upon the total number of Shares indicated in the Member Exercise Notices. 10.5.6. VALUATION. Should the purchase price specified in the Disposition Notice be payable in property other than cash or evidences of indebtedness, the LLC shall have the right to pay the purchase price in the form of cash equal in amount to the Fair Market Value of such property. The closing shall then be held on the later of (i) the fifth business day following delivery of the Exercise Notice or (ii) the fifth business day after the Appraisal shall have been completed. 10.5.7. FULL EXERCISE OF RIGHTS. If the right of the LLC or the Members is exercised with respect to all the Target Shares specified in the Disposition Notice, then the LLC or the Members (as the case may be) shall effect the purchase of the Target Shares, including payment of the purchase price, on the payment terms specified in the Disposition Notice; and the Transferring Member shall deliver to the LLC the certificates representing the Target Shares to be purchased, each certificate to be properly endorsed for transfer. The closing shall then be held on the later of (i) sixty (60) days following delivery of the Disposition Notice or (ii) the five (5) business days after any necessary valuation shall have been made. 10.5.8. PARTIAL EXERCISE OF RIGHT. If the LLC or the Members make a timely exercise of their rights which in the aggregate constitute less than all of the Target Shares specified in the Disposition Notice, the Transferring Member shall have the option, exercisable by written notice to the LLC delivered within thirty (30) days after the date of the Disposition Notice, to effect the Transfer of the Target Shares pursuant to one of the following alternatives: -20- 28 10.5.8.1. Transfer of all the Target Shares to the third- party offeror identified in the Disposition Notice, but in full compliance with the requirements of Section 10.1, as if the LLC did not exercise the Right of First Refusal; or 10.5.8.2. sale to the LLC or the Members of the portion of the Target Shares which the LLC or the Members have elected to purchase, such sale to be effected in substantial conformity with the provisions of this Section. Failure of the Transferring Member to deliver timely notification to the LLC under this Section shall be deemed to be an election by the Transferring Member to sell the Target Shares pursuant to alternative (b) above. 10.5.9. NON-EXERCISE OF RIGHT. If the LLC and the Members do not exercise their purchase rights in accordance with this Section, the Transferring Member shall have a period of thirty (30) days thereafter in which to Transfer the Target Shares to the third-party offeror identified in the Disposition Notice upon terms and conditions no more favorable to such third-party offeror than those specified in the Disposition Notice; provided, however, that any such Transfer must not be effected in contravention of the provisions of Section 10.1. If the Transferring Member does not effect the Transfer of the Target Shares within the specified thirty (30)-day period, the LLC's and the other Members' Right of First Refusal shall continue to be applicable to any subsequent disposition of the Target Shares by the Member. 10.5.10. RECAPITALIZATION/MERGER. 10.5.10.1. Upon any share dividend, share split, recapitalization or other transaction affecting the LLC's outstanding Shares without receipt of consideration, then any new, substituted or additional securities or other property which is by reason of such transaction distributed with respect to the Shares shall be immediately subject to the LLC's Right of First Refusal hereunder, but only to the extent the Shares are at the time covered by such right. 10.5.10.2. Upon (i) a merger or consolidation in which the LLC is not the surviving entity or (ii) a disposition of all or substantially all of the LLC's assets, (iii) a reverse merger in which the LLC is the surviving entity but in which the LLC's outstanding Shares are transferred in whole or in part to Person or Persons other than those who held the Shares immediately prior to the merger, or (iv) any transaction effected primarily to change the State in which the LLC is organized, or to create a holding company structure, the LLC's Right of First Refusal shall remain in full force and effect and shall apply to the new securities or other property received in exchange for the Shares in consummation of the transaction, but only to the extent the Shares are at the time covered by such right. -21- 29 10.6. MARITAL DISSOLUTION OR LEGAL SEPARATION. 10.6.1. GRANT. In connection with the dissolution of the marriage or the legal separation of any Member, the LLC shall have the Special Purchase Right, exercisable at any time during the thirty (30) day period following the LLC's receipt of the required Dissolution Notice, to purchase from the Member's spouse any or all Shares which are or would otherwise be awarded to such spouse incident to the dissolution of marriage or legal separation in settlement of any marital property rights such spouse may have in the Shares. The Special Purchase Right shall not apply to any Shares retained by the Member. 10.6.2. NOTICE OF DECREE OR AGREEMENT. Each Member shall promptly provide the LLC with written notice of (i) the entry of any court order resolving the property rights of the Member and the Member's spouse in connection with their marital dissolution or legal separation or (ii) the execution of any agreement relating to the distribution or division of such property rights. The Dissolution Notice shall be accompanied by a copy of the actual decree of dissolution or settlement agreement between the Member and the Member's spouse which provides for the award to the spouse of Shares in settlement of any marital property rights such spouse may have in such Shares. 10.6.3. EXERCISE OF SPECIAL PURCHASE RIGHT. The Special Purchase Right shall be exercisable by delivery of the Purchase Notice to the Member and the Member's spouse within thirty (30) days after the LLC's receipt of the Dissolution Notice. The Purchase Notice shall indicate the number of the Shares to be purchased by the LLC, the date such purchase is to be effected (such date to be not less than five (5) business days, nor more than ten (10) business days, after the date of the Purchase Notice), and the amount which the LLC proposes to pay for such Shares. If the Member's Spouse does not agree to the amount proposed to be paid by the LLC, then the price to be paid shall be the Fair Market Value of the Shares as determined by Appraisal and the purchase shall occur ten (10) business days following the completion of the Appraisal. However, if the Fair Market Value is greater than one hundred ten percent (110%) of the purchase price set forth in the Purchase Notice, the LLC shall have the right to withdraw the Purchase Notice. 10.7. EFFECT OF CHARGING ORDER. If any Member's LLC interest becomes subject to a charging order, the following provisions shall govern the rights and obligations of the Member whose interest is so charged and the creditor in whose favor the charging order was entered: 10.7.1. A creditor who obtains a charging order shall have no right to interfere in the management of the LLC or any other rights as a Member, except the same right to receive the allocations of Profit and Loss and the Distributions to which the Member whose interest is so charged would otherwise be entitled. -22- 30 10.7.2. The interest of a Member so charged may not be foreclosed upon or otherwise sold pursuant to court order without the consent of all of the Members, other than the Member whose interest is so charged. 10.8. ASSIGNEE'S TAX LIABILITY. An Assignee of any interest in the LLC which is taken by levy, foreclosure, charging order, execution or other similar proceeding shall receive both Federal and California Forms K-1 and report all income and loss on its income tax returns each year in accordance with Rev. Rul. 77-137, 1977- 1 C.B. 178. 11. LLC ACCOUNTING. 11.1. METHOD OF ACCOUNTING. The LLC books shall be kept on the accrual basis unless changed to the cash basis by the Management Committee. 11.2. FISCAL YEAR. The fiscal year of the LLC shall end on March 31 of each year unless changed by the Members in accordance with applicable tax laws. 11.3. FINANCIAL AND BUSINESS RECORDS. 11.3.1. MAINTENANCE OF RECORDS AND ACCOUNTS. The Management Committee shall maintain or cause to be maintained financial and business records (including those identified in Section 25a of the LLC Act) in which shall be entered all transactions of the LLC. 11.3.2. REQUIRED RECORDS. The Management Committee shall maintain or cause to be maintained at the principal place of business of the LLC all of the following records: 11.3.2.1. A current list of the name and last known business or residence address of each Member, together with the Capital Contribution and the share in the Profit, Loss and Distributions of each Member; 11.3.2.2. A copy of the Certificate and all amendments thereto, together with executed copies of any powers of attorney pursuant to which the Certificate or amendment has been executed; 11.3.2.3. Copies of the LLC's federal and state income tax or information returns and reports, if any, for the six (6) most recent taxable years; 11.3.2.4. Copies of this Agreement and all amendments thereto; 11.3.2.5. Financial statements of the LLC for the six (6) most recent fiscal years; and -23- 31 11.3.2.6. The LLC's books and records for at least the current and past three (3) fiscal years. 11.3.3. SUPERVISION; INSPECTION OF BOOKS. The Management Committee shall give notice to each Member of any significant changes in the location of the LLC's financial and business records. Such financial and business records shall be open to inspection, audit and copying by any Member, or the Member's designated representative, upon reasonable notice at any time during business hours for any purpose reasonably related to the Member's interest in the LLC. Any information so obtained or copied shall be kept and maintained in strictest confidence except as required by law. 11.3.4. INCOME TAX DATA AND REPORTS. The Management Committee shall send or cause to be sent to the Members, within ninety (90) days after the end of each fiscal year, such information as is necessary for the Members to complete their federal and state income tax or information returns together with an annual report which shall include financial statements of the LLC which may, but are not required to, be audited by independent certified public accountants. 12. BANK ACCOUNTS. All funds of the LLC are to be deposited in the LLC's name in such bank account or accounts as may be designated by the Management Committee and shall be withdrawn on the signature of persons as the Management Committee may authorize. 13. DISPUTE RESOLUTION. 13.1. BY AGREEMENT OR ARBITRATION. The Management Committee and the Members shall attempt to resolve informally all disputes that arise under this Agreement. Any such dispute that cannot be resolved informally shall be determined by binding arbitration conducted in Middlesex County, New Jersey by the American Arbitration Association or by any method of private arbitration upon which the Management Committee or the Members, as applicable, agree; provided, however, that any such private arbitration shall proceed in accordance with the procedural rules of the American Arbitration Association then in effect (the "Rules"). This provision shall not restrict the right of any Member to seek equitable remedies in a judicial proceeding pending the outcome of the arbitration. 13.2. PROCEDURAL GUIDELINES. Notwithstanding any provision in the Rules to the contrary, the following guidelines shall apply to arbitration under this Agreement: 13.2.1. The arbitration panel shall consist of three persons, one chosen by ARV and the other chosen by the Clearbrook Group. The third panel member, who shall chair the arbitration panel, chosen by these two panel members. -24- 32 13.2.2. The panel shall make all substantive determinations by majority vote, and procedural matters may be determined by the chairman. 13.2.3. The disputing parties shall be permitted discovery as provided in the New Jersey Rules of Civil Procedure in effect at the time the third panel member is selected. 13.2.4. Unless otherwise agreed by the disputing parties, the arbitration hearing shall be held no later than ninety (90) days following the selection of the third member of the arbitration panel, and the arbitration award shall be issued no later than thirty (30) days after the hearing. 13.3. PREVAILING PARTY. The successful or prevailing party in any arbitration or other proceedings brought under Section 13.1 shall be entitled to recover actual attorneys' fees (including fees for paraprofessionals and similar personnel and disbursements) and other costs it incurred in that action or proceeding, in addition to any other relief to which it may be entitled. The parties agree that actual attorneys' fees shall be based on the attorneys' fees actually incurred (based on the attorneys' customary hourly billing rates) rather than the court or arbitrator making an independent inquiry concerning reasonableness. 14. BUY-SELL PROVISIONS. 14.1. OFFER. Subject to the conditions set forth in Section 14.6 below, at any time after the Effective Date, any Member (the "Electing Member"), provided that the Electing Member is not then in breach of this Agreement, may offer to buy all, but not less than all, of the Shares owned by any other Member (the "Offeree") by delivering to the Offeree a written notice (the "Buy-Sell Offer") stating the Electing Member's proposed purchase price for the Shares (the "Purchase Price"). 14.2. REPLY NOTICE. The Offeree shall have sixty (60) days after the receipt of the Buyer-Sell Offer within which to send written notice (the "Reply Notice") to the Electing Member stating whether the Offeree will either (a) sell to the Electing Member all of the Offeree's Shares or (b) buy from the Electing Member all of the Electing Member's Shares. If the Electing Member does not receive a Reply Notice within the 60-day reply period, the Offeree shall be conclusively deemed to have accepted the Electing Member's offer to purchase the Offeree's Shares, and a binding contract of purchase and sale shall be deemed to be formed between the Electing Member and the Offeree at the Purchase Price. If the Offeree elects to purchase, it shall purchase an equal number of Shares from the Electing Member, or all of the Electing Member's Shares, at the applicable Purchase Price per Share. 14.3. CLOSING. The closing for the purchase of the Shares pursuant to this Section 14 (the "Closing") shall be held at the principal office of the LLC, unless otherwise -25- 33 mutually agreed, on a date selected by the purchasing Member, but not more than sixty (60) days after the formation of a purchase contract upon the Offeror's receipt of a Reply Notice or the expiration of the 60-day reply period, as applicable, under Section 14.2 above. 14.4. PAYMENT OF PURCHASE PRICE. The Purchase Price shall be paid in cash at the Closing. All loans of the selling Member owing to the LLC shall be repaid to the LLC concurrently with the first payment of the Purchase Price. The Electing Member shall have the right, in his sole discretion, to elect to pay the Purchase Price, or such a portion thereof as may be required, to the LLC in payment, or partial payment, as applicable, of the selling Member's loans owing to the LLC. 14.5. DEFAULT. If the purchasing Member does not close the purchase of Shares under this Section 14 as a result of his default, the selling Member shall have the right (but not the obligation), in addition to any other rights or remedies he may have to elect, by a notice (to be effective immediately) to the defaulting Member, (a) to purchase the defaulting Member's Shares at a purchase price equal to eight-five percent (85%) of the Purchase Price of the defaulting Member's Shares; (b) to file suit for consequential and incidental damages arising from the defaulting Member's failure to close his purchase; or (c) to dissolve the LLC. The closing of the nondefaulting Member's purchase under this Section shall be held at the principal office of the LLC, unless otherwise mutually agreed, on a date selected by the nondefaulting Member not more than thirty (30) days after the nondefaulting Member's election notice is given. The Purchase Price shall be paid on the same terms and conditions as provided in Section 14.4. 14.6. CONDITIONS TO INVOKING BUY-SELL PROCEDURE. Notwithstanding anything to the contrary in this Agreement, the buy-sell procedure may not be invoked by a Member concerning a Management Committee decision unless and until the Management Committee has reached an impasse over that decision. 15. DISSOLUTION, LIQUIDATION AND TERMINATION OF THE LLC. 15.1. LIMITATIONS. The LLC may be dissolved, liquidated and terminated pursuant only to the provisions of this Section and the Members hereby waive all other rights that they may have to cause the dissolution of the LLC or sale or partition of any of its assets. 15.2. CAUSE OF DISSOLUTION. The first to occur of the following events shall cause the LLC to be dissolved: 15.2.1. The occurrence of a Dissolution Event and the failure of the Members that remain to consent to continue the business of the LLC within ninety (90) days following the occurrence of the Dissolution Event; -26- 34 15.2.2. The unanimous vote of the Members in favor of dissolution and termination of the LLC; 15.2.3. The sale or other disposition of substantially all of the LLC's assets and the receipt in cash of the proceeds thereof; 15.2.4. At the end of the term of the LLC; 15.2.5. The election of a Member to dissolve the LLC under Section 14 as a result of a default of the purchasing Member to close after exercising a Share buyout under Section 14; or 15.2.6. The date on which the LLC is dissolved upon the occurrence of any of the events listed in Section 48(d) of the LLC Act or otherwise by operation of law or decree of judicial dissolution. 15.3. CONTINUATION OF THE LLC. Upon the occurrence of a Dissolution Event, if there are at least two remaining Members, the remaining Members have the right to avoid dissolution of the LLC and elect to continue the business of the LLC on the same terms as this Agreement. Such right can be exercised by the vote of the Members to continue the business of the LLC within ninety (90) days after the occurrence of a Dissolution Event. Expenses incurred in the continuance of the LLC shall be deemed expenses of the LLC. 15.4. AUTHORITY TO WIND UP. The Management Committee shall have all necessary power and authority required to marshall the assets of the LLC, to pay its creditors, to distribute assets and otherwise wind up the business and affairs of the LLC. In particular, the Management Committee shall have the authority to continue to conduct the business and affairs of the LLC during the period of liquidation of the LLC insofar as such continued operation remains consistent, in the judgment of the Members, with the orderly winding up of the LLC. 15.5. LIQUIDATION OF THE LLC. Upon the dissolution of the LLC, the LLC shall be wound up and liquidated on a reasonably prudent basis and shall not engage in any activity except that necessary to wind up its business; the non-cash assets shall be liquidated; and the remaining assets shall be distributed as expeditiously as possible. 15.5.1. CASH DISTRIBUTIONS AND PROFIT AND LOSS ALLOCATIONS DURING LIQUIDATION. During the winding up and liquidation period, the Members shall continue to receive Distributions and to share in Profit and Loss for tax purposes as provided in this Agreement. If the LLC is liquidated within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Regulations, liquidating Distributions shall be made in compliance with Section 1.704-1(b)(2)(ii)(b)(2) of the Regulations. -27- 35 15.5.2. DISTRIBUTIONS. Every LLC asset shall be either distributed in kind or sold, as determined by the Management Committee. The assets shall be distributed according to the following priority: 15.5.2.1. EXPENSES. First, to pay all expenses of winding up, liquidating, and terminating the LLC and second, to pay off all LLC obligations to third party creditors; 15.5.2.2. RESERVES. Then, to the setting up of any reserves which the Management Committee may deem reasonably necessary for any contingent or unforeseen obligations of the LLC, which reserves will be distributed when they are no longer needed; and 15.5.2.3. LIQUIDATING DISTRIBUTIONS. Liquidating Distributions shall be made, in compliance with Section 1.704-1(b)(2)(ii)(b)(2) of the Regulations, only to the Members, if any, who have positive Capital Accounts (or in the ratio of such Capital Account balances, if more than one Member shall have a positive Capital Account balance and the amount to be distributed is less than the sum of the positive Capital Account balances). If any Member's interest in the LLC is "liquidated" within the meaning of Section 1.761-1(d) of the Regulations, liquidating Distributions, if any, shall be made to such Member in the same amounts and at such times as would have been made to such Member, in accordance with the foregoing provision of this Section, if the LLC itself were being "liquidated." Liquidating Distributions shall in all events be made after there shall be distributed to each Member current Distributions required pursuant to Section 8. In the case of a liquidation of a Member's interest in the LLC where there is no liquidation of the LLC, the liquidating Distributions to such Member shall be made in accordance with the provisions of the preceding sentence on the same basis as if there were a liquidation of the LLC. 15.6. FILING CERTIFICATE OF CANCELLATION. Upon dissolution of the LLC, the Management Committee shall execute and file a Certificate of Cancellation in the office of the Secretary of State. If there is no Management Committee, then the Certificate of Cancellation shall be filed by the remaining Members. If there are no remaining Members, the Certificate of Cancellation shall be filed by the last Person to be a Member; however, if there is no such Person, the Certificate of Cancellation shall be filed by the legal or personal representatives of the Person who was last a Member. 16. MEETINGS OF MEMBERS. 16.1. CALL AND PLACE OF MEETINGS. Meetings of the Members at the principal place of business of the LLC or at any place designated by the President may be called pursuant to the written request of the President or of Members representing more than ten percent (10%) of the Total Outstanding Shares, for consideration of any of the matters as to which Members are entitled to vote. -28- 36 16.2. NOTICE OF MEETING. Immediately upon receipt of written notice stating that the Member or Members request a meeting on a date which shall not be less than ten (10) nor more than sixty (60) days after receipt of the notice by the President, the President shall immediately give notice to all Members. The notice shall state the place, date and hour of the meeting and the general nature of the business to be transacted. No business other than the business stated in the notice of the meeting may be transacted at the meeting. Notice shall be addressed to each Member at the address appearing on the books of the LLC for the Member. 16.3. QUORUM. At any duly held or called meeting of Members, a majority of the Total Outstanding Shares represented by proxy or in person shall constitute a quorum. The Members present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough Members to leave less than a quorum, if any action taken, other than adjournment, is approved by the vote of holders of a number of Shares sufficient to approve such action as required by this Agreement or by the LLC Act. 16.4. ADJOURNMENT OF MEETINGS. An LLC meeting at which a quorum is present may be adjourned to another time or place and any business which might have been transacted at the original meeting may be transacted at the adjourned meeting. If a quorum is not present at an original meeting, that meeting may be adjourned by the vote of a majority of the Shares represented either in person or by proxy. Notice of the adjourned meeting need not be given to Members entitled to notice if the time and place thereof are announced at the meeting at which the adjournment is taken, unless the adjournment is for more than forty-five (45) days or if, after the adjournment, a new record date is fixed for the adjourned meeting in which case notice of the adjourned meeting shall be given to each Member of record entitled to vote at the adjourned meeting. 16.5. MEETINGS NOT DULY CALLED, NOTICE OR HELD. The transactions of any meeting of Members, however called and noticed, and wherever held, shall be as valid as though consummated at a meeting duly held after regular call and notice, if a quorum is present at that meeting, either in person or by proxy, and if, either before or after the meeting, each of the Members entitled to vote, not present in person or by proxy, signs either a written waiver of notice, a consent to the holding of the meeting, or an approval of the minutes of the meeting. 16.6. WAIVER OF NOTICE. Attendance of a Member at a meeting shall constitute waiver of notice, except when that Member objects, at the beginning of the meeting, to the transaction of any business on the ground that the meeting was not lawfully called or convened. Attendance at a meeting is not a waiver of any right to object to the consideration of matters required to be described in the notice of the meeting and not so included, if the objection is expressly made at the meeting. Any Member approval at a -29- 37 meeting shall be valid only if the general nature of the proposal is stated in any written waiver of notice. 16.7. CONSENT TO ACTION WITHOUT MEETING. Any action that may be taken at any meeting of the Members may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by Members having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all Members entitled to vote thereon were present and voted. If the Members are requested to consent to a matter without a meeting, each Member shall be given notice of the matter to be voted upon in the manner described in Section 16.2. If Members representing more than ten percent (10%) of the Total Outstanding Shares, request a meeting for the purpose of discussing or voting on the matter so noticed, notice of a meeting shall be given pursuant to Section 16.2 and no action shall be taken until the meeting his held. Unless delayed by a request for and the conduct of a meeting, any action taken without a meeting shall be effective fifteen (15) days after the required minimum number of votes have signed consents to action without a meeting; however, the action shall be effective immediately if Members holding at least ninety percent (90%) of the Total Outstanding Shares sign consents to action without a meeting. 16.8. PROXIES. Every Member entitled to vote may authorize another person or persons to act by proxy with respect to that Member's interest in the LLC. 17. MISCELLANEOUS. 17.1. NOTICES AND CONSENTS. Whenever, under the provisions of the LLC Act, the Certificate or this Agreement, notice is required to be given to any Member, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such Member at the Member's address as it appears on the records of the LLC with postage thereon prepaid, and such notice shall be deemed to be given forty-eight (48) hours after the notice is deposited in the United States mail. Notice to Members may also be given by facsimile and deemed received when sent during regular business hours, or otherwise immediately upon the opening of business the next regular business day. All consents required or allowed in this Agreement must be in writing and signed by the consenting party in order to be effective. 17.2. WAIVER OF NOTICE. Any required notice may be waived in writing by the Person entitled thereto. 17.3. SEVERABILITY. Each provision hereof is intended to be severable and the invalidity or illegality of any portion of this Agreement shall not affect the validity or legality of the remainder hereof. 17.4. CAPTIONS. Section captions in this Agreement are for convenience only and shall not be used in interpreting its provisions. -30- 38 17.5. GENDER, ETC. The masculine gender shall include the feminine and neuter genders and the singular shall include the plural. 17.6. BINDING AGREEMENT. Subject to the restrictions on assignment herein, the provisions of this Agreement shall be binding upon, and inure to the benefit of, the successors and assigns of the Members. In addition, all references to a party include, bind and inure to the benefit of the party's partners, officers, directors, agents, employees, successors in interest and assigns. 17.7. APPLICABLE LAW. All the provisions of this Agreement shall be construed under the laws of New Jersey (without reference to any conflicts of law principles). To the extent permitted by governing law, this Agreement shall constitute a waiver by each Member of all rights under the LLC Act which are inconsistent with the provisions of this Agreement, and to the extent permitted by governing law, the provisions of this Agreement shall override the provisions of the LLC Act to the extent of such inconsistency or contradiction. 17.8. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties hereto with respect to the matters set forth herein and supersedes any prior understanding or agreement, oral or written, with respect thereto. This Agreement supersedes and replaces the letter agreements (a) dated May 5, 1995, between ARV and Clearbrook and (b) dated May 18, 1995, between Litt and Clearbrook. 17.9. AGREEMENT IN COUNTERPARTS. This Agreement may be executed in several counterparts and all so executed shall constitute one Agreement, binding on all the parties hereto, notwithstanding that all the parties are not signatories to the original or the same counterpart. 17.10. NO THIRD-PARTY BENEFICIARY. The provisions of this Agreement are intended to be for the benefit of the Members and the LLC only and shall not confer any right or claim upon, or otherwise inure to the benefit of, any creditor of, or other third party having dealings with the LLC. [SIGNATURES ON FOLLOWING PAGE] -31- 39 The parties hereto have entered into this Agreement as of the date first above written. CLEARBROOK: CLEARBROOK PARTNERS, L.P., a New Jersey limited partnership By: CASTLE AT CLEARBROOK, INC., a New Jersey corporation, managing general partner By: /s/ LEONARD KOHL ----------------------------------- Leonard Kohl, President ARV: ARV ASSISTED LIVING, a California corporation By: /s/ G. BRIAN CHRISTIE ---------------------------------------- G. Brian Christie, Executive Vice President LITT: By: /s/ ALAN LITT ---------------------------------------- Alan Litt -32- 40 EXHIBIT A MEMBERS
Capital Number of Name and Address Contribution Shares - ---------------- ------------ ---------- Clearbrook Partners, L.P. *The Property 40 c/o Castle American Corp. plus $25,000 in 270 Sylvan Avenue cash Englewood Cliffs, NJ 07632 Attention: Leonard Kohl, President ARV Assisted Living $775,000 ($500,000 of 50 245 Fischer Avenue, D-1 which will be paid under Costa Mesa, CA 92626 the Note) Attention: G. Brian Christie, Executive Vice President Alan Litt $150,000 in cash 10 45 Pine Terrace Demarest, N.J.
* In conjunction with the conveyance of the Property to the LLC, Clearbrook shall also assign, without cost to the LLC, all of its right, title and interest in and to all Property Documents and all other tangible and intangible property rights associated with the Property. The Property has an agreed value of $600,000 for the purposes of this Agreement. This value is equal to the Property's gross value of $1,500,000 less the $400,000 amount and the $500,000 Note distributed to Clearbrook under Section 8.1 of the Agreement. 41 APPENDIX 1 REFERENCES TO "SECTIONS" OR "PARAGRAPHS" CONTAINED IN THIS APPENDIX, UNLESS OTHERWISE IDENTIFIED, ARE REFERENCES TO THE SECTIONS OR PARAGRAPHS OF THE OPERATING AGREEMENT OF VILLAS AT THE PONDS LLC, OF WHICH THIS APPENDIX IS A PART. ACCOUNTING PERIOD. The period beginning on the 1st of January and ending on the 31st of December; provided, however, that the first Accounting Period shall commence on the date of formation of the LLC and shall end on December 31, 1995; and provided, further, that a new Accounting Period shall commence on any date on which an Additional or Substituted Member is admitted to the LLC or a Member ceases to be a Member for any reason. ADDITIONAL MEMBER. A Member admitted as a Member after the date this Agreement becomes effective. ADJUSTED CAPITAL ACCOUNT DEFICIT. Shall mean, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant fiscal year, after giving effect to the following adjustments: (a) Credit to such Capital Account any amounts which Member is obligated to restore or is deemed to be obligated to restore pursuant to the penultimate sentence of Section 1.704-1(b)(4)(iv)(f) and 1.704-2(i)(5) of the Regulations; and (b) Debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(5) and (6) of the Regulations. The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. ADJUSTED CAPITAL CONTRIBUTION. With respect to any Member, as of any day, that amount which is equal to the Capital Contribution of that Member reduced by all Distributions to that Member. If any Member Transfers all or any portion of the Member's Shares in accordance with the terms of this Agreement, the Assignee shall succeed to the Adjusted Capital Contribution of the Transferring Member to the extent it relates to the Transferred Shares. AFFILIATE. (a) Any Person directly or indirectly controlling, controlled by or under common control with another Person; -1- 42 (b) A Person owning or controlling ten percent (10%) or more of the outstanding voting securities of such other Person; (c) Any officer, director, partner or member of such Person; and (d) If such other Person is an officer, director, partner or member, any company for which such Person acts in any such capacity. APPRAISAL. Each of the parties requiring an interest or property to be valued shall appoint an appraiser and give notice of the appointment to the other. If either fails to appoint an appraiser, the appraiser appointed by the other shall be the sole appraiser. Each appraiser appointed shall have at least five (5) years experience appraising interests or property similar to that for which valuation is being sought. Each appraiser shall establish Fair Market Value by reference to such indicators of value as the appraisers deem relevant, and to the parties' relative participation in the interest or property for which valuation is being sought. If two appraisers are appointed, they shall independently appraise the Fair Market Value within thirty (30) days after notice of appointment of the second appraiser. If the higher appraisal is less than one hundred ten percent (110%) of the lower appraisal, then the Fair Market Value shall be the average of the two appraisals. If not, the two appraisers shall attempt to elect a third appraiser. If no third appraiser is agreed upon within ninety (90) days after appointment of the second appraiser, either party may ask the presiding judge of the highest court of the county in which the LLC's principal office is located to appoint a third appraiser. The third appraiser shall be a person who has not previously acted in any capacity for either party. The parties in interest shall each pay the fees of the appraiser they appoint, and shall share equally the fees of any appointed third appraiser and the fee charged by any judge to make such appointment. Within thirty (30) days after selection of the third appraiser, the third appraiser shall select one of the two appraisals, and such appraisal shall be the Fair Market Value. ARV. ARV Assisted Living, a California corporation. ARV RESPONSIBILITIES. The duties described on Appendix 3 that ARV has the authority and responsibility to perform on behalf of the LLC. ASSIGNEE. A transferee or a Permitted Transferee of Shares who has not been admitted as a Substitute Member. BANKRUPTCY. Means with respect to any Person that a petition shall have been filed by or against such Person as "debtor" and the adjudication of such Person as a bankrupt under the provisions of the bankruptcy laws of the United States of America shall have commenced, or that such Person shall have made an assignment for the benefit of its creditors generally or a receiver shall have been appointed for substantially all of the property and assets of such Person. -2- 43 CAPITAL ACCOUNT. An individual capital account to be maintained for each Member in accordance with Section 3.5. CAPITAL CONTRIBUTION. The amount of cash or the Gross Asset Value of property contributed to the LLC by each Member. Capital Contributions shall not include amounts paid to any person with respect to any assignment of Shares or any interest therein or with respect to any substitution of a Member. CLEARBROOK. Clearbrook Partners, L.P., a New Jersey limited partnership. CLEARBROOK GROUP. Clearbrook and Alan Litt. CLEARBROOK GROUP RESPONSIBILITIES. The duties described on Appendix 4 that the Clearbrook Group has the authority and responsibility to perform on behalf of the LLC. CODE. The Internal Revenue Code of 1986, as amended, or corresponding provisions of subsequent revenue laws. COMMITTEE MEMBERS. The six (6) persons appointed to the Management Committee by ARV and the Clearbrook Group. DEPRECIATION. For each fiscal year or other period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis. DISPOSITION NOTICE. The notice to be delivered by a Member indicating that Member's desire to Transfer that Member's Shares. DISSOCIATED MEMBER. A Member whose death, expulsion, Bankruptcy or dissolution causes that Member to become dissociated from the LLC. DISSOLUTION EVENT. The death, expulsion, Bankruptcy, or dissolution of a Member. DISSOLUTION NOTICE. The notice to be given by a Member with respect to a dissolution of marriage or similar event. -3- 44 DISTRIBUTIONS. Any cash or other property distributed to Members arising from their interests in the LLC. ECONOMIC RISK OF LOSS. Shall have the meaning set forth in Section 1.752-2 of the Regulations. EXERCISE NOTICE. The notice to be given by the LLC indicating its intent to exercise of its Right of First Refusal. FAIR MARKET VALUE. The value of an interest or property as determined by mutual consent of the parties in interest or, if those parties cannot agree on a value within ten (10) days after the event causing the need for valuation, by Appraisal. FORMATION CERTIFICATE. The Certificate of Formation of the LLC, duly filed and amended, as herein required, in accordance with the laws of New Jersey. GROSS ASSET VALUE. With respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (a) The initial Gross Asset Value of any asset contributed by a Member to the LLC shall be the gross fair market value of such asset, as determined by the contributing Member and the LLC; (b) The Gross Asset Values of all LLC assets shall be adjusted to equal their respective gross fair market values, as determined by the Management Committee, as of the following times: (i) the acquisition of an additional interest in the LLC by any new or existing Member in exchange for more than a de minimis Capital Contribution; (ii) the Distribution by the LLC to a Member of more than a de minimis amount of LLC property other than money, unless all Members receive simultaneous Distributions of undivided interests in the distributed property in proportion to their interests in the LLC; and (iii) the termination of the LLC for federal income tax purposes pursuant to Code Section 708(b)(1)(B); (c) The Gross Asset Value of any LLC asset distributed to any Member shall be the gross fair market value on the date of Distribution; and (d) If the Gross Asset Value of an asset has been determined or adjusted pursuant to paragraph (a) or (b) of this definition, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profit and Loss. LLC. The limited liability company created under this Agreement. -4- 45 LLC ACT. The New Jersey Limited Liability Company Act, N.J.S.A 42:2B-1 et seq. LLC MINIMUM GAIN. Shall have the meaning set forth in Section 1.704-2(d) of the Regulations. MAJORITY VOTE. The vote of more than fifty percent (50%) of the Total Outstanding Shares. MANAGEMENT COMMITTEE. The committee formed to manage and operate the LLC comprised of six (6) persons, three (3) of whom shall be appointed and may be removed by the Clearbrook Group and three (3) of whom shall be appointed and may be removed by ARV. The initial members of the Management Committee shall be (a) Stanley Diamond, Leonard Kohl and Alan Litt for the Clearbrook Group and (b) Gary Davidson, John Booty and Eric Davidson for ARV. MEMBER EXERCISE NOTICE. The notice to be given by non-Transferring Members indicating their intent to exercise their secondary Right of First Refusal. MEMBER NONRECOURSE DEBT. Shall have the meaning set forth in Section 1.704-2(b)(4) of the Regulations. MEMBER NONRECOURSE DEDUCTIONS. Shall have the meaning set forth in Section 1.704-2(i)(2) of the Regulations. The amount of member Nonrecourse Deductions with respect to a Member Nonrecourse Debt for an LLC fiscal year equals the excess, if any, of the net increase, if any, in the amount of Minimum Gain Attributable to Member Nonrecourse Debt during the fiscal year over the aggregate amount of any Distributions during that fiscal year to the Member that bears the economic risk of loss for such Member Nonrecourse Debt to the extent such Distributions are from the proceeds of such Member Nonrecourse Debt and are allocable to an increase in Minimum Gain Attributable to Member Nonrecourse Debt, determined in accordance with Section 1.704-1(b)(4)(iv)(h)(3) of the Regulations. MEMBER'S SHARE OF LLC MINIMUM GAIN. Shall be calculated as set forth in Section 1.704-2(g)(1) of the Regulations. MEMBER'S SHARE OF MINIMUM GAIN ATTRIBUTABLE TO MEMBER NONRECOURSE DEBT. Shall be calculated as set forth in Sections 1.704-2(i)(5) and 1.704(2)(g) of the Regulations. MEMBERS. Refers collectively to all Persons who are admitted as members of the LLC. Reference to a "Member" shall be to any one of the Members. -5- 46 MINIMUM GAIN ATTRIBUTABLE TO MEMBER NONRECOURSE DEBT. Shall have the meaning set forth in Section 1.704-2(i)(3) of the Regulations. NONRECOURSE DEDUCTIONS. Shall have the meaning set forth in Section 1.704-1(b)(1) of the Regulations. The amount of Nonrecourse Deductions for an LLC fiscal year equals the excess, if any, of the net increase, if any, in the amount of LLC Minimum Gain during that fiscal year over the aggregate amount of any Distributions during that fiscal year of proceeds of a Nonrecourse Liability that are allocable to an increase in Partnership Minimum Gain, determined according to the provisions of Section 1.704-2(c) of the Regulations. NONRECOURSE LIABILITY. Shall have the meaning set forth in Section 1.704-(b)(3) of the Regulations. NOTE. The promissory note in the form attached as Appendix 5 made by ARV in favor of Clearbrook in the original principal amount of $500,000. PERMITTED TRANSFEREE. Any member of such Member's immediately family, or a trust, corporation, limited liability company or partnership controlled by such Member or members of such Member's immediate family, or another Person controlling, controlled by, or under common control with such Member. PERSON. A natural person, domestic or foreign corporation, partnership, limited liability company, trust, estate, association or any other individual or entity with legal capacity to enter into a contract. PROFIT AND LOSS. For each fiscal year of the LLC, an amount equal to the taxable income or loss of the LLC, as the case may be, for such year, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss and deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (a) if the Gross Asset Value of any LLC asset is adjusted pursuant to the provisions of the definition of Gross Asset Value, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Profit or Loss; (b) gain or loss resulting from any disposition of LLC property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (c) in lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period, computed in accordance with the definition of Depreciation; (d) any receipts of the LLC that are exempt from federal income tax and are not otherwise included in taxable income or loss shall be added to such taxable income or loss; and (e) any expenditures of the LLC described in Code Section 705(a)(2)(B) or treated as Code -6- 47 Section 705(a)(2)(B) expenditures pursuant to Section 1.704-1(b)(2)(iv)(i) of the Regulations, and not otherwise taken in account in computing taxable income or loss pursuant to this paragraph, shall be subtracted from such taxable income or added to and taxable loss. PROJECT. A 150-unit assisted living project to be developed on the Property. PROPERTY. That certain unimproved real property (containing approximately 6.696 acres) located at Union Valley Road, known as tax map lot 9.04 in Block 27 of Monroe Township, Middlesex County, New Jersey. PROPERTY DOCUMENTS. All reports, studies, permits, agreements, development approvals and plans, evidence of zoning, title documents, surveys, correspondence and other documents and information in Clearbrook's possession or under its control of material significance to the Property and the proposed development of the Project thereon. PURCHASE NOTICE. The notice to be given by the LLC to a Member's spouse or former spouse indicating the intent to exercise the LLC's Special Purchase Right. REGULATIONS. The Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). RIGHT OF FIRST REFUSAL. The right to purchase Shares under certain circumstances upon a proposed Transfer of Shares by a Member. SHARES. The interests of the LLC representing ownership in the LLC. SPECIAL PURCHASE RIGHT. The right of the LLC to purchase the Shares of a Member's spouse or former spouse. SUBSTITUTE MEMBER. An Assignee who has been admitted to all the rights of membership pursuant to this Agreement. TARGET SHARES. The Shares desired to be Transferred by a Member to a third party. TOTAL OUTSTANDING SHARES. The total number of Shares outstanding on the date in question. TRANSFER. Any sale, conveyance, assignment, disposition or hypothecation. -7- 48 VALUATION DATE. The date on which Shares are valued for purposes of this Agreement, which shall be the date the LLC learns of the event causing the Member to become a Dissociated Member. -8- 49 APPENDIX 2 REFERENCES TO "SECTIONS" OR "PARAGRAPHS" CONTAINED IN THIS APPENDIX, UNLESS OTHERWISE IDENTIFIED, ARE REFERENCES TO THE SECTIONS OR PARAGRAPHS OF THE OPERATING AGREEMENT OF VILLAS AT THE PONDS, LLC, OF WHICH THIS APPENDIX IS A PART. 1. GENERAL. Except as otherwise provided in this Agreement, all items of LLC income, gain, loss, deduction, and any other allocations not otherwise provided for shall be divided among the Members in the same proportions as they share Profit or Loss, as the case may be, for the year. The Members are aware of the income tax consequences of the allocations made by Section 7, as amended by this Appendix 2, and hereby agree to be bound by the provisions of this Agreement in reporting their shares of LLC income and loss for income tax purposes. For purposes of determining the Profit, Loss, or any other items allocable to any period, Profit, Loss, and any such other items shall be determined on a daily, monthly, or other basis, as determined by the Members using any permissible method under Code Section 706 and the Regulations thereunder. 2. EXCEPTIONS - NONRECOURSE DEBT. 2.1 MEMBER NONRECOURSE DEDUCTIONS. Notwithstanding anything to the contrary contained in this Agreement, Member Nonrecourse Deductions shall be allocated to the Member that bears the Economic Risk of Loss for such Member Nonrecourse Debt. If more than one Member bears such Economic Risk of Loss, such Member Nonrecourse Deductions shall be allocated between or among such Members in accordance with the ratios in which they share such Economic Risk of Loss. 2.2 LLC MINIMUM GAIN. If there is, for any fiscal year of the LLC, a net decrease in LLC Minimum Gain, there shall be allocated to each Member, before any other allocation pursuant to Section 7 is made of LLC items for such fiscal year, items of income and gain for such year (and, if necessary, for subsequent years) in proportion to, and to the extent of, such Member's share of the net decrease in LLC Minimum Gain during such fiscal year within the meaning of Section 1.704-2(g)(2) of the Regulations). This Section 2.2 of Appendix 2 is intended to constitute a minimum gain "chargeback" provision within the meaning of Section 1.702-2(f) of the Regulations. 2.3 MINIMUM GAIN ATTRIBUTABLE TO MEMBER NONRECOURSE DEBT. If there is, for any fiscal year of the LLC, a net decrease in the Minimum Gain Attributable to Member Nonrecourse Debt, there shall be allocated to each Member that has a Member's Share of Minimum Gain Attributable to Member Nonrecourse Debt at the beginning of such fiscal year before any other allocation for such fiscal year pursuant to Section 7 (other than an allocation required pursuant to Section 2.2 of this Appendix 2) is made of LLC items for such fiscal year, items of income and gain for such year (and, if necessary, for subsequent -1- 50 years) in proportion to, and to the extent of, such Member's share of the net decrease in the Minimum Gain Attributable to Member Nonrecourse Debt in accordance with Section 1.704-2(i)(4) of the Regulations. 3. QUALIFIED INCOME OFFSET. Except as provided in Section 2 of this Appendix 2, if any Member unexpectedly receives any adjustments, allocations or Distributions described in Section 1.704-1(b)(2)(ii)(d)(4), (5), or (6) of the Regulations, there shall be specially allocated to such Member such items of LLC income and gain, at such times and in such amounts as will eliminate as quickly as possible any Adjusted Capital Account Deficit. To the extent permitted by the Code and the Regulations, any special allocations of items of income or gain pursuant to this Section 3 of Appendix 2 shall be taken into account in computing subsequent allocations of Profit or Loss so that the net amount of any items so allocated and the subsequent Profit or Loss allocated to the Members shall, to the extent possible, be equal to the net amounts that would have been allocated to each such Member if such unexpected adjustments, allocations or Distributions had not occurred. 4. GROSS INCOME ALLOCATION. Except as provided in Section 2 of this Appendix 2 if any Member has a deficit Capital Account at the end of any LLC fiscal year which is in excess of the sum of (i) the amount such Member is obligated to restore pursuant to any provision of this Agreement and (ii) the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(h)(5), each such Member shall be specially allocated items of LLC income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 4 of Appendix 2 shall be made only if and to the extent that such Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Section 4 have been made as if Section 3 of this Appendix 2 and this Section 4 of Appendix 2 were not in the Agreement. 5. MEMBERS' LNTERESTS IN LLC PROFIT FOR PURPOSES OF SECTION 752. As permitted by Section 1.752-3 of the Regulations, the Members hereby specify that, solely for purposes of determining their respective interests in the Nonrecourse Liabilities of the LLC for purposes of Code Section 752, their interests in the Profit of the LLC shall be allocated among the Members in proportion to the number of Shares held by them. 6. CODE SECTION 754 ADJUSTMENTS. To the extent an adjustment to the adjusted tax basis of any LLC asset pursuant to Code Section 734(b) is required to be taken into account in determining Capital Accounts, pursuant to Section 1.704-1(b)(2)(iv)(m) of the Regulations, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specifically allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations. -2- 51 7. CODE SECTION 704(C) ALLOCATIONS. In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss and deduction with respect to any property contributed to the capital of the LLC shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the LLC for federal income tax purposes and its initial Gross Asset Value (computed in accordance with the definition of Gross Asset Value in Appendix 1). If the Gross Asset Value of any LLC asset is adjusted as described in the definition of Gross Asset Value in Appendix 1, subsequent allocations of income, gain, loss or deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. Any elections or other decisions relating to such allocations shall be made by the Manager in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 7 of Appendix 2 are solely for purposes of federal, state and local taxes and shall not affect, or in any way be taken into account in computing any person's Capital Account or share of Profit, Loss or Distributions pursuant to any provision of this Agreement. 8. CODE SECTION 38 PROPERTY. Notwithstanding any other provision of Section 7, if the LLC's Code Section 38 property is disposed of during any taxable year, Profit for such taxable year (and, to the extent such Profit is insufficient, Profit for subsequent taxable years), in an amount equal to the excess, if any, of (i) the reduction in the adjusted tax basis (or cost) of such property pursuant to Code Section 50(c), over (ii) any increased in the adjusted tax basis of such property pursuant to Section 50(c) caused by the disposition of such property, shall be excluded from the Profit allocated pursuant to Section 7.2 and shall instead be allocated among the Members in proportion to their respective shares of such excess, determined pursuant to Section 9 of this Appendix 2. If more than one item of such property is disposed of by the LLC, the foregoing sentence shall apply to such items in the order in which they are disposed of by the LLC, so that Profit equal to the entire amount of such excess with respect to the first such property disposed of are allocated prior to any allocations with respect to the second property disposed of, etc. 9. BASIS INCREASES. If the adjusted tax basis of any Code Section 38 property that has been placed in service by the LLC is increased pursuant to Code Section 50(c), such increase shall be specially allocated among the Members (as an item in the nature of income or gain) in the same proportions as the investment tax credit that is recaptured with respect to such property is shared among the Members. 10. BASIS REDUCTIONS. Any reduction in the adjusted tax basis (or cost) of the LLC's Code Section 38 property pursuant to Code Section 50(c) shall be specially allocated among the Members (as an item in the nature of expenses or losses) in the same -3- 52 proportions as the basis (or cost) of such property is allocated pursuant to Regulations Section 1.46-3(f)(2)(i) of the Regulations. 11. DEPRECIATION RECAPTURE. Each Member's allocable share of Profit which is characterized as ordinary income pursuant to Code Section 1245 or Section 1250 with respect to the disposition of an item of LLC property ("Recapture Income") shall bear the same ratio to the total Recapture Income of the LLC as such Member's share of past Depreciation deductions taken with respect to the item of property bears to all the Members' past Depreciation deductions with respect to the property. -4- 53 APPENDIX 3 ARV RESPONSIBILITIES ARV shall have the power, authority and responsibility on behalf of the LLC to perform the following duties: 1. FINANCING. Subject to Section 4.2.3.3 of the Agreement, arranging and coordination of the construction and permanent financing for the development and operation of the Project, including the selection of the lender, negotiation of the loan terms, execution of loan documentation, closing and funding. 2. LICENSING. Subject to Section 4.2.3.4 of the Agreement, processing for approval and obtaining the operating license(s) required from the State of New Jersey and any other applicable governmental agencies having jurisdiction over the Project, including providing information to and coordination with Garden State Health Care Group in connection with meeting the requirements of and obtaining a certificate of need for the Project. 3. DESIGN. Subject to Section 4.2.3.5 of the Agreement, consultation with the Project architects and engineers concerning the design of the Project. 4. PROJECT MANAGEMENT. Development and implementation of all aspects of managing the Project, including marketing, accounting and operations. 54 APPENDIX 4 CLEARBROOK GROUP RESPONSIBILITIES The Clearbrook Group shall have the power, authority and responsibility on behalf of the LLC to perform the following duties: 1. CONSTRUCTION. Subject to Section 4.2.3.5 of the Agreement, implement and coordinate the construction of the Project improvements. 2. PERMITS. Subject to Section 4.2.3.4 of the Agreement, processing for approval and obtaining all building permits and other governmental permits (except for the operating license(s) to be obtained by ARV) required for the construction of the Project. 3. DESIGN. Subject to Section 4.2.3.5 of the Agreement, coordinating the work of the Project's architects and engineers. 55 APPENDIX 5 PROMISSORY NOTE $500,000 _______________, 1995 FOR VALUE RECEIVED, ARV Assisted Living, a California corporation (the "Borrower"), promises to pay the order of Villas at the Ponds, LLC, at its offices located at 270 Sylvan Avenue, Englewood Cliffs, New Jersey, or at such other place as the holder from time to time may designate in writing to the Borrower, the principal sum of Five Hundred Thousand Dollars ($500,000), with interest at the rate of nine percent (9%) per annum from the date hereof through and until December 31, 1995, when the entire balance of principal and interest shall be due and payable, unless earlier paid. The failure of the maker hereof to pay the entire balance of principal and interest when due shall be an event of default under this Note. From and after the date of any such default, the rate of interest payable hereon shall be increased to the rate of thirteen percent (13%) per annum, compounded monthly. Further in such event, this note may be placed for collection by the holder hereof with an attorney at law, from and after which the maker hereof shall be liable for all reasonable costs of collection by the holder hereof. The undersigned, and all other parties who at any time may be liable hereon in any capacity, jointly and severally, or a presentment of payment, demand, notice of dishonor, protest and notice hereof; consent to any renewals, extensions and partial payments on this note or the indebtedness for which it is given, and such renewals, extensions or partial payments shall not discharge any party from liability hereon. The execution, delivery, performance, interpretation and enforcement of this note shall be governed by the laws of the State of New Jersey. The undersigned represents the execution and delivery of this note has been unanimously approved by the directors of the Borrower. ARV ASSISTED LIVING, a California corporation By: _________________________________ Its: ___________________________ EX-10.32 5 OPERATING AGREEMENT OF PROSPECT PARK RESIDENCE LLC 1 Exhibit 10.32 OPERATING AGREEMENT OF PROSPECT PARK RESIDENCE, LLC A NEW YORK LIMITED LIABILITY COMPANY 2 TABLE OF CONTENTS OF PROSPECT PARK RESIDENCE, LLC A NEW YORK LIMITED LIABILITY COMPANY
DESCRIPTION PAGE NO. - ----------- -------- 1. Formation.............................................................................. 1 1.1. Definitions....................................................................... 1 1.2. Formation......................................................................... 1 1.3. Name and Place of Business........................................................ 1 1.4. Purpose .......................................................................... 1 1.5. Conflicts of Interest ............................................................ 1 1.6. Agent for Service of Process ..................................................... 1 1.7. Term.............................................................................. 2 2. Membership............................................................................. 2 2.1. Initial Members .................................................................. 2 2.2. General Representations and Warranties. .......................................... 2 2.2.1. Authorization ............................................................. 2 2.2.2. Compliance with Other Instruments. ........................................ 2 2.2.3. Purchase Entirely for Own Account ......................................... 2 2.2.4. Investment Sophistication.................................................. 2 2.2.5. Access to Information ..................................................... 2 2.2.6. Federal and State Securities Laws ......................................... 3 2.2.7. Legends ................................................................... 3 2.3. LLC Shares ....................................................................... 3 2.4. Additional Members ............................................................... 3 2.5. Admission of Substitute Members .................................................. 3 2.6. Resignation or Withdrawal of a Member. ........................................... 3 2.7. Compensation of Members. ......................................................... 3 2.8. Dissociation of a Member.......................................................... 3 2.9. Rights of Dissociating Member .................................................... 4 3. Capital Contributions.................................................................. 4 3.1. Initial Contributions............................................................. 4 3.2. Issuance of Shares ............................................................... 5 3.3. Loans or Additional Contributions................................................. 5
-i- 3 DESCRIPTION PAGE NO. 3.3.1. Acquisition Financing............................................... 5 3.3.2. Construction and Permanent Financing................................ 5 3.3.3. Inability to Secure Financing....................................... 6 3.3.3.1. DKL Assumes Responsibility................................. 6 3.3.3.2. Sale to Highest Bidder..................................... 6 3.3.3.3. Sale at a Loss............................................. 6 3.3.3.4. DKL's Rights to Make Payment on the Acquisition Loan............................................. 6 3.3.4. Other Loans or Additional Contributions............................. 7 3.3.4.1. Loans...................................................... 7 3.3.4.2. Additional Contributions................................... 7 3.4. Default in Making Contributions.............................................. 7 3.4.1. Remedies............................................................ 7 3.4.2. Contribution Loan................................................... 7 3.4.3. Other Remedies...................................................... 8 3.4.3.1. Share Reduction............................................ 8 3.4.3.2. Purchase of Shares......................................... 8 3.4.4. Exception........................................................... 9 3.5. Interest .................................................................... 9 3.6. Individual Capital Accounts ................................................. 9 3.6.1. Additions to Capital Account ....................................... 9 3.6.2. Subtractions from Capital Account .................................. 9 3.6.3. Compliance with Regulations. ....................................... 9 3.6.4. Capital Account Adjustment ......................................... 9 4. Management and Restrictions........................................................... 10 4.1. Management Committee......................................................... 10 4.2. Management Committee Responsibilities........................................ 10 4.2.1. By ARV.............................................................. 10 4.2.2. By DKL.............................................................. 10
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DESCRIPTION PAGE NO. - ----------- -------- 4.2.3. By Management Committee.............................................. 10 4.2.4. Cooperation.......................................................... 11 4.3. Power of Attorney. ......................................................... 11 4.4. Impasses.................................................................... 12 4.5. Authority of Members........................................................ 12 4.6. Fees........................................................................ 13 4.6.1. Project Management................................................... 13 4.6.2. Construction......................................................... 13 4.7. Amendment of Certificate or Agreement ...................................... 13 4.8. Liability of Members to the Other Members and the LLC; Indemnity of Members........................................................ 13 4.8.1. Liability............................................................ 13 4.8.2. Indemnification ..................................................... 13 5. Officers............................................................................. 15 5.1. Appointment of Officers .................................................... 15 5.2. Compensation of Officers.................................................... 15 5.3. Term of Office ............................................................. 15 5.4. Duties of Chairman ......................................................... 15 5.5. Duties of Vice-Chairman .................................................... 15 5.6. Duties of President ........................................................ 15 5.7. Duties of Vice President ................................................... 15 5.8. Duties of Secretary ........................................................ 16 5.9. Duties of Assistant Secretary............................................... 16 5.10. Duties of Treasurer ........................................................ 16 5.11. Duties of Assistant Treasurer............................................... 16 6. Share Certificates................................................................... 16 6.1. Certificates ............................................................... 16 6.2. Replacement Certificates ................................................... 16 6.3. Rights of Registered Owner ................................................. 17 7. Allocations of Profit and Loss ...................................................... 17 7.1. Loss ....................................................................... 17
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DESCRIPTION PAGE NO. - ----------- -------- 7.2. Profit ..................................................................... 17 7.3. Allocations for Tax Purposes ............................................... 17 7.3.1. Tax Allocations ..................................................... 17 7.3.2. Partnership Tax Treatment ........................................... 17 7.3.3. Allocations upon Transfers of LLC Interests.......................... 17 8. Distributions........................................................................ 18 8.1. Distributions of Cash Flow ................................................. 18 8.2. Return of Distributions in Certain Circumstances ........................... 18 8.3. Withholding Taxes .......................................................... 18 9. Members.............................................................................. 19 9.1. Liability of Members ....................................................... 19 9.2. No Distributions in Kind.................................................... 19 9.3. Bankruptcy of a Member ..................................................... 19 10. Transfer of LLC Interests............................................................ 19 10.1. Transfer ................................................................... 19 10.2. Transfer Void............................................................... 19 10.3. Rights of Assignees......................................................... 19 10.4. Admission of Permitted Transferees.......................................... 19 10.5. Right of First Refusal...................................................... 20 10.5.1. Grant............................................................... 20 10.5.2. Notice of Intended Disposition...................................... 20 10.5.3. Exercise of Right................................................... 20 10.5.4. Secondary Right of Other Members.................................... 20 10.5.5. Valuation........................................................... 20 10.5.6. Full Exercise of Rights............................................. 21 10.5.7. Partial Exercise of Right........................................... 21 10.5.8. Non-Exercise of Right............................................... 21 10.5.9. Recapitalization/Merger............................................. 21
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DESCRIPTION PAGE NO. - ----------- -------- 10.6. Marital Dissolution or Legal Separation...................................... 22 10.6.1. Grant................................................................ 22 10.6.2. Notice of Decree or Agreement........................................ 22 10.6.3. Exercise of Special Purchase Right................................... 22 10.7. Effect of Charging Order..................................................... 23 10.8. Assignee's Tax Liability..................................................... 23 11. LLC Accounting........................................................................ 23 11.1. Method of Accounting......................................................... 23 11.2. Fiscal Year.................................................................. 23 11.3. Financial and Business Records............................................... 23 11.3.1. Maintenance of Records and Accounts.................................. 23 11.3.2. Required Records..................................................... 23 11.3.3. Supervision; Inspection of Books..................................... 24 11.3.4. Income Tax Data and Reports.......................................... 24 12. Bank Accounts......................................................................... 24 13. Dispute Resolution.................................................................... 24 13.1. By Agreement or Arbitration ................................................. 24 13.2. Procedural Guidelines........................................................ 25 13.3. Prevailing Party............................................................. 25 14. Buy-Sell Provisions................................................................... 25 14.1. Offer ....................................................................... 25 14.2. Reply Notice................................................................. 26 14.3. Closing...................................................................... 26 14.4. Payment of Purchase Price ................................................... 26 14.5. Default...................................................................... 26 14.6. Conditions to Invoking Buy-Sell Procedure.................................... 27 14.7. Timing ...................................................................... 27 15. Dissolution, Liquidation and Termination of the LLC................................... 27 15.1. Limitations. ................................................................ 27
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DESCRIPTION PAGE NO. - ----------- -------- 15.2. Cause of Dissolution. ....................................................... 27 15.3. Continuation of the LLC...................................................... 28 15.4. Authority to Wind Up......................................................... 28 15.5. Liquidation of the LLC....................................................... 28 15.5.1. Cash Distributions and Profit and Loss Allocations During Liquidation.................................................. 28 15.5.2. Distributions....................................................... 28 15.5.2.1. Expenses.................................................. 28 15.5.2.2. Reserves.................................................. 28 15.5.2.3. Liquidating Distributions................................. 29 15.5.3. Negative Capital Accounts........................................... 29 15.6. Filing Certificate of Cancellation........................................... 29 16. Meetings of Members ................................................................ 29 16.1. Call and Place of Meetings................................................... 29 16.2. Notice of Meeting............................................................ 29 16.3. Quorum....................................................................... 30 16.4. Adjournment of Meetings...................................................... 30 16.5. Meetings Not Duly Called, Notice or Held..................................... 30 16.6. Waiver of Notice............................................................. 30 16.7. Consent to Action Without Meeting............................................ 30 16.8. Proxies...................................................................... 31 17. Miscellaneous....................................................................... 31 17.1. Notices and Consents......................................................... 31 17.2. Waiver of Notice............................................................. 31 17.3. Severability................................................................. 31 17.4. Captions..................................................................... 31 17.5. Gender, Etc.................................................................. 31 17.6. Binding Agreement............................................................ 31 17.7. Applicable Law............................................................... 32 17.8. Entire Agreement............................................................. 32 17.9. Agreement in Counterparts.................................................... 32 17.10. No Third-Party Beneficiary................................................... 32 17.11. Member Guarantees............................................................ 32
-vi- 8 EXHIBIT A - MEMBERS APPENDIX 1 - DEFINITIONS APPENDIX 2 - SPECIAL ALLOCATIONS APPENDIX 3 - ARV RESPONSIBILITIES APPENDIX 4 - DKL RESPONSIBILITIES APPENDIX 5 - PROMISSORY NOTE -vii- 9 OPERATING AGREEMENT OF PROSPECT PARK RESIDENCE, LLC A NEW YORK LIMITED LIABILITY COMPANY THIS OPERATING AGREEMENT, effective as of _______________, 1996, is entered into among those Persons listed on Exhibit A as the Members. In consideration of the mutual promises contained herein, the parties agree as follows: 1. FORMATION. 1.1. DEFINITIONS. Capitalized terms used herein shall have the meanings set forth on Appendix 1 . 1.2. FORMATION. The LLC was formed on December 1, 1995 pursuant to the LLC Act and other applicable laws of New York. 1.3. NAME AND PLACE OF BUSINESS. The name of the LLC is Prospect Park Residence, LLC. The initial principal place of business for the LLC shall be 270 Sylvan Avenue, Englewood Cliffs, New Jersey 07632, until the Property is in operation, at which time it shall be changed to 1 Prospect Park West, Brooklyn, New York. 1.4. PURPOSE. The primary purpose of the LLC is to acquire and renovate the Project and thereafter hold, manage and otherwise operate the Project, and do all things reasonably incidental to or in furtherance of that business. 1.5. CONFLICTS OF INTEREST. Any Member or any officer, director, employee, shareholder or other person holding a legal or beneficial interest in any entity which is a Member, may engage in or possess an interest in other business ventures of every kind, independently or with others, some of which may be competitive with the LLC, and neither the LLC nor any of the Members shall have any right by virtue of this Agreement in or to such other business ventures or to the income or profits derived therefrom. 1.6. AGENT FOR SERVICE OF PROCESS. Until such time as the Members have appointed a different person to act in the State of New York as the agent of the LLC for service of process, the LLC's agent for service of process in the State of New York shall be Epstein, Becker and Green, whose address is 250 Park Avenue, New York, New York, Attention: Phillip Gassel, Esq. -1- 10 1.7. TERM. The LLC commenced upon the Effective Date and shall continue until July 1, 2046, unless its existence is sooner terminated in accordance with the provisions of this Agreement or as otherwise provided by law. 2. MEMBERSHIP. 2.1. INITIAL MEMBERS. The initial Members of the LLC are set forth on Exhibit A, each of whom is admitted, subject to Section 3.1 hereof, to the LLC as a Member as of the Effective Date. 2.2. GENERAL REPRESENTATIONS AND WARRANTIES. Each Member hereby represents and warrants to the LLC and each other Member as follows: 2.2.1. AUTHORIZATION. If the Member is an organization, that it is duly organized, validly existing, and in good standing under the law of its state of organization and that it has full power and authority to execute and enter into this Agreement and to perform its obligations hereunder and that all actions necessary for the due authorization, execution, delivery and performance by that Member of this Agreement have been duly taken. In addition, each individual executing this Agreement on behalf of a Member represents and warrants that he or she is duly authorized to execute and deliver it on behalf of that Member. 2.2.2. COMPLIANCE WITH OTHER INSTRUMENTS. The Member's authorization, execution, delivery, and performance of this Agreement do not conflict with any other agreement or arrangement to which the Member is a party or by which the Member is bound. 2.2.3. PURCHASE ENTIRELY FOR OWN ACCOUNT. The Member is acquiring the Member's interest in the LLC for the Member's own account for investment purposes only and not with a view to or for the resale or distribution thereof and has no obligation or agreement of any kind with any Person to sell, transfer or pledge to any Person the Member's interest or any part thereof nor does the Member have any plans to enter into any such obligation or agreement. 2.2.4. INVESTMENT SOPHISTICATION. By reason of the Member's business or financial experience, the Member has the capacity to protect the Member's own interests in connection with the transactions contemplated hereunder. In addition, the Member is able to bear the risks of an investment in the LLC, and at the present time could afford a complete loss of such investment. 2.2.5. ACCESS TO INFORMATION. The Member is aware of the LLC's business affairs and financial condition and has acquired sufficient information about the LLC to reach an informed and knowledgeable decision to acquire an interest in the LLC. -2- 11 2.2.6. FEDERAL AND STATE SECURITIES LAWS. The Member acknowledges that the Shares have not been registered under the Securities Act of 1933 or any state securities laws, inasmuch as they are being acquired in a transaction not involving a public offering, and, under such laws, may not be resold or transferred by the Member without appropriate registration or the availability of an exemption from such requirements. The Member is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act of 1933. 2.2.7. LEGENDS. The Member acknowledges that any certificates issued evidencing Shares in the LLC shall bear a legend to the effect that the Shares have not been registered under the Securities Act of 1933 and are subject to the restrictions on transferability and sale set forth in this Agreement and under the Securities Act of 1933. 2.3. LLC SHARES. Except as otherwise set forth herein, in managing the affairs of the LLC and voting on any matter that requires the vote at a meeting of the Members pursuant to the LLC Act, the Formation Certificate or this Agreement, each Member shall vote in the proportion that such Member's Shares bear to the Total Shares Outstanding. Ownership of the LLC shall be divided into and represented by Shares of the LLC. The LLC shall issue a single class of Shares. The total number of Shares which the LLC is authorized to issue shall be 100. 2.4. ADDITIONAL MEMBERS. Additional Persons may be issued Shares of the LLC and admitted to the LLC as Members upon such terms and conditions as the Members may determine. 2.5. ADMISSION OF SUBSTITUTE MEMBERS. No Assignee of Shares of the LLC shall be admitted as a Substitute Member and admitted to all the rights of the Member who assigned the Shares of the LLC without the approval of the Members. If so admitted, the Substitute Member shall have all the rights and powers and will be subject to all the restrictions and liabilities of the Member who assigned the Shares of the LLC. Admission of a Substitute Member shall not release an assigning Member from any liability to the LLC which the assigning Member incurred prior to the assignment. 2.6. RESIGNATION OR WITHDRAWAL OF A MEMBER. Except as specifically provided below, and subject to the provisions for transfer contained in Section 10, no Member shall have the right to resign or withdraw from membership in the LLC or withdraw the Member's interest in the capital. 2.7. COMPENSATION OF MEMBERS. Unless otherwise expressly approved by the Management Committee, no Member shall be entitled to any compensation for services or activities undertaken in his capacity as a Member of the LLC. 2.8. DISSOCIATION OF A MEMBER. The death, expulsion, Bankruptcy or dissolution of a Member (i) will cause such Member to be a Dissociated Member, (ii) will -3- 12 terminate the continued membership of such Member in the LLC, and (iii) may or may not cause a dissolution of this LLC. 2.9. RIGHTS OF DISSOCIATING MEMBER. If any Member becomes a Dissociated Member: 2.9.1. If the dissociation causes a dissolution and winding up of the LLC, the Dissociated Member shall be entitled to participate in the winding up of the LLC to the same extent as any other Member. 2.9.2. If the dissociation does not cause a dissolution and winding up of the LLC, the LLC shall have the right to repurchase the Shares of the Dissociated Member from the legal representative of the Dissociated Member. The LLC shall exercise this right by delivery to the legal representative of notice of its election to purchase the Shares within ninety (90) days of the date on which the LLC learns of the event causing the dissociation. The repurchase price shall be an amount equal to the Fair Market Value of the Shares of the Dissociated Member on the Valuation Date and shall be paid within one year of the date of the LLC's notice of election to purchase. 2.9.3. If the dissociation does not cause a dissolution and winding up of the LLC and the LLC does not elect to repurchase the Shares, the legal representative of the Dissociated Member may request admission to the LLC as a Substitute Member. If the legal representative requests that it be admitted as a Substitute Member within ninety (90) days of the expiration of the LLC's right to repurchase and is denied Substitute Member status, the legal representative shall be entitled to (i) demand, within thirty (30) days from the date of such denial, that the LLC repurchase the Dissociated Member's Shares for an amount equal to the Fair Market Value of the Shares as of the date of such demand, the full amount of which shall be paid within one year of the date of demand; or (ii) to continue as an Assignee. If no request for Substitute Member status is made within the ninety (90) day period referred to above, the legal representative of the Dissociated Member shall thereafter have only the rights of an Assignee under this Agreement. 2.9.4. If the Shares of a Dissociated Member are purchased under this Section, interest on the Fair Market Value shall accrue from the Valuation Date until the full Fair Market Value is paid. The interest rate shall be the short-term applicable federal rate published by the Internal Revenue Service for the month in which the Valuation Date occurs. 3. CAPITAL CONTRIBUTIONS. 3.1. INITIAL CONTRIBUTIONS. The initial Capital Contribution of each Member shall be the cash amount set forth next to that Member's name on EXHIBIT A, which is the amount that Member has contributed to date towards satisfaction of the -4- 13 buyer's down payment and due diligence obligations under the Purchase Agreement. In the event a Member has not made such contributions, such Member agrees to immediately fund the amount of contribution not made. 3.2. ISSUANCE OF SHARES. In exchange for the initial Capital Contributions of the Members, the Members shall be admitted as Members of the LLC and shall have that number of Shares set forth opposite their names on Exhibit A. 3.3. LOANS OR ADDITIONAL CONTRIBUTIONS. 3.3.1. ACQUISITION FINANCING. The Members contemplate that the LLC will not be able to obtain third-party financing to acquire the Project. ARV shall, to the extent not otherwise obtained from third-party financing, loan the LLC Two Million Nine Hundred Seventy Thousand Dollars ($2,970,000), which is the balance of the Purchase Price required to acquire the Project under the Purchase Agreement (the "Acquisition Loan"). The Acquisition Loan will be evidenced by a promissory note made by the LLC to ARV in the form attached hereto as APPENDIX 5. The Acquisition Loan shall be due and payable in full on or before the first year anniversary of the date thereof (the "First Anniversary"), unless extended as provided in Section 3.3.3 below. The Acquisition Loan, as may be modified from time to time, is guaranteed by ARV and DKL in proportion to their initial ownership of Shares. 3.3.2. CONSTRUCTION AND PERMANENT FINANCING. Subject to Section 4.2.3.2 of the Agreement, ARV shall have the power, authority and responsibility on behalf of the LLC to use good faith efforts to obtain financing (the "Construction/Permanent Loan") for the rehabilitation and operation of the Project. Specifically, it is the goal of the LLC to obtain Construction/Permanent Financing (i) in the interim basis, sufficient to repay the Acquisition Loan, fund pre-development costs and repay Initial Capital Contributions and (ii) on the construction and permanent financing basis, sufficient to pay the remaining balance of the Acquisition Loan, if any, and to pay all costs required to rehabilitate the Project in accordance with the rehabilitation plan approved by the Management Committee. It is not anticipated that the Construction/Permanent Financing will be sufficient to fund the initial operating losses and the lease deposit required under a sale/leaseback. Such unfinanced amounts, which are expected to be funded through Capital Contributions, are expected to be approximately $1,500,000. ARV's rights under this Section include the right to select the lender, negotiate the loan terms, and present same to the Management Committee for approval. At ARV's option, the Construction/Permanent Loan may be in the form of a traditional mortgage loan, a sale and leaseback or another financing structure, and may be recourse if the Management Committee finds that non-recourse financing is unavailable on satisfactory terms. ARV shall not be required to guaranty any Construction/Permanent Loan, lease or other obligation unless DKL and the DKL Members are willing to join in such guaranty. To the extent, however, that such a guaranty is a condition of a Construction/Permanent Loan that is acceptable to ARV, DKL and the Management Committee, ARV, DKL and the DKL Members shall each join in such guaranty. -5- 14 3.3.3. INABILITY TO SECURE FINANCING. 3.3.3.1. DKL ASSUMES RESPONSIBILITY. If ARV is unable to secure the Construction/Permanent Loan on or before the First Anniversary, the term of the Acquisition Loan shall be extended for an additional eight (8) months (i.e., the Acquisition Loan will be due and payable in full on or before the last day of the twentieth (20th) month after the date thereof), and DKL shall, for sixty (60) days after the First Anniversary (the "DKL Financing Period"), have the same right, power and responsibility as ARV had under Section 3.3.2 to attempt to obtain the Construction/Permanent Loan on behalf of the LLC. 3.3.3.2. SALE TO HIGHEST BIDDER. If (i) DKL has not obtained a loan commitment acceptable to the Management Committee for the Construction/Permanent Loan within the DKL Financing Period or (ii) such loan is not funded pursuant to the terms thereof, the Project shall be put on the market and, subject to Section 3.3.3.3 below, sold to the party who makes the highest bid on terms and conditions reasonably acceptable to the Management Committee within one hundred eighty (180) days after the end of the DKL Financing Period. Either Member may bid on the Project and ARV may credit bid the outstanding balance of the Acquisition Loan. 3.3.3.3. SALE AT A LOSS. Concurrently with the sale, the LLC will be dissolved and, through escrow, the proceeds of the sale shall be distributed to the Members as appropriate. If the proceeds from the sale of the Project to the highest bidder will be insufficient to pay off the Acquisition Loan and all other amounts owed to ARV or DKL under this Agreement, the accounting upon the dissolution of the LLC will require one of the Members (the "Debtor Member") to make a payment ( the "Shortfall") to the other Member (the "Creditor Member"). In such event, the Debtor Member shall be required to pay the Shortfall to the Creditor Member concurrently with the closing. If the Debtor Member is unwilling or unable to pay the Shortfall in full at the closing, the Creditor Member shall have the right but not the obligation to acquire the Project at the same price and on the same terms as it was to be sold to the highest bidder and the Shortfall shall be immediately due and payable. 3.3.3.4. DKL'S RIGHTS TO MAKE PAYMENT ON THE ACQUISITION LOAN. DKL shall have the unilateral right to make partial payments representing up to fifty percent (50%) of all amounts owing under the Acquisition Loan. In the event of any such payments, (i) the amount so paid shall be deemed an additional Capital Contribution by DKL, (ii) ARV shall be deemed to have concurrently made an additional Capital Contribution in an equal amount and (iii) the balance of the Acquisition Loan shall be reduced by the sum of the payment by DKL and the deemed Capital Contribution by ARV. -6- 15 3.3.4. OTHER LOANS OR ADDITIONAL CONTRIBUTIONS. Whenever the Management Committee determines that the capital of the LLC is or is presently likely to become insufficient for the conduct of its business, the Management Committee shall raise the additional funds needed from one or both of the following sources: 3.3.4.1. LOANS. To the extent approved by the Management Committee, any Member may lend money to the LLC in addition to that Member's Capital Contribution. Any such loan shall be a debt of the LLC to that Member, shall bear interest at such rate and be payable on such terms as approved by the Management Committee. Any such loan shall not increase the lending Member's Capital Contribution. 3.3.4.2. ADDITIONAL CONTRIBUTIONS. To the extent that the necessary amounts are not raised from Member loans or any third party loans approved by the Management Committee, the Members shall make additional Capital Contributions in cash no later than thirty (30) days after the determination is made as to the need for, and amount of, such additional Capital Contributions. Each Member's share of the total additional Capital Contributions required shall be in the proportion that such Member's Shares bears to the Total Shares Outstanding, as the same may from time to time change in accordance with the provisions of Section 3.4. 3.4. DEFAULT IN MAKING CONTRIBUTIONS. 3.4.1. REMEDIES. Subject to Section 3.4.4, if, at any time, any Member (the "Defaulting Member") fails to make an additional Capital Contribution required of it under Section 3.3 within the appropriate period, that failure shall constitute conclusive evidence that the Defaulting Member has granted to the Members making the required contributions (the "Nondefaulting Members") the option to exercise any of the remedies provided under Sections 3.4.2 and 3.4.3. These remedies are in addition to any other rights or remedies granted by law or in equity, including, without limitation, filing suit seeking consequential and incidental damages arising from the Defaulting Member's default. The Management Committee shall notify each Member in writing of the total amount of the Capital Contributions not made. 3.4.2. CONTRIBUTION LOAN. The Nondefaulting Members, or a portion of them, on a pro rata basis based on their respective number of Shares or as they may otherwise determine, may elect, by written notice to the Defaulting Member, to advance the Defaulting Member's contribution to the LLC. If an advance is made, that advance shall constitute a loan ("Contribution Loan") from those Nondefaulting Members to the Defaulting Member and a Capital Contribution to the LLC by the Defaulting Member. The Contribution Loan shall bear interest equal to the lesser of (a) three percentage points over the prime commercial lending rate published from time to time in The Wall Street Journal or (b) the maximum rate allowed by law. Until such time as the Contribution Loan, together with accrued interest, has been fully repaid, those Nondefaulting Members shall (a) have a lien -7- 16 on the Defaulting Member's Shares and the defaulting Member shall pledge such Member's Shares to the Nondefaulting Member, and (b) shall be entitled to repayment of the Contribution Loan from any cash distributions by the LLC which would otherwise be made to the Defaulting Member. If capital is distributed to the Members before liquidation, or if this LLC is dissolved and the assets liquidated before the Contribution Loan is repaid, any distribution of capital or profits otherwise allocable to the Defaulting Member shall be first applied toward the repayment of the Contribution Loan plus accrued interest, and any remaining balance shall then be distributed to the Defaulting Member. If, however, the Defaulting Member delivers to those Nondefaulting Members within ninety (90) days after the date of receipt of notice under Section 3.4.1, an amount equal to the Contribution Loan made by those Nondefaulting Members to the Partnership together with the accrued interest, the Defaulting Member shall then not be considered to be in default under this Agreement and the pledge shall be terminated null and void. 3.4.3. OTHER REMEDIES. If the Nondefaulting Members make the Contribution Loan on behalf of the Defaulting Member under Section 3.4.2, and the Defaulting Member has not repaid the Contribution Loan within the 90-day time period provided under Section 3.4.2, then those Nondefaulting Members may, at any time after the expiration of that 90-day period, while the Contribution Loan is outstanding, elect by written notice to all Members to do one of the following: 3.4.3.1. SHARE REDUCTION. Treat the Contribution Loan as a Capital Contribution by those Nondefaulting Members so that the number of Shares held by the Nondefaulting Members shall be increased, pro rata, and the number of Shares held by the Defaulting Member shall be decreased, by a number equal to the Defaulting Member's Shares at the time multiplied by a fraction, the numerator of which is the amount of the unpaid balance of the Contribution Loan plus accrued and unpaid interest and the denominator of which is the sum of (i) the balance at such time of capital contributed by the Defaulting Member less capital distributions to such Defaulting Member, plus (ii) the amount of the unpaid balance of the Contribution Loan plus accrued and unpaid interest. If the Members' Shares are adjusted as provided above, the Defaulting Member shall no longer be in default under this Agreement and shall not be required to repay the Contribution Loan from that Nondefaulting Member. 3.4.3.2. PURCHASE OF SHARES. The Nondefaulting Members, on a pro rata basis, may purchase the Defaulting Member's Shares for their Fair Market Value. In such event, the Defaulting Member shall continue to be liable for payment of the Contribution Loan plus accrued interest, the Defaulting Member's accrued distributions to the time its interest in the LLC is acquired shall continue to be assigned, all as provided in Section 3.4.2., and the amount payable by the Nondefaulting Members to the Defaulting Member in payment for the Defaulting Member's interest in the LLC shall be offset against the unpaid Contribution Loan and accrued and unpaid interest thereon. -8- 17 3.4.4. EXCEPTION. Notwithstanding anything to the contrary in Section 3.4, the provisions of Section 3.4 shall not apply to any Member who would otherwise be considered a Defaulting Member if such Member then has outstanding loans to the LLC and a Capital Account balance which together exceed the Nondefaulting Members' outstanding loans to the LLC and Capital Account balances, taken together. 3.5. INTEREST. No Member shall earn any interest on his Capital Contributions to or share of the capital of the LLC. 3.6. INDIVIDUAL CAPITAL ACCOUNTS. A Capital Account shall be established and maintained on the LLC's books for each Member. The balance of each Member's Capital Account shall be calculated in accordance with the following provisions: 3.6.1. ADDITIONS TO CAPITAL ACCOUNT. Each Member's Capital Account shall be increased by: (a) the amount of cash and the agreed upon value of property contributed to the LLC by the Member; and (b) the Member's distributive share of the items of income or gain comprising the LLC's Profit for each taxable year. 3.6.2. SUBTRACTIONS FROM CAPITAL ACCOUNT. Each Member's Capital Account shall be decreased by: (a) the amount of cash and the Gross Asset Value of any LLC property distributed to such Member pursuant to any provision of this Agreement (net of liabilities encumbering such distributed property that the recipient Member is considered to assume pursuant to Code Section 752); and (b) such Member's distributive share of items of deduction or loss comprising the LLC's Loss for each taxable year. 3.6.3. COMPLIANCE WITH REGULATIONS. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Sections 1.704-1(b) and 1.704-2 of the Regulations, and shall be interpreted and applied in a manner consistent with the Regulations. If the Members determine that it is prudent to modify the manner in which the Capital Accounts are computed in order to comply with the Regulations, the Members may make such modification, provided that it is not likely to have a material effect on the amounts distributed to any Member upon dissolution of the LLC. 3.6.4. CAPITAL ACCOUNT ADJUSTMENT. If the Gross Asset Values of LLC assets are adjusted as described in the definition of Gross Asset Value in Appendix 1, the Capital Accounts of all Members shall be adjusted simultaneously to reflect the aggregate net adjustment as if the LLC recognized gain or loss equal to the amount of such net adjustment. -9- 18 4. MANAGEMENT AND RESTRICTIONS. 4.1. MANAGEMENT COMMITTEE. Except for situations in which the approval of the Members is required by statute, the Certificate or this Agreement, the LLC shall be managed and controlled by the Management Committee. 4.2. MANAGEMENT COMMITTEE RESPONSIBILITIES. The business of the LLC shall be managed by and under the direction of the Management Committee who may do all such lawful acts and things as are not by statute or by the Certificate or this Agreement required to be done by the Members. The Management Committee's responsibilities shall be carried out as follows: 4.2.1. BY ARV. ARV shall, on behalf of the LLC and the Management Committee, have the power, authority and responsibility to perform the ARV Responsibilities. Any action taken by any ARV Committee Member in the performance of any of the ARV Responsibilities shall be an action taken on behalf of the Management Committee and the LLC for all purposes. No separate Management Committee approval shall be required. 4.2.2. BY DKL. DKL shall, on behalf of the LLC and the Management Committee, have the power, authority and responsibility to perform the DKL Responsibilities. An action taken by any DKL Committee Member in the performance of any of the DKL Responsibilities shall be an action taken on behalf of the Management Committee and LLC for all purposes. No separate Management Committee approval shall be required. 4.2.3. BY MANAGEMENT COMMITTEE. The Management Committee shall, on behalf of the LLC, have the power, authority and responsibility to perform all other duties and responsibilities not included in the ARV Responsibilities and the DKL Responsibilities. The Committee Members shall devote such time and attention to the performance of the Management Committee's responsibilities as is reasonably necessary or appropriate. Each Committee Member shall be entitled to one vote and Management Committee decisions shall be made by majority vote. Any Committee Member shall be entitled to vote by proxy in the same manner as Members may vote by proxy under Section 16.8. The Management Committee's responsibilities shall include, without limitation, the following: 4.2.3.1. The adoption and/or modification of a Project rehabilitation and operating budget and plan for the LLC; 4.2.3.2. Consummation of any Construction/Permanent Loan or any other financing or refinancing required for the rehabilitation and/or operation of the Project; -10- 19 4.2.3.3. Any partnership, joint venture or other business arrangement with any other person or entity; 4.2.3.4. Filing any application to any governmental agency that binds the LLC; 4.2.3.5. Approval of (i) the construction contract, the owner/architect contract and other contract of material significance to the rehabilitation of the Project and (ii) any contract or subcontract involving an Affiliate of a Member; 4.2.3.6. The expenditure of, or commitment to spend, more than $15,000 on any single LLC expense or group of related expenses, except for any expenditures and spending commitment within either the ARV Responsibilities or the DKL Responsibilities, or that is authorized in the approved development and operating budget; 4.2.3.7. The transfer, compromise or release of any LLC claim exceeding $15,000; 4.2.3.8. Retaining accountants, attorneys and other professionals for the LLC; 4.2.3.9. The selection and hiring of the LLC's officers; 4.2.3.10. Any loan from a Member to the LLC; 4.2.3.11. The terms and conditions of any sale of the Project; or 4.2.3.12. Any other decision or action which the Management Committee is authorized or required to take under this Agreement, or which, by its nature, may reasonably be expected to have a material affect on the LLC or any of its assets or operations. 4.2.4. COOPERATION. Notwithstanding the allocation of the ARV Responsibilities to ARV and the DKL Responsibilities to DKL, each Member agrees to cooperate with the other Members in connection with the performance of their respective responsibilities hereunder and shall sign such documents and take such actions as may be reasonably required in connection therewith. 4.3. POWER OF ATTORNEY. By executing this Agreement, the Members hereby appoint the Management Committee their attorney-in-fact to act in their names to: -11- 20 4.3.1. Execute and acknowledge and, to the extent necessary, to file and record: 4.3.1.1. The Certificate and all instruments amending or canceling the Certificate; and 4.3.1.2. Amendments to this Agreement for the purpose of correcting an error or omission or satisfying the requirements or conditions imposed by any federal or state governmental agency, and for the purpose of admitting persons or entities as additional or substituted Members of the LLC as provided for in this Agreement. 4.3.2. Take any further action which such attorney-in-fact deems necessary or advisable in connection with any of the foregoing. The foregoing appointment is a special power of attorney coupled with an interest, is irrevocable and shall survive the Bankruptcy of a Member; may be exercised by the Management by the signature of an authorized member of the Management Committee as attorney-in-fact for all the Members. This special power of attorney does not supersede any other part of this Agreement nor is it to be used to deprive the other Members of any of their rights. 4.4. IMPASSES. If the Management Committee reaches an impasse concerning any decision which it has the responsibility to make and that impasse cannot be resolved within a reasonable time under the circumstances but in any event not longer than thirty (30) days, either ARV or DKL shall have the right to (a) submit the matter for resolution by binding arbitration under Section 13 below; or (b) exercise the buy-sell provisions as provided in Section 14 below. 4.5. AUTHORITY OF MEMBERS. Notwithstanding anything to the contrary in this Agreement, the Management Committee may not do or permit to be done any of the following without the express approval of all Members: 4.5.1. Voluntarily cause the dissolution of the LLC; 4.5.2. Transfer all or a significant part of the LLC's assets except in the ordinary course of business, or engage in any material recapitalization or merger; 4.5.3. The admission of additional Members; or 4.5.4. Take any action which would make it impossible to carry on the business of the LLC. -12- 21 4.6. FEES. ARV and DKL shall be entitled to receive fees for the performance of their respective responsibilities hereunder: 4.6.1. PROJECT MANAGEMENT. As consideration for the performance of its Project management responsibilities under this Agreement, each month commencing on the date on which the Project receives a certificate of occupancy or is otherwise available for occupancy, ARV shall be entitled to receive an amount equal to the greater of (i) two and one-half percent ( 2 1/2%) of the gross revenue of the Project from all sources, including funds received from the rental of office space at the Property, and (ii) Nine Thousand Four Hundred Dollars ($9,400). ARV shall not be responsible for any direct or onsite Project management costs. 4.6.2. CONSTRUCTION. As consideration for performing the construction manager's responsibilities for the rehabilitation of the Project under this Agreement, DKL shall be paid a fee of four percent (4%) of the hard construction costs for the rehabilitation of the Project. The fee shall be paid monthly from the Construction/Permanent Loan draws. DKL shall not be responsible for any direct or onsite Project construction costs. 4.7. AMENDMENT OF CERTIFICATE OR AGREEMENT. The Management Committee shall amend the Formation Certificate or this Agreement as necessary to reflect any changes as a result of any action taken by the Members. 4.8. LIABILITY OF MEMBERS TO THE OTHER MEMBERS AND THE LLC; INDEMNITY OF MEMBERS. 4.8.1. LIABILITY. Except as otherwise specifically set forth herein, no Member or any Affiliates, employees or agents shall be liable to the other Members because any taxing authorities disallow or adjust income, deductions or credits in the LLC income tax returns. Furthermore, no Member or any Affiliates, employees or agents shall have any personal liability for the repayment of the Capital Contributions of the Members except as provided in this Agreement. In addition, the doing of any act or the omission to do any act by any Member, the effect of which may cause or result in loss or damage to the LLC, if done in good faith and in accordance with sound business practices and otherwise in accordance with the terms of this Agreement, shall not subject the Member or the Member's successors or assigns to any liability. 4.8.2. INDEMNIFICATION. 4.8.2.1. The LLC shall indemnify and hold the Management Committee and the Members harmless from and against any loss, claims, damages, liabilities, expenses, judgments, fines or settlements arising from any claims (including reasonable legal expenses and other costs of defense), demands, actions, suits or proceedings (civil, criminal, administrative or investigative) in which they may be -13- 22 involved, as a party or otherwise, by reason of their management of, or involvement in, the affairs of the LLC, or rendering of advice or consultation with respect thereto, or which relate to the LLC, its properties, business or affairs, if the indemnitee acted in good faith and in a manner the indemnitee reasonably believed to be in, or not opposed to, the best interests of the LLC, and, with respect to any criminal proceeding, had no reasonable cause to believe the conduct of the indemnitee was unlawful. The termination of a proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not, of itself, create a presumption that the indemnitee did not act in good faith and in a manner which the indemnitee reasonably believed to be in, or not opposed to, the best interests of the LLC or that the indemnitee had reasonable cause to believe that the indemnitee's conduct was unlawful (unless there has been a final adjudication in the proceeding that the indemnitee did not act in good faith and in a manner which the indemnitee reasonably believed to be in or not opposed to the best interests of the LLC; or that the indemnitee did have reasonable cause to believe that the indemnitee's conduct was unlawful). 4.8.2.2. The LLC may also indemnify any Person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action by or in the right of the LLC by reason of the fact that such Person is or was an officer, employee or agent of the LLC. However, no Person shall be entitled to indemnification hereunder for any conduct arising from the gross negligence or willful misconduct of that Person or reckless disregard in the performance of that Person's duties hereunder. 4.8.2.3. Expenses (including attorneys' fees) incurred in defending any proceeding under Section 4.8.2.1 or 4.8.2.2 may be paid by the LLC in advance of the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the indemnitee to repay such amount if it is ultimately determined that the indemnitee is not entitled to indemnity. 4.8.2.4. The indemnification provided by this Section shall not be deemed to be exclusive of any other rights to which any Person may be entitled under any agreement, or as a matter of law, or otherwise, both as to action in a Person's official capacity and to action in another capacity. 4.8.2.5. The Management Committee shall have power to purchase and maintain insurance for the benefit of the LLC, the Members, officers, employees or agents of the LLC and any other indemnitees at the expense of the LLC whether or not the LLC would be permitted to indemnify such Persons against such liability under the provisions of this Agreement. -14- 23 5. OFFICERS. 5.1. APPOINTMENT OF OFFICERS. The officers of the LLC shall be appointed by the Management Committee and shall include a President and a Secretary. The Management Committee may appoint one person to be Chairman and one to be Vice Chairman. The Management Committee may also appoint a Treasurer and/or one or more Vice Presidents, Assistant Secretaries and Assistant Treasurers. Any number of offices may be held by the same person. The Management Committee may appoint such other officers and agents as they deem appropriate who shall hold their offices for such terms and shall exercise such powers and perform such duties as are determined by the Management Committee. 5.2. COMPENSATION OF OFFICERS. Members, their Affiliates, or their respective employees who serve as officers, shall serve without compensation. The compensation of any other officers and agents of the LLC shall be fixed by the Management Committee. 5.3. TERM OF OFFICE. The officers of the LLC shall hold office until their successors are chosen and qualified. Any officer elected or appointed by the Management Committee may be removed at any time by the Management Committee. Any vacancy occurring in any office of the LLC shall be filled by the Management Committee. 5.4. DUTIES OF CHAIRMAN. The Chairman, if any, shall preside at all meetings of the Members at which the Chairman is present. The Chairman shall have and may exercise such powers as are, from time to time, assigned to the Chairman by the Management Committee and as may be provided by law. 5.5. DUTIES OF VICE-CHAIRMAN. In the absence of the Chairman, the Vice Chairman, if any, shall preside at all meetings of the Members at which the Vice Chairman is present. The Vice Chairman shall have and may exercise such powers as are, from time to time, assigned to the Vice Chairman by the Management Committee and as may be provided by law. 5.6. DUTIES OF PRESIDENT. The President shall be the chief executive officer of the LLC, and in the absence of the Chairman and Vice Chairman shall preside at all meetings of the Members. The President shall have general and active management of the day-to-day business and affairs of the LLC and shall see that all orders and resolutions of the Members are carried into effect. The President shall execute all contracts except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Management Committee to some other officer or agent of the LLC. 5.7. DUTIES OF VICE PRESIDENT. In the absence of the President, the Vice President, if any (or if there is more than one Vice President, the Vice Presidents in the -15- 24 order designated by the Management Committee, or in the absence of any designation, then in the order of their election), shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Vice Presidents shall perform such other duties and have such other powers as the President or the Management Committee may prescribe. 5.8. DUTIES OF SECRETARY. The Secretary shall attend all meetings of the Members and record all the proceedings of the meetings of the Members in a book to be kept for that purpose. The Secretary shall give, or cause to be given, notice of all meetings of the Members and shall perform such other duties and have such other powers as the Management Committee or the President may prescribe. 5.9. DUTIES OF ASSISTANT SECRETARY. The Assistant Secretary, or, if there is more than one, the Assistant Secretaries in the order designated by the Members (or in the absence of any designation, then in the order of their election) shall, in the absence of the Secretary or in the event of the Secretary's inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Management Committee, President or Secretary may prescribe. 5.10. DUTIES OF TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the LLC and shall deposit all money and other valuables in the name and to the credit of the LLC in such depositories as may be designated by the Members. The Treasurer shall disburse the funds of the LLC as may be ordered by the Members, taking proper vouchers for such disbursements, and shall render to the President and the Management Committee, at regular meetings, or when the Management Committee so require, an account of all transactions as Treasurer and of the financial condition of the LLC. 5.11. DUTIES OF ASSISTANT TREASURER. The Assistant Treasurer, or if there is more than one, the Assistant Treasurers in the order designated by the Management Committee (or in the absence of any designation, then in the order of their election) shall, in the absence of the Treasurer or in the event of the Treasurer's refusal or inability to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Management Committee may prescribe. 6. SHARE CERTIFICATES. 6.1. CERTIFICATES. Every Member of the LLC shall be entitled to have a certificate issued by the LLC evidencing such Member's membership interest in and ownership of the LLC. 6.2. REPLACEMENT CERTIFICATES. Except as provided in this Section, no new certificates for Shares shall be issued to replace a previously issued certificate unless -16- 25 that certificate is surrendered to the LLC and canceled at the same time. The Management Committee may, if any Share certificate is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the Management Committee may require. The Management Committee may require indemnification of the LLC secured by a bond or other adequate security sufficient to protect the LLC against any claim that may be made against it on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 6.3. RIGHTS OF REGISTERED OWNER. The LLC shall be entitled to recognize the exclusive right of a Person registered on its books as the owner of Shares to receive dividends, and to vote as the owner, and to hold liable for calls and assessments a Person registered on its books as the owner of Shares. The LLC shall not be bound to recognize any Person as the owner of Shares, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of New York. 7. ALLOCATIONS OF PROFIT AND LOSS. 7.1. LOSS. After giving effect to the special allocations described in Appendix 2, Loss shall be allocated among the Members in accordance with their respective Capital Account balances. 7.2. PROFIT. After giving effect to the special allocations described in Appendix 2, Profit shall be allocated among the Members as follows: 7.2.1. First, among the Members proportionately in accordance with any Loss previously allocated to them, less any Profit previously allocated; and 7.2.2. Second, in proportion to their Shares. 7.3. ALLOCATIONS FOR TAX PURPOSES. 7.3.1. TAX ALLOCATIONS. For income tax purposes each item of income, gain, loss or deduction of the LLC shall be allocated among the Members in accordance with the method in which equivalent items of Profit or Loss are allocated pursuant to this Section. 7.3.2. PARTNERSHIP TAX TREATMENT. The Members intend the LLC to be treated as a partnership for all federal income tax purposes. No Member shall assert, on any tax return or elsewhere, anything inconsistent with this intent, or do anything which could deny the LLC the intended partnership tax treatment. 7.3.3. ALLOCATIONS UPON TRANSFERS OF LLC INTERESTS. Profit and Loss, together with corresponding tax items, shall be allocated between the transferring -17- 26 Member and the Substitute Member using any method selected by the Management Committee which is permitted by Section 706 of the Code. 8. DISTRIBUTIONS. 8.1. DISTRIBUTIONS OF CASH FLOW. Distributions shall be made to the Members at times determined by the Management Committee, but no less frequently than quarterly once the LLC generates positive cash flow. All Distributions shall be made as follows: 8.1.1. First, to repay any loans made by any Member until the amount of loans outstanding to each Member is equalized; 8.1.2. Second, to repay prorata any loans made by any Member; 8.1.3. Third, prorata to each Member a noncumulative, compounded preferred return of 9% per annum on the undistributed portion of that Member's Capital Contribution; 8.1.4. Fourth, among the Members proportionately in accordance with their relative Capital Contributions until their Adjusted Capital Contributions are zero; and 8.1.5. Fifth, in proportion to their Shares. 8.2. RETURN OF DISTRIBUTIONS IN CERTAIN CIRCUMSTANCES. Under the LLC Act, a member is obligated to return a distribution from a limited liability company to the extent that immediately after giving effect to the distribution all limited liability company unsecured liabilities to its creditors exceed the fair value of limited liability company assets (i.e. the limited liability company is insolvent). The Management Committee will endeavor to refrain from making any Distributions in such circumstances; however, a court may hold that, notwithstanding these provisions of this Agreement, the fair market value of the LLC assets is other than that determined by the Management Committee, and, accordingly, the Members may be liable to return to the LLC all or a portion of the Distributions received under such circumstances. 8.3. WITHHOLDING TAXES. If the LLC is obligated to withhold and pay any taxes with respect to any Member, any tax required to be withheld may be withheld from any Distribution otherwise payable to that Member, or in lieu thereof upon remittance to the appropriate tax authority may be charged to that Member's Capital Account as if the amount of such tax had been distributed to that Member. -18- 27 9. MEMBERS. 9.1. LIABILITY OF MEMBERS. The Members shall not be personally liable for any obligation of the LLC. 9.2. NO DISTRIBUTIONS IN KIND. Except as otherwise specifically set forth herein, the Members shall not have the right to demand or receive property other than cash in return of Capital Contributions or as to Distributions. 9.3. BANKRUPTCY OF A MEMBER. Upon the insolvency or bankruptcy of a Member, the LLC shall not dissolve or terminate and the representative of that Member shall have such rights of that Member as are necessary for the purpose of settling or managing the affairs and the same power as that Member had to constitute an Assignee of that Member's interest as a Substitute Member, but the representative shall not become a Substitute Member without complying with the requirements of Section 10. 10. TRANSFER OF LLC INTERESTS. 10.1. TRANSFER. Any Member may Transfer any portion of the Member's Shares only if (i) the Transferring Member has complied with the Right of First Refusal imposed by Section 10.5; (ii) the Assignee has agreed in writing to assume all of the obligations of the Transferring Member with respect to the Shares Transferred (including the obligations imposed hereunder as a condition to any Transfer), and (iii) the Management Committee shall have concluded (which conclusion may be based upon an opinion of counsel satisfactory to them) that such assignment or disposition would not (a) result in a violation of the Securities Act of 1933 as amended, or any other applicable statute of any jurisdiction; (b) result in a termination of the LLC for federal or state income tax purposes or result in the LLC being taxed as a corporation for federal income tax purposes; or (c) result in a violation of any law, rule or regulation by the Member, the Assignee, the LLC or the other Members. 10.2. TRANSFER VOID. Any purported Transfer of Shares in contravention of this Section shall be void and of no effect. 10.3. RIGHTS OF ASSIGNEES. An Assignee of Shares has no right to vote or to participate in the management of the business and affairs of the LLC or to become a Member. The Assignee is only entitled to receive Distributions and to be allocated the Profit and Loss attributable to the Shares Transferred to the Assignee. 10.4. ADMISSION OF PERMITTED TRANSFEREES. The Shares of any Member shall be Transferable free from any Right of First Refusal if (i) the Transfer occurs by reason of or incident to the death, dissolution, liquidation, merger or termination of the transferor Member, (ii) the transferee is a Permitted Transferee, and (iii) the Permitted Transferee agrees in writing to be bound by the terms and conditions of this Agreement -19- 28 as fully as if the Permitted Transferee were an original signatory hereto. A Permitted Transferee will be admitted as a Substitute Member only in accordance with Section 2.6. 10.5. RIGHT OF FIRST REFUSAL. 10.5.1. GRANT. The LLC is hereby granted the Right of First Refusal exercisable in connection with any proposed Transfer of Shares other than permitted Transfers under Section 10.4. 10.5.2. NOTICE OF INTENDED DISPOSITION. If a Member desires to accept a bona fide third-party offer for the Transfer of any or all of the Member's Shares, Member shall promptly (i) deliver to the Secretary of the LLC the Disposition Notice, and (ii) provide satisfactory proof that the disposition of the Target Shares to such third-party offeror would not be in contravention of the provisions set forth in Section 10.1. 10.5.3. EXERCISE OF RIGHT. The LLC shall, for a period of twenty- five (25) days after receipt of the Disposition Notice, have the right to repurchase any or all of the Target Shares specified in the Disposition Notice upon substantially the same terms as specified therein. Such right shall be exercisable by delivery of the Exercise Notice to the Transferring Member before the end of the twenty-five (25) day exercise period. 10.5.4. SECONDARY RIGHT OF OTHER MEMBERS. If the LLC does not exercise its Right of First Refusal with respect to all of the Target Shares within the twenty-five (25) day period set forth in the previous Section, the other Members shall, for a period of fifteen (15) days following the expiration of the LLC's Right of First Refusal, have the right to purchase any or all of the Target Shares specified in the Disposition Notice upon substantially the same terms as specified therein. Such right shall be exercisable by delivery of the Member Exercise Notice to the Transferring Member prior to the expiration of the fifteen (15) day exercise period. The Member Exercise Notice shall set forth the number of Target Shares which the exercising Member desires to purchase. If the Members delivering Member Exercise Notices desire to purchase more than the total number of Target Shares, then each exercising Member shall be permitted to purchase a pro rata amount of the Target Shares based upon the total number of Shares indicated in the Member Exercise Notices. 10.5.5. VALUATION. Should the purchase price specified in the Disposition Notice be payable in property other than cash or evidences of indebtedness, the LLC shall have the right to pay the purchase price in the form of cash equal in amount to the Fair Market Value of such property. The closing shall then be held on the later of (i) the fifth business day following delivery of the Exercise Notice or (ii) the fifth business day after the Appraisal shall have been completed. -20- 29 10.5.6. FULL EXERCISE OF RIGHTS. If the right of the LLC or the Members is exercised with respect to all the Target Shares specified in the Disposition Notice, then the LLC or the Members (as the case may be) shall effect the purchase of the Target Shares, including payment of the purchase price, on the payment terms specified in the Disposition Notice; and the Transferring Member shall deliver to the LLC the certificates representing the Target Shares to be purchased, each certificate to be properly endorsed for transfer. The closing shall then be held on the later of (i) sixty (60) days following delivery of the Disposition Notice or (ii) five (5) business days after any necessary valuation shall have been made. 10.5.7. PARTIAL EXERCISE OF RIGHT. If the LLC or the Members make a timely exercise of their rights which in the aggregate constitute less than all of the Target Shares specified in the Disposition Notice, the Transferring Member shall have the option, exercisable by written notice to the LLC delivered within thirty (30) days after the date of the Disposition Notice, to effect the Transfer of the Target Shares pursuant to one of the following alternatives: 10.5.7.1. Transfer of all the Target Shares to the third-party offeror identified in the Disposition Notice, but in full compliance with the requirements of Section 10.1, as if the LLC did not exercise the Right of First Refusal; or 10.5.7.2. Sale to the LLC or the Members of the portion of the Target Shares which the LLC or the Members have elected to purchase, such sale to be effected in substantial conformity with the provisions of this Section. Failure of the Transferring Member to deliver timely notification to the LLC under this Section shall be deemed to be an election by the Transferring Member to sell the Target Shares pursuant to alternative specified in Section 10.5.7.2. above. 10.5.8. NON-EXERCISE OF RIGHT. If the LLC and the Members do not exercise their purchase rights in accordance with this Section, the Transferring Member shall have a period of thirty (30) days thereafter in which to Transfer the Target Shares to the third-party offeror identified in the Disposition Notice upon terms and conditions no more favorable to such third-party offeror than those specified in the Disposition Notice; provided, however, that any such Transfer must not be effected in contravention of the provisions of Section 10.1. If the Transferring Member does not effect the Transfer of the Target Shares within the specified thirty (30) day period, the LLC's and the other Members' Right of First Refusal shall continue to be applicable to any subsequent disposition of the Target Shares by the Member. 10.5.9. RECAPITALIZATION/MERGER. 10.5.9.1. Upon any share dividend, share split, recapitalization or other transaction affecting the LLC's outstanding Shares without receipt -21- 30 of consideration, then any new, substituted or additional securities or other property which is by reason of such transaction distributed with respect to the Shares shall be immediately subject to the LLC's Right of First Refusal hereunder, but only to the extent the Shares are at the time covered by such right. 10.5.9.2. Upon (i) a merger or consolidation in which the LLC is not the surviving entity or (ii) a disposition of all or substantially all of the LLC's assets, (iii) a reverse merger in which the LLC is the surviving entity but in which the LLC's outstanding Shares are transferred in whole or in part to Person or Persons other than those who held the Shares immediately prior to the merger, or (iv) any transaction effected primarily to change the state in which the LLC is organized, or to create a holding company structure, the LLC's Right of First Refusal shall remain in full force and effect and shall apply to the new securities or other property received in exchange for the Shares in consummation of the transaction, but only to the extent the Shares are at the time covered by such right. 10.6. MARITAL DISSOLUTION OR LEGAL SEPARATION. 10.6.1. GRANT. In connection with the dissolution of the marriage or the legal separation of any Member, the LLC shall have the Special Purchase Right, exercisable at any time during the thirty (30) day period following the LLC's receipt of the required Dissolution Notice, to purchase from the Member's spouse any or all Shares which are or would otherwise be awarded to such spouse incident to the dissolution of marriage or legal separation in settlement of any marital property rights such spouse may have in the Shares. The Special Purchase Right shall not apply to any Shares retained by the Member. 10.6.2. NOTICE OF DECREE OR AGREEMENT. Each Member shall promptly provide the LLC with written notice of (i) the entry of any court order resolving the property rights of the Member and the Member's spouse in connection with their marital dissolution or legal separation or (ii) the execution of any agreement relating to the distribution or division of such property rights. The Dissolution Notice shall be accompanied by a copy of the actual decree of dissolution or settlement agreement between the Member and the Member's spouse which provides for the award to the spouse of Shares in settlement of any marital property rights such spouse may have in such Shares. 10.6.3. EXERCISE OF SPECIAL PURCHASE RIGHT. The Special Purchase Right shall be exercisable by delivery of the Purchase Notice to the Member and the Member's spouse within thirty (30) days after the LLC's receipt of the Dissolution Notice. The Purchase Notice shall indicate the number of the Shares to be purchased by the LLC, the date such purchase is to be effected (such date to be not less than five (5) business days, nor more than ten (10) business days, after the date of the Purchase Notice), and the amount which the LLC proposes to pay for such Shares. If the Member's Spouse does not agree to the amount proposed to be paid by the LLC, then the price to -22- 31 be paid shall be the Fair Market Value of the Shares as determined by Appraisal and the purchase shall occur ten (10) business days following the completion of the Appraisal. However, if the Fair Market Value is greater than one hundred ten percent (110%) of the purchase price set forth in the Purchase Notice, the LLC shall have the right to withdraw the Purchase Notice. 10.7. EFFECT OF CHARGING ORDER. If any Member's LLC interest becomes subject to a charging order, the following provisions shall govern the rights and obligations of the Member whose interest is so charged and the creditor in whose favor the charging order was entered: 10.7.1. A creditor who obtains a charging order shall have no right to interfere in the management of the LLC or any other rights as a Member, except the same right to receive the allocations of Profit and Loss and the Distributions to which the Member whose interest is so charged would otherwise be entitled. 10.7.2. The interest of a Member so charged may not be foreclosed upon or otherwise sold pursuant to court order without the consent of all of the Members, other than the Member whose interest is so charged. 10.8. ASSIGNEE'S TAX LIABILITY. An Assignee of any interest in the LLC which is taken by levy, foreclosure, charging order, execution or other similar proceeding shall receive both Federal and California Forms K-1 and report all income and loss on its income tax returns each year in accordance with Rev. Rul. 77-137, 1977-1 C.B. 178. 11. LLC ACCOUNTING. 11.1. METHOD OF ACCOUNTING. The LLC books shall be kept on the accrual basis unless changed to the cash basis by the Management Committee. 11.2. FISCAL YEAR. The fiscal year of the LLC shall end on March 31 of each year unless changed by the Members in accordance with applicable tax laws. 11.3. FINANCIAL AND BUSINESS RECORDS. 11.3.1. MAINTENANCE OF RECORDS AND ACCOUNTS. The Management Committee shall maintain or cause to be maintained financial and business records (including those identified in the LLC Act) in which shall be entered all transactions of the LLC. 11.3.2. REQUIRED RECORDS. The Management Committee shall maintain or cause to be maintained at the principal place of business of the LLC all of the following records: -23- 32 11.3.2.1. A current list of the name and last known business or residence address of each Member, together with the Capital Contribution and the share in the Profit, Loss and Distributions of each Member; 11.3.2.2. A copy of the Certificate and all amendments thereto, together with executed copies of any powers of attorney pursuant to which the Certificate or amendment has been executed; 11.3.2.3. Copies of the LLC's federal and state income tax or information returns and reports, if any, for the six (6) most recent taxable years; 11.3.2.4. Copies of this Agreement and all amendments thereto; 11.3.2.5. Financial statements of the LLC for the six (6) most recent fiscal years; and 11.3.2.6. The LLC's books and records for at least the current and past three (3) fiscal years. 11.3.3. SUPERVISION; INSPECTION OF BOOKS. The Management Committee shall give notice to each Member of any significant changes in the location of the LLC's financial and business records. Such financial and business records shall be open to inspection, audit and copying by any Member, or the Member's designated representative, upon reasonable notice at any time during business hours for any purpose reasonably related to the Member's interest in the LLC. Any information so obtained or copied shall be kept and maintained in strictest confidence except as required by law. 11.3.4. INCOME TAX DATA AND REPORTS. The Management Committee shall send or cause to be sent to the Members, within ninety (90) days after the end of each fiscal year, such information as is necessary for the Members to complete their federal and state income tax or information returns together with an annual report which shall include financial statements of the LLC which may, but are not required to, be audited by independent certified public accountants. 12. BANK ACCOUNTS. All funds of the LLC are to be deposited in the LLC's name in such bank account or accounts as may be designated by the Management Committee and shall be withdrawn on the signature of persons as the Management Committee may authorize. 13. DISPUTE RESOLUTION. 13.1. BY AGREEMENT OR ARBITRATION. The Management Committee and the Members shall attempt to resolve informally all disputes that arise under this Agreement. -24- 33 Any such dispute that cannot be resolved informally shall be determined by binding arbitration conducted in New York County, New York by the American Arbitration Association or by any method of private arbitration upon which the Management Committee or the Members, as applicable, agree; provided, however, that any such private arbitration shall proceed in accordance with the procedural rules of the American Arbitration Association then in effect (the "Rules"). This provision shall not restrict the right of any Member to seek equitable remedies in a judicial proceeding pending the outcome of the arbitration. 13.2. PROCEDURAL GUIDELINES. Notwithstanding any provision in the Rules to the contrary, the following guidelines shall apply to arbitration under this Agreement: 13.2.1. The arbitration panel shall consist of three persons, one chosen by ARV and the other chosen by DKL. The third panel member, who shall chair the arbitration panel, chosen by these two panel members. 13.2.2. The panel shall make all substantive determinations by majority vote, and procedural matters may be determined by the chairman. 13.2.3. The disputing parties shall be permitted discovery as provided in the New York Rules of Civil Procedure in effect at the time the third panel member is selected. 13.2.4. Unless otherwise agreed by the disputing parties, the arbitration hearing shall be held no later than ninety (90) days following the selection of the third member of the arbitration panel, and the arbitration award shall be issued no later than thirty (30) days after the hearing. 13.3. PREVAILING PARTY. The successful or prevailing party in any arbitration or other proceedings brought under Section 13.1 shall be entitled to recover actual attorneys' fees (including fees for paraprofessionals and similar personnel and disbursements) and other costs it incurred in that action or proceeding, in addition to any other relief to which it may be entitled. The parties agree that actual attorneys' fees shall be based on the attorneys' fees actually incurred (based on the attorneys' customary hourly billing rates) rather than the court or arbitrator making an independent inquiry concerning reasonableness. 14. BUY-SELL PROVISIONS. 14.1. OFFER. Subject to the conditions set forth in Section 14.6 and 14.7 below, any Member (the "Electing Member"), provided that the Electing Member is not then in breach of this Agreement, may offer to buy all, but not less than all, of the Shares owned by any other Member (the "Offeree") by delivering to the Offeree a written notice (the "Buy- Sell Offer") stating the purchase price of the Shares (the "Purchase Price"). As part of the -25- 34 Buy-Sell Offer, the Electing Member shall be required to relieve the Offeree, concurrent with the payment of the Purchase Price, of any and all outstanding guaranteed loans, including without limitation any guaranteed leases either made by a third party or by a Member to the LLC which the Offeree is liable for as a result of its involvement in the LLC, including, but not limited to, the Member Guaranties specified in Section 17.11 of this Agreement. The value of the LLC Shares, however, may be negative if the obligations of the LLC which are guaranteed by the Members is in excess of the value of the underlying assets of the LLC. In this event, the Offeree may be required to pay the Electing Member the negative valuation at the time of closing. 14.2. REPLY NOTICE. The Offeree shall have sixty (60) days after the receipt of the Buy-Sell Offer within which to send written notice (the "Reply Notice") to the Electing Member stating whether the Offeree will either (a) sell to the Electing Member all of the Offeree's Shares or (b) buy from the Electing Member all of the Electing Member's Shares. If the Electing Member does not receive a Reply Notice within the 60-day reply period, the Offeree shall be conclusively deemed to have accepted the Electing Member's offer to purchase the Offeree's Shares, and a binding contract of purchase and sale shall be deemed to be formed between the Electing Member and the Offeree at the Purchase Price. If the Offeree elects to purchase, it shall purchase an equal number of Shares from the Electing Member, or all of the Electing Member's Shares, at the applicable Purchase Price per Share. 14.3. CLOSING. The closing for the purchase of the Shares pursuant to this Section 14 (the "Closing") shall be held at the principal office of the LLC, unless otherwise mutually agreed, on a date selected by the purchasing Member, but not more than sixty (60) days after the formation of a purchase contract upon the Offeror's receipt of a Reply Notice or the expiration of the 60-day period, as applicable, under Section 14.2 above. 14.4. PAYMENT OF PURCHASE PRICE. The Purchase Price shall be paid in cash at the Closing. All loans of the selling Member owing to the LLC shall be repaid to the LLC concurrently with the first payment of the Purchase Price. The Electing Member shall have the right, in his sole discretion, to elect to pay the Purchase Price, or such a portion thereof as may be required, to the LLC in payment, or partial payment, as applicable, of the selling Member's loans owing to the LLC. Likewise, all loans by the LLC owing to the selling Member, and all Contribution Loans owing to the selling Member by the buying Member, shall be paid in cash at the closing. The payment of such loans shall be a condition of the closing. 14.5. DEFAULT. If the purchasing Member does not close the purchase of Shares under this Section 14 as a result of this default, the selling Member shall have the right (but not the obligation), in addition to any other rights or remedies he may have to elect, by a notice (to be effective immediately) to the defaulting Member, (a) to purchase the defaulting Member's Shares at a purchase price equal to eighty-five percent (85%) of the Purchase Price of the defaulting Member's Shares; (b) to file suit for consequential and -26- 35 incidental damages arising from the defaulting Member's failure to close his purchase; or (c) to dissolve the LLC. The closing of the nondefaulting Member's purchase under this Section shall be held at the principal office of the LLC, unless otherwise mutually agreed, on a date selected by the nondefaulting Member not more than thirty (30) days after the nondefaulting Member's election notice is given. The Purchase Price shall be paid on the same terms and conditions as provided in Section 14.4. 14.6. CONDITIONS TO INVOKING BUY-SELL PROCEDURE. Notwithstanding anything to the contrary in this Agreement, the buy-sell procedure may not be invoked by a Member concerning a Management Committee decision unless and until the Management Committee has reached an impasse over that decision. 14.7. TIMING. The Buy-Sell provisions shall not be available to any Member while the Acquisition Loan specified in Section 3.3.1 of this Agreement is outstanding, or 20 months following the Effective Date of this Agreement, whichever is sooner. 15. DISSOLUTION, LIQUIDATION AND TERMINATION OF THE LLC. 15.1. LIMITATIONS. The LLC may be dissolved, liquidated and terminated pursuant only to the provisions of this Section and the Members hereby waive all other rights that they may have to cause the dissolution of the LLC or sale or partition of any of its assets. 15.2. CAUSE OF DISSOLUTION. The first to occur of the following events shall cause the LLC to be dissolved: 15.2.1. The occurrence of a Dissolution Event and the failure of the Members that remain to consent to continue the business of the LLC within ninety (90) days following the occurrence of the Dissolution Event; 15.2.2. The unanimous vote of the Members in favor of dissolution and termination of the LLC; 15.2.3. The sale or other disposition of substantially all of the LLC's assets and the receipt in cash of the proceeds thereof; 15.2.4. At the end of the term of the LLC; 15.2.5. The election of a Member to dissolve the LLC under Section 14; or -27- 36 15.2.6. The date on which the LLC is dissolved upon the occurrence of any of the mandatory dissolution events listed in the LLC Act or otherwise by operation of law or decree of judicial dissolution. 15.3. CONTINUATION OF THE LLC. Upon the occurrence of a Dissolution Event, if there are at least two remaining Members, the remaining Members have the right to avoid dissolution of the LLC and elect to continue the business of the LLC on the same terms as this Agreement. Such right can be exercised by the vote of the Members to continue the business of the LLC within ninety (90) days after the occurrence of a Dissolution Event. Expenses incurred in the continuance of the LLC shall be deemed expenses of the LLC. 15.4. AUTHORITY TO WIND UP. The Management Committee shall have all necessary power and authority required to marshall the assets of the LLC, to pay its creditors, to distribute assets and otherwise wind up the business and affairs of the LLC. In particular, the Management Committee shall have the authority to continue to conduct the business and affairs of the LLC during the period of liquidation of the LLC insofar as such continued operation remains consistent, in the judgment of the Members, with the orderly winding up of the LLC. 15.5. LIQUIDATION OF THE LLC. Upon the dissolution of the LLC, the LLC shall be wound up and liquidated on a reasonably prudent basis and shall not engage in any activity except that necessary to wind up its business; the non-cash assets shall be liquidated; and the remaining assets shall be distributed as expeditiously as possible. 15.5.1. CASH DISTRIBUTIONS AND PROFIT AND LOSS ALLOCATIONS DURING LIQUIDATION. During the winding up and liquidation period, the Members shall continue to receive Distributions and to share in Profit and Loss for tax purposes as provided in this Agreement. If the LLC is liquidated within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Regulations, liquidating Distributions shall be made in compliance with Section 1.704-1(b)(2)(ii)(b)(2) of the Regulations. 15.5.2. DISTRIBUTIONS. Every LLC asset shall be either distributed in kind or sold, as determined by the Management Committee. The assets shall be distributed according to the following priority: 15.5.2.1. EXPENSES. First, to pay all expenses of winding up, liquidating, and terminating the LLC, and second, to pay off all LLC obligations to third party creditors; 15.5.2.2. RESERVES. Then, to the setting up of any reserves which the Management Committee may deem reasonably necessary for any contingent or unforeseen obligations of the LLC, which reserves will be distributed when they are no longer needed; and -28- 37 15.5.2.3. LIQUIDATING DISTRIBUTIONS. Liquidating Distributions shall be made, in compliance with Section 1.704-1(b)(2)(ii)(b)(2) of the Regulations, only to the Members, if any, who have positive Capital Accounts (or in the ratio of such Capital Account balances, if more than one Member shall have a positive Capital Account balance and the amount to be distributed is less than the sum of the positive Capital Account balances). If any Member's interest in the LLC is "liquidated" within the meaning of Section 1.761-1(d) of the Regulations, liquidating Distributions, if any, shall be made to such Member in the same amounts and at such times as would have been made to such Member, in accordance with the foregoing provision of this Section, if the LLC itself were being "liquidated." Liquidating Distributions shall in all events be made after there shall be distributed to each Member current Distributions required pursuant to Section 8. In the case of a liquidation of a Member's interest in the LLC where there is no liquidation of the LLC, the liquidating Distributions to such Member shall be made in accordance with the provisions of the preceding sentence on the same basis as if there were a liquidation of the LLC. 15.5.3. NEGATIVE CAPITAL ACCOUNTS. Upon dissolution, any Member who has a negative Capital Account balance shall be obligated to pay the Member with a positive Capital Account balance the total amount of the negative balance in cash. 15.6. FILING CERTIFICATE OF CANCELLATION. Upon dissolution of the LLC, the Management Committee shall execute and file a Certificate of Cancellation in the office of the Secretary of State. If there is no Management Committee, then the Certificate of Cancellation shall be filed by the remaining Members. If there are no remaining Members, the Certificate of Cancellation shall be filed by the last Person to be a Member; however, if there is no such Person, the Certificate of Cancellation shall be filed by the legal or personal representatives of the Person who was last a Member. 16. MEETINGS OF MEMBERS. 16.1. CALL AND PLACE OF MEETINGS. Meetings of the Members at the principal place of business of the LLC or at any place designated by the President may be called pursuant to the written request of the President or of Members representing more than ten percent (10%) of the Total Outstanding Shares, for consideration of any of the matters as to which Members are entitled to vote. 16.2. NOTICE OF MEETING. Immediately upon receipt of written notice stating that the Member or Members request a meeting on a date which shall not be less than ten (10) nor more than sixty (60) days after receipt of the notice by the President, the President shall immediately give notice to all Members. The notice shall state the place, date and hour of the meeting and the general nature of the business to be transacted. No business other than the business stated in the notice of the meeting may be transacted at the meeting. Notice shall be addressed to each Member at the address appearing on the books of the LLC for the Member. -29- 38 16.3. QUORUM. At any duly held or called meeting of Members, a majority of the Total Outstanding Shares represented by proxy or in person shall constitute a quorum. The Members present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough Members to leave less than a quorum, if any action taken, other than adjournment, is approved by the vote of holders of a number of Shares sufficient to approve such action as required by this Agreement or by the LLC Act. 16.4. ADJOURNMENT OF MEETINGS. An LLC meeting at which a quorum is present may be adjourned to another time or place and any business which might have been transacted at the original meeting may be transacted at the adjourned meeting. If a quorum is not present at an original meeting, that meeting may be adjourned by the vote of a majority of the Shares represented either in person or by proxy. Notice of the adjourned meeting need not be given to Members entitled to notice if the time and place thereof are announced at the meeting at which the adjournment is taken, unless the adjournment is for more than forty-five (45) days or if, after the adjournment, a new record date is fixed for the adjourned meeting in which case notice of the adjourned meeting shall be given to each Member of record entitled to vote at the adjourned meeting. 16.5. MEETINGS NOT DULY CALLED, NOTICE OR HELD. The transactions of any meeting of Members, however called and noticed, and wherever held, shall be as valid as though consummated at a meeting duly held after regular call and notice, if a quorum is present at that meeting, either in person or by proxy, and if, either before or after the meeting, each of the Members entitled to vote, not present in person or by proxy, signs either a written waiver of notice, a consent to the holding of the meeting, or an approval of the minutes of the meeting. 16.6. WAIVER OF NOTICE. Attendance of a Member at a meeting shall constitute waiver of notice, except when that Member objects, at the beginning of the meeting, to the transaction of any business on the ground that the meeting was not lawfully called or convened. Attendance at a meeting is not a waiver of any right to object to the consideration of matters required to be described in the notice of the meeting and not so included, if the objection is expressly made at the meeting. Any Member approval at a meeting shall be valid only if the general nature of the proposal is stated in any written waiver of notice. 16.7. CONSENT TO ACTION WITHOUT MEETING. Any action that may be taken at any meeting of the Members may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by Members having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all Members entitled to vote thereon were present and voted. If the Members are requested to consent to a matter without a meeting, each Member shall be given notice of the matter to be voted upon in the manner described in Section 16.2. If Members representing more than ten percent (10%) of the Total Outstanding Shares request a -30- 39 meeting for the purpose of discussing or voting on the matter so noticed, notice of a meeting shall be given pursuant to Section 16.2 and no action shall be taken until the meeting his held. Unless delayed by a request for a meeting, any action taken without a meeting shall be effective fifteen (15) days after the required minimum number of votes have signed consents to action without a meeting; however, the action shall be effective immediately if Members having at least ninety percent (90%) of the Total Outstanding Shares sign consents to action without a meeting. 16.8. PROXIES. Every Member entitled to vote may authorize another person or persons to act by proxy with respect to that Member's interest in the LLC. 17. MISCELLANEOUS. 17.1. NOTICES AND CONSENTS. Whenever, under the provisions of the LLC Act, the Certificate or this Agreement, notice is required to be given to any Member, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such Member at the Member's address as it appears on the records of the LLC with postage thereon prepaid, and such notice shall be deemed to be given forty-eight (48) hours after the notice is deposited in the United States mail. Notice to Members may also be given by facsimile and deemed received when sent during regular business hours, or otherwise immediately upon the opening of business the next regular business day. All consents required or allowed in this Agreement must be in writing and signed by the consenting party in order to be effective. 17.2. WAIVER OF NOTICE. Any required notice may be waived in writing by the Person entitled thereto. 17.3. SEVERABILITY. Each provision hereof is intended to be severable and the invalidity or illegality of any portion of this Agreement shall not affect the validity or legality of the remainder hereof. 17.4. CAPTIONS. Section captions in this Agreement are for convenience only and shall not be used in interpreting its provisions. 17.5. GENDER, ETC. The masculine gender shall include the feminine and neuter genders and the singular shall include the plural. 17.6. BINDING AGREEMENT. Subject to the restrictions on assignment herein, the provisions of this Agreement shall be binding upon, and inure to the benefit of, the successors and assigns of the Members. In addition, all references to a party include, bind and inure to the benefit of the party's partners, officers, directors, agents, employees, successors in interest and assigns. -31- 40 17.7. APPLICABLE LAW. Except as otherwise provided in the Guaranty, all the provisions of this Agreement shall be construed under the laws of New York (without reference to any conflicts of law principles). To the extent permitted by governing law, this Agreement shall constitute a waiver by each Member of all rights under the LLC Act which are inconsistent with the provisions of this Agreement, and to the extent permitted by governing law, the provisions of this Agreement shall override the provisions of the LLC Act to the extent of such inconsistency or contradiction. 17.8. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties hereto with respect to the matters set forth herein and supersedes any prior understanding or agreement, oral or written, with respect thereto. 17.9. AGREEMENT IN COUNTERPARTS. This Agreement may be executed in several counterparts and all so executed shall constitute one Agreement, binding on all the parties hereto, notwithstanding that all the parties are not signatories to the original or the same counterpart. 17.10. NO THIRD-PARTY BENEFICIARY. The provisions of this Agreement are intended to be for the benefit of the Members and the LLC only and shall not confer any right or claim upon, or otherwise inure to the benefit of, any creditor of, or other third party having dealings with the LLC. 17.11. MEMBER GUARANTIES. All of the DKL obligations under this Agreement, as may be amended from time to time by ARV and DKL (with or without the consent of the DKL Members), are hereby jointly and severally guaranteed by the DKL Members. Such guarantee, without limitation, extends to DKL's obligation to pay fifty percent (50%) of the Acquisition Loan and any other loan made by ARV to the LLC. Likewise, ARV shall be liable to DKL for fifty percent (50%) of any loans made by DKL and/or DKL Members to the LLC. In the event ARV, DKL and the Management Committee agree to the terms of any Construction/Permanent Financing which requires the guarantee of ARV, DKL and the DKL Members hereby agree to execute guarantees jointly and severally obligating such parties for such Construction/Permanent Financing. The form and substance of the guarantee shall be agreed to by the LLC, DKL and ARV. Whether or not any party, including ARV, DKL or any DKL Member fails or refuses to execute such guarantee, ARV shall as between themselves be responsible for fifty percent (50%) and DKL and the DKL Members, jointly and severally, shall be responsible for fifty percent (50%) of such Construction/Permanent Financing. However, as between such guarantors and any lender, such liability shall be joint and several. In the event the LLC does not satisfy its obligations under any obligation guaranteed by any Member, either Member may make partial or total payment thereon. In addition to any other rights under law and equity, the paying Member shall be deemed to have a lien on the nonpaying Member's Shares and shall be entitled to the repayment of the nonpaying Member's share of any payments made by the paying Member, along with interest thereon as afforded by law, from any cash distributions by the LLC which would otherwise be made to the nonpaying Member. The -32- 41 guarantees provided for herein are continuing and shall remain effective for any obligations which are renewed, extended, compromised, refinanced, or restructured from time to time. The guarantors hereunder waive all notices or formalities which they may be entitled to under applicable law. -33- 42 [SIGNATURES ON FOLLOWING PAGE] -34- 43 The parties hereto have entered into this Agreement as of the date first above written. DKL: DKL VENTURES, LLC., a New Jersey limited liability company By: / s / Leonard Kohl -------------------------------------- Leonard Kohl, Member By: / s / Stanley Diamond -------------------------------------- Stanley Diamond, Member By: / s / Alan Litt -------------------------------------- Alan Litt, Member ARV: ARV ASSISTED LIVING, a California corporation By: / s / Gary L. Davidson -------------------------------------- Its: Gary L. Davidson, Chairman of the Board DKL MEMBERS. Each of the DKL Members by signing below agree to the terms of Paragraph 17.11 Member Guaranties: / s / Leonard Kohl -------------------------------------- Leonard Kohl / s / Stanley Diamond -------------------------------------- Stanley Diamond / s / Alan Litt -------------------------------------- Alan Litt -35- 44 [INTENTIONALLY LEFT BLANK] -36- 45 EXHIBIT A MEMBERS
NAME AND ADDRESS CAPITAL CONTRIBUTION NUMBER OF SHARES DKL Ventures, LLC $280,000 50 c/o Castle American Enterprises, L.L.C. 270 Sylvan Avenue Englewood Cliffs, NJ 07632 Attention: Stanley Diamond ARV Assisted Living, Inc. $280,000 50 245 Fischer Avenue, D-1 Costa Mesa, CA 92626 Attention: Legal Department
46 APPENDIX 1 REFERENCES TO "SECTIONS" OR "PARAGRAPHS" CONTAINED IN THIS APPENDIX, UNLESS OTHERWISE IDENTIFIED, ARE REFERENCES TO THE SECTIONS OR PARAGRAPHS OF THE OPERATING AGREEMENT OF PROSPECT PARK RESIDENCE, LLC, OF WHICH THIS APPENDIX IS A PART. ACCOUNTING PERIOD. The period beginning on the 1st of January and ending on the 31st of December; provided, however, that the first Accounting Period shall commence on the date of formation of the LLC and shall end on December 31, 1995; and provided, further, that a new Accounting Period shall commence on any date on which an Additional or Substituted Member is admitted to the LLC or a Member ceases to be a Member for any reason. ADDITIONAL MEMBER. A Member admitted as a Member after the date this Agreement becomes effective. ADJUSTED CAPITAL ACCOUNT DEFICIT. Shall mean, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant fiscal year, after giving effect to the following adjustments: (a) Credit to such Capital Account any amounts which Member is obligated to restore or is deemed to be obligated to restore pursuant to the penultimate sentence of Section 1.704-1(b)(4)(iv)(f) and 1.704-2(i)(5) of the Regulations; and (b) Debit to such Capital Account the items described in Sections 1.704- 1(b)(2)(ii)(d)(5) and (6) of the Regulations. The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. ADJUSTED CAPITAL CONTRIBUTION. With respect to any Member, as of any day, that amount which is equal to the Capital Contribution of that Member reduced by all Distributions to that Member. If any Member Transfers all or any portion of the Member's Shares in accordance with the terms of this Agreement, the Assignee shall succeed to the Adjusted Capital Contribution of the Transferring Member to the extent it relates to the Transferred Shares. AFFILIATE. (a) Any Person directly or indirectly controlling, controlled by or under common control with another Person; -1- 47 (b) A Person owning or controlling ten percent (10%) or more of the outstanding voting securities of such other Person; (c) Any officer, director, partner or member of such Person; and (d) If such other Person is an officer, director, partner or member, any company for which such Person acts in any such capacity. APPRAISAL. Each of the parties requiring an interest or property to be valued shall appoint an appraiser and give notice of the appointment to the other. If either fails to appoint an appraiser, the appraiser appointed by the other shall be the sole appraiser. Each appraiser appointed shall have at least five (5) years experience appraising interests or property similar to that for which valuation is being sought. Each appraiser shall establish Fair Market Value by reference to such indicators of value as the appraisers deem relevant, and to the parties' relative participation in the interest or property for which valuation is being sought. If two appraisers are appointed, they shall independently appraise the Fair Market Value within thirty (30) days after notice of appointment of the second appraiser. If the higher appraisal is less than one hundred ten percent (110%) of the lower appraisal, then the Fair Market Value shall be the average of the two appraisals. If not, the two appraisers shall attempt to elect a third appraiser. If no third appraiser is agreed upon within ninety (90) days after appointment of the second appraiser, either party may ask the presiding judge of the highest court of the county in which the LLC's principal office is located to appoint a third appraiser. The third appraiser shall be a person who has not previously acted in any capacity for either party. The parties in interest shall each pay the fees of the appraiser they appoint, and shall share equally the fees of any appointed third appraiser and the fee charged by any judge to make such appointment. Within thirty (30) days after selection of the third appraiser, the third appraiser shall select one of the two appraisals, and such appraisal shall be the Fair Market Value. ARV. ARV Assisted Living, Inc., a California corporation. ARV RESPONSIBILITIES. The duties described on Appendix 3 that ARV has the authority and responsibility to perform on behalf of the LLC. ASSIGNEE. A transferee or a Permitted Transferee of Shares who has not been admitted as a Substitute Member. BANKRUPTCY. Means with respect to any Person that a petition shall have been filed by or against such Person as "debtor" and the adjudication of such Person as a bankrupt under the provisions of the bankruptcy laws of the United States of America shall have commenced, or that such Person shall have made an assignment for the benefit of its creditors generally or a receiver shall have been appointed for substantially all of the property and assets of such Person. -2- 48 CAPITAL ACCOUNT. An individual capital account to be maintained for each Member in accordance with Section 3.5. CAPITAL CONTRIBUTION. The amount of cash or the Gross Asset Value of property contributed to the LLC by each Member. Capital Contributions shall not include amounts paid to any person with respect to any assignment of Shares or any interest therein or with respect to any substitution of a Member. CODE. The Internal Revenue Code of 1986, as amended, or corresponding provisions of subsequent revenue laws. COMMITTEE MEMBERS. The six (6) persons appointed to the Management Committee by ARV and DKL. DEPRECIATION. For each fiscal year or other period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis. DISPOSITION NOTICE. The notice to be delivered by a Member indicating that Member's desire to Transfer that Member's Shares. DISSOCIATED MEMBER. A Member whose death, expulsion, Bankruptcy or dissolution causes that Member to become dissociated from the LLC. DISSOLUTION EVENT. The death, expulsion, Bankruptcy, or dissolution of a Member. DISSOLUTION NOTICE. The notice to be given by a Member with respect to a dissolution of marriage or similar event. DISTRIBUTIONS. Any cash or other property distributed to Members arising from their interests in the LLC. DKL. DKL Ventures, LLC, a New Jersey limited liability company. DKL MEMBERS. Leonard Kohl, Stanley Diamond and Alan Litt as individuals. DKL RESPONSIBILITIES. The duties described on Appendix 4 that DKL has the authority and responsibility to perform on behalf of the LLC. -3- 49 ECONOMIC RISK OF LOSS. Shall have the meaning set forth in Section 1.752-2 of the Regulations. EFFECTIVE DATE. The date on which the Formation Certificate is filed with the New York Secretary of State. EXERCISE NOTICE. The notice to be given by the LLC indicating its intent to exercise its Right of First Refusal. FAIR MARKET VALUE. The value of an interest or property as determined by mutual consent of the parties in interest or, if those parties cannot agree on a value within ten (10) days after the event causing the need for valuation, by Appraisal. FORMATION CERTIFICATE. The Certificate of Organization of the LLC, duly filed and amended, as herein required, in accordance with the laws of New York. GROSS ASSET VALUE. With respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (a) The initial Gross Asset Value of any asset contributed by a Member to the LLC shall be the gross fair market value of such asset, as determined by the contributing Member and the LLC; (b) The Gross Asset Values of all LLC assets shall be adjusted to equal their respective gross fair market values, as determined by the Management Committee, as of the following times: (i) the acquisition of an additional interest in the LLC by any new or existing Member in exchange for more than a de minimis Capital Contribution; (ii) the Distribution by the LLC to a Member of more than a de minimis amount of LLC property other than money, unless all Members receive simultaneous Distributions of undivided interests in the distributed property in proportion to their interests in the LLC; and (iii) the termination of the LLC for federal income tax purposes pursuant to Code Section 708(b)(1)(B); (c) The Gross Asset Value of any LLC asset distributed to any Member shall be the gross fair market value on the date of Distribution; and (d) If the Gross Asset Value of an asset has been determined or adjusted pursuant to paragraph (a) or (b) of this definition, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profit and Loss. LLC. Prospect Park Residence, LLC. LLC ACT. The New York Limited Liability Companies. -4- 50 LLC MINIMUM GAIN. Shall have the meaning set forth in Section 1.704-2(d) of the Regulations. MAJORITY VOTE. The vote of more than fifty percent (50%) of the Total Outstanding Shares. MANAGEMENT COMMITTEE. The committee formed to manage and operate the LLC comprised of six (6) persons, three (3) of whom shall be appointed and may be removed by DKL and three (3) of whom shall be appointed and may be removed by ARV. The initial members of the Management Committee shall be (a) Stanley Diamond, Leonard Kohl and Alan Litt for DKL and (b) Gary Davidson, John Booty and Sheila Muldoon for ARV. MEMBER EXERCISE NOTICE. The notice to be given by non-Transferring Members indicating their intent to exercise their secondary Right of First Refusal. MEMBER NONRECOURSE DEBT. Shall have the meaning set forth in Section 1.704-2(b)(4) of the Regulations. MEMBER NONRECOURSE DEDUCTIONS. Shall have the meaning set forth in Section 1.704-2(i)(2) of the Regulations. The amount of member Nonrecourse Deductions with respect to a Member Nonrecourse Debt for an LLC fiscal year equals the excess, if any, of the net increase, if any, in the amount of Minimum Gain Attributable to Member Nonrecourse Debt during the fiscal year over the aggregate amount of any Distributions during that fiscal year to the Member that bears the economic risk of loss for such Member Nonrecourse Debt to the extent such Distributions are from the proceeds of such Member Nonrecourse Debt and are allocable to an increase in Minimum Gain Attributable to Member Nonrecourse Debt, determined in accordance with Section 1.704-1(b)(4)(iv)(h)(3) of the Regulations. MEMBER'S SHARE OF LLC MINIMUM GAIN. Shall be calculated as set forth in Section 1.704-2(g)(1) of the Regulations. MEMBER'S SHARE OF MINIMUM GAIN ATTRIBUTABLE TO MEMBER NONRECOURSE DEBT. Shall be calculated as set forth in Sections 1.704-2(i)(5) and 1.704(2)(g) of the Regulations. MEMBERS. Refers collectively to all Persons who are admitted as members of the LLC. Reference to a "Member" shall be to any one of the Members. MINIMUM GAIN ATTRIBUTABLE TO MEMBER NONRECOURSE DEBT. Shall have the meaning set forth in Section 1.704-2(i)(3) of the Regulations. -5- 51 NONRECOURSE DEDUCTIONS. Shall have the meaning set forth in Section 1.704-1(b)(1) of the Regulations. The amount of Nonrecourse Deductions for an LLC fiscal year equals the excess, if any, of the net increase, if any, in the amount of LLC Minimum Gain during that fiscal year over the aggregate amount of any Distributions during that fiscal year of proceeds of a Nonrecourse Liability that are allocable to an increase in Partnership Minimum Gain, determined according to the provisions of Section 1.704-2(c) of the Regulations. NONRECOURSE LIABILITY. Shall have the meaning set forth in Section 1.704- (b)(3) of the Regulations. PERMITTED TRANSFEREE. Any member of such Member's immediately family, or a trust, corporation, limited liability company or partnership controlled by such Member or members of such Member's immediate family, or another Person controlling, controlled by, or under common control with such Member. PERSON. A natural person, domestic or foreign corporation, partnership, limited liability company, trust, estate, association or any other individual or entity with legal capacity to enter into a contract. PROFIT AND LOSS. For each fiscal year of the LLC, an amount equal to the taxable income or loss of the LLC, as the case may be, for such year, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss and deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (a) if the Gross Asset Value of any LLC asset is adjusted pursuant to the provisions of the definition of Gross Asset Value, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Profit or Loss; (b) gain or loss resulting from any disposition of LLC property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (c) in lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period, computed in accordance with the definition of Depreciation; (d) any receipts of the LLC that are exempt from federal income tax and are not otherwise included in taxable income or loss shall be added to such taxable income or loss; and (e) any expenditures of the LLC described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Section 1.704-1(b)(2)(iv)(i) of the Regulations, and not otherwise taken in account in computing taxable income or loss pursuant to this paragraph, shall be subtracted from such taxable income or added to and taxable loss. PROJECT. The retirement living project located on the Property. -6- 52 PROPERTY. The real property located at One Prospect Park West, Brooklyn, New York, more particularly described in the Purchase Agreement. PURCHASE AGREEMENT. That certain Sale and Purchase Agreement dated as of December 1, 1995, under which ARV has agreed to purchase the Project from Madonna Residence, a New York not-for-profit corporation. PURCHASE NOTICE. The notice to be given by the LLC to a Member's spouse or former spouse indicating the intent to exercise the LLC's Special Purchase Right. REGULATIONS. The Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). RIGHT OF FIRST REFUSAL. The right to purchase Shares under certain circumstances upon a proposed Transfer of Shares by a Member. SHARES. The interests of the LLC representing voting interest and ownership in the LLC. SPECIAL PURCHASE RIGHT. The right of the LLC to purchase the Shares of a Member's spouse or former spouse. SUBSTITUTE MEMBER. An Assignee who has been admitted to all the rights of membership pursuant to this Agreement. TARGET SHARES. The Shares desired to be Transferred by a Member to a third party. TOTAL OUTSTANDING SHARES. The total number of Shares outstanding on the date in question. TRANSFER. Any sale, conveyance, assignment, disposition or hypothecation. VALUATION DATE. The date on which Shares are valued for purposes of this Agreement, which shall be the date the LLC learns of the event causing the Member to become a Dissociated Member. -7- 53 APPENDIX 2 REFERENCES TO "SECTIONS" OR "PARAGRAPHS" CONTAINED IN THIS APPENDIX, UNLESS OTHERWISE IDENTIFIED, ARE REFERENCES TO THE SECTIONS OR PARAGRAPHS OF THE OPERATING AGREEMENT OF PROSPECT PARK RESIDENCE, LLC, OF WHICH THIS APPENDIX IS A PART. 1. GENERAL. Except as otherwise provided in this Agreement, all items of LLC income, gain, loss, deduction, and any other allocations not otherwise provided for shall be divided among the Members in the same proportions as they share Profit or Loss, as the case may be, for the year. The Members are aware of the income tax consequences of the allocations made by Section 7, as amended by this Appendix 2, and hereby agree to be bound by the provisions of this Agreement in reporting their shares of LLC income and loss for income tax purposes. For purposes of determining the Profit, Loss, or any other items allocable to any period, Profit, Loss, and any such other items shall be determined on a daily, monthly, or other basis, as determined by the Members using any permissible method under Code Section 706 and the Regulations thereunder. 2. EXCEPTIONS - NONRECOURSE DEBT. 2.1. MEMBER NONRECOURSE DEDUCTIONS. Notwithstanding anything to the contrary contained in this Agreement, Member Nonrecourse Deductions shall be allocated to the Member that bears the Economic Risk of Loss for such Member Nonrecourse Debt. If more than one Member bears such Economic Risk of Loss, such Member Nonrecourse Deductions shall be allocated between or among such Members in accordance with the ratios in which they share such Economic Risk of Loss. 2.2. LLC MINIMUM GAIN. If there is, for any fiscal year of the LLC, a net decrease in LLC Minimum Gain, there shall be allocated to each Member, before any other allocation pursuant to Section 7 is made of LLC items for such fiscal year, items of income and gain for such year (and, if necessary, for subsequent years) in proportion to, and to the extent of, such Member's share of the net decrease in LLC Minimum Gain during such fiscal year within the meaning of Section 1.704-2(g)(2) of the Regulations. This Section 2.2 of Appendix 2 is intended to constitute a minimum gain "chargeback" provision within the meaning of Section 1.702-2(f) of the Regulations. 2.3. MINIMUM GAIN ATTRIBUTABLE TO MEMBER NONRECOURSE DEBT. If there is, for any fiscal year of the LLC, a net decrease in the Minimum Gain Attributable to Member Nonrecourse Debt, there shall be allocated to each Member that has a Member's Share of Minimum Gain Attributable to Member Nonrecourse Debt at the beginning of such fiscal year before any other allocation for such fiscal year pursuant to Section 7 (other than an allocation required pursuant to Section 2.2 of this Appendix 2) is made of LLC items for such fiscal year, items of income and gain for such year (and, if -1- 54 necessary, for subsequent years) in proportion to, and to the extent of, such Member's share of the net decrease in the Minimum Gain Attributable to Member Nonrecourse Debt in accordance with Section 1.704-2(i)(4) of the Regulations. 3. QUALIFIED INCOME OFFSET. Except as provided in Section 2 of this Appendix 2, if any Member unexpectedly receives any adjustments, allocations or Distributions described in Section 1.704-1(b)(2)(ii)(d)(4), (5), or (6) of the Regulations, there shall be specially allocated to such Member such items of LLC income and gain, at such times and in such amounts as will eliminate as quickly as possible any Adjusted Capital Account Deficit. To the extent permitted by the Code and the Regulations, any special allocations of items of income or gain pursuant to this Section 3 of Appendix 2 shall be taken into account in computing subsequent allocations of Profit or Loss so that the net amount of any items so allocated and the subsequent Profit or Loss allocated to the Members shall, to the extent possible, be equal to the net amounts that would have been allocated to each such Member if such unexpected adjustments, allocations or Distributions had not occurred. 4. GROSS INCOME ALLOCATION. Except as provided in Section 2 of this Appendix 2 if any Member has a deficit Capital Account at the end of any LLC fiscal year which is in excess of the sum of (i) the amount such Member is obligated to restore pursuant to any provision of this Agreement and (ii) the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(h)(5), each such Member shall be specially allocated items of LLC income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 4 of Appendix 2 shall be made only if and to the extent that such Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Section 4 have been made as if Section 3 of this Appendix 2 and this Section 4 of Appendix 2 were not in the Agreement. 5. MEMBERS' LNTERESTS IN LLC PROFIT FOR PURPOSES OF SECTION 752. As permitted by Section 1.752-3 of the Regulations, the Members hereby specify that, solely for purposes of determining their respective interests in the Nonrecourse Liabilities of the LLC for purposes of Code Section 752, their interests in the Profit of the LLC shall be allocated among the Members in proportion to the number of Shares held by them. 6. CODE SECTION 754 ADJUSTMENTS. To the extent an adjustment to the adjusted tax basis of any LLC asset pursuant to Code Section 734(b) is required to be taken into account in determining Capital Accounts, pursuant to Section 1.704-1(b)(2)(iv)(m) of the Regulations, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specifically allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations. -2- 55 7. CODE SECTION 704(C) ALLOCATIONS. In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss and deduction with respect to any property contributed to the capital of the LLC shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the LLC for federal income tax purposes and its initial Gross Asset Value (computed in accordance with the definition of Gross Asset Value in Appendix 1). If the Gross Asset Value of any LLC asset is adjusted as described in the definition of Gross Asset Value in Appendix 1, subsequent allocations of income, gain, loss or deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. Any elections or other decisions relating to such allocations shall be made by the Manager in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 7 of Appendix 2 are solely for purposes of federal, state and local taxes and shall not affect, or in any way be taken into account in computing any person's Capital Account or share of Profit, Loss or Distributions pursuant to any provision of this Agreement. 8. CODE SECTION 38 PROPERTY. Notwithstanding any other provision of Section 7, if the LLC's Code Section 38 property is disposed of during any taxable year, Profit for such taxable year (and, to the extent such Profit is insufficient, Profit for subsequent taxable years), in an amount equal to the excess, if any, of (i) the reduction in the adjusted tax basis (or cost) of such property pursuant to Code Section 50(c), over (ii) any increase in the adjusted tax basis of such property pursuant to Section 50(c) caused by the disposition of such property, shall be excluded from the Profit allocated pursuant to Section 7.2 and shall instead be allocated among the Members in proportion to their respective shares of such excess, determined pursuant to Section 9 of this Appendix 2. If more than one item of such property is disposed of by the LLC, the foregoing sentence shall apply to such items in the order in which they are disposed of by the LLC, so that Profit equal to the entire amount of such excess with respect to the first such property disposed of are allocated prior to any allocations with respect to the second property disposed of, etc. 9. BASIS INCREASES. If the adjusted tax basis of any Code Section 38 property that has been placed in service by the LLC is increased pursuant to Code Section 50(c), such increase shall be specially allocated among the Members (as an item in the nature of income or gain) in the same proportions as the investment tax credit that is recaptured with respect to such property is shared among the Members. 10. BASIS REDUCTIONS. Any reduction in the adjusted tax basis (or cost) of the LLC's Code Section 38 property pursuant to Code Section 50(c) shall be specially -3- 56 allocated among the Members (as an item in the nature of expenses or losses) in the same proportions as the basis (or cost) of such property is allocated pursuant to Regulations Section 1.46-3(f)(2)(i) of the Regulations. 11. DEPRECIATION RECAPTURE. Each Member's allocable share of Profit which is characterized as ordinary income pursuant to Code Section 1245 or Section 1250 with respect to the disposition of an item of LLC property ("Recapture Income") shall bear the same ratio to the total Recapture Income of the LLC as such Member's share of past Depreciation deductions taken with respect to the item of property bears to all the Members' past Depreciation deductions with respect to the property. -4- 57 APPENDIX 3 ARV RESPONSIBILITIES ARV shall have the power, authority and responsibility on behalf of the LLC to perform the following duties: 1. FINANCING. Subject to Sections 3.3.4 and 4.2.3.2 of the Agreement, arranging and coordination of all Project financing as provided in Section 3.3. 2. LICENSING. Subject to Section 4.2.3.4 of the Agreement, processing for approval and obtaining the operating license(s) required from the State of New York and any other applicable governmental agencies having jurisdiction over the Project. 3. DESIGN. Subject to Section 4.2.3.5 of the Agreement, consultation with the Project architects and engineers concerning the Project rehabilitation. 4. PROJECT MANAGEMENT. Development and implementation of all aspects of managing the Project, including marketing, accounting and operations; provided, however, that ARV shall not be responsible to any direct or onsite Project management costs. 58 APPENDIX 4 DKL RESPONSIBILITIES DKL shall have the power, authority and responsibility on behalf of the LLC to perform the following duties: 1. PERMITS. Subject to Section 4.2.3.4 of the Agreement, processing for approval and obtaining all building permits and other governmental permits (except for the operating license(s) to be obtained by ARV) required for the Project rehabilitation. 2. DESIGN. Subject to Section 4.2.3.5 of the Agreement, coordinating the work of the Project's architects and engineers for the Project rehabilitation. 3. CONSTRUCTION MANAGEMENT. Subject to Section 4.2.3.5 of the Agreement, DKL shall be the construction manager for the Project rehabilitation; provided, however, that DKL shall not be responsible for providing onsite superintendents or for direct Project costs. 59 APPENDIX 5 PROMISSORY NOTE $2,970,000 February 23, 1996 FOR VALUE RECEIVED, Prospect Park Residence, LLC, a New York limited liability company (the "Borrower"), promises to pay the order of ARV Assisted Living, Inc., a California corporation, at its offices located at 245 Fischer Avenue, D-1, Costa Mesa, CA 92626-3545, or at such other place as the holder from time to time may designate in writing to the Borrower, the principal sum of Two Million Nine Hundred Seventy Thousand Dollars ($2,970,000), with interest at the rate of nine percent (9%) per annum, compounded annually, from the date hereof through and until February 23, 1997, when the entire balance of principal and interest shall be due and payable, unless earlier paid. Notwithstanding the above, the term of this note may be extended for an additional eight (8) months, and payment may be made on this note, all in accordance with Section 3.3 of the Prospect Park Residence, LLC Operating Agreement. The failure of the maker hereof to pay the entire balance of principal and interest when due shall be an event of default under this Note. From and after the date of any such default, the rate of interest payable hereon shall be increased to the rate of sixteen percent (16%) per annum, compounded monthly. Further in such event, this note may be placed for collection by the holder hereof with an attorney at law, from and after which the maker hereof shall be liable for all reasonable costs of collection by the holder hereof. The undersigned, and all other parties who at any time may be liable hereon in any capacity, jointly and severally, or a presentment of payment, demand, notice of dishonor, protest and notice hereof; consent to any renewals, extensions and partial payments on this note or the indebtedness for which it is given, and such renewals, extensions or partial payments shall not discharge any party from liability hereon. The execution, delivery, performance, interpretation and enforcement of this note shall be governed by the laws of the State of New York. PROSPECT PARK RESIDENCE, LLC, a New York limited liability company By: ________________________________ Its: _________________________ EX-10.33 6 IMPERIAL BANK COMMITMENT LETTER DATED 3/19/96 1 EXHIBIT 10.33 IMPERIAL BANK 695 Town Center Drive, Suite 100 Costa Mesa, California 92626-1924 (714) 641-2200 April 16, 1996 Mr. Patrick M. Donovan Vice President Finance ARV Assisted Living, Inc. 245 Fischer Avenue, D-1 Costa Mesa, CA 92626 Dear Patrick: Imperial Bank ("Bank") is pleased to offer the following credit facility (the "Facility") to ARV Assisted Living, Inc. ("Borrower") subject to your acceptance of the following terms and conditions: BORROWER: ARV ASSISTED LIVING, INC. PURPOSE: A revolving line of credit under which Bank may make advances to Borrower from time to time up to and including the maturity date as referenced below, the proceeds of which shall be used for general operating needs, the acquisition of health care properties, and/or issuing standby letters of credit as security in support of health care properties leasing transactions. AMOUNT: $10,000,000 MATURITY: June 30, 1998 (To coincide with receipt of Borrower's fiscal year end financial statements). The line of credit will be reviewed annually and may be extended for an additional year subject to Bank's satisfactory credit analysis and formal credit approval. LOAN FEES: A one-half percent (0.50%) per annum loan fee is payable at acceptance and a one-half percent (0.50%) per annum non-utilization fee will be charged quarterly in arrears on the unused portion of the Facility. LETTER OF CREDIT FEES: The Bank will charge a commission, set at the LIBOR Rate Applicable Margin, upon issuance and quarterly in advance on a 360 day basis for all letters of credit issued in pursuant to the Facility.
2 ARV Assisted Living, Inc. April 16, 1996 Page 2 INTEREST: All amounts owing under the Facility will bear interest, as elected by the Borrower, at either(A) Imperial Bank's Prime Rate as it may vary from time to time plus the Prime Rate Applicable Margin (as defined below) or (B) the fully reserve adjusted LIBOR Rate for any interest period of 1, 2, or 3 months plus the LIBOR Rate Applicable Margin (as defined below) for amounts of at least $1,000,000 and in $500,000 increments. All such interest will be calculated on the basis of a 360 day year. Interest on the Prime Rate loans will be payable monthly in arrears. Interest on the LIBOR Rate loans shall be payable at the end of the applicable interest period, but no less frequently than quarterly, in arrears. With respect to each revolving credit loan and each fiscal quarter of the Borrower, the Prime Rate Applicable Margin (as set forth below) and the LIBOR Rate Applicable Margin (as set forth below) will be determined by the Bank after review of the Maximum Total Net Debt (defined as Total Debt less unrestricted cash in excess of $3,000,000) to EBITDA Ratio of the Borrower for each of the preceding three consecutive fiscal quarters immediately preceding such fiscal quarter, all as follows: --------------------------------------------------------------------------------- Total Net Debt Prime Rate LIBOR Rate to EBITDA Ratio Applicable Margin Applicable Margin --------------------------------------------------------------------------------- Over 3.0 times 0.50 2.50 --------------------------------------------------------------------------------- 2.5 - 3.0 times 0.25 2.25 --------------------------------------------------------------------------------- less than 2.5 times 0.00 2.00 --------------------------------------------------------------------------------- The Bank will determine the Base Rate Applicable Margin and the LIBOR Rate Applicable Margin for each fiscal quarter on the forty-fifth (45th) day following the last day of each quarter of the immediately preceding fiscal quarter by reference to the financial statements delivered to Bank by the Borrower with respect to the three (3) immediately preceding fiscal quarters. The Total Net Debt to EBITDA Ratio for each of the three (3) immediately preceding quarters must meet the above referenced thresholds in order to qualify for any decrease in the LIBOR Rate Applicable Margin and the Prime Rate Applicable Margin . COLLATERAL: Borrower shall execute a security agreement and UCC-1 Financing Statement providing Bank with a first priority security interest in all corporate assets including, but not limited to, accounts receivable, notes from affiliates, inventory, equipment and general intangibles with the exception of existing permitted liens and encumbrances. Borrower shall execute Leasehold Deeds of Trust, which shall be a first lien on the Borrower's and its subsidiaries' leasehold estates for apartment, assisted living and transitional real properties. Leases shall provide for or be modified such that the lessors are required to notify Bank as to any default with a further provision allowing Bank to cure said default(s). All lease landlords to provide estoppel certificates in form and substance acceptable to Bank.
3 ARV Assisted Living, Inc. April 16, 1996 Page 3 Borrower shall pledge the stock of all subsidiaries and general partnership interests now owned or hereafter acquired. The Bank understands that the Borrower intends to form a new holding company, and, when that occurs, the Borrower and the Bank will redocument the facility to reflect the holding company as the new Borrower, secured by the stock of the present Borrower. FINANCIAL REPORTING: o Monthly financial statements certified by the Borrower's chief financial officer within thirty (30) days of the end of each month. At the end of each fiscal quarter, the Borrower shall also submit form 10-Q and covenant compliance calculations as required by the loan agreement. o Annual independent financial statement and form 10-K within ninety (90) days of fiscal year end, audited by an independent certified public accounting firm satisfactory to Imperial Bank. o All other information that Imperial Bank may reasonably request. CREDIT TERMS AND CONDITIONS: All extensions of credit proposed by the Bank to Borrower, as set forth herein will be subject to and governed by a "Credit Terms and Conditions" agreement acceptable to Bank. Said Credit Terms and Conditions will include, but not be limited to, the following financial covenants: o Minimum Net Worth of $36,500,000 as of 12/31/95, increased by a.) 70% of net income, b.) 100% of increase in Net Worth from sale, conversion to, or issuance of stock, plus c.) 100% of any gain from the sale or disposition of assets occurring thereafter. o Minimum Current Ratio of 2.00 to 1.0. o Maximum Senior Net Debt (net of unrestricted cash less $3 million) to EBITDA Ratio of 2.5 to 1.0. o Maximum Total Net Debt (net of unrestricted cash less $3 million) to EBITDA Ratio of 4.0 to 1.0. o Limitations on liens, indebtedness, dividends, sale of assets, capital expenditures, sale/leaseback transactions, loans to third parties, and investments. o Maintain a minimum Coverage Ratio of 1.25 to 1, wherein the numerator, EBITDAR (Earnings before Interest Expense, Lease Expense, Taxes, Depreciation and Amortization Expense), divided by the denominator of Interest Expense, Lease Expense and Current Portion of Long Term Debt shall be 1.25 or greater. DEPOSITORY RELATIONSHIP All primary depository accounts are to be maintained at Imperial Bank's Orange County Regional Office. CONDITIONS PRECEDENT TO o No material adverse change in Borrower's financial condition prior to funding. LENDING: o Evidence satisfactory to Bank of the perfection of all security interests granted to
4 ARV Assisted Living, Inc. April 16, 1996 Page 4 the Bank and that there are no prior security interests except those permitted. o Completion of documentation and final terms of the proposed financing satisfactory to Bank. DOCUMENTATION: The Bank shall utilize outside counsel to prepare the loan documents. The documentation shall be prepared in a manner that will allow the Bank to agent the credit facility subject to the availability of acceptable participants. Borrower to pay all legal and administrative expenses.
Please indicate your acceptance and agreement to the foregoing by executing the enclosed copy of this letter and return it to us along with the loan fee as specified above prior to April 30, 1996, at which time this commitment will expire unless accepted or extended by Imperial Bank in writing. Sincerely, /s/ ARNOLD ONAGA /s/ CAROLINE HARKINS - -------------------- ------------------------ Arnold Onaga Caroline Harkins Vice President Regional Vice President ACCEPTED AND AGREED: ARV ASSISTED LIVING, INC. By: /s/ PATRICK M. DONOVAN ---------------------------- Patrick M. Donovan, Vice President Finance DATE: April 24, 1996 TS:RMB EX-10.34 7 HEALTH CARE REIT COMMITMENT LETTER DATED 6-6-96 1 EXHIBIT 10.34 HEALTH CARE REIT, INC. One SeaGate, Suite 1500 Toledo, OH 43604 Phone: 419-247-2800 Fax: 419-247-2826 BRUCE G. THOMPSON GEORGE L. CHAPMAN Chairman President June 6, 1996 Gary L. Davidson, Chairman ARV Assisted Living, Inc. 245 Fischer Avenue Costa Mesa, CA 92626 Dear Mr. Davidson: We understand that ARV Assisted Living, Inc., a California corporation, ("ARVI") would like Health Care REIT, Inc. (the "Lessor") to provide financing for the development of the facilities described below. This letter outlines the terms and conditions pursuant to which Lessor would agree to provide financing. 1. CREDIT FACILITY TERMS 1.1 Lessee: The lessee (the "Lessee") will be ARVI. If ARVI elects to have a controlled affiliate serve as Lessee, ARVI, the controlled affiliate, and the other owners of the controlled affiliate will guarantee the Lease. ARVI or its wholly-owned subsidiary will manage the Facility. 1.2 Financing Type. The financing type will be operating leases. 1.3 Facilities: The facilities to be financed will be assisted living and independent living facilities (individually, a "Facility" and collectively , the "Facilities") located or to be located in the continental United States (the "Approved Region"). Facilities will generally contain between 60 and 200 units. Each Facility will be subject to Lessor's due diligence review and approval process as set forth below. 1.4 Credit Facility Amount and Funding Amount: The total amount of the credit facility will be up to Sixty Million Dollars ($60,000,000). The funding amount available for any Facility will be up to 100% of the Approved Costs (as hereinafter defined) provided that [i] Lessee has availability under the credit facility; [ii] the Facility meets the LTV Test (as hereinafter Page 1 2 defined); and [iv] Lessee has met all other conditions to funding. "Approved Costs" means the following: [i] Facility Costs; and [ii] Closing Costs. "Approved Costs" does not include unreasonably large contractors profits, the Required Working Capital, any Letter of Credit deposits, development fees, or fees paid to Lessee, or any affiliates of Lessee. "Facility Costs" means the following reasonable costs: [a] land acquisition cost; [b] cost of construction of the building and fixtures; [c] costs of architectural and engineering services; [d] costs of soil borings and other customary testing services; [e] cost of personal property not to exceed 10% of the financing amount; [f] construction period interest; and [g] other reasonable and customary costs approved by Lessor. "Closing Costs" means the following reasonable costs to meet Lessor's closing requirements: [i] Commitment Fees; [ii] title insurance premiums and search fees; [iii] cost of surveys; [iv] costs of environmental studies; [v] legal fees of Lessor's counsel and Lessee's counsel; [v] property inspection fees; [vi] Letter of Credit Fee; and [vii] other costs customarily incurred in closing financings. "Required Working Capital" means Lessee's reasonable estimate, subject to Lessor's approval, of the cash needed to fund [i] preopening operating expenses e.g. marketing, staffing, advertising, and office expenses; [ii] operating losses during fill-up; [iii] financing payments during fill-up prior to cash flow breakeven; and [iv] permanent working capital. "LTV Test" means that the financing amount must not exceed 80% of the Appraised Value of the Facility. The Appraised Value will be determined by an MAI appraiser acceptable to Lessor using an "as stabilized" appraisal. "Coverage Test" means that the financing amount must be less than the quotient of the ANOI divided by 1.25 divided by Payment Constant. "ANOI" means the NOI less a five percent (5%) management fee and less a replacement reserve of $350 per unit. "NOI" means the stabilized net operating income of the Facility and will be based upon the following assumptions: [i] 90% stabilized occupancy; [ii] a unit mix and rate structure consistent with local market conditions; and [iii] operating expenses consistent with similar facilities operated by ARVI and local market conditions. "Payment Constant" means the assumed payment constant for the permanent financing and will be based upon Lessor's reasonable estimate of the forward yield on comparable term USTNs. 1.5 Use of Proceeds: Financing proceeds will be used solely for Approved Costs. 1.6 Operator: Each Facility will be operated by ARVI or another wholly-owned subsidiary of ARVI. Page 2 3 1.7 Guarantors: Not applicable except as provided in Section 1.1. 1.8 Term of Credit Facility: The term of the credit facility will commence sixty (60) days after approval by Lessor's Board of Directors (the "Commencement Date") and expire on the second anniversary of the Commencement Date (the "Expiration Date"). Lessor may cancel the credit facility if the credit facility is not adequately utilized for any reason. To be adequately utilized, the credit facility must meet the closing schedule (the "Closing Schedule") set forth in Section 1.9 below. 1.9 Credit Facility Fee. In consideration for the availability of the credit, Lessee will pay Lessor the Credit Facility Fee set forth in the schedule below per annum, payable monthly, on the unused balance of the credit; provided, however, that the Credit Facility Fee in year 2 will be 0% if Lessee meets the Closing Schedule for year 1 as set forth below:
================================================================================ YEAR Fee Minimum Closings ================================================================================ 1 0% $30,000,000 - -------------------------------------------------------------------------------- 2 .25% $30,000,000 ================================================================================
1.10 Financing Submissions: Lessee agrees to use its best efforts to meet the Closing Schedule and to submit to Lessor all proposed lease financings for Facilities in the Approved Region, including, but not limited to, the Proposed Financings set forth on Exhibit A attached hereto for which the transactions will be structured as leases. The submission package for each Facility will contain the following information: (a) Parties. The most current financial statements for Lessee. (b) Facility. Detailed description of the building, land, site improvements, construction budget or purchase terms, location, market demographics and competition analysis. (c) Proforma. A 5 year proforma for the Facility with a detailed description of all assumptions including, but not limited to, unit/bed mix, ancillary services, payors and rate structure, staffing analysis, month by month absorption period proforma, and computation of the Required Working Capital. (d) Licensure/Reimbursement Analysis. Summary of the licensure/reimbursement system in the State where the Facility will be located. (e) Other Information. All other pertinent information directly related to the submission. Page 3 4 IF LESSEE SHALL DEVELOP ANY PROJECT LISTED ON THE PROPOSED FINANCINGS UTILIZING A LEASE STRUCTURE WITH ANOTHER HEALTH CARE REAL ESTATE TRUST AS LESSOR OR LANDLORD WITHIN THREE (3) YEARS OF THE DATE OF THIS COMMITMENT, AND SHALL NOT HAVE FIRST EXHAUSTED THE CREDIT FACILITY HEREUNDER, THE PARTIES HERETO AGREE THAT, BASED ON THE CIRCUMSTANCES NOW EXISTING, KNOWN AND UNKNOWN, IT WOULD BE EXCESSIVELY COSTLY AND IMPRACTICABLE TO ESTABLISH LESSOR'S DAMAGES AS A RESULT OF LESSEE'S DEFAULT AND THAT IT WOULD THEREFORE BE REASONABLE TO AWARD LESSOR LIQUIDATED DAMAGES IN AN AMOUNT EQUAL TO $50,000 FOR EACH PROJECT SO DEVELOPED. BY THEIR RESPECTIVE INITIALS SET FORTH BELOW, THE PARTIES AGREE THAT LESSEE SHALL PAY SUCH SUM TO LESSOR AS ITS REASONABLE LIQUIDATED DAMAGES IF SUCH PROJECTS ARE DEVELOPED IN BREACH HEREOF. LESSEE'S PAYMENT OF SUCH AMOUNT SHALL BE IN LIEU OF ANY OTHER RELIEF, RIGHT OR REMEDY, AT LAW OR IN EQUITY, TO WHICH LESSOR MIGHT OTHERWISE BE ENTITLED BY REASON OF LESSEE'S DEFAULT THAT RESULTS IN DEVELOPMENT OF SUCH PROJECTS THROUGH A LEASE TRANSACTION WITH ANOTHER HEALTH CARE REAL ESTATE INVESTMENT TRUST. --------------- --------------- Lessor Lessee 1.11 Financing Approval. Lessor will have thirty (30) days to review and take action upon the financing. Lessee shall furnish to Lessor such information as may be reasonably requested. If Lessor fails to approve the financing, then Lessee may seek alternative financing for that Facility. 1.12 Bundled Maturities and Option Exercises. All financings closed during the first year of the credit facility and all financings closed during the second year of the credit facility will have coterminous expiration dates and option exercise periods so that Lessee's decision to abandon, renew, acquire, or terminate any of the financings for the Facilities closed in that year will be the same for all such Facilities. 2. FINANCING TERMS 2.1 Terms During Construction Period. The following terms will be applicable to any construction period: (a) Amount. The financing amount will be 100% of Approved Costs. (b) Term. The construction period will commence on the closing date and will expire on the earlier of twelve months after the closing or date of licensure. (c) Rate. (1) Construction Rate: Base Rate announced from time to time by National City Bank (Cleveland) plus 2.25%. Page 4 5 (2) Calculation Method: 365/360. (d) Amortization and Payments: Monthly payments of interest only. (e) Commitment Fee: .5% of the total financing amount payable at closing. (f) Prepayment: No prepayment. (g) Security: Lessor will require the following security: [i] for loans, a first lien on real estate and personal property, including receivables and for leases, fee simple ownership of any real estate or personal property; [ii] first lien on receivables and personal property not financed by Lessor; [iii] letter of credit for five percent (5%) of the financing amount subject to the adjustments set forth in Sections 2.2(i) below; [iv] subordination of any management fees to payments to Lessor; [v] subordination, attornment and nondisturbance agreement with any lessee of the Facility; [vi] a nondisturbance agreement with any equipment financier; [vii] assignment and estoppel agreement for any material contracts; [viii] upon default, assignment of Facility licenses and permits, where permissible; and [ix] cross-default and cross-collateralization. (h) Disbursements: Disbursements will be made monthly in accordance with a construction draw schedule. Disbursements will be subject to customary conditions including title updates, survey updates, and certificate by Lessor's consulting architect. (i) Retainage: Retainage will be 10%. (j) Payment and Performance Bonds: Not applicable. (k) List of Contractors and Vendors: Supplied to Lessor. (l) Construction Budget: The final construction budget will be subject to Lessor's approval. (m) Collateral Assignment of Architect's and Contractor's Agreement: Lessee will collaterally assign the Architect's Contract and Contractor's Contract. (n) Consultant's Inspection Fee: A fee of $750.00 per visit plus expenses. (o) Commencement of Construction: Lessee shall be required to commence construction within thirty (30) days of closing. Page 5 6 2.2 Terms for Operating Leases. The following terms will apply to any permanent operating leases: (a) Lease Amount. The purchase price will be 100% of the Approved Costs. (b) Term. (1) Initial Term: 15 years or such shorter term as may be required for operating lease treatment. (2) Renewal Term: 3 - 10 years each at Lessee's option. (c) Lease Rate. (1) Initial Rate: The yield on comparable term U.S. Treasury Note + 3.75%. (2) Renewal Rate: Fair rental value but not less than prior year's Lease Rate increased by the Inflation Adjustment set forth below. (3) Inflation Adjustment: Rate during second and each subsequent year of the Initial and Renewal Terms will be increased by 20 bps per annum. (4) Calculation Method: 365/360. (5) Absolute Net Lease. Lessee shall be responsible for all costs and expenses associated with the Facility including but not limited to insurance, taxes, utilities, repairs and replacements. (d) Walkaway Fee. Not applicable. (e) Lease Payments: Rent paid monthly in advance at Lease Rate. (f) Commitment Fee. .5% of the financing amount payable at closing. (g) Option to Purchase: Lessee will have the option to purchase the Facility at the expiration of the Initial or Renewal Terms for an option price equal to the FMV subject to a floor of the Lease Amount; provided, however, that if the FMV exceeds the Lease Amount, then Lessor and Lessee shall share equally the excess. Lessee will pay all costs and expenses in connection with the closing of the purchase, including but not limited to, transfer fees, title insurance, surveys, environmental, etc. Lessor will convey title pursuant to quitclaim deed and quitclaim bill of sale. (h) Security: Lessor will require the following security: [i] fee simple ownership of any real estate or personal property; [ii] first lien on receivables and personal property not financed by Lessor; [iii] letter of credit for five percent (5%) of the Page 6 7 financing amount subject to the adjustments set forth in Section 2.2(i) below; [iv] subordination of any management fees to payments to Lessor; [v] subordination, attornment and nondisturbance agreement with any sublessee of the Facility; [vi] a nondisturbance agreement with any equipment financier; [vii] assignment and estoppel agreement for any material contracts; [viii] upon default, assignment of Facility licenses and permits, where permissible; and [ix] cross-default and cross-collateralization. (i) Letter of Credit Adjustments. The Letter of Credit for all construction financings will be five percent (5%) of the financing amount and will be reduced to two and one-half percent (2.5%) upon stabilization. Stabilization is three consecutive months of meeting the Facility Coverage Test. Notwithstanding the foregoing, the maximum aggregate amount of outstanding Letters of Credit will not exceed Two Million Dollars ($2,000,000). 3. GENERAL TERMS 3.1 Subordination of Payments: In the event of default, distributions and payments from the Facilities to Lessee or any affiliate shall be subordinated to all obligations owed to Lessor. 3.2 Late Payment Charge: 5% of the amount then due. 3.3 Default Rate of Interest: The greater of 18.5% or 2.5% plus the then applicable rate. 3.4 Events of Default: 10-day and 30-day grace period after written notice for monetary and nonmonetary defaults, respectively, cross-defaulted with any obligations owed to Lessor by Lessee or any affiliates. 3.5 Financial Covenants: (a) The following financial covenants will be included and tested quarterly: (1) Facility Coverage Test: Facility shall have payment coverage of 1.25 to 1 (including management fees equal to 5% of gross revenues and a replacement reserve equal to $350 per unit, per year) after the first 15 months of operation; (2) Minimum Net Worth of Lessee. Lessee or Guarantor shall have a minimum net worth of $36,500,000 (the method of calculating net worth and valuing business assets shall be consistent with the financial statements previously provided to Lessor). (3) Liquidity Requirement: Current Ratio of Lessee of 1.25 to 1.0. Minimum Cash Balance of Lessee of $3,000,000. Page 7 8 (4) Debt Coverage of Lessee: Lessee shall maintain a Minimum Coverage Ratio of 1.25 to 1.0 with EBITDAR as the numerator and a denominator of Interest Expense plus Lease Expense. (b) The following financial information shall be furnished to Lessor within forty-five (45) days after the end of any quarter and within ninety (90) days after FYE (March 31st): (1) annual audited financial statements of Lessee, any corporate Guarantor, and Facilities; (2) quarterly unaudited internal financial statements of Lessee and the Facilities. 3.6 Negative Covenants: The following will be prohibited without the prior written consent of Lessor: [i] transfer of any interest in the Facility; [ii] change in control of Lessee (as defined in Exhibit B); provided, however, that Lessor must, with thirty (30) days after written notice of a change in control, notify Lessee that it must purchase the Facilities pursuant to the option to purchase; [iii] creation of other Facility indebtedness; and [iv] modification of any material Facility contracts. 3.7 Escrows: Upon default, monthly escrows of taxes and insurance. 3.8 Governing Law: Financing will be governed by the laws of the State in which the Facility is located. 3.9 Due Diligence Review: Lessor's customary due diligence review including, but not limited to, review and approval of the following items: [i] title policy through Stanley R. Day of Lawyers Title Insurance Corporation; [ii] ALTA survey; [iii] environmental assessment; [iv] property inspection; [v] pest inspection; [vi] MAI appraisal; [vii] CON, licensure and reimbursement requirements; [viii] compliance with laws including zoning; [ix] financial condition and creditworthiness of Lessee and any Guarantors; [x] five-year proforma operating statements; [xi] property and liability insurance; [xii] legal opinion. All due diligence items will be subject to meeting Lessor's underwriting requirements. 3.10 Conditions to Closing: Lessor's obligation to close any financing will be conditioned upon the following: [i] approval of the due diligence review including compliance with financial covenants; [ii] approval of the transaction by the Board of Directors of Lessor; [iii] approval of the transaction by Lessor's line of credit banks; [iv] the availability of funding to Lessor; [v] approval of security and loan documentation; and [vi] no material adverse change in the financial condition of Lessee after Lessor's review of their financial statements. 3.11 Deposit: A nonrefundable Credit Facility Processing Fee of $10,000 payable upon execution of this agreement to be credited against the deposit on the first Facility financing. Page 8 9 A nonrefundable deposit of $25,000 per Facility upon approval of financing submission to be credited against the Commitment Fee at closing. 3.12 Closing Date: The closing for each Facility financing shall occur no later than sixty (60) days after Lessor approves the financing submission; provided, however, that Lessor may extend the Closing Date at its option. The failure to close by such date does not terminate this Commitment Letter unless Lessor gives Lessee notice of termination. Time is of the essence. 3.13 Commitment Expiration Date. This Commitment will expire if not accepted and returned to Lessor by 3:00 p.m. eastern time on June 6, 1996. Upon notification of Lessor's Board Approval, Lessee shall send to Lessor, by overnight mail, a check in the amount of the Credit Facility Processing Fee. 3.14 Standard Terms: The Standard Terms of Commitment are attached hereto and incorporated herein. Lessee acknowledges that Lessee has read, understands and agrees to the Standard Terms of Commitment. In compliance with the Fair Credit Report Act, this notice is to inform the undersigned that in connection with this transaction, an investigation may be made as to the financial history, character, general reputation, personal characteristics, and mode of living of Lessee. Lessee may request from Lessor a complete disclosure of the nature and scope of the investigation. [The remainder of this page is intentionally left blank.] Page 9 10 Sincerely, Accepted By: HEALTH CARE REIT, INC. ARV ASSISTED LIVING, INC. /s/ BRUCE G. THOMPSON By: /s/ GARY L. DAVIDSON - ---------------------- ------------------------------ Bruce G. Thompson Gary L. Davidson, Chairman Chairman Date of Acceptance: June 6, 1996 - ------------------- Page 10 11 STANDARD TERMS OF COMMITMENT 1. COMMITMENT FEE AND DEPOSIT. The Commitment Fee will be deemed earned and nonrefundable upon execution by Customer of this Commitment Letter unless i) the Board of Directors of Health Care REIT, Inc. fails to provide the Financing in accordance with this Commitment Letter; ii) Health Care REIT, Inc. defaults under this Commitment Letter; or iii) Health Care REIT, Inc. fails to approve all due diligence and other items required to be submitted to Health Care REIT, Inc. including but not limited to the title insurance policy, survey, environmental assessment and appraisal. The Deposit will be nonrefundable; provided, however, that if the Commitment Fee is refundable pursuant to this paragraph, then Health Care REIT, Inc. will refund to Customer the Deposit less, in the case of iii) hereof, any costs and expenses incurred by Health Care REIT, Inc. The Commitment Fee constitutes the bargained-for consideration for Health Care REIT, Inc.'s issuance of this Commitment Letter and does not constitute liquidated damages for any damages arising from Customer's breach hereunder. 2. EXPENSES. In addition to the Commitment Fee and upon the acceptance of this Commitment Letter, Customer agrees to pay, or reimburse Health Care REIT, Inc., for all reasonable costs and expenses in connection with this transaction (whether or not a closing occurs), including but not limited to the following: i) title insurance premiums, search fees, commitment fees, and cancellation fees; ii) survey fees and expenses; iii) environmental assessment fees and expenses; iv) inspection fees and expenses including fees of consulting architects or engineers and reimbursement of expenses for inspection by Health Care REIT, Inc.'s representatives; v) appraisal fees and expenses; vi) pest inspection fees and expenses; vii) UCC search fees and expenses; viii) costs and expenses incurred by Health Care REIT, Inc. in investigating and negotiating this transaction including travel, meals, and lodging; and ix) attorneys' fees and expenses for Health Care REIT, Inc.'s inside counsel in connection with this transaction. 3. RELIANCE BY HEALTH CARE REIT, INC. This Commitment Letter has been issued in reliance upon the accuracy of the information furnished to Health Care REIT, Inc. by or on behalf of Customer and any guarantor and, notwithstanding any investigation by Health Care REIT, Inc., all such information is deemed to be material. Health Care REIT, Inc. intends to notify Customer's auditors of its reliance on the audited financial statements of Customer and any guarantor in making the Financing. Health Care REIT, Inc.'s obligation to close is conditional upon no material adverse change in the financial condition of Customer, any guarantor, or the Facility. 4. COMPLIANCE WITH LAW. If any law or regulation affecting Health Care REIT, Inc.'s entering into this transaction imposes upon Health Care REIT, Inc. any material obligation, fee, liability, loss, cost, expense or damage which is not contemplated by this Commitment Letter, the commitment evidenced hereby may be terminated by Health Care REIT, Inc. without any obligation of Health Care REIT, Inc. hereunder. 5. ASSIGNMENT. Health Care REIT, Inc. may assign all or a part of this Commitment Letter of the Financing to another institutional investor. This Commitment Letter and the Financing Documents are not assignable by Customer by operation of law or otherwise. 6. APPLICABLE LAW. This Commitment Letter shall be governed in all respects by the internal laws (as opposed to the conflicts of laws provisions) of the State of Ohio. Customer and any guarantor i) submit to the jurisdiction of any state or federal court located in Lucas County, Ohio over any action or proceeding to enforce or defend any matter arising from or related to the Commitment Letter; ii) waive the defense of an inconvenient forum to the maintenance of any such action or proceeding; iii) agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in any other jurisdiction-diction by suit on the judgment or in any other manner provided by law; and iv) agree not to institute any legal action or proceeding against Health Care REIT, Inc. or any director, officer, employee, agent or property of Health Care REIT, Inc., concerning any matter arising out of or relating to the financing in any court other than one located in Lucas County, Ohio. Nothing in this section shall affect or impair Health Care REIT, Inc.'s rights to serve legal process in any manner permitted by law, or Health Care REIT, Inc.'s right to bring any action or proceeding against Customer or guarantor or the property of Customer or guarantor in the courts of any other jurisdiction. 7. ENTIRE AGREEMENT. This Commitment Letter sets forth the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all other prior written or oral understandings with respect thereto; provided, however, that all written and oral representations made by or on behalf of Customer with respect to the subject matter hereof shall survive this Commitment Letter. 8. MODIFICATION. No modification or waiver of any provision of this Commitment Letter shall be effective unless the same shall be in writing, signed by the parties hereto. 9. NOTICES. Any notice required hereunder shall be in writing delivered personally, or by a nationally recognized overnight courier service, or by certified mail, return receipt requested, postage prepaid, addressed to the party to be notified of the address set forth in the Commitment Letter or to such other address as each party may designate for itself by like notice. When personally delivered, all notices shall be deemed to be given when actually received. When mailed, all notices shall be deemed to be given when deposited with the overnight courier or with the U.S. mail. 10. ANNOUNCEMENTS. Health Care REIT, Inc. and Lessee have the right to make public announcements regarding this Financing. 11. NO BROKERS. Customer represents and warrants that no financing brokers were used in connection with this transaction. 12. CUSTOMER'S OBLIGATIONS. Upon acceptance of this Commitment Letter, Customer shall be obligated to provide all due diligence items required by this Commitment Letter and to close this transaction. Page 1 12 EXHIBIT A: PROPOSED FINANCINGS
======================================================================================================== CITY STATE AMOUNT EST. CLOSING ======================================================================================================== Jamesburg New Jersey $15,500,000 7/96 - -------------------------------------------------------------------------------------------------------- Houston Texas $13,605,550 9/96 - -------------------------------------------------------------------------------------------------------- Denver Colorado $9,800,000 7/96 - -------------------------------------------------------------------------------------------------------- Fort Meyers Florida $12,300,000 8/96 ========================================================================================================
Page 2 13 EXHIBIT B: CHANGE IN CONTROL A "Change of Control" will be deemed to have occurred when; [i] any "person" or "group" (as such terms are used in Section 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of shares representing more than 50% of the combined voting power of the then outstanding securities entitled to vote generally in elections of directors of the Lessee ("Voting Stock"), or [ii] the Lessee consolidates with or merges into any other corporation, or conveys, transfers or leases all or substantially all of its assets (other than to a wholly-owned subsidiary of the Lessee) or any other corporation merges into the Lessee, and, in the case of any such transaction, the outstanding Common Stock of the Lessee is reclassified into or exchanged for any other property or security, unless the stockholders of the Lessee immediately before such transaction own, directly, or indirectly immediately following such transaction, at least a majority of the combined voting power of the outstanding voting securities of the corporation resulting from, or to which its assets were conveyed, transferred or leased in connection with, such transaction in substantially the same proportion as their ownership of the Voting Stock immediately before such transaction; provided, that a Change of Control shall not be deemed to have occurred if at least 90% of the consideration (excluding cash payments for fractional shares) in the transaction or transactions constituting the Change of Control consists of shares of common stock that are, or upon issuance will be, traded on a United States national securities exchange or approved for trading on an established automated over-the-counter trading market in the United States. Page 3 EX-10.35 8 BANK UNITED OF TEXAS COMMITMENT LETTER - 6-24-96 1 EXHIBIT 10.35 3200 Southwest Freeway, Suite 2000 Houston, Texas 77027 P.O. Box 1370 Houston, Texas 77251-1370 Telephone 713/543-6500 Bank United of Texas FFE BANK UNITED June 24, 1996 VIA OVERNIGHT DELIVERY AND FACSIMILE (LETTER AND EXHIBITS A & B ONLY) Mr.Graham P. Espley-Jones Chief Financial Officer ARV Assisted Living, Inc. 245 Fischer Avenue, Suite D-1 Costa Mesa, CA 92626 Re: APPROVAL OF REVOLVING CREDIT FACILITY IN THE AMOUNT OF $35,000,000 TO ARV ASSISTED LIVING, INC. Dear Mr. Espley-Jones: This letter supersedes in its entirety that certain approval letter to you dated April 11, 1996, regarding the above-referenced, which has, by its terms, expired. We are pleased to inform you that Bank United of Texas FSB ("Bank United") has approved a revolving credit facility in the amount of $35,000,000 (the "Line of Credit") to ARV Assisted Living, Inc. ("Borrower") for purposes of financing the acquisition, acquisition and rehabilitation, or construction of assisted living facilities, subject to certain terms, conditions, and covenants generally described below and others to be negotiated and mutually agreed to by and between Borrower and Bank United in connection with the specific acquisition or construction project to be financed under the Line of Credit ("Financed Project"). Construction projects financed under the Line of Credit shall be referred to as "Financed Construction Projects". Acquisition projects and acquisition and rehabilitation projects financed under the Line of Credit shall be referred to as "Financed Acquisition Projects". I. GENERALLY APPLICABLE TERMS, CONDITIONS, AND COVENANTS A. PROJECT ELIGIBILITY. Each Financed Project shall be separately underwritten and subject to the specific approval of Bank United. Although satisfaction of the below-described criteria does not obligate Bank United to approve a proposed Financed Project, the following minimum parameters must be satisfied as a condition precedent to Bank United's review and consideration of a proposed Financed Project: 1. MARKET AREA. All Financed Projects shall be located in market areas approved by Bank United and in which Borrower has demonstrated operations and management capabilities ("Eligible Market Area"). As of the date of this letter, Eligible Market Areas consist of California, Florida, Texas, Ohio, Colorado, New York and New Jersey. 2 2. ASSISTED LIVING FACILITIES. All Financed Projects shall consist of assisted living facilities or other facilities (other than nursing homes) to be converted into assisted living facilities, and for which all required facilities, administrative, and other legally required licenses, if any, have been obtained as and when legally required, and which will be maintained until the Line of Credit has been terminated and repaid in full; but shall not include nursing homes. 3. LOAN TO VALUE/COST. The total amount advanced under the Line of Credit for any single Financed Project may not exceed 70% of its appraised value. The total amount advanced under the Line of Credit for Financed Construction Projects may not exceed 80% of the total cost of construction and lot acquisition, excluding developer's fees and overhead. The total amount advanced under the Line of Credit for each Financed Acquisition Project may not exceed 70% of its purchase price or purchase price plus renovation costs in the case of a rehabilitation project. 4. DEBT SERVICE COVERAGE. Each Financed Project must generate a debt service coverage ratio of not less than 1.40 to 1, based upon projected rentals in the case of Financed Construction Projects, and actual rentals in the case of Financed Acquisition Projects, and, in either case, assuming monthly payments based upon a twenty-five (25) year amortization. 5. SUBLIMIT FOR FINANCED CONSTRUCTION PROJECTS. At no time may the total amount committed for approved Financed Construction Projects exceed $20,000,000. 6. DUE DILIGENCE REQUIREMENTS. In addition to the documentation and information requirements for Financed Acquisition Projects and Financed Construction Projects set forth in Exhibits "A" and "B" respectively, Borrower shall provide market studies, satisfactory to Bank United, that analyze, among other factors, the demographics, housing needs, existing comparable facilities, economic climate, absorption rates, surrounding neighborhoods, average rentals per square foot, occupancy levels, and job market in the vicinity of the proposed Financed Project, if the proposed Financed Project is either (i) a Financed Acquisition Project that has been completed less than two (2) years previously, or (ii) a Financed Construction Project. B. FINANCIAL COVENANTS OF BORROWER. Borrower shall maintain the following minimum financial covenants: 1. Borrower's total liabilities (excluding contingent liabilities such as payment or performance guaranties, or general partner liability) divided by total tangible net worth shall not exceed 3.5 to 1 as of the end of each fiscal quarter. 2. Borrower shall maintain a tangible net worth of not less than $35,000,000 calculated as of the end of each fiscal quarter. For purposes of this covenant, "tangible net worth" shall 3 mean the sum of the shareholders' equity in Borrower (including capital stock, additional paid-in capital, and retained earnings, but excluding treasury stock, if any), less the aggregate book value of all intangible assets of Borrower (as determined in accordance with generally accepted accounting principles consistent, with those applied in the preparation of financial statements required under paragraph C, below, of this Section I and including, without limitation, goodwill, trademarks, trade names, service marks, copyrights, patents, licenses, and franchises). 3. Commencing with the fiscal quarter beginning October 1, 1996, Borrower shall maintain a debt service coverage ratio, calculated, as of the end of each fiscal quarter, by dividing (i) Borrower's earnings before interest, taxes, depreciation, and appreciation ("EBITDA") by (ii) all scheduled debt payments upon which Borrower is obligated including interest payments due on Financed Projects, of 2.0 to 1. C. FINANCIAL REPORTING REQUIREMENTS Borrower shall provide to Bank United internally prepared balance sheet and income statements, certified by its chief financial officer, within forty-five (45) days following each fiscal quarter and shall provide audited balance sheet and income statements within ninety (90) days following the end of each fiscal year. In addition, Borrower shall provide Bank United, not later than forty-five (45) days following the commencement of each fiscal year, Borrower's annual budget and cash flow projections. Within five (5) business days of Bank United's request therefor, Borrower shall quarterly provide rent rolls and operating statements relating to Financed Projects. D. PAYMENTS Borrower shall make monthly payments of interest only on the total outstanding principal balance of all loans made under the Line of Credit, with all unpaid principal and accrued and unpaid interest due and payable at maturity of the Line of Credit, howsoever occurring. E. LINE OF CREDIT MATURITY The Line of Credit shall have an initial term of two years, commencing as of the date the initial loan under the Line of Credit is closed and funded ("Commencement Date"). The Line of Credit shall be reviewed on the first and second anniversaries of the Commencement Date and may, within Bank United's sole discretion, be renewed for an additional one-year term on each such anniversary, upon Borrower's payment of the renewal maintenance fee described below. F. INTEREST RATE The contract rate of interest on all loans made under the Line of Credit shall be a floating rate, adjusted monthly on the first day of each month equal to the lesser of: (i) the maximum nonusurious rate under applicable law; or (ii) 275 basis points (2.75%) over the thirty-day London Page 3 4 Interbank Offered Rate ("LIBOR Rate") quoted on page 5 of the telerate screen or as published or quoted by any other nationally recognized rate quoting service or publication selected by Bank United, two business days prior to the first calendar day of each month. G. COLLATERAL All loans under the Line of Credit shall be secured by a first lien priority interest in the real property and improvements that comprise each Financed Project, in addition to a collateral assignment of rents, leases, management agreements, replacement reserve accounts, deposits, and other escrows, personal property owned by Borrower and located on or used in the operation or maintenance of the Financed Project and a collateral assignment of the construction contract, architect's contract, plans and specifications, and engineer's contract, in connection with the Financed Construction Projects. To the extent permitted by law, Borrower shall assign to Bank United all licenses and permits required in connection with each Financed Project. H. SUBORDINATE DEBT/LIENS No subordinate liens on any of the above-described collateral shall be permitted without Bank United's consent. In addition, Borrower shall not be permitted to incur any other secured debt, in connection with the construction, operation, acquisition or management of a Financed Project, except for indebtedness owed to Bank United. I. FEES EXPENSE DEPOSIT 1. APPLICATION FEE/EXPENSE DEPOSIT. Borrower has previously paid Bank United an Application Fee of $35,000 which has been utilized for the payment of third-party expenses incurred by Bank United in connection with underwriting or other preparations incident to closing the loans made for certain proposed Financed Projects. Contemporaneously with its execution and delivery of this commitment letter to Bank United, Borrower shall pay an expense deposit of $15,000 for application against expenses incurred in connection with underwriting and closing loans for Financed Projects. Bank United may require additional expense deposits in connection with any proposed loan for a Financed Project in the event it determines the balance of the expense deposit, if any, is insufficient to cover anticipated third-party expenses. In the event that previously paid expense deposits are insufficient to cover expenses incurred by Bank United in connection with underwriting or other preparations incident to closing loans made under the Line of Credit, including, without limitation, market studies, environmental site assessments, inspection reports, surveys, appraisals, and legal fees, Borrower shall reimburse Bank United for any deficiency upon demand. 2. MAINTENANCE FEE. Borrower shall pay to Bank United a Maintenance Fee in the amount of $187,500 for the first year following the Commencement Date, which shall be payable as follows: $75,000 on the Commencement Date, and $112,500 on or before November 1, 1996 provided that in the event the committed amount of loans for Financed Projects Page 4 5 exceeds $10 million, Borrower shall pay, upon demand by Bank United, any remaining balance of the $187,500 Maintenance Fee. In the event that, at any time prior to the first anniversary of the Commencement Date, the principal balance of advances for Financed Acquisition Projects plus the amounts committed for Financed Construction Projects ("Total Usage") exceed $25 million but is equal to or less than $30 million, the Maintenance Fee shall be increased to $225,000, and Borrower shall, upon demand, pay to Bank United $37,500, representing the amount of the increase. In the event that the Total Usage, at any time prior to the first anniversary of the Commencement Date, exceeds $30 million, the Maintenance Fee shall be increased to $262,500, and Borrower shall, upon demand, pay to Bank United, the difference between $262,500 and the aggregate Maintenance Fees previously paid. Commencing with the first anniversary of the Commencement Date and thereafter, in the event Bank United permits Borrower to extend the Line of Credit for one or more additional one-year terms, Borrower shall pay Maintenance Fees, in the following amounts, based upon the highest Total Usage during the initial and extended terms. The following Maintenance Fees for the second year and each extended term, if any, shall be payable upon the first anniversary of the Commencement Date and every six months thereafter until the expiration of the Line of Credit, howsoever occurring:
Total Usage Maintenance Fee ----------- --------------- $25 million or less $62,500 greater than $25 million, but equal to or less than $30 million $75,000 greater than $30 million $87,500
If, at any time during any six month period, the highest Total Usage exceeds the Total Usage upon which previously paid Maintenance Fees for that period were based, Borrower shall, upon demand, pay the difference to Bank United, without pro-ration. The Maintenance Fees shall be deemed to be paid in connection with the commitment sublimit amount of $20 million for Financed Construction Projects and are calculated on the basis of a certain percentage of such sublimit, that varies, depending upon the highest Total Usage under the Line of Credit and the period for which such Maintenance Fees were paid, as described below: Page 5 6
Highest Total Usage - ------------------- Percentage of Financed Percentage of Financed Construction Project Sublimit Construction Project Sublimit ----------------------------- ----------------------------- (for first year) (for periods after the first year) $25 million or less .9375% .3125% greater that $25 million, but equal to or less than $30 million 1.125% .375% greater than $30 million 1.3125% .4375%
J. LOAN DOCUMENTS. Each loan for a Financed Project shall be separately documented, substantially in the form and content attached hereto as Exhibit "C" in the case of Financed Acquisition Projects and consistent with the parameters of Exhibit "D" in the case of Financed Construction Projects, with modifications required to comport with the law of the state in which the Financed Project is located and to accommodate specific terms and conditions imposed incident to Bank United's approval of the Financed Project. In the event of any inconsistency between the sample documents or parameters contained in Exhibits "C" and "D", and the requirements of this letter, the latter shall control. In the event of inconsistencies between the terms of this letter and the loan documents executed in connection with a specific Financed Project, the project-specific loan documents shall control. The loan documents shall be governed by the law of the state in which the Financed Project is located. However, Borrower's rights and remedies under and the terms and conditions of this letter shall be governed by the law of the State of Texas. All loans made under the Line of Credit shall be full recourse to Borrower and shall be cross-defaulted and cross-collateralized with each other. K. BLANKET COMPREHENSIVE LIABILITY INSURANCE Borrower shall, at all times during the term of the Line of Credit, maintain comprehensive liability insurance in an amount not less than $25 million issued by a carrier and with deductions and coverages acceptable to Bank United. Page 6 7 II. CONDITIONS TO ESTABLISHMENT OF THE LINE OF CREDIT Bank United's obligation to establish the Line of Credit in favor of Borrower is conditioned upon the following: (1) There being no material adverse change in the financial condition or credit standing of Borrower, including but not limited to, the initiation of insolvency, liquidation, or bankruptcy proceedings, voluntary or otherwise, by or against Borrower; (2) Borrower's payment when due of all fees or expenses required to be paid by Borrower prior to closing any loan under the Line of Credit and strict compliance, in all respects, with each condition contained in this commitment letter; (3) Bank United's receipt of an unmodified and executed copy of this letter by the Commitment Acceptance Deadline. III. TERMINATION OF THE LINE Bank United may terminate the Line of Credit prior to the initial or renewal term, as the case may be, in the event any of the following occurs: a. Borrower consents to a liquidation agreement or arrangement, or any bankruptcy, reorganization or insolvency proceedings are instituted by or against Borrower; b. A default occurs and continues beyond any applicable grace and cure provisions in any loan document entered into in connection with any Financed Project; c. Failure of Borrower to fully satisfy and comply with the terms, provisions, and conditions contained in this commitment letter; d. Any of the representations, materials, or information heretofore or hereafter submitted by Borrower with respect to the Financed Projects or Borrower, including, but not limited to rent rolls, operating statements, financial statements, and reports, is now or hereafter becomes inaccurate, false, incomplete, incorrect, or misleading in any material respect; or e. Any change subsequent to the date hereof, deemed by Lender in its good faith judgment to be material or substantial, in the Financed Projects, or the assets, net worth, or credit standing of Borrower, or in any other facts relating to the Financed Projects or the taking of a judgment against Borrower, which in the sole judgment of Lender adversely affects Page 7 8 the Financed Projects or the credit standing of Borrower. In the event Bank United elects to terminate the Line of Credit for any of the reasons specified in paragraphs (a) through (e) above, it shall have no obligation to consider or fund any additional proposed Financed Projects and may, subject to any notice and cure provisions provided within the loan documents, accelerate the maturity of all promissory notes evidencing loans made under the Line of Credit, demand immediate payment in full of all outstanding balances owing on such loans, and may further exercise the remedies provided to it as a secured party under the loan documents with respect to any and all collateral securing such loans. IV. MISCELLANEOUS A. USURY SAVINGS PROVISIONS. It is the intent of Bank United and Borrower to conform to and contract in strict compliance with applicable usury law from time to time in effect. All agreements between Bank United or any other holder of any note made under the Line of Credit ("Note") and Borrower (or any other party liable with respect to any indebtedness under the Line of Credit) are hereby limited by this provision, which shall override and control all such agreements. In no way, nor in any event or contingency (including but not limited to prepayment, default, demand for payment, or acceleration of the maturity of any obligation or the recharacterization of any fees required hereunder or under the loan documents as interest), shall the interest taken, reserved, contracted for, charged or received under the Note, or otherwise, exceed the maximum nonusurious amount permissible under applicable law. If, from any possible construction of any document, interest would otherwise be payable in excess of the maximum nonusurious amount, any such construction shall be subject to this provision and such document shall be automatically reformed and the interest payable shall be automatically reduced to the maximum nonusurious amount permitted under applicable law, without the necessity of execution of any amendment or new document. If the holder of the Note shall ever receive anything of value that is characterized as interest under applicable law and that would, apart from this provision, be in excess of the maximum nonusurious amount, an amount equal to the amount that would have been excessive interest shall, without penalty, be applied to the reduction of the principal amount owing on the indebtedness evidenced hereby in the inverse order of its maturity and not to the payment of interest, or refunded to Borrower if and to the extent such amount, which would have been excessive, exceeds such unpaid principal. The right to accelerate maturity of the Note or any other indebtedness does not include the right to accelerate any interest that has not otherwise accrued on the date of such acceleration, and the holder hereof does not intend to charge or receive any unearned interest in the event of acceleration. All interest paid or agreed to be paid to the holder of the Note shall, to the extent permitted by applicable law, be amortized, protected, allocated, and spread throughout the full stated term (including any renewal or extension) of such indebtedness so that the amount of interest on account of such indebtedness does not exceed the maximum nonusurious amount permitted by applicable law. Page 8 9 B. Time Time is of the essence with respect to all dates and periods of time set forth in this Commitment. Please indicate acceptance of the terms of this letter by causing the Borrower to execute the same, without modification, in the spaces provided below and returning the same, in addition to the $15,000 expense deposit, to the undersigned by noon, Houston, Texas time on July 3, 1996 ("Commitment Acceptance Deadline"). THE PARTIES HERETO EXPRESSLY ACKNOWLEDGE AND AGREE THAT, WITH REGARD TO THE SUBJECT MATTER OF THIS LETTER (1) THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES HERETO AND (2) THIS AGREEMENT AND THE ATTACHED EXHIBITS EMBODY THE FINAL AND COMPLETE AGREEMENT BETWEEN THE PARTIES; SUPERSEDES ALL PRIOR AND CONTEMPORANEOUS AGREEMENTS AND UNDERSTANDINGS, WHETHER ORAL OR WRITTEN; AND MAY NOT BE VARIED OR CONTRADICTED BY EVIDENCE OF ANY SUCH PRIOR OR CONTEMPORANEOUS MATTER OR BY EVIDENCE OF ANY SUBSEQUENT ORAL AGREEMENT OF THE PARTIES HERETO. BANK UNITED By: /s/ R. MARTIN HALL ------------------------------ Name: R. Martin Hall Title: Director Correspondent Lending ACCEPTED: This 26th day of June 1996. BORROWER: ARV ASSISTED LIVING, INC. By: /s/ GRAHAM P. ESPLEY-JONES ------------------------------ Name: Graham P. Espley-Jones Title: Chief Financial Officer Page 9 10 EXHIBIT A REQUIRED INFORMATION SUMMARY FOR FINANCED ACQUISITION PROJECTS In addition to the Loan documents to be executed at the closing of the Loan (that shall include but not be limited to a note, deed of trust or mortgage, other security agreements, financing statements, a Borrower's affidavit regarding legal compliance and loans to one borrower, and a certificate and indemnification regarding hazardous substances), the following information or documents, in form and substance satisfactory to Bank United, must be provided prior to closing: 1. Appraisal prepared by appraiser approved by Bank United 2. Survey/Flood Hazard Determination 3. Title commitment (to contain ingress/egress, comprehensive, zoning, and environmental endorsements) 4. Phase I Environmental Site Assessment 5. Tax certificates relating to the Financed Project 6. Form of lease agreements 7. Insurance policies or binders (with agreed-amount endorsements) 8. Buy-Sell Agreement for purchase of the Financed Project 9. Structural and mechanical inspection report relating to the Financed Project prepared by engineers approved by Bank United 10. Inventory of personal property to be located in or upon the Financed Project 11. Rent rolls relating to the Financed Project 12. Certificates of occupancy 13. Architect's Certificate of Compliance with building codes and zoning ordinances 14. Opinion of Borrower's Counsel (including, but not limited to an opinion that the Loan is not usurious). Where the Financed Project is located in California, the Opinion of Borrower's Counsel may be provided by Borrower's in-house counsel. 15. Copy of management agreements relating to the Financed Project 11 16. Copies of executed commercial leases, if any, relating to the Financed Project 17. Estoppel and attornment agreements executed by commercial tenants, if any, of the Financed Project 18. Copies of all facilities and administrative licenses and/or permits required for the operation of the Financed Project as an assisted living facility. 12 EXHIBIT B INFORMATION SUMMARY FOR FINANCED CONSTRUCTION PROJECTS In addition to loan documents consistent with the requirements of Exhibit D, the following documents shall be required as conditions precedent to closing any loans under the Line of Credit made in connection with Financed Construction Projects, such documents shall be in form and content satisfactory to Bank United: (1) Survey: Originals of a current (prepared no more than ninety (90) days prior to the closing of the Loan) staked survey of the real property underlying the proposed Financed Construction Project ("the Land") and all improvements located thereon ("Survey") prepared by a professional engineer or registered surveyor, acceptable to Bank United and the Title Company which Survey shall conform to a current Texas Surveyors Association Standards specification for a Category 1A Texas Surveyor's Association Standards in the case of proposed Financed Construction Projects located in the state of Texas or, in the case of Financed Construction Projects located in states other than Texas, in conformity with all ALTA survey requirements, with a certificate acceptable to Lender. The Survey shall, among other matters, contain the following information: (1) metes and bounds description of the Land showing all corners and points of course changes and/or marked with iron pins or rods; (2) the location of all existing and proposed roads, highways and streets adjoining the Land and the access thereto and all improvements, encroachments, easements, drainage ditches, utilities, parking areas, rights-of-way, set-back lines, and all other matters located upon or effecting the Land. The Survey shall contain a certification that the Land is not located in any flood hazard area. The surveyor's certification on the face of the Survey, which shall be approved in both form and substance by Bank United , shall be in favor of both Bank United and the Title Company. The metes and bounds description of the Land prepared in accordance with this paragraph shall be the description of the metes and bounds of the Land used in connection with the preparation and execution of all of the loan documents. In the case of previously platted and subdivided Land, the Survey shall also reflect the legal description thereof, which shall comport with the legal description contained in all loan documents. (2) Plans and Specifications: Two (2) complete sets of final plans and specifications signed and dated by Borrower and certified by Borrower's architects and appropriate engineers (and with the seals of such architects and engineers affixed), and containing all certificates, and permits required by all governmental authorities having jurisdiction over the Project. Any deviation from the approved plans and specifications must be approved by Bank United in writing, in advance of the issuance of any change orders. Following completion of the Financed Construction Project, Borrower shall provide Bank United with unconditional certificates of occupancy for each of the units located within the Financed Construction Project. 13 (3) Preliminary Construction Cost Estimate and Schedule: A fixed price Preliminary Construction Cost Estimate for the Financed Construction Project covering the items shown on the budget therefor provided to Lender and showing all direct construction costs and all indirect and overhead items, satisfactory to Bank United, executed by Borrower and Borrower's general contractor. In addition, upon request by Bank United, Borrower's design architect shall certify that such estimate is fair and reasonable. Bank United shall be furnished with a detailed construction schedule showing a trade-by-trade breakdown of the estimated periods of commencement and completion of construction of the improvements on the Financed Construction Project, which schedule shall be confirmed in writing by the general contractor and the design architect. (4) Construction Inspection: A statement provided by a professional structural, mechanical, and construction inspection firm acceptable to Bank United ("Construction Inspector"), stating that it has reviewed the Financed Construction Project and plans and specifications and the cost breakdown and that there are adequate funds available from the proceeds of the loan and funds supplied at closing to complete the construction of the Financed Construction Project. Following completion of the construction of the Financed Construction Project, Borrower shall provide to Bank United an inspection report certifying that the Financed Construction Project has been completed in accordance with the plans and specifications approved by Bank United. (5) Soil Tests: A letter of certification from the Construction Inspector indicating that the soil conditions are satisfactory for the construction of the Financed Construction Project. (6) Contracts: Fully executed counterparts of all contracts with architects, engineers, and the Construction Inspector, relating to the Financed Construction Project including any and all amendments and modifications thereto and the fixed price construction contract with the general contractor, which shall be executed contemporaneously with the closing of the loan for a Financed Project. If requested by Bank United, Borrower shall furnish to Bank United, for approval by Bank United, financial statements of the general contractor. (7) Architect's/Engineer's Certificates: Certificates by Borrower's architects or engineers certifying that all utilities are currently available to the boundaries of the Financed Construction Project, that the Financed Construction Project complies with, or when built, will comply with applicable zoning ordinances and other applicable laws, and can be operated for the purposes for which constructed, that all permits, licenses and approvals have been issued by the appropriate authorities, that all improvements will be constructed above the 100 year flood plain for the land, and that the budget submitted to and approved by Bank United adequately provides for all sums necessary to complete the work called for in the architect's/engineer's contract with Borrower. (8) Environmental Site Assessments and Indemnity: Unqualified environmental site assessments performed by an environmental services firm selected or approved by Bank 14 United, which verify that the Financed Construction Project is free from any "hazardous materials" and "hazardous waste," as those terms are defined by federal and state statutes, laws and regulations, including without limitation, asbestos and diesel fuel (as reflected on the Phase I environmental assessment). Such environmental survey shall include a determination of "wetlands" status and condition. Additionally, Bank United shall have obtained evidence, in form and substance acceptable to Bank United in its sole discretion, that indicates that any "hazardous materials" or hazardous waste" previously located on the Land have been properly disposed of in accordance with all applicable laws and the requirements of Thrift Bulletin 16. Borrower shall execute an Environmental Indemnity Agreement in favor of Bank United in the form contained within Exhibit C attached to this letter. (9) Appraisal: At Borrower's sole cost and expense, an appraisal addressed to Bank United from an appraiser selected or approved by Bank United, which appraisal shall be in form and substance satisfactory to Bank United and shall indicate that the value of the Financed Construction Project completed in accordance with the plans and specifications shall not be less than an amount sufficient to support a loan to value ratio of no more than 70%. (10) Proof of Payment of Taxes/Insurance: Borrower shall provide Bank United with evidence satisfactory to Bank United that Borrower has fully prepaid insurance premiums relating to the Financed Construction Project for the first year of the loan and evidence satisfactory to Bank United that all taxes affecting the Financed Construction Project attributable to the period beginning January and ending on the closing date of the loan have been paid or, in cases where annual tax bills are payable in increments and over successive years for preceding years, evidence that the taxes have been paid in such other manner as is customary under local customs and practice and acceptable to Bank United. (11) Budget Disbursement Schedule: Borrower shall deliver to Bank United a final budget for the construction of the Financed Construction Project, including without limitation, a draw schedule and schedule of completion. (12) Contractor's Letter: Bank United shall be furnished with a letter from Borrower's general contractor stating, among other things, that the general contractor shall give written notice to Bank United in case the Borrower defaults under the construction contract, that the general contractor will continue performance under the construction agreement if so requested by Bank United, and otherwise acknowledging that Borrower, by assignment of the construction contract, has granted a security interest in all of Borrower's right, title, and interest in the construction contract, that the maximum amount that shall be due and payable under the construction contract is as stated therein, and that such amount is adequate to complete the work called for in the construction contract. (13) Notice of Commencement: Bank United shall have received evidence satisfactory to it that no construction on the Financed Construction Project has commenced nor has any 15 construction contract been entered into prior to the time of filing of the deed of trust or mortgage in favor of Bank United securing the Loan. (14) Attorney's Opinion: At the time of the closing of the Loan, Borrower's counsel shall deliver opinions addressed to Bank United in form, scope, and substance satisfactory to Bank United concerning all aspects of the loan including, without limitation, usury, doing business, and the due authorization, legality, validity, enforceability, and binding effect of all required loan documents. If the Financed Project is located in the state of California, such opinions may be provided by Borrower's in-house counsel. (15) Leases/Management: Forms of lease agreements for apartments and actual lease agreements for commercial units, if any, and management agreements pertaining to the Financed Construction Project and any and all amendments and modifications thereto. Bank United shall have the right to approve or disapprove all management agreements, and the latter shall provide for a management fee of not more than 5% of monthly collections. (16) UCC Search: UCC search of all filings of Borrower with the Secretary of State and the county where the Financed Construction Project is located and the county where the Borrower resides; (17) Title Policy: Simultaneously with closing but prior to funding, a mortgagee title insurance policy ("the Title Policy") issued by an underwriter acceptable to Bank United through a title company acceptable to Bank United ("Title Company") pursuant to an insured closing protection letter satisfactory to Bank United for an amount equal to the loan amount insuring Bank United's valid first lien upon the Financed Construction Project and containing only such exceptions as specifically approved by Bank United. Any exception regarding restrictive covenants shall be deleted or shall list such restrictive covenants and insure that they will not affect the validity or priority of Bank United's lien. The standard pre-printed exception regarding any discrepancies, conflicts, or shortages in area or boundary lines shall be modified to read only "shortages in area". The standard pre-printed exception regarding taxes shall be modified to read "Standby fees and taxes for the year ______ [current year] and subsequent years not yet due and payable." The Title Policy may contain the standard pre-printed "pending completion" and "pending disbursements" exceptions and Borrower shall, at Borrower's cost and expense, obtain endorsements to the Title Policy as advances are made so that the coverage reflects the amounts that have been advanced under the terms of the loan documents. The Policy shall also insure for access to the Financed Construction Project and, where available, contain environmental, comprehensive, zoning, and mechanic's lien endorsements. (18) Insurance Policies: Insurance policies required under the loan documents including builder's risk, hazard, public liability, and extended coverage. Such insurance shall be in amounts satisfactory to Bank United and, in the case of builder's risk and hazard insurance shall be equal the lesser of 100% of the full insurable value of the insurable 16 portion of the Financed Construction Project or an amount equal to the loan amount. All such insurance policies shall be issued by insurers with a Best rating of at least A+, shall name Bank United (or the holder of the Note) as a loss payee subject to a mortgagee clause (without contribution) of the standard form attached to or otherwise made a part of the applicable policy, and shall provide that the same shall not be canceled or modified without at least thirty (30) days prior written notice to Bank United. The requirement for public liability and extended coverage may be satisfied by Borrower's blanket comprehensive general liability policy, provided that its terms, coverage, and the issuer thereof are satisfactory to Bank United. (19) Public Liability/Worker's Compensation: Certificate from an insurance company indicating that Borrower's general contractor is covered by public liability and workman's compensation insurance in amounts and issued by insurers satisfactory to Bank United; (20) Borrowers Affidavit: Affidavit of Borrower regarding loans to one Borrower, correctness and accuracy of representations and warranties in loan documents, and accuracy and completeness of all other information or material furnished to Bank United to induce it to make the loan and such other matters required by Bank United, all in form and substance satisfactory to Bank United; (21) Lien Waivers: Lien waivers and subordination of lien rights from all architects, engineers, and contractors providing materials or services in connection with the Financed Construction Project; (22) Permits: Copies of all necessary building, curb cut, sewer and water tap, and other permits required for the development of the Financed Construction Project, issued in the name of the Borrower; (23) Zoning Letter: A copy of the applicable zoning ordinances, certified by an appropriate municipal or county official to be a complete and accurate statement therefor and written certification by said municipal or county official setting forth the zoning classification of the Financed Construction and stating that the Financed Construction Project and use thereof comply with all applicable zoning ordinances; (24) Utility Letters: Letters from authorized officials or agents of each governmental entity or public utility furnishing any utility service, including water, sewer, telephone, gas, and electricity to the Financed Construction Project, which letters shall state that such service will be made available to the Financed Construction Project within the time required by the proposed schedule of construction in amounts adequate to serve the Financed Construction Project after its development in accordance with the approved plans and specifications; 17 (25) Performance and Payment Bond: If deemed advisable by Bank United following its review of the financial condition and experience of the proposed general contractor for a Financed Construction Project, a performance and payment bond issued by a surety company acceptable to Bank United covering the general contractor on the Financed Construction Project for not less than the cost of the construction contract and naming Bank United as a dual obligee. The dual obligee rider shall provide: "The Contractor and Surety shall not be liable under this bond to the Owner or Bank United unless the said obligee, or either of them, shall make payments to the Contractor in accordance with the terms of said Contract as to payments, and shall perform all of the other obligations to be performed under said Contract at the time and in the manner therein set forth, provided that the obligations of Contractor and Surety under said bond shall not be impaired unless Bank United fails to cure any default by Owner under the said Contract within a reasonable time after Bank United's receipt of written notice of said default." The bond shall also provide that the surety waives notice of, and consents to, changes in the construction contract, including changes in the plans and specifications, to the extent any such changes do not increase the contract price more than 10%; (26) Flood Insurance: If the Financed Construction Project is in a "Flood Hazard Area", a flood insurance policy in an amount equal to the loan amount for that specific Financed Construction Project or the maximum amount available therefor under the Flood Disaster Protection Act of 1973 and regulations issued pursuant thereto, as may be amended from time to time, whichever is less, in form complying with the "insurance purchase requirement" of the Act, which shall contain a mortgagee clause in favor of Bank United; (27) Inventory: Inventory of all personal property located in the Financed Construction Project after completion; (28) Water Service: Assignment and conveyance of water service and wastewater capacity reservation and security agreement; (29) Subordination Agreements: Subordination agreements in favor of Bank United executed by the Contractor, the property management company, architects and engineers, and any and all affiliates of Borrower providing services to the Borrower. (30) Additional Documents: Such other documents as Bank United may reasonably require to address specific issues relating to the Financed Construction Project. 18 EXHIBIT C SAMPLE LOAN DOCUMENTS FOR FINANCED ACQUISITION PROJECTS Financed Acquisition Projects shall be documented in form and substance substantially similar to the attached documents. Surveys shall comport with the Survey Requirements attached in this Exhibit and Borrower's Opinion of Counsel shall also comport with the sample attached in this Exhibit. These documents may be modified or supplemented to address issues of the state and local law of the jurisdiction in which the Financed Acquisition Project is located and issues specifically relating to the Financed Acquisition Project. [Sample Loan Documents Not Attached At This Time] 19 EXHIBIT D PARAMETERS OF LOAN DOCUMENTS FOR FINANCED CONSTRUCTION PROJECTS Among the terms and conditions to evidence and secure each loan made in connection with a Financed Construction Project, the loan documents executed in connection therewith shall contain the following provisions: 1. APPLICATION OF INSURANCE/CONDEMNATION PROCEEDS: The loan documents shall contain a provision or provisions that shall provide, inter alia, that any and all insurance and condemnation proceeds will be paid to Bank United and Bank United may, within its sole discretion apply the proceeds toward repayment of the loan or toward the repair of the Financed Construction Project. Provided, however, if: (i) Borrower is not then, and has never been, in default of any term or provision contained in the loan documents ; (ii) no more than 25% of the net rentable square footage of the Project has been damaged; and (iii) the insurance proceeds are less than 25% of the principal balance of the loan, then Bank United shall disburse such proceeds to Borrower, from time to time, for the sole purpose of repairing or replacing the damaged portion of the Financed Construction Project. Borrower shall be required to provide Bank United with good and sufficient documentation and information necessary and required by Bank United to verify and confirm the exact nature and extent of the damage or destruction to the Financed Construction Project and the amount of funds properly expended to repair or replace same. Any proceeds not paid to repair or replace any such damaged or destroyed portion of the Project shall be applied to the last maturing installments of principal due and owing under the loan. 2. WAIVER OF ANTI-DEFICIENCY/FAIR MARKET VALUE FOR CALCULATING DEFICIENCIES [Texas Financed Projects Only]: The loan documents shall provide that: If all or any portion of the Financed Construction Project is foreclosed upon pursuant to a judicial or nonjudicial foreclosure sale, then notwithstanding the provisions of Sections 51.003, 51.004, and 51.005 of the Texas Property Code (as the same may be amended from time to time), and to the extent permitted by law, Borrower agrees that Bank United shall be entitled to seek a deficiency judgment from Borrower and any other party obligated on the indebtedness secured by the deed of trust equal to the difference between the amount owing on such indebtedness and the total amount for which the Financed Construction Project foreclosed upon ("Foreclosed Property") was sold pursuant to judicial or nonjudicial foreclosure sales. Borrower expressly recognizes that this section constitutes a waiver of the above-cited provisions of the Texas Property Code which would otherwise permit Borrower to present competent evidence of the fair market value of the Foreclosed Propertyas of the date of the applicable foreclosure sale and offset against any deficiency the amount by which the foreclosure sale price is determined to be less than such fair market value. Borrower further recognizes and agrees that this waiver creates an irrebuttable presumption that the foreclosure sale price is equal to the fair market value of the Foreclosed Property for purposes of calculating deficiencies owed by Borrower. 20 Alternatively, in the event the waiver provided above is determined by an arbitrator or a court of competent jurisdiction, as the case may be, to be unenforceable, the following shall be the basis for the finder of fact's determination of the fair market value of the Foreclosed Property as of the date of the foreclosure sale in proceedings governed by Sections 51.003, 51.004, and 51.005 of the Texas Property Code (as amended from time to time); (1) The Foreclosed Property shall be valued in an "as is" condition "with all faults" as of the date of the foreclosure sale, without any assumption or expectation that any repairs will be performed in connection therewith; (2) The valuation shall be based upon an assumption that the foreclosure purchaser desires a prompt resale of the Foreclosed Property for cash promptly (but no later than twelve months) following the foreclosure sale; (3) All reasonable closing costs customarily borne by the seller in a commercial real estate transaction shall be deducted from the gross fair market value of the Foreclosed Property, including, without limitation, brokerage commissions, title insurance, a survey of the Foreclosed Property, tax prorations, attorney's fees, and marketing costs; (4) The gross fair market value of the Foreclosed Property shall be further discounted to account for any estimated holding costs associated with maintaining the Foreclosed Property pending sale, including, without limitation, utilities expenses, property management fees, taxes and assessments (to the extent not accounted for in paragraph 3 above), and other maintenance expenses; and (5) Any expert opinion testimony given or considered in connection with a determination of the fair market value of the Foreclosed Property must be given by persons having at least five years experience in appraising property similar to the Foreclosed Property and who have conducted and prepared a complete written appraisal of the Foreclosed Property taking into consideration the factors set forth above. 3. WAIVER OF JURY TRIAL: The loan documents will contain a provision wherein Borrower will expressly waive any right to a trial by jury in any action or legal proceeding arising out of or relating to this commitment, the loan, and any of the transactions contemplated by the loan. 4. ARBITRATION: The loan documents will contain a provision that requires Bank United and Borrower to submit disputes arising thereunder to binding arbitration. This provision shall read substantially as follows: To the maximum extent not prohibited by law, any controversy, dispute or claim arising out of, in connection with, or relating to the Note or any of the other loan documents or any transaction provided for therein, including but not limited to any claim based on or arising from an alleged tort 2 21 or an alleged breach of any agreement contained in any of the loan documents, shall, at the request of any party to the loan documents (either before or after the commencement of judicial proceedings), be settled by arbitration pursuant to Title 9 of the United States Code, which the parties hereto acknowledge and agree applies to the transaction involved herein, and in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA"). In any such arbitration proceeding: (i) all statutes of limitation which would otherwise be applicable shall apply; and (ii) the proceeding shall be conducted in the state and nearest metropolitan area in which the Financed Construction Project is located by a single arbitrator, if the amount in controversy is $1 million or less, or by a panel of three arbitrators if the amount in controversy is over $1 million. All arbitrators shall be selected by the process of appointment from a panel pursuant to section 13 of the AAA Commercial Arbitration Rules and each arbitrator will have AAA-acknowledged expertise in the appropriate subject matter. Any award rendered in any such arbitration proceeding shall be final and binding, and judgment upon any such award may be entered in any court having jurisdiction. If any party to the Note or other loan documents files a proceeding in any court to resolve any such controversy, dispute or claim, such action shall not constitute a waiver of the right of such party or a bar to the right of any other party to seek arbitration under the provisions of this section of that or any other claim, dispute or controversy, and the court shall, upon motion of any party to the proceeding, direct that such controversy, dispute or claim be arbitrated in accordance with this section. Notwithstanding any of the foregoing, the parties hereto agree that no arbitrator or panel of arbitrators shall possess or have the power to (i) assess punitive damages, (ii) dissolve, rescind or reform (except that the arbitrator may construe ambiguous terms) the Note or any other loan document, (iii) enter judgment on the debt, (iv) an exercise equitable powers or issue or enter any equitable remedies or (v) allow discovery of attorney/client privileged information, and the parties hereby waive the aforementioned remedies. The Commercial Arbitration Rules of the AAA are hereby modified to this extent for the purpose of arbitration of any dispute, controversy or claim arising out of, in connection with, or relating to any loan documents. No provision of, or the exercise of any rights under, this section shall limit or impair the right of any party to the loan documents before, during or after any arbitration proceeding to: (i) exercise self-help remedies such as set off or repossession; (ii) foreclose (judicially or otherwise) any lien on or security interest in any real or personal property collateral; or (iii) obtain emergency relief from a court of competent jurisdiction to prevent the dissipation, damage, destruction, transfer, hypothecation, pledging or concealment of assets or of collateral securing any indebtedness, obligation or guaranty referenced in the loan documents. Such emergency relief may be in the nature of, but is not limited to: pre-judgment attachments, garnishments, sequestrations, appointments of receivers, or other emergency injunctive relief to preserve the status quo. 3 22 In the event applicable law prohibits the submission of a particular controversy, dispute, or claim arising out of or in connection with any of the loan documents or transactions contemplated therein to arbitration, Borrower and Bank United agree that any actions or proceedings in connection therewith shall be tried and litigated only in the state and federal courts located in the jurisdiction in which the Property is located or any other court in which Bank United shall initiate legal or equitable proceedings that has subject matter jurisdiction over the matter in controversy. Borrower and Bank United, to the extent permitted by applicable law, waive any right to assert the doctrine of forum non-conveniens or to object to the venue to the extent any proceeding is brought in accordance with this paragraph. 5. RESTRICTION ON ADDITIONAL SECONDARY FINANCING AND SALE OF PREMISES: Except as otherwise permitted herein, the loan documents shall contain "due on sale" provisions that shall state that any sale, conveyance, further encumbrance (including the granting of any easements or other matters affecting title to the Financed Construction Project), or any pledge or other hypothecation of Borrower's interest in and to the Financed Construction Project, or any part thereof, or any interest therein, shall be an event of default under the terms and provisions of the Loan documents. Without limiting the generality of the foregoing, the occurrence at any time of any of the following events, without Bank United's prior written consent, which consent may be given or withheld at Bank United's sole and exclusive discretion, shall be deemed to be an unpermitted transfer of title to the Financed Construction Project and shall constitute an event of default under the terms and provisions of the Deed of Trust: (1) any sale, conveyance, assignment, including any assignment for the benefit of creditors, or other transfer of, or the grant of any mortgage or security interest in all or any part of the Financed Construction Project; or (2) any sale, conveyance, assignment, or other transfer of all or substantially all of the assets of Borrower. 6. TRANSACTIONS WITH AFFILIATES: The loan documents will provide that Borrower shall be prohibited from entering into any transactions with any entity or person controlling or under common control with Borrower, without the written approval of Lender, other than in the ordinary course of its business and upon substantially the same or better terms as it could obtain in an arm's length transaction with an entity or person who is not controlling, under a common control with Borrower. 7. DISBURSEMENT PROCEDURES: The loan documents shall specify disbursement procedures in substantial conformity with the provisions of this section. The loan documents shall provide, among other things, that: (a) Disbursements shall be made only after notice is given to Bank United five (5) business days prior to a request for each such disbursement, accompanied by an affidavit of bills paid and a partial release of lien executed by the General Contractor and each subcontractor who has received payments in excess of $5,000.00, all in the form prescribed by Bank United. (b) Disbursement shall not be more frequently than monthly. 4 23 (c) Advance or disbursement requests shall be submitted by Borrower and Borrower's Architect on AIA forms for review and approval of the Construction Inspector. (d) Bills or statements for all expenses for which a disbursement is requested shall, at the option of Bank United, be presented to Bank United. All such disbursement requests shall include the certification of Borrower, Borrower's architect, the general contractor and Construction Inspector, that all labor and material for which funds are requested have gone into the Financed Construction Project according to the approved plans and specifications and that the remaining non-disbursed portion of the loan for that Financed Construction Project is adequate to complete the construction thereof. (e) Prior to any disbursement, the loan for the Financed Construction Project and all other loans under the Line of Credit must be current in all respects unless otherwise approved by Bank United. (f) At no time shall Bank United be obligated to disburse funds in excess of that recommended by the Construction Inspector, nor shall it be required to disburse funds for materials stored off the Financed Construction Project site. All draw requests shall be subject to the prior inspection of the Financed Construction Project by the Construction Inspector. (g) Interim disbursements of loan proceeds for construction work shall be subject to a ten percent (10%) retainage requirement. (h) Each disbursement must be accompanied by an endorsement by the Title Company. (i) Final disbursement to the General Contractor will be subject to Bank United's having secured the following: (1) Unconditional Certificates of occupancy for each of the units within the Financed Construction Project; (2) Certificate of completion prepared and submitted by Borrower and Borrower's Architect, which certificate shall contain only such qualifications as are acceptable to Lender in its sole discretion, and which shall indicate that: (a) the construction of the Financed Construction Project has been completed substantially in accordance with the approved plans and specifications; (b) all construction has been completed in a good and workmanlike manner; (c) all applicable zoning, building, or other governmental codes or regulations have been complied with; (d) there are no known structural deficiencies; and (e) all mechanical equipment, including without limitation, plumbing, air conditioning and heating, electrical, and kitchen equipment, if any, is in good working order; 5 24 (3) Certificate of completion executed by the General Contractor and filed in the real property records of the county in which the Project is situated. (4) Contractor's affidavit satisfactory to Bank United and the Title Company. (5) Lien waivers from all subcontractors, in form and substance satisfactory to Bank United, Bank United's Lender's Counsel and the Title Company. (6) Such additional documents as Lender may reasonably request. 6 EX-11.1 9 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 ARV ASSISTED LIVING, INC. COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED MARCH 31, --------------------------------------- 1996 1995 1994 ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net loss $ (965) $(2,999) $(1,653) Preferred dividends declared 351 398 40 ------- ------- ------- Net loss for primary earnings per share $(1,316) $(3,397) $(1,693) ======= ======= ======= Weighted average shares outstanding 6,246 4,903 5,113 ======= ======= ======= Net loss per common share $ (.21) $ (.69) $ (.34) ======= ======= =======
Since common stock equivalents were anti-dilutive in each of the periods presented, primary earnings per share are also used for fully diluted earnings per share. EX-21 10 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY AS OF JUNE 25, 1996 ARV Investment Group, Inc., a California corporation ARV Nevada Assisted Living, Inc., a Nevada corporation Bella Vita ARV, Inc., a Florida corporation Casa Bonita Fullerton, LTD., a California limited partnership Collwood Knolls, a California limited partnership LAVRA, Inc., a Delaware corporation Pacific Demographics Corporation, a California corporation Prospect Park Residence, LLC, a New York limited liability company Waterside Villas, LLC, a New Jersey limited company EX-23 11 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23 The Board of Directors ARV Assisted Living, Inc.: We consent to incorporation by reference in the registration statement (No. 33-95712) on Form S-1 of ARV Assisted Living, Inc. of our report dated May 25, 1996, relating to the consolidated balance sheets of ARV Assisted Living, Inc. and subsidiaries as of March 31, 1996, and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1996, which report appears in the March 31, 1996, annual report on Form 10-K of ARV Assisted Living, Inc. KPMG Peat Marwick LLP Orange County, California June 27, 1996 EX-27 12 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS YEAR MAR-31-1996 APR-01-1995 MAR-31-1996 1 7454258 0 1929905 (65000) 6807141 17688105 47233885 (1135572) 77402531 7673933 24813661 0 2357475 47547798 0 77402531 0 33062950 0 23038405 8675881 394627 1544308 (590271) 375207 (965478) 0 0 0 (965478) (.21) (.21)
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